Why Gold Is Dropping When
- and what it all means
Oct 14, 2008
Why is gold dropping right
now when anyone in their sane mind would expect it to rise? The
simple answer to this question is, "because Comex-gold isn't
gold" - and because it deceptively pretends to be 'the'
price-setter for real gold.
Gold is gold, paper is paper,
and "Comex gold" is nothing but paper masquerading
as gold while simultaneously pretending to be the price-setting
medium for actual gold in the world. Now, finally, Comex-gold
is in the process of being unmasked.
The real supply and demand
determinants for Comex gold are not actual gold investors but
fund managers. Fund managers are inextricably intertwined
with the world of contract-based credit instruments. They use
bet on Comex gold contracts to hedge their other (currently horrendously
losing) bets with something they all, in their in-bred belief
in paper markets, believe will 'go up' in value while everything
else is going down.
However, these very same fund
managers and their paper-bound investment psychology are the
exclusive reason why Comex gold is dropping in these times when
everyone (including fund managers) expects gold to rise. As already
stated, though, and as they now finally realize to their own
dismay, Comex-gold just isn't gold - and that causes even further
Two Losing Bets, Compounded
Fund managers' other bets are
losing money fast, now, so they need to raise cash to keep up
the overall value of their respective funds, so they can earn
their management bonuses and avoid getting booted for lack of
relative performance. Guess what they cash in on? The very same
Comex paper-gold they mistakenly bought as a 'hedge', of course.
Meanwhile, real investors in
real gold are enjoying their shopping spree - except that the
spree turned into a treasure hunt as the shelves and display
cases of gold dealers look more and more like the supermarket
shelves in the old Soviet Union - bare.
This is the only 'bare-market'
in real gold the world will see for a long, long time to come.
With this split, this disconnect,
between Comex illusion and gold reality, one thing or the other
will have to give, and it won't be physical gold that gives.
The system built up around
the reputation of Comex-gold as being a price-setting mechanism
for real gold plays right into the hands of the financial establishment.
The establishment depends for its (now increasingly meager) existence
on the illusion that gold "isn't living up to its promise"
as a real inflation and disaster hedge. The implication, of course,
is that investors might as well stay in the computer blip and
As the Comex gold price illusion
drops, many retail investors are still persuaded to keep their
money circulating in the paper world, and that ultimately feeds
the system. Of course, by now that 'feeding' mechanism looks
more like life-support, but try and unhook someone who is on
life-support. The results are dramatic, inevitable, immediate
- and final.
Yet, even on life-support,
the system is deteriorating at a catastrophic pace. It would
be hilarious to watch if it wasn't for the fact that we are all
depending on this phony system for our real-life support. Without
credit freely circulating through the commercial paper universe,
for example, grocery stores won't have food on their shelves,
there won't be gas a the gas station, and your bank will be shut.
Cash doesn't transfer very well without the bank settlement process.
That's the problem.
Our economy has become too
centralized. Everything has to travel over long distances, so
face-to-face cash transactions will not be able
to keep the system alive. There is much to be said for localized,
decentralized distribution systems, which in essence involve
many different and varied local economies rather than one large
and uniform one. For arms-length cash transactions to be able
to sustain an economy, economic activity needs to be localized,
The same thing goes for politics,
of course. That's why the framers of the Constitution gave us
a de-centralized federal system with little power at the center
and much of it spread out to the states. That system can develop
its own evils, as we have seen during the days of slavery, but
we are now seeing that centralizing and controlling everything
from the federal level is not really the answer, and rather magnifies
evil on an aggregate level.
And now, in the face of all
this abundant evil, the G7 crackpots have the audacity to suggest
that we need to centralize power even more and come up with 'global
solutions.' Yet, globalization was the very reason our profligate
lending and spending habits here in the US spread around the
globe so fast. True to their form therefore, politicians
and so-called leaders are now using the bad situation that they
created as an excuse for persuading us to give them the added
power they need to make it even worse!
