Why Gold Is Dropping When It Shouldn't
- and what it all means
(PLEASE NOTE: This article is from December 2008. Many of its observations are still valid. However, to get an up-to-date view of why gold has been dropping in Q4 of 2011, please visit our Blog page here - Alex Wallenwein)
Why is gold dropping right now when anyone in their sane mind would expect it to rise? The simple answer to this question is, “because Comex-gold isn’t gold” – and because it deceptively pretends to be 'the' price-setter for real gold.
Gold is gold, paper is paper, and “Comex gold” is nothing but paper masquerading as gold while simultaneously pretending to be the price-setting medium for actual gold in the world. Now, finally, Comex-gold is in the process of being unmasked.
The real supply and demand determinants for Comex gold are not actual gold investors but fund managers. Fund managers are inextricably intertwined with the world of contract-based credit instruments. They use bet on Comex gold contracts to hedge their other (currently horrendously losing) bets with something they all, in their in-bred belief in paper markets, believe will 'go up' in value while everything else is going down.
However, these very same fund managers and their paper-bound investment psychology are the exclusive reason why Comex gold is dropping in these times when everyone (including fund managers) expects gold to rise. As already stated, though, and as they now finally realize to their own dismay, Comex-gold just isn’t gold – and that causes even further selling.
Two Losing Bets, Compounded
Fund managers' other bets are losing money fast, now, so they need to raise cash to keep up the overall value of their respective funds, so they can earn their management bonuses and avoid getting booted for lack of relative performance. Guess what they cash in on? The very same Comex paper-gold they mistakenly bought as a 'hedge', of course.
Meanwhile, real investors in real gold are enjoying their shopping spree – except that the spree turned into a treasure hunt as the shelves and display cases of gold dealers look more and more like the supermarket shelves in the old Soviet Union - bare.
This is the only 'bare-market' in real gold the world will see for a long, long time to come.
With this split, this disconnect, between Comex illusion and gold reality, one thing or the other will have to give, and it won’t be physical gold that gives.
The system built up around the reputation of Comex-gold as being a price-setting mechanism for real gold plays right into the hands of the financial establishment. The establishment depends for its (now increasingly meager) existence on the illusion that gold "isn’t living up to its promise" as a real inflation and disaster hedge. The implication, of course, is that investors might as well stay in the computer blip and paper world.
As the Comex gold price illusion drops, many retail investors are still persuaded to keep their money circulating in the paper world, and that ultimately feeds the system. Of course, by now that ‘feeding’ mechanism looks more like life-support, but try and unhook someone who is on life-support. The results are dramatic, inevitable, immediate – and final.
Yet, even on life-support, the system is deteriorating at a catastrophic pace. It would be hilarious to watch if it wasn’t for the fact that we are all depending on this phony system for our real-life support. Without credit freely circulating through the commercial paper universe, for example, grocery stores won’t have food on their shelves, there won’t be gas a the gas station, and your bank will be shut. Cash doesn’t transfer very well without the bank settlement process.
That’s the problem.
Our economy has become too centralized. Everything has to travel over long distances, so face to face cash-transactions will not be able to keep the system alive. There is much to be said for localized, decentralized distribution systems, which in essence involve many different and varied local economies rather than one large and uniform one. For arms-length cash transactions to be able to sustain an economy, economic activity needs to be localized, i.e., decentralized,
The same thing goes for politics, of course. That’s why the framers of the Constitution gave us a de-centralized federal system with little power at the center and much of it spread out to the states. That system can develop its own evils, as we have seen during the days of slavery, but we are now seeing that centralizing and controlling everything from the federal level is not really the answer, and rather magnifies evil on an aggregate level.
And now, in the face of all this abundant evil, the G7 crackpots have the audacity to suggest that we need to centralize power even more and come up with 'global solutions.' Yet, globalization was the very reason our profligate lending and spending habits here in the US spread around the globe so fast. True to their form therefore, politicians and so-called leaders are now using the bad situation that they created as an excuse for persuading us to give them the added power they need to make it even worse!
