By James West

The irony of the emergence of a Swine Flu pandemic amidst an economic contraction brought on by glutinous gorging on credit and real estate in the United Casinos of America is surely not lost on barbed minds. The insistence by the World Health Organization that it be termed the far less ominous sounding H1N1 is evidence of our collective predisposition to avoid calling a spade a spade if it has negative implications. That predisposition will be viewed by posterity, should there be any, as a terminal flaw in the human character of our era.

The manifestation of a Swine Flu pandemic in the midst of a global economic meltdown does not bode well for the ‘recovery’, which, depending on who you listen to, is either well under way or years away. Our insistence on ignoring the simple solutions to both problems may yet herald the biggest historic instance of mass delusion and subsequent extinction of our kind.

Close the airports, and unwind the global entanglement of trade temporarily pending a recalibration of its mechanisms, and enjoy the inevitable return to mental and physical health, albeit amidst diminished financial circumstances.

Such simplistic yet idealistic pontificating sounds feasible superficially, but we’ve devised and installed such a pervasive metaphysical infrastructure of mis-information, that its only on our death beds that we catch a brief glimpse of the reality behind our fabulous global amusement park.

Economists, (the academic variety, I mean – not the “one who acts economically” of archaic definition) are the copywriters for the tanned and coifed anchormen who translate economic data from mathematical complexity into street form.

“Stocks Rise on Renewed Optimism.”

“Gold Down as U.S. dollar rallies.”

“Green Shoots of Economic Growth Seen”.

Its as if the real driving forces of economic fluctuation are too menacing to identify plainly. Instead they must broadcast in the language of kindergarten students.

More realistic headlines are conceivable.

“Swine Flu Pandemic Caused by Too Many Pigs”

“Stocks and Gold’s Daily Price Fluctuation Irrelevant to Bigger Picture”

“Economy Won’t Recover Until Transparency Across Derivatives, Commodities and Credit Implemented”.

Its not so hard.

The Swine Flu outbreak is being compared in the press to the Spanish Influenza outbreak of 1918-19. That outbreak was caused by “an unusually virulent and deadly Influenza A virus strain of subtype H1N1”, according to Wikipedia.

The Swine Flu outbreak of 2009 has been described as a virus “that was produced by reassortment from one strain of human influenza virus, one strain of avian influenza virus, and two separate strains of swine influenza virus.

The Spanish Flu outbreak was not Swine Flu. At least, that’s what the Center for Disease Control in Atlanta says. The question is, then “why are they being labeled identically?” The same question could be asked of currency and gold. Gold is money, and currency is merely paper printed with a value that fluctuates according to its perceived value. Gold takes gargantuan effort to produce from mines, which explains its cost and value, whereas paper money is fabricated with a minute fraction of the effort.

Why, then, is paper currency accorded the same utility as gold?

Historically, paper money evolved from the fact that you stored your gold with a banker, and he issued you pieces of paper acknowledging the fact that there was gold that you owned stored in the banker’s vault. That evolved into governments issuing currency backed by gold in the government’s vault. Through various manifestations the Gold Standard determined the value of the world’s currencies, until Richard Nixon terminated the relationship with the end of the Bretton Woods Agreement, that governed the last albeit bastardized version of the original gold standard.

The motivation for the United States Government in adopting a floating currency backed by nothing but the willingness of a counterparty to accept its face value is obvious enough. Gold takes enormous effort to produce, and is limited in quantity.

Confidence is manufactured comparatively easily, and is limitless under the right conditions. The inherent value of gold undermined the confidence game required to perpetuate the U.S. dollar into the global reserve currency, and so it evolved that it was against the government’s interest to have a global Gold Standard, and very much within its interest to have a global U.S. dollar standard, which is what we have now.

Unfortunately, the same inability of humanity to temper its responsible stewardship of currencies throughout history has once again manifested itself in the virulent fabrication of U.S. dollars, facilitated by the media. No currency has lasted more than a hundred years in history, and it appears that the inflation of the U.S. dollar supply should soon enough lead to a Weimar-esque price hyper-inflation, where the price of a loaf of bread doubled every 15 seconds that will spell its doom.

Unfortunately, or fortunately, depending on your position in the food chain, the information distribution apparatus that has been hijacked by the richest of the rich and the power hungry mob in three piece suits is now so powerful, that even in the face of irrefutable tangible plain-as-the-nose-on-your-face evidence to the contrary, the U.S. dollar continues to appear strong, and gold performs weakly.

For those of you entranced by the information apparatus so described, here are a few basic facts that should help you prepare for the worst.

Gold is money (So is silver). Currency, especially the U.S. dollar, is not.
There is no recovery underway, and won’t be for at least another 2 years, if even then.
Swine Flu, despite its emerging ‘preferred’ name H1N1, is still Swine Flu.

DISCLOSURE: The author owns some gold and some U.S. dollars but no pigs.

China called Sunday for reform of the global currency system, dominated by the dollar, which it said is the root cause of the global financial crisis. "We should attach great importance to reform of the international monetary system," Chinese Vice Finance Minister Li Yong told the spring IMF/World Bank Development Committee meeting in Washington. A "flawed international monetary system is the institutional root cause of the crisis and a major defect in the current international economic governance structure," Li said, according to a statement.

"Accordingly, we should improve the regulatory mechanism for reserve currency issuance, maintain the relative stability of exchange rates of major reserve currencies and promote a diverse and sound international currency system." As the world's main reserve currency, US dollars account for most governments' foreign exchange reserves and are used to set international market prices for oil, gold and other currencies. As the issuer of the key reserve currency, the United States also pays less for products and can borrow more easily. Li did not name the dollar but in late March the People's Bank of China Governor Zhou Xiaochuan said he wanted to replace the US unit which has served as the world's reserve currency since World War II. "The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Zhou said, suggesting the International Monetary Fund could play a greater role. Zhou's remarks sparked uproar and concern since China has the world's largest forex reserves at 1.9 trillion dollars. China became the world's top holder of US Treasury bonds last September, and currently holds around 800 billion dollars, according to official US data. Beijing has voiced increasing concern over its massive exposure to the US dollar as the global crisis has steadily deepened but after some tense exchanges, the issue appears to have eased in recent weeks…

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Insider Selling Jumps to Highest Level Since ‘07 as Stocks Gain

April 24 (Bloomberg) -- Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

... While the Standard & Poor’s 500 Index climbed 26 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”

Insiders Sell

Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 mostly institutional clients.

That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began. The $42.5 million in insider purchases through April 20 would represent the smallest amount for a full month since July 1992, data going back more than 20 years show. That drop preceded a 2.4 percent slide in the S&P 500 in August 1992....

The S&P 500 has rallied 26 percent over 32 trading days, the sharpest rally since 1938, as speculation increased that the longest contraction since World War II will soon end....

Bullionmark comment: Pump and dump? Good for CEO's to offload stock before the "big event". Good for the banks as they can raise much needed capital by offloading crappy paper on to newly bullish investors and good for the government as the stock market creates the illusion that all will be well in the economy soon. Don't be fooled this is a suckers rally.

WSJ: BofA CEO Lewis testifies to NY AG that Bernanke, Paulson wanted Merrill losses kept quiet
http://finance.yahoo.com/news/WSJ-BofA-CEO-says-was-told-to-apf
-15006709.html?sec=topStories&pos=3&asset=&ccode=

A few comments from LeMetropole provide good insight into this amazing story....

Blackmail?

