As hardcore Kingworld News listeners will already know, the prescient Ben Davies gave Eric King a remarkable interview a few days ago, which encompassed virtually every topic of recent interest to Cobden Centre readers. I was enthralled by this interview, and only wished it could go on longer, but, alas, after nineteen minutes, the brilliant Mr Davies had other souvlaki to fry.
If you’d like to listen to the interview too, just click on the link below:
In the KWN weekly metals wrap, we’re looking at $1,440 as the new ceiling and perhaps $1,420 as the new floor for gold (yes, the dreaded ‘G’ word). Although last week was indeed a consolidation week, if we break through $1,440, then we’re up through $1,450 and a new ceiling at $1,460. With gold going through these $20 window breakpoints, silver appears to be going through the same logical process, but with $2 dollar breakpoints, as people abandon paper currency, particularly the paper dollar (which other paper money printers still treat as their reserve currency, even though the dollar has been backed by nothing since 1971). The new silver ceiling target is $38 dollars. Once we’re through that, then we’ll probably be up to $40 as the new immediate target:
James Turk, the proprietor of GoldMoney, is more bullish than the metals wrap commentators (as you might expect, of course). The major difference between silver and gold at the moment, is that silver is in backwardation (the future delivery prices are lower than the on-the-spot prices), which indicates that people prefer physical silver in the hand, to two birds bearing paper promises of silver in the bush. Mr Turk predicts that if gold goes into backwardation too (a highly unusual and usually extremely fleeting occurrence), then it’s all over for the dollar. Backwardation in both silver and gold will indicate a major flight of wealth into private metal (solidity) and away from government paper (junk). Turk still says he believes in $1,800 dollar gold this year, and $50 dollar silver:
[For financial markets newcomers, future delivery contracts for hard valuable commodities are usually more expensive than on-the-spot delivery contracts. This is called 'Contango', which is a sort of cod-latin for 'I touch against'. The idea is this; I have two routes to holding a thousand ounces of silver, in one month from now. I can either buy hard physical silver today in the on-the-spot markets, and hold it for a month, or I can buy a promise from someone else to deliver me a thousand ounces of silver in a month. The problem with buying it today, however, and holding it for a month, is that you need to borrow money today to pay for it, then you need to store it in an expensive vault, and you also need to insure it from theft. These three costs of finance, storage, and insurance, are usually added on to the on-the-spot price to make it equal to the future delivery price. If this relationship is broken, then arbitrage theory might come into play. If the future delivery contract price is lower than the on-the-spot physical price, then you can sell all the silver you hold and save a month's finance, storage, and insurance charges. To keep your silver portfolio filled, you simply buy a future delivery contract from a reputable firm, and take their delivery of silver in a month to refill your portfolio. Therefore, you'll make a lot of money. For example, if physical silver is $36 dollars, and the total finance, storage, and insurance costs are $2 dollars, per month, per ounce, the futures contract for a thousand ounces should cost $38 dollars per ounce; this is sometimes known as the 'fair value' of the futures contract. However, if because of supply and demand the silver futures price for delivery in one month's time is $35 dollars (i.e. it is in 'backwardation') and you hold one contract's worth of silver, then you sell your thousand ounces of silver at $36 per ounce and buy a future for delivery of 1,000 ounces of silver, at a promise-to-pay of $35 per ounce; you then bank the $36,000 dollars you have just made, and start collecting interest on it. In one month's time, you take $35,000 dollars out of your bank account, and pay that to the reputable firm to take delivery of your silver, at a 'profit' of $1,000 dollars (plus one month's bank interest on the full $36,000). You also saved yourself $2 dollars per ounce in holding costs. So on a one month future contract, that's $3,000 dollars of gain, plus interest. On a thousand contracts, that's over $3 million dollars! When a market in a hard commodity like silver goes into backwardation, it indicates that there is a massive 'convenience yield' in holding physical silver right now, rather than waiting a month for someone else's promise to deliver it to you. What this might indicate in these markets, is that people believe silver's price rise is relentless, in terms of dollars and other unbacked paper monies, and that in a month's time silver is going to be priced significantly higher and rising, therefore wiping out any 'paper money' gains in arbitrage, because you have lost your real silver, and are left holding nothing more than a paper promise to deliver it back from someone else, who might have gone bust in the meantime, or who has resorted to hiding behind complex smallprint in the original future delivery contract because they cannot cover themselves and cannot find the silver in the market that they promised to deliver to you, at the cut-price rate you promised to pay, and cannot afford to fund the difference. If