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China's Demand for Gold Has Trapped The West's Central Banks

Kill the banks or kill their currencies?
Wednesday, April 9, 2014, 6:12 PM

Every once in a while, an Off the Cuff interview is so important that we decide to make it available to the entire public. This is one of those occasions.

In this week's Off the Cuff podcast, Chris and Alasdair Macleod build on the insights laid out in Chris' recent mega-report last week on gold: The Screaming Fundamentals for Owning Gold. And specifically, they delve deeply into the poorly-understood topic of why Chinese demand has become such a game changer in recent years.

In my opinion, this podcast offers the best clarity I've heard to-date in explaining:

  • what the true measurement of annual Chinese bullion demand actually is (hint: it's even bigger than you imagine)
  • what the implications of China's gold voraciousness will be
  • why Western central banks had to smash the price of gold last April
  • why Chinese demand exploded at these lower prices, putting the Fed and other Western central banks into a trap (kill the banks or kill their currencies)
  • why the Fed is desperate to keep the price low for as long as possible (and why this suppression will fail)
  • why the Eastern attitude towards gold will trump the West's

In regard to the last point, Alasdair pithily summarized a critical dynamic that, in my opinion, is as hugely important as it is under-appreciated:

In the rest of the world and particularly Asia, people do not think like we do. As far as they're concerned, gold is the only long term asset worth holding. It is the family pension fund. I like quoting the typical situation in India. I first went to India in 1965 and the price of gold at that stage in rupees was around about 170 rupees an ounce. Today it's about 100,000 rupees an ounce. And when you think that the young man getting married at that time -- he'll be a grandfather now -- he would have got a dowry from his wife's family which would have been in gold. His presents would have been gold. Every time they had children there would have been gold. Every time there's a festival there would be gold. Gold is the family pension fund. What other investment has gone from 170 rupees to 100,000 rupees over that period of time? Absolutely nothing! There isn't even an alternative like sensible equities or anything like that for them to play. Gold is the only way they can escape the devaluation of the rupee. And so no wonder it's so popular. That's the story all over Asia, by the way.

I think the financial press in the West, the mainstream media, basically they rely for their information on analysts in the bullion banks. And the bullion banks are always short. And so they always get a negative story. Universities teach people economics, the Keynesian variety and the monetarist variety. And there is an assumption that gold is no longer money. It is just a commodity with peculiar characteristics. 

Now whether the West is right or wrong is not the point. The point is there are 4 billion people in Asia who have got a very old-fashioned view of gold, and they have become wealthy over the last twenty years. And their view is likely to prevail against the <1 billion of us in North America and Western Europe. I mean it really is as simple as that. It's not a question of Austrian economics, or Keynesian, or whatever. We're outnumbered. 

To help drive this point home, consider this...

Click the play button below to listen to Chris' interview with Alasdair Macleod (54m:32s):

Transcript: 

Chris Martenson: Welcome to this Off-the-Cuff. I have Alasdair MacLeod with me today and we are going to discuss one of my favorite topics, gold, particularly gold in China. It's an extremely important topic. Alasdair, so good to be talking with you today.

Alasdair MacLeod: It's very nice to be talking to you too Chris. Also, it's my favorite topic du jour as you might say.

[Laughter]

Chris Martenson: We have a lot of jours wrapped together. So where do we start in this? Here's—you know where I'm going to start with this—I'm looking at a Forbes article that came out today and it's a reprint from Kitco News, some of my favorite people. I don't know if you remember but—I'm sure you do—but when John Nadler was there writing Kitco was presumably a gold company and related to precious metals and things like that. But for some reason they put out some of the worst, most bearish sentiment stuff I've ever read, constantly, on gold. And so they found a new guy who's, I think, taken Nadler's place—let me scroll to the bottom—Neils Christensen. Do you know him?

Alasdair Macleod: It sounds like he's related to you.

[Laughter]

Chris Martenson: Awesome!

Alasdair Macleod: No, no, I don’t know him. But I think it can't have made an awful lot of sense for Kitco, I think, in the business having someone who is consistently bearish.

Chris Martenson: Yeah, well, here's this article, just came out today, and it's sort of a summary of what analysts are thinking. "Second quarter will not be a great time for gold prices" is the headline. And they go through all of these bearish sort of people who are saying—you know, they're just from banks, right? All western banks, saying, "well, typically this is a weak quarter and maybe gold's gotten ahead of itself. And it's sort of failed at this key thirteen hundred psychological area again and again." It's just they list all of these things, right? And I make it all the way through the entire article and you know what's interesting. Lots and lots of ways to tell me that gold is still down and strengthening the dollar's going to reduce the need for safe haven assets, blah, blah, blah, off we go. Not one word about China in here.

Alasdair Macleod: [Laughs] Well, there are two points about that. And I think your first point I would sum up by saying that when everybody's bearish actually what it means is that everybody who's got something to sell has already sold it and they're waiting for it to fall so they can buy it back. And I think that describes the position of a lot of the bullion banks who, in the run-up to the end of the first quarter, were pushing about stories, about shadow bank financing on the back of copper and gold implying that copper and gold are going to have to be sold because shadow bank financing was going to be unwound probably violently, and suddenly there would be a lot of stuff dumped on the market. I mean complete and absolute nonsense. But I was just interested in the timing of this, ahead of the end of the first quarter, when I have no doubt that bullion banks with short positions in the market would very much want to see bullion down. So I think that's the background there. And as regards China, I find it absolutely extraordinary that everybody is in denial. They seem to think that China's demand has only just overtaken India's at about a thousand tons a year. I've recently reworked these figures and I find it's nearly five times as much. I've identified 4,843 tons of demand in 2013, which is a staggering figure and it's so far adrift from what the analysts and the big banks are talking about as to—I mean are they giving disinformation or am I missing something?

Chris Martenson: Well, let's talk about how you got that information because that's critical, 4,800 tons is an extraordinary number. It's just, it's mind boggling. So how did you get that, knowing that gold information is hard to come by. The Shanghai Gold Exchange no longer prints in English as far I've been able to determine. So you need some translation skills there to read what's going on. So where do you get your data and how much confidence do you have in it?

Alasdair Macleod: Well, I have complete confidence in some of the data. The data which I have complete confidence in is what is actually being delivered by the Shanghai Gold Exchange into public hands. If I just may say a few things about that the Shanghai Gold Exchange publishes a monthly set of tables showing, amongst other things, delivery and also a weekly set, again, showing delivery. And that gives you the tonnage of gold delivered into public hands. Now, the reason this is important is that when it is delivered into public hands it is delivered out of the vaulting system. There is a system of something like forty-nine vaults that the SGE has authorized to hold gold. This makes—this allows us, and I'm sure you understand and I'm sure a lot of our listeners understand—allows gold to be fungible within the system so that if a kilogram of gold is delivered from one vault to somebody who wants to store it in another vault he can rely on the fact that that is as kilogram of gold as described because it's in the system, it's checked, and it's definitely gold. However, once it's delivered out of the vaulting system into a general public circulation, if it's going to come back into the vaulting system basically it's treated as scrap. And so there's some quite high scrap numbers—scrap tonnages—in China that we know of, as you rightly say about three or four years ago, we don't have more recent information. But what that refers to is not old gold because, of course, there is no old gold or very little old gold. And there's very, very little industrial gold. What it refers to is basically people taking profits or needing to raise money out of gold bars they have taken delivery of and is being remelted, you know, submitted back into the system for remelting. That is scrap. So this—we're talking—what we do know is that last year the deliveries from the Shanghai Gold Exchange alone were 2,197 tons. That is straight from the horse's mouth. That is a firm figure.

The other firm set of figures we have are Hong Kong's imports, exports, and re-exports. Now obviously being an island Hong Kong imports pretty well everything. Exports are goods that are—raw materials that are being brought into the island and turned into some other form. So typically with gold, gold would be imported, it would be turned into jewelry and then exported. Hong Kong tells you exactly where all the gold that they've exported actually goes to. So we can isolate, let's say, the gold that is processed in Hong Kong and exported back to the main land in China and to Vietnam and to Indonesia and to Japan, and so on and so forth. Re-exports, however, is gold that comes into Hong Kong, is cleared through customs, and then re-exported without any material change in its form. So typically this would be gold bars produced in the refineries in Switzerland for the Chinese market. So we can assume pretty well that everything that goes into Hong Kong and is re-exported onto the mainland is feedstock for the Shanghai Gold Exchange. So that's—those are the two sets of statistics which are absolutely firm. You've got Hong Kong and you've got the Shanghai Gold Exchange.

Chris Martenson: So then the Hong Kong data is going to be feeding into the Shanghai Gold Exchange so you wouldn’t double count those figures, right? I mean…

Alasdair Macleod: No, you have to net it out. I mean essentially you've got three sets of figures in Hong Kong. You have got the exports to China in sort of jewelry form or whatever, that doesn't go into the Shanghai Gold Exchange. You've got the re-exports which go into the Shanghai Gold Exchange. But you have also got to net out imports which come from China into Hong Kong because Hong Kong is a great jewelry processing center. It also has vaulting arrangements. Now, I don't know how much of it is jewelry and how much of it is vaulting. But what we do know is that there is no taxes on jewelry purchased in Hong Kong. So what happens is the people in the mainland do a day trip into Hong Kong, they shop for their jewelry, and then they go back. And that way they save themselves tax on jewelry. So quite a lot of—I think it's something like a net three hundred tons off the top of my head—of what came in last year has actually been bought by Chinese citizens and then walked back into the mainland. So those are the variables which we're playing with.

Chris Martenson: Okay, so let me put this in context then because Comex, that’s where, obviously, I think a great deal of the world's pricing of gold actually happens. You know, if there's a big smash of paper gold, futures sold in Comex, off it goes. Now the context I want to put in here, the staggering numbers you put forward—I'm looking at an article you wrote where you said there's an average of 212 tons of gold leaving just the Shanghai Exchange. This would be independent of any gold exports that in the form of jewelry that walked across the border, right.

Alasdair Macleod: That's correct. Yeah.

Chris Martenson: So 212—just to put that in context right now the most recent report I've pulled from Comex from the CME Group says the total eligible ounces of gold are 7,070,000. So there's 7.07 million ounces of gold eligible, ready to be sold out of Comex. And of course, a tiny, tiny fraction of that would ever get delivered. The average delivery month I'm looking at is between ten and fifteen tons with ten to eleven tons per month actually coming out of the Comex. Just to put that in context, a single month of Shanghai Gold delivery, Shanghai Gold Exchange deliveries, is equivalent to the entire current eligible stock in Comex.

Alasdair Macleod: Yes, that is correct. There is also, of course, a Shanghai Gold Futures Exchange where the numbers are, if you like, more in line with Comex's relationship between turnover and physical deliveries. I think the physical deliveries last year was something like under a hundred tons on that.

Chris Martenson: Right.

