September 13, 2006 –
I recently blogged about gold’s sharp decline but wanted to follow up with another blog so people don’t get my message twisted. I am still very confident that after this correction ends that gold will go much much higher. In addition, in my newsletter when I wrote that I had predicted the dollar’s climb six weeks ago, even though I believe it will continue to climb and strengthen for maybe another month or two, that doesn’t change my long term view that I think the dollar, as a fiat currency, is junk. Gold has increased volatility these days because of all the morons that run hedge funds that pump and dump commodities such as gold. Recently I’ve already read of numerous hedge funds that were forced to close due to millions of dollars they have lost for investors based on their speculative bets. Prior to the Gold ETF coming into existence just a couple of years ago in the U.S., it was difficult for hedge funds to speculate on gold in huge positions. Unfortunately, now it is not. And unfortunately, gold, already a traditionally volatile asset, has become more volatile because of this.
Ever hear the saying, “Buy the rumor. Sell the news”. In fact this is a strategy I often use with options when I decide to dabble in them though I never use this strategy with stocks (only because I don’t trade, I invest). In the case of gold right now, it makes sense to “Sell the rumor. Buy the news”. Gold has declined sharply because recently there have been many rumors that central banks have been selling gold. In fact, though it’s always close to impossible to pinpoint the exact origins of rumors, I wouldn’t even be surprised if central banks themselves are releasing these rumors to drive down prices so that they can purchase at their desired price. Currently it’s impossible to confirm the reliability of these rumors because central banks all over the world make it as difficult as possible for you to know exactly what they are doing with their gold reserves.
They use non-GAAP approved accounting principals to account for gold on their balance sheets, they report their gold reserves on a two month time lag, and even in the instances where you can look at monthly changes in gold reserves, they report changes aggregately for global regions, so you still can’t tell what country’s central bank is selling and which one is buying. People that believe that their country’s central bank acts in their best interests are just like Neo from the Matrix before he took the red pill. They have no idea of what reality is.
For gold in this case, since everyone has been selling the rumor, my guess is that the news will reveal most central banks will actually have increased their gold reserves. If this is the case, then you should buy the news. Though there have probably been central banks that have been selling, it may still be impossible to tell how much due to the non-GAAP, not-accepted-anywhere-in-the-world-but-at-central banks-accounting procedures of accounting for leased gold that they don’t own as “assets”. Furthermore, I’m convinced that central banks collude to drive down the price of gold at certain times.
Just google the “Washington Agreement” and you will discover that an agreement to sell controlled quantities of gold among all the world’s central banks already exists. But the reason I believe the collusion runs much deeper down the rabbit hole than just the arrangements revealed in the Washington Agreement is because of the particular actions of certain central banks such as the Bank of England. The Bank of England helped to keep gold artificially low in 2002 by selling more than half of their gold reserves when the price of gold was almost at its bottom. No central bank could be so moronic as to unload gold at its absolute bottom in transactions that cost them more than USD $4 trillion in losses (when compared to today’s price of $600 an ounce), not even a country that is the U.S.’s political slave, the U.K. As stupid as I think people can be at times, nobody could be that stupid right? Thus I believe that the Bank of England’s actions were driven by the requests of other central banks, the IMF, the World Bank or some combination of the these three entities in a plan to keep gold artificially low during that time. That is the only rational explanation for such moronic behavior.
Stephen Roach, the chief global economist at Morgan Stanley in New York, said this week that “the mega-run for commodities has run its course”. I know that millions of people sold commodity-based stocks and commodities including gold based upon this singular statement and will no plan on re-entering the commodities market. I don’t really understand why the thundering sheep herd places so much faith in global investment firms and their statements. If you read my blogs posted under Investment Psychology then you already know that I don’t hold the public opinions of global investment firms in high esteem based on my belief that all major global investment firms intentionally deceive and defraud the public.
If there is anyone’s opinion I would pay closer attention to, though, it would be the chief economists/strategist at Goldman Sachs. Why? Because, for years, they have had a direct line to the United States Treasury. With former Goldman Sachs CEO Henry Paulson assuming the position of U.S. Secretary of Treasury this past July, their proud tradition of having a direct line to the U.S. government’s most important economic offices continues. Furthermore, it appears now that President Bush will now appoint Robert Steel, another high level Goldman Sachs executive, as the U.S. Treasury Undersecretary for Domestic Finance. Thus Goldman’s access to inside information about gold prices and the U.S. economy will soon be even further bolstered.
