Credit and Credibility: by Greg Canavan

Is it laughable, or lamentable? The market, that is. In the past few years, it has become a joke…a tool of manipulation, an unreliable source of information. Despite the outperformance of the US equity markets this year, ordinary investors (presumably people with savings they would like to invest in productive and attractive businesses) are not interested.

Reuters columnist Felix Salmon recently posted a few charts to highlight this trend. This one, originally appearing at ZeroHedge, shows the decline in trading volumes since the credit bubble bust in 2007/08.

Using the Monday after Thanksgiving as the comparison date (the first day of trade after the 2-day Thanksgiving holiday) trade volumes in 2012 are back to 1997 levels. So while you’re being told a recovery is underway, it’s clearly not a recovery in investor confidence or involvement in the stock market.

Read more: Credit and Credibility http://dailyreckoning.com/credit-and-credibility/#ixzz2DkEOKUxw

THE DYNAMICS OF THE GOLD & SILVER MARKETS?….EXPLOSIVE!

Adrian Douglas

This week gold closed above $1000/oz for the fourth consecutive week and made another all time weekly high close. But the top-callers have come out in their droves declaring that gold is in a bubble that is about to burst, and because the recession has been declared as over there is no reason to hold such a safe-haven asset. All that is nonsense and I will explain why. The dynamics unfolding in the gold and silver markets are nothing short of explosive.

The dynamics are different for gold and silver so I will start by discussing gold.

Gold is a unique substance. It is about the only thing on the planet that is bought and stored and never consumed. Almost all the gold ever mined in history still exists above ground. The purpose of gold is to act as a store of wealth. This singularity of gold makes it susceptible to a scam that was first perpetrated by the goldsmiths in the 16th century. The goldsmiths realized that customers would buy gold and leave it for safe keeping in their vault. This meant that they could show the same gold bar to many customers and sell the same gold bar many times over. This was the early form of the concept of fractional reserve banking where banks only retain 10% of the money on deposit gambling that no more than 10% of the money will ever be called upon to be paid out.

This basic scam is at the center of modern gold market manipulation. Paper substitutes for gold are sold instead of real gold through derivatives, futures, pooled accounts, ETF’s, gold certificates etc. I estimate that each actual physical ounce of gold has been effectively sold 20 times over or more. To be able to maintain this Ponzi scheme some real gold is required because some investors or jewelers demand real gold. For the scam to be sustained there must always be plentiful physical gold for those who want it. This physical supply has been met from mine supply and central bank leasing and selling. The market is in effect a giant inverted pyramid with a huge paper gold market being supported above a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If the twenty or so claimants of each oz of real gold demand their gold then there is the potential for a squeeze like has never been seen before in history.

To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley who were sued in 2005 for selling non-existent precious metals to their customers. They even had the audacity to charge storage fees! They settled the class action suit out of court but no criminal charges were ever filed against them. If Morgan Stanley was doing this you can bet that it is the tip of the iceberg. As further evidence just look at the monster OTC derivatives market. Standing at approximately $1,000 trillion it is multiples of the liquidated value of all the assets in the world and all currency in the world. Clearly derivatives must be selling some sort of claims to assets that can not be fulfilled because there are not enough underlying assets.

The price discovery of gold has been almost exclusively achieved through the shuffling of paper gold promises between investors and bullion banks on the COMEX with very little real gold ever changing hands. The situation is changing. Some big entities are now demanding physical gold. These entities are almost certainly countries not individuals, such as China, Russia, India, Venezuela, Iran the Gulf States to name but a few. This demand for real gold, instead of paper substitutes, is putting a strain on the gold market. Paul Walker, CEO of GFMS, recently said the price of gold was going up because of “large lumpy transactions in a market with a degree of illiquidity”. Roughly translated this means that there are large demands for physical metal which the market is struggling to meet. That is a Cartel apologist’s limp wristed reference to the explosive dynamics that I am defining!

The supply that feeds the bottom of the inverted pyramid to support the gold price suppression via a paper market is drying up. Mine supply has been declining for almost a decade and this year central banks became net buyers of gold for the first time in 20 years. The stress in the physical market is starting to show to those who are paying attention. For example, the London PM Fix is coming in at historic highs day after day, the contango in the futures market has contracted dramatically, the US mint is routinely suspending production due to shortages of metal. But most importantly we are seeing astute investors display a growing preference for real bullion. A couple of months ago Greenlight Capital, the large hedge fund, switched $500 million of investment in GLD to physical gold bullion. The supposed gold holding of GLD has not grown to a record high despite a record high gold price. Apparently Germany has requested that its sovereign gold held by the NY Federal Reserve Bank be returned to Germany. Hong Kong has requested the same of the Bank of England that stores its sovereign gold. Robert Fisk, a respected journalist for the UK’s Independent newspaper, reported this week that the Arab oil producing states, Japan, Russia and China have been holding secret talks to replace the dollar as the international reserve currency and as an accounting unit for trade. He reports that the basket of currencies they propose instead of the dollar would include gold! If gold is going to regain its monetary role then you can understand why those in the know want actual physical bullion. There are some very real and significant signs that a run on the bank of the Gold Cartel for physical gold is commencing.

Meanwhile most investors and analysts are focused only on the net short position of the Commercial traders on the COMEX which has reached an historically high level, and has in the past signaled the onset of a major correction. However, such market observers are only watching a side-show of the main event. The main event is all about a growing tightness in supplies of gold in the physical market. I don’t think the Commercial net short position of 800 tonnes is that important; what is important is that the world’s stockpile of 140,000 tonnes may have been sold several times over. In all likelihood half of the supposed 30,000 tonnes of Central Bank stockpiles have been sold at least 20 times over. The gold short position could well be 300,000 tonnes (15,000 times 20) against a total world inventory of only 140,000 tonnes, much of which is not available to the market. Could you think of a more bullish scenario? If you think that such business practices could not be tolerated I can hold up the example of the airlines who regularly and knowingly oversell the seats on their flights expecting that not all passengers will show up. Bullion bankers oversell their inventory of gold knowing that only 10% of the customers will ever ask for it, just as the goldsmiths did.

One can not discuss the gold market in isolation as it is linked to the dollar and Treasury debt. The major impetus behind the suppression of the gold market was to maintain a strong dollar despite massive over-issuance of the currency. This has allowed the US to live beyond its means because the rest of the world accepts the home-made funny money as payment for goods and services! Lawrence Summers, in a study he made when he was a Professor of Economics at Harvard titled ‘Gibson’s Paradox and the Gold Standard” showed that in a free market gold and real interest rates move inversely to each other. However, since 1995 the US has had low gold prices and low interest rates. In the absence of a Gold Standard this could only have been achieved by surreptitiously fixing the gold price through market manipulation. This was the essence of the “strong dollar policy” of Robert Rubin, the mechanism of which was never explained to the public.

