Value of the value of a bond, part 5

We've been looking at how much silver the government would have to give you every year for lending it $100 (for ten years). Remarkably, just a decade ago, the government gave you a silver eagle's worth of interest every year for your $100 loan. Now, all they'll give you is the paper equivalent of 1/20th oz., or about half the melt value of an old dime (i.e. circulating dimes when money was money).

For almost 10 years, the value of the 10-yr yield in silver traveled down a narrow channel in what could very well be a managed descent. Then, in 2010, the descent became even steeper (see purple channel). Back in May, I guessed that we'd go back to the top of the purple channel, which we did, and then we went back to the lower trend line, where we are now, after overshooting for a few days. The UST10Y looks to be in a descending wedge (orange lines in lower chart), which signals a steep fall, but how much lower could it go? Anyway, it will probably make its way towards the upper orange line first. But if it doesn't, and since the silver chart looks bullish, perhaps we are entering an even steeper phase of yield worthlessness, which might begin after the thin blue line proves to be resistance. Stay tuned.

Sunday pre-game

After hitting the top purple line and then dropping precipitously last week, it certainly looked like we were getting a repeat of the other two times gold hit the top purple line on this chart below: namely, a drop all the way to the 144-day moving average (orange). However, encouragingly, it bounced off the middle purple line, and made it's way quickly back to the top purple line (see magnified box).

In the next few weeks, it's hard to say if gold will stay within its new trend channel, or blast through the top purple line (post- Labor Day is, after all, the strong season for gold), or whether (as Turd Ferguson says) a head-and-shoulders top (or perhaps a double top) will be painted, and gold will plummet a few hundred dollars once again. The 144-day moving average is approaching its 3-year upper bound (grey dotted line), which signifies an impending major correction. The 200-day moving average, however, still looks like it's moving in an orderly straight line. Stay tuned.

For silver, I realized that the line I drew connecting its two lower-most points this year actually forms the top of a trend channel, the bottom of which was perfect support last week. My guess is silver stays within that channel. FYI, the top of the channel will hit $50/oz in the middle of October.

Hard Assets

I am no economist but I would like to publish a few understandings I’ve had since I’ve been studying all this stuff. My reflections attempt to combine a number of concepts from a few different sources, but primarily FOFOA’s exposition of the difference between debtors and savers [link], and a discussion I had a while back with Blondie @ Flow of Value blog [link].

One of the concepts central to FO/FO/A treatise is the difference between currency and a store of value. Fiat money attempts to perform all roles at once which leads to anomalies, expressed by ‘FOFOA’s dilemma’. FOFOA explains it [better] than me but the premise is easy to understand – a saver who saves in the same notes which a money printer prints, is the loser in that arrangement.

The problems go deeper when you consider the ‘unit of account’ function of money, where here in the western world we are hardwired to price the value of things nominally and leads to all kinds of misconceptions that an item has increased in value when in fact it is the supply of currency which has changed (this by the way, is one of the reasons I’m bullish on Silver and Gold – specifically after studying the historical increases of the supply of currency in Australia alone).

But this article is not a FOFOA exposition. Today I want to borrow just one additional concept from his work as my premise. It is the concept that all money is actually just a claim on the goods or productivity belonging to another member of society. Obviously the global economy is more complex than just a single paragraph but I want to try and simplify the model to make some points. That has currently been one of the best aspects about being involved in Louis Cypher’s soapbox, which has attracted the intelligent discussion I’ve needed to get the full picture in my head.

This seems to be the history of money as much as I have studied it: the currency thing is there because it’s convenient to swap and trade for goods and services we actually need, without needing to swap 4000 eggs for an entire cow (or whatever the egg:cow ratio is). The store of wealth thing is about being able to hold those surplus claims until you actually need them. And that doesn’t have to be gold, as Brian points out
Successful people can go their entire lives during boom, bust, deflation or inflation owning not an ounce of gold ...” [link]
and at the same time, different wealth assets achieve this task in different capacities over different time frames, as Louis exemplifies:
Kid, I would be happier holding onto just property but some jackass from the IRS will show up once a year looking for rent. I would be happier with food but it rots. My seashell collection and beads are no longer considered much use even by the native Americans around here ...” [link]
I want to expand on the ‘claims on productivity of another person’ because I think it articulates many of the fiat anomalies that we experience, and even sheds some light on some of the precious metals culture.

Let’s say we have a typical utopian village. In our very simplistic model we have a few categories of folk, but as a community they have to function together or else they all starve. As a community some specialization is enabled but technology is simple and generally everyone is happy – the blacksmith makes horseshoes for the farmer and the farmer makes grain and the butcher raises pigs … and all that crap. Any ‘surplus’ of productivity can be stored in whatever means, but with the assumption the village operates as a closed loop system, that surplus can only be used to claim productivity within the village. Regardless of how that surplus is stored (for this chart we don’t care about their currency) and ignoring the time factor then at some point that surplus (productivity) will be consumed. This process can take many forms. Suppose the blacksmith has made so many horseshoes that he can have a 6 month holiday where he puts his feet up and does nothing. But during that time he must still eat bread, so he simply uses his stored wealth for that purpose – to keep him and his family warm and provisioned during that time. Once he runs out of surplus stored wealth, he has to go back to making horseshoes again (presuming there is still a need for horseshoes, maybe it is something different). Even in this simple village there is plenty of room for variations in the productivity picture – maybe the blacksmith has a child who was crippled by polio and must be supported – so the blacksmith works an extra hour a day or introduces efficiencies to his forge process to help him create more horseshoes per day. The main point here is that there is no free lunch – if someone is consuming (energy) and not producing (a benefit to society), the price tag has to be paid by someone. And so we get our basic graph. Some individuals have a higher work output than other individuals. The height of the column represents an individual’s total productive contribution, the white area is what they get to keep, and the yellow is any surplus. Boring, yes, but it might look something like this:

The same kind of graph could be used to work out where the productive value goes in a traditional slave plantation. The workers certainly work hard all day every day but they don’t get to keep the fruits of their labour – the owner is very happy because he keeps all the profits. For their efforts, the slaves at least get clothed, fed, and protected but that’s about all. They are not necessarily happy about it but there is not much they can do about it due to the culture imposed on them.

