Saturday, July 13, 2013

The Global Economic Crisis, The Gold Market Crash And Why The Gold Futures Market Is Probably In Backwardation

I try to put up unique, indepth perspectives that often aren’t available anywhere else.  And I think most people interested in gold and the gold markets will find this piece very unique and accurate.  Especially the second half of the post that is specific to the future of the gold market.   I have written gobs of posts on money and gold.  Never should the two topics cross paths.   Gold is not money.  It may have been money when robber barons and feudal lords ruled the world through violence (gold’s scarcity) but it surely isn’t money today.  I have not always been bearish on gold as a tradable asset.  In fact, within just a couple of days of the absolute bottom in 2008’s gold collapse, I wrote that the only assets I saw at that time that looked attractive were gold miners.  They roared higher for years after that.  I’ve generally been right about the direction of gold in my posts but haven’t been the most accurate at projecting price targets.  These are two different disciplines that require different factors in their analysis.  Regardless, you will never see me write that gold should be used as democratic money.  I have written a litany of detailed posts explaining why any such notion is completely preposterous and plays into the hands of a feudal monetary system as gold always has been. 

One of my most recent posts was that gold could conceivably go to zero if this system completely unwinds.  And the futures market is pointing to that very possibility right now.  Not to zero, per se, but continued downward pressure as liquidity becomes more valuable than gold.  Now there are many ways to interpret the backwardation that is taking place in the gold futures market, and since no one has a clear view of all of the participants, all of the events and all of the data, no one can be write authoritatively of every factor involved.   But some things we do know for certain.  One is that we are in the midst of a massive unwinding in the gold futures market.    Massive.

As noted on here a few times, the gold futures market is levered to the hilt.  Many hundreds of times.  It is one of the most levered markets on earth.  But then being the 1% who own the vast majority of the world’s gold are only able to manipulate reality for the 99% through leverage itself.   The gold futures market leverage is no different than the leverage of other renter capitalism shenanigans.   It is Wall Street, corporate capitalism and the financial economy behind this and all other leverage.   And just like the housing producers and real estate speculators, many of whom went to zero or nearly to zero in 2008 for their exposure to the financial leverage in the real estate market, we could easily see the same dynamic develop in the gold market as it unwinds.   In fact, given gold’s massive leverage, both in the futures market and in wildly-levered central banks, the outcome could be much more severe for gold.  In other words, gold miners, speculators and central banks could all easily end up defaulting or heading very close to zero or bankruptcy or some equally catastrophic outcome. 

I would probably consider Professor Antal Fekete, a mathematician and  formidable critical thinker, as the most eminent gold expert I know of.  Although I certainly disagree with his notions of gold as money, he is not an unthinking gold shill as many gold speculators are.   But he does have ideological tendencies when it comes to the topics of gold used as money.   Fekete is generally driven by critical thought, rationality and reason in his thinking, something often missing in the cult worship of the gold religion.  Fekete recently talked about the gold futures market and its backwardation.  None too surprisingly, he rejects the conspiracy theories of over-manipulation of gold as a reason for its collapse just as I have in prior posts.   He also remarks that the price of gold, rather than headed for over $10,000 or more, is likely headed for extinction.   His view of extinction and mine may vary but the end results aren’t that far apart if we get to the point of this system completely freezing up.  It’s key to remember when cult worshippers hoot and howl about gold prices going to the moon, their remarks are driven by beliefs, emotion and ideology rather than rationality, logic and qualitative-quantitative analysis of macro and micro factors affecting the world today.  They simply follow an unyielding ideology that there can be no other outcome than the one they worship.

