For those not paying attention, we have entered a global deflationary depression. The nutjobs running the world’s central banks and the moronic politicians elected by the sheep have tried Keynesian fiscal pork, zero interest rates, fraudulent accounting, printing money at hyper-speed, propaganda, austerity for the peasants, bonuses for the criminal bankers and crony capitalism for the super rich. It is five years later and it hasn’t worked. The grand experiment has failed. Bernanke and Krugman’s theories have been discredited. The world is on the edge. Bad shit is happening. Behind the scenes, the oligarchs are panicked and scrambling to retain their wealth and power. They are criminally inept. Their solution will be to accelerate what has already failed. This is how deflationary depressions turn into hyper-inflationary collapses. The massive buying of physical gold and silver by individuals and Far East countries is rational and prudent. The oligarchs won the battle in the past week. They may win a few more battles, because they have many weapons, but they will lose the war. This Fourth Turning is about to get really interesting.  

Fed and Bank of Japan caused gold crash

Commodity prices have been falling since September, culminating in a rout over the past two weeks. That is a classic warning for the global economy.

Traditionally shaped pure raw gold bars stacked in a secure bullion room safe


7:22PM BST 17 Apr 2013

It is becoming ever clearer that the roaring boom in global equities since last summer has priced in an economic recovery that does not in fact exist. The International Monetary Fund has had to nurse down its global growth forecasts yet again. We are still stuck in an old-fashioned trade depression, with pervasive over-capacity in manufacturing plant and a record global savings rate of 25pc of GDP.

German car sales fell 17pc in March. That should puncture the last illusions that Germany is about to pull Europe out of a self-inflicted slump.

As you can see from the chart below, the divergence between stock markets and the Deutsche Bank index of raw materials is astonishing to behold, so like the pattern in early 1929.

Steel has fallen 31pc this year. Brent crude is off 17pc since early February, and copper 15pc.

You have to be careful reading too much into commodities, distorted by China. The time-honoured cycle is a surge of investment that comes on stream at once with a lag. America’s shale drive has turned the gas market upside down, diverting liquefied natural gas to Europe and Asia. Copper output in Chile rose 7pc last year. The crash in the Baltic Dry Index for shipping rates is partly a tale of too many ships.

Yet excess supply does not explain the collapse in gold over the past week. Cyprus may have been an incidental trigger. If the EU-IMF Troika is determined to strong-arm the Cypriots into selling most of their pint-sized holding of 14 tonnes, it may do the same to Portugal when the time comes, and then you are talking about the world’s 14th biggest holding of 382 tonnes.

Bank of America says the gold crash since Friday has already discounted sales of the entire Cypriot, Portuguese and Greek gold reserves combined. “As we believe additional gold selling in the European periphery is highly unlikely, we find it hard to fully justify the sell-off,” it said.

The central banks of China and the emerging powers bought 535 tonnes last year to escape dollars and euros, the biggest wave of state purchases since 1964. Their strategy is to buy the dips, and they are no fools. The head of China’s reserve manager “SAFE” used to run a US hedge fund.

They won’t try to catch a “falling knife”, prefering to wait until the dust settles. The upward trend of the great bull market has been broken. The technical damage is brutal. Bank of America expects a further drop to $1,200. Be patient.

My view is that the US Federal Reserve and the Bank of Japan “caused” the gold crash. The rest is noise. The Fed assault began in February when it published a paper warning that the longer quantitative easing continues, the harder it will be for the bank to extricate itself.

The report was co-written by former Fed governor Frederic Mishkin, often deemed Ben Bernanke’s “alter ego”. It said the Fed’s capital base could be wiped out “several times” once borrowing costs climb. The window will start shutting by 2014, with trouble then compounding at a “dramatic” pace.

This was a shock. It suggested that the Fed has lost its nerve, and will think long and hard before launching a fresh blitz of money if growth falters.

Then came last week’s Fed Minutes, with hints of tapering off QE earlier that expected. That was the next shock. What they seemed to be saying is that the US economy is groping it way back to normality, that the era of silly money is over, that the dollar will stand tall again.

If that were the case, gold should fall. But it is not the case. The US economy is growing below the Fed’s own “stall speed” indicator. Half a million people fell out of the workforce in March. Retail sales fell in March. So did manufacturing.

The US faces fiscal tightening of 2.5pc of GDP this year, the most since 1946. Ex-labour secretary Robert Reich said the effects have been disguised so far, but a “stealth sequester” is just starting: $51m of grant cuts to Brandeis university; $1m for schools in Syracuse; and so on, the reverse of the stealth stimulus before.