they are speculators rather than silver miners, they will have only sold you the futures contract in the first place, because they believed or hoped the price of silver would fall, and this rise has really caught them short. For instance, if the demand price for physical silver has gone to $50 dollars an ounce, and they sold you a thousand fair value contracts to deliver at $38 dollars an ounce, a month earlier, they are down $12 million dollars. You therefore want to keep holding all the silver supply you have now. You do not want to let a single ounce go. And you want more silver, real silver, in the hand, at your convenience. Right now. You do not trust even reputable exchange organisations to be able to deliver real silver to you in a month's time, without monkeying about with obfuscated exchange rules on paper money compensation in lieu of real physical delivery. You don't want $50 miserable paper dollars delivered late by a recalcitrant, possibly even, bailed-out exchange; you want your ounces of silver right now, which could be rising by a dollar a day, at this point. For instance, you might believe you will receive $50 miserable paper dollars in contracted compensation for not receiving a promised and undelivered ounce of silver, but that silver itself might be over $55 dollars an ounce, and rising, by the time you are so compensated (with the finagling firm or even silver miner that sold you the futures contract keeping hold of your silver, that they should have delivered to you). Your faith in paper money is, as they say, crumbling. (You might wonder therefore who is selling silver futures at $35 dollars an ounce? Well, there's lot of talk about that on the Internet, particularly if you stray anywhere near Max Keiser's web site, but if we're being generous, we'll say it's silver mining companies who are digging it out of the ground for $5 dollars an ounce, and who will be happy with a guaranteed $30 dollar profit on that in a month's time. They just want a predictable market for their effort, and are prepared to forego any speculative profit to get that guaranteed money, plus, as silver miners, they should be able to honour their obligations in physical metal.) Therefore, if gold does go into backwardation for any sustainable period, then Mr Turk is probably right. If you could believe in futures markets and paper money, then buying gold futures in backwardation would make lots of sense, thereby pushing the price up of these futures contracts. It only makes sense for gold to go into backwardation if a large mass of gold buyers, including central banks, have given up on paper money. It probably really is all over for the dollar if gold goes into backwardation for any sustained kind of period. The Federal Reserve will therefore have done its assigned job in less than a century, since 1913, when it was formed. It will have completely destroyed the dollar and the wealth of every dollar holder in the world, and passed this wealth on to the U.S. government to waste on itself in a century of imperial ambition. Well done, Alan and Ben. Your mission will have been accomplished. A truly magnificent effort in the face of so much economic logic from the Austrian School, of which Alan Greenspan, in particular, was intimately aware. As for Ben, he's really a confused cardboard cut-out character on sabbatical from 'Hector's House', and so is to be pitied more than defiled.]
Ben Davies speaks about George Reisman’s book, Capitalism (freely available for PDF download), and government price controls. Davies predicts that no matter how stupid price controls are, in an economic sense, western governments are heading towards more price controls to miserably fail to smother the paper money inflation they are creating with their printing presses.
He also talks about how the silver price has been artificially controlled, which has led to a shortage in physical silver, and therefore the current price explosion in silver as those controls fall apart (as price controls always do). Davies predicts a consolidating top for silver, at $45 dollars an ounce. He believes once silver reaches that point, then gold will be where the action is, with a breakthrough ceiling of $1,440 dollars an ounce, and then nothing to stop it rising another $400 dollars on the upside, if it breaks through that price-controlled ceiling, to match Mr Turk’s $1,800 dollars by Christmas. Interesting:
Rob Arnott speaks about the general inflationary cycle, moral hazard, and the policy blunders of central banks; he is alarmed. He also predicts that if the U.S. government keeps going with its money-printing policies, then it is heading for a Greek-style collapse. Listen out for the line about the iPad:
The heroic honey-voiced Robin Griffiths strays a teensy-weensy bit into Bastiat broken window territory, but we’ll forgive him for this possible faux pas because of the kicking he then gives Helicopter Ben. He believes it is reasonable to expect gold to hit $3,000 dollars an ounce, at some point, without a specific timeframe, though even $8,000 dollars is a not unreasonable target, if Helicopter Ben really keeps going with his prodigious money printing programme. On silver, he thinks a reasonable resting position is somewhere between $40-45 dollars, but that it should double from there within some kind of short-term horizon:
With the price of gold crashing through record highs most days of the week at the moment, I should imagine most gold bugs are having trouble keeping smiles off their faces.
