Gold Pressure Is Near a Breaking Point

The demand pressure slowly yet consistently building over the last year has created some remarkable pressure to the upside on the price of gold. With recent announcements by Iran that its foreign reserve holdings are being converted to gold, and the record purchase of $3.5 billion by unidentified Saudi Arabians over a two week period, it seems remarkable that gold continues range-bound trading in the low 700s.

Recent coverage of the gold market by mainstream financial stations such as CNBC and Fox News indicate that the discrepancy between the COMEX spot price and the average price for gold bars and coins (US$900+ on eBay, for example) is starting to make even the most stalwart feeble-minded news anchors see what two plus two equals.

So the forces building that will take gold through $1500 within the year and likely much further are compounding with every day that the global economy slides deeper and deeper into depression. The United States must continue its desperate efforts to saturate the economy with USD while its value is high because when the repatriation of those same dollars ebbs on the conclusion of the widespread and ongoing deleveraging-induced asset selling, the crash of the dollar will begin.

In my estimation, that will probably not occur until the New Year, because the Bush administration will be in full gear trying to salvage a favorable conclusion to 8 years of ham-fisted fiscal mismanagement.

Barack Obama will inherit the messiest administration in terms of financial order since Roosevelt and will be faced with a conundrum: Stop the economic window dressing tactics of the Bush administration and let the inevitable unfold on his watch, or else continue the various ruses to buy time and perhaps find a miraculous solution.

It is to all of our advantage to stop the limp capital infusions as soon as possible and let the bottom rise up to meet us sooner rather than later. The natural corrective forces to start recovery will kick in only when the massive global over-capacity of production is allowed to contract through financial collapse. As painful economically as that will be, at least a recovery can begin when the U.S. Dollar is properly devalued to reflect its excess currency in circulation relative to the national balance sheet. G20 holders of the fragrant paper bearing the image of George Washington will have to bite the bullet and realize a massive devaluation in their foreign reserve holdings – a condition they are reluctant to embrace. That reluctance is facilitating an artificially high dollar value, and also abetting the equally false low gold price.

The bailout tab for the U.S. economy alone stands at $4.3 trillion. Prior to the onset of fund asset liquidation, the U.S. Dollar was in serious decline thanks mostly to its malignant current account deficit that is so malignant as to be terminal.

If we now add another $4.3 trillion to the liability side of the balance sheet, such is the additional impact on monetary inflation. U.S. Dollar purchasing power will begin to decline in the new year, and that will add yet more underlying pressure to gold demand.

But the real explosive force is the still-swelling and still-unregulated derivative market.

Now at an incomprehensible US$ 684 trillion, this is the metaphoric elephant in the room.

There is little doubt the Obama will tackle this suicidal exposure with regulation. Much like the Great Depression that started with the stock market crash in 1929, overzealous bankers who at that time were buying securities from risky firms and then recommending and reselling them to their clients had to be reigned in after much of the banking in the U.S. collapsed by 1933.

Note that the height of the banking crisis occurred 4 years after the onset of the stock market crash. By 1933, 4,000 U.S. banks had vanished.

The Glass-Steagall Act of 1933 was passed into law and it prohibited banks from selling securities, and investment firms from becoming banks. In the present crisis, the opposite has occurred, and now banks can become investment firms and vice versa.

Glass-Steagall was repealed in 1999 and replaced with the Gramm-Leach-Bilely Act of 1999, which made significant changes to Glass-Steagall. The 1999 law did not make sweeping changes in the types of business that may be conducted by an individual bank, broker-dealer or insurance company. Instead, the act repealed the Glass-Steagall Act's restrictions on bank and securities-firm affiliations. It also amended the Bank Holding Company Act to permit affiliations among financial services companies, including banks, securities firms and insurance companies. The new law sought financial modernization by removing the very barriers that Glass-Steagall had erected.

In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it." Born called for greater transparency--disclosure of trades and reserves as a buffer against losses.

