Sarajevo Is The Fulcrum Of Modern History: The Great War And Its Terrible Aftermath

Courtesy of David Stockman @ Contra Corner Blog:

One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later.

In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath—–a century of drift toward statism, militarism and fiat money—-that was actually triggered by the events at Sarajevo.

Unfortunately, modern historiography wants to keep the Great War sequestered in a four-year span of archival curiosities about battles, mustard gas and monuments to the fallen. But the opposite historiography is more nearly the truth. The assassins at Sarajevo triggered the very warp and woof of the hundred years which followed.

The Great War was self-evidently an epochal calamity, especially for the 20 million combatants and civilians who perished for no reason that is discernible in any fair reading of history, or even unfair one. Yet the far greater calamity is that Europe’s senseless fratricide of 1914-1918 gave birth to all the great evils of the 20th century— the Great Depression, totalitarian genocides, Keynesian economics, permanent warfare states, rampaging central banks and the exceptionalist-rooted follies of America’s global imperialism.

Indeed, in Old Testament fashion, one begat the next and the next and still the next. This chain of calamity originated in the Great War’s destruction of sound money, that is, in the post-war demise of the pound sterling which previously had not experienced a peacetime change in its gold content for nearly two hundred years.

Not unreasonably, the world’s financial system had become anchored on the London money markets where the other currencies traded at fixed exchange rates to the rock steady pound sterling—which, in turn, meant that prices and wages throughout Europe were expressed in common money and tended toward transparency and equilibrium.

Continue reading

Cronyism In The 21st Century

Courtesy of Mark E Jeftovic @ The Dollar Vigilante

Ghandi was once asked, “What do you think about Western Civilization?” to which he famously replied “I think it’s a good idea.” He may as well have been talking about free market capitalism.

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Capital in the 21st Century has hit the world like a new teen idol sensation. Everybody is drinking the Kool-Aid and it’s being held up as the most important book ever written on the subject of how runaway capitalism leads to wealth inequality. Paul Krugman of course, loves it. As does every head of state and political hack in the (formerly) free world. A text-book sized brick that can be condensed down to a couple bullet points:

  • that unchecked capitalism leads to increasing wealth inequality, and
  • this can be fixed through government management, most notably more taxes and higher minimum wages.

What’s not to love?

There are many other refutations of Capital circulating, most of which address the numerous factual errors and flawed research methodologies in the book, and countering the income equality assertions with observations around how the standard of living generally increases across the board during periods of free(er) market capitalism (such as England during the industrial revolution under the classical gold standard or wider Europe during the High Middle Ages).

The age we live in today is not an example of this. I submit that the modern run of standard of living increases, say from end of WWII to present is not an example of “free markets given room to run”, but rather a crack-up boom fuelled by credit expansion (cheap money) and cheap energy. This era is now drawing to a close, as the cost of energy inexorably rises and the global debt super-cycle finally hits a wall. After decades of government targeted inflation, after the better part of a decade of ZIRP, after increased regulations in every aspect of our lives, after civil liberties being for the most part abolished (after all, the government is allowed to assassinate any one of us and we are all under continuous pervasive surveillance) what is difficult to fathom is that political economists can still make hay in the world by blaming its problems on capitalism gone wild and runaway free markets. Put simply, true capitalism requires free markets, free markets require a free society and we do not live in a free society. Continue reading

Central Bank Transparency: A Delicate Balancing Act

Courtesy of World Finance.com:

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Ex-MI6 employee and whistle-blower Richard Tomlinson in 1998, after his dismissal from the British Secret Service

Central bank transparency has increased these past two decades since the former MI6 agent Richard Tomlinson made public the consequences of secretive monetary policy

“I enclose a document describing some of MI6s operations against member states of the European Union,” reads a letter addressed to the Intelligence Services Select Committee in 1998 and written by the ex-MI6 employee Richard Tomlinson. Since his dismissal from the British Secret Services in 1995, the New Zealand-born, Cambridge University-educated individual has been hounded and even imprisoned by his former employer on account of spilling state secrets and making supposedly spurious accusations against the agency.

As a consequence, the former spy today ranks among the world’s most audacious whistle-blowers, and while his accusations fall short of Bradley Manning and Edward Snowden in terms of scale, the ramifications have been similarly impressive.

Intelligence as an economic tool

“I would like to draw your attention to MI6s operations against fellow member states of the European Union,” wrote Tomlinson in one of his many statements made against his former employer. “It is my belief that many, if not all, of such operations would be illegal under European law as it is illegal for UK government officials to bribe government officials of fellow European states.”