The dynamics of the silver market are different. About 90% of physical silver production is used for industrial applications. Only 10% is purchased for investment. Clearly paper substitutes for silver can not be used in industrial processes. The investment market is suppressed by paper silver substitutes as described above with respect to the gold market. It is this market, specifically the COMEX futures exchange, which controls the price of silver. The very low price of silver over the last 30 years has encouraged large holders of silver to dishoard it. After all, who wants to pay costly storage fees for something that is of low and declining value and very bulky to store? This dishoarding has filled the gap between silver production and industrial demand which runs at over 200 million ozs annually. Much of the investment demand has been met with paper substitutes and scams that are variations on the one that was perpetrated by Morgan Stanley described above. Because of the suppression of the price of silver it has been uneconomic to recycle most industrially used silver, with the exception of that used in the photographic process. This has meant that most industrially used silver finds its way into land fills. All the existing above ground silver is now less than 1 billion ozs. Considering that just SLV ETF alone claims to have over 250 million ozs of silver it is reasonable to estimate that investors have been sold something of the order of 5 billion ozs of silver. But how much is supported by real physical silver? If the same oz of silver has been sold 20 times over, as per my estimate in gold, then only 250 million ozs of investment silver bullion exist. This means that 4.75 Billion ozs of silver could potentially be demanded in a market where only 1 billion ozs of stock pile exists and mining supply is already oversubscribed to the tune of 200 million ozs annually. One can probably add to this picture that investors who can not easily find physical gold will come looking to buy physical silver. What is even more bullish is that the industrial users will not sit idly by watching a manic silver grab. They will join in the fray because they can not remain in business unless they have silver inventory. They will try to stockpile at a time of acute shortage.

The dynamics of the gold and silver markets are bullish beyond anyone’s wildest dreams. This is no longer about whether the commercials will knock down the price by selling more contracts short. This is about a lot of market participants who have been content in the past to hold precious metal paper substitutes who now increasingly will want to own real bullion. This has been happening slowly but will gather pace like a rolling snow ball. Because in the last 30 years most investors have trusted the brokers, dealers and bullion banks to actually have the metals that have been sold there has been no “run on the bank”. This is now changing. Many indications point to significant supply stress building.

Why are the entities that hold the largest short positions on the planet custodians of the bullion depositories for the largest ETF’s? That’s like putting a sex offender in charge of the Children’s Day Care Center or Bernie Madoff in charge of your company pension fund! The argument against holding physical bullion yourself has always been the risk it might get stolen while in your possession. However, the risk of holding bullion substitutes might be that it has already been stolen or never existed!

The precious metals market is now akin to a game of musical chairs with perhaps only one chair for every 20 players. It might be prudent to follow in the footsteps of Germany, Hong Kong, China and Greenlight Capital and get your chair BEFORE the music stops.

If the physical markets for precious metals lock up due to shortages then the short squeeze will be of epic proportions; it will be something to tell your grand children about. Needless to say it will be a better story for your grandchildren if you are on the right side of the trade!

Adrian Douglas
October 9, 2009

Crude Reality – A Closer Look at the Almost Perfect Crime

Rob Kirby

Some time ago, GATA Secretary / Treasurer Chris Powell gave a speech titled, There are no markets anymore, just interventions. These sage words have stuck in my head. While Mr. Powell was specifically referencing manipulations in the precious metals markets, I am revisiting the concept as it relates to the crude oil market. The ongoing surreptitious “management’ of strategic commodity prices by the U.S. Government and its agents needs to be exposed for what it really is – UNFAIR TRADE and AN ABUSE OF PRIVILEGE. These practices have resulted in a litany of unsustainable, unfair and damaging outcomes in many markets with results that favor privileged insiders at the expense of the common good. I continue to be amazed at the lack of uptake by the media to these over-arching issues that impact the well being and daily lives of all citizens and media’s feeble attempts to explain the ‘unexplainable’ based on free market principles when markets are not free.

7 months ago I published a research paper which examined the root cause of last year’s crude oil price collapse, Oh Yes They Did!. With the passage of time, and a little bit more poking around, I came to the conclusion that there was a lot more mileage in the original material than first reported.

With a show of hands, how many of you out there really know how the U.S. Strategic Petroleum Reserve [SPR] is filled anyway? Because I did not see many hands, compliments of the Congressional Research Centre [pg. 3 of pdf doc.], I present you all with this little refresher:

Congress authorized the Strategic Petroleum Reserve (SPR) in the Energy Policy and Conservation Act (EPCA, P.L. 94-163) to help prevent a repetition of the economic dislocation caused by the 1973-74 Arab oil embargo. The program is managed by the Department of Energy (DOE). Physically, the SPR comprises five underground storage facilities, hollowed out from naturally occurring salt domes in Texas and Louisiana. The SPR, with a capacity of 727 million barrels, currently holds roughly 692 million barrels.

In mid-November 2001, President Bush ordered fill of the SPR to its current capacity of roughly 700 million barrels, principally through oil acquired as royalty-in-kind (RIK) for production from federal offshore leases. This level will be attained during FY2005. However, the Bush Administration has been periodically criticized for continuing to fill the SPR with RIK crude as crude prices have continued to rise and be volatile……

From this document supplied by the U.S. Congress, we can see that oil in the SPR is, by definition, referred to as royalty-in-kind [RIK] crude.

I’d like to draw everyone’s attention to the fact that the United States Department of Energy admits, in the notes on page 48 of their 2008 financial report, that they “swapped” RIK crude for ‘other’ [to be delivered] crude oil [i].

A swap of this nature requires the REMOVAL of physical crude from the SPR through pipelines.

source: U.S. Dep’t of Energy

Interestingly, the U.S. government chose not to publicly disclose that they were involved in crude oil swaps – because their intention was to stall manically rising prices, creating a temporary “physical glut” in the market place – and to DRIVE CRUDE OIL PRICES DOWN. Their actions were only recorded “buried” in foot notes of the Department of Energy’s Annual Report where, I’m certain, they assumed no one would ever look.

This was done under the cover of [ii] and [iii] making public announcements that they were no longer filling the reserve [net add which had been occurring continually since 1999] and were in fact providing SPR crude to refiners in the aftermath of Hurricane Gustav.

Here’s the intended resulting oil price collapse:

Remember folks, the result of this action produced several effects;

1] A “localized’ glut of crude oil in the Cushing, Oklahoma region – which produced the tell-tale signature evidence of a lack of physical crude storage facilities.

2] The shortage of physical crude storage facilities reverberated back through the supply chain creating the well documented spike in Very Large Crude Carrier [VLCC] super-tanker rates in an otherwise moribund shipping market – as attested by the “then battered” Baltic Dry Index.

3] It was this same criminal interference in the crude oil market which produced the anomalous “flipping” of the historic price premium which the higher grade West Texas Intermediate [WTI] enjoyed over Brent [North Sea] Crude – a price inversion which remains to this day.

