By now the financial cynics have concluded that our federal government has engulfed us in an unprecedented wave of economic disinformation as part of its most important imperative, which is to maintain the illusion of economic prosperity or to at least disguise the reality of our economic decline. The typical word on the street is that by using the same economic measures that we employed in the 1970s, we would now regard ourselves as being in a long-term recession with an annual shrinkage rate of over 2%, an inflation rate of 9%, and an unemployment rate of well over 20%.
I have little doubt that these estimates are much closer to the reality than the official numbers being published by Washington, but recent evidence suggests that the disinformation campaign has been ratcheted up to a new level. If there is any truth to my theory that the Feds are now "printing" precious metals, the implications for investors are enormous. But let's start with some history.
Inflation of course is the creation of new currency out of nothing by government. If government wants something that it cannot afford and if raising taxes is politically impractical, government simply prints the money to buy whatever it wants. The key to doing this profitably is to keep the public in the dark. Government must purchase goods and services before there is a general awareness that the money supply (and along with it corresponding apparent demand for goods and services) has increased. Government must buy at pre-inflation prices and it must keep the inflation rate low enough that the public does not start anticipating the next round of currency injection, thereby requiring government to enter a death-spiral of radical money-printing in order to stay ahead of the game.
In the late 1960s the US government was drowning in debt incurred by its Vietnam War, its space program, and Lyndon Johnson's "Great Society", and it was apparently printing money at unprecedented rates. But the money it printed went directly to pay for armaments, space hardware, and social services, and so that money found its way into the consumer economy pretty quickly. By 1971 the public had figured out the game and was raising prices and wages in anticipation of currency expansions. President Nixon saw the potential for hyperinflation and tried to force the public to eat the cost of government policy by famously imposing price and wage controls.
By mid-1974 Nixon had left office, the public's ire at being so openly swindled had resulted in the cession of the controls, and President Ford was left to continue paying the bills without them. So Ford devised a new strategy: he would convince the public that inflation was an external enemy to be fought by voluntarily refraining from raising prices and demanding wage increases. His famous "Whip Inflation Now" propaganda campaign lives on today in the annals of politically preposterous infamy.
By the 21st century the Feds have learned a few things about concealing inflation from the public. Firstly, you don't pump money into acquisition of things that are only one or two or maybe zero steps away from the consumer economy, where the presence of the new money will be immediately noticed. Instead you pump it into Treasurys, thereby putting the entire onus of the expense on the backs of bond holders who do will not realize that their bonds are nearly worthless until far into the future when the final holders will seek to redeem them. Or alternatively you pump the money into mortgage-backed securities, thereby propping up collapsing housing prices, much to the applause of the public. Both of these methods are of course just as destructive as old-style inflation, but the difference is that you can keep doing them longer because the population doesn't grasp the magnitude of the damage you've done until much later, probably long after you've left office. So that is why, starting this year (2013), the Federal Reserve has begun "buying" $45 billion of Treasurys and $40 billion of mortgage-backed securities. It's good old-fashioned inflation, but without the nasty obviousness of drastically rising consumer prices (yet).
Of course the Feds can't keep all of this money out of the consumer economy, so to complete the ruse our government keeps changing the method of determining the Consumer Price Index to specifically exclude commodities whose prices are rising fastest. This more subtle and successful propaganda campaign, coupled with what is probably a staggering unemployment rate, is what's helping to keep prices and subsequently wages from skyrocketing.
But there's a fly in the ointment. There are enough savvy people around who know that you can measure inflation by watching the prices of gold and silver. Up until a year ago these prices were rising at an alarming rate and threatening to unveil the great inflation machine despite our doctored CPI. So what's a government to do?
Over the past year gold and silver prices have been basically flat despite ever-increasing demand and little increase in supply. Sovereign central banks are stashing away physical gold like never before, and supplies of physical metal at major online bullion dealers are disappearing - completely! This phenomenon is illustrated amazingly well in a YouTube video entitled, "Is demand for physical silver diverging from spot price in 2013?!".
So how is this being engineered? The answer, in retrospect, is obvious and simple, but I still must admire the ingenuity. The spot prices of gold and silver are determined by the "futures markets", which in reality are based on a bunch of paper derivatives. And wherever derivatives exist, the prospect for fraudulent inflation also exists. The most commonly known precious metals derivatives are exchange traded funds (ETFs), which have made possible the relatively recent increased demand for gold and silver due to the increased convenience of owning it. But ETFs are only paper, and it is possible to fraudulently issue an ETF against overstated stocks of metal, or against metal that has been leased. And of course one can practice "fractional reserve" issuance, in which ETFs are issued against entirely fictitious metal.
And so we have the answer. How do you suppress the prices of physical metals even while supply is limited and demand is through the roof? How does government circumvent the age-old whistle-blowing effects of the gold and silver prices? Why you mint precious metals derivatives in the same way you mint currency of course! Somewhere, someone (at the behest of the federal government and its banking partners) is creating metals derivatives out of thin air, thereby temporarily keeping the spot prices of the physical items down. Only when the public wises up (probably soon due to obvious shortages) will the prices of physical metals start diverging drastically from the fictitiously low "spot prices".
That's my theory. It's the only one I've heard so far that makes any sense. If it's true, there will eventually be very dire consequences for holders of dollar-denominated instruments (such as bonds) and very pleasant consequences for holders of physical metals. Invest accordingly.
Disclosure: I am long PHYS, PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.