Now Fekete’s conclusions are both different and similar to mine.  Mildly different in the sense that he believes gold will eventually only be transacted through barter.  I have noted that if this system fails, and money with it, gold too will go to zero.   That outcome means gold can only be transacted through barter.  If money doesn’t become meaningless, then I could still see the possibility of a barter economy for gold as its only method of exchange.    None of this means a dollar crash is imminent as so many believe.   I have been consistent.  A global currency crisis is coming.   And with it, a violently rising dollar.  Just like 2008’s violently rising dollar.  Currencies don’t need to drop to experience crisis and as noted before, as long as the dollar is the world’s reserve currency, it will not collapse.  At least not until the world would be in some post-apocalyptic reality.  I’m not so certain of that as most gold advocates are.   The status quo toast?  Absolutely.  A Mad Max world?  Doubt it unless the status quo drags us into global war.   Anyway, who said the dollar will be the currency crisis?  It could be the yuan, the ruble or all currencies as I have remarked.  In other words, this global trade settlement system is the problem.  Most likely the currency crisis will be global and that means affecting all major currencies.  All major currencies are dying to some degree anyway.  All currencies could become essentially useless.  By the way the dollar is rising quite substantially in 2013 and is at its highest level in years just as anticipated on here.  How great that will be for corporate state profits, employment and tax revenues?  Not.  

Our views are similar in the sense that he now recognizes that we are in the biggest financial bubble in the history of the world as I have noted on here ad nauseam.  In fact, it has always been a basic supposition for many of my analyses.   That means we both appreciate that outcomes will be incredibly out of bounds, nonlinear or with a fat-tail distribution.  How nonlinear is it to believe the gold futures market could disappear as Fekete believes is likely?   (Umm…  This bubble has been building for over 30 years so let’s do away with the finger pointing at Bush or Obama or Clinton or Obama or…..  They are all complicit.  And if you are still hoping that some politician is going to save us from what they ignorantly and incompetently created, good luck with that.   They don’t have the intellectual capability to even understand their incompetency let along allowing civil discourse and citizen government work to actually create solutions.  Awaken to your emotional servitude to your masters and recognize the worthiness of your own abilities to think beyond what political dunces and corporate bureaucrts tell you.)

Putting aside our differences in what democratic money is, because gold is clearly not and never has been democratic money, many of his recent conclusions match with what I have been writing for the last eight years.

The gold miners in the gold futures markets have seen their hedging positions unwind by 94% in the last nine months.  94%.  Unheard of.  Fat-tailed distribution.  Nonlinear.  Without precedence.  And those positions were levered to the hilt as were the opposite side of that trade, the long-side, gold financial speculators including Wall Street banks.  We are making history as I type this.  The gold futures market is exhibiting many behaviors never before seen.  Additionally, gold is now in backwardation in the futures market.  Something that has seldom happened.   Maybe never happened with this type of environment.  The downward pressure on future prices of gold is very intense because of this massive speculative unwinding.  There may be other factors, or maybe not, but let’s stick with known facts rather than some paranoid conspiracy theory ungrounded in any facts.   So, it doesn’t matter how much gold China or Russia’s central banks have been buying because the un-levering of hundreds of times of leverage in the futures market is driving the price of physical gold lower. 

Now remember there were zealots telling us that the action in the paper market would never affect the price of gold.   I said on here a long time that was nonsense.  The price of gold only reached $1900 because of paper demand and paper leverage in the futures markets.  It created a recursive, self-reinforcing upward bias as contracts were opened beyond the limits of physical gold.   The speculators forced the exchanges into buying more and more gold at higher and higher prices as they would the futures market ever higher.   This is a speculator’s bubble.  And when that paper leverage collapsed, the price of physical gold went with it just as has been proven over the last nine months with the change in the paper market.  Once again, gold zealots and their religious ideology proven wrong.

This current situation in the gold market is eerily similar to real estate’s unwinding back in 2008.  Future prices or backwardation of real estate continued for some time because of that unwinding.  Forget about the fact that there are also carrying costs associated with real estate that would make future contracts more expensive in a normally-functioning, liquid market.  Just like gold.  The price of real estate could have dropped to levels not seen in decades were the bleeding not stopped by central banks providing liquidity.  Ditto with gold.  Someone needs to provide liquidity to the gold market or risk further declines as I noted on here in a prior 2013 post.  That means the massively corrupt, massively overleveraged central banks of wildly corrupt nations like China and Russia must keep buying gold if we are ever going to have any chance of holding prices here. (I have noted many times on here that the price of gold is a proxy for liquidity.  That it is now collapsing is a sign that money is draining out of the global economy at a faster rate than 2008’s collapse, as noted on here many times over the last year. )

