DO
YOU THINK GOLD DESERVES TO TRADE IN A FREE MARKET?
The
relentless selling we have seen over the past month in precious metals
was kicked off by the manipulative interventions occurring right around
the time of the Fannie Mae and Freddie Mac implosions in mid-July. Unprecedented
short selling by two major banks in the futures market along with waves
of naked short selling of resource stocks pushed indices and stocks
through technical support on charts. Yamana Gold, which is one of the
most successful gold companies saw short interest rise 72% in the first
two weeks of August (without counting all the naked shorts). There is
no reason to short this stock; it has been a star performer. Many investors
have given up and portfolio managers that haven’t given up are
now forced to sell due to redemptions. These investors believe that
the market is telling them a message and don’t realize it is not
a market message but a heavily controlled manipulation to make them
believe so and to dupe them out of their positions. The official explanation
of this action is that we are experiencing deflation and all things
real will crash. A deflation scare is mainly useful to the financial
authorities for one main purpose; to justify the next round of government-sponsored
inflation. The dollar has been rising against other increasingly worthless
fiat currencies with the explanation that Europe is weakening. As bad
as it might be getting there, there is no way we are doing any better
in the US unless we are referring to our ability to generate more bogus
statistics. If we were experiencing a true deflation with the level
of debt out there, the fear of accepting any paper currency would cause
gold to rise even faster. Yet foreign exchange reserves have grown to
$7 trillion in the past seven years and money market assets are over
$3.5 trillion in the US alone so there is plenty of cash around. Everything
we feared could happen in this economy has more or less occurred, or
more correctly, has started to occur yet we have not been sheltered
by the traditional safe haven status of gold and silver. This is no
accident. It is a planned policy known as “the strong dollar policy”
that runs against all the natural forces in the real world, dooming
it to failure. The fiat money system can not possibly survive if money
is not continuously created since it is brought into creation as debt
and additional money to pay interest must always be created. With interest
payments at such a high proportion of the overall money in creation,
any slowing at this point will lead to implosion and any expansion in
excess of productivity will also lead to implosion. This is why the
talk of any tightening is a bluff and any drop in rates threatens inciting
a dollar crash. Very few can see this logic but the truth is getting
ever more difficult to hide and soon the masses will see things much
more clearly.
We are witnessing
the complete breakdown of the world, but particularly the US, financial
system. Evidence mounts on a daily basis but investors do not see or
understand the relevance of events. One of the most significant events
yet is the recent all out attack on gold and silver. Although the mainstream
belief is that “the commodity bubble” is over, most of those
that have been buying gold and silver to protect from Governments that
are now in the early stages of hyper-inflating have not been fooled.
Purchasing gold and silver and other items of enduring value is the
only way to step outside the system of constant Government devaluation
of money and illogical manipulation of everything else. They are buying
physical gold and silver because they do not trust any currencies and
do not like what they see out of the various Central Bank “operations”.
They realize every time they buy physical gold and silver and take it
into possession they are reducing the stockpiles that are being used
to control their prices in the fractional reserve type operations of
the bullion banks. The rapid $7+ decline in silver was accomplished
100% in the paper markets, largely by two banks selling 27,000 paper
contracts representing 138 million ounces of silver in just over a month.
That is almost 1/4 of annual world production shorted by two banks no
less. Their shorts as of August 5th accounted for 61% of the total commercial
net short position. These operations are meant to demoralize you and
hopefully get you to sell your physical metal and turn to their ridiculous
safe haven candidate, bonds yielding less than 4% in a 15% inflation
environment. They were expecting to incite panic selling in silver,
however, the result of their actions were just the opposite. Worldwide
investors scrambled to take advantage of the price crash, wiping out
most bullion dealers despite paying as high as well over $4 above the
spot price of silver. In fact, this is the first time in 30 years since
gold began trading that declining futures prices led to a spike in physical
demand. The world’s largest single refinery in South Africa said
it was cleaned out by one 5000-coin order for Gold Krugerrands. Even
the questionable silver ETF was seeing massive buying on the 40% sell
off! Not only were they unsuccessful in prompting selling, (except by
the leveraged paper longs on the COMEX), they also did tremendous damage
to the functioning of the futures market that will derail the ongoing
manipulation. Dealers that bought to hedge off price risk from selling
physical silver to customers have been crushed, losing untold sums since
paper prices have still not recovered even close to physical prices.
