It's a Trap! - Casey Research

What's Up with Gold?

David Galland: Watching the price action of gold on Wednesday after the Fed announced it was going to double down on quantitative easing, it was hard not to conclude that the precious metals were at risk of another leg down.

After all, here was Capt'n Ben announcing that the Fed helicopters were going to drop an additional $40 billion a month, bringing the dollar deluge to a whopping $85 billion a month – $1.02 trillion a year – and instead of soaring, the precious metals barely squeaked out any gains at all.
Sure enough, confirming my fears, in the overnight markets heading into Thursday, the prices of gold and silver were both smacked down smartly.
That this happened immediately on the heels of the Fed's announcement was concerning enough, but it's actually worse than that.
I say that because earlier this week Mark Carney, the incoming head of the Bank of England, the equivalent of the Fed, made a speech essentially stating that upon assuming his new job, he, too, would be advocating a large and open-ended quantitative easing.
Ditto, the sure-to-be-elected new prime minister of Japan is basing his successful campaign platform on much the same idea – an unlimited amount of new quantitative easing. Likewise, the ECB is shifting toward an accommodative policy.
In essence, in a deliberate attempt to spawn a global wave of inflation, it became clear this week that the Western world's major central banks have fallen lock-step behind a coordinated policy of extraordinary and unprecedented currency debasement.
Yet, gold and silver take it in the neck. What's going on?

A conspiracy-minded individual would no doubt blame "da boyz," and who knows, they could be right. After all, gold's role as the "anti-fiat" makes it a very inconvenient barometer for the monetary malfeasance committed by the grasping governments on a daily basis. Should attitudes about gold change to the point where the public loses faith in it as the currency of last resort, said governments could continue picking the pockets of the public pretty much unmolested.
Yet motive alone is insufficient to convict. Until I see a smoking gun – versus the anecdotal and circumstantial evidence being waved around – I can't say one way or the other if manipulation is going on.
In fact, there are other signs in the economy that something bigger is going on. For example, the VIX volatility index is acting positively schizophrenic. So, is that also being manipulated?
Here's a snippet from a very interesting and important article that appeared on PragCap.com this week and was brought to my attention by David Franklin of Sprott Asset Management.

To compare the current VIX levels to macro fundamental risk, we have performed a simple quantitative exercise: we compiled a list of 484 macro indicators published by Bloomberg that have a significant correlation to the VIX index and regressed them against the current reading of the VIX.
Results show that the current low VIX level is in stark contrast to virtually every macroeconomic indicator across the globe. These indicators include PMI, GDP, payroll and unemployment, housing, retail sales, consumption, inventory, business and consumer confidence, delinquencies, and other economic activity indicators. The 81 US macro series point to a VIX level on average 7.2 points higher, the 214 European indicators point to a VSTOXX level 9.7 points higher, and the 186 Asia economic indicators point to a VNKY level 8.9 points higher (Figure 8). While these results don't signal an imminent increase in the VIX, they do point to a large discrepancy between the market volatility and macro fundamentals.

You can read the full article here.

Simply stated, like the counterintuitive reaction of gold, the key indicator of volatility (and by extent, market risk), VIX, has broken free of long-standing correlations to other major market indicators. Whereas those other market indicators suggest that VIX should be much higher than it is, it is currently bouncing along at levels one would expect to see in a healthy economic climate, versus the veritable economic tuberculosis ward we live in with governments infecting each other, and their respective populations, with highly contagious and dangerous levels of debt.
The usually reliable bond markets are also asleep at the switch, despite the fact that the US government budget deficit for October and November, the first two months of the new fiscal year, were 24% higher than in the same two months last year. In other words, not only is government not addressing its deficit problems – it's significantly accelerating said deficits. Yet bond yields remain near all-time lows, a sure sign that all is well.
Couldn't the disconnects be signs that the economy is recovering? After all, in the months leading up to the US presidential election, the unemployment rate fell below the 8% mark – rather conveniently, some obstinate anti-Obama observers observed. Turns out they may have been right. Here's another snippet, from CNSNews.com, also forwarded by David Franklin earlier this week…

73% of New Jobs Created in Last 5 Months Are in Government
In June, a total of 142,415,000 people were employed in the US, according to the BLS, including 19,938,000 who were employed by federal, state and local governments. By November, according to data BLS released today, the total number of people employed had climbed to 143,262,000, an overall increase of 847,000 in the six months since June.

