Copyright Martin Armstrong All Rights Reserved June 5th, 2012
The Truth About Gold & Why You Should Buy It
Some people only ever say BUY gold and God help you if you say SELL! Even the pro-Gold radio shows will bar you if you do not agree with them. Guess Mainstream applies to them in reverse! The pro-Gold radio shows are just as biased and prejudiced as they say everyone else is against gold, but in reverse. They just don’t get it! This is NOT a religion. This is trying to survive an economic meltdown. You have to be careful not to lose during the short-term battle if you ever hope to make it through the war! Sometimes it is best to SELL and then buy back more when the correction is over. Yet they justify their one-sidedness saying if gold ever does down, it is a conspiracy for it is the exception to everything and must always go up each and every day. There is no such market that acts in the manner they wish to portray as normal. There are legitimate reasons to buy physical gold – they just ain’t what the Goldbugs say they are!
HYPERINFLATION is the Effect not the cause
I have warned that the US system will collapse long before HYPERINFLATION could ever take place. Some people have written how that is possible? Isn’t it HYPERINFLATION the cause of the collapse? They understand that governments will not give up power voluntarily and yet then some think that the biggest risk to the government is the dollar system itself. Europe routinely has cancelled the currency and replaced it. The USA is the ONLY nation where a dollar bill from 1863 is still legal tender. The dollar is NOT the biggest risk from their point of view – that is social unrest! This is why they are creating the power to detain citizens without lawyers or trial and why they are creating the kill switch for the internet to eliminate the only Free Press and to shut down the ability of the people to organize.
Some people ask will the government just stand by as debt deflation simply kills the entire system? Or will it save the failing debts as they have bailed out the banks to prevent them from their own collapse? The HYPERINFLATION crowd bets on simply the latter without end or consequence. They bailed out the bankers because the bankers own the government. They convinced the government they cannot selling their debt without them. If the bankers fail, the government fails. The Investment Banks they did let fail was merely a power-play by those who guide the reins of power to eliminate their competitors. With each crisis, there are fewer and fewer NY banks, for what is taking place is creating a monopoly by crisis. It’s true that the Fed has been buying in federal debt. They shortened the time horizon (maturity) even more by purchasing long-term thinking that would encourage reflating the mortgage market to save their buddies in the NY banks. That failed because the bankers have never passed on any savings from the cheap cost of funds to the borrower making the spread between their cost and the loan rate at historic highs.
Some have asked “Why do you think they will stop” buying the debt and just allowing the system to collapse? This is a loaded question assuming that they have a choice and as long as they continue the buy the debt somehow the system will survive. The question or statement presented was:
“You think the US will ever look like Greece or Spain? Nope, because that is governments giving up power, and you said the US won’t do that. That’s the flaw in your thinking: either they allow the markets to break the system, via debts failing and higher rates, or they print and buy it all, including overseas stuff, to save the system, the US dollar-based financial system, that has allowed the US to live like a King on thin air for decades. Of course they won’t give all of that up, they won’t stand by, they will say to the Fed ..’Print us another few trillion please’” You say the system will collapse…me too, when they print so much that foreign confidence in the dollar vanishes, and the US Govt is forced to print even more to defend its lifestyle, eventually crowding out its own citizens, and there’s your hyperinflation. No offence, but your argument wants to have it both ways. Your experience with politicians should make it obvious that they will not stand by and allow it to collapse (as in 2008), they will print til infinity to preserve their power.”
There are just a lot of assumptions going on here; namely that the system is even linear rather than nonlinear (Bell Curve). The presumption here is you move in a straight line until HYPERINFLATION somehow makes gold $50,000 and ounce, everything else remains the same, and this is better than a Miracle of 34th Street. This is being marketed trying to suck people in like those who are broke sitting in a casino desperately trying the pull that leaver and become a millionaire. This a just pathetic preying upon those who can afford bad advice the least.
Higher interest rates will attract foreign capital only when CONFIDENCE remains intact, as it did between 1981 and 1985 driving the dollar to record highs when even the pound fell to $1.03 in 1985 and gold fell from 1980 for 19 years into 1999. The Plaza Accord also presumed that if they lowered the value of the dollar they would indirectly reduce the trade deficit. What they stupidly did not consider is that they would also devalue all the assets in the United States held by foreign investors and that would create a huge loss for them and the incentive to leave. This is why I wrote to the White House in 1985 warning they would create a crash within 2 years. If you were an investor in Mexico and the currency was about to be devalued by 50%, wouldn’t you SELL? Everything is connected. You cannot simply take some arbitrary action and presume a one-effect consequence. This is far more complex than most even think about.
