Bank Of America Analyst: A ‘Flash Crash’ In Early 2018 ‘Seems Quite Likely’
Is the stock market bubble about to burst? I know that I have been touching on this theme over and over and over again in recent weeks, but I can’t help it. Red flags are popping up all over the place, and the last time so many respected experts were warning about an imminent stock market crash was just before the last major financial crisis. Of course nobody can guarantee that global central banks won’t find a way to prolong this bubble just a little bit longer, but at this point they are all removing the artificial support from the markets in coordinated fashion. Without that artificial support, it is inevitable that financial markets will experience a correction, and the only real question is what the exact timing will be.
For example, Bank of America’s Michael Hartnett originally thought that the coming correction would come a bit sooner, but now he is warning of a “flash crash” during the first half of 2018…
Having predicted back in July that the “most dangerous moment for markets will come in 3 or 4 months“, i.e., now, BofA’s Michael Hartnett was – in retrospect – wrong (unless of course the S&P plunges in the next few days). However, having stuck to his underlying logic – which was as sound then as it is now – Hartnett has not given up on his “bad cop” forecast (not to be mistaken with the S&P target to be unveiled shortly by BofA’s equity team and which will probably be around 2,800), and in a note released overnight, the Chief Investment Strategist not only once again dares to time his market peak forecast, which he now thinks will take place in the first half of 2018, but goes so far as to predict that there will be a flash crash “a la 1987/1994/1998” in just a few months.
“A flash crash (à la ’87/’94/’98) in H1 2018 seems quite likely, in our view, as the major sedative of volatility, the central banks, start to withdraw liquidity.”
Hartnett is making the same point that I have made repeatedly in recent weeks. As the central banks withdraw the artificial support that has been propping up the markets ever since the last financial crisis, we will see if the markets can really maintain these absolutely ridiculous price levels on their own.
And we are not just talking about stock prices either. In fact, Bill Blain believes that the coming crash will actually originate in the bond market…
The 2008 crisis, which was about consumer debt, was triggered by mortgages. We still have consumer debt crisis problems ahead, warns Blain, adding the next financial crisis is likely to be in corporate debt.
“More immediately, the realization a crisis is coming feels very similar to June 2007 when the first mortgage-backed funds in the US started to wobble.” He said it explains why “we’re seeing the highly levered sector of the junk bond markets struggle, and companies correlated to struggling highly levered consumers (such as health and telecoms) also in trouble.”
Stock markets don’t matter, according to the strategist. “The truth is in bond markets. And that’s where I’m looking for the dam to break. The great crash of 2018 is going to start in the deeper, darker depths of the credit market,” he said.
Asset prices of all classes have been pushed to absolutely absurd levels by the central banks.
If it wasn’t for central bank manipulation, stock prices would have never gotten this high, and the bond market would have never been pushed to such irrational extremes.
And it isn’t just the Federal Reserve that has been intervening directly in U.S. markets.
For example, did you know that the Swiss National Bank is now the eighth largest public holder of U.S. stocks in the entire world?
According to John Mauldin, the Swiss central bank has poured 17 billion dollars into our stock market so far this year, and overall they now own approximately 80 billion dollars worth of our stocks…
The SNB owns about $ 80 billion in US stocks today (June, 2017) and a guesstimated $ 20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it).
They have bought roughly $ 17 billion worth of US stocks so far this year. And they have no formula; they are just trying to manage their currency.
Think about this for a moment: They have about $ 10,000 in US stocks on their books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.
Switzerland is now the eighth-largest public holder of US stocks. And apparently they are concentrating on the largest of the large-cap stocks. The own 19 million shares of Apple (as of March 31).
They have made these purchases with money that they have literally created out of thin air.
If that sounds like “cheating” to you, that is because that is exactly what it is.
How in the world can stock prices possibly fall when global central banks are creating colossal mountains of money out of thin air and are using that money to buy stocks?
The central banks created this ridiculous stock market bubble, and they can also burst the bubble by pulling back on the level of artificial support, and that is precisely what we see happening right now.
So don’t buy into the hype. All that really matters is what the central banks choose to do, and if they wanted to continue to pump enormous amounts of money into the financial markets they could continue to pump up this absurd financial bubble that we are currently witnessing.
But at the moment they appear to be pulling back, and that makes a very “interesting” 2018 for the financial markets much more likely.
How The Elite Dominate The World – Part 2: 99.9% Of The Global Population Lives In A Country With A Central Bank
Even though the nations of the world are very deeply divided on almost everything else, somehow virtually all of them have been convinced that central banking is the way to go. Today, less than 0.1% of the population of the world lives in a country that does not have a central bank. Do you think that there is any possible way that this is a coincidence? And it is also not a coincidence that we are now facing the greatest debt bubble in the history of the world. In Part I of this series, I discussed the fact that total global debt has reached 217 trillion dollars. Once you understand that central banks are designed to create endless debt, and once you understand that 99.9% of the global population lives in a country that has a central bank, then it finally makes sense why we have accumulated so much debt. The elite of the world use debt as a tool of enslavement, and central banking has allowed them to literally enslave the entire planet.
Some of you may not be familiar with how a “central bank” differs from a normal bank. The following definition of a “central bank” comes from Wikipedia…
Over the past 100 years or so, we have seen central banks steadily be established all over the planet. At this point, there are just 8 very small nations that still do not have a central bank…
-Andorra -Monaco -Nauru -Kiribati -Tuvalu -Palau -Marshall Islands -Federated States of Micronesia
When you add the populations of those 8 nations together, it comes to much less than 0.1% of the global population.
But even though central banking is nearly universal, only a very small fraction of the global population can tell you how money is created.
Do you know where money comes from?
Here in the United States, most people just assume that the federal government creates money. But that is not true at all.
Many are absolutely shocked when they discover that U.S. currency is actually borrowed into existence. The federal government gives U.S. Treasury bonds (debt) to the Federal Reserve in exchange for money that the Federal Reserve creates out of thin air. The Federal Reserve then auctions off those bonds to the highest bidder.
Since the federal government must pay interest on those bonds, the amount of debt that is created in these transactions is actually greater than the amount of money that is created. But we are told that if we can just circulate the money throughout our economy fast enough and tax it at a high enough rate, then we can eventually pay off the debt. Of course that never actually happens, and so the federal government always has to go back and borrow even more money. This is called a debt spiral, and at this point we will never be able to escape it until we do away with this horrible system.
But why does our government (or any government for that matter) have to borrow money that is created by a central bank in the first place?
Why can’t governments just create money themselves?
Oops. That is the big secret that nobody is supposed to talk about.
Theoretically, the U.S. government doesn’t actually have to borrow a single penny. Instead of borrowing money the Federal Reserve creates out of thin air, the federal government could just create money directly and spend it into circulation.
Yes, this could actually happen. Back in 1963, President John F. Kennedy signed Executive Order 11110 which authorized the U.S. Treasury to issue debt-free “United States Notes” which were not created by the Federal Reserve. These debt-free notes began to be issued, and you can still find them for sale on eBay today. Unfortunately, President Kennedy was assassinated shortly after this executive order was issued, and the notes were not in production for long.
If we had ultimately fully adopted “United States Notes” and had phased out Federal Reserve notes, we would not be 20 trillion dollars in debt today.
The elite of the world love to get national governments deep into debt, because it enables them to enslave entire populations while making an obscene amount of money in the process.
Back in 1913, an insidious plan was rushed through Congress just before Christmas that was based on a blueprint that had been developed by very powerful Wall Street interests. Author G. Edward Griffin did an extraordinary job of documenting how all of this happened in his book entitled “The Creature from Jekyll Island: A Second Look at the Federal Reserve”. A central bank was established, and it was purposely designed to create a government debt spiral, and that is precisely what happened.
Since 1913, the size of the national debt has gotten more than 6,000 times larger, and the value of our dollar has declined by more than 98 percent. Many conservatives are still under the illusion that we could get out of debt someday if we just grow the economy fast enough, but I have shown in another article that we have gotten to the point where this is mathematically impossible.
And most people are also operating under the false assumption that the Federal Reserve is part of the federal government. But that is not accurate either. The following comes from one of my previous articles…
There is often a lot of confusion about the Federal Reserve, because a lot of people think that it is simply an agency of the federal government. But of course that is not true at all. In fact, as Ron Paul likes to say, the Federal Reserve is about as “federal” as Federal Express is.
The Fed is an independent central bank that has even argued in court that it is not an agency of the federal government. Yes, the president appoints the leadership of the Fed, but the Fed and other central banks around the world have always fiercely guarded their “independence”. On the official Fed website, it is admitted that the 12 regional Federal Reserve banks are organized “much like private corporations”, and they very much operate like private entities. They even issue shares of stock to the private banks that own them.
In case you were wondering, the federal government has zero shares.
According to the U.S. Constitution, a private central banking cartel should not be issuing our currency. In Article I, Section 8 of our Constitution, Congress is solely given the authority to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.
So why in the world has this authority been given to a central bank?
The truth is that we do not need a central bank.
From 1872 to 1913, there was no central bank and no income tax, and it turned out to be the greatest period of economic growth in all of U.S. history.
But since the Fed was established, there have been 18 different recessions or depressions: 1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.
As I discussed yesterday, the elite use debt to enslave all of the rest of us, and central banking allows them to literally dominate the entire planet.
Until we abolish this debt-based system and go to a currency that is debt-free, we are never going to permanently solve our very deep long-term economic and financial problems.
But because they are so immensely wealthy, the elite are able to wield extraordinary influence in our society. They control the mainstream media, our politicians and even global institutions such as the United Nations. Anyone that would dare to question the validity of the current system is marginalized, and for a long time very few politicians around the world were even willing to speak out against central banking.
However, that is starting to change. A new generation of leaders is rising up, and they are absolutely determined to break the stranglehold that the elite have on our society. It won’t be easy, but if we are able to wake enough people up, I believe that we will eventually be able to free ourselves from this insidious system.
Michael Pento Exclusive: Gold Sniffing Out Central Bank Failure; Fed Tightens into Economic Weakness
Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear from Michael Pento of Pento Portfolio Strategies on how the broken window fallacy is now becoming a part of the narrative surrounding the terrible tragedy in the Houston area and also talks about an exciting setup he sees in the gold market and what will be the tipping point. Don’t miss another wonderful interview with Austrian economist and money manager Michael Pento, coming up after this week’s market update.
Precious metals markets enter trading for the month of September with strong upside momentum on the heels of a late summer rally.
On Monday, gold prices broke out above the $ 1,300 resistance level to new highs for the year. As of this Friday recording gold trades at $ 1,323 an ounce, up 2.4% on the week. Gold’s gains are being confirmed by the gold mining stocks, which are now putting in their biggest weekly up moves of the summer.
Turning to the white metals, silver shows a weekly gain of 3.3% to bring spot prices to $ 17.69 an ounce. Platinum poked back above the $ 1,000 level on Thursday and currently trades at $ 1,007 an ounce on the heels of this week’s 2.9% advance. Its sister metal palladium is up 3.9% to $ 966.
Metals markets responded to the carnage inflicted by Hurricane Harvey and the inflationary implications for U.S. fiscal policy.
Lawmakers return to Capitol Hill next Tuesday. They will take up a Harvey aid bill expected to cost tens of billions of dollars. Whether it’s a clean bill or is tied to unrelated pork barrel spending or an increase in the debt limit remains to be seen.
The Treasury Department had said that the debt ceiling must be raised by September 29th. Officials now say that the deadline may move forward by a couple days because of disaster relief spending. These developments will make it more difficult for Freedom Caucus members of Congress to win any spending concessions.
President Donald Trump still intends to push for tax reform. Senate Republicans will be under tremendous pressure to deliver something on that front after they failed spectacularly on Obamacare repeal. Here’s what Trump had to say in a speech earlier this year:
Donald Trump: We need a tax code that is simple, fair, and easy to understand. That means getting rid of the loopholes and complexity that primarily benefit the wealthiest Americans and special interests. Our last major tax re-write was 31 years ago. And I am fully committed to working with Congress to get this job done, and I don’t want to be disappointed by Congress.
The President did get some good news on the economy this week. U.S. GDP growth got revised upward to a better than expected 3%.
Good news is often interpreted by markets as bad news for metals markets. A stronger economy makes the Federal Reserve more likely to tighten monetary policy. But this week, good news was good for stocks, commodities, and precious metals.
The bad news out of Texas may have something to do with that. Given the tremendous financial stresses on millions of families who have either been impacted or flooded out of their homes, the Fed is likely to hold off on any new rate hikes or quantitative tightening for a while. Central bankers don’t want to be perceived as villains for causing rates on mortgages and home improvement loans to rise.
Yet in keeping rates artificially low, central bankers are complicit in inflating asset bubbles to dangerous proportions. The stock market certainly wouldn’t be trading where it is today without Fed stimulus. The sky high costs of health insurance and college tuitions wouldn’t be where they are now, either.
In order to help qualified students pay for the ever-rising costs of higher education, Money Metals Exchange has teamed up with the Sound Money Defense League for a scholarship fund. It is the first gold-backed scholarship of the modern era. We’re setting aside 100 ounces of physical gold for scholarships to outstanding undergraduate and graduate students who display deep understanding of economics and monetary policy.
For 2017, we will be awarding this scholarship to two incoming or current undergraduate students and to two graduate students. First place winners will receive $ 2,000 each, with runner ups getting $ 1,000.
Applicants must submit an essay that answers a specific question about free markets and sound money. Essays will be reviewed by a blue ribbon committee of professors, economists, and executives of Money Metals Exchange and the Sound Money Defense League. The application and essay must be submitted by September 30, 2017.
