What’s up with the metals? Part 2

Someone asked me whether I “was still in favor of gold.” The answer is an unqualified Yes. One easy reason is that almost every country on the planet is trying to drive down the value of their paper currency. So if you live in the US, it looks like this, and this is based on the US Government’s statistics for price inflation and we all know that they have every reason to play games to make this number look a lot lower than it really is, so you can safely increase each of these number by 50%:


The first column, CPI, says plenty: That if you live in the US, since the year 2000, the purchasing power of your money, of your salary, has lost 39%. And this is during a period that they claim has had “low inflation”! And the US Federal Reserve is currently on record as saying they are trying to create more inflation. So when you own US Dollars, or items denominated in Dollars such as US stocks and bonds, or items in currencies pegged to the US Dollar, realize that this is only going to get worse. The same is true for the purchasing power of the other currencies.

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The post What’s up with the metals? Part 1 showed that some notable gold bears had turned bullish and that unprecedented demand for physical gold continued. Despite the strong demand, gold then had the bargain price of $1,237 per ounce, having just bounced up from $1,181 on the last day of 2013. Price went to $1,355 Monday and has pulled back to $1,338 today.

The strong demand for physical bullion, coins, and jewelry, documented in Part 1, has continued. Despite record-breaking demand in 2013, Chinese demand year-to-date is 51% higher than demand to this point in 2013. Mints around the world are working overtime:

     U.K. Royal Mint Runs Out of Sovereign Gold Coins on Demand

The U.K.’s Royal Mint, which traces its history back more than 1,000 years, ran out of 2014 Sovereign gold coins as prices near a six-month low led to “exceptional demand.”

     Gold Mint Runs Overtime in Race to Meet World Coin Demand

Austria’s mint is running 24 hours a day as global mints from the U.S. to Australia report climbing demand for gold coins…

Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.

Global mints are manufacturing as fast as they can…“The market is very busy,” Lang said. “We can’t meet the demand, even if we work overtime.

So, if demand for physical gold is so strong, how could there possibly be such a price drop as happened in 2013?  The answer is simple really. They have created a paper gold market that is hundreds of times larger than the physical gold market. By larger I mean in terms of the dollar value of trading in these two markets. People trade paper that has more or less of a connection with gold (sometimes none at all), and it is in these large markets that the price of gold is set. Most of the participants in these paper gold markets believe that they could, if they wished, convert these pieces of paper into physical gold, that the pieces of paper are claims on real gold. But in reality, only a tiny fraction of them could succeed in converting their claims into real metal. There just isn’t enough metal to go around.

If you think I exaggerate, check this chart, which I’ll explain below. It describes the action at the COMEX, the primary gold price-setting exchange in the US:


The key phrase on the chart is “Owners Per Ounce,” which for the COMEX is now at 111 owners per ounce of gold in the vault! That is, for each ounce of gold in the COMEX vaults (the blue line in the upper section of the chart), 111 contracts exist that allow the owners of those contracts to demand delivery of that single ounce of gold. We all understand that banks operate with only a little cash on hand for all the deposits they’ve taken, called a fractional reserve system. The COMEX is the same, worse actually: percentagewise, they keep a lot less gold around than the banks keep cash on hand.

(Please skip this paragraph if you already understand what 111 owners per ounce means!) Let me explain: The COMEX is a futures trading exchange where people trade gold and other commodities. Futures exchanges were created to be a meeting place between producers of a commodity and its end users. In January of any year, for example, a producer of wheat can agree to sell wheat in the future, in September, at a specified price to a cereal company. Both the wheat farmer and the cereal company know that they can make a reasonable profit on their operations if the farmer supplies, and the cereal maker takes delivery of, wheat at the pre-arranged price when that wheat is ready in September, so they make the deal. That’s called a futures contract. It promises both delivery and payment in the future at set price, and that’s great. But the futures exchanges are now dominated by big money speculators who have no intention of producing or taking delivery of anything. The chart above reflects this reality. The COMEX vault is supposed to have gold to back up the gold trading that takes place on that exchange. As you can see in the upper panel of the chart, back in 2006 they had over 5 million ounces backing up the contracts. Now that amount has fallen by 93% to only 370,000 ounces as more people realize that they better stop trading paper and get their hands on the real stuff.  Currently, for all the futures contracts to buy and sell gold on the exchange, they only have 1 ounce for every 111 contracts in existence. These contracts are paper gold, a huge synthetic supply of fake gold.  If everyone decided to make their claim for real gold (similar to a run on bank), only 1 ounce would be available for every 111 claims. Such an attempt would drive the price of physical gold into the stratosphere. On a typical day last week, 55,000 of these paper contracts traded hands. That represents 5,500,000 ounces of paper gold traded each day just at the COMEX. That trading sets the price for gold in the US. But it’s possible that no one demanded delivery of gold from the COMEX on that same day. So the trading that sets the price is really for cash, not for gold. And this paper trading involves a lot of borrowing, that is, leverage.  One can easily prove this crazy situation by contacting a futures broker and creating an account with $8,000 in that account. One could then buy or sell (they call it selling short) a futures contract for 100 ounces of gold. At today’s price of $1,338 per ounce, 100 ounces of gold is worth $133,800. So as far as COMEX is concerned, you are using your $8,000 gambling stake to control $133,800 worth of gold. And this “gold” can be sold, driving down the price. Seems crazy, but it’s literally true.

So if you or I can control 100 ounces for $8,000, imagine what JP Morgan and Goldman Sachs can control with the many billions of printed money they receive from the Federal Reserve, printed money that has not been lent out to boost the economy but is being used as collateral for trading. They can push markets in whatever direction they want. The same is true for central banks, but on an even greater scale: They have no limit on the amount of cash they can print up, so they can overwhelm any market anytime they wish.

