(Bloomberg) -- An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.
Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.
“The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “They’re still so shell-shocked by what they went through despite the improvement in the market and the economy.”
Stock markets have slid in the past week after bounding higher since March as the economic outlook improved. The MSCI AC World Index of emerging and developed markets has risen by 68 percent since March. It fell 0.4 percent as of 1:30 p.m. in Tokyo, an eighth day of declines.
The S&P 500 index, which has gained 54 percent since March, closed below its 50-day moving average level for the first time since July yesterday after a 2 percent drop.
Worldwide, investors and analysts now view the U.S. as the weak link in the global economy, with its markets seen as among the riskiest by a plurality of those surveyed. One in four respondents expects an unemployment rate of 11 percent or more a year from now, compared with a U.S. administration forecast of 9.7 percent. The jobless rate now is 9.8 percent, a 26-year high.
Dollar’s Decline
The skepticism about the U.S. is taking a toll on the dollar, with a plurality of respondents saying it will weaken against most other currencies in the next year, the yen being the major exception among the 11 currencies tested. Thirty-seven percent say the dollar should not continue as the world’s reserve currency in 10 years. The yen fetched 90.32 per dollar as of 1:45 p.m. in Tokyo from 90.75 in New York.
The poll is based on interviews conducted Oct. 23-27 with a random sample of 1,452 Bloomberg subscribers, representing decision makers in markets, finance and economics on six continents. It has a margin of error of plus or minus 2.6 percentage points.
“The stock market has had quite a run since July when more Bloomberg customers thought the Standard & Poor’s 500 index would rally than predicted a downturn,” says J. Ann Selzer, president of Selzer & Co., the Des Moines, Iowa-based firm that conducted the polls. “That rally may have dampened views of what to expect next. They may also think that there are better markets now for investments than the U.S.”
Emerging Markets
Respondents see China, Brazil and India as the markets with the most potential, and commodities as the asset of choice, replacing stocks as the most desirable investment class in last quarter’s survey. Real estate and bonds are out of favor, with 40 percent saying bonds will have the worst returns over the next year.
“Asia is the best place to put money as there are not mountains of consumer debt, bad mortgage lending, trade deficits or high unemployment,” says Peter J. Emblin, a fund executive at Thai Strategic Capital Management Co. in Bangkok who took part in the poll.
Investors and analysts in Asia are the most bullish, while those in the U.S. are the most cautious. A majority of Asian investors expect their country’s benchmark stock index to rise while a plurality of U.S. and European respondents thought their benchmarks would fall in the next six months.
Equity Rebound
“A lot of people have been surprised by the speed of the equity rebound,” says Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, adding that the rally has probably been fueled by buying from hedge funds and traders. “It caught them off guard and they don’t believe it.”
Fund manager Paulsen thinks the stock markets rose largely because of the disappearance of panicked sellers. “I don’t think the market has gone up because of heavy buying. You only need a little bit of buying when there are no sellers.”
Asia’s optimism is understandable. The region is leading the global economy out of the worst recession since World War II, according to the Washington-based International Monetary Fund. The IMF said on Oct. 1 that the world economy will expand 3.1 percent next year after shrinking 1.1 percent this year, with China growing by 9 percent and India by 6.4 percent.
Global investors and analysts agree that the world economy is on the mend. Almost 75 percent describe the global economy as stable or improving, up from just over 60 percent in July.
By Rich Miller
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Friday, October 30, 2009
Be Prepared for the Worst
The large-scale government intervention in the economy is going to end badly.
(Forbes)Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.
Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate. We have seen the results of Alan Greenspan's excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.
This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve's balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?
What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.
Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.
The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.
By: Ron Paul
Read Entire Article
(Forbes)Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.
Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate. We have seen the results of Alan Greenspan's excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.
This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve's balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?
What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.
Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.
The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.
By: Ron Paul
Read Entire Article
Thursday, October 29, 2009
Paul Tudor Jones Says Now Is Time, Place for Gold as an Asset
(Bloomberg) -- The time to hold gold is now as faster inflation and increased purchases through exchange-traded funds and by central banks boost demand amid stagnant mine output, Paul Tudor Jones’s Tudor Investment Corp. said.
"I have never been a gold bug,” Jones, whose company manages about $11.6 billion out of Greenwich, Connecticut, told investors in an Oct. 15 letter, a copy of which was obtained by Bloomberg News. “It is just an asset that, like everything else
in life, has its time and place. And now is that time.”
Gold futures gained 18 percent this year in New York and reached a record $1,072 an ounce on Oct. 14, on concern that near-zero interest rates and government spending will debase currencies and spur inflation. Fund manager John Paulson increased his bets on gold this year, while David Einhorn told clients of his $5 billion Greenlight Capital Inc. hedge fund in January he was buying gold for the first time.
The Federal Reserve has kept its target rate for overnight loans among banks between zero and 0.25 percent since December to help stimulate the economy. President Barack Obama increased the nation’s marketable debt to an unprecedented $7.01 trillion
as the government borrows to revive growth. The U.S. economy, the world’s biggest, expanded for the first time in more than a year in the third quarter, the Commerce Department said today.
“As one would expect, rising inflation suggests higher gold prices, especially when the Fed is perceived to be behind the curve,” according to the letter. “Gold appears to be cheap. In our view, gold’s value should increase as its scarcity relative to printed currencies increases.”
Patrick Clifford, an outside spokesman for Tudor in New York, confirmed the letter was sent to investors. Tudor’s Tudor BVI hedge fund gained 14.9 percent this year
through the third quarter, according to the letter. Tudor identified gold, emerging market equities denominated in local currencies and commodity related stocks as among the most likely assets to perform best.
As the metal’s price rallied to a record, so too have bullion holdings in exchange-traded funds. Assets in the SPDR Gold Trust, the biggest ETF backed by bullion, reached an all-time high 1,134 metric tons on June 1, and were at 1,104.43 tons as of yesterday, its Web site showed. Central banks were net buyers in the second quarter for the first time since at least 2000, according to the World Gold Council.
While metal exploration expenditure has increased, mine
production has been “stagnant” the past decade and new output
is “marginal” in terms of available supplies, according to the letter. “Any incremental demand for gold must be met through sales from current owners,” the company said in the letter. “They just aren’t making that much of it anymore.”
By Nicholas Larkin
Read Entire Article
"I have never been a gold bug,” Jones, whose company manages about $11.6 billion out of Greenwich, Connecticut, told investors in an Oct. 15 letter, a copy of which was obtained by Bloomberg News. “It is just an asset that, like everything else
in life, has its time and place. And now is that time.”
Gold futures gained 18 percent this year in New York and reached a record $1,072 an ounce on Oct. 14, on concern that near-zero interest rates and government spending will debase currencies and spur inflation. Fund manager John Paulson increased his bets on gold this year, while David Einhorn told clients of his $5 billion Greenlight Capital Inc. hedge fund in January he was buying gold for the first time.
The Federal Reserve has kept its target rate for overnight loans among banks between zero and 0.25 percent since December to help stimulate the economy. President Barack Obama increased the nation’s marketable debt to an unprecedented $7.01 trillion
as the government borrows to revive growth. The U.S. economy, the world’s biggest, expanded for the first time in more than a year in the third quarter, the Commerce Department said today.
“As one would expect, rising inflation suggests higher gold prices, especially when the Fed is perceived to be behind the curve,” according to the letter. “Gold appears to be cheap. In our view, gold’s value should increase as its scarcity relative to printed currencies increases.”
Patrick Clifford, an outside spokesman for Tudor in New York, confirmed the letter was sent to investors. Tudor’s Tudor BVI hedge fund gained 14.9 percent this year
through the third quarter, according to the letter. Tudor identified gold, emerging market equities denominated in local currencies and commodity related stocks as among the most likely assets to perform best.
As the metal’s price rallied to a record, so too have bullion holdings in exchange-traded funds. Assets in the SPDR Gold Trust, the biggest ETF backed by bullion, reached an all-time high 1,134 metric tons on June 1, and were at 1,104.43 tons as of yesterday, its Web site showed. Central banks were net buyers in the second quarter for the first time since at least 2000, according to the World Gold Council.
While metal exploration expenditure has increased, mine
production has been “stagnant” the past decade and new output
is “marginal” in terms of available supplies, according to the letter. “Any incremental demand for gold must be met through sales from current owners,” the company said in the letter. “They just aren’t making that much of it anymore.”
By Nicholas Larkin
Read Entire Article
Wednesday, October 28, 2009
Gold to Rise to $2,000 Amid ‘Massive’ Inflation
(Bloomberg) -- Gold may rise to a record $2,000 an ounce in the next three years as investors hedge against “massive” inflation sparked by governments printing money, according to Superfund Financial Singapore Pte’s Aaron Smith.
“In the next few years, after the deflation cycle, we’ll see massive inflation,” Managing Director Smith, 30, said in an interview. “Soon, when you go to buy a cup of coffee, you’ll pay $20 or $30 because the dollar won’t be worth anything.”
The company’s Superfund Green Gold A Fund, which has more than doubled since its inception in 2005, has lost 15.6 percent this year because of higher volatility, said Smith, who joined in 2002. Gold rose to an all-time high this month as governments including the U.S. boosted debt to combat the global recession.
“When the U.S. dollar crashes, all the paper currencies have to crash, otherwise if their currencies are too strong, their economies will be weak,” said Smith, who issued similar gold forecasts in May and earlier this month. “Another excellent buying opportunity for investors is silver.”
Gold for immediate delivery, which touched a high of $1,070.80 an ounce on Oct. 14, traded at $1,039.32 at midday in Singapore. The metal has strengthened 18 percent this year, while the Dollar Index, a six-currency gauge of the dollar’s strength, fell 6.4 percent.
Gold Forecasts
Smith joins investors including Shayne McGuire, director of global research at the Teacher Retirement System of Texas, and Jim Rogers in forecasting higher gold prices. Pension funds will increase gold holdings as currencies decline, McGuire said on Oct. 22. Gold will probably top $2,000 in the next decade as the dollar weakens, Rogers said Oct. 7.
Superfund, founded in 1995 and backed by $1.6 billion in assets, specializes in so-called managed futures, using its own trading system to generate buy and sell calls on stock, bond, currency and commodity futures. Still, the company’s flagship Superfund A, which gained 35.4 percent last year, has lost 24 percent this year, Smith said.
The ratio of silver to gold, currently at 62.35, will be “cut in half” in the next three to five years as millions of people in South Asia and China buy the metal as an alternative because they can no longer afford gold, Smith said. Silver has soared 46 percent this year to $16.65 an ounce.
Read Entire Article
“In the next few years, after the deflation cycle, we’ll see massive inflation,” Managing Director Smith, 30, said in an interview. “Soon, when you go to buy a cup of coffee, you’ll pay $20 or $30 because the dollar won’t be worth anything.”
The company’s Superfund Green Gold A Fund, which has more than doubled since its inception in 2005, has lost 15.6 percent this year because of higher volatility, said Smith, who joined in 2002. Gold rose to an all-time high this month as governments including the U.S. boosted debt to combat the global recession.
“When the U.S. dollar crashes, all the paper currencies have to crash, otherwise if their currencies are too strong, their economies will be weak,” said Smith, who issued similar gold forecasts in May and earlier this month. “Another excellent buying opportunity for investors is silver.”
Gold for immediate delivery, which touched a high of $1,070.80 an ounce on Oct. 14, traded at $1,039.32 at midday in Singapore. The metal has strengthened 18 percent this year, while the Dollar Index, a six-currency gauge of the dollar’s strength, fell 6.4 percent.
Gold Forecasts
Smith joins investors including Shayne McGuire, director of global research at the Teacher Retirement System of Texas, and Jim Rogers in forecasting higher gold prices. Pension funds will increase gold holdings as currencies decline, McGuire said on Oct. 22. Gold will probably top $2,000 in the next decade as the dollar weakens, Rogers said Oct. 7.
Superfund, founded in 1995 and backed by $1.6 billion in assets, specializes in so-called managed futures, using its own trading system to generate buy and sell calls on stock, bond, currency and commodity futures. Still, the company’s flagship Superfund A, which gained 35.4 percent last year, has lost 24 percent this year, Smith said.
The ratio of silver to gold, currently at 62.35, will be “cut in half” in the next three to five years as millions of people in South Asia and China buy the metal as an alternative because they can no longer afford gold, Smith said. Silver has soared 46 percent this year to $16.65 an ounce.
Read Entire Article
Tuesday, October 27, 2009
Is Your Safety Deposit Box Safe?
More than 500 officers smashed their way into thousands of safety-deposit boxes to retrieve guns, drugs and millions of pounds of criminal assets. At least, that's what was supposed to happen. Adrian Levy and Cathy Scott-Clark investigate
The Finchley Road is one of the busiest thoroughfares heading out of London. It leads traffic north past Lord's Cricket Ground and the multimillion-pound houses of some of the country's richest hedge-fund managers all the way to the M1. At three in the afternoon it's always pretty slow going, but on this particular summer Monday the traffic was almost at a standstill.
This was partly because the normal three lanes going north had been cut down to one. But it was also because of drivers slowing down to a crawl so they could gawp at the massive police operation unfolding on a busy corner of the road.
Police vehicles - both cars and menacing armoured trucks - jammed up two lanes. Dozens of armed officers in bulletproof vests were standing ready, waiting to be called inside an anonymous-looking building. From the sheer manpower and weapons on display it looked like the capital was under another terrorist attack.
But while this was the Metropolitan Police's most ambitious operation in its 180-year history, it had nothing to do with national security. Only hours before, at a special briefing, teams from SCD6 (the Economic And Specialist Crime unit) and C019 (Specialist Firearms Command) hunkered down with technicians armed with angle grinders and drills. Also present were dog handlers, their animals trained to sniff out guns, drugs and explosives.
In all, more than 500 officers had gathered to receive orders to raid smart addresses in well-heeled parts of the capital. The locations included three of Britain's largest and most well-established safety-deposit box depositories in Edgware, Hampstead and Park Lane as well as an office and the homes of the three directors of Safe Deposit Centres Ltd, which owned the vaults - two in Hampstead and one in Barnet.
For most of those at the briefing, arriving just before 3pm on June 2 last year, this was the first they had heard of the operation. Secrecy had been paramount and, with so many involved, keeping the operation 'airtight' had been one of the largest headaches in the pre-planning for what was codenamed 'Rize'.
The police rolled through London in a convoy: scores of patrol cars, armed-response vehicles, outriders on their bikes, vans with their windows shielded by metal cages. With a Met film unit recording everything, detectives forced their way past startled security guards, demanding receptionists open the secure doors that led to the normally hushed strong rooms, which in the three centres housed 6,717 safety deposit boxes.
Cash found in deposit boxes
Cash found in deposit boxes. More than £53 million in cash was impounded, some of it stuffed into supermarket bags
Over the next few hours, the three depositories were transformed into makeshift evidence-sorting centres, decked out with tables to bear the contents of the safety-deposit boxes that were soon to be forced open. Within a day, the first stage of the operation was finished but it would take over ten more to complete the next intricate and prolonged phase.
Investigators wearing gas masks and blue overhauls used power tools to chop away at the locked doors that protected the boxes themselves. They had rehearsed this bit for many hours, on mockups, trying numerous methods to get quickly and safely at the deposit boxes.
Forged passports found in deposit boxes
Forged passports found in deposit boxes
Diamond drill bits forced down into the locks proved disastrous, potentially damaging evidence inside. Instead, they settled on Makita angle grinders, with which they now effortlessly hacked at the hinges, allowing them to slide out the individual strong boxes, some as small as an A4 pad. Larger ones required a more bullish approach - strong-arm tactics that the police maintained were essential as key-holders would have been unlikely to co-operate.
As the first of the boxes was opened, detectives began probing the contents. Many were spilling over with bank notes and jewellery. Each was given a rough designation - for instance, 'cash' or 'gun' - and the words scribbled onto labels before they were placed in sealed evidence bags that were loaded into vans and given an armed escort to their final and secret destination, a secure counting house.
