In the graph below, you can see how world markets ‘fared’; however, as Dave Kimble has pointed out below, all currencies have gone down in value, based on the current buy cost of gold. While gold holdings was the standard on which all countries currencies are guaranteed, with the USA leading the charge (not guaranteeing their $ and printing it like it’s going out of fashion), fiat currencies are now the norm.

So what is the correct and relative strength of currencies with the obvious standard of gold?

Over the last 12 months the major hard currencies have all devalued against gold:

US -21.3%
EU -28.0%
UK -23.4%
JP -13.6%
CA -19.2%
CH -14.7%
AU -12.3%

If China was in the above and wasn’t – by choice – pegging its currency to the US$, it would surely have gone up against gold; so the share markets are just reflecting the loss of purchasing power of fiat currency.

Therefore, there is no ‘share market recovery’.

Or to put it another way, the currency has devalued 62.3% in 5 years !The price of Gold in Aussie $’s has reached a record $1,482 /oz on F

Now if you were a bit paranoid (like me), you wonder about the banks borrowing money off shore to lend here and having their debt pegged at the lending country’s exchange rate allowing for devaluing and fluctuations …

The reality is that any given country’s currency was supposed to be supported by gold reserves, when in fact there has never been enough gold to support a currency; it turned into a matter of trust and as we know now (and did in the past), the banking industry is corrupt and the saying ‘no honour amongst thieves’ has never proven to be more true.

Banks operate under a fairly simple system, they borrow money by paying little to a pittance to small depositors / investors and then go a borrow money elsewhere from near and far.

Problem is though, the amount of money they borrow has to come from savings of someone somewhere, trouble is, worldwide savings are at an all time low (mainly because the majority have borowed so far into their future savings that they don’t have any anymore), so how do banks and or governments get a hold of money when it doesn’t exist?

Ohh I know it works on ‘trust’ that vague promissory note to pay sometime into the future, but how does a bank lend money it doesn’t have to pay for things and then charge interest on just another promissory note from the borrower ?

The following article titled ‘Breakdown of the Gold Market’ is by Jim Willie CB (Feb 5 2010 10:17AM www.GoldenJackass.com);  the link will enable you to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. But here is a lengthy but shorter version of (the cause and) what went wrong (and effect) and what will most likely happen.   Just envision a high roller profile, spending wildly at a casino, having access to someone else’s money, consistently losing to and with other high rollers who all eventually end up with no money but do have access to a printing machine that prints money … and that is the banking industry supported by government.

An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

A great disconnect exists in the gold market between the exchange futures contract price (the paper price) and the gold bullion paid price for transactions (the physical price). The differential in price is growing wider, enough to place tremendous pressure on the gold market itself. Look not to the gold premium paid for purchases, but to high volume purchases in the tens of million$. In mid-December, almost every demand for gold contract delivery was matched by a cash delivery, complete with 25% bonus premium offered. The officials even produced a new ledger item called ‘Cash For Delivery’ that was necessary to balance their badgered books. It prompted little attention. Some call it a basic bribe. Others call it a technical default. It is truly both.

The paper gold market and the physical gold bullion market have finally separated in a practical manner, meaning actual gold has almost no role anymore in London paper contract settlement. This shocking statement comes from a man who actually trades from the inside. The absence of gold in London requires extraordinary tactics to settle contracts and to obtain gold bullion. Red tape procedures delay delivery for individuals, and cash premiums accompany gold delivery demands as standard practice. The opportunity to convert fiat money into precious metal at prices considered reasonable is also vanishing. The London gold banker said,

“There is going on a lot more than meets the eye. The physical system is actually consolidating bigtime and is organizing itself with lightning speed, totally hidden from pretty much anyone, even the so-called insiders. The paper precious metal market and the physical precious metal market have defacto disconnected. The paper and physical gold markets currently operate in parallel universes. The outflow of physical metal from bank vaults is happening at a mind bending pace.” His reference to bank vaults extends beyond the LBMA inventory to basic bullion banks.

