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Federal Reserve’s Attack on Gold & Silver A Warning Sign All Patriots Should Heed

April 24, 2013

By Paul Craig Roberts

For Americans, financial and economic Armageddon might be close at hand. The evidence for this conclusion is the concerted effort by the Federal Reserve and its dependent financial institutions to scare people away from gold and silver by driving down their prices.

When gold prices hit $1,917.50 an ounce on August 23, 2011, a gain of more than $500 an ounce in less than eight months, capping a rise over a decade from $272 at the end of December 2000, the Federal Reserve panicked. With the United States dollar losing value so rapidly compared to the world standard for money, the Federal Reserve’s policy of printing $1T annually in order to support the impaired balance sheets of banks and to finance the federal deficit was placed in danger. Who could believe the dollar’s exchange rate in relation to other currencies when the dollar was collapsing in value in relation to gold and silver?

The Federal Reserve realized that its massive purchase of bonds in order to keep their prices high (and thus interest rates low) was threatened by the dollar’s rapid loss of value in terms of gold and silver. The Fed was concerned that large holders of U.S. dollars, such as the central banks of China and Japan and the OPEC sovereign investment funds, might join the flight of individual investors away from the dollar, thus ending in the fall of the dollar’s foreign exchange value and thus decline in U.S. bond and stock prices.

Intelligent people could see that the U.S. government could not afford the long and numerous wars that the neoconservatives were engineering or the loss of tax base and consumer income from off-shoring millions of U.S. middle-class jobs for the sake of executive bonuses and shareholder capital gains. They could see what was in the cards, and began exiting the dollar for gold and silver.

Central banks are slower to act. Saudi Arabia and the oil emirates are dependent on U.S. protection and do not want to anger their protector. Japan is a puppet state that is careful in its relationship with its master. China wanted to hold on to the American consumer market for as long as that market existed. It was individuals who began the exit from the U.S. dollar.

When gold topped $1,900, Washington put out the story that gold was a bubble. The presstitute media fell in line with Washington’s propaganda. “Gold looking a bit bubbly” declared CNN Money on August 23, 2011.

The Federal Reserve used its dependent “banks too big to fail” to short the precious metals markets. By selling naked shorts in the paper bullion market against the rising demand for physical possession, the Fed was able to drive the price of gold down to $1,750 and keep it more or less capped there until recently, when a concerted effort on April 2-3 drove gold down to $1,557 and silver, which had approached $50 per ounce in 2011, down to $27.

The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.

For now it seems that the Fed has succeeded in creating wariness among Americans about the virtues of gold and silver, and thus it has extended the time that it can print money to keep the house of cards standing. This time could be short or it could last a couple of years.

For the Russians and Chinese, whose central banks have more dollars than they want, and for the 1.3B Indians in India, the low dollar price for gold that the Federal Reserve has engineered is an opportunity. They see the opportunity that the Fed has given them to purchase gold at $350-$400 an ounce less than two years ago as a gift.

The Fed’s attack on bullion is an act of desperation that, when widely recognized, will doom its policy.

The Fed is creating 1T new dollars per year, but the world is moving away from the use of the dollar for international payments and, thus, as reserve currency. The result is an increase in supply and a decrease in demand. This means a falling exchange value of the dollar, domestic inflation from rising import prices and a rising interest rate and collapsing bond, stock and real estate markets.

The Federal Reserve’s orchestration against bullion cannot ultimately succeed. It is designed to gain time for it to be able to continue financing the federal budget deficit by printing money and also to keep interest rates low and debt prices high in order to support the banks’ balance sheets.

When the Fed can no longer print due to dollar decline which printing would make worse, U.S. bank deposits and pensions could be grabbed in order to finance the federal budget deficit for a couple of more years. Anything to stave off the final catastrophe.

By its obvious and concerted attack on gold and silver, the U.S. government could not give any clearer warning that trouble is approaching. The values of the dollar and of financial assets denominated in dollars are in doubt.

How the Fed Tanked Gold & Silver

By Paul Craig Roberts

I was the first to point out that the Federal Reserve was rigging all markets, not merely bond prices and interest rates, and that the Fed is rigging the bullion market in order to protect the U.S. dollar’s exchange value, which is threatened by the Fed’s quantitative easing. With the Fed adding to the supply of dollars faster than the demand for dollars is increasing, the price or exchange value of the dollar is set up to fall.

A fall in the dollar’s exchange rate would push up import prices and, thereby, domestic inflation, and the Fed would lose control over interest rates. The bond market would collapse and with it the values of debt-related derivatives on the “banks too big to fail” balance sheets. The financial system would be in turmoil and panic would reign.

Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price, trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.

According to bullion trader and whistle-blower Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can significantly drive down the market price.