Here, every one of the thousands of boxes was to be intimately scrutinised. Not only did detectives have to itemise what they had found but match the contents to a person.
A few of the box-holders' identities had been acquired through months of police surveillance. Others were revealed in vault registers seized by police during the raid. Some used aliases and would be hard to track down; more still would be identified by scrutinising the vaults' CCTV cameras. Sixty officers would sift, analyse and count until November 2008 and beyond, racking up £1.4 million in overtime bills alone.
There was a lot at stake. Never before had the British police been granted a warrant as broad as this. The raids had been made possible under a controversial law, the Proceeds Of Crime Act (POCA), which came into being in 2002 and introduced an array of wide-ranging new powers to seek out and confiscate dirty money - the houses, cars and boats bought by criminals.
However, lawyers watching the police operation unfold were quick to warn that the strong-arming of these vaults and the crashing into each and every box was tantamount to the police having obtained permission to smash down the doors of an entire housing estate.
David Sonn, of Sonn Macmillan Walker, one of the largest criminal defence practices in London, says, 'POCA was never intended for this. No one objects when criminals are caught and their assets seized - but shaking down everyone to get to them is specifically not what lawmakers wanted.'
A handgun belonging to a suspected drug dealer
Items seized include police riot gear, guns and swords
A handgun belonging to a suspected drug dealer(left) and items seized include police riot gear, guns and swords (right)
Aware of the controversy, Scotland Yard went on a charm offensive, with Assistant Commissioner John Yates giving a series of briefings.
'This is a huge operation to tackle criminal networks who we believe are using safe deposit facilities to hide assets,' he reassured the media.
The raids had come after 18 months of scrupulous intelligence gathering that had led detectives to suspect the vault owners were turning a blind eye to the worst kinds of criminality, enabling major villains to conceal, transport and launder their ill-gotten gains, said Yates. Brushing aside concerns about the invasion of privacy, he asserted that 'the majority' of the boxes seized belonged to criminals.
Evidence was soon put on show that seemed to underscore his position. More than £53 million in cash was impounded, some of it stuffed into supermarket bags. Most of the money, said the Met, was 'the proceeds of armed robberies and international drug trafficking'.
Unnamed Yard sources speculated that some had come from the 2006 Securitas depot robbery in Tonbridge, Kent, and that a mysterious haul of gold grains wrapped in plastic and squashed inside suitcases could be linked to the Brinks Matt heist of 1983. There were sufficient diamonds and pearls to string up as bunting for a street party.
CCTV footage of Gavin Leon
CCTV footage of Gavin Leon, whose box held a Glock handgun
In one box in Edgware, bags of white powder when tested turned out to be 140g of 81 per cent pure cocaine. Lying next to it was £62,500 in cash. Another box, crammed with notes, was identified as belonging to a Russian woman whose boyfriend was the son of a convicted major-league drugs dealer.
A semi-automatic Glock 9mm, the weapon of choice for British gangsters, was lodged in Box 1653 at the Hampstead depository, rented by 44-year-old Gavin Leon, who was jailed for five years last March. A Brocock firearm and nine rounds of ammunition, together with £20,000 in cash, some heroin and weighing scales had been deposited in a box belonging to John Derriviere, a 47-year-old who is now wanted by police.
A £100,000 stash left in a box in Edgware turned out to belong to convicted drug dealer David Wilson, 38, from Dagenham, a nest egg he intended to collect after completing a 24-month sentence. Scrutinising the vault's CCTV, police also identified drug trafficker Yaset Berhane, 27, whose box contained £122,000 in cash, some of it marked by Sussex Police in an earlier drugs sting, leading to Berhane's jailing in March 2009 for drug trafficking and money laundering.
When vice-squad detectives raided five premises connected to a southeast Asian businesswoman who had more than £100,000 in cash in one box, they found brothels worked by girls who had all potentially been trafficked to the UK, as well as a string of foreign bank transactions showing £800,000 flowing out of the UK. In the months after Rize there were more than 40 arrests and 11 prosecutions.
However, by talking to scores of box-holders, none of whom have spoken before, Live has uncovered a different version of Operation Rize, one that shows how the vast majority of those caught up in the raids were innocent. They have had their lives turned upside down over the past 17 months. Many have struggled to recoup their money and possessions, been forced into legal trench warfare with police lawyers and told they must prove how they came by the contents of their boxes.
This is also a story told through secret legal papers, including confidentiality agreements struck with some vault depositors whose cases threatened to topple the entire operation. Although the police told a judge that 'nine out of ten' of all of the thousands of box-holders were probably criminally minded, criminally connected or felons, the paper trail reveals that perhaps only as few as ten per cent of the boxes have any connection to serious crime.
More worryingly, according to eminent lawyers and barristers, Operation Rize has seen the Yard employ unethical tactics, driving a coach and horses through the new POCA legislation, leaving the Met facing a raft of legal actions that could potentially cost taxpayers millions of pounds.
Police raid at Hampstead
The police raid at Hampstead. Never before had the British police been granted a warrant as broad as this
'Rize is a juggernaut veering out of control,' said one barrister who helped advise on POCA during its passage through Parliament, 'and now a sharp tool that we badly needed to drain criminal cash has been tarnished, potentially damaging it and inhibiting its use'.
Within days of the raids, the police set up a helpline to deal with potential inquiries. They were overwhelmed by the response. One detective told Live: 'Everyone presumed we had bagged a load of villains who would not dare claim their iffy property. But thousands of the box-holders complained.'
Some of the box-holders contacted lawyers. These were people far removed from the criminal underworld. Many had been with the company from the beginning, drawn to the likeable Jewish businessman who ran it. Leslie Sieff founded the company in 1986, although by the time Operation Rize unfurled he'd been bought out by developer Milton Woolf.
In one box there was 140g and cocaine and £62,500 in cash beside it... In another, a Glock 9mm, the weapon of choice for British gangsters
Many of the clientele were families who had fled turmoil, pogroms, coups and wars and long had a cultural preference for locking away money and jewels, building up a vehement distrust for the integrity of traditional banks. Here, stepping down the spiral staircase at the back to the darkened boxes below, they felt reassured that their most important possessions were safe.
One survivor of Nazi Germany in his seventies told us how he had placed a bag of diamonds there - security if ever he or his descendents needed to run again.
'My wife and I had escaped from Germany with nothing but these gems,' he said. 'She sewed them into our clothing before we crossed occupied Europe, reaching Britain by ship when the jewels were snipped out and locked up.'
There was a rabbi too, Yitzchak Schochet, of Mill Hill Synagogue, who said: 'Safety deposit boxes are supposed to be confidential. The whole situation was very unsettling and an intrusion of privacy.'
Another client, an Indian millionaire entrepreneur with connections to the House of Lords, described how he was 'treated like a convicted man just because I had wealth in cash'.
A Hindu priest described to Live how his family's valuables had been carried in the Sixties from Madhya Pradesh, India, to London 'in a gunny sack'.
Among the possessions seized by the police were elaborate handcrafted bracelets, gold rings set with uncut stones, and a bejewelled wedding tikka ornament to be draped on the forehead of a new bride. 'These items had always been in our family,' the priest said, 'We had cash in there too. But now we had to prove how we bought them and where that money, saved over the years, had come from.'
Officers painstakingly record the contents of the safety-deposit boxes
Officers painstakingly record the contents of the safety-deposit boxes
Under POCA, the burden of proof lay with the box-holders. Finding evidence for wartime treks across Europe, or charting migration stories from the Partition of India and beyond, would cost many of the box-holders tens of thousands of pounds.
Mark Richardson, a former military intelligence officer and now a forensic accountant, who has been employed by several box-holders to explain their wealth, told us: 'We had to get one family's diamonds carbon-dated at great expense to demonstrate to the police that they had been cut in the Thirties, which tallied with their story of fleeing Germany before World War II.'
Lawyer Sara Teasdale, of City practice Roiter Zucker, whose client had kept more than £900,000 in his box at the vaults in Edgware as cash flow for his business leasing black cabs, said: 'The police are "deep-pocketing" - hauling people through a protracted legal process that they know is so costly that most will roll over.'
One angry box-holder rented Box 73 at the Park Lane depository. Alexander Temerko, formerly a vice president of Russian oil giant Yukos, whose billionaire boss Mikhail Khodorkovsky had fallen foul of President Putin, had fled to London as Khodorkovsky was jailed for eight years in Russia.
When I got my box back, £9,000 cash and some smaller items of jewellery were missing - a gold baby's bracelet and a gold ring
On his arrival in the UK, Temerko had locked five crates of legal documents into his safety-deposit box. However, as a result of Rize, the papers were now in the hands of the Met, which claimed they were evidence of an alleged criminal conspiracy whose participants were British, obliging the police to investigate. Incandescent, Temerko hired an expensive lawyer, Ian Burton, of BCL Burton Copeland. Burton recommended Clare Montgomery, a barrister from Cherie Blaire's chambers, Matrix.
Within weeks of Operation Rize, Temerko's team set about applying for a Judicial Review of the judge's decision to grant the controversial Rize warrant and demanded the return of Temerko's files, which they claimed had been taken unlawfully.
Montgomery and Burton highlighted case law that specifically stipulated 'fishing expeditions' were barred to the police, even under POCA. In other words, the police were not allowed to seize property in the hope that it would later prove to be criminal. The legal team also demanded sight of the police evidence that had convinced the judge to issue the warrant in the first place.
Across town, in Camden, some less high-profile but equally infuriated welltodo box-holders did the same. John and Estelle Selt, aged 62 and 73, wealthy retired shopkeepers, had rented a box for 15 years. Inside it was £150,000 and three valuable bracelets. Determined to clear their names, the Selts put up the £50,000 needed to launch their own Judicial Review that also focused on the lawfulness of the original warrant.
Following seven months of legal fencing, with the police guarding its Rize file, the twin Judicial Reviews finally succeeded in prising from the Yard a startling 32-page 'skeleton discussion'. This document - which we were able to obtain after being given a case number by a senior source in Customs and then trawling through court records at the Royal Court building - provides an extraordinary insight into how the police managed to obtain a warrant for Rize.
The document provides a summary of two confidential meetings between the Met, its legal advisors and the judge who signed the Rize warrant in May 2008. The document revealed the Met had begun targeting Safe Deposit Centres Ltd in January 2007, in an operation led by DCI Mark Ponting.
Read Entire Article
The Finchley Road is one of the busiest thoroughfares heading out of London. It leads traffic north past Lord's Cricket Ground and the multimillion-pound houses of some of the country's richest hedge-fund managers all the way to the M1. At three in the afternoon it's always pretty slow going, but on this particular summer Monday the traffic was almost at a standstill.
This was partly because the normal three lanes going north had been cut down to one. But it was also because of drivers slowing down to a crawl so they could gawp at the massive police operation unfolding on a busy corner of the road.
Police vehicles - both cars and menacing armoured trucks - jammed up two lanes. Dozens of armed officers in bulletproof vests were standing ready, waiting to be called inside an anonymous-looking building. From the sheer manpower and weapons on display it looked like the capital was under another terrorist attack.
But while this was the Metropolitan Police's most ambitious operation in its 180-year history, it had nothing to do with national security. Only hours before, at a special briefing, teams from SCD6 (the Economic And Specialist Crime unit) and C019 (Specialist Firearms Command) hunkered down with technicians armed with angle grinders and drills. Also present were dog handlers, their animals trained to sniff out guns, drugs and explosives.
In all, more than 500 officers had gathered to receive orders to raid smart addresses in well-heeled parts of the capital. The locations included three of Britain's largest and most well-established safety-deposit box depositories in Edgware, Hampstead and Park Lane as well as an office and the homes of the three directors of Safe Deposit Centres Ltd, which owned the vaults - two in Hampstead and one in Barnet.
For most of those at the briefing, arriving just before 3pm on June 2 last year, this was the first they had heard of the operation. Secrecy had been paramount and, with so many involved, keeping the operation 'airtight' had been one of the largest headaches in the pre-planning for what was codenamed 'Rize'.
The police rolled through London in a convoy: scores of patrol cars, armed-response vehicles, outriders on their bikes, vans with their windows shielded by metal cages. With a Met film unit recording everything, detectives forced their way past startled security guards, demanding receptionists open the secure doors that led to the normally hushed strong rooms, which in the three centres housed 6,717 safety deposit boxes.
Cash found in deposit boxes
Cash found in deposit boxes. More than £53 million in cash was impounded, some of it stuffed into supermarket bags
Over the next few hours, the three depositories were transformed into makeshift evidence-sorting centres, decked out with tables to bear the contents of the safety-deposit boxes that were soon to be forced open. Within a day, the first stage of the operation was finished but it would take over ten more to complete the next intricate and prolonged phase.
Investigators wearing gas masks and blue overhauls used power tools to chop away at the locked doors that protected the boxes themselves. They had rehearsed this bit for many hours, on mockups, trying numerous methods to get quickly and safely at the deposit boxes.
Forged passports found in deposit boxes
Forged passports found in deposit boxes
Diamond drill bits forced down into the locks proved disastrous, potentially damaging evidence inside. Instead, they settled on Makita angle grinders, with which they now effortlessly hacked at the hinges, allowing them to slide out the individual strong boxes, some as small as an A4 pad. Larger ones required a more bullish approach - strong-arm tactics that the police maintained were essential as key-holders would have been unlikely to co-operate.
As the first of the boxes was opened, detectives began probing the contents. Many were spilling over with bank notes and jewellery. Each was given a rough designation - for instance, 'cash' or 'gun' - and the words scribbled onto labels before they were placed in sealed evidence bags that were loaded into vans and given an armed escort to their final and secret destination, a secure counting house.
Here, every one of the thousands of boxes was to be intimately scrutinised. Not only did detectives have to itemise what they had found but match the contents to a person.
A few of the box-holders' identities had been acquired through months of police surveillance. Others were revealed in vault registers seized by police during the raid. Some used aliases and would be hard to track down; more still would be identified by scrutinising the vaults' CCTV cameras. Sixty officers would sift, analyse and count until November 2008 and beyond, racking up £1.4 million in overtime bills alone.
There was a lot at stake. Never before had the British police been granted a warrant as broad as this. The raids had been made possible under a controversial law, the Proceeds Of Crime Act (POCA), which came into being in 2002 and introduced an array of wide-ranging new powers to seek out and confiscate dirty money - the houses, cars and boats bought by criminals.
However, lawyers watching the police operation unfold were quick to warn that the strong-arming of these vaults and the crashing into each and every box was tantamount to the police having obtained permission to smash down the doors of an entire housing estate.
David Sonn, of Sonn Macmillan Walker, one of the largest criminal defence practices in London, says, 'POCA was never intended for this. No one objects when criminals are caught and their assets seized - but shaking down everyone to get to them is specifically not what lawmakers wanted.'
A handgun belonging to a suspected drug dealer
Items seized include police riot gear, guns and swords
A handgun belonging to a suspected drug dealer(left) and items seized include police riot gear, guns and swords (right)
Aware of the controversy, Scotland Yard went on a charm offensive, with Assistant Commissioner John Yates giving a series of briefings.
'This is a huge operation to tackle criminal networks who we believe are using safe deposit facilities to hide assets,' he reassured the media.
The raids had come after 18 months of scrupulous intelligence gathering that had led detectives to suspect the vault owners were turning a blind eye to the worst kinds of criminality, enabling major villains to conceal, transport and launder their ill-gotten gains, said Yates. Brushing aside concerns about the invasion of privacy, he asserted that 'the majority' of the boxes seized belonged to criminals.
Evidence was soon put on show that seemed to underscore his position. More than £53 million in cash was impounded, some of it stuffed into supermarket bags. Most of the money, said the Met, was 'the proceeds of armed robberies and international drug trafficking'.
