Thursday, January 19, 2012

Silver & Gold: The TRUTH IS - There Just Ain't Enough To Go Around

The US Dollar began rolling over this morning at 3:10AM est. from an over night high of 80.58 in Asia.  By 4AM est, the US Dollar was clearly beginning to trend down, and Gold exploded to the upside.  At 4:05AM est, Gold hit $1670...and promptly had it's legs kicked out from under it.

Strangely, as the slide in the Dollar gained momentum, the price of Gold began to fall along with 1PM est the price of Gold had fallen $20 an ounce from it's overnight high to $1650.  The Dollar fell 40 ticks by 12PM est to reach a low of 80.18.

Ah, the wonders of the Western Banking Gold Cartel..."can't have the price of Gold rising on our watch."

The lengths to which the Western Banking Gold Cartel are going to, to suppress the price of Gold [and Silver], have breached the threshold of absurd.  The TRUTH is out there, and the prices of Gold and Silver WILL BE going higher no matter what the clowns in the financial news media offer as comment on the subject:

Why gold could lose its glitter in 2012

Gold may hit $2,000, as it ends long bull-run

Everyone is entitled to their opinion...and I am entitled to laugh at it!

Let's focus on some of the TRUTH that the mainstream financial news media flat out ignores when making their claims that the bull run in the Precious Metals is over:

GFMS reports substantial offtake of Gold by Central Banks
By Trader Dan Norcini

Dow Jones news is carrying a report this morning from GFMS (formerly Gold Fields Mineral Services)detailing the amount of gold purchased last year by the world's Central Banks. It was indeed a formidable number.

The net purchases of the yellow metal came in near 430 tons, a more than 5-fold increase on the previous year. It was also the highest level recorded since 1964.

To give you a sense of the significance of these purchases - the amount of NET purchases by Central Banks in 2010 was a mere 77 tons!

Surprising to me was the fact that Mexico was the largest buyer as far as the official monetary sector goes. GFMS reports that they added almost 100 tons of gold to their reserves. I would have thought it would have been China to lead the pack.

The other surprising fact was that signatories to the Central Bank Gold Agreement ( this was set up to limit the amount of gold sold by European Central Banks ) sold less than 10 tons for 2011.

The summary - Central Banks are now absorbing a significant amount of world gold production. This should continue to provide very good downside support for the metal on price retracements lower as these banks do NOT CHASE PRICES HIGHER but are there to buy at levels they consider gold to have "value".

By Eric King,

With many global investors still concerned about the price of gold and silver, today King World News interviewed the “London Trader” to get his take on these markets. The source stated, “We’ve still got a very, very compressed spring because the shorts are still trying to defend their positions, their naked short positions in both the gold and silver markets.  As an example, in the silver market, you saw that type of activity in the silver ETF (SLV).  Shorts borrowed another 3 million ounces to cover immediate delivery concerns.  There are 25 million ounces now borrowed from SLV.  It is getting worse and worse for them.

“They are naked short on the COMEX and to meet immediate delivery demand they are having to borrow it from the SLV.  It is still unwinding and it’s still got a long way to go.  Yes, you will still see games being played and yes you can create paper gold out of thin air.  But there comes a point where each time you do that the physical buyers are taking it and it has a lagging effect that will catch up, and eventually it gets reflected in the price.

The demand for euro gold here in London is so intense it’s shocking to some of the players.  This is what has left some market participants in the US wondering why the price of gold has risen along with the dollar.  It’s because demand in the eurozone is unimaginably strong.  The euro physical gold demand is off the charts and it is creating shortages for metal, in size, here in London.

The physical gold market is actually being drained by euro gold buyers.  People are converting their euros to gold and there is only a finite amount of physical gold available.  Again, that’s why you are seeing the dollar and gold rallying together.

We are also seeing very strong markets in Asia with solid premiums.  Silver is in backwardation.  There are huge premiums for size (large tonnage orders) in silver and you are going to wait 3, 4 or 5 weeks for delivery.  There is constant backwardation into the March futures contract.  For the most part, the bid on silver spot has been higher than the ask on March futures.

