International Forecaster Weekly

Gold Migrates to the East

So, what does a country do when it’s taking in billions and billions of dollars? Well, in stable times, they go out in the bond market and buy up really secure treasuries and sovereign bonds. So, they did just that. They became enormous owners of US treasury debt.

Bob Rinear | September 28, 2013

Earlier in the week I asked the question….”if he Fed isn’t tapering its QE program, why was gold attacked and sent lower just two days after the announcement?” One would think that continued money printing would be a good reason for gold to rise, right? Right. But it didn’t, and very few people understand why. So, I’m going to try and lay this out for you all, so you really “get” the whole deal. It isn’t terribly pleasant, but it is… what it is. It is what I believe to be the truth.

When Bernanke announced the first QE, to help stabilize the markets after the big melt down, the globe accepted that as an “okay” response by a Central bank to inject liquidity into the system. Gold was allowed to be gold and it rose ever higher and higher, because of perceived inflation and the uncertainty of the times. Then in November of 2010, QE 2 was announced which was an extension of the first one, they would continue to buy 600 billion worth of Treasuries and Gold still continued to work higher. But in September of 2011, it was the announcement of operation twist, where all of a sudden things changed. From that day on, Gold started to get pounded, as the world and especially China realized that the jig was up. The US wasn’t going to rebound. Gold hit its high in the same month the twist was announced. From 1900 the ounce, it’s been beaten down, especially after more QE announcements.

During the halcyon days of the 90’s, money was everywhere. The years 95/96/97/98/99 were incredible on a bunch of levels. I remember quite clearly of our local Burger King actually advertising on the radio for employees. There were jobs a plenty, the stock market was going absolutely bonkers and we were in the midst of a computer revolution of epic scale. I’m sure you all remember it well too.

The technology explosion was furious. I remember all too well the race for the next “hot computer”. Almost everyone started out with the infamous “386” machine. The 386 can be considered the first modern processor; it was the first to include the x86 instruction set basics, used until the present day. After that, the “race” for speed was on, inaugurated by the Pentium, which was launched in 1993, but it took several years to become popular and replace the 486. In 1997 it launched the Pentium MMX. Then in 1997 came the Pentium II, which used a different fit and was therefore incompatible with older motherboards. AMD took advantage of the opportunity, developing the K6-2, a chip with an architecture similar to the Pentium II, but that was compatible with the older Socket 7 boards.

From there it was a mad race. Every few months there was a “newer, hotter” processor and we all went like lemmings to the shows and had new computers built. Along with computers, we bought hand sets, head sets, camera’s, mice, keyboards, modems, speakers, monitors, and all other manner of tech goodies. It was frustrating as hell, trying to “keep up” but something massive was happening in the global financial arena that most didn’t consider. Where were all those technology gee-gaws and do-dads being made? China comes to mind. While we were spending our dollars here to buy up the latest greatest, China was raking in umpteen millions and eventually umpteen billions. Their companies were flush with cash, and their Government was getting insanely rich in the process.

So, what does a country do when it’s taking in billions and billions of dollars? Well, in stable times, they go out in the bond market and buy up really secure treasuries and sovereign bonds. So, they did just that. They became enormous owners of US treasury debt. Depending on whom you wish to listen to, they have a “lot”. Even the US Treasury states that China owns 1.3 TRILLION dollars worth of our Treasuries. (They are our biggest holders now, surpassing Japan) The thing to remember is that they amassed the bulk of that during those heady days of the tech explosion, and then since the tech melt up, it has just continued to grow.

But China’s got a major problem. They own a trillion dollars worth of our debt, and yet our Central bank is destroying the value of those dollars. They’re playing the age old game of “devalue your currency and repay your debt with cheaper dollars”. Well, imagine how China feels about that. They’ve got a trillion worth of dollars, but each day the dollar itself is worth less and less. The idiot Fed’s even tell us they want a 2% minimum inflation rate. How would you like to own a trillion dollars and hear publicly that the Central banks want to devalue that by 20 billion a year? You wouldn’t. But, what do you do about it? If you’re China, you’re looking at modern day America and realizing that the US dollar is toilet paper. The only reason it isn’t publicly worth 4 cents is because of the rigged deal we have in place to be the world’s reserve currency, a deal implemented when we were indeed the strongest economy on earth. If we lose reserve status, the dollar will be worth… well… snail snot. Nothing.

So, the Chinese have been furiously trying to buy up “real” things with their dollars while they’ve still got some form of value. They’ve bought oil fields, they’ve bought US theatres. They’ve bought IBM’s personal computer division. They’ve bought Smithfield foods. In 2012 they even bought 12 billion dollars worth of California Commercial real estate. All over the globe they are using “dollars” to buy up energy assets, rare metals, and yes folks….Gold.