Silvio Berlusconi, the Italian
prime minister and former EU president, let the cat out of the
bag last Thursday when he blurted out (God bless his soul for
being such a loose cannon!) that the G7 want to shut down the
markets this coming week while they figure out how to deal with
the crisis. That cat was very quickly stuffed back down his throat
as he was forced, only an hour later, to retract his statement
by saying he just repeated what he had "heard on the radio."
You Can't Argue with Abysmal Failure
Judging from the success rate
of elected and appointed leaders in politics and economics so
far, whatever they will come up with over this weekend and the
succeeding week will undoubtedly be an unmitigated catastrophe.
Just picture a time line from Bear-Stearns in mid-March to IndyMac
in May, Freddie and Fannie,in July, Lehmann, AIG, WaMu, and Wachovia
in September, the bailout package fiasco a couple of weeks ago,
and then last week's post-bailout market-action, and you'll see
a direct, negative correlation between official action and market
The more they try to
'help,' the worse things get - and now they want to act
on a global scale and they want our support?? I don't
A very legitimate question
arises whether things would have even gotten this bad if they
had done nothing. I can tell you one thing for sure: if they
had never had the power to do what they did, things would have
never gotten to the point where they would have been called upon
to exercise it to save us. By 'they,' I am referring to the political
and financial thieving class, of course. A prime example for
how badly they have screwed things up is what has been sold to
us as 'deregulation.'
Deregulation? Sorry. Not for You!
Under the Republican mantra
of "deregulation", the only things that were really
deregulated were the banks' ability to sell investment products
and deal in derivatives, and the largest corporations like Enron
and WorldCom. You, the living, breathing individual on the other
hand, are now more regulated than ever. What does that tell you?
Here is some advice: whatever
'they' tell you to do - do the opposite! Why not? After all,
they routinely do the opposite of what they say, so why can't
This is not to say that under
a Democrat regime of over-regulation things would be any better.
You, the individual, would still end up being as regulated as
you are now, or worse, and the additional concentration of power
at the government level would certainly not make the economy
any better, either.
So, this November 4th, when
they are asking for your vote, tell them what you think. Vote
to un-elect every single politician who is asking you
to reelect him or her, from local dogcatcher to city hall member,
from state-rep to federal congressman and senator. It won't even
matter whom you vote for, as long as you vote the incumbents
out. Then, rinse and repeat, from now on until you die.
It's the only power you have left.
But, back to gold (excuse the
From the Past ...
What we have in store for us,
economically and as an investment environment in stocks and bonds,
is perfectly depicted by a comparison of the world's major stock
(The BSE Bombay Stock Exchange
data for this chart don't go back to 1980, so a shorter-term
view is presented):
... to the Future!
These charts above show the
past. They show all of the major uptrends that are about to be
broken - and here is our future:
The world's major stock market
charts will look like this in twenty years, or worse, unless
the bleeding can be stopped and a new bubble is created - but
the bleeding won't stop.
By the way, to all those who
think gold will 'go down' in a deflationary environment, here
is a gold chart in Japanese yen since Japan's deflationary period
began in 1989:
Interesting, isn't it?
Now I can hear some saying,
"Well, we're in a global environment now, and the global
deflation has only just begun." So what? In a deflation,
cash is king and rises against commodities, financial assets,
and consumables - but so does gold, because ultimately, gold
is money. Like it or not. Right now, it may not be 'current'
money that is exchanged for goods and services in the ordinary
course of business - but that will change.
Financial Diarrhea - and its Cure
Wait a minute. 'Change' is
Obama territory, isn't it? So, is he the one who will make it
all better, then?