To all, so today we hear that Ken Lewis, CEO of Bank of America was told by Ben Bernanke and Hank Paulson to shut up about the "material adverse change" that took place at Merrill Lynch before their merger. I would call this "blackmail", but then again, who am I anyway, I think Gold is money so I must be a whacko. Mr. Lewis has testified under oath (whatever that means) that he was told to remain silent about Merrill, otherwise his board of directors would be disbanded and the management team would be fired. Appalling yes, but does this surprise you?

What would you do? Remain silent? Cancel the deal? I know what I would have done, I would announce the piece of crap Merrill had become, cancel the deal so my shareholders didn't get left holding the "bag of pooh", and then simply resign. How could you wake up and go to work in the morning knowing you just shafted your shareholders over a blackmail? How could you remain silent? Was his silence going to save the system? No, it can't be saved because "it is what it is", the debt, derivatives, mal investment, etc., were all already in place, NOTHING could reverse that. If the system was so close to collapsing just a few months ago, how far away can we be now?

So, as for Mr. Bank of America, either he is a spineless buffoon that threw his shareholders under a steamroller, or he lacks the moral values to tell the truth no matter what the consequences, even if they included losing your job. Maybe he was afraid of becoming Mr. "Freddie Mac" and turning up as a suicide. Who knows? The point here is the confidence (lack of) this instills in foreigners with investments in the U.S.

Supposing Mr. Lewis is telling the truth, this means that Paulson and Bernanke are both "blackmailers" and liars. They told us umpteen times that the "banking system is solid", the "system is sound". WHO to believe? I think they are ALL full of $#I+!!! The system is busted, the banks are broke, the Dollar has ZERO intrinsic value, and the Treasury has become the biggest beggar in the history of the world. And now we get the stress test results? Yeah, I can't wait to see these morsels of truth and wisdom!

This can of worms that Mr. Lewis has opened has huge ramifications, most importantly one of CREDIBILITY. I can only guess what my thoughts would have been as a child growing up in the 60's, the Sec. of the Treasury and Fed Chairman lied and blackmailed someone? So what if Merrill went down, they are only one Investment house, you mean the system is THAT fragile? This is the world's biggest debtor trying to hide JUST how weak, debilitated, and fragile the whole situation has become. One can only hope that foreigners go deaf, dumb, and blind for few a weeks since it is they, that Treasury relies on so heavily to fund our debt.

From today forward, it is now clear that ANYTHING can happen at ANYTIME. Everything is not what it seems to be, nothing is real in the financial world, and everything is worth nothing. As it turns out, the economy, real estate, and stock markets were all propped up and "Bulled" by borrowed money and dirty tricks. The entire "fiat" bull run has been bull shit, and to think we EVER questioned Gold ownership. No wonder we have been told on a daily basis that Gold is a "barbarous relic" and has no use. So they lied to us, what's the big deal? They will lie to us again tomorrow, ...and your point is? Clearly, things aren't what they used to be, now I sound like my parents. Sorry for the rant, I do feel much better though!

-----------------------------------

Bof A and the DYKE!

The revelation that Bank of America was forced to buy Merrill Lynch is the nail in the coffin, the straw that broke the camels back, the beginning of the end...how many more sayings do you we need??!!

There are no more fingers to stick in the dyke!

This revelation is HUGE on so many fronts I can't even begin. First of all Bank of America will be sued by EVERY SHAREHOLDER for accepting this deal, not disclosing the "material information", falsely promoting the deal to the public and hiding the truth. The Treasury and the Federal Reserve will be investigated for illegally forcing the merger without any congressional approval or ANY PUBLIC DISCLOSURE....

AND THEY HAVE BEEN LYING TO THE PEOPLE FOR MONTHS THAT WE WERE AT THE BOTTOM AND THE BANKS ARE FINE!

Bank of America will likely see a "Run"on the bank" within the next few weeks as the liability from this is incalculable!

It's about to get VERY UGLY out there!

--------------------------------------------

Andrew Cuomo's Smoking Gun

New York State Attorney General has unleashed a letter today which could well lead to an avalanche of lawsuits against, Bank of America, Ken Lewis and the BAC board, John Thain, Henry Paulson, the U.S. Treasury and Ben Bernanke et al at the Fed.

If you read through Mr. Cuomo's letter, there can no question in anyone's mind that Lewis, Paulson and Bernanke are guilty of committing fraud. This must be a serious issue because when it was being exposed on CNBC, CNBC quickly cut away just as Ken Lewis was telling Erin Burnett that he was told to keep his mouth shut.

At issue is whether or not Henry Paulson and Ben Bernanke, along with staff members wholly and severally at the Treasury Department and the Federal Reserve, forced Ken Lewis and the board at BAC to complete its merger with Merrill Lynch, despite Ken Lewis' decision that the financial condition of MER at the time of the merger agreement had been fraudulently misrepesented, covered up and had materially changed.

It would appear from a close reading of the letter sent from Andrew Cuomo to Government officials listed, that Ken Lewis was going to invoke a Material Adverse Change clause, due to a substantial deterioration in the assets of Merrill Lynch which appear to have been covered up during merger negotiations (i.e. hidden from sight during the due diligence process), in order to either abort or substantially renegotiate the terms of the BAC/MER shotgun wedding. Here is what the MAC clause is all about:

"THE MATERIAL ADVERSE CHANGE CLAUSE (MAC) as a closing condition has achieved permanent status as one of the most highly negotiated parts of acquisition agreements. The basic premise underlying a MAC is that the purchaser should receive the benefit of the bargain. In practice, a MAC included within the closing conditions of an acquisition agreement provides purchasers with an "out" in the event of unforeseen material adverse business or economic changes affecting or involving the target company or assets between the execution of the definitive acquisition agreement and the consummation of the transaction"

Please read the Cuomo letter in its entirety, as it contains statements and accusations from both Lewis and Paulson that are both accusatory of each other and self-incriminating. Here is just one snippet:

"Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and board would be replaced" page 2.

There is much more in that letter which can be used to go after every person listed above. Bernanke has denied making any of the statements contained in that letter. My bet would be that Bernanke is now on record lying.

At the very least, all the people listed above will subject to massive lawsuits by Bank of America shareholders. Hopefully Mr. Cuomo will prove to be more forthright than his predecessor, Eliot Spitzer who used his attacks on Wall Street to launch his bid for Governor of New York, and will use this as an opportunity to pursue justice for all the parties involved, not the least of which is the U.S. Taxpayer.

Here is the letter from Mr. Cuomo:

http://zerohedge.blogspot.com/2009/04/cuomo-letter-exposing-paulsons-and.html

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This Cuomo thing is getting gooooood

This is a postcard perfect example of what happens when rats are trapped in a corner - they turn on each other:

Paulson Contradicts Bernanke, Blames Bernanke For Lewis Threat

"Hank Paulson admitted to Andrew Cuomo that he threatened to oust Ken Lewis and the Bank of America board if Bank of America invoked a Material Adverse Change (MAC) clause to block the deal, Cuomo says. Paulson also added, however, that he made this threat at the request of Ben Bernanke"

http://www.businessinsider.com/henry-blodget-paulson-contradicts-bernanke-blames-bernanke-for-lewis-threat-2009-4

Ken Lewis Shafted Bank Of America Shareholders To Save His Job (BAC)

http://www.businessinsider.com/henry-blodget-ken-lewis-shafted-bank-of-america-shareholders-to-save-his-job-2009-4
I think the media is either being told to not report all of this, or they are vastly underestimating the seriousness of what Cuomo has unleashed today. This is going to be epic entertainment watching this unfold.

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The cover of the latest Time magazine includes the headline story -- THE NEW FRUGALITY. The story is about Americans cutting back everywhere and in everything. Personally, I think the frugality trend is just starting. Right now, I don't think most people view the current recession as a major economic phenomenon. I think the public impression is that the government "won't let it happen," and that the government will stabilize the economy by the end of the year. The public reads about the trillions of dollars the Fed and the Treasury are spending, and it believes what we are going through is just a deeper version of the recessions that have plagued the US since WW II.

