Gold Desafio: Global Struggle

The gold market has become, despite little recognition by the financial press, the battlefield for global control of the financial world. To the winner go the spoils and access to the helm. To the winner goes control of global banking, dominance in commerce, and the advantage in some degree of printing money on a credit card that all nations must finance indirectly. In the Untied States, the custodial control of the USDollar as global reserve currency enabled it to spawn numerous independently run organizations that operate outside all legal authority, since under the USGovt aegis. Some call them syndicates. The gold market is the site of the most ominous dangerous life changing battle in recent history. My work has frequently mentioned a Paradigm Shift in progress. The shift is of power, influence, dominance, control, privilege, and direction. It also permits the writing of history itself. Since the end of World War II, the Untied States and Great Britain created an empire based primarily upon economic and financial prowess, but certainly reinforced by military strength. With the fall of Wall Street, the ruin of US banks, the insolvency of American households, and the quagmire of US foreign wars, the shift has accelerated. The parallel debacles with pushes into insolvency for Great Britain has caused a short circuit in the Anglo power grid. The transition will not be smooth, since weapons of an extreme nature are at their disposal.

Notice the slow fade of the Japanese, a nation having served as US monetary squires for more than a few decades. They must next join forces with the Chinese, and perhaps bow but not too much since they bring tremendous technological prowess to the table. Thousand year old enmity must yield to cooperative alliance and ventures. Regional unity will become of paramount importance in the next chapter of economic development. The Tokyo mavens are suffering from the shock of the Yen Carry Trade unwinding process. Weeks ago, my articles pointed out how the rise in the Japanese Yen would keep the pressure firmly on their economy, clearly still export driven. The USDollar crisis has its own core troubles. But they are amplified by a stronger yen currency, which is undergoing a handoff to the Dollar Carry Trade. The Yen currency continues to push higher, causing the Japanese Govt to assemble and hammer out emergency policy. Never in history has a carry trade fed off and exploited a decline in the global reserve currency. These are historic times.

GOLD AS CRUX FOR BATTLE

The shift in power is most evident in the rapid rise in accumulated gold by the Chinese Govt. In my view this is the actual crux of the global desafio. In the Spanish language, desafio means a great struggle and battle, much akin to jihad in the Arabic language, but without the other connotations toward violence. My first exposure was the Discovery Channel. A show focused upon the Alaskan Desafio as some brave group weathered the wintry storms, traveled with sled dogs, and struggled to eat and sleep. This gold desafio is for global control. Those who control the gold control the global banking with all its trappings. The COMEX and London Bullion Market Assn are the clear battlegrounds for the gold battle, the metals exchanges tied to major currencies. In a manner obscured less from view, the COMEX might be settling gold long futures contracts with Street Tracks GLD shares, as part of the delivery process. Investors in GLD shares should be worried at shareholder integration. Questions are raised as to whether the COMEX has adequate gold bullion in inventory. Some analysts go out on a limb and call this new redemption mechanism a silent COMEX default. It would not be necessary if adequate gold supply was available. My view on the GLD itself is well stated. The GLD appears to be a device to attract gold demand from the public and to supply it to Wall Street firms to use as they see fit. Investors are thus not demanding direct ownership of physical gold in a clear visible manner, but instead entrust the custodial management to third parties.

Jesse's Cafe Americain provided some intriguing information on COMEX details. They wrote "Some months ago a chap described changes in the COMEX rules for futures contract deliveries. Therein it was described that the EFP, exchange for physical, rules were amended to allow for delivery of GLD shares in lieu of bullion. We will take a look at something new, at least for me, in Monday's COMEX preliminary volume and open interest report. On page 3 of the attachment, notice that in addition to futures contracts listed under the EFP category, a new category is listed: Delivery Cash Settled = 2866 December gold contracts. Just so happens 2866 was exactly the number of delivery notices issued on FND as reported in the Nov 27 volume and open interest report. Conclusion: guess you can no longer get bullion via using COMEX contracts. This apparently is the next step in the evolution of gold trading." Refer to Formal Notices of Delivery. See the Jesse Crossroads Cafe article (CLICK HERE).