These paper markets are a joke.  Nobody who is seriously in the business of taking physical delivery is trading on the COMEX anymore.  That is big news.  The COMEX is no longer a credible marketplace...

“You now have international funds, whose compliance departments are saying to them, ‘You can no longer trade on the Comex because the CME did not back client accounts.’  There are a tremendous number of international funds and hedge funds that can no longer trade on the COMEX as of the first of this year because of compliance reasons and no one is talking about this.  This is huge news. 
Back to gold, if we get a pit close above $1,650 you could see a lot of scared shorts begin to cover.  This could create a very quick move higher in the gold price.  Also, if we get a pit close above $1,650, we are going to see a very large tranche of unfilled wholesale orders moving a lot higher with their bids, and that will become a base.  There are massive orders for sovereign entities under the market here.  

The Chinese are long-term thinkers and they really don’t care whether they are paying $1,600 or $1,700 for gold.  What they do is get the best price they can.  When the new floor eventually becomes $1,700, they will buy everything available at that price.  When it becomes $1,800 they will buy at that price.  They are just looking to accumulate gold and they are never sellers, never.

There are two things here.  Yes, China wants a cheap gold price and they’ve been enjoying the fact the gold market was taken down.  They have recently taken another roughly 150 tons away from the Western central banks.  The Western central banks essentially donated that gold in an attempt to prop up their paper currencies.  Yet again these traitorous Western central bankers have given away more power. 

I see gold as power and once again they have given it away to the Eastern Hemisphere.  The Chinese continue to laugh.  As much as the Chinese would like to have a cheap gold price and have this manipulation keep going, they also want to bring the renminbi to the center stage.  

To them, it’s more important the Chinese currency becomes the world’s currency.  The dollar, despite the latest rally, is dying, we all know it’s dying.  So, the Chinese are moving to become the international currency of the world and the best way to do that is through gold.  It’s a very clever tactic.  Every time more gold arrives in China, the more their currency is backed, the closer they move technically to becoming the world’s reserve currency.”

The flow of gold from Western vaults to Eastern vaults is the most important symbol of the decline of the West.  As the East rises, the West falls.  “So goes the gold, so goes the power.”  Remember to be your own central bank by owning physical gold.  Many in Europe have apparently figured this out as gold demand is, “off the charts.”

If central banks are now net buyers of Gold, in amounts not seen since 1964, [the London Gold Pool collapsed in 1967] and demand for Euro gold is "shocking", how can the price of Gold be falling in Europe...not to mention New York?

S & P, the bastion of late to the party credit ratings, downgraded several European nations sovereign debt last Friday, and the price of Gold has been under pressure ever since.  Huh?  The balance of Europe receives a debt downgrade, and the price of Gold is held in check?  And nobody in the financial news media questions this?

Central banks are buying Gold, and Europe is bankrupt, investor demand for physical bullion is off the charts and the US is about to raise it's debt ceiling by $1.2 TRILLION...and the price of Gold is predicted to be flat to down in 2012?

Yeah right...

Bill Holter from GATA chimes in:

The new normal?

To all; as you know, S+P downgraded various sovereign debt last Friday. They also downgraded the EFSF one notch over the weekend, thus stripping their pristinely stupid "AAA" rating. But just one notch? This is ridiculous because we could wake up on any given day facing an outright "run" and the EFSF would be exposed as the Ponzi engine that it is. How could it have been rated AAA in the first place? Various sovereign debt from Greece, Italy and today Portugal (which if (when) were to fail will take the Spanish banking system down) could not issue new debt OR survive without EFSF purchases of said debt. But what happens... if the EFSF were to have problems issuing debt of their own? Do you see where this all leads to?

A buyers strike, all owners selling and outright panic, that's where. This has actually already started to some extent and has been covered over here in the States and in Europe by clandestine purchases with "newly created" money. THIS sadly is the "new normal". ...And the worst part? The markets are just begging for more more more of it! Monetization has ALWAYS lead to ruinous hyperinflation, always. This try will be no different, but what amazes me is how many "smart people" they trot out in Wahington and on CNBC to tell us that this time will be different. It won't be. ...Well...maybe a little different.

