Oct 31, 2006

Richard Russell on gold

"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence." -Charles De Gaulle

Russell Comment -- De Gaulle called upon the US to settle its debt with France by shipping US gold to France instead of US paper. At that point, President Nixon shut the gold window and in so doing took the US and the world off the gold standard and into the world of fiat paper.

Lower interest rates make the US dollar less attractive. And over the last few weeks the dollar has been heading down. How far down is the big question. A lower dollar means that imports to the US become more expensive. More expensive imports in turn mean rising inflation. It becomes a vicious circle, and if it continues Ben Bernanke is going to be facing a nasty and rather puzzling situation.

A weakening dollar represents a "wake-up call" for gold. Most people don't realize it, but rising gold is a form of dollar-devaluation. It's not an official devaluation, I call it a "free market devaluation".

Question -- Why does the US government continue to keep the official price of gold at $42.22 when the free market price for gold is over $600?

Answer -- This is the government's way of denying that the dollar has been greatly devalued. It's the government's method of keeping its citizens "stupid" and unaware of what's been happening to its money.

Remember, rising gold is the free market's way of devaluing paper currencies. Since the Federal Reserve creates our fiat dollars, you can imagine that the Fed does not want to see the dollar fall apart. A dollar that is very slowly declining against gold is acceptable, but a dollar that is rapidly declining against gold (i.e., a surging gold price) is something that the Fed most assuredly does not want. This has given rise to talk of the Fed manipulating the gold price, particularly at times when gold is surging. Does the Fed really manipulate the price of gold? I honestly don't know -- I'll leave that question to others, such as the Gold Council...

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Oct 29, 2006

Gold Market Interventions

Gold Market Interventions

Dimitri Speck

Translation of the article for the International Precious Metals and Commodities Convention in Munich, October 13 through 15, 2006

Since August 5, 1993, there has been a systematic attempt to administer downward impulse to the gold price through loans and sales of the metal. The intention of the involved Central Banks is to maintain low inflation rate expectations. An additional goal is to strengthen trust in the dollar, the bond market and the financial system in general. Intervention is only made possible by bank vault supplies of the metal which are several times yearly demand. Similar to common practices in the currency market, these interventions are not made public.

There are a number of signs indicating these systematic interventions. Especially succinct was Federal Reserve Governor Angell's statement made when the interventions began: "We can hold the price of gold very easily". Fed Chief Alan Greenspan provided another example: "central banks stand ready to lease gold in increasing quantities should the price rise". Indeed Greenspan's statement was made in a different context; however the quote shows that willingness to apply market pressure was present. Additionally he referred to gold leasing as a means to suppress prices. This leads to gold supplies reaching the physical market - evidently independent of gold mine hedging requirements. The actual intervention is then done by the banks, which loan the gold (a division of labor similar to that of the suspected support buying following the 1987 stock market crash). Incidentally, the majority of central banks fail to publicize the extent of the gold loan activities.

How do we know the date when the systematic interventions began? By observing their execution times. These actions are not divided evenly throughout the day, but instead tend to focus on important time points such as the PM-Fixing and the New York closing price. Additionally, COMEX trading hours are preferred. This creates an intra-day pattern that can be statistically identified and allows us to pinpoint the starting date of the interventions on August 5, 1993 (*).

This intra-day anomaly existed for a very long time, but has weakened the last few years in the course of the continued upward trend in prices. The attached chart shows the average intra-day trend of all days for which there are high numbers of price fixings. The right axis shows the price, the bottom scale the time of day. The average is calculated by taking the minute by minute prices throughout the day from about 2000 days and consolidating them as a single day. Thus this so-called intra-day seasonal chart shows at a glance how intra-day prices behaved over the last eight years.

Chart: Average Intra-day Price Trend of Gold 08/1998-06/2006

Clearly visible is the price decrease at the time of the London afternoon fixing. The minor lows near the morning fixing as well as the open and close in New York are all worth noting. Also conspicuous is that during American market hours the price generally trends sideways, in contrast to the rest of the time when it is moving upwards.

The upwards trend that Gold has been in for the last several years, does not mean that interventions no longer take place. They are however not as frequent (and are thus more difficult to prove statistically). Moreover they retard the rising trend or lead to temporary pullbacks, but in all they no longer prevent the price from increasing. However they remain one of the most important influential factors in the Gold market. This is also the case because of there own history: for instance, the actions led to mine closures following years of artificially suppressed gold prices. Not only that, it also means the base price level of gold is low making its potential high.

Dimitri Speck
October 27, 2006

(*) More, and sources:


350 Years of Economic Theory in 50 Minutes (video)

A concise Austrian bird's eye view of economics by Mark Thornton:

Oct 23, 2006

Unstoppable Chinese Growth and Gold

Unstoppable Chinese Growth and Gold
by Julian D. W. Phillips

From - Gold Forecaster - Global Watch 23rd October 2006

There's a great deal of talk about slowing economic growth in China. We heard this talk last year too. Indeed the incredible growth in China has gone on so far for 15 years, so shouldn't it slow? So far no! We have not seen a slowing down, 'soft landing' or anything but a firm hand on the tiller of growth by the Chinese Central government keeping momentum up around 10% and seeking to rein in only excesses. They are reasonably concerned that the growth should be maintainable in the long-term. Excesses serve no one, least of all China.

Guiding growth
It is in this light that we must see the new controls being imposed in China. "China must maintain controls over medium and long-term lending and investment," Chinese Premier Wen said. He also vowed to tighten rules on land sales, cut pollution, improve public finances and cap surging real estate in all major Chinese cities. Strong controls over such a burgeoning economy are vital as the present numbers show that Gross Domestic Product in the third quarter increased 10.4% from a year earlier, after expanding 11.3% in the previous three months. Second-quarter growth was the fastest in the last decade. To stem the excesses, China restricted bank lending and project approvals to bring about a gradual slowdown in investments [over-capacity is a present problem, requiring a catch-up in other sectors] in an economy that currently accounts for about a tenth of global growth. The government is encouraging China's 1.3 billion people to increase spending to sustain demand and underpin employment as the government attempts to rebalance the economy. Since April, the government has imposed curbs on land use and new project approvals, shuttered investments that flout government guidelines and ordered banks to slow lending. The central bank raised interest rates twice, forced banks to set aside more money as reserves and stepped up measures to drain funds from the financial system through bond sales. Money supply grew 16.8% in September, the slowest pace in more than a year. The rate on seven-day loans between banks has slipped to 2.6% from 2.89% on August 10th, reflecting the increase is funds available. China will continue raising interest rates!

The Benefits for Chinese society
Ideally the main driver of the Chinese economy [exports] should continue to feed the furnace of Chinese growth, but be joined by internal demand as the level of wages in China rises to create a larger and larger middle class and richer working class that promotes Chinese consumer demand and adds to the growth furnace of the nation. The government has limited Yuan gains to 2.6% since easing a peg to the $ in July 2005. One of its biggest concerns is the potential loss of export jobs resulting from a higher currency, which could lead to unrest among laid-off urban employees and China's millions of migrant workers. While curbing investment, the government has cut taxes, raised minimum wages and civil servants' salaries to encourage spending. The national savings rate is about double the world average. Retail sales in September rose 13.9% from a year earlier, the most since January, today's report said. [Wal-Mart Stores Inc. plans to spend about $1 billion to double its stores in China by acquiring Trust-Mart.]

Commodity prices lower?
Some economists have said that the encouragement of internal demand will be at the expense of export growth, itself causing a slowdown in the demand for commodities and metals and whilst we respect these opinions, they do not make sense when one looks at the objective of the Central government's objectives. These opinions are expressed as a reason why the commodities boom should slow as well. Again we have difficulty with this. When a nation of 1.3 billion people reach out for development we have to track the extent of the development as it reaches more and more of the nation. We hear numbers like 400 million poor people just waiting to enter the cities for work. That is 33% more than the entire population of the U.S. China is only now passing the U.K. to become the world's fourth-largest economy. So the development has a huge distance to go before the all-powerful Chinese Central government reaches its targets. In line with these aims has to be the building of consumer demand internally so the dependence on exports drops down considerably. But this does not mean that exports will suffer, but that internal demand has to mushroom.

First - The reference to the negative impact on commodities has to exclude gold and silver. We have to emphasize that gold demand is largely separate from other metals and is a metal to be acquired as wealth, arising from the growth of the Chinese nation. Any 'slowdown' [if it does come] is most unlikely to affect the demand for gold, which is rising steadily at around 20% per annum [which is very slow in our opinion as the demand comes from a narrow sector of the Chinese population, close to government and not the Chinese nation per se].

Second - The criteria by which we assess the Western economies of the world have to be modified to gain an accurate assessment of the Chinese economy. It is unlike any other. A parallel with Germany before the last World War is pertinent at this point. After the Depression in the early thirties, the U.S. innovatively used stimulation to set its economy on a growth path. It was aware of the potential for war but did not adjust their economy for it until it burst on them. At the same time, and suffering a depression, Hitler was credited with stimulating the German economy by building a war machine, which then had to be used. So Hitler forced the economy to go as it did, a demonstration of just how a fully dominant government can control the economy.

The Chinese government wants to develop China to the point where it is a self-sufficient economy, self-driving as well as a supplier to the rest of the world. If it carries on at the present rate it will dominate the global economy and be one of its leading drivers, if not the main one, eventually. Yes, that is one or two decades time, but that is what the government of China wants and it will harness everything in its reach to achieve that goal. The Chinese government has an iron grip on its economy and will not be dictated to by Western economic principles, but will dominate economic growth. So, China's economy is not the result of the different facets of the economy evolving as economics dictates, but is the result of a central government policy, which harnesses economic forces to achieve its goals.

What we see on the intransigent exchange rate policy typifies this point.

Our conclusion is that growth in China will continue at the fast pace we have seen for the past few years, but is now about to focus on internal growth so the Chinese people can feel the benefits of their increase in wealth. Consequently, the osmotic drift of wealth to the East will continue to feed the Chinese Trade surpluses and reach even further as it develops the skills to emulate Japanese penetration of the global economy of the last 50 years.

And the Impact on the Gold Price?
How will this affect the gold price? In terms of rising Chinese demand? - Very slowly until the gold distribution system in China develops to the point where small town gold prices are the same as those in Shanghai.

In terms of the evolution of the global economy, the impact of Chinese development will be dramatic as the flow of Capital to the East threatens the Balance of Power in the global monetary system. The $30-million-an-hour pace of growth in China's foreign exchange reserves took them to $988 billion at the end of last month. The trade surplus reached $110 billion through September, already exceeding last year's total, and economists forecast the gap will widen to more than $150 billion this year. As the sheer weight of capital flows into the ownership of the Chinese [either in U.S. Treasuries or other currencies] so its control over those currency [and Treasury] markets grows.

More importantly the longer they keep the $ strong in this way, the easier it will be for them to tap more developed nation's wealth through a continuing and even rising flow of capital to China. Any diversification from the U.S.$ or the imposition of the Yuan as a global reserve currency, by China will weaken the $. However, until they have a firm grip on the global economy through Trade and Capital investments, they are unlikely to use such power as it will reduce the spending power of their surpluses.

In the meantime the potential threat from this source will encourage more and more investment in gold.

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Σχετικά με τη κατάντια της ελληνικής "παιδείας"...

...αντιγράφω από το e-rooster blog , ένα βαθυστόχαστο άρθρο του blogger Κώστα σχετικά με την ελληνική παιδεία που θέτει την κοινωνία μας ενώπιον των ευθυνών της για τη κατάντια της παιδείας μας (και όχι μόνο..)

