Peter Degraaf: Does manipulation render technical analysis obsolete?

DOES MANIPULATION RENDER TECHNICAL ANALYSIS OBSOLETE?

Peter Degraaf
21 January 2009

Hardly [a] day goes by without one of my subscribers asking me the above question. In this article I will attempt to provide some answers.

The fact that manipulation exists has been well documented; first by Frank Veneroso, later by John Embry, while he was Portfolio Manager at RBC Global Investment Fund.

Meanwhile GATA.ORG this year celebrates 10 years of informing the world of the facts behind the manipulation in the gold markets. Last year they paid for a full page advertisement in the Wall Street Journal with the headline: "Anybody seen our gold?"

Gold is the barometer of the health of a nation's currency. When the amount of money in circulation in a particular country is steady, people tend to trust that currency and do not hesitate to hold onto it, or keep it parked in a bank account, or under a mattress. All other things being 'normal', the price of gold as expressed in that currency will tend to hold steady, and since gold does not draw interest, people will not be tempted to rush into purchasing gold.

It is when the money supply is increasing, that people, especially those who have studied monetary history, begin to get anxious about the future purchasing power of that money, and initially some of them and eventually more and more investors begin to buy gold as protection against the price inflation that inevitably follows monetary inflation.

It comes as no surprise that central banks take an interest in suppressing the gold price, in order to be able to add money to the money supply without having the barometer that mirrors their actions (the price of gold), warn the public of their mischief.

"In 1980 we neglected to control the price of gold. That was a mistake." Former Fed Chairman Paul Volcker.

"Central banks are ready to lease gold, should the price rise." Former Fed Chairman Alan Greenspan during Congressional testimony July 24/1998).

The manipulation in the gold market usually occurs when the Commercial Traders (often referred to as the COT's), have accumulated a large number of 'shorting contracts' on the COMEX. When they begin to feel the pinch of margin calls against their mounting pile of short positions, they inevitably mount a sudden assault on the gold price, with the intent of driving the price down to a point where they can cover their short positions, and start the game all over again.

Charts courtesy www.stockcharts.com

Featured is the daily gold chart from July 2005 to June 2006. In July the 'net short' position (short positions less long positions), totaled 53,000. It should be noted that commercial traders are apt to be more often short than long, because miners tend to lock in future production. By the time May 2006 rolled around the 'net short' position had more than tripled, and price had increased to 40% above the 200DMA. This is the kind of technical setup that appeals to whoever may be behind the manipulation in the gold price, as margin calls at this point are starting to 'bite'. A concerted effort by the 'shorts' to gang up on the 'longs', together with profit taking by a number of experienced traders, was enough to stop the rally and bring price back down to the 200D.

What this chart tells us is that technical analysis was quite useful in determining that a top was due and that it was time to take profits.

Featured is the gold price between February 2007 and April 2008. In February the 'net short' position of commercial traders was 135,000. By March 2008 it had risen to 252,000, while price by then reached a point 32% above the 200DMA. Once again the people who are interested in keeping the gold price from rising forced gold down, and once again technical analysis was useful in warning that the market had become ripe for a pull-back.

Featured is the same gold chart again, only this time with a few more months added on. We see here a repeat of the March 2008 top from the previous chart, followed by a correction that takes price back to the 200DMA in June 2008. Next we see a top in July with 'net short' positions reaching 247,000. This total did not raise any red flags, as price back in March by comparison advanced for a few weeks, after the 'net short' position rose to 253,000. At this point there were no 'clouds in the sky'. About the only technical warning sign in July 2008 was the RSI (at top of chart), which had reached '70'.

It took blatant manipulation in July 2008 to hammer the gold price down - well below the 200DMA where bulls could always count on support in the past. This waterfall-like price drop was caused by 3 US banks that switched from being '2 to 1 long to short' in early July, to '22 to 1 short to long' at the end of July. This type of action by banks that are not in the gold producing business smells to high heaven. This is one time when technical analysis was of little use. Anyone who saw this coming was either very good, or very lucky, or 'in with the mob'.

In conclusion: Technical analysis works in markets where there is no manipulation. It also works most of the time, even in manipulated markets, in view of the fact that the manipulators also read the charts. Historically manipulations are doomed, as supply-demand factors rule in the end. The banks tried to hold the gold price at 35.00 in 1968, and during one day in April they sold 4,000 tonnes in a vain attempt to hold the line. They failed then, and they will fail in the future.

Thus, in the words of Richard Russell: "He who buys the dips, and rides the waves will be successful."

Featured is the current gold chart. The lows are getting higher (green arrows), and as soon as price works its way above the two blue arrows (where resistance is evident), the rally that started in November can be expected to rise to a new all-time high. At the blue arrows is where we can expect strong resistance from the 'gold bears'.

DISCLAIMER: Please do your own due diligence. I am NOT responsible for your trading decisions.