I've thought all along that the steadily rising rate of unemployment and loss of income will be the surprises of this bear market. Unemployment will produce a downward spiral of negative growth in the US. When an individual or a family leader is laid off, the full impact of a loss of income hits the unit. They will immediately cut back in every area possible -- doctor's visits, dentistry, meds, clothes, automobiles, travel, vacations, expensive colleges, food, entertainment, etc. This sets off a "downward spiral." It's a spiral that only halts with exhaustion.

-----------------------------------------------

Most Americans still cannot fathom what lies ahead … still believing that once the correction is over, life will go back like it has been for so long. Don’t think so. Years ago it was my contention that the standard of living in America would go down by 35%. I am sticking with that notion.

from LeMetropole cafe

Profit taking? That's what we are being told today is all about in the stock market. Technically, the MACD lines are about to crossover to the downside as a result of two weeks or more of sluggish momentum. Fundamentally, (you know, the real meat and potatoes of investing) could not be worse on a global basis for equity investing. As I mentioned last week, I smell smoke billowing from the back rooms of financial institutions. What has happened, (and been happening for at least 10 years) is that the government has meddled in the markets for so long and to such a degree that the "gears" if you will, are no longer aligned properly nor even running in the same directions.

What they have done, has been to run around putting out fires and managing perceptions without ever considering the longer term consequences. The beauty of capitalism is (was) that it is a "self correcting system", if you make a bad investment, you lose. You go out of business and learn a lesson. Capital will always seek the undervalued and exit the overcrowded, this is the most basic tenet of a free market. When you artificially entice, prod, or even (GOD FORBID!) manipulate markets, you create "mal investment" that shouldn't (wouldn't) normally exist. Investing is always "weighed" or tempered with risk in mind. RISK, is what the world forgot to factor in while "things were good".

In my opinion, risk was masked, hidden, and delayed by the Fed , Treasury, and the administrations in general since 1988 when Pres. Reagan formed the "Working Group on Financial Markets" otherwise known as the Plunge Protection Team. Since the 1987, the U.S. economy has been forbidden from having a real recession that would have cleaned out bad debt and mal investments. Instead, the bad debt was allowed to pile up like a garbage dump that finally reached its boundaries. We could have avoided the current situation had the 1991, 1997, or 2001 recessions been allowed to run a natural course, they were not and now the Piper will get paid no matter what the government wants.

Had markets been left alone to reward the smart and kill the ill informed and ignorant, 2003-2007 could never have happened. After the tech bubble blew up, the Fed HAD to have another debt bubble because they feared the current outcome (debt contraction). The current situation has been postponed for so long and to such an extent that the problem is now far, far, bigger than the Treasury, Fed, and all other world Central banks and Treasuries combined by a factor of at least 10. I know you have heard me say this before but, had the price of Gold been allowed to move freely and not been suppressed all these years, the alarms would have sounded as far back as 1996 about the over issuance of money and credit.

As stated many times before, we will have a new currency, probably very soon. This will amount to a devaluation of all fiat paper versus real goods. All the lies, manipulations, managed perceptions and expectations will be accounted for in one fell swoop. The scales will be balanced, and assets, liabilities, production, consumption, and yes, even money, will all be completely revalued to reflect "the new reality". Once the creators of fiat lose their "power" to obfuscate values, reality will return. I believe that every human being that has used fiat currency will be shocked to some extent as to where some of these new values level out at.

We have heard all sorts of projected numbers for the future "Dollar" price of Gold, Sinclair $1,650, Bill Murphy $3,000-$5,000, Alf Fields $6,000-$10,000. If we are going down the road of fiat destruction as I think we are, ANY Dollar price will make no sense whatsoever. Just look at Zimbabwe, $10 billion for a loaf of bread, what does an ounce of Gold cost, $10 trillion? The point is, the "Fiat masters" are losing the system and we are watching it first hand. If I had any cash left, I would surely invest in a "Zero factory" since 0's will be the most commonly used number in all of history (can you imagine the demand?). Think about it, multiple 0's will follow a number for the price of all sorts of common goods and a single, lonely 0 will be used for what once had been the foundation of society, PAPER. I know this sounds a little off the wall, but what value do you put on a currency when it is no longer accepted? Yes, that's right ZERO!

from LeMetropole cafe

I cannot emphasize this enough. The collapse in the U.S. Treasury’s financial condition is accelerating much faster than I thought would happen. While everyone is worried about higher taxes, the exact opposite is occurring. Personal and corporate tax receipts are plummeting. Corporate profits have vanished faster than any time in American history; profits are not coming back any time soon. With continuing claims hitting new highs, with commercial and residential foreclosures hitting new highs and with credit card delinquencies hitting new highs, it is simply not credible to believe that there will be any improvement in the financial condition of the U.S. consumer anytime soon. U-6 unemployment has gone from 9.1% to 15.6% in one year. Consumers continue to deleverage and banks refuse to lend to anyone with less than stellar credit. Meanwhile, social welfare payments and financial institutional bailouts are accelerating. Last week Goldman raised financing needs of the Treasury to $3.25T for this year.

The Federal Reserve’s response of monetizing the debt is something I predicted. This is accelerating as fast as the deficit expands. This is what happened in the Weimar Republic (no political will to raise taxes yet a political decision to accelerate spending to keep the labor force from rebelling). I have been expecting a currency collapse for more than a year. I was early on my prediction of the Internet Bubble collapsing and the housing market collapsing also. In the end the fundamentals mattered. The most important emerging trend which I can identify currently is the collapse of the condition of the U.S. Federal Reserve’s Balance Sheet and the cash flow requirements of the U.S. Treasury. IMHO Operation Green Shoots is a concerted and intentional effort spearheaded by Larry Summers (Harvard Behavioral Finance) to convince everyone that the worst is over. In essence he is attempting to start the third bubble of the decade. They have encouraged banks to report fraudulent earnings by forcing a change in FASB. Operation Green Shoots is based on spin and not reality; therefore, it sprouts will wither shortly. Caveat Emptor!

Bank of America last night continued the earnings "fairy tale" of US banks. With free money from the government, front row seat at the market manipulation table and right to record toxic crap assets at any value they like with the changes to mark to market accounting rules.......how could BoA, Citigroup, Goldman Sachs, JP Morgan et al not make money (on paper only)? Funny how each of these banks are owners of the private institution that bailed them out.....The Federal Reserve....and have former executives running the US Treasury. This cartel arrangement stinks. The sooner we see the abolition of the Fed, bankruptcy of their member banks and removal of corrupt "Government Sachs" employees in Treasury the sooner we will see real economic recovery.

Comments from LeMetropole Cafe suggest the recent fairy tale may be about to end...

We know that using very aggressive (e.g. unrealistically low loan loss reserves) and several other one-time or questionable accounting tricks, that Bank of America's reported profit of $4.2 billion is an utter and complete fairy tale, if not outright fraud. Once the 10-Q is filed, I'll be able to go thru and recreate BAC's earnings using realistic accounting assumptions and stripping out one-timers. The question I have, in the context of BAC CEO Ken Lewis expressing disgust on CNBC that BAC stock is down 23% today, DOES KEN LEWIS REALLY TRULY BELIEVE THE NUMBERS HE HAS SIGNED OFF ON TODAY? If the answer is yes, he is the epitome of managerial incompetence OR the world's biggest liar...


