Sunday, January 30, 2011

Misallocation of capital, unintended consequences, gold suppression scheme and brain dead financial journalists.

A wonderful "must-read" speech by Chris Powell of Gata ( explaining that our financial markets are actually a joke, benefitting the insider. What is worse is that the one "above-all" undemocratic institutions of the Western world, Central Banks and the private company called Federal Reserve Bank ( "Federal" as "Federal Express"...) as HQ, manipulates almost everything, inclusive gold as the Alpha and Omega of monetary policies, thereby making sure that vast amounts of capital and labour are being misallocated. As a consequence, can you believe the price of anything? Unintended consequences, alchemy with ETF's and why financial journalists appear to be brain dead when it comes to gold and the gold suppression schemes.

Chris Powell: And was Jerusalem builded here?

The Cheviot Asset Management Sound Money Conference
The Guildhall, London
Thursday, January 27, 2011

Most Americans will believe almost anything if it's said with a British accent. I'm not here to ask you to return the favor, but rather to consider some evidence, to be receptive to questions, and to start asking some questions of your own.
In September 2009 Jim Rickards, director of market intelligence for the Omnis consulting firm in Virginia, was interviewed about the currency markets on the cable television network CNBC. Rickards remarked: "When you own gold you're fighting every central bank in the world."
That's because gold is a currency that competes with government currencies and has a powerful influence on interest rates and the value of government bonds. This was documented in an academic study published in 1988 in the Journal of Political Economy by Lawrence Summers, then professor of economics at Harvard, future U.S. treasury secretary, and Robert Barsky, professor of economics at the University of Michigan -- a study titled "Gibson's Paradox and the Gold Standard":
This close correlation among gold, interest rates, and government bond values is why central banks long have tried to control -- usually suppress -- the price of gold. Gold is the ticket out of the central banking system, the escape from coercive central bank and government power.
As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply and to warn the world against it. Because gold is the vehicle of escape from the central bank system, the manipulation of the gold market is the manipulation that makes possible all other market manipulation by government.
Of course what Jim Rickards said about gold was no surprise to my organization, the Gold Anti-Trust Action Committee. To the contrary, what Rickards said has been our premise for most of our 12 years, and we have documented it extensively. But while the gold price suppression scheme is a hard fact of history, it is seldom mentioned in polite company in the financial world. So it is a thrill for me that everyone here today is being so polite.
How have central banks tried to suppress the price of gold?
The gold price suppression scheme was undertaken openly by governments for a long time prior to 1971.
That's what the gold standard was about -- governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies backed by gold.
Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price. Throughout the 1960s the United States, Great Britain, and some of their allies attempted to hold the price at $35 per ounce in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement was known as the London Gold Pool.
As monetary inflation rose sharply, the London Gold Pool was overwhelmed by gold demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold -- convertibility for government treasuries that wanted to exchange dollars for gold. At that moment currencies began to float against each other and against gold -- or so the world was told.
In fact since 1971 the gold price suppression scheme has been undertaken largely surreptitiously, seldom acknowledged officially. But sometimes it has been acknowledged officially, and with a little detective work, still more about the price suppression can be discovered.
You may have heard GATA derided as a "conspiracy theory" organization. We are not that at all. To the contrary, we examine the public record, produce documentation, question public officials, publicize their most interesting answers, or their most interesting refusals to answer, and sometimes litigate to get information. I'd like to review some of the public record with you.

The official records
The gold price suppression scheme was a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee's minutes, that the U.S. Treasury Department's Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed's Internet site:
The gold price suppression scheme was again a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." That is, Greenspan contradicted the usual central bank explanation for leasing gold -- supposedly to earn a little interest on a dead asset -- and admitted that gold leasing is all about suppressing the price. Greenspan's admission is still posted at the Fed's Internet site:
Incidentally, while gold advocates love to cite Greenspan's testimony from 1998 because of its reference to gold leasing, that testimony was mainly about something else, for which it is far more important. For with that testimony Greenspan persuaded Congress not to regulate the sort of financial derivatives that lately have devastated the world financial system.
The Washington Agreement on Gold, made by the European central banks in 1999, was another admission -- no, a proclamation -- that central banks were working together to control the gold price. The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that explanation, it was still collusive intervention in the gold market. You can find the Washington Agreement and its successor agreements at the World Gold Council's Internet site:
Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. That is when Barrick filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market.
Barrick's motion claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick's confession to the gold price suppression scheme is posted at GATA's Internet site:
The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. "Foreign currency reserve assets and gold," the Reserve Bank's report said, "are held primarily to support intervention in the foreign exchange market." The Reserve Bank's report is still posted at its Internet site:
Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005.
There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." White's speech is posted at GATA's Internet site:
Two years ago a remarkable 16-page memorandum was found in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. Amazingly, this plan for rigging the currency and gold markets remains on the Internet site of the Federal Reserve Bank of St. Louis:
In August 2009 the international journalist and provocateur Max Keiser reported an interview he had with the Bundesbank, Germany's central bank, in which he was told that all of Germany's gold reserves were held in New York. That interview is posted at the YouTube Internet site:
Some people saw the Bundesbank's admission as a suggestion that Germany's gold had become the tool of the U.S. government. GATA consultant Rob Kirby of Kirby Analytics in Toronto then pressed the Bundesbank for clarification. The Bundesbank quickly replied to Kirby by e-mail with a denial of Keiser's report, but the denial was actually pretty much a confirmation:
"The Deutsche Bundesbank," the reply said, "keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centers. This," the Bundesbank continued, "has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centers. Moreover, the Bundesbank needs to hold gold at the various trading centers in order to conduct its gold activities."
The Bundesbank did not specify those "gold activities" and those "trading centers." But those "activities" can mean only that the Bundesbank is or recently has been surreptitiously active in the gold market, perhaps at the behest of others -- like the United States, the custodian of German gold.
A few weeks ago the German journalist Lars Schall, at GATA's urging, pressed the Bundesbank for clarification about the German gold reserves, and particularly about whether the Bundesbank had undertaken gold swaps with any U.S. government agency. Schall sent the Bundesbank 13 questions. But the Bundesbank brushed him off, even as it seemed to acknowledge meddling surreptitiously in the gold market:
The Bundesbank replied:
"In managing foreign reserves, the Bundesbank fulfils one of its mandated tasks as an integral part of the European System of Central Banks. We trust you will understand that we are not able to divulge any further information regarding this activity. Particularly with respect to the confidential nature of information about where gold holdings are kept, we are unable to go into any greater detail concerning exact locations and the quantities stored at each of these. Likewise, owing to the strategic nature of the activity, we are not at liberty to provide you with more detailed information about gold transactions."
In 2009 a New York financial market professional and student of history, Geoffrey Batt, posted at the Zero Hedge Internet site three declassified U.S. government documents involving the gold market.
The first was a long cable dated March 6, 1968, sent by someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It has been posted at the Zero Hedge Internet site:
The cable described the strains on the London Gold Pool, the gold-dishoarding mechanism established by the U.S. Treasury and the Bank of England to hold the gold price to the official price of $35 per ounce. The London Gold Pool was to last only six months longer.
The cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors "that there is no point anymore in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.
The cable recommended creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposed "monthly or quarterly reshuffles" of gold reserves among central banks -- what the cable called a "reshuffle club" that would apply gold where market intervention seemed most necessary.
Of course these "reshuffles" sound very much like the central bank gold swaps and leases of recent years.
The idea, the cable says, is for the central banks "to remain the masters of gold."
Also disclosed in 2009 by Zero Hedge's Geoffrey Batt was a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. This too has been posted at the Zero Hedge Internet site:
The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be:
"-- To isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."
"-- To bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."
The third declassified U.S. government document published by Geoffrey Batt at Zero Hedge in 2009 may be the most interesting, because it was written on June 3, 1975, four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and against gold and that gold would be free-trading.
The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It has been posted at GATA's Internet site:
Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" -- that's Helmut Schmidt, West Germany's chancellor at the time -- "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."
Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."
While the Burns memo is consistent with the long-established interest of central banks in controlling the gold price, it was written 36 years ago.
But there is a contemporaneous admission of U.S. government intervention in the gold market. It has come out of GATA's long Freedom of Information Act struggle with the U.S. Treasury Department and Federal Reserve for information about the U.S. gold reserves and gold swaps, information that has been denied to GATA on the grounds that it would compromise certain private proprietary interests. (Of course such a denial, a denial based on private proprietary interests, is in itself a suggestion that the U.S. gold reserve has been placed, at least partly, in private hands.)
Responding to President Obama's declaration, soon after his inauguration, that the federal government would be more open, GATA renewed its informational requests to the Fed and the Treasury. These requests concentrated on gold swaps.
Of course both requests were denied again. But through its Washington lawyer, William J. Olson (, GATA brought an appeal of the Fed's denial, and this appeal was directed to a full member of the Fed's Board of Governors, Kevin M. Warsh, formerly a member of the President's Working Group on Financial Markets, nicknamed the Plunge Protection Team. Warsh denied GATA's appeal but in his letter to our lawyer he let slip some stunning information:
Warsh wrote: "In connection with your appeal, I have confirmed that the information withheld under Exemption 4" -- that's Exemption 4 of the Freedom of Information Act -- "consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."
So there it is: The Federal Reserve today -- right now -- has gold swap arrangements with "foreign banks," and the public and the markets must not be permitted to know about them.
Eight years ago Fed Chairman Alan Greenspan and the general counsel of the Federal Open Market Committee, Virgil Mattingly, vigorously denied to GATA, through two U.S. senators who had inquired of the Fed on our behalf, that the Fed had gold swap arrangements, even though FOMC minutes from 1995 quote Mattingly as saying the U.S. has engaged in gold swaps:
But now the Fed has admitted such arrangements, if only inadvertently.
GATA subsequently sued the Fed in U.S. District Court for the District of Columbia to gain access to the documents involved. That suit is pending.

