Gold – Dennis Tubbergen

The Problem with Fractional Reserve Banking and an Interesting Irony

Last week, I discussed the failure of Silicon Valley Bank and the harsh realities of the fractional reserve banking system.

Since I wrote that piece last week, there have been more bank failures and bank rescue packages.

Signature Bank followed Silicon Valley Bank. Credit Suisse was propped up with a $54 billion loan from the central bank of Switzerland. First Republic Bank is being bailed out by bigger banks.

As I have been stating here for a VERY long time, when there is too much debt to be paid, it won’t be paid. And, since banks have debt as assets, when debt goes unpaid, banks fail.

In the case of Signature Bank, there is an interesting ancillary story.

First, the facts around the Signature Bank failure. While I am no longer a fan of the editorial content of “Forbes”, the magazine did report on the Signature Bank failure (Source: https://www.forbes.com/sites/brianbushard/2023/03/13/what-happened-to-signature-bank-the-latest-bank-failure-marks-third-largest-in-history/?sh=b4456b890ff6):

Signature Bank, a New York-based regional bank that became a leader in cryptocurrency lending, shuttered suddenly on Sunday, marking the third-biggest bank failure in U.S. history just two days after the country’s second biggest failure, Silicon Valley Bank, rocked the stock market and reignited fears of “challenging and turbulent” economic times.

New York’s Department of Financial Services announced Sunday it had taken possession of the bank, which had more than $110 billion in assets and more than $88 billion in deposits as of the end of last year.

Signature Bank became the third regional bank to collapse in a matter of weeks, following the high-profile collapse of California-based crypto-friendly banks Silvergate Bank and Silicon Valley Bank, whose failure spooked investors wary of widespread financial vulnerability.

Interestingly, one of the Signature Bank board members is former US Congressman and co-sponsor of the Dodd-Frank Act, Mr. Barney Frank.

If you’re not familiar with the Dodd-Frank Act, it was passed in 2010 in response to the banking failures at the time of the Great Financial Crisis. Dodd-Frank (among other things) created the Financial Stability Oversight Council. According to the Dodd-Frank Act, the FSOC has three primary purposes (Source: https://www.investopedia.com/terms/f/financial-stability-oversight-council.asp):

“To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.
To promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.
To respond to emerging threats to the stability of the U.S. financial system.”

I find number 2 above especially interesting. Reading it, one would logically conclude that bailouts would be a thing of the past. But, as we all know, bailouts are once again being used to make depositors, even uninsured depositors, whole. This from “CBS News” (Source: https://www.cbsnews.com/news/silicon-valley-bank-signature-bank-collapse-joe-biden-cbs-news-explains/)

The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.

In a bid to contain the risk of contagion, financial regulators announced Sunday that they will guarantee all deposits at the banks, while President Biden said Monday that “Americans can have confidence that the banking system is safe.”

In the case of the Signature Bank failure, there is an interesting, ironic side story. Seems that the co-sponsor of the Dodd-Frank Act, former congressman Barney Frank, is on the Board of Directors of Signature Bank. This from “The Wall Street Journal” (Source: https://www.wsj.com/articles/barney-frank-signature-bank-failure-silicon-valley-bank-dodd-frank-congress-elizabeth-warren-d1588178?mod=djemalertNEWS):

Life is full of irony, but it’s hard to think of a richer one than Barney Frank sitting on the board of the failed Signature Bank. The former Congressman who was the scourge of Wall Street, the co-author of the Dodd-Frank Act that was supposed to keep the banking system safe, wasn’t able to prevent his bank from becoming one of the first casualties of the latest bank panic.

It’s amusing to think of Mr. Frank cashing a check as a bank director, but then even left-wing former Congressmen have to make a living. And in Mr. Frank’s case, it has been a nice one, with cash compensation of $121,750 and stock awards of $180,182 in 2022 alone. He’s been on the board since 2015. Perhaps out of office and late in life, Mr. Frank developed a strange new respect for capitalism.

Mr. Frank once famously said he wanted to “roll the dice” to ramp up lending on Fannie Mae and Freddie Mac before they failed. Signature seems to have done the same as it dove into crypto during the Federal Reserve-fueled financial mania.

In recent interviews, Mr. Frank is blaming crypto for the bank’s demise in the wake of the Silicon Valley Bank (SVB) closure on Friday. He told Politico that Signature was in good shape as recently as Friday, but was then hit by “the nervousness and beyond nervousness from SVB and crypto.” He said the bank is the “unfortunate victim of the panic that really goes back to FTX,” the failed crypto exchange.

Mr. Frank seems to blame regulators for taking a needlessly hard line against Signature because of crypto. “I think that if we’d been allowed to open tomorrow, that we could’ve continued,” Mr. Frank told Bloomberg. “We have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit.”

We sympathize with Mr. Frank because the Biden Administration really does want to purge the U.S. banking system of any dealings with crypto companies. It may be that the regulators decided to roll up Signature Bank because of its crypto association. It wouldn’t be the first time regulators saw an opening in a crisis to achieve a political goal by other means.

If Mr. Frank is right, he now knows how hundreds of thousands of other people in business feel when regulators panic for political reasons and look for businesses to shut or blame.

As for the failure of Dodd-Frank’s regulatory machinery to prevent the latest bank failures, Mr. Frank is taking no blame. He says the reforms made the system sturdier, and he also dismisses claims by Sen. Elizabeth Warren that some modest Trump-era changes in bank rules for mid-sized banks made a difference.

“I don’t think that had any effect,” Mr. Frank told Bloomberg. “I don’t think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion.” He ought to know from where he sat on the Signature board.

Mr. Frank is getting a painful education in the difficulty of running a company when politicians don’t like the business you’re in.

The reality is, as I noted last week, that under the fractional reserve banking system, even banks that would be considered healthy by current standards can be taken out by a bank run by depositors. This is a reality that was reiterated in a recent MSNBC interview by former FDIC Chair Sheila Bair. (Source: https://www.msn.com/en-us/money/companies/banking-system-on-the-verge-of-a-bear-stearns-moment-former-fdic-chair/ar-AA18LP2A)

Bair added that the “immediate problem” posed by the situation in the banking system is “if people start to panic and take deposits out of a perfectly healthy bank, they’re going to force that bank to close.”

“It’s the classic Jimmy Stewart problem,” she told host Neil Cavuto. “We deposit money into a bank, they lend it out, they invest it in securities, it’s not all sitting in a vault. If you try to get all the money out at once, you’re going to force the bank to unnecessarily fail.”

According to Bair, actions taken by the government have created “mass confusion” that could cause efforts to support the banking system to backfire. Acknowledging there are some banks with problems, she also emphasized that only a small percentage of the overall banking system has issues.

“[The government is] trying to imply that all uninsured are protected, which they don’t have legal authority to do, frankly, and this is putting pressure on community banks,” she said. “It’s really troubling.”

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Stagflation Imminent?

Last week, I discussed the inevitable outcome of government overspending and central bank overprinting.

This outcome will be as ugly as it will be predictable in my view.

Eventually, inflation will give way to an ugly deflationary environment. In the meantime, we will probably see stagflation – rising consumer prices and falling asset prices. Professor Noriel Roubini has a similar take. This from “Markets Insider” (Source: https://markets.businessinsider.com/news/stocks/nouriel-roubini-economy-recession-inflation-debt-market-crash-dr-doom-2023-3):

A “perfect storm” is brewing, and markets this year are going to get hit with a recession, a debt crisis, and out-of-control inflation, the economist Nouriel “Dr. Doom” Roubini said.