There's definitely really bad news of some sort coming our way. The insurance companies are getting destroyed relative to the banks today. Also, the last time the dollar rallied in a big way alongside gold/silver, the stock markets tanked, and 1/3 mo T-bill yields approached zero was late last December/early January. This tells me there is some kind of de-leveraging occurring by funds globally, as they are dumping crap assets, need to buy dollars in order to make payments on their dollar-based liabilities, and running to safety. Probably one of the reasons the Fed did currency swaps with England and Europe recently.

The Turner Radio Network has obtained "stress test" results for the top 19 Banks in the USA.

The stress tests were conducted to determine how well, if at all, the top 19 banks in the USA could withstand further or future economic hardship.

When the tests were completed, regulators within the Treasury and inside the Federal Reserve began bickering with each other as to whether or not the test results should be made public. That bickering continues to this very day as evidenced by this "main stream media" report.

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse.

By J.S. Kim

In the past three years, while banks all over the world and Wall Street were imploding, while some $40-$50 trillion of capital was being destroyed in global stock markets, one financial market kept growing. That market is the financial derivatives market.

According to the Bank for International Settlements [BIS], the global Over the Counter [OTC] derivatives market has grown almost 65% from $414.8 trillion in December, 2006 to $683.7 trillion in June of 2008. On the BIS's own website, there are no updated figures for the notional derivatives market since June 2008, so we can likely assume, with some margin of safety, that this market has now grown to more than $700 trillion. Comparatively speaking, the total market cap of all major global stock markets is approximately $30 trillion.

Before I discuss how financial products could grow more than 65% during a time period when financial companies were imploding all over the world, let's review the definition of a derivative, because this will explain how this market of financial products keeps becoming more valuable at a time when the value of many capital assets are sinking like a rock in an ocean.

According to Wikipedia:

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying value on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index [CPI] -- see inflation derivatives), weather conditions, or other items. Credit derivatives are based on loans, bonds or other forms of credit. The main types of derivatives are forwards, futures, options, and swaps.

Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet. Over-the-counter [OTC] derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds...Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.

There are two key phrases to note in the above explanation of the financial derivatives markets-

The notional value of derivatives is recorded OFF the balance sheet of an institution, although the market value of derivatives is recorded ON the balance sheet; and
OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform.
As I've noted before, the $700 trillion global derivatives market is the notional value of this market, not the market value of these derivatives. The Bank for International Settlements compiles the notional value of this market worldwide from reported figures by Central Banks of the G10 countries and Switzerland. Thus, if the off-balance sheet assets of major international banks are growing so rapidly in the form of their notional values of their held financial derivative products, how can so many of these banks be in trouble?

The answer, quite simply, is that the market value of these derivatives is nowhere near the notional values of these derivatives maintained and reported by these banks, and that the global derivatives market is in serious trouble. Because derivative products are subject to counterparty risks as well, this means that the failure of one major financial institution could cause the evaporation of assets for many other financial institutions that have derivative products with exposure to that one financial institution. In other words, when the notional values of a good percent of these financial derivative products start evaporating into thin air, and they will, it will have a negative domino effect on the balance sheet of not just one major financial institution, but many.

Of course, when FASB suspended mark-to-market accounting rules recently, major international banks were allowed to re-value some of their derivative products closer to their notional value on their books to pad their balance sheets. Due to this change in accounting law, I can almost guarantee you that before market open Friday, Citigroup will announce better than expected financial results as they carried huge amounts of illiquid mortgages and financial derivatives on their balance sheets. [Editor's note: Article was written prior to earnings announcement on 4/17/09]

Though many people argue that only the market value of these derivatives, and not their notional values, is ultimately important, this would have only been valid if FASB hadn't suspended mark-to-market accounting rules. The types of derivative products most likely to continue to blow up are Credit Default Swaps [CDS], and indeed, it was AIG's exposure to Credit Default Swaps that caused it to collapse.

In reality, the market value of financial derivatives is only a fraction of its $700 trillion notional value; however the reality is that the potential losses from bad Credit Default Swaps can also be much more than their notional value. For example, consider a scenario where Company ABC underwrites a CDS in which they will receive $100,000 of payments from Company X in return for guaranteeing a $1,000,000 bond issued by Company Z. If all goes well, and the bond performs, then company ABC makes $100,000 in profit. However, if company Z fails, then Company ABC may now have to pay Company X $1,000,000. This is a scenario in which the losses from financial derivative products can be very real and very large. Though many analysts harp on the fact that the $700+ trillion notional figure of the derivative market is not real, it is not realistic either to only consider the much smaller market value of these derivatives as the above example illustrates.

Since it is now likely that the balance sheets of many financial institutions have been quickly "nursed back to health" by returning the book value of OTC financial derivative products to some fantasyland notional value versus their true market value, the collapse of the notional value of the $700+ trillion derivative market will indeed have future devastating consequences for global economies

www.GoldForecaster.com

“You can fool all of the people some of the time and some of the people all of the time, but you can’t fool all of the people all of the time, but you can give it a good go and discredit the rest who won’t be fooled!” If it doesn’t go like that maybe it should?

The issue of Money.

Many are still digesting the outcomes of the G-20 meeting in London. So a thought occurred to me. If I went to my bank and asked, “May I have another loan? Oh, I know I am terribly over-borrowed already, but could you lend me my entire year’s income on top of my present loans?” He would ask me, “against what collateral?” I would say, “none!” His reply would likely not come from the best of English. Now I tell him that, “I am your only client and say no and you’ll go bust as well as me.” Then he might smile and hail me as his financial savior too?

Isn’t that what the issue of $1 trillion on top of the $12 trillion already issued as guarantees, ‘quantitative easing’ and the like [equivalent to the entire production of the U.S. in one year] really is? Just think of it, where is the money coming from? What collateral is being given, what repayment terms. It is simply another tranche of the huge mountain of I.O.U.’s already given, but this time to lift the lesser developed nations out of a potential Depression.

Confidence restored?

Let’s face it, the financial system has broken down and still has not been repaired. Yes, steps are underway and are trying to restore the system. Yes, the banking system is being checked to ensure it will be healthy, but something else has not been repaired and remains structurally damaged. “Confidence!” Without this no matter what mechanics are applied the repairs won’t work. And we are not talking about professionals in finance becoming confident, we are talking about the drivers of the global economies, the consumers. Unless he is confident going forward he will not spend freely again, he will save, reduce debt, remove his vulnerability to his lifestyle being reduced again. At the moment the repairs to the system are starting at the top not at the bottom. You may reply but homeowners are receiving assistance and seeing a reduction in the threats to their homes. This may be true, but what we are talking about here is the full restoration of confidence so that the consumer will buy houses again, they will go out and finance cars again, without that sneaky feeling that he could see them foreclosed on or repossessed. Until that happens don’t expect much improvement in the overall national or international economies.

Will the present issues of mountains of money restore confidence? Only to some extent and that with such caution, that a retreat into fear can be sparked in just a day to a week. After all, confidence in the banking system has been badly mauled in the last 18 months and presently still stands on the edge of a precipice.

Can fear produce confidence?

How can the system speed up the process? Through a different kind of fear! With very few choices in the hands of governments and central banks the most obvious way forward is an unpleasant one. If the consumer is made to believe that his income will rise because of inflation and his savings further decimated by inflation, he will stop saving and start spending if only to gain value through the rising prices that his house and perhaps his car will enjoy through inflation. That would be a quicker process, moving at the same speed as inflation.

We don’t advocate this path at all, but there has to be a policy of saving what can be saved and letting go of that which cannot be saved and savers will be the victims as their wealth is erased. [That is unless they switch to precious metal now and shield themselves from inflation? We do expect to see this happen, but sad to say, most investors just don’t know gold and silver] Until the powers that be accept that the system is structurally faulty and rectify this, the path ahead will not be just.

