As the Mogambo Guru does not discuss silver this time - but has 3 MORE reasons to own gold, let me just add my thoughts:
On Tuesday confidential sources informed me that the Fed categorized the recent advances in silver as a "bubble."
On Wednesday margin requirements for silver were raised on all US futures exchanges.
On Thursday silver corrects almost $2.
If you still believe in market forces only please tell me where Santa Claus lives.
by The Mogambo Guru
Bank of China Will Launch Equivalent Of A Gold ETF
But methinks that maybe we are a little too hasty, as right off the bat we learn "Chinese banks are expanding the options they offer rich depositors in the face of greater competition from foreign banks." And what is this new option for the Chinese rich? "Next month," the article reveals, "the Bank of China plans to launch its newest product, dollar-denominated certificates linked to the price of gold."
Hmmm! Suddenly, my brain is going every which way! This is very, very interesting! On the one hand, this seems to prove that rich Chinese people are no more sophisticated than the rest of us clodhopper bozos out here who mess with dollars. I mean, these rich Chinese people are supposed to be so dull that they will line up to buy a certificate, denominated in dollars, a currency that is due to fall in purchasing power due to massive over-creation by the Federal Reserve over decades, that is also linked to gold? Huh? Why? Isn't this merely a bet on gold, which these foreign people will naturally price in their own currency anyway, which will ALSO trade up and down against the dollar in the currency exchange markets, negating the gain made in dollars using these certificates? What's the point?
Or, much more excitingly, perhaps this is actually the Chinese equivalent of a new gold Exchange-Traded Fund! If so, wow! The impact of gold ETFs on the price of gold has been, so they say, significant in producing the stellar performance of gold. And if it is, and here is another one, a potentially enormous one, to add to the impact!
Naturally, I am wondering "Are these Chinese gold certificates, paid for with dollars, going to be backed by physical gold, newly bought with the investor's dollars?" If so, like I said, wow! A Chinese gold ETF! Animated by glee, with the lithe, sinuous grace of a panther I dance the Forbidden Mogambo Dance of Love (FMDOL) in celebration that my bullish stance on gold is apparently vindicated!
But if the certificates are NOT going to be backed up with physical gold bullion, then who is so incompetent, or insane, that they would take the other side of that trade, in essence going naked short? Or is there a derivative hedge that can be laid on? Is this some kind of government scam? I scream out in my frustration "What the hell is happening here?"
And if NOT that, then I fall to my knees, pleading, pleading, pleading with that pathetic look in my eyes, my lower lip trembling, hands clenched together as I beg you to please, please, please tell me what in the hell is the attraction of these certificates, linked to gold, denominated in dollars, to rich Chinese people?
Gold As A Hedge For China
As I crumble, blubbering at your feet in what is probably my greatest dramatic performance ever, I suddenly think to myself "Wait a minute! Maybe it has something to do with how Nick Godt, writing about gold at TheStreet.com, reports 'With all the uncertainty surrounding the dollar, gold bugs believe that the precious metal will increasingly act as a hedge for countries, such as China, which seek to invest a surplus of savings in financial assets.' "
So, energized, I leap to my feet, my bright Mogambo eyes (BME) shining with excitement, because the way I figure it, the plan is that if Chinese businessmen will accept gold for their accumulating dollars (thanks to the trade deficit and their financing of our budget deficit) instead of asking for them to be converted into yuan, then the government does not have to print so many yuan to keep the dollar/yuan exchange rate from changing! And thus, too, their overheated economy is somewhat cooled by reducing the expansion of the money supply! And China also winds up, believe it or not, with the gold of the United States at a huge discount! My head is spinning!
On the other hand, this germinates into my new idea for a great Tom Clancy novel, starring the larger-than-life hero Mogambo, the popular and handsome head of the Economic Stupidity Task Force To Wipe Out The Aforesaid Economic Stupidity (ESTFTWOTAES), bravely tangling with the dark forces of fiat-money evil, like Congress, the Federal Reserve and the Supreme Court. The plot is that perhaps there is a lot more going on here than meets the eye! Economic Warfare kinds of stuff!