Notice the reference to consolidation and re-organization in a manner not apparent to those fixated on the existing contrived system that is permitted by loyalist regulators. The officials in the LBMA, COMEX, USDept Treasury, and elsewhere are struggling to maintain the current system, and reportedly are not in step with awareness of the newly devised structures coming into place. In the background, far from view, new systems are being fabricated from scratch. Some involve complex barter systems soon to emerge and hit the scene with a splash, with impressive vertical integration, and even a gold core in its foundation. At the same time, new currencies for usage are still undergoing planning, foundation setup, contract latticework, and more for actual implementation. They too will contain a gold core component, not a 100% coverage but a component that might serve as an effective cover clause.

The true gold price might very soon become unknown, an extremely positive development. Telltale events such as bankruptcy and legal action could actually come, all in time, since the breakdown in order has led to extraordinary reactions. If done without the benefit of adequate required collateral, then it is in violation of exchange requirements. Margin calls have hit, forcing further selling of paper contracts. Gold investor sentiment among the naive and less informed has been dragging, ever since early December.

The world is approaching a climax event. Sure, many analysts have made such a claim for months. But with Europe in flux, the USCongress in flux, the Persian Gulf in flux, the US-China trade battles escalating, and USTreasury debt finance recognized more and more as monetized printing press activity, we are truly approaching a climax event if gold base inventory is indeed exiting the London market. The trigger event is unknown. It will likely not be directly related to the above event fronts. It will probably be a typical garden variety event pertaining to the far from ordinary stresses tied to the ongoing crisis in the credit market, gold market, and currency market. The financial press is critically important precisely now, for not spilling the facts on the current gold market breakdown and divergence. Do not expect to read in mainstream news of any gold shortages at major exchanges. They concentrate on the official prices from accepted paper contracts. Reports simply are not published that billionaires are emptying their gold bullion accounts at rapidfire pace, on the heels of independent inspections, since gold leasing has illegally been standard practice for many years. Imagine selling lumber contracts without wood delivered. Imagine selling mortgages without home titles delivered. Actually, Wall Street did precisely that from 2003 to 2007.

LONDON AS TARGET

Last August 2009, a busload of former key employees from the USDept Treasury and Wall Street firms arrived in Brussels Belgium. They turned themselves in to legal authorities in an attempt to avoid eventual prosecution. They came loaded with evidence, documents, emails, testimony, boxes of CDs, and much more. They won asylum in exchange for turning state’s evidence. The Brussels Serious Fraud Squad is running with the data. All indications point to a strategic decision made by the Brussels Interpol squad. Their target for legal action and market tests appears to be London. It lies at the center of enforcement of the fiat currency system, where lately the absence of gold is most glaring. The system seems clearly vulnerable.

Another important event occurred, this in December. A clearinghouse held a Letter of Intent to supply the London metals exchange with 250 metric tonnes of gold bullion. The contract was interrupted. The method used to disrupt and derail the contract is a story unto itself. Little is known in verifiable form. The point is that London bankers were denied an important channel of gold in supply at an operational level. At the same time, demands came from private billionaires to take back possession of their gold in allocated accounts. They are often called in the gold industry the ‘sovereigns’ politely. When pressed for details, my sources tell of their Chinese background. In recent weeks, the billionaires have been joined by others from Central Europe, in particular from Switzerland. So London is being drained of gold and not being resupplied, from the front door and from the back door. A breakdown is coming, and accidents assured. Gold is the ultimate vulnerability. It underpins the USDollar, competes with the USTreasury Bond, while the USDollar remains buttressed by the Petro-Dollar defacto standard. That too has been served notice. See the Saudi announcement last May 2009, with Russia, China, Japan, and Germany at their side. Eventually, crude oil sales will not be fulfilled in US$ settlement.

PARADOX OF INELASTICITY

Gold is unique as a market, as far as its tendency to seek equilibrium from matched supply and demand. Since the year 2005, my analysis has pointed out the unique condition of gold as far as supply inelasticity is concerned. My forecast over four years ago was to expect less gold output from the mining industry, even with higher gold price. That forecast was correct. In addition to more difficult mine projects, deeper ore bodies, thinner gold veins, and more costly projects, other paradoxical factors have been at work. The industry projects surely translate greater challenge into lower output. Introduce the sloppy management of the Marxist leaders in South Africa concerning electricity production. Dirty coal at power plants and higher mining firm taxation assure much lower gold output from the industry’s former leader. Numerous are the reasons for lower gold output in the current year, even with high gold price. The industry is in decline. Ultra-rich ore bodies are long gone.

