John Embry on China & Gold

First, if you haven't read my post earlier today on the Gold Wars, please read it first then come back to read this post as it directly relates to this post.

John Embry  comments today on China and Gold:

With gold near the $1,650 level and silver firmly above $31, today King World News interviewed John Embry, Chief Investment Strategist of the $10 billion strong Sprott Asset Management.  Embry told KWN the financial system is built on an unsustainable mountain of debt, and over time this will create a more significant shift from paper markets to hard assets.  He also stated that what is taking place in China right now is wildly bullish for gold.  But first, here is what Embry had to say about what is happening with the gold and silver markets:  “The gold and silver situation is under control of the paper manipulators at this time.  I think they have an agenda to keep the gold and silver space as quiet as possible, in order to keep people away from it.”

“They have a vested interest in making sure people are buying stocks and bonds.  In the fullness of time this will be overcome, but in the meantime we have to put up with this.  To me, gold is the antithesis of the financial system as we know it.  It’s real money.

The problem with the financial system is that it’s built on an unsustainable mountain of debt.  The idea that we are going to be able to cure the current problem by creating more debt isn’t going to work.  We can’t support the existing debt....

“As this sinks in with a lot of people, and it will as time goes on, gold is going to be seen as a major alternative, if not the major alternative.  It won’t take much of that money that’s currently tied up in paper, moving into the gold space, to have an outsized impact on the price.

The Chinese, over the weekend, stated their intention they wanted to make the yuan a much more internationally traded currency.  Up to now it’s been so restricted that you couldn’t really deal in it.  If this is their intent, and I believe it is, this is a huge step.

This is spectacularly bullish for gold because I think the Chinese will ultimately want to back their money with gold.  The Chinese are huge players in the gold market.  That’s their agenda, to be seen as a major play in the international currency market.

What the US dollar doesn’t need these days is serious competition in terms of being the reserve currency.  If the US dollar starts to move off center stage as time goes on, this will be wildly bullish for gold.  One of the things that would destabilize the whole financial system is if people figured out how vulnerable the US dollar is.”

John seems to believe, as I do, that China's long term goal is for the Yuan/Reminmbi to become the new world reserve currency and will do this by backing their currency with gold. I previously noted this back in January. Remember that being the world's reserve currency comes with huge privileges, one of which is lower than normal interest rates on the government's debt. If the US loses this status, what do you think the interest rate will be on our $15.5 Trillion (and soon to be $20 Trillion) debt?

The Gold Wars

There is a war going on right now between the US Fed, gold investors and Asian central banks. As I've pointed out previously, The US Fed is actively selling gold to keep the price low on a relative basis even as central banks in India and Asia are buying by the ton. In the previous story, linked above, I noted that China was strategically buying gold for their long term goals as the US Fed sells gold for its short term goals.

King World News often reports on the gold market and recently posted an interview with a London gold trader had this to say:

With many global investors still rattled by the price action of gold and silver, today King World News interviewed the “London Trader” to get his take on these markets.  Here is what the source had to say:  “Gold was trashed on Monday, while the Fed minutes essentially said nothing.  When a central bank coordinates that kind of attack, it’s war, of course it’s war.  This type of action is coordinated by Bernanke and the Fed and executed by the bullion banks.  It’s actually laughable if anyone thinks that was a legitimate selloff, on what was, in reality, no news.”

 

“No legitimate market participants were really selling.  Sure there were some stops that were taken out, but it was the bullion banks that came in with their selling and this was what suddenly created the air pockets.

There is massive sovereign physical buying going on right now.  Interestingly, the sovereign buying is being swamped by paper selling.  Sovereign buyers are aggressively buying tonnage every day at these levels.  You have to remember their goal is to pick up physical and get rid of dollars.  Nothing has changed.  

Interestingly, the Asian buyers have figured out the algorithms, like breaking an enemy’s code in war, and they are using the algorithmic trading to get the best prices each day for physical gold at these levels. The trading is just taking place at lower levels because these bullion banks and the Fed, which manage the price of gold, get overzealous in their price fixing.

But there will be a huge price to pay for their activity.  An incredible amount of physical gold has been promised for delivery and the amount of promised gold is increasing every day.  

Meanwhile, back in the casino, the bullion banks don’t know whether it’s day or night.  But out back there are trucks carting off some of the remaining Western gold to vaults in the East. 

There is very little low hanging fruit left for the paper guys to cover into.  Meanwhile, you have the sovereign buyers who are saying, ‘You know what, this elephant herd has kind of stopped now,’ and they want more physical gold at these levels.  

Every day at the fix, regardless of price, sovereign entities are buying physical gold.  They are averaging in at the fixes, as well as during the declines.  On top of that, there are bids for hundreds of tons of physical gold starting at the $1,610 level and below.  This is why the recent decline in gold halted $2 above that level.  