Unnamed Yard sources speculated that some had come from the 2006 Securitas depot robbery in Tonbridge, Kent, and that a mysterious haul of gold grains wrapped in plastic and squashed inside suitcases could be linked to the Brinks Matt heist of 1983. There were sufficient diamonds and pearls to string up as bunting for a street party.
CCTV footage of Gavin Leon
CCTV footage of Gavin Leon, whose box held a Glock handgun
In one box in Edgware, bags of white powder when tested turned out to be 140g of 81 per cent pure cocaine. Lying next to it was £62,500 in cash. Another box, crammed with notes, was identified as belonging to a Russian woman whose boyfriend was the son of a convicted major-league drugs dealer.
A semi-automatic Glock 9mm, the weapon of choice for British gangsters, was lodged in Box 1653 at the Hampstead depository, rented by 44-year-old Gavin Leon, who was jailed for five years last March. A Brocock firearm and nine rounds of ammunition, together with £20,000 in cash, some heroin and weighing scales had been deposited in a box belonging to John Derriviere, a 47-year-old who is now wanted by police.
A £100,000 stash left in a box in Edgware turned out to belong to convicted drug dealer David Wilson, 38, from Dagenham, a nest egg he intended to collect after completing a 24-month sentence. Scrutinising the vault's CCTV, police also identified drug trafficker Yaset Berhane, 27, whose box contained £122,000 in cash, some of it marked by Sussex Police in an earlier drugs sting, leading to Berhane's jailing in March 2009 for drug trafficking and money laundering.
When vice-squad detectives raided five premises connected to a southeast Asian businesswoman who had more than £100,000 in cash in one box, they found brothels worked by girls who had all potentially been trafficked to the UK, as well as a string of foreign bank transactions showing £800,000 flowing out of the UK. In the months after Rize there were more than 40 arrests and 11 prosecutions.
However, by talking to scores of box-holders, none of whom have spoken before, Live has uncovered a different version of Operation Rize, one that shows how the vast majority of those caught up in the raids were innocent. They have had their lives turned upside down over the past 17 months. Many have struggled to recoup their money and possessions, been forced into legal trench warfare with police lawyers and told they must prove how they came by the contents of their boxes.
This is also a story told through secret legal papers, including confidentiality agreements struck with some vault depositors whose cases threatened to topple the entire operation. Although the police told a judge that 'nine out of ten' of all of the thousands of box-holders were probably criminally minded, criminally connected or felons, the paper trail reveals that perhaps only as few as ten per cent of the boxes have any connection to serious crime.
More worryingly, according to eminent lawyers and barristers, Operation Rize has seen the Yard employ unethical tactics, driving a coach and horses through the new POCA legislation, leaving the Met facing a raft of legal actions that could potentially cost taxpayers millions of pounds.
Police raid at Hampstead
The police raid at Hampstead. Never before had the British police been granted a warrant as broad as this
'Rize is a juggernaut veering out of control,' said one barrister who helped advise on POCA during its passage through Parliament, 'and now a sharp tool that we badly needed to drain criminal cash has been tarnished, potentially damaging it and inhibiting its use'.
Within days of the raids, the police set up a helpline to deal with potential inquiries. They were overwhelmed by the response. One detective told Live: 'Everyone presumed we had bagged a load of villains who would not dare claim their iffy property. But thousands of the box-holders complained.'
Some of the box-holders contacted lawyers. These were people far removed from the criminal underworld. Many had been with the company from the beginning, drawn to the likeable Jewish businessman who ran it. Leslie Sieff founded the company in 1986, although by the time Operation Rize unfurled he'd been bought out by developer Milton Woolf.
In one box there was 140g and cocaine and £62,500 in cash beside it... In another, a Glock 9mm, the weapon of choice for British gangsters
Many of the clientele were families who had fled turmoil, pogroms, coups and wars and long had a cultural preference for locking away money and jewels, building up a vehement distrust for the integrity of traditional banks. Here, stepping down the spiral staircase at the back to the darkened boxes below, they felt reassured that their most important possessions were safe.
One survivor of Nazi Germany in his seventies told us how he had placed a bag of diamonds there - security if ever he or his descendents needed to run again.
'My wife and I had escaped from Germany with nothing but these gems,' he said. 'She sewed them into our clothing before we crossed occupied Europe, reaching Britain by ship when the jewels were snipped out and locked up.'
There was a rabbi too, Yitzchak Schochet, of Mill Hill Synagogue, who said: 'Safety deposit boxes are supposed to be confidential. The whole situation was very unsettling and an intrusion of privacy.'
Another client, an Indian millionaire entrepreneur with connections to the House of Lords, described how he was 'treated like a convicted man just because I had wealth in cash'.
A Hindu priest described to Live how his family's valuables had been carried in the Sixties from Madhya Pradesh, India, to London 'in a gunny sack'.
Among the possessions seized by the police were elaborate handcrafted bracelets, gold rings set with uncut stones, and a bejewelled wedding tikka ornament to be draped on the forehead of a new bride. 'These items had always been in our family,' the priest said, 'We had cash in there too. But now we had to prove how we bought them and where that money, saved over the years, had come from.'
Officers painstakingly record the contents of the safety-deposit boxes
Officers painstakingly record the contents of the safety-deposit boxes
Under POCA, the burden of proof lay with the box-holders. Finding evidence for wartime treks across Europe, or charting migration stories from the Partition of India and beyond, would cost many of the box-holders tens of thousands of pounds.
Mark Richardson, a former military intelligence officer and now a forensic accountant, who has been employed by several box-holders to explain their wealth, told us: 'We had to get one family's diamonds carbon-dated at great expense to demonstrate to the police that they had been cut in the Thirties, which tallied with their story of fleeing Germany before World War II.'
Lawyer Sara Teasdale, of City practice Roiter Zucker, whose client had kept more than £900,000 in his box at the vaults in Edgware as cash flow for his business leasing black cabs, said: 'The police are "deep-pocketing" - hauling people through a protracted legal process that they know is so costly that most will roll over.'
One angry box-holder rented Box 73 at the Park Lane depository. Alexander Temerko, formerly a vice president of Russian oil giant Yukos, whose billionaire boss Mikhail Khodorkovsky had fallen foul of President Putin, had fled to London as Khodorkovsky was jailed for eight years in Russia.
When I got my box back, £9,000 cash and some smaller items of jewellery were missing - a gold baby's bracelet and a gold ring
On his arrival in the UK, Temerko had locked five crates of legal documents into his safety-deposit box. However, as a result of Rize, the papers were now in the hands of the Met, which claimed they were evidence of an alleged criminal conspiracy whose participants were British, obliging the police to investigate. Incandescent, Temerko hired an expensive lawyer, Ian Burton, of BCL Burton Copeland. Burton recommended Clare Montgomery, a barrister from Cherie Blaire's chambers, Matrix.
Within weeks of Operation Rize, Temerko's team set about applying for a Judicial Review of the judge's decision to grant the controversial Rize warrant and demanded the return of Temerko's files, which they claimed had been taken unlawfully.
Montgomery and Burton highlighted case law that specifically stipulated 'fishing expeditions' were barred to the police, even under POCA. In other words, the police were not allowed to seize property in the hope that it would later prove to be criminal. The legal team also demanded sight of the police evidence that had convinced the judge to issue the warrant in the first place.
Across town, in Camden, some less high-profile but equally infuriated welltodo box-holders did the same. John and Estelle Selt, aged 62 and 73, wealthy retired shopkeepers, had rented a box for 15 years. Inside it was £150,000 and three valuable bracelets. Determined to clear their names, the Selts put up the £50,000 needed to launch their own Judicial Review that also focused on the lawfulness of the original warrant.
Following seven months of legal fencing, with the police guarding its Rize file, the twin Judicial Reviews finally succeeded in prising from the Yard a startling 32-page 'skeleton discussion'. This document - which we were able to obtain after being given a case number by a senior source in Customs and then trawling through court records at the Royal Court building - provides an extraordinary insight into how the police managed to obtain a warrant for Rize.
The document provides a summary of two confidential meetings between the Met, its legal advisors and the judge who signed the Rize warrant in May 2008. The document revealed the Met had begun targeting Safe Deposit Centres Ltd in January 2007, in an operation led by DCI Mark Ponting.
Read Entire Article
Gold Blast-Off Starts Friday?
(Numismaster) There are two significant events this week that could exert pressure for higher gold prices. Because of this, I expect to see major behind-the-scenes actions to try to suppress gold (and silver) prices until the middle of Thursday afternoon.
First, the U.S. government’s Treasury debt auctions will sell the greatest amount of debt ever sold in one week. The net debt increase of $153 billion is so high it will exceed the current authorized federal debt limit. Flooding the financial markets with so much debt is a sign of weakness for the U.S. dollar. As the dollars declines in value, the price of gold in U.S. dollars invariably rises.
Second, we will also see the expiration of options contracts in two days. If the spot price at the close of trading on the day that gold (and silver) options contracts expire is higher than the contract price on a call option, the owner will exercise the option to demand immediate delivery of physical gold. The higher the price of gold, the more call options that will be exercised. Conversely, a lower gold spot price will reduce the demand for gold for immediate delivery. There is a major block of call options at $1,050, so expect prices to stay below that level through Wednesday night.
As we have seen previously in 2009 with large Treasury debt auctions and options expirations, the price of gold was clobbered before these events, and not allowed to rise quickly until after the last Treasury auction closed on Thursday afternoon. I see no reason to expect a different pattern this week.
H.R. 1207, the bill in Congress calling for an audit of the Federal Reserve System (that would also likely result in an audit of the U.S. government’s gold holdings) is under current consideration in the House Financial Services Committee. Hearings began last month. With over 330 co-sponsors of this bill and of the Senate’s companion bill S. 604 (over 75 percent of all members of Congress), there would be reasonable prospects of enactment.
A couple of months ago, the Fed hired a government-relations lobbyist to combat H.R.1207. Various Fed officials have tried to intimidate Congress and the public by stating that enactment of this legislation would result in higher interest rates, higher consumer prices and a falling value of the U.S. dollar. None of these threats seemed to have stopped H.R. 1207 from moving along.
On Oct. 20, a new tactic to combat H.R. 1207 was implemented. Senators Jeff Merkley, D-Ore., and Bob Corker R-Tenn., introduced S. 1803, the Federal Reserve Accountability Act. This alternative bill pretty much guts any attempt at Federal Reserve accountability by allowing only limited audits of the Troubled Asset Relief Program and similar high profile bailouts. I expect to see Fed officials pushing for this bill as a way to sidetrack H.R. 1207.
Last Friday, Bloomberg reported an interview with Shayne McGuire, director of global research at the Teacher Retirement System of Texas, the nation’s seventh largest pension fund. McGuire noted that his retirement fund has now invested $250 million of its $95 billion in total assets in precious metals, mining stocks, and exchange traded funds. McGuire further predicted that pension funds were going to have to significantly increase the percentage of their portfolios devoted to precious metals.
Also last Friday, Dennis Gartman, the analyst who writes the Gartman Letter, said that he expects gold to become the world’s largest reserve currency. Gartman is not fan of gold and rejects any possibility that the price of gold has been suppressed. His gold trading recommendations over the past five to 10 years have almost always lost money. There are gold traders who have made profits by trading the opposite of Gartman’s recommendations.
Analyst Adrian Douglas is publisher of the Market Force Analysis and now serves as a member of the board of directors of the Gold Anti-Trust Action Committee. He issued an essay Saturday where he argues that the volume of gold traded on the London bullion exchange could not be supported by the reported sales of 15,000 tons (482 million ounces). By Douglas’s calculations, the London market needed a minimum of 64,000 tons (2.05 billion ounces) of gold to be sold to support its reported trading volume. He believes that any disclosure that this much extra gold has been sneaked onto the market, leaving less inventory available to cover open contracts in London, could cause a panic in the gold market.
Bill Murphy is the chairman of GATA. He reported late last week the latest scoop from a London trader who has been his source of secret information since the early years of this decade. This source has an extremely accurate record on trends. For instance, he was the first to tell Murphy that it looked like the Chinese government was regularly buying gold reserves, including information on quantities, back in 2003. This same source says he has recently added two American clients, one a very wealthy individual and the other a large corporation, with instructions to execute major physical gold purchases. His source told Murphy that he is having extreme difficulty locating any sizeable quantities of physical metal to fill the orders.
Read Entire Article
First, the U.S. government’s Treasury debt auctions will sell the greatest amount of debt ever sold in one week. The net debt increase of $153 billion is so high it will exceed the current authorized federal debt limit. Flooding the financial markets with so much debt is a sign of weakness for the U.S. dollar. As the dollars declines in value, the price of gold in U.S. dollars invariably rises.
Second, we will also see the expiration of options contracts in two days. If the spot price at the close of trading on the day that gold (and silver) options contracts expire is higher than the contract price on a call option, the owner will exercise the option to demand immediate delivery of physical gold. The higher the price of gold, the more call options that will be exercised. Conversely, a lower gold spot price will reduce the demand for gold for immediate delivery. There is a major block of call options at $1,050, so expect prices to stay below that level through Wednesday night.
As we have seen previously in 2009 with large Treasury debt auctions and options expirations, the price of gold was clobbered before these events, and not allowed to rise quickly until after the last Treasury auction closed on Thursday afternoon. I see no reason to expect a different pattern this week.
H.R. 1207, the bill in Congress calling for an audit of the Federal Reserve System (that would also likely result in an audit of the U.S. government’s gold holdings) is under current consideration in the House Financial Services Committee. Hearings began last month. With over 330 co-sponsors of this bill and of the Senate’s companion bill S. 604 (over 75 percent of all members of Congress), there would be reasonable prospects of enactment.
A couple of months ago, the Fed hired a government-relations lobbyist to combat H.R.1207. Various Fed officials have tried to intimidate Congress and the public by stating that enactment of this legislation would result in higher interest rates, higher consumer prices and a falling value of the U.S. dollar. None of these threats seemed to have stopped H.R. 1207 from moving along.
On Oct. 20, a new tactic to combat H.R. 1207 was implemented. Senators Jeff Merkley, D-Ore., and Bob Corker R-Tenn., introduced S. 1803, the Federal Reserve Accountability Act. This alternative bill pretty much guts any attempt at Federal Reserve accountability by allowing only limited audits of the Troubled Asset Relief Program and similar high profile bailouts. I expect to see Fed officials pushing for this bill as a way to sidetrack H.R. 1207.
Last Friday, Bloomberg reported an interview with Shayne McGuire, director of global research at the Teacher Retirement System of Texas, the nation’s seventh largest pension fund. McGuire noted that his retirement fund has now invested $250 million of its $95 billion in total assets in precious metals, mining stocks, and exchange traded funds. McGuire further predicted that pension funds were going to have to significantly increase the percentage of their portfolios devoted to precious metals.
Also last Friday, Dennis Gartman, the analyst who writes the Gartman Letter, said that he expects gold to become the world’s largest reserve currency. Gartman is not fan of gold and rejects any possibility that the price of gold has been suppressed. His gold trading recommendations over the past five to 10 years have almost always lost money. There are gold traders who have made profits by trading the opposite of Gartman’s recommendations.
Analyst Adrian Douglas is publisher of the Market Force Analysis and now serves as a member of the board of directors of the Gold Anti-Trust Action Committee. He issued an essay Saturday where he argues that the volume of gold traded on the London bullion exchange could not be supported by the reported sales of 15,000 tons (482 million ounces). By Douglas’s calculations, the London market needed a minimum of 64,000 tons (2.05 billion ounces) of gold to be sold to support its reported trading volume. He believes that any disclosure that this much extra gold has been sneaked onto the market, leaving less inventory available to cover open contracts in London, could cause a panic in the gold market.