Conclusions:

The Foreigners Are Learning

The rigging of markets benefits insiders and strains international relations. The significance of this issue is now becoming clearly evident as we are just beginning to see the empirical manifestations of these unfair dealings:

China warns banks on OTC hedge defaults -report

Sat Aug 29, 2009 9:47am IST

BEIJING, Aug 29 (Reuters) – Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.

China’s SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.

It did not name the banks or the firms in question, but said Keith Noyes, an official with the International Swaps and Derivatives Association, had confirmed he was aware of the letter to the banks. He declined to comment further to Caijing.

It also cited a SASAC official as saying that almost every SOE involved in foreign exchange or trade had some exposure to derivatives such as crude oil, non-ferrous metals, agricultural commodities, iron ore and coal, although only 31 SOEs were licensed to do so.

Nobody at SASAC was immediately available to comment on Saturday.

SASAC took over the job of overseeing SOEs’ derivatives trading from the securities regulator in February after several Chinese firms reported huge losses from derivatives, and quickly tightened the rules, ordering firms to quit risky contracts and report their positions on a quarterly basis.

In January, Air China (601111.SS: Quote, Profile, Research) (0753.HK: Quote, Profile, Research), Shanghai Airlines (600591.SS: Quote, Profile, Research) and China Eastern (600115.SS: Quote, Profile, Research) reported book losses of almost $2 billion on aviation fuel hedging contracts, the official Xinhua news agency said at the time.

China is but one example whose voice, as America’s largest creditor, cannot be ignored. Their recognition of ponzi-paper markets has led to their repudiation of the market rigging game. The unspoken, yet imminent, extension of this logic is ultimately the repudiation of U.S. Dollar hegemony, as all strategic commodities currently settle in U.S. Dollars. A failure on this level would have catastrophic implications with America being unable to conduct international trade. Additionally, unilateral termination of losing derivatives positions could precipitate a seismic paper avalanche that could overwhelm the global banking system.

Additional tell-tale signs of possible, systemic financial dislocations will be covered in the next few days in a special subscriber’s report analyzing Barrick Gold’s apparent capitulation and announced intention to cover all existing gold hedges [in the next 12 months] still on their books.

In closing, I re-present this to you in greater detail now because – when the article was first published 7 months ago – there were some that said, “the oil price collapse may have been caused by a release of crude from the SPR”.

Ladies and gentlemen, the notion that the oil price collapse “may have been caused” by a secretive release of crude from the SPR is as debatable as the notion that the sun “may have risen yesterday”.

For the record, both are indisputable, documented, historic facts.

Invest wisely and understand who and what you’re dealing with and remember, there’s no such thing as the perfect crime.

But Did Anyone Notice Inflation?

The mainstream media has been elated by early signs of economic activity picking up. In particular the Institute of Supply Management (ISM) issued their Purchasing Managers Index (PMI) on September 1:

http://www.reuters.com/article/pressRelease/idUS158400+01-Sep-2009+BW20090901

The index was reported at 52.9. This is the highest in two years and the first reading above 50 since the credit crisis began. A reading above 50 indicates expansion in manufacturing. The media was euphoric and investors have pushed the US stock indices to post recovery highs. What did not receive any attention was the prices paid component of the index. It increased to 65 from a reading of 55 in July. This is 18% increase in a single month! In May 2009 the index was at 43.5 which represents 49% increase in prices paid over 3 months. This is absolutely stunning. This is not a government massaged index; this is based on what purchasing managers are reporting they are paying. Only 8% of managers reported paying lower prices while 38% reported receiving higher prices.

This report was followed on September 3 by the Non-Manufacturing (Services) Index.

http://www.reuters.com/article/pressRelease/idUS173419+03-Sep-2009+BW20090903

It was reported at 48.4 and while this is still indicating contraction the index was 2 points higher than in July and 8 points higher than in March. Again the media were waxing lyrical about recovery. Again what was not mentioned was the prices paid component; it increased to 63.1 from 41.3 which is a simply shocking 52% jump in one month. It increased 34.5% from its May reading. Only 6% of managers reported paying lower prices while 23% reported paying higher prices.

On September 4 the Economic Cycle Research Institute’s (ECRI) U.S. Future

Inflation Gauge (USFIG) was released:

http://www.reuters.com/article/marketsNews/idUSNYS00538420090904

It was 89.6 in August compared to 84.6 in July. This is a 5.9% increase in one month. The August USFIG annualized growth rate, which smoothes out monthly fluctuations, rocketed to positive 6.5% from negative 8.8% in July! In other words the annualized indicator which smoothes out volatility went from a highly deflationary picture to one of rampant inflation in just a single month! The ECRI commented that the gauge was pushed higher by rising commodity prices. This dovetails with the picture we see from the reports of actual prices being paid as reported by the ISM.

The NY Federal Reserve Bank President, William Dudley, said on August 31^st “My view is we have tools to manage our balance sheet so we’re not going to have an inflation outcome, a bad inflation outcome”

http://www.americanbankingnews.com/2009/08/31/ny-federal-reserve-president-says-us-can-avoid-coming-inflation/

“I’m totally committed to taking away the punch bowl at the right time,” he said during the same interview. “It is possible that inflation could decline for a while because of the slack in economy and the banking system will take time to heal itself”, Dudley added.

Judging by the data I have presented it looks like Mr. Dudley only takes away the punch-bowl when his guests are rolling around on the floor incapable of drinking another drop!

Almost everyone has their eyes glued to the money supply data and the BLS CPI and PPI. Of course the government’s proclivity to exclude everything that is rising in price from the PPI and CPI in their special brand of hedonics means that the last place to observe the affects of monetary inflation will be in these indices. John Williams at shadowstats.com reports that his reconstructed M3 is only growing at a rate of 6% annualized. I however question the accuracy of the input data. I don’t think that all the actual monetary injections are being reported, which is probably one reason the FED does not want to be audited. Neil Barofsky, Inspector General of the TARP, recently testified before Congress that the total credit lines of the 50 or so stimulus programs totaled 23.7 Trillion dollars. A Treasury spokesman countered with a statement that only 2T$ had so far been spent. Where does that 2T$ appear in the M3 data? It doesn’t! If government officials have the capacity to access 23.7T$ of credit who will bet me that they will not spend it? Clearly money is being pumped into the system which is bypassing the reporting system.

Furthermore the weakness of the US dollar means that foreign holdings of dollars will return to the domestic market as they are dumped.

