Sunday, August 31, 2008

I Love This Intro

"Think now, if you are a person of "great worth" is it not better to acquire gold over years, at better prices? If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!" --ANOTHER (THOUGHTS!) 1/10/98

"If ANOTHER's claims are true -- that a consortium of oil states has cornered the gold market (and given the impressive circumstantial evidence, this could very well be the case) -- these "footsteps of giants" become the most salient and persuasive case for gold ownership I have seen in the past decade, if not the full twenty-eight years I have been in the gold business." -- Michael J. Kosares, president of Centennial Precious Metals, Inc.; author of The ABCs of Gold Investing

When the once highly secretive London Bullion Market Association (LBMA) -- its venerable membership comprising the world's largest gold dealers -- published its daily clearing volume for the first time in January 1997, it rocked the tight-knit world of international gold traders and analysts.

According to this first of many subsequent LBMA press releases, thirteen hundred tonnes of gold (representing more than 50% of the world's annual mine production) changed hands daily in this fog-shrouded center of the global gold market. This figure represented over $10 billion per day and $4 trillion per year in bullion banking activity!

The gold market had always stood in austere, quiet contrast to the highly charged, mega-volume world of stocks and bonds. Now this first LBMA report forced analysts, investors, and brokers to reassess their understandings of the gold market. While some reveled in the glow of the large LBMA numbers, others began to raise some very important and rather unsettling questions. First, Why was this much gold on the move? Second, Where was all this gold going? And third, Where was all this gold coming from?

Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text. If you are not similarly moved to at least reassess your own view of the international financial scene after reading what's revealed below, then you are either firmly entrenched in your world view, or you've been numbed by too many hours of Wall Street's cheerleader (CNBC) and too many Friday nights with Louis Ruykeyser.

What matters most to us here at USAGOLD is ANOTHER's educational value to all who would take the time to read and think through his (at times) arcane and cryptic commentary of international economic dealings behind-the-scenes. ANOTHER demonstrates a feel for and understanding of the gold and oil markets that indicates connections at the highest echelons of international finance, yet for reasons having to do with his "position," as he has indicated, he wishes to remain anonymous. If his "THOUGHTS!" are theory; they are good theory. If they are speculation; they are reasonable speculation. If they are supposition; they are well-grounded supposition.

In the final analysis, ANOTHER offers one of the more plausible hypotheses for why the financial markets have acted as they have in the past few years, and therein lies his immense value to the reader, no matter who he is. Again, knowledge as is conveyed in his series of "THOUGHTS!" is rarely to be found outside the highest levels of international finance, and is seldom to be seen bandied about on the front pages of The Wall Street Journal or your favorite financial newsletter.

As explained by ANOTHER, an opportunistic arrangement for massive physical gold acquisition among important petroleum producing and exporting nations could be comfortably facilitated within these astronomical trading volumes now being publicly revealed via the LBMA. For the oil states this meant receiving real money (as opposed to government-sponsored paper) in payment for their depleting oil reserves. For the industrialized countries, this meant a continuing supply of cheap oil to fuel the economic boom already in progress. These transactions were to be cleared through the bustling London gold market. Up until late 1996, the volumes were a tightly kept secret so "the deal" proceeded without the knowledge of the general public.

When the LBMA went public with its figures, it raised the shroud off "the deal." But by then, according to ANOTHER, it no longer mattered. The oil states had already (almost inadvertently) cornered the gold market. As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices. Their subsequent heavy purchases of physical gold upset the delicate balance. Now there was no longer a reason to keep it secret, and hence, the revelation of this extraordinary tale.

His choice to use an Internet forum to tell his story is surely a "story" in itself. Many who have read ANOTHER's "THOUGHTS!" speculate why he would choose this particular venue for his revelations. Why not a magazine article? Or a book? Rather than turning this Foreword into a treatise on the merits of the Internet, let it suffice to say that if ANOTHER and his motives are as implied, then there is probably no better venue than the Internet; allowing his "THOUGHTS!" to be disseminated rapidly, anonymously, and without editing by intermediaries. In addition, they could be efficiently targeted to go directly to the core market audience -- the gold analysts, brokers and investors who frequent such Internet sites as this, devoted strictly to the yellow metal. And after all, as a utility, isn't this capacity for specialization and instant communication what the Internet is all about?

We encourage you to find time to read and consider these remarkable postings of ANOTHER with an open mind. In the field of gold and international economics, these posts are sure to remain as fascinating and worthy of careful study as anything you will find on the web today.

That is the forward to the archives of ANOTHER (THOUGHTS!) which was originally posted on Kitco's forum and then archived on the USAGold website. Then, in April of '98, this:

April 1998 Editor's Note:

I want to first of all welcome ANOTHER to the USAGOLD web site and thank him for electing to post here. ANOTHER has made an important on-going contribution to the discussion about gold in recent months and it is good to have him back in action. That he has surfaced here -- at the USAGOLD web site -- takes a backseat to the simple fact that ANOTHER will once again be offering up his mysterious and cryptic brand of market analysis to the delight of his many readers. His analysis goes beyond the surface representations which we have come to expect from mainstream sources and goes to the core of what is occurring in the world economy. ANOTHER is a teacher, but in our short private correspondence, I have found that he is also a seeker of wisdom -- a philosopher who offers substantially more than dry economic theory. He is also a consummate gentleman. Whether right or wrong, the one thing we can say about ANOTHER is that he makes us think, and perhaps, in the final analysis, that is his most fundamental goal. So we move forward with these THOUGHTS!