Peter Degraaf is an on-line stock trader with over 50 years of investing experience. He issues a Weekend Report for his many subscribers. For a sample copy, send him an E-mail itiswell@cogeco.net or visit his website www.pdegraaf.com

Are You Better Off Now Than You Were Eight Years Ago?

The Centre for Economic and Policy Research (CEPR) recently asked the same question that Ronald Reagan had asked the American people during the final presidential debate of 1980: "Are you better off now than you were four years ago?"

They used 25 indicators of economic well-being and economic performance and found out that 23 of the 25 indicators are worse in 2008 than they were in 2000!..

...lo and behold the answers:

Economic Indicator	2000	2008
Unemployment rate	4.0%	6.1%
Inflation rate	3.3%	5.4%
Job Growth (preceding 8 years)
Total nonfarm employment	21.4%	4.3%
Private sector employment	23.6%	3.6%
Manufacturing employment	2.9%	-22.2%
Employment rate (% of population)
All, age 16 and older	64.4%	62.6%
Men, age 16 and older	71.9%	69.1%
Women, age 16 and older	57.5%	56.5%
Real wage growth (preceding 8 years)	8.2%	1.8%
Minimum wage (July 2008$)	$6.58	$6.55
Family income
Median, 2007$	$61,083	$61,355
Growth (preceding 8 years)	14.7%	0.4%
Poverty
Rate (% of population)	11.3%	12.5%
People in poverty (millions)	31.6	37.3
Uninsured (health insurance)
Rate (% of population)	14.0%	15.3%
People without insurance (millions)	38.7	45.7
Personal savings (% of disposable income)	2.3%	0.6%
College tuition (average per year, 2007$)
Private four-year college	$19,337	$23,712
Public four-year college	$4,221	$6,185
Gasoline (gallon, 2008$)	$2.03	$4.09
GDP growth (preceding 8 years)	34.2%	19.6%
Productivity growth (preceding 8 years)	15.9%	21.9%
Trade balance (% of GDP)	-3.9%	-5.1%
Federal debt (% of GDP)	57.3%	65.5%
Net foreign debt (% of GDP)	13.6%	17.9%

A. E. Fekete: Open The Mint to Gold!

Could a Private Firm Force the Government to Do It?

Antal E. Fekete
Gold Standard University
E-mail: aefekete@hotmail.com

How to rebuild the shattered credit system

People ask: "Isn't the Mint already open to gold, producing Gold Eagles and Buffaloes?" Opening the Mint to gold has a technical meaning, namely, opening it to the free and unlimited coinage of gold on private account. The Gold Eagles and Buffaloes are produced on Treasury account in limited quantities and sold at a premium as souvenir coins. It is a ploy to show that gold coins would just not circulate as money. Well, they would if there was no premium and the market was saturated.

Not until that happens do I see any hope for the world's greatest and most permanent asset, wealth tied up in gold, to leave its hiding place, get mobilized and start discharging its duty for which it is so superbly suited: rebuilding credit and refinancing world trade on a sound basis. Irredeemable promises to pay by default-happy governments can under no stretch of the imagination serve as a sound basis for world credit and world trade.

Unless the ice is broken and one country does open its Mint to gold, the same pattern that was established in 1971 (when the U.S. Government defaulted on its international gold obligations) would continue to the further detriment of the world's prosperity. The output of the world's gold mines, plus whatever gold trickles down from the public sector, will go into hiding and will not benefit society. The world economy is literally bleeding. It is bleeding credit that keeps factories humming and cargo ships sailing. There is no other way to stop the hemorrhage than opening the Mint to gold. The battle cry should be: put gold back into circulation to save our civilization and to save the world! People must be aware what the malady is and what the remedy should be.

The full meaning of 1971

Apart from the enormity of a great government reneging on its solemn obligation, sealed by international treaties, confirmed by several sitting Presidents, to pay holders of its short-term debt gold at a fixed rate of exchange, we should remember another aspect of the 1971 default. It triggered the world's greatest deflation ever to take effect with a lag lasting about one generation.

The world prospered before 1971 because it had the U.S. Treasury as its residual supplier of monetary gold. The wholesome effect of this arrangement was that people were willing to pay out gold. They were confident that they could get back their gold exactly on the same terms. Confidence permeated producers, banks, trading houses, shipping lines, right down to the lowliest consumer. They could make deals with one another in the belief that the world's monetary system is not run by tricksters. It is run by upright men who know the meaning of the word 'honor'.

But once the commitment to redeem dollars in gold was broken, people became reluctant to pay out gold. They were no longer certain that they could get their gold back on the same terms. This froze the stock of the world's monetary gold. More ominously, newly mined gold started to go into hiding, and the world economy had to be financed through the creation of synthetic credit.

