An important anniversary slipped quietly by last month without any fanfare, on August 15th, as the anniversary of the day, that President Richard M Nixon, closed the Gold Window, and put the world on the path to financial armageddon.
From that day to this, the U.S. has essentially been able to print up as many dollars as it felt it needed to pay for things it wanted, and forced the rest of the world to accept “funny money” – aka. – Fiat Currency.
The fact that they were able to strengthen the dollar in 1973, temporarily when it convinced Saudi-Arabian leadership to accept an offer it could hardly refuse is still highly relevant…
America would back the House of Saud, with the full military might of its national forces, and the Kingdom of Saudi-Arabia (KSA), would accept only U.S. dollars for its oil, forcing dozens of other countries to trade for dollars, to pay for that oil, and the KSA, would re-invest those surplus dollars in Treasury Bills. Eventually the rest of OPEC would be forced to follow suit or commit commercial suicide.
Over the last 9 months, events in the precious metals markets and geo-political and economic circles, world-wide have been making headlines.
As geo-political tensions rise around the world, I wonder out aloud what is the end game. To learn where we are going, it’s important to know where we’ve been, and we have to look back 40+ years.
If we look at the ageing baby-boomers who are retiring in droves here in the west, (Of which I am one) and as our spending patterns change, we need to understand why this has such a big impact on economies.
In my experience, young people spend their money on a handful of things – Music, Fashion, Booze, travel and generally having fun, primarily in their pursuit of their partner in life – irrespective of their sexual proclivities.
As these people mature, they buy a bike/car, and their first flat or small starter home, and all the essentials of normal urban life – beds, tables, chairs, sofas, kitchen gadgets etc.
Then as they pair and begin to settle down, their partner now safely esconced in their home, perhaps 5 years have passed, and two incomes in one household means for a while they can experience a rise in social status and maybe buy a bigger home or have more expensive holidays. (though things are a little different in recent years as gap year students take the young to the far-flung corners of the globe.)
With women now making up more than half the working population in the west, women are now leaving “bonding” later, and perhaps seeking someone who meets and exceeds their expectations, and thus probably for professional women (i.e. those with degrees and/or professional qualifications) they’re leaving the having of children until they are in their early 30s, or as late as early 40s causing problems for over-stretched maternity departments, and over-stretched National Health Services, as increased age introduces greater risks and higher costs.
By their mid-thirties, people are climbing the corporate ladder, getting increases in pay, generally as their productivity rises in line with their experience.
Output on a national scale rises but this is only temporary unless higher investment in capital goods (new vehicles/machinery etc., that gets goods to market quicker, and/or cheaper) increases productivity further, these gains are not carried through indefinitely though. This is where political mistakes are made, as politicians think that the growth will continue.
As people hit their forties and early fifties, their willingness to learn unless pushed, seems diminished as they become experts in their field, just at the time newer technologies are adopted by the young first.
By the time people hit their mid 50s and early 60s, their abilities are beginning to decline; health issues begin to rise on average and national governments see a fall off in taxes, as some retire early, or die young – though the demands on their national budgets increase as improvements in health-care put additional burdens on national budgets.
Intermittent overseas wars also add to these burdens as those apparently with historical empires adopt the role of world policemen.
This adds further financial burdens on countries, and leads to overspending to maintain prestige, or to appease emotional electorates, or to maintain their leadership role, allowing those with more quiescent military to improve and begin spending in increasing amounts.
This was the nature of things in the west when Britain began losing its pre-eminence, and the U.S. took up the political and economic cudgels.
As a result, we now see the extent to which Britain, and America have over-spent in recent years, as the U.S. deficit grows to 105% of national income, and its budgets become overstretched as its military tentacles have extended now to over 145 countries.
The role of World policeman is an onerous one, and like all great empires this eventually causes a collapse at home, due to excessive spending as tribute (the term used by the Romans to refer to taxes) begins to lessen.
As demographics affects all economies, those with rising populations have greatest demand for housing, food, water and the other essentials of life, and when economics fails to meet those requirements, people look for scapegoats. Those with the most usually get the most scrutiny and criticism.
But to get back to the title of this piece, where will this ultimately lead us?
As Vladimir Putin, and Xi Jinping, grow their economies, and grow increasingly wary of U.S. dollar hegemony their actions have consequences for all of us.
China has in recent years agreed bi-lateral trade deals with a rising number of countries to reduce the dollar from its trading, and China in particular has used its excess dollar reserves to buy increasing amounts of Gold and Silver, and overseas resource assets with precious metals and other precious resources for its industries.
Russia too has sought to lessen its dependence on dollars, and the BRICS Development Bank recently announced, will wean these emerging economies off the dollar as the $100billion in Capital gets used to help out economies in difficulties. Will some of this capital be used to buy Precious Metals? It would appear so, as China now trades more Silver in physical metal form, than the COMEX, the former leader in precious metals derivatives trading.
This will ultimately lead to a dollar collapse, and like a wounded animal, this may lead to the U.S. lashing out to protect its interests, as it has been in the middle-east and in Ukraine, where fights to protect access to middle-eastern oil, paid for with dollars, and for access to Ukrainian agricultural land are being waged by proxy military. But the collapse of the dollar unless mitigated by the increasing energy production, may cause the whole world economic woes, or worse.
This involvement in the middle-east has caused many of the problems as those with a different view of the world seek to eliminate western ideologies from their countries. These skirmishes though, may grow to encompass those other major economies – China and Russia.
James Dines, the economic mind behind the Dines Letter and Dr Paul Craig Roberts former adviser to Ronald Reagan, also thinks that we are on the verge of a major conflagration and James Rickards a CIA adviser on financial matters, in a recent interview claims the U.S. is staring down the barrel of an economic gun.
But also in January 2014, the United States government entered into a deferred prosecution agreement with JPMorgan Chase which is the biggest bank in the United States and one of if not THE biggest banks in the world giving those who have benefitted most from the financial mess the U.S. has gotten itself into essentially a free pass.
The recent prosecutions of Financial Institutions has resulted in fines being paid, and JPM – probably the biggest offender, has paid approximately $29 billion in fines – yet not one senior banker has done any jail time.
When Janet Yellen begins the next round of Quantitative Easing (which might be called something else) all hell will break loose in the precious metals markets.
Buying Silver… Why NOW?
The reasons are not so obvious.
Silver is collectively, a monetary metal, an investment vehicle, and an industrial material.
Silver’s role in international finance has been prominent over several millennia, as this shiniest of metals was used in Roman currency, and only when Emperors devalued the money by reducing the silver content of coins, did they suffer the wrath of the people. (See: The Coming Battle – 2013)
Industrially, silver is the most widely used commodity on the planet, reputedly used in 10,000 applications and rising. Second only to oil in importance, but its price has been walked lower for decades, as silver was first taken from its pre-eminent role in both American and Chinese money with its removal from the dollar, to junior partner, to minimalist role, and finally in 1964 to negligible role as U.S. currency removed the last remnants of the metal from American currency.
Is it significant, that just 7 years later, on August 15th 1971, the last vestige of precious metals, was removed from the American financial system?
If the death of President Kennedy, and Louise Auchincloss Boyer are anything to go by, I think so.
But silver’s western denouement, means that the East has been able to accumulate this most precious of precious industrial commodities at prices unlikely to be seen again, after this financial collapse begins in earnest.
Silver historically was bought in ratios circa 16:1, compared to gold. We see evidence of this still all around us – 16 ounces to the pound, in the U.S. – 16 fluid ounces to the Pint and this ratio has varied in recent years as silver’s role in monetary matters has been slowly extracted, but its time will come again – it always does…
And with the current Silver/Gold ratio of circa 65:1 when it does go up, because it currently comes from the earth at circa a 9:1 ratio, then its rise will be meteoric.
And if that wasn’t reason enough to be accumulating…
These links should help you make up your mind…
And this page shows you were you can STILL buy silver coins and bars at VAT free prices, and have them discreetly shipped to your door.
And you can get further news on these matters at:
I am reminded of the above childhood refrain from days spent playing “Hide and Seek”, with regard to the economic malaise that I and many others foresee coming to a country near you in the not too distant future – whether YOU are ready or not.
Harry Dent, of Dent research, thinks we are in for a period of deflation, and even prophesizes that the markets and Gold price will tank with Gold possibly heading down to $750.00/oz, with a major stock-market correction in 2014. And Goldman-Sachs has re-iterated its forecast that Gold will drop to $1050.
Seven years ago, Mike Maloney of GoldSilver.com, had a more nuanced grasp on monetary matters, even if Harry Dent perhaps understands economics and Demographics better. Mike Maloney suggested we would have minor inflation first, followed by a period of deflation, which will initiate a Central Bank helicopter drop of currency, and THAT would bring about the final epic period of inflation which will bring about the new financial order and even perhaps the New World Order, that so many seem to have been prophesizing.