Bill Murphy is the chairman of GATA. He reported late last week the latest scoop from a London trader who has been his source of secret information since the early years of this decade. This source has an extremely accurate record on trends. For instance, he was the first to tell Murphy that it looked like the Chinese government was regularly buying gold reserves, including information on quantities, back in 2003. This same source says he has recently added two American clients, one a very wealthy individual and the other a large corporation, with instructions to execute major physical gold purchases. His source told Murphy that he is having extreme difficulty locating any sizeable quantities of physical metal to fill the orders.
Read Entire Article
Monday, October 26, 2009
China Expert Urges Foreign Reserve Shift
The dollar should remain the principal currency in China's $2.27 trillion stockpile of foreign exchange reserves, but the share of the euro and yen should increase, according to an opinion piece in Monday's Financial News, a paper published by the People's Bank of China.
The dollar fell to a 14-month low as word of the report spread before recouping some of its losses after the author, Zhou Hai, told Reuters he was only expressing a personal opinion.
"It is purely my personal view," Zhou, a division chief with the financial research department of the central bank's branch in Harbin, capital of the northeastern province of Heilongjiang.
Other researchers have expressed similar views to Zhou, whose piece appeared on the "Theoretics Weekly" page of the paper.
The composition of China's currency reserves is a state secret, but bankers estimate that at least two-thirds of the holdings are invested in dollar-denominated securities.
Senior Chinese officials have expressed concern about the weakness of the dollar but have also acknowledged that the U.S. currency will remain the linchpin of the global financial system for the foreseeable future.
Any diversification from the dollar is proceeding very gradually, foreign exchange strategists say, not least because Beijing has continued to buy dollars to prevent the yuan from rising since the middle of 2008.
Zhou also wrote in the Financial News that China should improve the yuan's exchange rate mechanism to reduce pressure on the central bank to buy inflows of foreign exchange.
China should exclude the Hong Kong dollar from its official reserves because Chinese can easily obtain the currency, and it is pegged to the U.S. dollar, Zhou added.
Before Monday's piece, Zhou's most recent article was in the August edition of China Finance, according to an Internet search.
The article was titled, "A few thoughts on supporting modern agricultural development through finance — the example of Heilongjiang."
Read Entire Article
The dollar fell to a 14-month low as word of the report spread before recouping some of its losses after the author, Zhou Hai, told Reuters he was only expressing a personal opinion.
"It is purely my personal view," Zhou, a division chief with the financial research department of the central bank's branch in Harbin, capital of the northeastern province of Heilongjiang.
Other researchers have expressed similar views to Zhou, whose piece appeared on the "Theoretics Weekly" page of the paper.
The composition of China's currency reserves is a state secret, but bankers estimate that at least two-thirds of the holdings are invested in dollar-denominated securities.
Senior Chinese officials have expressed concern about the weakness of the dollar but have also acknowledged that the U.S. currency will remain the linchpin of the global financial system for the foreseeable future.
Any diversification from the dollar is proceeding very gradually, foreign exchange strategists say, not least because Beijing has continued to buy dollars to prevent the yuan from rising since the middle of 2008.
Zhou also wrote in the Financial News that China should improve the yuan's exchange rate mechanism to reduce pressure on the central bank to buy inflows of foreign exchange.
China should exclude the Hong Kong dollar from its official reserves because Chinese can easily obtain the currency, and it is pegged to the U.S. dollar, Zhou added.
Before Monday's piece, Zhou's most recent article was in the August edition of China Finance, according to an Internet search.
The article was titled, "A few thoughts on supporting modern agricultural development through finance — the example of Heilongjiang."
Read Entire Article
Friday, October 23, 2009
Pension Funds to Buy Gold as Insurance, McGuire Says
Oct. 23 (Bloomberg) -- Pension funds will increase gold holdings to acquire “financial insurance,” pushing prices higher as currencies drop, according to Shayne McGuire, director of global research at the Teacher Retirement System of Texas.
“I think the largest institutions like our own are realizing that we barely own any,” McGuire said in an interview in Hong Kong. “The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.”
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year as investors seek to protect their wealth against the prospect of rising inflation and currency debasement. Teacher Retirement, backed by $95 billion in assets, has launched its first internally managed gold fund, worth $250 million, invested in precious metals, mining stocks and exchange-traded funds. McGuire is the portfolio manager of this new fund.
The fund is “a reflection of our interest in gold,” said McGuire, the author of “Buy Gold Now” published in March 2008 that correctly predicted the metal will rally. “That’s mostly because of diversification” that benefits our overall portfolio.
Gold represents only 0.4 percent of total global financial assets valued at around $200 trillion in 2007, McGuire said, adding the future focus for the metal was investment demand.
“The interest in the gold sector continues to be strong,” said Stephen Goodman, investment banker with New York-based Casimir Capital L.P. “We are pleased to connect a growing number of institutional investors globally with opportunities.”
Losses, Writedowns
Gold for immediate delivery climbed to a record $1,070.80 an ounce on Oct. 14 and traded at $1,059.25 at 4:42 p.m. in Singapore. It has risen 47 percent in the past year. Gold for December delivery in New York traded at $1,059.70. McGuire said it’s “difficult to estimate how quickly it will rise,” and saw “significant upside” in the next two to three years.
The U.S. Dollar Index, which measures the currency against those of six major trading partners, has fallen 7.5 percent this year as President Barack Obama increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
‘Financial Insurance’
“I don’t think the question really is what is gold worth but what are currencies not worth,” McGuire, 43, said yesterday. “Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing,” he said. Owning gold today is “financial insurance,” he said.
McGuire, with 15 years of international financial experience, has worked for the seventh-largest pension fund in the U.S. since 2001. He had managed a $2 billion European equity portfolio and was ranked among the best Latin American analysts by Institutional Investor in 1995 and 1996, he said.
Teacher Retirement has nearly 1.3 million public education and higher education employees and retirees participating in the system, according to its Web site.
By: Kim Kyoungwha
To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net
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“I think the largest institutions like our own are realizing that we barely own any,” McGuire said in an interview in Hong Kong. “The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.”
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year as investors seek to protect their wealth against the prospect of rising inflation and currency debasement. Teacher Retirement, backed by $95 billion in assets, has launched its first internally managed gold fund, worth $250 million, invested in precious metals, mining stocks and exchange-traded funds. McGuire is the portfolio manager of this new fund.
The fund is “a reflection of our interest in gold,” said McGuire, the author of “Buy Gold Now” published in March 2008 that correctly predicted the metal will rally. “That’s mostly because of diversification” that benefits our overall portfolio.
Gold represents only 0.4 percent of total global financial assets valued at around $200 trillion in 2007, McGuire said, adding the future focus for the metal was investment demand.
“The interest in the gold sector continues to be strong,” said Stephen Goodman, investment banker with New York-based Casimir Capital L.P. “We are pleased to connect a growing number of institutional investors globally with opportunities.”
Losses, Writedowns
Gold for immediate delivery climbed to a record $1,070.80 an ounce on Oct. 14 and traded at $1,059.25 at 4:42 p.m. in Singapore. It has risen 47 percent in the past year. Gold for December delivery in New York traded at $1,059.70. McGuire said it’s “difficult to estimate how quickly it will rise,” and saw “significant upside” in the next two to three years.
The U.S. Dollar Index, which measures the currency against those of six major trading partners, has fallen 7.5 percent this year as President Barack Obama increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
‘Financial Insurance’
“I don’t think the question really is what is gold worth but what are currencies not worth,” McGuire, 43, said yesterday. “Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing,” he said. Owning gold today is “financial insurance,” he said.
McGuire, with 15 years of international financial experience, has worked for the seventh-largest pension fund in the U.S. since 2001. He had managed a $2 billion European equity portfolio and was ranked among the best Latin American analysts by Institutional Investor in 1995 and 1996, he said.
Teacher Retirement has nearly 1.3 million public education and higher education employees and retirees participating in the system, according to its Web site.
By: Kim Kyoungwha
To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net
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Tuesday, October 20, 2009
Gold at $2,000 Becomes Inflation-Adjusted Bullseye for ‘80 High
(Bloomberg) -- Gold’s rally to a record means prices are still 53 percent below the 1980 inflation-adjusted peak.
While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year, and options show investors expect the rally to continue. When prices reached all-time highs, the contract with the most open interest was the December call to buy the metal at $1,200. The contract to purchase at $1,500 an ounce was the third biggest.
“Gold is not at any peak,” said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth Inc., which manages $58.5 billion in mutual funds and brokerage accounts. “The world’s money supply has increased and gold hasn’t kept pace,” he said. “We’re now in a period where gold is catching up.”
The U.S. Dollar Index, which measures the currency against those of six major trading partners, fell on Oct. 15 to the lowest level in 14 months, and has dropped about 7 percent this year. President Barack Obama has increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Preserving Value
Gold bulls say today’s record borrowing and low interest rates mean the government will have to accept faster inflation as the economy recovers. Investors buy bullion to preserve value during times of turmoil and economic stress.
Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
“Gold is the hedge against currency devaluation,” John Brynjolfsson, of hedge fund Armored Wolf LLC, said in a Bloomberg Television interview from Aliso Viejo, California, on Oct. 7. He predicted bullion will top $2,000.
Banks have raised their gold estimates. On Oct. 9, JPMorgan Chase & Co. said the metal will average $1,006 an ounce next year, compared with an earlier projection of $950. Deutsche Bank AG forecast an average of $1,150, up 32 percent from its estimate in July. Barclays Capital said Oct. 12 that “prospects for a run at $1,500 should not be underestimated” next year.
Understated CPI
Gold would need to rise more than sixfold to top the 1980 record, using a more accurate inflation-adjustment, said John Williams, an economist and the editor of Berkeley, California- based Shadowstats.com. He said the government has understated the cost of living over the past two decades with adjustments in the way it measures the basket of goods and services monitored by the U.S. consumer price index, or CPI.
Gold futures for December delivery closed Oct. 16 at $1,051.50 an ounce on the New York Mercantile Exchange’s Comex division, gaining for a third straight week.
“If the methodologies of measuring inflation in 1980 had been kept intact, gold would have to hit $7,150 to be the equivalent of the 1980 record,” Williams said.
The cost of living in the U.S. rose 0.2 percent last month, the Labor Department said on Oct. 16. Compared with a year earlier, consumer prices fell 1.3 percent. The CPI will drop 0.5 percent this year, before rising 1.9 percent in 2010, reflected by the median estimates of 61 economists in a Bloomberg survey. Annual increases averaged 2.8 percent a year in the past decade.
Purchasing-Power Adjustment
In March 1980, inflation surged to a 14.8 percent annual rate, two months after gold capped a four-year rally. Adjusted for the decline in the dollar’s purchasing power since then, gold’s Oct. 14 record of $1,072 represents the equivalent of $409 in 1980 dollars, the Labor Department calculator shows.
Since January 1980, the average price of a pound of white bread has risen almost threefold, from about 50 cents to $1.38 in August, and medical care has surged more than fivefold, Labor Department figures show. Gasoline and electricity prices have more than doubled.
Today, the gap between gold’s spot price and its CPI- adjusted equivalent is the widest ever.
Read Entire Article
While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.
Record government debt and interest rates close to zero percent are pushing gold higher for a ninth straight year, and options show investors expect the rally to continue. When prices reached all-time highs, the contract with the most open interest was the December call to buy the metal at $1,200. The contract to purchase at $1,500 an ounce was the third biggest.
“Gold is not at any peak,” said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth Inc., which manages $58.5 billion in mutual funds and brokerage accounts. “The world’s money supply has increased and gold hasn’t kept pace,” he said. “We’re now in a period where gold is catching up.”
The U.S. Dollar Index, which measures the currency against those of six major trading partners, fell on Oct. 15 to the lowest level in 14 months, and has dropped about 7 percent this year. President Barack Obama has increased the nation’s marketable debt 22 percent to $7.01 trillion to revive growth.
Preserving Value
Gold bulls say today’s record borrowing and low interest rates mean the government will have to accept faster inflation as the economy recovers. Investors buy bullion to preserve value during times of turmoil and economic stress.
Financial institutions worldwide have reported credit losses and writedowns of about $1.62 trillion since the start of 2007, when the credit crisis began. Group of 20 governments have pledged about $11.9 trillion to ease credit and revive economic growth, according to the International Monetary Fund.
“Gold is the hedge against currency devaluation,” John Brynjolfsson, of hedge fund Armored Wolf LLC, said in a Bloomberg Television interview from Aliso Viejo, California, on Oct. 7. He predicted bullion will top $2,000.
Banks have raised their gold estimates. On Oct. 9, JPMorgan Chase & Co. said the metal will average $1,006 an ounce next year, compared with an earlier projection of $950. Deutsche Bank AG forecast an average of $1,150, up 32 percent from its estimate in July. Barclays Capital said Oct. 12 that “prospects for a run at $1,500 should not be underestimated” next year.
Understated CPI
Gold would need to rise more than sixfold to top the 1980 record, using a more accurate inflation-adjustment, said John Williams, an economist and the editor of Berkeley, California- based Shadowstats.com. He said the government has understated the cost of living over the past two decades with adjustments in the way it measures the basket of goods and services monitored by the U.S. consumer price index, or CPI.
Gold futures for December delivery closed Oct. 16 at $1,051.50 an ounce on the New York Mercantile Exchange’s Comex division, gaining for a third straight week.
“If the methodologies of measuring inflation in 1980 had been kept intact, gold would have to hit $7,150 to be the equivalent of the 1980 record,” Williams said.
The cost of living in the U.S. rose 0.2 percent last month, the Labor Department said on Oct. 16. Compared with a year earlier, consumer prices fell 1.3 percent. The CPI will drop 0.5 percent this year, before rising 1.9 percent in 2010, reflected by the median estimates of 61 economists in a Bloomberg survey. Annual increases averaged 2.8 percent a year in the past decade.
Purchasing-Power Adjustment
In March 1980, inflation surged to a 14.8 percent annual rate, two months after gold capped a four-year rally. Adjusted for the decline in the dollar’s purchasing power since then, gold’s Oct. 14 record of $1,072 represents the equivalent of $409 in 1980 dollars, the Labor Department calculator shows.
Since January 1980, the average price of a pound of white bread has risen almost threefold, from about 50 cents to $1.38 in August, and medical care has surged more than fivefold, Labor Department figures show. Gasoline and electricity prices have more than doubled.
Today, the gap between gold’s spot price and its CPI- adjusted equivalent is the widest ever.
Read Entire Article
Monday, October 19, 2009
Is Your Gold Really There?
Continuing doubts are being expressed that all the gold claimed to be held by Central Banks and others may not be there, or title is being held by several parties as the statistics just don't appear to add up.
(MineWeb)It doesn't just seem to be GATA which nowadays is questioning whether the volume of gold held in ETFs and in official reserves is really there - or perhaps there is more than one title to what is actually in the world's gold vaults? Would a run on gold bullion thus create panic among the Bankers?
Banking has run for centuries with the banks themselves only keeping on hand a fraction of the money owed to depositors with the balances loaned out and not always immediately available, if indeed it is even there at all, so when there is a run - like that on Britain's Northern Rock last year - the bank concerned can find it tough to keep its head above water. Northern Rock, in the event, needed to be bailed out by the U.K. government.
There are plenty of theories that the gold markets also operate on a similar principle - or perhaps worse. Not only may the banks not hold the amounts of physical gold they say they do, say the doubters, having loaned much of this to third parties, but there are now analysts and observers expressing doubts over the actual title to the gold that is still seen to be in the vaults, feeling that perhaps some of it has been sold several times over. Central Banks, for example, seem to hate being questioned over gold loans preferring to duck the question and keep any such arrangements under wraps, although most will admit to gold swaps and loans being made - but little or no detail.
It may be no coincidence that the recent surge in the gold price which burst it through the $1,000 barrier followed shortly after Hong Kong demanded repatriation of its gold held in London banks and reports suggest that Germany is also looking for its foreign-held physical gold to be returned from overseas repositories. Has this created shortages of physical gold which holders are now trying to cover?
