Monday, July 12, 2010

Never Make Promises You Can't Keep

"Deflation is not real, although we are seeing some symptoms of it now. In the inflationary eras I’ve studied they are presaged by what at the time appears to be deflation. That is where we are today."
-Warren Bevan

This BIS gold swap story has legs! And whenever central banks and their nefarious Gold market activity finds it's way into the news, sentiment in the Gold sector plummets. Given the information gathered so far regarding this "Gold swap" featuring the BIS as a the major counter party, one can only come to the conclusion that this "revelation" is purely bullish for Gold. One might, looking back historically, see this "transaction" as a watershed moment in the destruction of the global Gold Cartel's manipulation of the price of Gold.

As each day passes now, Gold is becoming recognized for what it is: REAL MONEY. The Gold Cartel and its bullion banks are on the ropes, a run on the bank's Gold is now reaching full throttle. In order to meet rising physical demand for Gold promised for delivery by contract, the bullion banks are turning over every seat cushion in the office to find a few more ounces to meet overwhelming demand for physical delivery. Moral of the story: Never make promises you can't keep.

Mysterious BIS gold swaps are likely a bullion bank bailout
By Adrian Douglas
As always, news of anything to do with the gold market is cloaked in secrecy, misinformation, and innuendo.

What we can be sure of is that the BIS news is gold-friendly.


Because the BIS was intending to keep the matter secret.

The BIS gold swaps were not announced but instead "discovered" by an analyst snooping around the BIS accounts.

Similarly the International Monetary Fund has been quietly selling gold each month since February even though for years every possibility of a gold sale by the IMF was announced X to the power N times, where X is the number of tonnes to be sold and N is the gold price.

The BIS typically transacts with central banks but not exclusively; the BIS' own profile also mentions a "number of international institutions" with which it does business, which includes undoubtedly commercial banks and bullion banks, which are also commercial banks.

The BIS is always active in the gold market, so it cannot just transact with central banks, as the central banks need someone to make trades for them:

"The BIS offers a wide range of financial services specifically designed to assist central banks and other monetary authorities in the management of their foreign exchange reserves. As of 31 March 2010 some 130 such authorities, as well as a number of international institutions, made use of BIS financial services. Total currency deposits amounted to SDR 196 billion, representing around 3 percent of world foreign exchange reserves."

If the BIS were to trade directly with a central bank in a gold swap, the gold would act as collateral and probably would not change its physical location and cash would be given to the central bank.

But the BIS corrected The Wall Street Journal's first story, saying its swap was with commercial banks, not central banks.

While a central bank theoretically and practically could hold 380 tonnes of unencumbered gold, there is no way that a commercial bank is sitting on 380 tonnes of unencumbered gold. So the gold in the BIS swaps came from somewhere else.

The only possibility is a central bank or several central banks. (Portugal holds 380 tonnes. Just coincidence? Spain holds 280 tonnes and Greece 112 tonnes.)

So the BIS swaps look like a tripartite transaction. The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS.

Why would this be done?

This is not about currency liquidity, as the $14 billion reported raised is not liquidity; it is pocket change.

On the other hand, 380 tonnes of gold is liquidity in the gold market, where mines produce only about 2,200 tonnes per year.

If the BIS made the swap directly with a central bank, the gold would not be provided to anyone for liquidity.

If the swap was made between a commercial bank and a central bank, the commercial bank would get its hands on the gold and the gold would change location to the vaults of the commercial bank, a bullion bank.

This would require the bullion bank to hand over $14 billion of its own money.

But by doing another swap with the BIS, the commercial bank would get the money from the BIS and technically the gold would now belong to the BIS, even as it most likely would not change location and 380 tonnes of gold would be digitally credited to the BIS' unallocated gold account at the bullion bank.

In this way the central bank or banks would get cash and the BIS would get the unallocated gold as collateral and as if by magic the bullion bank or banks would get 380 tonnes of gold to bail them out for a few more weeks as massive physical demand for metal eats their lunch.

And the bullion banks would manage this without paying a dime of their own money.

Why would the BIS be a willing player in this scheme?

Because it would fall into the type of operations BIS official William S. White described in a speech in 2005 when he said that among the five objectives of central bank cooperation is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." You can find White's speech here:

With gold reaching record high prices and a run on the banks of the gold cartel gaining pace, this must be an occasion where such an asset price-influencing operation would be thought "useful" by those who are beneficiaries of the longevity of the paper currency game.