Former Fed Governor, Ben Bernanke was famously called Helicopter Ben, for suggesting that in extremis, a committed government or Central Bank could create inflation by dropping currency from a helicopter. It is a tag he has never quite lost. And Janet Yellin seems to be Bernanke’s biggest protégé.
For me, I choose to follow my instincts and try to wind my way through the differences of opinion. I am also a great believer in history repeating itself. Especially when the same or similar circumstances prevail.
Demographics drives personal spending patterns, as Dent has proved, but Central Banks and Governments have a habit of reacting to those events. Some, like the Americans and Europeans, lend that newly minted Central Bank money to the Senior Banking sector, in the vain hope that the banks will lend that money into the economy. (Or merely to prop up those banks?)
Governments spend money on infrastructure projects, which they are pretty certain will boost the economy. Witness the Tory Government of Margaret Thatcher giving the go ahead on the Channel Tunnel project during the 1980’s, and Britain’s New Labour Government giving the go ahead to the group that built the “Millennium Dome” (now the O2 Arena). And the current coalition’s attempts to make big infrastructure gestures with the HS2 – High Speed rail Link from London to the North West, and a new Airport for London, or an extra runway at London’s Heathrow are also in the mix.
But of course we know that when politician’s spend with one-hand, they take in taxes with the other. And that usually means you and me get to spend less on things we consider important to us.
Of course there can be an antidote to all this, and that is to improve one’s lot by saving and good investing, particularly in tax efficient investments.
The last time we had a similar set of circumstances was in 1975/76, as the inflation rate that had risen to almost 27% the previous year, fell to 8-9%, considered acceptable by many at the time.
Of course back then, this inflation prompted Tesco, to ditch the Green Shield Stamps of yesteryear, and to plan a new strategy with deep discounting, which was planned for 6th July 1977 in “Operation Checkout”.
Over the Week-end of the 4th and 5th all their stores were re-priced, and the stores became like a light to moths and other night-time flying insects. Turnover all but doubled in many stores. But of course it was the demographics that was driving the economy.
Given TESCO’s recent results, will they repeat this exercise to compete with the new kids on the block – Lidl, and ALDI?
During the late sixties, western countries had large numbers of retirees, born at the turn of the century in the late Victorian and early Edwardian eras, who fought in the 1914-18 war, and again in 39-45. These 60+ year olds were now retired and retiring in droves, spending their retirement proceeds, as they sold their pension accounts to buy bonds, driving down interest rates and stock prices with equal aplomb. These retirees who had fought – some in TWO World Wars, felt they deserved the relaxed retirement that they were promised. The world fit for heroes.
However, just as recently, in April 2012, the number of retirees in the U.S. reached 10,000 per day as those born in the aftermath of the second world war – the baby-boomers, began retiring in huge numbers, but the early retirers had already been selling their stock portfolios (or their pension companies were) as early as 2003, as the oldest ones retired at 55 or just after.
Those with a fixed lump sum to spend, put deposits down on the already rising property market, and helped in the “buy-to-let” boom of that period, and just as the profits made by the NASDAQ investors in the late 90s, also put their winnings into property, Banks were lending outrageous multiples to people in low income areas.
The Fed and government’s actions have been an attempt to mitigate these affects on the economy since. And foreign wars in foreign lands (as long as not too many of “OUR” boys get killed), is one way of keeping the economy ticking along. Economists call this the “guns and butter economy”, as an economy cannot direct resources to both with equal measure.
Anyway, as I was reading another blog, that talked about investments and the US Bond Markets, it mentioned the Fed’s requests to other nations – Belgium – to be precise – who apparently have been pressed into supporting the dollar by buying T-Bills, in the absence of the Fed, to keep interest rates from spiking, which would cause another recession, but as I read this, something crossed my mind.
What if Russia and China now decide to abandon the dollar for commodities sales to non-western aligned countries – say with Vietnam? Iran? Or how about Brazil? India? And what if others followed suit causing a run on the dollar?
This could cause an all out dollar crisis, necessitating a hike in interest rates, that would be painful to watch. But it might also stress the system and induce the hyperinflation that many fear – myself included.
Of course, if you read the book “The Coming Battle” you will know that the Fed made surreptitious loans to 20 major Banking groups in Europe of $15 TRILLION, in total – interest FREE, during the heat of the last financial crisis, and they may be now calling in that favour – requesting that these Banks buy Fed debt, to support the dollar, keeping the Gold price in check.
But, if Russia decides to avoid the dollar, then all bets are off
In my last post, I mentioned that Gazprom, would under different circumstances be possibly a good investment opportunity, and then I remembered the sage advice of Baron Rothschild in his oft quoted phrase: “Achetez aux canons, vendez aux clairons”.
For those who don’t speak french, it means figuratively – Buy on the sounds of the cannons, sell on the sounds of triumphalism (or trumpets). Put more simply, “Buy when the war starts, sell when it ends.”
Now I’m not suggesting you put 100% of your portfolio into Gazprom. But if you do your due diligence, and research the MICEX,(Moscow International Commodities Exchange) there will be opportunities, and/or some of the other Russian behemoths, that might benefit from “the return to the mean”, and there could be money to be made.
Anyone who has been investing for any length of time, knows, or will have heard, that on the average, stock prices rise in line with growth in the economy. When they temporarily exceed this price, they fall, and where they are below the average they will at some point return to the average (the mean).
Of course as many of my recent posts will no doubt have showed, the amount of currency being injected into the economy at any particular point in time, can affect certain asset prices. Of course when cash is tight (as in a recession) bank lending goes down, and thus asset prices reflect that lowering of available capital. And when banks have money to burn (so to speak) then lending goes up, and so do asset prices – particularly stocks and property.
Of course the banks take advantage of this, by lending when asset prices are cheap, and forcing foreclosure (where they have to) when interest rates become high. (which of course, they control)
Warren Buffet also known as “The Sage of Omaha” advises to buy when an asset is cheap, and to sell when the asset is dear, and has said – “Be greedy when others are fearful, and fearful when others are greedy”.
Of course the good sage also buys businesses that will never be sold, but ensures good management manage the business and give a good return on his investment. His last maor purchase that I am aware of was H. J. Heinz, of 57 varieties fame.
He also made major purchases in American Rail infrastructure, in light of the production of tar-sands, and shale oil and gas from the Bakken oil fields in Montana, and Wyoming, and north of the border in Canada which will have to be moved to refineries in the south. And given the size of the finds, this will guarantee regular shipments for years to come.
Another of Russia’s behemoths, and one slightly less well known than its bigger brother but also worth a look is Rosneft.
However, a precipitous fall in the dollar will force many stocks into freefall on international valuations, and force those who hold dollars to flee the dollar also, but into what? Probably GOLD and SILVER.
Grant Williams, who is portfolio manager of the Vulpes Precious Metals Fund, also spoke about exactly what will cause this historic rise in the gold price, as well as what it will mean for the global financial system.
There are reports out this week that the BRIC nations are going to set up a version of the IMF and a BRICs Development Bank, which could trigger the collapse. The amount of trade now being done in Yuan directly between the Chinese and their trading partners, is all a move away from the dollar, which will over time weaken the dollar’s rule as world reserve currency, and with it the U.S. Empire.
Williams also thinks the Russians want to swap oil for gold because they want to bring back gold as a monetary asset. They just want gold, and rather than swap their oil for dollars or roubles, they would rather have gold for it, and they are absolutely right to do that.
From the view, from 30,000 feet as a Central Bank, they can make those decisions. And Williams guarantees the Russian central bankers, who are in charge of their gold policy, are not worrying about whether the price of gold is $1,300, $1,200, or $1,500. They don’t care about that. They just want to own the gold. And so they are going to keep doing these deals that enable them to acquire more physical metal.
At some point, when all the smoke is cleared in the paper markets, like it did during the London Gold Pool in the late 1960s, once that gets righted, then we will know what the right price is for gold.”
We know the London Gold Pool ended finally when France and then Britain asked for $3billion dollars worth of Gold in place of the depreciating dollars, just 4 days before Nixon closed the Gold window for good (even though, he said it was temporary).
Will that happen this time? I doubt it, the U.S. and European Banks are too intertwined.
But Russia’s and China’s Banks?
Now they could do some serious damage.
But an even bigger threat comes courtesy of a number of major actors in the formation of the internet – though they didn’t know it at the time…
As events in Ukraine spiral out of control, it is possible that in the absence of a thawing of relations between Russia and the U.S., over the Ukraine, a new cold war could be about to emerge.
Particularly as the Ukraine, gets its gas from Russia, and currently owes the Russian Gas Giant – Gazprom over $2.2 BILLION in unpaid bills.
However, all this turbulence in eastern Ukraine, with Russian defenders of their cultural identity, that have stormed Local and Regional government offices, will possibly force Putin’s hand to defend these ethnic Russians which could draw in western forces to defend its supported government in the west of Ukraine.
