Friday, May 31, 2013

Must-Read Essay On Gold

This country has become so corrupt, it makes Mexico look like the Boy Scouts.  The U.S. has become the most corrupt country in the world.  - "Don" in Denver - May 31, 2013
I wanted to post this essay by Alasdair Macleod.  After over 12 years of researching, trading and investing in the precious metals sector, there are only a few writers to whom I pay credence.  Macleod is one of them.   He references the Shanhai Cooperation Organization (SCO).  Most of you probably have not heard of it.  I first read about it in Bill Buckler's "Privateer" about 5 years ago.  Led by Russia and China, it's comprised largely of eastern hemisphere countries.  I view it as the eastern "blocs" counterpart to NATO and IMF rolled into one organization.  The countries all have one thing in common:  they are aggressively accumulating physical gold and they are systematically working towards eliminating the use of the U.S. dollar in trade.   This is a must-read essay by Macleod:

The Geopolitics of Gold  LINK

Western central banks have got themselves horribly wrong-footed as a result of not adjusting their anti-gold policies to allow for the realities of Asian gold demand. Though their dealings are shrouded in secrecy, there is compelling evidence that much – if not most – of Western central bank gold has been quietly sold over the last three decades.

More recently all members of the Shanghai Cooperation Organisation, a common security and trading bloc led by Russia and China and incorporating the bulk of Asia’s land mass, have been accumulating gold. Between current SCO and future members (India, Iran, Afghanistan, Mongolia, Belarus and Sri Lanka), with their citizens numbering over 3 billion people, they have together cornered the global market for physical supply, without even taking account of demand from the rest of South East Asia’s gold-hungry population.

The result is that gold markets are now failing to clear. The outcome is a choice: the West will either have to stop intervening and allow gold to find a level where physical and derivative markets interact properly with each other, or capital markets in the West will face a growing crisis likely to spill over into other markets. While these outcomes were always going to be a choice to be made at some time in the future, the disconnection between physical gold and derivatives has become so great that it is now an immediate concern.

At the government level it is a geopolitical clash of the titans. Russia and China are almost certainly aware of the lack of gold in Western central bank vaults: they are fully capable of thorough due-diligence in this respect. They have so far been careful not to disrupt capital markets because it has not been in their interests to do so; however, the current hiatus in gold markets is almost certain to modify their view.

Fundamental to all this is their attitude to Western currencies: the yen is now collapsing, the euro area is in deep trouble and the US economy is at very best stagnating. Until now, payment for Russian energy and Chinese goods in foreign currencies has been welcomed, because it has allowed the Russian and Chinese elites and middle classes to accumulate wealth. This balance of interests can only be maintained for so long as Russian and Chinese governments and their citizens can hedge foreign currency risks through an offsetting accumulation of foreign-owned gold.

This is no longer the case, because to all intents and purposes western capital markets are cleaned out of physical supplies, and the ability of the Western central banks to supress gold prices appears to be ending. And with the West’s financial system no longer able to deliver their most prized commodity, hitherto passive attitudes in Asia to Western currencies are likely to be reassessed.

The gold question has become central to east-west trade. The sensible approach for Western central banks is to defuse the problems arising by taking positive steps to ensure that gold markets operate properly. This is conceptually difficult, because the most likely result, a higher gold price, would risk undermining confidence in the major currencies and most probably damage the bullion banks in London.

Despite these difficulties, realities have to be faced.


  1. Dave, I have read somewhere that a possibility exists that gold may experience two prices. One for the West and one for the East. A controlled lower price for the West compared to the East. Can you elucidate?

  2. Already is. They're paying $30 over spot wholesale for bars right now. I spoke with someone today looking for silver eagles locally. She isn't buying enough to buy a mint box from Tulving. A couple rolls. She said she can't find them any cheaper than $6 over spot.

  3. 100 Largest Hedge Funds Manage 61% Of Industry Capital

    The mean AUM of the top 100 hedge funds is a little under $13.9 billion. Seventeen of the 100 largest hedge funds have AUM of more than $20 billion. About 75% of the of the top 100 hedge funds are based in the United States. A study conducted by Preqin reveals that the top 100 hedge funds manage about 61 percent of the hedge fund industry’s total capital. Preqin says in its May edition of Hedge Fund Spotlight that hedge funds currently have about $2.3 trillion of assets under management, of that $1.4 trillion is managed by the top 100 hedge funds.

    Isn't this part of the problem.

