Today I was watching the Bloomberg, my favorite source of financial news and analysis on what is happening in the financial markets. The news and happenings coming out of the global financial markets particularly the gold and silver markets are very interesting. Gold, silver and other precious metals have historically acted as powerful stores of value.
Today with economic uncertainty at historically high levels across the world and the voracious demand for gold from the emerging markets such as India and China also at historically high levels, the price of gold should have gone through the roof. But, curiously enough, we are witnessing the opposite.
The price of gold now stands at marginally above $1600 in international markets. According to official inflation rates, the price for gold, instead, should be hovering at above $2500. What can explain the difference? Of course, the answer, unfortunately, is brazen manipulation of gold as well as silver markets that are dominated by some of the most prominent financial institutions.
In their hands the derivatives, as “financial weapons of mass destruction” of choice, are being recklessly used in order to force down the price of gold and silver. One group of beneficiaries is long term investors who purchase gold and silver as long term strategic investments.
The gold and silver markets are heavily rigged and manipulated. The derivatives used to affect these market manipulations are not physical gold but papers on which vast quantities of gold and silver are traded without any real gold being physically available. This is why a number of countries are actually taking physical delivery of their gold purchases and do not rely simply on these derivative paper contracts on which no one can count if the gold prices start to drastically climb up.
The economic and financial state of developed countries particularly the U.S. and England are much worse than they appear and are made to appear. In the U.S., we are seeing the Federal Reserve pumping in trillions upon trillions of dollars into the financial markets in order to keep the house of cards together. The so-called quantitative easing in the U.S. seemingly has no end in sight.
Two rounds of quantitative easing are already over with the third round starting soon. The Federal Reserve and its chairman, Ben Bernanke, have already given hints that the third round will indeed begin. Quantitative easing, in simple terms, is creation of money and credit out of thin air and pumping it into the economy and the financial system to boost the financial markets and help those financial institutions that are effectively bankrupt or in trouble.
It amounts to secret and an extremely opaque process of bailing out of the financial system participants in a way that evades democratic oversight and does not create the popular backlash the way the bailouts of 2008-09 did.
Quantitative easing and endless creation of money and credit are extremely inflationary. This is precisely the reason why we are witnessing accelerating rate of inflation in the developed world. In the U.S., for example, Americans are feeling the pinch of rising inflation and increasing cost of living while the doctored statistics released by the government are dishonest acts in covering up the real inflations rates.
The dollar, being the world’s reserve currency since at least the 1950’s, has lost more than 90% of its value in only one century. This is an achievement considering the fact that within a few years to a decade, we might very well see the dollar losing more than half of its present value.
Creation of endless money and credit by the patriarch of Western edifice of finance capital, the Federal Reserve, is, in actuality, nothing but buying time and postponing the inevitable day of reckoning to the future. This is one reason why the developing countries loathe and publicly voice their disapproval of the Western policies that are, among other things, inflationary.
In a recent summit of BRICS heads of state and prime ministers, they collectively voiced displeasure at the reckless financial policies by the U.S. and other Western countries. The point is that the Federal Reserve in the U.S. is not accountable even to the U.S. Congress let alone to the collective good of other countries on which its policies have strong impacts. In the words of Dennis Kucinich, the American Congressman, the Federal Reserve, is no more federal than the Federal Express!
The participants in the gold and silver markets are well aware of the fundamental trends and forces that are shaping the long-term trajectory of the gold and silver markets. They know that with economic uncertainties set to deepen much further, the real option is to own real assets and gold and silver.
China, Russia, India and other central banks are buying gold and taking physical delivery of the metal at historically high and accelerating levels. There are very few sellers of physical gold in the international markets. Everyone is clinging onto the gold that they own and are after accumulating more of the precious metal.
This situation was not seen since at least the World War II years. The whole system is blinking red and if there was a siren to caution countries, nations, governments and central banks, the siren would be loud enough to awaken even the most ignorant of all.
The buyers of gold in vast quantities are, curiously enough, countries and central governments and not financial institutions. China, Russia and Indian governments are major buyers of gold. This shows the gravity of the situation. Countries are running budget deficits and printing money in order to buy more gold at current prices (hovering above $1600) which are relatively very low compared to what the pieces will be a few years from now.
The record-breaking flight into gold and silver and other precious metals foretell of the financial cataclysm ahead. The massive edifice of derivatives that underpin the manipulated gold and silver markets is vulnerable to collapse.
The situation bears resemblance to a massive sand castle trembling as the tremor from the feet walking by mounts past its resistance threshold. It is uncertain how long the manipulation in the gold and silver markets and the forced down prices will hold. But the outcome will be ugly indeed.
Daily Outlook Afghanistan – April 8, 2012