THIS time the monetization is not in one country or one region, it is everywhere! We now face the prospects where even the ratings agencies are telling us that "risk" of non payment is rising everywhere (way after the obvious fact) and even IF investors went totally mad and decided to invest ALL new monies into sovereign debt, well, there just wouldn't be enough money! The debt "appetite" (actually , debt addiction that is now mandatory just to roll over old debt and pay interest) has gotten so large that the system is no longer generating (nor has the ability to) enough cash flow to sustain the debt necessary for the sovereign's to continue. No problem though, central banks will magically create what is needed!

I wrote back in the early fall of 2008 that "debt saturation" levels had been reached as individuals and corporations needed to deliver, I did not think that sovereign governments would bankrupt themselves to prolong the fantasy. Well, here we are and "they" have bankrupted themselves. Now, we have reached debt levels that are no longer sustainable on a "payback" basis by the sovereign's, NOR sustainable in amounts that the financial system can even provide. The wall has been hit and THE only thing left is for central banks to magically create credits to provide to various treasuries. This "new normal" that exists is not sustainable. Just because no one wants to acknowledge it doesn't mean it does not exist. Math is math and the amounts of debt necessary to continue cannot be funded "internally", the money is just not there. T We have arrived at Jim Sinclair's "QE to infinity" not out of desire, no, it is now out of necessity!

I say the above because the numbers are just getting beyond stupid! Our president has asked for another $1.2 Trillion increased debt ceiling to get us through the year (probably only August) and the ECB has just run through 250 Billion Euros since Dec. 21 (less than 3 weeks) and rumored to be announcing another 1 Trillion LTRO (long term refinancing operation) very soon. The whole thing is toast beyond toast mathematically while CNBC parades the goatheads to tell us "tech is cheap" or "Pharmaceuticals are a buy". I have news for you all, the entire system is 100%, completely and totally bankrupt! The governments are bankrupt which means their currencies are worthless and thus, everything saved in those currencies are worthless! Period! When all is said and done, history will remember this "new normal" as more infamous than when Fisher said back in 1929 that "we have reached a new and permanent higher plateau".

How could a "tulip bulb" be worth 30 houses? How could a tech stock with no earnings have a larger market cap than Exxon in 1999? ... How could "no one" (in the mainstream) not see this one coming? It will all be so obvious after the it always is! Regards, Bill H.

The Fed and the ECB are printing money as fast as they can [despite their official denials] in the hopes of papering over the insolvency of the western world, and the price of Gold is locked down?

Demand for Precious Metals is rising to ever higher levels by the month, and yet the prices are flat or falling?

Global Gold Coin & Bar Demand Surges in 2011 - Thomson Reuters GFMS Annual Gold Survey
From ZeroHedge

Gold coin purchases gained 13% last year and will increase 2.7% in the first half. Purchases of gold bars increased by 36% to nearly 2,000 (1,194) metric tonnes, concentrated in China, Germany, Switzerland and Austria. East Asia demand for gold bars rose 53% to 456 metric tonnes. India rose 9% to 297 metric tonnes and western markets demand for gold bars rose 41% to 335 metric tonnes. Central banks increased net purchases by a massive fivefold to 430 tons last year, and may buy another 90 tons in the first half, GFMS said. Combined official holdings stand at 30,788.9 tons, data from the London-based World Gold Council show. “Attitudes among central banks haven’t really changed,” Thomson Reuters GFMS annual survey said. “There’s still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings.” The Thomson Reuters GFMS annual gold survey also predicts that gold will struggle in the first half of the year, increasing in the later half towards $2,000. It also says the gold bull market is losing steam and predicts an end to the run as economies recover next year and interest rates begin to rise.

...And what about the demand for Silver?  Surely demand for Silver must have plummeted along with its price since September:

HOT OFF THE PRESS: Sprott Asset Management doing an overnight issue of the PSLV, which will be a minimum of $300 million, and hopefully will get even larger.