I would like to deal with the question of ANOTHERs identity from the outset. At all costs, ANOTHER wishes to remain anonymous. His contact with me has been through a third party who describes himself as "the firewall that breaks the electronic connection from the source." I have made no attempt to find out who ANOTHER is, nor do I want to know who he is. After long consideration of this situation, I have come to the rock-solid conclusion that it is not only in ANOTHER's best interest to remain anonymous; it is in our best interest as well. So, please, in your liaison with ANOTHER (which will be offered below) and with USAGOLD, do not waste your time or ours by making inquiries as to his identity, country of origin, etc. We simply do not know, nor do we want to know.

I would also like to put to rest any notion that I am ANOTHER; that I am an agent of ANOTHER; or that ANOTHER is an agent of USAGOLD, Centennial Precious Metals, or Michael Kosares. There is no connection between us (as you will see in these first postings) except that USAGOLD is providing a forum, the way a newspaper provides space for opinion columns, and ANOTHER is simply taking advantage of it. In the end, as I said in the Introduction to "IN THE FOOTSTEPS OF GIANTS":

"(The actual identity of ANOTHER) might not matter. What does matter is ANOTHER's educational value to all who would take the time to sift through his (at times) arcane and cryptic, but always thought provoking, look behind the scenes of international finance. If his THOUGHTS! are theory; they are good theory. If they are speculation; they are reasonable speculation. If they are supposition; they are well grounded supposition. In the final analysis, ANOTHER offers one of the more plausible hypotheses for why the financial markets have acted as they have in the past few years, and therein lies his immense value to the reader no matter who he is."

I would like to clarify one other aspect of ANOTHER's postings at the USAGOLD web site. There will be two people posting on this page. The first will be ANOTHER himself. From time to time his associate will also be posting. He will be identified here as the Friend of ANOTHER. There was some confusion over this dual role in the earlier Kitco postings. This will hopefully clarify the matter. The writings of both authors will be posted as I receive them without attempting to correct misspellings, punctuation, grammatical and/or textual errors so that analysts, researchers, and readers in general can study the text in its original form.

ANOTHER has graciously accepted my invitation to entertain questions from the public. Another has asked that in the interest of time that only a few questions be forwarded so I will do my best to pick and choose the most salient. This forum is not designed for, nor is it intended to deal with, specific investments and specific investment strategies.

As ANOTHER would say, "We watch this new gold market, yes?" Yes, we will. There is no formal time-table for ANOTHER's postings, so stay tuned. I think you are going to learn from and enjoy these initial exchanges which were originally intended to be private correspondence. On behalf of both ANOTHER and myself, we welcome you to this venue.


Michael J. Kosares/USAGOLD

If that doesn't make you want to read on, I don't know what will!


Saturday, August 30, 2008

Ultimo Contango a Parigi

Here's another great article from Antal E. Fekete, just out today. I think of Fekete as a kind of a technician who has figured out a technical way to track and receive an early warning sign just before Another's predictions become reality. There are many similarities between Fekete's writings and Another's and FOA's.

This article touches on why governments (and fiat currencies) view gold as an enemy, manipulation, the final end game, and the ongoing separation of the paper and physical price of gold.

Be sure to read all the way to the bottom. Here's a taste:

"That will be the most dramatic event in the entire history of money, an event that I have, tongue in cheek, called "The Last Contango in Washington". The basis will give you an early warning signal...

...The basis will tell you well in advance when all the offers to sell real gold or silver are about to be withdrawn in all the markets of the world. Once that happens, infinite demand will confront zero supply. Don't say it can't happen here. It has happened locally in France in 1796, in Germany in 1923, in China in 1947, to mention but three episodes. This time it will happen globally

Basis is Fekete's secret weapon. It is brilliant in my opinion. To learn just a little bit more about it, please read this piece he wrote more than two years ago called The Last Contango in Washington.

"People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for. My answer invariably is: watch for the last contango in silver."

More on Manipulation

More rebuttal from GATA. Mish says "The U.S. government, foreign governments, central banks, various broker-dealers, and a consortium of 10 large U.S. banks are all acting together in some massive conspiracy to suppress the price of precious metals for 15 years running, and not a single insider has stepped up to expose the fraud".

Chris Powell of GATA lists out several insider admissions over the last 13 years.

I'll note that this manipulation of the price of gold is important in understanding Another. But Another takes a different view than GATA on the subject. While GATA sees it as something to fight, Another says it is neither good nor bad. It simply is the way it is. And you understand this and act on it by accumulating gold over time during this season of suppressed prices. Because he knows it will not last forever. And he says that gold only has to meet its true value in price once in your lifetime, and that will be more than enough!

Friday, August 29, 2008

Price Manipulation Wars

I must say that I don't really agree with these guys, but this is an interesting article by Mike Shedlock (Mish) which includes a message from Jon Nadler of Kitco. At issue is all the recent talk about price manipulation in metals. There is a lot of hate between these "mainstreamist contrarians" and regular (or as I like to think, rational) contrarians like Ted Butler, Jim Sinclair, James Turk and GATA. And the hostility goes in both directions as is evident in this article.

The real truth of the matter is that physical gold possession is all that matters. Possession of your money is what will keep you whole and carry you through this gathering storm. And that is only on an individual level. It is hard for hedge funds to benefit by accumulating piles of physical gold. In fact, it's hard for any group of people or non-individual entity to secure itself through physical gold.