For Ukraine whose currency has depreciated in value by 27%, since the troubles began, this could spell disaster for the country and its people. The gas bought from Russia was purchased at the highly advantageous gas prices that Gazprom gave to former CIS/Soviet states.
As Gazprom increased its prices to above market rates to Ukraine, to reflect the risk of failure to pay, and to recoup lost income, it is obvious that naturally Ukraine would be upset. Wouldn’t anyone if their energy bill went up 300%? And this has implications for Ukrainian industry, already not as well developed or efficient as their western counterparts.
Aleksey Miller – CEO of Gazprom, Russia’s biggest energy supplier, which in different circumstances would be a huge investment opportunity, suggested that Russia should abandon the Dollar and use the Euro for the international sale of GAS.
Even Christine Lagarde, Managing Director of the IMF, weighed in on the subject of Ukraine, by admitting in an interview on 2nd April, that the problems in Ukraine could affect the global economy.
Of course the Soviet state, went through its own internal challenges in the late 80s, as the commodities prices fell. Russian tanks and soldiers were embroiled in Afghanistan, and the Soviets spent more than they earned, the end result was the end of the Soviet Empire.
Are there parallels today for the U.S. empire? I suspect so – only their printing press has saved them. But will Chinese Gold cause the U.S. empire to collapse? We shall see…
As American and other nation’s troops are stationed in the Far East to – as Hilary Clinton put it – pivot Washington to the Far East, which drew the statement from a senior Chinese military figure, that “Chinese containment” was not possible.
As the raw materials of life have become more important, both Russia and China have used different strategies to achieve similar results.
Russia and the Global Metals Supply Chain
Both Russia and China have large land-masses, and the potential for commodities production. Russia is an important commodities giant. and Russian output is critical to the global supply chain for many items.
Russia is a major producer and exporter of oil, natural gas, ores, refined metals and industrial minerals. According to a recent analysis by the British firm Roskill, the extractive, energy and chemical sectors are vital to the Russian economy and accounted for an estimated 80% of Russian export revenues in 2013.
It’s important to recognise though, that Russia’s commodities are important on several levels. Russia is more than a major producer and exporter of energy and materials; Russia is an important player within Western supply and product chains. So, targeting Russian companies has the potential to provide blow back on Western businesses and economies.
For example: Nickel is much more than a 5 cent piece in people’s pockets. Nickel is critical to manufacturing stainless steel and a lot more. Nickel prices have pulled back in recent years as supplies have had to adapt to lower global demand, but picked up in recent weeks as commodites prices turned around, and Indonesia, imposed restrictions on exporting raw ore.
One of Russia’s big players, Norilsk Nickel, extracts ore in Russia but refines its product in Finland. Overall, Russia is the world’s second-largest producer of nickel, after China. But since China consumes most of its nickel domestically, this leaves Russia as the world’s key “swing” supplier. In 2013, Russia accounted for 26% of global nickel cathode exports, or around 13% of total world consumption of nickel. Without Russian nickel, the world’s steel industry would be quickly disrupted and prices on international markets would rise, possibly steeply.
Cobalt: Although Cobalt is found in many African countries, Russia is an important supplier. Cobalt, is used in steel and alloys increasingly with military applications as it is used to harden steel based alloys for armour piercing shells, and military vehicles as armour re-inforcement.
Russia accounts for about 6% of global mine output of ore and 3% of global refined output. Most Russian cobalt production is related to Norilsk operations in Finland, where cobalt comes out of nickel production. At 6% and 3%, as noted, Russian cobalt numbers are relatively low overall, but the point is that if Western sanctions somehow choke off Norilsk operations in Finland, we’ll see the impact on global availability of refined cobalt which would only add to military hardware costs.
Vanadium: Russia is the world’s third-largest producer of vanadium – providing about 10% of the world’s supply. Vanadium is critical to hardening steel and other alloys and is a key element for the future of utility-scale storage batteries. If vanadium supply takes a hit, all manner of metal and energy projects could be disrupted. Though a small miner – American Vanadium – is about to commence mining operations in the U.S..
Tungsten: Russia is the world’s second-largest producer of tungsten (behind China) and accounted for about 6% of global supply in 2013. Don’t be fooled by that low raw number, though, because about 70% of global tungsten is a Chinese play. So that Russian 6% “global” statistic is really about 20% of what’s available to the world outside of China. Tungsten is critical to building machine tools as well as manufacturing drill bits. In essence, tungsten is used for requirements that call for hard, dense metals with high melting points. Europe is a major tungsten importer from Russia, and much European industry will have to scramble to make up for any loss due to sanctions.
Titanium: Russia is a large supplier of aerospace-grade titanium to both the U.S. and Europe, accounting for about 12% of imports. Two important buyers are Boeing and Airbus, whose operations could be slowed by lack of titanium supply, certainly in the short term. I’m guessing you can see a trend here?
Rare Earth metals may also be included in this list of essential resources that modern economies cannot do without and that are sourced, at least in part in the former Soviet Empire.
Will Russia Look More to the East?
I could go on with other energy and materials that come out of Russia, but you get the point. Western politicians may feel like they have to “do something” about Russia annexing Crimea. but they have to be careful to not bite the hand that feeds them.
For our purposes, on the investment front, one potential result of Western sanctions will be to give Russian leadership even more incentive to look east, toward Chinese markets. China is a major consumer of many raw materials and refined products and would likely be able to buy and use Russian materials that no longer move west.
Different commodities will move in different ways, of course; some more than others…
Is China’s growth story about to unravel?
David Stockman writer for the Daily Reckoning, says: China is in the greatest construction boom and credit bubble in recorded history. An entire nation of 1.4 billion has gone mad building, borrowing, speculating, scheming, cheating, lying and stealing.
The source of this demented outbreak is not a flaw in Chinese culture or character – nor even the kind of raw greed and gluttony that afflicts all peoples in the late stages of a financial bubble.
Instead, the cause is a kind of monetary madness with an oriental face. Chairman Mao was not entirely mistaken when he proclaimed that political power flows from the end of a gun barrel – he did subjugate a nation of one billion people based on that principle. But it was Deng Xiao Ping’s discovery that saved Mao’s tyrannical communist party regime from the calamity of his foolish post-revolution economic experiments.
Just in the nick of time, as China reeled from the Great Leap Forward, the famine death of 40-60 million people – depending on whose figures you use, and the mass psychosis of the Cultural Revolution, Mr. Deng learned that power could be maintained and extended from the end of a printing press – just as Western Bankers did 200+ years ago. And that’s the heart of the so-called Chinese economic miracle. Its not about capitalism with a red accent, as the Wall Street and London gamblers have been braying for nearly two decades; its a monumental case of monetary and credit inflation that has no parallel.
Will Hutton who wrote “The Writing on the Wall.” (an ironic play on the Great Wall of China) suggested back in 2007, that the mixture of capitalism and political direction, would eventually lead to a collapse in China’s economy, when investments, and prices were centrally controlled, because the market mechanism of the free flow of information in markets – the price signal – and “Contract Law” is a requirement for all modern capitalist economies to function properly.
Perhaps our own politicians and Bankers would do well to remember that too, as they force Bullion Banks into manipulating currency prices by manipulation of interest rates, and precious metals prices, but I digress.
At the turn of the millennium, credit market debt outstanding in the US was about $27 trillion, and they’ve hardly been slouches in attempting to borrow their way to prosperity. Total credit market debt is now $59 trillion; so America has been burying itself in debt at nearly a 7% annual rate.
But America has been out-banked – to coin a phrase. In 2000, China had about $1 trillion of credit market debt outstanding, but after a blistering pace of “borrow and build” for 14 years it now carries nearly $25 trillion. BUT, this stupendous 25X growth of debt occurred in the context of an economic system designed and run by elderly party apparatchiks who learned their economics, when Chairman Mao was still alive. That said, the country sent highly educated senior communist figures around the world to study other cultures, and political and economic systems, so it is possible they have learned something since then.
However, it is probable, that there is no legitimate banking system in China – just giant state banking bureaucracies which are run by party operatives and a modus operandi of parcelling out quotas for national credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages.
There have never been any legitimate financial prices in China – all interest rates and Foreign Exchange rates have been pegged and regulated to the decimal point; nor has there ever been any honest accounting either – loans have been perpetual options to extend and pretend. Even the Yuan was pegged to the dollar at 8 to the dollar, until an agreement to enter the World Trade Agreement meant they had to freely float their currency by 2015, and China has allowed the Yuan to strengthen to circa RMB6.5:$1 – and is also behind their drive to collect as much gold as they can.
However, in two short decades, China has erected a monumental Ponzi economy that is economically rotten to the core. And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $10 trillion dollars during this century alone — that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison. Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies. When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief – a courtesy that the regime has invariably granted.
Since 2000 China has 1.5 billion tons of steel capacity, but “sell-through” demand of less than half that amount and, on-going demand for sheet steel to go into cars and appliances and rebar into replacement construction meaning the other half is produced merely to go into surplus storage – once the current pyramid building binge finally expires.
