first majestic silver

How To Win The “War On Gold”

December 1, 2016

Oh, the tangled web we weave, when we seek to deceive.  And sometimes, when we actually want to help – particularly when referring to vote-seeking politicians.

Case in point, OPEC – which yesterday, pulled off the lie to end all lies in pretending to “cut production,” prompting the “oil PPT”-aided “market reaction it sought.  Thus, enabling it to kick the can a few more months – or perhaps, weeks – before the reality of history’s most oversupplied crude oil market inevitably smashes its elaborate rigging mechanism to pieces.

I was hoping the bitter geopolitical tensions that played out up until the “deal’s” final hours would cause the emotional response of a full-out abandonment of talks; thus, enabling said reality to arrive now.  However, in true OPEC fashion, they for the 22nd time in its long, sordid history agreed to “cut production” – during which, compliance has cumulatively been below 60%.  In other words, if this were actually a genuine “production cut,” the deal would most likely be reneged on anyway; particularly given that non-OPEC nations like Russia and Mexico are involved as well – of which, their cumulative compliance has been even worse.

The “deal” has more holes in it than a bag of Swiss cheese – starting with the “non-OPEC” commitment that hasn’t even been officially agreed upon.  To wit, Russia’s 300,000 barrel per day production cut commitment has neither been agreed to nor based on any official reference point.  And as I discussed earlier this week, Russia has in reality “agreed” to nothing more than a “de facto” cut of the 300,000 barrel per day growth it anticipates in 2017, from today’s all-time high production levels.  As for Mexico, the 150,000 bpd cuts OPEC attributes to it is not only not “agreed to,” but mere hours after the “deal” was announced, Mexico’s state-owned oil company, PEMEX, issued a press release claiming it isn’t planning any output cuts in 2017!

450,000 of the supposed 600,000 bpd of non-OPEC production cuts that must be “agreed to” at next week’s Doha follow-up meeting – OPEC itself admits the “deal” is contingent upon such cuts – are likely figments of the “oil PPT’s” imagination.  Let alone, the other 150,000 bpd, from as yet undisclosed participants.  Which of course, do not include the ones that matter most – like Brazil; Norway; and most importantly, the United States; none of which are participating; and all of which – particularly, hundreds of US-based shale producers, will swoop in to steal whatever market share OPEC cedes – particularly if prices rise above $55/bbl, at which point the recent rig count/production surge we’ve already seen will go parabolic.

Per this must read Zero Hedge article, regarding “what can go wrong” with said “deal,” OPEC clearly worded its statement to avoid its true intention of higher prices, in lieu of the more euphemistically-phrased, but painfully transparent language regarding “normalization of excess inventories.”  Clearly, because these crude oil Keystone Kops know full well that if prices do indeed rise above $55/bbl – a level, I might add, that is still well below what they cumulatively require to remain solvent – it will ignite a firestorm of surging U.S. shale production, which is still 500,000 bpd lower than its year-ago level, and rapidly rising already.

And that’s not even the bigger issues of the OPEC “cuts” themselves; as geez, said Keystone Kops, in their haste to get the press release out, enabling crude oil’s ill-begotten, ill-fated bounce, their own documentation reveals an error related to the supposed “cut” Iran has agreed to.  Iran, who just one day earlier said it would not cut at all, accusing Saudi Arabia of reneging on its initial agreement to exempt it.  In other words, like Russia, the question of what baseline the “cut” is coming from is in question; as is Iraq’s – given that to this day, no one truly knows what its actual output level is, as its own production estimates differ significantly from privately-generated, third party estimates.  Throw in the fact that Indonesia was unexpectedly “suspended” from OPEC because all production cuts require unanimous votes, which Indonesia wasn’t going to enable; and the fact that Libya, Nigeria, and Angola have been exempted, and cumulatively intend to increase production by more than 500,000 bpd by mid-year; and it becomes painfully obvious that OPEC’s propagandized 1.2 million bpd “production cut” is more fiction than fact; particularly in light of the fact that today’s all-time high production levels, significantly above those prevailing at the time of the mid-September Algiers meeting when this short-term price- and face-saving fabrication was concocted.