Such a course will produce convincing benefits. The consumer would see the burden of debt drop as inflation pushed his income up and that sufficient for him to repay debt quicker. Institutional debt would face the same outcome enabling the system to produce a larger after-tax, cash flow and lowering of debt ratios. Yes, it would be tough on those who live on past savings, unless they hold these in the unprintable precious metals. Unfortunately the dangers are so vivid that this may well be taken as collateral damage, as was the case in the past.

In the sixties through the eighties debt re-scheduling was used in the same way to the point where such bad debt was written off and ceased to be a threat to the banks. A similar path can be followed speeded up by inflation. Toxic assets will have to be “contained” until that process is well underway, emasculating such toxicity. As inflation scythes it way through debt [and the mountains of debt we now see with the lenders of last resort have never been seen before] so confidence [likely misplaced] will be restored as the threats hanging over the consumer diminish.

So the printing of money serves a dual role.

Restore the system [if only in the short-term].
Pressure the consumer into spending again. Remember the target remains the consumer, so that inflation must encourage spending out of both fear and the preservation of value.
However, the entire experience of the last two years will not be erased. The system has broken down and can’t be fixed in this way. All the moves to date simply restore the system to a workable one. Genuine confidence, the sort that inspires hope in the future, has gone. What is most concerning is the way the market is receiving bad news in dribs and drabs. We are aware that another $500 billion in write-downs is on the way and that the process of new liquidity flowing to trouble spots is usually inefficient, so we must expect more shocks to the system. But that takes away a bit more confidence each time and belittles any efforts made to repair the system. Can a resuscitation of confidence take place in this environment?

The consumer driven growth has been found to be wanting. It engendered a “Live now, Pay later” attitude, which has now become “lived once, now paying”. And in the current environment the consumer doesn’t harbor dreams of wealth beyond his means, he is in survival mode. How can one get the system right without the traumas that usually attend system reformation? Only if the short-term answers have produced an environment that takes away the traumas at the lowest common denominator of consumer, the blue collar worker level. In the Depression he was revived through infrastructural spending where he would simply be paid to work, even if that work produced few goods. In China the government has instituted massive infrastructural projects to keep workers busy and paid. This process must be on-going until confidence is restored, but across the entire world!

Effective Reformation?

One economy from history, millenniums ago, had laws that had debt written off every seven years, with property being returned to it original owners every fifty years. This prevented the building of banking and property empires and spread wealth more evenly through the nation, bringing integration to that society that made it survive and prosper on a broad front. In that economic system there was no mass production, no mass distribution system and no unemployment because of that.

But there is little will to change the current system into anything that produces that sort of result. The focus is now on to get our consumer driven system with its financial empires, restored to what it was. This implies it will remain vulnerable to what it has already experienced.

Change investing?

Consequently, wise investors have to take precautions against the potential damage they may suffer. Leveraged investing with time limits will be seen as what it is, gambling! More and more, investments will be fully paid for up-front and short-term investments relying on short-term results will be seen as unacceptably risky. The prudence of investments in assets that are at the same time assets and cash, such as gold and silver, will come firmly back into fashion and institutional portfolios.

We cannot emphasize enough the dangers of the inflation that lies ahead! Gold and Silver have yet to have their day!

By Kevin Phillips

Thirty to forty years ago, the early fruits of financialization in this country - the first credit cards, retirement accounts , money market funds and ATM machines - struck most Americans as a convenience and boon. The savings and loan implosion and junk bonds of the 1980s switched on some yellow warning lights, and the tech bubble and market mania of the nineties flashed some red ones. But neither Wall Street nor Washington stopped or even slowed down.

In August, 2007, the housing-linked crisis of the credit markets predicted the arriving disaster-stage, the Crash of September-November 2008 confirmed the debacle, and now an angry, fearful citizenry awaits a further unfolding. There is probably no need to fear a second coming of nineteen-thirties Depression economics. This is not the same thing; the day-to-day pain shouldn't be as severe.

Indeed, for all that the 1930s evoke national trauma, that decade was in fact a waiting room for national glory and wellbeing. World War Two ushered in American global ascendancy, the "Happy Days" of the 1950s and an unprecedented middle-class prosperity.

Today's disaster stage of American financialization - the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector -- won't be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.

My 2002 book, Wealth and Democracy, in its section on the "Financialization of America" noted that the "finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big." Hardly anyone was paying attention.


By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.

This represented a staggering transformation of the U.S. economy - doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.

Thus, it was pleasing to read MIT economics professor Simon Johnson's piece in the April Atlantic fingering financial "elites" who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson's analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.

Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books - Perfectly Legal and Free Lunch - describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).

The backstop to avarice provided by a wealth culture and market mania from the late 1980s through the Clinton years to the George W. Bush administration, prompted another set of indictments that still resonate: William Greider's Secrets of the Temple: How the Federal Reserve Runs The Country (1987), Robert Kuttner's Everything For Sale (1997), Thomas Frank's One Market Under God (2000) and John Gray's False Dawn (1998). More recently, Paul Krugman's books have been equalled or exceeded in timeliness by his New York Times columns blasting the perversity of the Obama-Geithner financial bail-out and the malfeasance of the financial sector.

James K. Galbraith, in his 2008 book The Predator State, has elaborated the valid point that too many conservatives over last few decades betrayed their free market rhetoric by supporting a relentless use of state power and government financial bail-outs to advance upper-income and corporate causes. On the other hand, some conservative economists of the Austrian school make related indictments of liberal bail-out penchants.

This could be a powerful framework. All of these critiques have merit, and ideally they might converge as earlier indictments of elite and governmental abuse did during the Progressive and New Deal eras. But I have to return to whether the public will ever be given full information on the fatal magnitude of financialization, who was responsible, and how it failed and crashed in 2007-2009. So far, political and media discussion has been so minimal that the early 21st century American electorate has much less readily available information on what took place than did the electorates of those earlier reform eras.

Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster.

Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

The principal inventors, hustlers , borrowers and culprits were the nation's 15-20 largest and best known financial institutions - including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off.

The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it's all under control and that the run-amok financial sector remains sound.

This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.

by: Avery Goodman

On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price [evidence of either unbelievable stupidity or gold market manipulation], faced a serious predicament. Some 27,000 + contracts, representing about 15% of the April COMEX gold futures contracts remained open. Technically, short sellers are required to give “notice” of delivery to long buyers. However, in reality, buyers are the ones who control the amount of gold to be delivered. They “demand” delivery of physical gold by holding futures contracts past the expiration date. This time, long buyers were demanding in droves.

In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper. It was amazing, therefore, when March 30, 2009 came and passed, and so many people stood for delivery, refusing to part with their long gold futures positions.

On Tuesday, March 31st, Deutsche Bank (DB) amazed everyone even more, by delivering a massive 850,000 ounces, or 850 contracts worth of the yellow metal. By the close of business, even after this massive delivery, about 15,050 April contracts, or 1.5 million ounces, still remained to be delivered. Most of these, of course, are unlikely to be the obligations of Deutsche Bank. But, the fact that this particular bank turned out to be one of the biggest short sellers of gold, is a surprise [if I was a German citizen, I would be furious. Deutsche Bank short selling of gold has helped the dollar at the expense of EU gold. For a nation that experienced hyperinflation eighty years ago, this should be ABSOLUTELY UNFORGIVABLE.]. Most people presumed that the big COMEX gold short sellers are HSBC (HBC) and/or JP Morgan Chase (JPM). That may be true [I expect the remaining positions are overwhelmingly US/UK banks (ie: JP Morgan Chase)]. However, it is abundantly clear that they are not the only game in town.