Alasdair Macleod: If I can just sort of continue with the breakdown on the numbers. I mean so far I think I've accounted between Hong Kong, the net position in Hong Kong, and Shanghai's—the Gold Exchange deliveries—works out short 3,000 tons. Now there is another figure in there which is customer vaulted gold. Now this is not delivered into the system. Obviously if you get a change in the amount of gold vaulted, you have got to put that into your supply—your demand figures, if you like. Now, what's interesting is that we have vaulted figures for 2009 and 2010 and 2011. And the relationship between vaulted and deliveries is surprisingly tight. It runs at a hundred and five percent down to ninety-nine percent. So it's almost one for one. So if you get an increase in the amount of gold delivered, you're going to get a similar increase in the amount of customer vaulted gold. Now to confirm this from what we know in terms of the number of gold account customers with the commercials banks they have increased pretty well in line with overall demand. So that tells us that there is—or it confirms that vaulted gold is increasing at a similar pace to deliveries. So in 2013 when the amount of SGE deliveries jumped by 1,058 compared with the previous year you can add a further 1,058 tons in the form of customer vaulted gold which is not delivered and, of course, not otherwise seen. So that's an extra thing.

The last element that we've got to look at is what happens to scrap and mine supply. Now here I've got some interesting information which I think is very, very important. Gold money obviously deals with both vaulting companies and also refiners. And I was lucky enough to interview—we haven't actually published the interview for various reasons, but I interviewed a director of a Swiss refiner and I asked him the question about Chinese gold and also Russian gold. And he said, "well, we do see Russian bars but I have never ever seen a Chinese 1kg .9999 bar from a Chinese refinery." And furthermore he added to me that he has a notice on the staff notice board that if ever one of these bars comes in, to let him know immediately. So he hasn’t seen one come in as if you like, refined. That's being delivered and it's coming back into the system and he's having to recast it. I asked the same question of vaulting contacts in Hong Kong. And again, the same answer. No, never seen one. Now there are two possible explanations. One is that customs between the mainland and Hong Kong—and they are, they don't like gold walking out of the country by the way, even into Hong Kong. The customs are so efficient that not one bar out of about two million, roughly, actually has made it across the border. The other possibility is that the government acquires all locally refined production of that particular type. There are also smaller bars, which presumably are more available, if you like, to the general public. But the standard one kilo four-nines bar: never, ever seen in circulation.

Now this indicates to me—I can't believe that the customs are a hundred percent efficient. That is an impossibility. But what it does indicate to me is that the government is taking—whether it's cleared through the Shanghai Gold Exchange or not is immaterial—but it is taking both scrap and also total mine output of 430 tons. Scrap is probably another 350 odd. So we've got a total—I estimated last year, 780 tons is being taken into government vaults, so you need to add that into the equation as well.

Chris Martenson: Well, that would make the government take more than all of the other central banks in the world combined.

Alasdair Macleod: Yes, I mean, well, 780 tons last year from its own production and from scrap—previous year was about 833 on my numbers. I mean if you take—since the Lehman crisis, or since the year of the Lehman crisis, the amount of gold that has been acquired or mined in China, and not left the country, comes to over 13,000 tons. It is quite a staggering figure.

Chris Martenson: That's huge. That's vastly more than the United States and Germany combined. It's about the same as both those, I guess, yeah?

Alasdair Macleod: Exactly! So I mean yeah. We're not talking monetary gold here, by the way. We're talking non-monetary gold. I mean the figures for 2008 are 1,382 tons. 2009: 1,112 tons, 2010: 1,732 tons, 2011: 2,256 tons, 2012: 2,331 tons, 2013: 4,843 tons. So you know, we're looking well over 13,000 tons.

Chris Martenson: This is just genius. So if I was China, say, and I wanted to get a lot of gold inside the borders of my country, which would be step one in this—in my evil plan, this couldn't have worked out any better because they've been able to acquire those 4,800 tons at fire sale prices at a huge knockdown sale compared to recent prices. How does that happen? That's amazing. That can—I mean it's just—well, first of all, it strikes me as an extraordinary strategic blunder on the part of the west. Or there has to be some secret deal that China said, "if you want us to hold onto our giant pile of reserves you're going to have to get us gold. And by the way, we don’t want the price going to the moon while we're doing that," or something. I can't make sense of this Alasdair.

Alasdair Macleod: Well, the answer is that we messed it up big time. 2013 was a pivotal year and I think—let me just take you through the events, if you like, that have really accelerated this mess. In 2013 we had the Cypress crises and that was in February/March. Bail-ins became obviously the way forward. Now this meant that every depositor in Europe suddenly thought, "my goodness, what's going to happen to my unallocated gold account with XYZ bank." And the result was that there was a run on some of these banks and ABN AMRO and Rabobank were unable to deliver gold to their customers and settle for cash instead. Effectively there was a run on those two banks, and they declared, if you like, the equivalent of force majeure. Now by April it was clear that this was a growing problem to the central bank community. So the decision was taken basically to remove from the market bullish expectations and to make everybody think that actually gold is in a bear market and therefore they ought to sell their ETF holdings and stop buying it. That was the important thing.

Chris Martenson: Now just to put context on this, you're saying that what was done by the banks in 2013 was an exact copy of what we know they did in 1998 for the same exact reasons which was there was a run on the bullion banks that was going to destroy them and so steps had to be taken to prevent that.

Alasdair Macleod: Yes. That's absolutely right. I mean these things happen from time to time. Of course, it's always behind closed doors. So you know, that's sort of—you know, you pick it up by seeing the signs rather than actually seeing physical written evidence. But basically that is what happened. And I mean I was talking to people in the market in London and they were telling me that they have—they were forewarned this was going to happen. Why were they forewarned? Because really what the central banks wanted was not just the central banks to sell their gold but everybody else to as well. And they succeeded in convincing everybody in the west that gold is in a bear market and that is why gold is where it is today. But you'll probably remember that when they hit the gold price in April actually what happened was that physical demand took off. And it accelerated so rapidly I think I'm right in saying that demand for American Eagles just went off the charts, you know, both gold and silver. And of course, the Chinese grabbed the opportunity with both hands as did the Indians but they managed to stop India buying more by putting in their place man, Governor Rajan, to head the Reserve Bank of India. And in heading that up one of his first actions was to introduce the eighty-twenty rule whereby anyone who is licensed to import gold had to export eighty percent of it. So you can see there were desperate attempts to try and control this situation. But if you're going to knock the price you've got to keep it there. And basically this means that they had to accelerate their leasing program to supply physical metal so that the price wouldn't rise. Otherwise they would have completely failed.

Chris Martenson: On that one point then, the 4,800 tons that you've identified, again, full context here, total mine supply in the world is 2,700 tons. I believe that is inclusive of China's figures. So that doesn't actually hit the world market but it's wrapped in your 4,800. So that nets out. So yeah. So this was the difference between 2,700 and 4,800 but those 1,800 ton—sorry, how much is that?

Alasdair Macleod: Yeah. I mean it's a huge…

Chris Martenson: 2,100 tons had to come from somewhere, right?

Alasdair Macleod: Yeah. Absolutely! Yeah.

Chris Martenson: Yeah. So where did—so that had to come from western vaults.

Alasdair Macleod: Yeah. This assumes that no one else in Asia is buying gold.

Chris Martenson: Correct. Or Russia or anywhere else. [Laughter]

Alasdair Macleod: I mean we're talking about a continent with nearly 4 billion people on it. And incidentally the idea that Indian gold demand has fallen off a cliff just because the government said so is completely wrong. It is presumably continued at a similar or maybe slightly lesser pace because there are huge premiums in the market but the amount of smuggling that's been going on is just absolutely phenomenal. So you know, the idea that the mixture of scrap and newly mined is in some sort of balance with global demand is completely mistaken. I mean if you look at non-Chinese mines you're talking about less than 2.5 thousand tons. Your 2,700 figure is I think the USGS number but the World Gold Council reports mine supply at around about 2,900 tons. So we've got 2,490 tons available to the rest of the world from non-Chinese mines. And I qualify that slightly because where the Chinese refiners can get a hold of gold from places like Mongolia, Kazakhstan or the rest of it, they take that in as well. And I'm not even including that. And you've got non-Chinese scrap which is probably about a thousand tons. You've got the ETF supplies which, last year, those net liquidation of 880 tons. You’ve got central bank buying, which goes against that. And that means that I think we have got a sort of total supply, notionally, of about 4,000 tons and that' incorporating World Gold Council figures against the global demand including China which runs at 7,600 tons.

So there is a deficit between supply and demand of just under 3,600 tons, which has got to be contributed from global stocks. Now given that everybody in the west is bearish and given that their interest in gold is predominantly in ETFs, this hasn't come from the private sector in the west. And I'm absolutely certainly it hasn't come from the other large holders who are the Arabs. I'm also convinced that quite a lot of gold production in places like Russia actually goes straight back into the Russian central bank's vaults. So the situation is: there has to be an enormous amount of supply from central banks' monetary reserves. So the leasing that's been going on must have accelerated it's pace very, very substantially. And if we want proof of this we need look no further than Germany's experience of trying to recall it's gold from the United States. It only got five tons last year.

Chris Martenson: Five tons….

Alasdair Macleod: I mean five—and the United States is meant to be storing 1,536 tons of Germany's gold. They can only give them five tons. I mean it's laughable.

Chris Martenson: Let me tell you one more kind of funny thing that just popped across my screens the other day. This is on March 29th. This is printed in the International—let me look and scroll up. This is, yeah, the Express Tribune, which is a subsidiary of the International New York Times. And the headline is, "Pakistan Refuses to sell $2.7 Billion-Worth of Gold, Says IMF." And the article goes on to note that the IMF has been leaning on Pakistan saying, "hey, you should be—" what they want Pakistan to do is to "achieve greater liquidity from its gold," right? And so they're asking Pakistan to put its gold into the safe keeping of the world's central bank system so that they can increase liquidity which means lease it out or lend it out never to be seen again potentially. And Pakistan is refusing. And so we get the IMF doing their—what was that, sort of like the henchman routine of the global banking cartel leaning on this poor little country that wants to hold onto some gold reserves.

Alasdair Macleod: Yeah, they're better to try it with a non-Asian country I think.

[Laughter]

Alasdair Macleod: I mean you're right Chris. It just shows complete desperation, but there are—I mean there are very important implications for this because Frank Veneroso very, very famously made a speech in Lima, in Peru, I think in about 2000/2002, something like that. And he had analyzed and tried to quantify the amount of gold out on lease. And the number he came up with was somewhere between 10-15,000 tons. Now if you bear in mind that the total amount of country gold is around about 28,000 tons according to the IMF you can see that even by the year 2000 half of that had already gone. So given their attempts to try and control the market since, over the last thirteen years, and particularly what's happened in this last year, they must be really running out of anything left to lease. And I think that it means that a number of central banks are beginning to query the relationship they have on the central banking network with, say, the Fed and with the Bank of England and the Banc du France and anyone else who might store gold for them. And this idea that we're quite happy leasing our gold because the Bank of England is doing it for us—this is now I think being questioned, and I think it's being questioned very severely by quite a number of central banks who are going to be less compliant in this sense in the future. So that again I think is an additional problem to those trying to manage the gold price.