Throw in the fact that Saudi Arabia, by far the largest contributor to said “deal,” typically reduces production due to seasonal factors every January – which just happens to be when this “deal” is scheduled to commence -contingent on said non-OPEC producers agreeing to said “fake” 600,000 bpd of cuts next week – and you can see why OPEC’s final, ignominious days are upon it.  Let alone, due to the ominous, inexorable headwind that is declining global demand; both secularly, and due to the imminent reduction of Chinese purchases for its nearly full Strategic Oil Reserve.  In the words of the recently deemed “fake news” outlet Zero Hedge, “one wonders how long until the market does this math, and realizes that basically OPEC’s strategy since February (when prices plunged to $26/bbl) has been to jawbone prices higher, ramp up production throughout, and then adjust to seasonal levels in January 2017 and call it a cut.”  Which I assure you, “Economic Mother Nature” is well aware of – as will traders be, too, when they see dozens of oil tankers seeking ports to offload unwanted inventory a few months hence.

The OPEC “deal” was but a deception, and not a very good one at that.  As is the case, sadly, of essentially all the lies, frauds, and fabrications of the “powers that be” destroying our lives.  Which thankfully, due to a combination of the inexorably deleterious impact on billions of lives, and “fake news” outlets like the Miles Franklin Blog, are being serially called out; as the UK did in June, America last month, and Italy and Austria will likely do Sunday – the latter of which, may well catalyze a new European financial crisis.

Yes, the horrific ramifications of lying are everywhere, even those espoused with the best of intentions.  For example, Trump’s promise of a multi-trillion dollar “supply-side” fiscal stimulus plan, focused on ambiguously described, non-productive military and infrastructure projects; funded by a negative tax increase that will blow already exploding budget deficits sky high, if in fact it could actually be willed through a fragmented Congress that, for the most part, despises outsider Trump, given the threat he poses to their cozy status quo (like his vehement insistence on term limits).

Just the thought that such a plan might occur has caused interest rates to explode – i.e., the “gigantic pink elephant in the room” I discussed yesterday; and ironically, the dollar, as simple math tells us surging budget deficits; funded by printed money and parabolically rising debt; to fund said non-productive projects (i.e., ones with negative returns on investment); are decidedly NOT favorable to a fiat currency’s purchasing power.  Then again, when the resulting surge in rates (which caused $1.7 trillion of global bond losses in November, the most of any month in history) catalyzes fears of a global currency war – like, when the CHINESE devalue the Yuan to new post-peg lows each day – the impact on emerging market issuers is far more lethal on the issuer of the far more liquid “reserve currency.”

And oh yeah, did I mention that Trump’s proposed corporate tax cut could, equally ironically, at one fell swoop bankrupt dozens of companies?  Yes, the “King of Debt” himself, whose personal strategy (which I have no issue with) of gaming the system to avoid paying cash taxes, clearly wasn’t considering the reality that thousands of business owners doing the same have to deal with, when stockpiling trillions of “deferred tax assets” via the, generally speaking, value-destroying but stock-price- supporting mergers and acquisitions they’ve undertaken at a record pace since the Fed lowered the cost of borrowing to essentially zero eight years ago.  Which is, that if corporate tax rates are reduced, the value of said “assets” – which for the most part, represent tax carry-forwards that may or may not ever be realized – must be immediately written off.  Thus, a corporate America that, care of the aforementioned, lethally destructive Central bank policies of the past decade, has indebted itself like never before, will immediately see its cumulative balance sheet decimated further – in many cases, triggering funding covenants and credit rating reductions; and in all case, ironically, raising the cost of capital.

Both sides of the campaign-propagandized “stimulus” program are doomed from the start; the “spending” due to the surging costs of funding (which in reality, only the Fed’s printing press can accomplish); and the “tax cut” due to the resulting, massive write-offs it would engender.  But hey, let’s not let facts get in the way of a good story; particularly as, until the very day of the “unexpected” election result – heck, that very night, when stock futures initially plunged – “common knowledge” was that Trump would be “bad” for the economy, and Hillary Clinton, “good.”  Let alone, the most maniacally unjustified equity and base metal surge since the 1999 internet stock, and 2007 real estate blow offs – which then, like now, had “nowhere to go but up.”  Both of which occurred, I might add, during boom times; with geopolitical tensions, far better, and debt far lower; than today’s historic global bust – featuring crashing currencies, skyrocketing debt, and explosive social, political, and geopolitical tensions.

