TarCottage

Why High Inflation Will Not Take Hold

Comments I have read so far are quite interesting.

I agree we are in a secular bear market for stocks and a secular bull market for commodities that started in 2000.

Regarding the statement that from 2000 on, growth in real corporate earnings has been low, is probably correct if you factor in the large devaluation of the U.S. dollar during this period.

However I disagree with the author that since 2000 inflation has not been a concern. I estimate, based upon the increase in the price of gold expressed in U.S. dollars, that real inflation has been near double digits since 2000.

The real problem we all face in trying to figure out the true rate of inflation in a fiat money world is that, except for maybe gold, we have no reliable fixed horizon on which to benchmark inflation against.

The annolgy I use is this. Imagine Uncle Sam, Mr. Yen, Mr. Euro, Mr, Pound, Mr. Ruble, etc. all falling in space. Without a fixed horizon to reference to, if Uncle Sam is falling faster than Mr. Yen and company, then at least two observations could be made. One, Uncle Sam is falling faster than Mr. Yen and company. Or two, if uncle Sam isn't falling, then Mr. Yen and comapany must be going up. Your answer probably has a lot to do with how you preceive things.

My view is that all the currencies are constantly being inflated, some faster than others. I use gold as my fixed horizon.

Best Regards to All

Volatility Watch: Waning Over the Next Few Months

Today with financial institutions controlling 75% of shares and individuals only owning 25% (verses 94% in 1950), may also explain some of the recent market volatility. Throw in margin calls and redemptions and you get a rather explosive mixture.

Sign of the Times: Ethanol Boom Goes Bust, Utilities, Energy and Consumer Staples Hit Hard

I guess the Saudis decided this was the perfect time to pull the rug out from under all the world's alternate energy projects by temporarily increasing the supply of oil so as to eliminate any current competition to raising oil prices in the future!

Is the Bear Market Almost Over for the S&P and Silver?

Hi Roland:

I enjoy your Elliott Wave comments and always read them with great interest because few are brave enough to publish their Elloitt Wave counts for all to see. Not being at all an expert, it is my understanding that generally the very long Elliott Wave usually consists of about five waves (3 up and 2 down + more shorter waves inside of these waves, which is where I get lost!).

However, have you ever considered that maybe the time periods you have assigned for your 1-2-3-4-5 Elliott Wave positions are off? Below is the reason why I think you might want to reconsider the timing for your Elloitt Wave counts.

To my way of thinking the 5th Elliott Wave of the long term bull ended about 2000 and with that a new long term bear market then started. I am using 2000 as the end of the secular bull because (my) Elloitt Wave (count), Knodratieff Wave, and Ian Notley all seem to generally concur on this date.

I believe most people don't understand that we are already in a bear market and have been for 8 years now. In a bear market, buying the dips and holding (as you do in a bull market), provides little upside (reward) but plenty (mostly) of downside (risk). All risk and no reward, hardly a winning stradegy.

In a bear market, to make money investors (not traders) need to avoid investing in those sectors of the market that are in secular (long term) bears and only invest in those areas that are in secular bulls. Starting about 2000, maybe earlier, energy and gold began their secular bulls after having been in secular bears since 1980. Starting in 2000 just about anything based upon paper (i.e. financials, banks) entered their secular bear.

What seems to have confused most people is the so called bull market that started about 2002 ending mid-2007. I believe this actually was a bull rally in a secular bear market. Many will say but this rally reached the same high as the dot.com rally in 2000. Yes, nominally it reached the same number, but when adjusted for the "real" rate of inflation, at best it retraced about 1/2 of it's 2000 high.

So if investors make the mistake of continuing to invest as if they are still in a bull market, then they are going to experience continuing losses. This is because in a secular bear, each succeeding bull rally makes lower highs and each bear portion lower lows. It is like going down rapids. If you buy and hold like you did in a secular bull, you are going to go lower and lower. That is like trying to make money by buying high and selling low.