Our modern global village is no way as simple as these examples. Modern technology has allowed multipliers of productivity, and incredible degrees of specialization are enabled on a scale never seen before in the history of civilization. But for all the benefits and multipliers, the overall model is still the same in the above two charts – any excess wealth represents a claim on the existing pool of productivity (goods and services) and nothing else. On a modern global scale we have lots of ways to get access to people’s productivity. My primary point is that through various means, and on a regular basis, value is stolen from the hands of the producers and ends up in the hands of those who have not truly earned it. All these effects act like a giant fan to push value from end of the population to the other.

Take George Soros with his 1992 British Pound shorting as a great example of this – he didn’t create any value — he just lined his own pockets at the expense of the British taxpayer, enabled by the structures which exist. Blow that fan. Then you have HFT perfect trading days – effectively just dredging value from the market. Blow that fan. A Chinese man works in a sweatshop for 20 cents an hour. A Warlord in Africa pillages a local village, and so on. It would be easy to just lay the blame on FIAT (as most pundits on zero hedge do), but actually electronic fiat is damn handy, it’s just been abused chronically.

I have always wondered why the massive amounts printed by the fed never really blasted the dollar price of gold higher than it has. I suppose that during the credit contraction, that dollars were evaporating and then they just created new dollars to replace them. That’s what scares me … deflationary, inflationary, whatever – because for all the theatrics and heated debate, the picture doesn’t seem to ever change – in this standing wave form its business as normal, with most of the world in a form of modern slavery, their productive value sapped by the folk with control of the levers. As the savers and producers (like mtbbuck) decide to shift their wealth out of the dollar and into hard assets (and increase their purchasing power), hopefully they don’t just become like the current generation of exploiters, otherwise it’s the same tired game all over again.

Hiding in the Sand By Martin Armstrong
Full article is in the link above.

Bill Downey update

Last Nights update listed 1773-1793 as support and the high so far is 1795. Support was listed at 1730-1742 and the low today is 1756.

The big question really comes down to one thing. Was the drop in gold a manipulated event to bail out the option writers and is it now ready to move forward without haste? And that is the problem with manipulation -- one is not sure when they will strike again.

The situation in Europe has stock markets selling off hard again today as the rumors and evidence of real liquidity concerns in the system. Then take Warren Buffett buying Bank of America yesterday. What a coincidence as the discussions of insolvency were rampant this week. Along comes Buffet and buys the bank ? Is it me or are we reaching different levels of incredible manipulation. Now the pundits are issuing buy signals on it on bloomberg ? I mean how crazy can it get.

The big Bernanke speech begins now and over the next hour will probably the most anticipated speech that will say as little as possible.

Going to the chart (see for charts)

The hourly chart shows the triple test of 1700 yesterday and the subsequent bounce back up. So far the bounce is 38% of what was lost --- a typical retracment number. Even a run to the 50% would not be out of context after such a fast drop.

Deciding as to whether the trend has turned down we have the weaker cycles due to come into full force next week.
In addition price has not even pulled back to the 34 day average and today's bounce is still within the confines of a bounce. The only thing we can say that provides evidence is the July channel line held yesterday on the 8 hour chart. Besides that, there is really no other evidence that the correction has ended. And that is the problem with manipulation. It brings into question whether the whold gold and silver thing was to bail out the option writers. All global stock markets are selling off very hard --- so the question is this --- Do we really want to enter in a market like this where everything is all over the place? Gold has already experienced two 30 dollar drops this morning, the latest just during this update. Is it that important that we have to have a position coming into Monday? I don't think so. And if your worrying about the market getting away from you on the upside --- I would ask --- were you worrying about that on Monday night before this selloff ?

From a long term perspective -- buying at the 34 week moving average is usually the best play. In the past few years, it hits it twice a year. From a shorter term perspective --- i try to find trades that last longer than a day -- as it is difficult to get the info out to everyone not knowing if they are at the email at the moment. Had I bought yesterday --- i would be selling and getting out at this area. So I don't think its a good idea to get either long or short from a trading perspective today. At least not for me.

If trade you must --- support is the 1750-1760 area and resistance is 1783-1790 and the 1805-1810 area. In summary -- due to options expiration -- it is possible that this whole thing was a set up and higher prices are coming. I want to see at least one pullback and see how the pattern looks. That should give some clues as to whether we moving higher next week. My best take is that prices usually are higher the last few days of the month --- and the first few days of a new month so that has a slight favored status at the moment.

Bottom line --- I favor higher prices into early next week. The 1750-1760 area is first support.

Gold Trends Intra Day Silver Update - Aug 26th

Silver looks very strong --- and the longs have not been liquidating they are holding and buying up everything the shorts are throwing at them. A close above 41.50 would put the bulls back in charge. We'll look at the situation over the weekend -- and try to isolate a good point of entry. Right now --- the 38.60-40.20 area is first support today -- and resistance is the 41.20-41.50 area.

In Summary -- the shorts look like things got worse, not better.

Roubini on the Anti-Gold Warpath

I’ve always had great respect for Nouriel Roubini. Not only because he was my Econ professor at NYU, but also because he is not afraid to take on controversial issues in economics with a very strong opinion. Harry Truman said it best “All my economists say ‘on one hand’, and then adding ‘but on the other hand’”. He then said “give me a one-handed economist”. Roubini is one of the few “one-handed” economists.
Roubini has long been a classic Keynesian and his views on gold has always been negative. But his hatred of gold has turned into a fierce crusade in recent days. After first doing battle with Zero Hedge on Twitter, his anger has now turned to gold and gold bugs.
Here’s a snapshot from his Twitter stream today:

And part 2:

So, what’s his beef? Well, first, as a Keynesian he obviously hates gold. I have no problem with that, everyone’s entitled to their own beliefs. But he has two other points worth discussing: 1) the impact of leverage on the price of gold and 2) the vast amount of hype, misinformation and crack theories being spread across the Internet.
Regarding leverage, it is interesting that Roubini argues that the high leverage allowed for gold futures trading and the ability of even physical buyers to borrow almost the entire purchase price had driven the gold bubble higher. Most gold bugs think the opposite - that leverage is used by shorts to suppress the price. However, common sense supports Roubini. As with housing, stocks or any other asset, speculators throughout history have used leverage to drive asset prices up, not down. Take the example of housing - no money down mortgages, no doc loans, etc allowed the public infinite levergage to drive the housing bubble to its ultimate peak. When the leverage was stopped, prices collapsed.
Some gold bugs argue that if Comex and the LBMA collapse it would be positive for gold prices, but in reality it would be the opposite. As seen from the impact of margin increases in gold and silver, it is the longs that are using the leverage, not the shorts. Think about what would happen if everybody had to pay 100% cash to buy a home. Would that be positive for housing prices, or negative? It would be the same for gold.
The second main point in Roubini’s stream is the extreme way gold has been pushed on the public. As mentioned in Yukon’s rant, conspiracy and doomer entrepreneurs have no limit to how low they will stoop to push their cause. From simple misinformation to conspiracy theories, proclaiming impending doom and calling for the execution of public officials, these guys will do and say anything. The result is that the more objective, clear thinking gold bugs like ourselves are grouped in with these nutcases while the true case for gold is obscured beyond recognition. True gold bugs should rise up and reject the nutcases and bring the discussion back to the mainstream, or the public will end up siding with Roubini and reject gold once and for all.
While many of us may dismiss Roubini’s arguments as the rants of an elitist intellectual, there is some truth in those statements. Considering and reflecting upon his statements would do us all a lot of good.

New 2012 Coins From Perth Mint (Updated x 2)

While Numismatics should never really come into play with heavy duty silver and gold investing, it's hard to ignore some of the beautiful designs produced by the Perth Mint. With a limited production run, I'm sure these dragons will be snapped up so quickly by the chinese. These coins are part of Perth Mint's lunar year series and become available 1st September.

The appeal and legend of the dragon as a powerful mythical creature hoarding gold is enough for me to really want as many of these as I can get my grubby mitts on.

2012 Australian Gold and Silver Bullion Coin Program Unveiled

... four hours later I just realised this post could be construed as an advertisement for Perth Mint - well it is, but (sadly) not the kind where anyone makes any money (see disclaimer at bottom of site - it is very accurate). So, no, it just reflects my sad obsession with minted products. Like many other collectors, my coins are for keeps (to give to the kids and grandkids one day) and any bars are for shorter term trade. These are the Australian equivalent of your Eagles, but specifically these coins are part of the coin set themed on the lunar calendar. The silver is still silver and the gold is still gold, but they are pretty and shiny.

The standard coin from the Perth Mint is of course the 'Nugget', which features a kangaroo in various designs, with a new design each year. The half-ounce is a particularly beautiful coin in terms of weight and size and these days I prefer it over the full ounce coins (despite the extra premium).

The current smash down in gold (down from ~1900 to ~1700) is particularly interesting, and to be honest if they really need to wind it back that far then in the next couple of days the price action is going to be really something - i.e. specifically I am expecting (for various reasons) a complete rebound which keeps us back on the gold price trendline (either that, or this is the start of FOFOA's paper price going to zero, which will be incredibly unsettling). Don't trade on my view of course, that's just what I think will happen (i.e. I think we're in for an amazing punch up through 2000 shortly). I will probably be wrong as usual :)

Update: Sunday 27th August - For anyone who might be still reading, this post from SilverGoldSilver came up - I just wanted to tell you that it IS a false rumour, and I'll explain why.

Perhaps Bron could comment for sure, but even some simple research into this matter shows where this would have come from - you will see it is not so much Chinese Buyers but Chinese Whispers. Here are the raw facts:
  1. The production run for the dragon coin in the 1oz mintage are limited. Not the other coin sizes. The limits are gold 1 oz Lunar Gold Dragons: 30,000 and 1oz Lunar Silver Dragons: 300,000, and this is keeping with their standard production runs. This is stated in the blog post, but on first read it's easy to miss because I find myself looking at the coins and not really reading the words :)

  2. The mint knows that the coins will be in high demand, so they have said no more than five x 1 oz gold dragons per customer, and 20 silver 1 oz lunar dragons per customer. Not sure how they are going to enforce that with their various resellers, but I'm going to talk to my local bullion dealer about it.

  3. On the same blog at Perth Mint Bullion, on the 1st of August, they did talk about the offer for the entire mintage of 1oz gold lunar dragons. They also categorically state they rejected the offer. Here is the link, but I've also highlighted the important points.

So you can see where the rumours may have come from, but just bear in mind that Perth Mint has a lot of distributors for its products, and they know that demand (for the 1oz) will be very high for these coins and because it's all about business then (I assume) they will not dare stiff their suppliers. That's pretty much all there is to know.

To his credit, SGS qualifies his rumour circulation with a capital 'IF'. It's still sensationalism though, and it's lazy if he didn't do any basic research out there - to post it as an 'exclusive'. Here is his post:

Update x 3 - August 29th 2011

For completeness, SilverGoldSilver keeps running with the Chinese Whispers here:

and is debunked directly by Perth Mint Bullion Blog:

If you view the comments in SilverGoldSilver, he keeps running with the idea, wanting it to be true, saying he is waiting for his person in Australia to confirm. I just want to say that if this is an indicator of his levels of basic research then you should take his 'info' with a very large grain of salt folks.

I just wonder if he will be man enough to pony up to his mistake and make a note that the rumour is false.

Gold forecast by Martin Armstrong

Copyright Martin A. Armstrong All Rights Reserved August 24th, 2011
The GOLD Market
The markets followed through after Friday’s closing but gold failed to close ABOVE 1900 last week and bounced off the projected resistance for this week 1910-1960 for this week topping at 1917. The sharp decline suggests a temporary high is coming as of this week, just four days early although the price target was achieved. The closing support remains at 1730 and a daily close beneath that area would warn of a nearby correction and we have a temporary high. A mere closing BELOW 1780 today will keep gold BEARISH for now. This is the correction that seems to be due for this period, but we need a weekly closing BELOW 1617 to confirm that. A further weekly closing BELOW 1583 would warn of a serious correction to flush-out a lot of people before any uptrend could resume.
Volatility will rise in November and should remain fairly high for the first quarter next year. A month-end closing BELOW 1630 would signal a serious correction is likely back to retest 1350.
This is the ideal QUARTER for the high being 43 such quarters from the 1999 low (5 x 8.6). At the very least, we should get one quarter correction with a max up to three taking us into the second quarter next year. That outcome would be indicated by a year-end closing BELOW 1427.
The bull market I not over long-term. The market will reveal its intent based upon the closings laid out. We did NOT get through the NORMAL projected resistance at 1910-1960, so that is good news in that we avoided a PHASE TRANSITION up to 2500 that would have warned we are in VERY serious trouble until the ECM turns in 2015.75
A detailed update will follow shortly.

