Precious metals paper market correction continues

 

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Last week and earlier saw the precious metals paper market correction continue.  Please note that this is the supposed paper market tail wagging the physical market dog. The physical market remains in high demand and short supply.

The banksters kept forcing the paper price of gold and silver lower, started covering their shorts, and rebuying longs as the technical funds coughed up their leveraged positions. Eventually, the price will rise, the banksters will sell into strength, and this round of the dance will end, only for another round to begin. We have seen this particular dance so many times that one might think all gold pundits would report accurately on it – but no. One would be better advised to listen to Jim Sinclair, who has stated many times that this game will continue, with a marked increase in volatility, as the gold price see-saws higher, as it assuredly will, whether we are in for a period of heavy deflation, or massive inflation.

The financial system is now inherently unstable, and one of the other of these outcomes is inevitable. The debt will either collapse, meaning massive defaults at individual, municipal, state and sovereign level, or it will be inflated away.  The powers that be know this – that’s why central banks have become net buyers of gold, and the Chinese government is encouraging its citizens to buy gold and silver.

Meanwhile, western governments are encouraging their citizens to spend any money they have and indeed to go further into debt, to buy widgets to “get the economy moving again”.  It’s also why the SEC has quietly arranged to allow money market funds to suspend redemptions. A brighter flashing pointer to continued expected financial instability, I have yet to see.  Here’s Zero Hedge’s take on the new rule…

 

Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

Here’s an interesting question. Is it immoral, or “un-American”,  to walk away from your mortgage debt? Of course if you’re a too big to fail bank, it is apparently quite OK. But corporations have legally become people – they can spend as much as they like endorsing their preferred candidates for Congress or Senate. It’s all very confusing. I would hazard a wager though, that as more and more folks take the “jingle mail” route, we will hear increasing calls from the banks about the dubious nature of the practice….

 

Speaking of debt, Australian economist Steve Keen, who was one of the few to presciently call the upcoming crisis in 2007, has carried out some very interesting work concerning the rate of growth of debt in an economy. What he has found, if I understand him correctly, is that for both the US and Australia, there is a very high correlation between the rate of growth of debt and the rate of growth of the economy.

Now we know that, in the US, it is taking increasingly large increases in debt to produce growth – now the figure is upwards of $5 of debt to produce a $1 increase in GDP. This means that if we go for growth, we have to accept an increasing debt burden – just at a time when the existing debt burden is becoming unconscionably large.

It is also interesting to see President Obama try to harness the groundswell of calls for fiscal responsibility by proposing certain spending freezes. Of course the fact that this is a small drop in a very large ocean seems to escape many folks attention…

 

Lastly, I just want to draw people’s attention to Eric King’s site King World News where each week, Eric posts great interviews with noted figures in both the precious metals and general business communities. The current interview with Jim Rickards is long, but one that I found particularly good for understanding the nature of the gold market.

UPDATE:  If you’re pushed for time to listen to this interview, we’ve now published this summary article of the main content… Jim Rickards: A tidal wave of demand for gold

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