Bitcoin made big news over the past year or so, when the price spiked and made some people rich. The possibility of fast money always generates a lot of commotion, and it certainly did this time.
Personally, I didn’t want the price of Bitcoin to spike; it grabbed people’s attention for all the wrong reasons. Cryptocurrencies—of which Bitcoin is the first, the best known, and currently the most important—are a revolution in commerce. But they are also much more than that.
Bitcoin is an intrusion into a stasis-oriented world: the child of radical concepts and cryptography, birthed by confirmed outsiders. This is a new and different thing, not a slightly different financial tool.
But even this is not what matters most about Bitcoin.
The Bitcoin blockchain—a decentralized public ledger for the transfer of assets—is truly a ground-breaking development, but that’s not the key factor here.
The ability to utterly bypass the Fed, SWIFT, and the rest of the money monopoly is the answer to a hard-money advocate’s fondest dreams, yet even this isn’t the thing that really matters.
What matters are the people whom I call, affectionately, “the Bitcoin kids.” This is a very loose grouping of thousands of people, mostly fairly young and widely dispersed, who are thoroughly committed to the cryptocurrency revolution and all that it entails.
What the uninitiated don’t understand is that these people are not just trading bitcoins; they are busy developing a whole new generation of products and services—things like Silent Vault, Monetas, Etherium, and many others. Lots of them are involved in 3D printing, and some, in the maker movement. Others are involved in humanitarian efforts like BitcoinNotBombs.
These young people are not terrified at the prospect of failing at a new venture. Rather, they are picking spots, jumping in, and getting to work. And if a venture of theirs does fail, they pick themselves up and start over.
Please bear in mind that if I wanted to, I could list a number of problems in the world of Bitcoin. I could further explain a number of attacks and potential attacks on Bitcoin. This is not an entirely invulnerable technology, and I am not holding it up as perfection. But those problems don’t belong in the center of this picture either. The Bitcoin kids are adaptable and stand a good chance of side-stepping or overcoming the attacks that will come upon them.
Older folks are sometimes too touchy about the things that young people do. For example, take a look at this photo:
Seeing a kid in a mask and with a scarf around his head, it’s easy to call him silly. (Before throwing any stones, though, we really should remember all the stupid things we did at twenty.) But again, that is beside the point—look at this kid’s sign:
The corrupt fear us.
The honest support us.
The heroic join us.
Think about the thoughts and commitments behind those words. These young people are claiming righteousness and honesty and heroism. What better ideals could we possibly want our children and grandchildren to champion?
And here’s another thought for older folks:
If you think the Bitcoin kids are being impulsive and erratic, get involved and help them. If you think they’re discounting the attacks they’ll face, fill the gap and prepare them for those attacks. Sitting on the sidelines and finding fault is primarily a way of defending your own inaction. If you think these young people lack experience and depth of understanding, roll up your pants, wade into the surf, and start delivering it to them. Show them by doing.
Let me give you an example of the attitude these young people are displaying. One of them, Julia Tourianski, wrote this:
Just like the Internet gave information back to the people, Bitcoin will give financial freedom back to the people. But that’s only the first step… Bitcoin will allow us to shape the world without having to ask for permission. We declare Bitcoin’s independence. Bitcoin is sovereignty. Bitcoin is renaissance. Bitcoin is ours. Bitcoin is.
These young people believe precisely what Thomas Paine told the disobedient and rebellious American colonials of 1776:
We have it in our power to begin the world over again.
The Bitcoin kids believe that they have the power to begin the world over again, and that’s a very powerful thing all by itself. Furthermore—and this is of supreme importance—they are acting on that belief every day… thousands of them. They are not waiting around for public opinion to support them, they are not waiting for “the masses to rise up,” and they are certainly not waiting for permission. They are getting up each day, inserting their will into the world, and building a crypto-currency economy… and building a new world thereby.
Most of us have long known that the current world system was corrupt and devolutionary. We’ve been trying to thrive in spite of it, biding our time, and wondering when things would ever start to change.
I’m here to tell you that things have started to change. Bitcoin is at the center of it, and the Bitcoin kids are the key. We can fight it, join it, dance, mourn, or simply defend our ignorance, but the time we’ve been waiting for stands before us, right now.
Courtesy: Paul Rosenberg via Casey Research
Argentine’s currency “the Peso” fell another 2.2% and is trading at 12.9541 per dollar at 4:04 p.m. Buenos Aires time. Since last month’s default, the currency has declined 22%.
Argentina defaulted last month for the second time in 13 years after the country was blocked from making debt payments because President Cristina Fernandez de Kirchner refused to comply with a U.S. judge’s order to also pay about $1.5 billion to a group of holdout creditors from an earlier default in 2001. Creditors including Elliott Management Corp., which is demanding payment in court, refused to accept losses of about 70 percent in debt restructurings following the earlier default and have spurned subsequent offers on similar terms.
Over the past week, the currency has weakened 0.9 percent in the official market, the most among 24 emerging-market currencies tracked by Bloomberg after the Chilean peso. It was little changed at 8.4014 per dollar today.
The future of the Peso is very much depending on a potential resolution of the default. If Argentines will rush for US dollars to protect themselves from further depreciation, the situation will become worse for the currency.
As gold is reflecting the value of currencies, it is no coincidence that “Peso gold” or gold in Argentine’s currency has exploded higher recently. The Argentine Peso, expressed in US Dollars, is trading at all-time lows. Consequently, Peso gold is trading at it all-time high. The following chart is courtesy of Sharelynx.
The chart shows the Argentine Peso over a period of 10 years with the black line, expressed in US Dollars. Before 2002, both currencies were pegged at parity. The lower part of the chart represents Peso gold. It goes without saying that the Peso and Peso gold are inversely correlated.
Dollar gold is represented in yellow. One could observe that Dollar gold and Peso gold have been tracking each other closely till June 2013. As of then, Dollar gold has gone sideways, while Peso gold has gone higher and truly exploded in 2014.
In terms of outlook, Zerohedge summarizes Bank of America’s view as follows:
The perception of many locals is that the risks of an economic/currency crisis before year-end have increased significantly. This compares to a view they had before of a muddle-through till the 2015 presidential elections. Policy decision-making is ever more concentrated, and the administration has radicalized, but the severe economic downturn will change political incentives in 2015, in BofA’s view. With the official peso rate at record lows once again, the black-market Dolar-Blue tumbled to over 14/USD – a record low indicating dramatic devaluation ahead (which of course, sends ARS-denominated stocks surge to record highs).
If that scenario would come true, Peso gold should go much higher in the months ahead.
The new silver fix is a fact since 17th August 2014. The silver fix has been a driver in setting the silver price in the last 117 years, but now a revised “fixing mechanism” with other “fixing members” is in place. Up until August 14th 2014, three institutions have been participating to the daily silver fix, i.e. Deutsche Bank AG, HSBC Bank USA N.A. and The Bank of Nova Scotia. In the new silver fix, the participating members are HSBC, ScotiaMocatta and Mitsui.
Before looking into the question what to expect from the “new” silver fix, it is important to understand what the “old” silver fix has done to the price of silver. Commodity analyst Dimitri Speck has focused his research on discovering silver price manipulation related to the silver fix, more so than the Gold Fix. Based on his extended statistical analysis around intraday average price patterns, he was able to pinpoint when exactly the manipulation (or, intervention) took place, and he provided the world unbiased charts. The next paragraphs focus on his findings; they are based on Dimitri Speck his book “The Gold Cartel.”
The book “The Gold Cartel; Government Intervention in Gold, the Mega-Bubble in Paper and What this Means for your Future” is written by commodity analyst and precious metals expert Dimitri Speck. The book is available at Amazon. It is one of the few “must read” books on precious metals with important investment insights for serious investors.
The key in uncovering the silver price manipulation is to analyze price patterns in three distinct time frames:
In the period before 2010, the intraday average silver price chart clearly shows statistically significant anomalies. The first chart shows the intraday average price between August 1998 and 2011. The obvious observation is that a significant price break down has been appearing right at the silver fix, which is at 7AM EST (New York time). A second sharp decline is visible at 10AM EST, which is probably linked to the gold fixing, see below. The chart takes into account almost 13 years of data, it excludes every form of coincidence or randomness.
Interestingly, the manipulation (or intervention) in silver is much more pronounced than the one in gold. The next chart shows a data set for a comparable period in time as the previous chart, but applied to gold.
Dimitri Speck concludes in his book “The Gold Cartel”: “Contrary to the situation at 10AM EST, this decline cannot be ascribed to the high correlation with gold. The average intraday chart of silver shows that there are independent price interventions in silver that are not connected to gold.” Or, in plain simple words, silver price manipulation is obvious and much more outspoken than gold price manipulation.
What happened in the period 2010 – 2011? Between summer 2010 and April 2011, the price of silver surged from below $20 to $49 an ounce. It goes without saying that it was an historic rally. How was such a rally possible given the daily price break down which was discussed above? The answer is very simple: the interventions did not take place in that period of time. The next chart provides clear and unambiguous evidence of the trend change.
“Coincidentally,” in September 2010, JP Morgan announced that they were in the process of winding down their proprietary trading operations. It is no secret that market observers are considering JPMorgan responsible for the manipulation of silver, because of their power to influence price setting, being the bank with the largest stake in the precious metals futures market in terms of derivatives positions.
One way or another, the interventions in the silver price “disappeared” between the summer of 2010 and April 2011. However, on 1 May 2011, the sharp rally suddenly stopped and a new phase with another intraday average price pattern became apparent. The price breakdowns from the period before 2010 were back at play.
The comparison between the three periods of time are so obvious that everyone can observe them. It is the technique to use the intraday average prices, combined with the distinctive time periods, that are the key to uncover these anomalies.
From Dimitri Speck’s book “The Gold Cartel” page 149:
In September 2010, JP Morgan decided to close its proprietary trading operation. Market observers subsequently forecast a rally in the price of silver, as this trading division was alleged to have been responsible for silver price suppression. In the following months, silver rose strongly, whereby the price more than doubled in a short time. Concurrently, there are no traces in the average intraday chart hinting at interventions that specifically target silver. But then the price threatend to move above the level of $50 per ounce. This level represents not only an important round number level; it marks also the historical record price of 1980. Apparently an uncontrollable breakout was feared at that point. This was to be prevented, which is why it was decided to resume the price interventions. Thus, a sharp price decline occurred on 1 May 2011, in thin trading. This initiated the trend change, the silver price would subsequently fall for months. During this downward move, price declines at the time of the silver fixing are, once again, in evidence in the average intraday chart. These shocks attending the reference price are typical for price interventions. Their renewed appearance confirms that silver price suppression had resumed. The operation to keep silver from rising further had succeeded.”
The “old” silver fix has officially come to an end on August 14th 2014. The revised process shows to some extent similarities with the “old” process, although the participants and facilitators differ. First, the participating members are HSBC, ScotiaMocatta and Mitsui. The process is electronic and facilitated by Thomson Reuters, while the LBMA owns the intellectual property rights of the fix. On the other hand, market participants have been complaining lately that the preparations have been intransparant. Similarly, the rationale for chosing the facilitators have been intransparant. A review of the new process was conducted by an ex-Barclays director while Barclays has been found guilty of rigging the gold price, as reported by GoldCore.
With the new silver fix, the allegations of manipulation through the old process are inapplicable anymore. Does it mean that silver price manipulation has come to an end? Unfortunately not, according to precious metals expert Dimitri Speck. He explains to GoldSilverWorlds that the “new” fix has the potent to improve the transparency on the long run, and avoid of conflicts of interest. However, the main manipulation is taking place in the gold and silver futures market. These manipulations appear at any time, just more frequently during the fixing, so that it remains visible in the statistics.
Dimitri Speck reiterates that “the fixing is influenced from outside”; as discussed before, the futures market is the main cause for manipulation of the silver price. Unfortunately, that issue cannot be solved by only “fixing the fix.” One has to end the manipulations in the futures market, which is, up until now, visibly not desired by the American authorities.
You may be familiar with the story of how the US government confiscated gold bullion and then made owning it illegal back in 1933.
Actually this event is more accurately termed a nationalization. Americans were forced under harsh penalties to sell their gold at an artificially low “official price.” If it were an outright confiscation, the government would have just taken the gold without giving anything in return. But no matter how you label it, the end result was the same: the theft of purchasing power.
Many have speculated that the US government could once again turn to gold confiscation/nationalization if it became desperate enough. These fears are not unfounded given the abysmal financial situation of the US government that only continues to get worse, coupled with a total lack of political will to cut spending.