James Gutman, senior commodities economist in London at Goldman Sachs Group Inc., stated that he viewed the steep drop in commodities not as the end of the bull run, but as buying opportunities, strongly dissenting with the view of the Morgan Stanley chief global economist. Although I am sure that Goldman Sachs always knows in which direction gold is headed, I don’t always trust that they always disclose what they know. I believe that many times they do not disclose what they know and use it for their benefit only. However, this time, Mr. Gutman appears to be stating Goldman’s true point of view.
Long blog this week, J.S., but also one that raises my level of cynicism to new heights and will inspire an extra long Kaeho’s Corner today. In martial arts, people are impressed with so many things they should not be impressed by. I once remembered reading that action star Steven Segal had been awarded such a high ranking as an Aikidoist when he was younger because he had married the sensei’s daughter. Now I have no idea if this is true, and I don’t want to defame the man if it is not, but it is a certainty that travesties such as this do occur in the awarding of ranks in martial arts just as many incompetent businessmen are awarded executive management positions based upon who they know and not what they know.
Both of the senseis and sifus that I trained the longest under did not really believe in a “belt” system, instead adopting Bruce Lee’s philosophy that a belt is only good for holding up your pants. My first sensei told me that he witnessed guys fresh off the boat with no ranking totally dominate second and third dans (second and third degree black belts) in sparring matches. Such shenanigans, when they happen in the financial world, however, hurt far more innocent people.
Recently, I saw another article that a global financial organization (can’t remember which one) was nominating Citigroup, Deutsche Bank, Goldman Sachs, and a couple other firms for their Derivative House of the Year award for the great success playing derivatives over the past year. This award should be titled the “Most Efficient Use of Insider Information to Reap Huge Rewards in Derivative Plays” instead.
Whenever I hear these huge global institutions brag about how they are the best or number one in league tables, I am about impressed with their accomplishments as I would be seeing a 150 kg. man without an ounce of fat beat up on a 35 kg. weakling. With the level of inside information they receive, if they couldn’t accomplish these feats, they would be absolute morons. Citigroup, in fact, never engaged in huge multi-billion dollar positions in gold derivatives until, you guessed it, they hired a former U.S. Secretary of Treasury. Is this just a mere coincidence that a global firm never had the confidence to make huge, risky multi-billion gold derivative bets until AFTER a U.S. Secretary of Treasury joined their staff? And is it just coincidence that they made huge profits off these highly speculative and risky bets, so much so that they are now being nominated for Derivative House of the Year?
Consider the following hypothetical scenario. Let’s assume I was head of the U.S. House of Representative’s Select Committee on Intelligence and at the same time I moonlighted for one of the major global investment firms as a senior analyst for the Biometric and Security industry. And every time I set a price target of double or triple the current share price for a company, the price indeed doubled or tripled. However, the only reason I was able to make such accurate calls is because as head of the U.S. House of Representative’s Select Committee on Intelligence, every memo regarding legislation surrounding security issues crossed my desk. At the end of the year, the firm awarded me the title “Best Analyst of the Year” for my phenomenal work. Well I’d have to be moron if I wasn’t awarded that title. That’s how skillful I think the major global investment firms’ calls are in derivatives. It’s their inside lines to important government agencies that allow them to be so successful. Nothing more.
If you believe that stuff like this doesn’t happen, then you deserve to have your Zen of Investing pass revoked. Just because stuff like this isn’t supposed to happen doesn’t mean that it doesn’t happen on a regular basis. Although anti-trust laws exist, these laws are violated all the time. If you ever have lived in California as I had for eight years, you know exactly what I mean. Why is it that oil prices are higher in the state of California, where 25% of all Americans live, than in any other state in the U.S.? Why can you cross the border into Arizona, and all of a sudden, petrol prices drop? Why, for years, were cattle ranchers lowballed regarding beef prices, no matter who the buyer was?
One question though J.S., if every institution that deals with gold reserves are so deceptive about their transactions, then how can YOU be so sure that gold is heading higher?
Maholo, KAEHO.