The COMEX sets the price in the US. In London, it’s the LBMA (London Bullion Market Association) which is more than 7 times larger than the COMEX in terms of the dollar value of daily paper gold trading. The LBMA admitted a couple of years ago that, like the COMEX today, their leverage ratio was over 100 to 1. And the gold market in Switzerland is just as large as the LBMA, but it is run privately by the Swiss banks, so they publish no statistics. All told there are 40 futures exchanges in the world for trading paper gold.

Another form of paper gold is certificates for gold accounts with banks. Several of these banks have been caught charging people fees for storing gold when they are actually storing nothing at all. The banks figured they could quickly meet any claims for the gold, but when the claims came in, it took them weeks to procure the gold in the open market.

And there are stocks that hold gold, options on both those stocks and on the futures described above, gold leases, and swaps contracts. The latter are private contracts and they may actually dwarf all of the rest of the paper gold claims in terms of their stated dollar value (their “notional value,” as it is called) because the central banks, like the US Federal Reserve and the Bank for International Settlements, often use swaps for their trading. What, central banks trading gold? In September, the French Central Bank admitted:

We are still active in the gold market for our own account…meaning that we are in the market nearly on a daily basis.

In that same paper, the Bank of France said they owned 2,500 tons of physical gold and that they had no plans to sell it. So what are they trading daily? Paper gold, for profit.

Sometimes people go way too far with these contracts. People thought that Bear Stearns went bankrupt in 2008 because of the mortgage market. But the astute article What Really Happened to Bear Stearns by Ted Butler explains that it was actually bad trading in gold and silver that took them down: they had massive bets that the prices of gold and silver would go down, but instead the prices shot up by a lot over a few months instead. 


The chart above is the price of gold from 2004-2008. Notice how the price was moving up strongly prior to the collapse of Bear Stearns. Guess who picked up all of the assets and trading positions of Bear Stearns as it went bankrupt. Why our “good friends” at the company implicated in, and fined for, manipulating just about every market around since then: JP Morgan. They picked up Bear’s assets for about 6 cents on the dollar. Notice the smashdown of the gold price as soon as Morgan was in charge. The price smashdown was even worse in silver. Here’s the chart from 2004-2008 for silver:


It sure makes one wonder whether JP Morgan was involved in both moving the price up to bankrupt Bear Stearns, and then smashing it down once they had taken over Bear and inherited all those bets that the prices of gold and silver would drop.

Getting back to our discussion. All of these contracts taken together are called derivatives because they derive their value from the underlying value of gold. Guess who owns most of them now:

     Market Cornered: JPMorgan Owns Over 60% Notional Of All Gold Derivatives

What? Isn’t it illegal to corner a market? Don’t the regulators come down hard on anyone trying to corner a market? Yes, but as long as it isn’t gold or silver. JP Morgan is allowed to corner gold and silver because it serves the interests of those who still want the US Dollar to dominate the world so that the US can continue to exercise its “exorbitant privilege” of printing paper to trade for the real goods of other countries. So if someone like Morgan and the central banks weren’t suppressing the prices of gold and silver, it would make the Dollar and the other paper currencies look bad, and those in charge won’t allow that.

To show you how off base these government people and economists are, when Nixon took the world off of what remained of the gold standard in 1971, his chief economist was the “great” Milton Friedman. Friedman told Nixon and others that gold was deriving its value from the US Dollar, not the other way around, and that as soon as Nixon severed the link between gold and the Dollar, that the price of gold would actually fall quite a lot. He was entirely wrong, as government economists so often are, as gold never looked back again at its then-current price of $35 per ounce.

These government types have always hated gold for one reason: it inhibits their ability to wage war. We’ve covered it before: governments started going off the very-successful gold and silver standards in order to fight World War 1. That war would have been over in a few months, but that wasn’t good enough for the warmongers, they had to kill off millions of people over four years to serve their greed.

We’ll talk more about governments and gold later, including their failed attempts to suppress gold in the past, in Part 3. But you know that comment above about the gold price going into the stratosphere when people with all these paper contracts rush to convert them to physical gold? That will happen. It’s inevitable, as more and more people lose confidence in governments, banks, and the blizzard of paper claims they have created. That COMEX chart above–where it shows that the physical gold backing up the paper trading is down by 93%–says that the process is already well underway. Best to get your gold and silver before all those folks with the paper contracts try to get some because, at that point, it will be tough to find real gold at any price.

Accelerating Truth

Most people have been trained to internalize only those ideas that come from honchos, that is, political and religious big shots, “experts,” very rich people, celebrities, etc. The powermongers capitalize on this when faced with criticism of the system by often resorting to what the logicians call ad hominem attacks, that is, they deflect attention from the criticism by attacking the person delivering it, attempting to undermine that person’s credibility. They characterize the malcontents as crazy, unpatriotic, uninformed, uneducated, or as crackpots, charlatans, imbeciles, demons, and so forth, while never addressing the issue at hand.

So for a more general public understanding of the nature of our system, it helps when people considered to be honchos start publicly discussing what is in fact going on. Other honchos are less likely to try to pull the ad hominem attack on one of their own. In other words, truth about the nature of our system needs to emerge from the blogosphere and into the mainstream. This process is accelerating.

Below is a link to an amazing video showing Columbia Professor Jeffrey Sachs speaking to a conference organized by the US Federal Reserve:

     Columbia Economist Dr. Jeffrey Sachs speaks candidly on monetary reform

He begins by reporting that he was just at a meeting with foreign ambassadors at the UN who were asking:

“Why are we taking advice from the people who have managed the financial system so badly?”

