The laws of nature

From Lemetropole cafe

From what I've heard so far out of the G-20 meeting, nothing much of substance is forthcoming. The "plan" is to formulate a "plan" by April. Not gonna happen, the markets and economy are in an absolute nosedive and as with an airplane the central banks do not have the luxury of time to pullout [reflate] before crashing. The central banks had this meeting as an opportunity to fix the problem of "bad money", it looks like the opportunity will be squandered. Now it will be Mother Nature to the rescue but it will feel like anything but a rescue.

Make no mistake, big money around the world knows what must happen officially [central bank decree] or unofficially [Mother Nature]. Official money, ie the Saudis, the Chinese central bank, Russia and others have already started their moves toward Gold on a physical basis. They are not buyers of paper promises, they want the real thing because of the default risk. Up until this point the talk in the physical markets was about tight or non existent supplies at the retail level, this past week the lack of supply took a quantum leap when Europe began curtailing Gold shipments to the worlds' largest consumer, India. This has the possibility of starting a bidding war that breaks physical away from paper for good. Think of it this way, either Europe doesn't have the physical for delivery, they have physical but don't want to part with it, or they are afraid of default by India within the 3-5 day shipment period between the order and settlement. The truth is that probably all of the above are correct answers to some extent.

We really did receive news of epoch proportions this past week regarding Gold and either no one realized it or everyone is so demoralized that it didn't even register. The Saudis bought $3.5 Billion of bullion, the Chinese are talking about shifting or diversifying part of their $2+ Trillion of reserves into Gold, and the Russians are talking about a "Gold convertible Ruble". In my mind only the announcement that "Fort Knox is empty" could have been bigger news, in time I think we will find out the truth about U.S and IMF bullion reserves. So now we have governments that have been adversely affected by the fiat Dollar standard beginning to mobilize and act in their own best interests, they obviously see the writing on the walls.

Capitalism, as in any other game, the participants will act in their own self interest to "win". I have compared the current situation to "musical chairs" and a "game of chicken" many times in the past, it is fast becoming obvious that this is truly the case. For instance, while sovereign money has stopped and reversed in FNM/FRE bond purchases, they have only slowed or stopped their purchases of direct Treasuries. Who will be first to start the wholesale liquidation that's coming? Who chickens out first and sells U.S. Treasuries? While some governments have spoken about and others have begun "local currency settlement" of trade, who will be first to request settlement in bullion? This is absolutely where trade and currency is headed. While I'm sure the U.S. and it's allies put on the "stall" this weekend in Washington, I don't believe Mother Nature will have any of it. Without a coordinated "reflation deal", we can only see more deflation as the derivatives keep blowing out balance sheets like popcorn kernels in a microwave. It truly is REFLATE or DIE.

The sooner this process begins, the better! Governments can try to wait it out, stick their heads in the sand and peek out in the first quarter of next year only to find their butts were blown off while they weren't looking. Or, they can be proactive, close the markets and hammer out a currency deal that allows the world to execute commerce in a sound and stable currency. This is a currency crisis of biblical proportions that will not be solved with "Rubinesque" methods [just buy another 6 months time, and pray]. No, it is over and this past week saw the early posturing by sovereign nations preparing for a stoppage in the music. The sovereign floodgates into Gold has begun and will shortly become every nation [man/woman] for themselves. That's how Mother Nature works, she can be cruel but she is always fair as the rules are the same for everyone and they don't change in the middle of the game. Governments have tried for 5,000 years to cheat Mother Nature to no avail, today is no different.