Χωρίς παιδεία - Χωρίς σχολεία

Στην πρωινή εκπομπή του Μέγκα την Παρασκευή, ο Δημήτρης Καμπουράκης ασχολήθηκε με το κύμα των καταλήψεων στη Δευτεροβάθμια εκπαίδευση. Όχι βέβαια με το ποιά είναι τα αιτήματα των μαθητών, το ποιές είναι οι επιπτώσεις των καταλήψεων στο μέλλον τους, ή αν τέτοιες ενέργειες είναι νόμιμες, αλλά με το αν ο Λυκειάρχης στο Σικούριο κλώτσησε στο στομάχι ένα μαθητή καθώς προσπαθούσε να εισέλθει στο σχολείο του οποίου προίσταται πηδώντας τα κάγκελα, καθώς οι μαθητές του είχαν απαγορεύσει την είσοδο. Είναι δείγμα και αυτό των προτεραιοτήτων των δημοσιογράφων, και ειδικά αυτών του Μέγκα. Αυτό που με εξέπληξε ωστόσο ήταν τα όσα είδα στην πρωινή εκπομπή της ΕΡΤ του Σαββάτου.

Στη σύνδεση της εκπομπής με ένα σχολείο στη Γκράβα, δύο παρευρισκόμενοι πατέρες κλήθηκαν να εξηγήσουν γιατί υποστηρίζουν την κατάληψη στην οποία συμμετέχουν τα παιδιά τους. Ο πρώτος πατέρας ρωτήθηκε για τους λόγους που του ανέφερε η κόρη του όταν του είπε ότι σκοπεύουν να κάνουν κατάληψη. Η απάντηση ήταν ότι τα παιδιά έχουν τους λόγους τους τους οποίους συζήτησαν μεταξύ τους πριν προβούν στην κατάληψη. Η δημοσιογράφος επέμεινε στην ερώτηση. «Ποιοί σας είπε η κόρη σας ότι είναι οι λόγοι?» Εκείνος και πάλι απέφυγε να απαντήσει, λέγοντας ότι τα παιδιά έχουν συζητήσει τους λόγους στις γενικές του συνελεύσεις πριν προβούν στην κατάληψη στην οποία, έδωσε έμφαση, έχουν δικαίωμα. Η δημοσιογράφος, αφού έσπευσε να διευκρινήσει ότι βέβαια έχουν τα παιδιά δικαίωμα, μην την κατηγορήσει κανείς και για φασίστρια, επέμεινε πάντως, προς τιμήν της. Τελικά, κάτω από την πίεση, ο πατέρας ψέλισε κάποια πράγματα για τους δασκάλους, και για τη βάση εισαγωγής στα Α.Ε.Ι και Τ.Ε.Ι.. Ήταν προφανές ότι ο «κηδεμόνας» της κοπέλας δεν είχε κάνει τον κόπο να συζητήσει μαζί της για τα αιτήματα των μαθητών, καθώς και τις επιπτώσεις της κατάληψης. Του αρκούσε ότι η συγκεκριμένη πράξη στρεφόταν ενάντια σε μια κυβέρνηση με την οποία προφανώς διαφωνεί ιδεολογικά. Ο δε δεύτερος πατέρας έσπευσε να προσθέσει ότι οι συγκεκριμένες καταλήψεις έχουν και επιμορφωτικό χαρακτήρα, καθώς τα παιδιά, καθώς είπε, μαθαίνουν πως να οργανώνονται και να παίρνουν αποφάσεις μέσα από τα συλλογικά τους όργανα! Ε, βέβαια, τι αξία έχουν τα μαθηματικά και η φυσική μπροστά στη γνώση του συνδικαλίζεσθαι.

Οι δύο παραπάνω περιπτώσεις είναι χαρακτηριστικές του πόσο θλιβερή και επιζήμια είναι η έλλειψη παιδίας σε θέματα οικονομίας, πολιτικής και κοινωνικής αγωγής, και δημοκρατίας γενικότερα. Σε μία κοινωνία που θεωρεί ότι η πρόοδος κερδίζεται όχι με την αξιοκρατία και την ικανότητα του καθενός να παράγει αγαθά και υπηρεσίες που τιμώνται υψηλά από τους συμπολίτες του, αλλά με κινητοποιήσεις και απεργείες που εκβιάζουν την ανακατανομή του εισοδήματος από το κράτος, που θεωρεί ότι ο μεμπτός τρόπος διαμόρφωσης πολιτικής είναι όχι μέσα από την ψήφο και την ικανότητά του καθενός να πείθει τους συμπολίτες του για το ορθό της άποψης του, αλλά με βάση τους πόσους δρόμους μπορεί να κλείσει και πόσα εκπαιδευτικά ιδρύματα μπορεί να καταλάβει, λογικό είναι ο χρόνος των ανθρώπων να κατανέμεται αντίστοιχα. Έτσι, οι καταλήψεις, οι γενικές συνελεύσεις, και οι κινητοποιήσεις είναι δημοφιλείς ανάμεσα στους νέους, άλλωστε έχουν και χαβαλέ, ενώ το διάβασμα, η σφαιρική επεξεργασία των θεμάτων, και η μελέτη της λειτουργίας του δημοκρατικού πολιτεύματος και της πολιτικής φιλοσοφίας αποροφούν ελάχιστα τον χρόνο τους.

Το δυστύχημα είναι ότι η προαναφερθείσα έλλειψη παιδείας οδηγεί σε διαιώνηση των ανισοτήτων. Τα παιδιά των παραπάνω δυο κυρίων πιθανότατα θα αποτελέσουν τους χαμηλόμισθους του αύριο, τους διαδηλωτές τη επόμενης γενιάς, σε αντίθεση με εκείνα των οποίων οι γονείς είχαν τη δυνατότητα να τα στείλουν σε ιδιωτικά σχολεία. Και όμως, για αυτό δεν θα φταίει το καπιταλιστικό σύστημα ή η πλουτοκρατία, αλλά οι ίδιες οι κατώτερες εισοδηματικά τάξεις, καθώς θα έχουν πετάξει στα σκουπίδια μια από τις μεγαλύτερες κατακτήσεις του κοινωνικού φιλελευθερισμού απέναντι ακόμα και στον οικονομικό φιλελευθερισμό, της παροχής βασικής εκπαίδευσης μέσω της φορολογίας σε όλους τους πολίτες. Δυστυχώς, τόσο βαθιά έχουν πέσει θύματα οι πολίτες της αριστερίστικης ρητορικής, που πυροβολώντας τους εαυτούς τους στο πόδι συνεχίζουν να υποστηρίζουν πολιτικές που, αντίθετα με αυτό που διατίνονται, τους μειώνουν τη δυνατότητα οικονομικής ανέλιξης, ενώ ουσιαστικά διασφαλίζουν το συμφέρον κάποιων εις βάρος τους. Μήπως τελικά, μέχρι να αποκτήσουμε ως λαός πολιτική παιδεία, δεν έχει και μεγάλη διαφορά αν τα σχολεία είναι ανοιχτά η κλειστά?

....έχουμε συνείδειση άραγε, το πού πάμε σαν κοινωνία;


Oct 20, 2006

The Power of Gold

by Bill Bonner and Addison Wiggin

Mr. James Surowiecki wrote a wise and moronic piece on gold in the New
Yorker. His wisdom is centered on the insight that neither gold, nor paper
money are true wealth, but only relative measures, subject to adjustment.

"Gold or not, we're always just running on air," he wrote. "You can't be
rich unless everyone agrees you're rich."

In other words, there is no law that guarantees gold at $450 an ounce. It
might just as well be priced at $266 an ounce, as it was when George W.
Bush took office for the first time. Since then, a man who counted his
wealth in Kruggerands has become 70 percent richer.

But gold wasn't born yesterday, or four years ago. Mr. Surowiecki noticed
that the metal has a past, just as it has a present. He turned his head
around and looked back a quarter of a century. The yellow metal was not a
great way to preserve wealth during that period, he notes. As a result, he
sees no difference between a paper dollar and a gold doubloon, or between
a bull market in gold and a bubble in technology shares.

"In the end, our trust in gold is no different from our trust in a piece
of paper with 'one dollar' written on it," he believes. And when you buy
gold, "you're buying into a collective hallucination-exactly what those
dot-com investors did in the late nineties."

Pity he did not bother to look back a little further. This is the moronic
part. While Mr. Surowiecki looked at a bit of gold's past, he did not see
enough of it. Both gold and paper dollars have histories, but gold has far
more. Both gold and dollars have a future. But, and this is the important
part, gold is likely to have more of that, too.

The expression, "as rich as Croesus," is of ancient origin. The king of
historic Lydia is remembered, even today, for his great wealth. Croesus
was not rich because he had stacks of dollar bills. Instead, he measured
his richness in gold. No one says "as poor as Croesus." We have also heard
the expression, "not worth a Continental," referring to America's paper
money during the Revolutionary War era. We have never heard the
expression, "not worth a Kruggerand."

Likewise, when Jesus said, "Render unto Caesar that which is Caesar's," he
referred to a denarius, a coin of gold or silver, not a paper currency.
The coin had Caesar's image on it, just as today's American money has a
picture of Lincoln, Washington, or Jackson on it. Dead presidents were
golden back then. Even today, a gold denarius is still about as valuable
as it was when Caesar conquered Gaul. America's dead presidents, whose
images are printed in green ink on special paper, lose 2 percent to 5
percent of their purchasing power every year. What do you think they will
be worth 2,000 years from now?

A few years before Jesus, Crassus, who had made his fortune on real estate
speculation in Rome, decided to put together an army to hustle the east.
Alas, such projects almost always meet with disaster; the attempt by
Crassus was no exception. He was captured by the Parthians and was put to
death in an unusually cruel and costly way. He did not end his days with
paper money stuffed down his throat, and certainly not dollar bills.

No, they poured molten gold down his gullet-or so the story has it. Gold
has a long history. And during its history, many was the time that humans
were tempted to replace it with other forms of money- which they believed
would be more convenient, more modern, and most importantly, more
accommodating. Gold is hard to find and hard to bring up out of the earth.
By its nature, the quantity of gold is always limited.

Paper money, by contrast, offers irresistible possibilities. The list of
bright paper rivals is long and colorful. You will find hundreds of
examples, from assignats to zlotys, and from imperial purple to beer suds
brown. But the story of paper money is short and predictable. Since the
invention of the printing press, a new paper dollar or franc can be
brought out at negligible cost. Nor does it cost much to increase the
money supply by a factor of 10 or 100-simply add zeros. It may seem
obvious, but adding zeros does not add value.

Still, the attraction of being able to get something for nothing has
always been too great to resist. That is what makes goldbugs so
irritating: They are always pointing it out. Even worse, they seem to
enjoy saying "There ain't no such thing as a free lunch," which comes as a
big disappointment to most people.

Once people were able to create money at virtually no expense, no one ever
resisted doing it to excess. No paper currency has ever held its value for
very long. Most are ruined within a few years. Some take longer.

Even the world's two most successful paper currencies-the American dollar
and the British pound-have each lost more than 95 percent of their value
in the past century, which is especially remarkable since both were linked
by law and custom to gold for most of those years. For the dollar, the
final link to gold was severed only 34 years ago.

Some paper currencies are destroyed almost absentmindedly. Others are
ruined intentionally. But all go away eventually. By contrast, every gold
coin that was ever struck is still valuable today, most have more real
value than when they first came out of the mint.

Central bankers reported in early 2005 that 70 percent of them were
Increasing their reserves of euros. As for the world's erstwhile and
present reserve currency, the dollar, they seemed to have, not growing
reserves, but growing reservations. We also have reservations about the
dollar. Whatever it is worth today or tomorrow, we are sure it will have
less worth eventually. That it is not regarded as worthless already is
remarkable. The average dollar is nothing more than electronic
information. It exists thanks only to the ability of digital technology to
keep track of it. Relatively few dollars ever make it to paper, and many
of them end up in the pockets of Russian drug dealers and African
politicians. Most dollars inmost people's accounts are not even graced
with the image of a dead president; when the end comes, they won't even be
useful for starting fires.