My forecast of lower gold output at higher gold price, the inelastic factor, went like this. As large mining firms suffer the consequences of their unwise (surely illicit, perhaps illegal) future gold sales within their cratered hedge books, the losses would approach catastrophic levels. Take Barrick Gold for example. In 2007, they announced the complete cover of their disastrous hedge book. Not quite true as they covered about one third, using dilutive new stock issuance and new long-term corporate debt. In summer 2009, they announced again the complete cover of their disastrous hedge book. The financial press forgot that they supposedly removed all future commitments just two years ago, hardly a surprise lapse of memory. Again not quite true, since they ran out of funds from yet another grand stock issuance that again crippled their stock from vast dilution. The Toronto and Wall Street investment community still loves this total dog of a stock, as collusion and kickbacks must be suspected to prop the stock. A quick look at its Board of Directors offers an important clue toward loyalties. In fact, it has two Boards to provide extra service to the stockholders, or to shadowy entities in control. So in conclusion, the cover of huge hedge books cost the big mining firms tens of billion$ in funds that otherwise would be devoted to mine projects and additional gold output. It did not happen, since mine industry funds went into the sewer of future gold price suppression. The most curious aspect of this factor is the lack of investor lawsuits for failed fiduciary responsibility.

The flip side to this important price reaction factor is the demand inelasticity. When on the upslope, the phenomenon is called Gold Fever. A rising gold price prompts a rising demand for gold. Imagine a 50% increase in the price of televisions resulting in lines forming to buy more costly TVs. Never. But such is normal for gold. When on the downslope, the phenomenon works in reverse. A falling gold price, in particular for the paper gold price dictated by brutal gold futures contract pressures, often not reinforced by the presence of gold bullion, results in a gradual darkened gloomy sentiment for gold. People do not rush to buy more gold since it has been offered at a cheaper price. Rather, they are trapped in margin calls when leverage is applied. Rather, they give up and sell out, dump their gold, and lick their wounds. These are the legion of dull blades and risk junkies. These are the vast hordes who do not exercise patience and prudence, fully aware of the gold exchange distress. They will return, but when they do, they will purchase gold at a price 50% higher than when they abandoned the precious yellow metal. They will double up when the gold price has doubled. For the wise, the patient, the informed, those who look to the future, we can purchase physical gold & silver at artificially low prices, with a wink of deep appreciation, while the open door of opportunity lasts. To purchase scarce precious metal at paper contract prices is a chance of a lifetime!

DIVERGENCE TOWARD COLLAPSE

My forecast on gold made a couple months ago within the Hat Trick Letter was clear. The gold price will experience a remarkable divergence. As the collapse approaches, the paper gold price (from futures contracts) will decline while the physical gold price (from bullion purchases) will rise sharply. The differential will grow gradually at first, then burst into a grotesque price disparity. When this occurs, expect some darkness to fall upon the gold market. At this point, pure speculation follows. My expectation is for the official gold metal exchanges to possibly shut down, at least temporarily. Such would be a natural consequence if they have no gold to sell! To remain open would only aggravates their contract and legal risk. Some anticipate prosecutions of middle level officials from the exchanges, heavy police pressures put on them, and deals cut to bring down the kingpins. This is standard police procedure. Lawsuits are the wild card, hard to control, difficult to predict.

Pressures build that contribute toward the divergence. Whenever large deliveries are made in recent months from the gold exchanges, a new rigorous procedure must be followed. Delivery verification involves strict assayer information like certificates and dates and firm names and stamps. Before autumn 2009, such procedures were not endured or seen. The buyers are distrustful of the gold bullion quality, amidst prevalent stories of not just 80-year old bottom of the barrel London gold bar quality, but of bars with gold less than 100% content. Great shifts in gold bullion bank industry practices seem to be the norm, after full control of the USGovt gold treasuries took place since 1992. At that time, Robert Rubin infiltrated the scene as US Treasury Secretary from his former Goldman Sachs currency trading post. The rest is history.

