September 23 (King World News) -
We recently wrote about the board game called Clue in which participants solve a crime by identifying the perpetrator, the place and the weapon used. Recent revelations in the world of finance in the past week have made it a bit clearer as to the likely forces behind the curtain who are perpetrating what has to be the biggest financial crime in human history....
The first thing we learned is that there apparently has been no criminal manipulation of markets. It turns out that the perpetrators, the legal system and the enforcement mechanisms have decreed that the manipulation of markets is completely legal relying upon legislation enacted in the 1930s. That is quite a disturbing surprise for the majority of investors who have been told that attempting to corner and manipulate markets would not be tolerated, and would also result in severe financial penalties as well as incarceration. Apparently this is the case for everyone except central planners. It is just official policy. As they say, “nothing to see here, keep moving”.
In the case of J.P. Morgan, they have said that they are simply executing the orders of the customers when accused of cornering/manipulating the precious metals markets. There has also been speculation that the “customer” to which they are referring is the U.S. government/ Federal Reserve. There has also been speculation that the Chinese have had a hand in the suppression of gold and silver prices.
It crossed our minds that the real customer is not only the Fed and the U.S. Treasury, but also the Chinese. It has been surmised that the Chinese have had two objectives with their massive acquisition of gold. The first is diversification away from their massive accumulations of paper currencies, specifically the dollar. The other speculation is that the Chinese would like to take over the mantle of the world’s reserve currency in the form of a gold-backed Yuan. Both are no doubt true.
Connecting the dots to create a plausible explanation for what we are witnessing, let us assume that China is one of the customers to which J.P. Morgan is referring. The U.S. might be allowing China to suppress gold and silver prices in exchange for a deal not to disgorge their huge holdings of Treasuries on the open market. J.P. Morgan could very well be telling the truth, just not the truth that most people believe.
China also floods the paper gold and silver markets with huge quantities of contracts which neither the Comex or J.P. Morgan will question. At these artificially low prices, China is able to vacuum up existing stocks of physical gold from the GLD and other repositories, in order to add to the tons acquired from their own domestic mining.
But the harsh reality is this is a very dangerous poker game for the United States to take part in because the deck is stacked against the US. How does it end? China simply defaults on any outstanding paper contracts. The answer as to when they might do that is when there are no significant existing holdings to be acquired. We appear to be getting very close to that moment with the dramatic reduction of above ground supplies throughout the Western central bank vaults.
If default sounds far fetched, recall that in August of 2009, it was decreed by the Chinese Assets Supervision and Administration Commission that state-owned entities could walk away from derivatives where lack of disclosure and fraud are involved. Given that the evidence is clear that the gold and silver markets have been rigged, it would be easy to say that outstanding contracts could be voided. We are also sure that J.P. Morgan and other firms alleged to be involved would have protected themselves long ago.
Why would the scenario outlined above be plausible? Having the reserve currency status is a huge advantage. Faced with the choice between allowing the Chinese to acquire 10,000 tons of gold that could very well dethrone the dollar longer-term and an immediate dethroning if U.S. treasuries were unloaded, one can see the Fed choosing the option that buys more time. Strategically, the U.S. avoids an immediate collapse of the dollar and the loss of reserve currency status. The Chinese get cheap gold, but this means that the dollar won’t be dethroned, at least for now.
As the financial fog continues to dissipate, the above scenario makes sense to us. As investors, we will have to wait and see how these events unfold. In the meantime, diversification out of paper currencies into real assets is the proper strategy. Energy, gold and silver remain as crucial components of the foundation of a portfolio. We also believe that shares in rapidly growing companies as well as cash-rich older firms make equally good sense to us. Another good choice would be well-managed private companies with sound business models. For those worried about getting their paper assets “out of the system”, stock held in private companies would add that particular dimension.
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