But would the US government really turn to a 1933-style grab again?
I would argue that they wouldn’t, but that doesn’t mean the threat to your gold has diminished. Quite the opposite.
Today only a tiny fraction of the overall US population owns gold. That wasn’t the case back in 1933 when the US was still on a variation of the gold standard.
Heck, I’d bet most Americans today have never even seen a gold coin, much less appreciate its value.
This is why I think it’s unlikely we’ll see a repeat of the 1933 ripoff. It’s simply not worth the effort. If the government is looking to confiscate wealth, they’ll likely go for the low-hanging fruit… like financial accounts, which can be plundered with a few mouse clicks. Or they’ll continue to ramp up the inflationary money printing, which is a way to confiscate from savers.
But that doesn’t mean gold owners are in the clear.
Instead there will be a new scam. And that scam is likely to be a windfall profits tax on gold.
A windfall profits tax on gold would be much easier for the government to administer than what they did in 1933. And thanks to the system of citizenship-based taxation, a windfall profits tax on gold could be levied on Americans no matter where in the world they live.
There’s precedence for this, too. In 1980 the Congress passed the Crude Oil Windfall Profit Tax Act, which taxed up to 70% of what they deemed to be “windfall profits” of domestic oil producers.
If gold were to explode to the upside (another way of saying the dollar crashes), we shouldn’t be surprised to see a bill like the Fair Share Gold Windfall Profit Tax Act get passed, which would levy a 80%, 90%, or higher tax on gold.
Fortunately, there are some practical steps you can take to protect yourself from a windfall profits tax on gold, which I believe is the most likely form of future confiscation.
One way you can avoid a windfall profits tax on gold is to become a resident of Puerto Rico—read more on that here. You could also preemptively divorce the US government by renouncing your citizenship.
But these are drastic measures and out of reach of most people.
There’s a far easier solution that can be done from your living room and without having to turn in your US passport. It’s to own gold in a Roth IRA, preferably offshore gold.
A Roth IRA is like a tax-free zone. It’s funded with after-tax savings, and any future capital gains or income derived from investments in a Roth IRA are not taxable—if you wait until the age of retirement to withdraw.
While we can never know 100% for sure what the US government will do, it would be unlikely that gold placed in the tax-free zone of a Roth IRA would be affected by a future tax increase. That is, of course, unless the politicians start monkeying with the IRA rules. But that would produce a lot of screaming from tens of millions of people, most of whom are voters. If I were a politician, I would stay away from IRAs.
This is not to say that the US government doesn’t have its eyes on the juicy target of retirement accounts. As we’ve seen with the myRA scam, they most certainly do.
However, if and when an executive order is issued to convert a portion of your retirement savings into unwanted Treasury securities, it will likely apply only to the most susceptible retirement assets—those being accounts with the large, traditional IRA custodians. These assets are soft targets for the government. They could be frozen, confiscated, or nationalized at the flip of a switch.
Physical gold held offshore in a Roth IRA would represent a significantly more complex challenge for them to confiscate. It probably wouldn’t be worth their effort either, as only a very tiny percentage of Americans hold their retirement assets in physical gold overseas. It makes much more sense that they’d go for the sitting ducks at the large custodians.
In short, a Roth IRA with gold held offshore is the most practical way to protect yourself from the most likely forms of future confiscation—a windfall profits tax on gold and a forced conversion of retirement savings to Treasuries. It’s the ultimate retirement insurance policy and makes you a hard target.
It used to be very time consuming and difficult to own gold offshore in an IRA. For a lot of people, it simply wasn’t worth the effort.
Fortunately, that’s no longer the case—this solution is within reach of almost anyone.
All it takes is about 10 minutes to get set up, and it can all be done online without having to leave your living room.
Courtesy: Casey Research
Several months ago, when Russia announced the much anticipated “Holy Grail” energy deal with China, some were disappointed that despite this symbolic agreement meant to break the petrodollar’s stranglehold on the rest of the world, neither Russia nor China announced payment terms to be in anything but dollars. In doing so they admitted that while both nations are eager to move away from a US Dollar reserve currency, neither is yet able to provide an alternative.
This changed in late June when first Gazprom’s CFO announced the gas giant was ready to settle China contracts in Yuan or Rubles, and at the same time the People’s Bank of China announced that its Assistant Governor Jin Qi and Russian central bank Deputy Chairman Dmitry Skobelkin held a meeting in which they discussed cooperating on project and trade financing using local currencies. The meeting discussed cooperation in bank card, insurance and financial supervision sectors.
And yet, while both sides declared their operational readiness and eagerness to bypass the dollar entirely, such plans remained purely in the arena of monetary foreplay and the long awaited first shot across the Petrodollar bow was absent.
According to Russia’s RIA Novosti, citing business daily Kommersant, Gazprom Neft has agreed to export 80,000 tons of oil from Novoportovskoye field in the Arctic; it will accept payment in rubles, and will also deliver oil via the Eastern Siberia-Pacific Ocean pipeline (ESPO), accepting payment in Chinese yuan for the transfers. Meaning Russia will export energy to either Europe or China, and receive payment in either Rubles or Yuan, in effect making the two currencies equivalent as far as the Eurasian axis is concerned, but most importantly, transact completely away from the US dollar thus, finally putin'(sic) in action the move for a Petrodollar-free world.
More on this long awaited first nail in the petrodollar coffin from RIA:
The Russian government and several of the country’s largest exporters have widely discussed the possibility of accepting payments in rubles for oil exports. Last week, Russia began to ship oil from the Novoportovskoye field to Europe by sea. Two oil tankers are expected to arrive in Europe in September.
According to Kommersant, the payment for these shipments will be received in rubles.
Gazprom Neft will not only accept payments in rubles; subsequent transfers via the ESPO may be paid for in yuan, the newspaper reported.
According to the newspaper, the change in currency was made because of the Western sanctions against Russia.
As a protective measure, Russia decided to avoid making its payments in US dollars, which can be tracked and controlled by the United States government, Kommersant reported.
“Protective measure” meaning that it was the US which managed to Plaxico itself by pushing Russia to transact away from the US Dollar, in the process showing the world it can be done, and slamming the first nail in the petrodollar’s coffin.
This is not surprising to anyone who has been following our forecast of the next steps in the transition from the Petrodollar to the Gas-O-Yuan. Recall from April:
The New New Normal flow of funds:
- Gazprom delivering gas to China.
- China Gazprom paying in Yuan (convertible into Rubles)
- Gazprom funding itself increasingly in Yuan.
- Russia buying Chinese goods and services in Yuan (convertible into Rubles)
And all of this with the US banker cartel completely disintermediated courtesy of the glaring absence of the USD in any of the above listed steps, or as some may call it: from the Petrodollar to the Gas-o-yuan (something 40 central banks have already figured out… just not the Fed).
Still confused? Then read “90% Of Gazprom Clients Have “De-Dollarized”, Will Transact In Euro & Renminbi” for just how Gazprom set the stage for the day it finally would push the button to skip the dollar entirely. Which it just did.
In conclusion we will merely say what we have said previously, and it touches on what will be the most remarkable aspect of Obama’s legacy, because while the hypocrite “progressive” president who even his own people have accused of being a “brown-faced Clinton” after selling out to Wall Street and totally wrecking US foreign policy abroad, is already the worst president in a century of US history according to public polls, the fitting epitaph will come when the president’s policies put an end to dollar hegemony and end the reserve currency status of the dollar once and for all, thereby starting the rapid, and uncontrolled, collapse of the US empire. To wit:
In retrospect it will be very fitting that the crowning legacy of Obama’s disastrous reign, both domestically and certainly internationally, will be to force the world’s key ascendent superpowers (we certainly don’t envision broke, insolvent Europe among them) to drop the Petrodollar and end the reserve status of the US currency.
As of this moment, both Russia and China have shown not on that it can be done, but it is done. Expect everyone to jump onboard the new superpower axis bandwagon soon enough.
In a surprising update, Canadian Silver Maple Leaf sales for the first half of 2014 surpassed sales during the same period last year. According to the Royal Canadian Mint’s Q2 2014 Report, just released, sales of Silver Maples hit a new record of 15.4 million ounces in the first half of the year.
If we look at the chart below, we can see that the Royal Canadian Mint sold an additional 1.4 million Silver Maples in the 1H 2014, at 15.4 million compared to 14 million during 1H 2013.
Thus, 1H 2014 sales of Silver Maples are 10% higher than 1H 2013. If we compare Silver Maple sale to Gold Maple sales, its a totally different picture indeed. Gold Maple sales are down considerably in the first half of 2014. The Royal Canadian Mint sold 681,000 oz of Gold Maples in the 1H 2013, compared to only 337,000 oz in 1H 2014.
This is a stunning 344,000 oz decline in Gold Maple sales or a 51% drop year-over-year. If we combine U.S. Gold Eagle and Gold Maple Leaf sales for 1H 2014, this is the result:
The U.S. Mint sold a pathetic 266,000 oz of Gold Eagles during the first half of 2014, compared to 629,000 oz during the same period last year. Together, total Gold Eagle & Maple Leaf sales were 603,000 oz in the first half of 2014, down a whopping 707,000 oz (-54%) in comparison to the 1,130,000 oz in the 1H 2013.
It is plain to see that for whatever reason, investors have cut back considerably on their retail gold bullion investments in 2014. However, this is not the case in the physical silver market. This next chart shows how much stronger physical silver buying is in the top two Official Coin Sales Markets.
In the first half of 2014, combined U.S. Silver Eagle and Canadian Maple Leaf sales hit a new record of 39.5 million ounces. Even though this is only up slightly higher at an additional 500,000 oz compared to 39 million in 1H 2013, it is still positive growth while Gold Eagle and Gold Maple sales are down a staggering 54%.
As we can see from the chart, the increase in Canadian Silver Maple sales (+1.4 million oz) offset the 900,000 oz decline in U.S. Silver Eagle sales. The reason for the increase in Canadian Silver Maples sales this year over last is due to a relatively strong first quarter.
Sales of Silver Maples were 8.2 million Q1 2014, compared to 6.6 million Q1 2013. Second quarter sales this year were slightly lower at 7.2 million, versus the 7.4 million oz Q2 2013. Silver Eagle sales Q2 2014 were down 600,000 oz compared to Q2 2013. Which means, Silver Maple sales fell less in percentage terms at 3% y.o.y. versus the 6% decline of Silver Eagle sales during the same period.
The Silver to Gold buying ratio in these to Official Coin Sales jumped up dramatically in the 1H 2014 due to the large drop-off of Gold Eagle & Maple purchases
1H 2013 = 30 / 1
1H 2014 = 65 /1
The majority of investors are still wrapped up in the biggest Paper Ponzi Scheme in history. Even though retail gold bullion buying is down in the top two Official Coin Markets, sales of Silver Eagles and Maples remains stubbornly strong.
I will be coming out with a new article shortly titled, “U.S. Retirement Asset Bubble vs Physical Gold Investment.” It’s amazing just how big of a bubble the total U.S. Retirement Market has become.Courtesy: SRSroccoreport
“The price of gold is going nowhere,” despite being seasonally in its strongest month and geopolitical destabilization. On the other hand, the dollar rally is putting pressure on gold. The chart shows gold’s performance since the start of this year. What is going on and why is gold (and silver) not trending?
In our view, the answer lies is in opposing forces at work in the markets and economy. There are two very important drivers which we discuss in this article: real interest rates and the inflation/deflation tug of war.
First, there is the relationship between the gold price vs the US 10 year real yield with the real yield being the nominal yield on a government bond adjusted for inflation expectations. Advisor Perspectives, a group of advisors focused on investment strategy, writes: “There is historical evidence to show that gold has tended to perform best in an environment of falling and low real interest rates and perform poorly in an environment of rising and high real interest rates. Arguably ‘falling and low real interest rates’ accurately describes the current environment here in the US and other major economies such as the European Union, the UK and Japan and as such in the charts below we examine the recent relationship between real yields in each of these countries and the price of gold expressed in the local currency to see if there are any discernible patterns.”
In the following two charts, the vertical, real yield axis has been inverted with values reading from high to low moving upwards on the axis (in order to make the direction of the two data series consistent on the chart with lower real yields being associated with high gold prices).
