Monday, January 24, 2011
Propaganda And Rigged Markets
20 January 2011
Upon awaking and discovering that gold and silver had dropped a couple of percent overnight, I do what I always do. I immediately went to Kitco.com - for all of the anti-precious metals propaganda which would be put out to "explain" this move in markets. I was particularly well-rewarded today, as the gold bears at Kitco had furnished no less than four anti-gold headlines, telling all the sheep why gold and silver should be moving lower today.
With two of those items focusing on the economic data out of China, I will take that as my cue that the China news is the principal "explanation"of the propagandists for the moves today in bullion markets. The "news" was that China's economic growth accelerated faster than expected by the "experts".
What this directly implies is that China's demand for commodities (which includes gold and silver) will increase, the Chinese people will have more money in their wallets to buy these commodities, and this will increase inflationary pressures - making gold and silver much more attractive investments as hedges against that inflation. This is why virtually every time economic news of this nature comes out, gold and silver have been strongly higher on the day.
What did the propagandists have to say to justify their "reasoning"? Because of increased inflationary pressures, they expect China's government to raise interest rates, which is (supposedly) "bearish" for commodities because demand will go down rather than up. Let's look at this analysis more closely.
Unlike the interpretation I supplied (the usual interpretation of this data) where the "drivers" for higher commodity prices are direct, the interpretation supplied by the propagandists is not only indirect, but also built atop several assumptions. In other words, it's extremely speculative.
First, what the propagandists are saying is that higher economic growth in China will cause increased demand for commodities and higher inflation (both very gold-bullish), but that China will react to this bullish development with a bearish response. Not only is that indirect reasoning, but it assumes that (automatically) China will respond by raising interest rates, when there are many arguments that they would not (see below). However, that immediately illustrates the second assumption here: that any response by China's government would negate the upward pressure on commodities (and gold and silver).
In fact, we have two full years of empirical evidence which shows us commodity prices steadily rising despite weak demand from anemic Western economies - because the insane money-printing of Western bankers has meant that the speed with which they are destroying our currencies has overwhelmed all other economic fundamentals.
Have these Western bankers shown the slightest inclination to curtail their reckless money-printing? Not at all. Ben Bernanke has repeated again and again that he planned on finishing his latest batch of Bernanke-bills (totaling $600 billion) irrespective of whether he sees stronger U.S. economic data. Meanwhile, "across the pond" in Europe, we see the Euro printing press being ratcheted-up to an almost Fed-like level.
The propaganda is seen to not only defy conventional analysis, but to defy the empirical evidence of the past 24 months, and to defy the primary driver of commodity markets: Western money-printing. Another way to illustrate that this is shallow and meaningless drivel is to observe what the propagandists would have said had the "news" out of China been literally the exact opposite.
If China's economic growth had slowed below the level expected by the "experts", we would be told that this was the "reason" for the decline in gold and silver prices. The explanation we would be given is that the previous moves by China's government (raising interest rates and bank-reserve levels) were showing that China's economy was slowing, and that demand for commodities (and inflationary pressures) would lessen.
Note that unlike today's propaganda, that this is direct reasoning: China's economy slowed, which directly impacts demand for commodities and inflationary pressures. In other words, unlike today's propaganda, this would have been a much more plausible reason for a decline in gold and silver prices. Indeed, when such direct news reaches the market, the typical reaction has been for gold and silver prices to sell-off.
We see a general principle emerge: markets typically respond to direct drivers for asset prices rather than speculative, indirect drivers. This can be expressed as basic "risk/reward" analysis, or simply common sense - making today's propaganda "nonsense".
To further illustrate the absurdity here, what the propaganda implies is that if China's economic news had been terrible that gold and silver would have risen strongly today, because (using the same indirect reasoning) China would have reacted by lowering interest rates, which would have boosted commodity-demand and inflationary pressures.
In fact, alert readers will recognize this last example as a very common propaganda-tool used to pump U.S. equity markets higher. How many times have U.S. markets rallied on "bad economic news" in the past, because this (supposedly) meant the Fed would react by lowering interest rates or cranking up the printing press?
If readers merely take a moment to evaluate whether a particular piece of analysis is based upon direct or indirect reasoning, this will often provide a quick tip-off as to whether a news item is legitimate analysis or deceptive disinformation.
As I mentioned earlier, the bears at Kitco.com cited two other "reasons" for the drop in gold and silver prices today. It's worth taking the time to examine these other explanations as well. Speaking of the U.S. economy, bullish U.S. economic data was given as another reason for today's bullion sell-off.
