The following is a commentary that appeared on Treasure Chests Monday November 14, 2005.
German Politicians were out late last week talking about selling some gold to pay their bills, but as per usual, this should all turn out to be more 'jaw-boning', as the Bundesbank will likely not allow it again. One big news item that came out last Thursday that will likely go through however is the Fed's decision to cease publication of M3 monetary aggregate statistics, including repurchase agreements (RPs) and Eurodollars. Is this development significant? You bet your 'bottom dollar' it is, and for more than one reason.
In the first place, the initial observation one should make concerning this move on the part of the Fed is that they obviously plan on monetizing increasing quantities of securities in the future, and they do not want the public (especially currency traders) to see exactly how much largesse will be involved. This tells us the economy is very weak, and that Mr. Bernanke is already gearing up for those helicopters.
That is to say, with the housing market now softening, aggregate consumer credit growth rates falling, and the general demand for money slowing as a result, the Fed has been forced to increase the rate at which it is adding liquidity to the system (monetizing securities) via direct market operations. Further to this, the fact they will cease reporting on RPs suggests they do not want observers knowing about elements of their day-to-day activities either, which will make it difficult for both equity market and currency speculators to estimate what they are up to in terms of short-term cycles. In this regard, as this information is of importance to us, the primary concern is they are effectively removing all of our reliable tools to discern exactly what they are doing, where for all intents and purposes, they will be able to debase the Dollar at any rate they wish after March of next year, and nobody, including other governments, will be the wiser.
For this reason, expect similar announcements from concerned US trading partners soon, where in effect, this is as big a deal as Nixon closing the 'gold window' back in '71, and we all know what happened after that. If I didn't know any better, and perhaps I don't, as we have underestimated the stupidity of current administrators numerous times throughout the years, it almost looks like the boys are getting ready to unleash Weimar Republic II on the world. Perhaps we should all be making sure our wheelbarrows are in good working order, no? My commodities broker's name is Harold. I think I'm going to give Harold a call in the morning and pick up a few gold contracts that will likely get delivered.
Not wanting to sound alarmist, but at the same time making sure you do not miss how important this is, you should know dropping this reporting is one of those events that could change everything, as a no holds barred hyperinflation is extremely hazardous to your financial health. At a minimum, the fact officials no longer wish anybody to see how fast monetary aggregates are growing should be 'most disturbing' to you, as again, one must realize we will no longer be able to gauge the rate at which the US Dollar (USD) is being debased.
And while Pollyanna's and Wall Street shills will attempt to minimize the importance of this alteration by the Fed, you should know it will be impossible for currency traders to properly value the world's 'reserve currency' against it's counterparts after these changes are implemented, especially considering they will not be reporting on Eurodollars anymore. Therein, accept for high-level currency traders, most do not realize the USD trades more off Eurodollar interest rate differentials than any other factor in the market, as these differentials reflect relative currency debasement rates between Europe and the States, where the Euro comprises more than half of the USD Index. So, someone must really be worried about how bad things are going to get in the States if this readily discernable gauge of inflation is being removed from our view, as the European economy is not exactly a model of health. Could it be authorities are worried about the Dollar losing reserve currency status? Something tells me we are not far from the truth here.
Will this make it impossible to determine how fast money supply is growing thereafter? While it's not certain what other changes may be instituted in the future, this transgression does suggest that even though we may have access to Fed portfolio statistics, etc. afterward, there will be no way of measuring total money supply growth rates in the absence of this data, save M1 and M2, where M3 encompasses both the aforementioned, making it the final all-inclusive measure. Undoubtedly, we will be able to gauge the effects of accelerating monetary largesse with remaining measures, as prices will still be changing. It's just that accounting for changes in relation to the inflation of aggregate money supply (including security monetization) will no longer be possible, nor will forecasting future price changes based on current debasement agendas. Can you say welcome to the 'People's Republic Of The United States Of What Use To Be America'? That pretty much sums it up all right.
A light bulb just went off in my head. The more we think about the nature of these changes, it's not difficult to see what authorities are up to here, because the measures they intend to use within inflation methodologies (buying securities in the open market), as we know, this information is being withheld. But, if you wish information on currency inflation for example, as this measure would likely remain relatively stable under what appears to be the Fed's 'new paradigm', no problem, because they obviously do not expect this measure to expand anywhere near as fast as the portfolios of their dealers. Now you may better understand why the bid in gold has been so strong in spite of the Dollar's strength of late, where the net result triggered a move over 400 in Euros last week.
That being said, where we will assume our conclusions above are correct, at least until the hyperinflation runs its course, what does this change in reporting standards by the Fed tell one about how to react? It's quite simple actually, the best way you can protect yourself from these guys is to buy gold and silver. And make no mistake about it, the big and sophisticated money will hear from their advisors soon, who will advise them in similar fashion, and they will be scooping up all the available supplies faster than you can say, 'deliver me one of those Comex contracts please.' Thus, as often happens in this world, despite the best-laid plans on the part of the Fed, unintended consequences may cause the exact opposite result planned for by our central planners. That is to say, precious metals prices could vault higher due to this transgression, as increasing numbers begin to panic into 'safety'. And it could happen very quickly if other governments join the fray, which we were expecting in '06, if you remember our thoughts on the subject.
In conclusion, one must realize that what the Fed is doing here will not be taken lightly by other Central Banks and governments, even though you will not hear much about it in the press. This means if they get involved in the precious metals accumulation game as opposed to towing the US's 'party line' by selling gold, the dynamics in the market could swing around overnight. It should be noted this also means that since production is down and in a sorry state globally, along with the fact above ground supplies are lean; market conditions could get unruly with no warning. This is especially true considering global economies are currently waning, and the 'need for speed' in money growth is known. As stated above, and in retrospect years from now, we may look back on this move by the Fed as the most significant event since the closing of the 'gold window', because in effect, we just got another very 'big signal' from US monetary authorities that the rules of the game are about to change fundamentally, once again.
Hold gold.
