By popular demand, I decided to turn this very well-written comment by "Icarus" into it's own, stand-alone guest post.
In the first half of his essay, Icarus lists off eleven, separate items that should have been precious metal positive over the past two years. (I'd encourage all readers to add into the comments any events that he might have missed.) In the second half, Icarus makes some reasonable conclusions and connects the current price decline to the ongoing shenanigans with the GLD, the Comex, GOFO and other ongoing events that TPTB are attempting to portray as one-offs.
I'm confident you'll enjoy reading and discussing this excellent commentary.
How Could We Be So Wrong
Let's take a trip down memory lane. Assume it's August of 2011. Gold has hit $1900 an ounce. Now assume we had a time capsule that could catapult us two years into the future. Let's jump in our time machine and jump from the present (August 2011) to July 2013 shall we? Once we get there we will learn a few things:
- The bank depositors of Cyprus have been 'bailed in'. This means that their depositors have had their deposits stolen taken, to pay off other banks in the banking system. This template is then benchmarked by all the other major Reserve banks in the world. Message? Your money is no longer safe in the banking system.
- The United States, owner of the world's reserve currency, has been downgraded by Standard and Poors to AA+ from AAA. For the first time in history the world's reserve currency is not one of the safest places to put your money. It's debt to GDP ratio is soaring and in spite of a total flooding of 17 trillion dollars into the economy there is no substantial recovery. No data point in existence shows a recovery yet. They all just show us bumping along the bottom with economic stagnation.
- QE 2 is announced. Followed by QE to infinity. These two programs are euphemisms for outright money printing to pay our bills. The amount of money 'printed' by the Federal Reserve increases the money supply by a factor of 4 over a few short years. This is outright money debasement and will eventually result in massive amounts of inflation. We are just throwing trillions of trees with ink on them at the economy. This has stemmed the decline for a short time, but it has not turned the longest recovery in history around. We should be booming with this flood of money, in reality we are just treading water at the bottom of the toilet bowl.
- The Swiss announce that they will print to oblivion to keep the Swiss Franc from rising too high against the Euro. The world's safe haven in the 20th century (the place where the world went to protect the value of their savings thru a great depression and two world wars), the bastion of stability, has now become for the first time in centuries, just another currency in the worldwide currency war.
- The Federal Reserve puts the United States on a zero interest rate policy (ZIRP). In essence this steals 8 Trillion dollars of potential interest payments (assuming a normalized rate of 5.8%) from savers and gives it to the banks who save interest that they should have paid to savers. Savers, and retirees, and the economy in general, lose 8 trillion dollars, over 2.5 trillion a year. Things have value today because they can generate income in the future. What the FED is saying with ZIRP, is that dollars have little value in the future.
- Venezuela becomes the first country to repatriate its gold from the vaults under the Federal Reserve Bank in New York (most countries store part of their gold hoard in NY). The Germans become the second country to ask for their gold back. They are told that you can only have one third of their gold, and they must wait 7 years to get it. Why? Could the German gold not be there? Could the Federal Reserve have absconded with this sovereign gold and they need 7 years to replace it? Is there now a gold shortage?
- The Euro is crumbling. Portugal, Spain, Greece, Cyprus and now Italy, are in full blown DEPRESSION. They are experiencing total economic collapse.
- China has increased its purchases of gold on the open market by 10X. In May and June they purchased 100% of global mine supply. They will be the largest purchaser of gold in the world in 2013, surpassing India.
- Politically, the Middle East is as unstable as it's ever been. Iran continues to develop nuclear weaponry. We had the Arab Spring which deposed dictators throughout the region. The United States has been involved in conflicts in Libya, Yemen, Pakistan, and Afghanistan, and we are now selling arms to terrorists in Syria, where there is a full scale civil war that pits the Russians on one side and the U.S. on the other. And we now have boots on the ground in Jordan.
- The Congress has done nothing to fix the problems that caused the meltdown of 2009. They passed Dodd-Frank which has more holes than Swiss cheese (of course, it was written by the banks, for the banks). They continue to run up 1 trillion dollar deficits, and the sequester (which was very painful to both sides of the aisle) cuts less than 3% of the budget. And this "savings" is now totally wiped out by the interest rate increases of just the last 4 weeks. The Volcker Rule, keeping the banks from trading in their proprietary accounts against clients has been eviscerated. So in effect we have had no movement on increased fiscal responsibility. We still have done nothing to solve the problems of the 2009 meltdown.
- Fraud in the financial system goes into overdrive. Sentinel brokerage steals customer accounts, no one goes to jail. Politically connected John Corzine steals 1.4 Billion from his clients at MF Global, and no one goes to jail. HSBC bank, money lauders trillions of dollars from Mexican drug cartels, pays a fine worth three days profit, and no one goes to jail. Barclays and now JP Morgan is fined over a billion dollars for manipulating energy markets, and no one goes to jail. Every bank in the country committed hundreds of thousands of felony offenses by lying in court to judges and forging signatures on foreclosures, and no one goes to jail. And the biggest of all; the major banks are caught with their hands in the cookie jar manipulating LIBOR (London Interbank Overnight loan rates) which sets the cost of money EVERYWHERE (in essence they stole money from everyone in the world), and no one goes to jail.