The same is true for its cement industry, ship-building, solar and aluminum industries – to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping malls and new cities.
Will this ultimately lead to a price and economic collapse? Probably, but WHEN?
In short, the flip-side of the China’s giant credit bubble is the most massive malinvestment of real economic resources – labor, raw materials and capital goods – ever known.
Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and steel erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Pyramid scheme.
China has been on a wild tear heading straight for the economic edge of the planet – that is, monetary “Terrain Unknown” – based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.
Thus, local government’s have meager incomes, but vastly bloated debts based on stupendously over-valued inventories of land. Coal mine entrepreneurs face collapsing prices and revenues, but soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stockpiles of copper and iron ore at prices that are already becoming ancient history.
Is this factored into China’s Plans for Empire, so that if – IF – a third world war begins, most of the materials will already have been purchased and produced, and once their currency is re-flated due to their large Gold holdings, they can buy what they need with the world’s strongest currency?
So China is on the cusp of the greatest margin call in history? Or the precipice of the biggest long term plan for global domination the world has ever seen?
Only the Chinese political class know the answer to that one.
But a Chinese market collapse would seriously affect all the world’s economies, and the Chinese have the biggest savings on the planet.
Cracks began showing in this edifice when a bank run began at Jiangsu Sheyang Rural Commerce Bank last month, as worried citizens clamoured for their money when a withdrawal for RMB200,000 (about $32,000) was refused at the Sheyang branch.
This was on the heels of the failure of several shadow banking institutions whereby several rural co-operatives and Farmer’s Credit Unions failed in recent months.
However, once asset values starting falling, these pyramids of debt will stand exposed to withering performance failures and melt-downs. Undoubtedly the regime will struggle to keep its printing press prosperity alive for another month or quarter, but the fractures are now gathering everywhere because the credit rampage has been too extreme and hideous. Maybe Zhejiang Xingrun Real Estate which went belly up last week was the final catalyst, but if not, there are thousands more to come. Like Mao’s gun barrel, the printing press has a “sell by” date, too.
Worryingly, a Chinese man was arrested for spreading rumours/information about these financial problems.
Of the more than US$562 million (RMB3.5 billion) that it owed to debtors, US$112 million was borrowed from 98 private parties with annual interest rates of up to 36%, according to recent revelations from Chinese media. Under that kind of pressure, the only surprise is that the default didn’t happen sooner. The company struggled to find capital for years; the chairman is suspected of borrowing up to US$38.6 million with “fake mortgages.”
But before Xingrun gets branded as China’s worst small, private homebuilder, it’s important to understand how it ended up in the mess in the first place, and what specific factors brought the operation down, or at least to the brink of collapse (local government officials insist it hasn’t officially defaulted yet).
Xingrun’s business in Fenghua, a county-level city that is part of Ningbo in a manufacturing belt on China’s east coast, ran into trouble through a renovation project starting in 2007, Chinese media pointed out. The company attempted, after securing government support and taking over for another distressed local property company, to build high-rise apartment blocks in a village called Changting. The project required the company to build homes for the original residents before the existing village could be torn down and the new buildings built. Construction was slated to start in the first half of 2012. Xingrun projected that it could pay off its debts within three years.
The project never got to the construction phase. In fact, the small village homes are still standing. Xingrun built the replacement homes for the villagers but there’s no sign of its main housing product, high-rises. Nothing has happened because the residents of the village have tangled the project and the company in a lawsuit that has stretched for years.
High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago. That explains why Xingrun was unable to pay back its loans. But why has it come so close to keeling over now? Its troubles with the Changting project persisted for years but the company simply rolled over loans and borrowed at high rates from private lenders.
One problem for capital-strapped developers in the Ningbo area is that private lenders no longer want to lend to highly risky companies. In fact, they are calling in their loans. This is just one of the problems afflicting Xingrun. The value of property in some areas of Fenghua is decreasing and that trend has lowered confidence in developers’ ability to pay dizzyingly high interest rates.
Banks aren’t hot on lending to this kind of developer either. In the past, a developer such as Xingrun could ask the local branch of a commercial bank for more credit. The local branch would take that risk because loan officers there knew that, somewhere much higher up the chain, officials promoted the lending.
That support exists no longer. Now, when small developers beg local banks for credit, they will likely be turned away. Local bank managers are reportedly being told that they may lend to risky borrowers if they wish, but they will be held accountable.
High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago.
Fenghua is a small town, and Xingrun’s reach beyond that area is limited. Analysts have come out strong in saying that such a default has little systemic risk. The bigger picture in the region, however, can’t be ignored.
Xingrun’s woes are still the woes of the local authorities. The default will add US$305 million (RMB1.9 billion) to Fenghua province’s non-performing loan portfolio, pushing up the rate of toxic assets to 5.27% and making it Zhejiang province’s most indebted government, according to calculations by The Economic Observer newspaper.
Add Fenghua’s problems to those of the The greater Ningbo Liberty Silver region. The area reportedly has at least six years of housing stock either sitting empty or under construction. The massive buildout will put small developers under great pressure to pay back loans, especially if private debtors are calling in high-interest loans. A slowdown in property prices won’t help either. Without a rescue from provincial-level banks, Fenghua won’t be the last local government stuck in a jam.
So what is The Coming Battle?
It will be between depositors (the people) and the Bankers when the next economic collapse occurs – far sooner than most people think. Crypto-Currencies, do not rely on Banks to transfer value between individuals, or between people and businesses, and will increasingly mean the Banks wield less power over the economy, and the state, but this means that many governments will want to outlaw them. However, if you feel you want to find out a little more on the subject at Review Outlaw.
And, you can get some free currency – HERE.
Of course if you have spare capital, putting some of it into precious metals with no counter party risk – that is – hold in your hands metal… would be considered sound advice, and if you want to know where you can buy these wonderful metals – try HERE.
Addendum: 12 April 2014
Since this piece was researched and written, the PBoC (People’s Bank of China) has agreed to provide RMB1,000,000,000,000 (1 Trillion – Renminbi/Yuan) about $153 Billion to provide increased infrastructure in rural communities, improving roads, agriculture and local amenities. So the end speculated on, won’t be happening soon; but someday the spending has to stop. (or not rise quite as much) to rein in inflation, which will probably now happen circa 2018-20.
The west too will probably make one last attempt to stave off the inevitable collapse, resulting in the final outburst of inflation. Bankers will be held to account by the people, and the result will not be pretty.
And the final analysis, will compare Precious Metals with the number of Dollars, Yen, Yuan, Pounds, and Euros in circulation.
Silver which is my favourite precious metal, is so oversold as to be the best buying opportunity for anyone with money to invest, and time to wait.
The above chart tells its own story. The MACD (Moving Average Convergence Divergence) shows when we can expect a turn in prices. When it’s high, the price turns down, and when it is low, the price turns up… You have been shown the future.
The below film, tells of The Coming Battle.
And here’s more evidence of what’s likely to follow.
“There are none so blind,
as those who will not see.”
What do YOU see?
Sometime in the not-too-distant future, China is going to do something, that will likely directly steal up to 40% of your wealth… IF, you do nothing about it.
It is probably going to affect you, your job, your family, your investments, your savings, your retirement, your home, and your whole future.
What happens, will be like the earthquake that happens 5 miles down on the floor of the Pacific Ocean, that lifts the ocean floor a few feet on one side of the tectonic plate, and that event will not be felt for hours, days or even weeks later. Hardly anyone will notice it immediately. Nobody will wake you up one morning, and say you need to do ‘X’, and no-one will protect you from what is going to happen.
That surge of water, will start out slow at first, but with gathering strength, it will travel across the ocean, and as the sea becomes shallower towards the shore, so the wall of water will rise – higher and higher, until like a Tsunami it eventually crashes ashore. Like the Tsunami, that created the Fukushima disaster in 2011, nothing will be the same ever again.
Interest rates around the world, will probably rise a little at first, then alarmingly. Mortgage rates will go up in the U.S., Europe, and Britain, as the value of the dollar, then your currency – falls. House prices – which have risen so much in recent years – will fall, perhaps by 40% in many areas, and as much as 60% or more in the worst affected areas, and the economic turnaround, that so many have pinned their hopes on, will grind slowly to a halt, and possibly even reverse. Bond prices will plummet. And the stock-market will lose the gains made in recent years.
Nothing will stop this, and there isn’t anything you can do to stop it.
A decade in the making, this event will disrupt many aspects of normal British, European and American life, with potentially devastating results.
The United States is stuck with an enormous debt, that they can never realistically repay… and Britain and Europe are almost as bad. China (by far the US’s largest creditor), now holds nearly $1.5 trillion worth of loans to the federal government, and is stuck with an outstanding loan they can neither get rid of, nor collect on. The Chinese and the Americans realize they are both trapped in a mutually executable stranglehold, and neither can easily let go.