To keep all these fine people in a continuing happy mood — after a few months of nervousness that Ben Bernanke was somehow, despite all logic, going to get away with his quantitative easing money printing programme — I thought I would do a round-up of the latest MP3 shows on King World News, where a certain ‘dominant theme’ is evident, based upon the dreaded ‘G’ word:
The big date is going to be the 30th of June. If Mr Bernanke keeps going with his quantitative easing after this point — which in my own view is a no-brainer — then all bets are off on the upside potential of gold and silver in terms of dollars. We shall have to see if our own central planning money board at the Bank of England tries to accompany Ben down on his race to the bottom, to keep him company, but I would imagine they will, though hopefully not at the same prodigious rate, particularly given this news from Zero Hedge.
Davies discusses how the sovereign debt euro crisis has entwined itself with a major global banking crisis and led us to the point where if a new Irish government emerges in the New Year which refuses to swallow the recent EU forced bailout, then the whole euro shooting match could come crashing down in short order, with all of Club O’Med falling in sequence like dominoes.
“The fiat currency system is one big Ponzi scheme.”
If the EU do manage to buy time by creating a Brady-style EU bond to support all of these peripheral EU countries, thinks Davies, then this will only push the viability of the euro down the road. However, with all of the fudging that has gone on around this currency since its inception, Davies trusts gold much more than he trusts the future of the euro.
He therefore thinks it likely that the euro will thus fail sometime in 2011 and 2012, perhaps precipitated by the situation in Ireland, and is preparing himself and his investors for this eventuality.
Eric King interviewed Ben Davies recently about a recent presentation Mr Davies gave as a keynote speaker at the Gold and Silver summit in London. This presentation focused on the UK debt situation and the interview starts on the clock at 1:05 minutes:
Going much further than Martin Durkin did recently, on Channel4, Davies thinks that the UK government debt level stands at around £170,000 per man, woman, and child. He discusses why this makes the UK a prime candidate for hyperinflation, particularly because of the government’s lack of gold ownership.
The interview is interesting because Davies predicts that if a G3 country experiences a sovereign debt crisis, within a cluster of such crises, then the fiat currency system could come to an end right there and then.
When answering Eric King’s usual questions about the medium and long-term price of gold, Davies sees $1600 dollar gold by the end of the year, but that gold will then trade in a highly volatile range from $1200 to $1600 for a period, but that its long-term fair value is still in the order of $4000 dollars an ounce.
You can find a PDF of the original presentation, here.
Following on from an earlier piece, Ben Davies of Hinde Capital discusses the current Japanese economic environment before wrapping up with the precious metals market, in the King World interview below:
Davies thinks the Japanese are in an unenviable position because they are being squeezed on the export front by China with the Chinese government’s revaluation downwards of their Yuan. Although I would hedge some personal reservations about his positive opinion on this, Davies thinks the Japanese must devalue the Yen to avoid having their export markets devoured by the Chinese.
The Japanese government are also no longer able to issue more debt because their national savings rate has collapsed, and they cannot go to the international capital markets and offer their government debt for close to 0% and get any takers. With 95% of JGBs (Japanese Government Bonds) being held by Japanese citizens and with a savings rate collapse partially caused by an ageing demographic — where older Japanese people are beginning to consume stored wealth after decades of previous saving — Davies thinks the Japanese have nowhere to go but down in Peter Schiff’s Race to the Bottom.
[We can perhaps leave till another day the discussion on whether gross financial mis-management by government is what causes negative ageing demographics — go here, here, or here for more on how government financial policies of all kinds can wreck a country's otherwise healthy demographics in the age old story of reaping what you sow.]
Despite concluding that Japan should engage in a race to the bottom with the Chinese, with national debt greater than 160% of national revenues, Davies thinks Japan is on the same road as Lebanon, Zimbabwe, Jamaica, and Sudan — which possessed similar debt/revenue ratios; i.e. heading towards hyperinflation.
[There are 900 trillion Yen's worth of JGBs outstanding, which is approximately $10 trillion dollars worth of debt, which is approximately 240,000 tons of gold at $1300 dollars an ounce. As only 165,000 tons of gold have ever been mined in human history, then you can see that this is somewhat of a problem.]