A significant divergence has occurred with German real yields and Gold/Euro with the real yield falling from +0.40% to -0.32% since December 2013. Advisor Perspectives sees two possibilities going forward: “Assuming there has been no structural breakdown in the relationship, in each case we would expect that either the real yield will bottom-out and start to rise or the price of gold in local currency will rise to close the gap. However, absent an economic trigger to push real yields higher, in particular in the Eurozone which is currently battling strong disinflationary forces, we would expect that the more likely outcome would be for gold prices to be supported at current levels or perhaps move higher over the next few months.”
As a general rule, the inflation/deflation war is undoubtedly one of the key drivers in the gold market. As the previous chart showed, the deflationary pressure in Europe is probably causing the divergence between real interest rates and euro gold. This will resolve, either by deflation fading away andpushing gold higher. Alternatively, deflation wins the tug of war, resulting in lower gold prices.
In line with this thought, an interesting chart was posted by professional trader Dan Norcini, see below. It evidenced that the TIPS spread took a sharp plunge over the last few weeks. It sits at the lowest level in 9 weeks. “Clearly, there has been a change in the market’s expectations regarding any onslaught of inflation pressures.”
The opposing inflation/deflation pressures are reflected in the futures positions of big investors. As evidenced by Dan Norcini, professional futures trader, in one of his latest market commentaries, in which he explains continued lack of consensus among the big speculators as to the true state of the global economy.
Dan Norcini writes on his personal blog: “It is this shifting sentiment which is wreaking havoc among some of the trend following systems and has sent some of the individual commodity markets into their current range trade or sideways pattern. Clearly, investors/traders are looking at some signs of economic improvement but they are also seeing geopolitical events and other factors which are making them second guess themselves. There is no clear cut conviction outside of the equity market traders as to which way things are going.”Courtesy: Goldsilverworlds
Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Meanwhile, Europe’s already high (and rising) government debt levels and large budget deficits raise the question whether we should worry about ‘debt thresholds’, past which increasing deficits, and hence growing sovereign debt, no longer add to growth? Such a constraint could come from one of at least two sources:
1) Once the debt level gets high enough, debt service costs (even at very low rates of interest) can eat up so much of the budget that it is impossible to spend new money on anything else. Fortunately, most European countries are not at that point. Take France as an example: at roughly €45bn (or 2.1% of GDP), debt servicing costs are not out of line with its recent past.
2) Perhaps more insidiously, if the sustainability of the debt becomes dependent on low rates—as increasingly it is in countries like France— thenthe government has a powerful incentive to do everything it can to keep rates low so it can pursue its existing policies without facing the threat of fast-rising debt service costs. If the price of keeping rates low is low nominal GDP growth, then so be it. This is where Japan has been for some years, and could be where France is now heading. Though, worryingly for France, when it comes to the sustainability of debt accumulation, the similarities with Japan may end there.
When looking at an over-indebted borrower the most important questions should always be ‘Who owns the debt?’ and ‘Will the owner prove patient or fickle?’ For example, a family in which a father lends money to his children, will, on a consolidated basis, have no debt. Applying this analogy to Japan, it seems that Japanese savers prefer to buy bonds rather than pay taxes (government debt is nothing but deferred taxes). As a result, 92% of outstanding Japanese Government Bonds are owned by the Japanese themselves. Thus, in a pinch, Japan could choose to convert its repayable debt into perpetual bonds yielding, say, 1%. Even better, it could transform its debt into pieces of paper called banknotes, which are really perpetual debt yielding 0% (perhaps this is what Japan is already doing?). Another option would be for Japan to impose inheritance taxes of 80%, and very quickly the government debt would melt away…
Of course, such solutions are not consequence free. Financing governments through debt rather than a functioning tax system tends to be debilitating for economic growth. Over time it favors the rentier above the entrepreneur (since the only way to find buyers for the new debt is for its yield to be higher than the growth rate of corporate profits). As Knut Wicksell conclusively showed, this pushes the economy into stagnation. Still, Japan has proved that such stagnation is compatible with economic stability. But is the Japanese option open to France?
The other alternative to growing debt levels is the path trodden by Argentina, Russia and Greece in recent decades. What unites these bankrupt issuers is that a majority of their debt was owned by foreign savers. Indeed, when a country accumulates too much debt and begins to find the roll-overs a growing challenge, it really has just two options: the first is a total or partial default; the second is a large currency devaluation. The second choice begs the question ‘Who prints the currency in which the debt is labeled?’ When a central bank controls and independently prints the currency, then a default is highly unlikely and devaluation a near certainty (which is what is starting to occur in Japan). If the central bank does not control the currency in which the debt is labeled, then the only solution over time is a partial or total default, especially if interest rates are above the nominal growth rate of the economy (debt trap).
This brings us to Mr. Draghi’s speech at Jackson Hole, in which the European Central Bank (ECB) head argued for more fiscal stimulus and more structural reforms before the ECB does more to help out Europe’s failing economies. But, at this stage, more fiscal stimulus in countries like France and Italy would likely mean much higher budget deficits and debt levels. Given the rollover schedule of the next 18 months, those could prove challenging for the bond market to swallow, unless, of course, the ECB is willing to embark on the same kind of exchange program that the BoJ has embraced in the past 18 months, namely trading 0% interest rate bank notes for government bonds. It is a kind of Catch 22: the ECB wants to see more reform before turning on its printing press; however, reforms without growth are particularly tough to deliver. Incidentally, this was the pattern in Japan for 15 years or so: the Ministry of Finance (MoF) pointed the finger at the Bank of Japan (BoJ) for not printing enough, and the BoJ pointed the finger at the MoF for the slow pace of reform in the Japanese economy. Replace MoF with Bercy, and BoJ with ECB and very little has been ‘lost in translation’.
But as we know, there are key differences between Japan and France; differences which bring us to the following conclusions:
Investors who believe that the ECB will always step in to prevent French spreads from blowing out should probably conclude that France is now heading down the Japanese path: that of an underperforming economy whose technocratic elite has a growing embedded interest in keeping interest rates low (and thus nominal growth low), lest a spike in rates trigger a funding crisis.
Investors who believe that the ECB will not always step in to prevent French spreads from blowing out will have to conclude that a potential debt restructuring lies in France’s future. However, this restructuring is unlikely to happen until the ECB decides to let France go. And the ECB won’t let France go until conditions in Germany (most likely higher inflation) force the ECB’s hand. Hence, this scenario is not a near term concern.
Very clearly, with French Government Bonds (OAT) yields at record lows, and the euro gapping down, the market is acknowledging these conclusions.
Nothing Mr Draghi said in his Jackson Hole speech changed this reality.
At this stage, the path of least resistance is for the eurozone, and especially France, to continue disappointing economically, for the euro to weaken, and for Europe to remain a source of, rather than a destination for, international capital.Courtesy: Zerohedge
In this article, precious metals market analyst Ted Butler (www.butlerresearch.com) explains his vision of how a silver bubble is going to develop. Contrary to the mainstream view, Mr. Butler believes that the silver peak of 2011, when spot silver intraday touched $49 per ounce on May 1st 2011, was only an intermediary peak. In other words, the real price explosion lies still in front of us. Of particular interest is the role of the ongoing silver price manipulation as a key driver in the creation of a bubble.
What is an asset bubble? An asset bubble occurs when a large number of buyers, normally not usually prone to speculate in an asset, bid the price of that asset much higher than underlying valuations would support, most often fueled by leverage or borrowed money. Typically, towards the terminal phase of the bubble the most compelling reason for continuing to buy the asset is due to the rising price itself, as all caution is thrown to the wind amid the collective belief that prices can only move higher still. Then, when the last possible speculator has purchased the asset, the inevitable occurs and the price of the asset collapses as previous buyers turn into sellers and attempt to get out. Since the formation of the bubble and its inevitable collapse are driven by the collective emotions of greed and fear, it is generally impossible to predict how long an asset bubble will persist and how high the price can climb, as well as the timing and extent of the subsequent collapse.
How do asset bubbles develop? Most often, an asset bubble develops when an undervalued asset which has a compelling investment story and there exists an overall financial environment of sufficient buying power, catches the collective interest of the crowd. For example, by the mid-2000’s and after years of steady appreciation, residential real estate developed into an asset bubble amid the self-fulfilling cycle of continued gains and the availability of easy credit.
As far as great stories go, silver has the best potential story to develop into a bubble. First, there is little argument that it is among the most, if not the most undervalued asset of all by objective relative historical price comparison. In addition, it is at or below its primary cost of production, as evidenced in recent quarterly earnings reports. Remember, most bubbles start out with an asset that is undervalued – on this score silver more than qualifies as being undervalued.
Aside from extreme undervaluation, the silver story is multi-faceted. Silver is both an industrial metal and a primary investment asset, the net effect being that very little newly-produced silver is available for investment, perhaps only 10% of the one billion oz produced yearly (mine plus recycling), or 100 million oz annually. In dollar terms, at current prices that comes to less than $2 billion per year. There are two ways to look at that; the observation that there are countless individuals and investment funds capable of ponying up that entire amount on their own and the fact that $2 billion amounts to less than 30 cents on a per capita basis for the world’s 7 billion inhabitants. Simply put, there is no other asset class which would require less buying to develop into a bubble than silver.
Apart from newly-produced silver available for investment, the amount of previously produced metal available for investment, or world inventories, is also shockingly low. As a result of a 65 year deficit consumption pattern that ended in 2005, world silver inventories have been depleted by 90% from the levels existing at the start of World War II. Today, only a little over one billion oz of metal in accepted bullion industrial form exists with perhaps another billion oz existing in coins and bars. In dollar terms, that comes to $20 to $40 billion, where most other asset classes (stocks, bonds, real estate and even gold) are measured in the many trillions of dollars. And please, never confuse what exists with what’s available for purchase – only the owners of the small amount of silver that exists will determine at what price it is available.
The conclusion is simple – the asset requiring the least amount of buying to create a bubble is, automatically, the best candidate for developing into the biggest bubble. The fuel for any bubble is total (world) buying power versus the actual amount of an asset available for purchase. Previous, as well as prospective, bubbles in stocks, bonds and real estate grew to many trillions of dollars of total valuation. At $200 an ounce, all the silver in the world (bullion plus coins) would “only” amount to $400 billion, not even a rounding error to the total valuation of stocks, bonds, real estate and, even, gold. In other words, due to silver’s current undervaluation and its shockingly small amount in existence, it has more room to the upside than any other asset class.
But I’m not done. Silver’s unique dual role as a vital industrial material and primary investment asset creates a setup for something happening that has never occurred in any previous bubble. As and when sufficient physical investment buying develops in silver to drive prices significantly higher, the industrial consumers of silver, in everything from electrical and solar applications to medical and chemical applications, will likely be subject to delays in the customary delivery timelines of the metal. As is almost always the case, whenever industrial consumers of a commodity are deprived of timely deliveries, they resort to stockpiling that commodity as a remedy, further exacerbating delivery delays to other users.
Thus, the stage is set for something the world has never experienced previously – an asset bubble accompanied with an industrial shortage. The two greatest upward price forces known to man, an asset bubble and a genuine commodity shortage, appear set to combine in silver. Either one, alone, would have a profound impact on the price, but the combination seems both inevitable and almost impossible to contemplate in terms of how high the price of silver could be driven. And it’s hard to see how intense investment buying wouldn’t trip off industrial user attempted inventory stockpiling or vice versa; it doesn’t matter which comes first.
Tying everything together, there is one and only one explanation for why silver is so undervalued and the asset bubble/industrial shortage hasn’t occurred yet – the ongoing price manipulation on the COMEX. Massive amounts of paper contracts traded between two groups of large speculators (technical funds and commercials), measuring in the hundreds of millions of ounces and completely unrelated to the supply/demand fundamentals have set the price of silver. This COMEX price control is both the curse and the promise in that it not only explains the undervaluation, it will explain why it seems inevitable for an asset bubble/user shortage to develop.
Think of it this way – the asset with the greatest potential for becoming the biggest bubble ever had better have the greatest story ever as well. And that is what the COMEX silver manipulation is – the key ingredient in the greatest investment potential score ever. If silver wasn’t manipulated how good would the story be? Absent manipulation, I wouldn’t buy or hold silver because that would mean that free market forces were setting the price all along. In other words, if silver wasn’t manipulated there would be scant reason to buy it in my eyes. If I wasn’t convinced silver was manipulated, I can’t see how I would have ever written this or anything about it in the past or could have become interested in it in the first place.