THE ANTICIPATED DUBAI CRUSH

On October 8th, the Jackass gave you a "TOLD YA SO" on the announced previewed end of the Petro-Dollar. The Saudis, with Chinese and Russians on their left and right arms, heralded the end of the sale of crude oil in US$ terms, with French and Japanese in tow. The Germans secretly were in charge of counseling toward the forged deal, but preferred the shadows. The new crude oil transaction settlement system will take time, but surely not to require eight years until 2018 as announced. That stated target was given perhaps to minimize harmful reactions. The mere announcement should be regarded as a schematic diagram for architects and investors alike to follow. New systems must be constructed. Investors ahead of the curve will be the primary beneficiaries. The changes that result from the announcement itself will assure the completion date to be just 2 or 3 years, not 8 years.

In just two short months, it is time to say "TOLD YA SO" again, this time on the story that came out of the United Arab Emirates. The emirates are full of significant squabbles and inner conflicts. The Dubai World debt default and restructure has caused shock waves the world over. IT WAS FORECASTED IN AUGUST BY THE HAT TRICK LETTER. The vast construction bust has caused anticipated ripples. The threat to London banks is acute. Time will tell whether its ripples will cause sufficient damage to London and New York bankers to topple them and to force lost control in other banking functions like gold management, as my forecast indicated. It seems that worsened big London bank solvency from underwritten Dubai losses, rather than Arab USTreasury Bond dumping, will be the principal cause of any imminent breakdown, if it occurs. See the article entitled "US Bank Enemies at the Gates" from late August (CLICK HERE).

For the record, here is what was written over three months ago by the Jackass pen. "The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. The Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.

A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities."

Much can be told about hidden developments, like family squabbles between the UAE emirate rulers, bitterness over shame brought to the region, anger from unheeded counsel, sudden departures of people in key posts, and a desire to punish (even exploit) the decline in fortunes. The biggest question in my book is how much Abu Dhabi bankers wish to permit London bankers to absorb losses, before Abu Dhabi enters the room to acquire liquidated properties in Dubai at deeply distressed prices? Negotiations are underway, heated, and of vital importance in London between all the bankers involved. What can London offer Abu Dhabi? That is the question. The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial managers, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans. These people will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before trapped in homes.

Expert analysts warn of continued shock waves, as almost nothing has been resolved, very little asset or corporate liquidation has occurred, fallout has not yet been permitted, bank losses have not been declared, and resolution prices have not been posted. The internal battle between UAE city states, one rich in oil and a banking center, the other recovering from a construction bust amidst great hubris and displayed magnificent follies, will play itself out in the coming several months or years. The internal families are locked in a power struggle. In Dubai, 30% of their economy is derived from real estate, construction, and other property development. They have some truly bizarre concepts at work, like indoor snow skiing, like cooled beaches with underground pipes, and golf courses that require much output from the desalinization plants to water the green landscape against sandy backgrounds. These are like plebeian versions of marble palaces in the desert. To be sure, a great awakening comes as a load of debt is dumped on the big bankers, just when they might have thought the worst was over.

One friend calls the Dubai construction array the greatest property folly in a century. Maybe so! Next come shock waves to London banks. The follies must be liquidated, with great losses dumped upon balance sheets. The banks must take much more lumps and losses. The original $10 billion in debt loss is more like $80 billion. Details on the story appear in the upcoming December Hat Trick Letter reports, which are streaming in on a daily basis. European banks have some exposure too, but not as much as London. The Abu Dhabi rulers must complete bargains with London bankers. The UAE leaders hold a huge amount of gold, and have demanded its return from London custodial accounts. The fallout will affect Royal Bank of Scotland severely, and maybe HSBC too.

