Gold Diggers of 2013

We are now in the midst of what can only be described as a gold rush. Of course some countries, China being the shining example, have been rapidly expanding their gold reserves for many years – the full amount of Chinese gold being a closely guarded secret although most analysts anticipate a full disclosure of Chinese gold reserves in the relatively near future, and based on an accumulation rate of slightly less than 1,000 tons per year, it is widely believed that China may already be the second largest holder in the world, which, as zerohedge noted back in November, means “surpassing Germany’s 3,395 tons and [becoming] second only to the US.”

Meanwhile, other countries are suddenly asking for the repossession of their own physical reserves that have been stored in vaults around the world during many decades. About a year ago I reported on Hugo Chavez’s retrieval of Venezuela’s physical gold reserves, and more recently we hear how, for instance, the Dutch and German governments are increasingly eager to get their hands on their own gold. Here is part of a report from Dutch News published in late November:

Questions have been asked in parliament about the location and value of the country’s gold reserves, most of which is said to be in foreign vaults, news agency ANP reports on Wednesday [Nov 28th].

The Netherlands is said to have 612 tonnes of gold, with a value of some €24bn. Just 10% of it is held at the central bank headquarters in Amsterdam. The rest is in bank vaults in the US, Canada and Britain.

Socialist and Christian Democrat MPs are now asking if it is sensible to keep the gold abroad and want to know how pure the gold bars actually are. 1

Anyone would think they don’t trust us or something – although when I mean us, I actually mean our central bankers obviously, and frankly who does trust them? Indeed, it turns out that the Germans had started repatriating their own reserves shortly after the launch of the euro and around the time of Brown’s Bottom, which was more then a decade ago:

The report [I’ll come back to this in a moment] claimed that the Bundesbank had slashed its holdings in London from 1,440 tons to 500 tons in 2000 and 2001, allegedly because storage costs were too high. The metal was flown to Frankfurt by air freight.

The revelation has baffled gold veterans. The shift came as the euro was at its weakest, slumping to $0.84 against the dollar. But it also came as the Bank of England was selling off most of Britain’s gold reserves – at market lows – on orders from Gordon Brown. 2

Click here to read the full article in the Telegraph.

The report in question, which had been produced by the German court of auditors (Bundesrechnungshof), is now demanding a complete audit of the nation’s gold reserves:

Germany’s gold bars, stored in the United States, Britain and France “have never been physically checked by the Bundesbank itself, or other independent auditors, regarding their authenticity or weight,” reveals a report prepared by the Federal Auditors’ Office. Instead, the Bundesbank relies on a “written confirmation by the storage sites.” […]

Concerns about Germany’s gold reserves arose this year after a group of German federal lawmakers wanted to check gold bars stored at the Banque de France in Paris. But they were turned away by local officials who said there were no facilities to visit the vaults, Deutsche Welle reported. […]

The Bundesbank has reportedly decided to ship 150 tons of gold from the New York Federal Reserve to Germany, according to German daily Bild. After returning to Germany the gold will be melted down to test the overall purity of each consignment before being re-cast into standard gold bars. 3

Click here to read the full report published by Russia Today in late October.

So why this accelerating rush to acquire gold, as in the case of China, or, as in the cases of Germany and Holland, to repatriate their gold reserves? What can it all portend…?

An article simply entitled “Are Fiat Currencies Headed for a Collapse?” published by CNBC back in July 2012 offers a concise assessment of the situation:

A fiat currency derives its worth from the issuing government – it is not fixed in value to any objective standard. That means central banks can print as much money as they want. If an economy is struggling, injecting more notes into the system juices activity but lowers the value of the currency in question.

With major central banks all desperate to stimulate their economies, some say currencies have entered a dangerous new phase often described as a race to the bottom.

Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, says investors will soon start to demand fiat currencies be backed by gold or other hard assets.

“It’s already happening, you’re beginning to see that trend with central banks stocking up on gold. The estimate is that at least half of the buying is central bank buying. They are looking to the day when they can say okay, our currency is backed by gold and therefore we’re a strong country,” Mobius told CNBC Asia. 4

Of course, such rumours of widespread currency collapse have been with us ever since the financial panic of 2007/8 – rumours that were quickly given extra legs thanks to the enormous bank bailouts and the multiple rounds of quantitative easing (QE) both in the US and in Europe – all this money printing being the immediate way that the derivatives Ponzi scheme, the original cause and the deep root of the crisis, could be propped up. Yet, in spite of such vast injections of new money, the more serious catastrophe predicted by many has not (as yet) come about. So does this mean, as our governments wish to persuade us, that the crisis has been brought under control, or does it simply mean that they’ve managed to kick the can just a little further down the road than most of the economic pessimists could have imagined?

Undoubtedly such rampant money printing without anything like commensurate economic growth does mean, and however cunningly it may be have been disguised, that the money we hold has undergone and continues to undergo a rapid devaluation. So prices in the longer term must be expected to rise since inflation is already baked into the quantitatively-eased cake: the only legitimate questions being not if, but when, and importantly, how sharp the eventual decline in our purchasing power turns out to be.