This could destroy the futures market which severely restricts the ability
to manipulate prices lower since many futures market participants (suckers)
will no longer trust such a sham of a market. The longer these below
market prices persist, the sooner greater shortages will develop which
are already substantial. This recent manipulation has been so severe
the interveners may have gone too far. We shall see but if buyers and
sellers circumvent the exchanges the manipulation will get much more
difficult and we are already seeing that. The reason we have spent so
much time on this is because this is the sign that the physical market
is taking over from the paper markets. This is what needed to happen
in light of the ongoing manipulation for true market prices for gold
and silver to be reached and now we are one giant step closer. Unfortunately,
Americans are the most exposed to the misinformation campaigns regarding
gold and are the most disadvantaged as a result. Foreigners know not
to believe the rhetoric and are steadily accumulating gold and silver
at giveaway prices. Going forward this is all that will really matter.
The crashing of
precious metals stocks has shaken investors and they are selling the
stocks despite the fact that the stocks are selling as low as 1.5-3
times earnings or cash flow (unheard of multiple for a gold stock) despite
many stocks growing production and earnings in excess of 30%. There
are also many stocks that have more cash than their entire market cap
with no debt. They never get much cheaper than that. I have spoken with
some investors that are throwing in the towel and selling and was alarmed
to hear they are planning on moving to the “safety?” of
bonds or large cap stocks. These are companies such as GM and Citicorp
which are already on life support from the Government. These zombie
companies would be long gone if not for the funneling of the citizens’
money into their pockets. During the weekend when no one would notice,
GM just received a $50 BILLION! loan from the US Treasury for the development
of electric cars and gas vehicles. This is to a company with a total
market capitalization of only $5 billion. As for bonds, a 4% yield in
an instrument that provides zero protection against 20% worldwide increases
in M3 money supply is about as unsafe as you can get. Cash is no better
as the even lower yields will do nothing to offset the 20% loss in purchasing
power that we expect over the next year or the potential for total loss
due to bankruptcy. People understand that their dollars don’t
stretch as far now that they are paying $4 for gas, higher prices for
food, and most everything you need to live but they have somehow not
been able to make the connection of how that affects different asset
classes they have to choose from to invest their money.
This is probably
the fourth big scare and pullback since this gold and commodity market
got under way; and the most severe considering how overwhelmingly positive
both the fundamental backdrop is and the progress the companies in the
industry have made. There is a saying that a gold bull will do what
it has to, to throw off as many riders as it can and we are seeing it
demonstrated before our very eyes. It was the same in the 1970’s
despite gold rising 26 times and many stocks rising from pennies to
over $500 per share! It is sad to see investors give up on the very
few areas of the stock market with such strong fundamentals that can
allow them to do well despite the onerous future we face. Gold, silver
and uranium are certainly three areas that will stand the test of time.
All the natural forces in the universe are pushing these sectors forward
yet the substantial power of the manipulators have delayed their progress.
The suppression of the market price of a badly wanted commodity only
catapults the price that much higher when a serious delay to development
is introduced. There are already shortages, particularly for silver.
Gold production is likely to be down sharply this year if you just observe
the larger producers that can not expand operations due to the suppressed
price. Goldfields, one of the largest producers, just announced its
costs have risen to well over $800 per ounce! Compare that to Yamana’s
negative $140 per ounce due largely to its copper credits. It is very
difficult to find physical silver right now and gold is very limited.