Updated charts

Hello folks, back from a little vacation. Did I miss anything?

Everyone and his mother was waiting for a sell-off and we finally got one today, but weird that the DC earthquake served as a catalyst for much of the carnage. Immediately after the quake, equities shot up (wtf?) while metals fell (wtf?) even though the dollar also fell (wtf?), and mining stocks were absolutely destroyed (ok, no surprise there). Fair is foul and foul is fair these days. Incidentally, in this late stage of our fraudulent fiat currency regime, it's looking like some serious external shock is needed (along with the bullion bank raids, of course) to cause gold & silver to sell off once they really start picking up steam. The last three times that the metals had an RSI greater than 70, the RSI has stubbornly stayed over 70 until the day of some exogenous event: Fukishima, Osama bin Laden capture, and now the Gaddafi theater/DC earthquake.

OK let's start with the old stand by daily gold chart. We appear to have found support at the top purple dotted line. If we really do bounce off of it, then that might signify a game-changer and a flight to the moon (btw I was surprised to see both Ben Davies and Jim Rickards make a big deal of the Venezuela news). More likely, IMO, the top purple line fails as support, but the next purple trend line doesn't, at the $1725 area. If that too breaks, a drop to the 144-day MA would seem to be in the cards, which might then be in the mid- $1500 range.

If you recall, in early June, I brought up how the 144-day MA was moving in a straight line (or more precisely, coiling tightly around its regression line), such that, if that pattern were to continue, you could get a very good idea of what's going to happen based on what happened 144-days ago. Interestingly, today's $70 drop is exactly 144 days after the low point of the January 2011correction (of course I refer to trading days).

The 144-day MA (orange) is still tracking the brown regression line, which is good news (because if we assume the rate of ascent will continue its 3-year pattern, the further we are from the regression line, the more imminent the correction). The 200-day MA (green) also moves linearly, and that pattern also hasn't changed yet despite the huge jump in gold's price. Note 200-day intervals are also significant: I've circled two peaks exactly 200 days apart, and the November peak was exactly 200 days ago today.

Here's my updated monthly chart from June 2. Back then it very much looked like a breakout was impending, either up or down. Well, I'm gonna go ahead and call this one for up. Does it not look like we'll hit the purple line by the end of the year? That would be anywhere from $2100 to $2400 depending on how long it takes to get there.

Now silver. If you recall, I've been focusing on the blue trend line connecting the low points since silver's breakout of a year ago. Well, that line now seems to be really significant, as silver has bounced off of it 4 more times since I noted it back in July. If that line is broken, I'd hate to be short.

And here is the old stand by weekly chart. That trend channel looks like a real good one. The 34-week MA also seemed important even before silver bounced off of it in late June. It's now well over 36, so Wynter Benton is probably licking her chops. Or someone's chops, as I hear she is something of a free spirit.

The Rise and Fall of the Euro ... Martin Martin Armstrong

This will take more than one reading but it is well worth the time.  If you can grasp what he is saying you will understand what he means about Macro and Micro being as different as Quantum physics V Classical Physics. 

Are the ravens leaving the Tower?

Ah, the good old BBC. For us limeys (I use this word only because Screwtapes' audience seems to come mostly from across the Pond), there's nothing quite like it. It's the oldest broadcaster in the world, and its name is synonymous with sobriety, calm reflection and (supposedly) unbiased reporting. It's hard to explain its place in the British psyche to non Brits. It is the news equivalent of a comfy pair of pyjamas: not very sexy, admittedly, but calm, comforting and trusted.

An old English legend goes along the lines that if the monarchy is about to collapse, then the ravens will leave the Tower of London (rather unsportingly, the current unkindness of ravens* at the Tower have their wings clipped to prevent such an event). Similarly, during the Cold War, BBC Radio 4 - the most hard-hitting, trusted, and influential source of news for Her Majesty's United Kingdom of Great Britain and Northern Ireland - formed part of the Royal Navy's letters of last resort: in other words, if the station ever went off air, it was to be assumed that London had fallen to a massive Soviet nuclear strike and our submarines were to immediately launch a retaliatory attack.

So, given all of the above, imagine my surprise in reading this report from the economics editor of Newsnight (roughly the equivalent of the US '60 minutes'):

Please read this article in full. It is the best summary of where we are currently that I have seen in the traditional media since 2008. It is, of course, UK-centric, but all of the arguments apply equally to the US and the rest of Europe.

Paul Mason is one of the three most respected economic reporters in the UK, along with Robert Peston (also of the BBC; he scooped the collapse of Northern Rock and predicted most of the events that have taken place since 2008) and Gillian Tett of the FT, who predicted the collapse of the sub-prime derivatives market and credit default swaps long before 2008. A gold-bug/anti-Keynesian/conspiracy-theory-loving Glenn Beck type he certainly ain't. A prophet of doom he ain't, either - or at least he wasn't until yesterday.

No, the fact that a previously 'main stream' (albeit highly respected) senior economics reporter for a flagship British current affairs programme could have produced something that would not look out of place in some of the more paranoid parts of the PM blogosphere should really tell us something. It's worth noting that the FT (perhaps the most staid of all UK broadsheets) is following suit, and appears now to be quite happily printing articles about $5000 gold.

The anti-Keynesian backlash is becoming mainstream. Gold's break from its well-trodden bullish channel (2008 - 2011) into a new, steeper channel has been to the traditional media what a red-hot poker was to Edward II's backside. Now even the most conservative analysts seem to be sitting up and taking note.

Some of you will be interested in all this simply because your investments in Au and Ag are likely to do very, very well over the next few years. I'm interested in it because it feels like a paradigm shift is taking place, and one in which the so-far relatively comfortable lives of millions will be utterly overturned. It seems to be only a matter of time before another big bank fails (SocGen, RBS, take your pick) and this time no-one will be able to afford a bailout. Be afraid.


* yes - that really is the collective noun for ravens.


