Coeur d'Alene Mines Corp.

Tuesday, April 16, 2013

What The Heck Just Happened To The Metals?

Buy when there's blood in the streets, even if the blood is your own. - Baron Rothschild, 18th century British nobleman and member of the Rothschild banking family

I have to say, for as many people out there who fancy themselves a "contrarian" investor, the amount of kicking and screaming and fear that I've witnessed across all sectors of the investor community is quite staggering. I guess many of you were not around in 2008, when silver and gold were systematically taken down from $21 and $1020 to $8.50 and $700, respectively in a 5 month time period, with most of it coming in July and August that year. And the problem was that back then it was impossible to see what the catalyst would be to create the next bull run. Furthermore, the big Central Banks were still net sellers of gold. In other words, we didn't have the massive bid for physical coming from China (China imported nearly 100 tonnes of gold thru Honk Kong in February) and other big non-NATA countries who are buying gold aggressively.

And I guess very few were around for the early days (2001 - 2004). I remember waking up in the morning and seeing gold down $10 and then watching in horror as the Comex operators took gold down another $10. $20 on a base of $400 is 5%. A 5% intra-day down-swing was not uncommon back then. But not many people watched the sector (CNBC didn't even have a gold price indicator on it's market scroll) so not many remember those days

No one said this sector was going to be easy. After all, gold is the "anti-Christ" of fiat currency-based Governmental and Central Bank systems. It's Dave vs. Goliath, people. The Old Testament tells me that David kicked Goliath's ass.

What just happened in the metals market was a by-product of a creatively planned and well-orchestrated take-down of gold/silver by the Federal Reserve, with the help of the bullion banks (JPM, Goldman, etc) and the unwitting help of the big, computer-driven macro hedge funds. I don't want to go into a play-by-play accounting of the details - it will put you to sleep or many of you would be in disbelief. But I know how manipulation works. I used to help manipulate the junk bond market in the 1990's. I remember the trade that put me on the map at my firm was $10 million face trade of bonds that the RTC had acquired in the S&L liquidation and into a firm owned by the very wealthy owner of one of the NFL football teams. We manipulated that trade in order to create a 50% mark-up from the price we paid the Government to the price we got paid by the smart investor. We had to hold the position overnight to get around the old NASD 5% mark-up rule and convinced the compliance people to look the other way. Back then a $3 million profit on a junk bond trade might compose 30% of the desk P&L for the year. We did that in one trade. Ya the market isn't manipulated...today the numbers involved and degree of illegality is many multiples of what they were 20 years ago. Today we wouldn't have had to hide the trade from compliance until after the cash register was rung.

I have a bone to pick with an article posted on Yahoo yesterday in which some shit-for-brains market "expert" from Societe Generale claims that the "era" of gold is over. You can read his mindless drool here: LINK Here's the commentary that made me roll my eyes:

Gold is a different animal than the rest of the commodities complex, driven primarily by macrodrivers," and those macro-drivers now are driving gold prices lower... because the macroeconomy looks stronger.

Unless this guy, Michael Haigh, is unbelievably stupid, that has to be one of the most intellectually dishonest statements I have ever seen with regard to the relative strength of the economy and the true factors driving gold.

What are the factors Haigh is examining? Is it the recent plunge in retail sales? How about the fact that for the month of January the number of households using foodstamps hit a new record (23 million, which means roughly 20% of all households) LINK. How about the plunge in railcar loadings (I bet most of you weren't aware of that grass-roots economic indicator)LINK How about the fact that over 100 million people in this country are either unemployed or haven't been able to find work for so long that the Government has decided they're not part of the "labor force?" Are those the indicators that Haigh is using in his analysis?

How about the fact the sovereign domicile of Michael's French employer, Societe Generale, is considered to be a candidate for the next EU country to go tits up? It's unlikely, however, because both Germany (you'll have to plug this aricle into google translator but it basically reports how Germany is helping to fund the French financial system right now: LINK) and the U.S. are taking measures to keep the French financial system solvent, including the Fed injecting $100's of millions into Societe Generale's U.S. subsidiary. As a taxpayer, Michael, you're welcome.

At any rate, the true factors driving the price of gold are: 1) the unstoppable and growing amount of money printing occurring globally; 2) the inability of Governments, especially the U.S. Government, to reign in massive and growing spending deficits; 3) as a result of #2, the growing amount of outstanding direct Government debt being issued and the growing amount of indirect off-balance-sheet liabilities (medicare, Obamacare, pensions, war on terror, etc); growing exposure to and potential catastrophic risk of the Too Big To Fail Bank OTC derivatives exposure.

There are other factors but 1-4 above are the primary drivers. Just for the record, the decelerating - and soon to be tail-spinning down - U.S. economy will unmitigatingly prevent the Fed and the Government from fixing factors 1 thru 3.

What investors should really be afraid of is not the price-action in the gold market - but the underlying reasons for why the Fed orchestrated this paper attack on gold. Recall that in 2008, two months after the metals take-down referenced above, Lehman/AIG/FNM/FRE all collapsed and so began the great financial crisis and the massive Government/taxpayer funding and Fed money printing required to keep the system from completely collapsing and to let the big banks fund massive employee bonuses.

Given the shock and awe nature of this recent take-down, I would suggest that something really ugly - even worse than 2008 - is coming at us in the financial system and it will be just a matter a few months before we find out. I would suggest that the event in Cyprus is likely what re-lit the fuse on the financial system that was stamped out with use of at least $1 billion in direct taxpayer money and, so far, more than $2.2 trillion of printed money.