Chris Martenson: Well, it's—you know what's coming up here is this—it's like what you're saying, Alasdair, is that there's some relationship between price and demand. And as the price fell the demand went up and that this created issues. It's crazy talk. That sounds like basic economics to me.

Alasdair Macleod: Well yes. You're absolutely right, Chris. But if you're in capital markets and you understand that it's the trend that drives business rather than anything else, then it's very easy to make the mistake to think, "well, if we could persuade everyone that it is a bear market then they will sell on falling prices." Whereas actually, in economics, if you lower the price you increase the potential demand. And that's precisely what's happened because the rest of the world and particularly Asia, those 4 billion people in Asia do not think like we do. As far as they're concerned gold is the only long term asset worth holding. It is the family pension fund. I mean I like quoting the sort of typical situation in India. I first went to India in 1965 I think it was. And the price of gold at that stage in rupees was around about 170 rupees an ounce. Today it's about a 100,000 rupees an ounce. And when you think that the young man getting married at that time, he'll be a grandfather now, but he would have got a dowry from his wife's family which would have been in gold. His presents would have been gold. Every time they have children there would be gold. Every time there's a festival there would be gold. Gold is the family pension fund. What other investment has gone from 170 rupees and to 100,000 rupees over that period of time? Absolutely nothing! There isn't even an alternative like, sort of, sensible equities or anything like that for them to play. That is the only way they can escape the devaluation of the rupee. And so no wonder it's so popular. That's the story all over Asia, by the way.

Chris Martenson: Yeah. Well, you know, what's coming up to me—and I've written about this extensively actually—but in the west the propaganda against gold is really, really pernicious and pervasive. It's constant. The headlines are, you know—whenever gold goes down it's almost reported with glee above the fold in my Wall Street Journal online edition. It's just every time gold goes down they just can't trot out enough people to sort of dance on the grave of gold. And this has been going on for a very, very long time but the reasons you're talking about that the people of India have a certain context with—I was just talking with some people in Peru and I'm going to have an opportunity to go down and present in Peru. And they said "you'll be very welcomed down here because you're 40-years-old. You've already been through three currency destructions, you know, so you have experience with this" and China's the same thing. And this is the part that's really astonishing to me. I know a gentleman who deals in gold and he goes over and does trade shows over in China and this would be a standard tradeshow, right. There's all these people show up and you have your tables and you set up your wares and hopefully you have a good session and you sell out your wares at that show. He says that he sells out before the show starts. His door gets knocked on the minute he arrives and the demand is so strong for both numismatic rare pieces plus bullion that it's all gone before the show even starts, that the rest if just a formality. And so that's really what's going on over there. You wouldn't know that by reading western press. To read western press, gold is in a bear market. It's just—it's an awful investment. You should put your money in stocks and that's that.

Alasdair Macleod: Well, I think the financial press in the west, the mainstream media, basically they rely for their information on analysts in the bullion banks. And the bullion banks are always short. And so they always get a negative story. And there's also—universities teach people economics, the Keynesian variety and the monetarist variety. And there is an assumption that gold is no longer money. It is just a commodity with peculiar characteristics. So there's no understanding in the west of this at all. Now whether the west is right or wrong is not the point. The point is there are 4 billion people in Asia who have got a very old fashioned view and they have become wealthy over the last twenty years, and their view is likely prevail against the—I don't know, I mean less than a billion of us, if you like, in North America and Western Europe. I mean it really is as simple as that. It's not a question of is it Austrian economics or Keynesian or whatever. We're outnumbered. And you know, I mean as far as the Chinese government is concerned they have been actively promoting gold as an investment and I mean they've been pushing against an open door. And I'm interested in your story, about your contact who goes out to China. You know, in that context it's not surprising but, of course, as you say this gets no publicity over here whatsoever.

Chris Martenson: And so let's get to the punch line of all this. These figures you've come up with at 4,800 tons for China alone—we probably have to toss at least 2,000 tons for the rest of those 4 billion people not counted in China. And so we're looking at just a huge massive shift of gold from the west to the east. It's really a staggering number. The punch line for me is that from a fundamental standpoint—so I consider the flow of gold on one fundamental thing. I have a basic view which is that I don't believe the western central banks will be willing to physically part with their last ounce of gold. I just can't see that. They talk a good game and talk a lot of smack about gold but they never seem to really, truly, you know—they have big vaults full of it nonetheless. And then when I look at where we really are in the mine production—because I just caught a big report looking at demand and supply issues—but on the supply side, from 1999 to current there have just been absolutely no major gold discoveries to talk about. All the mines in operation were mining from discoveries of prior decades. And the average ore quality is falling dramatically. I think we're below 2 grams per ton on average worldwide and the mining costs are going up because that's a function, at least in part, of energy. So added altogether I see less mine output coming at the same time that I can only see demand increasing in the east unless, big caveat, there's some major economic dislocation. But barring that I can't see any other way than at some point the western nations are going to have to find a way to stem the flow of gold from their vaults, and there's only two ways to do that. One is to do it the wrong way, which is to make it illegal or declare force majeure or somehow renege on your obligations and refuse to sell it. Or two, you have to let the price rise.

Alasdair Macleod: Yeah. Now that's absolutely right. The problem they've got I think, Chris, is that the central banks decided in the wake of the Cyprus bail-in and the developments in the gold market that followed that, that they needed to change the sentiment in the market. They changed it in the west but what they did was they just triggered unexpected and enormous demand from the east. And they had to satisfy that demand otherwise they had to admit that the policy had failed and if the price started rising under those circumstances I mean it could have really rocketed well over two thousand dollars and that would have taken down a number of bullion banks. Of that there is very, very little doubt. So we're now in a situation where you have got a far greater shortage of physical metal. I mean how does the Bank of England or—not so much the Bank of England—but how does the Fed, for example, come clean—not that they ever come clean—and say "we've got no gold left," which is broadly I think what the situation is. There is no gold left. How do you admit it? And I suspect that they're scratching around for some way of dealing with this problem because it's not just the Fed. It's all the other central banks. And every time people like me write about this it gets more and more understood even amongst some of the smaller central banks. I mean some of them are on my circulation list. And I'm glad to say that they don't write—well, perhaps I should be worried—but they don't write back to me and say "McLeod you're talking absolute rubbish," you know. I wish they would because I really do see the potential for a huge great crisis in bullion markets because the gold is gone and the ability of central banks to bailout the bullion banks is very seriously compromised. And you know the problem is if you're going to declare a force majeure—well, you would have two effects. You would confirm the physical market is entirely in China's hands. And secondly, there would be a huge scramble for physical gold from all those people who thought they had gold through bank unallocated accounts.

Chris Martenson: And GLD potentially…

Alasdair Macleod: Well yes. I mean this is the thing that worries me because when things really do cut up rough you're looking at—I mean GLD, the custodians are banks. And you know, I think that it's not beyond imagination that the central banks might turn around and tell custodians how they are going to handle gold in their custody.

Chris Martenson: Well, it's very interesting, GLD: the main custodian is HSBC. The sub custodian that HSBC lists in their documents is the Bank of England. So imagine that, the Bank of England is a sub custodian in this story and, of course, the prospectus says that if GLD, under various and nebulously defined circumstances, it can always just true up in cash instead of gold.

Alasdair Macleod: I think we have to put the Bank of England thing in context actually because it was partly as a result of my digging around with the old FSA. They changed their prospectus to show that they work under what's called the NIPS code, which is the—I can't remember what NIPS stands for, but basically it's the dealing code, if you like, for bullion banks operating under the egis of the Bank of England. And the whole of the sort of the vaulting and clearing system all revolves around the Bank of England. This is not to say that gold is stored automatically by the Bank of England. That is not the case. I mean there is some, potentially, but I think the Bank of England is listed as a sub custodian, if you like, as part of, well, some gold could well end up there but I don’t think we're talking about very much of it.

Chris Martenson: Right, right. So the bottom line though is whatever's in GLD, when push comes to shove, you're not going to see gold coming out of that again. That's a lost game at that point when the jig is up I believe.

Alasdair Macleod: Yes. I think it's a risk. I mean really what you and I are saying is that there will be a complete abandonment by the authorities of property rights in that situation. Now that's a very, very strong statement to make. I think it is…

Chris Martenson: Well, it's not a strong statement post Cyprus.

Alasdair Macleod: Well.. yeah… I think that with a bail-in what you're doing is you're taking creditors, which is what depositors are, and what unallocated gold accounts are—you're taking those and you're writing them off in return for shares. Now it's different where something is held in custody where it is not on the bank's balance sheet. Now that is the situation, that is, that should be the situation with GLD's underlying bullion and SLV's underlying bullion as well, by the way. But GLD is the thing that worries us here. What we don't know is, if you really do get a real crisis, whether there will be some, if you like, invasion of property rights, which is really what it boils down to, on the basis that this is gold held within the system, it is within the banking system, and it has a better use, if you like, for the banking system than merely belonging to someone else. It is something that we just cannot envision at the moment but if things really do cut up rough, priorities change and suddenly property rights go out of the window.

Chris Martenson: Of course rules will be changed. And I was just doing a very nice podcast with Jim Rickards yesterday and he reiterated the point that the Federal Reserve is there to assure that the banking system is healthy, period. That's what they do, right?

Alasdair Macleod: Exactly! Exactly!

Chris Martenson: And that's the mandate actually of any central bank is to ensure the banking system is healthy. So it's not at all surprising for me every time I discover or hear about, well after the fact, that some bank or another got into trouble because it did something dumb. And you're talking about the bullion banks post Cyprus being one of these examples. And it doesn't surprise me at all to discover that rules were bent, optics were distorted, whatever needed to be done was done in order to preserve that bank rather than admit defeat and say, "yep, that was a mess-up and they're going to have to eat their losses here." That never happens. And we're so far into this though that—it was just in The Economist —this morning is the first time I saw it. It probably came out a few days ago—where The Economist itself is starting to say, "hey, wait a minute. This QE thing looks kind of permanent and it looks like it's—there's no way out of it. And it's actually enriching a few at the expense of the many. And there were no votes taken by the populous to go along with this." And so by the time, I feel, when you have a status quo defender like The Economist starting to say, "wait a minute, what are these banks really up to," you're pretty far along in this game. And what I love what you're doing is you're looking at what's happening in the game through the data we can have available to us—because, by the way, they never tell us this stuff. You have to go and figure it out for yourself. And there's been a massive—this looks like a failure to me. The amount of gold flowing into China feels like a failure of strategy and imagination by the west at best. Something worse and more nefarious on a darker slant. But what we can do about that is notice it and say, "huh, how might this resolve itself?"