He goes on to say that while people expect economists to talk about statistics and monetary issues, that the real problem with the system is as follows:

We have a mountain of criminal and fraudulent behavior…The amount of utter criminality and financial fraud is absolutely enormous…This is what’s called the American financial system at the moment.  It’s an unregulated essentially lawless environment…

This is a profound failure of government…

I regard the moral environment as pathological…

We have a corrupt politics to the core. Both parties are up to their necks in this. It really doesn’t have anything to do with right wing or left wing. The corruption, as far as I can see, is everywhere.

Sachs follows that by saying that he meets with the top Wall St CEOs on a regular basis and the common feature he observes is that these people believe they can do anything they want, legal or not, with impunity. And that given their takeover of the politicians and regulators, they are correct!

Now this isn’t coming from MIT’s Prof. Noam Chomsky–who, let’s face it, was decades ahead of all of us in pointing out the criminality of the corporate/political system–it’s coming from a highly respected Columbia professor.

For a few years now, the money printing central banks such as the US Federal Reserve (the central banks have directly printed at least $16 trillion and counting) have been told by bloggers that this money is not supporting jobs and the economy, but rather that it is going to the rich who are bidding for financial assets and causing bubbles in multiple asset markets including stocks, bonds, and real estate. People like Ben Bernanke, his henchman, and academic and Wall St economists have denied this.

But now we find out, from a Freedom of Information Request by Bloomberg and from a leaked Fed document, that the banking insiders who advise the Fed are finally saying the same thing that the continuously-discredited bloggers have been saying all along: that the money printing is creating bubbles in farmland prices and student loans, and:

There is also concern about “an unsustainable bubble in equity and fixed-income markets given current prices.

And for years, bloggers have said that the central banks cannot possibly stop printing more and more money or the whole edifice will crumble, another charge that is roundly derided. The Fed has claimed repeatedly that it has the tools to undo all the money printing so that it will never cause a problem. But now their own banker advisory panel says that if the Fed stops printing, it “may be painful for consumers and businesses…” and thatthe Fed may now be perceived as integral to the housing finance system.” In other words, if the Fed stops printing, the “housing finance system” will collapse. Which it would. In a heartbeat.

People like Matt Taibbi of Rolling Stone have been stalwart in documenting the ongoing manipulations in the interest rate, municipal bond, derivatives, and oil markets. And others have offered very strong evidence of manipulation of the stock market and precious metals markets. Taibbi recently wrote that “everything is rigged.” The US Bond market, the largest in the world, is certainly rigged: the Federal Reserve itself buys 75% of the bonds issued by the US Treasury. And the Fed announces, at the start of each month, which days it will be buying bonds through the Wall St firms in the coming month. The stock market always rises on those days. Always. Why? Because the Wall St firms take that money, leverage it up by further borrowing, and buy stocks. The Fed wants exactly that: they believe that a rising stock market makes people feel a “wealth effect” and therefore they will go out and spend more money in the real economy.
So finally, along comes one the largest banks in the world, Deutsche Bank, saying:

We would stress that we fully understand why the authorities wouldn’t want free markets to operate today as the risk of a huge global default and unemployment cycle would still be very high.

And a recent member of the Federal Reserve Board, Kevin Warsh, said that their money printing is not working and they are losing credibility:

…over the last several years, [the Fed] has over-promised and under-delivered, and the bank’s most important asset – credibility – is under attack.

One would think that, if their strategy isn’t working, that they have other tools they can bring to bear. That’s what they tell us. But Warsh says, “There is no Plan B.”

Bloggers have been warning that European banks are insolvent and getting worse all the time. Now the European Central Bank itself admits that the “euro zone’s slumping economy and a surge in problem loans were raising the risk of a renewed banking crisis.”

Here is an interview with the President of the Chicago Mercantile Exchange, that place where they trade paper and electronic instruments that have an increasingly tenuous connection with physical things like gold, silver, copper, oil, etc. From the interview:

What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products (ed: futures) trade down significantly, but one thing that did not trade down, was gold coins, tangible real gold.  That’s going to show you, people don’t want certificates, they don’t want anything else.  They want the real product.

Then there is the supposed eternal juggernaut of the Chinese economy that will keep all the other floundering countries afloat. Much of that juggernaut has been propelled by debts taken on by local governments to promote the economy in their areas. But now the Financial Times reports this:

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns.

Last but not least, an insider is finally speaking up about nuclear power plants in the NY Times:

All 104 nuclear power reactors now in operation in the United States have a safety problem that cannot be fixed and they should be replaced with newer technology, the former chairman of the Nuclear Regulatory Commission said on Monday…

The position of the former chairman, Gregory B. Jaczko, is not unusual in that various anti-nuclear groups take the same stance. But it is highly unusual for a former head of the nuclear commission to so bluntly criticize an industry whose safety he was previously in charge of ensuring.

This system is coming apart at the seams. Insiders and whistlebowers are finally describing the details. The US Government realizes this and is desperately trying to keep whistleblowers from telling the truth by filing charges against them and trying to ruin their lives. Ultimately, it won’t work. I just hope that everyone reading here takes those actions they need to take. By the time the collapse is on the television Nightly News and Page 1 of the newspapers, with the system honchos all claiming “No one could have seen this coming,” it will be too late.