Central banks are out of control
There is a reason for the Fed's insistence that the public and the markets must not know what the Fed is doing in the gold market.
It is because, as the documents compiled and publicized by GATA suggest, suppressing or controlling the gold price is part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments; because this market rigging is the foremost objective of U.S. foreign and economic policy; and because this rigging cannot work if it is exposed and the markets realize that they are not really markets at all.
This should not be so surprising. For intervening in markets is what central banks do.. They have no other purpose. They've just gotten out of control.
Central banks often admit intervening in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels. Central banks admit doing the same in the government bond markets. There is even evidence that the Federal Reserve and Treasury Department, through intermediaries, have been intervening frequently in the U.S. stock markets since the crash of 1987.
You do not have to settle for rumors about the "Plunge Protection Team," the President's Working Group on Financial Markets. Again you can just look at the public record.
The Federal Reserve injects billions of dollars into the stock and bond markets every week, on the public record, through the major New York financial houses, its so-called primary dealers in federal government bonds, using what are called repurchase agreements and the Fed's Primary Dealer Credit Facility. The financial houses thus have become the Fed's agents in directing that money into the markets. As GoldMoney's James Turk notes, the recent rise in the U.S. stock market matches almost exactly the money funneled by the Fed to the New York financial houses through repurchase agreements and the Primary Dealer Credit Facility -- devices of "quantitative easing."
Meanwhile, for years the International Monetary Fund, the central bank of the central banks, has been openly intervening in the gold market by threatening to sell gold and then finally selling some, or at least claiming to have sold some. The IMF said its intent in selling gold was to raise money to lend to poor nations. This explanation was ridiculous on its face, though the IMF has never been challenged about it in the financial press. No, the financial press has been happy to tell the world that central banks that lately have effortlessly conjured into existence, out of nothing, fantastic amounts of money in many currencies could find a little money to help poor countries only by selling gold.
Of course the intent of the IMF and its member central banks was not to help poor countries but to intimidate the gold market and control the gold price.
Just as Lars Schall recently tried to get some useful information out of the Bundesbank about its gold reserves, in April 2008 I wrote to the managing director of the IMF, Dominque Strauss-Kahn, with five questions about the IMF's gold. I copied the letter to the IMF’s press office by e-mail, and quickly began to get some replies from one of its press officers, Conny Lotze. But they were all evasive or refusals to answer. Exactly where is the IMF's gold and who controls it? The IMF wouldn't say:
Lately central bankers often have complained about what they call "imbalances" in the world financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers about "imbalances" are brazenly hypocritical, since these imbalances have been caused by the central banks themselves, caused by their constant interventions in the markets to prevent the markets from coming into balance through ordinary market action lest certain political interests be disturbed.
Yes, when markets balance themselves they sometimes do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for the almost 150 years before 1913 the country went through a catastrophic deflation every decade or so. Central banking was created in the name of preventing those catastrophic deflations.
The problem with central banking has been mainly the old problem of power -- it corrupts.
Central bankers are supposed to be more capable of restraint than ordinary politicians, and maybe some are, but they are not always or even often capable of the necessary restraint. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest -- to benefit especially the financial interests, the banking and investment banking industries. These interventions, subsidies to special interests, increasingly are needed to prevent the previous imbalances from imploding.
And so we have come to an era of daily market interventions by central banks -- so much so that the main purpose of central banking now is to prevent ordinary markets from happening at all.
By manipulating the value of money, central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret -- because, in choosing winners and losers in the economy, advancing infinite amounts of money to some participants in the markets but not to others, administering the ultimate patronage, central banking cannot survive scrutiny. As has been noted by U.S. Rep. Ron Paul, the Federal Reserve, an unelected agency of the government, has come to appropriate and spend far more money than Congress itself does.
Yet the secrecy of central banking now is taken for granted even in nominally democratic countries.
Now that Paul, an immensely informed critic of the Fed, has become chairman of the House subcommittee on monetary affairs, there may be some devastating public inquiries into central banking. But what a hundred years ago in the United States was called the Money Power is still so ascendant that it sometimes even boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in the United States in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: "The last duty of a central banker is to tell the public the truth."