If you don't hold the physical gold yourself, you don't really own it. You own a promise. Trust is involved and trust can be broken. Only true personal possession qualifies as a final payment for your hard work. Anything else is one or more steps away from your final payment.

With those principles in mind, Mish's article makes some sense. In the world of hedge funds and pools of many people's money, often the paper markets for metals are considered the next best thing to owning physical, which is really a game for individuals. But the reality is that paper promises carry only the intrinsic value of the paper itself, which is zero. The additional, temporary value is based on a promise which requires trust.

And when you consider that all the paper promises of the COMEX add up to more gold than exists in the marketplace, trust becomes a rubber band stretched very thin, and the promises carry the ultimate promise of an eventual default. So who can blame the hedge funds for dumping their paper gold for any number of reasons. Perhaps they had margin calls on their other losses and needed to raise cash by selling the only thing they still had with value left in it. Perhaps they saw the dollar rally coming and wanted to make a quick profit in it. Or perhaps they are losing trust in the promise.

Whatever the reason, I'm sure it is perfectly logical, just like Mish and Nadler say it is. I do, however, believe that manipulation is occurring in these paper markets. It was going on before the Great Depression in a very open environment. And it goes on now within the current rules. And it doesn't require, as Mish and Nadler put it, a massive conspiracy.

In fact, in that article the word conspiracy appears ten times. And of those, it appears as "conspiracy theorist" three times. Other "endearing" terms that appear are "conspiracy quacks", "conspiracy fairy tales" and "drivel". And all this from people who are supposedly on the same side of the dollar/gold issue as us physical gold advocates. It makes you wonder, doesn't it?

There was also a great rebuttal of this article today from Chris Powell of GATA, the Gold Anti Trust Action Committee. If you read the first article, you must now read this one.

And for anyone reading this who is confused by the rising dollar right now, and the flagging price of gold, please watch this video. It is a documentary about the Great Depression. It was made in the mid-90's, so the parallels you see to right now are not intentional from the filmmakers, they are simply "baked into the story". In early spring of 1929 there was a crash, then months later a significant rally, then in October the final crash which left 10 years of misery in its wake. It is an amazing story, and it makes me want to sell all of my stocks right now, while I still can... and buy gold!

Addendum: Chris Powell just made this funny post on USAGold:

August 29, 2008
Chris Powell ( 29August2008; 19:18)
CNBC Europe manages to spell ‘gold manipulation’ right
9:10p ET Friday, August 28, 2008

Dear Friend of GATA and Gold:

Somehow the issue of manipulation of the gold market made its way onto CNBC Europe today as the business channel interviewed Evy Hambro, portfolio manager for BlackRock Investment Management in London, and Jill Leyland, an analyst for the World Gold Council.

The program was terribly clumsy with the facts, as the moderator announced that the U.S. Commodity Futures Trading Commission had issued a report suggesting that the gold market had been manipulated by certain banks. Actually, of course, the recent disclosures about the unprecedented concentration in short positions in gold and silver on the U.S. commodities exchanges came from GATA consultants Ted Butler and Rob Kirby, not from the CFTC, though Butler and Kirby might be glad to accept appointment to the commission. And another CNBC interviewer talked about world gold supplies of “500 million tonnes,” when the best estimate of all the gold ever mined is less than 170,000 tonnes. (The interviewer probably was thinking of the 500-tonne annual sales limit imposed on the parties to the Washington Agreement on Gold.)

But at least CNBC Europe managed to spell “gold manipulation” right, reported the shortage of U.S. gold eagle coins, and allowed Hambro to remark with British understatement that recent reversals in several markets, not just gold, were hard to explain. And Leyland’s curt assurance that nothing possibly could be wrong in the gold market might have struck impartial observers as a little smug and arrogant.

As it turned out, the manipulation issue was only raised on the program; the program did not cite a single piece of evidence, apart from the misattribution to the CFTC of the work of Butler and Kirby. But maybe the network was expecting everybody to have the wit to look for the evidence at

The CNBC Europe program is 7 1/2 minutes long and you can watch it at the CNBC site here:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Thursday, August 28, 2008

Follow in the Footsteps

By Claudia Carpenter

Aug. 28 (Bloomberg) -- Rand Refinery Ltd., the world's largest gold refinery, ran out of South African Krugerrands after an ``unusually large'' order from a buyer in Switzerland.

The order was for 5,000 ounces and it will take until Sept. 3 for inventories to be replenished, said Johan Botha, a spokesman for Rand Refinery in Germiston, east of Johannesburg. He declined to identify the buyer...

South African krugerrands

Wednesday, August 27, 2008

The King and his Gold

In his very first post on the Kitco forum, October 5, 1997, Another wrote "gold and oil can never flow in the same direction". This was a major theme in his writings. To understand Another is to understand what is going on with the gold market now. And in that spirit I have written a short story that will hopefully help you understand this first important message from Another:

Many decades ago the Saudi King realized his barren kingdom was sitting on a gold mine. Only it wasn't gold, it was oil. From his high perch as king, he was able to see the wide and very long view of the world, way off into the future. He saw a future filled with many riches, but he also knew that those oil reserves under foot were only finite cavities of value. As a king, he knew the workings of money and fiat currencies. He knew that the Western World needed his oil treasure, but he didn't want to exchange it for only paper. He wanted to turn his virtual "gold mine" into an actual pile of gold.