Alasdair Macleod: Yeah. Absolutely! And I mean here we're now out of control of the situation. China is in control of the situation. And I think there are very good reasons why China wanted to do it. I mean bear in mind that China has got $1.3 trillion dollars-worth of treasuries. Now the idea that that is China's property is second to the fact that it is actually completely under the control of the US government. You know, China couldn't access that if it wanted. If it wanted to sell it, you know, there would be a bar put on it. So instead of that, actually, what China has is she's now got control over the gold market. Not only has she accumulated for herself, between herself and her citizens, a huge quantity, she has left the western central bank vaulting system bereft of its gold. And it can switch the value at any time it wants from its holding in US treasuries into gold just by jacking up the price to $10,000. So the idea that as a major creditor of the United States, China has got a problem is no longer true. And I think…

Chris Martenson: Well, probably just a little bit true but they're working on it pretty rapidly and it's amazing that we're just sitting here calmly holding gold under $1,300 an ounce or thereabouts while this all transpires.

Alasdair Macleod: Yeah, indeed. And also we must not forget that China is in a relationship with Russia through the Shanghai Cooperation Organization. And basically what this means is that China will never ever back the west against Russia. And we saw this over the Ukraine…

Chris Martenson: Sure, yeah, yeah…

Alasdair Macleod: …the Crimean situation. I think that when it comes to a financial war, and I think World War III is looking like it's a financial war, you know, it's Russia and China against the rest of us. And the one thing they control is gold. Now if Keynes is right, it doesn't matter. But the fact of the matter is there are 4 billion people out there who take a very different view and it bloody well does matter.

Chris Martenson: You know, if I put on my provincial, western, us-versus-them hat, I actually consider this to be a really, really awful strategic blunder. The whole idea first of selling your sovereign debt off to another country puts you at a bit—I know you say the United States controls the treasuries, that’s true, but there's a bit of risk in that. You're not as entirely under your own control as if your own populous owns your own debt. And the second thing is to allow the only non-fiat monetary asset to be trundling so briskly to the other corner of the globe. That feels like a real strategic error to me.

Alasdair Macleod: It's a huge error. But I mean how do you stop it now? I mean do you sort of say, "right, okay, well, we've completely mispriced gold. We're going to jack it up to stop these guys buying it. So we'll run it up to $1,800 or something like that." I mean you would immediately bankrupt most of the bullion banks, you know. And so you're stuck. There's nothing you can do. And if you show any sign that you are actually in trouble you're just going to make the thing a whole lot worse. And if you even turn around and try to ban gold ownership—I mean for a start in the G20 you wouldn't get an awful lot of support. But I can't see the German government turning around to German people who have had a complete hyper inflationary collapse for their grandfathers, and their fathers saw one at the end of the last war. I can't see them going along with it. I can't even see the Italians going along with it. I mean this is a very, very difficult subject to handle. And I just cannot—you know, there is no comparison with the situation today, between the situation today and the situation when FDR was around. You know, people are not sort of that patriotic nowadays. I mean if the British government turned around and told its people "you got to surrender your gold" I think they would get nothing. And I suspect the situation wouldn’t be all that different in America either.

[Laughter]

Alasdair Macleod: It's a very different—these are different times. You know, everything is global. Everything is international. And you can't just sort of pigeon hole your people into your jurisdiction and say they will do as they're told. That is no longer an option. So the idea of banning gold ownership by dictate—that I don’t see happening again. But what I do see is that almost anything the west does now is going to make the situation worse for them.

Chris Martenson: Well, I guess they can just continue to lease and dump for a while longer and hope it all turns out, but this is really—this is where we're far enough into the story where I think that's where The Economist finally got around, which is like, "hey, wait a minute. Aren't we coming on our sixth year of this easing and where's our giant recovery?" You know, there's only so—I think they start these things, it's a crisis mentality. They say, "oh, we're going to have to start QE or we're going to have to bailout the bullion banks just this one time," but then it becomes your permanent policy by default because you have to continue it and then you don't know how to get out of it, and then it becomes entrenched and then nobody quite knows what to do about it at that point in time. That's kind of where I think we are with the gold story.

Alasdair Macleod: I think that's a very important point actually Chris because if you're a bullion bank the one thing you do know is that periodically when required the central bank will bail you out. That is basically the background against which you operate. The rest of the time you make lots of money and have loads of fun. And I don't think they've woken up to the possibility that that's no longer the situation.

I did want to also say something about all the QE. What's becoming more evident I think is that some of the countries which have majored on QE, I mean like the Fed and so on and so forth, are finding it's not working and they're slowing down. And they're looking for the baton to be picked up by someone else. And it's interesting that—I think it was last week for the first time there was talk coming out of the European central bank that they may well indeed indulge in QE to the tune of about a trillion Euros. I don't know that they can even do that legally, but there is the hope that—the ECB is going to pick it up. You've got Lagarde at the IMF saying she sees "low-flation," you know, and wants lots more inflation. You know, this is—they are in desperate straits. "I mean for goodness sake, we've done enough QE. It's your turn to do some QE." That's really what they're saying. And Japan, I mean it just doesn't work. That's a separate story and I can spend an hour telling you exactly why it won't work. But I think you probably already know that.

Chris Martenson: And it's already in place. I mean I was absolutely shocked. It was last week I believe that Spanish ten year treasuries were priced out at a lower yield than US ten year treasuries. Are you insane? There's already plenty of QE operating in Europe. They just don't call it the same but there's no other explanation for that, right? You've already got interest rates slammed down to zero or close thereabouts even in a country like Spain, which by every large macro measure I look at is a complete economic disaster that's still unfolding at this point. And how you price out a ten year at less than—what is it, one and three-quarter points or something? That’s just—its nuts, nuts, just nuts.

Alasdair Macleod: It is. It's complete nonsense. I mean the idea that the principle is ever going to be returned is absolute nonsense. And really if Spanish debt, and for that matter, all government debt—if it was properly priced, it would actually reflect the fact that there is going to be a day when the whole thing defaults. So what rate of interest do you require to compensate for that? And unfortunately you then get into the sort of story where, well, the higher their interest rate the sooner the default is going to be. So it's going to be higher yet. So you know, it is crazy and I sort of often just sort of—I'm puzzled as to how this situation continues. And I think it's partly the way banking rules are set through Basel III and all the rest of it, giving no hair cut at all to government debt. I think that's part of the story. You've got all this money, if you like, drilling around the banks and it's got to go somewhere. So it goes in there because it's sufficient from a balance sheet point of view. But I think also that countries like France who are demonstratively bust, if you like, and Italy as well—they do in theory have very substantial gold holdings. And I wonder to what extent that is being pushed out as collateral or even leased to raise money for those countries. And whether the sale of gold has been partly responsible for the very low interest rates on the bond yields.

Chris Martenson: Probably. There's a whole lot of nefarious stuff in the gold world that I don’t understand yet. I've been puzzling for a while and I've gotten no answers even from some fairly well placed people which is exactly where did all of Saddam's gold go and Khadafi's gold, and so on and so forth?

Alasdair Macleod: I can give you a fair bet. It's in China, China or India.

Chris Martenson: Right. I think it looped through London, went to Switzerland and ended up in China. That's my guess.

Alasdair Macleod: We might argue about the route but I think we know the destination.

[Laughter]

Chris Martenson: Well indeed. Alistair I could talk to you all day long and we will probably continue after I hang up on the recording, but it's been so good talking to you here.

Alasdair Macleod: Oh, it's been great fun. And the reason I enjoy doing this is I know that you place a huge emphasis on educating people about actually what's going on and what they need to understand about looking after themselves financially. And I'm very, very happy to be part of that process.

Chris Martenson: Well thanks. It's really important work. And as an ending point, is anybody else really looking at the China—which large bullion bank is analyzing the China data the way you do?

Alasdair Macleod: There's no bullion bank analyzing it the way I do. There is one other individual who's from the Netherlands, a guy who blogs under the name…

Chris Martenson: Koos

Alasdair Macleod: …of Koos Jansen, yes, that's it.

Chris Martenson: Yeah

Alasdair Macleod: And indeed, you know, I am in touch with him and I've found he's been very helpful to me and hopefully I've been of some use to him. But other than that, no, I don’t think anyone. I mean it was him who sort of pointed me in the right direction in terms of understanding the weekly and monthly Shanghai Gold Exchange reports. And after I wrote that article he came—he managed to find a Shanghai Gold Exchange 2011 report which gave me an extra couple of figures which interestingly, showed that I was underestimating the amount of customer vaulted gold for 2011. So it's nice to know one's on the slightly cautious side rather than saying, you know, being accused of hyperbole.

[Laughter]

Chris Martenson: Well, very good. You've made me more interested in gold now. I didn't know that was possible. And one other place you might want to peak that's kind of fun is to look at the—from the BEA, the gold import/export numbers for the United States. There's a fairly hefty gap there on a yearly basis measuring twenty-some billion dollars-worth of gold that goes somewhere.

Alasdair Macleod: Yeah. Well, the largest mining countries in the world at the moment are the city of London [Laughter]. That's a well kept secret, and also they seem to have enormous gold mines in Switzerland. I'm not quite sure how they manage that.

[Laughter]

Chris Martenson: Well, we'll keep a close eye on that, that sort of fill-in place you speak of, so. Alright, well, very good Alistair. And thank you so much for your time today.

Alasdair Macleod: It's very much my pleasure Chris.

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44 Comments

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 4664
This is important!

I have been on fire, in my mind, since conducting this podcast.  There are some very important ideas in here.

One of them is the idea that there are one billion people in the west and four billion people in the east.  Numbers rule.  If those one billion want to sell gold, at cheap prices, I'm positive the four billion people will continue to be thrilled to help them.

The second one was that the Cyprus event, where rich people were told in no uncertain terms that their bank money would be seized, somehow resulted in gold being smashed by more than 25% over the next 3 months.

Here's that timeline laid over the price of gold.

Seriously, it just beggars belief that the "appropriate response" from rich western gold holders to the Cyprus seizures was to sell gold relentlessly and hard.

The most compelling explanation is that provided by Alasdair which is that some bullion banks got in trouble and with a bit of panic and some triage skills the western central banks, and their proxies, did everything possible to cast a poor light on gold.  They smashed its price, peppered the pages and airwaves with anti gold propaganda, and probably leased gold from their vaults too.

The only kink in their genius plan?

The east.

They looOooved the lower prices and bought with both hands.

4,800+ tonnes bought by China alone in 2013?  Wow!  That tells you everything you need to know.....

lunableu22's picture
lunableu22
Status: Bronze Member (Offline)
Joined: Oct 19 2011
Posts: 41
Eastern Educations

i shouldn't wonder at all that the chinese have carefully planned their strategy to at least get themselves out from under their UST load, but even more probably to "win" since they are educated in Western Universities and are handed the economic game plans carte blanche during their schooling.  They know that the west relies on Keynesian ideas, or chicago school of economics cuckoo-ness, or mises.  So figuring out how to checkmate the west wasn't all that hard.  Plus, they are patient.  And i shouldn't wonder if they didn't agree to accept such a gargantuan amt of UST as part of the long-range strategy.  You know:  sacrifice one of your weightier pieces so you can checkmate the other party's queen.  Now who's crowing?