As painful as recent prices have been to existing holders because of the manipulation, without it there would be little chance for a price explosion at some point. The easiest major potential change in the silver price equation is for the manipulation to end, one way or another. And if history and logic win out, the silver manipulation must end, not the least because of the coming clash between paper and physical silver. Some call it the disconnect between paper derivatives contract on the COMEX and actual physical silver, but in reality the story is that COMEX futures contracts are very much connected to each other via the delivery mechanism.
The connection between paper and physical has been forged because the main COMEX futures speculators are only interested in trading paper futures contracts and not in trading physical metal. Technical funds have no desire to buy and sell real metal for full cash payment when they can deal in paper contracts for only 10% cash down because they are trading, not investing. The problem is that the trading between the technical funds and the commercials has become so large that it dwarfs real world silver supply/demand fundamentals and ends up setting the price of silver in violation of commodity law. I know that this perversion of the price-discovery process has existed for a long time, but it would be wrong to confuse longevity with permanence.
The fact is that while the COMEX paper market dominance has lorded over the real supply and demand fundamentals, the stage has been set for a physical asset bubble/industrial user panic event. I’ve become convinced that any prospective bubble in silver won’t be driven by the aggressive buying of COMEX futures contracts, but only by physical buying. For one thing, the crooked CME and CFTC would never allow any group of traders to drive silver prices sharply higher by buying unlimited amounts of COMEX futures contracts. If the technical funds do buy big amounts of COMEX silver futures contracts (as was the case from June to mid-July), you can almost be certain that the CME and CFTC knew that those funds would be soon forced to sell on lower prices.
As a result, any bubble in silver must and will develop from physical investment buying. Surely, any industrial user inventory buying panic must involve immediate physical delivery and not a paper futures contract in a time of delivery delays and uncertainty. In fact, it is hard to imagine, as a silver bubble begins to develop, a greater urgency for holding only physical metal to intensify, due to a growing recognition that the COMEX manipulation was responsible for the former low price.
Since I am speaking in terms of a potential historic asset bubble in silver, I am implying that the price of silver will far exceed its true value at some point before correcting sharply. It is before that collapse point, that God-willing, I intend to sell. I am not deluding myself that I will come close except hoping not to be terribly early or late. While I respect anyone’s reasons for buying and holding silver, my mission has always been to help end the manipulation and be done with silver after that was accomplished and reflected in the price.
This article is based on a commentary of Ted Butler’s premium service at www.butlerresearch.com which contains the highest quality of gold and silver market analysis. Ted Butler is specialized in precious metals market analysis for over four decades.
There has been much commentary published as of late discussing when the Federal Reserve will begin raising interest rates. Generally, attached to the heels of that discussion, are comments suggesting that investors have nothing to fear from such an event. However, is that really the case?
Much of the case built behind the current financial market levitations, which has been a directly impacted of Federal Reserve interventions, has been: 1) low interest rates are supportive of higher valuations (aka Fed Model), 2) the yield curve (10 year – 3 month yield) is positive; and, 3) increases in interest rates lead to higher stock prices.
Let’s take a look at these three arguments in a bit of detail.
This theory is primarily built around a very flawed idea which has been dubbed “the Fed Model.”The basic premise is that if the “earnings yield” of equities (the inverse of P/E – Earnings divided by Price (E/P) is higher than the interest yield of bonds, then investors should be in equities.
The problem here is twofold. First, you receive actual income from owning a Treasury bond, along with a return of principal function, whereas there is no tangible return from an earnings yield on stocks. Therefore, if I own a Treasury with a 5% yield and a stock with a 8% earnings yield, if the price of both assets do not move for one year – my net return on bond is 5% and on the stock it is 0%. Which one had the better return? This has been especially true since the turn of the century where stock performance has lagged bonds and cash (until just recently.) Yet, analysts keep trotting out this broken model to entice investors to chase one of the worst performing asset classes.
Secondly, as shown in the chart below, the Fed model worked from 1950-1980 as earnings yield was rising faster than lending rates. This was due to a rising trend in annual rates of economic growth which fostered higher levels of prosperity and personal savings rates. However, since 1980, the steady trend of falling annual rates of economic growth, inflation and interest rates broke the fundamental premise of the model. While the model appeared to work in 2004, it failed to get investors out of the market before they lost all of their gains and then some. It is yet to be proven that the current process will not end as badly.
Yield Curve Is Positive
Another “bull market” indicator that has often been cited is the spread between the interest rates of the 10-year treasury bond and 3-month treasury bill (almost a perfect representation of the effective Fed Funds rate). Historically, when the spread between these two interest rates is positive it has been indicative of both a strengthening economic environment and rising asset prices. The opposite has also been true.
What the Fed giveth, the Fed taketh away. As shown in the chart below, the spread between these two rates falls quickly once the Fed begins increasing interest rates. The reason this happens is that the Fed can directly control what it charges to lend money to banks, however, the 10-year treasury rate is a function of market dynamics. Therefore, as the interest rates on the short end of the spectrum rise faster than the long end, the spread falls very quickly as the economy slows towards recession.
Currently, the yield spread suggests that the current “bull market” remains intact along with economic growth. However, as shown by the dashed red line in the chart below, this can change VERY quickly when the Fed begins hiking interest rates.
This claim falls into the category of “timing is everything.” The chart below has been circulated quite a bit to support the “don’t fear rising interest rates” meme. I have annotated the chart to point out the missing pieces.
As I stated above, timing is everything. While rising interest rates may not “initially” drag on asset prices, it is a far different story to suggest that they won’t. I addressed this issue previously in “Why Market Bulls Should Hope Interest Rates Don’t Rise” wherein I pointed out twelve (12) reasons why rising interest rates are a problem, particularly when those rate increases are coming from a period of very low economic growth.
What the mainstream analysts fail to address is the “full-cycle” effect from rate hikes. The chart and table below address this issue by showing the return to investors from the date of the first rate increase through the subsequent correction and/or recession.
There are several things to take away from the table above:
1) There have been ZERO times that the Federal Reserve has entered into a rate hiking campaign that did not have a negative consequence.
2) Assuming a buy and hold investment, which never really occurs due to panic selling during declines, investors would have still netted a slightly positive return following the crash of 1987. However, having just been in cash during that entire period would have netted a higher overall compounded return.
3) The average period of time following an increase in the effective funds rate to either a stock market correction, economic recession or both has been 20.75 months. Therefore, if we assume an initial increase in the Fed funds rate in June of 2015, that would put the next negative event sometime in the first quarter of 2017.
4) However, the median number of months following the initial rate hike has been 17 months. This would advance the timeframe into mid-2016. Such a time frame would coincide with both the Decennial and Presidential cycles as discussed previously.
5) Importantly, there have been only two times in recent history that the Federal Reserve has increased interest rates from such a low level of annualized economic growth. The most relevant period was in 1983 when the economy was recovering from two adjacent recessions. Due to such weak economic growth, the impact of rising interest rates tripped up the stock market just 17 months later.
6) Lastly, it is crucially important to recognize that the ENTIRETY of the “bullish” analysis is based around a sustained 34-year period of falling interest rates, inflation and annualized rates of economic growth. With all of these variables near historic lows there is absolutely no way to assume how asset prices, or economic growth, will fair going forward.
What is clear from the analysis is that the net, full-cycle, return to investors has been dismal following the Federal Reserve’s first interest rate increase. While it may initially seem that stocks can weather higher interest rates, it is only due to the fact that it requires 6-9 months before a rate hike impacts the economy. Much like a car hitting its brakes in traffic, as one rate hike compounds on the next, the eventual outcome is a complete traffic jam.
Absolutely. However, as I stated earlier, “timing is everything.” It is highly unlikely that with employment, consumption and global economies weak, the lag between the Fed’s first rate hike and the next negative outcome will be very long. While the current cyclical bull market is still firmly intact, which keeps my allocation model almost fully invested, there is little to suggest that “this time is different.”
For now the bullish trend is still in place which needs to be “consciously” honored. However, while it may seem that nothing can stop the markets currently, it is crucially important to remember that it is “only like this, until it is like that” and those “asleep at the wheel” will pay a heavy price when taillights turn red.Courtesy: Lance Roberts
The IMF’s latest international gold reserves data, updated yesterday, shows that in July, Russia raised its official gold reserves to 35.5 million ounces (1,104 tonnes).
This confirms data released last week by the Central bank of the Russian Federation, which reported an increase of over 300,000 ounces from June’s 35.197 million ounces figure. IMF data is reported with a one month lag.
The latest IMF data also shows that in July, the National Bank of Kazakhstan added 45,000 ounces to its official gold reserves, taking its total holding to 5.1 million ounces.
According to the World Gold Council, over the last six months, Russia has now increased its gold reserves by 54 tonnes. In the same period Kazakhstan has purchased 12 tonnes.
Russia now has the world’s 6th largest gold reserves, officially higher than both Switzerland’s 1,040 tonnes and China’s 1054.1 tonnes. As a comparison, in the second quarter of 2009, Russia only had 550 tonnes of gold in its official reserves meaning that their reserves have nearly doubled in just over 5 years.
The ongoing accumulation of official gold by Russia appears to be part of a reserve diversification strategy. Gold is held by central banks as one of their reserve assets alongside foreign exchange assets including US Dollars and Euros, and also IMF Special Drawing Rights (SDRs).
Some Russian analysts point to the threat of continued western sanctions on Russia as a renewed catalyst for the Russian central bank diversifying out of dollars and euros by increasing its gold reserves. Gold now accounts for over 12% of Russian official reserves and could reach 15% by year end if the current trend continues.
As well as Kazakhstan, other countries in the region have also actively been increasing official gold reserves this year including Azerbaijan, Kyrgyzstan and Tajikistan.
Today in the Belarusian capital of Minsk, Russian President Vladimir Putin met for trade talks with his counterparts Nursultan Nazarbayev of Kazakhstan, Alexander Lukashenko of Belarus and also President Petro Poroshenko of the Ukraine.
If Putin meets separately with the Ukraine’s Poroshenko today, this will be the first time that the two presidents will have held discussions, which is especially significant given the ongoing Ukrainian conflict.
Russia is a member of the Eurasian Customs Union along with Kazakhstan and Belarus. The Eurasian Customs Union is a precursor to a Eurasian Economic Union which the three countries hope to establish by 2015 which will be modelled on the European Union.
Russia, Kazakhstan and Belarus are also members of the Eurasian Economic Community along with Kyrgyzstan, Uzbekistan and Tajikistan, and all six countries are members of the Shanghai Cooperation Organisation (SCO) alongside China.
Chinese President Xi Jinping raises a shot with Russian President Vladimir Putin
Given close economic cooperation between Russia, Kazakhstan and Belarus, and a trajectory towards economic union, it is probable that the three countries would be coordinating monetary policy which would include a common approach to official gold reserves accumulation.
This will be worth watching in the coming months and years, and like China, it is possible that Russia and its allies may not be fully reporting their gold reserves accumulation data to the IMF since it is not obligatory that they do so.
By Ronan Manly
Today’s AM fix was USD 1,286.50, EUR 974.77 and GBP 775.79 per ounce.
Yesterday’s AM fix was USD 1,281.00, EUR 965.12 and GBP 772.29 per ounce.
Gold fell $4.20 or 0.3% to $1,276.20 and silver fell $0.11 or 0.5% to $19.37 per ounce yesterday.
Gold is marginally lower in trade in London after gold in Singapore surged over 1% from $1,276/oz to over $1,290/oz.
Silver for immediate delivery rose 0.9% to $19.64 an ounce. Spot platinum rose 0.5% to $1,427 an ounce. Palladium was unchanged at $888 an ounce – remaining near record 13 year nominal highs.
Gold has moved up on higher volumes, which is a bullish indicator. Futures trading volume were 34% above the average for the past 100 days for this time of day, data compiled by Bloomberg show.
Despite all the massive monetary pumping over the past six years and the lowering of interest rates to almost zero most commentators have expressed disappointment with the pace of economic growth. For instance, the yearly rate of growth of the European Monetary Union (EMU) real GDP fell to 0.7 percent in Q2 from 0.9 percent in the previous quarter. In Q1 2007 the yearly rate of growth stood at 3.7 percent. In Japan the yearly rate of growth of real GDP fell to 0 percent in Q2 from 2.7 percent in Q1 and 5.8 percent in Q3 2010.
In the US the yearly rate of growth of real GDP stood at 2.4 percent in Q2 against 1.9 percent in the prior quarter. Note that since Q1 2010 the rate of growth followed a sideways path of around 2.2 percent. The exception is the UK where the growth momentum of GDP shows strengthening with the yearly rate of growth closing at 3.1 percent in Q2 from 3 percent in Q1. Observe however, that the yearly rate of growth in Q3 2007 stood at 4.3 percent.
