247Bull.com Editor: The vast majority of people still don’t understand what is really happening behind the headlines about currency wars, open-ended asset purchases, rising deficits etc. What’s really going on is the slow but inevitable collapse of the fiat (paper) money system – an experiment that has been running for more than 40 years. Precious metals expert David Morgan, author of The Morgan Report, explains that “this is a huge battle. It’s the battle between the real money story and the fictional money story. It’s been played out again and again throughout monetary history but it’s never been played out in a global manner as it is right now. That is why it is so fundamentally important for everybody to understand what’s going on.” Fiat currency systems have been tried many times before but every fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse. There have been 34 hyperinflations in the last 100 years – most of which took place in the 20th century with fiat currencies – and it’s not only the currency that collapsed but also the economy that created it. Crucially this is the first time that no currency on earth is backed by anything more tangible than a politicians promise. Ultimately the battle to preserve your wealth comes down to a simple question: would you rather hold something of real value or would you rather hold worthless paper?
MOTIVE FOR GOLD INVESTMENT
The motives for buying Gold are growing with each turn of the season, and each crumbling platform. The reasons are many and should be listed in outline form for emphasis. The most important motives are:
1) The major central banks are printing new money with utter abandon. The US Fed admits to expanding the US Dollar supply for US TBond and US Agency Mortgage purchases at the tune of $80 per month. In January alone, the US Fed poured $1.2 trillion into the big European banks, through the Euro Central Bank channels. The US Dollar debasement initiatives do not lift Gold price so much as they undermine the major currencies in unison relative to Gold. The effect is to shine a bright light on Gold for its legitimacy.
2) The major central banks are engaged in Competing Currency War in open style, with major nations participating. They are justifying their actions, as to preserve their export trades. They are rendering damage to other nations which attempt to hedge their outsized reserves. The victim is global trade, in a steady relentless decline. The competitive devaluations are deeply damaging to both trade and the trust behind the fiat paper currencies themselves. The war debases all major currencies, and lifts the integrity of Gold.
3) The major banks in the United States, England, and Western Europe are insolvent, almost without exception. Since April 2009, the United States blessed the corrupt accounting via a Congressional bill that endorsed a plan by the gutless Financial Accounting Standards Board. They declared any big US bank can dictate the value of their assets on balance sheets, even using original date valuations before market impact, even if no market exists anymore for the asset. The London banks are busted from property loans and Southern Europe sovereign debt gone bad, with the LIBOR scandal adding to their bankrupt image. The European banks are busted, with heavy reliance upon the property market. The PIIGS nations have actually suffered added damage from the goony loony Euro Central Bank LTRO bonds which acted like large grenades. With major banks no longer serving as a strong physical foundation for the Western monetary system, the flight to Gold continues in a brisk pace. The big banks will soon buy Gold by the truck load.
4) The sovereign bonds of Southern Europehave recently been joined by UK Gilts and US TBonds as impaired bonds with little or no global demand. The Anglo-American bond game has seen its jig up. The PIIGS bonds are supported by extreme Euro Central Bank efforts. The US TBonds are supported by extreme USFed efforts. The Japanese are openly selling their own JapGovtBonds, the opposite. All sovereign bonds are in effect supported by the Weimar engines of phony money and burned oil, complete with hissing sounds from the great strain. The collection of sovereign bonds serves as Nemesis to Gold. With the lost prestige and lost squeaky clean AAA ratings, as the debt downgrade parade continues, the effect is to lift Gold demand. The race is on whether the USTBond or UK Gilt will be downgraded next. Maybe both at same time!
5) The negative real rate of interest continues to serve as the primary cylinder to the Gold Bull Express Locomotive. Interest rate paid to savers is abysmal and low. The standard 2% certificate of deposit is an embarrassment to attract savers and their capital. The official USTreasury Bonds offer roughly 2% and 3% on the 10-year and 30-year vehicle in commitment. This is woefully inadequate. The CPI is over 7% in conservative terms, resulting in a loss of at least 4% per year to savers. The real rate has been negative since 2003 and will continue to be negative for years to come, at least until the USGovt debt default. Gold demand is in lockstep with negative real interest rates.