It is imperial vanity that keeps the dollar in business. And it is vanity
that will make it worthless. Economists want money they can control.

Central bankers want money they can debase. And politicians want money
they might get their mug on. The trouble with gold is that it turns its
back on world improvers, empire builders, and do-gooders. It is money that
no central bank promotes and none destroys. It is money that exists only
in a tangible form, a real metal-a number on the periodic table.

"Gold goes up and down, just like other kinds of money," say economists.
Which is true. "You can protect yourself from inflation in other ways,"
say the speculators. True again.

"Gold pays no dividends or interest," say the investors. True.

Nor will gold cure baldness or add inches to your most private part. Even
as money, gold may not be perfect. But it is better money than anything
else. Gold was around millions of years before the U.S. dollar was
invented. It will probably be around a billion years after. This longevity
is not in itself a great recommendation. It is like buying a suit that
will last longer than you do; there is no point to it. But the reason for
gold's longevity is also the reason for its great virtue as money: It is
inert; it yields neither to technology nor to vanity.

The world improvers will always be with us. They will spend more than they
have, boss other people around, and generally make the world a worse place
to live. They will offer proposals like those of Thomas L. Friedman. The
nice thing about gold is that it is so unresponsive. It neither laughs nor
applauds. Gold is money that no central bank promotes and none destroys.

Paper money is a handy tool for the world improvers. They use it like
politicians use civil service jobs and generals use heavy bombers-to get
their way. Whatever the vapid ideal du jour, it takes money to pursue it.
Given enough money, the poor can be fed and housed. The middle classes can
be given free medical care and low-cost loans for houses. The upper
classes can be given contracts and favors. Enemies can be summoned up,
bombed, and reconstructed. Bread, circuses, war-the imperial program costs

How to get more money for these great new programs, these marvelously
worthwhile ideals, these fabulous public spectacles? Gold flatly refuses
to cooperate. It doesn't even give a reason. Instead, it stays as mute and
reticent as a dead man in front of a television. No matter how persuasive
the advertising, the man is not going to go for it.

Paper money, on the other hand, barely needs encouragement. Start up the
presses! Lower the interest rate! Relax reserve requirements and lending
standards! Sell more bonds! Create more paper! Paper money is ready to go
along with anything. Like George W. Bush, it never met a boondoggle it
didn't like. Sooner or later, it ends up as worthless as the projects it
was meant to pay for.

Gold is merely the subversive investor's way of protecting himself.


Bill Bonner and Addison Wiggin
for The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily
Reckoning. He is also the author, with Addison Wiggin, of The Wall Street
Journal best seller Financial Reckoning Day: Surviving the Soft Depression
of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic
Financial Crisis, they wield their sardonic brand of humor to expose the
nation for what it really is - an empire built on delusions. Daily
Reckoning readers can buy their copy of Empire of Debt - now available in
paperback - just click on the link below:

The Most Feared Book in Washington!


Oct 16, 2006

When Atlas Shrugged (Part II)

Gibson's Paradox and the gold price

by Antal E. Fekete,
Professor, Intermountain Institute for Science and Applied Mathematics, Missoula, Montana, USA.
October 7, 2006

My approach is different from that of other monetary scientists in that I take speculation into full account. The theory of speculation is conspicuous only by its absence from mainstream economics. (Keynes’ attempt to create one was a dismal failure.) But it is not a strong side of Austrian economics either. I reach back to Carl Menger and construct a theory of interest directly on his economic principles.

In this concluding part of my two-part series I suggest that the year 2006 has decisively changed the nature of gold speculation. Speculators no longer take the bait of riskless profits. They no longer short gold at the first sign of a rising gold price. It is only a matter of time before the marginal gold bull decides to short not gold, but the gold stock par excellence, Barrick.

Faux pas of Mises

My theory of interest is centered around the constant marginal utility of gold. It is this property that makes gold ‘most hoardable’. That there is a limit to gold hoarding is due solely to the institution of interest. The opportunity cost of hoarding gold is just forgone interest. This is a distinctive property of gold. The hoarding of all other goods is severely limited by declining marginal utility. Mises missed this fundamental connection between gold and interest. (This is not to mention David Ricardo. If Mises missed by inches, Ricardo’s ‘bullion plan’, adopted by Britain in 1925 and the by U.S. in 1934, missed by miles.) All this is fully worked out in my Gold Standard University lecture series, which has been in the public domain for many a year.

It follows that the rate of interest is just the rate of marginal time preference. In practical terms this means that the agent to regulate the rate of interest is the marginal bondholder*. He is doing arbitrage between the gold market and the bond market. As the rate of interest is falling below the rate of marginal time preference, he takes profits in selling his overpriced gold bond and puts the proceeds into gold. This action makes the rate of interest turn around. As it is rising above the rate of marginal time preference, the marginal bondholder will buy back his gold bond at a lower price.

It is interesting to note that Mises explicitly referred to this particular arbitrage, although without using that word.** So he was actually pretty close to discovering the real force driving the rate of interest. Yet he went astray because, for him, paper currency was a present good no less than the gold coin -- a faux pas.
Should the marginal bondholder accept paper currency in exchange for his gold bond, he would take zero in exchange for a positive income. Thus his protest against low interest rates would be counter-productive. In effect, he would jump from the frying pan into the fire.

This irrefutably shows that the action of the marginal bondholder aims at hoarding gold, and not currency in general. Under modern conditions the meaning of the term ‘time preference’ is not preference for an apple available today as against two apples available ten years from now. It is, rather, preference for holding the gold coin, a present good, as against holding the gold bond, a future good -- unless the rate of interest is sufficiently high to compensate for the unequal exchange.

Key to Gibson’s Paradox

Imagine my surprise when I learned that mainstream economists have also discovered gold as the only instrument to give teeth to time preference that would otherwise remain but a pious wish. See in particular the joint paper of Barsky and Summers. The correlation between the rate of interest and the price level under a gold standard was named ‘Gibson’s Paradox’. Paradox, because monetary theory according to Keynes would call for a correlation between the rate of interest and the rate of change (rather than the level) of prices. Gibson’s, because Irving Fisher named Gibson as the first author to make this observation. Keynes stated in 1930 that two centuries of data failed to confirm that a correlation existed between the rate of interest and the rate of inflation. Instead, between 1730 and 1930, the rate of interest and the price level showed a positive correlation which Keynes described as “one of the most completely established empirical facts in the whole field of quantitative economics”. No one has been able to come up with a full theoretical explanation. Friedman and Schwartz in 1976 concluded that “the Gibsonian Paradox remains an empirical phenomenon without a theoretical explanation”. It was not for want of trying, either. Irving Fisher wrote in 1930 that “no problem in economics has been more hotly debated”. Barsky and Summers also state that “Gibson’s Paradox has proven to be an especially stubborn puzzle in monetary economics”.

Yet to find the key to the ‘paradox’ we have only to observe that suppression of the rate of interest will intensify gold hoarding by the marginal bondholder which, under a gold standard, squeezes bank reserves and leads to a falling tendency of the price level. Conversely, we observe that when the rate of interest rises the marginal bondholder will, in buying the gold bond, release hoarded gold. Increase in the quantity of monetary gold increases bank reserves, and leads to a rising tendency in the price level. The ‘Gordian knot’ finds its ‘snap solution’ in Menger’s concept of marginal utility.

The regime of the irredeemable dollar

The validity of Gibson’s Paradox clearly extends to the regime of the irredeemable dollar with a variable gold price. It varies directly with the price level. In particular, as the irredeemable dollar loses purchasing power, the price of gold will rise for the stronger reason. In terms of Gibson’s Paradox, the price level rises less if the rate of interest is suppressed; otherwise it rises more.

Properly interpreted, there has never been an episode in history when Gibson’s paradox failed to operate. It is the empirical description of the apodictic truth that suppression of the rate of interest brings about increased gold hoarding, subject to leads or lags. Every ounce of hoarded gold is a testimony to the fact that somebody, somewhere, has found the quality of savings instruments, and their yield, inadequate. By making the regime of irredeemable dollar non-negotible, the U.S. government has foolishly deprived itself of the possibility to channel people’s savings into ‘socially more useful’ applications. Therefore it is the government, not the people, that is to be blamed for the present negative savings rate in the United States.

Government manipulation

In Part 1 I advanced the hypothesis that the U.S. Treasury and the Federal Reserve have been manipulating both the rate of interest and the price of gold. In more details, they encourage bull speculation in bonds and bear speculation in gold. They do it by making unlimited quantities of bonds available for the speculators to buy, and unlimited quantities of paper gold available for them to sell in the derivatives markets. Lures, in the form of risk-free profits, are planted along the path of the speculators.

Clandestine government policy to manipulate the bond and gold markets is revealed by statistics on the number of outstanding contracts in derivatives, showing an inordinate open interest in bonds on the long and in gold on the short side. Neither has any rhyme or reason to exist, in view of the underlying economic reality. What is more, the long interest in bond and short interest in gold derivatives are increasing exponentially, far outpacing the amount of bonds in existence, and the amount of gold available for delivery. Significantly, there is an extreme concentration of derivatives in the hands of three or four firms on the long side of the bond market, and on the short side of the gold market.

A most alarming development occurred recently as observed by Pinank Mehta on www.gold-eagle.com (October 6). The net long open interest of the 10-year US bond contract, as reported by Morgan Stanley Research, has increased explosively and is now greater than six standard deviations. This level is unprecedented.

The Twin Towers of Babel

In Part 1 I explained why the government was interested in manipulating speculators so that they compulsively construct such uneconomic Twin Towers of Babel. The purpose of Part 2 is to show that, in view of Gibson’s Paradox, there is a conflict involved in the dual manipulation. In fact, the two desiderata in the agenda of the government: the propping up of the bond price and the suppression of the gold price, are contradictory. In encouraging bull speculation in bonds the government prompts more gold hoarding, making gold scarcer and the gold price more buoyant still. On the other hand in encouraging bear speculation in gold, in so far as it is effective, gold hoarding is reduced pushing interest rates higher. Rather than canceling out, the two effects could ratchet up both the gold price and the rate of interest simultaneously. As a result, the Twin Towers will self-destruct in due course.

The regime of the irredeemable dollar is subject to the ‘sudden death syndrome’, a malady afflicting all fiat currencies with a 100 percent fatality rate. Creditors know this, and add a risk-premium to the rate of interest they charge on their loans. If it weren’t for bond derivatives, the dollar would have gone the way of the assignats and mandats already in the twentieth century. But the government plants lures, to induce speculators to buy the bonds. This keeps interest rates low, and props up the dollar.

However, in terms of Gibson’s Paradox, the suppression of the rate of interest means increased gold hoarding. To counter that threat, the government has to have recourse to a devious scheme to induce speculators to sell unlimited amounts of gold through the gold derivatives market. In Part 1 I described an imaginary mining concern, Sarrick Gold, with a phony hedge plan involving forward selling, to the exclusion of forward buying, of gold. Speculators are offered risk-free profits on the short side of the market. All they have to do is to pre-empt Sarrick’s forward selling strategy, that is, sell before Sarrick does.

