John Embry, a Toronto-based senior market strategist with Sprott Asset Management, is appalled that, in just one week, bullion banks boosted their short positions by a staggering 35,000 contracts. One bank alone, Germany’s Deutsche Bank, has a derivatives exposure 20 times Germany’s own gross domestic product.
As strange as it may seem, gold markets have been singing a different tune as of late.
Yes, there have been blatant paper raids on the metal by the usual suspects. But the price of gold has been bouncing back, seeking new highs.
This may suggest that aggressive price suppression, something that’s now into its fifth year, may finally be coming to an end. In fact, there’s mounting evidence that physical gold inventories in the West have been dramatically drawn down.
But the international bullion banks haven’t given up, as they recently showed on the New York Mercantile Exchange. There, in just one week, they boosted their short position by a staggering 35,000 contracts.
Not only is this the equivalent of 110 tonnes of gold, it’s also the equivalent of more than two weeks of global gold mine production. This is outrageous, representing as it does the worst market manipulation. But the regulators, who are employed by the U.S. government, continue to turn a blind eye.
Although it might seem hard to imagine, the situation in silver is even more ridiculous. Indeed, the very same bullion banks that have been manipulating gold have been moving heaven and earth to keep silver below US$16 an ounce.
That this price lags the production costs of virtually every pure silver miner in the world doesn’t seem to bother the bullion boys.
In the meantime, buyers are now paying hefty premiums for physical silver, while wait times for the delivery of the metal are getting noticeably longer.
But as I’ve asked many times before, what else can the bankers do at this stage?
When the full effects of the West’s Ponzi scheme for gold and silver become known, the global reaction should be fascinating.
Little wonder that the powers that be don’t want the public to know about what then will likely happen.
Meanwhile, astute investors, who fully understand what’s unfolding, are using every means possible to buy gold and silver bullion while both are still available.
Of course, a counterweight to the manipulation of precious metals is the steady deterioration in economic, financial and political conditions across the globe. And although the mainstream media are trying mightily to paint a rosy picture, the facts are beginning to blot out their propaganda.
Readers will know that I’ve complained bitterly about the lack of integrity in Washington’s press releases concerning economic growth, housing and employment.
But Beijing is now making the U.S. government’s efforts seem amateurish by comparison. China, for example, recently reported a growth rate of just 1.8 per cent a quarter, or roughly 7.2 per cent a year — a figure for which there isn’t a shred of evidence.
Not only do the country’s export-import numbers flounder in negative territory, but its production of steel, cement and electricity is also on the skids.
Yet when these sectors are under pressure, it’s no surprise that China is growing slowly, if at all. That’s because the country’s growth had been fueled by huge exports, as well as by huge investments in infrastructure.
So, the idea that China is now seamlessly morphing into a consumer-driven economy is pure fiction.
Debt is a concern
Oddly, in the wake of its announcement regarding gross domestic product, China announced an interest rate cut, essentially confirming that all is not well. A more serious problem, however, is the country’s domestic debt.
Not only is China’s shadow banking system grossly overextended, but bad loans are mushrooming throughout the legitimate banking sector.
Yes, because of its huge reserves of foreign currency, China can likely stretch things out. But make no mistake. The country’s economic miracle is over — at least for the foreseeable future.
China now faces the same debt- related issues that have been plaguing every other major economy for the past few years.
People forget that the market meltdown of 2008-’09 was mainly debt-related and that total global debt, which had arced up dramatically, was then US$140 trillion. The system almost capsized, only to be rescued by massive infusions of money and credit, along with zero-based interest rates, in most advanced countries.
What’s happened since has been the creation of massive bubbles, whether in stocks, bonds, or real estate.
There’s also been a huge jump — nearly 50 per cent, in fact — in total world debt to more than US$200 trillion. Of course, if the global economy could entertain thoughts of sustainable growth, this debt might be able to be serviced.
Despite the massive monetary infusions, the world is sputtering and coughing while its main economic engines — America, China, Europe and Japan — now appear likely to lapse into recession.
Canada, Australia and Russia are in trouble
Moreover, commodity-producing nations, such as Canada, Russia and Australia, are already in deep trouble, as are many of the world’s emerging markets.
And things will only get worse if the U.S., Europe, China and Japan start losing momentum. So, the central economic planners can now do little more than stretch things out. Indeed, at this point, there’s absolutely no palatable solution.
If you’re a student of the Austrian school of economics, you’ll know we must now either accept voluntary debt deflation, or continue to pump the system full of liquidity until we trigger a complete currency collapse.
Contrast would be stark
If we were to cleanse ourselves with debt deflation, we’d make the Dirty ’30s look appealing, given that today’s massive leverage dwarfs anything previously seen.
So, the world’s central bankers will likely continue to go down the same path they’ve followed since 2008, pumping in enough liquidity to create global hyperinflation.
And from what I read, there seems to be a serious lack of understanding about how this could come about. It has little or nothing to do with excess demand in the real economy, but everything to do with monetary creation. But this time, the hyperinflation will be global, not merely national.
And with the world’s population having tripled to more than seven billion in the few years I’ve been on this earth, this form of hyperinflation will be something to behold.
The poster boy for the current lunacy in the financial world is unquestionably the German banking behemoth, Deutsche Bank AG (NYSE─DB).
Deutsche acknowledges a derivatives position of US$75 trillion in notional exposure. And, yes, an apologist would say the net exposure is only a fraction of that. But the argument loses validity when one remembers that with counterparty failure, notional or gross value comes into play.
Moreover, Deutsche Bank’s equity base is less than US$100 billion, So, if just one per cent of its derivatives exposure goes seriously offside, its capital base will be wiped out several times over.
Not only is this beyond outrageous, but it shows the vulnerability of the global banking system — in particular, those banks that are often considered too big to fail.
But what’s truly idiotic is that Deutsche Bank’s derivatives exposure is 20 times Germany’s own gross domestic product. More astoundingly, it even exceeds global GDP!
Make no mistake. This is a ticking time bomb — one whose fuse has been lit.
Tangible alternative investments are key
To protect themselves, investors should get a big exposure to real tangible alternative assets, the cheapest of which are gold and silver bullion. They should also stock up on the shares of precious metals miners—especially gold and silver stocks.
If I’m correct in my belief that hyperinflation looms ever closer, investors must steer clear of all pure paper assets.
Then, too, given our low interest rates, folks aren’t getting any reasonable compensation from paper assets anyway.
Investor’s Digest of Canada, MPL Communications Inc.
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