“His motive is entirely financial, and he is paid very substantially”

In the letter, Tomlinson went on to describe project “Jetstream”, which apparently encompassed the entirety of MI6s anti-European operations, alongside the specifics of the ORCADA operation. “ORCADA is a German national and a senior officer in the Bundesbank, with access to all of Germany’s most sensitive economic and financial information. ORCADA was recruited by MI6 in approximately 1986 and has since then been a fully conscious agent.

“His motive is entirely financial, and he is paid very substantially. Indeed, he is among the best paid and most important of any of MI6s agents. He provides regular and detailed intelligence on all German interest rate movements, and provided detailed information on the German negotiating position during the Maastricht treaty negotiations.” Continue reading

The truth is out: money is just an IOU, and the banks are rolling in it

It’s good for the Bank of England to admit that the ‘money’ we use, correctly called fiat currency, is just a worthless paper IOU and the only thing that gives it value is your belief that it is worth what you think.

It is debt, not money and this monetary setup is gamed for the few and enslaves the rest of us. Gold and silver are money and have been for 5000 years, a return to sound money and The Real Bills Doctrine is what is required to get this country and the world, back on track.

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Courtesy of David Graeber @ The Guardian:

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn’t know how banking really works, because if they did, “there’d be a revolution before tomorrow morning”.

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called “Money Creation in the Modern Economy”, co-authored by three economists from the Bank’s Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank’s new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don’t suffice, private banks can seek to borrow more from the central bank. Continue reading

Uncovering China’s Rush for Gold

China appears to be one step ahead of the curve in terms of positioning itself for the next monetary system and that system revolves around gold. What are you going to do about this? Courtesy of the The Real Asset, a collaboration between the lovely Jan Skoyles and Koos Jansen:

The Chinese government acknowledged gold as a strategic asset in 2000, when it included the establishment of an open gold market in its five year economic plan.

Since then China has come to play a significant role in the international gold market as it strives to develop and advance all aspects of the industry and gold’s role in the domestic market.

Why it has decided to focus on building and developing the gold industry from both a supply and demand perspective is a question that requires further investigation.

In the coming weeks Koos Jansen and myself will reveal the cogs of China’s gold market as we work to reach a conclusion as to why gold is such a high priority for China’s economic development.

This week we provide an overview of the major elements of the marketplace in an attempt to unveil the strategy of the State Council.

What is the China Gold Market?

There are three main areas of focus for the State Council when it comes to the precious metal market. These are not exclusive areas and are, in many ways, interconnected. The point being however that the government has identified where and who is best to develop its gold strategy.

We look at them briefly below.

Shanghai Gold Exchange

The SGE is the poster child for the 2013 gold market. It is managed and supplied by the PBOC. Many expect it to represent the tipping point in a dichotomous two part gold market (paper vs physical) due to the vast number of physical deliveries made in the last year. At times delivery numbers have touched global mine supply figures and when they haven’t they remain stunningly high.

Numbers from the SGE this year suggested that there was a change in the manner in which the Chinese made investment decisions. Having previously bought when prices were climbing and during festival seasons, they took delivery of record amounts of gold in both April and July following significant drops in the price of gold.

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Launched in 2002, it took just ten years for the SGE to become the biggest physical gold exchange in the world signalling the rise of China as a gold market leader. A quick glance at previous data released by the SGE shows that the three largest gold contracts traded on the exchange are as follows: Au 99.95 (3kg contract), Au 99.99 (1 kg) and Au (T+D) (also 1kg of 99.95).

Members of the SGE, of which there are over 160, are heavily represented by commercial banks (domestic and Chinese branches of foreign banks) and firms involved in gold production and investment.

Shanghai Futures Exchange

The Shanghai Futures Exchange, controlled by China’s Securities Regulatory Commission, launched its first 1kg gold contract in 2008. This was a major step in the sophistication of the China gold market.

In terms of open interest the SHFE is the second largest gold futures exchange in the world. Despite this, the largest contract on COMEX (100 troy ounce) is over 11 times larger by volumes traded than the SHFE 1kg contract.

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As we found in previous research, the 100 ounce gold futures contract on COMEX dominates this market and accounts for 82% of gold futures trading. This has fallen since we last looked at this area, by 3%. Neither the SHFE nor TOCOM have had any issues picking up more demand in the market.

