Gold Standard, Gold Futures, and Perception Management

The apparent end to momentum in the 12-year bull market in the gold price is a carefully coordinated exercise in perception management. J.P. Morgan and a handful of the world’s largest banks have been permitted the right to originate contracts for forward sales and purchases of various commodity products far in excess of what is produced of each commodity annually.

There is seldom any delivery of physical metals, and the contracts are originated on completely false premises equivalent to a casino where every game is rigged in favour of the house. Thus, the effect of real supply has been replaced by the effect of artificial supply.


This represents a regulatory deficiency on the part of the Commodities Futures Trading Commission at minimum, and at worst, outright criminal fraud and collusion among the U.S. government, the banks, and the market operators themselves.

CFTC Commissioner Bart Chilton has admitted on behalf of his agency that they are of the opinion that certain entities are engaged in manipulative and unlawful practices in the futures markets, and announced and investigation was under way. Four years ago. No results from the investigation have materialized, and that’s because the apparent end to the momentum in the 12-year bull market in the gold price is a carefully coordinated exercise in perception management.

The banks will forever be able to lay legitimate claim to the pursuit of profit as the primary motivation for exploiting the regulatory aberration that permits and even abets fraud on such a large scale. The government will never admit to active collusion.

CNBC, Bloomberg, the Wall Street Journal et al refuse to extend their line of inquiry into the factors controlling the price of gold beyond superficial fundamentals such as jewelry demand and store-of-value investor demand.

This perception management apparatus has now become so finely-tuned that the gold price is rather deftly handled upward and downward in movements that serve the requirements of the two parties operating the scam. For the banks, reliable risk-free profit, and for the government of the United States, the perception that the U.S. dollar is a safer haven than gold.

I think the current continuous downward pressure on gold is undertaken to create the reality of a gold price that declines below its 52-week low. That would, in the invisible deliberations of the fraud participants, end the perception of gold as a safer store of value than U.S. Treasury bills, widely understood to be a key component of keeping the U.S. dollar lie alive.

The Bloomberg headline of May 29th is precisely the objective of anti-gold dollar defenders: “Gold Set for Worst Run Since 1999 as Dollar Strengthens”. The U.S. Dollar lie is complete.

When you’re living a lie, perception outweighs the importance of reality, and that is optimally here achieved.

The second part of the elaborate perception management ploy is that the third round of U.S. stimulus will coincide perfectly with the re-emergence of the U.S. deficit and debt position at the top of the news heap once Europe has fallen the rest of the way apart. Stimulus will be required then, because the banks who are the recipients of the stimulus are subject to conditions that result in substantial proportions of that money being invested into U.S. Treasuries, which is essentially the mechanism by which the United States government counterfeits its own currency to the detriment of U.S. dollar-denominated sovereign reserve currency positions and its own population.

Thus the objective of the perception management exercise – the condition where selling U.S. debt is just slightly more egregious in a net-net evaluation of sovereign reserve value than buying more of it – is achieved. And the U.S. can continue bullying the rest of the world around because theoretically we are all unfortunate passengers in the same boat.

The problem with this strategy, as the perps likely comprehend perfectly, is that there is a point where the math can simply no longer support the illusion. That point is visible in a not-too-distant future. That is when all the major currencies collapse into the black hole of debt, whose traction is so strong that nothing in proximity can escape it.

Increasingly, that is the inescapable inevitability in this manufactured debt crisis charade.

For gold to fall below its current 52-week high implies a price of $1543 an ounce. That’s only ~$60 from where we are today. The fact that the ongoing futures market fraud is yet unable to drive it down below that mark is evidence of the growing demand for gold in view of the inevitable outcome for currencies outlined above. As Sprott U.S.A. CEO Rick Rule so aptly points out, “gold isn’t somebody’s promise to pay (like currencies) – its
payment.” So China continues to accumulate gold surreptitiously to offset its U.S. dollar reserve risk, while other nations such as the Philippines, Kazakhstan, and Mexico do so more overtly.

The inflection point at which gold explodes to the long-awaited stratosphere (taking silver and PGM’s along with it) is exactly the moment at which it becomes apparent that what’s happening in Greece and Spain will engulf Italy, France, Germany, Britain, and ultimately, the United States.

When the largest capital positions suddenly hit that “Oh shit” moment, when they realize that they’ve been had, the relief valve for all that financial terror will be precious. Metals that is.

Knowing the date of that event in the future is not really that important. All a capital-preservation minded investor needs is to understand that no matter what price gold is had at below $2,000 and ounce, there’s a 5-bagger at least waiting just round the bend.

All of the institutional analyst calls for gold heading back below $1200 are not necessarily to be ignored either.

Remember, the supply of precious metals is now infinite, according to current futures law, and so the way to achieve $1,200 or even $1,000 or even $600 an ounce is to sell vast quantities of gold into the future at lower prices. For those with deep pockets sitting on lots of cash, PRAY that gold is driven below $1,200 because it will be the trade of the decade to scoop it up at that price.