The Nonlinear Nature of the Economy
To survive what is coming, you MUST understand the nature of the beast. For far too long you have been lied to and led to assume there is a one-dimensional cause and effect scenario.
If confidence in any country does not exist as in HYPERINFLATION, no degree of interest rate will attract foreign capital. The system is NEVER a one way street. It is a delicate combination of variables. What is being assumed here is that the core economy can just simply inflate without limit or that it must reach HYPERINFLATION to create the crash. This is the chicken or the egg problem. HYPERINFLATION is not the CAUSE – it is the EFFECT! Confidence internationally flees causing a “flight-to-quality” and that causes the HYPERINFLATION! Why? As capital flees a country, it leaves behind debt that cannot be serviced. This lack of acceptable reserves of a nation precludes it from trading globally. This is why it is a Bell Curve. Interest Rates went to 17% in 1981 fighting inflation, but that did not cause HYPERINFLATION for confidence in the United States had not collapsed since it was the core economy.
I gave numerous seminars in Europe between 1980 and 1985. The number one question I got was DID I THINK THE US WOULD GO TO A TWO-TIER MONETARY SYSTEM TO GET OUT OF THE DEBT CRISIS?
I explained to audiences that I may have been one of the few Americans who even understood the question. Even South Africa at the time had the Financial Rand for international trade and the Rand for domestic use. This allows countries to control their currency inflow and outflow separate and distinct from the domestic economy. The idea dominating the capital flows at the time was that the US national debt had just hit $1 trillion in 1980 and the Euro Dollar market was also about $1 trillion. Europeans were BEARISH the dollar – absolutely! But the more BEARISH they became, the more BULLISH the dollar became! Why? They were convinced that in order to get out of the massive debt, the US would adopt a two-tier monetary system making external dollars BLUE and domestic GREEN and these external dollars would decline in purchasing power value and thus the solution was to sell Euro Dollars and move all deposits to domestic dollars. That drove the dollar higher and the Euro Dollar deposits in Europe dropped by nearly 50%.
So the end result can be far more complicated than the simple linear idea that they will just print into HYPERINFLATION. Sounds nice! Way too simplistic! It just can’t happen that way within the core economy – that is only possible within the peripheral fringe economies from which capital can flee to other safe ports. HYPERINFLATION is possible only in a peripheral fringe economy because the rest of the world around it is STABLE. That allows capital to “flee” outside the economy and it is the lack of currency with real value that creates the vicious spiral toward the HYPERINFLATION lacking reserves. When you are talking about the CORE economy instead of the fringe such as Germany in the 1920s or Zimbabwe, it is no longer possible for capital to flee to other nations because there is nothing stable to run to. If the USA were to move into that sort of scenario, the entire world would collapse. The political pressure would be tremendous against the United States and war would breakout before HYPERINFLATION becomes possible. What are you going to buy? Euro bonds? Yen bonds? They are better? Big institutional money still needs the dollar. The flight-to-quality is still taking place.
The Germany HYPERINFLATION was 170 marks to the dollar to 87 trillion. When you say HYPERINFLATION, you are not talking merely 100 times increase in price. We are talking about exponential moves that go into the trillions. Most seem to throw this word around very easily without any true comprehension of what HYPERINFLATION even is.
The Bank for International Settlements (BIS) reported cross-border loans in Europe fell by $799bn (£520bn) in the fourth quarter of 2011. This was led by an overall broad retreat from Italy, Spain and the Eurozone periphery. Lending to banks within the Eurozone saw an overall decline of $364bn or 5.9%, while drastic reductions took place amounting to 9.8% in Italy and 8.7% in Spain. And you think the dollar is the problem and US HYPERINFLATION?
The BIS’s quarterly report said the decline in lending was “largely driven by banks headquatered in the euro area facing pressures to reduce their leverage”. Banks must raise their core tier one capital ratios to 9% by the end of this month or face the risk of partial nationalization! The global Basel III rules are also pressuring banks to retrench even further in Europe. The International Monetary Fund announced the banks will have to slash their balance sheets by $2 trillion (£1.6 trillion) by the end of next year even and that they said was a “best-case scenario”.
Sorry, but HYPERINFLATION is not even appearing on the radar yet. The European banks are still partly nationalized in many cases. Their reserves were bonds of Euro member states. We are talking about the same type of DEFLATION that hit the US banks and resulted 744 bank failures in just the first 10 months of 1930. For the whole decade of the ‘30s, 9,000 banks failed! It’s estimated that 4,000 banks failed during the one year of 1933 alone. By 1933, depositors saw $140 billion disappear through bank failures. That was massively deflationary! It is more than what the Fed does.
