Wednesday, March 3, 2010

Breaking The Chains That Bond

The Gold Bull broke from his leash yesterday morning and plowed through the CRIMEX China shop, laying waste to resistance at 1126. Silver followed it's big brother on the rampage and broke some resistance of it's own, closing above 16.92 for the day.

Today we find Gold and Silver looking to follow through with a bit more carnage in the CRIMEX China shop. However, for this to occur we must first see a strong move over 1.3653 in the Euro. This would force a corresponding move below 80 on the US Dollar Index. Silver faces some resistance directly here at 17.22. Gold has cleared near term resistance at 1135 this morning, and has set it's sights on the next spot of overhead resistance at 1157. Resistance in Gold at 1157 is key as it coincides with it's last swing high on January 11. Before attacking 1157 Gold must first establish support here at 1135. Silver, as always, will travel in Gold's shadow.

If your gold is at an LBMA bank, you may be just an unsecured creditor [MUST READ]
By Adrian Douglas
Recently I have written several articles that have discussed how much "paper gold" has been sold, principally through the unallocated accounts of the London Bullion Market Association, though there are other vehicles that achieve the same end, such as pool accounts, unbacked exchange-traded funds, futures, and derivatives, etc., but the LBMA dwarfs them all.

I estimate that as much as 50,000 tonnes of gold have been sold that do not exist. That is equivalent of all the gold reserves in the world that are yet to be mined -- or, put another way, 25 years of gold production.

That is the granddaddy of all short positions.

The fractional reserve operation of the LBMA is likely to be the next Madoff scandal, except multiplied by 100 -- a $5 trillion fraud as opposed to a $50 billion fraud.

Like all financial scandals before it, this one will be exposed just as surely as night follows day. Gold is unique among all commodities. It is the only commodity that is not bought to be consumed. Rather, it is purchased as a store of wealth. Because it is not consumed, the buyer does not need to take possession of his gold but can be persuaded to trust the seller to store his gold on his behalf.

This unique wrinkle allows bullion bankers to sell gold that does not exist. This allows them to make huge profits, since they have very little cost, as they don't have the inconvenience of actually having to purchase the gold before they sell it.

The consequence of this illegal activity is that it suppresses the price of gold because the "paper gold" supply has the same effect on prices that would happen if real gold had actually been supplied to the market.

US Dollar Money Supply Is Underreported[MUST READ]
By James Turk
March 1, 2010 – As the financial crisis has unfolded over the last two years, the Federal Reserve has been responding in a variety of unprecedented ways. Therefore, it is logical to assume that these never-before-used actions have altered long-established ways of viewing things. One area that has been impacted is the US dollar money supply.

"When deposit currency created by the Federal Reserve is added to the traditional definition of M1, M1 after adjustment is actually 170 percent higher at $2,918 billion. Its annual growth increases to 29.5 percent, nearly three times the rate reported by the Fed and, more importantly, an annual rate of growth in the quantity of dollar currency that is approaching hyperinflationary levels."

The diminished incentive to save[MUST READ]
By Martin Hutchinson
United States Federal Reserve chairman Ben Bernanke reaffirmed last week that short-term interest rates would be kept at their current ridiculously low rates for "an extended period". Apart from the danger of inflation this produces there is another problem: Fed monetary policies in the past decade have done great and possibly permanent damage to the US propensity to save. The devastation that this will wreck on the economy is slow-moving, but potentially ruinous.

The United States today is in the position of Weimar Germany about 1921, as I have pointed out before and as has been elegantly illustrated in a new paper by Societe Generale's Dylan Grice. On the surface, the economy is relatively prosperous, having recovered well from the devastation of a few years previously - obviously the losses caused by World War I having been far worse than a mere banking crash.

In both 1921 Germany and 2010 America, the fiscal authorities propped up the local economy through large budget deficits, while the monetary authorities, Rudolf von Havenstein's Reichsbank and Ben Bernanke's Fed, have abandoned conventional economic restrictions and pushed monetary expansion to extreme levels in an effort to reflate the economy as rapidly as possible. In both countries, the stock markets responded quite well - by 1921 the German stock market had risen by over 100% in real terms from its lows. In both countries, savings rapidly diminished in real terms, it being impossible to maintain the value of savings other than by speculation.

We know what happened in Weimar - hyperinflation, the wipeout of savings, a few years of unsteady prosperity and then economic and social disaster. Only after 1945, when a wiser leader with experience of both the Weimar and Nazi disasters created a society and a Bundesbank charter in which preserving the value of middle-class savings was paramount, did Konrad Adenauer's Germany finally re-take the economic preeminence the country had enjoyed under Kaiser Wilhelm II.

Von Havenstein was known as the "Money General" - a title that could well have been applied by his admirers to Bernanke as the 2009 market and banking recovery took hold. Our own von Havenstein has presided over a policy that has hugely damaged the savings base of his society, and the middle-class virtues of prudence and thrift that in a high-savings culture produce rapid economic growth. Whether his policies will in the long run produce only anemic growth, persistent high unemployment and a gradual decline in living standards, or like von Havenstein's something immeasurably worse, only time will tell.

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