A very important factor in the growing inflationary scenario is the monster derivatives market. The derivatives market provided massive leverage to mask inflation created in the Greenspan era. Greenspan massively increased the money supply from 4 T$ in 1995 to 12T$ by 2006. This would normally have created rampant general price inflation. The prices of commodities, which are the raw materials we use for manufacturing and for much of our food chain, were suppressed by the derivatives market creating phantom paper supply of commodities resulting in the apparent supply appearing many times bigger than the physical supply and so suppressed prices. This was the main purpose of the derivatives market and why 5 US Banks held 96% of all OTC derivatives and why Greenspan vehemently defended it not being regulated. The derivatives market grew to a staggering 1,200 Trillion dollars. How can a market that has a notional value of 20 times the size of the global economy not be regulated? How can this market be excluded from a discussion of whether we face inflation or deflation? This monster has now contracted to less than half its peak size and is continuing to shrink. As the phantom paper promises of commodities are removed from the market the previous suppressing effect is also removed and prices will rise. The 15 years of price suppression has prevented any meaningful expansion in the global production capacity of commodities. We will now see many commodities become in short supply and the consequent ramp up in prices.

Many analysts are waiting at the “front door” of the economy for signs of inflation, while inflation is flooding in through the back door.

In my article “The Green Shoots of Hyperinflation”

http://www.marketforceanalysis.com/Published%20Articles_2009_assets/Green%20Shoots%20of%20Hyperinflation.pdf

I showed that the S&P500 has entered a new bull market trend. An updated version of the chart in that article is shown in Figure 1.

Figure 1: S&P 500 Potential Energy Chart (1990-2009)

 

At Market Force Analysis we have developed a proprietary indicator which is called “Potential Energy” (PE) which uses the intraday data to determine whether buyers or sellers are more dominant. In figure 1 the S&P 500 is shown in black and the Potential Energy (PE) in blue. When the PE is rising the primary trend of the market is up and when it is falling the primary trend is down. It can be seen that this indicator is excellent at identifying a change in the primary trend. In the last 19 years only 4 turning points are identified as indicated by the arrows. The latest is a transition from bear to bull in March 2009. What is clear from PE is that the rise and fall cycles of the S&P500 in 2008 where the PE was falling are not the same as the rise we have seen since March 2009. The most recent rise is very similar to what was seen in 2003 when the market turned from Bear to Bull.

This is totally at odds with the fundamentals of the economy but this is another sign of inflation. As the dollar is debased money will flood into anything as a hedge against loss of purchasing power. The stock market will be such a hedge. It will rise in nominal terms but decline in real terms. This phenomenon was seen in Weimar Germany when its stock market made stellar nominal gains as the currency was debased and more recently in Zimbabwe the same phenomenon has been observed. The S&P500 will see pullbacks but it will not crash to new lows, below the March 2009 level of 676, as many expect.

I do not recommend buying general equities because investors will only gain in nominal terms while losing in real terms. The time tested hedge against inflation is precious metals and quality companies who explore for them and dig them out of the ground.

Real data is being reported, but ignored by the media and mainstream analysts, that reveal shocking increases in prices. There are still many who have their head stuck in the sands of deflation. Inflation and hyperinflation are baked in the cake by the promiscuous and unprecedented actions of the Federal Reserve and the unwinding of the massive derivatives commodity price suppression scheme.

Adrian Douglas
September 6, 2009

Your Gold is Safe – It’s Somebody Else’s That’s Missing

Your gold is safe; it’s somebody else’s that’s missing 

Submitted by cpowell on 07:03PM ET Friday, June 12, 2009. Section: Daily Dispatches
Mint Moves to Halt Possible ‘Run’ on Gold

By Ian MacLeod
The Ottawa (Ontario) Citizen
Friday, June 12, 2009

http://www.ottawacitizen.com/Business/Mint+moves+halt+possible+gold/1690805/story.html

OTTAWA — To halt a possible “run” on the gold it safeguards for private businesses, the Royal Canadian Mint is reassuring customers their deposits are fully accounted for and in secure vaults as the investigation continues into as much as $20 million in lost precious metals.

Since the scandal broke last week, some precious metals market advisers have been trying to instigate “some kind of a run” on the custodial accounts of the Ottawa mint and other mints around the world, said Jon Nadler, senior metals market analyst with with Montreal-based Kitco, one of the world’s leading precious metals bullion dealers.

“I cannot name names, but I’ve seen a number of forums and blogs and newsletter alerts from people who claim to be market analysts and saying, ‘You should take delivery of everything that’s in storage, no matter who you keep it with because of things like this,’” Nadler said in an interview Friday, calling the tactic “pathetic.”

The federal government this week ordered the mint to call for a Royal Canadian Mounted Police criminal probe, after a four-month external audit was unable to reconcile the unaccounted-for gold and other precious metals at the mint’s Sussex Drive headquarters. Mint insiders tell the Citizen the missing metals could be worth as much as $20 million. The RCMP continues to review the request for an investigation. The audit findings are expected to be made public next week.

In the cut-throat world of international bullion refining and minting, any loss of confidence in the mint’s reputation as a world-class operation could threaten future business.

For Kitco, which stores some of its gold and precious metals at the mint as well as some of its clients’ metals, the unaccounted-for gold mystery is “clearly not an issue,” said Nadler.

Letters, he said, were sent to the company and other custodial customers June 4, a day after the Citizen broke the story, in which mint chief operating officer Beverley Lepine assured them, “All individual customer holdings and metal deposits entrusted with the Royal Canadian Mint are secure and have been fully accounted for.”

Whatever the outcome of the audit and anticipated police probe, people knowledgeable with mint operations say it’s unlikely the gold was stolen, and certainly not all at once.

Referring to the blockbuster 2003 gold-heist movie “The Italian Job,” Nadler said, “People tunnelling under vaults and making off with mass quantities of gold and walking out the front door — this just doesn’t happen.”

In a Friday blog posting on the website of the International Business Times, Nadler wrote: “Some over-zealous alarmists need to get a grip and learn how vaults, insurance policies, and such operate in the real world. Until then, we can only call them saboteurs. Anyone who listens to them is sadly misinformed.”

In the later interview, he said, “I can appreciate this atmosphere of post-Madoff mania, but at the same time, when you have a government entity that you’re dealing with and they have a hundred years of track record under their belt, your worry level is certainly misplaced. We’re quite comfortable sleeping at night and so are our clients.”

The mint Friday declined to comment on its precious metals storage service and the June 4 letters.

Meanwhile, mint chairman James Love says one possible but unconfirmed explanation for the mystery is a programming problem with a new computer system used to track the mint’s precious metal reserves.

In a media interview this week that attracted scant coverage, Love said, “It’s still possible that it is some sort of a programming error in that system. Obviously frauds and security breaches happen, so we haven’t ruled anything out. But we simply don’t believe that that’s the sort of thing that happened.”

Further, the issue may be traced to a decision not to re-refine an estimated 90 tonnes of slag for residual gold not captured during the initial refining process. Because of the huge demand for gold last year, there was no time, explained Love.