P.S. Chris,  thank you profusely for making this available to all.  smiley

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 3566
numbers rule

So it costs about $4 billion per 100 tons of gold - $40 billion per 1000 tons.  There are enough rich people in China to buy a whole lot of gold.  And now India too.  But it took both countries to become wealthier before they started seriously participating in the (physical) gold buying marketplace.

I liked hearing the demand numbers on the podcast.  But I think they depend largely on China having a lot of money sloshing around their economy - mostly borrowed into existence, then some of it skimmed via corruption - and if/when that credit bubble comes to an end, I'd be willing to bet China's physical gold demand will drop off pari passu, right along with construction, and Shanghai home prices.

Likewise, before we wax too eloquently about population, we have to remember that the 4 billion people buying gold also need money.  :-)  4 billion poor people with no money won't be able to buy any gold at all, even though they may want to.

The timeline you present is definitely curious.  Remember we should also add to that the German repatriation request too.  But if we step back to the weekly chart, we can see that the stage was set to allow "the bad guys" to do their work long before Cyprus came along.  Had this been a bull market, with inflation cooking the way it was in 2010-2011, and not this dreadful-looking chart with a declining overall commodity index, I don't think things would have worked out the same.

So we can say, "boy those manipulators are all-powerful" - or perhaps, they were only able to trip and and then push an already-enfeebled man down a hill faster than he would have gone under his own power.  I definitely believe there was concerted action to cause the support break at 1525, likely as you described (based on various studies I've done) but again, the preceeding weak chart formation indicated that buying was really drying up.  Gold had 3 hits at moving through 1800, and it failed 3 times.  At the same time, all commodities were dropping.  Look at the Sep-2012 peak in commodities, and see how it aligns with gold's last shot at 1800.  Then commodities dropped, and so did gold, and that set up the weak chart for the events of the gold smash.

However, I think your main point is - going forward...as long as China & India have money, they'll keep buying gold, and eventually this will exhaust the supplies of gold from anyone trying to "keep the market down."  Gold priced at cost of production is a very strong clue that this can't last forever.

Assuming no big deflationary event hits, of course.

kaimu's picture
kaimu
Status: Silver Member (Offline)
Joined: Sep 20 2013
Posts: 114
BARBARIC IS AS BARBARIC DOES?

Aloha! I appreciate the podcast Chris ... mahalo! I always go back to the "odd man out". There may be 4 billion Asians buying gold, but that pales in comparison to "national forex reserves". 

Foreign exchange reserves - Also forex reserves or FX reserves are assets held by central banks and monetary authorities, usually in different reserve currencies, mostly the US Dollar, and to a lesser extent the Euro, the  Pound Sterling, and the Japanese yen, and used to back its liabilities, e.g., the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

Now look at the various countries and their percent of foreign exchange reserves in gold based on data as of Dec 2013.

US - 8,131t = 70% of national forex reserves

EU(G6) - 8,972t = 76% of national forex reserves

CHINA - 1,054t = 1% of national forex reserves

INDIA - 557t = 7% of national forex reserves

Why would the US reserve currency want to stock up on USDs when we print them? Would China abandon the USD in a full blown Depression? Why use a USD when the trade balance becomes worthless. The Chinese government will be more concerned about its own citizens rioting. How many Chinese citizens now carry USDs in their wallets any way? What would the Chinese government sell or swap in order to survive such a Depression ... US Tbonds, GSEs and USDs?

Looks as if Chindia(China/India) are way behind the gold reserve eight ball even though their citizens love gold! What the above numbers tell me is "yes" those private Chindia citizens have been buying up gold at current low prices(4,800t) but the Chinese and Indian governments have not seen their reserves move up proportionately. They're still stuffed with USD. Will they? And how?

How did the US Treasury gain such a huge portion of the national forex reserves in gold? If you recall FDR signed the Emergency Banking Act and confiscated citizens gold in 1933. What are the chances the Chinese government would allow its citizens to keep their gold in the event of an equivalent Depression and China Emergency Banking Act? Are the Chinese leaders encouraging their citizens to buy gold for an altruistic reason? Remember this is the same Chinese Communists who gunned down protesters at Tiananmen Square and the successors to Mao and that brutal regime that murdered millions of its own people. The Japanese WW2 invaders were kind in comparison to Mao! Under a pretext of war or a banking emergency governments use those opportunities to victimize citizens rights and private property, US Constitution or not. We saw what FDR did in the Land of the Free and the Home of the Brave in the 1930s. FDR and Congress used the US Constitution for toilet paper and as we have seen in recent times Congress and all Presidents still consider the US Constitution as toilet paper. Am I being too harsh? Well, actions speak louder than words. 

An even bigger question is the EU and Germany have much of their gold stored in US vaults. What of German repatriation and what about Italy and France? The US Fed and its member banks, which are also bullion banks with gold vaults and some of the largest long term COMEX shorts, seem to have only one view on "property" and if it is in their possession then "possession is 10/10ths of the law-never mind 9/10ths!" I have to wonder where the US gold reserves belong? I know they are in US Treasury and US Fed vaults but who contractually owns the gold? Just how deep is that audit? Can the US Treasury repatriate its gold from the NY Fed?

I asked questions awhile back about the US Treasury and its valuation of 8,133tonnes of gold reserves, more than any of the ETFs including GLD. The US Treasury lists its gold at $42.22 per ounce. It has not changed since Nixon days. You have to ask why when all other governments use a spot price valuation? In 2005 the IMF made plans to sell gold and revalue it from $47 to $435. First off the IMF is US owned. In the IMF charter they cannot sell any gold reserves without the permission of the US as the US can veto any proposed sale.The fear then was that such a revaluation to sell gold would cause the gold spot price to fall. First of all, how does the COMEX gold price fall when the transfer of IMF gold is not part of the COMEX? None of the central banks move gold on the COMEX. Also for every seller there is a buyer. I think the more truthful answer is that revaluing gold prices at the US Treasury in particular would signal that the USD reserve currency would technically be devalued. If the US Treasury has maintained a reserve price of $42.22 USDs since the 1970s how would it look for the US Treasury to sell its gold reserves in 2014 at $1300 USDs? It would essentially tell the world that the USD has lost a large portion of its purchasing power. Not exactly news to US Social Security retirees today as they have to use EBT to buy cat food! 

In the rest of the world and particularly Asia, people do not think like we do. As far as they're concerned, gold is the only long term asset worth holding. It is the family pension fund. I like quoting the typical situation in India. I first went to India in 1965 and the price of gold at that stage in rupees was around about 170 rupees an ounce, it is now about 80,000 rupees(47,000% increase). 

Still not as good as the first US Social Security recipient's(Ida May) 93,000% return on her investment of $24.75USD. However you look at it governments and their central banks have steadily devalued currency over the many decades. They can do that because they make the laws and dictate money as they own the military. Honestly if US citizens don't see that as a "severe tax" on earnings and revolt then the US Constitution really is toilet paper.

I think I read once that the entire gold market that includes all gold ever mined and gold held outside the COMEX, TOCOM and LBMA and GLD priced at $1500 per ounce is worth $8.2TRIL. Compared to global debt markets both sovereign and corporate and stock and derivative markets that isn't even a drop in the bucket. I mean since Obama took office the US Debt has risen $8.4TRIL. I can never figure out why such a tiny market of worthless barbaric relics gets so much attention from governments, central banks, futures traders, economists and market analysts and CNBC. If gold is as worthless as Warren Buffet says then why does the US Treasury never sell its gold reserves? Why do 4 billion people care and why have gold markets expanded so much internationally since the last record highs from the 1980s. Remember back then not even the Chinese Maoists had a gold market. In fact for a long time from 1933(EO 6102) to 1975 not even US citizens could freely own or trade gold under the Gold Reserve Act 1934. Why do global citizens hoard it so much and why do governments fear it or confiscate it if it is worthless? In this world of $800TRIL of derivatives and debt just what is "value"? What is a "fair market"? What is safe? 

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Value Systems

Plenty of good laughs, thank you.

Hmm So Switzerland is mining gold? That must explain the Vast cavity in the Matterhorn. (Steady!) Either that or it's got a soft center.

Ah- White men and their gold!

Cattle, women and goats are what real men value.

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Nice picture and link,

Nice picture and link, Arthur.

I read the article and I found this quote interesting:

The Federal Office of Hiking Tourism (FOTP) has already begun preparing for post-Matterhorn reality. In discussion with the country's primary postcard producers, they are trying to find the best viewpoint for promoting the international image of the Valais ski resort, says FOTP director Stefan Müller. Hopefully this will help compensate for the inevitable hit that the tourist business will suffer.

 

If the people at Switzerland's tourism office are preparing for a post-Matterhorn reality, I wonder how much time and energy they are putting into a post-peak-oil, ergo post-peak-tourism reality...or an almost-no tourism reality.  

Then, maybe, the Swiss will live a simpler life, with their goats, etc.  Actually, I think that Switzerland was rather poor before the Industrial Revolution, and certainly poorer than most parts of the agricultural cornucopia that is France.  Not a lot of productive land here for growing things, but they do turn lots of grass into milk and cheese with the help of cows.  Though I fear that there's not quite enough Emmental and Gruyere to support 6 million Swiss and 1.7 million foreigners like me.

Cheers,

Hugh

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Before we write off the Matterhorn

Before we write off the Matterhorn, we might note that the alleged vast internal cavity was discovered using "triple-woven spectroscopic probes" which raises some flags for the alert as (a) spectroscopy refers to the detection of electromagnetic radiation (i.e. 'light,' not the preferred method of peering into a mountain we might guess) and (b) "triple-woven"?  Can we now knit up scientifically useful light detectors?

Of course we could also just note the April 1st post date for that article....

/Well played Physorg, well played!

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Doh!

Doh!

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Your assumption

Dave,

your commentary & chart make sense for a trading environment.  But, it appears to me that the Chinese & Indian population have no interest in trading gold.  It is entirely used for wealth preservation.  In a deflationary bubble, I would think more of those people would be buying physical gold to preserve their wealth.  

As Paul Craig Roberts said yesterday in a podcast on another site, gold vs. the dollar is a battle to the death.   Not only is history not on the side of the dollar, but as Chris & Alesdor discussed, population numbers are not either.  As a betting person, I'd say the decades long dollar hegemony is coming to an end sooner rather than later.

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thank you, Chris

Chris, 

Thank you very much for sharing this conversation between you and Alasdair Macleod.

It was fabulous.

Dave 

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Inflation vs Deflation

The crux of the 'be careful everything could fall in price' argument is that somehow debt defaults will (be allowed to) swamp the system and drag everything down, except money of course and dollars in particular.

While this is always a technical possibility I simply cannot see it happening for political or institutional reasons.  That is, the Fed (et al.) are charged with maintaining the banking system in a profitable and healthy state and a big deflationary wipe out would go against that prime mandate.  Big time.

Banks, financial institutions, pensions, endowments and careers will all be destroyed in a deflationary rout.

