Wednesday, December 14, 2011

Behind the Crash in Gold

Gold is down $90 plus in futures trading today.

Oil and most other markets are also down significantly. This comes on the heels of major downside action in European stock markets. I suspect European traders fear the European Central Bank will not do enough to prop up eurozone government debt and in the panic traders are liquidating commodities as well as stocks.

However, I am not sure traders are interpreting the ECB correctly. Germany is reactivating its financial sector rescue fund. The fund closed to new applications at the end of 2010. These funds will the source from where European banks will obtain capital that they will then be able to leverage up to buy eurozone sovereign debt.

Medium to long term the ECB is likely to go on a major money printing binge. It is just putting the pieces in place, in stealth fashion. The ECB in trying to hide the steps they are taking to inflate have done a good job, but the stealth money printing is on the way. I explained how it is going down in this mornings EPJ Daily Alert:
Nearly 26 billion euros of Italian bonds mature on Feb.1, with 91 billion euros of bonds falling due by the end of April. Banksters are not going to re-up on this stuff, they are trying to get out of it. This is where things start to get complicated.

Last week Thursday the ECB’s Governing Council announced a plan to offer 36-month loans to European banks at full allotment and at fixed interest rates. The ECB also loosened up the eligibility requirements for collateral. This creates the opportunity for EU banks to buy sovereign debt, use it for collateral and lay it off on the ECB and earn the huge spread. This is going to be very profitable for the banksters and will result in the banksters looking like pigs buying up PIIGS paper.

There is one problem with this plan, however. Banks in the eyes of EU regulators are over-leveraged and need more capital, so under current rules it is going to be difficult for banks to leverage up their balance sheets. But as Tim Geithner might say, getting around this problem is not rocket science. That's why a wrote in a comment to an EPJ post:
The fact that the reserve requirement was lowered suggests that the "capital requirement" will also be monkeyed with so that it won't apply relative to sovereign debt purchases.

Lo and behold, we have this announcement today from Germany.
Germany is reactivating its financial sector rescue fund as the eurozone debt crisis raises increasing questions about how banks can cover their capital needs.

Chancellor Angela Merkel's spokesman, Steffen Seibert, said the Cabinet decided Wednesday to reopen the euro360 billion ($474 billion)fund, first established at the height of the 2008 financial crisis.

The fund closed to new applications at the end of 2010. But much of the money—which totaled euro60 billion for potential capital injections and euro300 billion for loan guarantees—remains untapped.

European authorities have determined that German banks require a total of euro13.1 billion in new capital to comply with tougher new requirements. The country's second-biggest bank, Commerzbank AG, has been told it needs euro5.3 billion.

Got that? Germany has reopened its rescue fund which can supply the capital banks need, which will then allow them to buy the sovereign debt paper that can be discounted to the ECB.

Folks, the plan is in place. The eurozone inflation is coming.
Bottom line, the Germans, French and Brits will be back buying gold and other commodities in no time.


  1. A correction in gold has been a long time coming, both by the anti-gold people (who will bash it to no end) and pro-gold people who want to buy on the cheap.

    I personally think it's time to shake out the weak hands (hopefully all the mainstream media types sell whatever they bought)...I think a healthy correction would be in the 1350-1400 area. **ducks to avoid flying tomatoes**

    If the stars are to be aligned for Ron Paul by the time the election rolls around, then a correction *now* is necessary to prepare for the next bull run fueled by the monetary inflation.

  2. I've been buying metals for some time, I am not worried. Though, this looks like a great time to buy up some more. There are some truly bargain prices in the online auctions. I am bidding on a few ounces of gold for under $1500 a unit. It closes in less than a day. Silver is doing pretty good. Then again, the "ratio" has been all sorts of screwed up since the 70s-- it seems that there is a lot of paper in silver.

    I'll buy on these troughs and move along.