For those of us who do not subscribe to the Quantity Theory of Money, this was deflation waiting to happen. The synthetic credit was - what else? - the broken promise of the defaulting banker. People with a logical mind knew that this arrangement had to be temporary. Only a deranged man would reward default by promoting the dishonored monetary instrument from the bottom of the garbage heap to the position of the highest-powered money of the international monetary system. After all, the U.S. government did have the gold it needed to run the world's credit system. What it did not have, but could easily get with incorruptible politicians, a matching foreign policy free from entanglements, and a matching social policy free from the 'free lunch' mentality.

The present deflation is open-ended, as it is not known how much devaluation the dollar will have to undergo before it can be tethered once more to gold - as it was done exactly 75 years ago. To stop deflation, the flight into gold must be stopped first, as it was done by the U.S. in January, 1934. President-elect Obama has already named his candidate to run the Treasury. An historical opportunity has been missed. The very same people who engineered and orchestrated the present crisis will be put in charge to rectify it. They are dyed-in-the-wool Keynesians or Friedmanites.

America's antagonists are just as helpless

Of course, the Arab countries, the Muslim countries, as well as the Asian powers (including Russia), which do not have carry the heavy Keynesian and Friedmanite ideological baggage, would love to start a new currency based on gold, and then take credit for saving the world. If they could, that feat would pass the torch of human civilization back to the Orient, and thereafter the Western governments could be deservedly castigated as the selfish and stupid satraps that landed the world in this incredible economic mess. They would hardly be invited to sit in the councils of nations, let alone to lead them. Worse still, the fear is that without the free flow of gold the world may get lost in the quagmire of a New Dark Age, in which law and order disappears, along with the disappearance of gold and silver.

Yet all the attempts of the Arab, Muslim, and Asian powers to put gold back into the monetary system have misfired, precisely because they have 'forgotten' to open their Mint to gold, which is the key to a New Golden Age.

Why gold?

I have dealt with that question several times in my earlier writings, but I shall say it again. Gold is absolutely indispensable for reconstruction, far beyond the limits imposed by gold's present valuation in the markets. The reason is that, once remobilized gold, and only gold, could carry a weight thousands of times greater than its nominal value. Gold, once put back into circulation, will regenerate credit which, under Western tutelage, has been allowed to disintegrate. The Western powers have fallen victim to the most inept and stupid Ponzi-scheme ever inflicted on people who are otherwise not illiterate: the Ponzi-scheme of Keynesian and Friedmanite economics. The 'miracles' that these two so-called economic systems can work depend on what I have described as a check-kiting scheme between the Treasury and the Central Bank. They conspire to accept each other's irredeemable promises to pay. For a time the shills could whip up sagging gambling spirit by their spectacular off-take at the gaming tables. But, ultimately, this Ponzi scheme, like any other, depends on an infinite supply of new fools. While the supply of fools in the world is very great indeed, it is not infinite. That is the only weak point in Keynesian and Friedmanite economics.

Without rebuilding credit on a gold foundation there is no hope for reconstruction, president-elect Obama's grandiose reflation plans notwithstanding. The U.S. Treasury is empty, nay, it is in a hole, of the size of several years' GDP. Government revenues are fading. American industry has been dismantled. Foreign creditors of the U.S. have had enough of the make-belief world of giving up real goods and real services in exchange for irredeemable promises to pay. Even if you put them under duress using military blackmail, they badly need those goods at home because they are themselves in deep trouble.

De facto opening of the Mint

I have been greatly discouraged and dismayed that the Western governments, in their dogged stubbornness, have refused to listen to the voice of reason and allowed their antagonists to advocate the return to a gold standard. The Western governments should have taken the initiative and made a coherent statement on their own position.

But then something unexpected happened, which gives us a ray of hope. Canada has been my adopted country for over half of a century. In many ways it is a decent country in this world of indecent governments. Canada has not used conscription to coerce young men to become cannon-fodder in foreign imperial and colonial ventures. It did not succumb to the 'Roosevelt-syndrome' in confiscating the citizens' gold. While taxes are high, on balance it may be a price worth paying in exchange for clean cities, sane banks, safe streets, and universal health care.

Canada's gold policy was free of the neurotic aspects of the American. Gold has never been declared contraband in Canada. While it is true that fools were put in charge of government-owned gold, and they sold it for a pittance to invest the proceeds in irredeemable obligations of the U.S. government, the Royal Canadian Mint started issuing gold coins as early as 1967 (to commemorate Canada's centennial.) Later, in 1979, with the issue of the Canadian gold Maple Leaf coin of one Troy ounce, 9999 pure, the Royal Canadian Mint created a coin that may well become the standard coin of a new emerging international gold standard. By now, 30 years later, many other countries are issuing gold coins to the same standard of weight and purity. As I shall explain below, the world treats these coins as being as perfectly fungible as only money can be, and refuses to treat them as souvenirs, keepsakes, or as a conversation-piece, which was the intention of their designers.