“An estimate was made at the year end as to what the value of the gold in this slag would be, and it was thought that this could explain a significant portion of this reconciliation difference. The amount of gold that was determined to be in that slag was significantly higher than the estimate that was originally used,” he said in the report.

“That went a significant distance in reconciling the rolling inventory to the physical count, but certainly not far enough from our point of view.”

It’s not clear what happened to the slag.

The initial discrepancy at issue was less than 0.5 per cent of the gold that had flowed through the facility last year, Love said.

Nadler said that though he is not privy to the external audit findings, “I’m reasonably sure that it’s an accounting issue and literally a reconciliation issue, where a shipment was either short or diverted or what have you. Even if it’s proven to be actual malfeasance, I’m sure that the coverages that they have in place are ample to make (up) any particular shortfall.”

China’s Commodity Strategy

China’s New Commodity Hoard

by Jennifer Barry
Global Asset Strategist

In April, China announced that it purchased 454 metric tons of gold over the past six years. However, gold isn’t the only metal the Chinese have been buying. According to Michael Gaylard of Freight Investor Services, “They are building up some stockpiles right across the commodity spectrum, from base metals to coal.”

China is taking advantage of the low commodity prices to scoop up bargains. The nation has been buying so much copper that the market slipped into a deficit in February, drawing down stockpiles, as average mine utilization fell 9%. Iron ore imports were up 33% in April, to a record 57 million metric tons. Chinese purchasers visited Mozambique in May to lock in deals for base metals like aluminum. The nation just finalized a $9 billion deal with the Democratic Republic of Congo to develop copper and cobalt mines in exchange for infrastructure projects like roads, schools and hospitals. Recently thwarted in its attempts to invest in Rio Tinto, China has reached an agreement to acquire an Australian miner, Oz Minerals.

In addition to coal, China is assuring its access to adequate energy supplies. The nation increased its oil imports 13.6% in April. The government also awarded a US$25 billion loan to two Russian energy companies to lock in 300,000 barrels of crude per day for 20 years. This is part of the Chinese strategy to increase its crude stockpiles from about 30 days of use to 90-100 days supply.

China is not neglecting its need to secure food stores, either. The official Xinhua news agency is citing experts who recommend the nation accumulate 50 million metric tons of soybeans. The Chinese are purchasing tons of soybeans now, to try to avoid end of crop year rationing. Stockpiles are expected to run very low before the new crop is harvested in the fall, as Argentina’s harvest was much smaller than expected. Much higher prices are anticipated this summer.

Although soybeans have gained more than 46% since March, there is still room for appreciation. As of two weeks ago, Chinese soybeans cost more than $2 per bushel more than U.S. beans, so the backhaul and arbitrage makes it worthwhile to import this essential foodstuff.

I predicted tight supplies and Chinese purchases in my essay A Growing Problem, which was published on this website in December. That week, we saw a bottom in the grain complex, and the beginning of a robust rally in the CRB.

The Move to Real Assets

Readers of lemetropolecafe.com are already aware that back in April 2006 I formulated and publicized a theory that China was quietly shifting from dollar-denominated Treasury assets into commodity stockpiles. Their targets included especially copper and other metals, but also agricultural commodities. Peter Rhalter on the Café christened it the “China Hoard Theory.”

Through the years I have uncovered additional data to support my theory. I detailed the rotational model the Chinese use to purchase metals on the London Metal Exchange, allowing inventories to build and the price to fall. Once the commodity was cheap again and inventory was plentiful, China would rotate back to purchasing that metal. I articulated the backhaul shipping mechanism they used to cheaply ship heavy commodities back to China on the return voyages of ships loaded with consumer goods.

China’s public acknowledgement that it had secretly built gold reserves has opened eyes. This has now spurred important voices in the financial world to align with the China Hoard Theory, acknowledging a broader Chinese strategy to get out of the dollar and into real assets. The Royal Bank of Canada stated that “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline.” In April, Ambrose Evans-Pritchard realized the folly of China’s vendor financing with its customer America in a severe economic downturn. Also that month, Jim Puplava and Puru Saxena analyzed the Chinese desire to exchange paper promises for shrinking supplies of depleting minerals. Having correctly called China’s commodity strategy years ago is a great triumph for me as an analyst.

Other pundits have deprecated the commodity rebound, claiming that China is just spending stimulus money that will soon run out. However, I think this uptrend is more than an aberration. Instead of “green shoots” in the U.S. we are seeing bamboo shoots in Asia. Even with China having its worst year since 1992, its first quarter GDP grew 6.1% year-over-year, a strength other countries envy.

Industrial production was strong last month as well. Zapata George Blake notes that tire plants in China are running full shifts – a leading indicator of a rebound in auto manufacturing. This will continue to boost the price of related commodities like palladium, which made a recent high of $262, up 45% for the year.

Other measures corroborate a recovery in China. The CRB Index is up nearly 32% since its lows in December. The Baltic Dry Index, a measure of global shipping demand, reached 4,291 this week, more than six times its December low of 663, but still less than half its 2008 high. It smashed its 200 day moving average to the upside, and went nearly parabolic before correcting. This indicates higher demand as well as some loosening in the credit markets.

The resurgence in these indices, and the rise of U.S. stock markets on poor fundamentals is also signalling a resurgence of price inflation. The world’s central banks can’t flood the globe with liquidity in a move they euphemistically call qualitative easing without pushing the cost of goods much higher. The Federal Reserve is the globe’s worst offender in this area, swapping banks’ toxic assets for Treasuries which these financial institutions can use as collateral for other risky deals. With banks deemed “too big to fail,” the taxpayer is on the hook for any further losses, and the regulators do little to rein in excesses.

I believe that hyperinflation is sadly inevitable, so it’s wise to copy the Chinese. Make sure you have a heavy weighting in the precious metals, the safest assets of all. Then swap your excess dollars for real assets like nonperishable food and other necessities. Avoid leverage in all commodity investments, as the volatility can cause big losses if you are on margin.

Derivatives Monster – Real Economic Data – Investment Strategy

OPPORTUNITIES & THREATS IN DERIVATIVES SHOCKER

 “With Key Mega-Financial Institutions around the World claiming in 2008 that they risked collapse if they were not bailed out, one must ask which ones benefited from the $13 Trillion plus Increase in Gross Market Value of their OTC Derivatives in the six months between June, 2008 and December, 2008 when the Equities Markets were crashing? A logical Conclusion: Key Central Bankers and Favored Financial Institutions of The Fed-led Cartel*, quite possibly including the shareholders of the private for-profit U.S. Federal Reserve”

Deepcaster, May 29, 2009

For investors, both Opportunities and Threats reveal themselves in the recently reported stunning drop ($90 Trillion+) in Total Notional Value of OTC Derivatives Contracts Outstanding worldwide and an equally stunning rise ($13 Trillion+) in Actual Gross Market Value of OTC Derivatives Contracts Outstanding, in just the last 6 months of 2008. (See Chart Below)

Source: Bank for International Settlements

The Total Notional Value of OTC Derivatives Outstanding dropped from some $683 Trillion as of June, 2008 to $592 Trillion as of December, 2008, according to the Bank for International Settlements (BIS – the Central Banker’s Bank – see www.bis.org, Path: Statistics > Derivatives > Table 19) (Ed Note: A Rough “Cocktail Party” Definition of “Notional Value” is “Unrealized Potential Maximum Value.”)