The latest commentator to express doubts is Paul Mylchreest in his Thunder Road Report. Mylchreest has calculated that, using GFMS figures, that data on the volume of gold traded on the London market (about 90% of gold traded worldwide), if put in its proper context, does not tally with his estimate of the amount of gold that is held in the form of bars which conform to "London Good Delivery" standard. He has thus come up with two alternative possible reasons for the anomaly:
"Alternative 1:"
On average there is more than one ownership claim on each gold bar conforming to London Good Delivery (LGD) standard on the "pool" of gold which acts as liquidity for the massive OTC gold trade based in London. Essentially, the market operates on a fractional reserve basis, but if a sufficient number of market participants become concerned about this and there is a stampede to take delivery of physical bullion, there is a risk of market failure. Such a process could be delayed by central banks lending gold to the market, although this would likely be obvious by a spike in gold lease rates, or by a much higher gold price in order to encourage holders to sell bullion. In this scenario, the gold price could SOAR at any time and the gold market, which is subject to little regulation, is basically an accident waiting to happen; "
Or:
"Alternative 2:
"There is FAR more gold bullion held in private hands than is acknowledged by current industry estimates. It is the large amount of additional gold on top of known gold stocks which provides sufficient liquidity to support the high volumes traded through London. The most likely source for this gold dates back to the Japanese conquest of Asia from 1894-1945 when Japan is alleged to have looted the gold and valuables of 12 nations - it is best known as the story of Yamashita's Gold. If true, my[Mylchreest's] analysis shows that particularly heavy volumes of this gold may have been laundered into the London market during 1986-90 and the mid/late 1990s. In this scenario, the continued evolution of the gold bull market could be more protracted, if supplies of this gold continue to enter the market periodically."
Under either scenario Mylchreest remains positive on the future of the gold price with the proviso that if the Yamashita's Gold theory proves to be in any way correct there could be occasional pullbacks in price as further amounts of clandestine gold are released onto the markets.
[Yamashita's gold is a fascinating story and does appear to have some historic backing, but volumes, and who may control it, are shrouded in mystery
Subsequent to our commencing this article, Adrian Douglas - a member of GATA's Board of Directors and publisher of the Market Force Analysis letter - has also commented on Mylchreest's analysis. He has largely concentrated on Alternative 1 and concludes that the global gold market is in a precarious position. He reckons that the panic at the end of September, which drove the price rapidly up through the $1,000 psychological barrier, suggests that liquidity is very tight, in which case only a small percentage of investors asking for their gold to be delivered or placed in an allocated account could blow up the gold market and expose what he describes as a ‘scam' and one that has been repeated time and time again throughout history. "Why should this time be any different?" he asks.
The big problem, though, with much of this kind of analysis is that the analysts and observers are working with a mixture of real and assumed figures. It thus tends to rely on statistics being manipulated, perhaps subconsciously, to support pre-conceived theories. It does not mean necessarily that the conclusions are incorrect, but they could be. Whether they are or not there are some major anomalies in the gold marketplace out there that deserve better explanation from Central and bullion holding banks. Impartial audits of global gold holdings may well be necessary to clear up these matters once and for all - although should such an audit, or series of audits, conclude that the gold is indeed there, will those who have set their hearts, and investment strategies, on the premise that it isn't, believe the auditors? Conspiracy theories will likely continue to abound.
Author: Lawrence Williams
Read Entire Article
(MineWeb)It doesn't just seem to be GATA which nowadays is questioning whether the volume of gold held in ETFs and in official reserves is really there - or perhaps there is more than one title to what is actually in the world's gold vaults? Would a run on gold bullion thus create panic among the Bankers?
Banking has run for centuries with the banks themselves only keeping on hand a fraction of the money owed to depositors with the balances loaned out and not always immediately available, if indeed it is even there at all, so when there is a run - like that on Britain's Northern Rock last year - the bank concerned can find it tough to keep its head above water. Northern Rock, in the event, needed to be bailed out by the U.K. government.
There are plenty of theories that the gold markets also operate on a similar principle - or perhaps worse. Not only may the banks not hold the amounts of physical gold they say they do, say the doubters, having loaned much of this to third parties, but there are now analysts and observers expressing doubts over the actual title to the gold that is still seen to be in the vaults, feeling that perhaps some of it has been sold several times over. Central Banks, for example, seem to hate being questioned over gold loans preferring to duck the question and keep any such arrangements under wraps, although most will admit to gold swaps and loans being made - but little or no detail.
It may be no coincidence that the recent surge in the gold price which burst it through the $1,000 barrier followed shortly after Hong Kong demanded repatriation of its gold held in London banks and reports suggest that Germany is also looking for its foreign-held physical gold to be returned from overseas repositories. Has this created shortages of physical gold which holders are now trying to cover?
The latest commentator to express doubts is Paul Mylchreest in his Thunder Road Report. Mylchreest has calculated that, using GFMS figures, that data on the volume of gold traded on the London market (about 90% of gold traded worldwide), if put in its proper context, does not tally with his estimate of the amount of gold that is held in the form of bars which conform to "London Good Delivery" standard. He has thus come up with two alternative possible reasons for the anomaly:
"Alternative 1:"
On average there is more than one ownership claim on each gold bar conforming to London Good Delivery (LGD) standard on the "pool" of gold which acts as liquidity for the massive OTC gold trade based in London. Essentially, the market operates on a fractional reserve basis, but if a sufficient number of market participants become concerned about this and there is a stampede to take delivery of physical bullion, there is a risk of market failure. Such a process could be delayed by central banks lending gold to the market, although this would likely be obvious by a spike in gold lease rates, or by a much higher gold price in order to encourage holders to sell bullion. In this scenario, the gold price could SOAR at any time and the gold market, which is subject to little regulation, is basically an accident waiting to happen; "
Or:
"Alternative 2:
"There is FAR more gold bullion held in private hands than is acknowledged by current industry estimates. It is the large amount of additional gold on top of known gold stocks which provides sufficient liquidity to support the high volumes traded through London. The most likely source for this gold dates back to the Japanese conquest of Asia from 1894-1945 when Japan is alleged to have looted the gold and valuables of 12 nations - it is best known as the story of Yamashita's Gold. If true, my[Mylchreest's] analysis shows that particularly heavy volumes of this gold may have been laundered into the London market during 1986-90 and the mid/late 1990s. In this scenario, the continued evolution of the gold bull market could be more protracted, if supplies of this gold continue to enter the market periodically."
Under either scenario Mylchreest remains positive on the future of the gold price with the proviso that if the Yamashita's Gold theory proves to be in any way correct there could be occasional pullbacks in price as further amounts of clandestine gold are released onto the markets.
[Yamashita's gold is a fascinating story and does appear to have some historic backing, but volumes, and who may control it, are shrouded in mystery
Subsequent to our commencing this article, Adrian Douglas - a member of GATA's Board of Directors and publisher of the Market Force Analysis letter - has also commented on Mylchreest's analysis. He has largely concentrated on Alternative 1 and concludes that the global gold market is in a precarious position. He reckons that the panic at the end of September, which drove the price rapidly up through the $1,000 psychological barrier, suggests that liquidity is very tight, in which case only a small percentage of investors asking for their gold to be delivered or placed in an allocated account could blow up the gold market and expose what he describes as a ‘scam' and one that has been repeated time and time again throughout history. "Why should this time be any different?" he asks.
The big problem, though, with much of this kind of analysis is that the analysts and observers are working with a mixture of real and assumed figures. It thus tends to rely on statistics being manipulated, perhaps subconsciously, to support pre-conceived theories. It does not mean necessarily that the conclusions are incorrect, but they could be. Whether they are or not there are some major anomalies in the gold marketplace out there that deserve better explanation from Central and bullion holding banks. Impartial audits of global gold holdings may well be necessary to clear up these matters once and for all - although should such an audit, or series of audits, conclude that the gold is indeed there, will those who have set their hearts, and investment strategies, on the premise that it isn't, believe the auditors? Conspiracy theories will likely continue to abound.
Author: Lawrence Williams
Read Entire Article
Friday, October 16, 2009
Dollar to Hit 50 Yen, Cease as Reserve
(Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.
“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”
The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.
The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.
“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran’s deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran’s foreign reserves.
By: Shigeki Nozawa
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“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”
The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.
The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.
“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran’s deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran’s foreign reserves.
By: Shigeki Nozawa
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Thursday, October 15, 2009
The Federal Reserve Is Openly Telling You to Buy Gold and Silver
(DailyWealth)At the end of last year, I began writing about what I saw happening as the Federal Reserve started assuming the liabilities of the investment banks and the federal government began deficit spending at an unprecedented pace.
I've been calling these changes the "End of America" because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world's reserve currency.
To get an idea of why I'm concerned, have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.
What you see here is Bullard's estimate of the future growth of Federal Reserve assets.
A lot of people seem to have forgotten something that is very much on Bullard's mind: The growth of the Fed's balance sheet isn't nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.
Even though these direct purchases are unprecedented, that's only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.
That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss.
Since the expansion of its balance sheet got started in earnest last fall, the trade-weighed value of the dollar has fallen 15%. Keep in mind, the Fed's assets form the base of our monetary system. The more it grows, the more money and credit become available to the banking system. And the faster the money supply grows, the more likely the value of the dollar will continue to fall.
As Bullard points out, a doubling of the monetary base won't necessarily cause an immediate doubling of inflation... But suppose it takes 10 years? The average inflation rate would still be 7% a year. If inflation does grow to this average level, at least a few of those years will see inflation running at or near double digits.
Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least 50%. Likewise, we would see high-yield corporate bonds yielding at least 20% – double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.
It's going to happen. I guarantee it.
By: Porter Stansbury
Read Entire Article
I've been calling these changes the "End of America" because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world's reserve currency.
To get an idea of why I'm concerned, have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.
What you see here is Bullard's estimate of the future growth of Federal Reserve assets.
A lot of people seem to have forgotten something that is very much on Bullard's mind: The growth of the Fed's balance sheet isn't nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.
Even though these direct purchases are unprecedented, that's only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.
That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss.
Since the expansion of its balance sheet got started in earnest last fall, the trade-weighed value of the dollar has fallen 15%. Keep in mind, the Fed's assets form the base of our monetary system. The more it grows, the more money and credit become available to the banking system. And the faster the money supply grows, the more likely the value of the dollar will continue to fall.
As Bullard points out, a doubling of the monetary base won't necessarily cause an immediate doubling of inflation... But suppose it takes 10 years? The average inflation rate would still be 7% a year. If inflation does grow to this average level, at least a few of those years will see inflation running at or near double digits.
Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least 50%. Likewise, we would see high-yield corporate bonds yielding at least 20% – double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.
It's going to happen. I guarantee it.
By: Porter Stansbury
Read Entire Article
Tuesday, October 13, 2009
Gold Climbs to Record as Dollar, Inflation Outlook Spur Demand
Oct. 13 (Bloomberg) -- Gold rose to a record in New York and London on speculation that a weakening dollar and faster inflation will boost the appeal of precious metals. Platinum and palladium climbed to the highest prices in more than a year, and silver advanced to its costliest since July 2008.
Bullion, which usually moves inversely to the dollar, is on course for a ninth annual gain after the dollar dropped 6.6 percent this year against a basket of six currencies. Futures reached $1,069.70 an ounce in New York, while spot gold climbed to $1,068.63 in London, surpassing the previous highs on Oct. 8.
“There’s lots of concern about the weakness in the dollar, and this has been driving gold,” Peter Fertig, the owner of Quantitative Commodity Research Ltd. in Hainburg, Germany, said by phone. “The fear that central bank exit strategies will come too late to prevent inflation is giving support to gold.”
December gold futures gained $8.60, or 0.8 percent, to $1,066.10 an ounce on the New York Mercantile Exchange’s Comex division by 8:41 a.m. local time. The metal has advanced 20 percent this year. Immediate-delivery bullion was 0.7 percent higher at $1,065 in London.
Gold rose in the morning “fixing” in London, used by some mining companies to sell production, to a record $1,064.50 an ounce from $1,058.75 at yesterday’s afternoon fixing.
Record U.S. Debt
“As we start to see more evidence of economic recovery, we might see the momentum catalyst push gold higher,” said Darren Heathcote, head of trading at Investec Bank Ltd. in Sydney.
President Barack Obama has increased U.S. marketable debt to a record as he borrows to reignite growth in the world’s biggest economy. That’s boosted speculation increased money supply will debase the currency and spur inflation.
The Federal Reserve has cut its main interest rate almost to zero and backed asset purchases and credit programs to combat the recession. Chairman Ben S. Bernanke is leading plans to buy mortgage-backed securities, federal agency debt and Treasuries.
U.S. consumer prices will expand 1 percent this quarter and 1.9 percent and 1.8 percent in the following two quarters respectively, according to the median estimate of 66 economists surveyed by Bloomberg.
Oil futures, used by some investors as an inflation guide, gained as much as 1.6 percent to $74.47 a barrel today in New York, after climbing 2.1 percent yesterday. The U.S. Dollar Index, which last week dropped to the lowest level in almost 14 months, was 0.3 percent lower today.
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Bullion, which usually moves inversely to the dollar, is on course for a ninth annual gain after the dollar dropped 6.6 percent this year against a basket of six currencies. Futures reached $1,069.70 an ounce in New York, while spot gold climbed to $1,068.63 in London, surpassing the previous highs on Oct. 8.
“There’s lots of concern about the weakness in the dollar, and this has been driving gold,” Peter Fertig, the owner of Quantitative Commodity Research Ltd. in Hainburg, Germany, said by phone. “The fear that central bank exit strategies will come too late to prevent inflation is giving support to gold.”
December gold futures gained $8.60, or 0.8 percent, to $1,066.10 an ounce on the New York Mercantile Exchange’s Comex division by 8:41 a.m. local time. The metal has advanced 20 percent this year. Immediate-delivery bullion was 0.7 percent higher at $1,065 in London.
Gold rose in the morning “fixing” in London, used by some mining companies to sell production, to a record $1,064.50 an ounce from $1,058.75 at yesterday’s afternoon fixing.
Record U.S. Debt
“As we start to see more evidence of economic recovery, we might see the momentum catalyst push gold higher,” said Darren Heathcote, head of trading at Investec Bank Ltd. in Sydney.
President Barack Obama has increased U.S. marketable debt to a record as he borrows to reignite growth in the world’s biggest economy. That’s boosted speculation increased money supply will debase the currency and spur inflation.
The Federal Reserve has cut its main interest rate almost to zero and backed asset purchases and credit programs to combat the recession. Chairman Ben S. Bernanke is leading plans to buy mortgage-backed securities, federal agency debt and Treasuries.
U.S. consumer prices will expand 1 percent this quarter and 1.9 percent and 1.8 percent in the following two quarters respectively, according to the median estimate of 66 economists surveyed by Bloomberg.
Oil futures, used by some investors as an inflation guide, gained as much as 1.6 percent to $74.47 a barrel today in New York, after climbing 2.1 percent yesterday. The U.S. Dollar Index, which last week dropped to the lowest level in almost 14 months, was 0.3 percent lower today.
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Monday, October 12, 2009
Dutch DSB Bank Nationalized After Bank Run By Clients
(ZeroHedge) And you thought the FDIC had its hand full in the US (even though the ominous "lack" of failures this past Friday prompted many to ask whether or not the FDIC has any funds left to even take over the hundreds of upcoming bank failures). As of this morning, well-known Dutch bank DSB Bank, which gives loan to lower-income people, has been put into "curatorship" (another words for taken over by its respective central bank), after its clients staged a bank run.
BusinessWeek reports:
The Netherlands' central bank said Monday it has taken control of DSB Bank NV after clients began a run amid fears the regional lender might collapse.
Doubts about the health of DSB, a small but well-known bank based in the north of the country, grew since the start of October as media reports questioned its solvency and clients began having problems withdrawing money from their Internet accounts.
De Nederlandsche Bank said in a statement Monday it had asked the Amsterdam District Court to put DSB under its curatorship "because of a large outflow of liquidity that brought the existence of DSB in danger in the short term."