To be sure, the Royal Mint of Canada is not open to gold in the legal sense of the word. If it were, it would have made a commitment to convert gold, 9999 pure, free of seigniorage charges, into Maple Leaf coins, ounce for ounce, in unlimited quantities, to all comers. If there is no de jure commitment, is there a de facto commitment to the same effect?

That's what a Canadian firm decided to find out in 2007, and so far the results are encouraging. They show that the Royal Canadian Mint has taken upon itself the burden to provide the world with a reliable source of gold coinage at an acceptable cost. This firm buys the standard international "good delivery gold bar" of 400 Troy ounces or about 12.5 kg, 999 fine and exchanges it at the Mint for 400 Canadian Maple Leaf coins, paying a premium that, according to the firm, is small enough that it can sell the Maple Leafs profitably at the normal 7-9% premium, even during this latest rush into gold coins. As soon as the coins are sold, the firm is buying more good-delivery bars and converts them into Maple Leafs at the Mint. It keeps doing this. This is the exact opposite of the great coin melt of F.D. Roosevelt's fame, who confiscated the citizens' gold coins only to melt them down and to mark up the dollar value of the resulting ingots - a symbolic gesture to show that gold has been demonetized.

This Canadian firm leads the way to gold remonetization. It uses the agency of the Royal Canadian Mint to do it. Needless to say, there will be imitators both at the Mint level and at the arbitrage level. In particular, the premium on coined gold will decline. There will be a race of governments to offer the same service on a competitive basis. (Remember how the Kugerrand has found imitators in all major countries of the world?) Willy-nilly, the Mints are going to do what they have been conceived to do in the first place: put the citizens in charge to decide what the money supply should be. By the U.S. Constitution the power to create money is reserved directly to the people themselves, and should not be delegated.

As you can see, the Royal Canadian Mint is open to gold de facto. As more imitators enter the field, the de facto commitment to monetize gold will become permanent.

Reason for optimism

I think it is impossible to exaggerate the importance of this fact. While the 7-9% premium is an eyesore and takes away from the purity of the scheme, and the lack of a de jure commitment to keep this facility open through thick and thin is deplorable, the bottom line is that the first tentative steps have been taken by a Western Country (blessed with a strong gold-mining industry, and with an unbroken history of gold trading and sound banking) to opening the Mint to gold. This gives plenty of reason for optimism.
A new stage in gold's evolution?

Two professors at Prince Sultan University in Riyadh, Saudi Arabia, H. Assenov and K. Petrov, have published a paper with the title: A New Stage in Gold's Return to Money (see References below.) In this paper they put forward the hypothesis that the market monetizes the one ounce standard gold coins regardless of shape and country of origin, as long as they have the right weight and fineness, as witnessed by the uniform price at which they are traded. They say that this is a new phenomenon that first appeared in December, 2008, the same time when gold backwardation first appeared as a threat to close down Comex warehouses. It means a great leap in the marketability of these coins due to perfect fungibility. Now a much larger pool of coins backing the trade is available. Both buyers and sellers dismiss the coins' idiosyncracies that would be of interest to numismatists and collectors. The authors suggest that this is a proof that gold's remonetization is in progress. Gold is not yet money, but it has cleared one of the most serious hurdles towards becoming money. The market for the standard gold one-ounce coin, 999 fine, is no longer fragmented.

The authors make no reference to the fact that the Royal Canadian Mint is de facto open to gold as shown by the activities of a private Canadian firm. This fact, in my opinion, plays a large part in the phenomenon the authors describe: the uniform valuation of all standard gold coins. However, it is significant that they noted the simultaneous appearance of backwardation in the December gold future contract at the Comex. They also quote Carl Menger's theory on the origin of money, that is, the rise of indirect exchange. Both the ugliest and the most beautiful gold coins are traded in indirect exchange strictly by the quantity and quality of metal content, completely disregarding the outward appearance of the coin. Whether the coin features the effigy of a bearded man or a kangaroo is of no consequence. The authors conclude their paper as follows:

Under the current financial order we use paper tickets with the picture of a bearded man that are currently printed in the trillions by another bearded man. Those tickets have had no backing for many decades, so there has been no restraint in their printing. Up until recently there has been a modicum of self-restraint in the printing process. However, since the Summer of 2008 all restraint has been thrown out of the window by the bearded man, a.k.a. Bailout Ben, who has indulged Congress and the Bankers in an historic multi-trillion dollar printfest. In response, common-sense people have rushed into gold as a store of value. Now that the value of gold is driven entirely by its purity and quantity, it is only a matter of time before gold is used again as a medium of exchange. Gold coins are no longer a numismatic delight, nor do they appear to be a Barbarian Relic. Gold is becoming money once again. Dollar holders beware!

Sprott Money Ltd.