No, the currency system won't
change because of Barack Obama. He is as irrelevant as
Bush currently is. The Bush administration is impotent to change
anything, and so will he be. Both Bush and Obama are sucking
on the teats of the same mother-sow that is the global banking
elite. Mama sow is currently having a serious case of
food poisoning, though. She is bleeding red ink from one end
and vomiting credit from the other, and that invariably causes
Yet, her system cannot be successfully
re-hydrated. It rejects precisely what it needs to live, i.e.,
credit, just like a human patient suffering from food poisoning
cannot retain food or water. There are scores of economist magicians
and witchdoctors about, running to and fro, trying to impress
with their tricks and their smoke and mirrors - but there's only
one doctor in the house, and he's not being consulted.
Economic sorcery cannot cure
the world's fundamental illness because sorcery is what has brought
it about. Only a good dose of tried and true folk medicine can,
and that medicine is the oldest and most successful form of money
in the world:
The Limits of Financial Power
The financial elites can twist
and squirm all they want, but nothing they are able to do within
their own limited powers will work. All they can do is shut down
markets, shut down banks, or create more debt. Period. That is
the full extent of their economic power, and their power is now
running up against one of the oldest laws in economics - the
law of diminishing returns.
That law holds that when you
continue to do more of the same over a long time, whatever has
worked in the beginning will become less and less effective as
time goes on. For example, in the old days before synthetic fertilizers,
if you grew and re-grew the same crop on the same land for too
long, your crop yield would decrease to the point where it was
no longer economically feasible to plant that crop. That's why
old-school farmers used to let the more exhausted fields lie
fallow for a while before replanting them, or they used a combined
system of rotating crops and letting the land lie fallow for
The world's economic engine
hasn't lain fallow for a long, long time. The current recession
and coming depression will give it that much-needed opportunity.
Meanwhile, further injections of debt will not work, just like
more of the same rotten food won't cure the patient suffering
from food poisoning.
The world economy is
retching blood and debt, and all our leaders have to offer is,
well - more debt.
You can already see where this will end up.
The 'Patient' Revolts
Here is where the patient's
self-determination comes in. The word 'patient' here does not
stand for the mother sow. It stands for the billions of individuals
of the world who have so far played nice and played along with
their debt masters because it was soooooo convenient. But guess
what? It's no longer convenient to play along.
Something will have to give
- and the elites aren't powerful enough to make the entire rest
of the world cry uncle. Their power only extends so far as their
phony bag of tricks actually works to some extent, so that people
are at least marginally satisfied with their lives. Once we come
to the point at where whatever the elites do flat-out stops working,
things will change - and we are now very close to that
The more they try to do, the
less it works. The law of diminishing returns is spitting right
in their faces. The more they try what doesn't work, the
more people will lose respect for them, the less people will
look to them for solutions. Accordingly, the harder they try,
the weaker they get. All you and I have to do is sit there, watch
them on our television screens, chuckle to ourselves - and wait.
Sure, it will be hard, but
that will only get people madder. Your power may go out. There
won't be food in your local supermarket - but this time you'll
know that it is your 'leaders' in government and banking
who are the source of the pain you are experiencing.
We have all had it too good
for too long, anyway. It's time for some hard knocks. It's time
for some reality. With the accurate perception of reality comes
wisdom - and the determination to act.
That, of course, is the last
thing they want you to experience, but they are now powerless
to prevent this from happening. Everything they do drives the
rest of humanity closer to that point.
Americans are only easy to
control as long as you make things easy for them. In the 30's,
people still believed in FDR because they had no alternative
source of information besides his so-called 'fireside chats'
on the radio - where he could single-handedly rake the truth
over the coals, unchallenged. Now, we've had a functional Internet
for more than ten years already, and our kids are smarter than
we or our parents and grandparents ever were. That genie
will never go back in the bottle.
At the end of that entire road
of economic mayhem, pain, and privations, there will still be
the option of using gold and silver as currency - and it will
be the black market that will lead the revolution, not the official
exchanges and money centers. Our officials will continue to prove
to us that they can't do the job, so we will have no choice but
to step in and do it for them. In the process, we will realize
that we don't need them nearly as much as they need us.
It will be a most salutary
awakening - for both sides of the wrought-iron fence.
Oct 10, 2008
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