Gold, Banks and the Governments
Commodities / Gold and Silver 2011 Apr 05, 2011 - 09:05 AM GMTBy: Neil_Charnock
I have written this article to:
- Compliment some analysis I believe to be correct.
- To address some misinformation about the banking system which could potentially be dangerous to your financial future, and
- To reinforce your confidence in the fantastic golden opportunity right now and directly ahead.
Let me say first and foremost that gold is going to fly, rise to levels I dare not predict at this early stage in this gold bull. Gold and silver stocks around the globe are going to boom in the coming years – a mania in this sector approaches. Stocks in the USA, Canada, on the AIM in London, in Australia, South Africa, and South America and elsewhere are going to resemble (year 2000) Dot Com stocks on steroids in the next few years. There is not enough gold or silver to go around at these cheap prices so many investors will have to settle for highly leveraged profits from the gold and silver miners.
Our own Gold Members educational portfolio invests and trades local Australian gold stocks with full investment rationale, with transparency not seen anywhere else on this local market. Even this gold consolidation phase has been profitable with a non-optimised 14% gain at the last count (in just over two months). Dips should be seen as buying opportunities the same as gold and silver. I have published a leading indicator in my latest newsletter – good signs about the coming months.
Considering that gold’s role in the monetary system was so understated a few years back it is no surprise that mainstream investors are taking time to correctly weight it back into their investment modelling. We are at a critical point in history, things are changing rapidly. Retail gold and silver are rolling out in China at a furious rate further increasing high demand levels.
Gold and silver analysts have proven themselves to be for far ahead of both the investment curve and the analyst pack when it comes to accurate prediction over the past 10 years. As a group we have been proven to be correct over these years. The web sites that have facilitated investment and published commentary and data on this asset class over the past decade deserve your support and thanks. On the contrary, I watched a speech by David Attenborough recently where he stated that to believe in the concept of ‘sustainable growth’, you either had to be stark raving mad …or an economist. All very funny yet there are many fine economists out there I do not wish to slander or impugn. Sustainable growth in a finite world is the oxymoron here, it is a false input.
Man wants to be right, it is imprinted in our inner core and this can lead to some strange actions at times. You might have noticed that in the effort to “be right” people do all sorts of odd things. My point in this case is that governments and monetary officials have fooled themselves with sustainable growth as an input and then trapped themselves using this “have to be right” mechanism. It is the method of financing that ‘sustainable’ growth myth and the motivations of banks, corporations and governments that are always such a great topic of predictive analysis.
Their motivations are different, banks get richer by selling loans (debt), and sometimes they overdo it and make themselves (and us) poorer. They have been extremely successful at their purpose. It is the biggest banks with all the right connections and support that get richer each time this happens.
Governments want to get re-elected so that they can hang onto control. Corporations just want to sell their wares so that they can achieve sustainable growth. They end up resorting to merger and acquisition at times. The motivations of these groups assist us to predict their next move and attempt a reasonable shot at an assessment of the likely outcomes. You have to get the dynamics and mechanisms correct before you can analyse accurately or predict the outcome. If you input serious mistakes or omit important data sets you will arrive at the wrong answers.
Interesting point to make here; nowhere in any of these motivations is there anything much about your survival is there? You had better take that seriously. These gold web sites would not have lasted if we told you lies or got it wrong more than some of the time. If you are not happy with us you stop subscribing. So far so good many people have made fortunes and more people are finding our work as gold and silver march higher attracting new interest. Our goal is for you to succeed so you keep purchasing. However this is not the case with captive markets. Bankers have us all as captives and so do politicians, ditto many corporations that deal in products or commodities such as oil, food and other essentials.
As gold analysts shine the light of truth, piercing through the fog of spin and the lies perpetrated by banks, governments and corporations intent on their own quest - we have to keep a careful eye we don’t stray from the truth ourselves. We are at a critical point in history where a massive amount of wealth is transferring; changing hands and being destroyed. This role we find ourselves in is actually a great responsibility which most gold analysts (including yours truly) do not take lightly. We cannot afford hubris or to let our guard down on the basis that we have been right for the last 10 years.
One of the things that bother me about some of the data I have seen on the internet is the notion that banks create money out of thin air. Hear me out please as this is very important. Many investors in the UK, Europe and the US lost everything and are living in cars for the want of facts. FACT: there is a big difference between your local bank and a Central Bank. Unfortunately there is no differentiation from some analysis on this division and yet it is critical when we try to work out how this current financial mess we find ourselves in will pan out. In some cases I see outright misinformation rather than omission or lack differentiation which is worse. I am sure this is not deliberate; they just bought false information and then passed it along. In order to accurately predict the future and trends across asset classes we need to have the story right.