Sprott Physical Silver Trust Announces Follow-on Offering of Trust Units

TORONTO, ONTARIO--(Marketwire - Jan. 17, 2012) - Sprott Physical Silver Trust (the "Trust") (TSX:PHS.U)(NYSE:PSLV), a trust created to invest and hold substantially all of its assets in physical silver bullion and managed by Sprott Asset Management LP, announced today that it has launched a follow-on offering (the "Offering") of transferable, redeemable units of the Trust ("Units").

The Trust will use the net proceeds of the Offering to acquire physical silver bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per Unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering.

The Units are listed on the NYSE Arca and the Toronto Stock Exchange under the symbols "PSLV" and "PHS.U", respectively. The Offering will be made simultaneously in the United States and Canada by underwriters led by Morgan Stanley and RBC Capital Markets in the United States and RBC Capital Markets and Morgan Stanley in Canada.

Copies of the U.S. prospectus related to the Offering may be obtained by contacting Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing, or RBC Capital Markets Corporation, Attention: Prospectus Department, Three World Financial Center, 200 Vesey Street, 8th floor, New York, New York 10281-8098 (telephone: 212-428-6670, fax: 212-428-6260). Copies of the Canadian prospectus related to this Offering may be obtained by contacting RBC Capital Markets, Attention: Distribution Centre, 277 Front St. W., 5th Floor, Toronto, Ontario M5V 2X4 (fax: 416-313-6066) or Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, New York 10014 Attention: Prospectus Department (telephone 866-718-1649 (toll free) or 917-606-8474) or by e-mailing The Offering in Canada is only being made by the Canadian prospectus, which includes important detailed information about the Units being offered.

This news release does not constitute an offer to sell or a solicitation of an offer to buy the Units, nor shall there be any sale of the Units in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

Bill Holter from GATA comments on the Sprott Silver purchase:

PSLV announced what with overallotment will amount to a $300 Million add on offering!  Notice the "exclamation point"?  Yes I for one am excited for several reasons.  One being that the physical market will be "tested" as to real supply.  How long will it take this time for Mr. Sprott to receive his metal?  Will it take 4 months like last year?  Surely it should take less time now because supply (you know, the actual real metal) should be in abundance since the price is down nearly 40% from the May 2011 peak?  Surely mining companies came in with massive new supply because the price was so high?  Surely investors ran down to their local dealers with heavy bags full of Silver to "cash in" on their gains and "flushed" the physical markets?  Right? 

Well... this is not what happened.  Actually mining supply moved up less than 5% and it was physical demand that skyrocketed, NOT supply!  Yet the price is down 30-40%?  The only new supply that hit the market were new and freshly (printed) offered paper contracts with even less backing than the existing fraudulent contracts.  THESE hit the market like a sledgehammer!  Please keep in mind that this offering is only about 10 million ounces and with what Jeff Christian and Jon Nadler tell us should be less of a problem than a pimple on an elephant's ass.  My next thought is this, what if it doesn't take less time to fill the order?  What if it takes even more than 4 months for the metal to be delivered? 

Please remember that Mr. Sprott "filed" for a total of $1.5 Billion, which I for one believe is not even doable in today's physical market.  Is he just "testing" the market?  Does he not want to be "the one" who craters the whole system by unmasking just how TIGHT this market really is?  Another question (comical as it may be) is "where" will this order be placed?  The COMEX?  This size order would deplete their deliverable inventory (if it really exists) by 25-30% and still not make much of a dent in the total $1.5 Billion filing.  If the total filing were used and placed as an order on the COMEX, it could not be filled...hmmm?

I applaud Mr. Sprott's "guts" here, I know he is only doing a small (VERY small order in the scheme of "paper" things) order but risks exposing the whole "fractional metal" scheme.  This should in a "perfect world" not even be a topic to write about or discuss but the truth is...we haven't been told the truth for a long time and this is a perfectly legal and logical way to get at it.  We will find out just "how tight" the Silver market really is and very soon would be my guess.  As a side note and I usually don't discuss much in the way of politics, I really question just how well Ron Paul's heart would hold out were he to actually take an obvious lead in even the most crooked polls?  Do you see where I'm going with this...?  Hopefully the guardian angel union up there in Canada doesn't offer vacation days to its employees!