Closely connected institutions, it seems, do not have to worry about acting irresponsibly, in taking on more obligations than they can fulfill [evidence of this always irritates me]. Mysteriously, on the very same day that gold was due to be delivered to COMEX long buyers, at almost the very same moment that Deutsche Bank was giving notice of its deliveries, the ECB happened to have “sold” 35.5 tons, or a total of 1,141,351 ounces of gold, on March 31, 2009. Convenient, isn’t it? [yes, it is.] Deutsche Bank had to deliver 850,000 ounces of physical gold on that day, and miraculously, the gold appeared out of nowhere.

The announcement of the ECB sale was made, as usual, dryly, without further comment. There was little more than a notation of a sale, as if it were a meaningless blip in the daily activity of the central bank. But, it was anything but meaningless. It may have saved a major clearing member of the COMEX futures exchange from defaulting on a huge derivatives position. We don’t know who the buyer(s) was, but we don’t leave our common sense at home. The ECB simply states that 35.5 tons were sold, and doesn’t name any names. Common sense, logic and reason tells us that the buyer was Deutsche Bank, and that the European Central Bank probably saved the bank and COMEX from a huge problem [Agreed]. What about the balance, above 850,000 ounces? What will happen to that? I am willing to bet that Deutsche Bank will use it, in June, to close out remaining short positions [Agreed], or that it will be sold into the market, at an opportune time, if it hasn’t already been sold on Tuesday, to try to control the inevitable rise of the price of gold.

Circumstantial evidence has always been a powerful force in the law. It allows police, investigators, lawyers and judges to ferret out the truth. Circumstantial evidence is admissible in any court of law to prove a fact. It is used all the time, both when we initiate investigations, and once we seek indictments and convictions. We do this because we deal in a corrupt world, filled with suspicious actions and lies, and the circumstances are often suspicious enough to give rise to a strong inference that something is amiss. Most of the time, when the direct evidence is insufficient to prove a case beyond a reasonable doubt, or even by a preponderance of direct evidence, circumstantial evidence fills the void, and gives us the conviction. We even admit evidence of the circumstances to prove murder cases. In light of that, it certainly seems appropriate to use circumstantial evidence in evaluating possible regulatory violations. The size and timing of the delivery of Deutsche Bank’s COMEX obligation is suspicious, to say the least, when taken in conjunction with the size and timing of the ECB’s gold sale. It is circumstantial evidence that the gold used by Deutsche Bank to deliver and fulfill its COMEX obligations, came directly or indirectly, from the ECB.

I’d sure like to know what the ECB’s “alibi” is. If I were an investigator for the Commodities Futures Trading Commission (CFTC), assigned to determine whether or not gold short sellers are knowingly violating the 90% cover rule, I’d be questioning the hell out of the ECB staffers, as well as employees in the futures trading division of Deutsche Bank. There is certainly enough evidence to raise “reasonable suspicion”. Reasonable suspicion is all that one needs to start a criminal investigation. It should be more than sufficient to prompt the CFTC, as well as European market regulators, to start a commercial investigation of the potential violation of regulatory rules by both the ECB and one of the world’s major banking institutions. That is, of course, if and only if, the CFTC staff really wants to regulate, rather than simply position themselves for more lucrative jobs inside the industry they are supposed to be regulating, after they leave government service. [our regulatory system is filled with conflict of interests…]

It is quite important to determine whether or not Deutsche Bank was bailed out by the ECB because that will answer a lot of questions about allegations of naked short selling on the COMEX. If the ECB knew that its gold would be used as post ipso facto “cover” for uncovered shorting, staffers at the central bank might be co-conspirators. At any rate, the German bank did sell short on futures contracts without having enough vaulted gold it sold a naked short. It also means that the ECB has facilitated a major rule violation in a jurisdiction (the USA) with which Europe is supposed to have extensive joint regulatory agreements, any number of which may have been violated by this action of the ECB. At the very least, naked short selling is a blatant violation of CFTC regulations, which require 90% cover of all deliverable metals contracts. If the delivered gold came directly, or indirectly, from the ECB, it means that Deutsche Bank’s gold short contracts were “naked” at the time they were entered into [Unless the ECB, like the US, is in the business of selling call options on gold].

The 90% cover rule is very old rule, designed to prevent fraud on the futures markets. Its origin dates back into the 19th century. Farmers, in that simpler age, were complaining that big bank speculators were downwardly manipulating grain prices on the futures exchanges. Nowadays, the CFTC has a predilection toward categorizing banks as so-called “commercials” or “hedgers”, rather than as the speculators that they really are. Traditionally, only miners and gold dealers whose business involves a majority of PHYSICAL trade in gold should qualify as commercials. However, the CFTC has ignored this for a long time, and qualified numerous banks and other financial institutions, whose main gold business is derivatives, as “commercial” entities, immunizing them from position limits and other constraints. As a result, just like the farmers of the 19th century, today’s gold “cartel” conspiracy theorists revolve their theory around an allegation of downward manipulation, and heavy short selling concentration.

Manipulation can only take place when there is a disconnect between supply, demand, and trading activity on the futures exchanges. The 90% cover rule attempts to force a direct tie between the futures market and the availability of particular commodities, so that supply and demand become primary even on paper based futures markets, just as it is in trading the real commodity. Unfortunately, the modern CFTC has ignored or misinterpreted the purpose of the 90% cover rule for a very long time. This regulatory failure has allowed the current free-for-all “casino-like” atmosphere that now prevails at futures exchanges.

It would be helpful if some of my colleagues, within the public prosecutor and securities regulatory offices, in Europe, as well as the CFTC in America, filed complaints for discovery, to ferret out the truth. In the interest of transparent markets, the ECB should be forced to disclose who purchased the gold they sold in the morning of March 31, 2008 and why the sale was timed in a way that corresponded to the exact moment in time that Deutsche Bank had a desperate need for gold bullion.

Was it yet another bank bailout? Has another bank sucked up precious resources belonging, in this case, to the people of Europe? Gold is needed to bring confidence to the Euro currency, as often noted by Germany’s Bundesbank, which seems to be less kind to German banks than the ECB. Why should the ECB be permitted to sell gold to closely connected derivatives dealers, if the primary purpose is to save those dealers from the bad decisions they have made, and the end result is to reinforce moral hazard? Should banks like Deutsche Bank be allowed to take on more derivative risk than they can afford without involving publicly owned assets? Did Deutsche Bank issue naked short positions? Have innocent European citizens now had their currency placed at more risk, and some of their gold stolen from them, simply to enrich private hands? All of these questions are begging for answers. [If I was living in the EU zone, I would be complaining very loudly about this ECB gold sale.]

European regulators are quick to condemn the Federal Reserve for its incestuous relationship to client “primary dealer” banks, special treatment of favored institutions at the expense of other non-favored institutions, propensity toward injecting dollars to artificially stimulate the stock market, seemingly endless bailouts of closely connected banks, and, now, the seemingly unlimited printing of new dollars. I’ll not attempt to excuse the Fed for its failures. Indeed, I believe that it is in the best interest of the American people to close down that malevolent institution, permanently. However, if any of the questions I have posed are answered in the positive, people might begin to understand that special favors, nepotism, corruption, and a failure to properly regulate are not confined to America. The real estate bubble, for example, was allowed to become much bigger in the U.K., Ireland, Spain, and eastern Europe, than it ever was in the USA. The collapse of real estate, in those countries, is going to be more severe, even though it is more recent in origin than the pullback in the USA. America happened to be the first nation affected, but it did not cause the world economic collapse. That was caused by the joint irresponsible policies in almost every major nation in the world.