Roubini, one of the first economists to call the 2008 recession, has been warning for months of a stagflationary debt crisis, which would combine the worst aspects of ’70s-style stagflation and the ’08 debt crisis.

“I do believe that a stagflationary crisis is going to emerge this year,” Roubini said Thursday in an interview with Australia’s ABC.

With consumer inflation still sticky at 6.4%, Roubini said he estimated that the Federal Reserve would need to lift benchmark rates “well above” 6% for inflation to fall back to its 2% target.

That could spark a severe recession, a stock-market crash, and an explosion in debt defaults, leaving the Fed with no choice but to back off its inflation fight and let prices spiral out of control, he added. The result would be a steep recession, anyway, followed by more debt and inflation problems.

“Now we’re facing the perfect storm: inflation, stagflation, recession, and a potential debt crisis,” Roubini said.

He has remained ultrabearish on the economy, despite the market’s growing hope that the US could skirt a recession this year.

Though more bullish commentators are making the case for a healthy rebound in the S&P 500, which fell 20% last year, Roubini has previously said the benchmark stock index could slide another 30% as investors battled extreme macro conditions.

“They will continue to go down,” he said of stocks, pointing to the recent sell-off as investors priced in higher interest rates from the Fed. “The market is already correcting.”

He urged investors to protect themselves by choosing inflation hedges, such as gold, inflation-indexed bonds, and short-term bonds. Those picks are likely to beat stocks and bonds, he said, which could suffer.

I believe Roubini is correct on a couple counts.

Stocks will likely decline further in my view. One only needs to look at the Buffet Indicator to quickly conclude that despite last year’s decline in stock values, stocks remain heavily overvalued.

And, in order to tame inflation, as I have stated previously, real interest rates need to be positive – interest rates need to be higher than the inflation rate.

There are already signs of stagflation emerging. The real estate market is a good example. Wolf Richter, had this to say on real estate (Source: https://wolfstreet.com/2023/03/04/housing-bust-2-has-begun/):

The housing market in the United States has turned down, and in some big markets very dramatically so. Other markets lag a little behind.

That’s how it went during the last Housing Bust, that I now call Housing Bust #1. During Housing Bust #1, Miami, Phoenix, San Diego, Las Vegas, etc. were a little ahead; other places, like San Francisco were a little behind. In 2007, people in San Francisco thought they would be spared the housing bust they saw unfolding across the country. And then it came to San Francisco with a vengeance.

This time around, San Francisco and Silicon Valley, and the entire San Francisco Bay Area, are at the forefront, along with Boise, Seattle, and some others. In the San Francisco Bay Area, during the first 10 months of this housing bust, Housing Bust #2, the median house price has plunged faster than it did during the first 10 months of Housing Bust #1. That’s what we’re looking at. I’ll get into the details in a moment.

Across the US, home sales have plunged month after month ever since mortgage rates started to rise a year ago. In January, across the US, total home sales plunged by 37% from January last year. Sales plunged in all regions, but they plunged worst in the West, by 42% year-over-year, and the least worst, if I may, in the Midwest, by 33%. This is happening everywhere.

The median price of all types of homes across the US in January fell for the seventh month in a row, down over 13% from the peak in June. Some of the decline is seasonal, and some is not.

This drop whittled down the year-over-year gain to just 1.3%. At this pace, we will see a year-over-year price decline in February or March, which would be the first year-over-year price decline across the US since Housing Bust 1.

Active listings were up by nearly 70% from a year ago, though by historical standards they’re still low. Lots of sellers are sitting on their vacant properties and are holding them off the market, and are putting them on the rental market or are trying to make a go of it as vacation rentals. And they’re all hoping that “this too shall pass.”

“This too shall pass” – that’s the mortgage rates. The average 30-year fixed mortgage rate went over 7% late last year, then in January, it dropped, went as low as 6%, and the entire industry was breathing a sigh of relief. This was based on fervent hopes that inflation would just vanish, and that the Federal Reserve would cut interest rates soon, and be done with this whole nightmare.

But in early February came the realization that inflation wasn’t just going away. Friday’s inflation data confirmed that inflation is reaccelerating, that it already started the process of reacceleration in December. Some goods prices are down, but inflation in services spiked to a four-decade high. Services is nearly two-thirds of what consumers spend their money on. Inflation is very difficult to dislodge from services. The Federal Reserve is going to have its hands full dealing with this – meaning higher rates for longer.

And mortgage rates jumped again and on Friday were back to about 6.9%, according to the daily measure by Mortgage News Daily. Just a hair below the magic 7%.

And potential sellers are still sitting on their vacant properties, thinking: and this too shall pass.

So how many vacant homes are there? The Census Bureau tracks this. In the fourth quarter last year, there were nearly 15 million vacant housing units – so single-family houses, condos, and rental apartments. That’s over 10% of the total housing stock.

In 2022, the number of total housing units increased by over 1.3 million. If each housing unit is occupied on average by 2.5 people, that’s housing for 3.3 million more people than in the prior year. The US population hasn’t grown nearly that fast in 2022.

Ok, so now here are nearly 15 million vacant housing units. Of them, 11 million were vacant year-round. Some of the 11 million were being remodeled to be rented out, and others were for sale, and that’s the inventory we actually see, and there are other reasons why homes were vacant.

But 6.6 million homes were held off the market, for a variety of reasons, such as that the owners don’t want to sell the property at the moment.

If just 10% of these 6.6 million homes that are held off the market show up on the market, it would double the total number of active listings. If 20% of these homes show up on the market, it would trigger an enormous glut.

This is the shadow inventory. It can emerge at any time. And during Housing Bust 1, this shadow inventory that suddenly emerged created the biggest housing glut ever.

As I noted last week, history teaches us that excessive debt levels lead to deflation.

This time will ultimately be no different.

Deflation will at some point, become the prevalent economic force. In the meantime, expect stagflation.

That will be more bad news for stocks and real estate as well as consumer prices.

The best advice that I can offer is to have some of your assets that will be protected from a prolonged decline in stocks and real estate and other assets that will perform well in an inflationary environment.

Orwell and Gold

In reading an article penned by Egon von Greyerz this past week, I was reminded of the prescient writings of George Orwell as it relates to where we now find ourselves economically and politically.

While I would encourage you to read the entire article for yourself, let me share some excerpts with you (Source: https://goldswitzerland.com/us-doublespeak-will-not-stop-golds-imminent-surge/):

Propaganda, lies and censorship are all part of desperate governments actions as the economy disintegrates.

We are today seeing both news and history being rewritten to suit the woke trends that permeate society at every level, be it covid, the number of genders, the Ukraine war or government finances.

I have in many articles covered the explosion of money printing and debt which is an obvious sign that the global financial system is approaching collapse and default . The consequences will be far reaching to every corner of the globe and all parts of society.

See my recent article“In The End The Dollar Goes To Zero And The US Defaults” which outlines the probable course of events in 2023 and afterwards.

Later on in this article, I will look at the consequences in relation to markets and what ordinary people (investors?) can do to prepare themselves.