This is a global economy – not domestic!
The other problem that people talking HYPERINFLATION fail to understand besides their myopic view of just the Fed’s actions and not the collapse in asset values in banks and the private sector (mortgages), is the difference between BIG INSTITUTIONAL money and the individual. The individual can buy gold coins and hide them in their sock drawer. They can go to a bank and withdraw everything they have typically in cash. A BIG INSTITUTIONAL client does NOT have such options. They cannot walk to the bank and request $10 billion in cash. They cannot even buy $10 billion in gold coin. Assuming they did and could, they are sitting targets for government anyway. In 1934, the individual escaped with their gold. Institutions were ordered to turn it in and had to do so. That was the 6 month bank holiday. The same advice to an individual does not win the day at the institutional level. There are significant differences.
So why is this even important? Unless you honestly understand how the mechanism functions, and that there is a contraction still in assets globally that was highly leveraged, which is then offset by the Fed and other central banks buying in the debt. WHEN THE FED MONETIZES more than the CONTRACTION in private assets and banks, then inflation appears. If the CONTRACTION is $10 trillion and the MONETIZATION is just $3 trillion, it is still DEFLATIONARY! Those who ONLY look at what the Fed is doing is like only paying attend to the longs and not the shorts. There are two-sides to everything.
You have to understand this or you could lose more than just your shirt. What we are facing is by no means an isolated United States problem. There are so many people screaming and yelling that the end is near and the dollar is the real problem that we face, yet they are truly clueless. Europe is being torn apart at the seams. Do you really want even Spanish or French Eurobonds forget Greek? Then Japan from an economic debt perspective is far worse than even Greece. If things were so bad that the dollar will crumble in isolation, then why did China just cut a deal to BUY US Treasuries directly from the Treasury bypassing the New York banks altogether? China knows how corrupt the NY banks are and are starting to refuse to deal with them. They certainly do not want them to hold any of their assets! Look at MF Global. One of the many theories why the US government went after Princeton Economics to shut it down was Chine just hired PEI to start doing all its forecasting internally. China is well aware of how there is no rule of law in New York. Unlike the Fed, they sent people to work in the Western banks, learn the ways of the markets, and returned to run the Bank of China. They have INSIDE FIRST HAND knowledge how New York has been trading with other people’s money long before MF Global exposed how things really function in New York. So is it any surprise China is now refusing to deal with NY bankers?
Interest rates rise when capital shifts from Public (bonds) to Private (stocks, gold, commodities etc.). Rates rise in a bull market because people see the arbitrage meaning that there is a profit to be had over-and-above the interest rate. This is why the stock market has NEVER peaked with the same level of interest rates TWICE! It is the difference BETWEEN expectations of profits and the rate of interest. If you think you will triple your money, you will pay 35% interest. Thus, you cannot create hard and fast empirical rules about markets will peak when rates hit xyz! Assuming there has to be HYPERINFLATION to create the bust is simply a misunderstanding of even how HYPERINFLATION unfolds and why. Sorry – that is the result of capital flight – not the cause!
The global economy is a Complex Adaptive Dynamic Network composed of interconnected nonlinear activity. Capital has been rushing around for milenia. Aristotle wrote about. So did numerous Roman authors. In 63 B.C. the famous Senator of Rome, Marcus Tullinus Cicero, stood before the Senate of Rome and said:
“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt!”
The Tulip Bubble was not just Amsterdam. Tulipmania took place between 1614 and 1637 Europe-wide. What people do not appreciate, tulips even began to trade in London in 1610. Consequently, this first speculative Bubble post Dark Age is critically important, yet rarely understood. Charles Kindleberger in his Manias, Panics, and Crashes: A History of Financial Crisis (1989) paid only lip service to the event writing it “probably [is] the high watermark in bubbles.” He went on to say in a footnote on page 7 of his second edition (1989):
“Manias such as ••• the tulip mania of 1634 are too isolated and lack the characteristic monetary features that come with the spread of banking after the opening of the eighteenth century.”
Kindleberger failed to realize that investing in tulips was widespread drawing in capital from all over Europe. He basically dismissed the incident as a freak of finance. He paid too much attention to what the object of trading was and ignore how it was trading. These were options on future delivery not physical tulips. It was a “derivative” bull market. In truth, the instrument that is attracting capital is irrelevant. It is still a concentration of capital that matters.
Stop the Domestic Analysis – It’s International!