If you have a college student in your family who is interested in free market economics and sound monetary policies, be sure to let him or her know about this scholarship opportunity. For more information or to apply, please visit moneymetals.com/scholarship.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege to welcome in Michael Pento, President and founder of Pento Portfolio Strategies, and author of the book, The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a well-known and successful money manager, and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also the Money Medals Podcast, and shares his astute insights on markets and geopolitics from the perspective of an Austrian school economist viewpoint.
It’s always a real pleasure to have him on with us. Michael, welcome back and how are you?
Michael Pento: I’m doing fine and thank you for having me back on Mike.
Mike Gleason: Well Michael, let’s start out here with the topic that is dominating the news. Hurricane Harvey has laid waste to Houston, and the Texas Gulf coast. But Wall Street doesn’t seem to be bothered. Gold and silver have got a bit of a boost, but the equity market shrugged it off. This all makes me think back of the parable of the broken window, which was introduced by the well-known 19th century economist, Frédéric Bastiat, where he described why the money spent to recover from destruction is not actually a benefit to society.
But Michael, it appears as though Wall Street and the financial world might be buying into the idea of the broken window fallacy and viewing it as truth, and that all the destruction will somehow be good for the economy. What are your comments there, and what do you makes of the markets initial response here, to this terrible, terrible tragedy?
Michael Pento: I guess it’s part of the hyperbole and hysteria that encompasses Wall Street right now. Nothing can knock down the stock market. You didn’t even mention the fact that North Korea Kim Jung-un, his new regime, launched his 80th scud missile, and they’re ICBM’s, ballistic missiles, into the Sea of Japan and over Japan, and towards southern, south Sea of Japan. And nobody seems to care. As a matter of fact, the market rallied, from being down about 150 points in the pre-market to, I think, plus 58 on the DOW, yesterday (Tueday).
There’s nothing (that) can harm this market. The reason for that … The simple reason behind that, is that central banks have printed 15 trillion dollars’ worth of confetti and counterfeit money, leading out of the financial crisis, from 2008 to today. 15 trillion and counting. You know, don’t forget you still have 60 billion euros per month, over in Europe, and you’ve got the Swiss Central Bank. You’ve got the Bank of Japan, which is hopefully enamored with money printing in it, at least Mr. Kuroda, the head of the BoJ, understands that he can never, never, even think about, or hint about reducing his quantitative easing, or QQE program that he has.
Going back to Frédéric Bastiat … Wall Street, very low level of thinking, very idiotic group of individuals, who actually … I was listening to CNBC, comment about how … By the way my heart and my prayers go out to the people in Houston, and now in Louisiana. I heard a commentator on the show saying, “Hey, but let’s look at the good news here. Look at all the construction that’s going to happen, so this is actually a boom for the economy.” Well, you know, if you follow that philosophy, then we might as well just bulldoze all the houses, and all of the physical structures in the United States. That’s how you grow GDP. You don’t grow GDP through productivity, and you don’t grow GDP by increasing and boosting your labor force.
The new way of growing productivity now, is to break things, and to pray for catastrophic storms. Of course, they never think about where the money comes from. In other words, if I was going to fix this pane of glass, in the analogy that you brought up, the broken window analogy … Well, I was going to buy a pair of shoes, and now I have to spend that money on fixing the pane of glass. Or, if I have to just borrow that money, that money that’s borrowed, to fix the glass, would have been borrowed to, perhaps buy capital goods, and expand the economy. And of course, if that money is just printed, well then, we have the scourge of inflation. There is no magic. There is no free lunch, in anything, and especially in economics. That’s true.
Mike Gleason: When the flooding in Texas moves out of the news, the coming fight over the debt ceiling could be front and center. Now, it looked like, to us a fight was brewing with a contingent of conservative Republicans revolting on one flank, and Democrats looking to thwart Trump and his agenda, everywhere possible, on another. Trump and GOP leadership have their hands full, getting a bill to hike the borrowing limit passed. But it could be that Hurricane Harvey will be used to prevent a big fight here, relief for Texas, might be inserted into the bill to raise the borrowing cap. And few politicians will object for fear of being criticized. With that said, are you expecting a fight over the debt ceiling to be significant Michael? And any chance, we could see a government shut down here?
Michael Pento: Well, at first glance, a prima facie look at this, is that I expect more dysfunction in DC. I predicted this when Donald Trump was elected. I said that his massive reform of healthcare, his tax reform packages would be both, deluded, and delayed, and that’s exactly what has happened. And of course, Wall Street likes to look at every event as a positive. The glass is always half full. So, now they’re saying that we have hurricane that we have to pay for, that this is going to somehow make the passage of everything, tax reform, construction spending, infrastructure, the debt ceiling, the budget. Everything’s going to go smoothly.
I have my doubts. I run an actively managed portfolio. So, the base case scenario is dysfunction in DC. That has been very, very prudent, and a correct path to assume and to take. I believe it’s not going to go smoothly. I believe that we have to pass the budget by the end of September, and raise the debt ceiling by middle of October. Now, Mnuchin and Mulvaney, they were on opposite sides of this, but now they’re on the same talking points as Trump. They just want to raise the debt ceiling cleanly. But I don’t think the Tea Party Republicans, in the House of Representatives are going to go alone with that, so yes there will be a fight, even if they try to attach this hurricane spending bill, infrastructure bill to it.
Mike Gleason: The U.S. dollar isn’t looking too good these days. We’ve seen pretty steady decline, since the beginning of the year. Of course, the dollar is a terribly flawed instrument, and the fact that the DXY index traded at an all-time high late last year, was more a testament to just how bad other major world currencies must be. Where do you think we’re going from here? Is the dollar going to head lower?
Michael Pento: Well, we went from about 80 on the DXY … which is heavily weighted towards the euro … from 80 to above 100, in anticipation of what? Anticipation of Mr. Trump getting a lot of his agenda passed, rather quickly. And also the divergence between the two major central banks, between ECB and the Federal Reserve. And where, as we see now, things not shaking out that well at all. We see the dollar index has dropped from above 100, now at major support around 92. If it breaks through 92 on the DXY, I think it could head towards 80. All eyes are on the ECB. The ECB is primarily in charge here.
If Mario Draghi, on September seventh, announces a tapering of his 60 billion per euro a month, asset purchase program, I would expect the euro to skyrocket, and the dollar to fall precipitately, right through that 92, towards 80. And, of course if he does not taper his asset purchase program, then the dollar could catch a bid and head back towards 100.
That’s why, again, I run an actively managed portfolio, trying to guess the minds of these megalomaniac schizophrenics, that run central banks, is very, very difficult, so it’s best to have, not a passive ETF strategy, buy and hold, and then forget about your money. You have to actively manage your portfolio. So, I will react to, what Mario Draghi does. European GDP growth is very, not very strong, but getting stronger. They are missing on the inflation target, just as we are here in the United States, at least the way central banks measure inflation, if you don’t count everything that’s going up, like medical costs, and college tuition, and asset prices. So, who knows what they’re going to do, but you have to be reactive, rather than just proactive in this kind of environment.
Mike Gleason: Staying on monetary policy here for a moment. Any thoughts on where Trump goes with his Fed chair appointee early next year? Any chance Yellen get reappointed, or does he bring in somebody even more dovish? What do you think?
Michael Pento: Well, it’s hard to get someone more dovish than Janet Yellen, but … I guess, you know, I don’t have any special insight here. Gary Cohen would be my best guess, because Trump likes to put his fingerprint on everything, and he needs somebody in there who is going to really fight for low interest rates, and for deregulation policy. Yellen kind of submarines herself at Jackson Hole, talking about the importance of regulation in the banking system. So, my best guess is that, come February 2018, that we have a new Fed chair, and that person is Gary Cohen, who will really fight hard for low interest rates, and a weak dollar. Both those things espoused by our President Trump, not candidate Trump, President Trump, and there’s a difference.
Mike Gleason: Yeah. Very important distinction there, for sure. Let’s dig into the gold and silver markets here for a minute. Now, demand in the retail bullion market continues to be pretty soft. To our way of thinking. That can be largely attributed to a few factors. First off, bullion investors are more optimistic about a Trump Presidency, than the Obama Presidency.
Another is that, precious metals prices really haven’t been going anywhere for a while now. And then, also, those who have been buying gold and silver as a safe haven, have probably, just gotten exhausted. They’ve been on high alert, expecting significant fallout, resulting from ultra-loose Fed policy, massive Federal deficits, unlimited borrowing, et cetera.
But the reckoning, it never seems to come, so are bullion investors just going to have to live a while longer here, in purgatory, or do you see anything exciting developing in the months ahead for the metals?
Michael Pento: Oh. I see something very exciting developing. So, we have a condition here across the United States and in Europe – not in Japan as I mentioned – where we have central banks that absolutely believe they have solved all of the global, economic problems. And, what they have done instead, they’ve engendered, they’ve fostered a huge increase in debt. We have about a 70 trillion dollar increase in debt, coming out of the great recession. We have 230 trillion dollars of debt now in the globe. It’s about 330%, just about 330% of global GDP. And the entire global economy, as anemic as it is, and people talk about this global synchronized growth…
Global growth is not anywhere near where it was in the early 2000’s. We’re about – globally speaking, you look at the major developed economies – they’re about one percent, one to two percent. There is no big expanse in global growth, but whatever global growth there is, it totally and completely hinges on continued low interest rates. And central banks have now convinced that they’ve solved all our problems, as I said. And now, you look at the Fed, who entered QE in 2014, and now we’re getting ready for quantitative tightening, reverse QE to start this year.
And surely, I’m 100% convinced, if it doesn’t start in September, at least in the early part of 2018, Mario Draghi and the ECB, will start to taper, it’s assets. They were 80 billion. Now, they’re 60 billion. He’s going to be reducing his asset purchase program towards zero, certainly by the end of 2018. So, when that happens, you’re going to have … and the Fed likes to talk about tapering, they’re not selling assets, they’re just letting them roll off the balance sheet… assets do not roll off of a Fed’s balance sheet. When the Federal Reserve has a note due, what they’re going to do, is ask the treasury to pay them this note. Well, the treasury has no money.
So, the treasury has to sell an amount equal to the note due to the Fed. The treasury then, has to not only sell this debt, but has to now, service this debt, whereas before those interest payments were being refunded by the Fed to the treasury. And when the Fed gets this money, it’s retired. So, you’re talking about a draining of the money supply. You’re talking about that happening, not only in the United States, but also in Europe. And who’s going to buy all this debt?
Now, the debt has absolutely, as I said, skyrocketed, 70 trillion dollars increase. There isn’t any private source for this funding. No one is going to buy a German bund, yielding .37%, when there is no central bank around, and the central bank is getting ready to sell assets. There isn’t anybody who’s going to buy a U.S. 10-year note, yielding 2.2%, or 2.15 as we make this recording. Nobody is going to make that purchase, when the Federal Reserve is getting ready to sell trillions of dollars. They have four and a half trillion dollar balance sheet. If they take it down to two and a half, it’s two trillion dollars’ worth of mortgage backed securities and treasuries that are going to be adding to that a trillion-dollar deficit that we already have. Deficits go up huge, as interests rates go up. Interest rates rise. It’s a very vicious, counterproductive cycle.
If we have higher debt service costs for every one percent to 200 billion dollars. We have one trillion dollar in deficits, because of demographics. And if we have a recession, deficits will rise and buy an additional trillion dollars. We can have deficits well over two, approaching three trillion dollars, with no help from the government. This is going to cause, whatever relatively anemic economic growth to falter substantially.
And I will add this. We already have the automotive sector, and the real estate sector rolling over in this country. If we have a spike in interest rates, which will emanate from the ECB, whenever they decide to start tapering assets, and the German Bund rises towards nominal GDP, which is close to three percent, actually above three percent. You go from .37% to over three percent, that’s going to drag up yields across the globe, and that’s when the situations really going to be extremely pernicious.
And what’s going to happen then … now the gold market is already sniffing this out, by the way, as we breached $ 1,300 an ounce a couple of days ago … the gold market is sniffing out this: that central banks are going to have to get back into the QE programs, across the board. And when that happens, faith in fiat currencies – not just the dollar, all fiat currencies – is going to falter very dramatically. You see some of this, not only in the gold market, but you see this phenomenon in the cryptocurrency world.
There is going to be a dramatic watershed, trench and drop in the faith of central bankers. That’s the biggest bubble of all. And when that pops, gold’s going to go back to its all-time high, and well surpassing that level too. So, look for $ 2,000 an ounce gold. It’s going to happen rather quickly. I think it’s going to happen within the next couple of years, and you already see the beginnings of that happening today.
Mike Gleason: Well, we’ll leave it there. Fantastic stuff as always. Michael, it’s great to have you on, we respect your insights quite a bit. It’s excellent to have you join us every few months.
Now, before we let you go, as we always do, please tell people, who want to both read and hear more of your wonderful market commentaries, and also learn about your firm, and how they could potentially become a client, if they want to do that. Please tell them, how they can find out more information.
Mike Gleason: Well, thanks again Michael. Enjoy the Labor Day weekend. We look forward to catching up with you again later this year. Take care, my friend.
Michael Pento: Thanks again for having me back on Mike.
Mike Gleason: Well that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more information just visit PentoPort.com. You can sign up for his email list, listen to the midweek podcast that he does and get his fantastic market commentaries on a regular basis. Again, just go to PentoPort.com.
Head of the Financial Markets Division of the Dutch central bank, Aerdt Houben, stated in an interview for newspaper Het Financieele Dagblad published in October 2016 that releasing a bar list of the Dutch official gold reserves “would cost hundreds of thousands of euros”. In this post we’ll expose this is virtually impossible – the costs to publish the bar list should be close to zero – and speculate about the far reaching implications of this falsehood.