ORWELL PREDICTED THE FALSIFICATION OF HISTORY 73 YEARS AGO

“Every record has been destroyed or falsified, every book rewritten, every picture has been repainted, every statue and street building has been renamed, every date has been altered. And the process is continuing day by day and minute by minute. History has stopped. Nothing exists except an endless present in which the Party is always right.”― George Orwell, 1984

Let’s just look at government finances. As we are entering the end of an era with deficits and debts running out of control, the truth becomes an inconvenience to governments and must therefore be suppressed or rewritten.

If we just look at the US Doublespeak in regards to the 2021-2 budget deficit, we find that the US Treasury reported on Oct 21 this year:

WASHINGTON, Oct 21 (Reuters) – The U.S. government on Friday reported that its fiscal 2022 budget deficit plunged by half from a year earlier to $1.375 trillion, due to fading COVID-19 relief spending and record revenues fuelled by a hot economy, but student loan forgiveness costs limited the reduction. The U.S. Treasury said the $1.400 trillion reduction in the deficit was still the largest-ever single-year improvement in the U.S. fiscal position as receipts hit a record $4.896 trillion, up $850 billion, or 21% from fiscal 2021.

FANTASTIC!!

What an achievement by the Treasury Secretary Ms Yellen and her team to halve the deficit to only $1.4 trillion!

But let’s look a bit more closely what really happened.

If the deficit was “only” $1.4 trillion we must assume that the Federal Debt also increased by the same amount?

But ALAS, the debt increased by $2.5 trillion to $31T in the same period and not by the assumed $1.4T.

Hmmmm.

So again we can look at the 1984 Orwell quote above “Every record has been destroyed or falsified….”

The deficit wasn’t halved at all. Instead hal

f of it was stated below the line as a budget adjustment. So they can lie about the Budget Deficit but so far they are not lying about the level of the Debt. But that will certainly happen one day too. Remember that the Clinton so called surpluses in the late 1990s were produced with the same type of creative accounting. There were no real surpluses. They were just shuffled below the line since debt continued to grow.

Good old Mark Twain gave us the useful quote about lies and statistics:

So there we have it; 2022 seems more and more like 1984!

The clouds look extremely dark for 2023 and beyond.

As I have pointed out above, there is no attempt to reach a peace settlement in Ukraine. Weapons and money are pouring in to keep the war going. And the sanctions forced upon Europe by the US are having a devastating effect for the citizens of most European countries. Energy costs are up 2-3X or more for many consumers and food inflation in Germany for example jumped 21% year on year in November.

In the UK, many ordinary people cannot afford to keep their heating on or to eat properly. And this is before the cold winter sets in.

The situation in Ukraine seems to deteriorate and with Russia and the US involved, as well as China in the periphery, it could easily escalate.

But as I have spelt out numerous times, $300 trillion of global debt and $2 quadrillion of quasi debt in the form of derivatives can only end in currencies going to zero and sovereign borrowers defaulting.

A global sovereign default should be seen as an indisputable fact and it is only a question of how long it takes.

These events are normally a process. As Hemingway said, you go bankrupt “Gradually and then suddenly”.

The beginning can be a slow process and then at some point the shock comes so fast that no one will have time to react.

So no-one must believe that there will be time to get out once the early “gradual” phase starts.

Just to be clear, the gradual phase is here already although the world is in denial. The buy the dip mentality is still prevailing as evidenced by the partial recovery in stock markets.

Few realise that this is it and the next devastating fall in stocks is going to fool practically all investors. The majority will not get out but hope for a correction so they can exit at a higher level. And once the correction comes, they will be bullish again.

Once everyone is back into the market it will fall again. Most of the investors will be fooled most of the time until their portfolio is virtually worthless.

The Western world hasn’t experienced a real bear market since 1929-32. That time it took 25 years for the Dow to recover to the 1929 high.

The generosity of Central banks has made stock investments a one way game since the early 1980s. But now the game is up and few will realise it until they have lost everything.

So the “suddenly” will be like an earthquake seemingly coming out of nowhere. It can come in 2023 or it might take a few years.

What is certain is that there will be no warning. As I said, we have already had plenty of warnings but gullible investors will not believe them. This is just like the curse of Cassandra. She was given the gift of predicting disastrous events. But her curse was that no one would believe her. I wrote about Cassandra in this article five years ago. In the same article, I also made a timely gold forecast which most investors sadly ignored.

Gold has risen strongly in this century although most investors don’t actually realise how strong it has been.

Since the beginning of the 2000s gold has outperformed every major asset class including stock markets. But the move has been in two halves with the first 11 years being spectacular for gold which moved up 7X in dollar terms. Since then a strong dollar has made gold’s performance less spectacular.

But if we look at an annual chart of gold in US dollars it still looks very impressive.

Sanctions, energy prices, inflation, industrial production and many more problems in Euroland, make gold a sine qua non (necessity) in order to avoid total wealth destruction.

Both fundamentally and technically gold now looks ready for another major move. The first target is $3,000 on the way to much higher levels. But as I often point out, gold must be measured in ounces or kilos and not in what will be worthless fiat money whether paper or digital.

As I suggested last week, getting some of your wealth out of the fiat money system, given current world circumstances, is likely a good idea.

Long-Term Stock Forecast

While the overall stock market trend remains down, stocks did begin to show some signs of life last week, technically speaking. As the chart below, a weekly chart of an exchange-traded fund that tracks the S&P 500, illustrates, the longer-term downtrend line in place since the beginning of calendar year 2022 may have been broken to the upside last week.

From a fundamental perspective, stocks remain weak in my view, and as I wrote in my December 2022 client newsletter, I am forecasting more downside for stocks in 2023.

Short-term, we will have to wait and see.

Long-term, though, the outcome will be quite predictable in my view. We will have inflation followed by deflation. While stocks could rally in the inflation part of the cycle, when the deflation part of the cycle strikes, stocks and other financial assets will get hit.

In a recent piece, Egon von Greyerz of Matterhorn Capital comments. (Source: https://goldswitzerland.com/in-the-end-the-goes-to-zero-and-the-us-defaults/)

Although US debt has increased virtually every year since 1930, the acceleration started in the late 1960s and 1970s. With gold backing the dollar and, therefore, most currencies UNTIL 1971, the ability to borrow more money was restricted without depleting the gold reserves.

Since the gold standard prevented Nixon to print money and buy votes to stay in power, he conveniently got rid of those shackles “temporarily,” as he declared on August 15, 1971. Politicians don’t change. Powell and Lagarde recently called the increase in inflation “transitory,” but in spite of their bogus prediction, inflation has continued to rise.

Since 1971 total US debt has gone up 53X, with GDP only up 22X, as the graph below shows:

As the widening Gap between Debt and GDP in the graph above shows, it now takes ever more debt to achieve increases in GDP. So without printing worthless money, REAL GDP would show a decline.

So this is what our politicians are doing, buying votes and creating fake growth through printed money. This gives the voter the illusion of increased income and wealth. Sadly he doesn’t grasp that the illusory increase in living standard is all based on debt and devalued money.

Let’s also look at US Federal Debt:

Since Reagan became president in 1981, US federal debt has, on average, doubled every 8 years. Thus when Trump inherited the $20 trillion debt from Obama in 2017, I forecast that the debt would double by 2025 to $40t. That still looks like a valid projection, but with the economic problems I expect, a $50t debt by 2025-6 cannot be excluded.