I tease my readers' curiosity no longer. I disclose that the Canadian firm that has harnessed the Royal Canadian Mint to change the course of history is Sprott Money Ltd., established in 2007. The inspiration came from its founder, Mr. Eric Sprott himself. I salute him here as a man of great insight and courage. He firmly believes that gold should again be the international currency, by the choice of the people. He believes that the U. S. economy is in a state of total systemic failure. He says that we are in a depression today. He points out that the average bank is leveraged 25 or 30:1. He does not beat around the bush: he says that in a true mark-to-market, probably no bank would have any tangible capital left. He does not think that any economy that is paper-based can be insulated against the contagion of debasement that is the hallmark of the U.S. dollar.

In a recent interview (see References below) Sprott stated that during the past three years his organization has converted a lot of gold bars to gold coins at the Royal Canadian Mint, and then he went on:

We have lots of inventory; we are not seeing any signs that we are going to eat through our inventory of coins. But I always do worry that I've got to be able to buy the 400-ounce bars back, too. So we'll see. If it happens that I can't buy the bars back, I don't think I'll be selling the coins. (Emphasis added.)

I have included this quotation for its value as it so closely relates to the problem of backwardation in gold. When Sprott cannot buy any more 400-ounce bars, that's it: the curtain has fallen on the Last Contango in Washington. Backwardation is here to stay. And you will know it immediately because Sprott Money Ltd. will simultaneously withdraw its offer to sell Canadian Maple Leaf coins to retail customers. Not for sale at any price quoted in dollars, whether Zimbabwean or U.S.

We need lots of imitators for Sprott and lots of imitators for the Royal Canadian Mint, if we want to shorten the painful death-watch of this reactionary episode in the history of money, the experiment with the paper dollar backed, as it is, by the greatest collection of weapons of mass destruction: debt and thermonuclear warheads - if not much else.

References

By the same author:

The Rise and Fall of the Gold Basis, June 23, 2006
Monetary and Non-Monetary Commodities, June 25, 2006
The Last Contango in Washington, June 30, 2006
Gold, Interest, Basis, March,7, 2007
Gold Vanishing into private Hoards, May 31, 2007
Opening the Mint to Gold and Silver, February 5, 2008
Has the Curtain Fallen on the Last Contango in Washington? December 8, 2008

These and other articles of the author can be accessed at the website www.professorfekete.com

The Only Real Monetary Asset, www.sprottmoney.com

Eric Sprott: Gold: The Go-To Asset in Any Environment, The Gold Report 01/09/2009, www.theaureport.com

A New Stage in Gold's Return to Money, by H. Assenov and Dr. K. Petrov www.financialsense.com/editorials/petrov/2008/1226.html

Calendar of events

Szombathely, Martineum Academy, Hungary, last weekend of March, 2009
Encore Session of Gold Standard University Live.

Topics: When Will the Gold Standard Be Released from Quarantine?
The Vaporization of the Derivatives Tower
Labor and the Unfolding Great Depression
Gold and Silver in Backwardation: What Does It All Mean?

San Francisco School of Economics, July-August, 2009
Money and Banking, a ten-week course based on the work of Professor Fekete. The Syllabus of this course is can be seen on the website: www.sfschoolofeconomics.com

January 12, 2009

Bank of England: oiling the printing presses...

Reform Plan Raises Fears of Bank secrecy

By Edmund Conway
The Telegraph, London
Saturday, January 10, 2009

The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.

The Government is set to throw out the 165-year-old law that obliges the Bank to publish a weekly account of its balance sheet -- a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel's Government in 1844 that originally granted the Bank the sole right to print UK money.

The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.

However, some have warned that it means "there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses."

It comes after the Bank's Monetary Policy Committee cut interest rates by half a percentage point, leaving them at the lowest level since the bank's foundation in 1694.

With the Bank rate now at 1.5 percent, most economists suspect that the Government and Bank will soon be forced to start quantitative easing -- directly increasing the quantity of money in the economy -- in a drastic attempt to prevent a recession of unprecedented depth.

Although the amount of easing is likely to be limited, news of this increased secrecy will spark comparisons with Weimar Germany and Zimbabwe, where uncontrolled use of the central banks' printing presses ultimately caused hyperinflation.

The Bank said it will still publish details of its balance sheet, but, significantly, the data -- the main indicator of the extent of quantitative easing -- will not be presented until more than a month has elapsed. For instance, under the new terms of the law, if the Bank were to have embarked on a policy of quantitative easing last month, the figures on this would not be published until the end of this month.

The reforms, which are likely to be implemented later this year, will make the Bank of England by far the most secretive major central in the world, experts said.

In the US, where the Federal Reserve has already cut rates to close to zero and started quantitative easing, the main way to track its purchases of securities and the expansion of its balance sheet is through precisely these same weekly accounts.

"Quite why the Bank has to keep its operations so shrouded in secrecy is a mystery to me," said Simon Ward, economist at New Star. "This will make it much more difficult to track what the Bank is doing."

Among the details which will no longer be published are those revealing the extent to which London's banks are using the Bank's deposit facilities -- a yardstick of pressure in the financial system.