Update on Metals, Deposit Confiscation, and Capital Controls

…one goal is to get to the point where all market participants understand with certainty that if a large SIFI (systemically important financial institution) were to fail, the losses would fall on its shareholders and creditors
–Governor Jeremy C. Stein, US Federal Reserve Board, Regulating Large Financial Institutions, speech at a conference sponsored by the International Monetary Fund, April 17, 2013

* * *

“Bank creditors,” as it happens, is a class of people that includes bank depositors. Everything about the rhetoric of banking is designed to obscure this. You deposit money in your bank account…But what you’ve really done is loaned the money to the bank…

A big price drop in the precious metals. So let’s see, on Thursday, April 11:

     CEOs of biggest U.S. banks to meet with Obama on Thursday

and the big selling in metals took place on Friday, April 12 and Monday, April 15.  No chance of any causation in that correlation. Nah. Move along. As Leslie Nielsen said, “Nothing to see here.

Anyway, with all that selling, there must be lots of inventory of coins around. That’s what they teach in Econ 101, right? That if a price is plunging, it’s because people are dumping large quantities of that item onto the market.

But there isn’t lots of inventory. Inventory is very tight, sold out in many cases. Delivery lead times are out to five or six weeks, and that’s if you can even place an order for what you want.  Big-volume dealers like Tulving.com are entirely out of one-ounce silver coins minted by any country, and they have been since April 15. You can scroll down this page at their web site to see how many items they normally sell are currently sold out.

And these people make a living buying and selling lots of coins. They really want to do a lot of business. And they are happy to buy right now, but they can’t sell lots of items because there aren’t any available.

This scramble to buy physical bullion coins is going on worldwide.

In Australia:

     Golden times for Perth Mint

The volume of business that we’re putting through is way in excess of double what we did last week,” Treasurer Nigel Moffatt said, without giving precise figures. “There’s been people running through the gate.”

In Japan:

     As global price slumps, “Abenomics” risks drive Japan gold bugs

But on Tuesday, buyers outnumbered sellers by a wide margin. At Ginza Tanaka, the headquarters shop of Tanaka Holdings, gold buyers waited for as long as three hours for a chance to complete a transaction.

In India:

     India’s Response To The Gold Sell Off: A Massive Buying Frenzy

In China:

     Chinese Gold & Silver Exchange Society Runs Out of Gold…Importing from Switzerland and London

Now we discover that the Chinese Gold & Silver Exchange Society has essentially sold out of gold bullion, and must wait until Wednesday for shipments to arrive from Switzerland and London.

     Gold Buying Frenzy Continues: China, Japan, And Australia Scramble For Physical

In the US:

     US Mint Sells Record 63,500 Ounces Of Gold In One Day

According to today’s data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.

     Bullion Shortages Develop As Retail Demand Skyrockets

…on Monday there was such chaos in the markets that some of the larger wholesale dealers had to shut down at various times because of the massive demand on the buy side… Gold and silver buyers are still outpacing sellers by a stunning 50 to 1.  There were premium increases on everything bullion related.  The wholesalers are now telling us four to six weeks on silver maple leafs, and wholesalers quit taking orders on one ounce silver rounds.

In Canada and Europe:

     Massive Run On Physical Gold & Silver At UBS & Scotiabank

At the Bank of Nova Scotia in Toronto the gold window has been absolutely swamped. I have confirmed there were people lined up in droves recently for multiple-hours at a time to buy gold and silver bars and coins….

“I then confirmed with UBS today in Zurich, Switzerland, that they are experiencing exactly the same thing. They told me people are waiting in long lines for bullion related bars and coins. The physical market is incredibly tight…

In Switzerland:

     Refiners Can’t Keep Up With Massive Global Gold Demand

If you look at our company, as just one example, we did not have one single seller in the last few weeks.

So during this takedown in gold and silver there wasn’t one single seller, only buyers….

If we turn to the Swiss refiners, Eric, the premium over spot for physical gold is rocketing. Swiss refiners are unable to keep up with the demand for immediate delivery. They are working flat out, including the weekend, and still can’t keep up.

The Swiss refiners are seeing global demand coming in from everywhere, especially from the Middle-East and the Far-East. So, again, this proves that the artificial manipulation of paper gold has nothing to do with the physical market.
–Egon von Greyerz, Matterhorn Asset Management

So, with all that buying interest in real physical gold and silver, why has the price been falling? Because the two largest trading venues on the planet for metals, the LBMA (London Bullion Market Assoc.) and the COMEX in the US, are the places where the price of gold is currently set. And 99% or more of the trades there that are said to be related to gold are not for the physical metal, they are futures contracts that are traded for cash, not physical gold. In other words, these are very large trading casinos. But like the banks, they are fractional reserve systems. In other words, if everyone who had a futures contract for gold actually wanted physical gold for their contract, there would not be anywhere near enough gold to go around. Even supporters of the LBMA admit there is maybe 1% physical gold backing all these contracts. So that’s even more leverage than is used at most banks. A lot more.

Monday, April 15 was a good example. Andrew Maguire–an LBMA trader and whistleblower who the Powers That Be ran down, but did not kill, with a car in 2011 right after Andrew gave testimony on silver price manipulation to the authorities—reported that on Monday, there was a period during which 155 tons of gold was sold on the LBMA in one hour. I can tell you for sure that no one who owned or was the custodian for 155 tons of physical gold would sell it in a panic into a falling market. This was selling of futures contracts that will be settled in cash. They have little or nothing to do with physical gold. People in charge of 155 tons of real gold do not sell in a panic. If they wanted to sell—and such a thing would be quite unusual these days when even central banks are net buyers of physical gold—they would do so carefully, trying to get the best price. They would sell on days when the price was rising, not falling. This is the way anyone with a strong profit motive sells, they hire good traders to sell over time when they can get the best price. They do not panic dump their holdings regardless of price.