Official gold data is disinformation
Government's largely surreptitious agenda in the gold market is greatly assisted by the widespread falsification of gold reserve and market data. Gold is the worst understood financial market in part because most official data about gold is actually disinformation.
Years ago GATA disclosed that the International Monetary Fund, the leading compiler of official gold reserve data, allowed its member nations to count gold they had leased, gold that had left their vaults, as if it was still in their vaults. The effect of this accounting fraud was to deceive the market into thinking that central banks had much more gold left to bomb the market with than they really did.
But that's only the start of the false data.
In April 2009 China caused a sensation by announcing that its gold reserves had increased by 76 percent, from 600 tonnes to 1,054 tonnes. For the previous six years China had been reporting to the IMF only 600 tonnes. Had China acquired those 454 new tonnes only in the last year? Very unlikely. Most experts believe that China acquired those 454 new tonnes over at least several years, largely by purchasing the production of China's own fast-growing gold mining industry. So for as many as six years the official gold reserve data about China was way off.
Last June the World Gold Council reported that Saudi Arabia's gold reserves had increased by 126 percent, from 143 to 323 tonnes, just since 2008. That the world's oil-exporting superpower had made such a new commitment to gold in its foreign exchange reserves also caused a sensation.
But a few weeks later the governor of the Saudi Arabia Monetary Authority, Muhammad al Jasser, insisted to news reporters that Saudi Arabia had not purchased the gold cited in the June reports but rather had possessed that extra gold all along, holding it in what he called "other accounts":
That is, the seemingly new Saudi gold had been held in accounts not reported officially, just as the true status of China's gold accounts was not reported officially for six years, if the true status is being reported even now.
Some analysts think that China and Saudi Arabia have accumulated far more gold than they’re reporting and are accumulating still more gold surreptitiously -- China to hedge its dollar foreign exchange surplus, Saudi Arabia to hedge both its dollar surplus and the depletion of its oil reserves -- but that China and Saudi Arabia can't acknowledge this accumulation lest they spook the currency markets, explode the gold market, and devalue their dollar surpluses before those surpluses are fully hedged.
The United States claims to hold almost 8,200 tonnes of gold. But has any of that gold been swapped with other central banks through the gold swap arrangements Fed Governor Warsh disclosed in his letter denying GATA's request for access to the Fed's gold documents? The Fed won't be answering that question voluntarily. It will be answered only at the order of the federal court in which GATA is suing the Fed, or at the direction of Representative Paul's subcommittee.

Conflicts of interest at ETFs
Then there are the major gold and silver exchange-traded funds, which were established in the last few years supposedly to help ordinary investors invest conveniently in gold and silver. How much metal do the ETFs have?
While the major gold and silver ETFs frequently report their metal holdings, studies by GoldMoney founder James Turk and former GATA board member Catherine Austin Fitts and her lawyer, Carolyn Betts, suggest that this data is unreliable too:
For the major ETFs won't disclose exactly where their metal is, and indeed their prospectuses say it's OK for the ETFs not even to know where their metal is kept among custodians and sub-custodians.
Further, the custodians for the major gold and silver ETFs are, perhaps not so coincidentally, also the two major international banks -- J.P. Morgan Chase and HSBC -- that report having the biggest short positions in gold and silver, short positions that give these banks and metal custodians a powerful interest in suppressing the price of the assets they supposedly are holding for investors who want those assets to rise in price.
How much gold do the major gold and silver ETFs really have in their vaults? How much of it is encumbered in some way? ETF investors themselves may never be permitted to know.
The biggest so-called "physical" gold market in the world is run by the London Bullion Market Association. The LBMA publishes statistics on how much gold and silver are traded by its members. But these statistics show spectacular volumes, more metal than could exist. Of course much of this metal could be sold and resold back and forth many times every day. But an expert in that market, Jeffrey Christian of the CPM Group, acknowledged at a hearing of the U.S. Commodity Futures Trading Commission last March, as he had acknowledged in an explanatory report published in 2000, that the London bullion market is actually a fractional-reserve gold banking system built on the assumption that most gold buyers will never take delivery of their metal but rather leave it on deposit with the LBMA member banks from which they bought it.
GATA board member Adrian Douglas has studied the LBMA statistics and Christian's work and estimates that the great majority of gold sold by LBMA members doesn't exist -- that most gold sales by LBMA members are highly leveraged. How leveraged? How much gold is due from LBMA members that doesn't really exist? Of course the LBMA doesn't report that. Like the Fed's gold swap arrangements, the world must not be permitted to know that much of the gold the world thinks it owns is imaginary. The consequences might be catastrophic for the banks that have sold that imaginary gold.
For then the world might understand why even at its recent price above $1,300 per ounce gold has not come close to keeping up with the inflation, the currency debasement, of the last few decades, why gold has not completely fulfilled its function of hedging against inflation.
That is, gold's enemies figured out how to increase gold's supply by vast amounts without going through the trouble of digging it out of the ground. They invented "paper gold" -- imaginary gold that many buyers accepted, never suspecting that major financial institutions might deceive or defraud them.

Negligent journalism about gold
The misunderstanding of the gold market is worsened with the awful journalism about it.
The falsity of the data about the gold market practically screams at financial journalists:
-- There is the omission by official gold reserve reports of leased and swapped gold.
-- There are the sudden huge changes in official gold reserve totals.
-- And there are the deception and conflicts of interest built into ETF prospectuses.
The valid documentation about the gold market also practically screams at financial journalists as well:
-- There are the huge and disproportionate gold, silver, and interest rate derivative positions built up at just two or three international banks, positions that never could be undertaken without the express or implicit underwriting of government, particularly the U.S. government.
-- And there are the many official records, records collected and publicized by GATA over the years, demonstrating the plans and desire of the U.S. government to suppress and control the price of gold.
But somehow financial journalists just don't ask about these things. After all, who are the major advertisers in the financial news media? The market manipulators and governments themselves.
Here are a couple of examples of this gross failure of journalism in the last year.
Last June the Bank for International Settlements, the central bank of the central banks, disclosed, via a footnote in its annual report, that it had undertaken a gold swap of unprecedented size, 346 tonnes. But the BIS provided no explanation for this. A newsletter writer was the first to come upon the information; only then did it leach into the major financial news media. What was going on here?
The reporters for the major financial news media didn't bother going to the source, didn't bother asking the BIS itself. It was simply assumed that central banks never give serious answers about what they do, particularly in regard to gold. Instead the reporters called various gold market analysts for what they hoped would be informed speculation.
A few days after GATA ridiculed the Reuters news agency for not demanding answers from the source of the swaps, the BIS, Reuters did try putting some questions to the bank, and on July 16 last year Reuters reported: "The BIS said the gold in question was used for 'pure swap operations with commercial banks' but declined to respond to further questions from Reuters on the transaction":
Ever since Federal Reserve Governor Warsh admitted to GATA that the Fed has secret gold swap arrangements with foreign banks, I have been urging financial journalists to call the Fed to ask about those arrangements. As far as I know, no news organization has put such questions to the Fed officially. But, a bit intrigued, a reporter for a major news agency, having failed to get her editor's authorization to pursue a story about gold, called the Fed on her own and did ask about the gold swap arrangements. She told me that a Fed spokesman had told her: "Oh, we never talk about those things."
GATA has been gaining publicity, if with difficulty. Last year the Financial Times did a big story about gold that was half about GATA’s complaints about gold price manipulation by central banks and their agents, the bullion banks. But amazingly the FT reporter failed to put any questions to any central bank or government official:
How can you report complaints of central bank gold price manipulation without questioning central banks themselves? Again, it is just taken for granted that central banks operate in secret, particularly in regard to gold, and there's no point in questioning them.

Why gold and silver are mysteries
Why is gold such a mystery? Why is it, along with silver, kept such a mystery?
It's because the two precious metals are not only money but, from the point of view of free people, the best sort of money, less susceptible to what governments see as the most desirable quality of money -- the susceptibility to control by government and particularly susceptibility to devaluation. You can print or otherwise issue gold and silver derivatives to infinity, but not the metals themselves.
Gold particularly is kept such a mystery because it is the key to unlocking the currency markets, which long have been the most efficient mechanisms of imperialism.
Many of you have heard about the looting of Europe undertaken by the Nazi German occupation during World War II. But most of that looting did not take place as it is imagined, at the point of a gun. No, it took place through the currency markets.
This looting through the currency markets was spelled out by the November 1943 edition of a military intelligence letter published by the U.S. War Department, a letter called Tactical and Technical Trends. Of course the Nazi occupation seized whatever central bank gold reserves had not been sent out of the occupied countries in time. But then the Nazi occupation either issued special occupation currency that could not be used in Germany itself or, in countries that had fairly sophisticated banking systems, took over the domestic central bank and enforced an exchange rate much more favorable to the reichsmark. Or else the Nazi occupation simply printed for itself and spent huge new amounts of the regular currency of the occupied country.
This control of the currency markets drafted everyone in the occupied countries into the service of the occupation and achieved a one-way flow of production -- a flow out of the occupied countries and into Nazi Germany.
For a few years Nazi Germany had one hell of a trade deficit -- and couldn't have cared less about it. For being in the position to print the currencies for occupied Europe, Nazi Germany never had to cover that deficit, at least not as long as the military occupation continued.
Since the United States now issues the reserve currency for the world, the dollar, the United States now more or less occupies most countries economically, even those countries that have their own currencies, since even those countries hold most of their foreign exchange reserves in dollars.
Free-trading and widely accessible gold always has been and always will be doom to the rigging of the currency markets, always will be the escape from overbearing government generally and from any overbearing government in particular. That is why those U.S. government records compiled by GATA over the years candidly discuss or advocate or describe controlling and suppressing the gold market -- and suppressing the truth itself.