Please recall that when Eric Sprott purchased $500 MILLION of Silver last year, the price of Silver doubled.  $300 MILLION equates to 10 million ounces of Silver at $30 an ounce.  The COMEX only has 32 million ounces of Silver available to meet delivery demands [or so they claim to].  

The US Mint sold 40 million ounces of US Silver Eagles in just 2011!  The Silver industry produces less that 700 million ounces of Silver annually.  Am I to believe that a 10 million ounce purchase of Silver is not going to affect Silver supply and "force" the price of Silver higher?  Eric Sprott and the US Mint have Silver supply needs that are 18 million ounces more than the COMEX has to offer.  Simple math tells me that the Silver market is in for a "boom" in prices in 2012.

Ted Butler (

The second week of 2012 repeated the pattern of the first week with gold and silver rising (although ending the week somewhat sloppily). Gold rose $23 (1.4%) for the week, while silver climbed $1 (3.5%). As a result of silver's outperformance, the gold/silver ratio tightened in by a point to just over 55 to1. Despite the slight tightening in the ratio, silver still appears to be cheap relative to gold in many respects and also looks cheap relative to its closest base metal counterpart, copper.
Once again, this is not to suggest that gold looks expensive, particularly on a Commitment of Traders (COT) market structure basis. But the total dollar value of the world's three billion ounces of gold bullion has reached ridiculous levels relative to the dollar value of the world's one billion ounces of silver bullion. At current prices, the dollar value of gold is 165 times greater than the value of the world's silver. That's way too much for two items so closely similar. Here's another way of looking at it. Last week's $23 rise in the gold price increased the value of the world's gold bullion by almost $70 billion. That's more than twice as much as the total value of what all of the world's silver bullion is worth. I'm talking about the change for one week in gold being twice the total value of all the silver in the world.  That's crazy and is due to silver being artificially manipulated in price.

In a post at GATA's LemtropoleCafe James Joyce Table:

The scrap silver myth Hi Bill!

The market sentiment is so easy to manipulate in the great propaganda machine that is our mainstream media. The bearish spin on the metals is beyond belief. And when the metals WERE making new highs week after week, the 'bullish' commentary that was circulating was often left-handed nonsense. Flat out, there is no hint of a legitimate market press coverage to report on the precious metals.

Case in point, I read commentary today that states silver will underperform in 2012 due to over supply. Right off the bat I had to wonder where this was coming from. Well, the article stated it was added scrap silver that would tip the market into surplus this year. Now lets just consider that assumption...

Last year I know for a fact that any silver not nailed down was being dumped in the junk bullion craze. We all know of these shops opening all over North America in shopping mall kiosks, pawn shops, mail-in promos, and even road shows that travel from one hotel to another with a heavy marketing blitz to suck in the stupid. I have seen scavenger silver buyers showing up in auctions to bid up the price of any sterling silver items and then sell them for scrap bullion.

As silver made its highs in 2011 the temptation to sell scrap silver was drawing in a lot of bullion. These people got paid a fraction of the value for their jewellry, cuttlery, candlesticks, and whatever else they were unloading. And now its mostly gone. There are only so many suckers that will fall for that kind of scam and most of them now hold no silver trinkets to unload on the next price surge. Also, with silver now priced much lower and therefore the prices these scrap vultures are willing to pay have also come down, the incentive to hang out at auctions buying junk silver items is also fading. Suffice to say that less scrap silver will find its way to market in 2012. That is not the story that you will be hearing elsewhere.

The flipside to this loss of scrap supply is that refined bullion demand continues to rise. I read an article earlier this month that suggested India may import an additional 100 tons of silver bullion in 2012. Think about that in a market that is already in short supply. Also, the loss of production from the Lucky Friday Mine for this year will probably reduce the bullion produced by 2.5 million ounces from mine supply. Lets also consider that producers like Endeavour Silver have been holding back some of their production in inventory, which also reduces supply. And former bullion exporting nations like China are now net importers of silver bullion, putting further stress on the demand side of the equation.