In the same five-month period since June, the number of people employed by government increased by 621,000 to 20,559,000. These 621,000 new government jobs created in the last five months equal 73.3 percent of the 847,000 new jobs created overall.

Read the full article here.

Meanwhile, the number of people receiving food stamps in America surged by over 600,000 in September, the latest reporting period, the biggest increase in 16 months.
So what's going on, really?

It's a Trap!

The situation reminds me of a time not all that long ago, in 2005 if memory serves, when the tandem US stock market and real estate bubbles left many states in the unusual position of posting a surplus.

It was on one of these halcyon days that the governor of Vermont waxed rhapsodically on the radio about the surplus and all the many plans being developed to spend it.
"It's a trap!" I well recall muttering to myself, adding something to the effect of, "Don't do it, you dolts!"
That's because it should have been obvious to anyone paying attention that the good days couldn't last.
Not when the twin bubbles were entirely the result of a massive misallocation of capital based on the notion that anyone with a pulse was entitled to live in their dream house… then further leverage themselves with nearly effortless home equity loans to ensure that the new abode was fashionably outfitted with fine furniture, including the requisite La-Z-Boy.
Simultaneously, to ensure that no one would suffer the indignity of having to park a used car in their new driveway, the automobile industry was offering loans requiring zero money down and no payments for two years.
Yet, remarkably to me then and even now, almost no one in government or in the dark towers of Wall Street saw the situation for what it was. Or at least if they did, they didn't say anything. Or do anything, other than continue with business as usual until the train left the tracks in 2008.
The situation today is, in my view, almost identical, with only the systematic pressure points having changed. The currency debasement is not an illusion, any more than the debt (which, for the record, has only gotten worse), but a massive and deliberate act of inflationary overkill on the part of governments that are otherwise reaching the end of their policy ropes.
Earlier this week, the Bureau of Economic Analysis (BEA) revised its estimate for third-quarter 2012 GDP growth in the US upward to 2.67%. Yet when you dig into the numbers, you find that the aforementioned surge in federal government spending is responsible for all of that growth and more. In fact, according to Consumer Metrics (and again, thanks to David Franklin for bringing this to my attention), take out the federal spending and you discover the consumer portion of the economy is shrinking at a rate in excess of 1%.
Yet, just as was the case leading up to the onset of this crisis, the big institutions are once again continuing with business with usual, in this case by buying up government debt instruments as a safe-harbor investment to ride out the storm. Today, this strategy is working for them, just as it has over the last four years.
But it is a huge mistake to think the situation will stay the same, just as it would have been to expect the housing and stock market bubbles to continue expanding back in 2005, or for state houses to expect windfall surpluses. In fact, with the structural challenges facing global governments – the seriousness of which can be divined by the mere fact of open-ended quantitative easing – it's guaranteed it won't.
That anyone assumes it will continue on this illusionary – or is it hallucinatory? – path of pretend prosperity is a classic example of the tendency of (most) humans to believe the status quo will go on forever.
Yet, there are signs that outside of the Pollyannish harpings of the popular press, a growing number of people are seeing through the charade of creating currency units from thin air and passing them off as tangible wealth.
In fact, though you'd never know it from reading the mainstream financial media, the holdings of the GLD ETF hit a new record high on November 27.
Which conveniently brings us back to the question of gold. A question, I am sure, many dear readers would like to see answered in the positive, and pretty damn soon.
Unfortunately, while the outlook for the monetary metal remains extremely positive, the timing of when it will stage its next big rally, or ultimately reach its peak, are unknowable.
Thus, for those among you with gold and associated holdings, your continued patience is required. Which is another way of saying, you will need staying power. Which, in turn, means that your positions need to be "right-sized" compared to your net worth and your income versus your expenses. If you find yourself needing to raise cash – perhaps to pay your "fairer" share of the tax burden – you could be forced to sell before the fun really begins, locking in a loss, and that would be most unfortunate.
As to how long it will be before gold plays the very role that history has assigned to it, it really is anyone's guess.
A member of the Federal Reserve Board or employee of the Treasury Department would tell you that there is no inflation in sight, and probably won't be for two or three years and maybe longer. They might be right, in terms of serious and widespread price increases (as opposed to the steady body blows of higher fuel and food prices), but that would be wrong in terms of the technical definition of inflation – the issuance of new currency units – of which there is aplenty. You simply can't have the sort of monetary debasement we are witnessing without a knock-on devaluation in the purchasing power of the currency units.
But the policy makers and their quislings amongst the punditry could very well be wrong, just as the vast majority were about the financial crisis. You could literally wake up tomorrow and discover that something has gone terribly amiss in all the sage postulations about the economy and the ability of the US government to keep interest rates next to zero and price increases modest.
That's an important concept.
Namely that while fighting the Fed is said to be a bad idea, and for good reason – it does, after all, have all of the coercive power of the state at its command – the way the world actually works is that the best-laid plans are regularly found to be flawed. In today's world, with trillions of dollars in obscure and indecipherable derivatives pools, massively underfunded pensions, bankrupt municipalities, hundreds of billions of bad mortgages parked on the balance sheets of banks and, increasingly, of the Fed… the list of possible trigger points for the complete loss of confidence in the financial system and for what passes for money these days is long indeed.
Thus, the name of this particular game is to prepare for what's surely coming, but be sure that your plans do not hamper your ability to survive financially while waiting. In other words, don't use a lot of leverage, or go "all in" on anything, even your favorite precious metal or gold shares.
But likewise, don't despair. Just because the future you expect and have prepared for hasn't yet materialized, don't think it won't. The very structure of the world's financial system has been fractured beyond repair, as have the foundations of the largest economies. The only thing holding it together is the fiat-currency system that was behind the fracturing in the first place and that is now being taken to an extreme and extraordinary level in an attempt to keep the whole shebang from literally collapsing.
While I am not going to tell you what to do with your money, I will tell you in broad terms what my family and I are doing with our money, as I think that is the best way of communicating not only what my views are, but the specific actions I am taking as a result of those views. In no particular order…

