Archive for the ‘Economics’ Category

Onward Toward Bullion Bank Collapse - Craig Hemke
By Craig Hemke 

The events of Friday not only speed the eventual collapse of the Bullion Bank Paper Derivative Pricing Scheme, they also highlight the fraud of this current system and shine light upon the utter desperation of these Banks to maintain it.

We’ve written about this countless times over the past six years. Here are just two recent examples:

In short, as a measure of controlling the paper prices of gold and silver, The Bullion Banks that operate on The Comex act as de facto market makers of the paper derivative, Comex futures contract. This gives them the nearly unlimited ability to simply conjure up new contracts from thin air whenever demand for these contracts exceeds available supply and, almost without exception, these Banks issue new contracts by taking the short side of the trade versus a Spec long buyer. Never do these Banks put up actual collateral of physical metal when issuing these paper derivative contracts. Instead, they simply take the risk that their “deep pockets” will allow them to outlast the Spec longs and, without the risk of having to make physical delivery, The Banks almost always win. Eventually, an event like the runup to the Brexit vote or all of the Fed Goon jawboning of May will spook The Specs into selling and this Spec selling is used by The Banks to buy back (cover) their ill-gotten naked shorts and lower total open interest back down. (If you’re confused by this, please click the second link listed above for a more detailed explanation of this process.)

How this influences price is simple. If the supply of the paper derivative futures contract was held constant on a daily basis, then price would have to rise or fall based upon simple supply/demand dynamics. When the amount of buyers exceeded sellers, price would have to rise to a point at which existing owners would be willing to sell. But this is NOT how the Comex futures market operates! Because the market-making Banks have the ability to create new contracts from whole cloth, they can instead flood the “market” with new supply whenever it’s necessary. This mutes potential upside moves by imparting fresh new supply for the Spec buyers to devour. Price DOES NOT have to rise to a new, natural equilibrium. Instead, price equilibrium is found where demand meets this new supply.

As a case in point, simply study the “market” impact on gold “prices” in the hours that followed the Brexit decision in the UK. As turmoil shook the global markets, gold shot higher and, at one point, was up nearly $100. However, within hours it had given back nearly half of those gains and then spent the remainder of the day in am unusual and very tight trading range while virtually every other “market” was rocked with volatility throughout the trading day. See below:

The all-important question of the day is: How and why was this done?

First, the “how”. At the end of each trading day, the CME Group issues an update that details total open interest changes for both gold and silver. Friday’s preliminary totals can be found here: http://www.cmegroup.com/trading/metals/precious/gold_quotes_volume_voi.html What does the data show? On Friday, with global markets in turmoil and precious metals markets rallying significantly, The Bullion Banks on the Comex issued brand new supply of nearly 60,000 new paper gold contracts! At 100 paper gold ounces per contract, this represents a potential future obligation to deliver almost 6,000,000 ounces of gold, should the Spec long buyers ever stand for delivery (which they won’t). So, ask yourself these questions:

  • Did the world’s gold producers all suddenly decide to forward sell and hedge 186 metric tonnes of future production yesterday, just as the most significant economic event in eight years was beginning to unfold?

OR

  • Did the Bullion Banks suddenly put up a few million ounces of their own gold and then lever it up a few times and issue 60,000 new contracts based upon this collateral deposit?

Obviously, the answer to both questions is a big, bold NO! Instead, the market-making and price manipulating Banks simply played their usual game, writ large. In a desperate attempt to contain price, they simply issued these 60,000 new contracts and fed them to the Spec buyers. So next, ask yourself these vital questions:

  1. Without this added supply…which grew total open interest by over 10% in one day!…how much further would the paper price of gold have risen yesterday?
  2. If a natural equilibrium was forced to be found between buyers and sellers of existing contracts, would price have settled even higher?
  3. And how much higher? Gold was up nearly $60 yesterday. But without the paper derivative supply increase of 10%, would it have risen $100? $200??

So now let’s address the more important part of the question: “why”.

Simply put, these Banks are desperate and on the run. However, in their arrogance, they are still flailing away and attempting to postpone their demise. The minimal amount of physical gold that they do hold and utilize to backstop the paper derivative market is shrinking rapidly as investors and institutions around the globe seek gold as a safe haven against the financial devastation of negative interest rates.