This story started a couple of years ago. As I am Dutch and concerned not only about my own financial wellbeing but of my country as well, I commenced inquiring my national central bank about the whereabouts and safety of our gold reserves in late 2013. One of my first actions was submitting the local equivalent of a Freedom Of Information Act – in Dutch WOB – to De Nederlandsche Bank (DNB) in order to obtain all written communication of the past decades between DNB and the Federal Reserve Bank Of New York (FRBNY). In 2013 I knew a large share of the Dutch gold was stored at the FRBNY, which I deemed to be an unnecessary risk. In a crisis situation, for example, the US government would be able to confiscate Dutch gold stored on American soil. Unfortunately, DNB responded it’s exempt from certain WOB requests under the banking law from 1998, article 3. (I thought the WOB hit a dead end, though recent developments have changed my mind regarding the legitimacy of the rejection. In a forthcoming post more on my WOB from 2013.)
Subsequently, on 21 November 2014 DNB shocked the financial world by announcing it had covertly repatriated 123 tonnes of gold from the FRBNY vaults. Did DNB question the trustworthiness of the FRBNY like myself? Most likely, as I see few other reasons for repatriating, next to losing trust in the international monetary system itself. The gold wasn’t sold in the Netherlands, as our gold reserves have remained unchanged at 612 tonnes since 2008. Apparently DNB felt saver having less gold stored at the FRBNY. Note, the FRBNY offers institutional clients to store gold free of charge, yet DNB favored to ship it home. From the FRBNY website:
The New York Fed charges account holders a handling fee for gold transactions, including when gold enters or leaves the vault or ownership transfers (moves between compartments), but otherwise does not charge fees for gold storage.
In the press release DNB stated repatriating gold “may have a positive effect on public confidence”. Suggesting the Dutch public – or central bank or government – does not have full faith in the FRBNY as a custodian.
My focus on the Dutch gold, in a way partially mine as our official gold reserves are not owned but merely managed by DNB, was sharpened in 2015. On 26 September of that year I visited the Reinvent Money conference in Rotterdam, the Netherlands. One of the speakers was Jacob De Haan from DNB’s Economics and Research Division. In his presentation, De Haan repeatedly emphasized the importance of transparency in central banking.
Through my WOB experience, however, DNB appeared to be not transparent at all. Thereby, if DNB wants to be transparent and boost public confidence, why doesn’t it publish a gold bar list? The publication of this list would provide one of the most important checks on the existence of the Dutch official gold reserves, as the list can then be cross checked with the inventory lists of gold ETFs and alike, possibly exposing multiple titles of ownership on single gold bars. And this act of transparency could be accomplished within minutes by uploading an excel sheet to the DNB website. When I approached De Haan after the conference and asked why DNB doesn’t put out a gold bar list, he offered me he would look into it. He gave me his email address and we agreed to stay in touch.
Many months pasted, but after countless emails and phone calls DNB finally notified me it would not publish any gold bar list. So much for transparency! The following is what DNB wrote me on 11 August 2016 as the reason not to publish:
…we do not intend to publish a gold bar list. This serves no additional monetary purpose to our aforementioned transparency policy, however it would incur administrative costs.
Administrative costs? There hardly could be administrative costs as this list should be readily available in one or more spreadsheets, I reckoned. When confronting DNB with my logic they replied on 15 August 2016:
DNB has internal gold bar lists, however the conversion of internal lists to documents for publication would create too many administrative burdens.
DNB claims to have “internal lists”, but creating “documents for publication” would create too many administrative burdens. I couldn’t believe it. The only way this excuse would hold was if DNB’s internal lists are non-digital, which then need to be either physically copied or manually inserted in spreadsheet software. However, it’s highly unlikely DNB doesn’t have a digital gold bar list in this day and age. Computers have been widely used since the eighties; that’s more than thirty years ago. One the first applications that computers supported were spreadsheet programs designed for accounting.
Roughly 65 % of the international reserves of the Netherlands are held in gold. Would DNB still keep their precious gold records on pieces of paper?
In my professional opinion the Dutch gold must be meticulously recorded in digital documents and thus publishing a bar list should cost nothing. But showing proof will strengthen my perspective. Up till now this post has been more or less a summary of my previous writings. Down below we’ll zoom in on this material, and reveal why it’s virtually impossible for DNB to gain any administrative burdens for publishing a gold bar list.
Allocated Accounts: These are accounts held by dealers [/custodians] in clients’ names on which are maintained balances of uniquely identifiable bars of metal ‘allocated’ to a specific customer and segregated from other metal held in the vault. The client has full title to this metal with the dealer holding it on the client’s behalf as custodian.
Clients’ holdings will be identified in a weight list of bars showing the unique bar number, gross weight, the assay or fineness of each bar and its fine weight.
Clearly, allocated accounts contain uniquely identifiable gold bars owned by one specific client.
DNB discloses the Dutch official gold reserves position according to the International Monetary Fund’s Balance of Payments and International Investment Position Manual version 6 (BPM6). From DNB [brackets added by Koos Jansen]:
De Nederlandsche Bank [DNB] publishes the balance of payments statistics according to the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) since October 2014.
The figures for the Netherlands have been adjusted for the period since 2008.
BPM6 forces national authorities to distinguish between gold bullion and unallocated accounts, of which gold bullion can be held in allocated accounts. The German central bank wrote in June 2014 on adopting BPM6 [brackets added by Koos Jansen]:
The new rules are binding for the EU member states [which includes the Netherlands] by virtue of a Council regulation amended by the European Commission.
With regard to reserve assets, gold transactions and positions will in future be subdivided into  gold bullion, which includes gold bars and allocated gold accounts, and  gold receivables, to which no specific gold holdings are assigned [unallocated accounts].
In the next chart we can see the ratio between gold bullion and unallocated accounts of all the Eurosystem’s national central banks. The data has been sourced from the German central bank, as the BundesBank’s website has the most user friendly interface. The Netherlands is said to hold 100 % in gold bullion.
When asked directly, DNB replied all the Dutch official gold is indeed fully allocated. Accordingly, there should be lists from all custodians that show the uniquely identifiable gold bars owned by the Dutch state, as stipulated by LBMA guidelines.
Displayed above in exhibit 1, the Dutch gold is mainly stored abroad. Since November 2014 the breakdown by location is as follows: 31 % in Amsterdam at DNB headquarters, 31 % in New York at the FRBNY, 20 % in Ottawa at the Bank Of Canada (BOC) and 18 % in London at the Bank Of England (BOE).
The BOE And FRBNY Provide Clients A Gold Bar List In Digital Format
We can read the BOE claims to provide clients a digital gold bar list that complies with Annex H of the LBMA’s Specifications for Good Delivery Bars and Application Procedures for Listing, and clients are permitted to inspect their gold at the BOE.
When approached with the same questions, the custodian bank in New York replied it couldn’t comment on this subject. However, there is a bar list of gold stored at the FRBNY in the public domain. For the Gold Reserve Transparency Act (2011, not enacted) the US Treasury published two gold bar lists. The first list in excel sheet format covers the US official gold stored at Fort Knox, Denver and West-Point, which aggregates to 7,715 tonnes (click to download the list). The second list in PDF format covers the US gold stored at the FRBNY, which accounts for 418 tonnes (click to download the list starting on page 128). Below is a screenshot of the FRBNY list:
As shown the FRBNY list fully complies with LBMA standards: included is refinery brand, unique serial/melt number, gross weight, fineness, fine weight and year of manufacturing.
At the bottom of exhibit 8 we read the original document name is “FRBNY Schedule of Inventory of Gold Held.xlsx“. The extension of the document name “.xlsx” means the file was created by Microsoft Excel software, which is the most commonly used spreadsheet application. So, either, the FRBNY keeps its bar lists in excel sheets, or is capable of converting their data to excel format.
Kindly remember the US official gold reserves are owned by the US Treasury, not by the FRBNY. We may conclude the FRBNY is able to provides its clients, such as the US Treasury, gold bar lists in electronic format. There should be no problem whatsoever if DNB would ask the FRBNY for the Dutch gold bar list in excel format.
The Bank of Canada didn’t reply to my inquiries, but it doesn’t matter at this point. It should be clear gold custodians keep their books electronically and fully comply with LBMA standards.
I did find a hint of how the BOC operates. In 1997 Professor Duncan McDowall and his team investigated all gold dealings by the BOC from 1935 until 1956 to evaluate if some of the gold stored in Ottawa had ever been intertwined with Nazi gold. McDowall’s investigation is titled “Due Diligence: A report on the Bank of Canada’s handling of foreign gold during World War II“. One of the professor’s observations with respect to the BOC’s historical documents reads [brackets added by Koos Jansen]:
Fiduciary obligation is similarly represented in the Bank’s [BOC] written dealings with its clients: the entitlement of any client to have a written confirmation of the disposition of the assets they have placed in the care of a bank. A good example of such an obligation in the context of this report would be the regular production of account statements that provided foreign central banks [i.e. DNB] with precise month-end and year-end reckonings of their earmarked gold holdings [allocated accounts] in Ottawa. … Currency Division’s reports on the arrival and departure of gold to and from these accounts therefore provided a meticulous record of foreign clients’ dealings with the Bank.
Even the BOC’s gold books from before the war appeared to be impeccable. I assume the BOC’s current custodial gold bookkeeping is as precise and meticulous now as it was then
DNB Is Likely To Maintain A Gold Bar List in Digital Format
Which leaves us to speculate if DNB itself, as the fourth custodian, holds a digital bar list of the 190 tonnes stored in Amsterdam. Allow me to share why I think they do.
The fact DNB repatriated 123 tonnes in November 2014 from New York, shows they’ve revived their affinity with gold. Few central banks have brought their gold home in recent years, which clearly makes DNB a physical gold advocate. No matter how you look at it, this can’t be denied.
While repatriating DNB took the opportunity to upgrade its vault room at the Frederiksplein in Amsterdam, the Netherlands. Have a look at the DNB gold vault shelving system prior to November 2014 in the picture below:
Now have a look at the new shelving system at the Frederiksplein. This next picture was taken after November 2014:
Obviously, DNB made the structures more robust by switching from wooden shelves to what looks to be iron. DNB consulted the BOE for a new shelving system as the BOE has an identical system since many years prior to 2014. Have a look at a photo from the BOE’s gold vault below:
DNB repatriated 123 tonnes, worth roughly 22 billion euros, from the FRBNY somewhere in the months prior to November 2014, exposing a deep and renewed affinity with gold.
DNB must have received a digital list from New York with the bars transported, as we know the FRBNY keeps its records in an electronic configuration.
While repatriating DNB consulted with the BOE for a robust shelving system in order to upgrade the vault room in Amsterdam, which reaffirms DNB’s careful attention for the gold they store.
Judging from the actions above I dare to say DNB had meticulously, and thus electronically, inventoried the 67 tonnes already stored in Amsterdam before November 2014, or registered this metal when the batch from New York arrived. So very likely all gold stored in Amsterdam is properly recorded in digital format.
A summary of the previous three chapters before we continue:
All the Dutch official gold reserves are held in allocated accounts and thus there are bar lists available, which comply with LBMA standards, from all custodians.
We may conclude all custodians save and distribute their bar lists electronically.
Het Financieele Dagblad
Meanwhile, I was interviewed by Het Fiancieele Dagblad, the Dutch version of the Financial Times, on 27 September 2016 for a weekend special on gold. In the interview I told two FD journalists about my views on gold and my curious encounters with DNB. The next day one of the journalists wrote me he would interview Aerdt Houben, Head of DNB’s Financial Markets Division, for the same gold special and invited me to share what I would ask Houben in his seat. I wrote back I would inquire about the gold bar list and if DNB had ever physically audited all the Dutch gold, among other topics.
FD: Some people are worried the Dutch gold might be gone.
Houben: To a certain degree the people should have trust in us. We are transparent about how much gold we hold and the locations.
FD: Are there any reports and bar lists on this, if so: why aren’t those public?
Houben: The content of the reports is also being checked by our accountants for our annual report. But the gold bar lists that would costs hundreds of thousands of euros. Because many people would have to check the contents and the many updates that are required.
In part Houben said the same as DNB mailed me months before, while specifying the administrative burdens would be several hundreds of thousands of euros. By now we know this is a fallacy.
Regarding the “reports” as mentioned in the FD: according to Houben these “reports” (whatever they are) are checked by DNB’s accountants for the annual report and presumably should proof the existence of the Dutch gold. However, in DNB’s annual report 2016 there is no mentioning of such gold related “reports”, or any gold auditing for that matter. What are these “reports”? And in case these are audit reports, why aren’t those public?
Let’s also address that other excuse by DNB in the FD: “because many people would have to check the contents and the many updates that are required” . This is nonsense as well. For a proper audit, indeed, the bar lists would have to be checked against the physical inventory at the BOE, FRBNY, BOC and DNB. But, if the Dutch gold is audited by now, what additional checks would have to be done for publishing the bar list? Neither are any “updates” required as everything has been allocated since 2008. All DNB’s justifications have fallen apart.
I asked DNB in November 2016 by email, what exactly are the “reports” mentioned in the FD special, and why can’t DNB publish the gold bar list as provided by the BOE (the one custodian openly stating to provide clients a bar list)? DNB replied [brackets added by Koos Jansen]:
In the red frame it reads:
In response to your messages I can inform you DNB has internal overviews of her gold possessions. These are being checked by external accountants [presumably this means the Dutch gold is audited]. As stated previously, DNB considers publishing a gold bar list to serve no monetary purpose. Thereby, creating a bar list for publication would be costly regarding the different formats delivered by our custodians. This means we will not respect your request for obtaining the gold bar list.