However, unlike the reason given for bullish Chinese economic data "causing" this sell-off, even market sheep would have laughed at any suggestion that the Federal reserve might raise interest rates or bank reserve levels. So the propagandists had to invent new "logic" for this explanation. According to Bloomberg, stronger U.S. economic data has reduced the need for gold as a "safe haven".
But hold on here. While gold is off less than 2% today, silver was down well over 3% last time I checked. Knowledgeable readers will know that these same propagandists tell us again and again that silver is an "industrial" metal. So what we have in today's news is that the world's largest and second largest economies "surprised experts" with very bullish economic data (implying greater economic activity, greater industrial activity, and greater commodities demand), and according to the propagandists this is the "reason" why silver is down more than 3% today.
This brings us to the last "reason" for the drop in gold and silver prices: Brazil's government choosing to increase interest rates. At first glance, this actually seems like a legitimate reason for commodity prices to fall. A large economy raises interest rates, which directly implies lower economic activity and commodity prices. As the old saying goes, however, "looks can be deceiving".
Why is Brazil increasing interest rates? Because the reckless money-printing of Western bankers is causing horrible inflationary pressures on its economy (sound familiar?). Two observations must be made here.
First of all, the Brazilian government hated the idea of raising interest rates. Doing so causes its currency to rise versus the other fiat paper - reducing the competitiveness of its economy, while simultaneously drawing in dangerous amounts of capital into its debt and asset markets. It only engaged in this move as a desperation-measure, indicative of how extremely strong are such inflationary pressures (hardly "bearish" for commodities or bullion). This means that not only is Brazil unlikely to repeat today's move, but if there is any significant softening of inflationary pressures (i.e. lower commodity prices) it would seek to reverse this policy at the first opportunity.
The overall trend is clear: the reckless money-printing of Western bankers, which has rapidly pumped $trillions of their worthless paper into asset and debt markets is drowning-out all other economic factors (by a large margin). The propaganda with which we were bombarded today is nothing but a cynical attempt to (briefly) hide the monetary destruction caused by these bankers, parroted by mindless drones who lack the slightest understanding of the markets on which they report.
The lesson here for readers is look at the data, ignore the (so-called) analysis, and simply laugh at the absurd headlines. In the case of U.S. economic data, of course, we can't even trust any of that. This forces those looking for accurate information on the U.S. economy to go to Shadowstats.com (I wonder if John Williams is gracious enough to thank the U.S. government for their "contribution" to his enterprise?).
The other lesson is the "contrarian" lesson. If we are being bombarded on a daily basis with propaganda designed to frighten us away from the gold and silver markets, and discourage us from acquiring the world's only "good money", then what should we do?
I'll let readers answer that one for themselves.
Sunday, January 23, 2011
Jim Rickards interviewed on King World News
Jim Richards is interviewed about the coming inflation by Eric King........listen here
Egyptian leadership stashing a golden parachute?
From Zerohedge.com:After a week ago we learned that the central bank of Tunisia had parted with 23% of its gold stash courtesy of now deposed president who fled the country with a 1.5 ton shipment of gold, it appears that Egypt is preparing for a comparable spike in revolutionary activity. Only unlike the now former Tunisian president whose gold sequestering actions were retroactive and thus, quite lucky to succeed, Egypt has taken proactive measures. According to Egypt News, the country's airport has intercepted 59 shipments of gold directed for the Netherlands "worth tens of millions." The gold, as well as an indeterminate amount of foreign currencies, was hidden in pillow cases: uh, cotton may not show up on X-Rays, but gold sure does. We eagerly await to learn how big the decline in the country's official holdings 75.6 tonnes of gold will be after this most recent episode confirming that gold is precisely money. And all this happening despite gold's complete and thorough inedibility.
From Egypt.com:
The freight on Dutch plane bound for Amsterdam were surprised by tearing down two bags within 59 a parcel containing large quantities of gold and foreign currencies worth tens of millions have been reported to officials.
It was the formation of a committee headed by an official of one of the Egyptian banks of the parcels were re-examination of parcels and make sure that no shortages and supervision of shipping on the plane.
Bank of America posts heavy losses
From AFP:Bank of America, the biggest US bank, reported Friday a net loss of $1.2 billion for the fourth quarter, citing falling revenue and a hefty writedown on its home-loan business.