Tulipmania was a Europe wide bubble and the first international bubble post-Dark Age. Where the 1720 South Sea Bubble and the French Mississippi Bubble were the first emerging market bubbles as well as the first intercontinental bubbles. However, every time there is a crash, there is an investigation trying to pin the blame on some domestic player. They NEVER look around the globe to even try to comprehend international capital flows. In the movie coming out (the Forecaster) they interviewed former staff of Princeton Economics and verified that the CIA had made contact after the model correctly forecast the collapse of Russia with 1998.55 turning point in the Economic Confidence Model, acknowledging our contribution in developing Capital Flow Analysis that became obvious only because of our international client base. Economists from Marx on, purport that government has the ability to MANAGE the economy, and that assumption has been what is driving everything nuts right now. The FED will NOT be able to buy 100% of all debt. The system will collapse for it is not HYPERINFALTION that causes the collapse, it is purely an effect within the system after capital flees the country. The real question facing us now – where can you go since all nations borrow with no intention of paying anything back leaving everyone in the same boat?
Despite the doom and gloom that somehow the USA is the worst of all, the data shows precisely the opposite. There are more foreign owned assets in the USA than there are overseas assets owned by Americans. After the December enactment that foreign entities must report what Americans are doing outside the USA or that firms assets will be seized in America, American’s can’t open even a bank account offshore since nobody wants to deal with America. So look at US owned foreign assets to continue to decline as a matter of law in addition to the Sovereign Debt Crisis emerging in Europe before it will ever hit the USA. This is why Americans are now being compelled to resign their citizenship and leave because of the law and at the same time they have been fleeing Europe from an asset perspective contributing to its demise.
You simply have to understand how the global economy really functions or you will get your head handed to you in very short order. You have to understand the flow of capital globally. Hoover wrote about the Sovereign Debt Crisis of 1931 and how capital acted. This is what we will see for as Europe continues to be its worst enemy, they are setting off capital flight to everywhere but there. Hoover wrote:
“During this new stage of the depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold and short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era.”
So even under a Gold Standard capital flees. Why? Because there is not even one type of a Gold Standard! Far too often what people call a “Gold Standard” is by no means correct. Using gold as a medium of exchange is completely different from a “Gold Standard” that is an agreed upon fixed value for gold compared to a free floating value of gold. So while gold coins might go back to 600BC, that does not imply there was a “Gold Standard” of fixed value. The Gold Standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. There are several varieties of a Gold Standard.
(1) The Gold Specie Standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal. This was the predominant ancient monetary system where there was no “standard” per se regarding value and thus this was a de facto floating exchange rate system using precious metals among nations.
(2) The Gold Exchange Standard typically involves the circulation of only coins made of silver or other metals, but where the authorities guarantee a fixed exchange rate with another country that is on the Gold Standard. This creates a de facto Gold Standard, in that the value of the silver coins has a fixed external value in terms of gold that is independent of the inherent silver value.
(3) The Two-Tier Gold Exchange Standard is where there are two values for precious metals one that id domestic and the other external between nations. There have been many different two-tier monetary systems that existed for example in the United States during the 1870s where there was a domestic silver dollar and an external trade dollar used with mainly China. In the paper money world, South Africa in the 1980s had the rand (domestic) and the financial rand (external).
(4) The Gold Bullion Standard is a system in which gold coins do not circulate as in the USA post-1934, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency. This became the Bretton Woods Monetary System that collapsed in 1971.
So in 1931, physical gold was actually being moved from one country to the next. The big money did not have it in coins like an individual can do. So when gold was nationalized by Roosevelt, the institutions lost it to FDR! All the gold coins that survive today are from individuals who withdrew them from the banks. Government could not get its greedy hands on the privately stored gold outside of the banking system. Privately, gold is a great HEDGE against government. Publicly, they will never go to a Gold Standard. They want to eliminate physical money in any form and go electronic to collect 110% of what they think they are owed in taxes. Gold will become the UNDERGROUND barter medium not ABOVEGROUND medium of exchange.
Since World War II, Europe has routinely cancelled their currency. Americans have never heard of such a thing. Why would a country cancel its currency regularly? To prevent the hoarding of untaxed cash by the UNDERGROUND ECONOMY! From preliminary investigation we conducted at Princeton Economics, it appeared that the UNDERGROUND ECONOMY in Italy was as big as the reported economy. If you looked at the data, they should have been in civil unrest 30 years ago. The Italians simply didn’t bother to pay taxes. The Greeks were the same as were the Spanish. It appeared the further north you went in Europe the more oppressed and subservient the people became resulting in the lower the percentage of the UNDERGROUND ECONOMY. In the United States, that figure for the UNDERGROUND ECONOMY has been about 15-20% for decades. Waitresses rarely reported tips. Based upon survey we conducted recently, 5 years ago a waitress got nearly 50% of her tips in cash. Today, that is down to 20%. This reflects how people are being herded like cattle into plastic money. As cash dwindles and the use of plastic money emerges with greater force, government has been assaulting this UNDERGORUND ECONOMY like never before.