I presume DNB tries to communicate the gold has been audited, but how does one audit gold without a gold bar list that complies with LBMA standards? Only when cross checking the bars with an inventory list that discloses all physical characteristics of the bars can audits be performed competently. Bar lists that comply with LBMA standards are indispensable for a physical audit of gold in allocated accounts.
Relying on audit documents (“reports“?) drafted by custodians is forgery. A physical audit has to be executed by a third party (not the owner and not the custodian). Gold industry practise is to count 100 % and weigh 2 % of all bars at least once a year for an audit (source Bureau Veritas).
I don’t believe it would take DNB any effort to convert the different list formats by its custodians. It’s all digital and can be converted into one file within seconds. (Though publishing the bar list in different formats is fine too.)
By and by, publishing a gold bar list does serve a monetary purpose as it confirms how much monetary gold as nation truly holds. Without public bar lists countries can more easily create false data.
Sadly, in the email dated 5 January 2017 (exhibit 14) DNB told me it won’t reply to me anymore with respect to their bar list.
Secrets. In the past a central bank was proud of it. Nobody was allowed to know how much gold we had and where it was stored. But the age of central banks cherishing their image of a closed fortress is long gone. Openness is our new policy.
The question is, who’s not telling the truth here? That would be DNB, for sure, and possibly also the BOE and FRBNY.
Just to be clear, the amount of gold leased out by DNB is nil. In 2012 the Dutch Minister Of Finance, De Jager, declared in congress DNB had ceased all gold leasing activities by 2008.
Again, all the Dutch gold is allocated, and yet DNB declared in a newspaper the bar list can’t be published because it would cost “hundreds of thousands of euros“ – this has appeared to be an embarrassing statement andtruly blows DNB’s credibility. If DNB doesn’t wish to disclose its bar list, for whatever reason, it would have done wise not to comment at all on this issue.
But why all the nonsense? Time to speculate. We’ll run through a few scenarios:
Scenario 1) Publishing a bar list might limit DNB’s future flexibility to intervene in financial markets. Currently, DNB hasn’t got any gold leased out. But if the bar list would be published, my central bank would be obstructed in future covert leasing activities.
Suppose, the gold price spikes in five months from now. DNB, or multiple central banks in concert, decide to lease out monetary gold in order to calm the physical market. When the leases would be undone several years later, surely the bars returned will not be the ones lend out. Following this scenario, when a bar list is published now it would be inaccurate in a few years time; showing bars that are long gone, and can show up on private gold ETF inventory lists.
If readers question wether central bankers are capable of ‘not telling the truth’, consider what DNB’s Governor said in an interview early 2012 when asked if he would repatriate any gold from the FRBNY. His answer was firm: “No”. However, shortly after, DNB started to prepare repatriating by reinforcing its headquarters. A new security barrier was constructed around the compound. DNB confirmed to me this was done to prevent any trucks from crashing the building. Likely, the Governor ‘did not tell the truth’ in the interview for strategic reasons.
Scenario 2) It’s possible the BOE claims to provide its clients gold bar lists and auditing rights, but in reality it doesn’t. Meaning, DNB doesn’t have a bar list from the BOE that complies with LBMA standards, which forces them to come up with excuses whenever confronted. This scenario could mean custodial gold at the BOE (and FRBNY) has been embezzled.
In 2016 economist Guillermo Barba pressured the Banco de México to publish a gold bar list of the Mexican gold stored at the BOE. In February 2017 Banco de México delivered Barba a list, but it didn’t satisfy LBMA standards by far. Surely this was done on purpose, because how the list was distributed can never have been how the BOE keeps it. So prior to distribution parts of the list were edited. Barba pressured Banxico once more and received a new list in March 2017 (click here to download the list). But neither did the new list satisfy LBMA standards! The column in the list that reads “serial number“, doesn’t disclose the serial numbers physically inscribed on the bars, which makes them uniquely identifiable, but shows the BOE’s internal numbering. In my opinion Barba was fooled twice by Banxico. Or Banxico was fooled twice by the BOE.
My colleague Ronan Manly tried to obtain a gold bar list from the Irish central bank (CBI); gold stored at the BOE. The CBI’s first response was:
The record concerned does not exist or cannot be found after all reasonable steps to ascertain its whereabouts have been taken, …
Your request was referred to two divisions within the Central Bank of Ireland, … Both divisions have confirmed that they do not hold any such records which fall within the scope of this part of your request. Accordingly, this part of your request is refused.
As far as I know, there has never been a serial number of a gold bar stored at the BOE released in the public domain. It can be the BOE is routinely deceiving its clients by distributing incomplete bar lists.
In the past, the central bank of Austria (OeNB) has failed to audit its gold at the BOE. The Austrian Court of Audit (Der Rechnungshof) wrote in a report in 2015 [brackets added by Koos Jansen]:
… the gold depository contract with the depository in England [BOE] contained deficiencies. With respect to the gold reserves stored abroad, internal auditing measures were lacking.
The OeNB had no appropriate concept to perform audits of its gold reserves. …
Was the OeNB blocked entrance from BOE vaults in 2015?
There is proof FRBNY clients have not been able to audit their gold in New York, at least not in 2007. The German Bundes Rechnungshof released a report in 2012 on the safety of the German gold abroad. Although the report is heavily redacted, on page 10 we read German auditors were not allowed entrance in the FRBNY gold vault to inspect their precious metals, nor were any other clients:
A possibility for the owners to physically record the holdings of their gold is not provided in the terms and conditions. According to the FRBNY, it’s a long-term practice not to allow the owners to inspect their assets in the interest of a safe working and control process. It has confirmed to the Bundesbank that these conditions for gold custody also apply to all other clients that store gold at the FRBNY.
In response to repeated requests from the internal auditors of the Bundesbank, their representatives were given the opportunity to enter the vault system in June 2007 to get an impression of the safety precautions. However, the employees were not given access to the vault compartments, but only to an entrance hall. An examination of gold was therefore not possible.
[Four redacted paragraphs follow]
Clearly the Germans were blocked from auditing their metal, and for decades all FRBNY clients had suffered the same fate.
Not surprisingly, after the developments between the OeNB, BOE, Bundesbank and FRBNY both European central banks decided to repatriate significant shares of their gold stored overseas. And both repatriate over the course of multiple years, which accentuates the friction between the custodians and their clients.
Maybe DNB has experienced the same obstructions in New York as the Germans and hence decided to repatriate.
Scenario 3) DNB just doesn’t feel like publishing a gold bar list.
Who’s to say what the truth is? If readers can think of an additional scenario please comment below.
My final conclusion is that DNB is lying about its gold bar list, which is worrisome as it shouldn’t be necessary, or things behind the scenes are more convoluted and DNB is being lied to by its custodians, which is even more worrisome.
In short, producing a bar list that complies with LBMA standards should be child’s play. And only proper lists can grant us the safety of all the official gold reserves stored at the BOE and FRBNY. As of March 2017 the BOE and FRBNY stored an aggregated 10,821 tonnes of gold, of which the majority is monetary gold.
The Bundesbank, OeNB and DNB all claim their gold is audited by now, but none of them has ever released an audit report. The German central bank wrote me it doesn’t publish its audit reports “since Deutsche Bundesbank and its partners have agreed to maintain confidentiality with regard to the audits”. More secrecy and central bank collusion, no surprises there.
Until central bankers are fully transparent about their gold dealings we can have but mere distrust in them.
The Central banks bought a staggering $ 1.5 trillion in assets in the first five months of the year to keep the economy from imploding while at the same time, capping the gold price. Yes, it’s true…. $ 300 billion a month of Central bank asset purchases pushes up STOCK, BOND and REAL ESTATE values while it depresses or caps the gold (or silver) price.
The amount of Central bank asset purchases are now reaching insane levels. And they have to. It is the same thing as being a drug addict. Once, someone starts down the road of drug addiction, it takes more and more of the drug to reach the same effect. Thus, when Central banks started purchasing assets to prop up the market, they have to continue, and they have to continue buying even more.
In a previous article, I published this chart showing Central bank asset purchases up until the first four months of 2017:
This chart came from a Zerohedge article that showed the Central banks purchased $ 1 trillion in assets in just the first four months of 2017, and the total of their balance sheets reached $ 14.6 trillion. In just five years, Central banks purchased $ 7 trillion in assets. However, in the first four months of 2017, they ramped it up to $ 1 trillion. Which means, the Central Bank asset purchases could reach $ 3.6 trillion annualized in 2017, surpassing half of all official purchases in the past five years.
That’s a lot of PROPPING UP folks…. and it also has totally depressed and capped the gold price. But, not for long.
However, before I get into some really interesting charts on just how crazy things are getting in Central bank land, I would like to share some of my sentiments about what is taking place in the Good ‘ole U.S. of A.
BRAIN DAMAGE & INSANITY Have Taken Root In America
Unfortunately, many Americans are now suffering from increased levels of insanity and brain damage… and it’s only getting worse. That being said, I really can’t blame them. Everyday most Americans, from sunup to sundown, receive a constant flow of Mainstream media advertising and propaganda. And it’s even more damaging for the little tots and kids.
From infancy to adolescence, kids receive a tremendous amount of brainwashing via the TV, I-phone and internet. When a tiny tot is sitting in front of a TV all day watching someone named Sparky the clown telling the child to eat sugar loaded with a smattering of cereal, this is the first step in turning that infant into an attention-deficit hyper-active kid that will not only drive his-her mother and father completely insane, but also all the teachers and public that has to deal with this wonderful child in the future.
As the child grows up, it now needs a lot of sugar or the screaming starts. I know of this first hand when I travel on the road and stop at one of the newer Mega-Travel-Stops on the interstate. Maybe some of you have been into one of these new Mega-Travel-Stops that have RV & Big Truck fuel pumps along with 100 gas pumps for regular cars and trucks.
On a busy travel weekend, I would recommend anyone who hasn’t visited one of these fine establishments, to take a bit of time out of your day… to do so. When you get in there, it can be complete CHAOS. Of course, there are many fully wired adults and lots of screaming kids looking for their junk food fix. I have seen some kids grab bags of chips, take them to their parents standing in line at the checkout counter… and when the parent said no, the kid took the bag and threw it back on the wrong place on the shelf. Many times the bag fell on the floor, and the parent did the RIGHT THING… and ignored it… LOL.
I gather if you apart of the mass exodus of families out of the suburbs on the weekend get-a-way, this may seem normal… the CHAOS, ya know. Basically, these Mega-Travel-Stops are frogs boiling in the water and no one seems to notice, and no one seems to care.
Anyhow… after Americans spend top dollar just to live in a McMansion or some other shoddy built suburban home, with all the bells and whistles, they have to spend even more money to GET AWAY FROM IT ALL during the weekend. Of course, this makes perfect sense when we have gone completely insane.
Think about this for a minute. Many Americans spend 40-60 hours during the week to afford the dream home with white picket fence in the suburbs, located six feet from their neighbor, but as soon as Friday rolls around, they grab the kids, the RV and get out of there AS FAST AS POSSIBLE.
So, this is our new economy. Americans working jobs they hate, to buy a house they can’t wait to leave just as soon as the weekend arrives. And all of this is being propped up by massive amount of debt and Central bank asset purchases.
That’s the insanity. Now, let’s discuss the brain damage.
Brain damage impacts Americans in different ways. However, the majority who have the illness, don’t realize they are inflected. So, they continue on their marry life, not realizing the brain damage is getting even worse.
So, what do I mean by brain damage? It’s quite simple. A person who suffers from brain damage, actually believes a new Credit Card in the mail is a like winning a small lottery. Thus, they are able to go out and buy more garbage and crap to fill up an already stuffed house or rental storage facility. Brain damaged Americans no longer understand THRIFT, FRUGALITY or PRUDENCE.
Rather, Americans are racing 70 mph down the interstate, spending money they don’t have on lots of screaming kids, just to get away from it all. And it gets even worse. No, I am not kidding.
In the past, I have tried to share some of what I know about the economic and financial insanity to family and friends, but the response was normally the same, THAT I WAS LOSING MY MIND, and… “Don’t worry… Everything is Fine.” You see, when someone has severe brain damage, they believe BAD is GOOD, WRONG is RIGHT, DEBTS are ASSETS and so on and so forth.
Lastly, when someone responds by saying, “Gold is just a Barbarous Relic”, well then… you know the BRAIN DAMAGE is now irreversible. The poor slob is past the point of no return… and is not curable. All we can do is keep our mouths shut during holiday get-to-togethers, eat the junk food and hope and pray there aren’t too many screaming kids.
Okay… enough of my rant. Let’s get back to the good stuff.
Central Bank Asset Purchases & Their Impact On Gold
As I mentioned in the beginning of the article, Central Banks purchased $ 1 trillion of assets in just the first four months of the year. However, they did one better as they added another half trillion in May… LOL:
So, the total for the first five months of the year, is a staggering $ 1.5 trillion. Also, we can see that the Central bank balance sheet is now $ 15.1 trillion, up from $ 3.5 trillion before the 2008 U.S. Housing Market and Banking collapse.
If we compare the Central bank balance sheet as a percentage of GDP, we have the following wonderful chart:
If we are not suffering from brain damage, we can clearly see here that Central banks balance sheets now account for nearly 40% of GDP. The reason the total Central bank balance sheet in the chart above is higher than the previous chart, is that this one includes China’s official bank balances (PBOC). If the Central banks balance sheets now account for 40% of GDP, well then, we are in serious trouble when the punch bowl is taken away.
The latest data means that contrary to previous calculations, central banks are now injecting a record $ 300 billion in liquidity per month, above the $ 200 billion which Deutsche Bank recently warned is a “red-line” indicator for risk assets.