But let's leave open the possibility that what should happen, will happen.  I concede it's always possible.

The last five years have taught me that the Fed (et al.) will do literally anything, prop any market, inject any liquidity, buy any assets, plant any stories, and, yes, sell gold in order to prevent that deflationary outcome.

So a bet on deflation is a bet on the Fed tossing the towel and admitting failure.  Again, that's always possible, but I do discount that as being very unlikely.

This chart explains it all...nothing, and I mean nothing matters to the banking system besides continued growth in credit (and by extension money).  With such growth stability and profits.  Without it, collapse.

Further, the idea that China and/or India will become poor, simply because the US enters some form of deflationary bust needs to be fleshed out.  Why would this necessarily be the case?  What if the various currencies become decoupled in the next great crisis?  

This is the thesis of Jim Rickards, in part, who I recently interviewed which will soon be posted to the site.

If they do become decoupled, what will take the place of the US dollar in the reserve currency role?  SDRs?  Gold?  A new basket of currencies?

Lots to ponder.  But I no longer think about what *should* happen, but more along the lines of what will happen.  

My basic conclusion is that the Fed (et al.) will simply keep doing more of the same until something breaks.  That is, they will prop up stocks and bonds (see also:  Spanish 10 year debt trading below US 10-yr!) and continue to suppress gold.

All of that will trundle along merrily until it cannot.  At that time you had better have your basic portfolio and household positions established because it will be emotionally and physically difficult to accomplish much in the turmoil.  At least that's my theory.

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Chris, Really great interview

Chris,

Really great interview with Alasdair. I appreciate the bottom line facts that he presents and between the two of you, the outcome of this predicament is pretty easy to see for us laymen.

I understand you will be on Turd Fergusens A2A  today as well so I'm looking forward to that discussion. I don't think the opportunity to 'buy the dip' will last too much longer ...... but I have thought that for a long time now! 

When is always a guess! That is nearly assured.

The rest of my day will be spent on a windmill, soil improvements and getting ready for this seasons potato patch!  Cheers!

Coop

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cmartenson wrote: All of that

cmartenson wrote:

All of that will trundle along merrily until it cannot.  At that time you had better have your basic portfolio and household positions established because it will be emotionally and physically difficult to accomplish much in the turmoil.  At least that's my theory.

The gold analysis was great...but this last quote was right on target.  Not looking forward to how this plays out.  Gold and Silver can rise, but the potential turmoil is what makes me nervous.

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will defaults be allowed

Chris-

While this is always a technical possibility I simply cannot see it happening for political or institutional reasons.  That is, the Fed (et al.) are charged with maintaining the banking system in a profitable and healthy state and a big deflationary wipe out would go against that prime mandate.  Big time.

Agree completely that the Fed will not want this outcome to occur.

However, my contention is that likely our Friendly Bankers won't have enough political capital to engineer another bank bailout on the scale of TARP with asset injections, etc. - nor will there be enough room on the sovereign balance sheet for it either, in any of the countries where it happens.  So, the next time we have a banking crisis, we'll have bail-ins, both here, and in Europe.  And the bail-ins will be massively deflationary, because it results in removing large numbers of assets from the system.  Free from the government's point of view, but massively deflationary from the point of view of the person who just lost their asset.

It will be a liability jubilee for bank balance sheets, not for actual people.

And following the bail-in extravaganza, how exactly will the Fed reflate?  Buying treasury bonds?  That doesn't lead to inflation, as we've seen.  Simply increasing money supply alone isn't (re)inflationary.  Print 3.5 trillion and if it gets stuck in Excess Reserves, then nobody cares.  Will they actually do a Steve Keen-style jubilee?  That would certainly work, but since it involves helping real people and not banks, I doubt its high on the Fed's list of possible remedies to try.

Hussman likes to say that the real thing that saved the system last time around wasn't QE, it was allowing the banks to mark their portfolios full of junk to fantasy (i.e. "hold to maturity") - and that alone saved the banking system.  One small rule change, and that was it.  So - will QE4 save the system and cause the Great Reflation?  Probably not.

I think the odds of a banking crisis- bail-in - deflationary bust are not a low probability event.  It would likely be followed by attempts to do a QE4 that will end up with a massive amount of money sitting in Excess Reserves - i.e. not moving the needle at all in the real economy.  It will take the Fed time to figure out that it isn't working.  During that time...what happens to gold?

And more importantly, what will they do?  If the bond-buying-excess-reserves game won't cause the reflation they desire, what will they do?

Further, the idea that China and/or India will become poor, simply because the US enters some form of deflationary bust needs to be fleshed out.  Why would this necessarily be the case?  What if the various currencies become decoupled in the next great crisis?

I'm always up for a good fleshing-out.

Case 1)

China could have a deflationary bust all on their own.   Credit growth was - what - 13 trillion over the past 5 years?  In a 9 trillion dollar economy?  In 5 years!  I'm just guessing there's some malinvestment & unserviceable debt there.  We see hints of one forming already all on its own, and there IS no economic crisis on the horizon right now.

Case 2)

The west gets a recession, and that triggers a Chinese deflationary bust, since China is already right on the edge of one anyway.  Last time the world had a depression, the country that suffered the most was the exporting nations - the US.  This time around, that is China.  And India.  And all those low margin Chinese manufacturing companies who funded themselves with debt will be unable to service those debts.  Workers tossed out of work won't be able to make payments on those expensive Shanghai condos.  Boom.

Will people in China be buying or selling gold when they're out of work, can't make payments on something they've sunk huge down payments into, and imagine is the key to their retirement?  On balance, my guess the answer is "selling gold" rather than "buying gold."

The second and third condos were bought with large down payments of "middle class savings", which will all be wiped out if property values tumble back down to earth.

That's massively deflationary, which is not the environment that encourages people to buy gold.

Again, if things keep ticking along like they are, China has a voracious gold appetite, as does India.  I just think its important to realize the massive credit/money growth in China probably has more than a little something to do with their ability to actually buy it.

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no interest in trading gold?

jcat-

But, it appears to me that the Chinese & Indian population have no interest in trading gold.  It is entirely used for wealth preservation.

Well, I can only speak to my personal experience in asia, derived from actually living there and observing what people do.

There are lots of people "over there" who, as their avocation, trade gold.  When prices drop significantly, it brings the little old chinese ladies out of their houses (accompanied by their sons or daughters) with purses stuffed full of banknotes.  Lines form out the door of the gold shops, everyone gets a queue number, and everyone waits to exchange their banknotes for now low-priced gold.

But they don't hoard this gold forever.  The reverse happens when gold moves higher.  Then, the little old ladies come to the shop with their gold bars, and leave the shops with purses bulging with banknotes.  These days, many have iPads to check the international price vs the price the shop is showing.  When a serious dip in gold occurs, the activity is something to behold.

It may be a shock, but all those mainstream goldbug stories about Chinese hoarding gold forever like a bunch of Smaug-the-dragon-writ-small doesn't align with what I've seen.  So should I believe the mainstream goldbugs, or my lying eyes?

No doubt the hoard-forever people exist.  But - there are plenty who actually trade gold.  When I was there, I mentioned to a friend of mine that I trade gold.  He yawned and said, "oh, my grandmom does that too."

Buy low sell high.  Imagine that.

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anyone else notice how gold



anyone else notice how gold sits at 1300, silver at 20,crude at 110 and sand p at 1800......no matter what is said about any of them?

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Bring It

I listened to the podcast this morning and sat stunned.  "We are so F****D!" I thought.  "Go back to a gold standard?  With what?  The bastards have stolen everything!  The Chinese get poor all of a sudden?  With their government more then able back their currency with bullion and each housewife with her stash of 10gm gold rings?  What are the rest of us going to have to trade with?  A pocket full of useless plastic!"

Pulling up my emotional socks I went out to meet the day.  So now, having finished a run of late season maple syrup, salvaged over a quart of honey from a hive that didn't survive the winter, finished a cold frame and put tomatoes out to harden and policed up an unruly compost pile, I'm feeling somewhat better.  Resilience, do the next thing.

Bring it!

John G.

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Investment decisions.

If millions of Chinese grandmothers armed with iPads are my competition, What chance have I got? They would eat me up faster than an Algo.

And the bid/ask spread at the Perth Mint is a racket..

I dropped a rotten pomegranate into the soil. When it got really hot the seeds germinated and I ended up with maybe a hundred little seedlings which I potted out. Low investment-high yield. Talk about exponential growth!

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Let the "Bastards" empty out Fort Knox

jgritter wrote:

I listened to the podcast this morning and sat stunned.  "We are so F****D!" I thought.  "Go back to a gold standard?  With what?  The bastards have stolen everything!  

Pulling up my emotional socks I went out to meet the day.  So now, having finished a run of late season maple syrup, salvaged over a quart of honey from a hive that didn't survive the winter, finished a cold frame and put tomatoes out to harden and policed up an unruly compost pile, I'm feeling somewhat better.  Resilience, do the next thing. 

Bring it!

John G.

John,

Let the "Bastards" empty out Fort Knox. I have about as much emotional attachment to Gold as I do to my insurance policy on my house. It's just good to have for protection.

My emotional attachment is to the things you mentioned like maple trees, and compost and tomatoes. I can get excited about that stuff and I feel human when I'm working out in Nature. Gold is a yawn. Living things are much more intriguing. 

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it's time to just live as we

it's time to just live as we should and stop the lamenting,,,crickets.

yak or sow...up to you

i don't care what you do.....i'm sowing and reaping here on my homestead.

arthur....what;s an ipad?

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Amen, brother!

As Steven McCroskey would say, "Looks like I picked the wrong week to quit drinking".  So, anywho, I just got back from the "lower forty", making a couple of compostable (nocturnal) fertilizer deposits in the holes, in the garden, that I dug up recently.  I feel bad for my neighbor's dog.  She is so sweet, and curious, yet seemingly confused; particularly when I get on all-fours and start covering (i.e. spreading the dirt around).  I can see the wheels turning.  I feel somewhat better as well.  Do the next thing and make a deposit for resilience.

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iPad.

What's an iPad? My impression is that it is a large iPhone Ferralhen. 

( Would you like to come up to my pad to check out my iPad?)

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Koos Jansen

Gold even became more interesting. Excellent and very important podcast!

Just an aside, but being from The Netherlands, I just have to let you know that the correct pronunciation of Koos Jansen's first name isn't like ''goose', but like "goes".

Just in case you ever speak to him. :-)

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Koos Jansen

Maybe an idea for a future podcast?

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The Fed's Next Steps

davefairtex wrote:

So, the next time we have a banking crisis, we'll have bail-ins, both here, and in Europe.  And the bail-ins will be massively deflationary, because it results in removing large numbers of assets from the system.  Free from the government's point of view, but massively deflationary from the point of view of the person who just lost their asset.

It will be a liability jubilee for bank balance sheets, not for actual people.

I completely agree that a system-wide bail-in will be massively deflationary.  I rather doubt it will be survivable for all the affected institutions because there simply won't be enough of an economy left over for them to all skim from.   So some won't make it.