My expectation is when the breakdown comes, several key locations across the world will post and publish their actual transaction prices without names. Fine outfits like Kitco might be among them. They will vary somewhat. Even today, the Hong Kong gold spot price differs from the London gold spot price by $10 to $15 per ounce. This is standard, and reflects different demand levels against different supply levels. However, in the not too distant future, several key locations will herald their actual gold prices, which will be averaged, thus enabling the first true gold prices in a few decades. That day is coming, and those who stubbornly hold their physical gold & silver, do not yield to pressures, do not react to phony paper prices, they will be rewarded. They will find encouragement in the occasional story of heavy premium paid for large volume gold purchases off the market.

People who expect that day to be accompanied by unaltered political and economic landscapes are badly misguided. Think outside the box! In fact, some ugly developments already have begun to crop up. A new USGovt rule requires that any large volume gold purchase must satisfy strict anti-money laundering guidelines. So further restrictions have come. Maybe the day will come also for declaration of any American owning a foreign bank account to be illegal. Think desperation!

THE GOLD BASE AMIDST CONFUSION

Many are the background factors to gold. The principal story comes from Europe. The default of sovereign debt is assured to all but the experts, for Greece, for Spain, for Italy, for Portugal. Germany walks a fine line, as they pretend to prevent the breakdowns. They eagerly push for defaults, along with expulsions from the European Monetary Union, that group sharing the Euro currency. The Euro experiment has been a failure to Germany, ransacked of $400 billion each year in savings for a full decade. That tally is $4 trillion to Germany, which wants the Southern European fat trimmed off completely. The Euro currency decline will continue until clarity comes to the expelled member nations and to the new structure in the aftermath. The current Euro will continue to flounder in confusion, seen as a queer benefit to the USDollar. The European core with Germany and Benelux nations at its nucleus has firm fundamentals, a fact to emerge soon. European leaders benefit from a lower Euro valuation, as export trade can be encouraged in an economic stimulus, but more importantly as US$ reserve assets rise in value for bank support. Dubai started the process of debt intolerance. The Euro has embarked on a death-birth process, the end of the Broad Euro and the beginning of the Core Euro. The new Core Euro currency will resemble the old Deutsche Mark, whose return will coincide with other nations reverting to their former domestic currency. Except the new DMark will be strong and the reversion currencies will be trashed 25% to 40% lower. Unless and until Germany emerges with a solid plan with a new Super-Trim Euro currency, the US$ will benefit at the Euro’s direct expense. The Euro usage as a secondary global reserve has caused suffering. It was not designed for that purpose. Reversal is demanded. Gold faces competing forces to both lift its price and harm its price.

The currency market is in disarray. A bizarre USDollar rally seems to be underway, a second chapter to the Dollar Death Dance from one year ago. The chaos in the Euro currency combines with threats to sidetrack the extreme USGovt wasteful spending course, to offer cause for a higher USDollar. Such confidence in restored fiscal management is grossly misplaced, as the Black Holes of Fannie Mae & AIG expose colossal costs, and as the military budget grows without check or balance. The wrecked USGovt, USBank, USHousing, and USEconomy indicate a continued decline is justified. The Q4 Gross Domestic Product figure should have elicited laughter, but at least analysts noted the powerful effect of inventory buildup. Q4 data will reveal a climax sugar high, clearly evident as the USFed and USDept Treasury attempt to step back from powerful monetary excesses. Without a lower USDollar and lower USHousing prices, no economic recovery is remotely possible. A bright populist light attempts to expose the wayward US central bank. Its chairman will defend the fortress ramparts, but the syndicate is growing desperate as vassals are crossing the moats.