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The SHFE has taken a further 2% of market activity, from 7% since May 2013. TOCOM, in contrast has grown by just 1%.

This isn’t surprising given the increasing popularity of the 1kg gold futures contract on the SHFE, since January 2009 open interest has increased by 430%. In contrast, activity on COMEX has increased by just 116%.

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Commercial banks in the gold market

The 2011 China Market Gold Report states that there are four pillars of gold market activity in which commercial banks are involved; physical gold, gold for trading, gold for financing and gold for wealth management. Through these activities commercial banks are members of the SGE and SHFE.

Commercial banks also play a key role in the financing of gold-orientated businesses. This was a feature of the 2010 report, “Guiding opinions on promoting the development of the gold market”, that instructed commercial banks to be actively engaged in developing China’s national gold market. Bullion producers are targeted for strategic assistance, with banks instructed to offer finance for overseas gold mine purchases and innovation.

Commercial banks operating in the gold market own proprietary gold businesses. These subsidiaries are involved in a variety of areas from account gold business, to gold depository plans to gold leasing. In 2011 the paper gold sector, the account gold business, experienced the lowest growth. Whilst the gold depository plans as offered by institutions such as ICBC have proved popular between small and medium-sized investors.

Commercial banks and their proprietary gold businesses are the key to gold market development, providing the link between the gold exchanges, gold supply and the domestic customer. It is through these institutions that the government can encourage and facilitate gold investment.

For instance it is through commercial banks that individual investors can buy gold on the SGE. Banks provide individual investors with a trading number which allows them to trade.

Banks also sell branded gold bars, said to be of a higher quality than those sold in other commercial gold outlets. Making physical gold available to individual investors through this route improves the accessibility for the smaller saver and means the government can ensure the quality of gold being bought.

Who controls the gold market?

Above all else in the China gold market is the State Council. In recent five year plans the role of gold has featured heavily as the Council instructs banks and other major institutions to develop the gold market. The 2010 Twelfth Five-Year plan (2011 – 2015) urged on-going development of the gold market both domestically and abroad and showing China is want to affirm her strategic interest in gold.

Below the State Council is the PBOC which probably plays the largest role in China’s developing gold market.

Former member of the PBOC’s MPC Yu Yongding, is just one of a few PBOC staff who are vocal about the role gold should play in the China’s international strength, “China should use its foreign-currency reserves, the world’s largest, to buy gold and oil as a hedge to guard against the risk of a sudden drop in the U.S. dollar.”

Not only does the PBOC manage gold-based products offered by banks but they also manage and supervise the supply of gold through mining and import to the Shanghai Gold Exchange.

The China Gold Association acts as the industry body, or the trade organisation. With interests in every corner of the gold market it ensures the government’s policies are put into action within the world of the yellow metal. Senior staff of the CGA are vocal supporters of building up China’s gold reserves and critics of the US. Expert member of the China Gold Association, Zhang Jie, is an exceptionally vocal critic of the US Dollar’s dominance and the Fed’s actions to manipulate the gold market.

“For the Fed, it is crucial that the dollar dominates the world and so the Fed will store gold reserves from countries all over the world to control the gold settlement system.”

There are several other government departments and key individuals who drive the gold market development, from all aspects including gold reserves and international gold trading. Look out for our ‘Who’s Who’ infographic in the coming weeks.

Gold demand

This year many gold article headlines have told us that this year China will overtake India as the world’s largest consumer of gold. This is according to the World Gold Council who have highlighted China’s rapid gold demand growth through theirs and GFMS’ data. It is these figures gold market participants and observers use to watch the race between India and China for the top spot in gold demand.

However, 2011 data from the SGE suggests otherwise. China may have taken over India a while back.

In 2011 the WGC stated that China’s gold demand stood at 769.8 tonnes. However the 2011 China Gold Market report (as published by the PBOC) states that demand reached 1043 tonnes. As Koos Jansen recently illustrated, this was the exact amount delivered by the SGE in the same year.

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Koos Jansen found this same method of data reporting was duplicated in 2010, when SGE deliveries equalled the gold demand reported by the PBOC that year. If this is the accepted way to report gold demand in China’s data collection then total gold demand for the first eight months of 2013 is 1600 tonnes.

Central bank gold reserves

When it comes to reserves, very few believe that the PBOC has not increased the amount of gold since 2009 when the official reserves were announced to be 1,054 tonnes. It has been said recently by Zhaoxue Sun, Head of the China Gold Association and China’s biggest mining company, that gold reserves that account for 1.6% of total reserves are too low compared to other developed countries.