The camera pans in to the office of The Mogambo just as the phone rings. A voice calls out from offstage, "If that's my wife, tell her I'm not here! And if it is the police, tell them that I have been here all morning, and you are willing to testify to it!" But the phone keeps on ringing and ringing, until finally The Mogambo enters the room. He reads the note left under the phone, and he recognizes the handwriting of his own secretary as she scrawled "Dear Creepy Pervert, I quit! I hate you! Expect a lawsuit! Yours truly, Yolanda."
Cheap Gold Thanks To The Fed
Again the phone rings. Distractedly, The Mogambo picks up the receiver. Immediately, a voice comes over the phone line saying "Mr. Mogambo, your mission, should you decide to accept it, is to check this out; perhaps these sneaky Chinese dudes (SCDs) have realized that the idea is not to make money (as in 'wealth measured in dollars'), but in painlessly and effortlessly obtaining astonishing amounts of US dollars! See, as the purchasing power of the dollar falls and falls and falls, thanks to the Federal Reserve creating so many of them, then the price of gold goes up, and as those dollars wind up in China, thanks to the trade deficit, then pretty soon any Chinese dude or dudette with a handful of gold could own whole swaths of everything in America! Welcome to the future, dudes! Hahaha!"
I slam the phone down, and springing to stage front, I tear off my disguise (mild-mannered reporter for the Daily Mogambo Planet newspaper) and begin to sing my first aria as the orchestra begins playing and the stage fills with beautiful dancing girls. My voice belies my breaking Mogambo heart (BMH) as I croon "You thought that the debasement of the dollar by the over-creation of them was going to be so painless (chorus sings 'Painless! Painless!') that you laughed (chorus: 'Ha ha ha!') and scorned (chorus: 'Ho ho ho!') the Founding Fathers because they deliberately made it a Constitutional requirement that money would be only - ONLY! - of silver and gold precisely so the damned government COULDN'T do that? Hahaha! Morons!" And the chorus melodically echoes "Morons! Morons!"
And if the audience thought they were going to get off with that one short aria, they were wrong! I silence the orchestra with a wave of my hand, and the operatic patrons were deathly silent in rapt attention as I went on to say, darkly, like the voice of doom booming from hell, "You thought the promise of an 'elastic currency', the very antithesis of gold, was going to be so terrific that you let them create the Federal Reserve? And then you let FDR and a cowardly, traitorous Supreme Court rule that the Constitution was wrong, and that money did NOT have to be gold? Hahaha! Morons!" And the chorus replied "Morons! Morons!"
The sound of my crazed laugher echoing down the hall, I majestically went on to bellow the tragedy of "You thought Jefferson was crazy when he warned that the use of a fiat currency/debt based economy would cause us to wake up as slaves in the very country that their fathers gave to them? Hahaha! Morons!" And the chorus again returned "Morons! Morons!"
Drawing myself to my full height and repeatedly adjusting my oversized codpiece so that everybody gets the point, I gravely intone "I scorn you all!" The curtain falls, and another lovely evening of grand musical theater comes to a close.
3 More Good Reasons To Own Gold
And regardless of the audience booing and angrily demanding their money back, in that one power-packed operatic scene alone are three MORE very good reasons to own gold, to add to the thousands of other perfectly good reasons to own gold right now.
The AP newswire reports that the government is spending like crazy, and that "Spending during this six-month period totals $1.34 trillion, up 8.7 percent from the same period in 2005." 8.7% Police reports and video evidence (all of it fabricated by lying fascist police-state goons, vengeful family members and hateful, nosy neighbors) indicate that this is where I really started losing it, if by "losing it" you mean running down the street dressed in combat boots and an adult disposable diaper (it's going to be a long day, and experience has shown that once you are in a restroom answering "nature's call", they have you cornered) yelling "Wake up and kiss it all goodbye, you gullible morons! You believed them when they said it was okay to ignore the Constitutional requirement that money be made of silver and gold to keep the government from printing up too much of it! Now money is not an intrinsic store of value, but our money is paper and promises! Hahaha! The hyperinflation has begun! Hahaha! Heil, Weimar America!"