So presidents know they can buy the love of the people by running chronic deficits and printing money to make up for the difference.

But if we look at the graph above again, it shows that debt has gone up 35X since 1981, but that tax revenue has only increased 8X from $0.6t to $4.9t.

How can any sane person believe that with debt going up 4.5X faster than tax revenue that, the debt can ever be repaid?

When debt goes unpaid, it is deflationary; currency disappears from the financial system.

Financial assets like stocks and real estate don’t react well to deflation. Ultimately, I believe stocks will have to go much lower.

As I have been suggesting, I believe that the Dow to Gold ratio will reach 1 or 2 in the end. Presently, when taking the value of the Dow and dividing it by the price of gold per ounce, one finds the Dow to Gold ratio at 19.

That’s more downside for stock and more upside for gold in my view, no matter what may happen short-term with stock rallies.

If you are not yet using the Revenue Sourcing planning strategy to plan your retirement income and allocation, I’d suggest you check it out.

Are Precious Metals Markets Manipulated?

This week I’m going to discuss a topic that I am often asked about; that is the manipulation of the precious metals markets. More specifically, are the prices of precious metals manipulated?

While I can’t speak to the frequency of the manipulation of precious metals prices, there is indisputable evidence that this market has been rigged some of the time in the past. This from Ronan Manly of “Bullion Star” (Source: https://www.zerohedge.com/markets/despite-manipulating-precious-metals-prices-jp-morgan-still-heart-lbma-sbma-and-comex):

With a group of former JP Morgan precious metals traders currently on criminal trial in front of a federal jury in Chicago, accused of engaging in a racketeering conspiracy involving precious metals price manipulation, commodities fraud and trade spoofing, while another group of their colleagues have already pleaded guilty, now is a good time to ask how the bank JP Morgan is still considered fit and proper to not only continue to trade in the precious metals markets, but to continue to literally dominate the entire precious metals industry in London, Singapore and New York, with the support of the London Bullion Market Association (LBMA), the Singapore Bullion Market Association (SBMA) and the CME Group (operator of the COMEX and NYMEX).

While JP Morgan made a deferred prosecution deal with the US Department of Justice (DoJ) and Commodity Futures Trade Commission (CFTC) in 2020 and admitted wrongdoing for the criminal conduct of numerous JP Morgan traders and sales personnel on the bank’s precious metals desk located in London, Singapore, and New York, while paying US$ 920 million in the form of a criminal monetary penalty, criminal disgorgement, and victim compensation in relation to this criminal precious metals scheme, the LBMA and SBMA and CME Group (owner of COMEX), as you will see below, continue to not only welcome the proven criminal bank JP Morgan with open arms, but to allow JP Morgan to operate at the highest levels of each organization.

The current criminal trial, which kicked off on Friday 8 July 2022, with the US DoJ and CFTC as prosecution, accuses Michael Nowak (former head of JP Morgan’s precious metals trading desk), Gregg Smith (former JP Morgan precious metals trader) and Jeffery Ruffo (former JP Morgan precious metals salesman) of being involved in a criminal enterprise that entered and cancelled thousands of fake precious metals futures orders (deceptive orders) for gold, silver, platinum and palladium futures contracts traded on COMEX and NYMEX between March 2008 and August 2016 in order to manipulate precious metals prices as well as manipulate barrier options based on the futures prices.

A fourth former JP Morgan precious metals trader, Christopher Jordan, who left JP Morgan in December 2009, is also accused of similar crimes by the DOJ and will be tried separately.

The Nowak – Smith – Ruffo trial is being presided over by Edmond E. Chang, United States District Judge. Unbelievably (or maybe not), Nowak’s defense lawyer in the trial is none other than David Meister, who from 2010 – 2013 was the CFTC’s Director of Enforcement, and who was at the CFTC during the chairmanship of Gary Gensler during which time the CFTC did a 5 year investigation into precious metals price manipulation, and then shut down the investigation claiming it had found no evidence of manipulation. That could explain why Meister is called “the Gensler Whisperer” by lawyer profile experts Chambers.

At the time the indictment of Nowak, Smith, and Jordan was unsealed in September 2019, US Assistant Attorney General Brian A. Benczkowski at the DOJ said:

“The defendants and others allegedly engaged in a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants.”

In the current trial of Nowak, Smith, and Ruffo, the US Government is calling two other former JP Morgan precious metals traders as witnesses for the prosecution, namely John Edmonds, Christian Trunz, and one colleague of Gregg Smith’s who worked with him at Bear Stearns, namely Corey Flaum.

Edmonds and Trunz have already pleaded guilty to their roles in the JP Morgan criminal scheme, and Flaum has already pleaded guilty to manipulating precious metals prices via COMEX futures between 2007 and 2016.

As of the time of writing, John Edmonds, Corey Flaum, and Christian Trunz have all just testified to the federal jury in the Nowak – Smith – Ruffo trial.

On 9 October 2018, John Edmonds pleaded guilty to “commodities fraud and a spoofing conspiracy in connection with his participation in fraudulent and deceptive trading activity in the precious metals futures contracts markets”.

Edmonds admitted that:

“from approximately 2009 through 2015, he conspired with other precious metals traders at the Bank to manipulate the markets for gold, silver, platinum and palladium futures contracts traded on the COMEX and NYMEX.”

Notably, Edmonds also:

“admitted that he learned this deceptive trading strategy from more senior traders at the Bank, and he personally deployed this strategy hundreds of times with the knowledge and consent of his immediate supervisors.”

On 25 July 2019, Corey Flaum (who worked with Gregg Smith at Bear Sterns before Smith moved to JP Morgan) pleaded guilty to attempted commodities price manipulation and admitted that:

“between approximately June 2007 and July 2016, [he] placed thousands of orders to manipulate the prices of gold, silver, platinum and palladium futures contracts traded on COMEX and NYMEX.”

Corey Flaum worked at Bear Stearns from 2006 until 2008, and then worked at Scotia Capital from 2010 until 2016.

On 20 August 2019, Christian Trunz, “a former precious metals trader at the London, Singapore, and New York offices of JP Morgan” pleaded guilty to conspiracy and spoofing charges. Trunz also admitted that:

“between approximately July 2007 and August 2016, [he] placed thousands of orders that he did not intend to execute for gold, silver, platinum and palladium futures contracts traded on the NYMEX and COMEX).”

Notably, the DoJ says that Trunz admitted that he:

“learned to spoof from more senior traders, and spoofed with the knowledge and consent of his supervisors.”

Trunz is interesting in that he worked at various times in all three locations that JP Morgan’s global trading desk spans, i.e. London, Singapore, and New York.

The guilty please of Edmonds, Flaum, and Trunz over 2018 – 2019 then allowed the US Department of Justice to move forward with its indictment of Michael Nowak, Gregg Smith, and Christopher Jordan, an indictment which was filed on 22 August 2019, and then unsealed on 16 September 2019. In fact, the Nowak – Smith – Jordan indictment was filed only 2 days after Trunz had pleaded guilty.

I would encourage you to read the entire article at the link posted above.

Here are my points.

One, despite admitted price manipulation, gold and silver prices have moved steadily upward since 2007 when the price manipulation allegedly began. This demonstrates that as currency is created, it is ultimately difficult, perhaps impossible to keep metals prices down.