This is the biggest debt bubble in history. It threatens to implode rather than correct in a controlled manner. Thus the current situation is affecting the functional viability and security of the whole financial system as authorities scramble to address regulation after the horse has bolted. The banks and bond holders are in a bind, the music stopped and there are not enough chairs. Sovereign defaults approach and this has to be managed somehow.
Risk is being glossed over by the smoke and spin but the savvy are accumulating precious metals and the miners. They are gradually offloading toxic assets while the fiddler plays his tune. You may think this is too dire but I fear too many people are in the firing line and are going to be shocked when Ireland defaults for instance. I do not believe the sky is on fire or that civilization as we know it is about to end unless you are one of the unfortunate who lose everything. Currencies, banks, governments and corporations will come and go – the question is; are you prepared?
Even if this bubble does unwind more slowly it will still cause massive damage to confidence and cause serious financial disruption for a long time. It is highly unlikely it will end well and in the meantime gold flies with silver hot on its heels. But again I state emphatically that you need to understand the banking system correctly so that the facts line up. Any wrong assumptions or major flaws in an investment model are extremely dangerous to an investor. They can make or break your chances of survival even in less dramatic times.
What Trading Banks can and cannot do.
This is a simplified outline and therefore there are some minor points not fully explained. A complete explanation that covers further detail is beyond the scope of this essay. Trading banks are both dealers and producers. They are not just a business where you keep your savings and borrow money as most of the public think. This system is rigged in their favour it is true. For a start, when you deposit money, it becomes their asset (as far as they are concerned – by an accounting measure) on their own balance sheet becoming part of their reserve requirements. If this does not disturb you I don’t know why – it is the essence of the rigged nature of the game.
They are dealers; they provide the shop front that facilitates lending and borrowing. You deposit and they lend against it. You provide the asset (your savings) that gives them some of their ability to produce their stock in trade, which are loans. These have to be repaid at interest. Your deposits are not enough in this day and age. Trading banks also go to the wholesale money markets and buy (borrow) money themselves which they then loan out at a profit, a higher interest rate. Their loan book includes credit cards, mortgages, business loans (to name a few) for which they receive varying returns. This is like buying apples at wholesale and selling them at retail levels to generate income. This is a major part of trading bank activity.
They are also producers in effect as they transform cash issued by the government (via Central Banks) into more convenient checks and digital deposits or demand deposits, which are supposed to have greater security than cash. They also transform short-term deposits into longer-term loans. In the process, it can be said that they do the financial intermediation and maintain liquidity in the system at a very basic level. The Central Banks are there as the back stop lender to the banking system amongst other activities.
The trading banks have reserve requirements where they are obliged (getting stricter under Basel3) to hold a certain level of cash, theoretically say 10% of their own loan book. This is called fractional reserve banking. Their loan book is an income stream that supplements their deposit income stream. You can immediately see why they are scared about a run on the bank where depositors all demand their cash. It causes havoc with their reserve requirements. If deposits drop sharply they either have to reduce their loan book (and their asset level plus income along with it) by calling in loans or find the money to top up their reserve level by borrowing or attracting new deposits. In a distressed market condition such as a bank run this is very hard to do. Even profitable loans can be called under rough enough conditions. You would then have to refinance or sell assets to repay or lose the asset.
Their loan book traps your mortgaged house or car, giving them a first claim on the asset in the case of default, and in the process you effectively become enslaved to the bank. This makes you a nice loyal worker for the corporations as you have to stay there and eat gruel if necessary so that you can make those repayments. You can also see why they are happy about any social condition that makes people want to leave their money in the bank.
Trading banks also decided they needed even more sustainable growth so they started gambling in the markets via their own proprietary trading arms. They have been trading currencies and all sorts of markets for a long time and in the modern era they got involved in all sorts of new and complex financial instruments. These are extremely dangerous and threaten the entire system if a large enough default was to be let loose in the financial system like a domino effect. This is another problem the regulators are grappling with.
Like all big players in these markets they have the advantage of size. This allowed them great privilege and risk of conflict of interest as they found themselves trading against or in the same markets as some of their own clients. This all broadly tells you what a trading bank can do however it does not cover what it can't do.