Debating the issue in the House of Lords recently, Lord James of Blackheath, a Conservative peer, said: "Remove [this] control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.

"If we went down that path we would be following a road which starts in Weimar, goes on through Harare, and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about -- but the Bill abolishes it."

* * *

Real price of gold is less than real price of central banking

Dear Friend of GATA and Gold:

National Geographic's January issue has what has been the usual "global" sort of article about gold mining, written by Brook Larmer, accompanied by stunning photographs taken by Randy Olson, and predictably enough headlined "The Real Price of Gold." The article's thrust is that gold mining is a dirty business with enormous costs to the environment and human health and that these costs are borne largely by poor people.

This is, of course, only half the story, and National Geographic should tell the other half:

-- That the environmental and health costs of gold mining can be remediated, but only with a higher price for the product.

-- That government price-suppression schemes not only impede the development of poor countries with natural resources but also push the less-regulated gold mining there into the irresponsible practices cited in the National Geographic article.

-- That gold is money and that the alternative form of money -- government-issued currency without any direct convertibility into gold, silver, or some other valuable commodity -- has infinitely greater environmental and human costs that somehow never get inventoried, including much easier resort to war, such as the U.S. invasion of Iraq, which probably would not have been undertaken if it had had to have been financed by direct taxation rather than borrowing and printing; overconsumption; and the general expropriation of the producing class by the financial class.

You can find the National Geographic article on "The Real Price of Gold" HERE

Let's see how long we have to wait for the colorful magazine spread on "The Real Price of Fiat Currency and Central Banking."

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

* * *

Gold rush erupts amid financial crisis

From The Daily Telegraph
Sydney, Australia
Saturday, January 10, 2009

The global financial crisis has sparked a new gold rush.

Worried investors seeking a safe home for their money are ploughing billions of dollars into the precious metal in a bid to preserve their wealth, The Daily Telegraph reports.

Demand has now reached such unprecedented levels that the Perth Mint, Australia's biggest wholesaler of gold coins and bars, has been forced to ration its sales.

Perth Mint's bullion sales rose 194 per cent in the December quarter compared with the corresponding period in 2007, while silver bullion sales were up 140 per cent.

The mint has suspended sales of all gold bars and all bullion coins except its 1-ounce "Kangaroo" gold bullion coin.

On Monday, after a three-month suspension, it will expand its range of bullion coins for sale but the restrictions remain in place for minted gold bullion bars so the mint can sell some gold to as many customers as possible.

"We are working three shifts a day, six days a week, and still can't keep up with demand," Perth Mint CEO Ed Harbuz said. "I've never known anything like this in the precious metals market. We would be working Sundays too but we are having difficulty getting enough staff."

Non-minted gold in the form of cast bars produced by Perth Mint's local refinery can still be bought, although customers who want the bigger bars often have to wait several weeks.

One customer recently bought $500,000 worth of bullion and wanted it delivered so he could hold it personally.

"For very big orders we normally keep the gold in our depository for security reasons," Mr Harbuz said. "Orders of $10 million or more are not unusual. Often the orders are much larger if we are dealing with pension funds or institutional investors."

* * *

Merrill Lynch says rich want gold bars, not gold paper

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, January 8, 2009

Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.

"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.

Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.

The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.

He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."

Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3 percent will offer a real return of 4 percent a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided.

He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro. I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."

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Is COMEX running low on physical gold?..

...or maybe they're just applying "Fractional Reserve" depositing in their gold reserves?

This note is from a small precious metals fund:

"...We accumulated 3 emini gold contracts on CBOT for December delivery and we had been given serial numbers and weights last week for the 3 bars we were to receive.

Today we are informed that Comex is invoking a rule in which they can deny delivery of individual mini bars (roughly 33 ounces) and issue you only a Warehouse Delivery Receipt (WDR) against your mini-contract unless you have 3 WDR's, and then they'll issue you a 100 oz. bar.

Otherwise, if you have only 1 or 2 mini-contracts, you only own a WDR, which you sell by shorting a mini against it. If you own a WDR for a 100 oz., they encourage you to safekeep the gold at the Comex and hold a vault receipt.

CLEARLY, the Comex has run out of the bars that were being delivered to holders of emini contracts. Our back-office guy told us that he's been doing Comex deliveries for 30 years and he's never seen anything like this, and he's never heard of this rule on the mini contract. (update: its in the contract if you read it - Jesse)
Fortunately we have 3 WDR's and we will be getting delivery of a 100 oz. Comex gold bar.

But this whole episode brings into the question the validity of the Comex gold inventory. More importantly, the Comex is now going to issue WDR's, which are paper.

Are they becoming a "fractional" reserve depository, where they can issue several WDR's against the same bar of gold, knowing that some of those people will opt to keep storage on Comex and never require actual physical delivery?"

It certainly puts a fresh emphasis on the old adage, "When in doubt, take it out"

Willem Buiter: massive dollar collapse ahead...