6) All paper wealth is crumbling and eroding in value. The global financial crisis, better described as a global monetary war to preserve the fiat paper currencies led by the US Dollar, has resulted in colossal damage to home equity, commercial property, mortgage bonds, junk bonds, secondary stocks, shipping vessels, even some collectible art. Stocks and bonds are turning worthless, despite their bubbly prices posted, since they are supported by artificial corrupted means. The proof is absent legitimate buyers. Mining stocks have been in deep trouble for four to five years, due to share dilution, rising costs, difficult deposits, resource nationalism, and labor strikes. Add to their troubles the shortage of engineers, and Wall Street mining stock index suppression, alongside spread trades to support the largest miners (old guard of forward sellers and corrupt players). As paper wealth continues to crumble and vanish, the tangible assets like crude oil, farmland, and Gold rise in demand.
7) Absence of reliable inventory in the COMEX. The shuffling games have reached extreme levels. Silver supply is shuttled daily from the old vaults in Basel,London, and the Roman Catacombs. The raids done on the handy Exchange Traded Funds have been regular and frequent, as GLD vaults and SLV vaults are the object of the grabs. They act like Wall Street and London bullion central banks for the privileged corrupted big banks to draw upon, and thus show the price discount to the spot Gold price (signal of widespread corrupt shorting practices). The COMEX will someday shut down, from lack of inventory and lack of clients. The true Gold price will be revealed when the giant crime scene is shut down.
8) Neither Russia nor China sells any of its gold output on the global market. They are each a leader in gold mining output. The largest mining firms inSouth Africa, which as global leaders supplied a tremendous volume for decades, are the victims of marxist nitwits who have systematically been destroying the national cash cow with higher taxation and wrecked electricity grid. The gold shortage grows acute, as a result.
9) The large New York and London banks are being gradually drained of their gold bullion. From March to August, an astonishing 6000 metric tons were removed from London alone by large powerful Eastern entities. Many of the transactions were conducted off-market, with extreme force applied and duress felt amidst leverage. The players received no press attention, but the activity was reported to the Jackass by a broker participating in the process. The shortage of Gold within the power centers will result eventually in a Gold default among the banks. The Gold price will be jettisoned higher by an order of magnitude.
10) The gold accounting practices are steeped with fraud. The central banks lease out gold, but the party leasing the gold reports it in accounting, and the central banks report it in accounting. The JPMorgan gold vaults reside alongside the New York Fed gold vaults, where perhaps the double counting is doubled once more in overlap, making for quadruple counting. The gold held in inventory is much lower than reported. The Russian and Chinese gold reserves are at least three times higher than reported, possibly five times higher. Then the Congo gold trade, as in smuggling, accounts for 1000 metric tons on no ledger sheet. The Gold supply is far lower than reported in the West, and much higher in the East. The price mechanisms are controlled in the West. The true Gold price will reflect the true gold inventory. The East will force it.
11) The Allocated Gold Account scandal is fast gaining attention. It will see a climax in the German official account demand for repatriation. Numerous class action lawsuits totaling in the $billions are underway in Switzerland for massive abuse. The plaintiffs in my view are forced to sign non-disclosure agreements in order to proceed. The pillage of private Gold accounts is gaining attention at the lower levels. The abuse of official national Gold accounts like from Germany, Austria, Netherlands,Venezuela, Ecuador, and Ghana have come into view. Again, the true Gold price will reflect the true gold inventory. Libya was liberated last year (of its 144 tons in London, that is) to compensate for London bank shortages in gold.
12) The new Gold Trade Finance system is coming into view. The Iran sanctions galvanized the development of alternative methods for non-US Dollar trade settlement among Eastern nations.Iran has many trade partners, a situation that has remained firm for a few thousand years. As Turkey and India continue to step forward as gold intermediary agents, with banks and commercial entities providing the service, watch the Gold Trade flourish. Their channels could very likely converge with the numerous Chinese Yuan Swap facilities in place, which started the non-US$ trade practice years ago. Gold will sit at the core (along with Silver and Platinum) in the gold trade notes and settlement system.