The secret knowledge
The truth as GATA sees it is this:
First, gold is the secret knowledge of the financial universe and its true value relative to currencies is vastly greater than its nominal price today, since much of the gold that investors think they own doesn't exist. The actual disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons. For gold is a deadly weapon against unlimited government.
Second, all technical analysis of all markets now is faulty if it fails to account for pervasive and surreptitious government intervention.
And third, the intervention against gold is failing because of overuse, exposure, exhaustion of Western central bank gold reserves from gold sales and leasing, and the resentment of the developing world, which is starting to figure out how it has been expropriated by the dollar system, a system in which people do real work and create real goods and send them to the United States in exchange for nothing but colored paper and electrons.
For years now the Western central banks have been attempting a controlled retreat with gold, bleeding out their reserves with sales, leases, and especially derivatives so that gold's ascent and the dollar's inevitable decline may be less shocking. Central bankers often convey part of this strategy in code; they warn against what they call a "disorderly decline" in the dollar, as if an "orderly" decline is all right.
The rise in the gold price over the last decade is just the other side of that coin -- an "orderly" rise, 15-20 percent or so per year, a rise carefully modulated by surreptitious central bank intervention.
But GATA believes that the central banks may have to retreat farther with gold than anyone dreams, and far more abruptly than they have retreated so far. We believe that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between, on one hand, the supply of real gold, actual metal, not the voluminous paper promises of metal, and, on the other hand, the explosion of the world money supply of the last few decades -- as the market begins to perceive the difference between the real and the unreal -- there may not be enough zeroes to put behind the gold price.
Market analysts talk about what they call "reversion to the mean." But maybe we should talk about reversion to the real.
A century ago Rudyard Kipling anticipated this when he wrote a poem that foresaw the decline of the empire of his country, Great Britain. Kipling's poem attributed this decline to the loss of the old virtues, the virtues that were listed at the top of the pages in the special notebooks, called "copybooks," that were given to British schoolchildren at that time -- virtues like basic honesty, fair dealing, Ten Commandments-type stuff. Kipling titled his poem "The Gods of the Copybook Headings," and its conclusion is a warning to the empire that succeeded the one he was living in:
Then the gods of the market tumbled,
And their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled
And began to believe it was true
That all is not gold that glitters,
And two and two make four,
And the gods of the copybook headings
Limped up to explain it once more.
As it will be in the future,
It was at the birth of man.
There are only four things certain
Since social progress began:
That the dog returns to his vomit
And the sow returns to her mire,
And the burnt fool's bandaged finger
Goes wabbling back to the fire;
And that after this is accomplished,
And the brave new world begins,
When all men are paid for existing
And no man must pay for his sins,
As surely as water will wet us,
As surely as fire will burn,
The gods of the copybook headings
With terror and slaughter return.

The problem goes far beyond gold price suppression. Indeed, since central bank intervention in the currency, bond, equities, and commodity markets has exploded over the last few years, we don’t really know what the market price of anything is anymore. Thus the gold price suppression story is a story about the valuation of all capital and labor in the world -- and whether those values will be set openly in free markets, the democratic way, or secretly by governments, the totalitarian way.
The specifics of the gold price suppression operation are complicated, but you don't have to remember them all if you know what they mean.
They mean that there is a currency war going on between countries and their central banks, and a war being waged by central banks against the people of their own countries. There has been such a war for many years, only the victims were not really fighting back. Now some of them are, countries and individuals alike, by buying and taking delivery of the monetary metals. (Now all we need to do is find a safe planet to keep them on.)

The focus on London
London may seem like the belly of the beast of Anglo-American imperialism, being home to both the LBMA and the Bank of England, whose surrender of the better part of Britain's gold reserves a decade ago, at the bottom of the market and at the onset of a short squeeze, makes sense only as part of the gold price suppression scheme and the rescue of influential bullion banks that were caught short at the market's turn.
But let us instead see this scheme as an aberration and London as the city where the rescue of all decent civilization was arranged even as the bombs of the most horrifying evil fell on it. The St. Paul's that was so famously surrounded by the fire and smoke of those bombs is just around the corner from this grand old building; please forgive a rube tourist for being a bit in awe of it all. GATA actually has a few friends in this city and hereabouts. So this may be as good a place as any to clamor for the most cosmic justice. After all, isn't it practically in your anthem?
And did the Countenance Divine
Shine forth upon our clouded hills?
And was Jerusalem builded here
Among these dark, Satanic ... central banking systems?

I don't think Blake would mind too much about that rewriting if he was still around and knew the facts of the situation. He might even make it rhyme.
We in GATA have our bow of burning gold; we have our arrows of desire. But we can always use more, and with your help we will do more to restore our dear countries, Britain and America together, to their principles and ideals of democratic, transparent, limited government, and, really, the brotherhood of man, which, in the end, are what the monetary metals are about.

Thursday, January 27, 2011

Recovery Through Trickle Down Effect

<-----The US Middle Class Is Grateful and Says It Can Feel the Trickle Down Effect

Rich Shoppers On Spending Spree

(Bloomberg News) Rich shoppers are driving an increase in consumer spending, bolstering a recovery that masks reluctance among less affluent Americans to join in.

Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy. At the other end of the economic spectrum, Wal-Mart Stores Inc., the world’s largest discount retailer, reports “everyday Americans” are living paycheck to paycheck as they await an improvement in job prospects.

“The heavy lifting is being done by the upper-income households,” said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York. “They’re the ones benefiting the most from the stock market rally, and they’re spending.”

The uneven progress in household expenditures, which account for about 70% of the economy, helps explain why Fed policy makers likely will keep interest rates near zero and complete a second round of Treasury purchases. Unemployment averaged 9.6% last year, the highest rate since 1983, even as the expansion gathered speed.

Consumer purchases reflect bigger gains among high-income households and “financial pressures on those of more-modest means,” according to minutes of the Fed’s Dec. 14 meeting. Feroli estimates the top 20% of wage earners account for about 40% of spending, while Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, puts their contribution at closer to 50%.

Biggest Annual Gain

High-end retailers led the increase in December sales at stores open at least a year, company data showed Jan. 6. The Bloomberg Retail Sales Luxury Index jumped 8.1% from the same month a year earlier, while the Bloomberg Retail Sales Discount Index eked out a 0.9% rise. Nationwide, retail sales climbed 0.6% last month, capping the biggest annual gain in more than a decade, according to the Commerce Department.

The U.S. lost about 8 million jobs during the worst recession since the 1930s, and Fed Chairman Ben S. Bernanke said in Senate testimony on Jan. 7 that employers remain reluctant to hire. Payrolls expanded by 103,000 workers in December, less than the median forecast of economists surveyed by Bloomberg News. A healthier labor market would put more money in the hands of shoppers across the board, further lifting consumption.