Born was appointed to the CFTC by Clinton and served alongside Fed Chairman Greenspan, Rubin and SEC Chairman Arthur Levitt on the President's Working Group on Financial Markets. Instead of heeding the advice of the very independent and tenacious Born, her powers were limited and she ultimately left the CFTC to return to private practice.

To individuals who have the bulk of their net worth in gold, this will come as a blessing in disguise. Since the derivatives notional volume continues to increase, the explosive pressure on gold is theoretically building at exactly the same rate. At some point, its going to blow, and the long-maligned gold supporters will have more than just their day in the sun. Many will conclude that they were right all along.

Comments

[TheBookkeeper:]

Alan Greenspan Oct 2, 2008, Sandra Day O’Connor Project Conference:
"During the past year, lack of trust in the validity of accounting records of banks and other financial institutions in the context of inadequate capital led to a massive hesitancy in lending to them. The result has been a freezing up of credit.... trust will eventually reemerge as investors dip hesitantly back into the marketplace. From that point, history tells us, financial and economic revival sets in. I suspect it will be sooner rather than later. In either event, human nature being what it is, revival will come. It always has in this society governed by that remarkable document we call the Constitution of the United States."

Even if gold goes to $20K an ounce, if our world is to be safe to live in, our society must resolve the state of ignorance held by countless Greenspans who said: "During the past year, lack of trust in the validity of accounting records of banks and other financial institutions"

In fact "bank records" are not "accounting records." Accounting is a business strategy played subject to the rules of double-entry book-keeping. If banks today were using a proper double-entry bookkeeping framework of rules their "books" would be easily auditable and transparent. Greenspan's problem, and countless others, would disappear. .

Whatever happens to gold as the dollar fails will not take the place of society's need to return to a proper practice of double-entry bookkeeping.

2008 Nov 23 03:42 PM

[Robert Nabloid:]

Perth Mint stopped taking orders!

Not only did Perth have some very large potentially unfunded liabilities, but they were swamped with work and couldn't keep up. The price fluctuations didn't help matters. Some think they are on the hook for a lot of money...

Either way, it's evident that main street is rushing in and buying large quantities of smaller physical gold and silver items...

2008 Nov 23 08:29 PM

[Hutch:]

It is amazing to me how each generation seems to think it is unique in it's understanding of Economics, Philosophy, Theology, and Government. For all of our tremendous strides in technology, mathematics and the hard sciences; our human natures have not changed. We are still moved by the same oratory, driven by the same desires, still easily deceived and that most often by ourselves. It does not matter if we remember the lessons of history or not, we are doomed to repeat them, because we are what we are. Gold will outperform. The only question now is how long the market will cling to the belief that 'Government' might be able to save us from our own folly.

2008 Nov 23 08:57 PM

[closed:]

Most people sense that the financial crisis that has now been escalating for 15 months, and the "sudden'' collapse of the real economy, are only the beginning. These were just the first waves of the storm, but the really powerful tsunami wave is coming toward us. The catastrophe could still be avoided, but that would require responsible figures in governments and financial institutions to admit their mistakes and accept competent help.

But here we have a problem: Those who now should be taking decisive measures to defend the common good are still not ready to face up to the origins of the crisis. The communiqué of the G-20 summit in Washington on Nov. 15 admitted that "risks in the financial markets were underestimated.'' The latest annual advisory of Germany's Council of Economic Advisors, the so-called Five Wise Men, speaks in nebulous terms of "a darkening of the entire economy'' as the main reason for the crisis. "The chain of failure includes many,'' declared German President Horst Köhler at a conference of top bankers in Frankfurt--and one can only agree with him.

But Köhler's perhaps well-intentioned, but completely ineffective, appeal to the bankers who made ``a lot of money'' in recent years, to set up a ``Hardship Fund,'' is hardly a strategy to overcome the crisis, and the answer from those so addressed was just a tired smile. It is clear from all these statements, that the government, as well as the so-called experts, are still not willing or able to take the necessary steps to reorganize the financial system.