In fact, Maguire reports that central banks picked up 55 tons of physical gold during that one hour period when 155 tons worth of paper gold contracts were sold.

Here are Maguire’s comments about Monday, April 15.

At some point, this charade will fall apart. The price of physical gold will separate from the price quoted in these paper instruments. This is already visible when one needs to buy coins at a premium above the spot price of the metal. During these smashdown selloffs (we’ve seen these before in 2006 and 2008), the premium above the quoted spot price for physical gold and silver rises, sometimes to as much as 50% above the spot price if you want prompt delivery. During those periods, the price for physical coins is not the quoted spot price, it is the spot price plus the premium, and that price can be substantially higher. These are the indications of the separation of the paper and physical gold and silver prices to come.

The press duly reported nearly the same quote from representatives of all of the banks. Yes, reps from those same banks that met with Obama on April 11. “Gold has lost its safe haven status. “ “Gold is no safe haven.” And on and on. They should have dressed them up in silly costumes and they could have danced and sang together, at least that would have been entertaining.

So why do they want to scare you out of, or away from, gold and silver? Two main reasons:

First, so that you cough up your goods so they can buy them on the cheap.

Second, when they go to “Cyprus” your accounts, that is, when they want to confiscate some of your money, they want it easily available with a few keystrokes. Confiscating gold and silver coins would be inconvenient at best, dangerous at worst.

Do you think “they’ll never do that here”? Here is the overall order of events in Cyprus:

1. On Feb 10, the Financial Times published the plan for the confiscation of depositor money in Cyprus called Radical rescue proposed for Cyprus.

2. On Feb 11, the Central Bank of Cyprus posted a letter shown at this link saying that the Financial Times article was incorrect, that confiscating depositor money was against the constitution, etc.

3. In mid-March, the confiscation of depositor money was announced.

4. The Cyprus parliament voted against it.

5. The central bank of the EU overruled the Parliament of Cyprus and went ahead with the confiscation. So democracy and the constitution were thrown out the window along with the promises.

On the day after the confiscation, the new head of the EU finance ministers, Jeroen Dijsellbloem, gave not one, but two interviews in the mainstream press in which he said the Cyprus bank resolution was a new template for such actions. From Reuters:

A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region’s finance ministers said.

The rest of the EU and IMF politicians nearly had a baby on the public stage. For the next three weeks, all they would say was that Cyprus was not a template. We should have put them in a chorus line too. Even Dijsellbloem tweeted that he didn’t say what he said.

But then a member of the US Federal Reserve Board, Governor Jeremy C. Stein, said that if a Too Big to Fail bank failed, that private investors and creditors would have to bear the losses. His speech was on April 17, well after the Cyprus event wherein depositors were ruled as “creditors” of the bank. These people choose their words carefully. I hope everyone out there listens to them carefully.

And it’s worth remembering this: In the US, for example, the bank insurance fund held by the FDIC has $25 billion. That’s the amount insuring $9 trillion worth of deposits.  So that’s 370 times more deposits than the amount in the insurance fund. And the insured banks have an additional $297 trillion in exposure to derivatives. So that’s almost 12,000 times more than the amount in the insurance fund. Very safe and sound, eh? Now you know why the authorities have just hinted that banks won’t be simply bailed out anymore; people’s deposits will be bailed in. Just remember, they’ve put you on notice now that you need to determine whether or not your bank is safe. People who spend their whole lives trying to do that can’t figure out which banks are truly safe anymore, but so what, you are now supposed to be able to do that. You can see a chart of the FDIC situation here. And you can find out a little about the safety of any US bank at the Safe and Sound section here. I am not aware of what is available publicly available for bank analysis in other countries.

Also part of the Cyprus event were strong restrictions on how much money a person could take out of Cyprus, the dreaded capital controls. This is also part of the template. When that happens, people are stuck in their own currency even if it tumbles mercilessly in value. When people tried to switch their money into the electronic currency Bitcoins because it recognizes no borders, it doubled the price of Bitcoins in a few weeks. TPTB then smashed down the price of Bitcoins as well, to show people that there is “no safe haven.”

Throughout history, currency devaluations, capital controls, and asset confiscations are denied until after they have happened. Governments typically say, “Sorry, we didn’t want to do that, but we had no choice.” You need to either anticipate them or be a connected government crony. Here’s a chart of monthly deposits into and withdrawals from the Cypriot banking system. The large withdrawals in January and February show the strong likelihood that some people were given advance notice:


Most people were not given advance notice; if the time comes, you and I will be in that group.

Lots of people are showing that they understand. As the stories above show, people were waiting in line for metals at these prices across the globe. We have seen this play before. Sometimes the elites smash down the prices of metals. Did I see it coming? Nope. Can they do it again? Yep. But as the rising price of gold over the last 12 years proves, they can’t push it down too far. If they do, the Asians and regular people will end up owning all of the gold. And the banksters won’t like that at all since they know the financial (per)version of the golden rule: he who has the gold makes the rules.

Lots of regular people on the planet take these price smashes as a gift. I think these people are smart.

Here is Jim Sinclair’s latest comment on the topic: The US Will Be Cyprused & We Will See $50,000 Gold.

And the recently-released video The Secret World of Gold, while not perfect, has Andrew Maguire briefly explaining how gold and silver prices are manipulated, and brings up the interesting question of whether there is any real gold (and not just gold-plated tungsten bars) at the US gold depository at Ft Knox. Channeled information agrees that Ft Knox is empty of real gold.  It will be a very interesting day when the world finds out about that.