This may upset some readers however at some risk I ask you to just think about it carefully as what I am about to tell you makes good sense if you just think about it. Trading banks cannot create money out of thin air, this is a myth I want to dispel. They do not create a digital figure on their balance sheet against your asset and issue money out of thin air as I keep on seeing in oversimplified Utube clips on the banking system. Think about it if they did they would never fail would they? Yet trading banks go broke all the time.
What counterfeiter goes broke without getting busted? Money is created out of thin air in many cases in the Central Banking system at a higher level however it does not happen at the trading bank level. Bonds are also part of this equation and real money buys these as an investment class. Why would trading banks go to the wholesale money markets to borrow additional funds that they can then retail as more expensive loans if they could just create money out of thin air?
Why would they care about deposits if this were true? If trading banks, which are not known for their restraint when it comes to making money, were really able to create money then the world would be covered in cash to the stratosphere by now. Hyperinflation would be rampant. Why do they care if you can pay back or not if this is true?
Sure it looked like this might be the case with no doc and very low qualification loans at the end of the US housing bubble however this was more due to the securitization markets that allowed them to create the toxic loans and sell them on as fast as they could. They passed the risk of default to the next buyer of that debt. This low qualification environment was also amplified by derivatives that allowed them to offset the default risk by other means.
There is another point - why bother insuring your own counterfeit money against default and at cost if you can print more whenever you like? This would be simple for these banks; they would take the mortgaged house back, mark the value at market, sell it to the highest bidder and collect a tax loss if necessary. They would be losing nothing if the money was created out of thin air. Distressed assets sold by banks would not exist - yet they do. The myth is not backed by fact and it does not even make sense.
The trading banks are at risk the world over as this crisis spreads; this is obvious unless you believe in spin and lies. A full understanding of the real state of affairs is at the basis of this conviction. From what I just told you it is plain to see why asset values have crashed in parts of Europe and the USA where banks have been hit hardest (so far) by the GCF. This is what happens when you have a banking crisis, they have to shrink their balance sheet and this means they have to shrink their loan book.
This all creates uncertainty in the markets forcing gold and silver ever higher. As these metals rise in price the intrinsic value of miners that extract the metals also rises. This is an asset class that will continue to trend up over time, even if not in a straight line. The banking crisis is forcing governments to act with injections of capital and new red tape which makes the situation worse.
Perversely a part of this action has included offerings of our money to banks that have misappropriated these bail outs in part via bonuses to higher level employees. Governments are also trying to stop a repeat of the GFC without the full understanding of the root cause, only the symptoms seem visible to them. The root cause lies with the money creation, within the Central Banking system and the lack of restraint that only comes with a mechanism like gold backing.
Bank notes are nothing more than a legal tender issue that promises to pay you the face value of the note. So you can take your plastic or paper bank note to the Central Bank of any country (in theory) and claim the value on the note. The problem is they all you will be offered in return is another bank note of the same denomination. This is the greatest Ponzi scheme in history. Your confidence in the government that issues these notes is sustaining their value; that’s all there is. Safe as a bank is no longer true - if it ever was. Trust the government to look after you – huh! Some asset prices never go down – huh! Government bonds are low risk, like many currently trusted asset classes – huh! All wrong assumptions based on wrong inputs.
If you want the real facts you can get them in the GoldOz Newsletter which is supplied in full in our Gold Members subscription area. I will write up some further education on how money is really created in a further article. We have deep knowledge of the Australian gold sector, who is who and what drives the share prices and when. We seek to educate all levels of investor. We have to look after ourselves folks; everybody else is pushing their own barrow. Our success requires us to educate you so that you can make money, lots of it in your investing activities. Our Gold Membership is on special at the moment so you can take advantage if you wish.
The detail I have broadly outlined above is important to understand in the context of what the future holds for gold, silver, precious metal miners and other asset classes. These are dramatic times make no mistake. Alternate currencies are already being postulated and even initiated such as GoldMoney where you can use an alternate barter system, in effect to conduct transactions using gold backed accounts. Unfortunately another attempt; the ill-fated Liberty Dollar recently came unstuck and I urge readers to catch up with the brilliant analysis on this story at How to Vanish.com to see why this came about. I offer this link because it is critical that other future alternatives are not going to fail, at least not for the same reasons.
Good trading / investing.
Regards,
Neil Charnock
GoldOz has now introduced a major point of difference to many services. We offer a Newsletter, data base and gold stock comparison tools plus special interest files on gold companies and investment topics. We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators. GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.
Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.
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