In addition to still-subdued economic activity most central bankers are concerned with the weakness of workers earnings.
Some of them are puzzled that despite injecting trillions of dollars into the financial system so little of it is showing up in workers earnings.
After all, it is held, the higher the earnings, the more consumers can spend and consequently, the stronger the economic growth is going to be.
The yearly rate of growth of US average hourly earnings stood at 2 percent in July against 3.9 percent in June 2007. In the EMU the yearly rate of growth of weekly earnings plunged to 1.3 percent in Q1 from 5.4 percent in Q2 2009. In the UK the yearly rate of growth of average weekly earnings fell to 0.7 percent in June this year from 5 percent in August 2007.
According to Vice Chairman of the US Federal Reserve Stanley Fischer, the US and global recoveries have been “disappointing” so far and may point to a permanent downshift in economic potential. Fisher has suggested that a slowing productivity could be an important factor behind all this.
That a fall in the productivity of workers could be an important factor is a good beginning in trying to establish what is really happening. It is however, just the identification of a symptom — it is not the cause of the problem.
Now, higher wages are possible if workers’ contribution to the generation of real wealth is expanding. The more a particular worker generates, as far as real wealth is concerned, the more he/she can demand in terms of wages.
An important factor that permits a worker to lift productivity is the magnitude and the quality of the infrastructure that is available to him. With better tools and machinery more output per hour can be generated and hence higher wages can be paid.
It is by allocating a larger slice out of a given pool of real wealth toward the build-up and the enhancement of the infrastructure that more capital goods per worker emerges (more tools and machinery per worker) and this sets the platform for higher worker productivity and hence to an expansion in real wealth and thus lifts prospects for higher wages. (With better infrastructure workers can now produce more goods and services.)
The key factors that undermine the expansion in the capital goods per worker are an ever expanding government and loose monetary policies of the central bank. According to the popular view, what drives the economy is the demand for goods and services.
If, for whatever reasons, insufficient demand emerges it is the role of the government and the central bank to strengthen the demand to keep the economy going, so it is held. There is, however, no independent category such as demand that drives an economy. Every demand must be funded by a previous production of wealth. By producing something useful to other individuals, an individual can exercise a demand for other useful goods.
Any policy, which artificially boosts demand, leads to consumption that is not backed up by a previous production of wealth. For instance, monetary pumping that is supposedly aimed at lifting the economy in fact generates activities that cannot support themselves. This means that their existence is only possible by diverting real wealth from wealth generators.
Printing presses set in motion an exchange of nothing for something. Note that a monetary pumping sets a platform for various non-productive or bubble activities — instead of wealth being used to fund the expansion of a wealth generating infrastructure, the monetary pumping channels wealth toward wealth squandering activities.
This means that monetary pumping leads to the squandering of real wealth. Similarly a policy of artificially lowering interest rates in order to boost demand in fact provides support for various non-productive activities that in a free market environment would never emerge.
We suggest that the longer central banks worldwide persist with their loose monetary policies the greater the risk of severely damaging the wealth-generating process is. This in turn raises the likelihood of a prolonged stagnation.
All this however, can be reversed by shrinking the size of the government and by the closure of all the loopholes of the monetary expansion. Obviously a tighter fiscal and monetary stance is going to hurt various non-productive activities.Courtesy: Frank Shostak via Mises.org
In Why they are making an enemy of Russia? we looked at two of the key reasons why the US is making an enemy of Russia, namely the promotion of conflict by the powerful Defense industry lobby in order to keep its order books full, and the value of conjuring up an external enemy as a hate figure for the masses, in order to take the heat off the government. In this article we are going to look at what is arguably an even bigger reason, that was largely omitted in the earlier article, which is that Russia, in alliance with China, is threatening to bring an end to the dollar as the global reserve currency, which would mean the end of the American empire.
We are witness to the greatest struggle of our age – the battle to maintain global dollar hegemony, and with it US economic, military and political dominance of the entire planet – and this struggle is now coming to a head.
Notwithstanding its undeniably great accomplishments of the past hundred years, the relationship of the United States to the rest of the world is parasitic. This is because it creates money and debt instruments out of nothing, requiring virtually no effort, which it then swaps for goods and services with other countries. Because the US dollar is the global reserve currency, it is able to rack up astronomic deficits that would be untenable for any other country. US debts are now at such levels that if the US dollar loses its reserve currency status, the United States economy will implode and it will quickly be reduced to the status of a banana republic – hence the sense of urgency in the face of growing threats.
Any state that moves to opt out of using the dollar as a medium of exchange is dealt with, forcibly if deemed necessary. The tactics are threefold – economic blockade (sanctions), the funding of an internal revolution, perhaps assisted by US special forces, and an outright military invasion, or perhaps a combination of the three. This is what happened in Iraq and Libya, both of which planned to trade their oil in currencies other than the dollar. Perhaps the greatest irony of all is that the world’s savings, via the Treasury market, are used to fund the vast US military machine with its hundreds of bases spread across the world which forcibly makes sure they stay yoked to this system.
Enter Russia (and China), the biggest threat yet to dollar dominance. These large powerful neighbors have entered into various major currency and trade agreements in the recent past that do not involve the dollar, and therefore pose a serious threat to the dollar’s reserve currency status that left unchallenged would bring it to an end. Once you understand that you understand the reason for the recent propaganda blitz against Russia. In addition China has been busy mopping up the global gold supply for several years, as early preparation for the eventual backing of its currency by gold, which will put the final nail in the US’ coffin, as the unbacked dollar will collapse completely when this happens.
A sad irony for the American people is that even though the US has the ability to swap unlimited intrinsically worthless paper for goods and services from the the rest of the world, the infrastructure of the country is crumbling and many Americans already live in poverty on “food stamps”, and even the great US middle class is being squeezed. This is because the elites don’t care about the country or the masses – all they care about is power and the amassing of personal fortunes.
If you are any good at playing chess you should find it very easy to understand the power game as it now stands. The US wants to “deal with Russia” which has made substantial moves to operate outside the confines of the dollar based trading system. If it could attack it militarily and bomb it into submission, as it has done with various smaller states, it would, but because Russia is a big powerful country with a sizeable military of its own, and nukes, that is not an option. Efforts to subvert the Russian government from within and foment revolution probably wouldn’t work, because the Russian secret services are good at rooting out subversives, and probably as ruthless as the US black ops. That only leaves the option of an economic blockade – sanctions, in an effort to isolate and mortally weaken the Russia economy, and as we know, these sanctions are already in place. But what excuse do you use to impose sanctions? – after all, it doesn’t sound too good to go on BBC World News and say “Russia has decided to implement trade agreements that don’t involve the US dollar, so we are going to blockade it economically” – enter the Ukraine.
The US searched for a geographic doorway through which to attack Russia – the North and east routes don’t work because they are either ocean or China, countries like Poland in Europe wouldn’t do either, because they are firmly in the Western camp now, but the Ukraine was perfect for the job because of its being a large country on the SW flank of Russia that is torn in two directions, having old loyalties and blood ties to Russia, and aspirations to a closer union with Europe – the perfect place to foment a pro-Western revolution and perhaps a civil war that would draw Russia in and could then be used as an excuse to implement sanctions. That is exactly what has happened.
So now we have sanctions, but the problem for the US is this – they probably won’t work. They will cause damage, especially to the fools in Europe who have slavishly followed their orders from Washington to implement them, but they probably won’t destroy the Russian economy as the US is hoping. This is because the Russian economy is very big and can if necessary operate on a self-sufficient basis, especially as it has its own oil and gas, and an important supportive factor is that it has a big powerful neighbor in the form of China which knows it will be “in the firing line” after Russia, and is thus quite happy to enter into a mutually supportive relationship with Russia. China and Russia look set to form a “dollar free” axis and tough it out with Washington. The Chinese have worked all this out in advance, as has Putin, which is why, in addition to mopping up all the gold available on the market in recent times to later back its currency, it has been beefing up its military in readiness to counter future threats from the US military, which is already making moves to reopen bases in the Philippines, and engaging in other expansionary measures in the west Pacific.
Meanwhile, in the Mid-East, we have the Islamic State movement, which appears to have arisen spontaneously to fill the power vacuum that was created when US forces quit Iraq. We should not forget that although Iraq has existed for many decades, the country in an artificial creation of the British after the collapse of the Ottoman Empire in order to control the region and its oil reserves. The US is trying to stop them with air power, but without “boots on the ground” they are unlikely to succeed. Although Israel is looking on with satisfaction as Arab kills Arab, it had better hope that the dollar doesn’t lose its reserve currency status, or they could be in big trouble as the conveyor belt of money and arms across the Atlantic from the US could grind to a halt.
The situation between the US and Russia (and in the future China) is potentially very dangerous – is already very dangerous. Are they (the US elites and NATO) crazy enough to start a World War? – World War III? Sure they are and you can see the potential for it in the continual provocation and brinksmanship that is already going on, a fine example of which being the rabid and almost hysterical reaction to the Russian aid convey that just went across the border into eastern Ukraine. What they could have said to Russia, if they were reasonable, is “Thank you for going to the trouble and expense of organizing a big relief convoy for the besieged people of the cities of eastern Ukraine, who have no electricity, food or water.” Instead their reaction was one of sanctimonious outrage – “How dare you cross the border of this sovereign state without the permission of their government? – This is a grave escalation.” etc and are using it as an excuse to crank up sanctions even more.
The situation in eastern Ukraine and involving the Russian aid convey is a classic example of how propaganda can be used to turn white into black. The way it worked is this; the humanitarian situation for countless thousands of people holed up in big cities in eastern Ukraine, like Donetsk and Luhansk, is dire. They have been relentlessly shelled and have little or no electricity, food or water. Many are these people are either Russian speaking or of Russian descent, so it is natural for Russia to want to go to their aid. So Russia went to the trouble and expense of organizing a big relief convoy. The controlled Western media have downplayed this crisis which affects countless thousands, hardly reporting on it at all, but they have had plenty of airtime – much more – for one American reporter gruesomely executed by a British Jihadist. They have done this because they don’t want people to be aware of the attacks being carried by the Ukraine government against its own people, which they back, and they don’t want people to understand the reason for the Russian aid convoy, so that they can then misrepresent the reasons for the aid convoy. The allegations by the Western media that the aid convoy has military objectives is absurd – you don’t need to be a truck driver to know that it’s very difficult to squeeze a tank or an armored troop carrier into an average sized truck. The protest that Russia is “violating Ukraine’s territorial integrity” by driving the trucks on through without permission is hypocritical cant and humbug, especially coming from a country that invaded Iraq on false pretenses, the mythical “weapons of mass destruction”. If Kiev wasn’t massacring its own citizens in eastern Ukraine, the aid convoy wouldn’t be necessary, and the reason that the trucks pressed on into Ukraine is that they were being deliberately messed about for a week at the border, when vetting the trucks should have taken 2 days maximum. So there you see a fine example of propaganda by omission, the purpose being to misrepresent the objectives of the Russian aid convoy, in order to present it as an act of aggression by Russia and therefore as a justification for a further tightening of sanctions.
Let’s go back to first principles for a moment and ask ourselves why the US is so concerned about what happens in the Ukraine, which is a country on the other side of the world from the US and therefore none of its business, unless that is it fancies itself as the new Roman Empire – perhaps Barack Obama believes himself to be a latter day Julius Caesar, which conjures up the vision of him entering Congress as if it was the Coliseum, dressed in a white robe and sandals, with a laurel wreath on his head. The US does in fact command an empire, and uses the dollar reserve currency system and its massive military to control its dominions, punishing severely any that try to break out of it. However, its dominions do not include China and Russia, which cannot be subjugated due to their big economies and their ability to physically defend themselves with nukes, if need be, and they are destined to dethrone the dollar and collapse the empire, which is completely rotted out internally, stricken as it is with massive debts and hopelessly corrupt government, as evidenced by the recent train of deplorable leaders.