Gold is hostage to the European reconstruction and the USCongressional revolt. At the same time, the paper gold market and the physical gold bullion market have finally separated. Divergence and havoc come next. The paper gold price might find the 1080 level to serve as a base for the next upward leg in recovery. Be sure to know that gold has entered the Twilight Zone, along with the major currencies. The USDollar and the Euro currencies float adrift in the FOREX seas of confusion, as fiat money is more doubted in some corners. What is the value of the Euro if suddenly two, three, or four nations must end its usage, default their debt in its denomination, revert to older drachma, peseta, lira, complete with devaluation? Who knows? Gold will benefit from the chaos and confusion. The USDollar appears to benefit. The USGovt is much like a desperate gambler in Las Vegas, who is doubling down as the bust looms large. The main tool used by the USGovt to finance its debt is the hidden Printing Pre$$. So far in the last twelve months, credit must be given not by creditors, but instead credit must be given to the Inflation Engineers who have managed to keep the vast monetization of USTreasury debt off the pages of the financial press and off the air of the financial networks. For every dollar financed by actual bond bids and purchases, three to five dollars are financed by Printing Pre$$ kept as hidden as possible. The levitation of the USDollar in such an environment is a very temporary situation.

When the billionaire sovereigns demand their gold to be returned home, no longer under custodial mismanagement, this does not represent new demand. The new demand comes from legitimate funds like those run by Paulson and Sprott, which have actual gold bullion behind their funds as stipulated in the prospectuses. Little fanfare came when the decade closed in December, and the big winner among all investment classes was Gold. As the story of its performance is more fully recognized, when the facts sink in, expect investment demand to increase.

Physical gold is the best protection against gold counter-party risk in futures contracts, if gold underpin erodes and contract breach turns more common. Sovereign gold reserve levels have been updated for government holdings. These are lowball figures that exclude holdings outside central banks, like in certain sovereign wealth funds. The IMF & USGovt levels are pure fiction. The Russian central bank is ramping up its gold holdings. Private sources tell of Putin storing much more gold in non-govt Russian locations in addition, that avoids public accounting. China also has hidden gold holdings. At a mere 1.5% of stated reserves held in gold, China has much catching up to do. Most nations command 15 times as much gold as China in ratios. Demand by China will surely be steadily strong, powerful, and significant for years. Most industrial nations command a 60% to 70% gold ratio in total reserves. Debate aside on reserves reality, if China were to strive toward 65% in gold ratio of reserves, it would need to accumulate 44,619 tonnes of gold bullion. Their deficit represents 27% of the total existing gold hoard held above ground. The path toward prudent reserves management will push the gold price skyward.

On one hand, the major players enjoy the status of a strong currency; however, given that the USA is printing money hand over fist and thereby watering the value of the US$ and fast approaching a $3 trillion debt, is this but a deliberate scheme of actually reducing the value of debts being repaid?

In 2004 the US$ bought 0.8040 Euros; 108.15 Yen; 0.5456 Pounds; 8.2768 Yuan; 0.78 Aussie$

In 2009 the US$ now buys 0.75 Euros (-8%); 99 Yen (-8.5%); 0.66 Pounds (+21% – its strange that the UK government is buying junk USA bonds); 7 Yuan (-15.4% ) and 0.92 Aussie (+18%).

Gold sold for US$455 on December 3rd 2004 and hit US$1200 on December 3rd 2009 a rise just under 264%. You can do the maths for any given currency; however, it is clear to see that other currencies ‘values’ falling.

It’s disturbing to see the media ‘report the success’ of the Aussie $ against the US$ while the US$ continues to lose ground on the international exchange rate.

There is a consensus that for oil production the minimum return should be $80 a barrel and with the growing demand for gold by the worlds country’s focus for gold, that the minimum production cost is about $1,000 as a minimum return for gold.

Given that few countries have more than a 20% weighting in gold to support their currency and the concern of a devaluing / inflation driven pressure on the US$ and subsequent devaluing of countries that have heavily invested in the US$ to try and maintain parity reduce the exchange rate loss / maintain the debt amount, gold will be the only recognized ‘real’ currency; and if that is the case, then gold could well double in the next year or so to US$2,500, particularly given that there is a lot of debt hidden by the banks and that gold sales / purchases – in paper form or promissory notes – have far exceeded actual gold held.

As to whether the US$ remains the measuring stick is the tricky one, as more countries avoid the US$ in payments of any description. A concern I have is that countries like China and even India are making payments to us (Australia) in US$, thereby making us prop up an already collapsing monetary regime.

