International Forecaster Weekly

The Silent Gold Rush

Three concepts that you have to get a handle on, how much each country's central bank has in reserve is what we want to know, G7 pronouncements dubious, Russian and Chinese demand for gold is noted, all good Ponzi schemes will eventually come to an end.

James Corbett | February 16, 2013

            There are three concepts that you have to get a handle on in order to understand today's world financial situation. Don't worry, these concepts are ridiculously simple:

     Supply and demand determines prices.

     When people say one thing and do another they are trying to deceive you.

     Ponzi schemes always fall apart.

            See what I mean? Easy. And the best part is that once you have these concepts under your belt you'll be forearmed with the knowledge to protect yourself and your family from what promises to be the greatest monetary crash in the history of the world. And you'll be ahead of the curve of the 99% of the population who are caught in the financial matrix and unable to master even these principles

            Firstly: supply and demand determines prices. This isn't even Economics 101, this is more like economics preschool. Everything else follows from this remarkably simple principle. When there is a large supply of something that is in little demand, like individual grains of sand on a beach, it's of little monetary value. When there is a small supply of something in great demand, like real estate in Tokyo, it becomes pricy. All things being equal, markets converge toward equilibrium as producers step in to fill demand and prices stabilize around their “optimal” levels. This being the real world, things are almost never equal, and the myriad interactions of the market can be seen as one giant, ongoing calculation about how to reach that equilibrium.

            Given this principle, there are three main ways of manipulating prices: you can either tamper with the supply of a product, tamper with the demand for that product, or tamper with the information reaching the market about that supply/demand. The first two options are routine operating procedures for most businesses. If demand is outstripping supply, companies boost production. If supply outstrips demand, they advertise.

            The third option, manipulating information, is by far the most difficult to pull off (at least for extended periods of time), and therefore the most lucrative. Tampering with the information about supply of a given product involves cornering the market in a given product or commodity or forming a cartel that will work through a collective agreement to limit access to that product. In these cases, individuals or groups can artificially limit supply, thus driving prices up; witness OPEC and the supply/demand calculations that drive oil prices, or the diamond cartel that keeps prices artificially high by limiting the number of semi-precious stones reaching the market. On the other side of the equation, supply can be artificially inflated to drive prices down. This is exactly what the redcoats did to the Continental currency during the War of Independence, undermining the colonies' financial independence by artificially inflating the supply of money, and thus making that money worthless. Demand, meanwhile, can be artificially inflated through fraud. Enron created demand for its services by lying through their teeth about their business model, their assets, their earnings, and just about everything else you could imagine. (They even built a fake trading room to fool Wall Street analysts that came to marvel at their success.) Snake oil salesmen of various stripes make their living creating demand for their wares by lying about their benefits.

            This manipulation, unfortunately, is all too common in the economic wonderland that passes for our financial reality, and nowhere is that more apparent than in the precious metals market. This is primarily accomplished through manipulating the information in the market about the supply side. In fact, in the case of the gold market, this is relatively easy since there is so little information about the actual physical supply of gold out there. The numbers are complicated by the fact that much of the “gold” that is traded in the markets are just paper promises of gold, which are only worth the paper they're printed on if you're lucky. Adrian Douglas of calculated in 2010 that there are about 45 claims for every actual ounce of physical gold in the market. He further calculates that the true price of gold should be 45 times the current market price, which in 2010 terms meant $54,000 per ounce. You can quibble with the way he calculates this, but the numbers should at least give you a sense of the manipulation that takes place in the gold markets, and just how high the stakes are for the COMEXers and other paper peddlers should the piper ever actually ask to be gold.