The surreptitious monthly gold sales by the IMF and this record gold swap by the BIS are reminiscent of the London Gold Pool that ended so badly in 1968. The Western central banks have rigged the gold market for so long that they can no longer think straight. The only thing they can think of is to do more of the same, hoping that this will reverse the growing mistrust of all things paper and the entire banking system.

In the words of the great philosopher Aerosmith, "Dream on!"

Gold is back as money! The BIS 382 tonne Gold Swap - Good or Bad for Gold and Why?
By: Julian D. W. Phillips
Swaps are financial instruments that allow for the exchange of one asset for another, in this case, gold for currency. They are not gold leasing, futures or options [which the 1999 and 2004 Central Bank Gold Agreement states would not be increased – The 2009 did not contain the statement]. Swaps could be undertaken by the signatories of the CBGA. as these were not included in any of the three Agreements.

Gold swaps are usually undertaken between central banks: One central bank exchanges foreign exchange deposits (or other reserve assets) for gold with an agreement that the transaction be unwound at an agreed future date, at an agreed price.

The monetary authority acquiring the foreign exchange will pay interest on the foreign exchange received, the rate of which is currently very low. Gold swaps are usually undertaken when the cash-taking central bank may want foreign exchange but does not wish to sell outright its gold holdings.

The Wall Street Journal informs us that the B.I.S. did these swaps with commercial banks. We know of no commercial bank that has 382 tonnes of gold on their books. It is likely then that should these commercial banks have been in the deal, they would have been acting for a central bank [or several over time] who wished to remain anonymous.

The B.I.S. received the gold into its safekeeping for the nation that required the foreign exchange for the swap period. Swaps of this nature are renewable once the time runs out, so it is impossible to say how long the swap will last for. The central bank that undertook the swap would have to be certain that it could return the currencies to get the gold back at some point in the future. If that country defaulted, then and only then could the B.I.S. go ahead and sell this gold. Any sale in the open market would be trumpeted loudly to all as well as reported in the Press or by the World Gold Council, B.I.S. or I.M.F.

The financial crisis has led to a decline in the number of credit-worthy counterparties and a reduction in credit lines these counterparties can offer. This is significant in a world where credit risk and debt problems have been the subject of banker’s fears since the appearance of the Greek debt crisis. For someone in the trouble Greece is, gold swaps allow a central bank’s reserves to be lent in a credit-secure fashion. In other words, a gold swap allows the lender of currency to benefit from greatly reduced credit risk, as the gold can be held in an allocated account, usually at the Bank of England. The currency deposit is secured with gold throughout the life of the deposit.

Any country such as Ireland, Portugal, Spain, Italy, the U.K. and the U.S.A. can follow this route. Yes, sales may not be permitted for fiscal reasons under Eurosystem rules, but these are not sales, but swaps. So, of the utmost importance is just who swapped this gold? Could it be one of the countries we just mentioned? If so, their situation is far graver than previously thought. The implication is that the collateral they offered just wasn’t good enough, so they had to use their gold. This is major news for the monetary system.

What is significant about this or these transactions is that gold is being used in international settlements after so many decades of being sidelined in the monetary system! The transaction itself confirms that gold is being used in international settlements, which is a dynamic confirmation of gold's return to the monetary system. A "Swap" might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the B.I.S . would have to decide either to keep the gold on its books or to sell it. Again, keeping it on its books is part confirmation that gold is active again on the monetary system, a big boost by itself! Gold is back and alive in the monetary system!

What appears to have really happened is that one nation or more needed foreign exchange to counter some shortfall in its accounts and raised these funds as a short-term liquidity measure, believing that it would be able to return the currency and receive its gold back. The gold would then be returned at the conclusion of the swap period in return for the currencies swapped. If it fails to return these funds to the BIS, then the BIS could discreetly place the gold with another central bank, should it not want to keep the gold. If it did so, the BIS would simply report its disposal of the gold, the originating central bank would report the drop in its gold reserves and the gold buying bank would report its increase in the reserves.

This puts the transaction into an entirely different category. It seems that one or more of the developed world’s central bank’s credit is not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into quite a spin, shaking the global financial system to its core. No wonder the B.I.S. is keeping such a low profile!