It is hard to overstate the stupidity of Europe in toadying to the US and imposing sanctions on Russia (in other words starting a trade war). Russia is not some Third World banana republic, it is an important world power, and the act of imposing sanctions on it by Europe and the US is a gross insult and extreme provocation that will have disastrous consequences, particularly since it is now allied with China, with which it will now work assiduously to completely bypass the dollar. China knows that if the US succeeds in destroying Russia economically and subjugating it, then it’s next, so we can expect China and Russia to forge a very powerful alliance. Europe’s economy is already extremely fragile, and it stands to lose far more over the short to medium-term than the US by picking a fight it can’t win with its huge neighbor. Europe now faces a plunging currency and disintegration with the rise of far right political parties leading eventually to tribal wars – European countries have a long tradition of idiotic destructive attritional wars. Russia will probably get along alright, with its big internal economy and new trade agreements with China.
The rabid propaganda now being bandied about in Western media, especially with respect to Russia, is so crude and primitive that it would have even made the Nazi propaganda maestro, Dr Goebbels, blush with embarrassment, and you couldn’t accuse him of underestimating the stupidity of the masses. We haven’t seen this sort of thing since before the 2nd World War. What does it mean? – it means that the Western elites are DESPERATE, desperate in the face of a looming collapse of the dollar caused by its losing its reserve currency status – so desperate that you can practically see the perspiration running down their faces. It’s true that the dollar is rallying now temporarily because of the gathering collapse of Europe, and may continue to benefit from this for a while, and possibly soon from stock market liquidation too, but they are looking beyond that. Once the dollar goes their empire is finished – it will no longer be possible to maintain careening astronomic deficits, there will be no more limitless funds for the military machine many of whose bases could end up looking like the town of Pripyat near Chernobyl, no more imposing their will by force anywhere in the world, no more imposing fines on foreign banks and institutions for not doing things their way, no more money and arms for Israel, no more massive bonuses on Wall St etc. The rapid spread of destitution and poverty amongst the masses in the US means that a state of anarchy could well erupt that sees the mansions and citadels of the elites ransacked by the mob, and they are well aware of this possibility, which is the reason for the militarization of police forces across the country, as recently demonstrated in Ferguson, Missouri, and the stockpiling of vast quantities of ammo.
The biggest danger arising out of all this is that desperate people do desperate things, and the recent crude “gloves off” propaganda blitz is certainly a sign of desperation. It’s been a long time since a really big war and you can see from their increasingly reckless words and actions that they are lusting for it. It is one of the supreme ironies of this time that amidst all the maudlin sentimentality over the start of the 1st World War exactly 100 years ago, they are bringing us to the brink of another. Could it cross the line and go nuclear? – given the reckless aggression and brinksmanship already being displayed, that is certainly a possibility.
They can mass all the arms and missile batteries along Russia’s western border they like, perhaps promoting the paranoid notion that Russia wants to take back Eastern Europe, which it doesn’t, but it will never amount to anything more than a costly bluff, because if they ever dared attack Russia, then European cities would disappear under mushroom clouds. The underlying reason for such operations would probably be more lucrative contracts for the defense industry.
Remember, it wasn’t the elites who got killed in the 1st World War, it was the hapless young fools who thought they were doing the honorable thing going off to fight for their countries. So you’d better get good at seeing through the thick smog of propaganda in order that you understand what’s really going on and can take the necessary steps to protect yourself – if you don’t it could cost you and your loved ones more than just your property and investments, it could cost you your lives.
Many people suffer from vague uncertainties – they know something is wrong, but can’t put their finger on it. This is because they are not privy to “The Grand Plan” and believe the lies and misinformation carefully and skillfully served up to them by the compliant media, whose masters views the masses as sheep and treat them like mushrooms – “Feed them shit and keep them in the dark”. But once you become aware of the game plan, it is liberating, and spotting the lies and misinformation in the media becomes a kind of sport. Knowledge is power, and if you figure out that the dollar is going to collapse after its current rally – which could have quite a way to go incidentally – then you know to position yourself to escape the catastrophic effects of its eventual collapse and even profit handsomely from it – that is when gold and silver will do their moonshot of course, and it could coincide with the Chinese backing their currency with gold.
In conclusion, the answer to the question posed by this article “Will the US succeed in breaking Russia to maintain dollar hegemony?” is: “No, it won’t”, which means that the dollar is going to collapse, probably right after its swansong “death of Europe” rally, which is currently in progress.
Courtesy: Clive Maund
Ian Gordon created Longwave Analytics, which studies the Longwave principle, by which economies obey long-term cyclical trends of expansion and contraction. Eric Sprott is an avid reader — he suggested I interview Ian Gordon for his take on the role of Kondratiev’s ‘long wave cycle’ in explaining the economic environment we are seeing today.
Ian said ‘winter’ was coming for the world economy, though it has been staved off by the flexibility provided by paper money. As a result, a depression will be very different today than in 1929 or 1873, he believes. But now, as then, we could see a massive push for new gold discoveries.
Mr. Gordon explained how he got to know Eric Sprott over 10 years ago:
“I was writing about long-term economic cycles, referred to as ‘Kondratiev’ cycles. In 1998, I realized that we were close to the top of a bull market; we were somewhere akin to 1928 – immediately preceding the Great Depression. Eric appreciated my work, because it helped explain an imminent bull market for gold, which he saw as well.”
I asked: Do these ‘long wave’ economic patterns explain today’s bear market for gold – and the recent rally in general stocks?
“Well, they didn’t predict this – but they can help explain why it’s happening. Over the course of one entire ‘long wave’ economic cycle, covering a full expansion and subsequent contraction, you have what I call four ‘seasons.’ Winter is the period where debt is wiped out of the economy. It happened after 1929, which caused the US banking system to collapse. During the 1920’s, there had been a big build-up in consumer and corporate debt, as well as sovereign debt.
“During the Great Depression and the previous depression of 1873, we were on a gold standard system, so the ability to create money was limited. This time around, we are in a pure credit-based system, so the ability to create money withstands the ravages of the winter. Effectively, governments have been creating more debt. This will ultimately cause a more horrendous economic decline than in either 1929 or 1873, as debt levels are far greater today – and because the world is much more inter-connected financially.”
What about your prediction of a ‘new gold rush’ similar to the late 19th century?
“I do believe this will happen. Even though the amount of dollars is going up, eventually debt will be wrung out of the system. This causes deflation, which is very bullish for gold. In deflation, both creditors and debtors are in dire straits. They’re facing enormous pressure. People tend to turn towards stores of value like gold.
“We saw this happen in the 1930s’. When the stock market bubble collapsed, capital flowed into gold instead. Gold production in Canada rose from 1,928,308 fine oz. in 1929 to 5,311,145 fine oz. in 1940, which amounted to a 175% increase. There were 100 new gold mines started during that time, and world gold production increased by over 100%. That happened because capital was going into gold.”
So what do Kondratiev’s ‘long wave cycles’ tell us about what to expect going forward?
“We’re in the same period in the cycle as we were in the 1930’s and after 1873. The economic winter has been muted by the creation of paper money ad infinitum, but we will probably experience another leg down – similar to 2000.
“Follow the cycle: Kondratiev pointed out that the first cycle began with the industrial revolution in 1789, and that these cycles last around 60 years. This one is taking longer because we are on a paper money system, but we are approaching a full-on winter.
“Those 60-year cycles can be divided into four ‘seasons.’ You have spring, which is the re-birth of the economy, where debt’s been wrung out of and now the economy can start to function again. Then you move into summer, when the economy reaches its full fruition. It’s always the inflationary period of the cycle. Then, you get into autumn, which is the speculative period in an economy. It’s the biggest boom in stocks, bonds, and real estate in the cycle. Peaks, like we had in 1873, 1929, and 2000, indicate that we’re getting into the winter. That is the payback period where debt gets wrung out of the system.
“The market peaked in the ‘dot com’ bubble of 2000, but central banks forestalled winter by printing up trillions of dollars in paper money and effectively reducing interest rates to zero, between 2000 and 2002. From 2002 to 2007, interest rates rose in sync with the stock market. At the peak of 2007, interest rates were around 6%. Since then, interest rates went to zero again, but never came back up, even as the stock market took off after 2009. That’s created massive amounts of debt that still need to be wrung out of the system.
“It’s going to be a painful period in the economy, but I believe gold will shine as we have seen before, during the long wave economic winters.”Courtesy: Henry Bonner – Sprott Group
While the Comex utilizes highly leveraged paper contracts to control the price of silver, physical metal continues to be drained out of the Shanghai Futures Exchange. In just one week, total inventory declined by 24%.
As I mentioned in a earlier article, the Comex is more of a paper trading exchange in which the majority of contracts are settled in cash. However, the opposite is the case with the Shanghai Futures Exchange as the majority of contracts are settled with physical metal.
At the beginning of August, there were 148 metric tons of silver on warrant at the Shanghai Futures Exchange. In just three weeks, 29% of the total inventory was removed. The majority of this decline took place last week when 22 metric tons were withdrawn on Friday alone.
Also, we can see that since the beginning of July, 131 metric tons, or 56% of total silver stocks were removed from the Shanghai Futures Exchange. At this trend, it would only take a few more months to totally wipe out the remaining inventory.
I’ve received emails from some of my readers asking me “What does the continued draw-down of silver at the Shanghai Futures Exchange mean?” Unfortunately, I don’t trade silver in the futures markets, so I don’t really understand the dynamics behind the Asian markets.
So, I recently contacted Turd at TFmetalsReport to see if he might forward my inquiry to London precious metal trader, Andrew Maquire. As many of you all know, Andrew was one of the key players who assisted two JP Morgan whistle blowers to contact Bart Chilton at the CFTC about silver manipulation.
Nothing really came of the silver investigation, but that is no surprise. Regardless, it would be interesting to see what he has to say about the continued removal of physical silver from the Shanghai Futures Exchange. If, I receive a reply, I will publish it in an update.
Lately, I have noticed on my site and elsewhere there is this increasing percentage of DISILLUSIONED precious metals investors. While I can empathize with investors being frustrated that the price of silver has gone nowhere but lower over the past several years…. it doesn’t mean silver is a lousy investment.
I purchased my first ounce of silver at $4.52 an ounce back in 2002. That price is nearly 5 times less than the current price. Of course the prices of everything increased since 2002, such as the price of a barrel of Brent sweet crude oil which was only $25.
Brent crude is currently trading at $102 a barrel. Which means it’s now 4 times higher than its 2002 price of $25. If you bought silver in 2002, you protected yourself from the ravages of inflation as well as the collapse in the value of the U.S.Dollar.
In 2002, the U.S. Dollar Index reached 120… today it’s trading at 82. I don’t know when the Dollar finally crashes… but that time is approaching. The Fed and U.S. Treasury can still prop up that DEAD worthless piece of fiat currency, but a LIE doesn’t last forever.
We must remember… ALL FIAT CURRENCIES ARE LIES that die in the end.
Lastly, some analysts say they have a CRYSTAL BALL as to the time and place when the precious metals will return to new highs. Maybe they do, however I believe it’s impossible to forecast short-term moves in the metals when the markets are totally rigged.
Which is why I FOCUS on the FUNDAMENTALS. Investors need to realize that ENERGY is the driver of the economy, not finance. Furthermore, a growing energy supply allows the global reserve fiat currency, the U.S. Dollar to survive. So, if you follow that line of reasoning, then this is also true:
CHEAP OIL giveth the DOLLAR power, and EXPENSIVE OIL will taketh away.
This is the reason I include energy analysis on this site. I am trying to get it through the THICK SKULLS of the precious metal community that ENERGY is the key to the future value of gold and silver. Unfortunately, many of the precious metal folks are too wrapped up in gold and silver manipulation that they are blind to the real fundamentals taking place elsewhere.
When the world realizes GLOBAL PEAK OIL is here, valuations of most stocks, bonds and other assorted paper assets will plummet. Why? Because it takes a growing energy supply to power economic growth that gives future value to paper assets. When the global oil supply peaks and declines, valuations go down the toilet.
If you haven’t read my article, THE UNKNOWN FACTOR: How the Global Financial System Will Collapse, I recommend you do so. There is a short presentation by Roger Boyd who explains the Co-Dependent role of Energy & Finance. When one goes down, so does the other.
You cannot value gold or silver to its present cost of production. It is only useful as a tool to provide a base price in a highly manipulated paper market. The huge rise in the future value of gold and silver will be due to the collapse in value of paper assets… not the rise in the cost of production.
The Status Quo is desperate to mask the declining fortunes of those who earn income from work, and the Misery Index 2.0 strips away the phony facade of bogus unemployment and inflation numbers.
The classic Misery Index is the sum of unemployment and inflation, though later variations have added interest rates and the relative shortfall or surplus of GDP growth.
Since the Status Quo figured out how to game unemployment and inflation to the point that these metrics are meaningless except as a meta-measure of centralized perception management, the Misery Index has lost its meaning as well.