Regardless, these physical buyers will be purchasing at the fix going forward, even if the price of gold rises.  This is why the smart money, the few individuals and entities that are in the know, continue to accumulate physical gold.  These well financed individuals and entities are buying because they know they will be in profit.  

After ten days of the price being pummeled, after seeing these relentless sell orders come in, day after day, I can understand how smaller players can get demoralized.  Many of these smaller players have been in the mining shares, and while gold has risen $1,000 to $1,500, many of the smaller companies are the same price.  

It’s the same bullion banks doing this to the mining shares.  The same players that are manipulating the price of gold and silver.  The bullion banks are naked short these mining shares in an effort to keep the prices capped.

This is why when you look at the OTC Reports, in the latest quarterly report, there are $150 billion dollars worth of certain derivatives.  These are not futures, options or even swaps.  JP Morgan and HSBC control over 97% of all of the gold derivatives.  When you think about it, this is a mind-blowing number.

  

So this is a war.  This is actual warfare where the central banks and their agents are targeting sentiment.  You think the Fed and the bullion banks don’t monitor King World News?  Of course they do.  There is a war going on here.  This is a war against gold and holders of gold and the gold shares.  They are being targeted.

The bullion banks are so naked short both gold and silver, and they owe so much physical metal to market participants, that this has become like hell for them.  They are starting to prey on each other.  We are now at the point where these bullion banks are forced to fight a day trading battle each day, sometimes against each other.

We are now to the end game.  The bullion banks are so naked short gold and silver it’s unimaginable.  They owe so much physical metal to market participants and more physical purchases are being scaled in every day.  The sovereign buyers are taking down huge size, we’re talking serious tonnage.  

The bottom line here is the leverage by the bullion banks is extraordinarily massive, and players have to remember, eventually it has to get unwound.  Jim Sinclair recently stated, ‘Overvaluation in the gold market will be something to behold.’  I can promise you, his statement will be proven correct.”

 After this interview was posted on King World News, the site was attacked. GATA reports:

Dear Friend of GATA and Gold:
The King World News Internet site was attacked this week in ways that seemed aimed particularly at the network's revelatory interview April 5 with its London metals market trader source.

The major Internet hosting company that maintains the King World News site reported to the network: "The servers you are hosted on are what we call 'under guard' due to external attack. Sometimes there are millions of these attacks. Without these 'guards' in place, the servers would effectively become flooded and would be unable to display your website."

Eric King told GATA today: "The attacks started when the London trader interview piece was released April 5. The attacks continued and intensified when our interview with Jim Sinclair's futures market analyst, Dan Norcini, was published on April 11. A very powerful entity did not want this information out there."

  King World News experienced a similar "distributed denial of service" attack in March 2010 immediately after it carried an interview with three GATA board members.

According to Wikipedia, a distributed denial-of-service attack "is an attempt to make a computer resource unavailable to its intended users. Although the means to carry out, motives for, and targets of a DDoS attack may vary, it generally consists of the concerted efforts of a person or people to prevent an Internet site or service from functioning efficiently or at all, temporarily or indefinitely."

This week's attack blocked access to the King World News site for some of its readers around the world. After many hours of work by the site's staff, access has been restored.

In a way, these attacks are a tribute to the work done by King World News and the sensitivity of the observations made by the people interviewed there.

There seemed to be a similar denial of service attack on the day of the Leap Year Massacre at tfmetalsreport.com which is a blog where gold traders discuss the market in gold.

It would seem that not only is the Fed trying to suppress the price of gold but someone is actively using internet attacks to suppress the free flow of information on the gold markets. I have pointed out before that the media, especially CNBC, seems to be following some directive to discourage gold investment while promoting stock investment. This would be exactly what the Fed is trying to promote through quantitative easing, the artificial increase in the stock market while simultaneously discouraging gold investment. Once again, the Fed believes that a higher stock market increases consumer confidence and encourages people to go out and spend more money.

So the war is on. The question that an investor may ask is: "If both the stock and gold markets are manipulated, which market should I invest? Stocks? Gold? Both? Neither? I would say that if your time horizon is long, ten plus years, you probably want to keep at least some money in stocks, despite the risk that Fed support for stocks may end and cause a crash. Sitting in cash for a long period just means you are slowly losing money every year. Investing in gold will protect you from inflation and may have a huge upside if Fed intervention were to end, allowing the market to move it higher. For investors who are focused more on wealth preservation, a larger position in gold than stocks is probably more appropriate.

The gold wars will rage over the next several years, replacing currency wars (which have gone on for centuries). The Fed is fighting  a short term battle in an attempt to keep the economy afloat during a massive deleveraging in the western world. China, India and other Asian central banks are buying with an eye on the long term. If your goal is to preserve wealth, you should too.