Thus the Twin Towers of Babel, the long-bond pyramid and the short-gold pyramid, are interdependent. Neither one will prosper without the other prospering. Conversely, if one topples, so will also the other. It follows from standard theory of speculation that, in commodities, a short position constitutes unlimited risks, as opposed to a long position the risk of which is limited as the price cannot fall below zero. This suggests that the inordinate, fast-increasing and extremely concentrated short interest in gold is vulnerable and will act as a trigger when it gets wounded (that’s what the word ‘vulnerable’ makes you expect to happen). Delivery may encounter difficulties, backwardation may develop in gold futures, and the weakest link in the short chain may snap. Some shorts may default. That would cause other short positions cascade and defaults spread. The collapsing gold basis will accurately gage the development leading to the toppling of the short gold pyramid. In an earlier paper entitled: The Last Contango in Washington I conjectured that the collapsing silver basis may act as an ‘early warning system’ to herald the coming collapse of the gold basis.

The long bond-pyramid is at the mercy of the bond-bears, and the short gold-pyramid is at the mercy of the gold-bulls. Moreover, in terms of Gibson’s Paradox, a run on gold still available for delivery against gold derivatives would cause a panic in the bond market to sell. Thus the equilibrium of the Twin Towers of Babel turns on the knee-jerk reaction of the marginal bull speculator in gold. When he decides that Barrick is in fact bankrupt as it will never be able to make good on its forward sales commitments, he will do two things: (1) short Barrick stock, (2) take delivery on his long positions in the gold derivatives market.

Insatiable Appetite

Thus we have another ‘early warning sign’ for the collapse of the Twin Towers of Babel: the Barrick share price, already showing a profound shareholder disillusionment. It is significant that Barrick has worked up an insatiable appetite for further acquisitions. Its purpose is to confuse the issue through window-dressing of the balance sheet.

One might have expected that, having become No. 1 in the world, Barrick would want to catch its breath and rest on its laurels. Not so. Barrick is still looking for other gold producers to gobble up. This looks like a sign of desperation to me. As long as you are No. 2, appetite for acquisitions is understandable. You try harder. But when you are No. 1, it no longer makes sense. However, Barrick is in the limelight. The share price as compared with assets is lamentably low. It would be more fitting for the last than for the first in the business. The reason is the curse of the hedge book. It just won’t go away. Barrick will neither repudiate nor repair its faulty policy of forward selling of gold, in spite of dire warnings that it may eventually be the cause of its downfall. The hedge book is deep under water. It shows only forward sales, no compensating forward purchases.

Barrick has been challenged to mark its hedge book to market. The challenge was ignored. For all we know, there may be a good reason for that. Perhaps the rumors are true and, when liabilities are marked to market, all the assets of Barrick are wiped out. Barrick would be seen as being bankrupt. Could this be the very reason why Barrick is so desperate to acquire other gold mining assets? If it could buy badly needed time before share value declined more relative to assets, the worst could perhaps be averted.

Barrick loves to pay for its acquisitions with its own shares. From the point of view of its shareholders, this policy is disastrous. Not only does it mean further dilution of their share, but so low is the value of shares relative to assets that Barrick’s shareholders fear another attempt by management to fleece them. On the other hand, shareholders of the company targeted for a hostile takeover are increasingly reluctant to accept Barrick’s ‘stained’ shares in exchange for their ‘clean’ (read: not stained with forward sales) shares.

One wonders why targeted companies could not force Barrick to mark to market its existing commitments to sell gold forward. After all, the seller has the right to ask whether the check offered in payment by the buyer is backed as represented. Maybe they did try, whereupon Barrick decided to come up with the cash rather than make the uncomfortable revelation.

Atlas Shrugged

One can only guess that the urgency with which Barrick acquired Placer Dome is explained by the 2006 surge in the gold price. We may take it for granted that Barrick anticipated the surge, but could not close out the deal in time before it happened. At any rate, the two events are connected and their concurrence has materially changed the course of history. First, the utter futility of the short gold pyramid has convincingly been demonstrated. Speculators no longer take the bait: they no longer mindlessly short gold on the first sign of strength in the gold price. Second, Barrick has changed its strategy from forward selling to unlimited acquisitions. This is symptomatic of the problems Barrick is going to face in the future. The new battle cry is: “Acquire or die!” However, in doing so Barrick will be racing against a buoyant gold price.

This is the unpredictable part. Can Barrick acquire gold properties fast enough to win the race against a rising gold price no longer fettered by forward sales? If it can, this may be a set-back for the gold price. Atlas may be able to carry the $300 trillion derivatives market on its shoulder awhile longer.

But if it could not, and Atlas shrugged, then the short gold bubble would burst, triggering the collapse of the $300 trillion derivatives bubble. We could then expect to witness the ruination of the credit of the United States, and the close of the dollar system.


* In Human Action Mises treats time preference as if it were the same for everybody, paupers and nabobs alike. As I have found this too crude, I refined it by introducing the concept of the rate of marginal time preference, that is, the rate of the time preference of the marginal bondholder. He is doing arbitrage between the bond market and the gold market. The marginal bondholder is the first to reduce his bond holdings on the next downturn of the rate of interest.

Strictly speaking, there are two agents: the marginal bondholder regulating the floor, and the marginal entrepreneur regulating the ceiling of the range to which the rate of interest is confined. The ceiling is the rate of marginal productivity of capital as it is regulated by the marginal entrepreneur in doing arbitrage between the bond market and the capital goods market. As the rate of interest is rising above the rate of marginal productivity of capital, he sells his capital goods and invests the proceeds in the bond market. This action will make the rate of interest turn around. As it is falling below the rate of marginal productivity of capital, the marginal entrepreneur takes profits and sells his overpriced bonds. With the proceeds he re-equips his productive enterprise and starts production once more. For full details, see my Gold Standard University lecture series.

In this paper I have, for the sake of simplicity, assumed that the rate of interest is the same as the rate of marginal time preference, and the agent to regulate it is the marginal bondholder.

** The word ‘arbitrage’ does not occur in the Index of Human Action or in that of The Theory of Money and Credit.


Robert B. Barsky and Lawrence H. Summers, Gibson’s Paradox and the Gold Standard, The Journal of Political Economy, vol.96, no. 3(June 1988) p 528-50.

A. E. Fekete, Gold and Interest, Monetary Economics 102, The Gold Standard University, www.goldisfreedom.com , January 1, 2003

A. E. Fekete, Gold Fever Trumps Gold-Hedge Fever,
www.goldisfreedom.com , January 13, 2003

A. E. Fekete, The Bubble That Broke the World,
www.gold-eagle.com , June 30, 2003

A. E. Fekete, The Last Contango in Washington,
www.gold-eagle.com, June 3, 2006

A. E. Fekete, When Atlas Shrugged..., Part One, www.gold-eagle.com ,
August 24, 2006

Milton Friedman and Anna J. Schwartz, From Gibson to Fisher, Explorations Econ. Res. 3 (Spring, 1976) p 288-91.


I shall give a talk at the University of Chicago Business School on November 17, 2006 during the lunch-hour break. If you are interested to attend, please contact Ryan Humphreys at: ryan_humphreys@hotmail.com



© 2006 Antal E. Fekete
Professor, Intermountain Institute for Science and Applied Mathematics, Missoula, Montana, U.S.A.

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Oct 14, 2006

Η ιδέα του Φιλελευθερισμού στην Ελλάδα...

Αυτές τις μέρες στην χώρα μας, νέοι άνθωποι με καθαρά μυαλά και βλέμμα εστιασμένο στο μέλλον και με υγιείς φιλελεύθερες ιδέες για την οικονομία και τη κοινωνία στο παρόν, αφού αντάλλαξαν απόψεις για τα πάντα με το πλέον σύγχρονο δημοκρατικό μέσο της εποχής μας - ΤΟ ΔΙΑΔΙΚΤΥΟ (ναι τα ΜΜΕ είναι παρωχημένα και πατερναλιστικά), αποφάσισαν να ενώσουν τις δυνάμεις τους και τις γνώσεις τους για την ίδρυση μιας νέας πολιτικής οντότητας στα ελληνικά δρώμενα...


Καλούν όλους εκείνους που έχουν βαρεθεί να ακούν τα γνωστά πολιτικά "σουξέ" (με τα flip-sides τους) να έρθουν κοντά, να αφουγκρασθούν τι έχουν να πουν, και εάν συμφωνούν μαζί τους, να συμπαραταχθούν.

Και ιδού το κάλεσμα:

Αγαπητοί φίλοι

Σας ενημερώνουμε για εκκίνηση της διαδικασίας για την ίδρυση νέου πολιτικού κόμματος στην Ελλάδα με το όνομα Φιλελεύθερη Συμμαχία.

Η Φιλελεύθερη Συμμαχία είναι μια πρωτοβουλία ανεξάρτητων πολιτών, φορέων φιλελεύθερων ιδεών και αποφασισμένων να προωθήσουν την υλοποίηση εκείνων των ριζοσπαστικών μεταρρυθμίσεων που θα βγάλουν την Ελλάδα από το κύκλο της σημερινής μίζερης πραγματικότητας.

Η κίνηση δεν δημιουργήθηκε από γνωστή πολιτική προσωπικότητα ούτε καθοδηγείται από κανέναν στο παρασκήνιο. Είναι μια αυθόρμητη πρωτοβουλία που στηρίζεται αποκλειστικά στην δύναμη των αρχών και των ιδεών της και τον ενθουσιασμό των μελών της. Επιπλέον, η πρωτοποριακή αξιοποίηση των δυνατοτήτων της σύγχρονης τεχνολογίας για τη συνεύρεση και τον συντονισμό της πολιτικής δράσης των μελών της Φιλελεύθερης Συμμαχίας πολλαπλασιάζει την αποτελεσματικότητα του πολιτικού εγχειρήματος με ταυτόχρονη μείωση στο ελάχιστο του κόστους λειτουργίας και οργάνωσης.

Σας καλούμε να διαβάσετε την πολιτική διακήρυξη του νέου φορέα και στη συνέχεια, εάν συμφωνείτε, να τυπώσετε την ιδρυτική δήλωση, να τη συμπληρώσετε και να την υπογράψετε εάν επιθυμείτε να αποτελέσετε συνιδρυτικό μέλος του νέου πολιτικού φορέα. Η πολιτική διακήρυξη και η ιδρυτική δήλωση βρίσκονται στο www.greekliberals.net :



Η συμπληρωμένη και υπογεγραμμένη ιδρυτική δήλωση, κατάλληλα πιστοποιημένη για το γνήσιο της υπογραφής (από το τοπικό αστυνομικό τμήμα ή ΚΕΠ, ή τοπικό προξενείο για τους έλληνες του εξωτερικού), θα πρέπει στη συνέχεια να ταχυδρομηθεί στη Ταχυδρομική Θυρίδα 14167, 11510 Αθήνα, Ελλάδα.

Εφόσον έχετε υλοποιήσει τις προηγούμενες ενέργειες μπορείτε να εγγραφείτε στον δικτυακό τόπο του νέου πολιτικού φορέα www.greekliberals.net, γνωρίζοντας όμως ότι η εγγραφή σας σε αυτόν θα ενεργοποιηθεί μόνο μετά την ταχυδρομική παραλαβή της υπογεγραμμένης από εσάς ιδρυτικής δήλωσης.

Μετά την ενεργοποίηση του λογαριασμού σας, εκτός του ότι θα μπορείτε να χρησιμοποιήσετε τις λειτουργίες του ιστότοπου, αποκτάτε και την ιδιότητα του ιδρυτικού μέλους και το δικαίωμα συμμετοχής, με πλήρη δικαιώματα, στο πρώτο Συνέδριο του κόμματος που θα διεξαχθεί τρείς μήνες -το αργότερο- μετά την κατάθεση της ιδρυτικής δήλωσης στον Άρειο Πάγο. Ο προσυνεδριακός διάλογος θα διεξαχθεί σε ειδικά για το σκοπό αυτό φόρουμ συζητήσεων του ιστότοπου www.greekliberals.net, στον οποίο καλείστε να πάρετε ενεργά μέρος.