Not too unexpectedly were the bank's soothing words as recently as a week ago that it had enough capital to withstand a full blown run. Turns out it, like many of its counterparts across the Atlantic, has been lying:
DSB told critics at the start of October it had euro1.5 billion in cash -- enough of a buffer to withstand a run on its euro4.3 billion ($6.6 billion) in deposits.
Bank accounts in the Netherlands are insured by the government for the first euro100,000, and the central bank said customers would be able to pull money from their accounts using bank passes until midnight Wednesday.
Hilariousy, the Dutch Central Bank revised its optimistic statement from two weeks ago as well:
The central bank today said the solvency of closely held DSB Bank is under “great pressure,” revising an Oct. 1 statement that the lender met requirements for solvency and liquidity.
Keep in mind the Netherlands has been far off the radar screen for any major financial problem hotspots, especially with recent action directed more to the east, where everyone's attention has been focused on Latvia and how it's recent bond failure and currency devaluation will impact other Scandinavian countries, most prominently Sweden. Could this be the beginning of the FDIC's troubles spilling over to Europe?
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BusinessWeek reports:
The Netherlands' central bank said Monday it has taken control of DSB Bank NV after clients began a run amid fears the regional lender might collapse.
Doubts about the health of DSB, a small but well-known bank based in the north of the country, grew since the start of October as media reports questioned its solvency and clients began having problems withdrawing money from their Internet accounts.
De Nederlandsche Bank said in a statement Monday it had asked the Amsterdam District Court to put DSB under its curatorship "because of a large outflow of liquidity that brought the existence of DSB in danger in the short term."
Not too unexpectedly were the bank's soothing words as recently as a week ago that it had enough capital to withstand a full blown run. Turns out it, like many of its counterparts across the Atlantic, has been lying:
DSB told critics at the start of October it had euro1.5 billion in cash -- enough of a buffer to withstand a run on its euro4.3 billion ($6.6 billion) in deposits.
Bank accounts in the Netherlands are insured by the government for the first euro100,000, and the central bank said customers would be able to pull money from their accounts using bank passes until midnight Wednesday.
Hilariousy, the Dutch Central Bank revised its optimistic statement from two weeks ago as well:
The central bank today said the solvency of closely held DSB Bank is under “great pressure,” revising an Oct. 1 statement that the lender met requirements for solvency and liquidity.
Keep in mind the Netherlands has been far off the radar screen for any major financial problem hotspots, especially with recent action directed more to the east, where everyone's attention has been focused on Latvia and how it's recent bond failure and currency devaluation will impact other Scandinavian countries, most prominently Sweden. Could this be the beginning of the FDIC's troubles spilling over to Europe?
Read Entire Article
Global Central Banks Join The "Short Dollar" Bandwagon
(ZeroHedge)A recent piece by Barclay's Steven Englander demonstrates how everybody and the kitchen sink is soundly amused by Geithner's call for a strong dollar. "The IMF Composition of Official Foreign Exchange Reserves data suggest that central banks are doing more than talking about reducing the concentration of USD in their reserve portfolios. They are actually acting on their statements." This should come as no surprise to anyone following the Fed's central bank liquidity swaps which have plummeted to post-(and pre-) Lehman lows, as the Fed no longer needs to bail out its counterparts' short dollar positions.
Some highlights from Englander's report:
* Q2 09 was the only time that central banks have accumulated more than USD100bn of reserves in a quarter, and the USD’s share of this accumulation has been less than 40%.
* This is also the only time the EUR has accounted for more than 50% of the accumulation when central banks, in aggregate, have accumulated more than USD80bn.
* The JPY’s share of the increase in reserves was 12%, by far the highest incremental JPY share since 2005.
* The drop in aggregate reserves in Q4 08 and Q1 09 was almost all USD, but the recovery has been primarily in non-USD reserves.
Since the global recovery got underway at the beginning of Q2, the USD has been among the weakest of the major currencies. By definition this means that the US current account funding needs, while lower, were not reduced enough to stabilize the dollar. Other data, in particular the US Treasury TIC data, show unambiguously that there has been an outflow of capital from the US. The US private sector has been buying USD30-40bn of foreign portfolio assets, effectively doubling the financing need implied by the US trade deficit. The foreign private sector has been selling US Treasury obligations.
The last sentence also is no surprise, because as pointed out on Zero Hedge first, the Fed now accounts for the majority of Treasury buying, in essence leading to a feedback loop whereby its primary goal is to lead to dollar destabilization.
As for the key ongoing divergence between the dollar and the euro, Barclays provides this observation:
To be blunt, this is little more than saying there were more sellers than buyers of USDs, and more buyers than sellers of high quality EM currencies at the exchange rate levels that prevailed at the beginning of the recovery. However, it helps address the issue of how we know that the global private sector was not selling EUR and other European currencies in order to buy EM assets. The reserve accumulation data show as much buying of the EUR as the USD, so why view one as being bought and the other as being sold? The difference is that the EUR has appreciated while the USD has depreciated over this period. This suggests that EM central bank buying of the EUR (in addition to whatever the private sector was doing) was sufficient to firm up the EUR, while USD purchases by EM central banks were not enough to keep the USD from falling.
And another red flag for Fed apologists, whose actions have been crucial in enforcing the weak dollar doctrine:
Our conjecture is that first, EM central banks acquired USD through intervention and then sold USD them versus the EUR and other currencies as a way of preventing their portfolios from becoming to top heavy in depreciating USDs. Historically, we have observed that the accumulation of non-USD and USD reserves occurs in parallel. (Figure 1 shows this as well.) We have also found that the central bank accumulation of reserves is strongly associated with USD weakness. So there is some reasonably strong circumstantial evidence that USD weakness within G10 is associated with central banks building reserves, which supports our conjecture above, that the dynamic is driven by the USD overhang rather than some exogenous demand for EUR reserves by central banks.
The conclusion from Barclays is startling, mostly due to its analysis of implications to the Eurozone (obviously negative) and that the JPY, despite its low yield, will likely become less of a carry trade focus in the years to come. This speaks volumes about how the rest of the world sees the American economy, even after Japan's two lost decades. What the future has in store for America apparently can not even compare with the Japanese experiment.
No one wants to be caught holding too many dollars, and this rising reluctance is increasing pressure on the USD. This is an obvious USD negative, but it is also means that the ECB and the EUR are caught between a rock and a hard place. The capital flows into the EUR have very little to do with any euro area cyclical dynamism. If the ECB were the BoC, it would label the current EUR appreciation as undesirable “type 2” flows driven by capital flows that do not reflect fundamentals. However, as anyone who has been to the doctor knows, getting a diagnosis is not quite the same as being cured.
One surprise to us is some renewed JPY accumulation in reserve portfolios after years of decumulation. Given the USD overhang, the zero-yield JPY may be more attractive than the zero-yield USD, even with all the negatives surrounding the Japanese economy and its prospects.
The last and more tentative takeaway is that claims in other currencies (non EUR, USD, GBP, JPY or CHF) rose more than 10% in Q2. It is hard to tell what currencies in this category represent and how much of the gain is due to valuation effects. However, it could be that some of the smaller G10 currencies are beginning to get a “look see” from reserve managers.
As equity markets now follow the DXY tick for tick, which in turn follows the actions of Ben Bernanke to the dot, it reinforces our thesis that at this time, investment decisions can be completely removed from corporate income statements, balance sheets, and most troubling, cash flow statements (as unfortunately there is little to none positive cash flow to even talk about) and the only focus is on such excess liquidity aggregator representations as the Z.1, the H.3 and the H.4.1. As for what is happening at that other bubble spewing economy, China, at this point it is really anyone's guess as to what is going on there.
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Some highlights from Englander's report:
* Q2 09 was the only time that central banks have accumulated more than USD100bn of reserves in a quarter, and the USD’s share of this accumulation has been less than 40%.
* This is also the only time the EUR has accounted for more than 50% of the accumulation when central banks, in aggregate, have accumulated more than USD80bn.
* The JPY’s share of the increase in reserves was 12%, by far the highest incremental JPY share since 2005.
* The drop in aggregate reserves in Q4 08 and Q1 09 was almost all USD, but the recovery has been primarily in non-USD reserves.
Since the global recovery got underway at the beginning of Q2, the USD has been among the weakest of the major currencies. By definition this means that the US current account funding needs, while lower, were not reduced enough to stabilize the dollar. Other data, in particular the US Treasury TIC data, show unambiguously that there has been an outflow of capital from the US. The US private sector has been buying USD30-40bn of foreign portfolio assets, effectively doubling the financing need implied by the US trade deficit. The foreign private sector has been selling US Treasury obligations.
The last sentence also is no surprise, because as pointed out on Zero Hedge first, the Fed now accounts for the majority of Treasury buying, in essence leading to a feedback loop whereby its primary goal is to lead to dollar destabilization.
As for the key ongoing divergence between the dollar and the euro, Barclays provides this observation:
To be blunt, this is little more than saying there were more sellers than buyers of USDs, and more buyers than sellers of high quality EM currencies at the exchange rate levels that prevailed at the beginning of the recovery. However, it helps address the issue of how we know that the global private sector was not selling EUR and other European currencies in order to buy EM assets. The reserve accumulation data show as much buying of the EUR as the USD, so why view one as being bought and the other as being sold? The difference is that the EUR has appreciated while the USD has depreciated over this period. This suggests that EM central bank buying of the EUR (in addition to whatever the private sector was doing) was sufficient to firm up the EUR, while USD purchases by EM central banks were not enough to keep the USD from falling.
And another red flag for Fed apologists, whose actions have been crucial in enforcing the weak dollar doctrine:
Our conjecture is that first, EM central banks acquired USD through intervention and then sold USD them versus the EUR and other currencies as a way of preventing their portfolios from becoming to top heavy in depreciating USDs. Historically, we have observed that the accumulation of non-USD and USD reserves occurs in parallel. (Figure 1 shows this as well.) We have also found that the central bank accumulation of reserves is strongly associated with USD weakness. So there is some reasonably strong circumstantial evidence that USD weakness within G10 is associated with central banks building reserves, which supports our conjecture above, that the dynamic is driven by the USD overhang rather than some exogenous demand for EUR reserves by central banks.
The conclusion from Barclays is startling, mostly due to its analysis of implications to the Eurozone (obviously negative) and that the JPY, despite its low yield, will likely become less of a carry trade focus in the years to come. This speaks volumes about how the rest of the world sees the American economy, even after Japan's two lost decades. What the future has in store for America apparently can not even compare with the Japanese experiment.
No one wants to be caught holding too many dollars, and this rising reluctance is increasing pressure on the USD. This is an obvious USD negative, but it is also means that the ECB and the EUR are caught between a rock and a hard place. The capital flows into the EUR have very little to do with any euro area cyclical dynamism. If the ECB were the BoC, it would label the current EUR appreciation as undesirable “type 2” flows driven by capital flows that do not reflect fundamentals. However, as anyone who has been to the doctor knows, getting a diagnosis is not quite the same as being cured.
One surprise to us is some renewed JPY accumulation in reserve portfolios after years of decumulation. Given the USD overhang, the zero-yield JPY may be more attractive than the zero-yield USD, even with all the negatives surrounding the Japanese economy and its prospects.
The last and more tentative takeaway is that claims in other currencies (non EUR, USD, GBP, JPY or CHF) rose more than 10% in Q2. It is hard to tell what currencies in this category represent and how much of the gain is due to valuation effects. However, it could be that some of the smaller G10 currencies are beginning to get a “look see” from reserve managers.
As equity markets now follow the DXY tick for tick, which in turn follows the actions of Ben Bernanke to the dot, it reinforces our thesis that at this time, investment decisions can be completely removed from corporate income statements, balance sheets, and most troubling, cash flow statements (as unfortunately there is little to none positive cash flow to even talk about) and the only focus is on such excess liquidity aggregator representations as the Z.1, the H.3 and the H.4.1. As for what is happening at that other bubble spewing economy, China, at this point it is really anyone's guess as to what is going on there.
Read Entire Article
Friday, October 9, 2009
Got Gold?
Gold standing: a 1960 Fed guard in protective metal overshoes keeps an eye on some of its bullion. Congressmen once sent an investigator to its vault to ‘check it was there’
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China's Gold Investors Undeterred by High Prices
BEIJING/SHANGHAI (Reuters) - Gold might be a luxury most can live without when times are hard, but for cautious investors in China, the world's top producer and consumer of bullion, it has become a matter of necessity.
Jewelry sales might take a hit in China after prices hit a record high of $1,043.45 an ounce on Tuesday, but amid ongoing economic uncertainty, many in the financial community still prefer bullion to bonds, analysts said in comments made before the record was struck.
The government itself -- also looking for a safe haven for its foreign currency reserves -- is also likely to increase its gold holdings, which now officially stand at 1,054 metric tons.
"Consumption in China is expected to rise, as it is supported by expectations of inflation, and I also believe the government will increase its reserves," Yao Haiqiao, president of Longgold Asset Management, said.
Only around 1.6 percent of China's forex reserves is held in gold, and that figure is expected to rise, Sun Zhaoxue, chairman of the China Gold Association, said earlier this year.
World gold prices have broken the $1,020 per ounce barrier for the first time since March 2008 as investors seek a safe haven from uncertainty about the world economy and the dollar. While some have warned the price might not be sustainable, Chinese buyers are still expected to remain active.
"Consumers are sensitive about the prices, so rising gold prices will definitely hit purchases in India and China. We have seen a rapid drop in India's jewelry consumption in the first half so a similar story could be happening in China," said Zoe Wang, analyst with Shanghai CIFCO Futures.
"But in terms of investment, purchases are rising, as more people are using gold as a hedging tool. Such purchases will obviously increase in China."
China is already the world's biggest gold producer, and in the first half of this year, consumption of the precious metal also became the highest in the world, overtaking India.
Albert Cheng, Far East managing director at the World Gold Council, said Chinese gold purchases for investment reached a record high of 70 metric tons in 2008.
With jewelry sales expected to fall -- even in the biggest market of China, the only one to show any growth in 2008 -- it is investment purchases that continue to drive up prices.
"The Chinese buy more gold bars in banks while Indians buy more jewelry," said Longgold's Yao.
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Jewelry sales might take a hit in China after prices hit a record high of $1,043.45 an ounce on Tuesday, but amid ongoing economic uncertainty, many in the financial community still prefer bullion to bonds, analysts said in comments made before the record was struck.
The government itself -- also looking for a safe haven for its foreign currency reserves -- is also likely to increase its gold holdings, which now officially stand at 1,054 metric tons.
"Consumption in China is expected to rise, as it is supported by expectations of inflation, and I also believe the government will increase its reserves," Yao Haiqiao, president of Longgold Asset Management, said.
Only around 1.6 percent of China's forex reserves is held in gold, and that figure is expected to rise, Sun Zhaoxue, chairman of the China Gold Association, said earlier this year.
World gold prices have broken the $1,020 per ounce barrier for the first time since March 2008 as investors seek a safe haven from uncertainty about the world economy and the dollar. While some have warned the price might not be sustainable, Chinese buyers are still expected to remain active.
"Consumers are sensitive about the prices, so rising gold prices will definitely hit purchases in India and China. We have seen a rapid drop in India's jewelry consumption in the first half so a similar story could be happening in China," said Zoe Wang, analyst with Shanghai CIFCO Futures.
"But in terms of investment, purchases are rising, as more people are using gold as a hedging tool. Such purchases will obviously increase in China."
China is already the world's biggest gold producer, and in the first half of this year, consumption of the precious metal also became the highest in the world, overtaking India.
Albert Cheng, Far East managing director at the World Gold Council, said Chinese gold purchases for investment reached a record high of 70 metric tons in 2008.
With jewelry sales expected to fall -- even in the biggest market of China, the only one to show any growth in 2008 -- it is investment purchases that continue to drive up prices.