As to your next query, Jim Rickards said at the Casey conference last year that the Fed had ticked 13 places down a 14 point list and there was just one thing left on it....

And following the bail-in extravaganza, how exactly will the Fed reflate?  Buying treasury bonds?  That doesn't lead to inflation, as we've seen.  Simply increasing money supply alone isn't (re)inflationary.  Print 3.5 trillion and if it gets stuck in Excess Reserves, then nobody cares.  Will they actually do a Steve Keen-style jubilee?  That would certainly work, but since it involves helping real people and not banks, I doubt its high on the Fed's list of possible remedies to try.

...that final thing, lucky number 14, is a massive income tax cut, if not a full holiday for the year, if not a retroactive 'rebate' for one's past several years of tax payments handed out by the Treasury with the explicit backing of the Fed to buy up whatever incremental debt results.

That would do the trick and I cannot imagine how much support they'd get from the general populace!  Thunderous applause from the stadium for the next act in the Bread and Circus theatre!!

Will people in China be buying or selling gold when they're out of work, can't make payments on something they've sunk huge down payments into, and imagine is the key to their retirement?  On balance, my guess the answer is "selling gold" rather than "buying gold."

I too have concerns that China is headed for a big bust and that could wipe out their appetite for all sorts of things, including gold, oil, copper, steel, ore, .... you name it.

It's one of the risks I put in the section on gold demand.

But they'd also lose their appetite for accumulating more Treasuries, something they  already seem to be exhibiting, and might even get a hankering for doing some selling.

Given the ~$4 trillion in forex reserves they hold, a pile without historical equal, I do wonder what would happen if faced with the dilemma of letting their system implode or selling their reserves to prop up their system?

At that point the western central banks would have to dispense with the flimsy optics they have in place and openly monetize each other's deficits.  While I simply cannot understand why so many people still have so much money tucked in banks (given the bail-in scenario) I also cannot understand why so many have accepted the idea of central bank printing as somehow normal or tolerable.

We know that story ends badly, or we ignore a whole lot of history.  There's not much middle ground to stand upon.  I think people eventually wake up and say what were we thinking! and move to get out of an obviously poorly run, corruptible, and illusory system of money and banking.  

I also think that transition in thinking will happen very quickly, perhaps too quickly for most people to react well or even at all.

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THE WESTOLA VIRUS

Aloha! The Asian countries are suffering from what I call the "Westola Virus". This is similar to the Ebola Virus only on a monetary and financial level. The "West" has infected not only the Asian governments and markets but the entire world.

Chris wrote ..

But they'd also lose their appetite for accumulating more Treasuries, something they  already seem to be exhibiting, and might even get a hankering for doing some selling.

Given the ~$4 trillion in forex reserves they hold, a pile without historical equal, I do wonder what would happen if faced with the dilemma of letting their system implode or selling their reserves to prop up their system?

The Asians who are in power politically and financially have been sending their kids to the USA and UK to be educated for decades now. They are educated at the most influential universities there are. That would be schools like Harvard and Oxford and all the other ivy leagues. These are not so much centers for learning as they are centers for entry into the elite class. You are educated and trained to be an elitist. Most of the people I have met from those institutions have the superiority complex that goes with it!

To a layman who was not educated at those schools it is amazing that they still carry so much clout. If these schools really did create these marvels of genius then why is this world in such decay and corruption? From every angle the world is worse off than it was fifty years ago. The governments are more corrupt. The banking system is more corrupt. The corporations are more corrupt. The academia is more corrupt. Society is more corrupt. It seems to me the basis of all this corruption can be traced back to one source ... THE MONEY! When money loses purchasing power and earnings cannot keep up with cost of living then people get desperate and "cut corners" and resort to less than ethical behavior to get ahead or to just "survive". If I were an elitist I would insist on a world where there was a more equitable money system and free market economy. Very few dictators live long or have rewarding lives. Elitists seem to follow dictatorial pathways utilizing monopolistic tactics.

An example is the latest market scandal at Deutsche Bank whereby Kai Lew, a foreign exchange trader, was put on suspension for "benchmark manipulation". She is UK based now but is from Hong Kong and educated at Oxford with a Bachelors in PPE(Philosophy, Politics & Economics). After that she went to work for Goldman Sachs in 2000 learning Fixed Income Derivatives and Debt Syndication. She left the culture of superiority at Goldman Sachs and went to Deutsche Bank at FX Sales. All she has done is led an "elitist" life from Oxford to Goldman Sachs to Deutsche Bank. What product has she produced that has made a better life for the masses? She sells derivatives and debt! Great for her and her monopoly but the rest of the world suffers the "toxic fallout" from elitist greed. Even in her social life she is elitist. I have photos of her at an art auction for the charity TUSK, which has such patrons as the Duke of Cambridge. The auction was sponsored by American Express held in London. She is shown sipping wine with another Deutsche Bank comrade and some Asian model. These elite people's feet never touch the ground! They exist in an Alice in Wonderland world where they can manipulate everything including bank rates with no real repercussions. It is a "carte blanche" life ...

Just like England and the British Empire the British went around the world converting Africans and Asians and Americans into "Little Englands"! The "American Empire" has done the same, picking up where the Brits left off, only we go around the world converting Africans and Asians to "Little Americas"! Our government spends huge quantities of taxes and debt to make the world conform to our view of life. We want them to use our money, use our banks, use our democracy, use our fraud and enforce it with our military and our advanced weapons.

So at the point where China takes over for the American Empire then the "Chinese Empire" will go around the world making "Little Chinas"! The sad reality is all the "Little Empires" have almost no noticeable differences. They are worlds where the rich and the elite still occupy the most privileged lives, mostly done through the manipulations of monopoly and fraud. Like I have said before: "We can put a man on the Moon, but we can't devise a fair money system on Earth?"

Will the human race ever learn from history? It seems highly doubtful.

What's gotten "globalized" most is FRAUD ...

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What to do with my 10 year tax rebate

Chris:

I too believe a huge tax rebate to the general public might be the final desperate act of the Fed/Treasury. Ten years of taxes returned to me in a single check, for example, would set off some serious alarm bells for me. The end would definitely be in sight then. I've drawn some conclusions about that and am still ruminating about what to do at that point.

1. The End is near! Complete final preparations, including perhaps getting out of my city.

2. Act VERY quickly with the money as prices will literally explode in hours or days.

3. My first thought is to spend the whole wad on goldandsilver, as the currency would be about to evaporate. I might divert some to last minute preps but I'm also thinking I might just wait until owners would be glad to barter for goldorsilver. OTOH maybe everything I might want would've been snapped up too quickly to wait around for bartering opportunities.

4. Anybody want to weigh in on what to do with a huge, desperate tax rebate (right before the lights go out)?

Tom

"Welcome to the Hunger Games. And may the odds be ever in your favor."

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Tom, you have that right...

Tom, 

If there's a 'tax rebate' of any substance - not the meaningless $600 from Bush II - I think the only logical response would be to buy first, ask question later.

Have your targets all picked out and ready to go because the advantage goes to the first movers.

Of course, there will be hellacious fights for flat screen TeeVees at Walmart and such, but we both know that's not what I'm talking about.  Might want to stay far away from the usual haunts of the sleep walking consumers as they are not fully in control of their actions when faced with the prospect of free stuff.

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gold/silver

Gold and silver are for things you need at the minute ! Like the peak prosperity aurum for that, a little tiny bit of gold. thanks Adam!

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fed reflation fleshing-out

Chris-

... a massive income tax cut, if not a full holiday for the year, if not a retroactive 'rebate' for one's past several years of tax payments handed out by the Treasury with the explicit backing of the Fed to buy up whatever incremental debt results.

I like item #14.  It makes sense.  A massive tax rebate would certainly seem like "the fair way" to engage in money printing that actually would land money in people's pockets rather than in Excess Reserves.  "We'll keep doing tax rebates until the economy lifts off..."

So if we lay out the series of steps the Fed might take in the next crisis:

1) crisis hits, weaker banks start to wobble (possibly starting in the eurozone), collateral grabs start from CDS owners, bank runs start soon after.

2) "No more bank rescues" announced by various governments.  Once the situation gets bad enough, Eurozone and affected US bank bail-ins occur over a weekend; possibly capital controls and/or accounts frozen "temporarily" except for automatic payments and rent checks, etc.  Credit contracts massively from bail-in deflation.  Money runs and hides in cash, but let's say panic isn't too bad.

3) In support of bail-outs, Fed tries its trusty game plan from 2008 but with a few added bits of oomph: it buys bonds i.e. QE4, institutes negative interest rates, reduced rates on Excess Reserves to 0%.  Market rallies for a time, Fed waits for a while, but credit continues to contract, commodity prices drop, dollar rallies, widespread defaults, market falls again.

4) Finally, the Fed pushes button #14 - massive tax (retroactive) 2-year rebate, a $4 trillion spend by the government, supported by Fed monetization.

Sure, that would do it.  Once #4 hits, dollar would tank hard - really hard.  Treasury bonds (which probably rallied hard for the periods 1-3, with some sell-off during the initial introduction of #3) would tank too, since foreign owners wouldn't want to take the dollar hit and they'd show it by dropping treasury bonds.  Commodity prices (denominated in USD) scream higher, including gold, though industrial commodities might not benefit quite as much.

The elapsed time between #1 and #4 - how long?   6 months?  A year?  How long would the Fed wait after trying QE4, maybe even QE5, then seeing it fail, before moving on to Rickards step #14?

Thats how long we'll have to deal with an unhappy gold market.  Although as soon as Fed tries QE4 we'll get a headfake higher in all the commodities - but since the underlying issues aren't fixed, and the Excess Reserves just pile up higher, nothing gets fixed.

Sounds like a recipe for lots of volatility; an easy way for people to get whipsawed from euphoria to panic and back again.  During such a news-driven market, charts (i.e. trend-based analysis) are pretty much useless as guides to anything.

But it could be quite some time before the Fed has the guts to push button #14.

Luke Moffat's picture
Luke Moffat
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Few alternatives

A number of factors that I hope provide a coherent conclusion.

I buy gold to preserve my expended labour. In an honest and transparent system I would trust the state backed currency to preserve that wealth along with the institutions that said wealth is stored with. I would trust that my labour in 2006 would be traded for the same quality and quantity of goods in 2014. I understand that price is driven by supply and demand combined with inflation but what really irks me is when any government declares a generic price inflation figure. I, as an engineer and concerned citizen (or subject depending on your interpretation), buy a different set of products compared with a mother of 3 children. The idea that we both experience the same price inflation is ridiculous (the government really ought to understand what they can and can’t lie about).

