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Gold Wars, Part I: Central Banks supreme

There are many changing dynamics in the precious metals market which suggest that we are about to witness exponential, upward moves in prices for gold and silver – which dwarf the gains these metals made when they more-than-tripled in vale. For silver, it is a relatively straightforward issue of supply and demand: demand is surging in numerous areas, while decades of price-suppression has resulted in the evaporation of global stockpiles.

 

In the case of gold, however, the normal fundamentals of supply and demand do not apply. As a commodity which is never consumed, total stockpiles of gold grow every year. Conversely, even with a tripling in price, the supply of gold remains flat – despite the huge surge in Chinese gold production – suggesting that “peak gold” has arrived (see “Peak Gold: the new paradigm”).

 

As a result of these different dynamics, what will fuel the explosion in the future price of gold are not supply and demand principles, but radical changes in behavior amongst the major “players” in the gold market.

 

The gold market typically experiences seasonal weakness from roughly mid-Spring until September or October. This cyclical pattern was based on the buying habits of the Indian gold market – where cultural gold-buying during “wedding season” has dominated retail gold demand, since India has been the world's largest gold market, historically.

 

In 2009, Indian gold-buying has completely evaporated. Indeed, during the 1st quarter of this year – at a time when Indian buying is typically driving the gold market, some analysts have estimated that India was actually a net gold exporter (due to heavy “scrap” sales). Overall, India's gold imports were 75% lower for the first half of 2009, and this trend appears to be continuing – with imports 67% lower in July of this year compared to last.

 

Meanwhile, global jewelry demand fell by 21% in the 2nd quarter of this year, compared to 2008. While investment demand was 46% higher in Q2, this was the lowest rate of increase in the past year. As a result, total gold demand actually fell by 9% in the 2nd quarter versus a year ago (according to data released by the World Gold Council).

 

In addition, the International Monetary Fund has finally received approval to sell some of its gold from the U.S. Congress, and thus now appears poised to sell over 400 tons of gold (a sale that has been announced and re-announced at least half a dozen times).

 

Given this context, the natural assumption is that the price of gold would have a worse-than-usual performance in this period of seasonal weakness. Instead, gold has traded in a (relatively) tight 10% range, and as of this moment is little more than 5% below its all-time, nominal high.

 

What happened?

 

Part of the explanation for the unexpected resiliency of the gold market is the emergence of large-scale, retail buying by the Chinese. With demand from China surging while demand from India collapsed, Chinese retail demand is currently only 2% less than Indian gold demand (see “China replacing India as premier gold-consumer”).

 

However, with Chinese growth in demand not quite offsetting Indian weakness, and with many less-informed commentators predicting that the IMF gold-sale would depress the gold market, clearly this does not account for gold's better-than-usual performance during its period of seasonal weakness.

 

Instead, the primary support mechanism for the gold market at this time appears to be central bank purchases of gold. While the fall in Indian gold demand, and the rise in Chinese gold demand are both big stories in this market, they pale in significance to the fact that the world's central banks have switched from being the largest sellers of gold to become net buyers.

 

In the first half of 2009, the world's central banks bought 14 tons more in gold than they sold. This is the first time this has happened this decade. However, it would hardly be over-dramatic to say that this represents the biggest development in the global gold market in several decades.

 

Since the time when gold hit its all-time record-high roughly 30 years ago (when measured in inflation-adjusted dollars), the corrupt cabal of Western central banks has waged an unofficial 'war' against gold – doing everything in their power to depress the price of gold (and silver), since allowing gold to rise to its actual fair-market-value would expose their campaign of lies regarding inflation.

 

For new readers, there are two primary reasons why Western central bankers are obsessed with lying about inflation (i.e. grossly under-estimating it with official “statistics”). First of all, it has been a centuries-long dream of the Western world's bankers to be able to operate in a world with no “gold standard”.

Nixon effectively abolished the world's “gold standard” as a backing for its “reserve currency” (the U.S. dollar), when he announced that the U.S. was defaulting on its gold obligations to the rest of the world, in 1971. A gold standard acts as a powerful “leash” on the world's bankers by creating finite limits on the amount of new “money” (i.e. debt) which they can create.