Tim Geithner and the Princess Bride

Timothy Geithner April 2011: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner: "No risk of that"

August 5, 2011 - Standard & Poor's announced Friday night that it has downgraded the U.S. credit rating for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

 Geithner April 2012:  “If we don't deal with these debt problems we are going to be Greece in two years”?

 Geithner: "No risk of that"

Wow! Don't you feel better now?

Geithner sort of reminds me of this guy:

Biderman Update on Stocks & Gold

Is Gold Still a Good Investment?

Days like today can be frustrating. With gold dropping $45 in a single day not too long after the Leap Year Massacre, its fair to ask: Has something changed in gold? And when will it be time to sell?

Back in January I discussed real vs. nominal interest rates. Its an important concept to understand because the dollar is not a constant. Rather, it is a deteriorating asset. Casey Research recently tackles the above questions and shows that negative real interest rates are gold's best friend. If you haven't read the January post I would suggest you read it first then read Casey Research in the post below.

Gold's Critical Metric
There are many reasons why gold is still our favorite investment – from inflation fears and sovereign debt concerns to deeper, systemic economic problems. But let's be honest: It's been rising for over 11 years now, and only the imprudent would fail to think about when the run might end.

Is it time to start eyeing the exit? In a word, no. Here's why.
There's one indicator that clearly signals we're still in the bull market – and further, that we can expect prices to continue to rise. That indicator is negative real interest rates.

The real interest rate is simply the nominal rate minus inflation. For example, if you earn 4% on an interest-bearing investment and inflation is 2%, your real return is +2%. Conversely, if your investment earns 1% but inflation is 3%, your real rate is -2%.

This calculation is the same regardless of how high either rate may be: a 15% interest rate and 13% inflation still nets you 2%. This is why high interest rates are not necessarily negative for gold; it's the real rate that impacts what gold will ultimately do.

What History Tells Us
The chart below calculates the real interest rate by extracting annualized inflation from the 10-year Treasury nominal rate. Gray highlighted areas are the periods when the real interest rate was below zero, and as you can see, this is when gold has performed well.

(Click on image to enlarge)

Gold climbs when real interest rates are low or falling, while high or rising real rates negatively impact it. This pattern was true in the 1970s and it's true today.

A closer study of this chart tells us there's actually a critical number for real rates that seem to have the most impact on gold. Take a look at how gold performs when real rates are at 2% or below.

(Click on image to enlarge)

The reason for this phenomenon is straightforward. When real interest rates are at or below zero, cash or debt instruments (like bonds) cease being effective because the return is lower than inflation. In these cases, the investment is actually losing purchasing power – regardless of what the investment pays. An investor's interest thus shifts to assets that offer returns above inflation… or at least a vehicle where money doesn't lose value. Gold is one of the most reliable and proven tools in this scenario.

Politicians in the US, EU, and a range of other countries are keeping interest rates low, which, in spite of a low CPI, pushes real rates below zero. This makes cash and Treasuries guaranteed losers right now. Not only are investors maintaining purchasing power with gold, they're outpacing most interest-bearing investments due to the rising price of the metal.

Here's another way to verify this trend. As the following chart shows, from January 1970 through January 1980 gold returned a total of 1,832.6%. This is much higher than inflation during that decade, which totaled 105.8%.

(Click on image to enlarge)

In the current bull market, gold has gained 556.3% since 2001, while inflation has thus far totaled 30%.

(Click on image to enlarge)

Further supporting this thesis is the fact that when real rates are positive, gold has not performed well. You can see this in the following chart of when real interest rates were higher than inflation.

(Click on image to enlarge)

The gold price fluctuated between $300 and $500 for the twenty-year period when rates were positive. This is a strong reminder that bull markets don't last forever – even golden ones – and that at some point we'll need to sell to lock in a profit.

So if history demonstrates that gold does well during a negative-rate environment and poorly during positive periods, the natural question becomes…

How Much Longer Will Negative Real Rates Last?
US Federal Reserve Chairman Ben Bernanke stated in January that he expects to keep short-term interest rates close to zero "at least through late 2014." This low-rate, loose-money policy is intended to "support a stronger economic recovery and reduce unemployment." While his strategy is debatable, this implies that almost any inflation at all will continue to keep the real rate negative and thus gold will stay in a bull market.

What if the economy improves? After all, there are economic data showing the economy may be finding its footing, making some believe interest rates could be raised earlier, as soon as next year. Based on the data above, the answer to the question is, "What does inflation do?" In other words, interest-rate fluctuations alone aren't important; it's how the rate interacts with the inflation rate. If inflation simultaneously rises and keeps the real rate negative, we should expect gold to remain in a bull market.
With the obscene amount of money that's already been printed, high inflation seems almost certain at some point, even if there isn't any more money creation. This is why we think the end to the gold bull market is not yet in sight.
One more point. You'll notice in the above charts that this trend doesn't reverse on a dime. It takes anywhere from months to years for investors to shift from interest-bearing investments to metals – and vice versa. And the longer the trend, the slower the change. Real rates have been negative for a decade now, and with broad institutional investment in gold largely still in absentia, it seems reasonable to expect that the trend in gold won't shift anytime soon.

