Happy New Year! Welcome to the new year, same as the old year. Because so much has happened and nothing has changed. The Fiscal Cliff was not resolved, it was merely pushed off for a few more months. In that regard, we are looking more and more like Greece and the EU. Each day there are new meetings and proposals followed by new proclamations but never a solution! Though debt in the US is piling up as fast as ever, gold, which is highly correlated with the US debt, has essentially traded sideways in 2012 after peaking in mid 2011. So what's going on?
First, it must be recognized that gold had been appreciating at an average annual rate of about 22% prior to 2012, which are exceptionally high returns over an extended period.
Secondly, any real bull market has periods of increases followed by consolidation phases, even in a healthy, natural free market with no manipulation. The long term trend has not been broken. As of the date of this post, gold is trading at its 200 day moving average.
Thirdly, in July of 2011 gold had begun to go parabolic when it hit $1,800. This rise was above the trend and such parabolic moves are more indicative of the final bullish blow off tops you see in bubbles. The fact that it corrected and resumed its longer, more conservative trend, is long term bullish. Gold had much further to go, but it had gotten ahead of the fundamentals. That doesn't mean the sell off from the top was entirely the result of the free market. There were certainly other forces at work. Nevertheless, the current price is below the long term trend.
The fundamentals however, have never been stronger. This is why, despite much frustration within the gold holding community, I remain resolute that gold will go higher longer term and continue to provide one of the few places in the market that will hedge the true inflation rate and preserve wealth. Remember, gold is not just another commodity but an alternative currency to the US dollar which is still the world's primary reserve currency. Thus, if you believe the dollar is being devalued through monetisation, gold is the best alternative currency to hedge the dollar. It continues to have an extremely high correlation to the rising US national debt (Currently at $16.3 Trillion and rising)
With that review in mind, let's turn to my prediction last year that we would see a bifurcation in the price of paper and physical precious metals in 2012. The theory was that suppression of gold and silver prices through paper market manipulation would lead to sales of real (physical) gold and silver at prices higher than the market indicated. There were reports of large gold deliveries at higher prices than the market but these were private sales and I cannot prove they occurred. I can, however point to a recent interview with Andrew Maguire where he points out that the Asian market in Shanghai did, in fact, diverge from Western markets for silver in the last month. More on that below.
In conclusion of my prediction then, I believe I was only partially correct. The bifurcation did not seem to happen on a world wide scale and China seems to continue to use the paper price of gold to take delivery of physical gold at the lower price. This buying at a discount, however simply cannot last forever and at some point there will be a shortage of gold for delivery and the market will overwhelm the paper manipulation. This must happen if I am correct in my theory that China will continue to acquire gold until it at least hits parity with the US.
Moving on to Andrew Maguire and his interiew on KWN. Most people have probably never heard of Andrew as he is not a talking head on CNBC and almost never speaks in public. You'll see below why. He has though, become well known as a whistle blower against gold and silver price manipulation, even e-mailing CFTC commissioner Bart Chilton advanced notice of when gold and silver price beat downs were about to happen. Despite this evidence of obvious manipulation, the CFTC has of this date, done nothing. Below is a Wikipedia entry on Andrew Maguire as an introduction to those who have never heard of him.
Andrew Maguire is an independent bullion trader and a whistleblower. He notified United States regulators that fraud had been committed, manipulating prices in the international gold and silver markets. Maguire and his wife were injured in a hit-and-run accident a day after he was identified as the source of the allegations.
Andrew Maguire has 40 years of experience as a trader and is a former Goldman Sachs trader. On March 29, 2010, he was interviewed on the radio with Gold Anti-Trust Action Committee (GATA) board member Adrian Douglas. He went public in April 2010 with assertions of market manipulation by JPMorgan Chase and HSBC of the gold and silver markets, prompting a number of lawsuits, including a class action lawsuit. Maguire said "JPMorgan acts as an agent for the Federal Reserve; they act to halt the rise of gold and silver against the US dollar. JPMorgan is insulated from potential losses (on their short positions) by the Fed and/or the U.S. taxpayer." "No one at JPMorgan is familiar with Andrew Maguire," said Brian Marchiony, a JPMorgan spokesman. HSBC declined to comment. Maguire currently provides the DayTrades and Metalstrades services at Coghlan Capital wherein subscribers can view his daily trades in real time.
GATA chairman Bill Murphy gave a detailed account of Maguire's allegations to the Commodity Futures Trading Commission (CFTC), stating how "JP Morgan Chase signals to the market its intention to take down the precious metals. Traders recognize these signals and make money shorting the metals alongside JPM. [He] explained how there are routine market manipulations at the time of option expiry, non-farm payroll data releases, and COMEX contract rollover, as well as the ad-hoc events."
According to Maguire, the precious metals markets trade "pretty much in tandem", but because the silver market is so much smaller, it is harder to disguise one's activities and therefore easier to figure out who is behind a manipulative event. After Bear Stearns and their short silver positions were acquired by JPMorgan, manipulative events in the silver market became more frequent. Maguire decided to inform the CFTC. He contacted commissioner Bart Chilton, who had Eliud Ramirez, a senior investigator from the CFTC's enforcement division, get in touch with Maguire. Maguire explained the manipulations in great detail, both over the phone in an hour-long interview and afterward, in a series of e-mails with screen shots.