    1. The Greatest Fundamental Reason to own Precious Metals

      If you look at the column next to the U.S., you will notice that nearly 75% of its pension fund asset allocations are in equities, bonds and bills. Furthermore, almost half were invested in equities alone. With the majority of the United States pension funds invested into these assets, it’s no wonder why the Fed is buying up Treasuries while member banks are propping up the broader stock markets. It’s one big happy family.

      The remaining portion of the U.S. Pension funds are invested into the “other category”, which includes real estate, loans, mutual funds and private investments. Normally, when they list these “other” categories they do so in rank of highest to lowest in percentile. With real estate being the highest percentage of this category, we can see another motivation for the Fed and US Govt to keep real estate prices from falling — hence, the purchase of $40 billion a month of Mortgaged Back Securities included in the QE 3 announcement of Sept. 2012.

      Of course the housing market is good for the economy but as we can plainly see, all of these so-called assets are all interwoven into one giant propped up bubble. This also includes the global insurance funds.

  4. Will Silver be worth anything? I can see Gold going to $7000+ an ounce but silver is mostly used in consumer products. This tailspin will crush the customer-driven economy, making silver worthless except for making bombs.

    1. And I-Pads...don't forget I-Pads. Apple will save us stackers!


    Firms are using a difference in the yuan exchange rates in Hong Kong and Shenzhen to make money off fake trades, especially involving gold.

    (Beijing) – Last year, the owner of an export processing company who we will call Lin Minyao learned of an easy way to make money in Shenzhen, the port city next to Hong Kong.

    Like his fellow traders, Lin said he could set up two shell companies, one in Hong Kong and the other in special areas set up to encourage trade in Shenzhen, to fake trades and profit from the two city's differing yuan exchange rates.

    It was quite a tempting opportunity, he said. "The return rate could reach up to 20 percent, much higher than the 3 to 5 percent from real trades."

    This exchange arbitrage has existed for a long time, but never has it been so profitable, Lin said. In the past, the returns were at most 13 percent.

    There is, of course, a risk that the activity will run afoul of customs and foreign exchange regulators. Companies avoid being detected by frequently changing their arbitrage vehicles, Lin said. Usually they would deregister old shell companies and create new ones every two years.

    The Shenzhen government has long been suspicious of traders faking data. Last year, it sponsored a report that found that some companies repeatedly imported and exported the same commodity. Some did not even bother to cover their tracks: every detail of their imports and exports was exactly the same.

    Also catching the authorities' attention was the gold processing trade. In less than two years, the amount of Chinese exports of roughly processed gold grew from a negligible base to more than US$ 1.2 billion for the first four months in 2011, says a government-backed research report.

    The surge was unlikely driven by consumption because the report says much more work needs to be done before roughly processed gold can be used to make jewelry. The value of finer processing that could meet the consumption requirement, on the other hand, totaled only US$ 450 million for the first four months of 2011.

    One company was found to have imported and exported more than 300 times the same amount of gold through the rough processing channel in three months. Most other companies conducted on average at least one purchase and one sale every day, the report says.

    Despite the trouble, many small trading business owners like Lin were mulling the risk because recently exports had "really slumped," he said.

    That pessimism stands in sharp contrast to official data, which paints a picture of buzzing cross-border trade. In April, national imports and exports reportedly totaled almost US$ 356 billion, up 15.7 percent from the same period of last year.

    Several traders, however, said the data is inaccurate. One said any such growth was fictional because "half of the freight containers have been empty."

    An executive of a foreign-invested logistics firm said he suspected that trade in southern China had been slower in the first quarter than that along the eastern coast. That was when Shanghai, the biggest financial and trading hub in eastern China, posted a 1.1 percent year-on-year decline in imports and exports for the first four months this year.

  6. Dave, I think the western governments will keep intervening in the gold market until everything blows up. After the successful price intervention in the past 2 year, they will definitely try more. We are approaching summer, the traditional slow period and the demand for physical gold is receding for now. Just look the spread between Au9999 and AuT+D on Shanghai Gold Exchange and the delivery. This is an optimal window for more hammering down. The current price movements give me a feeling that they will try to crush $1300 and $20 to see if the eastern countries meet it with greater demand for physical. Albert Einstein once said "Insanity: doing the same thing over and over again and expecting different results." Since I think western governments are insane, I bet that they will try more price manipulation.