Those who rely on the good faith of Angela Merkel, to keep the Euro inviolate, certainly have a right to get answers from the ECB and from Deutsche Bank. The answers will tell us a lot about the real proclivities of the ECB. As the U.S. dollar is progressively debased, in coming years, will the Euro be any better? [good questions] Is the ECB merely a European copy of the Federal Reserve “slush fund”, utilized by well connected European banks, for the purpose of private financial gain, much as the Federal Reserve’s assets are utilized by its primary dealers? If the ECB is willing to bail out a major trading institution from the mismanagement of its derivatives operations, who could honestly claim that it would hesitate to competitively debase the Euro against the dollar? Having the answers to the questions I have posed would give everyone the knowledge needed to make important decisions. That is exactly the reason that, in all likelihood, we will never get these answers. Maybe, Europeans and others ought to be dumping Euros just as fast as they are now dumping dollars, and buy gold and silver, instead. [While I still believe the euro will hold up better than the dollar, gold will do much, MUCH better.]

Aside from the regulatory issues, if we did discover that Deutsche Bank got its gold from the ECB, one glaringly strong inference arises. When a major derivatives dealer goes begging for gold, to the ECB, it is very strong circumstantial evidence that not enough physical gold is available for purchase on the OTC wholesale market. Up until now, bearish gold commentators have steadfastly denied that wholesale gold shortages exist. Instead, they have insisted that all shortages are confined to retail forms of gold. Now, when combined with the circumstantial evidence, however, common sense tells us that they are wrong.

Decision: There is sufficient evidence for this case to go to a full scale investigation. The CFTC and similar securities regulators in Europe need to properly investigate the gold conspiracy allegations. That has never been done to date. They must determine who is buying central bank gold and whether or not it is simply being sold into the open market, or channeled into the hands of favored financial institutions who then use it to cover naked short selling. The investigation must include detailed vault audits and explore all paper trails.

By F. William Engdahl

US Treasury Secretary Tim Geithner has unveiled his long-awaited plan to put the US banking system back in order. In doing so, he has refused to tell the ‘dirty little secret' of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.

The Geithner Plan, his so-called Public-Private Partnership Investment Program or PPPIP, as we have noted previously, is designed not to restore a healthy lending system which would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets without demanding they change their business model. Yet, one might say, won't this eventually help the problem by getting the banks back to health?

Not the way the Obama Administration is proceeding. In defending his plan on US TV recently, Geithner, a protégé of Henry Kissinger who previously was President of the New York Federal Reserve Bank, argued that his intent was ‘not to sustain weak banks at the expense of strong.' Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.

The ‘dirty little secret' which Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks which are the source of the toxic poison that is causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem and the reason ordinary loan losses as in prior bank crises are not the problem, is a variety of exotic financial derivatives, most especially so-called Credit Default Swaps.

In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century , to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton .

One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called ‘weapons of mass financial destruction'), be free from Government regulation.

At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner's old boss, Larry Summers, is President Obama's chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.

The ‘Dirty Little Secret'

What Geithner does not want the public to understand, his ‘dirty little secret' is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet' or Over-The-Counter derivatives issuance.

Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere' $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain 's HSBC Bank USA has $3.7 trillion.

After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG's Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.' In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers' coup d'etat. It definitely is not healthy.

This is Geithner's and Wall Street's Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?

This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.

This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.

Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to ‘federalize' the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.

Ayn Rand from Atlas Shrugged 1957

"So you think that money is the root of all evil?" said Francisco d'Anconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears not all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor--your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money, Is this what you consider evil?

"Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions--and you'll learn that man's mind is the root of all the goods produced and of all the wealth that has ever existed on earth.

"But you say that money is made by the strong at the expense of the weak? What strength do you mean? It is not the strength of guns or muscles. Wealth is the product of man's capacity to think. Then is money made by the man who invents a motor at the expense of those who did not invent it? Is money made by the intelligent at the expense of the fools? By the able at the expense of the incompetent? By the ambitious at the expense of the lazy? Money is made--before it can be looted or mooched--made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced.'

"To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money permits no deals except those to mutual benefit by the unforced judgment of the traders. Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss--the recognition that they are not beasts of burden, born to carry the weight of your misery--that you must offer them values, not wounds--that the common bond among men is not the exchange of suffering, but the exchange of goods. Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade--with reason, not force, as their final arbiter--it is the best product that wins, the best performance, the man of best judgment and highest ability--and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil?

"But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality--the men who seek to replace the mind by seizing the products of the mind.

"Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he's evaded the knowledge of what to value, and it will not provide him with a purpose, if he's evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. Is this the reason why you call it evil?

"Only the man who does not need it, is fit to inherit wealth--the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. Is this the reason why you call it evil?

"Money is your means of survival. The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men's vices or men's stupidity? By catering to fools, in the hope of getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment's or a penny's worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. Then you'll scream that money is evil. Evil, because it would not pinch-hit for your self-respect? Evil, because it would not let you enjoy your depravity? Is this the root of your hatred of money?

"Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money?

"Or did you say it's the love of money that's the root of all evil? To love a thing is to know and love its nature. To love money is to know and love the fact that money is the creation of the best power within you, and your passkey to trade your effort for the effort of the best among men. It's the person who would sell his soul for a nickel, who is loudest in proclaiming his hatred of money--and he has good reason to hate it. The lovers of money are willing to work for it. They know they are able to deserve it.

"Let me give you a tip on a clue to men's characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it.

"Run for your life from any man who tells you that money is evil. That sentence is the leper's bell of an approaching looter. So long as men live together on earth and need means to deal with one another--their only substitute, if they abandon money, is the muzzle of a gun.

"But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich--will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt--and of his life, as he deserves.

"Then you will see the rise of the men of the double standard--the men who live by force, yet count on those who live by trade to create the value of their looted money--the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law--men who use force to seize the wealth of disarmed victims--then money becomes its creators' avenger. Such looters believe it safe to rob defenseless men, once they've passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter.

"Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'

"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.

"You stand in the midst of the greatest achievements of the greatest productive civilization and you wonder why it's crumbling around you, while you're damning its life-blood--money. You look upon money as the savages did before you, and you wonder why the jungle is creeping back to the edge of your cities. Throughout men's history, money was always seized by looters of one brand or another, whose names changed, but whose method remained the same: to seize wealth by force and to keep the producers bound, demeaned, defamed, deprived of honor. That phrase about the evil of money, which you mouth with such righteous recklessness, comes from a time when wealth was produced by the labor of slaves--slaves who repeated the motions once discovered by somebody's mind and left unimproved for centuries. So long as production was ruled by force, and wealth was obtained by conquest, there was little to conquer, Yet through all the centuries of stagnation and starvation, men exalted the looters, as aristocrats of the sword, as aristocrats of birth, as aristocrats of the bureau, and despised the producers, as slaves, as traders, as shopkeepers--as industrialists.

"To the glory of mankind, there was, for the first and only time in history, a country of money--and I have no higher, more reverent tribute to pay to America, for this means: a country of reason, justice, freedom, production, achievement. For the first time, man's mind and money were set free, and there were no fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and slaves, there appeared the real maker of wealth, the greatest worker, the highest type of human being--the self-made man--the American industrialist.

"If you ask me to name the proudest distinction of Americans, I would choose--because it contains all the others--the fact that they were the people who created the phrase 'to make money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity--to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words 'to make money' hold the essence of human morality.