If Deutsche Bank warned of a “RED-LINE” for risk assets at the $ 200 billion a month for Central bank asset purchases, than what in the hell is going on when they are now buying $ 300 billion a month?? And how much is $ 300 billion a month?? It’s quite a lot when we look at the following chart below:
As the Central banks purchased an average of $ 300 billion a month in assets to prop up the markets, it totally overshadows the $ 10.7 billion a month of global gold mine supply (based on spot price of $ 1,250). Thus, Central bank monthly asset purchases are 28 times more than the value of the global gold mine supply. This is totally insane when we realize gold is still a monetary asset on Central banks balance sheets.
However, it is even more incredible when we compare Central bank asset purchases for the first five months of 2017 versus gold:
So, we can plainly see in the chart above, that $ 1.5 trillion in Central banks asset purchases in just the first five months of the year, would have bought HALF of all Global Gold Investment. I repeat… HALF OF ALL GLOBAL GOLD INVESTMENT.
Which brings me to the subject of “Frustrated Precious Metals Investors.” I continue to see precious metals investors who are extremely frustrated by the so-called “WRONG CALLS” by the analysts on the gold and silver price movements. Yes, it is true that many of us didn’t realize the degree in which the Central banks would go to prop up the markets… but this is getting completely insane now.
If the Central banks were to stop purchasing assets… then the markets would collapse. Heck, they are trying to collapse even with the massive Central bank intervention. The signs are everywhere.
Folks, without the over $ 12 trillion in Central bank asset purchases since the 2008 U.S. Housing Market and Banking collapse, the gold price would have been stunningly higher… so would the silver price.
This brings me to an excellent comment that gold analyst Jim Rickards made in a recent interview. He said that the 1998 Long Term Capital Management Hedge Fund collapse, that nearly took down the entire system, was bailed out by the Financial Banks (16 financial institutions bailed out LTCM). When the financial banks were in BIG TROUBLE in 2008, the Central banks bailed them out.
However… who is going to bail out the Central banks when they get into trouble??? And they are getting into serious trouble. Unfortunately, there is no one left to bail out the system when the Central banks finally lose control.
If the Central banks try to pull back on asset purchases, then the market will start to do a NOSE-DIVE. This would likely motivate them to come back in with ALL GUNS BLASTING. So, pay attention to the increase in Central bank asset purchases as a clue to know when they are becoming desperate.
This massive increase in Central bank asset purchases is a last ditch effort to prop up the market and cap the gold price. While they may have more propping up to do, they will likely have to increase their level of buying even more. As it goes exponential… then we know the END IS NEAR.
The Fed and Central banks are manipulating the gold and silver price because they are horrified that the biggest global BANK RUN in history will take down the entire system. Unfortunately, a lot of investors are still being misled about the fundamentals of precious metals market manipulation. While the Fed and Central bank are indeed intervening in the gold and silver market, they are also propping up the majority of asset values across the board. This is especially true for most stocks, bonds and real estate.
Yes, it is also true that billions of Dollars worth of paper gold and silver are dumped into the market in nanoseconds during very light trading days. Thus, the impact is to cap the gold and silver price, making sure that 99% of investors stay fast asleep. These are the very same investors who the Central banks are working extremely hard to keep their funds placed firmly in stocks, bonds and real estate.
I continue to receive emails from individuals who believe the Central banks can push the price of gold or silver anywhere they please. This is total RUBBISH. However, there is some method to their madness. It is a crying shame that there are still analysts out there misleading their followers with that sort of superficial nonsense.
All the Fed and Central Banks can do is to keep the gold and silver price from exploding higher. They cannot push the value of gold or silver (too far) below its cost of production. Here is a chart from my previous article showing the gold price versus the top two gold miners (Barrick and Newmont) cost of production:
The gold market price was always HIGHER than Barrick and Newmont’s cost of production. So, as we can plainly see, the Fed and Central Banks NEVER pushed the annual gold price below Barrick and Newmont’s cost of production from 2000 to 2016.
NOT EVEN ONCE…
Which means, the notion that the Fed and Central banks can push the price of gold down to $ 500 or even zero, is total nonsense. They CAN’T do it, and they know it. Furthermore, I have older Homestake Mining Annual Reports from the 1970’s. Homestake Mining was the United States largest gold producer for more than 50 years. I plan on writing an article showing how Homestake’s cost of production increased substantially, along with the oil price, during the inflationary decade of the 1970’s.
That means, the surging gold price during the 1970’s was not really due to increased demand, rather it was due to the skyrocketing oil price. Now, I am going to post these charts again, because it seems as if some folks are still a bit DENSE. Moreover, I have added another chart for KICKS & GIGGLES. Please take a close look at the following gold, silver and copper charts:
According to these charts, the price of GOLD, SILVER and COPPER have been tied to the OIL PRICE. While their movements are not exact, we can see that each moved in tandem with the oil price, especially during the huge surge during the 2000’s. If we look at the new copper-oil price chart, we can see that the copper price, starting in 2003, moved up and down twice right along with oil.
EXTREMELY IMPORTANT TO UNDERSTAND BELOW:
Investors need to understand that the market “INNATELY” balances supply and demand over the long-term. For example, the copper mining industry is not going to bring on twice as much copper supply onto the market than the world needs. Furthermore, the copper mining industry only makes a small percentage of profits to build production slowly. Thus, small profit margins actually LIMIT the growth of the copper mining industry.
This is the same for the gold and silver mining industry. While supply and demand play a small role in determining price in the short term, it is less of a factor in the longer term. The COST OF PRODUCTION is the leading factor in determining the price of GOLD, SILVER and COPPER.
Now, if you read that, you would understand that the Fed and Central Banks CANNOT push the price of gold and silver (too far) below their cost of production. The only TRICK the Central Banks have, is to CAP the precious metals prices. And the reason they do this, is too make sure that the 99% of the WALKING DEAD keep funneling their funds into stocks, bonds and real estate.
In Spite Of All The Grand Conspiracies… Americans Still Living Life High On The Hog
I do realize that the American standard of living has declined over the past several decades. While many analysts believe this is due to the ELITE stealing most of the wealth, it has more to do with the Falling EROI – Energy Returned On Investment. The falling EROI is destroying our LEECH & SPEND SUBURBAN way of life in the Good ole U.S. of A. That being said, I continue to see homes and business pop up all over the place. Sure, some areas of the country aren’t doing as well as others, but the restaurants, movie theaters, stores and highways are full of traffic. Americans are busy moving everywhere and nowhere spending credit or money they really don’t have.
Moreover, most Americans live in one of these diverse and classy suburban neighborhoods below:
The majority of Americans live in three bedroom homes with two baths and all the modern appliances and amenities. Actually, a lot of the newer homes have four bedrooms and three baths. Now, all of these homes are stuffed full of gobs and gobs of furniture, TV’s, appliances and thousands of assorted clothes, books, electronics and all kinds of trinkets and garbage. In addition, neatly parked in the garage of these homes, Americans have at least two cars. Although, easy finance has allowed some to be more fortunate to have three cars, a boat, RV and several ATV’s.
Sure, the ELITE control more stuff today than ever… but so do AMERICANS. We have more CRAP filling our homes, garages and storage facilities than we did 50 years ago. I mean… who in the hell stored their stuff in a private storage facility 50 years ago?? I would imagine very few. Today, if you don’t have a storage unit… something is definitely wrong with ya.
Our motto used to be “As American as Baseball and Apple pie.” Now its, “Americans work jobs they hate to buy crap and garbage they don’t need.” Amazing what 50 years can do to a society.
Anyhow, if you think the Americans are the only ones at perfecting the COOKIE-CUTTER Suburban housing development, think again. The Chinese have taken it one step further… LOL:
Yes, that is a real picture of a suburban housing development in China. Talk about cookie-cutter. You can’t get any more identical than that. Well on the other hand, you will see some blue color mixed in here and there. Some owners decided to stand out from the rest by installing a swimming pool.
Regardless, Americans have more stuff today than ever. So, things aren’t really all that bad in West’s Greatest Empire when we compare ourselves to the poor slobs living in many other third world countries.
Okay, so what does all that have to do with precious metals manipulation? Good question.
You see, the majority of the American’s wealth is tied up into STOCKS, BONDS and REAL ESTATE. Also, these assets are where the Federal, State and Local governments receive the overwhelming majority of their tax revenue. Rapidly falling values in any of the assets listed above is the DEATH KNELL for governments. So, it is in the best interest of government to make sure Americans remain BRAIN DEAD when it comes to understanding real money such as Gold and Silver.
While many believe this may be a Grand Conspiracy to manipulate Americans, it’s not. Rather, I call what has taken place in the United States, as decades and decades of WINGING IT. That’s correct. Shooting from the hip by growing and expanding our economy without any regard for wisdom, prudence and long-term thought.
For example, individuals who live in a large metropolis like New York City, you have my sympathies. This picture below shows what a construction company had to deal with as it pertains to the massive amount of old underground infrastructure. Many of the water and sewer pipes in big cities are 50-75 years old. Well beyond their life expectancy.
Folks, we are in BIG TROUBLE and most Americans have no idea. Thus, Central bank market intervention is to keep this INSANELY COMPLEX world of ours going for another day, week, month or year. Unfortunately, time is running out. Not because the Central Banks are running out of paper to print money, but because the cheap and affordable energy that runs the system… IS RUNNING OUT.
That article received the most FACEBOOK hits ever at 1,300+. Which means, some people are finally WAKING UP. Precious metals investors ignoring the energy data are making a big mistake. Why? Because the Fed and Central banks can continue manipulating the markets forever if it wasn’t for the coming ENERGY CLIFF.
Unfortunately, a lot of folks in the “Alternative Media” believe in the “Abiotic Oil Theory.” This is the oil theory that suggests oil is made deep below the mantle of the earth which allows oil fields to magically refill… so there is no real threat of peak oil. Individuals who believe this nonsense, such as Jerome Corsi and his book, BlackGold Stranglehold, have lost all sense of logic and reason. While many of these individuals who believe in the Abiotic Oil Theory are quite intelligent, I am surprised how completely STUPID they can be on this subject matter.
REAL PROOF… Why Abiotic Oil Is Another Lousy Conspiracy Misleading Investors
Those who perpetrate the Abiotic Oil Theory say that the Russians are producing more oil than ever because they are drilling ultra-deep wells tapping into this limitless supply of oil. Well, if that was true… SOMEONE NEEDS TO TELL THE RUSSIANS. The Russians aren’t drilling ultra-deep wells to get to their oil, rather they are drilling a hell of a lot more horizontal wells, just like the insane U.S. shale oil industry. The proof is shown below:
In just two years, Russian horizontal well drilling has increased from 22% of the total in 2013 to 34% in 2015. Folks, horizontal wells aren’t ULTRA-DEEP WELLS tens of thousands of feet down. Rather, they are more like the typical shale wells that are 7-10,000 feet down with long laterals to get to the oil. If Russia is drilling more horizontal wells, just like the U.S. shale oil industry, they are also running out of cheap high quality oil.
A few months back I stated that I was going to write an article on this subject matter. I need to do so because a lot of people are still being mislead by this erroneous conspiracy theory.
Now, the reason I have been laying out all this information is to explain Central Bank precious metals manipulation and how it’s all tied together with energy and the markets. If you are only looking at the COMEX paper trading and daily charts, then you only have a small window of the overall market manipulation. Furthermore, precious metals price rigging is only a small part of the total amount of Central Banks market intervention.
David Stockman discussed this in his recent interview, Fiscal Bloodbath Coming This Fall – David Stockman, on USAWatchdog.com. In the interview, Stockman goes on to say that the Fed and Central Banks have propped up the Bond market by purchasing $ 20 trillion in Treasuries and Bonds over the past 20 years. This doesn’t include the Trillions spent propping up the global equity (stock) markets.
All this is being done to hold off the world’s largest bank run in history.
Central Banks Terrified About The World’s Largest Bank Run In History
What the Fed and Central Banks are really worried about, is the WORLD’S LARGEST BANK RUN in history. This is why they are now throwing everything and the kitchen sink to prop up the markets. We must remember, all the debt, derivatives and money printing is being done to keep people from freaking out and starting a global bank run. Thus, the Fed and Central Banks are manipulating the market by controlling “MARKET PSYCHOLOGY.” This goes well beyond gold and silver price rigging. It’s a full spectrum, wide-ranging, all encompassing market intervention never seen before in history.
This chart provides the reason (numbers) why Central banks continue to rig the markets:
According to data for 2015, of the $ 369 trillion in global stocks, bonds and real estate, gold and silver only represent $ 3.1 trillion or less than one percent of the total. Actually, David Stockman, in his interview posted above, states the the global bond market is closer to $ 100 trillion. Regardless, the massive amount of money-digital printing has been done to prop up the $ 366 trillion in stocks, bonds and real estate.
We must understand, ALL THE DEBT & LEVERAGE in the system is the same as when banks in the 1920’s loaned out a great deal more GOLD CERTIFICATES than they had gold in their vaults. Printing and issuing a lot more gold certificates worked fine until the point, it didn’t.
In all reality, the U.S. and global financial system are already DEAD. The citizens of the world just don’t know it yet. The only thing that is holding it up is a lot of HOT AIR and Central bank market intervention. However, the factor that will take away the Fed and Central banks printing press, is the disintegration of the U.S. and global oil industry.
I am working on an article about the U.S. OIL INDUSTRY IS NOW CANNIBALIZING ITSELF. While there have been news releases stating that the oil majors, such as ExxonMobil and Chevron, are now making profits…. this is nothing more than white noise obfuscating the facts.
For example, ExxonMobil, Chevron and ConocoPhillips reduced their capital expenditures (CAPEX) by a stunning 40% Q1 2017 versus Q1 2016. The major reason for the reduction in CAPEX spending is that these companies are in desperate need of free cash flow. In the past few years, they have been borrowing money to pay for CAPEX, or worse… dividends.