I propose a Misery Index 2.0 of four less easily manipulated (and therefore more meaningful) metrics:
1. The participation rate: the percentage of the working-age population with a job
2. Real (adjusted for inflation) median household income: an imperfect but still useful measure of purchasing power
3. Labor share of the non-farm economy: how much of the national income is going to wage-earners
4. Money velocity: a basic measure of economic vitality
The foundation of Misery Index 2.0 is jobs, earned income and the purchasing power of earnings. Inflation is easily gamed by underweighting big-ticket expenses and offsetting increasing costs with hedonic adjustments, and unemployment is easily gamed by shifting people from the work-force to not in the workforce. This category of zombies–not counted in measures of unemployment–has skyrocketed:
The participation rate is the more telling metric: if fewer people of working age have jobs, the claim that the Main Street economy is “doing better” rings false.
Even though the rate of inflation is heavily gamed, real median household income is the best available gauge of purchasing power. Purchasing power simply means how many goods and services will your income buy?
For example: if your daily salary buys 20 gallons of gasoline, and a year from now you get a raise but your daily pay only buys 15 gallons of gasoline, the purchasing power of your earnings fell despite the higher nominal salary.
Real median household income has declined, meaning the purchasing power of earnings fell.
This chart also shows labor’s share of the non-farm economy: that broad measure of earned income (as opposed to corporate profits, unearned income and rentier income) relfects a steady decline in labor’s share of the national income.
Once again, claims that the Main Street economy is “doing better” make no sense if labor’s share of the national income is declining.
An economy in rude good health has a high velocity of money. An economy bedeviled with high taxes, rentier skims, cartels, politically untouchable fiefdoms, quasi-monopolies and free money for financiers provided by the central bank has a declining velocity of money.
You can fake unemployment and inflation, but it’s harder to paper over the weakness reflected in money velocity:
Central-planning always leads to ginned-up phony statistics, because centrally planned economies always stagnate due to corruption, malinvestments, and some are more equal than others skims and scams by insiders, cronies, cadres and apparatchiks.
The Status Quo is desperate to mask the declining fortunes of those who earn income from work, and the Misery Index 2.0 strips away the phony facade of bogus unemployment and inflation numbers.Courtesy: Charles Hugh Smith
“ISIS poses a greater threat than 9/11. This is way beyond anything we have ever seen. We must prepare for everything. Get ready!” US Secretary of Defense, Chuck Hagel.
Whoa, Chuckie…back off a bit, here. Just who do you think it was that helped create the Islamic State of Iraq and the Levant, aka ISIS, fund them, train them, and provide the best weapons for them? Can you spell U S, as in a part of your title description as Secretary of Defense? Are you really telling America, and the world, that you are actually that clueless?
Nobel Peace Prize recipient and primary world warmonger, Barack Obama, has been itching to start a war in Syria. Why? To stop Russia from achieving its flow of LNG from East to West, a fact to which Obama will not openly admit. Turns out, bloggers on the internet can accept some credit for exposing Obama’s false flag excuses for attempting to overthrow Assad. How did Obama’s war machine, [mostly CIA-led], plan to oust Assad? By backing ISIS in every way possible: funds, training and weapons. ISIS is as much of an outgrowth of Western [US] meddling in that part of the Middle East as anything else.
Is this a story familiar to most Americans? Hardly. Beyond watching reality TV programs, almost all of Americans watch mainstream media for their “news,” those bought-and-paid-for organizations that spew whatever the administration wants the pablum-fed public to hear, and nothing else. The truth is, an American is 100% more likely to be killed by some local militarized cop than any ISIS member. Not only is that truth, it is a stark reality.
Several articles have appeared about the slaying of unarmed Michael Brown from as many responses written by Afghan and Iraqi veterans that admit while engaged in actual war, they were not as heavily armed and geared as Ferguson local cops, those same local militarized cops purposefully pointing their weapons at an unarmed, non-threatening public while perched atop a 14 ton armored vehicle, or while walking on the street, aiming at anyone within their range.
“Get off the streets and go home! We are not violating your Constitutional Rights!”
Say what?! You just did. Where is the outage, America? This is happening right in front of your eyes. Everywhere across this country, hundreds of local police have received free military vehicles and weapons from the Department of Defense, vehicles whose sole purpose was to engage in war. What is happening in Ferguson will eventually happen in a neighborhood near you, if not your own.
Do you think there is no connection with the Department of Homeland Security buying 3 billion rounds of hollow-point bullets and the ongoing militarization of local police departments? Did you know that even the elite’s world organization, the United Nations, has outlawed hollow-point bullets? Did you know the IRS [NOT a part of the corporate Federal government], also has IRS agents now armed and supplied with bullets? All the while, Obama, and elite wannabe former NY mayor Bloomberg want to see all Americans disarmed. If you want to better understand why, reflect more on events at Ferguson.
“Uncle Sam Wants YOU!” Just not in the way you thought.
The NSA has spent billions of fiat dollars, on your tab, and spies on every American [not only Americans], but admits it has not stopped a single terrorist threat or unveiled a single plot. Again, local militarized police are a proven greater threat to Americans than any other source, and Ferguson is proof positive that Americans have NO rights when push comes to shove. Fascism is alive and well in the US, but US citizens find that almost impossible to believe.
The elites have planned the takeover of the US since the early 1800?s. They think in terms of generations in executing their plans, gradually over time so that the effect is hardly noticed, like the gradual elimination of specie-backed United States Treasury Notes, and replacing them with worthless fiat Federal Reserve Notes issued by a private banking cartel. What citizen of the United States knows anything other than fiat Federal Reserve Notes as “money?”
People, on the other hand, think in terms of what is impacting their lives for the immediate term, and that is why we discussed ISIS, Ferguson, lack of Rights, a well-armed Department of Homeland Security and IRS agents, among others, the militarization of all police forces, fiat Federal Reserve Notes issued by the elite’s private banking cartel, almost entirely foreign-owned.
There are many other situations that could have been addressed. The presentation of these seemingly unrelated events is not random. Instead, each is symptomatic of the overall plans of the elites to maintain control over every aspect of US citizens without said citizens being aware of how the seemingly disparate dots connect.
The end will be devastating for almost all Americans who remain unaware of being unaware. The end will also take longer than most believe possible, until it all unravels seemingly “overnight.”
If you think the reasons for owning physical silver and gold are a function of the number of coin sales, the ratio of paper demand per available physical ounce, how many tonnes China, Russia, India, Turkey, and other countries own is why you should hold either or both metals, think again. The elite’s drive for a New World Order is all but done, and once they have total control, if you do not have any gold or silver, you got nothing, and you will be under the total subjugation of a federal government that will make Ferguson look like a walk in the park.
Buy physical gold and silver at any price. Once the window closes, based on the ongoing and never-ending developments you read about, and they are not as random as you might think, that window will be closed to you for your lifetime and your children’s lifetime. It is not just about the imminent collapse of the fiat Federal Reserve “Dollar.” If you think you have personal freedom, it is an illusion. Try moving large amounts of cash around, try speaking your mind against the Federal government, local cops, try asserting what you may think are your rights in a court of law.
The end is nearer and nearer, just not in sight, but for those who can exercise even a minimal amount of foresight, taking self-direction has never been more important. The charts give no indication of panic by those in control of the gold and silver market through the use of derivatives. The fact that China is endeavoring to become the next gold trade center, in control of a legitimate pricing mechanism has done nothing to alter the chart read.
Gold has almost disappeared from the headlines this past week, and the fact that it cannot make a move out of its protracted TR explains why. There is nothing apparent over which one can be enthused for the prospects of higher prices, but one must always be prepared for events when they do happen.
What we are viewing is the current status of the price of gold, and manipulated or not, the charts are not related to the need[s] for owning the physical. We mentioned earlier in the year, the second half of 2014 may not be any different from the first half, and until we see concrete signs of change, expect more of the same in the weeks/months ahead.
The chart comments are observations of how the market has been [under]performing, but the bottom line is, not much is happening to turn this market around. We all get to deal with what is, and this is what is, for now.
Without giving a definitive reason as to why, we are of the mind that silver could be the first metal to turn the trend, or eventually lead when the trend does turn. The gold/silver ration is around 66, after languishing around 63+ for some time. The turn in the ratio is much stronger if/when it nears 75-80:1. The very small weekly range could produce a buyer’s upside reaction because sellers were unable to extend the range lower.
We see that same evidence of a lack of sellers to press price lower. Both Thursday and Friday did show evidence of buyers, more likely short-covering than net new longs. It takes more than that to turn a trend, but a turn in trend starts with one step at a time. No apparent change here. Buy the physical metal for more reasons than a seemingly low price, but stay away from the long side of the paper market.
Submitted By: Edgetraderplus
Several very simple questions from Guy Haselmann of Scotiabank:
If QE is ending because it was so successful, then why is aggressive forward guidance necessary? If QE worked so well, then why will Yellen likely need to mention ‘the elevated number of part time workers’, ‘under-utilization of labor resources’ or ‘room for improvement in the labor market’? In regard to its inflation mandate, there is no evidence that QE has had any impact other than causing asset price inflation.
Central bankers and academics have propagated QE as an elixir for all economic ailments. Eurozone economic stagnation has now unleashed vociferous calls from proselytized market pundits that it is the ECB’s turn to administer QE medicine. Shouldn’t the lack of success at achieving the desired results in the US and Japan have curtailed such hasty Pavlovian responses?
QE is a powerful, but flawed tool; especially for Europe. Adaptation by the ECB will not boost aggregate demand across the Eurozone, or fix Europe’s structural problems. Those petitioning for QE consistently fail to address the costs of the policy. Those bullying Draghi also fail to recognize the inherent differences between the economic drivers of the US and Europe.
The benefits of QE are, for the most part, visible immediately. The costs and unintended consequences show up later. In the US, they may already be flashing red. The fact that there is (arguably) a poor tradeoff between benefits today, and unstable longer run outcomes (resulting in lower potential growth), is conveniently ignored.
Advocates fail to adequately explain how ballooning the central bank’s balance sheet through asset purchases leads to an increase in investment in new productive capacity. This modern day Phlogiston Theory fails to prove how the first order effect of widening the wealth divide through asset price inflation, trickles down into the second order effect of satisfactory job creation.
Certainly, QE-induced perpetually rising asset prices, and sinking volatility, likely boosted consumer confidence through the interpretation of lofty prices as ‘all must be well’. However, those aspects dangerously conspire to produce a false perception about the true state of economic fundamentals. The loudest voices regularly remain silent about how capital ends up being pushed into mispriced assets.
ECB QE would cause even-greater market distortions and misallocation of resources, undermining the long-run proper functions of the Eurozone economy. In addition, questions remain about its legality. If ECB purchases were made in asset-backed securities (rather than just EU sovereign debt), questions about fairness would likely arise.
European sovereign rates have already fallen many hundreds of basis points to multi-century low levels. 10 year rates have fallen to 0.99%, 1.38%, 2.38%, and 2.58% in Germany, France, Spain and Italy, respectively. In a sense, markets have already done the job for the ECB. The yield plunges are partially due to the binary aspects of the European Union. In other words, the common union will either work (converging yields) or break apart (diverging yield spreads). Great optimism (complacency?) is priced in.
Trying to navigate a QE drop in yields, of say another 25 basis points, would do little, if anything, to lift loan demand. It could even decrease overall lending. This is because those looking for a loan often received one when rates fell to historic lows; or alternatively, they were not able to get one due to the lousy quality of their credit. Since lenders typically receive marginally less for a loan when sovereign rates fall, the decline in the marginal worth of the loan means that the lending institutions should have less incentive to lend (i.e., loan supply falls).
At least the US has the benefit of a well-established corporate bond market. The EU has to rely more on bank loans to stimulate investment spending. In addition, it is difficult to argue that the benefits of QE would manifest via a depreciated Euro when global trade is so weak.
Often times, central bank policy attempts to ‘buy time’ to allow economic activity to self-correct or for politicians to agree on better remedies. Draghi had remarkable success after uttering “whatever it takes”. However, Draghi is fully aware of the quandary that doing too much (QE) for too long enables fiscal stalemate.
Brussels may have recognized that attempts to bring public sector debt under control have been counter-productive and resulted in higher debt-to-GDP ratios. Europe does not need QE. It needs serious reforms in state expenditures and taxation (in all non-productive subsidies) as well as flexibility in labor markets. Above all, the EU needs growth. Its current structure is faulty and QE from the ECB will not change that.