Wealthy Customers

Purchases made in the third quarter with American Express Co. credit cards, carried by relatively wealthy and corporate customers, were back to the most recent peak for a third quarter, reached in 2008, while the combined total for Visa Inc. and MasterCard Inc. didn’t experience a similar rebound, according to company data.

“The labor-market recovery will become more widespread as we go through 2011, which should take away some of the imbalance” in purchases, said Maki, who specialized in researching household finances at the Fed from 1995 to 2000. “We definitely expect to see some catch-up in spending by middle and lower-income households. It’s one of the ways the recovery will become more entrenched.”

Investors placed their bets early on, favoring companies that cater to consumers shopping beyond basics such as groceries and fuel. The Consumer Discretionary Select Sector SPDR Fund, which includes Tiffany, Coach, Best Buy Co. and Nike Inc., outperformed the SPDR Standard & Poor’s 500 ETF Trust from November 2008 through October 2010 by more than 50%.

Easy Gains Over

The easy gains may be over: The S&P trust has risen 8.8% since November 26, 2010, while the consumer- discretionary ETF produced a 4.4% gain.

Doug Cliggott, a U.S. equity strategist at Credit Suisse, said he recommends an “underweight” position in these stocks for 2011.

“Three years into the market cycle, it’s very uncommon for consumer discretionaries to be the leadership in the market,” Cliggott said.

In the meantime, rising share prices signal rich shoppers will retain an edge in driving spending. The top 20% of income earners own about 80% of equity wealth and half of housing wealth, Maki estimates.

The S&P 500 Index has soared 91% from its March 2009 low. On top of that, President Barack Obama on Dec. 17 signed into law an $858 billion bill extending Bush-era tax cuts for two years for all income groups, instead of letting them expire for family earnings that exceed $250,000 a year, the cutoff the administration uses for the middle class.

Poverty Threshold

The Census Bureau estimates the poverty threshold for 2010 was $22,314 for a family of four.

“It’s striking,” said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. “Most of the rest of the country is still suffering while the wealthy seem to be largely insulated. You would think they wouldn’t have all that much to complain about. Instead they’ve had unending criticism for the Obama administration.”

Sentiment data reflect the stock-market gains. The Conference Board’s consumer-confidence index for households making more than $50,000 a year climbed in December to a seven- month high, while the gauge fell for income groups in the $35,000-$50,000 and $25,000-$35,000 ranges.

Rising foreclosures and declining real-estate values indicate middle- and lower-income households will remain cash- strapped. The asset value of property held by Americans fell by $649 billion in the third quarter to $16.6 trillion, the Fed said Dec. 9. Home prices may drop as much as 11% through the first quarter of 2012, which would be 36% below their 2006 peak, according to a Dec. 8 Morgan Stanley report.

‘Uneven Recovery’

“It’s an uneven recovery at this point,” Maki said. “We’re seeing more of a rebound at retailers serving upper- income households.”

Coach, the largest U.S. maker of luxury leather goods, in October raised its North America sales forecast for the rest of the year. In anticipation of holiday-season sales, the New York- based company increased inventory by 36%, including its line of Sophia satchels that range from $298 to $1,000. The company will report second-quarter results on Jan. 25.

Tiffany will accelerate store openings for 2011, Chief Financial Officer James Fernandez said on a Nov. 24 conference call. The New York-based jeweler on Jan. 11 forecast profit from continuing operations of as much as $2.88 a share in the year ending Jan. 31, up 11 cents from a November projection and exceeding the $2.79 average estimate of analysts surveyed by Bloomberg.

Rising Wine Sales

Total U.S. wine sales rose 4.1% to $9.32 billion for the 52 weeks ended Dec. 11, according to the most recent data from Nielsen Co. The fastest-growing segment was wine priced at $20 a bottle and higher, with sales gaining 11%. Wines under $3 declined 0.6%.

There’s been “a greater bounce back in the more-affluent customer,” said Clarence Otis, chief executive officer of Darden Restaurants Inc. He should know: His Orlando, Florida- based company owns both casual-dining chains such as Red Lobster and Olive Garden as well as the upscale Capital Grille steakhouse.

The industry is witnessing a “changing guest mix,” Andrew Madsen, Darden’s chief operating officer, said on a Dec. 21 conference call with investors. “Less-affluent guests who tend to have a lower check are reducing their restaurant visits.”

Want, Not Need

Family Dollar Stores Inc., the second-biggest dollar-store chain in the U.S., fell 8.8% to $44.99 on Jan. 5, the most in more than two years, after its second-quarter forecast fell short of analysts’ projections. Purchasing decisions are “primarily based on want rather than need,” Howard Levine, chief executive officer of the Matthews, North Carolina-based company, said on a conference call that day.

The jobless rate among Americans who haven’t graduated from high school -- likely those in low-paid positions -- exceeded unemployment among people with at least a Bachelor’s degree by 10.5 percentage points in December, near the record 10.9 point gap set in September.

“The paycheck cycle is still pronounced” for Wal-Mart’s typical customer, Mike Duke, the Bentonville, Arkansas-based company’s chief executive officer, said on a Nov. 16 conference call with investors. “Financial uncertainty still weighs heavily on everyday Americans.”

Wednesday, January 26, 2011

The Betrayal And Moral Bankruptcy Of Our Leaders

Max Keiser says it best: " Bank of England declares war on workers and savers; sides with borrowers and speculators in pogrom of the middle class".

My comment: "Lending money is not difficult. Banks should operate low-key in the back ground, f.i. assisting entrepreneurs with great ideas to get on their feet in order for them to make loads of money. At the moment, the financial industry, has a 16% share on the NYSE, the biggest after the technology sector with 17%. It is contributing nothing to society but paper shuffling and gambling and has become a major systemic risk factor. What is worse: the entrepreneur is now the second fiddler, the guy who ("risk free" remember, TBTF) creates and decides who gets the money is the big money maker. The financial system has become a parasite sucking the life out of our society as the host. It should be stopped, but nobody knows how. Politicians side with the bankers as they all have been bought. If not stopped or broken up, the crisis will continue until all gambling debts of the banks have been paid off, the bonus system set firmly in place and the middle class brought to its knees as financial serfs of the elite. Then we will start again, but now 100% on their terms.............

Mervyn King: standard of living to plunge at fastest rate since 1920s

Families will see their disposable income eaten up as they “pay the inevitable ( can you believe this? Troy Ounce) price” for the financial crisis, the Bank of England governor warns.


Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned.

With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed.

Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. The Government blamed the unexpected reduction — the first since the third quarter of 2009 — on the freezing weather that paralysed much of the country last month.

But there were fears that the country was poised to slip back into recession, defined as two successive quarters of negative growth. Economists said the situation was “an absolute disaster”.

The economic gloom deepened this morning as figures showed that mortgage lending by the major banks dived to an 11-and-a-half-year low during December.

Net lending, which strips out redemptions and repayments, fell to £880 million during the month, the lowest level since June 1999, according to the British Bankers' Association.

Labour has accused ministers of jeopardising recovery by pushing ahead with public spending cuts too quickly.

Mr King said he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. Savers and “those who behaved prudently” would be among the biggest losers in the squeeze, he admitted.

Disposable household income has been hit by sharp increases in the cost of food, fuel and tax, coupled with restricted wage rises for most workers. Last year, take-home pay fell by about 12 per cent, official figures showed, and the trend was expected to continue in 2011.

The governor warned that the Bank “neither can, nor should try to, prevent the squeeze in living standards”.