Many investors who are shareholders in ExxonMobil or Chevron, do so because they get a nice fat quarterly dividend. The oil companies realize that if they start cutting dividends, what is the motivation for investors to hold onto their stock??? This is especially true as ExxonMobil and Chevron’s stock prices continue to fall due to lower oil prices.
We are now experiencing the beginning stages of the disintegration of the U.S. and global oil industry. While the Central banks continue to prop up the markets with money printing and massive liquidity, the biggest GLOBAL BANK RUN IN HISTORY is on its way.
Nearly five years ago, the former CEO of Barclays Bank, Bob Diamond, defended himself against accusations that on his watch, Barclays had deliberately falsified Libor submissions. To no avail: after widespread adverse press coverage, Diamond resigned.
Was this at the instigation of the Governor of the Bank of England and the head of the FSA? We will probably never know. But events yesterday make not only Diamond’s resignation, but also the prosecution and jailing of traders and Libor submitters from Barclays and other banks, look distinctly odd.
The BBC’s Andy Verity has revealed the existence of a recording which appears to indicate that the Bank of England and the Treasury pressured banks to “lowball” their Libor submissions during the financial crisis. According to Verity, the conversation, between a junior Libor submitter (who was subsequently jailed) and his manager, ran like this:
In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates. He tells him: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”
Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash. Mr Johnson says: “So I’ll push them below a realistic level of where I think I can get money?” His boss Mr Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”
This is not the first time that Barclays has issued material purporting to show that the Bank of England was influencing Libor rates. Diamond’s submission to the Treasury Select Committee included this file note recording a phone call between Diamond and Paul Tucker, then Deputy Governor of the Bank of England: Note the last sentence. At the time, this passed largely unremarked – but in the recording reported by the BBC, Mark Dearlove makes a similar comment. Someone very senior in the Treasury seems to have instigated the Bank of England’s request for Libor lowballing. The identity of this individual has not been revealed, though the Telegraph thinks it knows.
Libor manipulation is now a criminal offence – when it is done by banks or traders to boost their own profits. So the growing evidence that the Bank of England was manipulating Libor rates during the financial crisis at the behest of the Treasury raises some very serious questions.
Firstly, why would the Bank and the Treasury have wanted to manipulate Libor? It seems highly unlikely that this “lowballing” request, at the height of a crisis when “market” rates were completely meaningless, would have had anything to do with flattering bank profits. So what might it have been about?
Well, this was during the financial crisis, when banks were dropping like ninepins. Several Libor panel banks, including RBS and HBOS, were already shut out of markets: their Libor submissions in no way reflected the real cost of market funding for them (which was effectively infinite). And market rates were heading for the moon, as suspicious market participants looked for the next domino to fall. It seems entirely reasonable to me that the Bank of England, prompted by a worried Treasury, would have intervened to lower Libor to something more sensible than panicky banks would charge to lend to other banks they feared could collapse at any second.
Secondly, the note from Tucker shows that Barclays’s Libor submissions were among the highest at that time. Normally, high funding costs indicate that the market thinks the bank is a poor risk: Norther Rock’s funding costs rose dramatically in the months before its collapse. So Barclays submitting higher Libors than other banks could have signalled to the market that it was next in line for a bailout.
We now know that Barclays was indeed in trouble at that time. To avoid the same fate as RBS, it went cap in hand to Qatar. The Serious Fraud Office is now investigating the shady equity-for-loan deal Barclays did with the Qataris. According to the Independent’s Ben Chu, the SFO’s findings are due in about a month. If the SFO decides that the deal was fraudulent, criminal prosecutions will follow. The timing is exquisite….
Did the Bank of England – or the Treasury – know Barclays was in trouble? Or did they merely suspect it was? Either way, did they pressure Barclays to reduce Libor submissions in order to ward off a market attack on a bank perceived as vulnerable, thus buying time for Barclays to find additional funds to beef up its dwindling equity?
This raises further questions. If the source of the new recording was Barclays, why wasn’t it released five years ago along with the Tucker file note? Why has Barclays been sitting on this evidence? Why did Bob Diamond take the fall for Libor manipulation that appears to have been instigated by public officials?
And if the source was one of the participants, not Barclays itself, why did that person sit on the recording for five years? One of the people in that conversation was jailed. This evidence could have exonerated him, and others.
I think we need to know why this evidence was withheld for so long, and by whom. And we also need to know why it has now been revealed. Please don’t tell me the old team had hidden it in a vault and the new team have only just found it. I don’t believe it.
There are serious questions for the Bank of England, too. Why did Paul Tucker deny knowing anything about lowballing, despite the existence of the file note implicating him? His involvement in this matter destroyed his chances of becoming Governor. Why did he sacrifice his career at the Bank? Who was he protecting – and why?
I have previously asked why the FSA went ahead with fines and censure for Barclays and, subsequently, other banks when it appears they were acting at the behest of the Bank of England. The FSA must have seen the evidence Barclays presented to the Treasury Select Committee, though it may not have been aware of the recording. It therefore knew the Bank of England was possibly implicated. Hanging Barclays out to dry for an offence possibly committed at the behest of the Bank of England and the Treasury is hardly presenting a united front. Was the FSA distracting attention from its own failures by shafting other public institutions?
There is another matter, too. Back in 2012, Joseph Cotterill reported that the Bank of England was also suspected of Libor manipulation prior to the financial crisis, between 2005-2007. This is an entirely different – and potentially much more serious – matter than attempting to cap Libor to prevent bank meltdown in the financial crisis. It suggests that the Bank may have been treating Libor as a shadow policy rate. There is some justification for this: if the main monetary policy rate and Libor become significantly decoupled, monetary policy loses traction. So it may be that the Bank leaned on panel banks to adjust their Libor submissions if Libor appeared to be becoming unanchored from the policy rate. But the problem is that if this is what the Bank was doing, it didn’t tell anyone.
The Bank of England may or may not have had good reasons for manipulating Libor. But its officials had no reason whatsoever to conceal the Bank’s actions. Lying to Parliament is totally unjustifiable – as is allowing people to be prosecuted, and serve jail time, for offences they may not have committed. The real disgrace is the web of lies that seems to have been woven by both Barclays and the Bank of England.
We may never get to the bottom of this sorry mess. But we should give it a damn good try. Five years ago, I called for an independent judicial enquiry into the role of public institutions in Libor manipulation . I repeat that call now. Let those who really made the Libor decisions, both before and during the financial crisis, be brought to account.
The Co-Op bank is putting itself up for sale. It announced today that it will offer all of its shares for sale, including the Co-Op Group’s 20% stake and the shares currently owned by a consortium of American hedge funds, institutional investors and small investors. The decision follows on from last month’s disclosure that it was facing a full-year loss for the third year running and would fail to meet capital requirements set by the Prudential Regulatory Authority (PRA) for some years to come. It has almost certainly been made under pressure from the PRA.
The decision to offer the bank for sale was undoubtedly very painful for the Board. But it has been obvious for some time that the Co-Op Bank’s recovery plan was heading for the rocks. Both the 2014 and the 2015 reports contained warnings from the directors, endorsed by the auditors, that the bank may not be able to continue as a going concern. There is little doubt that the forthcoming 2016 report, due at the end of March, will contain a similar warning.
In fact the Co-Op Bank has been living on borrowed time ever since it ignominiously failed the Bank of England’s stress tests in 2015. The capital plan it agreed with the PRA was high risk from the start, relying on very favourable trading conditions and no major shocks. Unfortunately, the reality has been difficult trading conditions and a series of nasty shocks, culminating in the Brexit vote last June. Low interest rates were already squeezing its profits, making it hard to rebuild capital: in August 2016, when the Bank of England cut interest rates still further, the Co-Op Bank warned that uncertainty following the Brexit vote posed a serious risk to its recovery.
But low interest rates and uncertainty are not the only reason for the failure of the Co-Op Bank’s recovery plan. Speaking on BBC News, the new Chief Executive, Liam Coleman, admitted to two other reasons.
The first is the sheer scale of the repair work needed, which he said was much larger than had been expected. The bank has done a lot of work to clean up its balance sheet, cut its costs and improve the quality of its IT systems. But it still has unacceptably high levels of non-core assets and is struggling either to dispose of them or build the capital to support them. Despite a major cost-cutting and integration drive, its cost/income ratio remains unsustainable at over 100%. And although it has now migrated some of its IT systems to a more robust technical platform, it is still a long way from implementing the resilient, efficient and user-friendly IT infrastructure needed to deliver a strategy based upon a major move to online and mobile banking.
And secondly, the burden of fines, litigation costs and compensation for past misconduct. Relative to its size, its PPI mis-selling bill is nearly as large as that of Lloyds Bank, and it is the only bank to be censured by the FCA for breaking the Consumer Credit Act in relation to mortgages. In 2015 it was censured by the PRA for serious failings in risk management. And in 2015, its former Chief Executive, Barry Tootell, was personally fined by the PRA and banned from working in financial services, along with the former head of Corporate Banking, Keith Alderson. Tootell, an accountant who had acted as CFO as well as CEO, was subsequently barred from membership of the Financial Reporting Council as well.
The level of misconduct at the Co-Op Bank may surprise some people. But the truth is that the so-called “ethical bank” has been anything but ethical. Quite why its customers have been so loyal to it is a mystery. The bank systematically ripped them off for years.
The proposed sale amounts to an admission that the Co-Op Bank cannot grow out of its problems. It needs to find more capital, and it seems that its existing owners are not able or willing to provide it. The question is whether an external buyer would be willing to provide it. Frankly, this is a tall order. The market for distressed banks is decidedly thin at the moment, and there are arguably more promising candidates than the Co-Op Bank for anyone wanting to attempt a turnaround. Europe is littered with failing banks, many of which are in better shape than the Co-Op despite their problems. The Co-Op, after all, has already had one private sector rescue.
There have been suggestions that the TSB might be prepared to take it on – for the right price. The TSB’s management probably know better than any other potential buyer just what a mess the Co-Op Bank is in: after all, it was the failure of the Co-Op Bank’s attempt to buy the nascent TSB that exposed the awful state of the Co-Op Bank’s own balance sheet. They will drive a hard bargain. The sale price of the Co-Op Bank is likely to be extremely low.
There could be some poetic justice in the TSB taking over the bank that tried to buy it – though of course the TSB itself is no longer an independent entity, having been taken over by Spain’s Banco Sabadell not longer after its flotation. But it would need to be extremely careful. There have been too many cases of sound banks taking over distressed banks, only to end up in serious trouble themselves: the TSB will no doubt be mindful of the fate of its former parent Lloyds Banking Group, and indeed of the history of the Co-Op Bank itself. Taking on a distressed bank is not to be undertaken lightly. The TSB would no doubt like the Co-Op’s customers (if it can keep them) and whatever good quality assets exist on its balance sheet, but it won’t be nearly so keen on its costs and its debts. Even at a fire sale price, the Co-Op Bank may be too rotten a morsel to swallow.
If sale of the bank as a going concern fails – as seems distinctly possible, given the scale of the risks for any potential buyer – then it could be broken up. Currently, this seems more likely than an outright sale. The FT reports that challenger banks (including the TSB) and private equity firms are expressing an interest in buying parts of the Co-Op Bank’s portfolio.
Breaking up the bank would leave a rump business with its reputation shot to pieces and little in the way of decent assets. It might be better capitalised, but from a business perspective it would have an even bigger mountain to climb than it had before. It would be unlikely to survive for long as an independent entity. However, it would probably be easier for the stripped-down and recapitalised bank to find a buyer.
The FT suggests that the Board might also try to restructure the Co-Op Bank’s balance sheet by swapping debt for equity and raising additional capital from new and existing investors. I don’t believe it. If that were a viable alternative they would have tried it before putting the business up for sale. I suspect they have already sounded out major shareholders about a rights issue and been firmly told “No”. And without a rights issue, a debt for equity swap would still leave the bank desperately short of capital. It is not a solution.
As a last resort, the Co-Op Bank could be wound up by the PRA. In my view this outcome is only likely if a buyer for the whole business still cannot be found after a fire sale of assets.
Whatever the outcome for the bank as a business, the Co-Op Bank brand is likely to disappear. There are a number of reasons for this. Once the Co-Op Group no longer has a stake, it may object to the bank continuing to use its brand name. And if the bank ends up entirely in private sector ownership, the Secretary of State may revoke the bank’s right to describe itself as “cooperative”. If the bank is broken up, the assets will be absorbed into the buyers’ own brands: the rump business may retain the Co-Op Bank brand name, but unless by some miracle it manages to rebuild a distinctive franchise with a solid reputation, a future buyer would be unlikely to be interested in paying goodwill for what is by any standards a badly tarnished brand.
This 144-year-old institution seems set to disappear from Britain’s high streets. Many will mourn its passing. But there is a silver lining. The continued existence of a bank that is cooperative in name but not in nature has severely hampered the Cooperative Movement’s efforts to promote cooperative banking. Once this albatross has been cast overboard (and regulatory obstacles overcome), they will be free to create new, vibrant cooperative banks. The death of the Co-Op Bank could, perversely, become the source of new life in cooperative banking.
Deutsche Bank Lawsuit Uncovers Damning Evidence of Silver Price Rigging
Some say there is honor among thieves. Perhaps, but apparently not among the banking class of criminals when they are under serious legal and regulatory pressure.
German behemoth Deutsche Bank agreed last spring to assist plaintiffs and regulators by ratting out their co-conspirator banks in a wide ranging scheme to rig prices and cheat clients.