The financial system is based on twelve promises that are lies, Part 1

At base, the world has a true financial system consisting of people producing goods and services with real value and trading those among themselves. But grafted onto that reality is an intentionally complex and confusing mega-structure built from a series of promises that are lies. As these promises are increasingly understood as lies, this mega-structure is proceeding inevitably down a path to disintegration. The primary purposes of this article are:

1. To provide you with a checklist so you can understand where we are in this process of financial system disintegration. There is a caveat in terms of using this as a serial checklist proceeding over time: more than one of these lies may get generally recognized in a single event, with understanding rapidly communicated to the entire world.

2. To forearm those who wish to prepare with an understanding of what is unfolding. This is a predictable process, but it may feel quite chaotic to the unprepared. With understanding, and with echoes from the words of the immortal Rudyard Kipling, you will be able to keep your head (and your heart!) when all about you may be losing theirs.

3. To encourage people to take simple steps to sidestep the consequences of the widespread recognition of these lies. It is important to understand that general recognition of just one of these foundational lies–the lie that real estate prices always go up–came within hours, in October 2008, of vaporizing almost all of what are considered to be assets in this financial regime. Evasive action needs to be taken before these lies are generally understood. It is better to do your run on the bank before everyone else decides that’s a good idea. Those who prepare will be able to provide some assistance to those who have not.

4. To allow readers to proceed from understanding, not from the fear that leads to panic, and not from the fear that leads to denial or to throwing up one’s hands and pretending there is nothing to be done about all this. We hope this article provides such understanding.

In terms of tracking this process, we have already seen one prominent lie from this system bite the dust:

Lie #1: Real estate always goes up.

The perpetrators of this lie trotted out pithy sayings about population always increasing and “they aren’t making any more land” to somehow prove that real estate prices always go up. People can’t be blamed for this erroneous belief. Many saw real estate prices rising for their entire lifetime. But if one takes a larger historical look, it is obvious that real estate prices obey the Law of Cycles. They rise and fall just like most prices. This cyclical behavior of prices would not have been a problem for most people except so many of them fell for the idea that they should buy one or more properties with borrowed money, with a mortgage. So when prices fell, the amount owed on the mortgage has turned out to be greater than the current value of the house. Which is a nasty problem because, if a person wants to sell such a house, the current sale price is less than what they owe, so they have to pay money to sell their house, money which many don’t have. So they lose their house in a short sale or foreclosure.

For those who now have the urge to bet that real estate prices have fallen enough, the evidence says it’s a bad bet if you are thinking you will get price appreciation. If you are buying with cash to navigate through tough times, that is, you are buying a place where you can grow your own food, produce your own electricity, pump your own pure water, cut wood to heat your house? Good idea, depending, of course, on price and location. But buying or holding real estate thinking that the price will rise? Bad idea. There’s lots of evidence that any miniature “bottom” in prices will be short-lived and that prices will fall for a generation. The main reason? Real estate prices are still floating on a sea of debt. Most governments are still propping up otherwise-dead mortgage markets with government loans and guarantees that only a fool, excuse me, a government, would make. In other words, these are uneconomic loans that no sane person would make, and these insane loans are still propping up real estate prices in a big way. It won’t last.


The remaining lies are in various states of disarray, but all still play key roles in the mindset that keeps the system intact.

Lie #2: It’s best to use Other People’s Money.

The farther in time we progressed following the 1930’s—the last time there were worldwide losses of homes, farms, and business to foreclosure, the last time governments defaulted on their bonds en masse, the last time there were huge numbers of bank failures—the more people were convinced that saving up money in order to buy something was for morons, and that buying things now, on credit, was the smart thing to do. The big deal became just how much borrowing one could “qualify for.” (This disease still persists for some, which is why, despite all of the pain it has inflicted, Lie #2 has not been relegated to the past in this article.) Paying it back was simple: money was worth less and less over time, everyone knew that; salaries always rose; the price of houses, the main collateral for loans, those always went up.

The result of this mindset is that so many people and organizations and even countries have become debt slaves to the bankers. To quote an anti-debt crusader in
Ireland: “Bankers want you to use your energy and your work to make their dreams come true.” Too bad more people didn’t know that before getting themselves so far into debt that it dominates their life.

Lie #3: We can buy cheap goods from countries that have cheap labor, and yet keep our much-higher salaries and benefits.

We’ve all heard for decades about how manufacturing, and in more recent years services, are moving from the developed world to the emerging markets. People in developed countries love to buy cheap goods from lands with ultra-low labor costs. But they expect their own salaries and benefits to remain the same or even increase. How can that be when the sources of income–that is, the jobs and profits and the tax base–that support that salary and benefits structure have moved to another part of the planet? This divergence between expected lifestyles and the labor required to support those lifestyles is bringing exponentially increasing strain to the developed countries. People and governments have tried to maintain their lifestyle illusions by borrowing more money than they can ever repay. They have used this borrowed money to try to bridge the gap between falling real income levels and their habitual spending. Much of the borrowed funds are coming from the countries currently doing all the work to produce those cheap goods. The signs that this attempt is coming apart at the seams are everywhere for those who choose to look.

Lie #4: Government pension and medical programs will deliver on their promises.