As a modest earner I cannot afford housing or land in which to invest my expended labour. Nor can I trust the state’s guarantee to protect my expended labour hours in a system that continuously erodes purchasing power through creating asset bubbles by expanding credit/debt. I live in the UK so please allow me to quote some figures on UK sovereign debt taken from Maastricht Supplementary Data Tables (first table);

In 2009/2010 UK sovereign debt stood at £1.046 trillion with government borrowing at £163 million per annum equating to a borrowing rate of 11.2% GDP. In 2012/2013 the Conservative/Liberal Democrat coalition was able to reduce government borrowing to £82 million per annum equating to a borrowing rate of 5.2% GDP and yet the UK sovereign debt still increased to £1.386 trillion. The only way this debt will ever be repaid is if a meteor the size of 10 football fields smacks into the earth. And then it no longer matters.

From this point I simply assume that those in power will mirror my own insecurities about wealth depletion and will employ all manner of devices to stop the rot. The difference between the state and myself is that they have a vast array of devices at their disposal whereas I do not. I sense that I am faced with two likely outcomes; 1) the government will inflate my savings away to manage its debts, 2) the government will allow bail-ins so that banks can absorb their losses by using depositors as fodder. From this perspective I see only one choice – currencies outside of the backing system, i.e. gold.

It is fine making witty and cynical remarks about my ‘shiny, shiny behaviour’ but in all honesty I face few alternatives. Of course I would love to own land, set up solar arrays, build an automated farming system and recycle my waste in a responsible manner but to do so I require capital, and the UK government is destroying capital to service its own debts.

I truly believe that only innovation will solve this mess, but in the meantime I shall be turning to gold until I can invest in land upon which I can generate renewal energy, grow crops and apply my engineering/programming skills to construct a basic automated farming system.

Hats off to Chris, Adam and the rest of the PP team for their optimism and encouragement.

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ferralhen
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tom, chris, i;m wondering why

tom, chris,

i;m wondering why it would take the tax rebate to make people of sense to  finally act to prepare and why you or they think they have time to act before the crowd does?  to act before  any signally event for that matter.

chrisnsays: i think the only logical response would be to buy first, ask questions later.

that sounds emotionally charged and not logical to me.

i just don't see buying gold now for any reason...to be logical...there are too many life saving  priorities to focus on if one hasn't alreadygot them  in place.

fh

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davefairtex
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when reflation hits...

After musing about this for a time, it occurs to me that the whole reflation decision might be something that is known by some subset of insiders prior to the news being released to the general public.

In fact, what are the odds that seven people at the Fed will do this all on their own?  Zero percent, I say.

So if we take as given that the news will leak into and among the well-connected, it is quite possible that buying will show up in various places that you might expect it to without any visible explanation immediately prior to the event.  In other words, gold will have spent some amount of time being unhappy prior to the reflation - due to margin calls, forced selling, etc, and then (I'm guessing) shortly before it hits, the prices of gold and other "real goods" will likely rally at least to some degree.

It might be worth following price charts to see if we can spot it coming.  Of course there might be so much chaos that the small signal might be drowned out by all the noise of the period, but its a thought anyway.

My thought has always been to back up the truck (assuming you still have a truck left after bail-ins) when things get really bad in anticipation of a reflation.  Likely I'm being too clever by half - since we have no idea how bad "really bad" will have to be before they push that button.

Likewise, my sense is that when the banks start to get wobbly again, that would be the time to run off to short term treasury bonds at Treasury Direct, regardless of what the folks in charge say about confidence - to avoid that pesky bail-in if possible.  I used to think demand deposits (checking accounts) would be pretty safe, but I'm less certain now.

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Arthur Robey
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Asset or Liability?

Welcome Luke. Good first post.

I see things completely differently. (Wouldn't you know it?)

The government doesn't need your tax money, silly. They can print as much as they want. This is of cause a uniform, blanket tax. But they cannot do this in perpetuity, because of the Zimbabwe syndrome.

Therefore they have to take money out of your wage packet and burn it, to keep the supply and destruction of paper on an even keel.

All well and good. But here is what I darkly suspect is happening.

The PTB don't need your money, but they do need you to drag your sorry tail off to work on Monday morning to get things done. Therefore they watch every penny you earn and every penny you spend. And then they take from you just enough from you to keep you thinking,

"Just one more payday and I will start to accumulate wealth." Ha, Ha Sucker.

That is Now, but what of the future? What happens when the government does not need you to get things done? What happens when you stop being an asset and become a liability? What would you do if you were a rational dictator?

If I were in charge I would make it my priority to make the herd less fertile. And hasn't that been happening?   (Yes I think "Herd" is an entirely appropriate word.)

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ferralhen
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soylent green

soylent green

Arthur Robey's picture
Arthur Robey
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Posts: 3936
Joining the Dots.

It has just occurred to me.

Further to my comment that the system would want to make the Herd less fertile, one of the ways would be to decrease the relative earning capacity of Males (Thereby making them less desirable mates) and at the same time increasing the economic responsibility (Burden) of Females so that they:-

  1. Can't find a suitable mate and
  2. Are too tired to raise offspring on their own and
  3. Are suitably distracted by jetting off to exotic places and meeting really important people.

You are Just Not Like That? Bully for you.

Thomas F. Finnell's picture
Thomas F. Finnell
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Proofreader

Get a new one.

The word is "populace", not "populous".

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mazanda
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DaveFairtex on Steps 13 and 14 in Rckard's scenario

Referring to Davefairtex's analysis, why would gold be in distress upon a massive step 13 QE announcement; one would expect this nominally inflationary act would cause gold prices to rise. We know it won't cause inflation, but market reaction would be an assumption of ultimate inflation and rising commodity/gold prices. Upon step 14 all bets on deflation are off and prices would take off exponentially. What am I missing?

Luke Moffat's picture
Luke Moffat
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Queen Bee – the Future of Humanity?

Arthur,

Turning towards nature’s most refined matriarchy suggests that empowered females could make the system sweat for them. Eager males combined with child-welfare achieve the same goal as a bee colony – the queen gets impregnated by one lucky drone (who subsequently loses his penis) whilst those less fortunate drones are evicted in the winter to starve or freeze to death (whichever comes first). I would suggest that women on the lower rungs of the economic ladder see children as an entitlement program – get knocked up, evict the male and take society’s honey! Although your theory holds true for our more select females – ‘birth rate Japan’ coming to a home near you.

I wonder if populations will reduce further owing to automated warfare. We no longer need to field the largest army of indoctrinated humans – simply send in the drones. It would then follow that a population surplus actually becomes a surplus to requirements. How this sterilisation is extended to the wider population becomes an interesting discussion in itself.

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davefairtex
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Step 13 QE

mazanda-

My working theory is that QE isn't actually re-flationary if and when the recipients simply stuff the proceeds of their bond sales in Excess Reserves at the Fed.  If the world explodes in crisis again, I don't see the big banks taking hypothetical QE4 proceeds and deciding to take risk.  Instead, they'll stuff them under the mattress.

So while a QE4 announcement might goose the market temporarily (and gold will spike for sure), once it becomes clear that QE4 won't lead to any actual fix of bank solvency AND the dollars are just being parked in Excess Reserves again, the market (in all of its facets, including gold) would resume its downward slide.  We saw this a lot during the 2008 fix.  Government announces an intervention, market spikes causing a bunch of short covering, only to resume moving downhill once everyone figures out the intervention won't really address the core issue.

The difference between step 13 and step 14 is that real people are much more likely to spend QE money than banks are.  QE that gets dropped on real people will have a much higher proportion of it being spent directly into the real economy.  Or so my thought is anyway.

My key question is - how long will the Fed try QE4 before realizing it won't help and moving to the Big Gun.  That's how long we have to deal with a largely unhappy gold market.

Again, just my theory.

mazanda's picture
mazanda
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Step 13

I understand your assumption regarding the non-inflationary effects of step 13 and I actually agree with it, but there is no reason to assume the market will treat gold badly upon such an even. In fact, it is more likely for the market to finally perceive the long-term effects of perpetual QE in step 13 to be inflationary and push gold prices rising accordingly.

davefairtex's picture
davefairtex
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gold & step #14 - first principles

mazanda-

...there is no reason to assume the market will treat gold badly upon such an event. In fact, it is more likely for the market to finally perceive the long-term effects of perpetual QE in step 13 to be inflationary and push gold prices rising accordingly.

If Step #13 (QE4) is perceived by the market to be inflationary, step #14 won't be needed.  The whole goal is to reflate with minimum intervention.  I assume that if step #14 is needed, QE4 didn't work.

So for the Fed & Congress to execute step #14, prices on assets must be a lot lower than they are today.  Likely, that would involve a deleveraging firestorm similar to what we saw in 2008.  That will take down anything that involves futures contracts, which are usually leveraged 15:1 or more.  Gold included.

If we imagine gold will rise while everything else drops during a deleveraging firestorm, I believe that to be an extraordinary claim, not backed up by historical performance.  When your margin calls hit, you sell what you have available to sell, not what you want to sell.   Nobody will want to sell their gold at those prices, but for those in debt, they will be forced to do so or else lose everything.

So given all that, my only question is, how bad will things have to get and how long will that take in terms of elapsed time before Congress and the Fed execute step #14?

See the chart below - leveraged longs bailing out led directly to the price of gold dropping.

The Chinese will likely be buying (unless they too are having a meltdown) - premiums over COMEX were about $20 during the bottom in 2008 - but it won't be enough in dollar terms to offset the unwind at COMEX.

Cr's picture
Cr
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Comment 'Koos Jansen'

http://www.ingoldwetrust.ch/sge-withdrawals-equal-chinese-gold-demand-pa...

(doesn't agree with alasdair's analysis)

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cmartenson
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Posts: 4664
Koos does not agree with Mcleod

adamus wrote:

http://www.ingoldwetrust.ch/sge-withdrawals-equal-chinese-gold-demand-pa...

(doesn't agree with alasdair's analysis)

We've reached out to Alasdair for a response, and will reach out to Koos too as we'd very much like to have as much clarity as possible on this matter, of course.

It should be noted that Koos' own estimate of 2,197 tonnes for 2013, based on the proposition that the SGE withdrawals = 100% of Chinese demand, is both well above the WGC estimate of 1,187 tonnes and almost certain to be low because it excludes the 587 tonnes of net imports that Hong Kong made in 2013 on the basis of not being sure in whose hands that gold ended up.

It could have landed in vaults that serve non-Chinese customers, or perhaps in jewelry that Chinese citizens bought and walked back over the border...it's not known.

Further the 2,197 tonnes excludes any smuggling or customs circumvention that might occur and also rests on the proposition that 100% of Chinese mine output flows through the SGE and is not bought by the PBOC through other channels.

Koo's analysis completely sidesteps the issue of PBOC gold accumulation and simply assumes that since we cannot see it it cannot be additive to the SGE numbers.  this is a very conservative approach and it could well be right, but I am about as certain as I can be that the PBOC has accumulated gold over the past few years and that it does not buy it openly through the SGE leaving it a mystery as to where and how it got it.

If they got it through proxies operating on their behalf through the SGE then Koos analysis is closer to right....if the PBOC sourced it from Hong Kong or further, then those amounts would ahve ot be added to Koos' analysis.

Bottom line, Koo's numbers are as conservative as can be, and that's a great starting point.

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