My guess is that the Fed will be forced to row back smartly from its exit talk, but first we must look deflation in the eyes.

As for the Bank of Japan, it had been assumed that the colossal monetary stimulus of Haruhiko Kuroda would revive the yen-carry trade, leaking $1 trillion into world asset markets. But the early evidence is the opposite. Japanese investors brought money home last week.

“Mrs Watanabe” is selling her Kiwi and Aussie bonds to bet on stocks and property at home. And she is selling gold like never before. That too is a shock.

Japan’s “Abenomics” may prove a net drag on the world over coming months. It is exporting deflation through trade effects. This already visible in Korea and China, where soaring wages have eroded competitiveness. “Investors may have forgotten that yen weakness was one of the immediate causes of the 1997 Asian currency crisis and Asia’s subsequent economic collapse,” said Albert Edwards from Societe Generale.

China’s growth rate fell to 7.7pc in the first quarter. It will fall further, though the catch-up boom in the hinterland cities of Chengdu, Chonquing, Changsa and Xi’an may have further to run.

Fitch Ratings says credit has surged from €9 trillion to €23 trillion over the past four years, a rise equal to the entire US banking system. Beijing pumped up loans yet again after its recession scare in the summer, but is gaining less traction. The GDP growth effect of credit has halved. It is the classic sign of an economy sated on debt. China too will have to deleverage.

The world is still in a contained depression. Sliding commodities tell us global money is if anything too tight. “There is a threat of deflation almost everywhere. A lot of central banks will have to follow the Bank of Japan, whatever they say now,” said Lars Christensen form Danske Bank

The era of money printing is young yet. Gold will have its day again.


26 thoughts on “SHADES OF 1929”

  1. Simple Thought:

    Banks start lending money at a low rate of interest long term. Inflation kicks in, and now they have given away money at a negative interest rate.

    Banks go belly up.

    Who picks up the tab?

  2. I’m always suspicious of conspiracy theories about markets.

    I have no idea why the metals fell hard in the last few days. What I am confident about is that the most recent few years of monetary idiocy weakened the STRUCTURE of the broad money supply.

    Until the last few years, every new dollar CREDIT created by the Fed went into the economy somehow and pushed up the nominal price of SOMETHING.

    For a while it was stocks, then housing, then stocks again, and over that whole time, the metals rose higher on the same wave of credit-driven liquidity.

    Recently, the Fed’s actions have sledge-hammered the pilings supporting trust in some of the credit instruments heretofore treated as “money.” Each additional Credit-Dollar they create is undermining the perceived VALUE of the ocean of credit-money accumulated these past decades.

    The inverted pyramid of “money” is topped by the shakiest IOU’s, then slightly less-shaky, and so on, until we reach “money” that is the highest-order IOU– banknotes. Beneath banknotes is gold (or maybe better, real assets that have been pledged to NO ONE).

    As confidence in shaky IOU’s wanes, the money supply contracts. There are fewer things with “moneyness” chasing available assets, services, etc., so prices sink. Paradoxically, since gold is an asset priced in nominal dollars, as the money supply shrinks the price of gold can (and already did) fall. I think it will continue to do so.

    Deflation in action.

    If this view is correct, once the excess supply of unsupportable IOU’s collapses to a level people (the market) can trust, prices will stop falling. Given that a credit-collapse deflation will be accompanied by an economic depression dwarfing any in the past 300 years, academics and rulers will see the collapse in the money supply as THE PROBLEM (instead of a symptom of their prior idiocy) and once the supply of IOU’s collapses, no doubt they’ll try to reflate “prices” by the Zimbabwe Method.

    Until the deflation of credit has occurred, once the credit collapse begins (and the jury is still out on that) all attempts to replace credit with credit will fail. They may lead to spectacular bear market rallies, but until the IOU swamp is almost entirely drained, deflation will reassert (just as it has in Japan for over 23 years, with no end in sight).

  3. …just another opportunity to load up.. in physical that is.

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    April 18, 2013
    A Telling Gold Anecdote From Hong Kong
    Posted by Lew Rockwell on April 18, 2013 07:14 AM

    From a friend:

    I’ve been taking this opportunity to stock up on some yellow metal. Went to Hang Seng bullion counter yesterday. The line was out the door. It took an hour wait to see a teller. When I asked if people were buying in the dip or selling in panic, she told me that they haven’t had once ounce of gold sold back to them all day. She told me they have sold more gold in 24 hrs than they normally do in 3 months. Yes, there was a lot of extra security. The guy in front of me bought over $1 million USD in gold. He paid in cash and walked out of the door with the bullion in a Nike bag. Amazing.