Many currently depend on government pension, medical insurance, and disability programs. Many more consider them an essential ingredient in their upcoming retirement plans. But as discussed in Lie #3, the tax base that supports these programs is rapidly eroding, and their funding assumptions were based on far shorter lifespans, lower medical costs, and flawed demographics in terms of the shrinking number of people paying into the system versus the growing number receiving benefits. And governments forcing interest rates to near zero in lame attempts to boost their economies means that pension fund assets earn far less in interest payments than expected. (This is a serious problem for private pension plans as well, most of whom still claim they can earn 8% on their assets a year on average, something very few are able to consistently accomplish. Without that level of earnings, they will not be able to meet their commitments.) If the liabilities of governments were calculated the way they are for businesses, the governments would be promptly declared bankrupt and hauled into court, where evidence of fraud would be a dominant topic.

Governments have four options regarding this slow motion train wreck:

  1. cut promised benefits;
  2. radically increase tax revenue;
  3. borrow even more money;
  4. print new money. (In the typical fashion of these times, they came up with a new name for this counterfeiting process of printing new money, they call it “quantitative easing.”)

Because the last two options on that list are the most politically palatable and the least painful to current voters, these are the options strongly preferred by politicians. They believe that telling the truth about this situation and taking responsible measures to put these programs on a sound footing would get them promptly kicked out of office, which is likely correct. So they take the borrowing and printing route because the pain from these is hidden from most people, and most of the pain is dumped on people’s children and grandchildren. Oddly, for all the noise people make about wanting to leave great things to their children, most people don’t care a whit about passing this huge government borrowing burden onto the children and grandchildren about whom they claim to care so much.

The problem with the borrowing and printing regime is that markets and people are increasingly catching on that: the borrowings are too large to be repaid; and the printing debases the money people have saved and earn, driving up the prices of necessities. Countries such as Greece, to whom the markets will no longer lend money and which cannot independently print money because of membership in the Eurozone, have already cut retiree pensions by two-thirds, and there are more cuts to come.

And while federal government programs have so far garnered most of the attention in terms of their unsustainability, most state, province, and city pension and insurance programs are no better off, and many are worse off, and they generally don’t have the option to print money. In the US, the Pew Research Center and others have estimated that state and local pension programs are underfunded by more than a trillion dollars. Yes, a trillion dollars is one of those numbers that is too large to comprehend. But the takeaway for anyone depending on these programs is that you will not receive the benefits you expect. And yes, when the bankers need a bailout or the governments want to fight yet another war, then it’s deficits be damned, they can easily come up with a trillion dollars. But when it comes to helping regular people, then it’s: “Sorry, we’d love to help you, but we can’t afford it, we have these deficits, you know, so we can’t help you.”

Lie #5: Your money is in the bank

The banking cartel loves to make you feel like they are rock solid and that the money you deposit with them is “in the bank,” safe and sound. As most actually do know, it isn’t. Or rather, only a small portion of it is actually “in the bank.” The rest, generally 90% to 95% of it or more, gets loaned out. (Or is used by the bank for speculative trading.) The bank pays you, at best, a paltry amount of interest on your deposit, and utilizes your money for something that pays them at a higher rate, and thus makes money from your money. And in many countries, governments assure us that banks are a truly rock solid place for your money by saying that, if the bank really messes things up and loses your money, the government guarantees that you will get it back.

This works quite well—until it doesn’t. This model of banking, the “fractional reserve” system, where only a fraction of the deposits are kept on hand, depends on the idea that not all depositors will want their cash at the same time, so most of the deposits can be loaned out. This is fine until a group of depositors needs that money, or they get frightened that perhaps the bank won’t have their deposit available for them when they want it, and they start a “run on the bank.” We’ve all seen pictures of what that looks like. Some of them show a well-behaved line of people waiting to get their funds. Other pictures show an angry, unruly mob clustered at the front door, perhaps bashing some bank windows. And if the bank has loaned out 95% or more of their deposits, it doesn’t take a large group of depositors to drain all the cash from the bank.

When this happens at a single bank, no problem. The government steps in with its guarantees and depositors are made whole up to the level of what the government guarantees. But in the Fall of 2008, we saw the start of a run on the banking system. Seeing the collapse of some banks and hearing rumors of many more, some people and corporations worried that the entire banking system was going kaput (it was!), and they started withdrawing all they could from the system. So governments quickly stepped in with far larger guarantee programs than had ever existed before, covering types of deposits, such as those in money market funds, that had never been guaranteed before. It was made clear that money would be printed to cover deposits, and so depositors calmed down and stopped their run on the system.

So the problem was solved, for the time being, by governments guaranteeing that the failure of private, commercial, corporate banks would not hurt their depositors. But now, those who astutely foresaw that the 2007-2009 phase of the crisis was coming, and warned about it loudly and clearly before it happened, see that people are rightly suspicious of government guarantees because it is becoming obvious that governments are broke. And who wants to rely on a guarantee from a bankrupt entity! More on this topic below at Lie #8.

The real problem for the banks is that they own what are called toxic assets. When the banks were perceived to be failing, it was because people knew that what the banks were counting as “capital” was losing value hand over fist and that, in fact, many banks, especially the big ones, actually had no capital left at all. Because of the political power of the big banks, governments attempted to solve this problem in three ways:

1) They let financial institutions lie about the value of their assets. They came up with accounting tricks that enable a bank to say that a loan portfolio is worth 100% of what they paid for it even if the collateral backing the loans, for example houses or shopping malls, is now worth far less than 100%. People call this the “extend and pretend” model. It is not a real solution, but it temporarily covers up the problem.
2) They buy toxic assets from the banks at full value and transfer the toxicity to the government. For example, the US Federal Reserve purchased $1.2 trillion worth of mortgage backed securities to take the losses away from the banks and to put taxpayers on the hook for the loss. People call this the “privatization of profits and the socialization of losses” model.
3) They lend them scads of short term cash to keep them afloat. Most banks in Spain would now be closed without the accounting lies from point 1 above and from hundreds of billions of euros worth of short term loans of newly-printed money from the ECB, the European Central Bank.