Back then, the paper which paid for the oil was redeemable for gold directly from the US Treasury. So there was no problem. He would take the paper and then turn it in for gold. Later, after much inflation, the US Treasury defaulted on the promise of gold. Chaos ensued for almost 10 years. The price of both oil and gold skyrocketed and there were long lines at the gas pumps. For this kingdom was only willing to trade it's finite supply of oil for an equally finite store of value, gold. And without a secured source of gold at a stable price, the oil wells just didn't have the incentive to run at peak production.

Then in the early 1980's, the markets were brought back under control. A secret deal was cut between the King and a few very high, and very powerful leaders in the West. These leaders probably included central bank chairmen and top level leaders in the US and the UK. The Western World was on it's way to world domination, both financially and militarily, but to maintain this power it needed cheap oil. The Kingdom was a good way through it's reserves of oil, and to part with this valuable commodity, the King needed the promise of an equally scarce store of value, gold. So the deal was that oil would be shipped to the West in exchange for dollars AND gold. The dollar price of oil would be kept low as long as the much more valuable gold could be had for those same low costs. The CB's involved in the deal guaranteed this to the King by backing up the deal with their own vast stores of golden bars.

But these top bankers, like the King himself, were not as dumb as they may seem. In fact, they were the best and the brightest, for they knew that the true value of gold was probably somewhere around $50,000 per ounce in today's dollars. And that was the value of oil to the King as well. His oil reserves might only last his kingdom a mere century, but if he traded it for gold, not dollars, he would enjoy the wealth of his treasure for 1,000 years or more.

The central banks that backed this deal with their own gold NEVER intended to give the King any of their precious treasure. They knew they had a way around that. By using the open markets which traded paper contracts for gold, they could keep the price of gold down to $300 per ounce and the public would be none the wiser. Then, the King with his $30 per barrel of oil could buy future gold delivery straight out of the mines in backroom deals for a premium of perhaps 100% (which is a guess). So for 20 years, vast amounts of gold flowed from the West to the Middle East for maybe $600 per ounce (twice the spot price on COMEX at the time), and those sales were hidden from the price discovery exchanges so as not to affect the price, and the oil flowed to the west freely, at the seemingly cheap price of $30 per barrel. But in reality, the King was getting one ounce of gold for 20 barrels of oil, and if gold is really worth $50,000 an ounce, that's a price of $2,500 a barrel.

So who is paying that price? In a way, all of us are. The mines are making a profit for what they pull out of the ground. They are getting twice the cost of mining. That's a good profit. But the gold in the ground under us is flowing east, while the oil in the ground in the kingdom is flowing west. So who is getting the better part of this deal? I say the King is.

Sure, we have seen unprecedented prosperity for 30 years now. But that is about to end. On the other hand, the King has seen 50 years of amazing prosperity and is looking forward to another 950 years of extreme prosperity. You see, once the oil runs out, the kingdom does not become poor. In fact, that is when the party really begins! They have sold to the West 30 or 40 years of prosperity in exchange for a thousand years of unimaginable wealth.

Then, around 1997, some big money in the Far East became aware of this bargain on gold. But they couldn't get in on the back room deals that traded large amounts of physical without affecting the price. So they had to accumulate physical on the open market which started to drive the price up. This started the 10 year rise in the price of gold..... and oil! For now that the King has to pay more for his gold, we have to pay more for his oil.

And somewhere along the way, too much physical gold was heading east, both to the desert and to the great wall, and the mines could not cover it. This threatened a default in the paper gold price discovery markets used by the Central Banks to protect their own gold reserves. So they were faced with the option of either watching the whole monetary system crash, or parting with some of their own gold. They finally had to ship some of their precious treasure to the King. After that near disaster, they fought the markets even harder, with larger and larger short positions. But now, at this very time, they (the CB's) have maybe half the gold they once had, and they have probably the largest short positions ever too. So they are standing right on the edge of a cliff, holding the end of a rope that's trying to pull them over.

It won't take much for this deal to fall apart. And when it does, we'll see the price of gold go up to probably $5,000 an ounce and then all trading will stop. No market will exist for gold at it's true value. For those that have all the gold in their possession are only buying, not selling. Oil will skyrocket too... if it flows west at all. This is coming, and soon. Buy gold. Hold gold. It only has to meet it's true price once in a lifetime and that will be more than worth the wait. I believe this is not a once in a lifetime opportunity right now, but possibly a once in the history of the world opportunity. Silver, platinum, commodities... they may all do well. But nothing will come close to the true value of gold. $50,000 an ounce may even be low.

Monday, August 25, 2008

Frightening Prediction

This latest public article by Christopher Laird of the Prudent Squirrel paid newsletter, who I greatly respect, is the most chilling encapsulation of our current predicament that I have read in quite a while. And while I hadn't planned on posting articles in this blog, there are some striking similarities between Laird's latest foretelling and Another and FOA's ten year old predictions.

The first is the realization that Central Banks are simply the biggest players in this worldwide money game. Another called them Giants, as in "follow in the footsteps of Giants". He was also referring to other financial giants like Warren Buffet, the Saudis, and other's with massive wealth, but the primary giants to follow are the Central Banks, since as the biggest players they tend to set the rules and the trends.

Laird points out in this alarming piece that we now lay at the mercy of these giants in a way that has never been seen before in all of history. And if he turns out to be right, we could see a massive deflation in the price of all equities, all commodities, and all currencies the world over as we are forced to deleverage the last 60 years.