Two, as noted here previously, JP Morgan paid nearly $1 billion in criminal and civil penalties in 2020 as part of a deferred prosecution agreement. The current trial of those accused of price manipulation in the precious metals markets is a result of the continuation of that original investigation.

Finally, three, despite these events, JP Morgan remains a prominent player in precious metals markets. Despite the fines and the deferred prosecution agreement, JP Morgan has three entities that are part of the London Bullion Market Association. The author of this article, Mr. Ronan Manly comments:

Why have the LBMA and the LPPM not kicked JP Morgan out of their associations? Has the LBMA no moral compass or ethics? Additionally, why does the Bank of England observer on the LBMA Board, Andrew Grice, not call for JP Morgan to be immediately ejected from the London Bullion Market Association (LBMA) and the London Platinum and Palladium Market (LPPM) and permanently banned from trading, clearing and vaulting gold, silver, platinum and palladium in London?

Perhaps it has something to do with the fact that, through Morgan Guaranty Trust Company of New York, JP Morgan was one of the 6 founding members of the London Bullion Market Association (LBMA) in November 1987.

I believe that, moving ahead, should the Fed reverse course on tightening (which I believe they will), it will be next to impossible to keep precious metals prices down.

Market Analysis and Commentary on the Latest Russian Sanctions

To begin with this week, I want to offer an update on last week’s market analysis.

In last week’s “Portfolio Watch”, I wrote this about stocks and published a chart of the S&P 500 (which I am not reprinting here due to space limitations. You can visit www.RetirementLifestyleAdvocates.com and download last week’s newsletter to see the chart):

Let’s begin by taking a look at stocks.

I’ll use the Standard and Poor’s 500 for the analysis. The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right-hand side of the chart, I have drawn a blue trend line that begins at the end of the calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

Also on the chart, on either side of the green and red price bars (each bar is one week of price activity with the green bars representing the weeks that the ETF price went up and the red bars representing weeks the ETF price went down), you’ll see a blue line (on the top side of the price action) and a red line (on the bottom side of the price action). Those lines are the Bollinger Band indicator.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

Finally, if you notice on this weekly price chart that last week’s price action ‘gapped down’ leaving a space in the chart between the prior week’s price action and last week’s. Often, gaps on a chart are closed.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’. It’s sage advice.

That rally in stocks did occur; the Dow Jones Industrial Average rallied more than 5% and the Standard and Poor’s 500 Index rallied more than 6%. Despite the seemingly strong rally, by measure stocks remain in a downtrend.

The recent rally is counter-trend in my view, with the primary trend remaining down. To demonstrate how far oversold stocks were going into the beginning of last week, stocks can rally another 10% or so from here to get back to a 20-week moving average of price.

While stocks don’t have to rally that much, a consolidation period or a continued bear market rally would be more likely than not here in my view unless there is a geopolitical shock to the markets or some other black swan-type event.

At this point in time, US Treasuries like stocks are oversold just not to the same extent.

This chart is a weekly price chart of an exchange-traded fund that tracks the price action of long-term US Treasuries.

The faint silver line in the center of the price chart is a 20-week moving average of price. Notice that since the beginning of the calendar year 2022, US Treasuries have been trading well below their 20-week moving average price.

Here’s why that may be important. The 20-week moving average of price is the market’s collective consensus of value over a 20-week time frame. As one might expect, to calculate a 20-week moving average of price, one takes the closing price of the exchange-traded fund over the past 20 weeks, adds them up, and then divides by 20.

If the market’s current consensus of value is lower than the market’s consensus of value over the past 20 weeks, that means the market is down trending, at least by this measure.

The indicators at the bottom of the chart measure overbought and oversold conditions (at least that is part of what they do). Both indicators are telling us that the US Treasury market may be poised for a rally here although the indicators are not at extreme levels.

In other news, the G7 announced this past week that Russian gold imports would now be banned. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/biden-g-7-will-ban-russian-gold-imports) (emphasis added):

“The United States has imposed unprecedented costs on Putin to deny him the revenue he needs to fund his war against Ukraine,” Biden tweeted on Sunday, the first day of a G7 meeting in Germany; a formal announcement is expected later on during the summit.

“Together, the G7 will announce that we will ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Russia” he added.

The official talking point here, encapsulated by the pro-Biden outlet, The Hill, is that “while it does not bring in as much money as energy, gold is a major source of revenue for the Russian economy. Restricting exports to G7 economies will cause more financial strain to Russia as it wages the war in.”

That, of course, is incorrect: the biggest buyers of gold in recent years have not been G7 countries (United States, France, Canada, Germany, Japan, the United Kingdom, and Italy), many of whom naively sold much if not all their gold in the recent past and have refused or simply don’t have the funds to restock; instead, purchases have all been by developing-nation central banks (like India and Turkey, and of course China which however has a habit of only revealing its true gold inventory every decade or so) who have been quietly preparing to do what Russia is doing by dedollarizing and instead allocating capital into a counterparty-free asset.

As for Russia, its central bank has been an aggressive buyer of gold, not seller, and if anything Biden’s decision will only make the gold market the latest to follow the example of oil and bifurcate: cheaper for Russian-friends and much more expensive for Russian enemies.

This decision, like the prior Russian sanctions, will backfire. Russia and its allies will benefit and the west will suffer.

Thinking critically about this policy decision, one has to conclude that the US has decided to prohibit the trading of US Dollars, which are rapidly devaluing, for Russian gold an asset that, at worst, has maintained its purchasing power.

In other words, Russia gets to keep her gold and will not be allowed to exchange her gold for devaluing US Dollars. That’s punishment?

The reality is Russia and China, as the chart above shows, have been dumping US Dollars and adding gold as far as their reserve assets are concerned. The countries have reduced their US Treasury holdings by 25% since mid-2015 and have increased their collective gold holdings by nearly double over the same time frame.

The data unequivocally suggests that Russia (and China) has already made the decision to slow the exchange of US Dollars for gold.

Ultimately, I expect this will be bullish for gold and will continue to be bearish for the US Dollar and other western fiat currencies.

We live in economic times unlike any that anyone alive today has ever seen. Yet, the ultimate destination is completely predictable.

Fiat currencies eventually fail or are redefined. Unsustainable debt levels eventually cause a deflationary collapse and massive currency creation leads to inflation or hyperinflation before the deflationary crash begins.

If you are not using Revenue Sourcing™ to plan your retirement income, now is the time to look into it.

Market Analysis

This week, I want to offer some market analysis.

Last week stocks fell hard, US Treasuries declined as did gold and silver.

One of the money management strategies that has proven itself over time was developed by Harry Browne who began publishing a financial newsletter in the 1970s and authored many best-selling books up through the 1990s. The strategy was dubbed “Permanent Portfolio” by Browne and it had the investment objective of getting absolute returns (not losing money) while keeping pace with inflation.

When one examines the hypothetical performance of such a portfolio going all the way back to 1971 when the US Dollar became a fiat currency, the track record is very sound with 7 years of slightly negative returns and 44 years of positive returns.

This year, at the present time, this strategy is struggling as all asset classes are down or flat mid-way through the year.

Let’s begin by taking a look at stocks.

I’ll use the Standard and Poor’s 500 for the analysis. The chart below is of an exchange-traded fund that has the investment objective of tracking the S&P 500 index.

Notice on the right hand side of the chart, I have drawn a blue trend line that begins at the end of calendar year 2021 and continues to the present time.