Did anyone catch the “good news” that United Technologies’ Carrier Air Conditioning unit plans to keep 1,100 jobs at its Indiana (home of Mike Pence) factory, rather than move them to Mexico as initially planned, thanks to Donald Trump’s “brilliant negotiating tactics.”  You know, 1,100 jobs where workers are paid vastly more than their worth, as opposed to the pennies on the dollar UTX could pay Mexicans for equal quality work.  Well, we just learned today that United’s “benign” decision was based solely on Trump offering it $700,000 per year of tax incentives for an indefinite period of time, equating to $686/employee per year for U.S. taxpayers.  Which sounds great on paper, until every corporation considering such a decision decides to game the system, too – by announcing “planned” factory closures to get Trump to give them increasingly large “incentives” to change their minds.  In turn, creating yet another taxpayer-destroying, deficit-busting, government-sponsored, moral hazard.

Like, for instance, the “quasi-government” status Fannie Mae and Freddie Mac enjoyed until they went bankrupt – nearly taking down the entire financial system with them, saddling taxpayers with $5 trillion of “off balance sheet debt; and subsequently, creating history’s largest portfolio of overvalued, underfunded mortgages; which are in the process of imploding as we speak, now that the long-dormant “bond vigilantes” have been awakened by expectations of Trump’s deficit-busting policies.

And the “icing on the cake” is that newly appointed Treasury Secretary Stephen Mnuchin – a second generation Goldman Sachs partner, for those of you thinking Trump would actually “drain the swamp” – completed his first day as “Treasury Secretary elect” yesterday by first proposing 50- and 100-year bond issuance, igniting a massive economy- and currency-destroying Treasury bond sell-off; and second, proposed to re-“privatize” Fannie Mae and Freddie Mac, handing them back to the private sector to maim and destroy further, before having to be re-nationalized again.  Only this time, the cost of doing so will be exponentially higher, given how much more egregious today’s “echo bubble” has become, and how much more leveraged to it today’s mortgage “GSE’s” are.

But I digress – which you’ll have to understand, given how many “horrible headlines” I must deal with, and how much “fake” market action to comment on.  I mean geez, I don’t even have time to discuss the potentially cataclysmic European political and financial crisis that could ignite after Sunday’s Italian referendum and Austrian Presidential election, both of which are likely to go decidedly against the powers that be.  The former of which, may well ignite the collapse of the dying Italian banking system; and with it, countless banks tied to it by debt, derivatives, and other toxic financial arrangements.  Such as, for example, Italy’s largest bank, Unicredit; one of the UK’s largest, the still nationalized Royal Bank of Scotland – which miserably failed the ECB’s latest “stress test” yesterday; the entire, soon-to-collapse Greek banking system; and Deutsche Bank, the until recently (when JP Morgan and Citigroup passed it in the Financial Stability Board’s rankings) “most systematically dangerous institution” – which I assure you, is no more solvent today than this summer, now that global interest rates have surged, and currencies plunged.  But it’s OK, as I have discussed the looming European political and financial crisis ad nauseum, including in Monday’s “tear down that (manipulative) wall.”

Thus, I can finally get to today’s all-important topic of the burgeoning “war on gold” – which in many ways, is more rhetoric and fear mongering than policy; and more importantly, how you can “win” it.  To that end, I’m referring to the article Jim Rickards published this week, titled “first the war on cash, then the war on gold.”  Not to mention, mine from last week, titled “governments and Central banks in panic mode – the war on cash has begun” – both of which, focused not only on the horrific, potentially revolution-starting “cash ban” instated last week by India’s psychotic, megalomaniac Prime Minister, Narendra Modi, but its ominous, global ramifications.

As I consider the Indian cash ban – as well as lesser, but equally precedent-setting actions in nations as diverse as Sweden, Uruguay, and Australia; as well as the equally deleterious “capital controls” in essentially all nations and trading blocs, including the U.S. and Europe – it occurs to me the “war on cash” is in fact a last ditch attempt to prolong a dying status quo, in which a handful of “elites” control essentially all the world’s wealth and power, at the expense of the “99%.”  Their primary “weapon” is the unfettered printing presses history’s largest, most destructive fiat Ponzi scheme afford them; which unfortunately, have destroyed the global economy, financial system, and geopolitical stability; but fortunately, have been, for all intents and purposes, “spent.”  At this point, each incremental dollar, Euro, Yen, Yuan, and other sundry fiat trash unit printed is causing far more damage than “benefit” – to the point that most currencies have already crashed; all have been dramatically devalued, either overtly or covertly; and the irreversible course toward the worst case scenario – which all fiat currencies have faced throughout history – is unquestionably in its final, hyper-destructive phase.  This is why we are seeing draconian monetary and fiscal actions the world round; and until recently, unimaginable public revolt.