The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.

"...There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place. The notion that the US Federal government will be able to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of “dark matter” or “American alpha” is not credible.

So two things will have to happen, on average and for the indefinite future, going forward. First, there will have to be some combination of higher taxes as a share of GDP or lower non-interest public spending as a share of GDP. Second, there will have to be a large increase in national saving relative to domestic capital formation."

To read Prof. Buiter's Financial Times blog post on the US economy please click HERE

David Hale: Only one alternative to the dollar -- gold

By David Hale
Financial Times, London
Monday, January 5, 2009

The great challenge confronting the foreign exchange market at the start of 2009 is finding a good alternative to the US dollar. One of the ironies of market events during 2008 was that the US financial crisis produced a flight to safety in the dollar. The dollar emerged triumphant from a financial debacle that centered on $1,300 billion of subprime US mortgage loans. The fallout has triggered a $32,000 billion decline in global stock market capitalisation and driven all the Group of Seven leading industrialised countries into recession.

The dollar slumped against the euro during the final weeks of 2008 but fears about the financial system still drove US Treasury yields down to zero on three-month paper and less than 2.1 per cent on 10-year notes. This fear factor is likely to sustain demand for the dollar during the early months of 2009.

There is not now a clear alternative to the dollar because all big economies have slid into recession. Real gross domestic product could contract by 1.5 per cent in both the US and Europe during 2009 and by as much as 2.5 per cent in Japan. The decline in world trade and commodity prices will also reduce significantly the growth rates of the emerging market economies. South Korea and Taiwan are already in severe slumps. The growth rate of China could halve.

The US economy could be the first to emerge from recession this year because it appears to be headed for a far more aggressive macroeconomic stimulus programme than any other country. Barack Obama's administration will announce a $700 billion-$800 billion multi-year fiscal package focusing on cuts in payroll taxes, aid to state and local governments, and infrastructure investment. The Federal Reserve is also engaging in a programme of unprecedented monetary stimulus. It has slashed its core lending rate to zero and tripled the size of its balance sheet since August. Ben Bernanke, the Fed chairman, has also stated his willingness to engage in further large liquidity injections to buy mortgages, consumer loans and government securities. Mortgage rates have recently eased to 5.1 per cent after remaining above 6 per cent during the past year.

The European response to the recession has been far less aggressive. The European Central Bank is still under the influence of the Bundesbank and will ease monetary policy far more gradually than the Fed. Some Bundesbankers are opposed to cutting interest rates at this month's meeting. The ECB policy could produce political tensions because interest rate spreads on Greek and Spanish bonds have risen sharply compared with German bonds. Japan's government has been announcing modest fiscal policy changes but it cannot act decisively since it no longer controls the upper house of the Diet. And an election, before September, could produce a change of government.

The Kevin Rudd government in Australia announced a fiscal stimulus programme in October and Canada will announce a big fiscal package at the end of this month. But both currencies are dominated by market perceptions of the outlook for Chinese industrial production and commodity prices, not domestic economic policy.

If the US stimulus policy revives the economy by spring or summer, the dollar could rally further. The risk posed by US policy comes from potential market concerns about monetary policy becoming inflationary. The current growth rate of the Fed's balance sheet is totally unprecedented. As a result of the Obama fiscal policy and the troubled asset relief programme, the Federal government's borrowing requirement could rise to $1,500 billion-$1,700 billion this year. Government bond yields have collapsed because of investor fears about the safety of the financial system but they could rebound when conditions normalise. The current level of yields is the lowest since the period of official interest rate controls during the Second World War. Mr Bernanke has indicated that he would be prepared to return to the wartime policy of restraining yields. What remains unclear is whether such a policy of accommodation would provoke fears about inflation and encourage dollar selling, which could in turn drive up bond yields.

Foreign central banks could play an important role in the US government bond market because they already own about half of the existing debt stock. China recently displaced Japan to become the largest holder of US government securities because of its long-standing policy of intervening to manage its exchange rate against the US dollar policy. As a result of the downturn in its economy, China has recently begun to lose foreign exchange reserves and may not need to intervene in the market again to restrain the renminbi. Japan, by contrast, has been experiencing significant upward pressure against the yen despite the severe downturn in its exports and output growth. Japan has not intervened since 2003 but, if the yen rallies another 5 per cent, the country could be forced to spend large sums restraining its currency. If it does, Japan could provide $200 billion-$300 billion of funding for the US deficit during 2009 while Chinese demand for US securities fades.

As a result of the global scope of the recession, there is no country that wants its exchange rate to appreciate. The clear alternative to the dollar in 2009 is not other currencies but that ancient form of money: gold. Precious metals could emerge as a hedge for investors suspicious of central banks and fearful that inflation will be the simplest solution to the challenge of global deleveraging.

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The writer is chairman of David Hale Global Economics.