Notice also, how far below the trendline the current price is.

When prices reach outside the Bollinger Band, either on the top side or the bottom side, it often represents a price extreme and the price reverts to the mean.

For these reasons, I would not be surprised to see a rally in stocks this next week although there is another market axiom that advises to ‘never try to catch a falling knife’. It’s sage advice.

If you are a trader, you are best to trade with the trend and wait for a good opportunity to do so.

Long-term, as noted in my mid-year market forecast published this month, I look for more downside in stocks. I also expect the Fed to reverse course sometime soon and continue with easing.

That brings me to precious metals.

Gold and silver have not reacted the way one might expect of late with the high levels of inflation that exist.

The chart is a chart of an exchange-traded fund that tracks the price of gold.

Notice that the weekly price chart is forming a bullish ‘cup and handle’ pattern with the handle about to be completed.

I expect that the uptrend in gold will resume by year-end and silver will follow suit.

US Treasuries have also been a poor performer this year.

This chart is a chart of an exchange-traded fund that tracks the price of US Treasuries. Keep in mind that as bond prices fall, bond yields rise.

The trend line on the chart is clearly down since the beginning of 2020. A down trend over that time frame is not surprising given that the Fed expanded its balance sheet by trillions over that same time frame.

Now, as is the case with stocks, it would appear that bond prices are oversold and may be ready for a rebound. The Bollinger Bands on the weekly price chart seem to indicate that as does the MACD indicator at the bottom of the chart.

To summarize, both stocks and bonds are extremely oversold here and a rebound would not be surprising although the primary trend of both stocks and bonds remain down.

Gold and silver are forming a bullish pattern that may see prices rise by year-end.

I expect that Browne’s permanent portfolio will continue to outperform the stock market as it has year-to-date and I expect some recovery in returns from here.

Are Currency Changes Imminent? – Part 2

The big news in financial markets last week was the big decline in US Treasuries. Not surprising given the news I discussed last week; Russia has now loosely tied its currency, the Ruble, to gold and required any country that Russia deems to be unfriendly to use Rubles or gold when trading with Russia.

As I noted last week, this move will likely be bullish for gold and negative for the US Dollar. Many readers could be looking at the performance numbers in the databox above and noting that the US Dollar moved significantly higher last week. It’s important to understand that the US Dollar Index is a relative measure of the purchasing power of the US Dollar, not an absolute measure. The US Dollar Index measures the US Dollars purchasing power relative to the purchasing power of the Japanese Yen, the Euro, the Swedish Krona, the British Pound Sterling, the Swiss Franc, and the Canadian Dollar.

All one needs to do is visit a grocery store or purchase any consumer item to quickly realize that the US Dollar is losing absolute purchasing power. The other fiat currencies used in the US Dollar Index are simply performing more poorly than the US Dollar on a collective basis.

This move by Russia, I believe, is the biggest economic news of our time. As big as when Nixon eliminated the convertibility of the US Dollar for gold.

Interestingly, at the time Nixon made that move, the ultimate implications of the action were not widely understood by the populace. I think one could reasonably state that the same could be said about this move by Russia that could be the catalyst for big currency changes globally moving ahead.

From my perspective, currency changes typically occur slowly. It’s taken more than 50 years for the US Dollar to lose 98% of its purchasing power. The US Dollar has been the preferred currency for international trade since the Breton Woods agreement of 1944. After Nixon eliminated the US Dollar redemptions for gold in 1971, an agreement was struck with Saudi Arabia to sell its oil exports in US Dollars in exchange for military favors.

Now though, as has happened many times throughout history, currencies are beginning to evolve more rapidly. Many years from now, looking back, I believe this move by Russia will be viewed as the catalyst for major currency changes that are yet to come.

Past RLA Radio Guest, Peter Schiff, recently commented (Source: https://schiffgold.com/key-gold-news/russia-is-quietly-making-the-case-for-owning-gold/):

The head of the Russian Parliament, Pavel Zavalny, made comments recently addressing the subject of economic and financial sanctions. It’s clear that gold is playing a large role in protecting Russian wealth. That role may get bigger and it could create a paradigm shift in how the world does business.

Russia has a lot of natural gas and oil. And it sells a lot of natural gas and oil to the world. Zavalny made it clear that Russia is happy to sell — in hard currency. And what is hard currency? Not dollars.

“If they want to buy, let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency. As for friendly countries, China or Turkey, which are not involved in the sanctions pressure. We have been proposing to China for a long time to switch to settlements in national currencies for rubles and yuan. With Turkey, it will be lira and rubles. The set of currencies can be different and this is normal practice. You can also trade bitcoins.”

Zavalny said Russia has no interest in dollars, saying “this currency turns into candy wrappers for us.”

In an op-ed published by “MarketWatch”, Brett Arends said this might not mean anything. But it could mean a lot if other countries like China and India follow Russia’s lead. As Arends notes, a lot of countries aren’t thrilled with the United Sates’ ability to control the global financial system with a monopoly on the reserve currency.

Arends also says this adds to the argument for having gold in a long-term investment portfolio.

Not because it is guaranteed to rise, or maybe even likely to. But because it might — and might do so while everything else went nowhere, or went down. Like in a geopolitical or financial crisis where the non-western bloc decides to challenge America’s financial hegemony and ‘king dollar.’”

Arends calls himself “gold agnostic,” but he said there is no question “it has its uses.”

Gold is completely private. It is completely independent of the SWIFT or any other banking system. And despite the rise of cryptocurrencies, it remains the most widespread and viable global currency that is not controlled by any individual country.”

Moves made by Russia in recent weeks could represent a huge paradigm shift in global finance. Many countries have been building toward this for years as the US has weaponized the dollar.

In effect, Russia put the ruble on a gold standard that is now linked to natural gas.

Russia holds the fifth-largest gold reserves in the world. After pausing during the COVID-19 pandemic, the Central Bank of Russia resumed gold purchases in early March before suspending them again a couple of weeks later. The Russian central bank resumed buying gold from local banks on March 28 at a fixed price of 5,000 roubles ($52) per gram. Since Russia is insisting on payment of natural gas in rubles and they’ve linked the ruble to gold, natural gas is now indirectly linked to gold. The Russians can do the same to oil, as ZeroHedge explained.

If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble – gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas.”

So, what does this mean for the price of gold?

“By playing both sides of the equation, i.e. linking the ruble to gold and then linking energy payments to the ruble, the Bank of Russia and the Kremlin are fundamentally altering the entire working assumptions of the global trade system while accelerating change in the global monetary system. This wall of buyers in search of physical gold to pay for real commodities could certainly torpedo and blow up the paper gold markets of the LBMA and COMEX.”

“The fixed peg between the ruble and gold puts a floor on the RUB/USD rate but also a quasi-floor on the US dollar gold price. But beyond this, the linking of gold to energy payments is the main event. While increased demand for rubles should continue to strengthen the RUB/USD rate and show up as a higher gold price, due to the fixed ruble – gold linkage, if Russia begins to accept gold directly as a payment for oil, then this would be a new paradigm shift for the gold price as it would link the oil price directly to the gold price.”

We could be seeing a slow unwinding of the petrodollar. And the petrodollar is one of the foundations of the dollar’s position as the world currency. We’ve already heard rumblings of Saudi Arabia accepting yuan for oil.