Σας καλούμε να ενταχθείτε στη Φιλελεύθερη Συμμαχία, να συνδιαμορφώσετε την πολιτική της πρόταση, να συμμετέχετε δραστήρια στις πρωτοβουλίες της και να υποστηρίξετε με όλα τα μέσα που διαθέτετε την πολιτική υλοποίηση των στόχων της.

Η προσωρινή διοικούσα επιτροπή:
Τάσος Αβραντίνης,
Αντώνης Βλυσίδης,
Διονύσης Κατρανίτσας,
Μανώλης Μανωλεδάκης,
Γιώργος Μπούρχας,
Παύλος Μσάουελ,
Ελπίδα Μωραϊτη,
Φώτης Περλικός,
Δημήτρης Σκάλκος,
Ντίνος Στεργίδης

Περισσότερες πληροφορίες στο e-mail:
(ακόμα perlykos@yahoo.com ή msauel@hol.gr)


Oct 12, 2006

When Atlas Shrugged *

Part One: The lure and lore of risk-free profits

by Antal E. Fekete,
Professor, Intermountain Institute for Science and Applied Mathematics, Missoula, Montana, USA.
August 24, 2006

I receive a lot of hate mail from loyal Barrick shareholders accusing me of “plunging my little dagger into Barrick’s back out of spite”. I can assure readers that my time is more precious than wasting it on petty revenge or indulging in Schadenfreude**. I am not trying to make Barrick appear smaller than it is. In fact, I am suggesting that Barrick is the modern Atlas carrying the entire derivatives market, currently estimated at $300 trillion, on its shoulders. The global derivatives market and Barrick’s ‘hedging’ program stand or fall together. In particular when Altas shrugged, there would be an earthquake measuring ten on the Richter-scale, and the derivatives market would go down the drain causing unprecedented economic pain in the world through the destruction of bond, stock, and real estate values.

Speculation versus gambling

It is amazing that the exploding derivatives monster finds apologists in the “free market” camp. This monster has been called “the most toxic element of the financial markets today” (Howard Davies, Chairman, U.K. Financial Services Authority), “a financial weapon of mass destruction carrying dangers that, while now latent, are potentially lethal” (Warren Buffett). Yet if you read the opinion of some people associated with the the Ludwig von Mises Institute and the Lew Rockwell website, then you get the impression that the $300 trillion derivatives monster is benign, even ingenuous, if misunderstood and unfairly maligned. Derivatives are good because they allow banks, industrial companies, and private individuals to shift risk to speculators who are happy to shoulder it. Risk people are ill-equipped to deal with is “traded away” so that they “can focus on tackling tasks in areas in which they specialize”. A typical example is an import/export company using foreign exchange derivatives to neutralize risks inherent in buying and selling abroad due to the fluctuation of the exchange rate. Another example is provided by people carrying a variable-rate mortgage, who are allowed to switch to a fixed-rate mortgage when they expect a rise in interest rates. The free market helps those who help themselves. This is what ‘division of labor’ is all about, the source of economic efficiency of which Adam Smith spoke.

This apology is rather grotesque. It ignores the fact that gyrating foreign exchange and interest rates are far from being free market institutions. They were created by the government in order to strangle the free market. These rates were stable under the gold standard. It is one thing to shift risks created by nature to the shoulders of speculators who are better able to deal with them, for example, in the case of the futures markets for agricultures products. It is another thing if the risks have been created by men (read: the government). In the former case speculation has a legitimate role; in the latter, the word ‘speculation’ is a misnomer. Dealing with risks created by man is not speculation. It is gambling. Failure to make this distinction is to play into the hands of the enemies of the free market. They suggest that speculation in foreign exchange and interest rate futures has a ‘stabilizing’ effect on these rates, no less than speculation in grain futures has on grain prices. The message is that there is nothing to worry about. The regime of irredeemable currency is here to stay and it will create its own institutions to confront economic problems as they come along.

The carry trade

This message is false. Speculation in foreign exchange and interest rates does not have a stabilizing effect. As in the casino, more bets do not subdue the gambling spirit; rather, it will heighten it. Moreover, not all derivatives have arisen out of ‘risk management’. An unknown but apparently very large part takes its origin in the ‘carry trade’, the practice of creating something out of nothing (more accurately described, clandestinely siphoning off value from the balance sheet of the producing sector and transfer it to that of the financial sector). It consists of borrowing at a low and investing the proceeds at a high rate of interest. For example, consider the yen carry-trade involving the sale of high-priced Japanese bonds and the purchase of cheap U.S. bonds with the proceeds, thus swapping a 2 percent per annum outlay for a 5 percent per annum income. Since it takes a long time for the interest rate spread between the U.S. and Japan to close, pyramiding can be continued indefinitely. It cannot be denied that the carry trade adds materially to the $215 trillion ‘notional’ value of the Bond Derivatives Tower of Babel.

Official check-kiting

Government bonds today are not a legitimate instrument of saving as gold bonds of yesteryear were. They are supposed to have value because they are payable in FR notes at maturity. But what gives value to the FR notes? Why, it is the fact that they are liabilities of the issuing FR bank, backed by assets such as government bonds. Thus, then, there is an official check-kiting between the US Treasury and the Federal Reserve. The former issues bonds with which FR notes are backed; the latter issues notes used to pay off the bonds at maturity. This is no free market. It is a parody of the free market or worse. It is a charade designed to fool and defraud people. In effect the government bond is irredeemable, no less than the FR note.

If the bond appears to have value it is solely because bond speculators are, for the time being, willing to bet that producers will continue to accept it in exchange for real goods and services, and that there will be a demand for the notes by taxpayers anxious to pay their taxes. But don’t take this willingness for granted. Bond speculators are not running a charity to bail out profligate and bankrupt governments. If, in their judgment, too many of those bonds are owned by foreigners who are not subject to the taxing authority of the U.S. government, or the producers of crude oil, for example, are increasingly reluctant to accept FR credit in payment, then bond speculators will, without prior notice, withdraw their bets -- with fatal consequences to the fortunes of Treasury obligations. Note that the term “bond speculator” covers big-league banks and hedge funds with bond positions running into trillions.

Whitewashing illegitimate derivatives using free market rhetoric will not legitimize them. To sing a song of praise of ‘financial innovations’ designed to justify and perpetuate official check-kiting is not fitting for a defender of the free market.

Big Bang

It was not until 1973 that the Chicago Board of Trade opened its Options Exchange to trade options on financial futures marking Big Bang, the beginning of the explosive growth of the derivatives market. Notice the coincidence of Big Bang with the U.S. government’s default on its international gold obligations. Incidentally, the same year marked the explosion of volatility in commodity prices as well.

The derivatives market grew from zero to $865 billion during the 15 years from 1972 to 1987. During the next 15 years, from 1987 to 2002, it grew to $100 trillion, or more than 100-fold. It trebles on average every four years. The latest report of the Bank for International Settlements states that the gross market value of amounts outstanding in the over-the-counter derivatives markets at the end of December, 2005, was $285 trillion, of which the largest component, the interest-rate derivatives contracts was $215 trillion.

The amazing thing is that the total value of bonds outstanding world-wide is estimated at only $45 trillion. How can you write contracts to buy bonds, five times greater in amount than all the bonds in existence? Does this not give the lie to the word ‘derivatives’, meaning that these contracts ‘derive’ their value from the underlying assets? What kind of ‘musical chairs’ game is this? When the music stops, what will happen to those who are out of luck and hold the bag?

‘Telescope effect’

Defenders of the derivatives market insist that its growth is quite benign. Malignancy is explained away by the need of banks and other financial institutions, as well as industrial corporations, to hedge their interest-rate risk-exposure. The word ‘notional’ was introduced to cover up dangers involved in constructing this unprecedented Tower of Babel. The word means ‘fictional’, or ‘not having a real existence’. The idea is that behind the growth of the derivatives markets there is an increasing chain of swaps as companies are switching their debt-servicing back-and-forth between fixed-rate and fluctuating-rate income streams. There is nothing to worry about that, the defenders of this Ponzi-scheme say, because of the ‘telescope effect’ operating on income-stream swaps. The notional value of swaps may appear very large and seems to be growing very fast. But all this is an optical illusion, they say, because swapped payment-streams net out or cancel. No party to the contract demands that non-existent bonds be delivered upon expiry.

One defender takes the example of a company wishing to change its floating-rate loan into a fixed rate loan because it expects that interest rates will rise. It could renegotiate the loan with lenders, or it could retire the debt and reissue a new fixed-rate debt. However, these are expensive maneuvers. It is cheaper to find a counter-party who will take over the floating-rate payments for a consideration, while the company will make fixed-rate payments to it. The two swap. They do not swap the actual underlying bonds. They swap income-streams represented by the semi-annual interest-payments.

Conversely, if interest rates are expected to fall, then the company will want to change its fixed back into a floating-rate loan.

Dumping non-existent bonds

This argument ignores the problem of what happens in a panic when interest rates take off and bond values start falling like a rock. Then everybody wants to dump the obligation of making floating payments, but there will be no counter-party to assume it. An additional criticism is that the ‘telescope effect’ operates on the string of payment-stream swaps only if made between the same two parties, which is hardly ever the case. In general, the market value of the right to receive the fixed payment stream does not ‘telescope’. Every swap adds the value of the underlying bond to the balance sheet of one party or the other, without the benefit of the ‘telescope effect’. Yes, there is pyramiding of derivatives. It is foolish to think that ‘derivatives’ will retain their value when the bonds from which this value is supposed to have been ‘derived’ have lost theirs.

A third criticism concerns the fact that the bond and gold derivatives markets are interdependent. As in the former the long-interest and in the latter the short-interest gets bloated, disequilibrium keeps growing. It will ultimately act as a trigger. This will be more fully explored in Part 2.

In the absence of derivatives the panic would run its course and bond values, having absorbed the loss, would eventually stabilize at a lower level. In 1980 the runaway train could still be stopped before it derailed. But with a derivatives market of the present size such a panic would be tantamount to a stampede to sell up to $200 trillion worth of bonds which nobody wanted to buy. Nothing could stop this runaway train. The credit of the U.S. government would be ruined.

The problem is not that delivery of non-existent bonds is expected at the maturity of contract. The problem is that there will be an irresistible run to dump non-existent bonds when the underlying bond starts losing value precipitously, that is, when interest rates repeat or surpass their 1979-80 performance of entering stratosphere. In that episode, it will be recalled, the largest American banks became insolvent as the value of bonds in their portfolios collapsed, making huge holes in the balance sheet.

Fate of Sodom and Gomorrah

What is surprising is not that it could happen. Government bonds are the tangible result of check-kiting pretending that ‘NSF’ checks have value. For a time people accept them as such but sooner or later the truth will dawn on them. At that point the value of bonds, whether fixed or floating rate, is doomed and will be wiped out like the biblical towns of Sodom and Gomorrah have been.

What is surprising is that economists, among them free-market protagonists, fail to see in the derivatives market and in its unlimited exponential and cancerous growth the very mechanism, the fire and brimstone ordained by God that, in the fullness of times, will annihilate Sodom and Gomorrah. Instead, they sing a praise of “market innovation”, of “economic efficiency”, of the “Wonderful Wizard of Risk Control”, and of the “neutrality and usefulness of derivatives”, when they should sound the alarm and forewarn people of the impending catastrophe.