It is for the above reason that I am questioning the timing of your Elloit Wave counts. I think if you adjust your Elloit Wave count with the 5th wave of the secular bull ending in 2000, you will find many of the little things that haven't made sense will start making more sense and agree better with current market conditions.

Best regards.

All That Gold Is Really In the Gold ETF, Right?

If you still believe gold ETFs are backed by gold stored in vaults then read this. It may shake your confidence in U.S. bullion banks.

An Unoffical History of Gold's and Silver's Recent Correction.

Recently a New York state prosecutor announced he was going launch a criminal investigation into the shorting of financial stocks. Shorting stocks is not illegal but lying to a grand jury is! Too bad the prosecutor isn't going to investigate the U.S. banks that all shorted gold and silver on the COMEX at the same time this past July.

Many people knowledgeable in gold and silver believe that there was a massive downward manipulation of gold and silver prices by the U.S. government in mid-July. This also coincided perfectly with the U.S. dollar's miraculous surge higher. The panic inducing slide in gold and silver prices reeks of manipulation, not that of a natural free-market correction.

(Note: Compared to the foreign currency futures market which trades about $3.5 trillion per day, gold and silver futures markets are really very small markets. Gold only trades about $35 billion while silver trades about $4 billion per day. They are little tiny markets. So they can easily be pushed around.)

(The bullion banks, as primary dealers, have overwhelming knowledge and control of the gold and silver marketplace. Since all market orders flow through the bullion banks, they know where the stop-loss triggers of all long and short sellers are. To manipulate the market, enough paper gold or silver is continually issued to automatically trigger stop-loss orders. The price starts going down as sell orders are filled. This triggers yet more stop-loss orders. This process becomes like dominos, falling one after another, until the price collapses. If the collapse is big enough, investor confidence is destroyed, on a wide scale. By inducing a price collaspe, the bullion banks could either unwind hundreds of billions of dollars worth of potential losses, or position themselves to go long on hundreds of billions of dollars worth of potential profits.)

For evidence, they point to the fact that starting on July 14th, three U.S. banks sold short in one month more than 10% of the world's annual gold mine production and two U.S. banks sold short in one month more than 20% of the world's silver mine production. These were the largest gold and silver short positions ever recorded by U.S. banks. Nornally no one would be allowed to take such a large position in the futures market, but market regulators and media have been noticeably silent about this spontaneous collusion by U.S. banks. Refusal by regulators to act, points to government sanctioned manipulation. After these massive and concentrated short positions were established, gold and silver prices declined sharply, despite a record world wide increase in demand for physical gold and a shortage of physical gold and silver. (The opposite of how the laws of supply and demand should work.)

Further evidence of U.S. government sanctioned market manipulation of gold and silver was noticed on the 24 hour silver and gold charts during this correction. During this period the high physical demand for gold and silver in Asia often caused daily price gains of $5 or $10 an ounce. These gains were only lost once London closed and New York markets opened. These gains were quickly sold off on the COMEX, within a 30 minute time frame, and then transformed into deep losses. This patterned repeated itself, like clockwork, nearly every day during this correction.
The discrepancy between physical gold/silver and published gold/silver prices was possible because 99% of futures contracts are closed out with the purchase of another paper contract. Futures contracts represent digital bytes of gold and silver flying around in a paper market, not real ounces of gold and silver that exist in the physical market. This in effect creates two parallel markets for gold and silver, a paper and a phyiscal market, allowing signicantly different prices to be set for the same commodity over a short period of time. Paper markets were used to manipulate prices that were non-reflective of the physical market.

Due to record demand world-wide, a shortage of physical gold and silver has developed. This has forced the big western bullion banks, based in New York and London, who control both the gold and silver trade to essentially rationing a very thin supply while pretending there isn't a shortage of gold and silver. Most physical silver and gold, to a lessor extent, is being reserved for industrial and fabrication use while investors are simply not able to get any. The big bullion banks are artificially reducing the quantities of gold and silver delivered by refusing to extend lines of credit to all other buyers, like small banks, under the excuse that "they have run down their credit lines”. This has forced these buyers to pay down existing lines of credit before being allowed to take delivery of another gold or silver shipment. Thus investors are left to accept paper gold or silver, or have to wait months for the real thing. (Interestingly, the manipulating bullion banks made a mistake in not supplying the U.S. Mint, which ran out of gold and silver, proving that there is a severe shortage of physical gold and silver.)