RAMPANT GLD FUND INVENTORY RAIDS
The GLD exchange traded fund is undergoing big changes, with sudden reduction in its gold inventory. Giant raids are being executed by the big USbanks. They struggle mightily to meet demand and to prevent a price spike that would result from a default. The news story is simple, but the meaning is enormously significant. The story is perfect for distortion by the propaganda trumpets on the mainstream financial media, which have no motive to report correctly on the details. The Gold holdings in the SPDR Gold Trust, with trading symbol GLD, remain the biggest Exchange Traded Fund backed by bullion in the world. It is also the most corrupt, whose custodians designed it for easy gold bar inventory raids by the big US banks. The GLD gold bar inventory decreased 3.02 metric tons to 1323 tons as of February 14th, the lowest level since early October. The mainstream news story stops short of asking the natural follow-up question of where the physical gold bars went, where the delivery was directed, and who is the buyer might be. The simple fact is stark and ugly: no buyer is involved. It is a basic high volume raid. The big US banks short the GLD shares and arrive to pick up the three tons of physical gold bars in armored trucks. The dimwitted sheeple who invest in the GLD fund have their gold leased and borrowed like stock certificates right under their sleepy noses. Someday the ETFund will be drained dry of gold bars, its investors left dumbfounded. The GLD share price discount to the spot Gold price is the hint of abuse via rampant shorting. My hope is soon a GLD discount to spot Gold price becomes much bigger and is posted publicly, even debated. The big raid of gold bars, easily enabled, makes possible the defense of the Gold price. The massive rise in investment demand is met by massive raids of the corrupted GLD gold fund, in balance. In the process, the gold price looks tame, calm, and unaltered.
The financial news talking heads and very attractive strumpets and supposed expert guests talk about Gold being the trade on fear. What utter nonsense! Gold is the trade against monetary inflation gone out of control, the plethora of toxic sovereign AAA bonds, the broken insolvent banks, and the economies subjected to fierce attack on capital from a rising cost structure.
The Chinese gold imports from Hong Kong continue in a storm surge flow without interruption. The annual data is impressive, as imports to China almost doubled in the last year. The constant controlled price by the Western shamans combines with rising Chinese domestic income to enable a brisk Gold business in bars, coins, and scrap. Every month, huge gold imports flow to China from Hong Kong on a consistent basis. The annual data is out for 2012. It showed a surge of 94% in increased import of gold bars, coins, and scrap. The 2012 total was 834,502 kilograms, versus a total of 431,215 kilograms in 2011. The imports for December alone were an impressive 114,405 kilograms (=114.4 metric tons), according to the Hong Kong Census & Statistics Dept. The jump even for a single month was solid, as imports were 90,764 kilograms in November. That comes to a 12.6% monthly sequential gain for the final month of the year (not annualized). Income growth within China is significant enough to enable China to displace India as the world’s biggest gold consumer. Their demand has grown markedly for copper, energy, and farm commodities also.
Furthermore, a very odd red herring appeared in the Q4 trade deficit report issued by the US Govt. It appeared as a bulging line item, with industrial supplies as the heading, which showed a big jump. It is led by non-monetary gold being exported, mostly to Hong Kong. The Hat Trick Letter reveals more information on the odd story, within the Gold & Currency Report. On its face, it looks like the Chinese might be demanding gold bullion to finance the US trade gap, and the US Govt is concealing this fact. Some gold refiners might be involved, which would account for the non-monetary gold label.
Lastly, the fast rise in minted Gold & Silver coin demand has become a major global story. Somehow the mainstream harlots like Bloomberg and CNBC neglect to mention the record setting demand for coins by the US Mint, the Canadian Royal Mint, and elsewhere like for the Austrian Philharmonics and the Chinese Pandas. Details on coin sales also are provided with analysis in the February Gold report for the Hat Trick Letter subscribers. One should know that large investors are pursuing large supplies of Gold bars and Silver bars. The market in volume in several parts of the world is extremely tight with low inventory supply. My best source reports that in certain world market centers, for authenticated large volume sales in the multi-$millions, the Gold price is near $2000 per oz and the Silver price is near $40 per oz. The divergence between real physical markets and the COMEX corrupted market is growing. A point of proof is the fast rising price premium on Silver Eagle 1-oz coins. So the US Govt itself, through the US Mint, reveals how the true Silver price is much higher. Another story not reported by the compromised lapdog servile financial press.
ZERO BOUND RATES & LETHAL SOLUTIONS
It bears repeating, that the US Federal Reserve is stuck in the zero bound corner. Raising interest rates would cause severe problems, if not systemic breakdown, and rapidly. The US Fed under Chairman Bernanke is bluffing with an empty hand, in almost a laughable pathetic way. They are out of options, out of alternatives, and out of weapons. They have lost all credibility and have forfeited their prestige. Worse, by guaranteeing ultra-low interest rates until the labor market improves through year end 2015, the hapless US Fed assures a systemic failure for the United States. They assure the breakdown because low rates near 0% raise the cost structure, reduce profit margins, shut down business segments, and actually result in widespread job cuts. The Zero Bound kills capital, in a land that has forgotten what capitalism is.