In the process, watch power shift to Abu Dhabi as concessions are made by London under extreme pressures. Parts of Dubai are ghost towns, almost totally unoccupied vast projects. The biggest question in my book is whether RBS can go bust and its assets liquidated to a greater degree while still operating under the British Govt aegis? Lloyds will take large blows as well. The shock waves have not yet fully reverberated. They will continue for months. The Dubai property prices have not yet bottomed, and might settle at 20 cents per dollar on original basis. The legion of Western analysts in the financial sector unwisely expected Abu Dhabi to rescue all Dubai loans, without benefit of much knowledge of resentment, family conflicts, banker ambitions, and ramifications that extend to the new Gulf Dinar currency that shifted planning rooms (Saudi to Russian). My August article implied the Dubai bust would result since Abu Dhabi would not step in and bail out their UAE brethren. The inner conflicts and agendas were well known all along here.

The next shoe for the banker crowd in Central Europe is mortgage losses from Eastern Europe. For several years, the Swiss provided the funds as a result of their 1.5% steady official rate. At the time, it was 3% below the rest of the continent. The combination of home loan default, and sharply lower Eastern Europe currency basis has resulted in near total losses to Swiss banks on such mortgage portfolios. Also, watch Greece, which could be the next Dubai crush zone. It is a construction bust center also, like Spain. The socialist roots in Southern Europe have enabled a denial of property price declines from Spain to Italy to Greece. Instead of vast arrays of homes being sold at distressed lower prices, they sit in inventory at elevated absurd high prices. The bust impact comes soon, as these assets cannot be carried much longer on the books.

GOLD RUN CONTINUES

This is just the beginning. We are still in a very early stage of this gold explosion. Gold continues to rise because the system is breaking, because almost zero remedy has been completed, because pressures are brought to bear using the same broken tools to fix the problems, because mountains of new money are wasted and paid to failed bankers, because the crisis is ongoing, because the economies are not responding to stimulus, because home foreclosures and job losses continue unabated. Much more government rescue and stimulus comes, MUCH MORE. The Chinese appear firmly in control of the gold price. They might inch up the gold price systematically in order to release more supply from both those desperate for cash and the investment novices. A big story has hit the press, that HSBC is backing out of the gold storage business. My instinct tells me that HSBC might be clearing major bank vault space to hold Chinese deliveries from metals exchanges. The gold price does not merely rise from a weakening USDollar and major currencies. Nations intentionally try to undercut themselves in order to preserve their export economies. The gold price also rises from the gradual removal of unorthodox pressures. In the last couple weeks, extraordinary scrutiny has come to the gold delivery system. The process reveals a possible global shortage of gold bullion. The gold price is attempting to adjust to a proper higher price based upon the older traditional concepts like supply matching demand. The gold price will rise further from continued debasement of the major currencies by governments and their central banks. Even now, with the COMEX and LBMA in London, the gold market seems unable to clear at the current price. Evidence points to growing shortages of gold bullion in physical supply, after years of admitted USGovt interventions (by Greenspan) and the mechanisms of gold price discovery using paper contracts. Apart from weak or destroyed currencies, the gold price should seek a higher price from a renewed search toward an equilibrium.

Some argue that gold must rise to match the supply of newly created money, bound in the fiat currencies. Gold should rise in parallel with money creation, but not in lockstep. A currency can always be fixed according to a cover clause that dictates 1% of money can be redeemed in gold. Later, a move to 1.5% in the gold cover clause would fortify one currency in much the same way that official national interest rates lift currencies upon changed policy. Personally my wish is for the gold price to continue its powerful bull run without the Euro currency breakout toward 160. That would expose all the currencies together as horribly weak if not invalid. If the Euro rushes toward 160, the gold market in Europe must then adapt to an interruption in the bull roaming on the continent. Stand back! The explosive upward thrust in the gold price is still a threat, much like Mount St Helens.