  3. BTW, I am not saying that I'll get it at that bid, I am just saying that there are good prices to be found. I am notorious for underbidding on quantity and overbidding on small-stock. Luckily my spread is usually pretty close to a wash between the two (high/low bids). Though, during the last correction I was about a dollar short on each unit.

  4. I can't speak for the market obviously, but I have to imagine that many people are doing what I am doing which is selling out of the GLD and moving to physical. My gold coin dealer (the guys with the mustard stained shirts) told me they are seeing a pickup in business for gold coins(they even gave me some MS-70 coins at no additional cost since they were out of the mint wrap ones).

    Besides the MF-Global inspired reasons, there are tax reasons for moving at lower prices especially if you have a really low basis. It kills me to sell at a huge profit and then pay taxes at 28% to only buy the same asset back again. I have to beleive many others have this same problem, especially if you've been in the GLD before Gold prices took off.

    As for where the price will go in the short term, who the heck knows or cares? In the long run the government's of the world have no choice but to print money, if for no other reason then to monetize their debt. If anyone needs to have their reasons for holding gold checked, check this link out:

  5. It's another demonstration of the value of gold and another great opportunity to buy low.

  6. One again.

    Europe is heading towards a recession and a deleveraging crisis, eventually deflation.

    The environment makes a difference, folks. QE and stabilize the bond market under such a scenario can hardly be inflationary, it is aimed at avoiding a deflationary spiral. It is not a boom generated by credit expansion!

    It's cold, you need a jacket. It's hot, you need a shirt. Get it?

  7. ...and a fractional-reserve deflation means credit destruction followed by default on debt instruments which can no longer be repaid with credit growth. There will be a flight to cash and cash equivalents. Now do you get it?

  8. RW, did you see the Spanish auction this morning? They sold nearly double what they had hoped. No coincidence this is ahead of next week's first 3 yr LTRO. Banksters not worried about leverage ratios. Wonder why...

  9. It is high time the US and European Banks were stopped manipulating gold, silver, and other markets. It is nothing short of theft from honest people trying to recover some of their losses.

    L.Wilson - UK

  10. Blah, Blah, Blah I agree with Joseph. This is a buying opportunity for physical gold and silver as it is a repeat of the Wiemar republic collapse except this time on a global scale.

  11. "There is nothing new under the sun." All governments throughout time have had to devalue their currencies in order to pay for the Greed and Power they crave. As we know, this included changing the precious metal content of their coins/money. The ride is wild, but the outcome is obvious. Governments, Traders, unregulated manipulators and HFT Computers control the market's interim 'static', but the outcome is always the same, except this time it's global.

  12. That jsmineset link from anony was helpful.

  13. You mean the banks are purposely planning to default on their loans from the ECB, and pass the bonds to the ECB?

  14. All of what you are all saying is true. Fiat money ultimately, 100% of the time, goes to zero value. Thus gold, in terms of any fiat currency, goes to infinity.

    Unfortunately, this says little or nothing about the price of gold next week, next month, or next year as measured in our fiat currency, the US Dollar.

    Gold is going up and down in dollar term based not so much on the demand for gold as the inverse of the demand for the dollar. Liquidity and credit crises create demand for dollars to pay for debts that have come due and can no longer be rolled over. By increasing the value of the dollar, the prices of everything else, including even gold, are pushed down. Granted, since gold is of particular value in a crisis, it will likely see ultimate gains compared to other things of value. But if your debt is denominated in dollars, and it is due now, you need to liquidate the most solid of your liquid assets to pay -- such as gold and listed stocks.

  15. Maybe thats why you use the word banksters (instead of bankers) as it rhymes with fraudster.

  16. No. Rhymes with "gangster".

  17. @Anon 8:45 "...and a fractional-reserve deflation means credit destruction followed by default on debt instruments which can no longer be repaid with credit growth. There will be a flight to cash and cash equivalents. Now do you get it?"

    Don't ignore this statement gold lovers. Short and mid-term there could be a huge rally in the dollar. Long-term is bleak for the dollar.

  18. No worries here. Will continue loading up on gold as well as silver.