This first drop in Notional Amount of OTC Derivatives Outstanding in years, mainly reflects the massive deleveraging which occurred during the Fall, 2008 Market Crash.

Perhaps even more stunning was the drop in Notional Amounts of OTC Gold Contracts outstanding from $649 Billion in June, 2008 to $395 Billion as of December, 2008. Yet the change in Gross Market Values of the OTC Gold Contracts outstanding during that period was minimal – a drop from $68 Billion to $65 Billion. We comment on what that portends for Gold below.

In order to determine and evaluate the Opportunities and Threats created by the aforementioned drop in Notional Value of OTC Derivatives outstanding coupled with a dramatic increase of $13 Trillion in Gross Market Values we must first consider a few facts.

To put the Derivatives Monster in perspective, consider that the value of all publicly (exchange-traded) Equities now existing in markets world-wide is “only” about $31 Trillion.

That $31 Trillion is only just over 5% of the still remaining nearly $600 Trillion in Notional OTC Private (i.e. Dark) Derivatives Contracts outstanding. The implications are stunning:

1. If the unwinding of a “mere” $91 Trillion in Derivatives contracts (to bring the Total down to $592 Trillion from $683 Trillion) reflected the Magnitude of the pain that the Fall, 2008 Crash caused, then imagine the Pain which awaits if and when (and probably when) any substantial Portion of the $592 Trillion remaining get unwound.
2. But a substantial portion will likely have to be unwound given that various ongoing Crises have yet to be resolved, and, in many cases are worsening e.g.: Consider:
   1. The U.S. Treasury/Fed etc have already committed some $12.8 Trillion (by one reckoning) for Bailouts, Loans, Stimulus packages and Guarantees, much of it borrowed from, or guaranteed by, U.S. Taxpayers. Yet, clearly, the Toxic Derivatives problem has a long way to go before being solved.
   2. The Fed has moved over $577 billion of U.S. Treasuries onto its Balance Sheet in the short time since it publicly admitted it was monetizing the Debt. (One wonders how many hundreds of Billions in Treasuries were moved (and where!?) before that public admission.)
   3. The Chinese are switching from a U.S. Dollar basis to a Yuan basis domestically.
   4. The Chinese have authorized certain non-Chinese Banks to sell Yuan – based government Bonds.
   5. Foreign Creditors own over half the U.S. Dollar based government and Agency bonds leaving the fate of the U.S. Economy and Security in the hands of foreigners and primarily the Chinese government.
   6. The United Arab Emirates are spearheading plans to launch an Asset-backed (likely with Gold and Crude Oil) Currency, the Dinar.
   7. Germany has reportedly demanded return of all Gold held in custodial Accounts in the U.S.
   8. The Chinese have increased their Gold reserves from 400 Tonnes to over 1,000 Tonnes in the past five years.
   9. The default rate on U.S. Option ARMS recently rose to 35%. There are still some $300 Billion of these loans still outstanding.
   10. The interest Rates on about one Million Pick N Pay loans will reset in the next two years.
3. Clearly, given the foregoing, acquiring Gold and Silver as Safe Haven Assets is the Prudent Course. However, Gold and Silver are subject to price Manipulation by the Fed-led Cartel* of Central Bankers and Favored Financial Institutions as we explain below. But we also explain that there is a Strategy to Profit from these Interventions while acquiring an increasing core Position in these Precious Metals.
4. A substantial portion of the aforementioned $592 Trillion in OTC Derivatives is available to The Fed-led Cartel* to continue to overtly and covertly manipulate the Precious Metals, Strategic Commodities, and Equities Markets.*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s December, 2008 Letter containing a summary overview of Overt and Covert Intervention entitled “A Strategy for Profiting from the Cartel’s Dark Interventions & Evolving Techniques” and Deepcaster’s July, 2008 Letter entitled “Market Intervention, Data Manipulation – - Increasing Risks, The Cartel ‘End Game’, and Latest Forecast” at http://www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at http://www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at http://www.deepcaster.com have been facilitated by attention to these “Interventionals.”
5. And Market Manipulation is an Enterprise with Great Profit Potential. Consider specifically, as of June 2008 the Gross Market Value of all Derivatives Outstanding was $20,353 billion (see chart below). By December 2008, that $20 trillion has risen to $33,889 billion, a rise of over $13 trillion in Actual Gross Market Value of OTC Derivatives. Clearly, some of the Derivatives that were liquidated in the drop from the notional value $683 to $592 trillion resulted in (or, at least, were accompanied by) a very considerable increase in market value (otherwise known as “profits” – whether realized or unrealized) for the Mega Financial Institutions holding them.These remarkable developments reflected in the BIS Gross Market Value of OTC Derivatives figures (below) for period June 2008 through December 2008 prompt certain questions.
   1. First question: which financial institutions in the world experienced an increase in $13 trillions of market value in their OTC Derivatives Positions in the last six months of 2008 while the Equities Market were crashing?
   2. Why do we not see anyone publicizing this information (Tongue-in-cheek-intended) much less the private for-profit U.S. Federal Reserve, which has declined to respond to inquires from Members of Congress about the specific amounts of, or parties to, their transactions and holdings.
   3. Can we not logically conclude that some Mega-financial entities profited immensely from the market takedowns of the Fall 2008 – specifically profiting in the amount of $13 Trillion in increase Gross Market Value of derivatives owned?Consider too that the aforementioned figures were generated by the Ultimate Official Source. They come from the Bank of Central Banks itself, The Bank Of International Settlements, Switzerland, housed in the Tower of Basel.

      Indeed we encourage readers to consider the figures themselves, by visiting http://www.bis.org > statistics > derivatives > Table 19, “Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument.” Of course, not all “official” statistics are accurate as we demonstrate below. Indeed, some are intentionally misleading.

      But an increase of $13 trillion in gross market value of Derivatives held by major Financial Institutions, is testimony to the Resources and Power of The Fed-led Cartel*. See Deepcaster’s article “Coping with the Superpower-Cartel Threat!” (1/30/09) at http://www.deepcaster.com.

6. Moreover, Key Statistics continue to be gimmicked by Official Sources much to the detriment of American Citizens and Investors Worldwide.

Indeed, the True State of the Economy is much worse than the Official Figures suggest.