Gold derivatives

The latest report of the Bank for International Settlements on the over-the-counter derivatives of major banks and dealers in the G-10 countries for the period ending December 31, 2005, lists the total notional value of all gold derivatives outstanding as $334 billion at year-end, an increase $46 billion from $288 billion at midyear. Gold available for delivery has not increased nearly at this rate and the total value of outstanding gold derivatives exceeds the value of gold available for delivery by a large and increasing factor. Clearly, there is no ‘telescope effect’ at work here.

It is no coincidence that the amount of outstanding contracts is so much larger than the amount of underlying assets, both in the case of gold and bond derivatives. The dynamics of the growth of the derivatives market is hardly spontaneous. Here is the reason why.

The government has the following desiderata:

(1) to have a floor below the bond price;

(2) to have a ceiling above the gold price.

Indeed, without such a floor and ceiling, the bluffing epitomized by check-kiting could be called, and the international monetary system would unravel.

The lure of risk-free profits

To promote these desiderata, the bond and the gold markets are manipulated. It is true that the Treasury and the Federal Reserve prefer not to play a direct role in it. Speculators are induced to do it for them through the lure of risk-free profits.

Simply put, the role of the derivatives market is to make phantom bonds available to buy, and phantom gold available to sell, for the benefit of speculators. It is no problem to make speculators want to buy phantom bonds. They have the incentives. They know that the Federal Reserve is going to buy, rain or shine. This offers a risk-free opportunity for profits. All the speculators have to do is to pre-empt Federal Reserve purchases, that is, to buy beforehand. So let them.

The tricky part is how to make speculators want to sell phantom gold. This problem is solved by setting up a gold mine as a front, beefing it up as the world’s largest gold-mining concern, and letting it introduce a phony hedge plan. Let’s call it Sarrick Gold. The hedge plan of Sarrick calls for selling but never buying gold forward. The plan is then promoted as an essential ‘risk-management’ tool for the company, which is supposed to ‘stabilize revenues’ and even enhance them. It is alleged that forward selling also serves ‘to satisfy the banks that finance Sarrick’s mining operations’. Other hare-brained gold mining companies chime in: “Me too! Me too!”

But since no forward purchases complement forward sales (as they should if it were an honest-to-goodness hedging program), speculators abandon their traditional spot on long side of the market, and make the short side their haunt. They now have a risk-free opportunity for profits in short-selling gold. Speculators know that Sarrick is going to sell whenever the gold price is itching to rise. All they have to do is to pre-empt Sarrick’s sales, that is, to sell beforehand. So let them.

The lore of risk-free profits

You don’t have to go any further than that to explain the inordinate size of the derivatives markets in bonds and gold, and their cancerous growth. It is uninhibited pyramiding, pure and simple. Speculators pyramid on the long side of the bond derivatives market; and they pyramid on the short side of the gold derivatives market. In Part 2 we shall see that, far from supporting one another, the two activities tilt the imbalance more and more away from equilibrium so that, eventually, the pyramids will topple.

The gold standard rules out risk-free profits and unlimited pyramiding. That is its main excellence. The regime of irredeemable currency makes risk-free profits and unlimited pyramiding possible. That is the main reason that it will self-destruct in due course through the crash of the Derivatives Tower of Babel.***

To recapitulate, apologists suggest that the derivatives market is largely due to prudent risk-management, in the form of swaps between fixed and floating-rate payment-streams. Other contributing factors can be neglected. At any rate, there is nothing to worry about: payments streams are netted out and will stay manageable.

I emphatically disagree. I argue that the bulk of the derivatives market is due to positions motivated by the lure of risk-free profits. The lure is planted by the Treasury and the Federal Reserve. In particular, there is no limit to pyramiding for bonds on the long and for gold on the short side of the market, since there is no limit to human greed and thirst for power. This is not a condemnation of the individual speculator who, like everyone else, is trying to eke out a living. He is not responsible for bringing about false incentives. The responsibility for that rests squarely with the government.

In the second and concluding part I shall draw attention to the fact that the bond and gold derivatives markets are interdependent: the former is subordinate to the latter. Gold plays a pivotal role in the operation of the bond market in terms of ‘Gibson’s Paradox’. Default in gold derivatives will bring about the collapse of bond derivatives, with incalculable consequences to human welfare.


* With apologies to Ayn Rand, author of Atlas Shrugged.

** Schadenfreude is German, meaning the pleasure felt over other’s misfortunes.

*** Derivatives per se are not necessarily evil. Futures markets functioned quite well during the gold standard. It is conceivable that a sophisticated derivatives market would function optimally again in a world with a working gold standard. Agents may partake in derivatives for insurance against risks created by nature. Also, speculators may use derivatives to offer liquidity services against such natural risks.

© 2006 Antal E. Fekete
Professor, Intermountain Institute for Science and Applied Mathematics, Missoula, Montana, U.S.A.

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Oct 11, 2006

Why Silver is More Valuable than Gold

Why Silver is More Valuable than Gold

By: Theodore Butler

-- Posted 6 October, 2006

With gold selling for around 50 times the price of silver, you may be perplexed to hear me say that silver is more valuable than gold. It seems like an obvious contradiction. What I mean, exactly, is that silver has heavy demand by industry, while gold has limited demand, other than for jewelry. In terms of its necessity to a modern society, silver has the highest value and the greatest utility. An ounce of silver has more value to industries that must have it than does an ounce of gold. An opportunity exists because the current price doesn't reflect this fact.

For 60 years more silver has been consumed by industry than produced. That's the most bullish circumstance possible for a commodity. Silver is in much greater demand by industrial users worldwide than is gold. Yet gold sells for fifty times the price of silver.

For the past 60 years silver was dumped onto the market without much regard to price. The U.S. Government sold off inventory of five billion ounces. This silver has been used up by industry and is gone forever. A few years ago the U.S. Mint announced they would have to buy silver on the open market.

That's only part of the story. You may be shocked to learn that there's more gold around than silver. About five times more gold is documented in above-ground supplies than silver. Furthermore, there are less years of silver production remaining underground to be mined than gold. These powerful facts are not currently reflected in the price. However, some day they will be. That's why the opportunity for profit exists in silver like no other opportunity in history. Nothing in the world has the potential to multiply your net worth like silver.


Today, world silver inventories are at the lowest point in 200 years. All the known and recorded silver in commodity warehouses, and elsewhere, only comes to 250 million ounces, and most of that is tied up and unavailable. Industry requires over 900 million ounces each year. Mining and recycling fall short of providing the necessary silver.

Silver is the best conductor of electricity. Every computer, server, monitor, cell phone and switch must have silver. Lasers, satellites, high-tech weaponry and robotics, all require silver. Digital technology and telecommunications need silver. Around the house there's silver in every TV, washing machine, wall switch and refrigerator. Conductors, switches, contracts and fuses use silver because it does not corrode or cause overheating and fires. Silver is used heavily in photography and in prints. Meanwhile, new and exotic uses for silver are expanding.

A new double layer of silver on glass is sweeping the window market, as it reflects away almost 95% of the hot rays of the sun. A new electronic application for "smart tags" that are replacing bar codes could use significant quantities of silver.

Silver achieves the most brilliant polish of any metal and is the best reflector of light, allowing it to be used in mirrors and in coatings for glass, cellophane or metals. Chemical reactions can be significantly increased by adding silver. Approximately 700 tons of silver are in continuous use in the world's chemical industry for the production of plastics.

Batteries are now manufactured with silver alloys. Lead-free silver solder is used heavily for joining materials and producing leak-tight joints. Silver is also widely used in silk-screened circuit paths, membrane switches, electrically heated automobile windows, and adhesives. Silver has a variety of uses in pharmaceuticals. Silver sulfadiazine is the most powerful compound for burn treatment. Catheters impregnated with silver eliminate bacteria. Silver is increasingly being tapped for its bactericidal properties and water purification. In the face of all these industrial uses there is less silver available.

Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal.


The stock bubble and the real estate bubble better move over, because I'm going to tell you about a bubble that will be talked about for as long as mankind exists; the silver bubble. At the epicenter of reasons for launching silver to the heavens is the coming end of artificially depressed silver prices. There is no legitimate free market explanation for such extremely depressed prices in the face of greater demand and depleted world inventories.

For 20 years, there has been an outsized silver short position on New York's Commodity Exchange, Inc. (COMEX). This paper short position has been unique, in that no other commodity has ever before had a short position larger than its world production and world known inventories. This accounts for why silver has been depressed in price. But shorting is a two way street. While the shorts have had their way with the price of silver for a long time, when those shorts are brought back or covered, the price effect of shorting is reversed and it becomes bullish.

You can't keep the price of anything artificially depressed for decades and not expect violent counter moves when the artificial restraint is suddenly removed. So it is logical to assume that, when the silver price suppression ends, we will get a severe jolt to the upside. Silver must move to a price point where supply and demand balance. Considering how long silver has been kept depressed, it will take an extremely high price to accomplish this balance. It is very possible that, in the inevitable move to a market equilibrium price, we could overshoot dramatically to the upside. A short covering panic appears unavoidable at some point, because of the large size of the short position. That could create triple digit silver all by itself. Silver is a prime candidate for a future price explosion that is historic and worldwide in scope. The fundamentals of silver are so bullish and so compelling that I couldn't make them up if I tried.


The amount of silver used in each industrial application, while vital to the finished item, is a tiny percentage of the product's total cost. This means industrial users will not readily substitute other materials for silver in a price rise. If the price of silver jumps significantly, they will be more inclined to build inventories.

When the inevitable silver shortage hits, it will be only a matter of time before industrial users try to protect themselves from delays and price increases. They will attempt to build inventories of silver. You don't risk the shutdown of an assembly line for want of a single, low-cost component.

As industrial users try to immunize themselves from assembly line shutdowns, extraordinary demand will make the supply tighter.

This is how panics occur. The price of palladium rose to over $1,100 an ounce because industrial users panicked and built inventories. Silver is used in many more applications than palladium. That increases the chance that silver users will panic and try to build inventories. If a panic does develop, there is only one known cure - it must burn itself out at extremely high prices.


There are many forms of paper silver where the real silver does not exist, including pool accounts, leveraged accounts and bank silver certificates.

These accounts offer cheaper commissions and storage fees (since there is no real silver backing). I would estimate that there is well over a billion ounces of silver held in this form, perhaps by Swiss banks alone.

The issuers have use of "free" money, which is highly profitable to them as long as silver doesn't move up in price. But when silver moves up decisively, the issuers are, in essence, holding a short position. This is just another one of the many unique reasons for a historical blow off in the price of silver. At some point, with a high enough price of silver, the issuers can panic and try to limit losses. The only way to limit their losses is to buy silver. The net effect of the cumulative short positions in silver amount to a hydrogen bomb, on top of an atomic bomb, on top of a neutron bomb.


Oct 10, 2006

Gold May Surpass Record High on Weaker Dollar

Gold May Surpass Record High on Weaker Dollar, Baker Steel Says

By Debarati Roy

Oct. 10 (Bloomberg) -- Gold prices may surpass record-high levels next year as the dollar weakens and economic expansion in China and India spurs demand for jewelry, according to Baker Steel Capital Managers in London.

Bullion may reach $700 an ounce by year-end, and next year surpass the record $850 set January 1980, said Trevor Steel, who manages $600 million in commodity assets at Baker Steel on Oct. 6. The metal traded at $578.40 at 10:33 a.m. in Sydney.

Gold has risen for five years as a weaker dollar and rising oil prices led investors to buy it as an alternative investment and an inflation hedge. The direction of the dollar will drive gold prices in the coming year, according to Barrick Gold Corp., the world's largest gold mining company.

``Gold will rise because of the structural weakness in the dollar,'' said Steel, who's been tracking the bullion industry for the past 15 years and is speaking at a three-day conference in Hong Kong that runs from today to Oct. 12. ``The drop is temporary.'' Gold usually moves counter to the U.S. currency.

