Is The Gold Community A Cult?

I recently was involved in a discussion centered around the gold community and their constant talk of manipulation and price suppression.

There are some of us in the gold community who understand gold’s place in a diversified portfolio (insurance), have been recommending dollar cost averaging into a position for their clients rather than “all in” like most others who fear the U.S. dollar collapse, and have actually been dollar bullish (because of the Euro/Yen issues which represent 67% of the index) and bullish on Treasuries. All I do is follow what the market tells me. The rest will take care of itself.

Inflation will come. Any Fed stimulus so far has just been swallowed up by the greater credit contraction that is still occurring (deflation). The Fed will continue QE as Bernanke only knows this as his possible solution. He can’t see that he is adding fuel to the fire.

The Cold Hard Facts – The Economy Is Not Rebounding

The economy is not rebounding. Banks aren’t lending and still don’t mark to market their assets. The FASB still allows them to cheat. The FDIC is still underwater. Banks still hold more sub-investment grade derivatives today than they did at the height of the 2008 crisis. People who buy gold and silver today, aren’t selling. Central Banks have been net buyers. Supply will become an issue (Econ 101). The Fed will continue to implement QE or something similar. Same with the ECB. The Debt to GDP ratio’s of all countries will continue to rise. The reason gold and silver is not in the mainstream is because even the Certified Financial Planner (CFP) course that addresses investments doesn’t explain the industry well. In addition, the entire industry relies on the Prudent Man Rule and Modern Portfolio Theory that rely on the “risk free asset” that isn’t risk free at all.

Faith – Where Do You Put Yours?

It all comes down to faith in the Fed and/or our government to do the right thing. They don’t have a good track record in doing the right thing. History has shown where this leads. Throw in the bank’s issues (companies like MF Global can also be added to the mix) and while many gold bugs may not understand the short term mechanics, they aren’t too far fetched with their long term results for gold. “When to sell” and what to do with the proceeds will be the hardest decision buyers of gold will have to make.

The only real cult out there is the industry that wants you to put more faith in a piece of paper that has 41 short years of existence without a relationship to gold. How have we done since Nixon severed the dollars relationship with gold back in 1971?

Answer: Not too well.

Obama isn’t going to save us.

Romney isn’t going to save us.

Both the Republican Party and Democrat Party are collectively the reason we are exactly where we are today. The media would have you vote for one over the other like the other is the solution. This is a pattern that needs to be broken and precious metal prices moving higher reveals this pattern.

Silence About Sub-Investment Grade Derivatives, But For How Long? 

Will it take a blow-up by a large bank to get the media talking about the growth in sub-investment grade derivatives? Which banks are most heavily invested in sub-investment grade derivatives and how does that relate to gold and silver?

We can expect fights along the way by the Fed and their buddies at Goldman Sachs, as well as by J.P. Morgan (who just so happens to be the custodian of the largest Exchange Traded Fund (ETFs) for Silver.

To put this into perspective, all of those who own the Silver ETF symbol, SLV have as their custodian J.P. Morgan Chase N.A. This is the bank that leads all other banks in possession of sub-investment grade derivatives maturing in the next 5 years (see Table 11).  For those that own the Gold ETF, symbol GLD, the custodian is HSBC who just entered the top 5 in sub-investment grade derivatives (see growth of sub-investment grade derivatives in the second table below).

The top 5 are J.P. Morgan Chase, Citibank, Bank of America,  Goldman Sachs and HSBC.

Today the total amount of sub-investment grade derivatives for the nations top 5 banks is still growing, year after year. While J.P. Mogran’s share has been falling, they are pushing their unwanted sub-investment derivatives on Citibank who has seen their share increase considerably the last year. Of real note too is the amount of sub-investment grade derivatives what are maturing in one year or less has jumped from  (who else is counterparty to these than each other? – Answer: no one but the Federal Reserve). Four of these top 5 banks had trading losses in the credit markets totaling $570 million the last quarter of 2011 (see Table 7). Did you hear about this anywhere?

(Click for sharper image)

Just the Facts

While some may mock those who tell people to buy gold and categorize them as a cult, they don’t know what they are talking about. I have spent my time writing a book exposing the ignorance of the financial services industry, writing multiple articles challenging CFA’s, CFP’s, PhD’s, Dave Ramsey, Bob Pisani, Nouriel Roubini etc. etc., and exposing the increase in sub-investment grade derivatives that no other financial website seems to be mentioning. They only seem to talk about the massive amount of interest rate swap derivatives that really aren’t the problem. The problem is simply there are no counterparties to the sub-investment grade derivatives coming due in the years ahead.

Think MF Global here.

MF Global’s CEO, a former Goldmans Sachs CEO and U.S. Senator, bet heavily in Europe. Turns out, his bet was wrong.  What makes anyone reading this think that these top 5 banks bets are going to pan out? Did anyone  listen to Bernanke and Geithner the other day get grilled by the Senate and Bernanke telling everyone that we won’t get hurt by the Fed lending a hand to Europe? How does Bernakne know this? More importantly, how can he guarantee it? He can’t. So of utter most importance, what if he’s wrong?

The Real Cult

No, the only real cult are the Fed and our government who want you to drink the 41 year old Kool-aid known as the Dollar or as some call it, “the fiat experiment since 1913.” They prefer you to blindly do what you’re told and don’t think for yourself. They want you to forget that a 1964 silver dime could buy you a loaf of bread in 1964 and could still buy you a loaf of bread today based on it’s small silver content. They prefer you not catch on to the fact that our kids calculators don’t go as high as a trillion. And they’re  represented by the mainstream financial media who tell you a story over and over hoping you’ll believe it, that the stock market always goes higher. But it’s also those at Fox News and MSNBC who think that our savior is Obama or Romney moving forward.

We’ll all know the truth come 2013 when it will literally be….the beginning of the end.

One of the definitions of a cult is: “A system of religious veneration and devotion directed toward a particular figure or object.”

I would think that most of us in the gold community would direct our displeasure with Fed policy and the Fed itself as they continually allow Congress the ability to live beyond it’s means and fight wars on multiple levels by allowing them unlimited access to capital that has grown our debt to now over $16 trillion.

How strong would the dollar be if we just took away that ability to live beyond our means? How great would America be?

Now,….who is the cult again?