Hyperinflation Has Already Begun
The video evidence from later in the day is pretty interesting, too, as you can see that that the diaper is apparently soaking wet and getting pretty full by this time, and you can tell by looking at the faces of the police that they are uncharacteristically very reluctant to tackle me and wrestle me to the ground, kicking and punching and biting and going "zzzt!" with those damned Tazers like they usually do, the little cowards! My plan is working perfectly!
But this is not about how The Mogambo thought he had beaten them at their own game, or how this government goon squad decided to escalate to the tranquilizer-gun and throw-a-net-over-that-idiot stage, which I had not anticipated! No, this is instead about the government spending 8.7% more money than last year! And borrowing the money to spend!
Price Inflation Will Follow Monetary Inflation
And now some banks, somewhere, are going to create that money, so that someone can borrow it and lend it to the government, and (to make a long, sad story short, but still sad, only shorter), price inflation will follow monetary inflation. With a wail of hopeless despair, I fall to my knees, and I weep for America.
But before I could even refresh my makeup ("Fuller, pouting lips!" I demand with a flourish) or adjust the Mogambo propeller beanie to a rakish angle in preparation for my big boffo finish of this terrific scene about the horrors of inflation, here comes Tom Dyson of DailyWealth.com, interrupting and upstaging me by breathlessly quoting a recent article in the New York Times, which he calls "a landmark piece of news."
Chinese Wages Indicate Inflation Too
The article talks about "Persistent labor shortages at hundreds of Chinese factories. Wage levels throughout China's manufacturing ranks are rising." This IS bad news! And not only ARE Chinese wages rising, but they HAVE been rising, as Mr. Dyson goes on to note that, in China, "Minimum wages have climbed about 25 percent over the past three years in big cities. Wages at larger factories operated on behalf of multinationals are also on the rise."
What makes this a "landmark" is revealed when he goes on to say "The bottom line is this: If wages rise in China, then prices rise in China." Yikes! Or, as is written in the Ancient Mogambo Scrolls (AMS) "Mo mo yikes a bigga bigga freaking priceum up bigga badda mojo dude!", which translates more poetically as "Price inflation is the demonic, devouring dragon of economic death that springs to life under crushing piles of debt that created more excess paper money." But Mr. Dyson has never been to the Metropolitan Mogambo Museum Of Mogambo-Related Crap (MMMOMRC), and so is probably unaware of the contents of these sacred scrolls, and so he sticks more to the facts, and merely adds that we are talking about rising price inflation, as "The rising price of Chinese goods is bad news for CPI indices around the world." Everybody suffering inflation? Yow! Yow! Yow!
We Are Freaking Doomed!
I am screaming "We're freaking doomed!" while frantically trying to get the child-proof cap off of a bottle of powerful tranquilizers at this horrible news as he breezily continues "When this news hits the headlines, investors will find bonds a lot less attractive." And notice that he did NOT say that investors would merely "find them less attractive," but instead he is careful to say that investors will find them a LOT less attractive! So, if you want a clearly unstoppable trend to start speculating in, start shorting bonds!
Buy Bonds, Lose Money
Perhaps this explains why bonds, in a rare bit of sanity, are sporting rising yields. In fact, the U.S. 10-year T-Note has finally climbed back to over 5%, which is actually higher than it has been in four years! This means that all the morons who bought bonds in the last four years have lost money on them! Hahaha! Lost money! Everybody in four years! See what happens to you when you act stupid? Hahaha!
But notice how my insane laughter, likened by some to "the sound of a diseased weasel gagging up a dead rat," changes to laughter of stark raving fear, which is also (strangely enough) likened by some as "the sound of a diseased weasel gagging up a dead rat", probably indicating some weird new kind of social trend or something. Anyway, all that money (thanks to derivatives and insane levels of lending by the banks) has been leveraged and multiplied, so that the teensy, tiny gains would have been multiplied into a nice piece of change if things had worked out.
How Much Are Banks Under Water?
But, guess what? They didn't! Work out, that is! Hahaha! "They tossed the heavenly dice with Fate, and they came up craps!" Hahaha! And now they are underwater by some huge multiple of how much they had invested in the first place, thanks to the insane leveraging by borrowing heaps and heaps of money! And with the wild swings in things, the sheer tonnage of it, world-wide, must be shaking the world's economic foundations to the roots! So with gold and silver reacting like they should (blasting to the moon), and housing going down, why aren't the stock and bond markets tanking and people jumping out of the windows in fear, and the survivors cursing themselves and saying "Oh, why didn't I listen to the wise and wonderful Mogambo (WAWM) and get the hell out of common stocks and into gold?"