Regarding the Indian “cash ban,” I have written and spoken all week of the “rumors” that a “gold import ban” will follow.  Which, whilst practically speaking, fits the M.O. of what Modi is doing, would have the reactionary blowback of, in my view, the Bolshevik and French Revolutions combined, in a nation of a billion-plus fiat currency hating, gold loving Indians managed by a handful of Western puppets, destroying the Rupee in what can best be described as “Financial Apartheid.”  Let alone, the fact that 500,000 Indians are employed in the bullion, gems, and jewelry industry, accounting for roughly 7% of national GDP.  Hence, the unmitigated lunacy of the poorly conceived, and more poorly executed, cash ban that has wreaked unspeakable havoc on the Indian economy, social order, and prospects for political stability; in one of the world’s largest, albeit predominantly backwards, economies.

Then, “news” last night that China “tightened” its quarterly gold import quotas – which I put in quotes, given the source is the anti-gold Financial Times, presumably discussing quotas for the fourth quarter, which is more than two-thirds over (not to mention, without providing any hard data to support it).  Which thus, was not likely considered newsworthy until the FT suggested it, under the blanket, fear mongering guise of “capital controls” the Chinese government has been instating all year, to prevent offshore Yuan speculation that the onshore Yuan will be devalued further – which of course, it will.

I’ll reserve judgment for now, until further details are revealed, if any.  However, the suggestion that China, perhaps the world’s most pro-gold nation, which is not only officially adding to its state-owned reserves, but actively advocating public ownership, sounds, for lack of a better word, ridiculous.  To wit, unlike India, China has a tight grip on the world’s manufacturing leadership, and the world’s largest gold reserves; with a government that knows full well of the currency crisis coming – in which, the ownership of vast amounts of gold will be tantamount to national survival; and equally importantly, future global political and economic leadership.  In other words, I don’t believe for a second that such quota “tightening” is an actual, bona fide PBOC policy; any more than that Narendra Modi can ban Indian gold imports without catalyzing a violent, nationwide revolution.

Irrespective, the overarching theme is desperate, fearful governments, taking desperate, fearful, draconian actions to avert their own, mathematically-certain demises.  Which last time I looked, is far closer to history’s norm, than exception – particularly regarding futile attempts to “save” a thousand or so failed fiat regimes, over a thousand years – compared to none that ever succeeded.  In each case, those that held real money – i.e., physical gold and silver – survived and in nearly all cases thrived; as will unquestionably occur now, as history’s largest; most destructive; and for the first time, global; fiat Ponzi scheme collapses – which in many countries, it already has.

Thus,  the term “war on gold” sounds ominous, it’s far easier to “win” than the war on cash, given Precious Metals’ time-honored immutability, acceptance, and unmatched track record as a storage of value.  Rickards’ advice, like mine, is to simply hold gold while you still can.  As like anything “banned,” restricted, or otherwise, it will only become more valuable.  Particularly for Americans – who, care of being fortunate enough to live in the nation not only sporting the current reserve currency, but spearheading said “war,” prices are as low as they’ve ever been, whether you measure value by the cost of production, supply/demand balance, or the amount of fiat currency printed.

For those genuinely worried that gold would be banned, “confiscated,” or otherwise – which after perusing my must read “priceless precious metals versus worthless dollars” article of 2012, you’ll fear far less – consider that the odds of silver being banned, confiscated, or otherwise restricted are close to zero, given how little exists, and how three-quarters of silver production is utilized for vital industrial uses.  To that end, read this article of how silver demand exploded the last time India tried – and failed – to restrict gold ownership; and consider that silver has never been more undervalued; and thus, ripe to “revalue” to its true value, with countless potential catalysts to launch it.

In a nutshell, the war on everything of value has commenced, via desperate government attempts to maintain power by propping the value of things with little or no value.  Unquestionably, the world is on the cusp of political, economic, and monetary history.  In which, if you simply hold physical gold and silver, you will be better positioned to “win” than perhaps 99% of the global population.

Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

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