To drive down the price of gold, the big bullion banks flooded the market with artificially created (fake) "paper gold and silver". To get the secondary derivatives dealers to lease this artificially created paper gold and silver, the big bullion banks (with the Fed maybe providing the seed money?) have been "paying" the dealers (a "negative" lease rate) to lease this paper gold and silver! (Normally the dealers have to pay the bullion banks to lease gold and silver.) By leasing the gold and silver, the derivative dealers then can write futures contracts, etc. because the rules allow "paper claims" to vault-stored gold and silver to legally be used as cover for futures contracts.

(Interestingly this "paper claims" rule came about because a few years back Morgan Stanley, one of the major players in precious metals, was successfully sued (quietly settled out of court) for defrauding its clients from 1986 to 2007 for charging big fees for storing imaginary gold and silver in its vaults that it never bought. Morgan Stanley’s defense was that it was simply following “standard industry practices". Apparently, it is standard Wall Street industry practice to send people monthly statements claiming that the firm is storing physical gold or silver in a vault, charge for the storage, but really never buy or store any real precious metal. If you are an American, do you still believe that the gold ETFs issued by these American bullion banks are really backed by gold? How about an ETF that mimics the price of gold. Sounds like a derivative. Is there really a counter-party? If gold goes to $2000 will they pay up? Coins and bullion are the only real insurance policy.)

With the world-wide physical shortage of gold and silver, logic tells us that the big bullion bank's "claims" of gold and silver stored in it's vaults must be imaginary. If they have issued fake paper gold and silver "claims" before, they are likely doing it again to manipulate the precious metal markets for the U.S. government.

From market reports, it appears that these U.S. banks were successful in closing out most of their net short gold positions (known in manipulative circles as "ringing the cash register"), but were much less successful in closing out their silver short positions. Speculation is that the U.S. bank's short silver positions maybe trapped?

Why was this manipulative scheme executed in the gold and silver (and probably oil too) markets? Here are a number of theories put forward.

One theory was that they were desperate to unwind massive short positions. Another theory was to re-capitalize the U.S. financial sector, at the expense of the individual investor, by taking advantage of the daily arbitrage opportunities provided between the higher Asian prices and the lower COMEX prices to quickly make profits in the tens of billions of dollars (similar to Greenspan's bank re-capilization using the treasuries/bond interest spread in the early 1990s). Another theory thinks this was engineered to shore up the U.S. dollar and stem the record rate which foreign banks were dumping U.S. treasuries. Another theory is that the Fed sees gold as a rival to the dollar so the ultimate aim would be to destroy investor confidence in gold, by collapsing the price for a few weeks. Another theory is the Fed was trying to destroy investor confidence in gold to hide the inflation their massive printing of money has created. Maybe all of the above and more.

The Commodity Bull Is Still in the China Shop

Please Note: What I wrote below has come from borrowing (O.K. stealing!) the ideas of many people, all of them brighter than I am.

An Unoffical History of Gold's and Silver's Recent Correction.

Recently a New York state prosecutor announced he was going launch a criminal investigation into the shorting of financial stocks. Shorting stocks is not illegal but lying to a grand jury is! Too bad the prosecutor isn't going to investigate the U.S. banks that all shorted gold and silver on the COMEX at the same time this past July.

Many people knowledgeable in gold and silver believe that there was a massive downward manipulation of gold and silver prices by the U.S. government in mid-July. This also coincided perfectly with the U.S. dollar's miraculous surge higher. The panic inducing slide in gold and silver prices reeks of manipulation, not that of a natural free-market correction.