  7. Good work, Dave. You also have some loyal readers from China (including me). Since Blogspot is blocked in China, we have to buy VPN services to climb the Great Firewall. But your work is worth the price.
    However, I really doubt that our government in China is so clever to accumulate gold. Just look at the track record of China Investment Corporation, which is owned by the government.
    They invested in Blackstone, Morgan Stanley and suffered huge losses. Now there are also reports that CIC is planning to invest in the Commercial Real Estate market in London, which is a bubble in my opinion. I think it's the smart money in China accumulating gold not the government.
    Like in the US, there are also a lot of gold bashers in the main street media in China. You can always find negative reports on gold on popular business magazines, like Caixin and Caijing. Now the MSM in China are full of Schadenfreude on the Chinese Aunties who bought the dip in April. It seems that MSM, whichever country they are in, are always alike.:)

    1. Thanks for your feedback China! Appreciate it.

      I would bet good money the PBOC is accumulating physical pretty aggressively. Don't forget, China produces 400 tonnes per year that is not exported.

      I know CIC is accumulating gold because I did some data gathering for Bill Murphy for a conference call GATA had with CIC about 4 years ago. CIC wanted to suck GATA's brain trust on the best way to accumulate a lot of physical without being obvious about it. They also wanted to hear about manipulation.

      CIC ended up having two conference calls with GATA over a 2 yr period.

    2. One more Chinese reader here. I know several businessmen have kilo gold bars at home. But the general public seem to pay much more attention to the real estate. I have a university classmate working for the State Administration of Foreign Exchange. However, he is too small a fish to know whether the government is accumulating gold...

  8. Silver will not be pounded down to "0" and classified as only an industrial metal.
    Silver like gold is real money and will be respected as such.
    In fact as time goes on silver will be held in higher esteem as both a true form of money as well as a much needed ingredient to sustain civilization.

  9. Dave:

    Alistair is dead wrong. Realities don't have to be faced and they aren't and won't. There is no political will to do so, they would be slaughtered.

    Currency debasement will continue until all of the bridges are burned and all of the wealth is stolen. The PTB will claim they never saw it coming and NO ONE could have foreseen this tragedy.

    The sheeple, bored over the latest American Idol mind fuck, will turn to their political leaders and beg for a solution. There will be unrest in major cities. Obama and Shotgun Joe will pine for everyone to pull together and give all that they have to help pull the country together.
    "We must stand as one or fall!" They will demand all Western banks go "Cyprus" to collect the money they need - AS MUCH AS THEY NEED - raping the few businesses and people who actively saved their money - to restart the failed banks and economies. Businesses will be crushed and jobs will disappear. They will raise taxes to 90% and cut Medicare and Medicaid, destroying more jobs and businesses. They will create a governmental saving plan that will replace Social Security and will demand that all IRA's and 401k's but put into the plan, which they - The Government - will manage Using that money like they do with SS today and dump it in the general fund. Then only pay out retirement after 70 years, a smaller amount than you put into the account. ...Balanced Budget! They will proclaim, we saved you! Asia will laugh at the West, demand physical gold for transactions and proclaim the West a third world outpost at best avoided.

    American Idol will be cancelled. Americans will never look up. Who's on Dancing With The Stars tonight?

  10. Taibbi: Allegedly SEC Policy Not To Pursue Investment Management Fraud Allegations LIke Madoff

    It sometimes looks like open season on the small investor and the public at large with some very selective enforcement of the laws.

    "All animals are equal, but some are more equal than others."

    Why Didn't the SEC Catch Madoff? It Might Have Been Policy Not To
    By Matt Taibbi
    May 31, 5:20 PM ET

    More and more embarrassing stories of keep leaking out the SEC, which is beginning to look somehow worse than corrupt – it's hard to find the right language exactly, but "aggressively clueless" comes pretty close to summing up the atmosphere that seems to be ruling the country's top financial gendarmes.

    The most recent contribution to the broadening canvas of dysfunction and incompetence surrounding the SEC is a whistleblower complaint filed by 56-year-old Kathleen Furey, a senior lawyer who worked in the New York Regional Office (NYRO), the agency outpost with direct jurisdiction over Wall Street.

    Furey's complaint is full of startling revelations about the SEC, but the most amazing of them is that Furey and the other 20-odd lawyers who worked in her unit at the NYRO were actually barred by a superior from bringing cases under two of the four main securities laws governing Wall Street, the Investment Advisors Act of 1940 and the Investment Company Act of 1940.