  4. Fool on the hill,

    Pray tell, were you an owner of pre-1964 silver dimes/quarters in 1980? 1985? 1990?

    Did inflation basically end (or reverse) from 1980 to 2001?

    I’m tired of late-comers to this party spouting off like they have a clue. Holders of PMs lost nearly everything from 1980 to 2001, and if anyone can show me, document for me, that they “dollar-cost-averaged” into the PM’s during that period of time, I’d be astonished.

    It would be a super-human feat to take a 90%-plus draw-down (in CPI inflation terms, not just nominal) and not capitulate along the way. I’ve not met someone who could take that unless they were in a coma during that time.

    The metals float. Their relationship to inflation is about zero (correlation coefficient = 0.0 for the past 20 years, or so I’d wager.) Sometimes they reward early “investors.” Other times they punish, just as does every asset class.

    I post comments on this to fish for intelligent, REASONED explanations of why I’m wrong, yet all I get is the usual ad hominem attacks or regurgitation of platitudinous sales copy for those selling PMs.

    If you don’t have a comment based on more than what you read over at zerohedge or some gold-selling site, STFU and let the adults talk. I’m open to a good insight, but if I want to listen to sock-puppets I’ll turn on the TV.

  5. Why is it that rising conviction and unwillingness to sell stocks is often a sign of a top, and unwillingness to sell stock during a decline is a sign that the bottom is NOT in, but unwavering bullishness toward gold and an unwillingness to sell in spite of a price collapse on huge volume is a sign that we’re on the cusp of a major rally?

    Sentiment is sentiment.

    Today, far too many people are still in LOVE with gold. If you want to see what a bottom looks like, take the way-back machine to 2001. Even mining companies hated their own product, and all the perma-bulls (for gold) were throwing in the towel.

    That’s what a LOW looks like.

    I don’t know what prices will do tomorrow, or next week, or next year…and neither does anyone else. People who pound the table advocating Buy Buy Buy (the dip) today are expressing an opinion, NOTHING MORE, and citing an endless array of “Fundamental Reasons” why the PM’s will zoom to the moon is exactly what 1981, 1982,… looked like. Anyone who thinks people who bought gold and silver in 1978, 1979, and 1980 correctly adduced the future price movement of their holdings is truly stone-stupid. The euphoria of the 1980 top didn’t dissipate for 20 years.

  6. Mark, if the banks go belly-up, I’d say depositors picked up the tab (because they’ll get Cyprussed.)

    The banks took deposits, loaned out all that value, and the collateral for all those loans is far below liquidation value.

    The deposits are already GONE.

    The value returned to the ether from which the Federal Reserve Banking System conjured it. We just have yet to adjudicate who truly holds title to the underlying assets.

    One thing seems clear: Joe Sixpack will NOT be deemed the final title-holder of the underlying assets that form the accumulated wealth of the Western World. Our neo-feudal masters are busy buying every government on the planet, and since Mao was correct when he said the power of government comes out of the barrel of a gun, the people controlling the Big Guns will win out.

    This is the norm for humanity for 6000 years. Sallust was correct 2000 years ago: Most men don’t desire freedom, most only wish for a just master.

    Most people want to be slaves on a benign plantation.

  7. flash says:
    “The guy in front of me bought over $1 million USD in gold. He paid in cash and walked out of the door with the bullion in a Nike bag. Amazing.”

    40lbs of metal in a gymbag?

  8. “40lbs of metal in a gymbag?”

    First, I’d have to see it to believe it.
    Second, anyone who would do that “in the open” is crazy.
    Third, not unless I was wearing body armor, rifle plates, carrying a loaded, battle-worthy rifle and accompanied by several similarly-attired men of unimpeachable integrity.

  9. “Gold has worked down from Alexander’s time. When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory.”

    Bernard M. Baruch (who forgot more about money and markets than most ever knew)

  10. Somehow methinks that DC sunset has no PMs, garden, or a gun.

    Fool had Ag in 1968.

    Is a war orphan.

    Was raised by a single mother.

    A Vietnam vet.

    An electrical engineer.

    Has an eighty six year old lady friend.

    Has no debt.

    Is a Tufts U alumnus.