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Gold pays no interest, and soon the pound won't either

Savers Facing Accounts with No Interest

By Edmund Conway and Myra Butterworth
The Telegraph, London
Friday, January 2, 2009

Millions of savers are braced for zero per cent accounts within days as the Bank of England is poised to cut interest rates to the lowest level in its 315-year history.

Experts have warned the return on savings could plumb new depths with the Bank expected to take unprecedented steps to regain control over the economy.

They widely believe the Bank will reduce borrowing costs to below their 2 per cent level -- and possibly all the way down to 1 per cent -- in its first meeting of the year next week.

More than 7 million people have saving accounts which already pay interest of 1 per cent or less. If a cut is passed on in full by banks, these accounts will dive towards negative territory for the first time on record.

Many elderly people who rely on the income from savings have found themselves struggling in recent months as returns fall.

Just 18 months ago average interest rates on savings accounts were as high as 6 per cent. But consecutive cuts by the Bank's Monetary Policy Committee have led to banks slashing their savings rates, with the current average rate being just 2 per cent.

The Daily Telegraph has launched a campaign aimed at giving pensioners a tax cut on the income earned from their savings and investments to help them during the recession.

Mark Dampier, of asset managers Hargreaves Lansdown, said: "It is a dire times for savers, especially for elderly people who rely on their income. They have already seen a sharp drop in excess of 50 per cent, and can anyone tell me of someone in the public or private who would put up with a 50 per cent pay cut?"

A cut in interest rates raises the bizarre possibility that some savers may soon end up having to pay banks to keep money with them.

Kevin Mountford, head of savings at Moneysupermarket.com, said: "A large number of savings accounts pay only 1 per cent, and so a wave of savers will end up receiving no interest at all if rates are cut significantly again -- and may, in theory, end up paying banks for having being prudent savers.

"All round it is bad news for savers."

Calls for a rate cut were strengthened by evidence that Gordon Brown's L300 billion banking bail-out has failed to make it easier for households to borrow money. The credit crunch is instead set to worsen in the months ahead and lenders intend to make it even more difficult for customers to borrow, according to a new report from the Bank.

They intend to continue passing on only a fraction of the Bank's rate cuts and increasing the stringency of their loan conditions as they seek to repair their own balance sheets.

New figures showed that house prices have fallen by a record 18.9 per cent in the last year. The average house is now worth what it was in August 2004, according to Halifax.

Amid the deepening economic crisis, experts warned that while borrowing costs look certain to remain high, savings rates, which have already fallen fast, are set to dip to the lowest levels on record as soon as next week.

Economist Howard Archer of Global Insight said: "It seems a stone-dead certainty that the Bank of England will deliver another hefty interest rate cut next Thursday."

If they do, it will take interest rates to the lowest level since the Bank was founded in 1694.

The forecasts come after Nationwide announced that it is reducing the interest rates across its savings and banking accounts by an average of 0.87 per cent following the Bank of England's decision to cut rates by one percentage points in December.

The cuts mean some of its savings accounts pay as little as 0.5 per cent gross, such as its e-savings plus account if customers make more than three withdrawals in a year. The building society is also refusing to pass on any further interest rate cuts to its customers with tracker mortgages.

The Bank of England indicated that there would be further examples of this in the coming months.

Its Credit Conditions survey underlined the growing realisation that the banking bail-out package unveiled by Gordon Brown in October has failed. Although the bail-out has ensured the survival of the major banks it has not fulfilled its other promise: to increase the availability of credit to families.

It raises the prospect that the Government will be forced in the coming months to pump another multi-billion-pound sum into the British banking sector -- perhaps going as far as to wholly nationalise some of the biggest lenders.

Analysts believe there may be no alternative if the Government truly intends to increase the availability of mortgages to British consumers.

David Cameron urged Gordon Brown to admit that his bank recapitalisation plan has failed and more needs to be done to get banks lending to businesses.

The Conservative leader said: "Instead of Gordon Brown striding round the world lecturing everyone about the brilliance of his bank recapitalisation plan he has to recognise that it hasn't worked.

"The banks are now traumatised and trying to rebuild their credit -- the government needs to react to move banks out of that position -- small businesses shouldn't be going bust and they are because they are not getting the money they need."

He said it was vital that the Government brought in a national loan guarantee scheme. The Telegraph revealed last month that ministers are working on a scheme which will see the Government guarantee part of new loans that banks agree with businesses.

A Treasury spokesman said: "The Government is continuing to closely monitor commitments made by banks, through (the) new lending panel, and will continue to take whatever action is necessary to ensure the availability of new lending.

"Recent actions by many of the major banks to increase the availability of lending in 2009 are welcome but clearly we need to see more.

"As the Chancellor has said, he is prepared to look at further measures to make it more likely that banks will lend, but banks have to understand that with billions of pounds of taxpayers' money invested, or being made available as a guarantee, the public and businesses are looking for something in return."

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