"Yet these were the words for which Americans were denounced by the rotted cultures of the looters' continents. Now the looters' credo has brought you to regard your proudest achievements as a hallmark of shame, your prosperity as guilt, your greatest men, the industrialists, as blackguards, and your magnificent factories as the product and property of muscular labor, the labor of whip-driven slaves, like the pyramids of Egypt. The rotter who simpers that he sees no difference between the power of the dollar and the power of the whip, ought to learn the difference on his own hide-- as, I think, he will.

"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns--or dollars. Take your choice--there is no other--and your time is running out."

John P. Hussman, Ph.D., Hussman Funds

Brief remark - from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 4% of the purchase price - the remainder being "non-recourse" financing from the Fed, Treasury and FDIC. This essentially implies that the government would grant bidders a put option against 96% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats

Long time followers of this blog will be familiar with our view that JP Morgan is essentially the Federal Reserve and therefore the US governments bank. JP Morgan's share price provides a proxy for the markets view of whether the Fed and US Treasury are winning or losing the battle. It should also be noted that as the chief government executioner JP Morgan carries hundereds of trillions of dollars worth of derivatives on its books that have been used to manipulate markets. Consequently JP Morgan is a nuclear accident waiting to happen. When (note I didnt say if) JPM fall they will take the Federal Reserve and the current financial system with them. US sovereign default will also occur as a result.

JPM rallied strongly recently but has broken down from long term resistance at $27.50after the Feds PRINT PRINT PRINT policy this week to close just above $23. If JPM breaks recent lows of $15 the US government and financial system are in big trouble.

Got gold?

www.GoldForecaster.com

It is clear now that central banks are buying gold for their reserves. Here is a brief history leading to today and the present position of central banks as they turn to buying gold.

Massive Gold Sales!

From the early 1980’s and for the next 20 years gold was under the threat of massive sales from the world’s central banks. Many commentators reported that the overhang of gold above the ‘open’ market was so great that such sales would eventually lead to central bank reserves in the developed world having no gold at all. Central Banks had further worsened the situation by loaning gold to mining companies, through the bullion banks, allowing them to finance gold production to a far greater extent than warranted by the price of gold during that time. This acceleration in the production of gold allowed the gold price to be pressed down $850 to $275, the point at which Britain, at the instruction of the current Prime Minister Gordon Brown instructed that Britain sell the bulk of its gold reserves. From the turn of the millennium this perspective changed dramatically.

Limitation of gold sales by central Banks!

In 1999, through the establishment of the Washington Agreement, the signatories announced to the world that it need not fear uncontrolled sales of gold reserves for the next 5 years. While the U.S. and Japan were not signatories, they gave tacit agreement to such a limitation. Since then neither of them have sold gold on the open market. Following the end of the ‘Washington Agreement’, a second agreement, called the Central Bank Gold Agreement, extended the situation for another five years. This agreement ends on the 26th September this year. Sales were limited to the sales previously announced by the signatories, with the exception of Belgium and Spain who made no prior announcement to their sales. Under the Washington Agreement these were limited to 400 tonnes a year. Under the second Agreement the sales were limited to 500 tonnes a year. These limitations have not been met under the second agreement as sales are below this limit so far.

The halting of Central Bank Gold Sales!

Of great significance has been the actual slowing of gold sales from European banks, which appear to have lost all appetite for gold sales.

Indeed France was an unwilling seller, but under Presidential instruction has done so. Italy has had no plans to sell any of its gold. Germany had the option to sell 600 tonnes but has not taken this option up. Switzerland took some of this but has ceased selling now. It would be surprising if the signatories sold more than 150 tonnes of gold let alone the ceiling amount of 500 tonnes by the 26th of September this year. And next year, we expect no such sales [the I.M.F. sales are potential sales that are not part of a central bank gold selling policy] from central banks.

Central Bank buying of gold for reserves!

Just as the tide turned from damming gold in the monetary system in 1999 it appears we are rapidly approaching another watershed in the history of gold in the monetary system.
Countries not seen as an important part of the global monetary system have, in the last few months, turned buyers of gold. Ecuador [28 tonnes - 920,000 ounces - doubled its reserves from 26.3 tonnes], Venezuela bought gold [ 240,000 ounces - 7.5 tonnes - taking it up from 356.4 tonnes] , but this is not deemed of great significance.

Russia at last, after talking about it for over one year has begun to buy gold. It was reported that Russia has bought as much as 90 tonnes of gold for its reserves, lately [Previously it held 495.9 tonnes]. This is much more significant as it is a large figure in the small gold ‘open market’. Prime Minister Putin is reported to have said that Russia wants to see gold forming 10% of Russia’s reserve. The slow process of getting them up to that level could have begun. Even so Russia has little influence on global central bank thinking, so such increase are not thought to directly influence the principles behind gold as a reserve asset. So as not to minimize such purchases, if Russia were to keep up this pace of acquisition, it would be able to buy 360 tonnes a year and have a very significant impact on the gold price.

But the principles behind gold, as a reserve asset, are affected far more by the following news. Last week the European Central Bank reported that one signatory to the Agreement purchased gold [which for the first time we have seen them do it], because the purchase was not simply of gold coin [which has happened before – seemingly for good housekeeping reasons] but simply “of gold”. In other words the ranks of central bank selling in Europe have been broken and one has turned buyer!

We feel more positive now in our belief that European Central Banks are unhappy sellers and are inclined to change their views to the buy side. The very fact that one central bank in Europe has turned buyer confirms this. There is little doubt in our minds that there are conflicting views now amongst the heads of the leading European central banks on gold now.

Major changes taking place in central bank policies on gold!

According to the World Gold Council’s new chief Executive Aram Shishmanian, in the Middle East the new monetary union there intend to have “gold play a prominent role in Gulf CC economies.” He said, “It may play a role in that basket of currencies on which the GCC common currency will be pegged”. Of course, please bear in mind that the inclusion of gold in a basket of currencies, would simply be for valuation purposes and does not, of itself, imply that these central banks will buy gold for their reserves.

He continued, “Gulf central banks, along with the central banks of Brazil, Russia, India and China are expected to increase their gold reserves. Central banks with low reserves of gold are looking to increasing their reserves. They are trying to analyze what the right balance should be. They are becoming aggressive. Currently the belief is that if more than 20% of a central bank’s reserves are in gold, it is overweight, but this perception is changing! The metal is becoming an assert class in the region and Gulf investors are looking at long-term investments in gold as a hedge against inflation.” We are certainly not in a position to contradict what he says. After all he has the resources and contacts to be authoritative on the matter.

However after nearly 30 years of opposition to gold by central banks ands occasionally governments, it is a remarkable turnaround that tells us that gold is returning to the monetary arena again! [The gold world has expected this for so long it feels a bit like seeing an oasis in the desert.]

If right, expect to see both Russian and Chinese gold production go straight into those countries reserves and not even reach the open market. That will account for nearly 600 tonnes of supply disappearing. Now add to that the halting of sales from European central banks, a perceived 500 tonnes a year. If this trend continues gold, as an investment, will be fully rehabilitated.

Institutional demand will follow!

But this is by no means the largest effect that this change of heart will bring about. The recognition by central banks that gold has a role in the monetary system will influence investors, both institutional and individual. Should that happen and say 5% of funds placed in gold by funds such as Pension funds, then an amount of $920 billion, in the States alone, could head gold’s way. Only a five figure gold price could accommodate that volume of money in the gold market. Now add to that the same inclination in the rest of the world. Any such rise in price will stunt the demand for sure, but be certain that gold is not simply in a bull market.

If the World Gold Council’s CEO is correct, then he will have confirmed that 2009 and 2010 will be the year that heralds the return of gold to the global monetary system!

“Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historicallyhas always been the reason why governments hold gold.”