He said that the economic figures were a reminder that the recovery will be “choppy”. However, he said the biggest threat facing the Bank’s Monetary Policy Committee, which sets interest rates, was rising inflation.

The Bank is expected to use interest rates to keep inflation below two per cent, but the governor said inflation could rise “to somewhere between four per cent and five per cent over the next few months”.

He claimed that rising inflation had been caused largely by increases in global oil and commodity prices, and tax rises such as the increase in VAT introduced at the beginning of the year, which the Bank was powerless to control.

“In 2011, real wages are likely to be no higher than they were in 2005,” he said. “One has to go back to the 1920s to find a time when real wages fell over a period of six years.

“The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”

Mr King insisted that the Monetary Policy Committee could not have increased interest rates from their current record low level to tackle the rise in inflation.

“If the MPC had raised the Bank Rate significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now,” he said.

“The erosion of living standards would have been even greater. The idea that the MPC could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking.”

He added: “Monetary policy cannot be based on wishful thinking. So, unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.”

“The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy.”

The comments represented one of the governor’s starkest warnings yet. His claim that the banking crisis was behind the ongoing squeeze on living standards comes at a sensitive time, as banks prepare to announce multi-million pound bonuses for their executives.

Mr King expressed sympathy for savers and highlighted the failure of lenders to pass on cuts in interest rates. “I sympathise completely with savers and those who behaved prudently now find themselves among the biggest losers from this crisis,” he said. “But a return to economic stability from our fragile condition will require careful and well-judged steps looking beyond the next few months.”

Addressing the problems of borrowers, he added: “Households and small businesses with little housing equity may be unable to borrow at all or are able to borrow only in the unsecured market – where rates are much higher than before the crisis.”

Monday, January 24, 2011


<------- an ETF is a price tracker, nothing more, nothing less. Further to that, the custodians of these ETF's are almost all exposed to the 1,2 Quadrillion US$ Derivatives market and the undeclared losses of the banking system. Did your wealth manager not inform you about that?

Bravo to Max Keiser for his "Crash JP Morgan, Buy Silver" campaign. We need more campaigns like that, slowly dissolving the credibility of the banking system. Why? Just read on:

China vs. JPMorgan: the battle over gold and silver

Commodity Online

Gold is down 6% and silver 12% since the start of 2011. This is the sharpest decline in precious metals since June of last year and with technical support broken at the 50-day moving averages, many are concerned of a deeper correction ahead.

While there are a myriad of factors driving the prices, two of the major opposing forces are Chinese demand for physical gold on the long side and JPMorgan paper schemes on the short side. Which force prevails in the short term remains to be seen, but in the long run the paper shorts will eventually be squeezed, pushing the price for both gold and silver much higher.

Corrections are a healthy and normal part of any secular bull market, allowing the bull to rest its legs, shake out weak hands and prepare for the next phase up. Every correction in precious metals over the past decade has brought so-called “experts” out of the woodwork to proclaim an end to the gold bull market. They were wrong when gold hit $500, $800, $1,000 and will be wrong many times again before gold finally does peak somewhere above $5,000 per ounce.

But the recent slide in gold and silver prices seems like more than the usual correction and profit taking. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act during July of 2010 and many metals analysts believed it would lead to the CFTC implementing sensible position limits. In addition, the passing of the Volker rule and closing of prop trading desks seemed to jump start precious metals into an impressive and steady advance.

Many gold bugs believed they were witnessing the end of the fraudulent gold and silver manipulation that has been occurring so blatantly over the past several years. This manipulation has been painstakingly exposed by GATA over the years, was detailed in an earlier article that I published and has led to a series of lawsuits against JPMorgan and others.

Gold and silver posted impressive gains in 2010, with gold up 30%, while silver rocketed more than 80% higher! But these advances came to an abrupt halt at the start of 2011 and the decline worsened a few weeks later when the CFTC announced the details of it proposed position limits. First off, the proposed limits were way too high to curb manipulation and more importantly, JPMorgan, HSBC and other large investment banks were granted an exemption to the new position limit rules by being “grandfathered.” The CFTC absolutely caved to the interests of JPMorgan and the price of gold and silver both proceeded to tank and drop through key levels of support.

To what degree the CFTC decision is driving the decline in precious metals is unclear. Gene Arensberg recently pointed out that the large commercial banks have actually been covering their short positions lately and that the swap dealers are the ones that have been uncharacteristically piling on the paper shorts. Regardless, big money has certainly been helping to push prices lower, even as the dollar has weakened significantly in the past few weeks.

While the paper market has been driving the spot price lower, the physical market appears to be as robust as ever. Sales of silver eagle coins for the month of January have already set a new all-time record, with ten days still left in the month. Furthermore, silver demand in China has quadrupled versus last year, as the emerging Chinese middle class looks for a hedge against inflation and the Chinese government encourages its citizens to buy gold and silver.

This is a relatively new phenomenon in Chinese culture, as ownership of precious metals was illegal just a few short years back. But this has all changed as China has become the largest producer of gold in the world and is expected to surpass India as the largest consumer of gold as well.

Demand from China is not only coming from the citizens though, as the Chinese government has been accumulating massive amounts of gold and silver for their reserves. After not reporting gold reserves for six years, the Chinese government in 2009 made a surprise announcement that they had nearly doubled their gold reserves to over 1,000 tons. They have been doing this quietly via buying up the production from Chinese mining companies, as well as making purchases in the open market via intermediaries.

China announced annual gold production of 314 tons in 2010 and this number is expected to be around 320 tons in 2011. If the suspicion that China is buying up most of the country’s gold production is true, there could well be another 600 tons or more moved into ‘unofficial’ reserves before the next announcement. Add in purchases in the international market, and it is conceivable that China’s reserves could effectively be doubled again by the end of 2011 to some 2,000 tons.

In December, central bank adviser Xia Bin publicly commented that China should consider adding to its gold reserves and diversifying away from dollars as a long-term strategy to pave the way for the yuan’s internationalization. With $2.7 Trillion in foreign-exchange reserves, even a small portion of this going into gold could send prices skyward. All of this is extremely supportive to the gold price and could explain why the dips in the past year have been so shallow. Furthermore, the World Gold Council has stated that China could exhaust its gold reserves in the next six years, as demand is expected to double while production slows. If China has to go into the open market for a greater percentage of their gold needs, the robust gains we have seen in the past few years could suddenly look insignificant.

But China is not alone in their moves to aggressively increase gold reserves. Russia, India, Saudi Arabia, Dubai and central banks around the world are buying up as much gold as they can. Russia increased reserves by 169 tons and Saudi Arabia casually announced in 2010 that it had made ‘an accounting adjustment’ that upwardly revised their gold reserves from 143 tons to 343 tons, more than doubling the previous estimate!

So with robust physical demand from both citizens and governments around the world, the current correction should be short-lived, absent increased meddling from Wall Street banks. And even with increased meddling, there will come a time when the real buyers overwhelm the paper game and force a massive short squeeze and/or default on the rigged exchanges. The disconnect between the paper and physical market in precious metals appears to be deepening as premiums are increasing and silver is now in both short-term and long-term backwardation.

If you still aren’t convinced about the shortages and illiquidity in the silver market, consider that announced last week that it has run out of silver due to high demand. Furthermore, it took Sprott Asset Management over two months to take delivery of the 22 million ounces of silver they ordered for the Sprott Physical Silver Trust (NYSE: PSLV).

“Frankly, we are concerned about the illiquidity in the physical silver market,” said Eric Sprott, Chief Investment Officer of Sprott Asset Management. “We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver.”