  11. Finance bigger today than in 2007

    This multi-decade chart of financial profits as a percentage of GDP makes clear the big winner of the last thirty plus years has been Wall Street. This same chart also shows 1998 (post Long Term Capital Management blow up) – 2007 (pre Financial Crisis of 2008) was particularly lucrative for Finance. And the final takeaway is the Financial Industry today is even bigger than it was in 2007. So you gotta ask yourself is this trend going to continue or will we revert to the mean? If we revert to the mean, the world will look radically different than it does today.

  12. The $2.7 Trillion Medical Bill
    Colonoscopies Explain Why U.S. Leads the World in Health Expenditures

    The high price paid for colonoscopies mostly results not from top-notch patient care, according to interviews with health care experts and economists, but from business plans seeking to maximize revenue; haggling between hospitals and insurers that have no relation to the actual costs of performing the procedure; and lobbying, marketing and turf battles among specialists that increase patient fees.

    While several cheaper and less invasive tests to screen for colon cancer are recommended as equally effective by the federal government’s expert panel on preventive care — and are commonly used in other countries — colonoscopy has become the go-to procedure in the United States. “We’ve defaulted to by far the most expensive option, without much if any data to support it,” said Dr. H. Gilbert Welch, a professor of medicine at the Dartmouth Institute for Health Policy and Clinical Practice.

    In coming months, The New York Times will look at common procedures, drugs and medical encounters to examine how the economic incentives underlying the fragmented health care market in the United States have driven up costs, putting deep economic strains on consumers and the country.

    Hospitals, drug companies, device makers, physicians and other providers can benefit by charging inflated prices, favoring the most costly treatment options and curbing competition that could give patients more, and cheaper, choices. And almost every interaction can be an opportunity to send multiple, often opaque bills with long lists of charges: $100 for the ice pack applied for 10 minutes after a physical therapy session, or $30,000 for the artificial joint implanted in surgery.

    It is a lucrative migration. The Long Island center was set up with the help of a company based in Pennsylvania called Physicians Endoscopy. On its Web site, the business tells prospective physician partners that they can look forward to “distributions averaging over $1.4 million a year to all owners,” “typically 100 percent return on capital investment within 18 months” and “a return on investment of 500 percent to 2,000 percent over the initial seven years.”

    I think we're all getting it up the ass in a big way........

  13. Michael JacksonSunday, 02 June, 2013

    May 31,2013
    What Wealth Effect?

    Despite surging prices for homes and equities, consumer spending is contracting, registering its biggest monthly decline since September 2009. Quite simply, the wealth effect is rendered moot by languishing incomes.

    No wonder year-to-year U.S. import growth has also plunged into negative territory. In recent decades, this has happened only during U.S. recessions. Notably, unlike data for GDP and jobs, imports data are not revised substantially, long after the fact.

    Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation is simple: recession kills inflation.

    As a result, inflation, defined as year-to-year growth in the Personal Consumption Expenditure (PCE) deflator, has now dropped to 0.7%, its lowest reading since October 2009, and far below the Fed's official 2.0% target. This inflation measure has never been this low except during or in the immediate aftermath of recession.

    The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009.

  14. Don't be fooled by the false economic recovery. We all want to believe a recovery is here, but indicators are that it's not. We're getting swindled again by banks and politicians while Americans are still living beyond their means by using all forms of debt.

    After five years of unemployment, government deficits and financial struggle, every American wants to call it a recovery and call it a day. That's why some optimistic economic data this week seem to have messianic importance, in the ever-optimistic belief that higher consumer confidence and rising home prices will deliver us from economic evil.

    But if evil has one power, it is the power of illusion, to mask reality. And, in this case, that is also the power of the positive economic data.

    Take the consumer confidence numbers, which are measured every month by the Conference Board and act as one of the more foolish hinges on which to hang our hopes. Consumer confidence in May jumped to 76.2, on a scale of 100. In the popular interpretation, that indicates that consumers believe the economy is improving.

    It's also an object lesson in the silliness of believing in the validity of consumer confidence. As history shows, countries and people have long been confident when they had no reason to be.

    For instance, the consumer confidence numbers themselves are not as confident as they seem. As Michael Santoli at Yahoo Finance points out, the average consumer confidence number during a recession is about 79, and even with our recent boost, we're still lagging below that low bar."

  15. Dubai gold sales surge, helped along by India

    Indian expats are driving Dubai's gold trade, with expatriates as well as residents booking several kilos of gold following the price plunge in April

    It is not just India that is witnessing a gold rush. Gold bullion trade is hitting astronomical levels in another gold center in the East, Dubai, which has seen demand for the precious metal surge since the price collapse in April.

    Dubai is referred to as the city of gold. With the recent gold price dip and the massive rush in demand, it appears to be living up to the name.