Only gold will emerge from this second phase of the crisis, not because it is a commodity, but because it is a currency, just like it has been for the last 6,000 years. This is the other striking similarity to Another and FOA. That we are witnessing the death of an era and that gold will return to it's historic roots as the only world class store of wealth. Another always said that this will be different than the 70's and that "all paper will burn" which includes mining stocks, ETF's, and any other paper claim you hold on gold whether it be above or below the ground. If it's not in your possession, you don't own it, you only own an IOU!

So as you read this article, think about the Central Banks as individuals, or at least as entities like any corporation or group of people. Because that's what they are. The are the biggest financial representative of the group of people in the country in which they reside. And as individuals, they are driven by the instinct of survival. For the past 12 months they have been bleeding money at the rate of $50 billion per week. Total blood loss for the year is $2 trillion. If they don't stop the bleeding they die. If they simply print money to cover the bleeding, they die from losing all credibility and through hyperinflation. So what drastic measure will these Giants take in order to survive? And when?

Here's the article:

Credit crisis II, a world financial Armageddon?

Christopher Laird

Where are we now in the credit crisis, and why isn’t the massive Fed and ECB weekly lending working to loosen interbank lending? Why is the credit crisis not really improving? Where is this going next? We describe what may happen next as Credit Crisis II in this article.

Now that the credit crisis that started in 2007 is a year old, there has been a debate about whether the financial system will recover, or will the Western/world financial system end up like the Japanese financial system after the stock and real estate crashes in the 1990’s. In that case, the Japanese banks more or less carried their tremendous losses for ten years, and Japan entered a mild but painful decade of deflation. To this day, Japan is battling some of the deflationary forces from that time.

The question now becomes, will the Western financial system recover some normalcy, or are things merely going to get worse and the world end up with a financial malaise lasting ten years like Japan’s?

If the second alternative is the case, then the central banks which are merely propping up the financial institutions with their ‘temporary’ lending will find they are taking the losses off the banks hands, taking them on to their balance sheets, and effectively monetizing the losses.

The ECB and the Fed are both hoping to find a way out of having to keep the bad assets they took as collateral. They have lent hugely to financial institutions, taking their bad mortgage bonds, securities, derivatives as collateral. And at the same time, the financial institutions in question are carrying a sum total of $500 billion of losses on their books, the losses they admit so far, while estimates of ongoing losses from these bad assets runs well over $1 trillion. In effect, the Western credit industry is still crippled. Why is it so crippled still?

Either the financial industry earns its way out (will take ten or more years) and drastically pull back credit, or they find enough new investors to pony up new capital infusions, perhaps through stock sales. And new such investors are becoming increasingly hard to find. Hence, the central banks are the only alternative.

A theme now arises where it is becoming apparent that it is impossible to actually purge the escalating losses from the financial system, and that even big public bailouts don’t purge the losses because of interlinkages between stocks, bonds and derivatives. If one class or institution is bailed out, the losses of capital merely move to the other class. And the losses are clearly so huge as of now, that they weigh on the currencies themselves and cause a fall in their exchange rates.

It is estimated that the USTreasury/Fed/FHLB has infused a total of $2 trillion and counting since Aug 07 to the various credit infusions to the US financial system, and that the ECB is in at similar levels. And even after $ 4 trillion worth of infusions over the last year has been thrown out by the Fed and ECB, the world credit/financial system is actually getting worse. What will be the outcomes into 09?

Bankrupt en masse

In effect, this means the Western banks, etc are bankrupt en masse. The only thing propping up the entire Western financial system, and its respective stock markets has been massive ‘temporary’ lending, on an ongoing basis, by the Fed and ECB. Both central banks are beginning to balk at this situation. Even as they are starting to have second thoughts, the Western financial institutions continue to borrow more money than ever on a weekly basis. Why aren’t things loosening up?

Can’t stop or else

And, if the ECB or the Fed stops the emergency infusions, or even admit who the borrowers are, another round of collapsing banks/bank runs ensues as investors flee and pull their money out. In other words, the central banks have no choice but to continue the weekly $30-50 billion or so of infusions each for the Fed and the ECB, or else face a cascade of bank runs around the world.

…And each week the Fed and the ECB are effectively taking on another $30 or $50 billion of the bad assets from the various and sundry financial institutions scattered across the EU and the US. So, week after grueling week, the Fed and the ECB keep adding another $50 to $100 billion of bad assets to their balance sheets, as ‘collateral’ and making ‘temporary’ loans they keep having to roll over and extend the repayment on. Ie, the junk stuff is becoming a permanent resident on the central bank’s balance sheets. If either the Fed or the ECB stop the weekly infusions, quite possibly the entire Western financial system stops dead. And we get a massive world stock crash.

The question now becomes, what happens when these two central banks finally decide they have to let go? You are not going to tell me they are going to keep infusing a combined $50 to $100 billion worth of financial bailouts each week forever? This massive temporary lending certainly has to end at some point.

And even with all this new money every week, the credit system is barely functional anyway right now. And this half dead world credit system is dragging economies downward, as there is less and less and less credit. This is a paltry return for all the bailouts and massive temporary lending.

Probably what is happening is that this is a classic case of a parabolic world credit peak, as more and more money is needed each week merely to keep the bubble from collapsing. And the only ones left to infuse this money are the central banks. No one else is willing to step in. Financial institutions won’t lend to each other, and investors won’t recapitalize the crippled banks. As financial institution’s stocks fall, issuing new stock becomes prohibitively expensive.