So the Chinese government is now taking a somewhat secretive and radical approach.
Maybe you don’t care about international debt, currency wars, or battles between the world’s most powerful central bankers. (And if so – why have you read this far?) But this is one time you should.
There’s one very important reason for you to be concerned about what China is planning next. This plan will extract enormous sums from both the United States government, and ordinary hard-working, mortgage paying, credit-card spending people like you.
And you may be thinking, “How could the Chinese government actually keep something as big, important and potentially game-changing as this a secret?”
Well, the truth is, they haven’t.
And pretty soon, the world will see that China has been playing the U.S. like a fiddle.
For more than a decade, the Chinese government has published reports about the existence of this secret program in official, state-controlled newspapers and wire services. Officials have even publicly demanded more money for its development.
In fact, in early 1990s, the Chinese government began quietly laying the groundwork for their new financial weapon, making a series of dramatic changes to their financial system. The moves were announced in China’s official newspaper, but were barely noticed in the West. In a review of hundreds of articles in a historical database, the only mention was a 148-word item published in the Wall Street Journal on October 1st, 1993.
In 2000, they made the development official as part of China’s Quinquennial [five-year] plan, the country’s most important policy document. China’s CCTV called it a “pivotal year”.
A top private sector official with close ties to the government program called the developments from 2000-2008 “staggering.” Then came the biggest announcement
In April 2009, Chinese officials shocked the world with their announcement of the advancement of this new financial weapon, which had all but doubled its capabilities in six years, taking its place as one of the most powerful weapons of its kind in the world.
In 2011, the People’s Daily – an official propaganda mouthpiece for the Communist Government – reported plans for the program to accelerate even further.
In January 2013, a senior Chinese official was quoted by Bloomberg as saying the already powerful financial weapon was “too small” and should be built up further.
And, in October 2013, the Chinese government made its most shocking statement yet. The government used an editorial in its state-run news agency, Xinhua, to call for a “de-Americanised world” – a thinly veiled message about its intent to use this new and radical weapon against the United States – and with it – Europe and Britain.
But here’s what the Chinese government DOES NOT want you to know and what most major news outlets are afraid to tell you…
I believe that China could unveil this powerful “secret weapon” sometime in late 2014 or early 2015, but probably when they’ve achieved their interim goal of 10,000 tonnes. (All gold imported, is currently re-cast into 1Kilo bars)
Some financial commentators have said China’s financial attack will be “an earthquake.”
Business Insider called it “the elephant in the room” for one of the world’s most powerful market forces.
The Huffington Post wrote, “It’s amazing how little of the wider public are aware of what China is really up to here.”
Barron’s reports that the idea that China is developing this “ultimate stealth weapon” – once limited to a few obscure blogs – now “has a mainstream following.”
The US. government has essentially backed the Chinese into a corner, and they have left them no choice. The main thing the Chinese have kept secret is just how big their secret weapon is.
It is revealed in government documents that must be published, by law, in Hong Kong (now a Chinese territory) and by looking at where billions, even trillions of dollars are being shifted inside China – As any journalist will tell you, “Follow the money.”
Many believe we’ll see a major shift in the world’s monetary system. We will probably see a precipitous fall in the U.S. stock market, and a major disturbance of the U.S. mortgage and bond markets.
Most people are either too young to know, or too old to remember this, but the US., experienced something similar (although on a much smaller scale) in the late 1960s and early 1970s
After World War II, the U.S. dollar was actually backed by something real – instead of just a government promise. Back then, their currency was backed by real gold, and as a result, the U.S. government-owned two-thirds of the world’s gold – over 20,000 tons.
It wasn’t just a powerful national asset… It also formed the basis of the world’s financial system.
Every world currency was defined in terms of the dollar. And the dollar, in turn, was defined as 1/35th of an ounce of gold. In other words, it took 35 dollars to buy one ounce of gold.
This was supposed to keep the US., government from money-printing: Since dollars could literally be exchanged for gold, the government couldn’t just print all the money it wanted.
After the Kennedy administration, the Fed and the Treasury, asked the European Central Banks, to help prevent the dollar price of gold bullion on the open market from rising above $35.20. That is, whenever the free market price of bullion threatened to hit $35.20 the United States and the West European central banks would sell gold. If the price of bullion fell below $35 an ounce, they would buy gold.
But France would be the first to leave this pool.
It began in 1965, when French President Charles de Gaulle in a speech in February of that year, said that the US. owed the rest of the world a duty of care, to maintain its currency in parity with the agreed dollar price, and to not produce too many dollars. He later took $150 million of his country’s dollar reserves, and demanded that the paper currency be exchanged for U.S. gold from Ft. Knox.
(Here he predicts the crisis in 1965)
Of course, De Gaulle was simply doing the rational thing. even though he knew it would financially hurt so close an ally.
In 1971, De Gaulle actually sent a French battleship to New York, loaded with $191 million in cash to withdraw gold from the New York Federal Reserve bank vault.
And France was not alone. Spain also, redeemed $60 million of U.S. dollar reserves for gold. And many other nations followed suit. By March of 1968, gold was flowing out of the United States at an alarming rate.
It’s estimated that during the 1960s and early 1970s, the US., essentially gave away about 2/3rds of the nation’s gold reserves – around 400 million ounces.
And the news didn’t stop there…
On August 11th 1971, the British ambassador in Washington received instructions from London to redeem $3 billion of gold from the United States Bullion Depository at Fort Knox.
Then just four days later, August 15th, 1971, President “Tricky Dickie” Nixon, made an announcement that would send shockwaves around the world.
He announced to the American population, that he would “Close the Gold Window – Temporarily” and this Temporary Suspension notice has lasted 43yrs – so far.
Within about three years, America was in its worst recession since WWII, with an oil crisis, skyrocketing unemployment, a 30% drop in the stock market, and soaring inflation. And millions of Americans got a lot poorer, practically overnight.
In Britain in 1973, Labour Unions such as the Mineworkers, and Electricity power generation unions went on strike. Power cuts became commonplace as the three-day week took its toll on the British economy.
Inflation raged, reaching 26.9% in late 1974, just as the new Labour and Liberal government started their period in office – the Lib-Lab pact… Does this sound vaguely familiar?
By the end of the decade, Britain was watching helplessly, as government workers tried to maintain their living standards, and bodies piled up in morgues, while council workers let rubbish pile up over 3-4 feet high in London’s streets.
Shell Tanker drivers were the first to then beat the government’s pay restraint agreements, followed quickly by Ford’s car workers, and others would follow.
And the events of the 70s will probably be repeated, as that is EXACTLY what China is doing today, except this time, the stakes are much, much higher, because China is a much more powerful adversary.
China is now engaged in a fully-fledged “currency war” with the United States and the U.S. dollar.
China isn’t hiding this fact at all. A top Chinese central banker recently told China’s official, state-run news agency that the country is “fully prepared” for the coming currency war.
The ultimate goal, as the Chinese have publicly stated, is to create a new financial system, to dislodge the U.S. dollar from its current reserve role. Doing so will enable the Chinese to get back as much of that $1.5 trillion that the U.S. government has borrowed.
And here’s the most important part…
Understanding how the Chinese will execute this “currency war” over the next few years will likely mean the difference between the opportunity to make extraordinary sums of money, and potentially losing a fortune.
For the past 30 plus years, China has piled up a MASSIVE amount of U.S. dollars and other foreign currency reserves.
At first, the dollar inflows were small because trade between the two countries was tiny. In 1980, for example, China’s foreign currency reserves stood at approximately $2.5 billion. But since then, the amount of foreign currency held by the Chinese government has gone up nearly every year… and now stands at $3.7 TRILLION.
That’s a 146,300% increase! It’s simply astonishing, to look at the chart of the increase in currency reserves since the early 1980s…
When a Chinese business earns dollars by selling overseas, it hands that money over to the People’s Bank of China (or PBOC, the country’s central bank), in exchange for Chinese currency (called either the ‘Yuan’ or the ‘Renminbi’) at a fixed rate.
The group that manages these massive reserves is the “State Administration of Foreign Exchange” or SAFE.
And for the past few years, SAFE has had one big problem: What to do with so much money?
What SAFE decided to do with most of these reserves is to buy U.S. government securities (notes, bills, and bonds). Since 1980 their currency reserves have ballooned by 146,300%. Digest that figure…
China knows that as long as the US., continues to print and borrow unfathomable amounts, their U.S. dollar holdings will be worth less and less. So the Chinese want to trade their depreciating dollars for any “real” asset they can find that will better hold its value.
In 2013, SAFE did something absolutely remarkable.
They opened an office on Fifth Avenue in New York. This office had one purpose: “To invest in private equity, real estate and other U.S. assets.”
Not paper promises, but real things with real value that can’t be manipulated.
“The move by [SAFE], which oversees the world’s largest stockpile of foreign-exchange holdings, comes as it steps up its diversification away from U.S. government debt,” the Wall Street Journal reported.