In other words, the cat is out of the bag. The international monetary system, with the US Dollar at it's core and reserve currency, is teetering on disillusion. Accelerating at a pace far faster than thought imaginable, the international monetary system is on the brink of destruction. Gold stands at the ready to be it's savior.

U.S. dollar's collapse inevitable [MUST READ]
By: John Embry, chief investment strategist at Sprott Asset Management
"Only a heroic optimist would be prepared to ascribe any long-term value at all to the U.S. dollar."

The threat to the US dollar is hyperinflation, not deflation
by James Turk, Founder of
In the early 1930’s, the US dollar money supply as measured by M3 dropped by approximately 30%. This deflation, i.e., drop in the quantity of money, was one of the steepest in history. The purchasing power of the dollar – until 1933 redeemable into gold and thereafter redeemable into silver – rose dramatically because less money was in circulation compared to the quantity of goods and services available in commerce.

Today, the Federal Reserve no longer reports M3, which is unfortunate because it eliminates the possibility of accurate historical comparisons. M3 is estimated by economists by modeling historic trends. However, these models become less reliable as we move further from February 2006, the date the Federal Reserve stopped reporting M3. Eurodollars, a major M3 component, is particularly difficult to model.

In any case, much attention is being given to these private estimates, even though the decline in M3 they are reporting stands in marked contrast to M1 and M2. The Federal Reserve reports that these two money supply measures have grown 7.1% and 1.7% respectively over the past twelve months. Thus, by these two measures, the dollar is inflating, i.e., the quantity of dollars is expanding – particularly so for M1 – relative to the available stock of goods and services being produced in today’s depressed economy.

This inflation is also apparent from market prices. For example, crude oil prices have more than doubled since their post-Lehman crash low. More broadly, the price index of 19 commodities compiled by the Commodity Research Bureau is up 46% during this same period, which makes clear there is no deflation.

The ongoing erosion of the purchasing power of the dollar has been masked by wealth destruction as over-priced assets like houses fall back to realistic levels. This wealth destruction from declining prices feels like deflation, but it is not. In fact, it is forceful distraction taking our eyes off the real problem, which is that the dollar is approaching hyperinflation

This point is insightfully explained by Murray Rothbard in his excellent book, “The Mystery of Banking”. In explaining the consequences of the inflation-adjusted money supply, he notes:

“When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price.”

These circumstances prevail today. While crude oil prices have doubled and commodity prices have risen 46% since September 2008 as noted above, M1 and M2 during this period have increased only 16.9% and 8.5%. So the prices of goods and services are rising more rapidly than the increase in the quantity of dollars in circulation. The resulting “shortage of money” is being widely misinterpreted as deflation, which is exactly what happened in Weimar Germany shortly before the Reichsmark was swooped up in a hyperinflationary whirlwind. Let’s call it a ‘Havenstein moment’, named after the ill-fated president of the Reichsbank who presided over the destructive hyperinflation that devastated Weimar Germany.

With his usual brilliant insight, Rothbard explains what happens once the “Havenstein moment’ is reached. There are two alternatives. “If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more – thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to ‘catch up’ to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices ‘run away’…[i.e., hyperinflate]” Weimar Germany took the second alternative.

The dollar is at a ‘Havenstein moment’. Will policymakers follow the prudent advice of Murray Rothbard and tighten the federal government’s belt? Or like Herr Havenstein, will Mr. Bernanke continue to ‘print’?

Sadly, the Federal Reserve will ‘print’, for one reason. Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend. This reality puts the dollar on a hyperinflationary course.

Regardless of whether this BIS Gold Swap story is to blame for the recent take down in Precious Metals prices, or just an excuse used as cover for the Gold Cartel's now legendary manipulative practices, the CFTC is blatantly derelict in it's duty to police this sector of the commodities markets in New York. Once again, what we have witnessed over the past two weeks is a crime in progress where the intended purpose of the futures market for price "discovery" is buried under an avalanche of paper determined to "manipulate" the prices of Precious Metals lower.

The CFTC mandate is to protect investors from sharks that might roam in the futures markets, instead the CFTC has chosen to swim with the sharks and join them in giving the one finger salute to investors being robbed by the sharks representing the Gold Cartel.