On a more local level, one of my premium subscribers in Hawaii reported that the only coin shop in his area had committed to selling all of the silver it could procure to one wealthy customer. The shop had officially stopped selling to anyone else, as 100% of its ongoing supply has already been claimed! This further demonstrates the degree of demand in the market and potential for more extreme shortages in the near future. Wise investors are stocking up on physical gold and silver while it is still accessible and relatively inexpensive to acquire.

The snake oil salesman at the corrupt investment banks were not punished for misleading investors and selling mortgage-backed paper derivative instruments they knew were doomed to fail. This has created incredible moral hazard that persists today in the offices of JPMorgan, HSBC and others.

These scam artists are making more money than any industry today by finding ways to rip off smaller and less-savvy investors, all while providing absolutely zero contribution to society. They aren’t making anything of value and in this zero-sum gain, they are only helping to destroy the middle class and further concentrate the world’s wealth in the hands of a select few. They control the government and regulatory industries that are supposed to be policing their fraud and are to this day continuing to use the same paper schemes and tactics that precipitated the last financial crash and will likely lead to the next.

As honest investors lose faith in these institutions and grow weary of a default on the COMEX, price discovery may need to occur in the free market, between private buyers and sellers that aren’t using massive leverage and concentrated short positions to move the price to their advantage. I wonder if we might be more likely to use Ebay than Kitco to track the true price of gold and silver in the near future.

In the meantime, the financial shenanigans taking place in the precious metals sector are offering investors a temporary gift of artificially suppressed prices. As some point, the gig will be up and there will be a massive upward revision to the prices for gold and silver. So by all means, we should be using this current correction as another buying opportunity handed to us by Jamie Dimon and company.

They may be able to buy off the CFTC and change the rules of the game to their advantage in the short term, but you can avoid this trap by simply rejecting all paper forms of gold and silver in favor of buying the actual physical metal and keeping it in your possession. I’m not sure if this approach will “Crash JPMorgan,” but it will certainly make their manipulation more difficult, while providing true protection for your wealth.

The Fork In the Road For Europe

The Spectre Haunting Europe

Debt Defaults, Austerity, and Death of the “Social Europe” Model

Michael Hudson

..............The problem is the austerity imposed by existing debt levels........ Aside from the misery and human tragedies that will multiply in its wake, fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession.

The basic problem is whether it is desirable for economies to sacrifice their growth and impose depression – and lower living standards – to benefit creditors. Rarely in history has this been the case – except in a context of intensifying class warfare. ......

What is needed is a reset button on the EU’s economic and fiscal philosophy. How Europe handles this crisis may determine whether its history follows the peaceful path of mutual gain and prosperity that economics textbooks envision, or the downward spiral of austerity that has made IMF planners so unpopular in debtor economies.

Is this the path that Europe will embark on? Is it the fate of the Jacques Delors’ project of a Social Europe? Was it what Europe’s citizens expected when they adopted the euro?

There is an alternative, of course. It is for creditors at the top of the economic pyramid to take a loss. That would restore the intensifying GINI income and wealth coefficients back to their lower levels of a decade or two ago. Failure to do this would lock in a new kind of international financial class extracting tribute much like Europe’s Viking invaders did a thousand years ago in seizing its land and imposing tribute in the form of land. Today, they impose financial charges as a post-modern neoserfdom that threatens to return Europe to its pre-modern state.

Read the whole story here

Sunday, January 23, 2011

Growth For Growth's Sake Is The Sole Purpose Of A Cancer Cell, Not An Economy.

"Transparency", "sustainability", "success" are easy and soothing words we all like to hear. Like "credit", but credit is actually "Debt" and the article below should actually read:
Over US$ Trillion Additional Debt Needed To Support Global Growth. As this is what it is: Debt. Oops, ugly word, but easy to get, difficult to get rid off. In the meantime, Mankind will become the slave of the banking system as US$ 100 Trillion will surely be not enough. This "easy" money drive has to stop as it is the road to serfdom. But who will have the vision and guts to stand-up and say: "Enough is Enough? Surely not politicans as they have all been paid for. Therefore, it is perhaps easier to compare our financial system with the cancer cell: it will eat itself from the inside and die off.

Over US$ 100 Trillion Additional Credit Needed to Support Global Growth

World Economic Forum

New York, USA, 18 January 2011 – Credit levels will need to double over the next 10 years, growing by US$ 103 trillion, to support consensus-projected economic growth. This doubling of credit could be achieved without increasing the risk of major crisis, finds More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit, a report released by the World Economic Forum in collaboration with McKinsey & Company. The study develops a detailed global credit model using historical credit volumes and forecasting potential credit demand to 2020 across 79 countries, representing 99% of world credit volume. The study applies a sustainability methodology to the projected credit demand, using newly developed metrics to answer the following two questions: Will credit growth be sufficient to meet demand? Is there a risk of future credit crises and, if so, where?

The report finds that meeting credit demand will be challenging. Globally, financial protectionism may constrain cross-border financing, a key to the provision of sufficient credit in the next decade, as global imbalances persist. In addition, the regions will experience varying issues: Asia will face the challenge of meeting the high credit demand growth of US$ 40 trillion with less developed financial systems and capital markets. In the European Union, a further US$ 13 trillion of credit in the form of bank lending will be needed. To supply this, banks will require additional capital that, after retained earnings, could lead to a capital shortfall of US$ 2 trillion. Analysis shows that the US would continue to need to draw on global savings, potentially by up to US$ 3.8 trillion in 2020, in order to fund its credit needs, unless there is a marked increase in US domestic savings rates.

“Leaders in the private and public sectors must take decisive actions to avoid contributing to credit hotspots and coldspots, while still meeting the US$ 100 trillion of credit demanded to sustain economic growth over the next 10 years,” said GianCarlo Bruno, Director, Financial Services Industries, World Economic Forum.

Despite widespread deleveraging, a number of “hotspots” – i.e. segments where credit levels grow in excess of sustainable levels – will persist, while new ones emerge. By 2020, these will include retail credit segments in countries representing almost half of the global GDP. By contrast, government credit hotspots are projected for a much smaller set of countries, between them representing 13-14% of world GDP. In wholesale credit, Asia and Western Europe will be the main drivers of hotspots in 2020.

The report finds that the large projection in credit demand can be safely met, but financial institutions, regulators and policy-makers need more robust indicators of unsustainable lending, contagion risk and credit shortages – and better mechanisms to ensure credit promotes development.

“This report is a timely contribution to the discussion of what’s needed to secure stable and sustainable credit for the world economy in the years ahead. Given the huge financing needs of both developed and developing markets, it’s a crucial issue for policy-makers and the financial industry to tackle globally,” said Deven Sharma, President, Standard & Poor’s.

“The banking system has a critical role in supporting future economic growth and this report highlights ways in which it can do so with reduced risk of crises. In particular, there is a pressing need for continued development of capital markets in developing economies to support their continued economic success,” said Charles Roxburgh, Director of McKinsey Global Institute.

The report concludes with eight recommendations that financial institutions, regulators and policy-makers can follow today to ensure sustainable credit levels for the future:

1. Integrate the concepts of sustainable credit into the regulatory agenda
2. Create standardized government accounting practices to increase transparency and accurately assess sovereign finances
3. Encourage responsible borrowing through financial education
4. Encourage financing of local “coldspots” through targeted mechanisms
5. Task a single agency with monitoring global credit levels and system-wide credit sustainability
6. Align banks’ risk appetite with sustainable credit criteria
7. Drive innovation by financial institutions, developing new mechanisms that can safely meet future global credit needs
8. Establish goals for efficient and deep capital markets by 2020 in developing economies

The findings and recommendations of the report will be discussed by experts from the industry, policy-makers, regulators and academics at the World Economic Forum Annual Meeting 2011 in Davos-Klosters, Switzerland.