The loss was the second consecutive quarterly setback for the government-rescued bank, after a $7.3 billion loss in the third quarter.
For full-year 2010, Bank of America reported a net loss of $2.2 billion. The bank wrote off $12.4 billion in charges.
That amounted to a loss of 37 cents per share, compared to a loss of 29 cents per share in 2009.
In 2009 the bank had profit of $6.3 billion but for shareholders it was a loss of $2.2 billion following payments to the US Treasury stemming from bailout aid......read on
Brace for a 'Perfect Storm' in Gold
By Thomas Kaplan:Investment implies moving some part of one's assets from financial safety to a position of acceptable risk with the hope of increasing wealth over time. What qualifies as "acceptable risk" may thus be seen to be the gating question for the investment criteria of a "prudent man". This has come to be known as the Prudent Man Rule to guide persons entrusted with the finances of others.
Although the rule remains a guiding principle in the fund management industry to this day, at least one key element has changed. In 1971, our understanding of ultimate safety was transformed when President Nixon ended the US government's certification that each dollar in circulation was, in effect, worth exactly 1/35th of an ounce of gold.
Since all major currencies had been linked to gold via the US dollar since 1945, when the US held the majority of monetary reserves, the announcement provoked a momentous change in the financial culture. Cash no longer meant gold: the amount of dollars the Federal Reserve could print would not be restricted to some degree by a stored metallic tangible asset with a finite supply. In a great leap of faith, paper dollars and traded US federal liabilities became "risk-free" assets while gold, long regarded as money itself, was disdained as a "commodity", a volatile "risk asset".
This historically radical new notion was validated by the arbiters of money themselves. Central bankers dumped gold, driving prices down sharply during the 1990s. They thereby reinforced the MBA textbook perceptions that the dollar and US Treasury bonds were "risk-free" assets and gold a "barbarous relic," as John Maynard Keynes famously called it.
Even today, as the gold rally has reached the 10-year mark (following a 20-year bear market), the metal represents a mere 0.6 per cent of total global financial assets (stocks, bonds and cash). This is near the all-time low (0.3 per cent) reached in 2001, and significantly below the 3 per cent it accounted for in 1980 and the 4.8 per cent it was in 1968.
However, there are changes afoot. After a lengthy absence, some asset managers and central bankers are readmitting gold back into the group of prudent asset classes. Assessing the devastation of financial industry and government balance sheets, fiduciaries have been reminded that one of the principle reasons to hold gold - that it is the only major financial asset that does not represent someone else's obligation to repay - is not the arcane concept it once appeared.
I believe the renewed appreciation of risk management is in its infancy and that gold, like stocks and bonds, will recover its relatively small, but significant historical position in the world's investment funds. Considering the tiny size of the gold market, the implications of a potential return of gold into the world's largest portfolios are enormous. For, unlike stocks and bonds, whose supply can increase to meet demand, there is not enough gold to go around at today's prices.
According to International Strategy and Investment Group (ISI), if gold ownership rose from 0.6 per cent of total financial assets to only 1.2 per cent, still less than half its 1980s level, this would equate to an additional 26,000 tonnes, or 16 per cent of aggregate gold worldwide. This represents 10 years' worth of current production.
Is such a momentous development likely? I suggest it is more likely than not, as the metal is set up for a "perfect storm" from a supply/demand standpoint. At a time when mining companies can barely find enough gold to replace their reserves and production growth is anaemic, central banks have not only stopped selling their gold but are now aligning with investors to accumulate it.
As it dawns on the wider market that the bull market in gold is real, the impact on gold mining equities will probably be dramatic. Until recently, in spite of their theoretical leverage, miners have lagged behind the metal's performance. This should not be so surprising. As most analysts haven't changed the long-term pricing of their cash flow models to reflect a sustained bull market in gold, the shares have underperformed amid assumptions that are outmoded.
This disconnect is similar to the experience of energy equities in the early 2000s. Even as oil surged, it was not until investors accepted that oil might not stay low forever and started to factor in higher prices that the equities were revalued. With the total market capitalisation of all gold mining companies only fractionally higher than that of Apple, any move by investors to capture the inherent leverage of these equities could drive stock prices substantially higher.
Asset managers and central banks are just beginning to readmit gold back into the select group of prudent asset classes. That this is occurring at a time when what might be seen as the world's safest financial asset classes may also be its scarcest suggests interesting times ahead for those who own gold.
Thomas Kaplan is Chairman of Tigris Financial Group