Parabolic peak

One could say all that is happening is that all financial institutions in the world don’t really trust each other, and won’t lend to each other. And that an astounding $50 to $100 billion of weekly infusions from the Fed and the ECB is not fixing the situation, and that we are witnessing the final parabolic peak of the world credit bubble that has built up for the 63 years after WW2 ended. That, and the end of the USD and Yen driven credit/asset/finance bubble which ensued from the early 1970’s.

So, before we continue, it might be said that the present development of the credit crisis, from August 07 to now, is Credit Crisis I. And the present state of affairs is that the Fed and the ECB have to infuse a weekly $50-100 billion plus into their respective financial regions merely to prevent a world finance implosion.

I also have noticed that the Credit Crisis I has had a one year periodicity of major new developments, ie that if one major sector had a problem on a given month, that the next year the same sector seems to reinvent a new worse manifestation.

I made a graphic to describe the general situation:

So, when the central banks stop this massive weekly lending, what happens? Massive forced deleveraging and probably world financial Armageddon. This would be Credit Crisis II, or Phase II. We will look into Credit Crisis II in a moment.

This is the conclusion we came to here at PrudentSquirrel, trying to ascertain where we are in the big picture on the Credit Crisis now. It is that the Central Banks are desperately trying to stave off Credit Crisis II, and they are losing, and probably knowing this, they will at some point confer together and pick a time to let the credit system implode, and try to weather the stock/financial crashes that will occur at that time. Likely, some currencies can collapse as well, and a great deal of FX (foreign exchange) chaos and restrictions will ensue for several years after the fatal date.

If it is true, as we suspect, that we are at the peak of a credit/financial bubble that started right after WW2 ended, and it is at a parabolic peak and cannot be sustained, then the world’s central banks already know this too. They probably are trying to decide when to let go…They all don’t have to agree, it only will take one major Central Bank to let go, then the others will be forced to follow.

The central banks in question would be the BOJ, the US Fed and the ECB, and likely the BOC. The Russian central bank is an odd man out and is a wild card, but not as central to the equation. Either all the major central banks listed keep up the same rate of infusions, or the end of the world credit system comes in a week or two after one ‘lets go’.

Now as to the USD strengthening now, and gold’s vexing $100 plus volatility, it just seems best to make any protective moves well ahead of the fatal day. Once the situation gets out of control, Credit Crisis II begins, in a week from that point you will find it hard to make any changes. I view gold’s present volatility as a total side issue, compared to what would happen if all one’s money was tied to the financial system, the USD and so on, and then one’s financial situation was frozen if the central banks decide to let go, and world foreign exchange restrictions are instituted. Gold is still one of the best ways to ride out what may come to pass.

Our present state of affairs in Credit Crisis I

Let’s look at a few examples of why I am saying the world is at a parabolic credit bubble peak, and why the Central banks are finding they have no choice but to keep pumping out $50 plus billion a week of new ‘temporary’ lending, or else face a real financial Armageddon…

The ECB, Spanish banks, and North-South EU dissention

How Spanish banks are creating mortgage securities to get ECB funding is a perfect example of our present financial crisis…and how the ECB seems to have no choice but to continue the short term funding of the entire EU financial system, and it is causing big dissention between the North EU and South.

By Ambrose Evans-Pritchard

Last Updated: 3:06pm BST 21/08/2008

The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch.

Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position.

"There is a limit how long you can do this. There is a point where you take over the market," he told Het Finacieele Dagblad, the Dutch financial daily.

"If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding," he said.

While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and 'cajas' with heavy exposed to the country's property crash. Dutch banks have also been hungry clients at the ECB window.

One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.

"Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks," said the source.

This "soft bail-out" is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.

The latest data from the Bank of Spain shows that the country's banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt.

These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed, making it very hard to roll over loans as they expire.

The ECB has accepted a very wide range of mortgage collateral from the start of the credit crunch. This is a key reason why the eurozone has so far avoided a major crisis along the lines of Bear Stearns or Northern Rock.

While this policy buys time, it leaves the ECB holding large amounts of questionable debt and may be storing up problems for later.

The practice is also skirts legality and risks setting off a political storm. The Maastricht treaty prohibits long-term taxpayer support of this kind for the EMU banking system.

Few officials thought this problem would arise. It was widely presumed that the capital markets would recover quickly, allowing distressed lenders to return to normal sources of funding. Instead, the credit crunch has worsened in Europe…” Bold emphasis is mine

Fannie and Freddie rescue dilemma- their stocks and debt are held by other banks

Another perfect example of the impossible state of affairs in the world credit crisis is Fannie/Freddie. And that means that if the Fed/Treasury does a bailout, their stocks collapse in value, and all the other financial institutions take losses on that because they hold lots of Fannie and Freddie stock. Of course the stock is already in the tank, but the issue is still there and shows the interlinkages.

Then there is the question of the Fannie and Freddie bonds out. That is another can of worms, and the Chinese just stated this week that a collapse of Fannie-Freddie could lead to an economic catastrophe – their Central Bank advisor Yu Yongding stated. The Chinese hold hundreds of billions ($376 billion mostly in US agency bonds) of Fannie and Freddie debt and stock.

In many respects, because of all these cross holdings of the Fannie Freddie bonds and stocks by banks everywhere, and by Central Banks, it would seem that the losses cannot really be removed from the financial system – ie purged. If Fannie and Freddie are bailed out, their stocks collapse and those losses now translate to all these other banks and central banks that hold them. It’s virtually a no win situation.