The consequences of rate hike in any exit strategy would be felt in the following ways:
a) Raise borrowing costs to finance the USGovt deficit, and possibly force those costs to rival the bulging endless war costs. A $700 to $800 billion borrowing cost line item might be considered low. Rate hikes are totally out of the question.
b) The USFed would torpedo their best clients that accepted low-cost loans according to the Dollar Swap Facility. The total bestowed upon European banks alone is well over $3 trillion from the ample supply in 2011, plus the recent huge round. The biggest Western banks would be ruined in a matter of a couple months. Rate hikes are absurd on their face.
c) The USEconomy would be forced to contend with higher consumer borrowing costs for cars, homes, boats, and more, while businesses would be dealing with higher borrowing costs for trucks, communications equipment, and machinery. Rate hikes are not even remotely likely.
d) The US Housing market would be forced to enter a recognized depression, instead of the false recovery. This market cannot recover effectively with sub-4% mortgage rates and subprime lending, courtesy of the USGovt agencies like the FHA. Rate hikes are not going to happen, period.
e) The bigUSbanks would see their USTBond carry trade ruined. It is their primary source of profit, certainly not commercial lending or investment banking. The bigUSbanks borrow at near 0% and invest in 2% or 3% long-dated USTBonds. Higher rates would force them to sell the long-term USTreasury Bonds, and thus exacerbate any exit strategy by the cornered USFed. Rate hikes would be blocked before they happen.
f) The interest rate derivatives would cause a nuclear event. The JPMorgan interest rate derivative collection is over $72 trillion in notional value. If Interest Rate Swap contracts have been keeping the long-term rates under 3% for two years in steroid driven activity in hidden rooms, then their unwind would cause the long-term US TBond yields to rise toward Greek levels, and far past Spanish and Italian levels. Thus the label of a nuclear event. Rate hikes would cause a decade of darkness.
The other solutions like the numerous liquidity facilities by the US Fed, the Dollar Swap Facility for the benefit of European banks, the vacant Long-Term Refinance Operation bonds by the Draghi Euro Central Bank, the toxic bond redemptions, the deliveries of toxic paper onto the Fannie Mae doorstep, these are all pathetic central bank exercises that solve nothing. They fail to address the grotesque insolvency of the big Western banks, the rampant deficits of the Western governments, and the internal insolvencies within the many Western economies.
NEW GOLD TRADE SYSTEM
A new trade settlement system is coming, which works around the toxic US Dollar. While the United States slips inexorably into the Third World, with several key traits already showing in glaring style, the rest of the world will follow the Eastern lead. The Chinese and Russians will show the way, with a hidden German hand, as the trade settlement is to be conducted with Gold Trade Notes based upon a core of gold, silver, and platinum. If nations wish to be benefit from supply routes, they must acquire the Gold Trade Notes. The entire system is ready for implementation, sure to shock the New York and London paper traders in the empty temples. The paper IOU rubbish will no longer be accepted. Great changes cometh, in a grand Paradigm Shift.
For over two decades, trade has been dominated by the US Dollar in settlement, led by the crude oil sales by OPEC. It defined the Petro-Dollar and the Grand Surplus Recycle. Those ways are being gradually pushed aside. As trade is settled increasingly outside the US Dollar, led by Eastern nations, the entire global banking structures will shed their US Treasury Bonds no longer required. Once again, in a more natural order, the trade will dictate the banking reserve practices. The banks will accumulate Gold bullion, diversify out of US TBonds (even US Agency Mortgage Bonds), and begin to act like real banks again instead of toxic paper factories and obscene derivative casinos. The Jackass does not discuss the corrupted COMEX paper gold price any longer. It does not deserve the attention, nor the respect, nor a capital “G” in the name. Shocking events are coming, like earthquakes and tsunamis to foster change. The United States will be largely left behind as valid physical Gold takes center stage in the global financial system, the trade settlement system, and the banking system. The next important new bankers will be those in physical possession of Gold bullion without encumbrance of counter-party, like the Sprott Fund, like bullion banks that do not cooperate with the diabolical New York and London banks.