Taylor On The Markets & Gold
Jay Taylor
Financial Markets
Between a Rock and a Hard Place
Debt in the aggregate, is rising exponentially. Income is rising in a linear fashion at best. There has been a growing inability of consumers to meet their debt obligations, even during the period when interest rates were falling. Such difficulty is seen from a dramatic rise in consumer bankruptcies from a little over 300,000 per year in 1980 to 1.7 million now. Any dramatic rise in interest rates is likely to trigger the cascading deflationary spiral envisioned in Ian Gordon's Kondratieff winter.
So, what the ruling elite have to do is hold down real rates of interest (interest rates less the rate of inflation). But they have some real problems doing that now because the bond vigilantes are coming back. Why are they back? Check the gold price. It is rising. As Lawrence Summers knew, the gold price had to be capped if real interest rates declined. Otherwise, the dollar would decline in value and the reality of America's depraved economic policy would be exposed as foreign creditors would be expected to begin reducing their holdings of dollars. And without the benefit of foreign savings, U.S. interest rates will likely begin to rise dramatically.
So why don't the gold manipulators continue to cap the gold price? There are at least two reasons I can think of. First of all, if they could cap the gold price, thereby causing the dollar to remain stronger than its fundamentals warrant, that would lead the U.S. and then the global economy
into a deflationary collapse. Secondly, I don't believe the manipulators
can cap the gold price any longer. I say that on the basis of the extensive
evidence from www.gata.org that the central banks, which according to Alan
Greenspan, "stand ready to lease gold in increasing quantities, should the price begin to rise," are running out of gold.
Okay, central banks may not be running out of gold. They may still have as much as 50% of the gold they pretend they have (remember central banks
falsely report the gold they lease is in their vaults). But somewhere along
the way, the Keynesian and monetarist lies will be exposed for the falsehoods they are, as non-western countries snap up cheap gold dumped on
the market by the would-be cappers, quicker than a school of piranha tear
the flesh off the bones of a mammal. In fact, with Russia, China, and India
(not to mention smaller countries like Vietnam or a host of Islamic interests that are reportedly demanding gold rather than dollars as payment for their oil) already selling their dollars for gold, I believe the early stages of this process are already underway.
So the policy makers are, as they say, damned if they do and damned if they don't. Even if they were able to engage in a phony strong dollar policy by
capping the gold price like the Clinton Treasury boys (Rubin and Summers),
with such a huge amount of debt on America's books, the resulting strong
dollar would snuff out whatever meager economic life we Americans are now
enjoying. But if gold is not capped, in which case the dollar is bound to get much, much weaker, especially given the 20% percent growth rate of M-3
that is taking place now, we are likely to see an accelerated loss of foreign capital leave our shores, in which event interest rates are likely to be driven dramatically higher. And if Bernanke continues to fire up his helicopter dollar-printing machine, and tries to hold down interest rates to keep the economy alive, and in the process causes our money supply to grow like that of a South American banana republic, why would the process not spin out of control either in a hyperinflation or a devastating deflation?
Something Bad is UP-Big Time
Ever since a mini-deflationary event began to happen in the 1998 Asian debacle, I have followed Charlie Clough's actions by charting Global U.S.
dollar liquidity. Briefly in 1998, U.S. dollar liquidity actually shrank by
nearly 5%, and that struck fear in the hearts of investors. Quickly, the
"bubble pumpers" at the Fed sprung into action and a crisis was averted by
expanding global U.S. dollar liquidity by over 15%. However, just after the
imaginary Y2-K crisis was averted, Mr. Greenspan tapped on the monetary
brakes and very briefly this measure of money shrank to almost 0%. Scared
to death by prospects of a global deflation, Greenspan hit the gas pedal again like a teenage male with a testosterone rush, and he has kept the
pedal to the metal ever since, such that global U.S. dollar liquidity has
reached an astounding 22%!
This ridiculous growth of money did not go unnoticed by www.safehaven.com
who wrote an excellent article on May 30, also suggesting the Fed was in a
panic mode. I have chosen to excerpt the following parts from this very
excellent article, which can be read in its entirety at www.safehaven.com.
"Let me just say from the outset that the Federal Reserve has confirmed our Stock Market Crash forecast by raising the Money Supply (M-3) by crisis proportions, up another 46.8 billion this past week. What awful calamity do they see? Something is up. This is unprecedented, unheard-of
pre-catastrophe M-3 expansion. M-3 is up an amount that we've never seen
before without a crisis - $155 billion over the past 4 weeks, a $2.0 trillion annualized pace, a 22.2 percent annualized rate of growth!!! There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is, the Fed's actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event. What could it be? "One can draw no other conclusion except that the Fed is acting irresponsibly in its managing the money supply, in fulfilling its duty to "maintain a stable currency." I reject the notion that the Fed is acting irresponsibly. No, something is up, bigger than we have ever seen in the history of the United States. Let me ramble. Perhaps they simply see the ominous technical landscape we have been warning about in recent issues, and are attempting to pull out all the stops to avert the predicted crash. The recent rally in just about everything is similar to 2003's market behavior when the Fed pumped massive amounts of liquidity into the system during the first half of the year. This time seems different. The amount of liquidity is too large. The Fed is deflating the value of the monetary base by a fifth! Why are they willing to do this? Wisdom says something bad is up - big time."
