Another spectacular rant by one of the funniest learned men I've had the pleasure of reading. Chances are you will either love him or hate him.....<ggg>
Excerpted from this week's hilariously acerbic Mogambo Guru essay:
Alert: 'Danger' Ahead
We cannot back out of having a war with Iraq. If tomorrow Saddam says, "Hey! You win! I'm outta here!" what would happen to the "war premium" that is in bonds?
I mean, if the world suddenly went to some happy mode, then what chump in his right mind would loan money to a profligate government at less than the rate of inflation? And that means that bond prices would drop like stones in the market-place. And interest rates would have increases measured in hundreds of percents. Imagine that tomorrow interest rates on short-term money market money went from today's roughly one percent, sometimes even less than one percent, all the way back up to, oh, say, six or seven percent! That would be a 700% increase in rates! Now close your eyes and envisage the newspaper headlines. "700% inflation in interest rates! Economists in shock! President plotzes! Full story, and college pigskin preview, page eight."
Now imagine that short rates go from roughly one percent to twelve percent! How about twenty? How about thirty percent A MONTH? Sounds funny and laughable, huh? Now that you are happily chuckling, and by the way you look so cute when you nose crinkles up like that and your laugh is like music to my ears, come up with the reasons why it will NOT happen! Quick! Come on! Let's go, Mister Chortle Guy! Huh? How will it not happen? Let's hear it!
And an ancillary lesson of history is that people who hold gold will not suffer overmuch. Sometimes they prosper, but they never suffer for very long. Have you ever heard of one instance, in all of history, when gold went to zero purchasing power? Is there one single apocryphal anecdote that somebody ever went broke holding gold? Midas went broke because he had all that worthless gold? They killed and ate the goose that laid the golden eggs, since they needed meat more than gold, and you could not buy meat with gold, since gold was so valueless?
I bring this up because I want it to be very clear in your mind, with a crystal-like clarity, so clear that every syllable seems limned in sparkling sunlight, reminiscent of the way my eyes seem to sparkle whenever anybody asks if perhaps I would like to have some cookies, that I am saying that we are embarking on a period of time that will seem unprecedented, and it will be very unpleasant in the extreme, both in numbers of people affected and the cost to each, and as we shade our eyes with our trembling hands and look out over the coming years we see that it will be for a long time. As measured in decades. And the one thing that you can count on, looking at the historical evidence, is that gold will protect you from whatever happens. Short of confiscation by the government. Which will probably be what happens. The bastards.
The folks at the Daily Reckoning website say, "We recommend that you buy gold, not because we know what will happen, but because we don't."
But since I am such an egotistical and conceited bundle of know-it-all snot, I will bravely go one giant step farther, and say that I personally DO know what will happen. That's right! I know precisely what will happen! And, so, I am recommending that you buy gold, and with both hands snatching it up like a greedy two-year old scrambling for dropped candy, because I DO know what will happen. And what will happen will be bad for every thing that is NOT gold! Or silver. Or commodities. It's just that gold is so handy, small and portable.
- Speaking of gold, Kelly Patricia O'Meara, of Insight Magazine, writes that "What the Bank of Portugal revealed in its 2001 annual report is that 433 tonnes [metric tons] of gold - some 70 percent of its gold reserve - either have been lent or swapped into the market. According to Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA), a nonprofit organization that researches and studies the gold market and reports its findings at www.LeMetropoleCafe.com: 'This gold is gone - and it lends support to our years of research that the central banks do not have the 32,000 tonnes of gold in reserve that they claim.'"
"So why would banks do that?" you ask? Well, the deal was that the central banks had all this gold left over from the old days, see, and it costs money to store and guard all this gold, which was an expensive hassle and pain in the old wazoo, and so what they decided to do, in order to get a few bucks rolling in, you know, sorta getting some pin-money but at least "putting assets to work" which was a mantra that was all the rage at the time, was to loan the gold to gold-mining guys who would sell the borrowed gold to customers instead of having to go to the trouble and expense of actually digging the stuff out of the ground and getting their hands all dirty.
And everybody prospered, especially since the artificial explosion in supply kept driving the price down and down, year after year, making the whole thing more and more profitable the whole time.
Murphy goes on to explain: "The essence of the rigging of the gold market is that the bullion banks borrowed central-bank gold from various vaults and flooded the market with supply, keeping the price down. The GATA camp has uncovered information that shows that around 15,000 to 16,000 tonnes of gold have left the central banks, leaving the central-bank reserves with about half of what is officially reported."
"So what?" you ask? Well, now that the price of gold is rising, the huge, gigantic short position is becoming unprofitable for the short position. How big is the short position? Well, if you accept the notion that the 2,000 tonne per year total global output of new gold would now be used for closing out the short position, then it would require 100% of all the gold mined for the next seven years. Seven years!
As a reference, the total short position on the stocks of the NYSE, measured as a percentage of average daily volume, is measured in days, and is 5.4 days at latest calculation, but NOT weeks, and certainly NOT months, and emphatically NOT years, and, with voice rising in volume and actually shaking with emotion, NOT SEVEN, I'M TALKING SEVEN FREAKING YEARS!
But even this is not the big news. We all already know that the price of gold will rise dramatically, and for a long time to come. No, the big news is that, according to Mr. Murphy, "The cartel has been able to get away with lying about the amount of gold in reserve because the...IMF instructed them to count both lent and swapped gold as a reserve." In other words, the IMF told the central banks to practice a variant of fractional banking on a global scale, allowing them to count as reserves something that they loaned out already.
The IMF denies that it did any such thing. But, the article goes on to say, "A footnote on the Website of the Central Bank of the Philippines (www.bsp.gov.ph) in fact directly contradicts the IMF's claim: 'Beginning January 2000, in compliance with the requirements of the IMF's reserves and foreign-currency-liquidity template under the Special Data Dissemination Standard (SDDS), gold swaps undertaken by the BSP with noncentral banks shall be treated as collateralized loans. Thus gold under the swap arrangement remains to be part of reserves, and a liability is deemed incurred corresponding to the proceeds of the swap.'"
To further nail down the case that the IMF is a lying bunch of communist idiots, well, actually that they are liars, and it is me loudly exclaiming that they are communist idiots, O'Meara goes on to note "The European Central Bank (ECB) also made it clear that the IMF policy is to include swaps and loans as reserves. The ECB responded to GATA: 'Following the recommendations set out in the IMF operational guidelines of the 'Data Template on International Reserve and Foreign Currency Liquidity,' which were developed in 1999, all reversible gold transactions, including gold swaps, are recorded as collateralized loans in balance of payments and international investment-position statistics. This treatment implies that the gold account would remain unchanged on the balance sheet.' The Bank of Finland and the Bank of Portugal also confirmed in writing that the swapped gold remains a reserve asset under IMF regulations."
Case closed. The IMF is a bunch of liars that I think are communist idiots.
Now we open the file labeled, "How to make a few bucks on this tasty tidbit of news." Wending our way down to a later sentence in the same article, we read, "John Embry, the manager of last year's best-performing North American gold fund and manager of the Royal Precious Metals Fund for the Royal Bank of Canada, says he is putting his and his clients' money on the 'lunatic fringe' in this dispute." And if you care to examine my credentials, you'll notice that I am, indeed proudly, a card-carrying member of the aforementioned lunatic fringe. So if he were managing any of my money, and he is not, as far as I know, he would be doing the same thing that I am doing and I recommend that you do, too, and that is putting my money on gold.
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