With the gold futures market unwinding at such extreme levels, we have likely seen the peak price in gold.  In other words, unless we see a re-levering of unparalleled derivative leverage re-applied to the gold futures market, the financial predators will likely never be able to produce the synthetic demand necessary to retake this cycle’s gold price highs.   Can you imagine re-levering gold up from a 94% collapse with synthetic leverage in this environment?  That would require a nearly 2,000% future increase in gold market leverage.  This at a time when global liquidity is collapsing and the gold miners are writing down their assets just like the housing market did in 2008.   They are not going to be re-levering this bubble to the same extreme.  That likely means ever.  Forever.  Certainly, financial manipulators could mount a countertrend rally to root out gold futures market shorts.  That rise could be swift and violent but this would likely be very temporary and not driven by sustainable liquidity.  In fact, with leverage collapsing in gold, that move could come at any time buyers may step in.  That is, if they even have the liquidity and stomach to step into changing macro factors affecting gold. 

This dynamic in gold is no different than physical housing or real estate and the incredible leverage of packaged mortgage securities or the paper market.   Neither the physical or paper real estate market has re-levered to any substantially-comparative degree after its 2008 collapse.  The damage the real estate unwinding created will last for decades or longer.  So too could the damage to gold miners and gold speculators be lasting and deep with this unwinding. 

The Fed has again enabled another bubble in real estate but it is substantially narrower and smaller in price as breadth and depth of liquidity has diminished greatly due to economic and speculative losers.  We can plausibly expect any future rally in gold or attempt to re-leverage gold to follow the same path.  That is, unless there are future unforeseen dynamics that would re-liquefy the gold market to levels of previous synthetic leverage or artificial demand.  That certainly is not likely given the world is awash in debt, leverage, central bankers running out of bullets and economic collapse.  Liquidity has never returned to most of the economy in the last five years.  And it never will until this system is fixed, freezes or collapses.  Ditto with gold.  Or corporate profits.  Or the entertainment industry-service economy-consumption-military industrial complex, state power bubbles that are peaking.

Now I also wrote years ago that there would be a time that China, Russia and others would likely become net sellers of gold as they needed to raise liquidity as their economies and currencies collapsed.   When that happens, we’ll likely get another punishing leg down in gold’s price.  If nothing else, as their currencies and economies start to unwind, they will no longer be large buyers of gold.  That will put downward pressure on the physical gold market just as we are witnessing downward pressure on the paper or futures market today.  A worthless yuan or ruble won’t buy a lot of gold.  Or anything else.  Of course, the same could be said for dollars. 

As I have noted before, the yuan and many other currencies are already worthless.   The communists just don’t realize they have burned their currency to the ground.  Yet.  That collapse is already starting.  After 200%+ annual inflation in parts of the Chinese economy, an unprecedented dynamic in an economy so large, and propagandized trade and economic data that has not been indicative of real economic activity, the communists are finally running out of propaganda bullets.  Of course, so are the U.S. and Europeans in their levered schemes. 

We are seeing commodities, emerging market currencies and emerging market financial markets starting to collapse in 2013.  Some markets have been butchered including South Africa and Brazil as two examples.   Counterparty risk is rising rapidly and no where is that rise more rapid than between corporate states.  Something that I have been writing will come to pass before this cycle ends.  This rise in risk is substantially tied to China’s inability to continue to manipulate the reality of their economic catastrophe as emerging market currency and financial market valuations are dependent on commodities trade with China.   That could also be behind the recent rise in bond rates around the world in the last few months.  ie, As I wrote half a dozen years ago, China won’t stop buying U.S. bonds because they want to but because  they will be forced as their economy and currency implodes.  This does not bode well for future purchase of gold by China’s central bank.