Stay tuned tomorrow following Yellen’s 10 a.m. speech as the exceptionally shrewd Super-Mario Draghi gives the keynote lunch address at noon.
“One time the police stopped me for speeding, and they said, ‘don’t you know the speed limit is 55 miles an hour?’ I said, ‘Yeah, I know, but I wasn’t gonna be out that long’”. – Steven WrightCourtesy: Zerohedge
Alasdair Macleod writes the blog FinanceAndEconomics.Org. His research aims to explain the relationship between the dollar and gold, and to warn investors about the biggest threats to their wealth from macro-economic events.
Besides what the Fed is doing by printing money, there is another big threat to the dollar, said Alasdair. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.
He also warned that credible allegation of misconduct at the London bullion exchange could accelerate the trend of Shanghai becoming the world’s trading hub for gold.
“There is a thing called the Shanghai Cooperation Organization, an agreement principally between China and Russia, whereby they tie up the whole of Asia as their backyard. Other members are the countries north of Tibet, Tajikistan, Kyrgyzstan, Uzbekistan, and so on. In or soon after September, four new members will join – India, Pakistan, Iran, and Mongolia. That’s almost half the world’s population. The objective of the SCO is basically to settle international trades between these countries without using the dollar. I’m not saying they will necessarily achieve that, but that’s what they want to do. They don’t want to see trade settlements reflected in bank accounts in New York.
“It’s not just members of the SCO, either, that could eschew the dollar. The Middle East, for example, now principally sends exports to China and India, so there’s no pressing reason to use the dollar there.
“You can see that, if they succeed, the whole Asian continent, at some point in the future, will be off the dollar. They’ll use their own currencies, gold, or something else. That’s a very big change, and I don’t think people fully appreciate what that means for the dollar.
“Apart from everything the Fed is doing, there’s an awful lot of dollars held in foreign corporate accounts, principally because they’re required for trade. If the world stopped using the dollar, then those dollars will need to find their way back home.
“What that’s likely to do for the dollar relative to other currencies, I don’t know, but I do think it’s likely to affect the relationship between the dollar and gold.
“While the value of the dollar depends on confidence, gold is different, because gold is accepted everywhere. They might no longer accept dollars in some parts of the world – just like they wouldn’t accept my British Pounds in California – but they’ll accept gold. In Asia, that’s particularly true. People might place a different value on gold depending on the geographic region, but gold is more or less accepted as a form of payment anywhere.”
What do you make of allegations of manipulation within the London Bullion Market?
“It’s an interesting question. The problem with the London Bullion Market is that it’s an over-the-counter market, which means people are free to behave as they like in terms of interacting with the market. That’s not to say people automatically behave dishonestly, but there’s no way to disprove an allegation that someone is behaving dishonestly, and that’s very bad.
“In the 1980s’, during the ‘big bang,’ when they decided to regulate certain types of investments in London, stocks, bonds, futures, and options were all designated as regulated investments. Physical bullion, however, was not considered a regulated investment. You could trade these without regulatory supervision, any way you liked.
“Today, in the LBMA over-the-counter market, nobody knows what’s going on. We have a fix twice a day, which is fairly opaque – you don’t see how it’s carried out. So there is reason to doubt the integrity of the London market, and that’s not good for London. It especially isn’t good for London when other bullion markets have now evolved, such as the physical market in China, which is doing a very large amount of business and is transparent. You can see turnover, and you can see the ten largest traders in each commodity – whether it’s gold, silver, or platinum, for instance. It’s all out there.
“So you can see what goes on in those markets, but you can’t see that in London. It’s even been suggested, based on mathematical analysis of the bullion market, that the London gold fixing process is rigged about 10 to 30 percent of the time. That’s quite an indictment.
“The regulators in London have been told by the politicians to clean up the gold market. I would really be surprised if they don’t institute some major changes. I doubt they’d make it a regulated market, but I can see that they would put pressure on the member banks – which they do regulate. I think they will try to make the London bullion market a lot more transparent. I think the members might scream and kick against it, but there really is no other way.
“If it doesn’t, we’re not going to retain the business that places like China, Dubai, and Singapore want to develop. I’d say that changing the fix is the first step to a long road of reform that London needs to undertake.
“So much gold has already gone from Western vaults to the Far East – China, India – and the Middle East going back to the 1970s’. We probably don’t understand that this is one of the greatest wealth transfers in history. Relative to the amount of fiat currency in circulation, gold is probably as cheap as it was in 2000 or 2001 – incredibly cheap.”
Courtesy: Henry Bonner via Sprott Group
The government is very good at making things overly complicated for the purpose of obscuring what’s really going on from the public,” observed hedge fund manager Erik Townsend during our interview in May.
He was making a point about the 2008 bailouts. The Federal Reserve played a leading role, applying trillions in paper-clip and rubber-band solutions. The Fed’s balance sheet swelled from $900 billion in September 2008 to $4.4 trillion as we go to press.
Luckily for you, our friend Jim Rickards is just as good at elucidating the muddled world of finance as the government is at obscuring them.
“Since Federal Reserve resources were barely able to prevent complete collapse in 2008,” Jim writes in his recent New York Times best-seller, The Death of Money, “it should be expected that an even larger collapse will overwhelm the Fed’s balance sheet.”
Simply put, next time, printing another $3 trillion-plus won’t be politically feasible. “The specter of the sovereign debt crisis suggests the urgency for new liquidity sources, bigger than those that central banks can provide, the next time a liquidity crisis strikes. The logic leads quickly from one world to one bank to one currency for the planet.”
Leading the way, says Rickards, will be the International Monetary Fund. “The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of SDRs, and this monetary operation will effectively end the dollar’s role as the leading reserve currency.”
Ah… the SDR. That’s shorthand for “special drawing rights.”
The name is cryptic. The mechanism will prove far more inscrutable than the Fed’s alphabet-soup bailout programs in 2008. But the objective will be the same… to print money in the interest of keeping a rotten system functioning.
Boiled down to its essence, the SDR is a kind of super money printed by the IMF and then circulated among central banks and governments. Indeed, the IMF has issued SDRs three times since their creation more than 40 years ago. Each time was linked to a crisis of confidence in the U.S. dollar…
1969: The French and others recognized the United States was printing too many dollars. At the time, foreigners could still exchange dollars for gold, and there was a run on Fort Knox. The IMF created the SDR to smooth the rough monetary seas, issuing 9.3 billion SDRs through 1972.
1979: U.S. inflation soared out of control, past 14%. Oil-producing countries fretted the value of their dollar reserves was plunging. The IMF issued 12.1 billion SDRs through 1981.
2009: In response to the Panic of 2008, the IMF issued 182.7 billion SDRs during August and September.
A 42-page IMF paper published in January 2011 with the innocuous-sounding title “Enhancing International Monetary Stability — A Role for the SDR?” — lays out what Rickards describes. “A multiyear, multistep plan to position the SDR as the leading global reserve asset. The study recommends increasing the SDR supply to make them liquid and more attractive to potential private-sector market participants such as Goldman Sachs and Citigroup… The IMF study recommends that the SDR bond market replicate the infrastructure of the U.S. Treasury market, with hedging, financing, settlement and clearance mechanisms substantially similar to those used to support trading in Treasury securities today.”
Not that you’d use it to buy a gallon of gas or a loaf of bread. “SDRs will perhaps never be issued in bank note form and may never be used on an everyday basis by citizens around the world. But even such limited usage does not alter the fact that the SDR is world money controlled by elites.”
In fact, it enhances that role by making the SDR invisible to citizens. “The SDR can be issued in abundance to IMF members and can also be used in the future for a select list of the most important transactions in the world, including balance-of-payments settlements, oil pricing and the financial accounts of the world’s largest corporations, such as Exxon Mobil, Toyota and Royal Dutch Shell.”
The genius of the scheme is that the SDRs would create inflation… but ordinary people wouldn’t know SDRs were causing it. “Any inflation caused by massive SDR issuance would not be immediately apparent to citizens. The inflation would show up eventually in dollars, yen and euros at the gas pump or the grocery, but national central banks could deny responsibility with ease and point a finger at the IMF.”
The most provocative proposition in Rickards’ book, however, isn’t hidden global inflation. It’s this: Before the SDR can assume its role as the new leading global asset, China must accumulate a much larger stash of gold. And the gold price is being manipulated for the express purpose of making sure China gets it relatively cheaply.
We’ve long chronicled China’s gold accumulation. When we interviewed Mr. Rickards last year, he explained the rationale: “They want to be in a position where they just raise their hand and say to the world, ‘Hey, we’ve got our gold, now we’re a player. Now when the international monetary system collapses and the world has to reconfigure the system, we get a big seat at the table.’”
In The Death of Money, Rickards goes a step further: He says Western powers are making room at the table for China — using the precise mechanism we described in our “Zero Hour” scenario. Western central banks have “leased” their gold to commercial banks, and those commercial banks have sold that gold to Asian buyers — including the Chinese central bank.
“The gold price must be kept low,” Rickards writes, “until gold holdings are rebalanced among the major economic powers, and the rebalancing must be completed before the collapse of the international monetary system.”
The metric the power brokers are using to judge when China is ready to take its seat at the table? Gold reserves as a percentage of GDP. Recall the Chinese central bank last disclosed its gold holdings in April 2009 — 1,054 tonnes. Conservative estimates put that figure today at 2,710 tonnes. And as you see from the before-and-after tables nearby, it won’t take much more before China’s gold-GDP ratio equals America’s.
“The United States and China have a shared interest in keeping the gold price low,” Rickards writes, “until China acquires its gold… Once the rebalancing is complete, probably in 2015, there will be less reason to suppress gold’s price, because China will not be disadvantaged in the event of a price spike.”
His research and documentation is peerless. “Get the annual report from the Bank for International Settlements,” he told us during our dinner talk. “Read the footnotes. I understand it’s geeky, but it’s there. They actually get audited — unlike the Fed and unlike Fort Knox.”
Yet, we still wondered, who or what is the IMF’s biggest enemy in carrying out its plan?
Time, replied Mr. Rickards. “A financial panic in the next several years, caused by derivatives exposure and bank interconnectedness, may trigger a global liquidity crisis worse than the 1998 and 2008 crises,” he writes in his book. The IMF will step in but “the emerging circumstances will mean the process will be carried out on a crash basis, without reference to carefully constructed infrastructure now contemplated.”
And as he suggested in Currency Wars, the IMF might even swallow its pride and resort to some form of gold standard if that’s what it takes to restore confidence in the system.
But if that’s what it takes, expect some ugly times ahead, like Ferguson, Missouri, but worse. “Riots, strikes, sabotage and other dysfunctions,” complete with a “neofascist” response from well-armed authorities.
What can you do? What should you do?
First, prepare yourself by reading The Death of Money and understanding the seven signs Rickards says will point to a looming crisis. Then get cracking on the five investments he says can help you weather the storm.
If you haven’t gotten a copy yet, we’d advise holding off — just for a while longer. We’re working closely with Mr. Rickards on a brand-new project that will not only put his advice in your hands, but deliver constant updates and advice on how the coming monetary collapse will unfold.
In the meantime, you can probably guess what one of his recommendations is already: Go on your own gold standard right now, the rest of the world’s governments be damned.
“A fixed exchange rate is not essential to gold’s role in a contract money system,” he said. “It is necessary only that the citizen be free to buy or sell gold at any time. Any citizen can go on a personal gold standard by buying gold with paper dollars…”
He says our Zero Hour remains a distinct possibility — in which the price of real gold you hold in your hand runs away from the “paper price” quoted on CNBC. He thinks it could even be the trigger for the next crisis.
“As long as [gold] holders remain in paper contracts,” he writes, “the system is in equilibrium. If holders in large numbers were to demand physical delivery, they could be snowflakes on an unstable mountain of paper gold. When other holders realize that the physical gold will run out before they can redeem their contracts for bullion, the slide can cascade into an avalanche, a de facto bank run, except the banks in this case are the gold warehouses that support the exchanges and ETFs.”
Even Warren Buffett — that tireless critic of gold and its inability to throw off cash flow — has bought something very similar to gold, says Rickards. “Buffett has been known to disparage gold, but he is the king of hard asset investing, and when it comes to the megarich, it is better to focus on their actions than their words.”
Click the play button on the video below to see Jim explain what Buffett (and the Chinese) have been doing to pivot away from holding dollars.
Courtesy: Addison Wiggin via Daily Reckoning