Last weekend the disturbingly-brilliant Catherine Austin Fitts, publisher of the Solari Report, passed through town, giving us a chance to finally meet face-to-face. In the following excerpt from a much wider-ranging talk she explains the deeper, more sinister reasons for the recent action in precious metals.
DollarCollapse: It's great to finally meet you, Catherine. The timing couldn't be better, what with the recent, um, correction in gold and silver. What's your take: was it driven by fundamentals or manipulation?
Catherine Austin-Fitts: We're in a world where we have markets and we have management, so the question is which is dominant at any given time. In terms of fundamentals, the global economy is slowing, no doubt about that. The timing of the big drop in precious metals coincided with an announcement that growth in China had slowed. So there's lower growth, particularly in the markets where there's big demand for gold.
That tracks with the split about nine months ago between commodities and equities, when copper diverged inexplicably from the S&P 500. Can copper show that we're in a powerful deflation and corporate earnings imply a recovery? Not at the same time. So either copper goes up or the S&P 500 goes down. If copper is right and deflation is the now the dominant theme, then people who need to raise cash will have to sell assets, including precious metals.
The argument for these being managed markets is that with Cyprus we saw the dawning of the realization that insured deposits may not be what they used to be and that regulators are planning bank resolutions without too-big-to-fail, which is to say at the expense of depositors and creditors rather than taxpayers. The Bank of England and Fed recently published an overview of how this would happen, with equity investors, uninsured depositors and creditors taking a big hit. There's a lot of discussion in the blogosphere about the fact that that derivatives will have seniority in these kinds of circumstances.
Uninsured depositors and creditors in the fixed income markets are worried, and there's a danger of real contagion in which paper wealth flows into physical precious metals. For regulators, the last thing you want is the gold price going to the moon while you're trying to keep people in their bank deposits. In that circumstance gold becomes the safe haven, making it even harder to hold the bond market together.
So how to you make gold look riskier and more dangerous than an FDIC-insured deposit? You smash the price down. If you want to argue the case that this was a managed move, then I would say if you're running the G7 nations you're in the business of keeping the bond market going, so how do you keep trillions of dollars in the bond market that's earning no money? You make the price look stable and make everything else look volatile.
DC: What does all of this mean for precious metals going forward?
CAF: I think we are in a long-term secular bull market for precious metals that primarily reflects the ongoing expansion of the money supply. In theory this could be wrong and the bull market could be over but I see an 80% chance that the primary trend reasserts. One of the reasons I believe this is that Mr. Global - that's my nickname for the people who govern and manage the global economy -- wants a managed rise. To grossly oversimplify, he used fiat currency to steal everything, but once he's stolen everything he'll want to flip to sound money to keep what he's stolen. We've literally had a financial coup d'état and now that the coup is over Mr. Global wants to move to a sound currency. So to me this is simply a reset and doesn't change the long-term trend. If I'm wrong about that and he doesn't want a managed rise, then the system absolutely has the power to drive gold back to a low price.
DC: Based on the recent surge in demand for physical precious metals, it seems like the smack-down had the opposite of the desired effect. Instead of discouraging small investors the price drop has energized them. They're converting their bank balances to gold and silver coins, and supplies at the retail level have evaporated.
CAF: The reports I've seen show that there is certainly demand for physical. The premium for 90% silver coins went from 3-4% to literally 12% and the market still didn't clear there. So something's going on. But I've also had reports from hedge funds saying they're not having trouble getting physical in size. So the shortage is primarily at the retail level. At the same time there have been major transfers out of GLD and the other precious metals ETFs that dwarf the amounts being bought by individuals. The big question is, where is that gold going?
DC: So the takedown was about rebuilding physical inventory?
CAF: My guess is that they're trying to bring in large inventory to cover a variety of tensions in the unallocated institutional system. If I need gold and want to confiscate as much as possible, I could pass a law and go out and take it. But you would never bring in as much as they brought in this past month by playing with the price and extracting metal from the ETFs.
DC: Still, if the goal was to tarnish precious metals' safe haven status, the surge in buying implies that a lot of people came to the opposite conclusion. Will Mr. Global intervene again if the buying continues?
CAF: Normally when you see this kind of economic warfare it's never just one whack. You're trying to purge the market, and it's hard to believe that the purge is over. If you look at the charts and know where the support lines are, once you move through $1,530 it's easy to envision going all the way down to $1,100 and still be in the primary trend. If that turns out to be the case then we really are in for a very long-term bull market.
DC: But you still have your clients in gold, right?
CAF: To me gold is going to be at the very heart of what happens. It's one of the great power positions. I have a hard time looking at it through whatever the price is because nominal prices are very much manipulated to play people. In an economic war if you allow your enemy to set the value of your assets you're going to get played. It's the case that we all have to buy food in dollars so we can't just ignore what the dollar price of anything is. But as gold has gone from below $300 to where it is now, we've lived through some wild swings. It's inconceivable to me that those wild swings, both up and down, are over.
The people managing the system are doing everything they can to tighten down the hatches. This is like a ship going into a storm and all the sailors are tightening everything down. Banks are announcing that you can't take delivery in gold, you have to take it in dollars. The Bundesbank wants its gold back and the Fed says it will take seven years. Every day for months it's been a different story, but every story is about institutions getting ready for a period of real trouble. They want their systems to survive a period in which millions of people say "I'd rather have gold than Treasuries".