The Plunge Protection Team Must Be Quite Busy These Days
The answer is simplicity itself! Because (cue the blare of trumpets) the Plunge Protection Team and their counterparts around the world are bravely on the job! So, rest assured that everybody in any government, and everybody amenable to coercion by any government, are all on the job, busily using YOUR money to convey to the present owners of assets (mostly the rich, making them richer) to cover up the unfolding monumental mess of monstrous monetary mistakes made by the central banks in general and our loathsome Federal Reserve in particular. And not just innocent little mistakes, either, but the biggest and baddest mistake of them all (BABMOTA); pure economic insanity (PEI).
Pure Economic Insanity
And, if there is any comfort in "misery loves company," then perhaps we should feel better that it is not just us Americans. Tony Cherniawski at ThePracticalInvestor sent a link to the "Statement by Toshihiko Fukui, Governor of the Bank of Japan, concerning the Bank's Semiannual Report on Currency and Monetary Control III. Purchases of Stocks Held by Commercial Banks," which is a title so dreary that it makes me sleepy just to read it.
Bank of Japan Buys Stocks
Normally, I would say "Bah!" and take a nap. But fortunately, for some unexplained reason, I decided instead to waste some time by skimming through the article, mostly to see if there were any photos of scandalously underdressed beautiful young ladies or maybe hotrods or really boss choppers (there weren't), when my eyes accidentally read that the damned central bank of Japan, in the ultimate corruption, has been buying stocks! A virtual arm of the government is buying stocks, thus owning the companies! Note the exclamation point!
National Stock Purchases Are SOCIALISM Coming Through The Backdoor
In case it has been a long time since you took Social Studies in junior high (but you figured you already knew all the Social Studies you needed to know, namely that the world is divided into you versus them), the buying of equities by the government is (horror of horrors!) the very textbook definition of socialism; the government owns the means of production!
I knew you would not believe me since you know what a liar and idiot I am, so I am including the actual quote: "The Bank started to purchase stocks held by commercial banks from November 2002 to reduce the risk that stock price fluctuations might impact negatively upon the business management of individual financial institutions, potentially resulting in instability of the financial system as a whole." Hahahaha! Stock price fluctuations might "impact negatively" if, I assume, prices go down? Hahaha! How blatant! They even admit "The total amount of stocks purchased by the Bank as of May 31, 2004 was 1,979.9 billion yen," which I admit ain't a whole lot. But still!
Their conclusion was equally as chilling, as this is, apparently, just the opening salvo of the weird economic crap they have planned: "To ensure that this recovery will become sustainable and to overcome deflation, the Bank considers it essential that a wide range of economic entities continue to make efforts to revitalize the economy." Yow!
Bet Free Money On Guaranteed Winners
In short, the message is that every Tom, Dick and Hari Kari can buy Japanese equities with confidence that they will go up in price, because the government is going to be buying them relentlessly, too, and together they will swamp supply! And not only that, but you can also borrow the money from the banks with which to buy them, because the banks are continuing their zero-interest rate policy! So it's free money to bet on a guaranteed winner in a manipulated market! Hahahaha! How corrupt can a government get?
Japan's Wet Dream: Sizeable Inflation
Well, to tell the truth, they don't actually say that in so many words, but they do say that the money will be made instantly available because "The Bank is determined to firmly support Japan's economy by continuing with monetary easing even as the economy continues to recover, in order to realize sustainable growth and overcome deflation."
Japan's Reality: Financial Suicide
And how do you overcome deflation? With inflation! Hahahaha! Suicide!
And The Fed Happily Follows The Bad Example
But this is the same slimy, corrupt thing that is almost certainly happening here in America, too, as we already have the Plunge Protection Team, by virtue of Presidential Executive Order 12631, which creates a secretive, omnipotent group made up of the chairman of the Federal Reserve, plus other assorted riffraff like the Secretaries of the Treasury and the SEC and the honchos of the Commodity Futures Trading Commission. They have the power, literally conferred on them by the President, to literally intervene in the markets!