And in Greece and Spain, for example, some depositors are wising up. Billions of euros of deposits are being drained from Greek and Spanish banks each month, making bank solvency an even more distant hope with each passing month.

Lie #6: Your money is in your brokerage account.

Most people used to think–many still do–that brokerage accounts were safe from the fractional reserve threat to bank accounts, that is, they believed that brokerages did not lend out their money the way banks do, that their deposits to brokerage accounts just sat there waiting for deployment or withdrawal. Ha! Now that we are all wising up, how could we have thought that Wall Streeters could keep their grubby hands off that large pool of money. What the brokerages do is called the hypothecation of these assets, that is, they loan them out for a profit. And the entity, and I use that word intentionally, to whom they loan these assets often re-hypothecates them, that is, they loan those assets to yet another entity. It turns out that the City of London, an entity that operates quite independently of UK law in several respects, is the world playground of re-hypothecation, where the same asset can be re-lent several times. Have you wondered why it’s been so difficult for regulators to determine where the client money is in the recent failure of Jon Corzine’s MF Global brokerage? Look no further than the world of re-hypothecation, in which it can be difficult for anyone to know “where the money is” at any point in time.

So this is another part of the system where everything works well until it doesn’t. If people, intelligently I might add, start withdrawing significant amounts of money from the brokerage industry, they will find that it is yet another fractional reserve environment. So, is your money in your brokerage account really there? Maybe. Remember all that fine print they sent you when you opened your account that you didn’t read? Maybe that part about your account being a “Sweep Account”? Are the Wall Streeters sweeping your money for their profit?

Lie #7: It is OK for financial institutions to use huge leverage.

The Powers That Be/Were who run the financial regime think it is OK for central banks, commercial and investment banks, brokerages, and hedge funds to operate using massive leverage, in other words, massive borrowed funding. The system allows the likes of the Goldman Sachs, Bank of America, and Deutsche Bank to borrow tremendous amounts of money. In normal times, these big banks are considered reliable borrowers; when times are difficult, they are presumed to be backstopped by their governments.

The huge banks routinely operate at 20 to1 to 50 to 1 leverage. 50:1 leverage means that, for every $2 of reliable capital they have, they can operate in the marketplace as if they have $100. So a 2.5% loss wipes them out, makes them insolvent. In world markets operating at ever-increasing speeds, how can any participant always avoid a 2% loss? They can’t. Thus the financial system goes from crisis to crisis. As long as such large-scale leverage persists, the next bubble, and therefore the next crisis, will never be far off. Big leverage was at the base of every major crisis of the modern financial era: the Crash of 1987, the LTCM debacle of 1998, the tech stock crash of 2000, and the real estate bubble.

So why is this allowed to persist? Because these influential institutions can make a lot of money using leverage when times are good. Money they can use to influence the political and regulatory process. And when times are bad? Their losses are taken over by the taxpayers. Heads they win; tails we lose.

And consider what happened, and continues to happen, in the real estate market, when a buyer only has to come up with a 2% down payment. That means they are operating at a leverage ratio of 50:1. This has worked out very poorly for buyers and lenders. Yet in the USA, the government agency known as the FHA still guarantees hundreds of billions of dollars worth of real estate loans each year where the buyer only needs to come up with 3.5% as a down payment.

Lie #8: The government guarantees it.

Governments love to guarantee things. It makes people feel good, thus helping to secure votes, and typically it costs nothing up front. It’s a politician’s dream. So governments guarantee all kinds of things: bank deposits, mortgages, private pensions, student loans, loans to build what no sane person would build such as nuclear power plants, the bonds for infrastructure projects, loans made by a zillion government agencies, zombie banks (ones that would be promptly out of business if they weren’t being propped up by the government), companies considered too important to be allowed to fail, export-import loans, mortgage-backed securities…the list is long. And we have seen it expand promptly when an emergency hits.

But now people are questioning these guarantees. Iceland actually allowed citizens to vote on some of their government guarantees when the payments actually came due…and the people promptly threw those guarantees out. Guarantees in Ireland are on very thin ice. Very few trust government guarantees in Greece. Portugal, Spain, and Italy are likely next on the docket. In the past, very few people calculated these guarantees as part of government debt because they assumed that a guarantee was sufficient, that because of the guarantee, no money would ever have to actually be paid out. Now some of these guarantees are taking a big bite from government budgets. In the US, billions are being paid quarterly from government coffers into mortgage monsters Fannie Mae and Freddie Mac to cover losses on guaranteed mortgages.

Note that the public questioning of guarantees is mostly now happening in Europe because the individual countries in question do not have the authority to print new Euros. But the fact is that finances in Japan, the US, and the UK are worse than those in some European countries, but because these countries can print money at will, which they are also doing in volume, people still “trust” their guarantees. It is worth considering whether such trust is well-placed when printing trillions is required to keep the guarantees intact. People and markets will ultimately decide that it is not. It is best to stay ahead of this curve and to understand whether your bank, your pension fund, or any institution on which you rely is on a sustainable path. If it is not, make other plans as well as you can. And take action soon.

Let’s take a break! In tomorrow’s Part 2, we will cover these lies:

Lie #9: Government bonds are safe.

Lie #10: Derivatives reduce risk in the system

Lie #11: Central banks protect the interests of their country and its citizens

Lie #12: Your paper/electronic currency is a reliable store of value.

Many thanks.
Thundering Heard