There are a handful of emerging silver producers that are setting new production records, adding a million ounces here, half a million ounces there to mine supply. I doubt that we will see any increase in scrap silver this year at all, and probably a sharp decline is coming. Meanwhile, demand continues to increase from a variety of retail investors,institutional money, national buying, and industrial consumers.

I think the game plan now for the bullion banks is to continue to encourage bearish articles about the metals in the major media, while they play games to rig the market and discourage investors from getting back on board. Meanwhile, I think they are winding in the short exposure and getting ready to go long. The failure of so many 'analysts' to mention or even recognize this scam is shameful but I think there are many good people now putting the word out and I think some investors are getting the message. I still see regular reports that inventory is low in the bullion shops and the premiums are high, which suggests a tight market and retail buyers are still active (no matter what the media presents...).

The days to run the spot price and bag a bunch of clueless specs on a short raid are nearly over. The next big scam will happen when the big banks are on the long side and then get their media buddies to report incredible bullish stories on the metals. Right about when a real squeeze has developed in terms of physical bullion inventory we will have the light turned on for the retail herd to thunder into bullion shops looking to pay any price for whatever metal they can get. I think that will be the mania that ends with a blowoff top and I hope it is still a year or two away.

So I am not overly concerned that the same hack writers are quoting the same bearish 'experts' to put out their hit pieces on the metal and projected prices for 2012. It just tells me the big banks are still looking to close out shorts cheaply and buy while the rest of the market is looking elsewhere. In time the sentiment is going off the charts. Good hell! I will feel sorry for those who wait until the mania stage to get interested in buying silver.

Mexico Mike

If the prices of the Precious Metals are indeed tied to the inverse of the US Dollar, one looks at the markets this morning in dismay, wonder, or possibly anger.  Take heart wise Precious Metals investor, the days of the Western Banking Gold Cartel's manipulation of these prices may be numbered.

Not only is the "value of the US Dollar" questionable, its viability as the Worlds Reserve Currency may be in doubt as well.

Consider that recent "strength" in the Dollar is purely the result of weakness in the Euro, and a shortage of Dollars to meet debt obligations to be settled in Dollars primarily in Europe.  What if this phenomenon was to suddenly reverse itself?  

Say, a short squeeze in the Euro?

...anyone who has euro shorts on here has their balls on the chopping block ...


Thoughts on the Metals/USD/Euro:

I have a feeling that the large artillery guns are being quietly turned toward the USD versus the Euro. Let us not forget that the largest debtor nation on the planet is the U.S.A. and were it not for the Ponzi-gifted Fed buying bonds for which there are no real buyers, the U.S. banks and Government would be dead.

The Russians and the Chinese and the Japanese are not terribly pleased with the Euro situation because Euroland is a very important market for them and is far closer to them than are U.S. markets. In fact only 7% of Chinese exports hit American soil so the hypocrisy of Tim Geithner wagging his finger at the Euro pols is not going unnoticed.

So before one gets too excited about the prospect for a huge dollar rally that will torpedo the metals (AND the CRB as well), remember that the paper "markets" (translate: "interventions" (Thanks Chris Powell)) are USD-denominated and if you believe that contrarian investing is a useful tool, the sheer enormity of the open interest in the short Euro/long USD trade is enough to send you scurrying into a cave.

The short Euro/long USD is one of the most one-sided, over crowded, taxi-cab-driver, shoeshine boy dominated trades of the past two decades and somewhat analogous to the one-sided-ness of the masses all being simultaneously long in 1999 being launched at 2,000 times 2007 earnings with zero assets and zero revenue.

Being short the Euro and by default bearish on the precious metals is like tightrope-walking the Niagara gorge in February in a blizzard blindfolded. It is not a wise action unless you like safety in numbers because short Euro is one very, very crowded trade.

Michael J. Ballanger B.Sc., B.A. 

