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Why There May Be a Lot Less Gold Than We Realize

One report suggests a shortfall of 50% of stated US reserves
Wednesday, April 17, 2013, 5:26 PM

Executive Summary

  • The U.S. may have a lot less gold than widely believed
  • Replacing these missing reserves would be extremely costly and disruptive
  • Understanding this, the recent market manipulation begins to make sense (in a tradable way)
  • Why physical ownership is of paramount importance now as supply is increasingly tenuous

If you have not yet read Part I: Unintended Consequences Are Increasing World Demand for Gold, available free to all readers, please click here to read it first.

Exactly How Much Gold Do We Have?

There's growing concern that a lot of official gold has been leased out into the market and that sooner or later, as happened back in the late 1990s, one or more parties, perhaps bullion banks or a metals exchange, would run into difficulty trying to meet a physical gold delivery commitment.  

For a short video on the mechanics of gold leasing, click here.

If a lot of gold has been leased out, someday it will have to be rebought, and difficulties may emerge if the gold cannot be rebought in sufficient quantities without creating mayhem within the financial system by causing a very large hike in the price of gold.

Important:  The amounts of gold leased by central banks is a very closely guarded secret, and we do not have direct information on them, which means we have to try and back-calculate these amounts by other means.

A recent and thought-provoking study regarding gold leasing was done by Sprott Asset Management in March. After accounting for all known flows of gold into and out of the U.S. over the past 22 years, the Sprott team arrived at a figure of nearly 4,500 tonnes of gold that cannot be accounted for.

Here's the summary flow chart... » Read more

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Protecting Your Wealth from Deflation

And from a broken system run for the benefit of the banks
Monday, April 15, 2013, 5:18 PM

Executive Summary

  • The current gold slam has *nothing* to do with the fundamentals for precious metals, which are very favorable right now
  • How bad would deflation be?
  • Evidence that deflation is arriving
  • Why our current monetary system has become so compromised by the banks
  • How to best protect your wealth from both deflation and the banks

If you have not yet read Part I: This Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks, available free to all readers, please click here to read it first.

About Those Wealth Transfers

The biggest news of the recent past is the flow of gold from West to East. 

(Source)

With China importing 835 tonnes of gold in 2012 that we know about (and they may well be doing more under the table for official purposes) and also standing as the number one producer of gold, with ~360 tonnes of domestic production, none of which is exported, China is consuming at least 44% of total yearly world gold production.

Connect that with India importing between 200 and 300 tons per quarter (2011 imports were 967 tonnes, and 2012 was 864 tonnes), and this represents another 33% of total world mine output.  Add in Russia buying more official gold, and you suddenly find that a commanding proportion of the newly mined gold in the world is headed East, where it used to stay largely in the West.

To be clear, I view gold as money and therefore wealth itself.  Everything else that can be manufactured out of thin air is merely a claim on wealth.  In these terms, the West is slowly but steadily bleeding control of wealth to the East, something I thought our leaders were both aware of and focused on.

Knowing the lower prices will only exacerbate this West-to-East flow, I therefore thought that the bullion banks and central banks would not have dared push that dynamic any further.   But apparently no, obviously I was wrong, which pains me on several levels.

Add to this the various things going on in the world today, and I honestly thought we were in the most gold-favorable landscape of my life.

Consider:

  • Negative real interest rates (powerfully gold- and commodity-friendly throughout history)
  • North Korea threatening nuclear and conventional war
  • Open confiscation of wealth in Europe from bank accounts
  • Japan doubling their monetary base in a brazenly desperate bid to stoke inflation by attacking Japanese trust in their own currency
  • Extremely unfavorable bond yields up and down the yield ladder
  • Continued European stress and discord with the possibility of a Eurozone disintegration

Taken together, this level of system, sovereign, and institutional uncertainty is about as gold-friendly a situation one could concoct... » Read more

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The Gold Slam

Engineered by and for banks
Friday, April 12, 2013, 4:11 PM

Yesterday I had the very rare and delightful opportunity to visit with market legend Richard Russell.  Now in his 80s, his mind is sharp, his hearing is excellent, and he writes daily for his thousands of subscribers.  As a longtime reader of his work, I respect him for neither being bullish nor bearish, preferring to let his market indicators tell him which way the wind is blowing.

He’s been writing his newsletter since 1958 and has not missed a single month.  His home is crammed with books and monitors as he constantly surveys the landscape for clues and guidance.  He’s been in the game for a long time, has paid attention every step of the way, and has seen all of the ups and downs, fads, and real wealth trends across all of those decades. » Read more

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Off the Cuff: Faster & Furiouser

Dangerous exponentials everywhere
Thursday, April 11, 2013, 2:08 AM

In this week's Off the Cuff podcast, Chris and Jim discuss:

  • Bitcoin Bubble?
    • The price action looks like one
  • The Japan experiment
    • Look East to see our future
  • In Fraud We Trust
    • Our banking system is run on accounting fraud
  • Staying Sane
    • Focus on what’s under your control
Insider

Unsound Money

Japan is becoming increasingly unstable
Friday, April 5, 2013, 10:28 AM

The Bank of Japan threw a shock-and-awe bombshell into their markets, and world markets, by announcing a massive program of thin-air money printing designed to finally crush the dreaded deflationary monster that has been stalking the Land of the Rising Sun for two decades. » Read more

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Positioning Yourself to Prosper in the Post-Capitalist Economy

The dawn of the 'self-reliant' worker
Thursday, April 4, 2013, 9:04 AM

Executive Summary

  • The importance of "ownership" of specialized & skills
  • Why decentralization of work (vs the traditional hierarchical organization) is the future
  • Why disruption and fluidity will be the norm for most sectors of the economy
  • Why flexibility, innovation and self-reliance will be the hallmarks of the successful post-capitlaist worker

If you have not yet read Part I: We're Living Through a Rare Economic Transformation, available free to all readers, please click here to read it first.