Implications for Investors
Armed with these data, there are definite steps you can take with your investments at this point, as well as reasonable expectations you can have going forward:

1. You can buy gold today. As long as real interest rates are negative, gold will remain in a bull market. If you already own some gold, you can and should ask yourself if it's enough at a time when money in the bank is a losing proposition.
2. Don't get flummoxed when you hear talk about rising rates. Watch the real rate instead.
3. In our opinion, real rates will be negative for some time for the simple reason that we think inflation will be rising for some time. Ask yourself: Will the Fed and other central banks raise rates aggressively enough to catch up to inflation? Someday, sure… but not anytime soon.
4. When real rates turn positive, especially above 2%, it may be time to sell. We'll have to see what's going on in the world at that time; if there's financial chaos, the fear factor could cause gold to depart from this historic pattern. But even if not, keep in mind that while the price of gold fluctuates every day, the shift out of gold-based investments won't occur overnight. There should be time to gain clarity.

There are a lot of reasons to own gold today, and there will likely be more before it's time to say goodbye. In the meantime, we take comfort in the fact that the strongest historical indicator of all tells us the gold bull market is alive and well and has years to play out.

Sell in May and Go Away?

An old say in the investment business is "Sell in May and go away". The reason is that the first quarter of the year tends to be bullish in stocks and often times less so for the rest of the year. What I like about Biderman's business over at TrimTabs in Marin, CA is that he follows cash flows into and out of investments. This is important because at any one time there's essentially a generally fixed supply of investments so studying the demand side can give important insights into where the market is headed. Biderman has previously pointed out that insider buying (generally CEO's and shareholder with greater than 5% ownership in companies) has been high the last several months but have been dropping off. These insiders must report intended sales to the SEC which is made public, giving us a window to what the insiders are thinking about the prospects of their own companies.

The following video is from 3/22/2012. The entire 3 minutes 35 seconds is worth listening to but pay especial attention around  2:40.

I especially love Biderman's exasperation with what he sees out there. The guy cracks me up and I'd love to meet him one day.

Now take a look at his most recent video keeping the equity outlook in mind:

So what's the point? Well, most of us hold stocks either as part of our 401k's, IRA's or other type of retirement plan. Since most of us do not have access to gold through these funds we have little choice but to invest in equities given that neither cash nor bonds are likely to protect us from inflation. Equities (stocks) in a normal environment do provide some inflation protection but what percent to invest has been muddied by Fed intervention that has juiced the market.

The point is, we simply cannot know how long the Fed will support the equity markets and without their support the Dow may very well revisit the February 2009 lows around 7,000 (Its at 13,264 today). Given that this is an election year the Fed (Which has a strong aversion to being considered a negative in politics since it was accused of losing the election for Bush Sr in 1994) is likely to continue to support the market in its belief that strong markets are needed to support the consumer confidence needed to get the economy moving again on a path to a sustainable recovery.

As a result, we are unlikely to see a large, sharp correction in the market but be watchful. It may make sense to reduce your equity holdings in the stock market after this month. You may very well have an opportunity to buy again at a lower price.

I hope readers find this useful. I realize that this blog has been very gold oriented and I'm wanting to broaden out a bit rather than constantly hammering the same theme.

Best of luck! Happy investing.

What is the End Game?

So if I and all the experts I link to are correct, what is the end game? What do you do if you have stacked your gold and silver, watched the dollar lose its place as the world's reserve currency and generally become worthless? Brian Rogers answers the question in this post on Zero Hedge. You can read the entire thing but her's the punchline:

  Gold will be the surviving currency that will rise dramatically in value until a new global currency regime can be established and agreed upon.  Most likely years.  Bretton Woods was a relatively quick process, but remember, the US won the war so we made the rules with very little debate.  Things certainly won't work that way next time.

So while the coming deflation via rising rates will ravage the value of dollar-based assets (the aforementioned bonds, stocks, commercial real estate, residential real estate, auto prices, factories, etc...) gold will at a minimum hold your purchasing power and could very will rise many times from current levels. 

Then, in the heat of the deflation, when everyone you know is selling everything they own to simply stay afloat, you buy.  Sell your gold and buy.  With both hands.  Aggressively.  Greedily.  And if a bank will extend you credit based on your gold holdings, take it and buy with leverage.  You will be creating generational wealth.

Good luck and think long and hard about what you own and what's happening around us.