Monday, April 23, 2012

The Gold Standard Shuffle

What we are witnessing is a sea change in which market forces are driving a de facto return to the gold standard. All that is missing for this to be a de jure gold standard is some regulatory and legal recognition and one has been proposed. The Basel Committee for Bank Supervision, the maker of global capital requirements is studying making gold a bank capital Tier 1 asset.    -  Professor Lew Spellman, University of Texas from The Spellman Report (link below).
The source of that quote is a must-read essay written by Lew Spellman, who is a professor of finance at the University of Texas of business school.  He has also served as Assistant to the Chairman of the President's Council of Economic Advisors and as an economist at the Federal Reserve.  It is the latter two prestigious roles which make it both surprising that Professor Spellman would have written this essay and, yet at the same, thereby reinforces its validity.  You will not find this piece mentioned in ANY mainstream media news source in this country.

Spellman lays out the case for for the subtle, systemic manner in which gold is slowly creeping back into use by the banking system as an asset being used to back paper currencies and financing transactions. Those of us who study the precious metals markets on a daily basis, in the context of the overall global financial system, have been pointing to this dynamic for a while now.  For instance, Spellman links the announcement in which the Basel Committee is studying making gold a Tier 1 banking asset.  This was announced several months ago and remarked upon widely in the precious metals community.  I doubt anyone's financial adviser called them up to point this out.

The market, along with the massive Central Bank accumulation of gold by China, Russia and several of China's strategic allies - like the other BRIC countries - is starting to force this transformation.  I say "the market" because most of the collateral that has been pledged to secure paper financial transactions has been pledged/rehyopothecated (see MF Global, Lehman, Madoff).  This is especially true in the repo market where sovereign paper/Treasuries was historically the only asset to be used.  Now Central Banks have stretched the range of credibility and extended collateral status to everything except the Brooklyn Bridge (who knows how many times that's been rehypothecated...).  The last man standing is gold and it is being forced by the market back into the system as a paper anchor by necessity.  Eventually gold will remain as the bastion of "flight to safety" because of its ultimate utility for that purpose.

Everyone needs to read this essay and make sure they understand what is happening and why.  Here's the LINK  For me, this essay has "seminal" status because it was written by a former "insider" to elite circles - the elite circles which constantly denigrate and revile gold - and because it will likely expose a wider circle of market observers to a systemic dynamic that is taking place with little or no acknowledgement by 99.5% of all market participants.


  1. Dave,

    I'm hoping and praying that money will come back into the mining sector some time in the next 12 months. I can't believe how they keep diving. My portfolio of miners is down 36%. I sold a portion of my shares that saw profits (like Pretium) last week, so I could have some dry powder for lower shares prices ahead. I fear that recouping that heavy loss will be hard. Is there sufficient reason to hope that getting back to at least break-even in one's mining portfolio is possible in the foreseeable future?

    Thanks for all you do...


    1. I don't know where the bottom is. But look at the HUI from it's peak in March '08 to it's bottom in late October '08. Damn think dropped from 468 to 158. But then look at what it did. If you bought at the top and held until the next top you made 50%. If you doubled down at 200 and rode it to 158 and back up, you did even better. It's a volatile sector and if you hold for the long term you will outperform.

      I held from the top in '08 through the bottom and back up. Gotta stay strong.

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  2. Norcini - If History is Any Guide, This is Going to End Badly

    “I’ve read the The Decline and Fall of the Roman Empire, by Gibbons, and he might as well have been writing about modern day America. Our financial institutions are completely corrupt.”
    Dan Norcini continues:

    The Roman empire began to decline morally to the point where its own philosophers were expressing dismay over the decay. The military also began to decline as more and more of its ranks were constituted by mercenaries. At the same time, military incursions by the barbarians on the fringes of the empire were on the rise.

    The bottom line is the merchants began to understand how the monetary authorities (emperors) were corrupting the money by debasing it. It’s complicated, but let’s just say that as this debasement of the coinage continued, inflation spiraled out of control, the currency collapsed and the empire eventually fell.

    The combination of rising prices and rising taxes gave birth to an exodus out of the empire by many of its citizens. Unable or unwilling to comply with the onerous tax burden, some simply abandoned their estates and homes and moved elsewhere.

    By the time the end had come, in many cases, the citizens were actually relieved to see Rome fall. Citizens began to think the new rulers would be less oppressive than their former masters. Where I am heading with this, Eric, is that I see disturbing parallels between ancient Rome and the United States.,_This_is_Going_to_End_Badly.html

  3. Growth will save us? You bet!

    Mr Hollande is the first but will not be the last to say that the growth plan is not working. The Dutch Parliament yesterday collapsed because they too could not agree to go along with the fiction. We do not have growth. What we have are cuts in public spending while we have increases in public funds being siphoned away to pay for more and yet more bank bail outs.

