Three weeks ago, the investing public was awarded a brief glimpse into the mysterious world of central banking through events in Cyprus. Despite the official assurances by IMF head Christine Lagarde that this was an anomaly, a one-time expropriation of investor savings, it is now clear that the situation is far more serious than originally acknowledged and that the Cyprus style “bail-in” will likely be used as a template for other distressed banks. News soon circulated that Cyprus’s gold reserves will be seized as part of the plan. Rumors rapidly spread that other troubled countries would also be forced to sell their gold .
Central banking has always been a highly secretive, subterranean affair that has led to many conspiracy theories. Until the advent of the Internet and the light it has shed on this dark room, most of the world believed the Federal Reserve was a government agency rather than a privately owned bank, for example. Former Congressman Dr. Ron Paul was largely responsible for clearing up this mystery. As discussed in my previous commentary on the subject, Cyprus gave us an important glimpse of the three great secrets central bankers would prefer to keep in the dark: The loss of purchasing power brought about through inflation, debasement and financial repression; the loss of investor confidence in the fiat model and in government and banking policies that support it; and the importance of uncompromised bullion ownership. The attack on gold and silver further supports this premise rather than weakens it, but arriving at this conclusion takes more than superficial, reactionary analysis.
Central bank activity is a mystery that we can best attempt to solve through studying clues and through asking questions—particularly the question “Cui bono” meaning literally, “a benefit to whom?” After gold lost $84 an ounce last Friday and silver lost $1.81, we can conclude the beneficiaries were not gold or silver investors who panicked and sold, but rather those who are fighting to preserve the reputation of the U.S. dollar and the fiat currency model that underpins the global economy.
As with all things central bank-related, we can only speculate and conjecture. This is the purpose of this commentary. It is a worthwhile exercise because the most effective way to gain confidence in our investment strategy, which is now becoming a survival strategy, is through the sincere pursuit of economic/geopolitical truth. Otherwise, we will let our emotions rule our investment decisions and we will inevitably panic and sell our holdings out of fear and confusion.
Have gold and silver fundamentals deteriorated? No. Not in the least. There has been some technical damage and, of course, a temporary weakness in investor sentiment, but the global debt and the loss of purchasing power of fiat currencies, the main drivers of the price of gold, are still increasing by the day. Unemployment is still rising globally. There are still 48 million Americans dependent on food stamps. Employment participation is falling. Oil prices are still rising. Ten thousand baby boomers are retiring daily, putting further stress on government pensions. The debt ceiling debate that caused the gold price to rise 30% in two months has not been resolved and will soon be revisited. Gold production rose only nominally over the past decade despite the rise in precious metals prices. A detailed analysis of precious metals’ fundamentals show they have only strengthened, not weakened. There is obviously more to this story and, thanks to the Internet, we no longer need to wait for months to gain some clarity, as we might have a few decades ago.
Following Friday’s takedown, several reports appeared on King World News and through Jim Sinclair’s website stating this was a COMEX paper sale and that the physical gold market was tighter than ever as coin purchases and physical bullion sales soared in response. One commentator, Dr. Paul Craig Roberts, former Assistant Secretary of the Treasury for Economic Policy under President Reagan, did not mince words. He stated unequivocally that this attack was planned and quarterbacked by the Federal Reserve.
“This is an orchestration (the smash in gold). It’s been going on now from the beginning of April. Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance.”
As Dr. Roberts, like Dr. Paul had decades of first-hand experience working directly for the U.S. government, his words deserve a great deal of respect and should certainly serve as a starting point for anyone who sincerely wishes to get to the bottom of the mystery of gold’s recent price performance.