Or maybe a decision by a number of Global sovereigns to eliminate the US Dollar from trade settlement between nations?

A new Reserve currency to challenge the dollar – What’s really going on in The Straits of Hormuz.
By Golem XIV on January 9, 2012 in latest

A little over a year ago on 1st November 2010 I wrote what I called “…a little bit of scurrilous speculation.” In it I speculated that an unintended consequence of QE had been to spur several countries to think very seriously of how they could replace the dollar as their settlement currency for international deals. The Settlement Currency just means the currency both parties agree is stable, internationally trusted and accepted, and in plentiful supply. Which may not be the case for their own currencies . I wondered if doubts about the longer term stability of the dollar and of US debt levels, was combining with a political desire in China and perhaps other countries as well to challenge the US via the dollar with the eventual goal of creating an alternative reserve currency backed by gold rather than, as the dollar now is, by debt.

Various countries have been buying gold. Russia, China, India have all bought a lot….Which brings me to my speculation. The list of countries accumulating gold is similar to the list of countries that were reported to be talking about the need for a new reserve currency to replace the dollar.

I wonder if those who are seriously thinking of trying to unseat the dollar and create a currency which is backed by something other than debt and is not under the control of America’s corrupt banks and even more corrupt government, are investing in gold as a precursor to making a real bid for a new currency.

Later, in Making the New Sub Prime Part 2 I looked at the growing network of bilateral agreements in major trade deals gradually replacing the dollar as a settlement currency.

Being a ‘Settlement’ currency is not quite the same as being a ‘Reserve Currency’ like the dollar, but it a major step in that direction. It is, in fact, a very large step. Which currency large international trades are done in matters. It is a fact that in 2000, Iraq signed an agreement to sell its oil, all its oil, in Euros. Iran was contemplating doing the same at around the same time. The Iraq decision involved the large French bank PNB-Paribas. France was not one of those who supported the war and Washington led a hate campaign vilifying the French. The worry was that a switch from dollar to Euro settlement might gain momentum. Any major move away from dollar settlement would cripple the US.

In January of this year the India Times reported that India was talking to Iran about moving out of dollar settlements so as to be able to buy Iranian oil despite a US embargo. India said it was discussing settling in Gold. Remember, India has just signed a settlement agreement with China to use the Yuan.

A very good summary of recent news by ZeroHedge suggests I may have been on the right track. And recently the pace has picked up.

China and Russia have been trading directly in their own currencies and using them both interchangeably for settlement for over a year. As the The China Daily article reports,

China is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March he was “worried” about holdings of assets denominated in the greenback.

Then on 26th December 2011 Bloomberg reported,

Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

China is Japan’s largest trading partner. Japan will also start in 2012 buying Chinese debts. How much Dollar debt will either of them buy? They have both already been buying less.

Two days later (Dec.28th) the Iranain news service reported,

Iran and China on Wednesday signed two agreements on expansion of trade ties and joint investments.

These trades too will not be settled in Dollars or in Euros.

Three days after that The China Post reported that on the last day of 2011, US President Obama had signed a new law in which

U.S. imposes sanctions on banks dealing with Iran….Sanctioned institutions would be frozen out of U.S. financial markets.

Sounds tough. A bit like sending an aircraft carrier to the Straits of Hormuz. But as the article went on to report, with only barely concealed delight, the threat may be as hollow as the dollar itself. The law comes with exemptions which may eventually highlight America’s plight rather than its might.

The sanctions target both private and government-controlled banks – including central banks – and would take hold after a two- to six-month warning period, depending on the transactions, a senior Obama administration official said.

Under the law, the president can move to exempt institutions in a country that has significantly reduced its dealings with Iran and in situations where a waiver is in the U.S. national security interest or otherwise necessary for energy market stability. He would need to notify Congress and waivers would be temporary, but could be extended.

And as if to make the point, only a couple of days after this on Jan 7th, came the news that,

Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow.

So now almost none of Iran’s oil will be traded in Dollars.

India and Japan have also recently agreed a 15 billion dollar currency exchange. This will tie their two currencies closer together.