They cut a deal to avoid even larger monetary damages and criminal prosecution. Executives there agreed to pay nearly $ 100 million to settle their legal troubles and share information. In return the bank gets to deny wrongdoing and keep its license to trade in markets. The other alleged cheaters, including the Bank of Nova Scotia, UBS, Barclays, HSBC, Fortis, Standard Chartered, and Bank of America, may not get off as easy.
More details are now emerging as to exactly what kind of evidence Deutsche provided, and it is indeed damning. Plaintiffs in a class action suit looked it over and just filed an amended complaint with broader allegations of wrongdoing implicating more banks. The revised complaint describes what they found in the Deutsch materials this way:
Plaintiffs incorporate factual allegations based on the more than 350,000 pages of documents and 75 audio tapes that Deutsche Bank produced as part of the cooperation provisions of its Settlement Agreement with Plaintiffs (collectively, the “DB Cooperation Materials”). The DB Cooperation Materials provide direct, “smoking gun” evidence of a conspiracy among the Fixing Members and several other silver market makers, including at least UBS, Barclays, Standard Chartered, Fortis, and Merrill Lynch, to illegally manipulate the price of silver and silver financial instruments at artificial, anti-competitive levels through multiple means.
“Smoking gun” appears to be an apt description. Here is an example of a chat between a trader at Deutsche Bank and one at HSBC:
Deutsche Bank [Trader-Submitter A]: I got the fix in 3 minutes
That’s clear evidence of illegal collusion to manipulate prices down. But will this hoard of evidence actually lead to anything meaningful in terms of cleaning up the marketplace? We know banks have been rigging all sorts of markets and sticking it to their own customers for a long, long time with little repercussion. Regulatory capture – the cozy relationship between Wall Street and the bureaucrats who often want nothing more than to land a high-paying job there – is a real problem.
The CFTC, which regulates futures markets, announced they were closing their investigation into silver manipulation in 2013. After spending more than 7,000 enforcement hours, officials there somehow managed to miss what appears to be institutionalized cheating over a period lasting years.
Bart Chilton, who spearheaded the CFTC investigation, left for greener pastures shortly after the investigation wrapped up. He got a much better paying gig at nation’s largest law firm, advising companies on the topic of regulation. Many have all but given up on agencies like the CFTC when it comes to keeping banks honest.
There is, however, reason for investors to hope. This class action lawsuit is the biggest civil litigation pertaining to metals market rigging to ever get past first base. The judge will allow discovery to proceed, based in large part upon the evidence provided by Deutsche Bank. Attorneys will start deposing traders and bank officials and attempting to find out just how deep the corruption goes. And, because it is a civil matter, the case cannot be derailed by inept or compromised regulators.
Deutsche Bank agreed already to fork over nearly $ 100 million as part of the suit. Other class-action suits are already pending and it is safe to say more victims will look at that jackpot and jump into the game.
The new evidence might even be too compelling for regulators to keep looking the other way. It is at least possible investors will see actual criminal prosecutions and banks losing their privileges to trade in these markets.
Metals market rigging has moved out of the realm of theory and into the realm of fact. Perhaps, for the first time ever, investors in the sector have a real shot at more honest markets and price discovery. Wouldn’t that be nice?
Deutsche Bank Silver Rigging; David Morgan on Financial Markets under Trump
Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear from David Morgan of The Morgan Report. David gives his insights on current industry sentiment following a few rough months for the metals, tells us what to expect with the upcoming price action for gold and silver, and gives us his predictions on how the financial markets will react to Donald Trump’s presidency – and his outlook may surprise you. Don’t miss another fantastic interview with the Silver Guru, David Morgan, coming up after this week’s market update.
Precious metals markets continue to show signs of basing out and recovering into a potential rally, with the white metals leading the way.
The silver market registers a positive gain for the second straight week, albeit a small one. Spot silver is up 0.7% since last Friday’s close to trade at $ 16.97 an ounce. Platinum prices come in at $ 922 per ounce, and due to a 2% drop here today is now down 1.3% for the week. Palladium, which had been white hot in November, cooled off a bit this week, falling 0.4% to $ 744.
Gold, meanwhile, has been probing lower levels for the past few weeks. The yellow metal currently comes in at $ 1,163 an ounce, down 1.4% on the week.
Gold continues to be overshadowed by the resurgent stock market. The Dow Jones Industrials rose to another record this week. The blue chip average could soon hit 20,000 on strong post-election momentum.
The Dow to gold ratio is also on the verge of setting a new multi-year high. The Dow currently equals 16.7 times the price of gold. The ratio comes in higher than where it was at the start of the year. But it’s still a long way away from the 45 to 1 ratio seen at the peak in 1999. It’s also miles away from the 1:1 ratio seen at the 1980 low.
Gold and silver have been hurt in recent weeks by a strengthening U.S. dollar index. Currency traders are pricing in a rate hike at next week’s Federal Reserve meeting.
The European Central Bank met this Thursday and left interest rates unchanged. That was expected. But the ECB surprised markets by announcing that it would trim its quantitative easing program starting next April. It’s not really a tapering, though. The ECB extended its bond buying program through the end of 2017 and expanded the range of securities it would buy. In response, currency markets whipsawed, with traders ultimately deciding to dump euros and bid up the U.S. dollar.
Unless the Fed comes out with policies or language to arrest the rise in the dollar, it could continue to gain versus the euro in the months ahead. That doesn’t necessarily mean gold can’t gain in dollar terms. But it will need a catalyst to overcome headwinds in the currency markets as well as the price suppression schemes of institutional sellers in the futures markets.
Yes, believe it or not, the gold market is subject to being manipulated from time to time. Sometimes by some of the world’s biggest banks. Last Friday, we found out that Deutsche Bank will pay $ 60 million to settle claims of gold price rigging.
Documents released as part of the lawsuit reveal that the rigging runs deeper and extends beyond the gold market. According to a Bloomberg report that came out on Wednesday, traders with multiple large international banks, including UBS, allegedly conspired to rig the silver market.
Bloomberg Anchor: Today we’re talking about gold and silver market rigging. I’m just curious, has there been an uptick? Even though some of this is a couple years old, has there been an uptick? Is it just that it’s newly discovered? I mean, what’s going on here? It seems like there’s an awful lot of rigging going on in various different kinds of markets.
Market Analyst: Right. As you mentioned, a lot of this stuff is from several years ago, but it does raise the questions of whether it wasn’t just LIBOR. You had the LIBOR rigging scandals, and then you had currency markets, now you have allegations in the silver market.
The new smoking gun evidence shows that some of the biggest market makers in the silver exchanges haven’t been playing fair. They have been colluding to control spreads, slam down silver prices in coordinated midnight raids, and cheat their own customers. Chat logs between Deutsche Bank and HSBC traders that have now been made public reveal one particular exchange where one trader says he really wants to sell silver. To which the other responds, “Let’s go and smash it together.“
The Commodity Futures Trading Commission supposedly spent five years investigating allegations of silver market manipulation. In 2013, CFTC officials basically said they couldn’t find any wrongdoing. Maybe they just didn’t WANT to find any wrongdoing.
In any event, the paper markets for gold and silver are neither free nor fair. Individual investors should avoid trying to swim with the sharks – which means avoiding futures, options, and other derivative products that are controlled by big institutional traders. Stick with physical bullion products and know that in the end, the real supply and demand fundamentals in the physical markets will ultimately override the artificial games that are being played in the paper markets.
Well now, for more on the future of gold and silver and one insider’s take on the likelihood of some serious financial turmoil breaking out during Trump’s first term, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome back our good friend David Morgan of The Morgan Report and co-author of both The Silver Manifesto and now Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shockwave.
David, it’s always great to have you on, and how are you?
David Morgan: Mike thank you and honestly I’m not a hundred percent, I got a little bit of a cold still hanging on but I’m just about over it and had a little dental work, but I’m doing good. Thank you.
Mike Gleason: Well I’m sure with all of your travels here it’s probably easy to pick something up and that’s kind of where I wanted to start first. I’d like to have you tell us about some of those recent travels because I know you’ve been quite the jet setter here of late. Just in the past month alone I know you’ve been to the Silver Summit in San Francisco and then last week you were telling me you were in Sweden, so you’ve been traveling around to various conferences and meetings in the precious metals community and I’m sure you’ve gathered some valuable information as a result that you may want to share with our audience here today.
So what have you learned, and what is the sentiment out there right now? Because there are few that have their finger on the pulse of the industry better than you, so what can you tell us there David, and then give us some highlights of these conferences as we start out.
David Morgan: Well thank you for that. First of all I think if we go back to roughly the last four or five weeks or so, I made a trip to the Edelmetall Show, which is the Precious Metals and Commodities Show in Munich. This is a show that I’ve done many, many times, and one of the people that is one of the principles of that show actually translates and has translated The Morgan Report into German for years and years and years. And Jan asked me if Bill Holter would be amenable to coming over and speaking as well, and I said, “Yes, I’m sure he would,” and they invited Bill Holter along with myself and many others of course. Most of them are Europeans but they’re from all over the world.
And the sentiment in Germany is still very positive to metals. They are big bullion buyers. They are very much believers in what I’ve taught from the beginning, which is you have to own the real metal first before you go in the mining companies. They’re also large shareholders into mining companies across the board, meaning speculative juniors to mid-tier producers to top grade cash rich unhedged mining companies which we kind of stress in our reports.
What’s interesting is the amount of the sentiment. The sentiment in my main part of the industry is the U.S. and Canada, and our subscriber base dropped off probably 60% or more from the top of the silver market in April 2011 up until the end of last year. It’s built back somewhat, but Germany it never faltered. I mean it’s hard to believe that Mike, but basically the subscriber base in Germany held through basically thick and thin.
So the main takeaway is that they understand the metals. It’s in their consciousness because of what their parents or grandparents went through with the Weimer Republic. They believe in the real metal first, but the main concern wasn’t really economic as much as it was fear of an outbreak of war. Now this was pre the election. I left I think the day before the election, so it was November 7th when I left Germany.
A great deal of concern revolved around the fact that these missiles have been placed upon the German border, which is NATO obviously, facing in toward Russia. Of course the Germans, probably more than many, the population at least is very upset about any war activities. I mean they’ve been through enough, you know World War I, World War II, you know all that’s gone on. The Cold War, the Berlin Wall and on and on, and these people really just want to live their lives and be left alone, but they’re part of NATO and they see this.
So I think that’s calmed down somewhat. I don’t follow that type of news as adamantly as I probably could, but it’s not … I have to spend my time where I’m required to do so and my main interest of course is currency crisis. The upcoming reset and everything that deals with the precious metals and beyond. So that would be Germany.
As far as the Silver Summit in San Francisco, it’s been renamed the last few years. It’s now the Silver and Gold Summit. They still feature silver first which we’re very grateful for. I’m glad that they never dropped the conference. Well attended. Great speakers. Sentiment was good but not great. By that time silver and gold had already sold off fairly sharply. A lot of people were asking if the rally was over, if it was just a fake rally within the context of an overall bear market. Where do we go from here and that type of thing.
I would say we all had our own opinions but most of us were (saying) that this is a correction within the new phase of the bull market. Better times are ahead. This is the time to look for value and buy value. I’d like to point out on the mining side is that how many of your listeners missed the move of silver to $ 50? And I say that with my tongue in my cheek and I really want to explain it. Because a lot of these companies that we feature in The Morgan Report and others have done the equivalent of silver going from these lows in the $ 14 range all the way to $ 50 as far as the percentage return is concerned.
That’s something that you get when you invest in a mining company or a natural resource stock, is leverage to the upside and the downside. I’ll be honest about that though, I saw this thing topping and I warned our members that they should really take some profits of partial profits or hedge. Take something off the table. I was early which is always good. You want to sell in the strength. You want it to be topping. You don’t need to get the exact last tick. I took a little flack from some of the Twitter folks, but that’s fine.
And lo and behold you know that hundred dollar moved down in gold, a lot of my folks booked some profits. Having said that, even some of these stocks in the top tier. I mean if you bought in 2012 one of our main feature stock in the top tier, I mean that stock was a $ 38 stock and today it’s at $ 75. So what I like to point out is that some of these companies can do moderately well to very well even in a down trending market if you pick the right kind of companies. And of course we don’t get them all right, but believe me, we get most of them right and that’s the reason when I started The Morgan Report I emphasized the top tier cash rich unhedged mining companies and then the mid-tiers. Speculations are just that, and I love to speculate. I think everybody does, but it’s an art not a science and that’s where you have to be careful.
Mike Gleason: David, in your most recent newsletter you addressed some of the market action following the election. We’ve seen commodity prices move higher, driven in part by Donald Trump’s plan to spend a trillion dollars on infrastructure, but you advised some caution. The action in the bond market should give investors some reason to pause. People are selling bonds. They anticipate the Fed will be hiking the funds rate here next week and they recognize Trump’s proposal to cut taxes and increase spending on infrastructure will likely mean a massive new wave of government borrowing.
These rising borrowing costs are going to provide some headwinds to economic growth given our addiction to debt, so the question is, how strong will those headwinds be and what do you expect for the bond market and interest rates over the next year or so?
David Morgan: I think the pressure’s on for interest rates to rise. The Fed is not all powerful like most believe. I’m almost certain we’ll see a raise in this month. And that’s because the fed almost has to because the market’s already spoken. The market’s already raised interest rates on a 10-year note rather significantly on a percentage basis, and there will be more pressure. Because everybody knows that lower taxes and increased spending means a wider deficit not a narrower deficit.
It’s baked into the cake Mike. I think this is very bullish for the metals. I think there will be a sentiment change in the country for the most part. I think the sentiment will be “better times are here, more jobs are available… you know we’re doing something worthwhile” and that type of thing, but the real structural problems that are pervasive throughout the global economic system led by the Federal Reserve and let’s say the European banking systems are so pervasive. They’re so interconnected nation state to nation state. Of course the BRICS have tried their best and maybe have moved off somewhat where they might be able to side step some type of the financial calamity but not all of it.