Steel's company runs the Genus Dynamic Gold Fund, which invests in gold miners and futures, and has returns of 20.2 percent this year, compared with an 8.2 percent rise in the Standard & Poor's 500 Index.

The dollar may weaken as the U.S. economy slows, leading the Federal Reserve to cut interest rates next year, Citigroup Inc. said Oct. 2. The dollar has shed 7 percent this year against the euro this year.


The U.S. economy grew 2.6 percent in the quarter ended June 30, slower than the 5.6 percent in the previous quarter, increasing the chance the Federal Reserve will refrain from raising borrowing costs at its Oct. 25 meeting. Interest-rate futures contracts show traders see a 6 percent chance rates will be cut to 5 percent by February. The contracts predicted no chance of a cut as recently as Sept. 18.

Gold for immediate delivery has dropped 21 percent from a 26-year high of $730.4 an ounce on May 12, pacing a decline in oil prices. The price of oil futures, a key driver of inflation, has dropped 24 percent from a record $78.40 a barrel on July 14.

``I often wonder if inflation is a driver for gold,'' Greg Wilkins, chief executive officer of Barrick, said at a conference in Australia last week. ``What we see with inflation is the Fed's tightening, and higher interest rates are negative for gold. I think its going to be more the U.S. dollar trade as a driver of interest in gold.''

China, India

Rising jewelry demand for gold is also expected to support prices of bullion, as mining companies struggle to bring on new capacity, Steel said.

China and India, the fastest growing major economies, are two of the biggest buyers of gold. India alone accounted for 23 percent of world demand last year.

``The fundamentals supporting gold haven't changed and the bull run will continue for the next five years,'' said Steel. ``Even if a mine is discovered, it may take five to seven years for production to begin.''

Production in the first half of this year fell 1.5 percent, according to Toronto-based Barrick.

Steel isn't alone in forecasting that gold prices may cross its all-time high. Citigroup, the world's biggest financial services company, on Oct. 2 said bullion may test the record. GFMS Ltd., a London-based metals researcher, said April 12 prices may even exceed the all-time high.

Jim Rogers, the former George Soros partner who foresaw the start of the commodity rally in 1999, predicted in April gold would soar to $1,000 an ounce.

To contact the reporter for this story: Debarati Roy in Mumbai at droy5@bloomberg.net

Last Updated: October 9, 2006 20:52 EDT

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Oct 8, 2006

John Embry's speech at Silver Summit

Speech to The Silver Summit 2006
By John Embry
Chief Investment Strategist, Sprott Asset Management
Friday, September 22, 2006, Coeur d’Alene Inn

It is a distinct pleasure to address you this morning on one of my favorite subjects, and I would like to thank the organizers of the Silver Summit for giving me this opportunity. For a metal often unfairly derided as the poor man’s gold, I cannot tell you how impressed I am by the richness of intellectual independence exhibited by so many of you here today. It is a breath of fresh air within financial markets that seem increasingly dominated by a lemming-like refusal to deviate from conventional wisdom.
As many of you may know, I am rabidly bullish on the prospects for precious metals and have been for a number of years. The good news is that we have barely scratched the surface of this bull market and the better news is that I believe we are currently on the cusp of the next sharp up leg. When people ask me where we are in the bull market, my response is that we are currently digesting the first stage, where we true believers made a lot of serious money while the public remained blithely unaware. I believe that the second leg of the bull market is about to unfold, in which the public will both recognize and drive precious metals towards all-time real highs.

I speak of gold and silver almost interchangeably in that I think they are currently both subject to many of the same influences, of both the economic and trading variety. I do, however, believe that silver will ultimately have materially greater upside potential, due to severely depleted inventories, new uses for the metal, and what can only be described as an enormous short position. The reasons for my optimism seem self-evident. However, much of the investing public has failed to appreciate the opportunity to date and their discovery of these reasons will fuel the second leg of the bull market.

The primary factor underpinning what will turn out to be spectacular upside in gold and silver will be the impending erosion of faith in paper money. The noted French philosopher Voltaire got it right some 200 years ago when he observed that, “Paper money eventually returns to its intrinsic value - zero.” There are two tightly linked explanations for this conclusion. Literally speaking, paper money is inherently worth very little, relying on the continued faith of citizens to accept fiat currency as an acceptable method of payment and a reasonable store of value. No
less than Alan Greenspan once warned against this faith continuing without interruption. Testifying before the U.S. Congress in 1999, the former Fed chairman expressed his belief that,
gold still represents the ultimate form of payment in the world. It is interesting that Germany in 1944 could buy materials during the war only with gold, not with fiat, money paper. And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold..
Greenspan confined his comments to gold, but I believe the same stabilizing qualities typified by gold are also exhibited by silver.

From the first observation that fiat currency is inherently worthless, we can also understand its more consequential failings. Because governments can create paper currency at essentially no cost, and given the political imperatives that drive deficit spending, the structure of today’s monetary system provides little obstacle to the ongoing debasement of currency.
This truth can be obscured for long periods of time, as the spectacular results in paper assets during the 1980s and 1990s certainly attest. However, my sense is that the decades-old bull market in financial assets is largely behind us.
We now find ourselves on the slippery slope of a runaway credit expansion needed to sustain the debt build-up that went before. It is not a stretch to say that at this point, there is no turning back. Either credit creation continues to accelerate, or the U.S. economy in particular risks a dangerous lapse into deflation. An outrageous asset party could quickly morph into a vicious debt hangover.
Given the debt pyramid that has already been constructed, it will take greater and greater additional credit to generate a dollar of real GDP growth with each passing year. This could portend hyperinflation somewhere down the road, but I suspect that policymakers will judge this preferable to a deflationary collapse that could rival the 1930s. Indeed, Fed Chairman Ben Bernanke is an expert on “The Great Depression” and I doubt very much that Helicopter Ben wants to preside over its sequel. So despite admirable efforts to portray himself as an inflation hawk, Bernanke’s academic work on the Depression firmly entrenches him in the dove camp.

But if Bernanke comprehends the dynamics of deflation, it is less obvious that he and financial markets are similarly cognizant of the risks posed by derivatives. Warren Buffett had the misfortune of having to unwind some relatively minor derivative positions in an insurance company acquisition by Berkshire Hathaway, and later described these financial instruments as “Weapons of Mass Financial Destruction.”Some people argue that the proliferation of derivatives is akin to the tail wagging the dog. I would go further, and say that the tail may be swinging the dog around the room and bouncing it off all four walls. The notional amount of derivatives in the system today is preposterous, and raises the scary possibility that we have learned nothing since the Long Term Capital Management fiasco of 1998. With the notional value of derivatives now measured in hundreds of trillions, the mind boggles. What financial calamity a significant counterparty failure could reveal is yet to be seen.

At this point, suffice it to say that reported statistics on derivatives bear no resemblance to the world economy. Buried in a recent U.S. Office of the Comptroller of the Currency report was the fascinating revelation that J.P. Morgan Chase’s derivatives book grew from a notional value of just over $48 ¼ trillion in the 4th quarter of 2005 to $53.75 trillion in the first quarter of 2006. To put this in perspective, the growth of $5.5 trillion is equivalent to approximately 44% of annual U.S. GDP. In addition, Morgan Chase’s outstanding book is over four times the country’s annual GDP. And although the largest player in derivatives markets, J.P.Morgan Chase is far from the only one.

This begs an obvious question: What is the purpose of these derivatives? For the longest time, my impression has been that the outsized use of derivatives relates not only to legitimate hedging activity, but also aids efforts to manage various markets. Whatever their purpose, the danger inherent in huge derivatives books seems clear. Past Fed Chairman Alan Greenspan was a leading apologist for derivatives, and would point out that only a very small portion of their notional value is ever at risk. Nevertheless, if even 1% of the Morgan Chase derivatives book is at risk, that would be extraordinarily significant when compared to its underlying equity. Thus, I tend to be very skeptical if a government official attempts to rationalize the explosion in derivatives. They may be the smoking gun that all is not well with the financial system.

The realization that both the financial system and its reserve currencies are shaky will lead to an inevitable loss of faith and confidence in paper money. This will drive people out of paper assets into tangibles. Despite the recent appreciation in the price of commodities, we have seen nothing yet. Their rise over the past few years has occurred because of favourable supply-demand imbalances. During this time, the faith in paper money has remained intact, as evidenced by the ongoing strength in the bond market. Patience, as always, is required, but a loss of faith in paper currency will be the biggest driver for gold and silver prices.
However, it is only one of several positive factors. Surging demand and stagnant supply have already driven many commodities up, and I certainly don’t see this dynamic changing any time soon. The great news for silver is that above ground stocks, which for years weighed on the market, now appear to be seriously depleted. I’m not sure that the market fully recognized the impact of the above ground inventories, particularly those controlled by the Chinese. Their depletion represents a watershed bullish inflexion point. At the same time, important new uses for silver, particularly in the medical field, should easily sustain demand.

There are others more qualified to speak on this particular subject, but allow me to say that I don’t see fabrication demand for silver to be any sort of negative in the foreseeable future.
However, investment demand for silver will be another important new positive for the metal. I don’t think one can overestimate the impact of the silver ETF over time as a powerful new force for demand. There are those who worry that the silver residing in the ETF may be used to influence the market at key moments, but I see that possibility as a minor negative when compared to the access the vehicle provides to the public to invest in silver. My partner Eric Sprott and I have been huge investors in physical silver, but it isn’t the easiest thing to deal in or store. Thus, a lot of investors, both institutional and individual, who would otherwise not bother, now have a vehicle that makes it incredibly easy to get involved.

As the second leg of the precious metals bull market gets underway, I think the silver ETF will really ramp up demand. In effect, investors can now own the metal with the same ease with which they would purchase a stock. On the mine supply side of the equation, higher prices are expected to lead to greatly increased supply. If only it were so easy and simple. What goes largely un-remarked is how difficult it is becoming to get a mine into production. The cost of everything that goes into mining, both the variable and fixed expenses, has exploded. In addition, the availability of competent personnel-miners, engineers,and geologists-is becoming a larger and larger issue. One close friend of mine, who runs a mining company in Canada, used the word “frightening” to describe the situation. He anticipates a dramatic increase in compensation for mining personnel across the board.

Another factor to consider is that in so many instances, silver is a by-product of base metal production. As you are all acutely aware, base metal prices have done spectacularly well. Yet they are much more dependent on the health of the international economy than precious metals, which will increasingly be seen as currencies rather than commodities. While I remain bullish on commodities in general over the long term, I strongly suspect that we could see a severe economic dislocation in the not-too distant future. This could damage the demand and price prospects for base metals. On the plus side, lower base metal prices should constrain production, which in turn would limit fresh supply of silver by-product.

Turning to geopolitics as a positive contributor to precious metals demand, I think the situation in the Middle East is arguably as tenuous as it has been anytime during my lifetime. Considering how long I’ve been around, that says a lot. With Iran seemingly progressing to eventual possession of nuclear weapons, the prospects for mayhem in that region are far higher than any rational human being would consider manageable. The implications for the oil price remain dramatic, despite the current quiescent period, and my partners at Sprott Asset Management think that oil is headed for triple digits. If oil production cannot rise materially from current levels, then growing demand in India and China alone should render this an easy call.

This has very positive implications for precious metals, which are already seriously under-priced compared to oil. If the average ratio of the price of oil to gold that has prevailed since 1971 were in effect today, gold would be close to $1000 and silver would probably be at least $20.
Perhaps even more important than oil, the U.S. dollar reserves that are piling up in central banks throughout the Middle East, Asia and Russia are going to be diversified into other assets, and I know gold and precious metals will receive more than passing consideration. Gold flows to where the wealth is being created. Not surprisingly then, bullion is leaving North America and Europe and heading for Asia. As Russia and China gain in economic strength, these trends will intensify. Gold and, by extension, silver, will increase dramatically in price in all paper currencies, but most particularly in the doomed U.S. dollar.