(Note: Compared to the foreign currency futures market which trades about $3.5 trillion per day, gold and silver futures markets are really very small markets. Gold only trades about $35 billion while silver trades about $4 billion per day. They are little tiny markets. So they can easily be pushed around.)

(The bullion banks, as primary dealers, have overwhelming knowledge and control of the gold and silver marketplace. Since all market orders flow through the bullion banks, they know where the stop-loss triggers of all long and short sellers are. To manipulate the market, enough paper gold or silver is continually issued to automatically trigger stop-loss orders. The price starts going down as sell orders are filled. This triggers yet more stop-loss orders. This process becomes like dominos, falling one after another, until the price collapses. If the collapse is big enough, investor confidence is destroyed, on a wide scale. By inducing a price collaspe, the bullion banks could either unwind hundreds of billions of dollars worth of potential losses, or position themselves to go long on hundreds of billions of dollars worth of potential profits.)

For evidence, they point to the fact that starting on July 14th, three U.S. banks sold short in one month more than 10% of the world's annual gold mine production and two U.S. banks sold short in one month more than 20% of the world's silver mine production. These were the largest gold and silver short positions ever recorded by U.S. banks. Nornally no one would be allowed to take such a large position in the futures market, but market regulators and media have been noticeably silent about this spontaneous collusion by U.S. banks. Refusal by regulators to act, points to government sanctioned manipulation. After these massive and concentrated short positions were established, gold and silver prices declined sharply, despite a record world wide increase in demand for physical gold and a shortage of physical gold and silver. (The opposite of how the laws of supply and demand should work.)

Further evidence of U.S. government sanctioned market manipulation of gold and silver was noticed on the 24 hour silver and gold charts during this correction. During this period the high physical demand for gold and silver in Asia often caused daily price gains of $5 or $10 an ounce. These gains were only lost once London closed and New York markets opened. These gains were quickly sold off on the COMEX, within a 30 minute time frame, and then transformed into deep losses. This patterned repeated itself, like clockwork, nearly every day during this correction.
The discrepancy between physical gold/silver and published gold/silver prices was possible because 99% of futures contracts are closed out with the purchase of another paper contract. Futures contracts represent digital bytes of gold and silver flying around in a paper market, not real ounces of gold and silver that exist in the physical market. This in effect creates two parallel markets for gold and silver, a paper and a phyiscal market, allowing signicantly different prices to be set for the same commodity over a short period of time. Paper markets were used to manipulate prices that were non-reflective of the physical market.

Due to record demand world-wide, a shortage of physical gold and silver has developed. This has forced the big western bullion banks, based in New York and London, who control both the gold and silver trade to essentially rationing a very thin supply while pretending there isn't a shortage of gold and silver. Most physical silver and gold, to a lessor extent, is being reserved for industrial and fabrication use while investors are simply not able to get any. The big bullion banks are artificially reducing the quantities of gold and silver delivered by refusing to extend lines of credit to all other buyers, like small banks, under the excuse that "they have run down their credit lines”. This has forced these buyers to pay down existing lines of credit before being allowed to take delivery of another gold or silver shipment. Thus investors are left to accept paper gold or silver, or have to wait months for the real thing. (Interestingly, the manipulating bullion banks made a mistake in not supplying the U.S. Mint, which ran out of gold and silver, proving that there is a severe shortage of physical gold and silver.)

To drive down the price of gold, the big bullion banks flooded the market with artificially created (fake) "paper gold and silver". To get the secondary derivatives dealers to lease this artificially created paper gold and silver, the big bullion banks (with the Fed maybe providing the seed money?) have been "paying" the dealers (a "negative" lease rate) to lease this paper gold and silver! (Normally the dealers have to pay the bullion banks to lease gold and silver.) By leasing the gold and silver, the derivative dealers then can write futures contracts, etc. because the rules allow "paper claims" to vault-stored gold and silver to legally be used as cover for futures contracts.