Maguire then predicted a manipulative event in the silver market and gave detailed information in an e-mail to the CFTC about what to expect, sending it on February 3, 2010, two days prior to the event. The event transpired exactly as Maguire predicted. While the event was taking place, Maguire sent e-mails in real time, pointing out certain details because the CFTC enforcement seemed not to know what to look for or how to interpret the data.
Maguire and his wife were injured in London in a hit-and-run accident on March 26, 2010, the day after Maguire's name came to light during a CFTC hearing on limiting gold and silver positions held by large market participants in order to prevent manipulation. Maguire believes the accident was an attempt on his life. The driver of the other vehicle was apprehended after a police chase, both on the ground and from the air in helicopters, but his name has not been released. Maguire said, "We got hit in the side at full acceleration and tried to corral the cars in a gas station, including the guy who hit us with a commercial vehicle." The assailant then sped away, hitting at least two more cars. Maguire said the police told him the assailant was known to them, but he has been unable to get further information about the case. The assailant was reportedly given a slap on the wrist.
The United States Department of Justice's Antitrust Division and the CFTC are conducting civil and criminal probes steming from a New York Post article concerning Maguire's allegations. Following publication of the article, JPMorgan released a statement that they are not under investigation by the Department of Justice or the CFTC. The CFTC has interviewed 32 people and reviewed 40,000 documents, but as of May 2011, no action has been taken. On February 24, 2011, in less than an hour, the price of silver fell $1.50 per ounce before recovering. Another London-based trader, Richard Guthrie, wrote to Chilton to complain about the event, asking “How many investors lost money and positions to the financial benefit of an elite few?” Chilton believes violations of the law have taken place and wants to see prosecutions move forward, but the five-member commission has yet to act.
With this background in hand, I present an executive summary of his interview with KWN and links to the audio podcast.
- If you are buying gold or silver you are essentially short the dollar. Gold is the currency that is the anti-dollar.
- Western central banks are going long the dollar and short gold to keep the paper market price of gold low. They are defending their currencies against gold.
- Eastern central banks (China) are using the low paper price to take delivery of physical gold.
- Gold is permanently leaving the LBMA (London Bullion Market Association).
- Has seen Shanghai silver premium of $1.30 per ounce, which is $6,500 premium per contract.
- Silver is in “backwardation” because nobody is willing to sell silver today to buy a less expensive contract in the future (for fear of not getting the silver delivered).
- He’s seeing large physical buying at smashed down paper prices.
- Has seen Shanghai silver premium the next day of $1.75, which is $8,694 premium per contract.
- The paper and physical markets are temporarily diverging from the London market (where most manipulation takes place) to other markets (trading on demand for physical metals).
- BIS (Bank of International Settlements) is leasing the metals that are being delivered to contract holders standing for delivery.
You can listen to the podcast here and here.
On this blog I try to separate conspiracy theories from fact. You can decide for yourself if the 2010 hit and run was a coincidence or something more sinister. He seems to believe the latter and has maintained a relatively low profile since. I can say that his advanced notice of market manipulation tip off to CFTC Bart Chilton is a fact and Commissioner Chilton has acknowledged this publicly. Readers can decide for themselves whether the hit and run was related but the e-mails to Bart Chilton are facts.
Looking forward in 2013
We have not had free markets for the past four years. Central banks have continue to intervene in the markets. Initially it was out of necessity to save the global financial system from collapse. It continues today in an attempt to get world economies moving again. So far, these market interventions have not put world economies on sound footing and have likely extended the period of sub-optimal growth by preventing a painful reset that would allow bad debt to be washed out. In addition, the longer these interventions take place the greater the odds that huge price distortions are exaggerated leading to greater instability in the future. From 2008 to present, these market interventions have created an environment of "normalcy" intended to lure consumers into spending again, but in doing so they are creating a strained system that in the future may very well quickly collapse, reversing the more than doubling of the stock market since 2009 and putting an end to abnormally low interest rates. If this were to happen, it would be a shock to all international financial systems that would be far worse than 2008 and likely lead to greater consequences than would have resulted from allowing a quick but brutal reset in 2009 to market equilibrium.
Looking into 2013 we will have to look for signs that the world economies are either on the mend or are further deteriorating. Despite the calm in markets and even above historic averages of returns in stocks and bonds, little has changed in the financial system that would allow for a resumption in strong economic growth or prevent another derivative based calamity besides the moving of bad bank debt from the bank's balance sheet to that of the taxpayer's.
I'll admit that looking back I never could have imagined that the central banks could keep the veneer of functioning markets going this long. I had fully expected another crisis like that of 2008 to happen in either 2010 or 2011. Central banks continue to take extraordinary measures (Through quantitative easing and asset purchases.) that prevented a total collapse. In my view, they cannot sustain these efforts indefinitely. Simple math will tell you that time is running out as both the US national debt and the Fed's balance sheet climbs exponentially.
The Future and Beyond
This past year most of the focus has been on gold, not because I'm a "gold bug" but because the macro environment points to gold as one of the few places where wealth might be preserved when central banks run out of options to keep the current economic structure going. In the future, it is my hope that I will be able to return my focus to asset allocations and which sectors might optimize returns. However, first I believe we will have to go through a difficult transition. I hope this transition begins this year as I see much suffering and hopelessness in the economy. Too many people are either unemployed, on food stamps or wasting away in jobs that do not utilize their human potential. Here's hoping 2013 leads to a brighter future.
Happy New Year!