Gold production was down 5% last year from its peak in 2003 despite
steadily rising demand. Production will likely decline even more this
year. The four largest gold producers are expected to produce 18% less
gold this year than in 2006. These are not the signs of a bubble. Any
further declines in the price of these and other commodities will result
in even bigger shortages. The rapidly growing smaller producers that
are helping to offset these declines in the larger producers are being
seriously handicapped by the continuous price capping of gold and silver
which delays and cuts off badly needed capital to deliver what the world
is demanding. The US Government has stopped selling gold coins also,
so how does the price plummet when there is demand yet no supply? There
is overwhelming evidence that the recent declines in gold and silver
are a fraud. Gold expert James Turk noticed that in the Treasury’s
monthly report that gold held by US Mint facilities has not seen any
change in its working stock of gold since April 2006. No wonder the
Mint had to stop producing bullion coins. They are having trouble procuring
gold and silver to make new coins and if they really had an inventory
in working stock that is not already loaned out they would not have
to stop producing highly demanded bullion coins.
Our country’s
financial situation is very fragile. When Paul O’ Neill was US
Treasury Secretary a study was done that showed the current value of
obligations exceeded $53 trillion for a US economy that totaled GDP
of only $13 trillion. Fed Governor Richard Fisher of the Dallas Fed
recently upped that estimate to $99 trillion for a $14 trillion economy
in just a few years time. That includes $34 trillion for Medicare A,
$34 trillion for Medicare B, $17 trillion for Medicare D and $13 trillion
for unfunded social security. That amounts to a current bill of $330,000
per American. This just continues to get worse and is totally ignored.
How can this be? We have been hurdling out of control and we still have
to borrow $2 billion a day from foreigners to maintain our current lifestyle
and it is very uncertain that the money will continue to be lent to
us. The obvious thing would be to bring this consumption into balance
yet that is not even considered. We are extremely vulnerable to the
actions of foreign countries and a bad surprise could come at any moment.
The nationalization of Fannie and Freddie is just a tremendous blow
to the US dollar yet the dollar rises with every dollar negative news
item. Our country is on such a hopeless treadmill that it is very likely
the current crop of leaders will see war as the only solution, if only
a diversion. There are currently three US carrier groups within striking
distance of Iran right now with another two more on the way. You probably
won’t read about this in your evening paper because a market response
from gold would set off alarms and there is already enough trouble trying
to keep financial giants from imploding. The FDIC has upped the number
of banks on its watch list from 90 to 117 and it has been reported that
their funds may already be as low as $29 billion from the original $53
billion when IndyMac went belly up (which wasn’t even on the watch
list). We are very likely to see a military altercation in the very
near term because to risk waiting would risk that the system totally
implodes on its own beforehand.
The attack on gold
and silver and precious metal stocks is becoming more obvious to greater
numbers of investors. It was to be expected to be especially brutal
as the financial system comes closer to faltering so maybe that is where
we are. We see in the physical markets investors ignoring the paper
futures markets and paying almost 10% over the spot price for gold and
30% over for silver to get physical possession and that is the correct
response. We have always said it is the physical markets that will break
the suppression and allow gold and silver to move to true market prices
which we would guess are closer to $3000 an ounce for gold and $50 an
ounce for silver at present. The stocks are certainly selling at giveaway
prices but they will have trouble breaking free of the suppression until
the physical markets break free. We have heard that many gold stocks
in Canada are being shorted without borrows by brokerage firms with
almost no limits. This is how they are dislodging stocks from even the
most strong-handed precious metals investors. Don’t be surprised
when firms such as Goldman Sachs, JP Morgan, and Citigroup show up as
the biggest holders of these stocks when they bottom, just as Goldman
was the biggest holder of crude futures not long after manipulating
composition of some key commodity indices in the oil markets and then
riding crude as the biggest holder while the price rose to over $140
a barrel. Investors, including the most hardcore gold bulls, are extremely
confused. Again, do not be surprised that Hank Paulson, ex-head of Goldman
Sachs, has been able to rig trading to initiate this bogus commodity
sell off with the help of all his cronies sitting in Central Bank positions
around the world, his access to the positions of hedge funds and the
leverage they have employed through Goldman Sachs, as well as unlimited
access to trillions of dollars through derivatives contracts in conjunction
with the Fed. This is what our financial system and leaders have evolved
into, yet gold and silver and a few other strategic commodities will
remain the best way to defend yourself from the reckless and ruinous
policies they have employed. When Barrick Gold was able to claim immunity
from its lawsuit launched by Blanchard Coins several years ago because
it was acting as an agent of the Government or Federal Reserve involving
its manipulation and suppression of the gold price you could understand
that gold will take longer than previously expected to reach its true
market value. By investing in gold we do not wish to take on Hank Paulson
and his bazooka with unlimited ammo, we merely wish to protect our assets
in a highly negative interest rate environment which screams for investment
in precious metals. Thomas Jefferson and other patriots that founded
this nation would be rolling over in their graves if they saw how vehemently
the Government is trying to take that right away from us.