In Britain, for instance, prices of goods and services are certainly rising quickly, and well above the skillfully massaged Consumer Price Index (CPI) figure of less than 3%, whilst at the same time wages remain flat (falling in real terms and thereby magnifying the impact of inflation for most people), but, on the face of it at least, there is little indication of any kind of hyperinflationary collapse coming around the corner. However, there is one outstanding factor to be considered here: that the newly printed money has largely been hoarded by the banks that received it, and for so long as the banks are reluctant to lend, little to none of this issuance flows back out into the money supply. For this reason, most of the coming inflation remains as yet in the pipeline.

So are we about to see a protracted devaluation of our currencies involving many decades of relatively low inflation at survivable rates (although perhaps as high as ten or twenty percent), or ought we to expect a sudden leap to genuine hyperinflationary levels? Put differently, are the western economies going to continue to more slowly but inexorably sink or, alternatively, is the genuine ‘fiscal cliff’ of a currency collapse nearing? The simple answer is that I don’t know – I’m not an economist and I don’t pretend to understand the deeper complexity here; and when it comes to economics, pretending to understand and then making lousy predictions is far better left to the professionals! What is clear is that so long as the imposed ‘solution’ to this still deepening financial crisis relies upon the deadly cocktail of “austerity measures” mixed with money printing, the prospect of eventual hyperinflation looms not merely as a worst-case scenario, but a worst-case that appears increasingly likely.

Why do I say this? Well, because at the same time as “austerity” is destroying growth, the endless rounds of QE are effectively reducing the value of our money by repeatedly diluting it. So maintaining this combination of imposed “austerity” and sustained money printing is just about the most perfect recipe for creating not mere inflation, but stagflation – which is precisely what we are already seeing.

But then outright hyperinflation is always a result of political choices, rather than simply an outcome of economic failures. It happens whenever a government decides (or, very often, feels coerced) to flood the economy with currency in an increasingly desperate attempt to keep up with repayments on unsustainable debts and so to survive. And for dramatic effects, this tail-chasing exercise has to go on and on and on…

So here’s what I think we can most certainly expect in the immediate future – even given a best-case scenario. Undoubtedly our economies will continue to shrivel away under the imposed “austerity measures”, bringing mass unemployment in the wake of economic decline, and that rise in joblessness, in turn, generating a frenzied competition for the remaining jobs, and forcing down ordinary wages still further (when wages have already, certainly in real terms, substantially fallen since the crisis began).

In the meantime, attacks of QE are continually eating into our earnings and savings, and in terms of devaluation, it hardly matters whether one decides to stuff their money under the mattress or deposit it in a savings scheme, given the poor rates of return on offer. But let’s also keep in mind that all of this is being done merely to serve and protect the interests of the major banks: the ones long-since deemed “too big too fail”. Institutions not only operating outside of the law, but tacitly encouraged to carry on doing so (as the lack of prosecutions following the fixing of Libor and the more extraordinary scandal involving HSBC goes to show).

And now the increasing desire shown by governments and central banks (not to mention many of the richest individuals) to suddenly acquire gold and, perhaps even more importantly, to hold on to it, offers clues beyond the competing economic theories as to what the “money masters” themselves are actually anticipating. Needless to say, it does not bode well for the majority of us.

The steadily rising price of gold is at the same time, of course, a key indicator (alongside the rising price of other commodities like silver and copper) of how much our currencies have already been debased. During the past five years, both gold and silver have approximately doubled in their value, equivalent to an annual inflation rate of slightly less than 15% (which is obviously far higher than the CPI’s paltry 3%) – I offer a more detailed analysis of these trends as a footnote.5 And these rises have happened in spite of the fact that the price of gold and silver, like everything else in our supposedly ‘free market’ system, is subject to manipulation by the major financial players, who, having “invested” so heavily in varieties of paper, have a clear interest in keeping the value of precious metals down – and the Ponzi scheme up and running.

Meanwhile, the continued appliance of tough “austerity measures” in spite of so much damning evidence of ineffectiveness in rescuing any ailing economies, anywhere, ever (either during this crisis – to judge by the effects on Greece, Spain and elsewhere – or earlier ‘interventions’ in Latin America, Africa and in the aftermath of the break-up of the Soviet Union) proves only that there is still very much a political will to enforce such neo-liberal “shock therapy”.

“Austerity” kills the poor and the weak and is already doing precisely this in places like Greece. It cannot provide any cure for what is an intrinsically systemic failure. Instead, such tight restrictions on government investment in welfare and infrastructure during a depression is like telling a starving person that it might help if they were to eat their own stomach. A brutal approach that is nothing short of criminal lunacy. And the same goes for the bailouts – the banks are fundamentally broken, indeed the entire financial system is in a state of ruin, and repeatedly bailing them out means simply throwing good money after bad… ad infinitum.