Dear CNBC,
Please don't take these words as insulting. They are not meant that way.  I think you are simply doing your part to prop up the foundation stones. The problem is markets can't be managed and moved by words as they have in the past. This generation is a lot more cynical and have a much shorter attention span. They use multiple sources (not necessarily sound sources). If the politicians are relying on what I like to call Hopium then they don't understand this generation any more than Economics. The problem will only get worse as time passes.

This generation won't read anything more than a page and generally skip to the bottom of the page to get the final analysis and make their decisions from there. For example; the Pro's will wait for Jackson Hole and parse every word but this new generation will move swiftly on a sentence of 140 characters. Those 140 characters will move a generation. They like sound bites and will repeat them in lieu of reasoned arguments. It's a generation that won't invent much other than toys and get rich quick schemes. They don't have big ideas and they are complete narcissists. They want everything now and they expect information to be free. They expect everything digital available immediately and have no hang ups about stealing it either. 

They are moved by quick blasts of information. They are connected as never before by tweeting, texting and social networks. Twitter has become a super organism that swiftly changes opinion and mood at a rapid pace. Here is the super organism based fund at work and it's going to put the Elliot Wavers out to pasture:

A super organism can be infected but until the market makers figure this out it will be a reasonably honest expression of what the world is thinking. When the World decides the Dollar is junk it won't matter what anyone trading a trillion dollars thinks.

10% is the tipping point for an idea if those 10% are really committed to the idea. Once it hits 10% then those committed 10% will start to take over until the next idea takes root.
What I am also suggesting here is this generation could infect older generations to the point Hopium will not work.

BTW I am not a Gold Bug in the sense that I think a Gold Standard is the answer to the worlds ills. I am a gold bug in the sense that I see it as portable insurance against those who would continue to devalue my earned labor in paper money. I may not be part of the new generation but I understand their mentality. They will be passive until they see an opportunity to take something for nothing just like the recent riots in the UK. They will be passive until the 10% takes an idea and infects the rest with that idea. Consider this CNBC ... currently the Kitco price feed is used by a little over 3000 sites. Just imagine what will happen when it is is 30,000 sites all singing the same mantra.

As one liar said to another ....

This is petty funny. Jimmy Cramer and Simon Hobbs go at it this morning.

Martin Armstrong has a new article and it sounds like he is giving up on the notion of Europe ever agreeing to fix the problem.

New trading strategy yields some interesting results.
Here is the super organism at work. Using Twitter rather than 150,000 Elliot wave / Prechter rules to figure out what emotional state the market is in and will be in seems more likely to achieve results.

GLD ETF Mechanics 101 (Updated x2)

We have an automated download for the GLD Serial Bar list as part of the database project, and when today's file didn't get processed I went to see what the reason was. Somehow, the normal bar list was replaced with an internal fax. For the last 30 hours, it has been sitting at the following location:

[Update November 2012 - to anyone using this link from Scissorspaperockstar's post on TFMetalsReport, please be aware that this fax (in my opinion) does not prove Andrew Maquire's interpretation of GLD+SLV mechanics, and this article does not attempt to address that particular area. regards, Warren]

[Update x 2 November 2012 - recommended read is THIS PIECE by Bron Suchecki of the Perth Mint, which addresses Andrew Maquire's argument head-on !!!
plus, additional personal perspective post-analysis:


[[ *** another update - the PDF issue on the spdrgoldshares site seems to have been resolved. This link now shows the normal PDF bar list, which is regular. ]]
And I assume the HSBC custodians will fix it up once they realise they screwed up, but in the meantime let's have a look at the contents. Please note that even though the fax is an internal fax, I am placing a copy here on the grounds that it has been exposed publicly to the entire world (at the above URL) for more than 24 hours - but I will take it down if asked by a HSBC representative. I have blurred out the phone numbers, but until they replace the file, it's accessible by anyone (they'll want to change their letterhead after this incident too).

The fax highlights some of the boring mundane mechanics of how the bullion banks operate (yep, no conspiracy here folks).

This is basically how the banks can get gold so quickly - essentially a bunch of ledger entries.

In basic terms (confirmed by precious metals experts), the 'de-allocated' means converted to allocated unallocated ... HSBC takes control of (title to) 1907 physical bars* and gives 759,618.457 oz to the trust's unallocated account. So then, the 759,618.457 oz of unallocated are are effectively 100% backed by the 1907 bars. Then the trust is able to transfer (from the unallocated account) a total of 759,562.242 oz to the three Authorised Participants (AP), leaving 299.086 oz in the trusts unallocated account. Note that the balance here is treated to handle whatever rounding error is required on the day - the difference (addition) on the 16th is 59.215 oz, so the balance from the previous day must have been 239.871 oz).

The transfers to the three APs in the document may have been to the APs account with HSBC (in which case the 759,562.242oz in those 3x unallocated accounts are 100% physically backed - hooray) or maybe to the APs accounts with other bullion banks (in which case HSBC has a clearing balance with those bullion banks through **).

At this point the unallocated bars become part of the bullion banking system, liabilities and the rest - the mechanics I'm still a bit hazy on despite having had a lot of stuff explained to me. The main point (for me) is that the 1907 bar entries involved will have been removed from the GLD bar listing (which is a spread sheet), and that the gold bars themselves didn't necessarily have to leave the vault at all. Which is a good thing since the amount is about 21 tonnes of gold. I will have more to say about this in another article.

It's a really interesting insight and thank you HSBC for making that file available to the public. Take it with a grain of salt since it could have just been a very deliberate plant since one must assume these kind of mistakes don't happen by accident, but then it looks like a genuine screw up.

* which previously would have been part of the normal GLD shares system.
** according to my industry contact.