Global U.S. Dollar Liquidity - 1998 through June 2004.
The "Bottom Line" concluding remarks from this article were as follows:
"The Federal Reserve, contrary to our oftentimes cynical commentary, is not
going to inflate the Money Supply 22 percent simply to get Dubya reelected.
That sort of M-3 rise creates substantial financial risks that don't
justify its necessity. No, something horrific is on the horizon - and soon.
Perhaps the Open Market Committee was treated to a preview of The Day After Tomorrow - and they believed it! I don't want to be an alarmist, but I am reporting what I see. Like in the movie, it may be time for prayer. The
Master Planners' prayer is that all markets float higher on the rising tide
of swelling money and that the coming catastrophe be mitigated or delayed.
Should they be successful in extending the Bubbles, greater imbalances
emerge and the ultimate market event will be worse than if now. Defensive
strategies are warranted.
"But be sure of this, that if the head of the house had known at what time
of the night the thief was coming, he would have been on the alert and
would not have allowed his house to be broken into." Matthew 24:43"
GOLD
One of these Days, Bill Murphy Will Be Right
Bill Murphy declared this Friday to be "a turnaround day for Gold." I have
learned to know Bill very well. I love him because what you see is what you
get. A more honest person you will not find. I also love him because he
fights passionately for what is right, namely free and honest markets and
against the daily deceit and spin our policy makers are springing on the
American people. Bill gets angry and discouraged by the constant
intervention in the gold markets by the ruling elite as they pull every
trick imaginable to try to deceive the public into believing the U.S. form
of economic dictatorship, which is looking more and more like economic
fascism every day, is for the good of us all.
We get a steady does of propaganda every day that is based on two economic schools of thought both of which are anti-free market. Keynesian thought seeks to solve man's economic problems by government interference in the economy via stimulation of aggregate demand in the economy while monetarism seeks sanctions a hand full of dictators at the Fed to determine how much money should be printed every day for the good of us all. And to help them con the American people into thinking the dollar is better than gold, the U.S. Treasury through the Exchange Stabilization Fund rigs the gold price so as to disguise the true weakness and bankrupt state of the world's reserve currency. These interventions in the market are, as I pointed out in my talk at the New York Institutional Gold Conference, leading to greater and greater global distortions in the economy, like those pointed out above. Rigging the gold price is an essential step in keeping Americans stupid about the huge economic disaster that lies ahead of us. And rigging the gold price is also essential to keeping the bubble from collapsing by encouraging Americans to dig themselves deeper and deeper into future poverty via debt.
At some point in time, these actions will no longer succeed. In my talk I
suggested that any one of or a combination of four factors will certainly
send the U.S. economy into a liquidity crisis that sets off a deflationary
collapse as market participants sell illiquid assets in exchange for an
acceptable medium of exchange demanded by the public when confidence in
paper is lost. History suggests that acceptable medium of exchange will be
gold (very possibly silver) since gold is the most liquid asset of all that
unlike paper money always retains intrinsic value. When that process gets
underway, the price of gold will easily be measured as John Hathaway
suggests, in 4 digits rather than 3.
The four factors I mentioned as likely triggers for this liquidity crunch
were: 1) Exponential rise in total debt relative to a linear growth in GDP.
I suggested that over time, this dynamic alone was sufficient to lead us
into the freeze up phase of the Kondratieff winter depression. 2) Increase
in interest rates. 3) Increase in energy prices and 4) Higher taxes. At some point, whether my vision of a deflationary collapse or an run away inflation turns out to be true, confidence in the dollar as paper money will collapse and the manipulators will no longer be able to continue to manipulate the gold markets. Whether Bill Murphy is right about Friday being the turn around day, I don't know. But one of these days he is going to be right at which time we will have a number of "limit up" days for gold. What is very interesting however, is the following report from the GATA web site, www.lemetropolecafe.com.
"Panicky gold longs dumped their positions right after the jobs number was
released and gold fell all the way down to $383.70. Morgan Stanley was an early seller and then turned aggressive buyer when gold firmed up very quickly following the opening deluge of selling. The reversal close gives gold a healthy outlook for next week. The close back above $390 was also very constructive.
"Some good news to report on the fundamental front. One of our better
dealer sources reports a robust physical market. Premiums are the highest
since the Y2K buying binge years ago. They are running 1 ¼ to 1 ½ percent
from refiners. He used to be able to buy gold at a discount to spot. No
more. Even with these premiums many refiners are reluctant to part with the bullion inventories in anticipation of higher prices in the weeks ahead.
The market is that tight and the boys and girls refining gold know it.
"One other unusual comment from this dealer - a rare one -which sounds more like me than a conservative man who is 70. He says the people he speaks to are coming to the realization that the markets are "phony." Not just gold, but all the markets. The rank and file has become very wary of anything coming out of Washington and Wall Street.
"The gold open interest finally rose - to 226,553, up 1,220 contracts.
"Gold finally accompanied the euro higher. For the past week there was no
correlation at all to the dollar. Gold only moved within the dictates of what The Gold Cartel wanted it to do.
June 7, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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