With almost 40% of Japanese government tax receipts currently being spent on paying interest on their debt, if interest rates go up by just 1%, then coupon payments on JGBs will soak up more than 60% of current tax receipts. Davies therefore believes that Japan will experience a monetary frenzy over the next few years, as various global government submarines race to find the sea floor in this cataclysmic race to the fiat currency bottom.
“This bear market will be about the collapse of fiat money. In all history, no fiat currency has ever survived. The fundamental of this bear market will be about the collapse of the world’s fiat currency and all the fake prosperity that has been created through fiat currency. In other words, cold reality will prevail. The people of the world will, at last, realize that money by fiat is not reality, it’s fantasy money and a dream created by man.”
Moving on to the gold market, where I have absolutely no qualms with his opinions, Davies believes that as we are into new territory with the gold price, that a short squeeze will take place because so few people are willing to sell their gold, with few other assets (except other commodities, especially silver) looking very positive.
Very low returns are being offered on government bonds [which many see as being in a gigantic bubble] and stocks are hugely volatile. Because of the relative attractiveness of gold, as compared to bonds and stocks, Davies sees $1400 and $1500 gold prices as being within range, in the short term, and possibly even shooting up above that.
On silver, Davies is pleased he managed to get his investors into the silver game early on, but does expect more volatility on silver, as once again we are into relatively new price discovery territory.
[If we exclude the Hunt Brothers' unsuccessful silver squeeze, which various governments snuffed out when the squeeze exposed their fiat currency shenanigans, we are in similar virgin territory to the gold price.]
Ben Davies, of Hinde Capital, has written an excellent article about all of the fiat currency devaluations that have been going on recently around the globe. He spoke about this piece with Eric King, in the 10-minute interview below:
The thrust of the argument is that a ‘Bretton Woods II’ arrangement has arisen in the last few decades based upon the Renminbi-Dollar peg and the three-legged tripod of the Chinese and the Americans, with the Japanese trapped between them. This crystalline financial peg, held in place by the tripod, has supported the creation of a hugely imbalanced global financial structure rising above it into the clouds.
The subsequent and necessary unwinding of this peg in the last few years — as spoken about at length by men like Jim Rogers — has then become the internal engine of the world’s external financial problems, as this complex structure of pegged falsity twists painfully into a simpler more truthful shape.
The theory of money is like a Japanese garden: simple on the surface, but filled with subtleties that emerge after prolonged contemplation.
Davies argues that we may reach the point soon where this Hector-like crystalline fiat currency system will fracture and shatter completely, under the unrelenting stress of the Achilles-like unwinding peg, to be replaced by an honest metals-backed monetary system.
Until that shatter-point is reached, the current wave of currency devaluations will continue as the torque force of $3 trillion dollars of US assets in China and the $1 trillion dollars of US assets in Japan spins outwards, while the world’s governments constantly try to evade and escape this splattering deluge by devaluing their currencies. (These devaluers include the Swiss National Bank, the one former reliable home of ‘solid’ fiat currency, hence the rush to gold rather than to the Swiss Franc).
Paper money systems have always wound up with collapse and economic chaos.
Howard Buffett, former four-term US Congressman from Nebraska and father of Warren Buffett
Calling into question the entire Fractional Reserve Banking system, Davies declares that “the world is one big version of Zimbabwe”, and that “the pied-piper is a’calling”, because the whole world cannot export at the same time, which is the usual aim of one country engaging in a currency devaluation.
In a race to the bottom, all of the fiat currencies will eventually have nowhere to go but into the incinerator, along with all other historical fiat currencies.
The universe of fiat currency that we currently live in really will have become a burnt-out cinder.
I warn you that politicians of both parties [the Republicans and the Democrats] will oppose the restoration of gold, although they may outwardly seemingly favour it. Also, those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money. You must be prepared to meet their opposition intelligently and vigourously. They have had 15 years of unbroken victory.
But, unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.
The basic message of Mr Davies is that serious investment professionals should avoid investment in gold Exchange Traded Funds (ETFs), but should be invested in physical gold instead.
