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Exploiting Insanity

It is amazing to watch the markets. If oversupply makes the oil price sputter, deep pocket buyers prop it up against any commercial logic. When the S&P 500 appears to roll over, as earnings fall and ruthless CEO's ruin their companies with stock buy backs, the mysterious hand of "God" gives it a lift. And if exchange rates need a twist to give the worldwide currency wars a new direction, the global price control grid shows its worth of salt. The same goes for the gold price. Its US inspired, decade old price suppression is infamous. More and more banks are convicted of precious metal price manipulation but nobody goes to jail. The fines they pay are just the cost of doing business. Will this ever change?

Banks manipulate the markets out of sheer greed to steal other people's property. In contrast government market manipulations show signs of insanity. Why would Japan try to debase its currency if its perceived "value" is all that separates it from bankruptcy? Why would the European Union cling to the Euro currency when it is evident that it has failed economically and that it will eventually also fail politically? Why would the United States support a price level of gold that will ultimately lead to the total depletion of official gold reserves of the Western World when gold is the only money they have to support their credit reserves called Federal Reserve Notes commonly known as the US Dollar?

It appears that we have reached the decisive fork in the road of global market manipulation. The constant gold price suppression is exploited by more and more savvy investors who buy gold at a huge discount (a discount of at least 90 per cent if one adds the cost for off balance sheet items like pensions, health care and the future bail out of a largely insolvent banking system to the current oversupply of the world economy with credit reserves aka currency aka paper money). The scarcity of available physical gold has already ruined the reputation of the US gold market. COMEX gold reserves dropped below five tonnes backing up a market where within a week promises for thousands of tonnes of gold are traded.

In 2015 buyers from India and China acquired more gold than annual world mine production. This year Western demand has picked up significantly whilst Asian demand stays strong. Central banks all over the world are buying as much gold as they can without attracting the wrath of the US authorities. The program directors of the Matrix are showing signs of desperation. We are told that gold is just a pet rock. That it has no yield. The British newspaper "Financial Times" linked it to human waste in one of their recent videos. Thankfully authors like Jim Rickards have addressed these fables brilliantly in their books.

The elephant in the room that will bring these issues to a resolution is the debt mountain of this world. It is of Himalayan dimensions and threatens to crush the world economy. Estimates (in USD) range from a couple of hundred trillions to more than a quadrillion. Global leaders hope in vain that economic growth will lower it. Instead it keeps on rising and rising. They now face a stark and binary choice between two evils: bankruptcy or high inflation.

The problem will become apparent when inflation is rising more visibly. This could happen when the deflationary forces of falling commodity prices wane. There could be other reasons like a loss of confidence in a government triggering a change in capital flows and/or the velocity of money. We could have a deflationary bust that destroys government finances and the purchasing power of the currency.

Under normal circumstances central banks would be expected to raise interest rates when inflation exceeds their targets. Rising interest rates will lead to a drop in bond prices and create a black hole in the balance sheet of an already strained banking industry. They will increase deficits of over leveraged governments and undermine trust in their solvency and in the bond market. They will push pension funds, over indebted corporations and private households into default. They will strengthen approaching global recessionary forces.

Central banks can not avoid this outcome even if they stay put. Most investors will refuse to hold or buy bonds with negative yields. They will not tolerate that the value of their investments is being eroded by inflation. They will turn to gold or other hard assets. To prevent bond markets from collapsing, central banks will have to print ever more money to prop up bond prices. Eventually they will be the only buyers in the market. The world will face a Weimar style scenario where central banks are forced to give up any pretense of preserving the value of the currency in order to supply their governments with liquidity. Hyperinflation will follow.

 

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