Now let's get back into our time capsule, and return to 2011. We have a decision to make. Knowing the future events of the next two years, how do we position our portfolios in 2011 after learning about these eleven facts to come?
I submit that a prudent man would stay far, far away from the stock and bond markets. The bubbles here are getting worse, and the fraud (which increases when no one is punished) is terribly destabilizing. The degradation of the world economic output is staggering. The money printing is irresponsible. In this environment the only acceptable place to be is in something safe. The strategy should be to get a return OF your assets, not a return ON you assets. We must find a safe haven to protect us until this storm clears up. Until now, in the history of the last 120 years, that would indicate that we invest in the US dollar, the Swiss Franc, and gold. Well as mentioned, with massive money printing by both the Swiss National bank and the U.S. Federal Reserve, we are both debasing our currencies unmercifully, that leaves those two safe havens out. The only historic safe haven left for protection in 2011 is gold and other hard assets. As a matter of fact in some circles we could have been considered totally irresponsible for not putting 50 to 80% of our assets in this metal of kings.
That's what we did in 2011, without knowing these 11 items. Well, so far, we blew it. Gold, even after these 11 absolutely tremendous gold positive developments, has cratered from $1900 to $1200. The markets on the other hand proceeded to march on to all-time highs. What happened?
I think what happened can be summed up in a statement by Paul Volcker, Chairman of the Federal Reserve, back during the last crisis in 1980. When asked if he would have done anything different when he raised interest rates to 18% and destroyed the inflation of the day, he stated, referring to that time:
"Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."
Bernanke has not made the same mistake. He has obviously intervened in the gold market to keep the price down (learning from Volcker), and thus keep the dollar as an attractive alternative to gold (generating demand for dollars, that keeps our interest rates low). The FED, by law, cannot sell our countries gold to flood the world with supply and keep the price from reaching its normal market clearing value. But they can surreptitiously loan our gold out, and have the bullion banks (like JP Morgan) sell the gold into the market to hammer the price. They can also do this with German gold they hold. No one is the wiser until someone asks for their gold back. This leasing shenanigans game is why Ron Paul wanted to audit the FED and got over 250 Congressmen and Senators to cosponsor his Audit the FED bill. You think the gold not being there anymore might be the reason why the Germans have to wait 7 years to get their gold back???
As for the stock markets, Bernanke is ON THE RECORD with his famous 'wealth effect' policy. If we can get the stock and housing markets up, people will spend more money and we will jump start a recovery. Sounds like some kind of trickle down economics offshoot to me, and we know how that turned out...........Obviously they are depressing gold and pumping up the markets at the same time to further their current policy agenda. THERE IS NO MARKET PRICE DISCOVERY LEFT when interventions like this occur. The prices of both, like their balance sheets, are simply made up.
Well I think the game is afoot and is now about to collapse. The gold used to manipulate is now all gone. Sold. There is no more gold to flood the market with. The boyz are now stealing gold from every nook and cranny they can find, to keep this ponzi scheme going. Just look at the following graph from July 2013:
The yellow is the amount of physical gold available on the Commodity Exchange (COMEX). Note that these are two graphs, the data points are not cumulative, the yellow graph and the green graph stand on their own.) Notice the severe drawdown of available metal since January of this year from 11 million ounces to seven million ounces on the COMEX. The green is the drawdown of gold from Gold Exchange Traded Funds (ETF's). Notice the drawdown of gold from 9 million ounces to less than 6 million ounces since January 2013. This depletion of gold is UNPRECEDENTED! Looks like a panic to me.
Note that the main stream media reports that the drawdowns are simply investors selling their ETF gold shares because they don't want to hold gold. Well think about this. Gold and Silver are kissing cousins. They are both considered monetary metals and they both have a very high correlation to each other. What gold ALWAYS does, silver does, albeit more violently, because it is a smaller market. They are opposite sides of the same coin.
Now explain to me, main stream media, why the silver ETF's have had substantial net gains in inventory since January. Silver is not being drained, only gold. If this were Joe average investor selling, he'd sell both at the same time!!! That's not happening! Someone is pulling gold out of these vehicles while silver is going in. And by the way, where is all this physical going? That would be China, to satisfy their insatiable increased demand for the hard stuff.
Ladies and Gentleman we have a run on the bank going on. Physical gold is going from West to East. The Bullion Banks are out of physical gold available to sell into the market to suppress the price, and now they are raiding the ETF's and the COMEX to get physical gold to suppress the price of gold. It's only a matter of time before our strategy of using gold as our insurance against collapse (a la Greece) will be vindicated. They can play these games for a while, but they cannot fool Mother Nature forever. The market and its price discovery mechanism will eventually win. You cannot manipulate markets and ignore the law of supply and demand forever.
Thanks to Eric Sprott, Turd Ferguson and Grant Williams for the basic ideas presented.