By the way, remember all of this is happening with the most accommodative central banking policy in history.  With tens of trillions of dollars of bailouts and endless money printing.  Money printing that has allowed gold speculators and manipulators to drive the price of gold into the stratosphere with unprecedented futures leverage.  Central banks are not the solution.  They cannot and will not fix this crisis.   They are part of the the problem as configured.   A society’s money and banking should never be controlled by private, for-profit, debt-driven interests. 

As a reminder I have written for years that I expect the U.S. to default or monetize much of its debts and that 2013 was my estimate for such an act.   We still have six more months of a world deteriorating very rapidly.  I could make an argument that 2013 is the most important turn date in the last 4,000-5,000-odd years but regardless, we shall witness whatever happens together.   (I’ll share a little more about this later.)

Now, going back to my post I put up well before the 2008 collapse on what was going to happen with countries, companies, consumers, the military-industrial complex, the state, investors and financial markets.  I wrote exactly that the entire world was going to unwind.  Or, if you prefer, unravel.  And global trade would collapse.  Interestingly, Fekete just wrote that global trade is going to collapse.   We already got a whiff of this in 2008.  But for this to happen permanently, corporate capitalism has to collapse.  And that is what we are witnessing around the world today.  The amount of trade we see in the world is many factors beyond what is needed for sustainability because of corporate capitalism’s need to create endless overproduced make-work and associated overconsumption.  There is no way for central banks or politicians to provide the liquidity and solutions necessary to stop the reset.   The leverage is literally  unquantifiable in scale and breadth.   And it’s not debt-based or monetary leverage in most circumstances although we certainly are in the midst of a tyrannical debt bubble.  It also includes gold.  And yet it’s leveraged schemes of other sorts of mistruths, deceits and lies go well beyond renter or financial capitalism.  Monsanto, as just one example, is not levered to debt or money or financial leverage.  It is levered to an illusion of control enforced by corporate state corruption.   Ditto with countless thousands of corporations in every industry and in every nation.

Temporary liquidity stopped the collapse of financially-traded assets in 2008 but that mirage will ultimately disappear in the gold market, real estate, corporate profits, the military-industrial complex, the state, the investor class, etc.  Company assets, many companies, state institutions, etc. may survive in some form but we are in the midst of the largest transformation in social history. 

So while Fekete sees the gold futures market as possibly disappearing, I would certainly state that this is a plausible possibility.  In fact if capitalism dies, the stock market and other funding mechanisms for capitalism will likely disappear as well.  Again noted on here before.  Fekete talks about gold maintaining some intrinsic value as money through barter.  As the old saying goes, you can’t eat gold. (Take your God-given rights from the predators who steal them.)   I certainly believe barter is a distinct possibility in the future but not necessarily in some post apocalyptic world.   That said, I am dubious of gold barter becoming any type of mainstream reality in any widespread exchange for goods or services.  Maybe barter to use gold to make a cover for the golden calf’s idolatry of worldly greed and attachment.  Or a boat anchor.

If I have been writing that one day money will disappear permanently, how else would one gain access to food and shelter other than some type of barter or quasi-barter system?  I actually have two posts written on this topic that I just haven’t put up yet.  It will explain how elegantly such a system could work.  How much would your quality of life increase if you never had to spend a waking moment worrying about where the money would come from to provide food, shelter or health care?  That day will come for humanity.  It’s just a matter of when. 

What may be more likely is that money and gold will become irrelevant in many regards.  We may even witness money disappear permanently as noted on here many times.  That may be five years, two years or twenty years or two hundred years but it’s coming.  And I think the circumstances exist that it might happen in my life time.  Money is an institution of the ego and thus is used as a form of control that subverts discovery and truth.  

As noted on here many times, this cycle is the definitive cycle on failures of institutions of the ego - corporations, politics, political parties, empire, the state, manipulated institutions, money, capitalism, gold, etc.    That’s a very good thing.  When the ego and all of its faulty beliefs and control-based institutions are subsumed or destroyed or reset, truth and discovery rise from the ashes.  And with it a process of enlightenment occurs.  Unfortunately, enlightenment is a violent and invasive process for those who are rigid thinkers and have well-developed faulty  belief systems that are shattered in the process.

posted by TimingLogic at 9:36 AM

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