Every once in a while you hear about legalizing the drug trade. If they did, this will be the greatest blow to the UNDERGROUND ECONOMY and the biggest shift in capital flows back to the United States while boosting the Central American governments democratic process eliminating the corruption and bribery. That is why Prohibition was revoked by FDR – TAXES that contributed to the New Deal. It costs money to enforce vice laws that never work anyhow, but regulate it and you make a fortune. Like outlawing prostitution really worked? Hello! Remember Al Capone? Prohibition? Elliot Ness? Come on! You can pass a law that pretends to end anything. All it does is send it into the UNDERGROUND ECONOMY. Government actually underwrites crime in this manner.
It is Adam Smith’s Invisible Hand. Make something illegal and you increase the price and demand attracting more people to the opportunity to make big bucks tax-free. The same can be said about abortion. All the hype on that subject the takes place as if some law will eradicate the practice is amazing. People expect 100% compliance with anything is just nuts. Or outlawing Gay Marriage will somehow end same sex cohabitation. And of course, speed limits really work too. You can NEVER enact laws against any vice and really expect it to work. Nobody can point to a single period in history when such legislation did anything other than cost lives and funded crime via the UNDERGROUND ECONOMY. Regulate something is one thing. However, only a moron would actually pass a law and think it will stop the practice! That is the definition of insanity; doing the same thing to any vice over and over again while expecting a different result. Even the Romans tried eliminating prostitution by forbidding paying a prostitute with a coin that had the image of the emperor, which they all did. Solution, create Prostitute Tokens you bought, paid the girl, and she redeemed the token; all perfectly within the law.
This world of money is becoming a lot stranger. The move toward electronic money is in your face, yet some cannot see it because of these wild expectations that gold will win the day. To what purpose? The alternative to cash now includes debit cards, credit cards, and prepaid gift cards they sell on racks at the local pharmacy. Online, there are accounts where you authorize them to pay a bill or remit funds for an immediate purchase. You don’t even need a credit or debit card. There are even electronic currencies appearing that are not issued by a government such as BitCoin, which is an experimental new digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority managing transactions and issuing money are carried out collectively by the network. Bitcoin is also the name of the open source software which enables the use of this currency. The software is a community-driven open source project, released under the MIT license.
Then there is cell-phone-cash that is facilitating mobile transactions. Governments are ecstatic about this trend for now you make purchases by your cell phone and don’t even use a credit card. Google is pushing ahead with what they call the Wallet that is a mobile payment scheme replacing your credit card with the cell phone storing your data and communicating with a merchant’s credit card terminal via a radio technology known as Near Field Communication. Verizon, AT&T, T-Mobile, and others are all now rushing to compete with Google.
Consequently, for the individual who thinks the Goldbugs are crazy and make no sense preaching always the end of the world and how gold will become the new money, do not let that pure hype deter you from looking at gold for what it truly is – a hedge against government – NOT INFLATION! Gold is not even the hedge against fiscal mismanagement of the Fed and its monetization. Its role right now is the hedge against the meltdown of the current monetary system. HYPERINFLATION assumes that the entire world society will even tolerate that outcome. Keep in mind that it was the HYPERINFLATION in Germany that opened the door for Hitler.
The question of whether government would return to some form of gold monetary system, the answer is flat outright NEVER! That would imply they have to stop borrowing money. They would have to eliminate the national debt. Returning to some form of gold payment would wipe out Fort Knox just by paying the bankers now in gold on outstanding debt! They would love that one. The bankers will never agreed to making gold $50,000 and forcing them to accept that rate. Officially, it is not in government’s interest to return to gold. They want electronic money so they get all the taxes on every dime you pick-up in a parking lot. That is NOT a statement about gold or its worth, value, or use. Gold I think will be the hedge, but in a private sort of the way to transact almost on a barter system. They are using debt cards for everything replacing cash. This is by design. There were $10,000 bills in 1934. Now you have $100 at best. Back then you could have bought 20 Cadillacs for that. $100 may get you an oil change today – maybe! They have been systematically eliminating cash all along to attack the UNDERGROUND ECONOMY to get they pound of flesh!
So the argument is NOT gold per say, but what is government up to? That is the key! To go where the Goldbugs say that gold will become money again, there has to be an overthrow of government before that would ever happen. Everything has to go from the national debt to government and that includes both politicians and bureaucrats. We are talking about REVOLUTION to achieve that. Why do you think they are authorizing indefinite detention and the kill switch for the internet? Trust me. It has nothing to do with the 19 guys and the camel.