---- edited for Clarity - Kid Dynamite (comment #2 below) is correct, in the above sentence I got my allocated/unallocated mixed up, was a little late at night and I was rushing.
It is also worth noting that FOFOA has written a note (last half of that post, below the videos) about the GLD outflow (which was kind of a big movement of gold) - with a reference to Lance Lewis' GLD puke indicator, with the theory of the outflows being in a quasi correlation to the movements of FIAT pricing of gold. That is one avenue for the database that I'm interested in identifying - seeing if there is a way to predict paper gold price based on bar movements (but I think it would be way too complex).
As for the bars themselves, I will be looking at the data interested to see whether these same bars flow back into GLD holdings again soon. @GM - yes I haven't completely handed in my conspiracy badge just yet - but you're right I have been approaching this with an 'innocent until proven guilty' standpoint. I'm fascinated by these mechanics of wealth movement, where a single page of GLD entries represents more wealth than I'll see in the next 10 years.
This of course gets us into a whole new area of research - basically whether those serial number entries are fictitious or real. That is the key, since the entries themselves represent the gold and are TREATED AS money and wealth. But more on this in another article :)

Big Money and Economic Depression By Martin Armstrong

Martin has weighed in on the inflation / deflation debate. What he has to say will stir some controversy and heated argument.
It's a 5 page PDF and can be downloaded here;

Here is a quick snip;
"There appears to be a gross misunderstanding about how money moves and whether we face DEFLATION or HYPERINFLATION. In Physics, we are searching for the illusive Grand Unified Theory where the behavioral laws of Physics and Quantum Mechanics will be unified. The laws that govern our world at our level do not apply in the micro world at the atomic structure. The same division exists in Economics and unless you understand that there are two worlds that operate differently, don’t worry, you will never gravitate to an institutional advisor and you will probably lose your shirt expecting that all money will move the same. This appears to have been elevated to the point of extreme nonsense surrounding this S&P Downgrade. Those who keep betting on the collapse of the United States are impatient and fail to realize that even on a Debt to GDP ratio, the USA is by no means at the top of that list but is only #38."

Eric's Delivery (updated x 2)

Mr Eric Sprott likes to talk about how long it took him to get the first lot of silver for PSLV. Three months he said, which supposedly tells you how tight the physical market really is. His delivery is top notch – after all he’s a successful fund manager. But let’s take a closer look at his actual silver delivery. What I hope to demonstrate here is that rather than being sensational, his story is actually quite boring.

So as a second part of our series to encourage us all to question more closely the claims of those who promote silver as an investment, we turn to one of the most oft-repeated silver memes on the net: “Sprott had trouble sourcing silver because of how long it took to get his physical delivered”. And before anyone accuses me of being anti-silver, please read my recent ‘Silver Bulls’ post [link] where I basically speculate that the price of silver is about to smash all records. What I really want to do is question the dogma where people lap up the story (including me) and interpret it as being indicative of a tight physical silver market.

The PSLV bar list [pdf] says 22,298,542.936 fine ounces of silver. In round figures [calculator], this is 632 tonnes (or 632,153 kilograms).

Taking delivery of that much material is not the same as taking a delivery from Pizza Hut. Anyone who has taken delivery of a monster box (which you guys have in America) has would have an idea of how heavy physical silver can be. Anyway, shipping that much weight is a logistical challenge, so let’s explore. But let’s ignore insurance paperwork and shipping ports, customs, etc., since I still don’t know where Sprott bought his silver from, although it stands to reason that some of it must have come from overseas. I DO have knowledge about the weight limits for a shipping container, and it’s really easy information to find if you want to check for yourself [search].

A 20-foot shipping container can hold approximately 20 tonnes maximum. This is both a structural limitation as well as a road-transport maximum (the road tonnage limit varies from country to country). A 40-foot container is double the size but similar restrictions apply – i.e. not necessarily double the weight – my research shows one 30-tonne limit for a 40-foot container.

Using our average, if Sprott had to get his stuff to the Royal Canadian Mint for storage – he would have needed approximately 31 shipping containers to do it. Here is the visualization (using 20-foot containers) of what that looks like, and my digital people have loaded the first one onto the truck already, thirty to go!

Then there’s the forklifting involved. In my research I found a picture of the vault of the ZKB Silver ETF, which shows an example of silver stacking which should make us all envious. This isn’t an article about ZKB, I just wanted to show a photo of what silver bars typically look like when they are stacked on a pallet (e.g. for transport).

What you’ll see above in this picture roughly confirms my research:

“a 1000oz silver bar is approx 12cm x 9cm x 33cm (width x height x length) and they pack 1t per pallet in two layers of 2 bars wide by 8 bars deep = 32 bars, so excluding the height of the pallet, 1t would take up approx 96cm x 18cm x 66cm.”

Let’s say we have 1 tonne per pallet in rough figures, that means that Eric’s delivery required lifting and shifting approximately 632 of these babies – and requires pack and unpack. Here is another visualization of what that looks like (click for large version). The bulk of these are stacked 5 pallets high (each stack weighs 5 tonnes), except for the row at the end (32). Please note this is a visualization only - it is not likely that the silver was ever in a big pile until it was all stacked inside the vault (still on pallets inside?)

And the same view, different angle (click for larger versions of image)

From the above picture, it's pretty clear that this is one heck of a lot of silver to shift. No really – think about it … even if the refinery were just across the road from the Royal Canadian Mint, it would still be a huge job just based on the forklifting effort. Then add shipping times, road haulage, different suppliers, customs clearance, security, whatever else. Stepping back and looking at the practicalities of getting 632 tonnes of silver from multiple sources to Canada, the only thing I now find surprising about the fact that it took Sprott three months to get his silver is that he was able to do so quickly!

So even disregarding the stories of still-warm-metal-bars … if there are any experienced logistics managers out there, please let me know your opinion of whether taking 12 weeks to ship and pack these is about right or way off. Please anyone let me know if my mathematics is wrong, I'll happily adjust the figures or (and publicly amend my statements) if I’m proven wrong with my calculations.


Updated 17th August 2011 - thanks for all the opinion and feedback from everyone. I received a comment from Bron Suchecki by email, am adding the content to the bottom of this post because the blogger comments system seems to be malfunctioning at the minute. Bron introduces a rather excellent twist to the plot - the possibility that Sprott himself got diddled by whomever he bought the silver from - and to that extent Eric fully believes the 'shortage' association by virtue of his PSLV purchase experiences:

Bron said .."Having trouble posting this comment to your post, could you put it up for me:

Precious metal vaults are not like distribution warehouses with space for 20 trucks to load up a one time. Most would have one dock or two.

And yes it isn't just unload, thanks mate, see you later. You are checking off each bar against the supplier's bar list.

So even if the metal was across the road it would take some time.

As to the purchase, I think what Victor and Kid guess is probably how it was done. You would certainly buy in smaller lots over a few days so no one in the market knows you are a large buyer. My guess is he bought it loco USA, not London.