This report was developed by the World Economic Forum in collaboration with McKinsey & Company.

H/T: King World News

Wednesday, January 12, 2011

The Blind Panic of US Banks & Politicians

Moral hazard neglected as phony profits are being made thanks to corrupt accountants supported by mafia regulators and cheered on by fraudulent politicians and scary bankers.

Apparently only a few people "scratch their heads". The rest lives the lie.

Our society, as we know it, is "toast".

"Why would this be a problem", one could argue. "They rescued the world from a financial collapse?" Yes, but consider this:
  • the collapse will happen anyway; they are postponing the inevitable.
  • the "repair" is not transparent, no consultation at all but in the highest echelons of government & Wall street
  • the "repair" favours a few insiders; the well-connected, to become billionaires and future rulers
  • fraud is rife, rules and laws are being ignored: where are the law suits?
  • regulators, the watch dogs have been neutered; consider the SEC and accountancy profession which have been ordered to "cook the books".
  • Without consultation, the middleclass will foot the bill for the repair, 20-30 trillion US$ till now and empoverish them;
  • After the "repair", total costs will be 80-90 US$ Trillion and Wall street will continue their paper game
  • they are creating a fascist state in which physical and mind control will rule;
  • there is no way back to "democracy".
That's why we are TOAST. And do not think this post is not directed to you as you are not living in the US. Our financial & poltical world is too interconnected.

UPDATE: Threats from everywhere, not only for the middle class, now also for the "elite": the OMERTA has been broken! Code RED. If you talk, you're dead. Politicians, bankers and wealthy of this world are corrupt to the core: Swiss operation Officer of Julius Baer decides to talk, leak documents on internal policies to Wikileaks.

UPDATE1: Sorry, not 80-90 Trillion, but US$ 100 Trillion to clean up the mess. I was close, but not "on the spot". Sorry, but what's US$ 10-20 Trillion between friends?

UPDATE2: Damn! Wrong again. According to the World Economic Forum (WEF) we need US$ 210 Trillion for the coming 10 years just to retain GDP growth.

US Banks Report Phantom Income on $1.4 Trillion Delinquent Mortgages

Huffington Post

The giant US banks have been bailed out again from huge potential write-offs by loosey-goosey accounting accepted by the accounting profession and the regulators.

They are allowed to accrue interest on non-performing mortgages until the actual foreclosure takes place, which on average takes about 16 months.

All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due to them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.

Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

The potential write-offs could be even larger should home prices continue to weaken, placing more homes in the nonperforming category on bank balance sheets.

About 6 million homes are still at risk, according to Schnapp, and at least 10% of them are 25% underwater, meaning their market value is 25% less than the mortgage -- but the owners are still paying interest to their banks.

Wednesday, January 5, 2011

2011: Year of the bank run?

From the article below:
Bank runs "will seriously undermine the prosperity of this country (Ireland, troy ounce) for a generation," Pimco's Mohammed El-Erian said in November. He said the first steps to stemming the run would include "a big external aid package and steps by the Irish government."

Assistance must come from "Big External Aid Package" and "The State" say mr El-Erian. From whom? He knows, and now you know, that every single intergovernemental financial organisation, bank and state is bankrupt: the IMF, Worldbank, USA, Europe, ECB, sovereign countries, everybody!!

Another example of "kicking the can down the road". There is no money anymore, only debt and more debt. So the policy is "Extend and Pretend" and "Kicking the can down the road". As long as they can. In the meantime the rich and famous are hoarding physical gold and silver and stashing it away in vaults on island with names nobody can pronounce.

2011: Year of the bank run?

Is a bank run about to bring Europe to its knees?


Some market watchers say yes, pointing ominously to the torrents of money pouring out of Ireland.

Irish bank deposits declined in November for the fourth straight month, the central bank said last week. Overseas deposits fled the country at their fastest pace in more than a year.

The deposit flight compounds the stress on a financial system whose massive property-lending losses already have driven the government to accept an unpopular bailout from the European Union and the International Monetary Fund.

Worse yet, it shows that the solutions policymakers slapped together in the fall of 2008 helped in some cases to create even bigger problems -- ones that are now coming due.

Unconditionally guaranteeing bank deposits is just such a policy, in a country where loan losses made the banks insolvent, job loss left many taxpayers peniless and deposits now at least double annual economic output.

And this time, given the unpopularity of bailouts and dysfunctional European politics, there is ample reason to fear the banking mess won't so easily be swept aside.

"Facing facts like these, each morning when I wake up I have to wonder, 'Why is today not a good day for a wholesale run on the Irish banking system?'" asks Scott Minerd, chief investment officer at Guggenheim Partners. "And if there is a wholesale run on the Irish banking system, then what stops the same scenario from cascading into Portugal, Greece, Italy, and most importantly, Spain?"

That is very much the question being asked in bond markets, where the cost of borrowing surged in all the so-called peripheral European countries in the second half of 2010. The yield on Irish 10-year government bonds, for instance, surged to 9% at year-end from around 5% in August.

The high cost of market borrowing ties the hands of government officials who have promised to ride to the rescue of the bubble-ridden banks. Ireland has already ponied up outlandish sums to keep the banks afloat. Officials have said at every turn they believed they had the ability to stabilize the system, but stability has remained beyond their reach.

Now, with the state locked out of the bond market and the banks losing depositors, who is going to lend in an economy that already has shrunk drastically from its bubbly size of just a few years ago?

Bank runs "will seriously undermine the prosperity of this country for a generation," Pimco's Mohammed El-Erian said in November. He said the first steps to stemming the run would include "a big external aid package and steps by the Irish government."

The IMF, the EU and the Irish government committed to those steps this fall. But there is still no sign people in Ireland or elsewhere believe the $113 billion bailout package will keep their money safe. Among many other things, there has been a rush out of the euro for the Swiss franc, not to mention the ever-present embrace of gold.

On Minerd's mind

The flight from Irish banks has been most pronounced among foreigners, who presumably are less attached to their bailed-out bankers and can easily find other banks that, at least for the moment, appear less apt to go out of business.

Some 20 billion euros ($27 billion) of overseas deposits fled the country in November alone, according to the Central Bank of Ireland. The level of foreign deposits has plunged 28% in the past year and is down 42% from its bubbly peak.

But don't blame just the foreigners. Domestic deposits tumbled by 6.3 billion euros in November, in their steepest decline since August 2009.

All told, the Irish banking system's deposit base has contracted by 15% over the past year -- which isn't making it any easier for taxpayers to keep the deeply troubled banking sector afloat.

Meanwhile, the aid the Irish banks took from the eurosystem more than doubled over the past year, to 97 billion euros from 45 billion in November 2009.

The flight of deposits from troubled Irish banks is an unhappy irony because Ireland was lauded in some quarters in 2008 when it became the first state to guarantee bank deposits. That decision led to a short-lived surge of funds into the Irish banks -- not that the money stuck around for long. Since the late 2008 peak, more than 100 billion euros of overseas deposits have left the Irish banking system.

When you consider that similar trends could easily play out in the other euro countries, you have the recipe for a hangover-inducing New Year that is likely, in the view of Minerd, to see the euro plunge anew against the dollar. He expects the euro to test its decadelong low against the dollar of 85 cents before all is said and done, compared with a recent $1.33.

"As sovereign credit downgrades continue to flow in and deposits in Europe's weakened banking system flow out, a broader crisis in Europe appears to be imminent in 2011," says Minerd.