As the Real Numbers mentioned below demonstrate, our ongoing economic and financial crisis is not merely a “normal” business cycle Recession, but a System-Threatening Crisis. Indeed, we have entered into a Depression. (see below)

It is thus another Naïve and False Assumption that the Official Figures accurately reflect the state of the Economy and Markets – - for example, that the current Recession is merely a normal “business cycle” phenomenon.

Making matters worse, Investors and citizens-at-large are misled by Official Statistics which have been gimmicked, as shadowstats.com demonstrates. All of the following Genuine Numbers are calculated by shadowstats.com, which calculates them according to traditional methods used in the 1980s, and early 1990s, before The Political Adjustments currently being utilized began.

Consider the following Real Numbers from shadowstats:

U.S. Consumer Price Inflation (CPI) actually averaged about 11% annualized for much of 2008, rather than the 5% to 6% figures, which have been reported as Official Statistics. Thus, the consumer must cope with diminished purchasing power and the threat or reality of job loss.

Though Official Figures show CPI dropping to 0% in early 2009, the Real early 2009 numbers reveal that CPI was still about 7% annualized.

U.S. Unemployment has (according to Official Numbers) been ranging 4% to 6% from 1995 to 2007, spiking “only” to about just under 7% in late 2008 and 8% in early 2009. In fact, Real U.S. Unemployment in 2009 now about 20% and is still increasing. (shadowstats.com) Thus the consumer (70% of U.S. GDP, we reiterate) is increasingly unemployed, under-employed, and indebted.

As well, the Delusion of Economic Growth claimed by Official Statistics is just that – - a Delusion. Real GDP growth has been negative since 2004. Indeed, in early 2009 GDP “growth” is a negative 5%. (shadowstats.com) Thus the consumer is faced with a deteriorating economy, as well as diminishing job prospects and purchasing power.

As well, the 2008 U.S, Federal Deficit, rather than being about $1 trillion as reported officially, is over $5 trillion if one includes Social Security and Medicare. And, if downstream-unfunded U.S. obligations are included, the U.S. National Debt is about $66 trillion and rising!

Knowing these Real Numbers facilitated Deepcaster’s recommending “Opportunities in the Impending Perfect Storm” – - the title of his early September, 2008 (pre-Crash) Article warning of the impending Crash (available in the Articles Cache at www.deepcaster.com) and his making five short (and subsequently quite profitable) recommendations to subscribers at about that time.

A Strategy for Profit and Protection

Normally, (that is to say, in a Genuine Free Market situation) the go-to “Safe Haven” Assets in times of Financial Crisis would be the Precious Monetary Metals Gold and Silver, as well as other assets such as Strategic Commodities.

We say “normally” because nearly every time yet another Financial Market Crisis has come prominently into the public eye in recent years The Cartel* of Central Bankers has successfully taken down the price of what would normally be The Safe Haven Assets – - the Precious Monetary Metals. A prime example occurred during the much-publicized demise of Bear Stearns in March, 2008, which was accompanied by a vicious Takedown of Gold and Silver. In a non-manipulated Market, given the fact that Bear Stearns reflected great and increasing weaknesses in the Financial System, Gold and Silver should have skyrocketed. But instead they were dramatically taken down.

Yet, the late 2008 – early 2009 Crises appear to be different. Gold launched from the mid $700s/oz. to around $900/oz. during September, 2008, fell back to the low $700s and then launched again toward $900 in December, 2008 and has actually exceeded $900 several times in 2009.

So the question now, near the beginning of June, 2009, is it different this time around? Have Gold and Silver finally thrust off the shackles of Cartel Intervention? Or will The Cartel be able once again to cap and take down the prices of these Precious Monetary Metals and Strategic Commodities? Deepcaster has very recently addressed this question in a Forecast he issued for the likely fate of Gold, Silver, Crude Oil & the U.S. Dollar in the Alerts Cache at www.deepcaster.com.

One thing is certain: The Cartel will certainly attempt again to take down Gold, Silver and Crude Oil at the earliest opportunity because the Strategic Commodities and Precious Monetary Metals are Competitors as Stores and Measures of Value with the Central Bankers’ Treasury Securities and Fiat Currencies.

Yet there is a Strategy which accommodates Cartel Interventional attempts and at the same time provides excellent Profit Opportunities, whether the Cartel Interventional attempts are successful or not.

A major premise of The Strategy is that one can certainly remain a Hard Assets Partisan (as Deepcaster is) while at the same time insulating oneself somewhat from future Takedowns. The following points provide an outline of The Strategy (particularly as applied to the Gold and Silver Markets) and are designed to help avoid Portfolio unpleasantness, or even possible financial ruin, in the future, as well as to profit along the way:

1. Recognize that The Cartel is still Potent, as difficult as that may be psychologically for Deepcaster and other Hard Asset Partisans to acknowledge. The Cartel is still the Biggest Player in many markets and, if the timing and market context are propitious, the Biggest Player makes Market Price. In addition, The Cartel has the advantage of de facto controlling the structure and regulation of various marketplaces and that is a tremendous advantage; just as the Hunt Brothers years ago discovered much to their dismay and misfortune, when they tried to corner the Silver Market.
2. Accumulate Hard Assets near the Interim Bottoms of Cartel- engineered Takedowns.
3. In order to know when one is likely near the bottom of a Cartel-generated takedown, it is essential to take account of the Interventionals as well as the Technicals and Fundamentals. Paying attention to the Interventionals facilitated Deepcaster recommending five short equities positions as of early September (just before the Fall Crash) all of which we subsequentially recommended be liquidated profitably.
4. For example, regarding Gold & Silver, near such Interim Bottoms, accumulate a combination of the Physical Commodity (Deepcaster prefers “low premium to melt” bullion coins) and well-managed Juniors with large reserves. (Deepcaster provides a list of such Junior Candidates in our December 20, 2007 Alert “A Strategy for Profiting from Cartel Intervention” available in the Alerts Cache at www.deepcaster.com.) The “Physical” and “Juniors” are for holding for the long-term as a Core Position.
5. Then, to the extent one wishes to speculate on the next “long” move, one should buy the major producers or long-term call options on them. These latter positions are for ultimate liquidation at the next Interim Top and are not for holding for the long-term.
6. However, there will be a time when The Cartel price capping is ineffective and Gold & Silver make record moves upward. The benefit of this Strategy is that one will likely be long in one’s speculative positions when this happens.
7. Near the next Interim Top, liquidate the long options and majors. Again, in order to know when we are close to the next Interim Top, it is essential to monitor the Interventionals, as well as Fundamentals and Technicals.
8. Near that Top, sell short or buy puts on Majors. We re-emphasize the Majors as preferred vehicles for trading positions because such positions are more liquid and tend to be quite responsive to Cartel moves.
9. Near the next Interim Bottom, cover your shorts and liquidate your puts and go long again to begin the process all over again. We emphasize that it is essential to consider the Interventionals as well as the Fundamentals and Technicals in order to determine the approximate Interim Tops and Bottoms.
10. Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of The Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets and/or Retirement Accounts only to have those assets effectively de-valued by Cartel Takedowns and other Cartel actions. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:
    1. Become involved in the movement to Audit and then abolish the private-for-profit U.S. Federal Reserve as Deepcaster, former Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. The ‘Audit The Fed’ Bill is H.R. 1207 (and has over 180 co-sponsors); and The Abolish The Fed Bill is H.R. 2755.
    2. Join the Gold AntiTrust Action Committee, which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a non-profit organization, which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.
    3. Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game.” Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever. See Deepcaster’s July 2008 Letter in the ‘Latest Letter’ Archives at http://www.deepcaster.com.