The attention riveted on Greece and Spain is exactly the smokescreen that the banks and governments colluding to perpetuate and amplify the debt need to continue operations. The fabrication of capital in the form of loans and credit extensions, the primary source of revenue for many banks directly and for many government officials indirectly, will thus intensify as Spain, Italy, France and finally the U.K. and Germany are dragged into the widening whirlpool.

Gold is the buy for the long term. Gut-wrenching plunges in the price should be expected and ignored, except perhaps to buy more on such dips. The entire global financial apparatus is slowly crumbling, and the collapse of investment banks and funds from Geneva to Toronto to New York is underway.

And as far as arguments go for and against gold as a standard, there has never been a time in human recorded history where whatever fiat currency was in use was not measured in ounces of gold for comparison. All those currencies have ceased to exist, just as the Euro and the U.S. dollar and renminbi must one day, because mankind is incapable of responsible fiscal management. Gold is not a theoretical, or even a possible, monetary standard. It is the only true monetary standard, and always has been. Source: Midas Letter

The Fiasco of Fiat Money

 

Mises Daily: Thursday, June 07, 2012 by Thorsten Polleit

 

I.

 

Today's worldwide paper-, or "fiat-," money regime is an economically and socially destructive scheme — with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine.


Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society's morals; and it will ultimately end in a depression on a grand scale.

All these insights, however, which have been put forward by the scholars of the Austrian School of economics years ago, hardly play any role among the efforts of mainstream economists, central banks, politicians, or bureaucrats in identifying the root cause of the current financial and economic crisis and, against this backdrop, formulating proper remedies.

This should not come as a surprise, though. For the (intentional or unintentional) purpose of policy makers and their influential "experts" — who serve as opinion molders — is to keep the fiat-money regime going, whatever it takes.

II.

The fiat-money regime essentially rests on central banking — meaning that a government-sponsored central bank holds the money-production monopoly — and fractional-reserve banking, denoting banks issuing money created out of thin air, or ex nihilo.

In The Mystery of Banking, Murray N. Rothbard uncovers the fiat-money regime — with central banking and fractional-reserve banking — as a form of embezzlement, a scheme of thievery.[1]

Rothbard's conclusion might need some explanation, given that mainstream economists consider the concept of fiat money as an economically and politically desirable, acceptable, and state-of-the-art institution.

An understanding of the nature and consequences of a fiat-money regime must start with an appreciation of what money actually is and what it does in a monetary exchange economy.

Money is the universally accepted means of exchange. Ludwig von Mises emphasized that money has just one function: the means-of-exchange function; all other functions typically ascribed to money are simply subfunctions of money's exchange function.[2]

With money being the medium of exchange, a rise in the money stock does not, and cannot, confer a social benefit. All it does is reduce, and necessarily so, the purchasing power of a money unit — compared to a situation in which the money stock had remained unchanged.

What is more, an increase in the money stock can never be "neutral." It will necessarily benefit early receivers of the new money at the expense of the late receivers, or those who do not receive anything of the new money stock — an insight known as the "Cantillon effect."

Because a rise in the money stock benefits the money producer most — as he obtains the newly created money first — any rational individual would like to be the among the money producers; or even better: to be the sole money producer.

Those who are willing to disrespect the principles of the free market (that is, the unconditional respect of private property) will want to obtain full control over money production (that is, holding the money production monopoly).

Once people have been made to think that the state (the territorial monopolist of ultimate decision making with the right to tax) is a well-meaning and indispensible agent, money production will sooner or later be monopolized by the state.

The (admittedly rather lengthy) process through which government obtains the monopoly of money production has been theoretically laid out by Rothbard in What Has Government Done to Our Money?.[3]

Having obtained the monopoly of money production, government will replace commodity money (in the form of, say, gold and silver) with fiat money, and the regime of legalized counterfeiting gets started.

Commercial banks will press for fractional-reserve banking, meaning that they should be legally allowed to issue new money (fiduciary media) through credit extension in excess of the reserves they obtain from their clients. Fractional-reserve banking is a rather attractive profit-making scheme for lenders; and it provides government with cheap credit for financing its handouts (well) in excess of regular tax receipts.

Fiat money will be injected through bank-circulation credit: banks extend credit and issue new money balances which are not backed by real savings. Economically speaking, this is worse than counterfeiting money.

Fiat money is not only inflationary, thereby causing all the economic and societal evils of eroding the purchasing power of money and leading to a non-free-market related redistribution of income and wealth among the people; banks' circulation credit expansion also artificially lowers the market interest rate to below the rate that would prevail had the credit and fiat-money supply not been artificially lowered, thereby making debt financing unduly attractive, especially for government.

It is the artificial lowering of the market interest rate that also induces an artificial boom, which leads to overconsumption and malinvestment, and which must ultimately end in a bust. Mises put it succinctly:

The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a "crack-up boom" and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.[4]
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