CFTC Hearing and the Wall of Silence
By: Bix Weir

Re: CFTC Hearing and the Wall of Silence

Dear Commissioners :

Over the past few years I have engaged in correspondence with staff at the CFTC to learn about how your organization does its job in enforcing commodity trading rules as well as provide you with feedback as to why 99% of metal market participants believe that the CFTC is not doing its job. Since the public hearings on metal concentration limits on March 25, 2010, I have been truly astounded by the LACK of acknowledgment, LACK of follow up and LACK of action from the CFTC and Commissioners given what was openly discussed and revealed during the course of this historic meeting.

Here is what your takeaway SHOULD have been from the meeting on metal concentration limits:

Bix nails it...

Wholesale inventories rise in May, sales fall
Martin Crutsinger, AP Economics Writer
WASHINGTON (AP) -- Inventories held by wholesalers rose for a fifth consecutive month in May but sales fell for the first time in more than a year, sending a cautionary signal about the strength of the recovery.

Wholesale inventories increased 0.5 percent while sales dropped 0.3 percent, the Commerce Department said Friday. It was the first decline for sales since March of 2009.

The May sales decline is the latest sign that the economic recovery could be losing momentum in the second half of the year. Weakness in sales could discourage businesses from boosting their orders. That would translate into a slowdown in factory production.

Businesses helped spur the recovery by rebuilding their inventories after slashing them during the recession. The gross domestic product expanded at a 5.6 percent rate in the final three months of last year, largely because of the swing in inventories.

The trend in inventory rebuilding continued in the first quarter of this year, but at a more modest pace. That was among the reasons growth slowed to 2.7 percent.

Mike England, an economist with Action Economics, said Friday's wholesale inventories report has persuaded him to lower his growth estimate for the April-June quarter, to 2.8 percent from 3.3 percent. England noted that the report lowered April's inventory growth to a 0.2 percent increase -- half the initial estimate of 0.4 percent.

Rising inventories and falling sales are NOT indicative of a strengthening economy. Do not be buffaloed by the financial talking heads, or the blantant lies of an inept US President.

And with consumer borrowing floundering, if not in free-fall, how can an economy built on debt be categorized as rising when spending [ie. debt accumulation] is falling?

Credit-Card Debt: It's Worse Than It Looks
by Brett Arends
Don't be fooled by the latest news on credit-card debt. The true picture is worse than many people realize. And unless Congress renews extended unemployment benefits, you can expect it to get even worse.

Let's start with the headlines. They sound reassuring. The Federal Reserve said Thursday that Americans slashed their revolving consumer credit—mainly card balances—by about $7.4 billion in May. That's an annualized rate of 10.5%. And that's not a one-off. Since the end of 2008, they've cut those balances by about $127 billion, or 13%, says the Fed.

As people pay off their debts, you would expect the delinquency rates to fall. No wonder the American Bankers Association said this week that the percentage of cards with payments more than 30 days late fell in the first quarter to the lowest levels since 2002, and even below 15-year averages. "It's clear that consumer balance sheets are improving," says James Chessen, the ABA's chief economist. "People are borrowing less, saving more and building wealth. These are all positive signs."

So that's good news, right?


The biggest reason credit-card balances are declining isn't that people are paying them off with their spare cash and extra earnings. It's because the banks have been writing them off as the borrowers default. Sure, that reduces the balances. But it tells a somewhat different story.
During the first quarter of this year, says the Fed, credit-card balances fell by about $19.5 billion. How much of that was written off? About $18.7 billion, according to data from the Federal Deposit Insurance Corp.

Reminds me of the "falling" unemployment rate the government is so quick to boast about. It's falling because an ever increasing number of the unemployed are running out of benefits and are no longer "statistics" that meet the measure of "unemployed"...even though they REMAIN UNEMPLOYED.

I doubt this latest revelation on consumer credit will prove to be a positive for the phantom recovery we hear so much about from our President and the munchkins on his staff:

More Americans' credit scores sink to new lows
NEW YORK (AP) -- The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers -- nearly 43.4 million people -- now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on

More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual's score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.

It should be abundantly clear that the recent drop in the prices of Precious Metals is an opportunity, and NOT a warning. Gold remains the proverbial "canary in the coal mine". The longer the Gold Cartel can hold the rising price of Gold in check, the further down the road western governments can kick their debt bomb. Kick a bomb one to many times, and eventually it will will the prices of Precious Metals.

Sit tight and be right. Buy physical bullion while it remains available at discount prices.

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