    Just a quick look at what we can expect in Spain is enough to clear away the fog of lies. I and others have said for well over a year that Spain had been hiding debts in its regions. This turns ou to have been true. A recent report by Carmel Asset Management paints a very ugly picture. When you add in regional debts the total debt load in Spain rises from the official 60% of GDP to 90%. This comes ON TOP of the fact that all of SPain’s austerity cuts of last year did not reduce Spain’s’ debts not by even one single euro. They are worse off now than they were, with higher unemployment and borrowing costs shooting up.

    According to the Carmel study, with which I agree, Spain’s banks are STILL wildly underestimating the losses they are holding and more losses to come on their huge loans to property developers and owners. Further losses on these ‘assets’ will mean yet more bad debts piling up in the banks. Those debts will be taken on by the National government and this will further corrode Spain’s ability to finance the debts it already has. In 2012 alone Spain will have to refinance existing debts of €186 billion. And the rate of interest it will have to pay on all that debt is above what it currently pays. Spain is sinking.

    The money we have given to the big banks to bail them out via all the TARPs, EFSF’s and Bond buying programmes have not been invested in growth. They have gone into betting on failure and default.

    Of course the banks themselves, the biggest and most exposed of which are Goldman and JP Morgan, will say their net exposure to loss in the event of having to pay out is small because it is itself hedged with insurance for their insurance.

    But insurance doesn’t ever make the risks or the losses go away. It simply transfers them. And every time a risk is transferred it simply adds one more party to the chain of people each of whom could be the one who fails to pay. It’s what is known as counter-party risk. So as the chain of insurance grows so does the accumulated counter-party risk.

  4. Cough it up, Corzine

  5. ALERT -- Mark Melin - Sweeping MF Global Under The Rug -- BREAKING

    What does this (MF Global) mean to the average saver and investor. You cannot say with certainty that a 401K or a bank account might be subject to some bankruptcy shenanigans. What is at stake with MF Global is clearly savings and brokerage accounts. The criminality is getting worse and worse both with Lehman (Dick Fuld) and Jon Corzine (MF Global).. We have to defend the integrity of the markets so people are secure in investing in US institutions or the whole financial system will be destroyed. Its time that informed people say no you cannot do brazen criminal activity without investigation or prosecution. Given the chance, a Jury would be reasonably sure of convicting Jon Corzine. We are at a crossroads... What is the benefit of protecting Corzine.

  6. The Implications Of China Paying In Gold

    The implications of China paying for Iranian oil in gold is the most important event in the modern history of gold

    1. It is reasonable to assume that China has been threatened with total or at least selective exclusion from the SWIFT system if it pays in any currency for Iranian oil.

    2. Gold has been decided by China as the means of making payment for massive international purchases free of the SWIFT system.

    3. Other Asian and Middle Eastern nations will now see the gold they hold as money free of Western economic interference.

    4. Gold now is not only money free of liability, but also free from interference regarding settlement by the long arm of Western influence.

    5. The SWIFT system is becoming ever more a weapon of Western international political will.

    6. In case of war anywhere, it is now demonstrated for all to see that only gold will buy the materials required. Paper currencies are under the SWIFT system’s control in settlement.

    7. Far from being a barbaric relic, gold is now clearly the money of state survival in every sense.

    8. It is reasonable and possible for the supply of physical gold to fall far behind the size of the massive short positions now common to algorithm and hedge fund paper shorts. That will make an effective cover at a reasonable price as compared to a certain day’s close impossible the following day on an exogenous event.

    9. It may not be possible to use TA of any nature to determine a price of overvaluation for gold. Should the USA decide to take on China in full out economic war with the physical market totally illiquid, such as through isolation from the SWIFT system, consider the gold price that might result.

  7. I don't think this is news, gold creeping back into the monitary system. The bankers, at least in the US, have continued to hold onto their gold hoard (so they say) since 1971. I think TPTB knew one day to maintain their status after the fiat money train expired they would need to fall back on gold again to restore confidence. With the strike of a pen, the US dollar could once again be backed by gold and the world reserve currency, the USD, would maintain its control. However, gold would need to be revalued much higher.

  8. Hey Dave,
    Wondering if you had made time to read moneyness. A poster brought it up again and you mentioned you would try to read it. Been following “another” and his “thoughts” since a couple years pre Y2K. I even got a couple krugs around here I bot for ~$280.00. His scenario or something similar has got to happen. They are running out of road to kick the can. It’s not a “gold standard” but a “reference” point…Not just for the US dollar but all fiat currencies After the US$ goes Zimbabwe and the sheeple lose all confidence in fiat it will not function again without something to “back” it with that will restore the people’s confidence. Something that has worked for over 5000 years..

    Interested in your thoughts on his thoughts..

    Appreciate your time put into your site and keep up the good work.

    1. "Gold and oil never flow in the same direction." (Another)

      I've been reading Another and FOFOA since 2008/09. Oh how I wish I found Another Thoughts! earlier.

      -Sicilian Gold