Chinese companies are wise to this strategy, too. In 2012, the Chinese conglomerate Dalian Wanda bought AMC theaters for $2.6 billion. In September 2012, a Chinese company bought America’s largest pork producer, Smithfield, for a whopping $7 billion.
And now they have changed their target. Starting from a low base, the Chinese have been quietly accumulating Gold, to the point that in 2011, China became the world’s biggest Gold producer – producing 400 tons per year, and the world’s biggest consumer, importing more Gold than India, which has for generations been the world’s biggest consumer of Gold.
And every single ounce that gets produced in China – whether it’s dug out of the ground by the government or by a foreign company – must by law be sold directly back to the government. Not one ounce legally leaves their shores.
I believe China is trying to “corner” the gold market. Remember: “He who owns the gold, makes the rules.”
Richard Russell, a great financial historian, recently wrote: “China wants the Renminbi to be backed with a huge percentage of gold, thereby making the renminbi the world’s best and most trusted currency.”
The scale of China’s gold initiative is unprecedented in world history. This alone should make YOU take notice. And, China is signalling that the currency wars of the past decade are changing. Soon, the battle will be influenced by gold.
Here in Britain, America and Europe, Politicians and Central Bankers cling to the notion that their experiment with floating exchange rates and unbacked currencies will somehow save the day – but China suffers from no such delusion. It is voting with its wallet that the experiment has failed. It is preparing for the demise of the U.S. dollar, and with it the British Pound, and the Euro.
And what the Chinese government is doing right now will affect nearly EVERY Briton, European and American, in a big, big way.
Over the next few years, this may cause some assets to skyrocket, and others to plummet. Even if you decide to buy some gold itself, you need to know what to buy and this will obviously have major implications for you and me.
I believe with 100% certainty that the Chinese are now clearly on a path to accumulate as much gold as possible – as much as 10,000 tonnes, so that one day soon they will be able to restore the convertibility of their currency into a precious metal, just as they were able to do a century ago when the country was on the silver standard.
And China’s increased gold reserves will act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the Renminbi. [RMB – China’s currency].
China’s entry into the World Trade Agreement meant they have to float their currency by 2015, and the strength of that currency will depend to a large extent on how it is perceived on international currency exchanges.
China imports food, wheat, metals, oil and gas from all over the world, and a weak currency would sky-rocket inflation in the country, making angry Chinese people turn on their government in riots and with major social unrest. A strong currency will make food and raw materials cheaper, and Chinese autocrats fear the uprising of 1.4 billon people more than they fear anything or anyone else – which is why they crushed the Tiananmen Square riots with such ferocity in 1989.
In November 2010, China signed a currency deal with Russia for bi-lateral trade in their respective currencies, and in July 2014, signed a deal to buy Russian Gas. China has signed similar currency agreements with a rising number of other countries – UAE, Australia, Hong-Kong, Turkey, Japan, South-Africa, and Brazil to name but a few. And as of 19th March 2014, China added in the New Zealand dollar, as China begins trading in the national currency of yet another trading partner.
In a November 2010 report, HSBC, reported that by 2015, fully 50% of Chinese trade with emerging nations, will be conducted in their own currencies.
And to fully internationalize, their currency, China is importing over 100 metric tons of gold a month through Hong Kong. As Reuters reported, “China’s net gold imports from Hong Kong hit a record high of 136.185 tonnes in March. 2013”
Net Imports through Hong Kong exceeded 100 tons a month almost every single month in 2013.
They also imported well over 1,000 tons of gold from Hong Kong alone in 2013 – not including Shanghai. That number is up from 2012, when China imported a record 834 tons – in turn, nearly double the imports in 2011.
This data, of course, comes from the Census and Statistics Department of the Hong Kong government. The Chinese government, on the other hand, does not make such information public.
As Mineweb puts it: “China also imports gold through other routes, and total import figures now look likely to be nearer 2,000 tonnes. Some analysts put them even higher.”
When China last reported their gold reserves in 2009, they had “official” holdings of 1,054 tons. They’re now importing nearly double that amount in a single year.
And that doesn’t include the Gold purchased from the mining outfits that Chinese investment houses own outside of China, nor the alleged purchases from artisanal miners throughout sub-Saharan Africa, reputedly at 40 tonnes per month.
And as Business Insider put it last year, “China’s undeclared official gold reserve purchases remains an elephant in the room in the gold market with very little coverage of or analysis of the People’s Bank of China’s quiet and un-transparent accumulation of gold.”
China even had the audacity to partner with a U.S. company as it builds the gold stockpile that will torpedo the dollar. A company called Coeur d’Alene mines is selling gold produced at a huge new Alaskan mine directly to the Chinese.
“The gold concentrates produced at Kensington will be processed by China’s largest gold producer China National Gold through an agreement that is the first of its kind between a state-owned corporation of the People’s Republic of China and a U.S. precious metals mine,” Mineweb reports.
Keep in mind, Coeur d’Alene isn’t doing anything unpatriotic. They’re just selling their gold where it’s most in demand – China.
In fact, China offered the company a very sweet deal. Most gold producers have to wait 3 months while gold is processed and refined to receive payment. Coeur d’Alene is getting paid just seven days after shipment for raw “gold concentrate.”
Of course, not every ounce of gold that’s imported goes directly into the People’s Bank of China’s storage vaults. Some of it goes to industrial uses, individual investors, and China’s flourishing jewelry trade almost exclusively in 24 carat gold.
But no one knows how much the PBOC is absorbing. I believe it is at least 5,000 tonnes in total, since 2009, but could be as high as 7,000 tonnes.
What the markets do know is that China is importing thousands of tonnes and exporting ZERO. Every ounce of gold that goes into China stays there, like a black-hole, it just swallows up all that goes there..
And the Chinese government is now in the process of quietly buying up part or all of dozens of the best gold mining companies around the globe.
The government basically has a slew of investments in the gold markets, which it reveals as little information about, as possible.
For example, very few investors realize that China National Gold Group Corp (CNGGC) owns circa a 40% stake in an overseas investing arm, China Gold International. Resources Corp (listed in Toronto: CGG).
China National Gold Group is trying to vacuum up gold assets in Canada, Australia and Africa. Its latest move is a potential bid to take over the $1.7 billion Platreef mine in South Africa from a Canadian company, Ivanhoe Mines. It also bought a 95% stake in another Canadian company, Mundoro Mining, a few years ago. Even tiddler companies like Mwana Africa – quoted on the AIM Market in London, received a large investment for its Zimbabwean operations from the Chinese Gold investment community and investing in infrastructure to enable these reserves to be got to market – Chinese markets…
Most investors also don’t know that the China Investment Corporation, which manages $575 billion worth of government money, has major stakes in some of the best mining companies in the world, including:
* Anglogold Ashanti: 100,000 shares
* Kinross Gold Corp: 250,000 shares
* Gold fields Ltd: 350,000 shares
* Teck Resources: 101 million shares
Forbes ran a story following China’s 2009 announcement that stated China could amass some 5,000 tons of gold over 5 years. I would not be surprised if China amasses double that amount.
And, Jim Rickards, the currency expert who called China’s coming gold announcement “an earthquake,” believes they’ve already surpassed 5,000 tons.
He told an interviewer on RT:
“I have spoken to a number of sources in Asia. I’ve spoken to a number of people who are very close to the physical market, I’ve done my own investigations, etc. Every time I have an estimate and try to verify it, what I get back is that I’m wrong on the low side.”
The point is, when you look at the gold China already has in reserve… and look at what it controls that’s still in the ground… the Chinese might already have more gold than any other nation on Earth.
And , the Chinese government is reinventing both their own internal gold markets and also the international gold markets as well. Over the last few years they’ve purchased the London Metals Exchange, home of Gold and other metals buying, for over 120 years.
Also, in 2011, the Chinese made available the first yuan-denominated spot gold contract, called the Renminbi Kilobar Gold. Dow Jones MarketWatch reported that analysts see it as “a step toward making the Yuan a global reserve currency.”
In 2012, the Shanghai Gold Exchange (SGE) became the largest trading platform for physical gold in the world.
And in the last two years, they bought the LME for $2.1 billion, and even the former Headquarters of Chase Manhattan Bank – Chase Manhattan Tower, built in the 1950s by David Rockefeller.
What you might also not know, is that the building houses the largest gold vault in the world. Longer than a football field and anchored to the bedrock five stories beneath the city’s streets – and stong enough to withstand a nuclear hit.
How much more evidence do you need?
And when the inevitable happens, the price of gold will soar in all currencies. And now that more than 7/9ths of the world’s silver’s usage is for industrial use, the limited amount of available silver for investment purposes, will mean that when Gold rises, as it inevitably must, the silver price will be like it is attached on an elastic band to Gold’s coat-tails.