However, it did not need to be done as forwards. Each lot could have been done as spot unallocated and on t+2 requesting immediate conversion to allocated (held in London). Then you take 3 months to get it shipped from London to Canada. This means you have no counterparty risk as it is off balance sheet allocated and all at the cost of about 3 cents per ounce for shipment.

Contrast to the forwards, where if the counterparty fails, you now have price exposure. Yes you still have your cash, but have issued shares at a price based on the forward deals which you now have to scramble to buy at current spot prices. If Sprott did forwards, then as Victor says he was backing PSLV with "paper" temporarily and exposing PSLV holders to counterparty exposure to bullion banks.

There are a few possible reasons why it was done this way:

1. Kid's reasons - it allows Sprott to talk about the 3 months delivery time and let the bugs misinterpret that.

2. He relied on his bullion bank counterparts to structure the deal and got played. They would have recommended forwards as they can make more margin on the forward points and it takes pressure off their physical books as they just sub contract with refineries to deliver over 3 months ex-US as and when the refinery has the physical.

The best thing Sprott could do for the silver bugs would be to open a London metals account with a bullion bank. Buy silver in lots from different counterparties, with settlement to his London account. When all done call up the bullion bank and ask for a 600t allocation - shouldn't be a problem as SLV has done numbers like that on a number of days. That way he finds out if the daily huge movements in SLV are real. My guess is he'll never do it this way because they will deliver it. Then he has no story to tell.

Alternatively, Sprott's organisation is just not that cluey on the PM markets and just take their banker's advice. With the size Sprott is dealing in, he could just contact refineries directly and cut the bankers out. Better still, just do a deal with a miner to buy the next 600t of their output. Thinking creatively there are many ways to structure this and minimise or eliminate exposure to banks."
Updated 29th April 2012 - Over at the Chris Martenson blog there has been some great discussion about the bullion markets, with contributions from Eric Townsend, Bron Suchecki, Victor the Cleaner and Jeff Christian. It's quality stuff and worth a read (just the comments section) in it's entirety. However relevant to my own research, I spotted this quote from Jeff, which basically vidicates Bron's theory in the paragraph above. For the comment itself, one must take Mr Christian at his word but it's so beautiful it made my eyes water. This is just one paragraph of a larger comment about silver:

"... Regarding Sprott: They got hosed. We spoke with Sprott people about their delivery problems, as well as with bankers. They handled it dreadfully, and did not require the banks to behave in standard market operating procedures. Why, we don’t know, but they did everything wrong the way many rank amateurs do. Sprott is an eminent salesman, however: He turned lemons to lemonade, saying not that he was an amateur in buying all that silver, over-paid, and was messed over in delivery. Instead, he said it was because there was a problem getting the physical silver. There was no problem with the silver; he just did not negotiate and handle the bank properly. No surprise there to anyone who has watched his funds over the years. ..."

My comments on this are: (1) Bron's interpretation appears to be correct :). (2) Sprott, however resourceful and clever, still presented a deceitful story about what occurred. If this were about a delayed BRIE delivery then I suppose it's fine but it's not - common people are searching for ways to protect their wealth from financial armageddon and many good people have been hoodwinked by Sprotts story. Perhaps at the time they bought an overpriced PSLV which later had its premium collapse. A transfer of wealth from your pocket to someone else's courtesy of hype and spin. Or as Kid Dynamite would say, 'sold to you, Sucka'.

Addition 30th April 2012 - Kid Dynamite in the comments section added a good point, which is worth highlighting in the main article body.

"Warren - I just want to re-emphasize the point that Sprott's counterparty: ie, whomever was responsible for delivering PSLV's silver to PSLV - did NOT default on their side of the trade. this is important, as an uncareful reading of JC's explanation could conclude "just as we thought - the banks didn't give him what they owed him" which is false... "
And just remember, the primary issue is here is not whether Sprott is a great marketer (he is) or whether buying silver is good (it can be), or any kind of character judgment (irrelevant). My focus is purely that the story about the delivery taking a long time because of silver shortages, as popularly portrayed during the initial PSLV offering, is false. And consequently, whether newbie investors were influenced into a particular investment because of a false portrayal. And that it's okay to explore the human element of being duped and feeling poorly about it. Bear in mind that the PSLV 'delayed delivery' story was one of the underpinning 'shortage of silver' proofs.

Be sure to read the rest of the Martenson comments thread, which is still ongoing.