 

Indeed, the U.S.'s gold-default in 1971 proves this point with stunning clarity. It was specifically due to the vast creation of (then) unprecedented amounts of debt to fund the Vietnam war which made the U.S.'s gold-default inevitable. This also illustrates the 'unholy alliance' between the world's bankers and war-monger governments such as the United States – since (as history has demonstrated) a gold standard prevents the exact sort of massive deficits required to stage large-scale warfare in the modern world.

 

Thus, for three decades, the U.S. government and the anti-gold cabal of bankers have secretly waged war on gold – undermining the price of gold not only to lie about inflation, but also to undermine its obvious necessity as the only pillar of a stable, global monetary system.

 

However, there is a second, equally-evil reason why these nefarious actors have attacked gold to hide their inflation-lies. Inflation has often been called a “hidden tax”, since it decreases actual spending power even where there is no decline in nominal wealth. Historically, inflation has always hurt the poor and middle-class much more than the wealthy – since the wealthy people who run these inflation-generating economies have much greater access to investment tools which protect their wealth from inflation than the masses.

 

In other words, lying about inflation is a stealthy way of engaging in a massive transfer of wealth from the poor and middle-classes to the wealthy. This partially explains how Western “democracies” - who claim to have “progressive” tax systems, and “progressive” social programs – are experiencing a rapid increase in the already huge wealth-gap between the rich and poor. This is a complete reversal of a trend during most of the 20th century, where (for one of the few times in history) the wealth-gap was actually narrowing.

 

Thus, attacking and undermining gold at every opportunity is a central strategy for the world's filthy-rich bankers as they seek to steal all the wealth of our societies' unprotected masses.

 

For a quarter of a century, their evil campaign was based on simple, brute force. With roughly 20,000 tons of gold at their disposal, any and every time that the price of gold showed any upward momentum, these bankers would “bomb” the gold market with their huge gold reserves.

 

This campaign was so ruthless that by the 1990's this cabal had driven the price of gold well below the cost of production for most of the world's gold mines – causing shut-downs of mines all over the world, and the bankruptcies of numerous gold-mining companies. This can be considered the first step in their own downfall, as they had depressed mine-supply to the point where it was well below annual demand.

 

While the once-huge stockpiles of Western central banks could absorb this supply/demand imbalance for many years, the cost of such a strategy was to steadily deplete their own reserves (or “ammunition”) which would be available to continue depressing the gold market in the future.

 

Beginning this decade, the “future” has now caught up with this evil cabal. The moment of transition can now be clearly identified, in hindsight. It occurred in May 1999, when then U.K. finance minister (and now Prime Minister) Gordon Brown dumped roughly half of his countries gold reserves at essentially the all-time low for the price of gold. The rumored motive for this panic-sale was to rescue Goldman Sachs - who was sitting on a huge “short” position just as the gold market was showing signs of staging a big rally. This move has cost U.K. taxpayers in excess of $1 billion.

 

The increasing failure of these bankers to control the gold market can be illustrated in two ways. The most obvious indicator is that the price of gold has more than tripled this decade. Even given the low standards for performance which these bankers set for themselves, this represents a dismal failure.

 

The other way in which the inevitable defeat of this cabal can be revealed is through their own declining gold sales. A decade ago, these central bankers embarked on an official gold-sales strategy: an agreement to set an annual ceiling on gold sales.

 

At the time, with gold dismissed as a “barbarous relic” by these propagandists, selling gold was fashionable among these bankers. Therefore, some will argue that this was actually a good-faith effort by these Manipulators to prevent an even worse collapse in the price of gold (caused by their gold-dumping). In reality, this was a necessary measure in order to 'draft' the world's largest gold-producers into their cabal.

 

By allowing these major gold-producers to become “insiders” in the game of gold manipulation, the bankers could 'sell' the gold which these miners had not even dug out of the ground onto the market (to depress prices). In return, they kept the miners informed in advance of their manipulative selling – allowing these miners to engage in profitable “hedges” for their future gold production.

 

Thus, during the first five-year term of the central bank sales agreement (which expired in 2004), all was well in the world of gold-manipulation. However, as the second of these five-year agreements approaches its conclusion, the imminent defeat of the anti-gold cabal is now plain for all to see.


[Disclosure: I hold no position in Goldman Sachs]