HYPERINFLATION takes place as the EFFECT of capital flight – not because of it initially. When our computer was accurately forecasting wars, at first I was mystified. How could a model predict something like that when there was no political data being input? It took me some time to investigate this phenomenon. Then at last I understood how it could do that. If you are going to start a war, you anticipate what will unfold and you move your capital in advance. That was the key! So when I stood up and announced that the computer was forecasting the collapse of Russia in 1998 that turned out to be the whole Long-Term Capital Management debacle, I pointed out to our clients that we saw $100 billion flowing into Russia, but a $150 billion coming out. The computer could not say who was moving the money or even why, only with confidence that it would collapse and when.
Six months later we were able to put the pieces back together. It turned out Russia itself was moving money to hide it from the IMF to get more money from them. When 911 took place, the new theory that emerged was based upon that forecast. My correspondence with the Justice Department at the time explained that you trace funds to positions placed just before the event to profit from it. You also look to capital movements in ADVANCE of the event. So HYPERINFLATION is precisely the same thing. It is the EFFECT and never the CAUSE. Smart money sees the problem and begins to move. As it does, the trend in capital flows shifts. When that trend continues and picks up steam, collapse becomes inevitable because there is insufficient funds to meet obligations. In the case of Germany, they printed to meet obligations. Being the fringe, they did not set in motion the entire event globally just as the collapse in Russia in 1998 did not create the same effect outside of its financial markets.
Gold v Paper Gold
The one piece of propaganda about gold that has gained a lot of traction is that it would be worth more than $50,000 an ounce if the “Paper Gold” was eliminated for that is the conspiracy that keeps gold down. A typical comment I receive:
“I agree gold will be the hedge, but remember, with gold valued at physical only, it’ll be worth at least $55,000 in today’s dollars. That will get every government out of a hole. Some lucky individuals that have seen the way the tide is turning will benefit too, but mostly it’ll be governments around the globe. There is no way they can tax their way out of this mess.”
This argument is just nuts and so insane it is hard to grasp who even makes up this shit. ALL commodities trade in futures and physical. This has been going on since Babylon who invented futures markets. Farmers borrow today to plant their crop. To guarantee a profit, they sell it forward. So yes, there is now paper wheat rather than physical. So what? This is not a conspiracy that just hatched. This is how markets have been trading for at least 5,000 years. The statement presumes there is a conspiracy that all of these people have sold “paper gold” they do not have and that suppresses the price.
When the 1987 Crash took place, I had enough of government and came to the realization that they were morons. When we received a request for help, I was loath to even get involved. They began calling friends to persuade me to help because I turned my back on them in 1985 and wrote to the White House telling them they would increase volatility and crate a crash within 2 years. They were morons. They actually thought lowering the value of the dollar by 40% would increase exports with NO other consequence! The foreign investors sold creating the 1987 Crash. If a country is going to devalue their currency you get the hell out of their quick. These morons do not even understand that. Just Amazing!
The first statement I was hit with was how the investigation would uncover that mythical person who sold in effect PAPER STOCKS they did not own to force the market down. I asked how is it possible for any short to ever outnumber the longs? If at the time he borrows shares from a long and sells then to another person creating a second long, how does he outnumber the longs? He is at best outnumbered two-to-one. Now let’s take futures or naked shorts in stock. In order for some player to sell, there has to be a buyer. Everything is always evenly matched. So again, neither side can out-number the other.
So why has this argument gotten any traction? The PRESUMPTION is that those buying PAPER GOLD are “real” and the shorts are all just a conspiracy and if they were not there, then the longs would drive the price up dramatically to $50,000+. You could say that about every future contract from oil to wheat. Hell, life insurance is a futures contract. A number of people can take a life insurance policy on you from yourself, family, or your employer. There is only one life, but there can be numerous policies. So?
The FREE GOLD arguments today are similar to the FREE SILVER arguments of the 1890s that virtually bankrupted the USA in 1896 claiming silver should be raised in value and FREE SILVER will save the day. PAPER GOLD by no means is suppressing the price. The longs do not have to roll their futures. You can let your contract do to the end and take delivery! The longs are no more “real” than the shorts. This is a trading market. Sorry – that’s it. The so-called shorts are by NO MEANS suppressing the price of gold. If all the longs went to delivery, which they have the power to do not a short, then the “conspiracy” would be broken. Gold is just not ready for price time – IT WILL BE! JUST NOT YET! If all this nonsense would stop, a lot more people would buy gold. Right now, far too many assume to buy gold is a religion that makes no sense. I also get emails asking am I really serious and think gold would rise absent all the nutty scenarios?