The US and other western powers have tried to lock down Russia’s gold. But as Arends explains, that is virtually impossible in effect.

“Despite some laughable suggestions that the West might somehow sanction ‘Russian gold,’ there is no way of tracing the identity, nationality, or provenance of bullion. American Eagle coins or South African Krugerrands can be melted down into bars. Gold is gold. And someone will always take it. Carry a Krugerrand to any major city anywhere in the world and you will find people willing and eager to take it off your hands in return for any other currency you want.”

Back in 2011, when I wrote the book “Economic Consequences”, I noted that the Federal Reserve would ultimately determine whether the United States experienced deflation or inflation followed by deflation. I reasoned that the outcome would depend entirely on monetary policy.

It now seems that the latter outcome is inevitable and perhaps even imminent.

Are Currency Changes Imminent? – Part 1

Despite the ever-so-slight rally in stocks this week, I view the primary stock market trend as down. Unless the market highs of the end of 2021 are exceeded, this will be the case.

This week, I want to discuss an event that has not been covered extensively so far as I can tell. But this event that recently occurred has the power to change the way the world does a lot of its business.

Here is why that could be a big deal to you – the rest of the world uses a lot of US Dollars in trade. As I have discussed in this publication previously, there has been a gradual, ever-intensifying move away from the US Dollar over the past twenty years or so. With this recent event, that move could really strengthen.

To what event am I referring?

This from “Fox Business” on February 28 (Source: https://www.foxbusiness.com/markets/us-freezes-russian-central-bank-assets-held-by-americans):

The U.S. said it is blocking financial transactions of Russian central bank assets, effectively freezing any of those assets held by Americans.

The freeze is effective immediately, a senior administration official said in a briefing for reporters on Monday. The official said that the U.S.’s actions are in conjunction and cooperation with the European Union, Japan, the UK, Canada, and others. This means that not only will Russia not be able to access funds in U.S. dollars, they will be unable to use dollars in the other countries turn to other banks and other currencies.

By making the move effective immediately, before markets open, the official said, Russia will be unable to move assets to avoid or mitigate the consequences.

“Our strategy,” the official said, “is to make sure that the Russian economy goes backward as long as President Putin decides to go forward with his campaign.”

As one would expect, Russia fought back. The country is now demanding payment for its vast natural resource exports in either gold or rubles giving any of the rest of the world that does business with Russia another reason not to inventory US Dollars.

Analyst and economic writer, David Kranzler, whose work I have discussed previously recently penned a piece on this topic titled, “Did Russia Intentionally Trigger a Monetary System Reset?” (Source: https://www.investing.com/analysis/did-russia-intentionally-trigger-a-monetary-system-reset-200621146). It is a thought-provoking article, here are some excerpts:

Fiat currency is a “promise” to repay a debt obligation and nothing more. A hard asset-backed currency is a guarantee that repayment will occur.

On Mar. 7, Zoltan Pozsar, who formerly worked at the NY Fed, was an advisor at the U.S. Treasury, and currently is a strategist at Credit Suisse, published a research report titled “Bretton Woods III.”

Anyone familiar with the Bretton Woods agreement understands the reference. Nixon’s snipping of the final thread connecting currency to gold is considered to be Bretton Woods II. Pozsar makes the case that Bretton Woods III is a reversion back to a monetary system in which currency is backed by commodities as opposed to being backed by a sovereign issuer’s “full faith and credit.”

The post-1971 fiat currency reserve banking system enabled by the removal of gold from the monetary system is nothing more than a Ponzi scheme. “Inside money” refers to the interbank repo/lending mechanism from which the fractional bank reserve monetary system blossoms.

Pozsar distinguishes “inside money” from “outside money.” Inside money” is created by the Central Bank/inter-bank lending mechanism that can magically turn one dollar of reserve capital into nine dollars of “credit” capital. And the one dollar of reserve capital is backed by nothing tangible—just the “full faith and credit” of the issuing entity.

Think of this monetary system as an inverted pyramid, e.g., something like Exter’s Pyramid. In bankruptcy law, “full faith and credit” would be considered, at best, an unsecured loan. Get in line and pray that there’s value left over to be distributed to the unsecureds.

In contrast, Pozsar references Bretton Woods III as the “rising allure of outside money over inside money,” where “outside money” is “commodities collateral,” meaning tangible assets for which definitive value can be determined, as opposed to the sovereign promise of “full faith and credit.”

In periods of banking crises, banks are reluctant to participate in the “inside game” (see 2008 and September 2019, for instance) because, at that point in time, they don’t trust the fiat currency collateral on which the fractional reserve banking system is predicated and thus are reluctant to lend money to their banking peers.

Every time this occurs, the Central Banks have to print more money to “lubricate” the system enough so that it functions. This in turn further devalues the “inside money” on which the system is predicated.

But if currency issued by Governments and printed by Central Banks is backed by hard assets, this problem is avoided. In this system, the counterparty to trade or financing transactions would have the option of demanding payment in the hard asset or assets backing the currency—most likely gold or possibly a pre-agreed upon commodity asset. Remember, fiat currency is nothing more than an unsecured debt instrument of the issuing entity.

It’s likely that Putin knew ahead of time that the West’s response to Russia’s invasion of Ukraine would be to freeze Russian currency reserves held at western Central Banks. Of course, this response by the U.S./West brought to light the inherent Achilles’ Heel of the modern Central Bank fiat currency reserve system.

Any country that keeps currency reserves for trade settlement purposes at foreign Central Banks, specifically the Federal Reserve and the ECB, is at risk of having those reserves confiscated, thereby rendering them worthless.

In response, Russia is now demanding payment for energy in either rubles or gold from what it deems to be “unfriendly” countries. Whereas in the “inside money” banking system, settlement of trade is merely a matter of accounting ledger adjustments at the respective Central Banks, in this trade settlement arrangement, a country purchasing oil or gas from Russia in exchange for gold would need to 1) demonstrate that the gold being used for trade payment actually exists, and 2) transfer the ownership rights to Russia. Russia ultimately would likely demand repatriation of the gold. The U.S./G7 made it crystal clear that possession of assets is 100% of the law.

The response by the West—led by the U.S. and its control of the global reserve currency—in all likelihood has triggered a reset of the global monetary system. I actually do not like the term “Bretton Woods III” because it references an agreement which, in its essence, destroyed the gold-backed global monetary system.

Regardless, it appears for now that Russia—likely with China’s tacit support—has set in motion a global monetary system reset. In the new system countries which supply the world with goods that have price inelasticity of demand—oil, natural gas and food commodities, for instance—will have the power to enforce trade settlement in hard currencies, e.g., gold or other hard assets, rather than fiat currency Central Bank accounting ledger adjustments.

“Coindesk” recently published a piece (Source: https://www.coindesk.com/policy/2022/03/08/credit-suisse-strategist-says-were-witnessing-birth-of-a-new-world-monetary-order/) that provided additional perspectives from Zolton Pozsar:

Former Federal Reserve and U.S. Treasury Department official, and now Credit Suisse (CS) short-term rate strategist, Zoltan Pozsar has written the U.S. is in a commodity crisis that is giving rise to a new world monetary order that will ultimately weaken the current dollar-based system and lead to higher inflation in the West.

“This crisis is not like anything we have seen since President [Richard] Nixon took the U.S. dollar off gold in 1971,” wrote Pozsar.