During the depression years of 1930s, there was another famous rush for gold. It eventually led to US President Franklin Roosevelt signing the notorious Executive Order 6102 in April 1933, “forbidding the hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States”. An order that was supposed to apply to every individual, partnership, association and corporation, and making possession “of gold or silver coin or bullion or currency” a criminal offence. It was the same year that Warner Bros. released the first of a string of popular musicals: Gold Diggers of 1933; quickly followed up with Gold Diggers of 1935 and … of 1937. These sugary confections, mostly remembered now for their lavish and dreamy choreographed sequences put together by the great Busby Berkeley, are ‘rags to riches’ tales with guaranteed happy endings that had helped to keep the public’s pecker up.

This time around we are perhaps still a long way off any equivalent to FDR’s Executive Order, though it is always wise to keep history in mind. Back on the entertainment front, and with the depression looking set to move up through the gears once more, we are offered the rather grittier and altogether more worthy distraction of a big screen release for Victor Hugo’s grand epic turned Broadway musical, Les Misérables – Surely the producers aren’t trying to plant the seeds for revolution?!!!

I can think of no better way to finish such a gloomy article than with a song. And what better than Noël Coward’s wonderfully sardonic ditty “There Are Bad Times Just Around The Corner” (albeit written during the rather more solvent 1950s). Here’s a chorus:

There are bad times just around the corner
The horizon is gloomy as can be
There are black birds over
The greyish cliffs of Dover
And the rats are preparing to leave the BBC
We’re an unhappy breed and very bored indeed
When reminded of something that Nelson said
And while the press and the politicians nag, nag, nag
We’ll wait until we drop down dead

You can enjoy a complete performance embedded below – Is there any better national anthem for these turbulent times?

*

Update:

It seems that the story had already moved forward before I released the post – so here’s the part I missed: “Germany bring home gold stored in US, France,” released by Associated Press (published by The Wall Street Journal on Wednesday Jan 16th):

In what sounds like the setup for a stylish Hollywood heist movie, Germany is transferring nearly 700 tons of gold bars worth $36 billion from Paris and New York to its vaults in Frankfurt.

The move is part of an effort by Germany’s central bank to bring much of its gold home after keeping big reserves outside the country for safekeeping during the Cold War.

Click here to read the full story.

*

1 From an article entitled “Are the Netherlands’ gold reserves real? MPs want answers” published by Dutch News on November 28, 2012. http://www.dutchnews.nl/news/archives/2012/11/are_the_netherlands_gold_reser.php

2 From an article entitled “Bundesbank slashed London gold holdings in mystery move” written by Ambrose Evans-Pritchard, International business editor, published by the Telegraph on October 24, 2012. http://www.telegraph.co.uk/finance/financialcrisis/9631962/Bundesbank-slashed-London-gold-holdings-in-mystery-move.html

3 From an article entitled “Germany orders a check on its gold reserves” published by Russia Today on October 29, 2012. http://rt.com/business/news/germany-gold-reserves-check-472/

4 From an article entitled “Are Fiat Currencies Headed for a Collapse?” written by Lisa Oake, published by CNBC on July 27, 2012. http://www.cnbc.com/id/48349503/Are_Fiat_Currencies_Headed_for_a_Collapse

5 As I write, the price of gold is $1687 per oz and silver stands at $31.7 per oz. Over the last five years this compares to lows and highs of $709 and $1900 for gold and ranging between $8.92 and $48.5 for silver. In other words, the current values are still below the high peaks that were reached in 2011. However, if you judge from the trend rather than from spot values then both graphs are very clearly climbing throughout the 5 years – and in that period (a period which approximately coincides with the length of the current crisis) gold has almost doubled in value (being around $900 in January 2008) and silver likewise (from just over $15 in January 2008). A doubling of prices over five years would equate to an inflation rate of very slightly under 15%. Click on the links to see price charts over 5 years for gold and silver.

Copper is a little different. The price of copper as I write is $3.6 per pound. If you study the price over the last 5 years then there has been a more modest rise compared to gold and silver (beginning with a price already a little over $3 in January 2008, before sharply falling by December 2008 and then recovering again in late 2010). But the trend for copper is very much more interesting when considered over ten years. Back in 2003, silver was still in a dip at around $0.7 but in early 2004 it sudden began to rise spectacularly, reaching $3.5 by mid 2006 – an incredible five-fold increase. It has more or less maintained this high price ever since, flattening off in recent years, although as the chart below shows, the overall trend remains modestly upward:

Historical Copper Prices - Copper Price History Chart

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2 Comments

Filed under analysis & opinion, austerity measures, China, Germany, Netherlands, Venezuela

2 responses to “Gold Diggers of 2013

    • Thank you for the link. I must say that I am impressed by the thorough, highly detailed and clearly explained breakdown of the causes of hyperinflation – it’s rare for any piece about economics to be so transparent and readable. So I certainly would encourage others to follow your link.

      One thing that jumped out as I read down the items was the part about minting some $1 trillion coins – isn’t this precisely what just happened? And therefore another indication of impending currency collapse? The other issue I’d like to raise is regarding debt cancellation as a solution to the crisis. You appear to dismiss this as an option and yet cancellation of debts and especially odious debts is something that has happened before – Surely a huge global debt jubilee is both warranted and ultimately the only way to end this cycle… what are your own thoughts on any of this? And thanks again.

      Like

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