The latest craze was all about PAGE (Pan Asia Gold Exchange). Somehow the new Chinese gold market will be an “honest” market compared to US and Europe was the new mantra that was supposed to reverse gold and sent it to moon within days. People have distorted this issue of spot v. futures claiming the futures market is dictating the spot market and somehow PAGE, located in Kunming, the capital city of Yunnan Province in South Western China, will reverse London and New York trends. This evil conspiracy where people prefer to LEVERAGE their bets rather than just buy gold for cash UNLEVERAGED is absurd and could apply to every market and of course stocks where margin trading exists. It did not stop the Dow rising from 41 in 1932 to the highs in 2007. It has also been argued that the US/European spot market is not “real” for you own no real title to a specific bar of gold. You can say the same thing about a $20 bill you deposit in a bank. When you go back and withdraw the $20, it will not be the same identical bill/note that you deposited. If you buy a stock it too is in “street name” unless you take delivery for only then will it be actually issued in your personal name. This is the way EVERYTHING functions. It is NOT abnormal. Title does NOT exist in anything unless you take delivery. If you invest in a mutual fund, you no longer have title to that specific money either. So these sorts of arguments are exploiting the nature of the entire financial marketplace that is by no means unique to just gold. So those making such arguments are either charlatans or ignorant of the real global structure. Of course, me just explaining this truth will only foster more hatred from those who are trying to preach a religion rather than forecast markets.
The PAGE market is a 10 ounce 90 day contract and it will be in China’s currency – the renminbi. This story is being spun to make people think that magically positions will now gravitate to China from COMEX and London because of the lack of title. This is just more nonsense. This would then create a contango because PAGE will be traded in renminbi. You will then have currency risk. China knows what it is doing. Again these stories are coming from people who have no real trading experience – just theory they seem to conjure up while reading the newspaper on the throne.
Much of these scenarios are simply repeats. For decades, Chinese citizens were barred from owning physical gold under penalty of imprisonment as was the case in any Communist country since gold was an underground form of money (which we could end go back to in an electronic money world). Those restrictions came off in 2002 and then, in September 2009, China began to actively promote gold ownership to its citizens. This was to help the trade imbalance. How? I did the same thing for Japan. As long as the gold would be purchased from America, the trade statistics only track money flow – not goods. Once you understand the accounting system, it becomes easy to tailor you actions to help political circumstances. Since the Japanese had the same problem, all they had to do was buy gold in the USA and it would impact the Current Account as if they bought Chevys. China is doing the same thing. Buy American gold, not manufacture. You get the same economic bang for your remminbi.
People making up these stories to justify buying gold are confusing a lot of people with bullshit that is turning potential buyers off because when they investigate closely, the stories appear to be akin to a used car salesman claiming a little old lady drove every car on the lot. The real point of this new contract in renminbi is currency! The theory is that when PAGE would open, gold will soar overnight for it will be the only REAL market and the Chinese have been waiting so long to buy, gold will take flight. Well, the PAGE market was scheduled to open in the last quarter of 2011 and here with 50% of 2012 gone, those lines have not appeared. China did not change the world with PAGE. In fact, again it is the same nonsense that dominated the rally from $35 to $200 in anticipation Americans would then line up to buy gold. That did not happened when America legalized gold.
Nevertheless, in other words, what China is doing is flying an indirect way to trade its currency. You will be able to arbitrage the gold stripping out the renminbi. China and its central bank are NOT stupid. The people I met with in the central bank in Beijing were traders, not academics. They know PRECISELY what they are doing. This is opening the door to indirect currency trading. From their perspective, this will allow them to experiment with a free floating currency without it directly affecting the exchange rate. It is a clever black market derivative. Just as we warned that allowing each member state in Europe to retain separate bond issuing authority was merely creating a derivative way of still trading a implicit currency per nation. Trading gold in renminbi is no different than Greece still issuing its own Euro bonds allowing capital to target just Greece. You can buy Page and sell New York on a per ounce basis and the net result will be a currency spread with nothing to do with gold that is neutralized.
The ratio of trading futures to actual spot gold is about 10:1 on a bad day. This is another pet argument that somehow is twisted into some evil plot where the future market is setting the tone for the price in the spot market. This simply means people prefer futures than spot because they can LEVERAGE their money. This is no different than buying stocks on margin. All commodity markets trade the same way. This is not evil because someone trades gold back and forth to make money instead of buying and holding as the stock brokers advised during the Great Depression. If you trade spot, you pay cash in full. People trade the futures to LEVERAGE their money the same as buying stocks on margin with a little more kick. This does not make them a traitor to some cause.