    Has never owned a TV.

    Is not impressed by “fifty cent” words.

    Has never owned paper metals.

    Has designed and scratch built a vehicle.

    Stood alone on all the major summits in the US.

    And is pretty sure that DC sunset doesn’t have a clue about the Mollier chart.

    And is probably older than DC by a long shot.

  11. Older? Yes.
    Wiser? That surely remains to be seen.

    You go your way, I’ll go mine. I’ll leave your chart to my son the mechanical engineer. I’ll leave your scratch-built vehicle to my other son’s conversion of a non-turbo, auto-trans car to a twin-turbo, manual shift rocket. I’ll stick with my wife of 30 years. I’ll aver I had the good fortune to see the military for what it is and was, and avoided it like the plague. I’ll see your zero debt and raise you NOT pulling in a check from Uncle Sugar (I owe no one, own what I own outright, and rely on no one’s handouts to pay the bills). I respect your travels (and love mountains and sea shores as well). If “50 cent words” imply a large vocabulary, I’ll reflex to a quote on this site not long ago that equated a large vocabulary with the ability to think clearer and deeper than those of fewer words.

    And yes, I have a gun. They’re fun. A man without a gun is the bitch for everyone who does, and I try to be no one’s bitch (but the IRS makes us all bitches, no?)

  12. Oh, and while I’m not a “war orphan,” I’m an adoptee whose paternal great grandfather built Standard Oil into the behemoth it became, who was a “Rough Rider with Teddy R.,” and all around asshole (I’m sure), whose biological father ran Bankers Trust’s brokerage division, whose maternal grandmother has sculptures in famous galleries across the US and Europe (and was an asshole from what I discern), so if I rub people the wrong way out of arrogance it’s because I’ve got good genes for it.

  13. Admin, gold may be great long term, but if you’re on the wrong side of a trade for 20 years, don’t tell me that doesn’t matter.

    People who bought gold and sat on it in the late 1970’s are still under water in inflation-adjusted terms, and if they bought gold and eschewed stocks during the Great Bull Market (or simply bought long-dated US Treasuries during that time) then they got doubled killed.

    No one strategy works in all times and in all places. Why is this so controversial?

  14. DC: I call bullshit on your “investment” theories. PMs are not investments, they are insurance. I started buying gold in the early 80s and silver in the $7.00 range. I’ve had to cash in a few “insurance” policies(KRs) when I was between jobs and they worked just fine!

  15. dc.sunsets says:

    “Oh, and while I’m not a “war orphan,” I’m an adoptee whose paternal great grandfather built Standard Oil into the behemoth it became, who was a “Rough Rider with Teddy R.,” and all around asshole (I’m sure), whose biological father ran Bankers Trust’s brokerage division, whose maternal grandmother has sculptures in famous galleries across the US and Europe (and was an asshole from what I discern), so if I rub people the wrong way out of arrogance it’s because I’ve got good genes for it.”

    OMG it’s Bill Gates posting on TBP.

  16. When I got my last shipment of Au (bought at $1000/oz), the postman who delivered it almost busted a sprocket bringing it up to the house.

    I told him (with a straight face) that the package was four dry-packed batteries for my Harley Sportster.

    Physical gold and silver are never bought as a “greater fool” investment, gambling that they will go higher to be flipped to a greater fool. Gold and silver may be considered partial insurance against the Fed’s mishandling of everything but mostly, gold and silver are used to retain purchasing power. The value of the PM’s will vary up and down in spikes and valleys but, over time, will retain the purchasing power when or even if ever traded for other physical goods and services.

    I’ve been in PM’s since the 70’s (purchased then through a Swiss Bank because it was illegal for ‘Mericans to own it. Been in it ever since. Buy the physical and speculate in the paper. Buy and hold the physical, buy and sell the paper.

    Since 2008, he who loses lease wins as when you stir world wide debt default (via money printing and purchase of government debt by central banks), stagflation and the last half of the Fourth Turning, The Shit Is About To Hit The Fan.

    Even James H. Kuntsler got with the plan this week and (retching and barfing all the way) admitted that there “just might be a little tiny bit of conspiracy cooking” in the monetary and gold manipulations going on and he HATED to admit it, as he is a foe of conspiracy theory (as I am except as far as monetary global activities are concerned). His piece is fun to read.


  17. Thinker

    Hyperinflation happens suddenly when bankers and politicians make dreadful mistakes. Do you think there are any bankers or politicians making dreadful mistakes today?


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