If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.

Additional insights and details regarding this Strategy, which are essential to profiting from The Cartel’s Policies, are laid out in Deepcaster’s article of 3/06/09 entitled “Investor Advantage: Revisiting The Cartel’s ‘End Game’.”

Protection and profit required Proactivity and attention to the Interventionals, Fundamentals and Technicals, not “Buy and Hold.” “Buy and Hold” rarely succeeds anymore as current market conditions attest.

Indeed, the Key Point of the Strategy for Protection and Profit is careful attention not only to the Fundamentals and Technicals but also to the Interventionals. These Overt and Covert Cartel-generated Interventions have the power to move markets as those who study the matter can attest.

Thus, the Key to Profit and Protection is a Strategy: Successful Investors must become Long-Term Position Traders, with their trading choices informed by the Interventionals, as well as the Fundamentals and Technicals. Moreover engaging in the Actions suggested above can help prevent The Cartel’s obtaining Superpower status, and aid in achieving wealth protection and profits as well.

Deepcaster

May 29, 2009

DEEPCASTER LLC

An Often Overlooked Issue – Cash Flow

An Often Overlooked Issue!

Professor von Braun
The Rocket School of Economics

May 22^nd, 2009.

 

What I have referred to before in earlier articles as the great credit contraction is now well and truly underway. The credit expansion period is over and what we are seeing now is the effects of what happens when a fiat monetary system reaches the limits of its ability to both inflate the value of non productive assets and defer settlement, via the ongoing renewal of existing debt.

Attempts by governments and central banks to reinflate declining asset prices via large infusions of psuedo capital into the banking system so that the issuing of credit can be ‘kick started’ are doomed to fail.

House prices will continue to decline, unemployment will rise, tax revenues will decline further, government debt levels will continue to rise and peoples net worth will also decline. This is a given!

This is what happens when you get a major credit contraction. In simple terms it is like the tide going out prior to the tsunami coming in.

Since a monetary debacle of this size has not been seen before, there is nothing to compare it with, for not even the depression of the 1930’s comes close. Then people still had savings and the US $ was, until late 1933, pegged to gold at $20.67 per ounce.

Today all debts are now due, since the banking system can no longer lend its way out of its own dilemma and this is what needs to be clearly understood by investors. The dollar is a liability and as such being in cash is also a liability. Government securities are also liabilities but the issue of liabilities versus real assets is more widespread than that.

The precious metals are not a liability and ownership of them is a very wise move given the uncertainty surrounding everything else that is happening. We have seen calls by some market analysts for the Dow to be at 400, 600 and ‘under a 1000.’ What does that mean you may well ask?

It means that you have a collapsed banking system along with massive unemployment and no cashflow of any consequence being generated within the system itself. What will happen to brokerage houses if you have the Dow at 400? What will stock exchanges look like if there is a collapse through to these levels? How will capital be raised when there is no capital left?

Cashflow during the credit expansion period was ‘created’ by the banks themselves via home equity lines, credit cards, and a series of market bubbles. Productivity, which should have been the benchmark by which to measure cashflow went off to all sorts of different places such as Asia, India, China and now we have a situation that the holders of US dollar denominated ‘reserves’ are located outside the US. There is little by way of actual ‘reserves’ within the US itself, hence the need to issue more debt.

In addition money that has been spent within in the US by its residents has mostly been spent on items that have little, if any, appreciative value. On the contrary electronic gadgets tend to depreciate, as do autos, as do fridges, freezers, washing machines and dryers. The real estate bubble has now clearly demonstrated that house prices can and do decline. Those who have been saving for their retirement are in a double bind, since in most cases what they believed was assets are now being seen as liabilities. That second house purchase is now a liability and even the primary residence is, in many cases, under water.

The root cause of all of this is the banking system itself and its mismanagement, with some not so little help from both Congress and the Senate, along with the failure of the deregulation of the systems put in place during the 1930’s to stop this from happening. There still seems to be a complete lack of understanding of what the problem actually is, which is clearly demonstrated by the attempts so far to fix the banking systems dilemma.

The often overlooked issue is CASHFLOW! Where is your income going to come from now that the capital gains machine is broken? Even if you are sitting in cash and own high quality government securities (whatever they are), with a 3% return, what can you buy into that can offer a cashflow that is reasonably safe and secure?

What is going to be left to buy when the music stops, when Mr. Fiat finally succumbs to Alzheimer’s disease and you are left holding his empty bag of promises to pay?

Anything that has debt attached to it is a liability that won’t go away. Any sector that is dependant on people spending money on goods or entertainment that provides revenue to service their debt has a problem and all aspects of the economy are at risk. Real estate, both residential and commercial, travel & leisure, retailing, the auto industry, even the medical profession will be facing lower revenues. The economy is not something that can be easily isolated into safe & unsafe sectors as it is all interconnected via the banking system which can no longer inflate the value of the underlying assets, regardless of what they are.

The example given by President Roosevelt’s revaluing of gold in 1934 is of interest and contains pointers to the issue of cashflow. Small mining operations sprung up in many parts of the US. The reworking of tailings dumps from previous operations became common and with the increase in price gold mining became one of the few sources of consistent cashflow. Employment for miners was assured and towns that were close to producing mines did not nearly suffer the downturns and bank closures of areas that were not.

The production of gold is as close to guaranteed cashflow as you can get, even if gold is confiscated and a new ‘official’ price created, the gold that is being mined does have to be purchased and paid for by somebody. Will there be a resurgence of small privately owned gold mines?

Very few have understood the predicament the banking industry is in. The banks have been in the business of asset inflation and for a while it seemed to be working. But when it became the only game in town, everybody joined in and the ability to keep a lid on the issuance of debt was lost. Productivity was forgotten about as the technological advances gave people access to what appeared to be the goods, but was nothing other than an image.

The need for savings was ignored and now we have a compounding to the downside as assets continue lose their value. Ownership of debt is now being seen for what it is, something that can become problematic very quickly. Investors with capital are few and far between and assets that have strong cashflow potential are also few and far between.

The coming cashflow shortage will affect all entities from the Federal Government, to the states, the counties, pension plans, investors and homeowners alike.