            The other major question mark hanging over the gold markets is how much each country's central bank has in reserve. Some countries publish up-to-date numbers of how many tons they own, others (like China) surprise the markets every now and then by suddenly revealing how much of the precious metal they've purchased in the preceding years. But, as the whole world has started becoming uncomfortably aware in recent months, even those countries that are open with their gold holding stats are not nearly so transparent as once thought. It started innocently enough in 2011 with Venezuela asking to repatriate its gold from the U.S. and Europe, where much of it was being physically stored. Now if it had just been Venezuela pulling a move like this it would have been easy enough for the markets to write it off as “that crazy old Chavez” pulling his market-taunting rabble-rousing tricks again, but it turns out Venezuela was just the first domino. That domino managed to topple the Bundesbank, much to the surprise of most of the rest of the world, which has begun the repatriation of nearly 700 tons of gold from Paris and New York. That has set other dominoes toppling. There are now political movements in the Netherlands, Azerbaijan and, significantly, Switzerland, to do the same. There is no way to sugar coat what is happening: country after country is realizing that there may very well not be enough physical gold being held to cover all of these claims, and if they don't take possession of their gold now there may be none left when they eventually do.

            This is where we run into that second principle: When people say one thing and do another they are trying to deceive you. So let's look at the G7's recent pronouncement that there is no currency war happening, nor are they planning to start one:

            “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.”

            Now to be fair, the G7 countries are trying to cover their assets with this: after all, the Japanese are framing their devaluation in terms of reaching Nikkei 13,000 instead of reaching 100.0 USD/JPY, and the Fed is tying QEInfinity to unemployment figures, and the ECB is concentrating on bond yields. But we all know what this is really about: devaluation to insure competitiveness on the global market. In other words, the G7 are telling us one thing and doing something different; they're deceiving us.

            But to what end? Why the deception? And what does this have to do with gold repatriation? As it turns out, these trends are directly related. When a currency is devalued, it slips relative to other currencies. But when multiple currencies are devalued at the same time (as is happening today), that devaluation is harder to spot in the exchange markets. After all, what are you measuring each currency against, if not another currency? Well, the gold standard for currency valuation has always been (appropriately enough) gold, so the number one end result of all of the devaluation that's happening in the growing currency war is going to be a rise in the gold price...regardless of what currency you're measuring it in. Hence gold reaching 33 year highs against the yen as the yen starts to plummet in response to the BOJ's new inflation policy.

            This, combined with the demand that already exists from countries like Russia and China that are buying gold at a blistering pace, coupled with the fact that more and more people are buying into gold in its thirteenth straight year of positive returns, mean that there is a silent, little-publicized run on physical gold now. If calculations like those by GATA are even anywhere close to being right (within, say, an order of magnitude), then there are going to be huge problems fulfilling orders down the road. And now that Venezuela started the dominoes falling, and Germany, Switzerland, the Netherlands, Azerbaijan and others are getting in on the act, it seems that no country wants to end up being the one holding the empty bag of broken gold promises when this game of musical chairs comes to an end.

            Speaking of which, that would be the third rule we have to keep in mind: all Ponzi schemes come to an end. That is, after all, the nature of the Ponzi scheme: to stop the scam at some point and clear out all the money. We have been teetering on the edge of that precipice in the precious metals markets for years now, and with paper gold as extensive as it is these days, the ending of this Ponzi scheme could be the end of the monetary order as we've known it. Surely if China has been quietly building up its gold reserves and forging bilateral trade deals in non-dollar denominated assets in order to propose some sort of alternative to the dollar reserve system, as some analysts are beginning to speculate, then the era of measuring gold in dollars may be coming to an end, and people might become more used to measuring the value of their dollars in gold. At that point, those without the physical precious metals in their hands will be the losers.

            The original Gold Rush was loud and garish enough not to be missed. Everyone and their dog knew there was gold up at Sutter's Mill, and by gosh they were going to get some of it for themselves if it killed them. The current gold rush is almost the complete opposite. It is a silent gold rush taking place in hushed tones behind the closed doors of central bank offices, and everyone is trying to grab as much as they can for themselves before the rest of the world finds out. The information about the supply is being tampered with, and prices are nowhere near reflective of reality. The music will stop eventually, and many will be left without a chair to sit on.

            And the best part is that you now know about it.