In the 1970s, I helped many Arabs use the metals market to earn interest they religiously were not allowed to earn. They bought gold and sold it forward. That forward price was the effective interest rate. They leased gold because they could not earn interest. It was no big deal. This is simply the way the futures markets gained the capital backing.
There have been schemes to manipulate markets. This was common in ALL commodities especially the agricultural markets during the 1970s. As long as you are at one of the bank NY banks, you can do no wrong. That is corruption – it is not a plot to control the price of gold permanently. To what purpose? Just because gold is not at $10,000, does not invoke a conspiracy. Commodities always bust upward into a Phase Transition phase. Gold has not rallied just yet beyond the $2,000 level because the CONFIDENCE in the system has not yet collapsed. The say Spain will be bailed-out. But there is no actual entity with cash to help it. This is like a guy willing to say whatever it takes to get his date in bed then and there. Tomorrow I another day to explain why she thinks he lied, bit it is her problem because she misunderstood. It is just a matter of time when gold with explode and the real catalyst will be the Sovereign Debt Crisis. They manipulate silver more so than gold because it is easy. We really do not need all these scenarios to justify buying gold. It is the natural hedge against geopolitical and economic instability. In that regard, gold is coming of age.
Then there is the: “How do you explain the Chinese encouraging their citizens to save in gold, and the same in Europe (VAT removed, frequent issues from the mint), and actually even the Americans are minting Eagles as fast as they can. If it was all a conspiracy for government to tax everything electronically why would they still be dishing it out, especially the US?” The presumption here is that government gives two-shits about the people! The US and Europe are selling gold to the public BECAUSE they know there is NO POSSIBLE way they will return to gold. They removed VAT in Europe to sell more. HELLO? China has not really encouraged people to buy gold because gold is a great investment. This is a trick I showed the Japanese. Buy gold in New York to reduce the appearance of a TRADE DEFICIT because the Current Account does not care WHAT it is that has been purchased, only the currency being paid. So sorry! This is a trick I have taught countries for decades how to massage the political problems that stupid bureaucrats have no clue what they are arguing about – i.e. Plaza Accord. Buy gold in NY resell it in London, and reduce the trade deficit – voilà!
Gold has been around for a long time. It has evolved from something only the king or pharaoh was allowed to possess to a rare commodity used for jewelry. It only began to be used a medium of exchange simply because it was something everyone wanted. It became a symbol of wealth just as in the 17th Century paintings the women were fat for that showed they had money and could afford to eat. In Russia, sugar was a rare commodity. If you were rich then your teeth were black and decayed because you could afford sugar. People actually began painting their teeth black to pretend they were wealthy.
So gold has been around a long time. It has been an object of desire. Beyond that, there are no special qualities that render it as money nor does it present any exception to the ups and downs in value as anything else in society. Gold is in plain and simple terms, a commodity. Why some people have to use it as a mystical object that would solve all the problems of the world, who knows. But gold will never change. It is a valuable commodity that should be part of any portfolio. Its advantage over real estate or equities is its movability – you can take it with you when it is time to flee.
THE GOLDEN OUTLOOK
I love the plagiarizers. All of a sudden there are people claimed to be forecasting the Sovereign Debt Crisis will happen in 2020. Gee – wonder how they come to that date even independently. Others, who were insisting upon gold would be $10,000 to a $100,000 by now getting everyone all dressed up with no place to go. All of these people just like standing up and pretending they are what who knows. The ONLY way to do forecasting is by quantitative modeling. NOBODY can forecast this stuff from a personal gut feeling and be consistent. How do you do timing without a model? This is NEVER about one person’s opinion v another. Those who try to argue he is wrong because I think this, may be highly dangerous to your survival. This is not a guessing game. This is the short-comings of any type of model that depends upon personal interpretation such a patterns or technical analysis along. Here are the computer forecasting arrays on the daily, weekly and monthly level. It still appears the Labor Day period is going to be nuts this year. So hang on to your seat. We have a wild ride ahead. The forecasts provided the the Special Report are still active as are the targets ahead.
So Don’t Worry – Be Happy. Gold is not going up because of all the conspiracy claims nor because the real gold will conquer the paper gold. This is all about reality. Gold standards do not work because you cannot fix the price of money regardless what you call it. To try to do so is communism where the real attempt was to eliminate cycles. Gold is a viable part of the portfolio. It will rise to the occasion when the timing is right. The very people accused of keeping it down are the very people who will turn around and send it up as well. This is just about time. Nothing more! When the time is right and people realize that the Governments have no Clothes, look out – there will be a stampede at that time. For now, that still appears headed into 2017.