A 2012 paper, ‘A Study on Optimal Scale of China Gold Reserves’ co-authored by the Vice-President of the China Gold Association recommended that by 2020, China’s optimal reserves should be 5,787 – 6,750 tons. If the State Council has followed this recommendation then the PBOC should currently hold between 2,947.2 tons and 3332.4 tons of gold in reserve.

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Western central bank gold sales have become a source of gold supply, this does not appear to be the case in China. In the 2011 Gold Market Report the SGE provide a breakdown of gold supply for the year, no gold had been supplied by the central bank.

How much gold is in the country? The graph below provides a wide estimate of the total gold held in China – both domestically and institutionally. However this does not include private gold holdings prior to 2001 or imports via ports other than Hong Kong.

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Gold supply

Where does the gold come from? As we will explore further in this research project the supply of gold is coming under closer scrutiny. China National Gold is the largest supplier of gold to the country and the only Chinese member of the World Gold Council. The country’s gold mining production is now second to none, having risen from 4 tonnes 60 years ago to an expected 440 tonnes in 2013.

The 2011 Annual Gold Report state that ‘The country’s proven gold reserves in 2010 consisted of 4,898.09 tons of rock gold reserves in independent gold mines, 512.86 tons of placer gold and 1,468.03 tons of associated gold reserves.’ A total of 6864.79 tons of gold is waiting to be mined.

But this cannot be mined fast enough to meet day-to-day gold demand, a trend unlikely to subside given the ongoing development of gold investment products. The previous graph showed the growth of imports but recycled gold always plays a major role. Recently the PBOC highlighted the need to modernise and finance gold recycling and processing plants. In 2011 this source of gold accounted for 39% of total supply to China’s gold market.

The role of Hong Kong

Hong Kong’s gold imports and exports to mainland China have provided a window into the amount of gold being absorbed by the Chinese.

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Since mid-2010 the net inflow of gold from Hong Kong to mainland China has increased significantly. Prior to 2012 very little gold was imported via Hong Kong, however in the last 18 months import levels have increased enormously.

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The import and export numbers through Hong Kong show not just a growing demand for gold in China but also a growing presence of China’s gold on the international market.

Published plans for the Chinese gold market

As we have shown in recent research China’s quest to open up the gold market has been moving quickly since 2000.

In the 2013 China Financial Stability Report, the PBOC reaffirmed their commitment to the gold market stating they would, ‘Promote the steady development of the gold market, improving the service system of the gold market, improving storage, transportation, delivery and account service system of the gold market.’

One of the most recent developments was the launch of the country’s first gold ETFs in July 2013. Neither ETF, from HuaAn Asset Management Company and Guotai Asset Management Company, are backed by gold. Instead the funds mirror the domestic spot price by purchasing futures contracts on the Shanghai Gold Exchange.

Because of the nature of these ‘paper’ ETFs it is not impossible to understand why neither managed to raise the expected initial amount. If China is to become the next centre of price discovery it is unlikely to be driven by their ETF offerings.

Whilst the Western world watched the gold price fall at the beginning of October 2013 the PBOC floated the idea of the easing of gold trade restrictions for both firms and individuals. Bank members of the SGE will be able to apply for import and export licenses, as will gold producers with an annual output exceeding ten tonnes. Individuals will be able to bring in seven ounces of gold, without being required to pay tax or report to customs.

What China means for the gold market

Advancing and opening up the gold market to both domestic and individual participants is clearly a top strategy for the government of China. However gold market observers in the West merely acknowledge gold import numbers and, more recently, SGE delivery numbers. Many dismiss this year’s record gold figures as a provincial approach to investment. However, as we have shown, the Chinese gold market is far more complex and strategic than many would give it credit for.

The Chinese authorities recognise gold as an asset with two purposes. One for investment, the other as sound money. Not only are banks and institutions able to invest in gold as an asset, citizens are encouraged to use gold as money as they are offered savings accounts in gold.

As The Real Asset Company stated in previous research, the legitimacy and transparency of COMEX and the London Gold Market are being called into question. We have found a market, driven by the world’s most populous nation, which is transparent and eager to encourage gold’s role in the international investment and monetary system.

As much as the West may like to ignore it, China is the face of the modern gold market. And we believe, the soon-to-be-face of the modern monetary system. Look out for our upcoming research as we investigate this further.