[ETFs are funds which wrap commodities or baskets of other shares, inside a share structure. For instance, with a gold ETF, the fund buys and sells gold in the commodities market and then buys and sells shares representing this underlying gold in the stock market. The idea is that investors can then buy and sell gold via the convenient and liquid channel of the stock market, instead of the more complicated commodities and futures markets. As well as buying and storing physical gold, ETFs may also engage in complex derivatives trades to maintain share price liquidity. Perhaps the best known precious-metals ETF is the SPDR Gold Shares trust, which is denominated on the markets by the GLD ticker, and which is currently valued at approximately $50 billion Dollars.]
The contention from Mr Davies is that Wall Street did not invent ETFs for altruistic reasons. The fund managers take a management fee and the construction of an ETF provides the liquidity required for swift arbitrage trades in a chosen market. It is an unwieldy process moving bars of physical gold around, from one secure Swiss vault to another, but it is the work of a nanosecond to buy or sell an ETF share.
The problem is that the main reason you buy gold is to mitigate the effects of potential systemic risk. If the world should walk into a hyperinflative shock or some other systemic meltdown, then physical gold will be an island of economic safety. If you hold a bar of physical gold, aside from the security risk of needing to keep it safe from thieves and government officials, you encounter no counterparty risk and therefore no default risk. You buy gold to retain wealth, rather than to accumulate wealth.
But ETFs only work in a ‘normal’ market of wealth accumulation, thinks Mr Davies, because when the balloon goes up, precious metal ETFs are subject to indemnification risk with the ETF’s chosen vault; audit risk, with the ETF appointing the people who inspect their vaults; counterparty risk with the ETF fund managers; and worst of all, title risk.
The ETFs may have real gold in a real vault (subject to audit risk) to back their shares, but who owns this gold? The 53rd page of a complex prospectus addendum might reveal that in a systemic global financial meltdown, the gold bar property title reverts to the monetary authority central bank who leased out the gold bar which is currently backing the ETF share.
Mr Davies thinks that if you’re below £25,000 pounds in your investments, then ETFs may be a valid vehicle to keep things simple for yourself as a retail customer. However, if you are above that number, and especially if you are in the £500,000 investment league, then you should buy allocated physical gold yourself and store it yourself, rather than through an ETF.
International Accounting Standards governing property titles can be ambiguous and gold leased into the Over The Counter (OTC) markets, by monetary authorities, could sit inside an ambiguous grey area. This kind of gold is said to have its property title ‘encumbered’, and Mr Davies thinks it is inconceivable that ETFs have not been trading with encumbered gold to keep their costs down.
The danger comes if we should encounter a monetary breakdown of the type described in Alongside Night. Real physical gold prices will then rocket out to the Moon, while ETF share prices may collapse due to fraught legal dispute about encumbered titles, with the central banks and governments possibly even declaring emergency laws in their own favour to settle such cases.
With just a small handful of major bullion banks dominating the precious metals business, and with some of these banks being investigated for price manipulation on the COMEX markets, Davies thinks that the physical gold market has degenerated into a fractional reserve system, with more pieces of paper out there representing gold, than actual bullion bars of gold. This is why he compares gold ETFs to the infamous CDOs.
[The Mogambo Guru thinks there are 50,000 less tonnes of gold in the world than are officially represented by fancy stamped pieces of paper, which is about 25 years of current gold mining production. For another interesting slant on the background to the attitude adopted by Mr Davies, Cobden Centre readers might also want to read a Huffington Post report from last year, on COMEX, entitled Where's the Gold? This report is by Nathan Lewis, author of Gold: The Once and Future Money]
Fortunately, many people are recognising the leveraged basis of the gold market and they are moving into allocated physical gold. This is a good thing, because every time someone buys paper gold, they may be expanding the gold fractional reserve and driving the gold price down lower, but when they buy physical gold and take it off the market, they are boosting the price.
[Indeed, Mr Davies thinks that holders of ETF contracts should demand delivery of physical gold, if possible, to weed out what is fictitious paper metal and what is tangible real metal.]
With this increased demand for physical metal, especially from Switzerland and the Far East, Davies thinks that when the pullback in the gold price settles down, and the bull market gets going again, we could see gains of between $400 Dollars or $500 Dollars an ounce, in the next leg up.
[I am confident that every Austrian gold bug in the world hopes he is right. I must say, as an Austrian gold bug, it's painful to find that the one market we like to believe in, the gold market, has been so ruthlessly infected by the same fractional reserve virus we think gold is going to save us from.]