- Derivatives: The Main Problem -

In Europe, it is Italian Economy Minister Giulio Tremonti who, as a government representative, has had the courage to call a spade a spade, when he compared the financial crisis to a video game, in which every time you kill one monster, another pops up. And when you kill all of them, along comes the super-monster, which is derivatives outstanding.

This is exactly where the body is buried! Now panic is setting in, as investors in November have been massively withdrawing their deposits from hedge funds and financial institutions, in turn, forcing these to sell whatever assets they can. This generates a double feedback-loop: Since the depression is coming to a head, asset prices are falling--most of them having been bought on credit in the first place--which further stresses the balance sheets of banks and hedge funds, which therefore curtail their lending even further. These various intensifying phases of "deleveraging'' of so-called structured paper are the main problem.

The volume of derivative contracts outstanding was said to be, according to the Bank for International Settlements, $675 trillion at the end of 2007; the French magazine Marianne recently gave the figure as $1.4 quadrillion, but it could be much more. If an attempt is now made to honor what these bankers themselves call "toxic waste,'' then, on the one hand, this leads to hyperinflation, since more and more liquidity is pumped in to try to back up the virtual values; but at the same time, it brings on deflation, since the collapse of the real economy leads to falling prices.

This is the reason for the breathtaking speed of collapse of the real economy worldwide--the auto sector, the steel industry, petrochemicals, construction, shipping, etc., etc. And it is a global phenomenon: The U.S.A. is plunging into depression; China's American export market is collapsing; the Chinese economy is falling apart; China is no longer buying textile machinery in Germany; shipping is collapsing, since in the four or five weeks that it takes a ship to go from Europe to Asia, conditions have dramatically changed, so that the letters of credit are no longer accepted, etc., etc.: a downward spiral to...! Until an orderly bankruptcy reorganization is carried out.

- The Roosevelt Solution -

Fortunately, there is an historical precedent for how the problem can be solved: We need a new financial architecture, in the tradition of Franklin D. Roosevelt's Bretton Woods System: a New Bretton Woods. That was the idea that motivated French President Nicolas Sarkozy to propose the summit meeting of the G-20 countries, and this is the policy that is being proposed by Tremonti on a daily basis. This is what Lyndon LaRouche and I have proposed for a long time--since the beginning of the 1990s, to be precise. We must win the Berlin government over to supporting this policy.

We need a real New Bretton Woods conference, at which a new financial system is decided upon, just as Roosevelt intended in 1944; that is, replacing colonialism with a new, just economic and financial order.

Second, we need a worldwide New Deal, such as Roosevelt implemented in the U.S.A. during the 1930s, to end the Depression through state credit creation.

Concretely, for Germany, this means that after (!) reorganization by means of a New Bretton Woods system, there must be an investment program of about EU200 billion for the creation of full, productive employment, as the BüSo has demanded for years. We need to build the Eurasian Land-Bridge as the centerpiece for reconstruction of the world economy.

From a technical standpoint, such a reorganization is absolutely no problem. The problem lies elsewhere. For the last four decades, the economy and morality have been completely separated from one another, and a unrestrained dog-eat-dog society and personal profiteering have taken control. On the one side, you have totally unnecessary luxuries, such as the recent dedication of an artificially created luxury island in Dubai, which was apparently planned as a refuge for the super-rich before the outbreak of a world financial crisis; at the opening festivities, the fireworks alone cost $20 million and 1.7 tons of lobster was consumed; on the other side, billions of people are threatened with starvation and brutal poverty.

Pope John Paul II, in his encyclical Centesimus annus (1991), called it an "abuse in the sight of God and humanity, if someone directs his capital against the people and their work,'' and this has happened, without a doubt, under the now-shattered system of globalization. We need a new paradigm, in which the economy and morality are brought into harmony, and man is placed at the center of politics and economics.