"The Chinese buy more gold bars in banks while Indians buy more jewelry," said Longgold's Yao.
Read Entire Article
Thursday, October 8, 2009
Gold and Economic Freedom, Reinterpreted for the 21st Century
(SmartKnowledgeU)I do not profess that the main structural arguments of the following essay are mine. Rather they belong to a rather famous former Chairman of the US Federal Reserve named Alan Greenspan as noted in his rather seminal 1966 essay titled “Gold and Economic Freedom”. However, I have taken the specific arguments of that very prescient essay and modified and reinterpreted them to fit into the contemporary situation of our current global and financial crisis (that it its core, is a monetary crisis). It is clear that at some point after his appointment to the Chairman of the US Federal Reserve in 1987, Alan Greenspan turned his back on the very structural beliefs about gold’s inextricable connection to freedom that he championed some twenty years earlier. However, Greenspan’s failure to uphold the ideals he once championed does not invalidate their keen insight and validity. Today, these very ideals are especially pertinent to the impending economic catastrophe we face today, despite the continued three-ring circus of government, Central Bankers, & corporate executives that continually tell us that the financial crisis has bottomed.
Today, due to the proliferation of fragile and confusing financial instruments called derivatives and the fraudulent nature of our fractional reserve banking system, hundreds of billions, and more likely, trillions of more dollars exist than claims on real assets and goods. The comparable analogy would be if, as an Apple store owner, I sold the same 100 Apple desktop computers to 10,000 clients. As long as no more than 10 of my customers required delivery in any given year, then my business could operate for many years without this fraudulent scheme ever being exposed. However, the instant my clients collectively decided they wanted to take delivery of all 10,000 computers in the same month, my ruse would be exposed and my business sentenced to a fate of bankruptcy. Almost all of us would agree that this would be an insane way to run a business yet we readily accept the fact that all major banks in every modern, developed nation run their businesses in this very manner. However, the development of such a situation would be next to impossible with the institution of a true gold standard and this is why Alan Greenspan once made the timeless statement that economic freedom and gold are inseparable.
A true gold standard would operate as follows. The introduction of any new supplies of money into the global economy would necessitate the equivalent purchase of gold to be stored as reserves to back them. Thus, if the power to print money was returned to the US government as explicitly stated in the US Constitution, Article 1, Section 8, and the US Treasury wished to print $1 trillion new US dollars, such an action would require the purchase of an additional $1 trillion of gold to back the new dollar supply. Of course there is not enough gold in the world to back all the trillions of dollars that exist in our current monetary supply unless gold were to be revalued somewhere in the vicinity of USD $10,000 an ounce, or perhaps even north of this figure. Or perhaps the standard would have to be a silver standard or a hybrid gold/silver standard. For the sake of a hypothetical argument, however, let's examine how a gold standard keeps money “honest”. Once a new supply of $1 trillion was printed, every new dollar would be a claim on a portion of the US Treasury’s gold reserves, not just an empty piece of paper backed by the “full faith and credit” of the US government, as is the case today.
Because there is a cost to printing new supplies of dollars under a gold standard, the primary driver of monetary supply expansion would consequently become the sustainable expansion of real goods and services, NOT the speculative whims of a few powerful banking families that wish to drive up prices of unsustainable assets such as subprime mortgages, derivatives, dangerously overvalued stock markets, and rigged commodity markets for their own benefit. Inevitably, under our current fraudulent monetary system, such actions occur and lead to what the media erroneously terms as “bubbles” and which financial “experts” misinterpret as natural economic cycles. In reality, “bubbles” are grossly distorted unsustainable valuations of assets driven by the speculation and the monetary policies of the financial oligarchs that control the US Federal Reserve, the Bank of England, and the European Central Bank. This is why “bubbles” always burst. By the purposeful creation of bubbles, the financial oligarchs that create them increase their riches, and then plunder the wealth of their fellow citizens when these bubbles inevitably burst. This accomplishes two important goals for the financial oligarchs.
(1) Since they create every capital market bubble in every major economy, inevitably, they understand exactly how to profit from these markets, and they increase their wealth and power substantially as these bubbles grow;
(2) Since most citizens don’t understand the extreme fragility of the bubbles the financial oligarchs create and instead interpret the bubbles as bull markets that cannot end, when the bubbles inevitably burst, this action conveniently strips wealth and power from the classes that reside below the financial oligarchs and stifles any chance for real opposition and dissent to their power.
It is the perfect con game.
A monetary system that is backed by a true gold standard, however, would never sustain an expansion of monetary supply to fund risky assets that have a high risk of blowing up and becoming worthless, because in doing so, the financial oligarchs undermine their own assets. This is why they killed the gold standard in 1971. Under a true gold standard, it would have been impossible for this current global financial and monetary crisis to materialize, and here’s why. If banks continue to print new dollars backed by gold to support the purchases of risky assets, bank loans are inevitably paid back either slowly over time or not at all. Consequently, under a gold standard, banks curtail new lending by raising interest rates because they understand that the dollars they currently hold have greatly increased in risk in comparison to the real gold that backs them. Thus a gold standard successfully limits the greed driven behavior of banks and actually successfully stops further creation of ticking time bomb financial assets such as subprime loans. In the case where a bank refuses to curtail its risky behavior and continues to finance new loans for the purchase of risky assets, then a gold standard allows for their bluff to be called by any dollar owner. In other words, if a bank continues to expand the monetary supply to such an extent that many more dollars exist than claims on real goods, as people realize that banks are creating new money to finance risky assets that are likely to blow-up, people will either
(1) Demand gold in exchange for their dollars, or presuming that all other major global currencies are also backed by a gold standard;
(2) Exchange their dollars for another currency that they deem has not been diluted by the gold standard upon which that particular currency operates.
If scenario one materializes, and people demand gold in return for their dollars, the bankers realize that they will be granting a real asset to the people in return for receiving a devaluing asset that they are helping to devalue. Under this scenario, banks will do everything in their power to retain their gold reserves and thus will increase interest rates to contract monetary supply and renew the currency’s strength. Such actions would then serve to stop the run on their gold reserves.
If scenario two materializes, and people flood the market with US dollars by selling them to purchase other currencies that have maintained an honest gold standard, then again, banks would combat the devaluation of their own dollar holdings by raising interest rates, contracting the US dollar supply, and ensuring that the dollar’s strength returns to the equivalent strength of its rival currencies.
Thus, a gold standard automatically regulates monetary supply and monetary strength and there is absolutely no reason for Central Banks to exist and to allow Central Bankers to artificially deflate and inflate money for their own self-interests to the detriment of all other citizens. If one can understand that gold helps establish a free market where growth in sustainable goods and services drives monetary expansion, and not greed and speculation as is the case today, then it is easy to realize that not only is gold is linked to economic freedom as Alan Greenspan stated, but that it is also inseparable from the much broader concept of freedom itself.
However, a true gold standard is not even necessary to regulate integrity and honesty in the global monetary system. The world gold standard that existed before it was ended by President Nixon in 1971 under the advice of then deputy under-secretary of monetary affairs Paul Volcker and US Treasury Secretary John Connally, win fact, not a true gold standard, but a “pseudo” gold standard. It was a “pseudo” gold standard because banks were allowed to create more dollars than the value of their gold reserves. However, even under a “pseudo” gold standard, the above principles I described above would still automatically regulate free markets with little need for monetary policy decisions from Central Banks. In the event that banks attempted to execute fraudulent schemes under a gold standard, their scramble not to lose their gold reserves could still cause sharp recessions, but these recessions, due to the self-regulatory nature of such a monetary system, would likely be very short in nature and consequent economic recovery quick. Thus, a “pseudo” gold standard or “pseudo” gold/silver standard, though far from being perfect, is still much more preferable than the fraudulent monetary system we currently utilize today that allows financial oligarchs to create prolonged deep depressions and to destroy the wealth of the middle class.
People, ignorant of gold’s long history as a store of money, still erroneously believe gold to be a barbarous relic with zero intrinsic value. Today, hundreds of millions of people still ask, “What makes gold so valuable that it should back our monetary system?” Again, the lack of understanding about gold’s role in creating a free and honest monetary system is due to the fact that gold can call the bluff of the financial oligarchs, and they have done everything in their power, including the purposeful spread of misinformation about gold to prevent people from calling their bluff. The spread of this knowledge threatens the very power of the financial oligarchs so they ensure that people do not understand the basic tenets of Greenspan's "Gold and Economic Freedom" essay. It is not by mistake that gold has been used as a form of money for centuries and that, as a form of money, it has outlasted numerous other forms of paper money and even numerous other commodities once employed as money. Whereby ancient civilizations have used many different commodities over time such as corn, wheat, beads, clothes, etc. and instituted them as a means to barter for goods and services, it is by no mistake that ancient Egypt and the Roman Empire, civilizations that endured for long periods of time and required a more efficient form of money, eventually settled upon gold.
Gold has many qualities that make it ideal for use as money that other valuable commodities such as diamonds, platinum, rhodium, wheat, rice and oil all lack. Gold is a sufficiently rare enough metal to command a high value, it is extremely malleable and therefore easily divisible for use as money, it is uniform in quality, it is durable so retains its quality over time, and it has very little industrial use and thus is not consumed in any significant quantity over time. Though gold’s detractors continually spread misinformation about gold having zero intrinsic value and the US dollar as the only valid form of money, this argument is actually backwards. It is the dollar that has zero intrinsic value while the intrinsic value of gold has been well defined for centuries. All fiat money, whether the US dollar, the Japanese yen, the Euro, the Pound Sterling, the Icelandic Krona, or the Brazilian real, only has value because it is backed by the full faith and credit of their respective governments. Today, we know that the counterparty risk of all major global currencies is tremendous. Gold, however, has zero counterparty risk.
Ever since the financial oligarchs convinced US President Nixon to end the pseudo gold standard in 1971, there have been no limitations on any Central Bank in the world in regard to their ability to increase monetary supply, and to deflate and inflate currencies at will. Translated another way, this means that there is no way for any citizen of the world to ensure that their Central Bank does not enact monetary policies that unfairly tax and devalue their savings. Quite literally, our modern monetary system allows no means for citizens to prevent the theft of their savings by Central Banks. If one had $1,000,000 in their bank account in 2001, and today, in 2009, could only purchase half of the goods and services that he could have purchased with that money in 2001, it matters not if:
(1) the $1,000,000 retained the same purchasing power up until now but half the purchasing power was lost as a result of a 50% tax imposed by the government today, or
(2) if the 50% loss in purchasing power was a result of a 50% devaluation of the US dollar during the last 9 years.
Central Banks don’t want you to understand that their devaluation policies are equivalent to robbing citizens of their wealth. Alan Greenspan himself stated in 1997 US Congressional testimony that "price increases are really the same thing as depreciation of the currency.”
Various arguments that have been levied against gold’s relevancy as a form of money, such as gold is worthless because one cannot eat gold if one is hungry, or Warren Buffet’s infamous statement that gold is a terrible asset because “it won’t do anything between now and then except look at you” are arguments devoid of any logic. One cannot eat US dollars either if one is hungry, and diamonds won’t due anything other than glitter and look at you either. I imagine that Buffet’s statement about gold is a jab at gold’s extremely limited usefulness in industrial applications, yet it is this very “limitation” that has led multiple civilizations over many centuries to adopt gold as a form of money. To the very contrary of Buffet’s core argument against holding gold, why would anyone would want to own a fiat monetary asset that has a value not determined by the sustainable growth of societal goods and services, but a value determined by the whims of financial oligarchs that can deflate and inflate it at will? Maintaining your hard earned money in the form of dollars, pounds and Euros and allowing Central Banks to devalue them day after day, year after year, is truly an argument devoid of all logic.
When considering the recent International Monetary Fund (IMF) request to Asian Central Banks to flood their markets with liquidity, the heads of Asian Central Banks would be well served to become a student of the Great Depression before making any decision to do so. After World War I, Great Britain began to lose excessive amounts of its gold reserves due to the Bank of England’s refusal to revalue the British pound - gold conversion rate despite greatly expanding British pound monetary supplies during the war. Explained simply, in order to finance the war, the Bank of England had printed massive supplies of British Pounds without an equivalent increase in their gold reserves. Consequently, when the war ended, Britain had the same amount of gold backing a greatly increased supply of British pounds.
Simple math dictated that Britain had to devalue their pound or commit fraud by maintaining the same British pound-gold conversion ratio that existed pre-WW I. The Bank of England chose fraud over honesty, and citizens in turn, called the Bank of England’s bluff and began to convert their pounds into gold. When this happened, the Bank of England called on their sister Central Bank, the US Federal Reserve for assistance. Rather than raising interest rates to contract their own monetary supply and strengthen the British Pound in this manner to restore the pre-WWI British pound-gold conversion ratio, the Bank of England call upon the US Federal Reserve to flood the United States with dollars, much as the IMF is now calling upon Asian countries to do. According to Alan Greenspan, “The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The Fed succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process.”
Today, if the Asian Central Banks comply with the IMF's request, since we are not on a gold standard and there are no runs on a country’s gold reserves to prevent, the IMF’s request is meant to stop the rapid devaluation of the Euro, the British Pound and primarily the US dollar. If the Asian Central Banks foolishly comply with the IMF’s request, they should be forewarned that the end result of their actions will be to destroy their own economies as well.
In 1998, Mr. Greenspan stated, “You don’t have a free market. Central banks determine the money supply, not the market…We are not on a gold standard because leaders of the 20th and 21st centuries don’t want a market that functions in that manner.” The IMF’s request is driven by the desire of the world’s financial oligarchs to keep a fraudulent monetary system alive so that they can retain their power. Were the world to return to a gold standard or a combined gold/silver standard today, increases in global supplies of major currencies would be dictated by real sustainable economic growth of global economies and claims on currencies would be backed by real assets, not the untrustworthy empty promises of governments today. If we educate millions of people regarding gold’s central role to freedom, Central Banks cannot continue to keep financing bailout plans that ultimately steal significant wealth from their citizens. In fact, because there is no gold to lose under our current unsound monetary system, this is precisely the reason why large US banks had no problem continuing to feed growing bubbles of fraudulent assets such as subprime mortgages, asset backed commercial paper, etc. In the end, they knew that they would be bailed out with taxpayer money, and there was no "house gold" to lose. Thus, billions of profits could be made by risking not their own assets, as would be the case under a gold standard, but by risking only the assets of the people.
French philosopher Voltaire once said that as long as people believe in absurdities, they will continue to commit atrocities. Belief that freedom and an unsound fiat monetary system can coexist is one such absurdity. As result of this absurd belief, atrocities, such as the ongoing global hunger crisis from rising food prices that are a direct result of devaluing currencies, can develop.
Under our current fiat monetary system, the financial oligarchs that control the world’s central banks will continue to feed speculative bubbles because there is no way for the people to call their bluff other than exchanging one form of fraudulent money for another form of fraudulent money. The IMF Special Drawing Rights (SDRs) of a basket of fiat currencies is another absurd proposed "solution." What makes a basket of four or five fiat currencies backed by nothing fundamentally better than one fiat currency backed by nothing? In reality, when commentators say that the US dollar is backed by the "full faith and credit of the US government", do you know who is the "government"? Look in the mirror and you will know. In reality, when the Feds say "government", they mean you, for if they need to print more money so the government doesn't go bankrupt, the government will increase your taxes to raise more money for government transfer payments and to pay the interest on the money the Feds print. People that tried to protect themselves from dollar devaluation through the use of currency hedges discovered the futility of doing so at the end of last year and the beginning of this year when Euros, British Pounds, and Australian all plummeted by 25% to 30% in a matter of weeks. If the World Series of Poker operated under the same rules as our current monetary system, the richest man or woman to enter the tournament would win every single tournament. No matter his hand, if there was no way to call his bluff, he could raise the pot every round to such rich levels that he could force all other players to fold even under the occasions when he held the weakest hand. Even a poker game is more honest than our monetary system for it allows other players to expose bluffs and walk away victorious.