40 Year Anniversary By Martin Armstrong

The 40 year anniversary of the
Floating exchange rate system and
The Week From Hell
Copyright Martin A. Armstrong all rights reserved August 15th, 2011
The confidence in the world economy seems to have evaporated ever since the Economic Confidence Model turning point in June. It is true that this phase into 2016 of a Private Wave should be marked by a shift in confidence from PUBLIC to PRIVATE assets. So far, that lack of confidence has been widespread. The S&P Downgrade based upon politics rather than economics was a serious blow. The BIG money knows that the US Treasury market is the only game in town. The dollar is the reserve currency so two-thirds of central bank reserves are in dollars. All commodities trade in dollars from gold to oil. This creates a steady demand for dollars within world commerce. So the downgrading of the US Treasurys implied who is next – France? Because of the status of the dollar, it will be the last to fall and it is debatable whether hyperinflation is ever possible in the reserve currency. Historically, capital shifts prior to that causing the Financial Capital to migrate and that is followed by the collapse of the reserve currency. Such a collapse cannot take place merely because of a downgrade contrary to capital flows. Today is the 40 year anniversary of the birth of the floating exchange rate system and in
these 40 years, it remains an enigma wrapped up in a paradox.
It is vital to separate the long-term from the short-term. The Sovereign Debt Crisis is alive and well, but that is the long-term where the financial system turns to dust - not just yet! Some people will take offense to that and expect everything to collapse immediately. That attitude has prevailed ever since 1971 and the birth of the floating exchange rate system. Those who stood tall proclaiming such
end-of-the-world scenarios in the ‘70s, are dead and gone and the dollar kept on going rising to record highs in 1985 under a floating exchange rate system. There was no backing and that was not supposed to happen. Yet, the historic high for the dollar became 1985 AFTER the gold standard was abandoned.
We have a rising choir who propose a return to the gold standard as if this will magically restore stability. If it was so great, then why did it collapse? What these people FAIL to understand is that MONEY is nothing more than a MEDIUM OF ECHANGE no different than a language. It is NOT the alpha and omega – that is plain old barter. Mankind engages in commerce exchange one product for another. MONEY is nothing more than a DERIVATIVE object upon which people agree to accept in exchange to broaden commerce. The problem with barter is that two people have something they want to exchange, but each may want what the other person does not have. So, MONEY becomes a DERIVATIVE reflecting VALUE only by the fact it is acceptable by others as the MEDIUM OF EXCHANGE. Cattle and bronze served as MONEY far longer than gold and cattle is still used in Africa among privative tribes.
The collapse of the gold standard on August 15th, 1971 was intended to be temporary. It collapsed because politicians had spent like a drunken sailor increasing the supply of money while failing to revise the fixed exchange rate of $35 to a troy ounce of gold. Those who claim a return to the gold standard will solve the problems failed to realize that NO standard has ever survived because you simply cannot fix the value of anything be it commodities, labor, or money. Europe is tearing itself apart because it failed to create a unified system of one currency and one debt. The gold standard collapsed because they FIXED the price of gold while wages rose, spending rose, and gold became undervalued. When capital began to realize that, dollars were being exchange for gold and that caused the system to collapse.
Capital is confused right now and all this talk of the gold standard is not helping. It doesn’t know which way to turn. Many are captives of their biases. The Marxists insist this is the collapse of “capitalism” and get angry that anyone who has more money they should not be allowed to keep it. They refuse to look at the fact that it is socialism that is collapsing because it was never based upon assets, but just promises. If you enter into a contract and then refuse to honor that contract trying to change the terms, they call that FRAUD. Yet, this is how government functions. The Republicans refuse to raise taxes and insist upon cutting the social spending. Yet we were all promised social security in the US, our pay checks were disgorged accordingly and now the Republicans don’t want to pay. The Democrats insist upon taxing the rich as if this will solve the problem for more than 6 months. Either we end up with civil war under the
Republicans who will cheat the worker who has paid into all this stuff or we will create a de facto new state of Communism with rising unemployment and declining economic growth. Neither party will address the serious issue of structural reform. The gold standard collapsed because politicians refused to change the price of gold since that would confirm that they screwed up the entire fiscal management of the country.
Today the crisis lies in Europe. The European Central Bank revealed Monday that it purchased €22 billion euro ($32 billion) last week, which was more than it has ever done before in a desperate measure to prop up the bond markets of Italy and Spain. The ONLY solution to save the euro is to consolidate all the debts into a single euro bond. The next step will be to introduce economic reform. As long as the ECB continues to buy the debt of the weaker states, they will eventually blow themselves up because they cannot support such a market in the face of a Sovereign Debt Crisis. Once the euro goes, capital will then turn to look at the dollar and then we will see the presumption that the USA will be next. That’s the time to hold on to your socks and stay low.
We held the 11114 level for the weekly closing in the Dow Jones Industrials. This suggested that we may have a temporary low building into the end of the month. But after Labor Day (September 5th), we are likely to see a return to higher volatility. If the market makes a high at the end of the month, we could see another sharp decline thereafter. This may be driven by the euro once again. We need a daily closing back ABOVE 18895 to suggest we may see a rally into the end of the month.
The political will to consolidate the debt of Europe into a Eurobond does not seem hopeful as yet. This is like two bums tied together by a rope and one has fallen off the train. How long can the one remaining on the train hold on against fate? Do we cut the rope? Do we have the strength to pull him back on the train? Europe wanted a single currency without the responsibility and they got it. The system they created was as if all 50 states in the USA had the authority to print dollars. Can you image the chaos!
This week the overhead resistance in the Dow stands at 12000 and only a weekly closing above that area will signal a reversal of fortune. A daily closing in gold in New York below 1740 will signal a possible decline into the end of the month. There is a possibility of official sale of gold to reduce the debt in Europe. That would be long-term bullish since the less they have, the higher the price will rise.
So as we ponder this 40 year anniversary of the Floating Exchange Rate System, we must keep in mind that it has proven to be the best monetary system possible. Yes there is volatility. However, there is also freedom. Those who believe in gold are free to buy it rather than look at it in a museum. Capital is able to vote against the politicians and that is ultimately the ONLY voice they hear.
I am not finish working on the timing. I will complete this project this week.

 Euro Update By Louis Cypher

 (I had to do it this way so that I wouldn't jump ahead of Warrens post above. I am in no way trying to compare myself to M.A. or ride his coat tails)
 Hate to jump in on top of two great posts but there are restless Bond holders and Banker's looking for some money.

As has been mentioned before when the Euro was formed Martin Armstrong was consulted and he warned them specifically that unless the debt of all countries was rolled up and issued as a Euro wide bond instead of individual countries bonds than it would all fail. I am paraphrasing here and over simplifying  but that is the heart of it. It was tough enough to sell the EU and then to sell the Euro single currency was even tougher politically. The UK  did not succumb to the promises of easy EU money.

The smaller countries are now realizing this is their only way out.  Merkel and Sarkozi know it  but they are sitting in the drivers seat and what they are saying says they are resistant to the idea. They want to get re elected.
And who is Olie Rehn? He is the guy who tells countries like Ireland and Greece how to get their house in fiscal order much to the dismay of it’s citizens.  He is the fiscal grim reaper for the PIIGS. Of course he would probably be running Europe the same as Bernanke runs the US if this were to happen.
This will bring his dream of one world currency closer.
Both of these countries obviously stand to benefit as we all do with a stronger Europe.

Momentum is growing here. Can it be sold to the German and French people is the question or will it be shoved down their throats as a solution to what is quickly escalating into a crisis or is at least being pushed out there as a crisis.

Game theory time: With everyone who matters pushing for this it will probably happen.  So we get a bunch of talk about it to float the idea out there to see if it sticks politically.
They can’t push a crisis real or manufactured too far to the edge. They can’t wait until France gets a downgrade to do this. So my bet is we are looking at a shorter time frame of this year for this to happen.
What it will mean is everyone gets paid. When I say everyone I mean of course the Bond holders and Banks.  There are of course consequences. In order to sell it across strong Europe then Social Benefits will have to be uniform across Europe.  More haircuts for the PIIGS.

Edit: Looks like things are falling into place and fast.