    Even as the Dubai Gold and Commodities Exchange notched up a significant growth milestone in April, with cumulative trading volumes since inception crossing $1 trillion in value, there is just no stopping the mad rush for the yellow metal. Gold demand in Dubai was reportedly running at 10 times the normal levels in April.

    Demand in May has apparently not sloughed off and is far outstripping supply. Record buying levels in Dubai are emptying the nation's gold souks, with retailers paying record premiums to restock.

    Local bank Emirates NBD put out a report this month, in which it advised investors that participants of the physical industry in Dubai have bought an additional 50 tonnes of gold since the price crash in April.

    Expat Indians are reportedly rushing to buy 22 carat gold from Dubai’s numerous jewellery stores in addition to the city's iconic gold souks, where there are more than 250 gold shops in one area. In the latest quarter, World Gold Council data showed the UAE saw gold demand rise by 12% as compared with the same period of 2012, with growth in the UAE largely representing purchases of 22 carat gold among expat Indian consumers.

    The sharp drop in gold prices is driving Indian consumers to Dubai in droves, with a majority of shoppers queuing up in front of jewellery stores in the Meena Bazaar and the gold souk area in Dubai. A sizeable segment of the shoppers are from Kerala in South India.

  16. Mortgage Investors Get Blindsided
    Bonds Backed by Subprime Loans Had $1 Billion of Previously Undisclosed Losses. Some mortgage investors got an unexpected refresher course on the risks of subprime debt when they received notice of $1 billion of previously undisclosed losses.

    The unhappy surprise came with May's monthly statements on dozens of bonds backed by 75,743 home loans made before the financial crisis to borrowers with less-than-pristine credit. Many of the losses on the $15.2 billion of loans outstanding likely weren't reported to bondholders for a year or longer.

    Behind the sudden losses is a standoff between Wells Fargo WFC -0.86% & Co., the nation's largest mortgage lender, and Ocwen Financial Corp., OCN -1.47% the largest servicer of subprime loans, over the treatment of loans subject to a type of modification in which the borrower's repayment schedule has been extended to reduce the monthly payment.

    Both companies play roles in the complicated process of converting monthly mortgage checks into scheduled payments to investors. But so far in this case, neither is accepting responsibility for the errors.

    The losses themselves likely aren't backbreaking for investors in the $1 trillion market for nongovernment mortgage bonds. Like other riskier assets such as high-yield corporate debt, subprime mortgages have rallied since early 2012 as the economic recovery has gained steam and U.S. home prices have begun rising after a sustained decline.

    Still, the development stunned analysts and investors, renewing concerns that were common during the subprime meltdown and subsequent financial crisis about the accuracy of financial reporting and the risks of certain assets associated with the housing and mortgage markets.

    "It's highly troubling," said Michael Canter, head of securitized assets at AllianceBernstein about the surprise losses.

    "Our concern is that it is not just in these particular deals," he added.

  17. The Full List Of 2013's Bilderberg Attendees

  18. Dave, do you believe the data provided by Comex? Today Comex suddenly provided the following disclaimer for the warehouse data. "The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only."

    1. I don't believe the warehouse stock numbers at all. Not even close. I think the COT futures position numbers are fraudulent in that I believe JPM uses some LLC's it has set up and runs trades through and reports them to the CME as "managed money" and "other reportables."

      I don't believe ANYTHING published by Wall Street or the Government. Anyone who puts faith in those sources of data is a complete idiot

    2. Hey, are you sure you just noticed that was added yesterday? That's a great find.

    3. Never mind, I had a gold report spreadsheet from Friday and the disclaimer was not on there. Have to wonder why they felt compelled to add it after all these years. I know why...I bet you do too.

  19. A differnt kind of bubble but still a bubble

    Hope the whole intertainment industry bombs out. They help fuel the corruption in washington DC.

  20. Major Insider: Time to Buy Gold; The Chinese Want to Make the Yuan Gold Backed

    I have mentioned Philippa Malmgren before

    Philippa Malmgren is an insider's insider. She was Special Assistant to the President for Economic Policy on the National Economic Council. She was also a member of the President's Working Group on Financial Markets, aka, the Plunge Protection Team. Her client list includes every elite corporate firm in the world (Take a minute to look at the list, its mind boggling, the list is here.). You don't get much more insider than this.

    She is out with a new comment on gold. In it she seems to hint that there might have been a conspiracy to push gold down (Remember this is coming from a major insider, who travels in the circles she is talking about):