I think the Chinese realize that the fat lady is singing and the US is NOT going to recover and be the super power any longer. I think they finally realize they’ve got enough US debt that they could crush us like a bug if they started selling those bonds on the open market. So what would you do if you were China? You’d tell the US that if you don’t want us dumping hundreds of billions of treasuries on the bond market, which would implode the US virtually overnight…you’d best find a way to let us buy gold on the cheap. And that’s what we’ve seen for the past two years. Each time QE is implemented or extended, Gold jumps and then “mysteriously” gets slammed in the overnight trading sessions. All manner of paper gold hits the market and drives the price lower, and China swoops in and buys up the physical metal at the cheaper price.

So, what’s up with this little shell game? Well, it’s like this. Bernanke and the Central banks have scored a “two for one” by beating down gold. See when gold goes up in price, it really isn’t always the metal itself going up in price, more times than not it is the value of the dollar going down. Gold actually remains relatively stable. So, as Bernanke lost control and told the world that they’d have to continue to print and twist and do all manner of bizarre things to keep the economy moving, they also knew it would crush the dollar. They realized that they had to keep the dollar up, but how? How could they keep the dollar up, if they were printing them out of thin air? Then it hit them. Well, we could just beat down gold. Lower gold supports a higher dollar AND allows the Chinese to buy on the cheap. A two for one deal.

The real movers and shakers aren’t dumb. They know that the US cannot possibly repay its debts. The European Union is technically insolvent, and there’s going to be a global reset. None of the well to do countries that aren’t dying in debt want anything to do with dollars any more. Most don’t even want Euro’s which are just marginally better. So, there’s going to be a reset of some fashion. A global reset, where the US dollar is no longer the sole reserve currency of the world.

Well, the Chinese know this, and they want enough gold that when the reset comes, they have enough gold backing that their currency will be considered solid enough to be part of a new global reserve. So each time you see these insane attacks on Gold, you can rest assured that they’re lowering the price so that China can buy up another load of it, and make the dollar look like it isn’t monopoly money. That appears to be the “wink and nod” deal they’ve got with the world’s Central banks and the IMF. Go ahead and look back at the way gold reacts to QE announcements. It always gets pounded down shortly after. Most feel it is just the bankers making sure gold doesn’t look better than dollars. Sure there’s some truth to that. That’s part one of the game. But then look at the published schedules that we “know of” concerning China’s gold buying. It always seems to happen right when Gold is attacked. That’s part two of the game.

If you look at the amount of gold that is ready and able to be delivered and you match that up with the “demand” for it, you see something amazing. There’s more demand than there is available gold. So again, if you’re China and you’re desperate to trade dollars for gold, how are they going to get some supply for China to buy? They shake the cage. They rattle the little guy. They pound gold in the paper market to get the “weak hands” to panic and sell their bullion. Then China swoops in and sucks it up. This isn’t by coincidence folks. This is by design. Every time the bullion banks are virtually “empty,” gold gets pounded, folks sell it, and China buys it. Every time.

Now you know the deal. The central Banks are colluding to paper short the gold market every time the dollar loses significant ground while the Chinese have drained the bullion banks and warehouses down to where there’s no inventory. This gives the illusion of a stronger dollar, while agreeing to sell China all the gold they want at a discounted price. I know it reads like a cheap dime store novel, but unfortunately this is exactly what’s happening.

So what do we do about it? We buy when the Chinese buy. We buy the metal on these pound downs. Why? Can’t they keep this up for ever? No they cannot. It is true they can pull the rabbit longer than you’d expect, but this charade is going to end in a hyperinflation blow up, and it is then that gold will be repriced along with the new global reserve currency. Be patient folks. It took 11 long years for gold to go from 295 in the year 2000 to 1900 in 2011. It will have its new all-time highs in the future, and probably we won’t’ have to wait ten years. I’d be willing to bet we see all hell break loose before the end of 2015.

There are some that think the release of the new 100 dollar bill is going to have some implications for gold and I understand that logic. If you look at the new bill, it is LOADED with inference to gold. There’s a big gold ink well, there’s a gold liberty bell. The number 100 turns from Green to Gold if you move the bill. There’s a gold feather pen for the ink well. There’s all manner of things about the bill that has some thinking that they are going to try and announce some form of gold backing for this bill. I’m not in that camp. While I do believe that day is coming, I don’t think it will be on October 8th when they launch the new bill. I think they’ve put all the reference to gold on the bill because they plan on this design to be in circulation for years, and it will then be reflective of a gold “link” when this global reset of currencies takes place. But hey.. I’d sure like it to be next week! Could you imagine how high gold would pop on any sort of hint of this leading the way to an eventual percent/gold backing? Wow. In any event, that day will come as soon as the Chinese feel they’ve got what they want. Stay tuned it will be exciting.