Do you really want those who neither foresaw the crisis, nor are ready now to come to terms with its real origins, to be left to decide what should happen now?

I propose that you help us, the BüSo, to carry out the necessary mobilization of the population, so that we can implement a New Bretton Woods System and a new New Deal!

2008 Nov 23 10:13 PM

[closed:]

Sen. James Inhofe (R-Ok.) said on 21st Nov that it was Treasury Secretary Henry Paulson who personally told Congressmen that there would be martial law in America if they did not pass the bailout of the banks as demanded by the Bush Administration. On Oct. 2, Rep. Brad Sherman (D-Calif.) said on the House floor that "Many of us were told in private conversations that if we voted against this bill on Monday the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."

Now, Senator Inhofe, speaking on KFAQ radio station in Tulsa, has confirmed who it was that issued this threat. The interview host Pat Campbell asked Infhofe, "Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn't do this we were going to see something on the scale of the depression, there were people talking about martial law being instituted, civil unrest. Who was feeding you guys this stuff?"

Inhofe replied, "That's Henry Paulson. We had a conference call early on, it was on a Friday I think--a week and half before the vote on Oct. 1. So it would have been ... the 19th of September, we had a conference call. In this conference call and I guess there's no reason for me not to repeat what he said, but he said, he painted this picture you just described. He said, This is serious. This is the most serious thing that we faced."

Inhofe has demanded that the remaining funds not already given away be taken back by the government, and suggested that Paulson was giving the money to his friends.

But simply taking money back is not a solution. There is only one competent solution to this mess and that is a bankruptcy re-organization as Lyndon LaRouche has defined.

2008 Nov 23 10:14 PM

[Royal Scot:]

Brilliant. These are prophetic words.


On Nov 23 10:13 PM closed wrote:

> Most people sense that the financial crisis that has now been escalating
> for 15 months, and the "sudden'' collapse of the real economy, are
> only the beginning. These were just the first waves of the storm,
> but the really powerful tsunami wave is coming toward us. The catastrophe
> could still be avoided, but that would require responsible figures
> in governments and financial institutions to admit their mistakes
> and accept competent help.
>
> But here we have a problem: Those who now should be taking decisive
> measures to defend the common good are still not ready to face up
> to the origins of the crisis. The communiqué of the G-20 summit in
> Washington on Nov. 15 admitted that "risks in the financial markets
> were underestimated.'' The latest annual advisory of Germany's Council
> of Economic Advisors, the so-called Five Wise Men, speaks in nebulous
> terms of "a darkening of the entire economy'' as the main reason
> for the crisis. "The chain of failure includes many,'' declared German
> President Horst Köhler at a conference of top bankers in Frankfurt--and
> one can only agree with him.
>
> But Köhler's perhaps well-intentioned, but completely ineffective,
> appeal to the bankers who made ``a lot of money'' in recent years,
> to set up a ``Hardship Fund,'' is hardly a strategy to overcome the
> crisis, and the answer from those so addressed was just a tired smile.
> It is clear from all these statements, that the government, as well
> as the so-called experts, are still not willing or able to take the
> necessary steps to reorganize the financial system.
>
> - Derivatives: The Main Problem -
>
> In Europe, it is Italian Economy Minister Giulio Tremonti who, as
> a government representative, has had the courage to call a spade
> a spade, when he compared the financial crisis to a video game, in
> which every time you kill one monster, another pops up. And when
> you kill all of them, along comes the super-monster, which is derivatives
> outstanding.
>
> This is exactly where the body is buried! Now panic is setting in,
> as investors in November have been massively withdrawing their deposits
> from hedge funds and financial institutions, in turn, forcing these
> to sell whatever assets they can. This generates a double feedback-loop:
> Since the depression is coming to a head, asset prices are falling--most
> of them having been bought on credit in the first place--which further
> stresses the balance sheets of banks and hedge funds, which therefore
> curtail their lending even further. These various intensifying phases
> of "deleveraging'' of so-called structured paper are the main problem.
>
>
> The volume of derivative contracts outstanding was said to be, according
> to the Bank for International Settlements, $675 trillion at the end
> of 2007; the French magazine Marianne recently gave the figure as
> $1.4 quadrillion, but it could be much more. If an attempt is now
> made to honor what these bankers themselves call "toxic waste,''
> then, on the one hand, this leads to hyperinflation, since more and
> more liquidity is pumped in to try to back up the virtual values;
> but at the same time, it brings on deflation, since the collapse
> of the real economy leads to falling prices.
>
> This is the reason for the breathtaking speed of collapse of the
> real economy worldwide--the auto sector, the steel industry, petrochemicals,
> construction, shipping, etc., etc. And it is a global phenomenon:
> The U.S.A. is plunging into depression; China's American export market
> is collapsing; the Chinese economy is falling apart; China is no
> longer buying textile machinery in Germany; shipping is collapsing,
> since in the four or five weeks that it takes a ship to go from Europe
> to Asia, conditions have dramatically changed, so that the letters
> of credit are no longer accepted, etc., etc.: a downward spiral to...!
> Until an orderly bankruptcy reorganization is carried out.
>
> - The Roosevelt Solution -
>
> Fortunately, there is an historical precedent for how the problem
> can be solved: We need a new financial architecture, in the tradition
> of Franklin D. Roosevelt's Bretton Woods System: a New Bretton Woods.
> That was the idea that motivated French President Nicolas Sarkozy
> to propose the summit meeting of the G-20 countries, and this is
> the policy that is being proposed by Tremonti on a daily basis. This
> is what Lyndon LaRouche and I have proposed for a long time--since
> the beginning of the 1990s, to be precise. We must win the Berlin
> government over to supporting this policy.
>
> We need a real New Bretton Woods conference, at which a new financial
> system is decided upon, just as Roosevelt intended in 1944; that
> is, replacing colonialism with a new, just economic and financial
> order.
>
> Second, we need a worldwide New Deal, such as Roosevelt implemented
> in the U.S.A. during the 1930s, to end the Depression through state
> credit creation.
>
> Concretely, for Germany, this means that after (!) reorganization
> by means of a New Bretton Woods system, there must be an investment
> program of about EU200 billion for the creation of full, productive
> employment, as the BüSo has demanded for years. We need to build
> the Eurasian Land-Bridge as the centerpiece for reconstruction of
> the world economy.
>
> From a technical standpoint, such a reorganization is absolutely
> no problem. The problem lies elsewhere. For the last four decades,
> the economy and morality have been completely separated from one
> another, and a unrestrained dog-eat-dog society and personal profiteering
> have taken control. On the one side, you have totally unnecessary
> luxuries, such as the recent dedication of an artificially created
> luxury island in Dubai, which was apparently planned as a refuge
> for the super-rich before the outbreak of a world financial crisis;
> at the opening festivities, the fireworks alone cost $20 million
> and 1.7 tons of lobster was consumed; on the other side, billions
> of people are threatened with starvation and brutal poverty.
>
> Pope John Paul II, in his encyclical Centesimus annus (1991), called
> it an "abuse in the sight of God and humanity, if someone directs
> his capital against the people and their work,'' and this has happened,
> without a doubt, under the now-shattered system of globalization.
> We need a new paradigm, in which the economy and morality are brought
> into harmony, and man is placed at the center of politics and economics.
>
>
> Do you really want those who neither foresaw the crisis, nor are
> ready now to come to terms with its real origins, to be left to decide
> what should happen now?
>
> I propose that you help us, the BüSo, to carry out the necessary
> mobilization of the population, so that we can implement a New Bretton
> Woods System and a new New Deal!
>

2008 Nov 24 12:28 AM