As we progress forward bear in mind that nothing structurally has really been fixed. It’s kind of like having a foundation that’s rotting and then starting to put some new fascia on there. It starts to look good and the neighbors are happy. It’s looking better but unless you fix the foundational problems you’re not going to really make a solution.
Mike Gleason: I don’t know about you David but I’ve been rather encouraged the way silver has hung in there over the last week or so since we saw that last leg down right before Thanksgiving. We’ve been seeing gold drift lower but silver is actually outperformed something we generally don’t see when gold is falling. What do you make of that? Is that a function of silver being aided by its status as an industrial metal during a time that many believe industrials may do well in? And is that maybe a good sign of a short term bottom in the metals? What your thoughts there?
David Morgan: Well my thoughts Mike are slightly different to the what the mainstream banking system would tell you, that with the infrastructure build out it’s going to be more industrial use for silver and therefore it’s strong. My take is being in this market for several decades, is that silver leads gold when we’re in a bull phase. And I still think we are in a bull phase. I think we’ve had a pretty nasty correction and I think it’s going to continue for a short time longer.
But when silver starts to pull away from gold or is neutral and gold continues down, in other words the gold/silver ratio starts to decline, that to me is just another sign that we are in a bull market, so this is fully expected by me. Another thing that is fully expected is the strength of the U.S. dollar. This is something that a lot of people have a hard time wrapping their heads around but in an uncertain market people seek safety and they seek what’s certain. For most people that means cash.
Mike Gleason: That leads me right into my next question here. The metals market really do seem to need a catalyst for higher prices and right now we’re fighting a stronger dollar as you mentioned, and rising interest rates in an environment where many investors seem to be in a risk on mood. Safe haven investments including metals are less in vogue right now. But of course the reasons to own the metals haven’t simply vanished as we just spoke about, so how long are you expecting the risk on mood to last and do you see any specific event or events that are likely to derail the strength in the dollar or put a bid back under safe haven assets?
David Morgan: Great question. Whenever you get these types of questions it’s best not to answer them. I don’t know would be the best. I mean the market knows more than anyone and I look for queues or signs from the market and then based on that do a pretty decent job. Better than most actually on short to intermediate term calls. I think that we’re going to see a neutral market probably up until Donald Trump actually is sworn into office. There’s a lot of news sites out there, and I’m not talking fake news, real news that are concerned about what’s going on with this vote recount and all that’s going on.
I’ve been paying attention to it but not a whole lot. I think Trump will be sworn in. I think once it settles in, you know, a new president is there and the programs that he’s enacted, the cabinet he’s surrounding himself with, all of that, will play into the gold market. Because as we already discussed, we’re going to see lower taxes and more spending and that’s inflationary. And that will not only be a mode for people in the United States, it will be global. Because a lot of other Europeans and Asians will be concerned with the bond market, the debt markets getting worse not better which means rising interest rates.
Most people think rising interest rates are negative for gold, but actually gold did great during rising interest rates until the rate got well above the nominal inflation rate, so let me explain that briefly. In 1980 the true inflation rate by government stats was about 13%. So as interest rates started coming up during the last final phase, the last weeks of the silver and gold bull market, interest rates were rising rather rapidly and gold continued to rise just as rapidly until (Fed Chair Paul) Volker went ballistic and set interest rates at like 18% … 18 to 20 actually.
That was like 5% above the inflation rate, so when you have a real rate of return of like 5%, 4%, in that range, then that usually quells the metals. There’s nothing to fear about rising interest rates or a falling bond market. In fact the bond market is of course the big problem and you know we’ve talked about that numerous times, and if you really want to delve into it there’s lots of information you can Google on the internet. If you want our take, it took a lot of time and effort, you can read the Debt Bomb in The Silver Manifesto.
Mike Gleason: Yeah, that’s well put. It’s definitely all about the real interest rate environment, not the nominal interest rate environment and it’s sort of laziness to think that higher interest rates automatically mean lower precious metals prices. It’s all about where they are on that curve with the inflation rate. Now one thing that’s a bit interesting here are the rumors emerging out of India that may result in a ban on gold imports again. As many know, Indian citizens are pretty much the biggest gold buyers on the planet. It certainly wouldn’t surprise us as the government has already cancelled two of the most common rupee bank notes suddenly, causing a bit of chaos.
Now the last time they banned gold in India it mainly just raised its domestic price as smuggling emerged, but silver demand benefited in particular. Any thoughts on this unfolding situation David?
David Morgan: Well going back to the beginning of our conversation, you now, when I was in Germany, Mark O’Bryne of GoldCore was at that conference as well and I’ve had many Skype calls with Mark and I’ve known him for years and I like what he does. I like what he writes. He was at the conference so I got to meet him. And we did get to hang out together. He just wrote an article I think yesterday, talking about is silver the new gold for India. Which means that the government’s putting all of these screws down on a population for owning gold, or proving they owned it or if they inherited it or how they bought it or all this stuff.
And this is in the rumor mill. I haven’t had time to determine what’s fact from fiction, but that’s what swirling around the internet right now. And his article went on to say well that’s fine. The Indians will just move back to silver. What a lot of people don’t know really is India’s always had a propensity for precious metals, but it was primarily silver for decade after decade after decade because silver was much more affordable to the population than gold. Not that they weren’t big gold buyers, but it wasn’t as pervasive as silver.
Now that so much work has been off-shored to India for software in particular, and other things, the population as a whole has gotten even wealthier, and because they’ve gotten wealthier they’ve moved more into gold and other investments… I mean there’s a middle class developing in India and they’re becoming more Westernized and their thinking is becoming more Westernized and rather than just because dad and mom and grandma and grandpa always bought precious metals I’m thinking about mutual fund or whatever.
That’s all part of the scene but going back to what Mark’s article said, it’s like, okay if the government is really putting the clamps down on gold ownership you’ll see a push into silver in India and silver’s move in India has been rather robust the last couple of years. It got not only a large investment demand that’s carried through but also their solar industry, government sponsored, is rather robust.
Mike Gleason: As we start to wrap up here David give us your thoughts on the remainder of the year when it comes to what you’re expecting in terms of the price action in the metals because I recall in years past you were predicting a price raid in the metals over the last week or so of December which is exactly what we’ve gotten several times now over the last few years. Are you looking for something similar there this year? And then also talk about what you’re working on in the Morgan Reports and if there’s anything new there that you want to cover before we close.
David Morgan: Yeah Mike I do think we’re going to see probably a push down into the last few trading days of the year. It’s been pretty easy to forecast. It doesn’t necessarily mean it will happen this year, but any market that’s small is easy to move. Any market that has a very tight float and very low volume, if somebody comes in and buys a whole lot it’s going to shoot the price really high or conversely a small float, no volume, and someone comes in and sells a ton, it’s going to drive the price down.
That’s what will take place, I think, going into the end of the year. Does it mean we shouldn’t load on some good silver and gold for Christmas gifts or all that? I think it’s an amateurs game to try to pick the exact bottom. I think we’re pretty close right now anyway. Could it go lower? Yes. Do I expect it to go lower? Yes. Substantially lower? No.
As far as what we’re working on Mike, it’s one of the most interesting things I’ve seen in a long time. I made what I call an emergency trip to Vancouver B.C. to witness two things. One is… and I’ll call it a modernized ball mill, and I met with the engineer and being an engineer at one time we got along famously and had a nice chit chat about his design and how truly beneficial it will be as a mill.
Then there is another aspect to this company, and this is a company that’s in the speculative section of The Morgan Report. This process that I witnessed with a solvent, I guess you could call it a solvent, because water is the best solvent on the planet and we drink it. It’s similar from the aspect that it’s non toxic. You could actually drink it, it wouldn’t harm the body. And yet it precipitates out almost any metal.
So I went into the lab and witnessed this, filmed it myself and I’ll be putting this out as soon as I’m able. There are certain rules that I have to adhere to and I do, which means I can hand tout it like I’m doing with you Mike, but I can’t really say too much without it being publicly disclosed. I do think it’s going to be publicly disclosed within a week or two. This is something that anyone that’s a website member of The Morgan Report, the page site, of the website. They will probably, if they own most of the spec stocks, they’ll already have an in on this company because what I’ve been told right now is there will probably be a spin out of a holding that we’ve already put into our subscriber’s hands.
This happened to us once before but it wasn’t a new technology. It wasn’t as exciting as what I just described but as far as the mechanics of what I just described… we had a coal company and they had a platinum project and people that owned that company were spun off a share in this new platinum company. So basically you got kind of a two for one. That company’s gone on to get one of the best silver deposits on the planet and it’s very undervalued. I’ll be doing an interview with the CEO, probably in the next week for our website members.
That’s the last thing I want to mention Mike, and it hit my brain. As I said I’m still getting over this cold. One thing that we do that no one else in the industry does to my knowledge, is when we go to the Gold and Silver Summit, we interview almost every company there. I do the interviews, or my staff, one of the three of us, interviewed almost every silver and gold company that was attending the conference. We have about four speculative companies that are like high risk, high reward, but they’ve got interesting stories.
We provide all that in a video format for the website members so they can log in and watch these things at their leisure. Take notes, pause it, write down things. Let’s say you call up the IR department at one of these companies (and say) “I’m a Morgan Report subscriber and I heard so and so talk about such an such and I’m interested in getting with the IR department and learn more information,” and that type of thing.
You know it’s a service that those that are aware of it and subscribe are very, very happy with it. But I do want to get the message out that we just finished compiling all of the videos that shot at the Silver Summit and they will be going up on the website for our website members probably today.
Mike Gleason: Yeah that’s great stuff. Very fascinating information there on that new technology. I’m sure people are going to want to check that out. There’s another great reason to get The Morgan Report and then obviously what you’re talking about there with the Silver Summit interviews. That will be great stuff as well I’m sure.
David, we always appreciate your thoughtful analysis here on the Money Metals Podcast and I’m sure we’ll be talking again real soon. Now before we let you go, just please tell people how they can get information about The Morgan Report and how they get involved with that. Then also mention the new book you and David Smith just came out titled, Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shockwave. Tell us more about that as well.
David Morgan: Certainly. The best way to get on our free email list, free list, is just go to TheMorganReport.com. There’s a little video there. You can click it twice and I’ll stop talking, and just give me a first name and a primary email address. It’s a double opt in which means that we will mail your email address that you gave us and say you are really who you say you are. Once you do that you will be on the list. You will get a weekly update from me or one of my staff on a general outlook of the metals markets. There is some advertising on that. I mean I have to pay for those lists and the servers and everything else, so I’ll let you know that right up front.
We send it out usually twice a week or something along those lines. The weekend one is the one that is the free analysis or question of the week or we do have some videos of kind of hitting the high spots in the currency markets and the precious metals every week. So that’s the way to get familiar with our work.
As far as the Second Chance book is concerned, this is something that I wish I had the first time that silver went from $ 5 to $ 50. I might have been a little better at taking profits, although I did fairly well in gold. I mean I actually got in my biggest position at $ 300 gold and got out about $ 700, so I did pretty well and it was leveraged position, so I was pretty happy about that.
A lot of people don’t understand that everything is undervalued, fair valued and overvalued. These metals will get over valued. Right now they are very undervalued. They are not even fair valued. But once they get to an overvalued situation you don’t want to be married to these things. You need to take some profits and where do you take profits. Well we’ll try to help you if you’re a subscriber to The Morgan Report.
You know I’m a pretty giving guy. If I do an interview like this I’ll probably make some suggestions for the public domain as well. I don’t have any problem with that, but the idea is when these metals get to a point where they are so over valued and everybody wants in, you should be looking to get out or at least get out of part of your position if not maybe the entire thing, at least some of it.
Those days are ahead of us Mike. I don’t think they’re too far off. I actually, and I don’t like giving dates. I’ve certainly have had my share of hits and misses, but I really doubt that this four year term of Trump will go without some kind of financial conundrum, where we are in a 2008 type of situation. It won’t be exactly the same but it’ll be similar. It may even be worse. I just don’t see us going four more years with the debt situation that we have, with the tensions surrounding Europe, with the euro and people wanting to exit the euro. What’s going on in their political mainstream between Italy recently and of course Brexit.
The general shift of the idea that the bankers are the problem. You know this is something that I knew many, many years ago but very few would even agree with me, and it would be considered fake news and extremist. I’ve been studying this for years and the main problem is how money works… as Michael Rupert has so famously said, “Unless we change the way money works we haven’t changed anything.”
You can change the politics. You can change the politicians. You can change the ideology or the sentiment, but unless we change the way money works we really haven’t changed much. And unfortunately we haven’t yet. However, I do think, as I said, within this next four years there will be some type of reset and some type of monetary change and hopefully it’s for the better.
Mike Gleason: Well very well put David. We’ll leave it there. Thanks so much and we really appreciate your time as always. I hope you have a great weekend, a Merry Christmas, and all the best with the new book, and we’ll look forward to catching up with you again after the New Year.
David Morgan: Thank you Mike. Appreciate it.
Mike Gleason: Well that will do it for this week. Thanks again to David Morgan, publisher of The Morgan Report. To follow David, just visit TheMorganReport.com. We urge everyone to at the very least to go ahead and sign up for the free email list and start getting some of his great commentary on a regular basis and if you haven’t already, be sure to check out The Silver Manifesto, and now his new book as well titled, Second Chace: How to Make and Keep Big Money During the Coming Gold and Silver Shock Wave… both of which are available at MoneyMetals.com and other places where books are sold. Either one would make a fantastic gift this holiday season for anyone investing in or thinking about investing in precious metals.