These cross linkages reveal that it is virtually impossible, even with bailouts, to purge the ever growing $500 billion and counting losses of capital from the banking/financial system. The latest numbers being speculated on are the losses will be over $1 trillion (IMF) and $2 trillion or more (Roubini).

Now, maybe $2 trillion doesn’t sound like a lot compared to the entire world economy. The trouble is, that capital is leveraged anywhere from 10 to 50 times by the financial system. Fannie and Freddie have 60 to 1 leverage.

Losing $2 trillion of capital will totally wipe out the entire world financial system for a decade because of the leverage at 60 to 1. Basically, unless those losses can be purged in some way, it has to be earned back over a period of years/decades. That essentially cripples the entire world financial system.

I remember a very well put quote from a banker last Fall 07 about the credit crisis then. (I’m sorry, I don’t remember his name.) He stated “The credit deleveraging will not be denied.” I think that sums things up very well.

It appears that a relentless unwinding of the world credit/finance bubble with many dimensions and twists and turns cannot be avoided, even if the central banks were willing to try. The issue is the cross linkages and the fact that the capital losses in every corner of the world will not and maybe cannot be purged from the financial system, even with big public bailouts. There is possibly no way to do it other than to allow things to just unwind and try to re earn it all back the hard way.

Even if it appeared the central banks could figure out a way to purge the losses from the financial system, and take them on their books, then their currencies are in danger. The capital losses are there – period. The deleveraging of 60 to 1 credit is happening – period. The financial institutions don’t trust each other – period.

The Fannie – Freddie bailout proposals are being discussed in the light that the US government/Treasury can just about double the so called national debt from $9 trillion by possibly adding another $5 plus trillion, as they effectively have to guarantee those GSE bonds. That is now playing into a debate on the US fiscal situation….as if the USD needed another problem.

In short, once again, we see that it appears impossible to purge the effects of so much lost capital to the world financial system. The deleveraging will not be denied. We see this a year after the Credit Crisis I exploded worldwide Aug 07.

End of a huge world bubble

If that is true, then the theory I laid out above, that we are witnessing a peak in a parabolic finance/asset/stock bubble of world proportions, is going to pan out. I think the entire credit crisis can be looked at from that perspective. We are merely witnessing the relentless unwinding of the biggest financial bubble in history. And, ominously, this particular bubble has grown from the end of WW2 to the present. That is one HUGE economic bubble, and this one envelops the entire world. This is not just a bubble in one country’s economy.

The point of emphasizing it’s from the end of WW2 is that we are not talking merely about a banking crisis, or whatever. We are talking about the deleveraging of the greatest economic/finance bubble in history. Once the level of leverage reached 60 to 1, it becomes impossible to stay ahead of the deleveraging, even for central banks. The implications are staggering. Every major economy in the world is involved. The outcomes of deleveraging this monster bubble, represented by the green oval, will be what I term Credit Crisis II. At 60 to 1 leverage, a loss of 1 to 2% wipes out the capital.

Whether it’s the Chinese Central Bank (BOC), the Fed, the ECB, and then all the other world financial institutions of every type, insurance companies, gigantic retirement funds, other banks, you name it, the present losses of capital to the world financial system is pervasive worldwide.

Nobody will escape the wrath of this deleveraging, and that is why I call it Credit Crisis II. Credit Crisis I was only the preliminary round…Credit Crisis II is characterized by the realization that the gigantic losses of capital cannot be purged from the financial system, even with big public bailouts. And that this deleveraging cannot be stopped. There are too many interlinkages. And, without writing a book on this, the next victim when Credit Crisis II unfolds, will be massive world currency instability. This will make any of the banking and currency crises we have seen since WW2 look like child’s play. It is not clear when Credit Crisis II begins but it is threatening already.

The Prudent Squirrel newsletter is our financial and gold commentary. Subscribers get 44 newsletters a year on Sundays, and also mid week email alerts as needed. We alerted our subscribers April 20 that the USD was bottoming. The USD has strengthened significantly since. The alerts include quick notification of important financial news developments by email. Subscribers tell us that the alerts alone are worth subscribing for.

I had one potential subscriber ask me if the newsletter has much more content than these public articles, ie, if it was worth subscribing. The answer is that the public articles have less than 10% of our research and conclusions that subscribers see, not to mention the subscriber email alerts of important breaking financial news. We have anticipated many significant market moves in the last year, such as imminent drops in world stock markets within days of them happening, and big swings in the gold markets within days of them occurring. We have also made a number of good calls on big currency swings, such as with the USD, the Euro and the Yen.

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Copyright 2008

Christopher Laird

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Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice.

Here's a link to the orignal article.

Sunday, August 24, 2008

Follow the Giants

Central Banks in Russia, China and the Middle East are accumulating gold right now. European Union countries are required to keep 15% of their foreign currency reserves in gold. The IMF has been accumulating gold from small countries for years in exchange for giving them dollars. Germany's Bundesbank is hoarding it's gold. Now the US Mint is hoarding gold it is required by law to sell to citizens. They suspended sales from August 14th until August 25th, suspiciously during the PPT engineered dip in gold prices. Follow in the footsteps of these GIANTS and get you some! I know for a fact that there are still a few gold coins around. I just bought several this week. The price discovery mechanism for gold, the COMEX, may never go to the moon. This high demand is smart enough to know that you don't get real gold from futures betting. But those coins will go to the moon. The Central Banks know this, and they are preparing.