You can get a fuller picture of this in “The Coming Battle – 2013”, and you can still buy silver at VAT free prices from Here. And many expect silver to be an even better investment than Gold, with a climb towards a 10:1 price ratio between Silver and Gold a distinct probability – ten ounces of silver equal to one ounce of Gold.
Once China announces its Gold reserves, the blue touch-paper will have been lit, and the explosion that follows, is all but guaranteed.
Gold will rise inexorably like it did 40+ years ago, and silver, platinum, and other commodities will follow suit, including: wheat, corn, oil, gas, tin, lead, copper and all the other precious, and semi-precious metals that make up this modern world, and for a time, it will be hell, before the world adapts, just as it did almost 6, and 40 years ago.
But those banks that have extended mortgages in their tens of thousands, since 1998, may be forced to go to their respective depositors, investors and capital markets, “Cap in hand” or face the same fate as Bear Sterns and Lehman Brothers in 2008. The bail-outs of 2008, will become “Bail-ins” as happened in Cyprus. Money on deposit in these banks will become just part of the capital base of the Bank. Your deposits, will be their deposits, and the so-called insurance of governments on depositor’s money may be un-backed as governments are unable to cope in a world where Gold or silver has to back the currency.
And if you look at the image below, the chart of the Gold price, in the last fourteen years, is almost identical in shape to the chart of the mid-1960s to 1970s. And if the chart continues its replication, until 1980 and beyond… then you should be able to guess where the Gold price is heading next.
The time to act is now.
Until next time…
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Today’s rant is about Money…As the Fed, prints another 85,000,000,000 crisp new dollar bills, we have to ask…
“Where does that money go?” “Well, they don’t actually print that money do they?” Well, that depends on who you ask.
The money gets loaned into existence, so perhaps no, they don’t really print off that money, it just gets lent to the Government via an I.O.U. The Government gives the IOU to the Fed, who pays the government the money, then the Fed,, takes that IOU to the major Banks, They lend the money to the government at the prevailing interest rate (i.e. the discount rate), and the bond (IOU) then gets sold to the money markets who are essentially looking for a safe return on their surplus assets – you know, the money they don’t want to risk in the stock market, so that they can pay the pensions of those pensioners who have already retired, or the insurance companies, who need to have spare capital to pay out to claimants or for funerals etc..
The government of course get the money from taxes to pay the interest, (and the principal – that’s the money borrowed) and as long as the taxes covers the interest payable, the money markets really don’t give a damn.
However, when times are tough, and the economy suffers, the taxes the government collects go down, and their spending doesn’t, so the Fed steps into the breach, to fund the deficit. Of course when a government is fighting a war, it needs even more money, and of course people in the military do not produce anything, so they don’t add to the stock of goods in the economy. And despite their protestations, they don’t really pay taxes, though they see it going out of the pay packets – If I give you $100.00 from the Tax coffers, and you give me $10.00 back by way of tax – how have you paid a tax? All you’ve done is give me back some of the money that others have earned…(and that goes for all government workers by the way) Anyway, that’s another story for another day.
Sometimes though the government spends way more than the economy can really accommodate, and that disincentivizes people, who don’t start a business, or who move overseas to escape the high taxation. In recent years the U.S. has experienced an increasing number of people who are renouncing their citizenship and moving overseas to escape the high taxation.
Of course, the inventive ones search for ways to escape taxes, and of course there are those who think government should be a lot smaller.
And that leads me to the meat of this rant… A Japanese man Satoshi Nakamoto decided to try to escape his governments free spending ways and as a software developer came up with a way for people to exchange values without.money changing hands, and a way that wasn’t controlled by the government. That was back in 2008. In 2011. Bitpay Inc., the company was founded, and Bitcoin became a worldwide success. Initially the Bitcoin, traded at a discount. However, in the last year, the price has risen and fallen, and risen some more.
During the last few weeks, the price reached the dizzy heights of $700, and briefly touched $878. On a Max Keiser show the other day, Max interviewed one of the early adopters, who suggested that Bitcoin was the future, and that the far east had become its main focus of attention as it had been more widely adopted there. He added that the U.S. had reluctantly adopted it, partly for technology reasons, as certain parts of the country lacked the technological infrastructure.
Bitcoin has been seen by its evangelists as the antidote to Big Government, and a rein on their free spending ways, which ultimately will rob government of its fiscal recklessness. However, as the value of Bitcoin has risen, alternatives have begun to spring up. Litecoin, and upto 80 others have begun to vie for the attention of the value exchanges.
In my own locality, the local Bus Company has a no cash payment system known as MIDAS. Here you load up a pre-pay card, and then when you board the bus, you deduct the payment electronically, and thus don’t need to carry cash.
This is one more nail in the coffin of cash, its exponents argue, but as lots of other alternatives compete for the investment dollars of the world, we have to ask… Is this so?
What is money?
As I’ve said in previous posts, money has to serve several functions to really be useful.
Its most important function is as a store of value, though portability, durability, fungibility and is widely accepted as such are others.
Bitcoins, Litecoins, and the 80+ others might serve some of those, but how do we know for example whether they are limited in supply?
When we buy a Bitcoin, we are buying software. Software is just a series of magnetized elements on a storage medium – 0s and 1s. However the software is written by humans, and unless we can see the source code, and the source code of the compiler used to translate the human readable code into the computer code, then we can’t be REALLY 100% sure – Can we?. And given that we humans are a trusting species, we tend to take on face value when we hear that a company has carried out the necessary checks – we have a tendency to trust them.
But as we have learned in recent years there are organisations who have been less than trust-worthy. The Banks for example.
JPM recently agreed to pay $13bn, as a result of its misdemeanours. HSBC agreed to pay £1.2bn (circa $1.9bn) for money laundering offences in December 2012, and was also fined $2.5bn in October 2013, with 16 major financial institutions colluding to rig the LIBOR rates. HSBC is also alleged to have been the recipient of $15 Trillion for onward transfer to other Banks in Europe (The full story can be read in – “The Coming Battle” ) – during the heat of the 2008 crisis
Gold and Silver, are only less useful these days as money, because the Banks have colluded to lower their true value, by market manipulations. The Fed which hasn’t been audited since 1953 properly gave a cursory glance to journalists in 1973, but has resisted all attempts since. In fact stories abound that the true amount of Gold that they are supposed to be holding, is far lower than the 8,700 tonnes for which they have entries on their Balance sheet.
So, why would we trust a software house, with millions of shareholders to satisfy, to limit, the number of these crypto-currencies.
We can but ask.
My firm belief is that sometime in the next 2-3 years, the Chinese government will announce to the world, that it has stored in its vaults 10,000 tonnes of the yellow metal, and if, (or when) that happens, then our current world currency system will come to an end, and if a world currency is to be formed, at its heart will be precious metals. And the price to buy will be perhaps 8 times what it is now.
A period of tumult is coming.
Gold and Silver will protect those with the foresight to prepare for this eventual re-organisation. The Coming battle is for a limited time available – Sorry No longer available for FREE
Thomas Malthus, was a Reverend at the dawn of the Industrial Revolution in England. In 1798, he wrote an essay, “Essay on the Principle of Population”, which was concerned with the rising population, and theorised that improvements in subsistence would lead to higher growth in population, which in turn would mean competition for resources, wars etc, which would lower standards of living back to subsistence level.
Of course back then he couldn’t have envisioned the dramatic changes in technology, and the inventiveness of we humans, nor of the advances in food production, and at how much land has been turned over to agricultural use.
We see examples of this in countries where historically the people had large areas of un-developed land: For example, in areas such as Argentina, which has large tracts of savannah – open grassland – and Brazil which has huge jungle and forest areas.
This led Argentina to grow Beef cattle, which was ideally suited to their environment and during the early 1900s, Argentina was one of the richest six or so countries on the planet.
In the last few decades, we have seen how forests and jungles have been cleared in increasing proportions, particularly in Papua New-Guinea, and Brazil with their rising populations, and need for more cultivated land, but also the loss of habitat for native species, and a rapid fall-off in biological diversity. Brazil of course became famous for its coffee crop, and more recently sugar cane, which it uses ( after processing into ethanol, ) in its efforts to minimize its oil costs by using it in its Taxi fleets, and other vehicles.
But was Malthus that far wrong? Back when Thomas Malthus was alive, there were just one billion people. By 1927, there were 2 billion. In 1960, that became 3 billion, and by 1974, 4 billion. As of 1987, the population of the planet was about 5 billion inhabitants, and by 1999, that was 6 billion, in 2010, we passed the 7 billion mark, and those who make these predictions think we will surpass 9 billion by 2030-35, which means at current rates, we are adding 1 billion every 10-12 years on average.
With China announcing it will amend its one child policy so that those people who satisfy certain conditions, may have another child – this may drive growth faster. However, cultural norms which favour boys over girls, is precisely the policy which may lead to more men who do not have a partner when they reach sexual maturity, and this we know leads to higher sex crimes. But may also add to instability, and a political drive to find use for these men in the military.