But not only are The Banks attempting to reverse this trend that is rapidly deleveraging their system, they are also desperate to protect their established NET short positions from additional paper losses. Recall that the CFTC generates something that it calls The Bank Participation Report every month and we write about this report almost every month, too. Here’s the latest: http://www.tfmetalsreport.com/blog/7675/latest-bank-participation-report

So let’s cut to the chase…

With gold at $1060 back on December 1, 2015, the 24 Banks covered by this report were NET short just 30,757 Comex gold contracts. After running this NET short position all the way to 195,262 contracts on May 3, 2016, the report for June showed a NET short position of 133,396 contracts. However, data for this latest report was surveyed on June 7, with price at $1247 and total Comex open interest of 496,330 contracts. By this past Tuesday, in the days before the Brexit total were announced, price had risen to $1318 and then fallen back to $1270. However, total Comex open interest had risen to 571,517 contracts and, by analyzing the latest CFTC-generated Commitment of Traders Report, we can safely estimate that The Banks were likely NET short at least 180,000 Comex gold contracts.

Putting this all together, while price rose from $1060 to $1270, these 24 Banks added about 150,000 contracts of NET short liability to their Comex trading operations. So, with a NET position of 180,000 contracts short and with every contract representing 100 ounces of paper gold, the paper losses to these Banks for every $10 move in the gold price amounts to about $180,000,000. Multiplying that out…When gold was up nearly $100 early Friday, these Banks were on the losing side of a $1,800,000,000 move. Even for the likes of JPM et al, that’s a lot of fiat!

So, what did they do? Like any arrogant and addicted gambler, they doubled-down! They put “good money after bad” and, in doing so, likely increased their NET short position to nearly 250,000 contracts! All of this in order to suppress price and get it back under their control. This also allows them to somewhat control the message gold was sending. Can you even imagine the headlines if gold was up $200 yesterday? By holding the gains to just $50, The Banks hope to:

  • Manage the increased physical demand these higher prices are causing AND
  • Mitigate their paper losses. All of those new shorts lowered price by nearly $50 and nearly cut their one-day paper losses in half.

In the end, what’s the point of this post? First and foremost, it’s simply the latest installment of our efforts to shine the light of truth upon the incredible fraud and sham that is the current paper derivative pricing scheme. The Comex-derived price is not at all related to the price/value of true physical gold. Rather, the price discovered on Comex is simply the price of the derivative, itself, with the price of this derivative determined by changes of supply and demand of the derivative. Barely any physical metal ever exchanges hands on Comex so it is entirely inaccurate to say that the price discovered there has any connection at all to the underlying physical.

That said, though, we’ll leave you with one last link that you simply must read. Mark O’Byrne at Goldcore is closely-connected on the ground in London. In all of the hubbub of the Thursday and Friday, you may missed his daily report. If Mark and his sources are correct, we may be rapidly approaching the demise and destruction of these criminal Bullion Banks and their fraudulent pricing scheme. Demand for unencumbered, true physical gold is the key to ending this system and finding justice for gold holders, miners and producers around the globe…and this link may prompt you to think that we are closer to The End than at any other time in the past 40 years: http://www.goldcore.com/us/gold-blog/gold-lower-despite-panic-due-to-supply-issues-in-inter-bank-gold-market/

Friday’s Brexit vote truly was a game-changer and the single most important financial event since 2008. That it might accelerate the death throes of the Bullion Bank Paper Derivative Pricing Scheme is not something that is fully appreciated by the global gold “community”. Hopefully, this post has helped you to understand where we are at present, the reasons behind the price action of Friday and the significance of global physical supply/demand versus paper price going forward.


https://www.sprottmoney.com/blog/onward-toward-bullion-bank-collapse-craig-hemke.html

Gold and Economic Freedom

Posted: January 19, 2016 in Economics

Gold and Economic Freedom

by Alan Greenspan

Published in Ayn Rand’s “Objectivist” newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967.

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

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Original URL: http://www.constitution.org/mon/greenspan_gold.htm