Silvio Berlusconi, the Italian prime minister and former EU president, let the cat out of the bag last Thursday when he blurted out (God bless his soul for being such a loose cannon!) that the G7 want to shut down the markets this coming week while they figure out how to deal with the crisis. That cat was very quickly stuffed back down his throat as he was forced, only an hour later, to retract his statement by saying he just repeated what he had "heard on the radio."
You Can’t Argue with Abysmal Failure
Judging from the success rate of elected and appointed leaders in politics and economics so far, whatever they will come up with over this weekend and the succeeding week will undoubtedly be an unmitigated catastrophe. Just picture a time line from Bear-Stearns in mid-March to IndyMac in May, Freddie and Fannie,in July, Lehmann, AIG, WaMu, and Wachovia in September, the bailout package fiasco a couple of weeks ago, and then last week’s post-bailout market-action, and you’ll see a direct, negative correlation between official action and market performance.
They more they try to 'help', the worse things get – and now they want to act on a global scale and they want our support?? I don’t think so.
A very legitimate question arises whether things would have even gotten this bad if they had done nothing. I can tell you one thing for sure: if they had never had the power to do what they did, things would have never gotten to the point where they would have been called upon to exercise it to save us. By 'they', I am referring to the political and financial thieving class, of course. A prime example for how badly they have screwed things up is what has been sold to us as ‘deregulation.’
Deregulation? Sorry. Not for You!
Under the Republican mantra of “deregulation”, the only things that were really deregulated were the banks’ ability to sell investment products and deal in derivatives, and the largest corporations like Enron and WorldCom. You, the living, breathing individual on the other hand, are now more regulated than ever. What does that tell you?
Here is some advice: whatever ‘they’ tell you to do - do the opposite! Why not? After all, they routinely do the opposite of what they say, so why can’t you?
This is not to say that under a Democrat regime of over-regulation things would be any better. You, the individual, would still end up being as regulated as you are now, or worse, and the additional concentration of power at the government level would certainly not make the economy any better, either.
So, this November 4th, when they are asking for your vote, tell them what you think. Vote to un-elect every single politician who is asking you to reelect him or her, from local dogcatcher to city hall member, from state-rep to federal congressman and senator. It won’t even matter whom you vote for, as long as you vote the incumbents out. Then, rinse and repeat, from now on until you die. It’s the only power you have left.
But, back to gold (excuse the digression).
From the Past ...
What we have in store for us, economically and as an investment environment in stocks and bonds, is perfectly depicted by a comparison of the world’s major stock markets.
(The BSE Bombay Stock Exchange data for this chart don't go back to 1980, so a shorter-term view is presented):
... to the Future!
These charts above show the past. They show all of the major uptrends that are about to be broken – and here is our future:
The world's major stock market charts will look like this in twenty years, or worse, unless the bleeding can be stopped and a new bubble is created - but the bleeding won't stop.
By the way, to all those who think gold will 'go down' in a deflationary environment, here is a gold chart in Japanese yen since Japan’s deflationary period began in 1989:
Interesting, isn’t it?
Now I can hear some saying, "Well, we’re in a global environment now, and the global deflation has only just begun." So what? In a deflation, cash is king and rises against commodities, financial assets, and consumables – but so does gold, because ultimately, gold is money. Like it or not. Right now, it may not be 'current' money that is exchanged for goods and services in the ordinary course of business – but that will change.
Financial Diarrhea - and its Cure
Wait a minute. ‘Change’ is Obama territory, isn’t it? So, is he the one who will make it all better, then?
No, the currency system won’t change because of Hussein Obama. He is as irrelevant as Bush currently is. The Bush administration is impotent to change anything, and so will he be. Both Bush and 'Hussy' Hussein are sucking on the teats of the same mother-sow that is the global banking elite. Mama sow is currently having a serious case of food poisoning, though. She is bleeding red ink from one end and vomiting credit from the other, and that invariably causes fatal dehydration.