As the initial Bretton Woods era (1944-1971) was backed by gold, and Bretton Woods II (1971-present) backed by “inside money” (essentially U.S. government paper), said Pozsar, Bretton Woods III will be backed by “outside money” (gold and other commodities).

Pozsar marks the end of the current monetary regime as the day the G7 nations seized Russia’s foreign exchange reserves following the latter’s invasion of Ukraine. What had previously been thought of as risk-free became risk-free no more as non-existent credit risk was instantly substituted for very real confiscation risk.

What occurred surely isn’t lost on China, and Pozsar sees the People’s Bank of China (PBOC) faced with two alternatives to protect its interests – either sell Treasury bonds to buy Russian commodities, or do its own quantitative easing, i.e., print renminbi to buy Russian commodities. Pozsar expects both scenarios mean higher yields and higher inflation in the West.

Last week, I discussed how governments and central banks around the world are pursuing digital currencies with a great deal of determination. Perhaps this development helps to explain the sudden level of increased urgency. It certainly makes the case for non-US Dollar-denominated assets in a portfolio like gold and silver.

“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.”

-From “Atlas Shrugged”

What is Real and Where are We Heading?

While I don’t typically publish the databox above in my blog each week, I am including it this week for reference.

The Dow to Gold ratio continued to fall last week. As currency devaluation continues, this is an indicator that becomes more meaningful in my view.

If you are not familiar with the Dow to gold ratio, it is simply the Dow Jones industrial average priced in gold. The Dow to gold ratio began the year at about 20 and it currently stands just under 16 1/2. That is a decline in stocks when measured in gold of almost 18%.

To calculate the Dow to gold ratio, one takes the value of the Dow priced in dollars and divides by the price of gold per ounce also priced in dollars. The current value of the Dow, 32,944.19 divided by the price of gold per ounce of 1999 results in a doubt to gold ratio of 16.48.

As currency is devalued, the nominal value of stocks increases. That can result in the illusion of an appreciating stock market when the reality is a depreciating currency, not a stock market that is increasing in real terms.

If we go back to the beginning of calendar year 2000, we find that the Dow Jones industrial average was at about 11,500. Presently, the Dow is nearly triple that level.

The question is, does that mean stocks have tripled in value, or does it mean that the US Dollar just buys a lot less?

By pricing the Dow in gold, we can get an idea.

In January of 2000, gold was selling for about $280 per ounce. To price the Dow Jones Industrial Average in gold, one would take the value of the Dow, 11,500 and divide by the price of gold per ounce, $280, resulting in a Dow to gold ratio of about 41.

In other words, if you were going to use gold to buy the Dow instead of US Dollars, you’d need 41 ounces of the yellow metal to own the Dow. (You can’t actually buy the Dow, but this is a good comparison.)

Today, the Dow is at about 33,000 and the price of gold per ounce is about $2,000. Taking the value of the Dow and dividing by the price of gold per ounce, one finds that the Dow to gold ratio is 16.5. In other words, 22 years later, stocks when priced in gold have fallen nearly 60% while the same stock index priced in US Dollars has nearly tripled.

While that comparison may not conclusively answer the question posed above, another example may.

According to the United States Census Bureau, the median price of a home in calendar year 2000 was $119,600. (Source: https://www.census.gov/data/tables/time-series/dec/coh-values.html)

If you were using gold to buy the new home in calendar yar 2000 rather than US Dollars, a new home would have set you back about 427 ounces of gold.

Fast forward to today and the National Association of Realtors reports that the median price of a home is $358,000. (Source: https://www.newhomesource.com/learn/cost-to-build-house-per-square-foot/) Given that gold is about $2,000 per ounce, a new home could be had for about 179 ounces of gold.

Like stocks, home values have roughly tripled in the last 22 years when priced in US Dollars. But, priced in gold, real estate values have declined just like stock values.

This brings me to my point this week, in real terms (gold) we are experiencing deflation. Measured in US Dollars we have inflation.

As I discussed on my “Headline Roundup” webinar this week, Egon von Greyerz had some great observations along these same lines last week. Here is a bit from his article (Source: https://goldswitzerland.com/global-monetary-commodity-inferno/):

Inflation leading to hyperinflation was always guaranteed in the current debt-infested era, although the Fed and other Western central banks have never understood what inflation is. Just as they didn’t understand that their fake and manipulated inflation figures couldn’t even reach the Fed target of 2%. Now with real US inflation exceeding 15% (see graph below), the Fed has a new dilemma that they are totally unprepared for.

The US government conveniently changed the calculation of inflation to suit their purpose. Had they stuck to the 1980s established method, official inflation would be over 15% today and rising.

For years, the US Fed unsuccessfully tried, with all the king’s horses and all the king’s men, to get inflation up to 2%. In spite of throwing $ trillions at the problem and keeping interest rates at zero, they never understood why they failed.

In spite of printing unlimited amounts of counterfeit money, inflation for years stayed nearer 0% than 2%.

Now with official inflation at 7% and real at 15%, the Fed can’t understand what has hit them as we know from their laughable “transitory” language.

So now a quick volte-face for the Fed to figure out how to reduce inflation by 5 percentage points and more likely by 13 to get inflation down to 2% instead of up to 2%.

Clearly, the Fed can never get it right but many of us have known that for a very long time.

If the Fed studied and understood Austrian economics rather than defunct Keynesianism, they would know that the real inflation rate depends on growth in money supply rather than the obsolete consumer price model.

So let’s take a look at the growth in Money Supply. Since 1971, M2 has grown by 7% annually. A 7% growth means that prices double every 10 years. Thus 100% total inflation over 10 years rather than the 2% per annum that is the Fed target.

But as the chart above shows, the exponential phase started in March 2020 with M2 growing by 19% annually since then. That means a doubling of prices every 3.8 years.

Since the money supply is growing at 19% annually, this means that inflation is also 19% based on our Austrian friends.

And this is what the US and the world were facing before the Ukraine crisis. But now there is a lot of explosive fuel being poured on the global inflation fire.

Russia has the biggest natural resource reserves in the world which include coal, natural gas, oil, gold, timber, rare earth metals, etc. In Rubles, these reserves will obviously appreciate substantially with the falling currency.

In total, the Russian natural resource reserves are estimated at $75 trillion. That is 66% higher than the second country USA and more than twice as much as Saudi Arabia and Canada.

Even if the total Russian supply is not lost to the world, it is clear that the West is determined to punish Russia to the furthest extent possible. Therefore, as we have already seen in the major escalation of oil and gas prices, the shortages will put insufferable pressure on the prices of natural resources.

I have for quite a few years warned about the coming inflation, leading to hyperinflation, based on unlimited money printing.

But the dynamite of a global commodity crisis and shortages thrown into the already catastrophic debt and global monetary fire will create an inferno of nuclear proportions.

If a miracle doesn’t stop this war very quickly (which is extremely unlikely), the world will soon be entering a hyperinflationary commodity explosion (think both energy, metals, and food) combined with a cataclysmic deflationary asset implosion (think debt, stocks, and property).

The world will be experiencing totally unknown consequences without the ability to solve any of them for a very long time. All the above would most likely happen even without a global war. But if the war spreads outside Russia and Ukraine, then all bets are off. At this point, I am not going to speculate about such an outcome since what is standing in front of us currently certainly is bad enough.