In his own words, at a Jan. 14, 1997 speech in Leuven, Belgium, Greenspan said: "We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstance, through direct intervention in market events."
Notice, with horror in your heart and your blood freezing in your veins, that he says that not only do they have the power, but they also have the "responsibility" to use it! They are compelled, they think, to intervene, and thus corrupt the free markets and the whole pricing structure!
Trade Figures Mask The Disaster
George Ure at UrbanSurvival took a look at the "good news" that the trade deficit fell in February as compared to January's deficit of $68.6 billion, which was $2.2129 billion per day. And where did this big monthly improvement in the trade balance come from? Instead of me telling you the punch line and screwing it up ("That was no lady; that was a duck under my arm!") let's have him tell you. He says "There were also only 28 days" in the month! Hahahaha! I'm busting a gut here! Hahaha! Only 28 days! What a card! They say that the secret of humor is in the delivery!
Wiping the tears of laughter from my eyes, as the straight man in the piece I point to January's daily trade deficit of $2.2129 billion per day as he goes on to say that in February "the daily plunder was $2.3464 billion per day. My simple conclusion: Trade Worsened." Hahaha!
The obvious solution to the monthly trade deficit is thus: Declare that, from now on, every year will contain more months than the year before, and each month will have decreasingly fewer days in them. Thus, since we have more months in the year, and every month would be progressively shorter, we would, magically, produce a smaller "monthly" trade deficit, although the actual daily deficit could continue to go up and up and up! That way, we would have a fall in the trade deficit every month, and everything would seem to be fine!
Expect More Government Intervention
The world is, judging by the sheer amount of press it got, agog that Massachusetts, the same weird little state that perpetually sends overt communists like Ted Kennedy and John Kerry to the United States Senate, has, somehow, solved the healthcare crisis and saved the world. Mirthlessly I laugh hahaha!
I laugh (as I said) mirthlessly because nothing has changed the basic problem, which is that the government has still required that the healthcare industry or government pay for everything for everybody, from real life-or-death emergency care to everything you can name, all the way to acupuncture, chiropractic, and (for all I know) healing crystals, magic amulets and voodoo spells.
Somebody Will Have To Pay For It All
But regardless of the actual efficacy of any or all of these medical treatments, the fact is that somebody has to pay for it all. It's as simple as that. That's the ugly, ugly side of stark reality, and all the good intentions, sheer compassion and endless hours of debate and compromise will never, ever change that fact in the least. In fact, government interventions always make EVERYTHING cost more and get worse.
And so, with virtually unlimited rising demand for an ever-increasing menu of treatment options paid for by requiring insurance companies and providers to pay for them, then, by virtue of the very basic, "What You Learned On Day One" rudiments of basic finance AND economics, the price must rise right along with it! Popular uprisings ensure, as a horde of morons, many of them from Massachusetts, scream that "something must be done" about the rising cost of healthcare and health insurance!
And sure enough, I note that the new Massachusetts plan merely makes more people pay more money, and more businesses pay more money, and everyone collectively paying more money. How special.
I get a real kick of out people saying things like how they are concerned that central banks may "over-react" to signs of inflation by raising interest rates to the point where they kill off growth. To paraphrase the great David Bowie tune, I loudly sing "Major Mogambo to Ground Control! Major Mogambo to ground control! Killing off growth is how you stop inflation, you imbeciles! Look it up!"
And sure enough, rising interest rates may be killing off growth in the housing bubble! Robert Prechter of Elliott Wave reports that "February was another bad month for the housing industry, as sales of new homes plunged 10.5%, the biggest drop in nearly nine years, while prices fell and the number of homes on the market hit a record high." Nine years! Yikes! We are truly doomed! Ugh.
****Mogambo sez: It sure looks like history is repeating itself, as gold always zooms when government economic stupidities get to this end-stage. And if history DOES actually repeat, like it always has for thousands and thousands of years, then the startling rises in the price of gold and silver today are only the beginning. Whoopee!
The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at RichardSmithGroup@verizon.net.