Saturday, August 23, 2008

First Post

Another and Friend Of Another wrote about the changing gold market starting more than ten years ago and ending seven years ago. Many of their predictions came true then, but their boldest predictions are unfolding right now.

I don't believe that anyone knows what the future holds with certainty. Heisenberg's Uncertainty principle applies in life as it does in Quantum Physics. And just like in physics, the future of life is determined by the playing out of various probabilities. So when I appear to be predicting the future I am simply assigning higher probabilities to certain outcomes.

When I look to the future, I am looking to the end of this round. We are going from here to “there”, and it is the “there” that I am focusing on. There are many paths to get us from here to “there”, and in most cases the various paths have very similar probabilities while the final destination has a much higher probability. So by focusing on the endgame, I believe I can predict the outcome of our current crisis with greater certainty than many of the false prophets who are attempting to predict the exact road that will take us “there”. Does this make any sense?

When will we get “there”? In my view it could be as soon as a year from now or as long as four years from now. How will we know we are “there”? For one thing, many of the great questions about this crisis will have been answered. Though things may be very different and, in many cases, bad, things will have settled down for the most part. Stability will begin to reemerge. It will once again feel somewhat safe to invest in stocks and real estate because the bottom of each will have been clearly reached. What will “there” look like? The purpose of this blog is to make some predictions about this. How can we get from here to “there” in one piece? The answer as I see it will be very clear in this blog.

On to some predictions. Some of these will be quite controversial and I welcome the opportunity to defend and explain the rationale behind my statements. So please feel free to comment with your questions, criticisms or links to supporting articles.

First on the value of gold. When we get “there”, I believe that gold will be a world class store of personal wealth unlike anything else. I believe that governments and central banks around the world will welcome the high price of gold because it will bring a newfound stability to the world. I believe the future value of gold will be north of $30,000 per ounce based on the current amount of paper currency in existence. I believe a value north of $50,000 is likely. And I believe that between here and “there” we will see massive creation of new paper money so the future value of gold will likely be much, much higher. If “there” is one year from now, add 30% to 100% to that value. If it is four years from now, who knows.

On the values of other metals like silver and platinum, I believe that they will remain near current levels, with a fairly wide margin of error. If Another and FOA are 100% correct, they may be worth less than they are currently worth. But with the massive printing and scarcity of commodities, I could see them rising in value substantially and then falling in value due to demand destruction or something similar in the final analysis. The bottom line is that these metals do not share with gold the one thing that will make gold shoot to the moon. That is the world class fame as a store of wealth, and the commitment of the biggest players on earth, the central banks of the world. In the final analysis I believe other metals will be mere commodities, while gold will soar as the lone survivor in a world of failed fiat, government created money.

On the value of real estate. This is a tough one, because real estate is caught right in the middle of the fray. I have to keep reminding myself about some key aspects of real estate in my analysis. First is that houses are basically commodities. So as inflation skyrockets, so too should the price of houses. Currently the prices are falling because they just came off a bubble. But ultimately they should bottom out and then rise in the face of inflation. But even though they are essentially commodities, they cannot be shipped overseas and sold in the market which is paying the most for houses. So they are limited to the availability of "local money". On the other hand, wealthy foreigners can and do come over and buy property when it is relatively cheap. We saw this in the 1980's with Japan, and we are currently seeing the Sovereign Wealth Funds of the Middle East snatching up our countries' assets.

Another thing about houses is that we have likely borrowed a lot of the money for all this building of the last few years from foreigners. And through high inflation of the money supply and financial collapses we will likely have a de facto default on those loans in the near future. In other words, China and others have financed all this building of new homes and will never be paid back for their efforts. But they can't take back the homes. They are stuck here. So in that way it would make sense if we saw an influx of foreign money buying up our “fire sale” of home inventories.

So that brings me to my prediction. This is a reprint of a comment I posted a couple days ago on another blog:

Getting from here to there is going to be painful and confusing. But I've been trying to figure out what "there" is going to look like.

For the last two decades the American Dream has been home ownership for everyone. Easy credit made that almost possible. But over the last decade people went from mortgaging 3 years salary to more than twice that amount. They were essentially enslaving themselves for the dream of home ownership.

When we finally get to "there", we'll still have the same homes that are standing now, and we'll have the same amount of people as now. We will also have the same percentage of people willing to enslave their futures in order to live in a nicer house.

The big difference, I think, will be that these same people will be enslaved to landlords rather than to mortgage companies.

There is still a lot of money in the world, and that money is already starting to look at foreclosures as a future investment. Landlording is going to become big business, and the dream of everyone owning their own home is going to be a chapter in the history books.

When money is created in the form of a loan so that someone can buy an oversized house, that money flows through to the builder and out into the world. It is not destroyed by crashing prices, it is already in circulation. And all that money is going to come back in strong hands and the home ownership will be consolidated from the many weak hands to the few strong hands.

It's the same as in the stock market, through consolidation those on margin are shaken out and the strong hands not on margin take control.

I think the "there" will look a lot like here, except most houses will be occupied by renters, not by homeowners, even in the nicer neighborhoods.

A lot of people are thinking that home prices are going to crash so low that everyone will once again be able to own their own home. I don't believe it is going to work out that way. I think we are getting close to the point where we will see wholesale buying of foreclosed homes... in cash!

Well, this feels like a really long blog post. So I'll end it here. On my next post I'll make some predictions about other methods of gold investing like futures, mining stocks and ETF's. Thank you for reading and please come again.