Under our current monetary system, there is no means to call the bluff of Central Bankers by using other forms of fiat money. The only way to call the Central Bank’s bluff is to buy gold and silver. Understanding this, it is easy to deduce why Central Banks, despite holding loads of gold in their own private reserves, continually attack gold, discredit its role in our monetary system, and seek to drive its price down. If masses of people were to discover and understand the true value of gold in a sound monetary system, then calling the bluff of our current fiat monetary system and causing it to collapse would be possible.
By: J.S. Kim
Read Entire Article
Today, due to the proliferation of fragile and confusing financial instruments called derivatives and the fraudulent nature of our fractional reserve banking system, hundreds of billions, and more likely, trillions of more dollars exist than claims on real assets and goods. The comparable analogy would be if, as an Apple store owner, I sold the same 100 Apple desktop computers to 10,000 clients. As long as no more than 10 of my customers required delivery in any given year, then my business could operate for many years without this fraudulent scheme ever being exposed. However, the instant my clients collectively decided they wanted to take delivery of all 10,000 computers in the same month, my ruse would be exposed and my business sentenced to a fate of bankruptcy. Almost all of us would agree that this would be an insane way to run a business yet we readily accept the fact that all major banks in every modern, developed nation run their businesses in this very manner. However, the development of such a situation would be next to impossible with the institution of a true gold standard and this is why Alan Greenspan once made the timeless statement that economic freedom and gold are inseparable.
A true gold standard would operate as follows. The introduction of any new supplies of money into the global economy would necessitate the equivalent purchase of gold to be stored as reserves to back them. Thus, if the power to print money was returned to the US government as explicitly stated in the US Constitution, Article 1, Section 8, and the US Treasury wished to print $1 trillion new US dollars, such an action would require the purchase of an additional $1 trillion of gold to back the new dollar supply. Of course there is not enough gold in the world to back all the trillions of dollars that exist in our current monetary supply unless gold were to be revalued somewhere in the vicinity of USD $10,000 an ounce, or perhaps even north of this figure. Or perhaps the standard would have to be a silver standard or a hybrid gold/silver standard. For the sake of a hypothetical argument, however, let's examine how a gold standard keeps money “honest”. Once a new supply of $1 trillion was printed, every new dollar would be a claim on a portion of the US Treasury’s gold reserves, not just an empty piece of paper backed by the “full faith and credit” of the US government, as is the case today.
Because there is a cost to printing new supplies of dollars under a gold standard, the primary driver of monetary supply expansion would consequently become the sustainable expansion of real goods and services, NOT the speculative whims of a few powerful banking families that wish to drive up prices of unsustainable assets such as subprime mortgages, derivatives, dangerously overvalued stock markets, and rigged commodity markets for their own benefit. Inevitably, under our current fraudulent monetary system, such actions occur and lead to what the media erroneously terms as “bubbles” and which financial “experts” misinterpret as natural economic cycles. In reality, “bubbles” are grossly distorted unsustainable valuations of assets driven by the speculation and the monetary policies of the financial oligarchs that control the US Federal Reserve, the Bank of England, and the European Central Bank. This is why “bubbles” always burst. By the purposeful creation of bubbles, the financial oligarchs that create them increase their riches, and then plunder the wealth of their fellow citizens when these bubbles inevitably burst. This accomplishes two important goals for the financial oligarchs.
(1) Since they create every capital market bubble in every major economy, inevitably, they understand exactly how to profit from these markets, and they increase their wealth and power substantially as these bubbles grow;
(2) Since most citizens don’t understand the extreme fragility of the bubbles the financial oligarchs create and instead interpret the bubbles as bull markets that cannot end, when the bubbles inevitably burst, this action conveniently strips wealth and power from the classes that reside below the financial oligarchs and stifles any chance for real opposition and dissent to their power.
It is the perfect con game.
A monetary system that is backed by a true gold standard, however, would never sustain an expansion of monetary supply to fund risky assets that have a high risk of blowing up and becoming worthless, because in doing so, the financial oligarchs undermine their own assets. This is why they killed the gold standard in 1971. Under a true gold standard, it would have been impossible for this current global financial and monetary crisis to materialize, and here’s why. If banks continue to print new dollars backed by gold to support the purchases of risky assets, bank loans are inevitably paid back either slowly over time or not at all. Consequently, under a gold standard, banks curtail new lending by raising interest rates because they understand that the dollars they currently hold have greatly increased in risk in comparison to the real gold that backs them. Thus a gold standard successfully limits the greed driven behavior of banks and actually successfully stops further creation of ticking time bomb financial assets such as subprime loans. In the case where a bank refuses to curtail its risky behavior and continues to finance new loans for the purchase of risky assets, then a gold standard allows for their bluff to be called by any dollar owner. In other words, if a bank continues to expand the monetary supply to such an extent that many more dollars exist than claims on real goods, as people realize that banks are creating new money to finance risky assets that are likely to blow-up, people will either
(1) Demand gold in exchange for their dollars, or presuming that all other major global currencies are also backed by a gold standard;
(2) Exchange their dollars for another currency that they deem has not been diluted by the gold standard upon which that particular currency operates.
If scenario one materializes, and people demand gold in return for their dollars, the bankers realize that they will be granting a real asset to the people in return for receiving a devaluing asset that they are helping to devalue. Under this scenario, banks will do everything in their power to retain their gold reserves and thus will increase interest rates to contract monetary supply and renew the currency’s strength. Such actions would then serve to stop the run on their gold reserves.
If scenario two materializes, and people flood the market with US dollars by selling them to purchase other currencies that have maintained an honest gold standard, then again, banks would combat the devaluation of their own dollar holdings by raising interest rates, contracting the US dollar supply, and ensuring that the dollar’s strength returns to the equivalent strength of its rival currencies.
Thus, a gold standard automatically regulates monetary supply and monetary strength and there is absolutely no reason for Central Banks to exist and to allow Central Bankers to artificially deflate and inflate money for their own self-interests to the detriment of all other citizens. If one can understand that gold helps establish a free market where growth in sustainable goods and services drives monetary expansion, and not greed and speculation as is the case today, then it is easy to realize that not only is gold is linked to economic freedom as Alan Greenspan stated, but that it is also inseparable from the much broader concept of freedom itself.
However, a true gold standard is not even necessary to regulate integrity and honesty in the global monetary system. The world gold standard that existed before it was ended by President Nixon in 1971 under the advice of then deputy under-secretary of monetary affairs Paul Volcker and US Treasury Secretary John Connally, win fact, not a true gold standard, but a “pseudo” gold standard. It was a “pseudo” gold standard because banks were allowed to create more dollars than the value of their gold reserves. However, even under a “pseudo” gold standard, the above principles I described above would still automatically regulate free markets with little need for monetary policy decisions from Central Banks. In the event that banks attempted to execute fraudulent schemes under a gold standard, their scramble not to lose their gold reserves could still cause sharp recessions, but these recessions, due to the self-regulatory nature of such a monetary system, would likely be very short in nature and consequent economic recovery quick. Thus, a “pseudo” gold standard or “pseudo” gold/silver standard, though far from being perfect, is still much more preferable than the fraudulent monetary system we currently utilize today that allows financial oligarchs to create prolonged deep depressions and to destroy the wealth of the middle class.
People, ignorant of gold’s long history as a store of money, still erroneously believe gold to be a barbarous relic with zero intrinsic value. Today, hundreds of millions of people still ask, “What makes gold so valuable that it should back our monetary system?” Again, the lack of understanding about gold’s role in creating a free and honest monetary system is due to the fact that gold can call the bluff of the financial oligarchs, and they have done everything in their power, including the purposeful spread of misinformation about gold to prevent people from calling their bluff. The spread of this knowledge threatens the very power of the financial oligarchs so they ensure that people do not understand the basic tenets of Greenspan's "Gold and Economic Freedom" essay. It is not by mistake that gold has been used as a form of money for centuries and that, as a form of money, it has outlasted numerous other forms of paper money and even numerous other commodities once employed as money. Whereby ancient civilizations have used many different commodities over time such as corn, wheat, beads, clothes, etc. and instituted them as a means to barter for goods and services, it is by no mistake that ancient Egypt and the Roman Empire, civilizations that endured for long periods of time and required a more efficient form of money, eventually settled upon gold.
Gold has many qualities that make it ideal for use as money that other valuable commodities such as diamonds, platinum, rhodium, wheat, rice and oil all lack. Gold is a sufficiently rare enough metal to command a high value, it is extremely malleable and therefore easily divisible for use as money, it is uniform in quality, it is durable so retains its quality over time, and it has very little industrial use and thus is not consumed in any significant quantity over time. Though gold’s detractors continually spread misinformation about gold having zero intrinsic value and the US dollar as the only valid form of money, this argument is actually backwards. It is the dollar that has zero intrinsic value while the intrinsic value of gold has been well defined for centuries. All fiat money, whether the US dollar, the Japanese yen, the Euro, the Pound Sterling, the Icelandic Krona, or the Brazilian real, only has value because it is backed by the full faith and credit of their respective governments. Today, we know that the counterparty risk of all major global currencies is tremendous. Gold, however, has zero counterparty risk.
Ever since the financial oligarchs convinced US President Nixon to end the pseudo gold standard in 1971, there have been no limitations on any Central Bank in the world in regard to their ability to increase monetary supply, and to deflate and inflate currencies at will. Translated another way, this means that there is no way for any citizen of the world to ensure that their Central Bank does not enact monetary policies that unfairly tax and devalue their savings. Quite literally, our modern monetary system allows no means for citizens to prevent the theft of their savings by Central Banks. If one had $1,000,000 in their bank account in 2001, and today, in 2009, could only purchase half of the goods and services that he could have purchased with that money in 2001, it matters not if:
(1) the $1,000,000 retained the same purchasing power up until now but half the purchasing power was lost as a result of a 50% tax imposed by the government today, or
(2) if the 50% loss in purchasing power was a result of a 50% devaluation of the US dollar during the last 9 years.
Central Banks don’t want you to understand that their devaluation policies are equivalent to robbing citizens of their wealth. Alan Greenspan himself stated in 1997 US Congressional testimony that "price increases are really the same thing as depreciation of the currency.”
Various arguments that have been levied against gold’s relevancy as a form of money, such as gold is worthless because one cannot eat gold if one is hungry, or Warren Buffet’s infamous statement that gold is a terrible asset because “it won’t do anything between now and then except look at you” are arguments devoid of any logic. One cannot eat US dollars either if one is hungry, and diamonds won’t due anything other than glitter and look at you either. I imagine that Buffet’s statement about gold is a jab at gold’s extremely limited usefulness in industrial applications, yet it is this very “limitation” that has led multiple civilizations over many centuries to adopt gold as a form of money. To the very contrary of Buffet’s core argument against holding gold, why would anyone would want to own a fiat monetary asset that has a value not determined by the sustainable growth of societal goods and services, but a value determined by the whims of financial oligarchs that can deflate and inflate it at will? Maintaining your hard earned money in the form of dollars, pounds and Euros and allowing Central Banks to devalue them day after day, year after year, is truly an argument devoid of all logic.
When considering the recent International Monetary Fund (IMF) request to Asian Central Banks to flood their markets with liquidity, the heads of Asian Central Banks would be well served to become a student of the Great Depression before making any decision to do so. After World War I, Great Britain began to lose excessive amounts of its gold reserves due to the Bank of England’s refusal to revalue the British pound - gold conversion rate despite greatly expanding British pound monetary supplies during the war. Explained simply, in order to finance the war, the Bank of England had printed massive supplies of British Pounds without an equivalent increase in their gold reserves. Consequently, when the war ended, Britain had the same amount of gold backing a greatly increased supply of British pounds.
Simple math dictated that Britain had to devalue their pound or commit fraud by maintaining the same British pound-gold conversion ratio that existed pre-WW I. The Bank of England chose fraud over honesty, and citizens in turn, called the Bank of England’s bluff and began to convert their pounds into gold. When this happened, the Bank of England called on their sister Central Bank, the US Federal Reserve for assistance. Rather than raising interest rates to contract their own monetary supply and strengthen the British Pound in this manner to restore the pre-WWI British pound-gold conversion ratio, the Bank of England call upon the US Federal Reserve to flood the United States with dollars, much as the IMF is now calling upon Asian countries to do. According to Alan Greenspan, “The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The Fed succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process.”
Today, if the Asian Central Banks comply with the IMF's request, since we are not on a gold standard and there are no runs on a country’s gold reserves to prevent, the IMF’s request is meant to stop the rapid devaluation of the Euro, the British Pound and primarily the US dollar. If the Asian Central Banks foolishly comply with the IMF’s request, they should be forewarned that the end result of their actions will be to destroy their own economies as well.
In 1998, Mr. Greenspan stated, “You don’t have a free market. Central banks determine the money supply, not the market…We are not on a gold standard because leaders of the 20th and 21st centuries don’t want a market that functions in that manner.” The IMF’s request is driven by the desire of the world’s financial oligarchs to keep a fraudulent monetary system alive so that they can retain their power. Were the world to return to a gold standard or a combined gold/silver standard today, increases in global supplies of major currencies would be dictated by real sustainable economic growth of global economies and claims on currencies would be backed by real assets, not the untrustworthy empty promises of governments today. If we educate millions of people regarding gold’s central role to freedom, Central Banks cannot continue to keep financing bailout plans that ultimately steal significant wealth from their citizens. In fact, because there is no gold to lose under our current unsound monetary system, this is precisely the reason why large US banks had no problem continuing to feed growing bubbles of fraudulent assets such as subprime mortgages, asset backed commercial paper, etc. In the end, they knew that they would be bailed out with taxpayer money, and there was no "house gold" to lose. Thus, billions of profits could be made by risking not their own assets, as would be the case under a gold standard, but by risking only the assets of the people.
French philosopher Voltaire once said that as long as people believe in absurdities, they will continue to commit atrocities. Belief that freedom and an unsound fiat monetary system can coexist is one such absurdity. As result of this absurd belief, atrocities, such as the ongoing global hunger crisis from rising food prices that are a direct result of devaluing currencies, can develop.
Under our current fiat monetary system, the financial oligarchs that control the world’s central banks will continue to feed speculative bubbles because there is no way for the people to call their bluff other than exchanging one form of fraudulent money for another form of fraudulent money. The IMF Special Drawing Rights (SDRs) of a basket of fiat currencies is another absurd proposed "solution." What makes a basket of four or five fiat currencies backed by nothing fundamentally better than one fiat currency backed by nothing? In reality, when commentators say that the US dollar is backed by the "full faith and credit of the US government", do you know who is the "government"? Look in the mirror and you will know. In reality, when the Feds say "government", they mean you, for if they need to print more money so the government doesn't go bankrupt, the government will increase your taxes to raise more money for government transfer payments and to pay the interest on the money the Feds print. People that tried to protect themselves from dollar devaluation through the use of currency hedges discovered the futility of doing so at the end of last year and the beginning of this year when Euros, British Pounds, and Australian all plummeted by 25% to 30% in a matter of weeks. If the World Series of Poker operated under the same rules as our current monetary system, the richest man or woman to enter the tournament would win every single tournament. No matter his hand, if there was no way to call his bluff, he could raise the pot every round to such rich levels that he could force all other players to fold even under the occasions when he held the weakest hand. Even a poker game is more honest than our monetary system for it allows other players to expose bluffs and walk away victorious.
Under our current monetary system, there is no means to call the bluff of Central Bankers by using other forms of fiat money. The only way to call the Central Bank’s bluff is to buy gold and silver. Understanding this, it is easy to deduce why Central Banks, despite holding loads of gold in their own private reserves, continually attack gold, discredit its role in our monetary system, and seek to drive its price down. If masses of people were to discover and understand the true value of gold in a sound monetary system, then calling the bluff of our current fiat monetary system and causing it to collapse would be possible.
By: J.S. Kim
Read Entire Article