But if this means more unemployment, and higher demand for food at a time of maximum worldwide output, is this a recipe for wars over resources? And as China increases its economic muscle, so it will increase its military muscle, and already there are rising tensions in the South-China seas, as Vietnam, Indonesia, Japan, and Philippines have rising demand for energy, and other resources which may be buried beneath this contested stretch of water, at a time that Chinese Naval vessels are patrolling and harrassing other ships in the area. Vietnam even mentioned its concerns in a broadcast on Vietnam’s Overseas broadcasts, which it is known that America monitors. Was this an open request for America to intervene?
Of course, back when Reverend Malthus was postulating, he studied rabbits, and of course mixamotosis cured that particular problem for decades when it first appeared in the 1900s. By the same token, wars such as WW1, and WW2 reduced the numbers of humans at a time of rising populations and lower economic activity, and have no doubt lowered the total populations that we see today. So, is therefore ,WW 3.0 almost inevitable?
If we study almost all “bubbles” from the South-Sea bubble of the 1780s, to the Dot-Com mania of the late 90s and early noughties, we realise that – as the old saying goes – “What goes up, must come down”. Does this apply therefore to populations? And if not, how do we cope with 10 billion plus people on the planet by 2050, given that the amount of land is finite, oil, gas, and other mineral resources particularly, take increasing amounts of energy and finance to find, but the biggest hurdles will be potable water, and food.
The unrest in the middle-east will be as nought if we do not as a species collectively address these hurdles. Many African countries have shared the vast river resources of the Blue and White Nile rivers, but what if one country through which the rivers pass takes more and more water for agriculture, and thus leaves less for those countries downstream?
In 2008, food riots broke out in 40 countries. Aquifers are currently being depleted at phenomenol rates, and many will be empty by 2025. What is less well known is that these take 6,000 years to fill, and it takes 1,000 tonnes of water, to grow 1 tonne of Wheat.
And just since the year 2000, water demand has surged 58% worldwide.
So, everything is about to get VERY expensive
Precious Metals too suffer from this, and one of the few ways to protect yourself from what is to come, will be to hoard those resources that do not diminish over time. – Which brings us back to money – Not currency – A piece of paper, is a piece of paper, even if it does have $100 printed on it. JP Morgan used to say “Gold is money, everything else is credit”, but Gold or Silver are also things of beauty, and when times are tough as we may be heading for, then possession is nine-tenths of the law, and the value of that money will be preserved during inflationary times. Silver too, is a fungicide, a bactericide, and virucide. Kings and Queens, would in years past only drink from Silver vessels – a way to make potable water?
As Central Banks and particularly the Fed, manipulate the precious metals markets, we see Art prices rising inexorably – just as happened in the mid 1970s. Those seeking a return on their capital or who wish to move their capital to an overseas market to limit their tax position, may pay for an art-work, and ship it overseas where some years later they sell at a profit, and pay less in taxes.
Pop art icon, Andy Warhol, had a piece recently sold at auction, at over $100million. The Art market is telling us a subtle truth – the dollar is losing purchasing power, relative to things – Art in particular. The time will come for precious metals too.
Speaking of which, I’ve been reading more bullish sentiment of late regarding Silver Prices…
A couple of PM specialists feel that the bottom has already been and gone, and that we might see a new yearly high this year, and an all time high next year.
Having commented already on where I think Gold will go elsewhere, I suspect (But hope I’m wrong) that silver will remain in the doldrums for another 2 years or so, before we see a new all time high.
As things stand, Silver prices are not just based on investment demand. Supply is variable based on other commodity production – it is a by-product of several other mineral production… Zinc/Lead/Nickel/Copper/Gold mining in many mines, which with increases in growth in other markets will stimulate production of these other commodities (and thus silver).
As the price at the moment is still just above where mines can be profitable, then there’s not much reason to cut back production. (New mines are a different matter)
That said, there’s lots of new technology, which should keep demand up – with 10,000 uses, and the most widely used substance after oil – and if investors still keep buying silver coins and rounds/bars at unprecedented levels, at these low low prices, then once prices start to turn up, this will suck in the wider investment community, and we will see the blow off phase. (the J curve where the price goes vertical)
Of course, when that happens, that might be the end of the Dollar, though the U.S.’s rising oil production may overturn that as fewer dollars head overseas to pay for oil, and thus as some of those dollars return home for software, and other high-tech products, then this may strengthen the currency.
That said, hopefully, we’re at the turning point for precious metals. Anyone interested in buying Silver at V.A.T. free prices might want to learn where and how they can do this – Here
As the Philippines begins receiving Aid, from around the world, yet another disaster occurs, this time on the other side of the planet, in the U.S., as a Tornado hits Tornado Alley – unusual for mid November (apparently). A number of deaths have been reported. Once again we watch from the sidelines, and furrow our collective brows, seemingly unable to do anything except show our sorrow, and pass on our good wishes to those involved, and our condolences to those who have lost loved ones.
Is it just better communications, and thus we’re hearing about these things more frequently, or are there simply more of these natural disasters? We can only speculate at this time.
The implications for money though should be obvious. Someone has to pay for the reconstruction and the damage.
In the absence of Insurance, those buildings will probably never be replaced, The land holders will maybe invest money, that either had been sitting on the sidelines waiting for investment opportunities, or was already scheduled for investment elsewhere, meaning that either the opportunity doesn’t get the investment dollars, or someone somewhere “prints” the necessary money, increasing the supply of dollars, and probably Philippine Pesos.
Back when I first started commenting about the Precious Metals marketplace, it was a little African Gold miner with a foothold in Zimbabwe and an influx of capital, as 5 Directors put up £100,000 each to re-start operations on a grander scale that first caught my eye.
I simply looked at the chart of the 70’s and multiplied by ten.
From the mid 1960’s, it was obvious that Gold was coming under pressure, from Britain, France and Italy who all remonstrated with the Fed (who were funding the Vietnam war effort at the time) for their profligacy and money printing.
The Gold price had gone from $25.00 in 1932, to $35.00/oz after the Federal Reserve got their hands on all the Gold, and there the price stayed until August 15th 1971.
However, maybe Gold was slightly overvalued back during the early 60’s and really the price should have been closer to $25.00…
Anyway, if you recall, the 2001/2 bottom in Gold was $254.00 and that was a near enough ten-fold price improvement on the theoretical 60’s price. Wages had gone up similar levels – I’m old enough to remember wages from that era, as I was already working back then, and remember the slogan £20.00 for all in 1971-72 here in the UK. and circa £30, was a grown working man’s wage.
The Silver price per ounce bought roughly one barrel of oil, and ten years later as it peaked at close to $50, it still did.
Of course since then Central Banks have been divesting themselves of silver – an even more barbarous relic than gold? And If I recall accurately, oil fell to $18/bbl during 2000/1 – I certainly remember paying between 99 cents/gallon and $1.06, in Austin Texas back in late 97 anyway, when I worked at Dell Headquarters in Roundrock, just 8 miles from the city centre…
So, where does this lead me? To the inevitable…
Gold will certainly rise, but to where? It is unlikely that a steady rise in the price is likely, because that would mean moth-balled mines would begin re-opening, and an increase in supply, which would counteract price rises.
At $2,000 almost all current Gold mines would be profitable, so the price has to (MUST) remain in the doldrums to choke off supply, It is imperative then that those who control the world’s money supply, target the alternative currency – just as we learn again the U.S. legislators are seeking to interfere in the market for Bitcoins, as the price has risen again to a new high as it peaked at just over $600, before dropping back in recent days.
I don’t know enough about the miners to know which of the dozens fall into that category, but Turquoise HIll (TRQ:TVX) is perhaps one, unless the Mongolian Government gets greedy again. (They used to be known as Ivanhoe Mines Ltd – until Rio-Tinto (RIO:L) increased its shareholding to 51% and re-named the Company)
BUT if my tenfold theory holds, then $8,500 would seem a likely zenith, as a move into five figure territory would be too horrific to contemplate for the Banksters, who would defend it to the last and throw everything they had at the price. One only has to look at the 3-Day Kitco Gold and Silver Price charts (http://www.kitco.com/images/live/gold.gif)(http://www.kitco.com/images/live/silver.gif), to see that outside the New York time period, the price oscillates as a result of High Frequency Trading to maintain price stability. We can only speculate as to WHY?
BUT a rise to the suggested figure is likely, and above is not outside the bounds of possibility given the reckless money printing in the last 5 years….
Incidentally, Peter Schiff, who is a major commentator on Gold, and the Fed’s mess, as he might call it, was on the Max Keiser show on RT late last week, and very interesting he was too. Though TBH, I think his timing is out by a couple of years, as the economy stutters along for a little while with QE-infinity still in evidence.
He feels that they won’t taper next year, because as soon as they announce they might, the markets will tumble, and bond prices will fall, raising yields (and thus interest rates) choking off any hint of growth, which is very likely.