Yet, her system cannot be successfully re-hydrated. It rejects precisely what it needs to live, i.e., credit, just like a human patient suffering from food poisoning cannot retain food or water. There are scores of economist magicians and witchdoctors about, running to and fro, trying to impress with their tricks and their smoke and mirrors – but there’s only one doctor in the house, and he's not being consulted.
Economic sorcery cannot cure the world’s fundamental illness because sorcery is what has brought it about. Only a good dose of tried and true folk medicine can, and that medicine is the oldest and most successful form of money in the world:
The Limits of Financial Power
The financial elites can twist and squirm all they want, but nothing they are able to do within their own limited powers will work. All they can do is shut down markets, shut down banks, or create more debt. Period. That is the full extent of their economic power, and their power is now running up against one of the oldest laws in economics – the law of diminishing returns.
That law holds that when you continue to do more of the same over a long time, whatever has worked in the beginning will become less and less effective as time goes on. For example, in the old days before synthetic fertilizers, if you grew and re-grew the same crop on the same land for too long, your crop yield would decrease to the point where it was no longer economically feasible to plant that crop. That’s why old-school farmers used to let the more exhausted fields lie fallow for a while before replanting them, or they used a combined system of rotating crops and letting the land lie fallow for a while.
The world’s economic engine hasn’t lain fallow for a long, long time. The current recession and coming depression will give it that much-needed opportunity. Meanwhile, further injections of debt will not work, just like more of the same rotten food won’t cure the patient suffering from food poisoning.
The world economy is retching blood and debt, and all our leaders have to offer is, well - more debt. You can already see where this will end up.
The ‘Patient’ Revolts
Here is where the patient’s self-determination comes in. The word ‘patient’ here does not stand for the mother sow. It stands for the billions of individuals of the world who have so far played nice and played along with their debt masters because it was sooo convenient. But guess what? It’s no longer convenient to play along.
Something will have to give – and the elites aren’t powerful enough to make the entire rest of the world cry uncle. Their power only extends so far as their phony bag of tricks actually works to some extent, so that people are at least marginally satisfied with their lives. Once we come to the point at where whatever the elites do flat-out stops working, things will change – and we are now very close to that point!
The more they try to do, the less it works. The law of diminishing returns is spitting them right in the face. The more they try what doesn’t work, the more people will lose respect for them, the less people will look to them for solutions. Accordingly, the harder they try, the weaker they get. All you and I have to do is sit there, watch them on our television screens, chuckle to ourselves - and wait.
Sure, it will be hard, but that will only get people madder. Your power may go out. There won’t be food in your local supermarket – but this time you'll know that it is your 'leaders' in government and banking who are the source of the pain you are experiencing.
We have all had it too good for too long, anyway. It’s time for some hard knocks. It’s time for some reality. With the accurate perception of reality comes wisdom - and the determination to act.
That, of course, is the last thing they want you to experience, but they are now powerless to prevent this from happening. Everything they do drives the rest of humanity closer to that point.
Americans are only easy to control as long as you make things easy for them. In the 30’s, people still believed in FDR because they had no alternative source of information besides his so-called 'fireside chats' on the radio – where he could single-handedly rake the truth over the coals, unchallenged. Now, we’ve had a functional Internet for more than ten years already, and our kids are smarter than we or our parents and grandparents ever were. That genie will never go back in the bottle.
At the end of that entire road of economic mayhem, pain, and privations, there will still be the option of using gold and silver as currency – and it will be the black market that will lead the revolution, not the official exchanges and money centers. Our officials will continue to prove to us that they can’t do the job, so we will have no choice but to step in and do it for them. In the process, we will realize that we don’t need them nearly as much as they need us.
It will be a most salutary awakening - for both sides of the wrought-iron fence.
The EURO vs. DOLLAR & GOLD MONITOR
In this multi-decade gold bull market, the old investment maxim of "know when to buy and when to sell" has been replaced by "know when NOT to sell!" Euro vs. Dollar & Gold Monitor subscribers know when not to sell.
October 12. 2008