(Interestingly this "paper claims" rule came about because a few years back Morgan Stanley, one of the major players in precious metals, was successfully sued (quietly settled out of court) for defrauding its clients from 1986 to 2007 for charging big fees for storing imaginary gold and silver in its vaults that it never bought. Morgan Stanley’s defense was that it was simply following “standard industry practices". Apparently, it is standard Wall Street industry practice to send people monthly statements claiming that the firm is storing physical gold or silver in a vault, charge for the storage, but really never buy or store any real precious metal. If you are an American, do you still believe that the gold ETFs issued by these American bullion banks are really backed by gold? How about an ETF that mimics the price of gold. Sounds like a derivative. Is there really a counter-party? If gold goes to $2000 will they pay up? Coins and bullion are the only real insurance policy.)

With the world-wide physical shortage of gold and silver, logic tells us that the big bullion bank's "claims" of gold and silver stored in it's vaults must be imaginary. If they have issued fake paper gold and silver "claims" before, they are likely doing it again to manipulate the precious metal markets for the U.S. government.

From market reports, it appears that these U.S. banks were successful in closing out most of their net short gold positions (known in manipulative circles as "ringing the cash register"), but were much less successful in closing out their silver short positions. Speculation is that the U.S. bank's short silver positions maybe trapped?

Why was this manipulative scheme executed in the gold and silver (and probably oil too) markets? Here are a number of theories put forward.

One theory was that they were desperate to unwind massive short positions. Another theory was to re-capitalize the U.S. financial sector, at the expense of the individual investor, by taking advantage of the daily arbitrage opportunities provided between the higher Asian prices and the lower COMEX prices to quickly make profits in the tens of billions of dollars (similar to Greenspan's re-capitizing the banks using the treasuries/bond interest spread in the early 1990s). Another theory thinks this was engineered to shore up the U.S. dollar and stem the record rate which foreign banks were dumping U.S. treasuries. Another theory is that the Fed sees gold as a rival to the dollar so the ultimate aim would be to destroy investor confidence in gold, by collapsing the price for a few weeks. Another theory is the Fed was trying to destroy investor confidence in gold to hide the inflation their massive printing of money has created. Maybe all of the above and more.

Is it Finally Time to Sell Gold and Related Mining Stocks?

GaryD & jt - Enjoyed reading both of your comments very much.

Re-negative gold lease rate - The normal 1% gold lease rate which the Fed usually lends gold to the bullion banks has gone negative. On the surface it appears that the Fed is paying the gold bullion banks to lease gold. However one probably needs to dig a little deeper to understand what is really happening. Back in the 1990s the Fed likely leased a large amount of it's gold to the gold bullion banks (such as JP Morgan) in order to surpress the price of gold (The Great Gold Fiddle) to hide the fact that Greenspan was busy printing money and creating more credit. After leasing the gold from the Fed, the bullion banks then turned around and sold the gold for cash. With the cash the bullion banks then bought U.S. treasuries paying say 5% for a net profit of 5% - 1% = 4%.

First you need to understand that the so called gold leased by the Fed to the bullion banks has been phyically sold by the bullion banks at prices (say at $500/oz.) which are much lower than today's $900/oz. prices. That means neither the Fed or the bullion banks phyically have this gold in their vaults. Second, under current accounting rules, an IOU from the bullion banks can be counted as gold and entered on the books as gold held in the Fed's vaults. This allows the Fed's to issue accounting statements "implying" that they still phyically have the leased gold their vaults. In reality this gold left the barn a long time ago.

One can also probably assume the bullion banks are underwater on these gold lease transactions. Since these same bullion banks are likely underwater on a whole bunch of other stuff (subprime, etc.), then likely they are technically insolvent. The only thing keeping these banks solvent (probably with the Fed's blessings) is not "marking to market" the true value of their assets.

I think you can now see that the Fed has a problem. If it lets these bullion banks go under, then it would have to fess up that it no longer phyically owns all the gold that it claims to have in its vaults. That would expose the Fed's accounting lie and result in a considerable lost of confidence. The Fed probably figures it is cheaper to pay the bullion banks for leasing the gold so they can keep the game going for a while longer!

Regards, Au