The list of countries and trades no longer using the dollar for settlement for their trade is now considerable. How close are we to reaching the tipping-point where it no longer makes sense for nations to use dollars and makes more sense for them, both economically and politically, to use the network of currencies tied to the Yuan? When we reach that point the Yuan becomes in reserve currency in all but name.

China, India, Russia and Iran are all large holders of physical gold and most of them are also large producers of it. None of them are firm allies of the US. They all have long term relations with each other. All of them have expressed oncercern over US debts and printing. None of them will like QE3, nor Euro printing, when they both arrive later this year.

I think the stand-off with Iran in the Straits of Hormuz over sanctions is as much to do with the moves to replace the dollar as anything else. The stand off is as much with China and its allies as it is specifically with Iran. The US is testing China’s nerve and the solidity of its network of bilateral currency settlement agreements. We are seeing military power deployed to counter economic power. I think the US will lose. Depending on the nature of its loss we could see a precipitate decline in the standing of the dollar as global reserve currency.

2012 could see the beginning of large scale defections from the dollar settlement currency. Which would in turn have massive, perhaps even catastrophic consequences for how the world perceives what is an acceptable level of debt for the US. What is acceptable when you have the global reserve currency is quite different from what is acceptable when you don’t.

And the reverse is also true. If China can transform the netwrok of bilateral agreements which centre upon China and the Yuan, in to becoming accepted as a de facto reserve currency, then for those, like me, who wonder how China can possibly avoid a hard landing as its bad bank and property bubble deflates faster and faster, look no further.

There is no denying China has an absolutely massive bad debt crisis fermenting. Every one of its banks is gagging on bad loans made to every one of China’s regional governments. Trillions of Yuan worth of loans which will not be repaid, on property and land valued at hugely inflated but now defaulting prices. But if China can become a rival and rising reserve currency at the centre of a new and growing collection of trading partners then China can and will bury the debts in a a mass unmarked grave somewhere in its hinterland.

At the moment when America is seen as being no longer the pre-eminant reserve currency and its debt load is re-considered accordingly, China and its debt load will go the other way. America and its currency risk being seen as too rotted by debt to be trusted and it’s claims of economic growth seen as fake, empty, paper-based, accountancy-conjured growth. The Dollar and America itself risk being seen as the fiat currency and fiat nation par excellence .While China and the Yuan will be seen as backed by sold gold and real growth.

One more question to ask in all this is – how far have the big banks and brokerages managed to turn even gold and silver (at least gold and silver held in the West) in to another fiat currency? Gold and bullion bugs amoung you might argue the question makes no sense. But consider re-hypothecation. How much gold and silver has been pledged and re-pledged, hypothecated and re-hypothecated? How many more paper contracts for and claims upon gold and silver exist above and beyond the amount of actual physical gold and silver? After all gold and silver are the ultimate in ‘good’ assets which counterparties will happily accept. So it seems likely to me that gold and silver (or contracts for them) will have been in demand in those repo and hypothecation markets. If so then I wonder how many conflicting and contesting claims will surround every ounce of gold and silver in the West when investors start demanding to see their ‘investment’.

I think the big old sterling silver coin may already have dropped for some investors. That is why prices for physical silver are surging above the price for paper claims on silver. I think some traders are getting nervous about buying paper claims on silver and now want only the metal itself. They suspect that in the end, if you have only a paper claim or contract for, silver that is exaclty all you will ever have – the paper. Only those with the actual metal in their hands, will get what they paid for. I think there is a fiat, paper currency version of gold and silver floating around and parasitising the metals themselves. Those who own that paper stuff may get…well … stuffed.

Day to day, the prices of both Gold and Silver may lead to frustration and anger, but fundamentally, in the big picture and over the course of weeks and months, the ONLY path for the Precious Metals is matter what the boobs in the mainstream financial news media have to say about them.  These financial news journalists [hacks] write only what their sources ask them to write.  Few if any of them even understand the topic of which they comment on, let alone research their stories before writing them.


Got Gold you can hold?

Got Silver you can squeeze?

It is not too late to accumulate!

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