• Carrying a higher-than-normal cash position, on the order of about 25% of our portfolio. At this point, there is no real carrying cost for cash, and when the cash starts to turn to trash, there will be time enough to move into things more tangible. The cash we own, however, is spread fairly evenly between US dollars and Canadian dollars spread around a number of US and non-US banking institutions.

• About a 25% allocation to precious metals bullion and select precious metals stocks. Again, these holdings are heavily diversified, between gold and silver and between physical and alternatives to physical, such as the Perth Mint and the Hard Assets Alliance.

• About 25% in real estate, much of which is fully paid for (i.e., no mortgage). The real estate is diversified across political jurisdictions. That much of it is fully owned provides a lot of comfort, and because some of that real estate is located in places where the cost of living is low (e.g., Cafayate) – we enjoy the peace of mind of knowing, come what may, we should be able to enjoy a very acceptable quality of life.

• Miscellaneous, about 25%. Within this category are traditional deep-value and dividend-paying stocks, technology stocks, money managed by non-US firms invested in emerging markets, investments in private businesses and so forth.

We have also taken the steps to set up an international trust while it's still permitted.
In short, as I have stressed in many previous articles, we have done everything we can to diversify between asset classes, financial institutions and political jurisdictions. I am very comfortable that a 25% allocation to precious metals investments, as well as other tangibles such as our foreign real estate, will be enough to see us through once the trap closes and the system goes through a truly epic reboot. Given the scale of the problem, that reboot will most certainly be one for the record books.
In the interim, worrying excessively is a waste of precious time. The short-term gyrations, or even longer periods of correction and consolidation in precious metals, should mean nothing – provided you don't go overboard and find yourself in a position where you have to sell something.
As you view the big picture, all that really counts is what the statists-in-charge are doing, and you don't have to look very far at all to see that they are determined to destroy the currency units that their many debts are denominated in. That's really all you need to know.
Whatever you do, don't step into the trap of believing that all is well… it very much isn't.

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