I’ve talked about the prospects for silver as an investment, but at this point I’d like to switch gears somewhat. In my opening today, I made reference to the lemming-like unwillingness of the mainstream financial world to deviate from conventional wisdom. As it pertains to silver, this herd mentality has manifested itself in two important, interrelated respects. First, mainstream investment professionals and press outlets cannot bring themselves to regard silver as money.
Historically, this seems absurd. The Silver Institute notes that in 700 B.C. Mesopotamian merchants used the metal as a form of exchange. Not to be outdone, both the ancient Greeks and Romans employed currencies with substantial quantities of silver. More recently, the English sterling exhibited the stabilizing quality that silver contributes to the monetary system. Fast-forward to today, and Hugo Salinas Price is endorsing a silver-backed currency for Mexico.

Far from being a relic, silver seems poised to reassert itself.

In short, it is near impossible to ignore the longevity of silver’s role as money. By contrast, the ancient empires would regard today’s stockpiling of U.S. dollars as potentially useful for hoarding ink, but an exercise in wealth-preserving futility. This recognition is increasingly important in an age of depreciating paper currencies, confined to ongoing debasement by the twin burdens of accumulated debt and future government obligations. No less than Ben Bernanke has boasted that the U.S. government can create an unlimited supply of dollars via the supposed magic of the printing press. We should all give thanks that silver’s value cannot be eradicated by the same means. If anything, the allure of precious metals will soar as investors come to realize the decline of fiat money.

It is exactly due to silver’s historic role as money, and in particular the metal’s relationship to gold, that governments and their allies have an interest in suppressing its price. This silver market manipulation, understood as part of a larger pattern of increasing market intervention by central banks, is the second major fact ignored by mainstream commentators. It is also the subject that will shape the remainder of my talk today.

I am concerned not simply that the price of silver is being tampered with, but that silver’s natural allies mostly combat this activity with stone-cold silence. In the face of obvious price-fixing, the response is a neglect that is tantamount to aiding and abetting the manipulators. My abiding hope is that this silence will abate, that the silver community can summon the courage to stand up for themselves and their product, all the while permitting silver to reclaim its rightful role as money.

As some of you are no doubt aware, my colleague Andrew Hepburn and I have written two studies on market manipulation for Sprott Asset Management.
Let me first discuss our 2004 report, “Not Free, Not Fair: The Long-Term Manipulation of the Gold Price”. We carefully documented every major piece of evidence indicating that the gold market was unfairly influenced by the manipulative trading activities of central banks and well-connected bullion banks. Understanding that the subject was controversial, we provided a litany of footnotes to support our claims. It was our explicit wish that the investment community would engage our material, by either challenging our report on its merits, or accepting its conclusions and publicly voicing disapproval at the management of gold’s price. Neither occurred. Privately, we received very positive feedback from those inclined to the manipulation viewpoint. We have informed reasons to believe that some of the most well-known gold industry executives reside in this camp.

Discretion demands that we not publicize our private indications in this regard, but fortunately the public record is sufficiently bountiful to show that the industry does not consider the allegations to be baseless. In May 1999, John Willson, then chief executive of Placer Dome was quoted by the Financial Times as follows:

“I find it difficult to believe, given what (Alan) Greenspan said in the middle of last year, concerning the central banks intention to maintain a low gold price, that there is not some concerted action going on between central banks to hold inflation down through holding down the price of gold.”

Willson was not alone. Also in 1999, in response to persistent rumours that Gold Fields had recently sold forward large quantities of gold, the company issued a press release denying such actions. The statement quoted company chairman Chris Thompson asserting that,

"These rumours appear to be emanating from New York-based bullion dealers.
The seeming explanation for these unfounded and persistent rumours is a desire by the short end of the market, or the dealers, to talk the gold price down. We do not wish to be associated with these efforts.”

Approximately a month after this press release, the Sunday Times of London quoted Thompson to the effect that “there was a large amount of circumstantial evidence that investment banks were involved in a plot” to depress gold prices.
Later that year, Anglogold spoke of the industry’s role in achieving the September 1999 Washington Agreement, which limited European central bank gold sales and leasing. In an interview with the U.K. Independent newspaper, an Anglogold spokesman was quoted as acknowledging that, “[F]or a long time we, as producers, saw people manipulating our market and had no part in the game.”
The spokesman’s suggestion was that this realization underpinned industry efforts to secure the central bank accord. Even charitably assuming this is true, the silence of the gold industry after the Agreement cannot be overlooked. Gold may be rising, but gold’s suppression has intensified. The gathering courage displayed by the gold industry in 1999 has disappeared. In its place, the silence of 2006 reigns supreme.
It’s one thing for people who believe a market is rigged to remain silent for fear of recrimination. What was so startling about our report on gold manipulation was the widespread refusal of detractors to publicly challenge our central thesis.

Not one mining company publicly said we were wrong. Not one investment bank said we were wrong. And no central bank said so either. Statements by central bankers that have surfaced since we published our report likely explain official reticence on the subject. First, in a speech delivered in 2005, William White, Head of the Monetary and Economic Department of the Bank for International Settlements, admitted that a major objective of central bank cooperation was “…the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”

When, you might ask, might joint efforts to influence gold prices be useful to central banks? To answer this, one only need venture into the published memoirs of Paul Volcker, former chairman of the Federal Reserve. Discussing a multilateral agreement in the 1970s to adjust the exchange rates of the yen, European currencies, and the dollar, Volcker remarked that,
Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake. Through March, the price of gold rose rapidly, and that knocked the psychological props out from under the dollar.

As John Brimelow, a very perceptive gold analyst, has delicately articulated, “One can infer that the mistake of allowing gold an unrestrained voice at times of policy shifts was subsequently guarded against.”
Volcker’s statement has important contemporary implications. On May 14 of this year, the Guardian newspaper reported the following:
The International Monetary Fund is in behind-the-scenes talks with the U.S., China and other major powers to arrange a series of top-level meetings about tackling imbalances in the global economy, as the dollar sell-off reverberates through financial markets.

Almost to the day, the price of gold peaked at $720 an ounce. A good source of mine was told that around this time, the U.S. government ordered the gold price taken down, evidently fearful of the implications of bullion’s rise for financial markets.
Evidence pointing to surreptitious market interventions by governments is not confined to the gold market. In the course of conducting research for the second Sprott report, this one on stock market manipulation, my associate Andrew Hepburn uncovered a highly revealing statement by former Clinton advisor George Stephanopoulos on ABC’s Good Morning America. Speaking as a correspondent in the aftermath of September 11, Stephanopoulos described the government’s efforts to prevent a free-fall when trading resumed. After listing a few conventional means of preventing a panic, he stated:
And perhaps most important, there’s been – the Fed in 1989 created what is called a plunge protection team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there – they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have, in the past, acted more formally.
I don’t know if you remember, but in 1998, there was a crisis called the long-term capital crisis. It was a major currency trader, and there was a global currency crisis. And they, at the guidance of the Fed, all of the banks got together when that started to collapse and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall.

Stephanopoulos is not the only well-connected individual to have revealed this essentially unspoken interventionism. In the lead-up to the Iraq war, the Japanese Secretary of the Cabinet told a news conference that, “There was an agreement between Japan and the U.S. to take action cooperatively in foreign exchange, stocks and other markets if the markets face a crisis.”

I trust I have established that despite free market rhetoric, today’s major markets are susceptible to government intrusion. With this in mind, the recent price action in precious metals has been particularly suspicious. On the day after Labour Day, gold surged $14.00, silver rose sharply then mysteriously slumped, and the un-hedged Gold Index (the HUI) staged a powerful breakout. I closely watch the positioning on the Japanese futures market, the Tocom, which is considerably more transparent than its American counterpart, the Comex. Despite this robust unfolding strength in precious metals, there had been an ongoing aggressive buildup of short positions in gold by the usual suspects on Tocom, the large Japanese banks and one large American investment bank. At the same time, Comex floor sources reported that on the day gold rose $14.00, a large seller blocked the advance of the gold price at $648 on the December futures contract by selling indiscriminately until the buying was finally exhausted. The next day, gold was driven down, forcing the speculative buyers to unload their positions. For five consecutive days, gold was pounded. The thinner silver market was correspondingly annihilated on Comex, falling over $2.00 per oz. in a three-day period and continuing to fall in the aftermath, with the percentage loss reaching nearly 20%.
This decline, in a very short period of time, in a market with a physical shortage, is bizarre. But it is not without precedent. Often when Comex opens, both gold and silver are smashed in unison, with the downdrafts looking identical.

In addition, the two metals are routinely crushed in quiet periods on the Access Market. The violent attempts to sell gold and silver through key support levels is not indicative of profit-maximizing longs unloading positions, but instead demonstrates orchestrated movements.
Why this is disturbing to me, other than the fact that it does not appear to be legitimate price action, is the fact that three or four traders hold over 80% of the Comex silver short position. Ted Butler, a gentleman who knows as much or more about the silver market than anyone that I have ever encountered, believes this represents manipulation and I agree with him. The size of the paper short position in silver in relation to the size of the physical market, whether relative to available inventories or annual production, is outrageous, particularly when this short position is concentrated in so few hands. If the longs called for delivery, where is the silver going to come from? If the short positions were smaller, wouldn’t it be axiomatic that the silver price would be much higher?
It is tempting to believe that the manipulation of precious metals markets is aimed at garnering illicit profits for certain traders. But I think this misses the larger point. Gold is widely seen as a barometer of economic health, and silver is tightly connected to its more expensive cousin. Thus, as gold analyst Reg Howe has observed, “Any efforts to affect interest rates through the manipulation of gold prices cannot safely ignore silver.” In this regard, my sense is that the recent clobbering of silver is a case of the metal being an innocent bystander in a greater conflict. To the extent that the silver price runs free, it may also free the gold price from the shackles of government influence. Think of silver as the well-meaning witness whose observations must be silenced.

But despite the repeated mugging of silver, those responsible for ensuring its safety have abrogated their duty to protect the metal. The Commodities Futures Trading Commission continues to allow manipulation to occur, despite the howls of ordinary investors. Yet the CFTC is not the only possible defender of a free silver market. In particular, the captains of the silver industry, those mining companies engaged in its production, refuse to publicly confront these lingering allegations of market manipulation. This is not acceptable. As someone who oversees a large precious metals fund, I cannot tell you how frustrating it is to witness this obvious manipulation. I feel like the newscaster played by Peter Finch, in that classic movie from years ago, NETWORK, who would rant on air: “I’m mad as hell and I’m not going to take it anymore”.

It is further distressing to watch the mining companies suffer in silence, adamantly refusing to call the emperor on his lack of clothes (or, his large short position) and demand appropriate remedies. If you take but one message from my talk, let it be this: It is time that the era of silent collaboration in the precious metals markets ends. If you are not vocally and publicly against the silver manipulation, your reticence is facilitating its continuation.

There is a tendency in financial markets to ignore questions of right and wrong. Many companies and investors seem to believe that so long as they are positioned correctly, what happens behind the scenes is but an irrelevance. If we see the economy as a mere vacuum, this view might hold currency. But markets are about more than trading paper. They involve outcomes that affect the daily lives of ordinary citizens. In silver, I am talking about the best interests of shareholders, of miners, and of the communities engaged in the metal’s production. All these stakeholders have needlessly suffered due to the manipulation of the silver price. And all stand to benefit should investors and the industry muster the determination to end the meddling. Today I ask you to do just that.

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