But at the end of the day, you can’t eat gold and as is the case in Cuba now, farming is the most respected occupation.

Then the Share Market was created to allow businesses to access monies through inactive investors and then shares were bought and sold on future potentials; these were separated in ‘blue chip’ and non blue-chip organisations.

While this was happening and the various manipulations of dummy figures etc, Gold and silver were still recognized as the only real value commodity.

Banks were creating money out of thin air, lending out $10 for every $1 real ‘lodged’ with the Reserve Bank and often using their clients property as a validation for borrowing more money on the international as well as local market.

In the 1970’s the US$ went from being guaranteed by gold reserves to the Fiat system, a sort of honour system and of course we have seen how trust-worthy the banking industry has been; many think the global economic crisis has been and gone and things will return to ‘normal’, but the reality it never will.

You see we are only privy to what the banks and corporate government have ‘allowed’ to be aired, there is so much contraction in front of us, that it will literally kill off hundreds of millions and even billions of humans.

But before I go off on that tangent, the topic is gold, or more importantly, the lack of.  At some point on time stock brokers started selling gold and gold futures contracts.

Now gold futures contracts translate into your handing money over on the belief that you will get access to the gold you have paid for now or some time in the immediate future; however, just as banks lent more money than they had, so too did the gold selling institutions sell more real gold than they had, but they also graciously offered to ‘keep it safe for their clients’.

Now if you’ve been viewing this site, you will know that like many others, I am of the firm belief that America  – once the richest country on Earth – is already bankrupt and that we will see anarchy and a totalitarian government has already formed.

Because the USA borrows so much money to not only keep the wheels of government greased but pay interest payments, that there is not enough currency in the world to support a populace of 300+ million that is so energy intensive.

The US Mint is printing money like there is no tomorrow and most intelligent people see the Greenback having no real value, hence the exodus through the ‘gold exits’.  Of course it makes sense to borrow trillions of $’s and then devalue your currency to actually reduce your debt; trouble is, many businesses and countries want payment in a hard currency, not something that can be watered down / devalued so easily.

Now trying to keep a lid on this (and so many other ‘finance strategies going to hell in a basket) and track and control this, in the USA the organization keeping things ‘above board’ is COMEX.

Because the American can see the writing on the wall, they are lining up to buy gold and at the lowest possible price; now Comex has a complex and lengthy process of taking delivery of gold futures contracts. By buying gold contracts in deliverable months and wait for them to expire, the more sophisticated investors are emptying Comex warehouses of gold, but in increasingly difficult trying to pry the gold out of Comex who have cornered the marketplace in the US on pricing.

Just as America has run out of money to support their borrowings against future earnings, so too is Comex as investors are discovering. Investors are having to wait even months to get the gold they already own out of the warehouse.  Overseas investors are having restrictions placed on them and there is nor real department or autonomous body for foreign investors to formally lodge complaints.

These complaints include some brokerages refusing to assist with the delivery even after the commissions are paid and investors withdrawing 100oz. bars from the Comex depositories are being given bars with incorrect serial numbers or weight.  Many gold brokers doubt Comex has the gold inventory to match existing warehouse receipts.

And now we hear the U.S. Mint is temporarily halting sales of its popular American Buffalo 24-karat gold coins because it can’t keep up with soaring demand as investors seek the safety of gold amid economic turbulence. Michael White (Mint spokesperson) said last Friday (Nov 7th) that the sales were being suspended because demand for the coins, which were first introduced in 2006, has exceeded supply and the Mint’s inventory of the coins has been depleted.

The Mint had also ‘temporarily suspended’ sales of its American Eagle one-ounce gold coins on Aug 15th and ‘would resume under an allocation program to designated dealers’.

The reason – at least to me – is very obvious, the USA is running out of gold and is unable to meet their obligations; it’s a bit like Woolworths suspending sales in fresh fruit and vegetables because demand is greater then they expected.

When I was very young, a common practice was to mockingly bite into a coin to see if it was real; if I was an American, I’d be having any gold provided through Comex or an gold broker authenticated before signing off that I had what I paid for….