In Part I, we reviewed the basic structure of what author Peter Drucker termed the post-capitalist society, a knowledge economy based on a model of decentralized, perpetually innovating organizations.

In Part II, we ask: How do we turn these structural insights to our own advantage?

Structural Inequality

I want to start with the social-political-economic divide that is endemic to the knowledge economy: the widening gap between the class of knowledge workers, which Drucker understood would be the smaller of the two classes, and service workers.

In broad brush, those workers and enterprises engaged in sectors that generate most of the wealth creation will do much better financially than those engaged in low-margin sectors.  In the knowledge economy, those with high-level, specialized skills will create more value and thus be better compensated than those with generalized knowledge and/or lower-level skills.

A fast-food worker, for example, is the modern-day assembly-line worker.  The entire process of assembling and serving fast food is highly organized for speed and efficiency.  But since the product is not high-value, the workers cannot be highly compensated for this work.

As Drucker recognized, all work requires management, and all organizations need to learn to innovate.  This creates opportunities for highly trained, specialized workers and managers, but it doesn’t do away with service jobs, which will remain more numerous than knowledge-intensive jobs.

This leads to a sobering conclusion:  Just producing more highly educated workers does not create a demand for those workers’ skills... » Read more

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Off the Cuff: Cognitive Dissonance

These are trying times for the prudent
Wednesday, April 3, 2013, 3:23 PM

In this week's Off the Cuff podcast, Chris and Mish discuss:

  • Europe Worsens
    • Even Germany is showing signs of weakness now
  • David Stockman
    • Everyone's trying to shoot the messenger
  • Cognitive Dissonance
    • It feels like we're taking crazy pills
Insider

Rise a Pauper

Wealth confiscation is the next stage of the game
Monday, April 1, 2013, 8:46 PM

Because of exceptionally poor decision making on the part of Cyprus leadership both before and during the recent crisis, Cyprus is now consigned to a very dark future of economic depression and failure.

Whatever the jabbering from the Troika, a precedent has now been set.

The one genie that cannot be placed back into its bottle is the notion that bank depositor accounts are now fair game.  The larger lesson here is that a wealth tax is now one of the solutions on the table for various government authorities across the EU, US, and other developed nations. » Read more

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Off the Cuff: Whither the US Dollar?

A hot debate worthy of your time
Thursday, March 28, 2013, 12:50 AM

In this week's Off the Cuff podcast, Chris and Charles Hugh Smith do something a little different.

Given the thoughtful and in-depth discussion resulting in our recent article on the future of the dollar's purchasing power, Chris and Charles engage in a fundamentals-based debate on the outlook for the U.S. dollar over the next decade.

This is one of those instances in which Charles, a valued contributing editor to Peak Prosperity, sees the future differently than Chris... » Read more

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How to Survive the Mother of All Bubble Burstings: A Collapse of the Bond Market

It's time to batten down the hatches
Thursday, March 21, 2013, 4:43 PM

Executive Summary

  • The three main signs presaging a bond-bubble collapse are now evident
  • Why the Fed will fail to get new credit debt growth at the rate it needs
  • The return of CDOs and other risky tactics that show market participants have returned to reckless thinking
  • How a bond market collapse will play out
  • How to product yourself and your wealth during the extreme pain of a bond market collapse

If you have not yet read Part I: Investors Beware: Market Risks Today Are Higher Than Ever, available free to all readers, please click here to read it first.

The dangers growing in the bond market are, of course, all the result of the Fed, et al., cramming the real rate of interest on Treasury bonds into negative territory, starving investors for income, and forcing them to chase yield whenever and wherever it can be found.  Given a long enough time without a serious disruption in the markets, you eventually find yourself exactly where we are, with everyone chasing yield because they have to. Hey, everybody else is, and nothing bad has happened yet, right?

Of course, the odds of this ending well are practically zero.

How ridiculous has it become?  How about a company currently in bankruptcy proceedings able to sell bonds at investment-grade yields?

AMR Bankruptcy Yields Record-Low Bond Coupon

Mar 13, 2013

American Airlines is selling investment-grade debt even as it spends a 15th month in bankruptcy while bond buyers look ahead to the merger with US Airways Group Inc. (LCC) that will create the world’s largest carrier.

The AMR Corp. (AAMRQ) unit issued $663 million of so-called enhanced equipment trust certificates yesterday that included a portion paying 4 percent, matching the record low coupon for similar airline debt, which was first awarded to United Continental Holdings Inc. in September, according to data compiled by Bloomberg. American is also seeking to refinance about $1.3 billion of bonds backed by aircraft after receiving court approval to do so in January.

By the time you have 'investors' offering money to a perpetual basket-case like AMR a company that also happens to be in bankruptcy proceedings at present at investment-grade 4% yields, you know you are in the midst of a crazy bubble. Consider this anecdote to be the bond market equivalent of a hairdresser from Las Vegas buying her 19th house... » Read more