No search for safe haven in the USDollar took place after the Dubai world shock. That was a very false description of events. Rather it was a retreat from the British Pound and Euro currencies, which bore the risk of loans underwritten. In one short week, the effect has dissipated, as the USDollar is weaker than BEFORE the Dubai incident broke to make news. All currencies are weak relative to the stable powerful reliable gold. The USDollar is showing a steady relentless weakness, unable to snap into any recovery. Meanwhile, leadership seems increasingly defiant of foreign creditors, as additional costly federal programs create even more headwinds against recovery. The stimulus programs seemed more like state revenue plugs than any serious encouragement toward recovery like in past cycles. This cycle is much different, not the garden variety business cycle or credit cycle, something not acknowledged. The Untied States is fast becoming a sequestered state, where isolation would be the fate won.

THE WAR OF WORDS

Consider Richard Bernstein, the respected economist from Merrill Lynch. This week he said gold has no driving fundamentals that justify its rising price. On its face, that sounded something between astonishing and absurd. Clearly Bernstein endorses a high derived price on all things from the paper world, indicative of a professional compromise. Never forget that Wall Street earns almost zero investment banker fees from gold or the mining firms. It is like dogs selling cat food; they don't do it! What mining firms do solicit in funds for stock issuance is largely conducted in Toronto and Vancouver.

One must suppose that fast rising gold investment demand and a rush to diversify out of a threatened USDollar do not qualify as fundamental. And the unusual methods of metals exchange gold delivery also do not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the banks teetering on insolvency in the Untied States, England, and Europe, challenged to extend loans, suckling from government teats, that is not fundamental either. Bernstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system replete with toxic paper, and that anchor reached for is gold.

Then consider Enrico Orlandini. His work is actually quite good. Occasionally, like yesterday, he said something that struck the Jackass as lacking deeper insight. He said, "I think currencies are devaluing more than gold is rising, and that is why I contend that overbought is a relative term. Gold is rising, but not as fast as the world currencies are falling." The initial reaction here was that he misses the more urgent global banking condition, as this is a much bigger phenomenon than just currencies falling. We are in the midst of a fitful remedy from systemic breakdown during an ongoing major financial upheaval, a remedy that seems not to be on a triumphant course. We have a broken monetary system, a threatened global reserve currency, discredited central banks, insolvent major banking systems, and an important Paradigm Shift away from the USDollar as power shifts also to the East. Orlandini is watching too much the branches, leaves, and ferns within the forest, and seems to be missing the bigger forest. When he attempts to forecast the gold price today and the US$ DX index today, identifying resistance and support levels, one might wonder if he is missing the biggest story of the last few decades. It is the transition from the US$-based global monetary system and the urgent initiative to replace it and to salvage wealth accumulated. Furthermore, and more precisely, the gold price is pushed by not only a weakening USDollar and weakening major global currencies. They are simultaneously being destroyed, debauched, and debased, not just weakened. The additional force that Orlandini overlooks is that the gold price is attempting to free itself from the heavy influence of Wall Street and London City. The gold price (silver too) is attempting to find its correct price, even besides the continued weakening of currencies.

Lastly, consider US Federal Reserve Chairman Ben Bernanke. He was clearly chosen to continue support of Wall Street firms, to run the USDollar printing press in a manner never witnessed before, and to preach about how deflation will not happen here. He misses the hyper-inflation risk that lies directly ahead, just like he missed the asset bust that has occurred in the last two years. The USFed fights yesterday's battle and backs into the next meat grinder, time after time, in a well established cycle. He has not uttered one correct forecast in his entire tenure. He missed every single major banking turn of events, every single breakdown, misjudged the size of bank losses every step of the way, and has missed the economic relapse. The battle for the Bernanke re-appointment will reveal the titanic struggle for wresting control of the USDollar, the US banking system, and the disclosure of deeply engrained hidden practices. The management of TARP Funds is but one of several items being scrutinized.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at [email protected]