The bailout of Fannie
and Freddie will do little but prolong the pain of all the bad loans
and debt expended and at our expense. You can be sure that not only
will we now pick up the tab instead of the criminals and high paid executives
that got us into this mess, they will also siphon off more graft to
line their pockets the longer these ongoing bailouts continue. Then
when the system and country implodes you will see how many of these
leaders pick up their billions and live out their lives in luxury in
some foreign getaway for the ultra rich just as the past Presidents
of Mexico traditionally do.
When all the subterfuge
comes down we are likely to see the most incredible bull market in these
stocks that the world has ever seen. Our banks are losing money even
faster than it can be handed to them. It should not be long before the
total meltdown we are witnessing becomes apparent to the masses. In
times like these nothing beats physical gold and silver in your own
possession but an investment in the companies with proven metal in the
ground is a close second. Cash should only be kept to the barest minimum
to pay near term bills because cash is vulnerable to not only loss of
purchasing power but outright default of the bank it is in. If Americans
do not wake up to these recent unprecedented manipulations and hold
firm to these safe haven assets, they may not realize what is happening
until they can no longer afford to buy food because prices have risen
so much. Gold is an asset that people want to own for risks they really
can’t analyze and that risk has definitely gone up. Look no further
than the rapid increases in derivatives and worldwide money supplies.
Gold eventually exposes the irredeemable promises made by Governments.
During the Great Depression years of the 1930’s Homestake Mining
was the biggest gaining stock of the decade after a brutal decline in
the 1929 crash. Sit tight and watch history repeat.
While most of this
commentary discusses precious metals rather than energy, the commentary
is relevant to energy as well. As mentioned above there was tremendous
manipulation in the price of oil that had the involvement of several
banks and investment banks that were instrumental in running the price
of oil up to close to $150 per barrel. Now as the price falls under
its own weight the spin is being made that it is due to a forecasted
depression. This is not to say we believe that oil will not run up to
that level again. In light of the absorption of Fannie and Freddie’s
obligations by the US it is almost a sure bet that the price of everything
tangible will rise as we will soon be left with little choice but to
monetize debt repayment away. Our choice to move toward uranium in energy
investments was heavily influenced by the illogical moves in crude as
developments unfolded. It became increasingly clear that oil was moving
under a power “of its own”. Uranium on the other hand could
be clearly studied and the probable winners were not as hard to decipher
with a diligent research effort. We believe we have identified those
that will be huge winners in an energy segment that must be fully utilized
to offset the draw downs of our traditional energy supplies due to unprecedented
world growth, particularly in Asia. Investors should complain loud and
hard to the ongoing manipulations. Not only are the culprits being rewarded,
they are also delaying desperately needed solutions that will become
ever more evident moving forward. The lack of capital flowing to these
sectors under high demand guarantees that they will rise that much higher
and that much longer since investing in the development of a mine or
an energy source is a long term proposition that takes many years and
does not have the chance to become a bubble until years and years of
capital investment is made to the point of excess. We are a very long
way from that point in time.
Richard
J. Greene
September
11, 2008
Clearwater,
Florida