A naked short is when the short seller does not have or borrow the item that he shorts, but sells shorts regardless. In the paper gold market, the participants are betting on gold prices and are content with the monetary payment. Therefore, generally, as participants are not interested in taking delivery of the gold, naked shorts do not need to be covered with the physical metal. In other words, with naked shorts, no physical metal is actually sold.

Consider the 500 tons of paper gold sold on April 12. At the beginning gold price that day of about $1,550, that 500 tons comes to $24.8B. Who has that kind of money?

What happens when 500 tons of gold sales are dumped on the market at one time or on one day? It drives the price down. Investors who want to get out of large positions would spread sales out over time so as not to lower their sales proceeds. The sale took gold down by about $73 per ounce. That means the seller or sellers lost up to $73 dollars 16 million times, or $1.2B. [Over the next two days it dropped $200 per ounce. That equals a $3.2B fall.—Ed.]

Who can afford to lose that kind of money? Only a central bank that can print it.

Paul Craig Roberts is a former assistant undersecretary of the U.S. Treasury and former associate editor of The Wall Street Journal. He is the author of many books including The Tyranny of Good Intentions, Alienation and the Soviet Economy, How the Economy Was Lost and others.

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We Have Entered The First Of Four Phases That Will Bring The End Of Fiat Money

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John Browne, EuroPac

Last week, the G-20 meetings did not produce an expanded bailout fund for the eurozone. While this may bode well for the long-term solvency of the member-states (moral hazard and all), it has also triggered a market reaction that I expect to help destabilize the common currency. Wednesday’s market moves suggested that this development is good for the dollar and bad for gold. Allow me to step back from the stampeding herd to evaluate whether they are, in fact, moving in the right direction.

The argument for the dollar and against gold is simplistic, and I will evaluate it against the four-stage collapse I see ahead for the Western currencies.

Arguing that gold is a hedge only against inflation, and taking current inflation figures at face value, mainstream analysts have concluded that gold is grossly overvalued – that it may, in fact, be the latest asset bubble to arise. However, these analysts fail to account for why gold is a hedge against inflation: it is ultimately an insurance policy against runaway currency collapse. In other words, it’s intended as a longer-term, wealth-preserving purchase. Yes, some pit traders may be trying to make a quick buck shorting gold and going long on dollars, but for individual investors, following suit would leave them vulnerable to what may prove to be ahead. That is, a phased destabilization of the euro, leading to a possible collapse of the US dollar. In such circumstances, even today’s volatile prices for gold and silver would look attractive.

Phase One of the threatened catastrophe is sovereign debt crisis, which is effectively camouflaging a currency crisis. The Greek default is significant as the first crack in the dam. But Greece is a relatively small problem. The bigger threat is Italy, with its $2.4 trillion of debt and a 10-year bond yield having just surpassed the critical 7 percent level. This is the ruinous milestone at which the cost of new debt money surpasses the economic growth rate plus inflation. Italy faces massive debt refunding, falling buyer interest, and no hope of a bailout. If Italy were to default, it could threaten rapid contagion to Portugal, Ireland, Spain, and other larger eurozone countries, including perhaps France. In such an event, most international banks and institutional investors, including those in the US, could suffer severe, possibly total, losses on their holding of certain sovereign bonds. MFGlobal is but one speculative example of a looming secular trend. Worse still, the writers of credit default swap (CDS) derivatives, including many German Landesbanks (state-level banks) and major US banks, could suffer crippling losses.

This would lead to Phase Two of the collapse: a renewed and far larger banking crisis. This, in turn, could bring stock markets tumbling and threaten major institutional investors, including politically sensitive pension and insurance companies. In addition, banks would become extremely wary of lending to each other. Likely, the interbank market would freeze, but far more severely than in 2008. It could result in curtailed lending and even the recall of short-term corporate funding and call-loans. This could cause a dramatic spike in US bank failures. Unwary depositors who have failed to watch their banks closely could find their insured funds frozen, perhaps for months, as the FDIC reorganizes the problem banks – and perhaps even waits for its own bailout. This would add further downward pressure to economic growth.

Meanwhile, the cascading banking crisis would likely push Europe into a severe recession, even a depression. As the EU accounts for some 22 percent of world trade, a European depression would no doubt drag down the US even further. In response, the price of precious metals may face severe selling pressure as liquidity becomes paramount.

This would present an opportunity for long-term gold and silver investors.

Phase Three would be a restructuring or dissolution of the euro and possibly a stampede into the US dollar, sending its price and US Treasuries temporarily upwards. With a far stronger dollar, the price of most commodities, including precious metals, may fall temporarily in dollar terms. We are seeing a preview of this dynamic with today’s news on Italy.

However, to reallocate one’s portfolio in reaction to such a move could put an investor in jeopardy. That is because Phase Four, the most alarming, would be investors’ realization that the US dollar lies at the root of the international currency collapse and is itself vulnerable. Likely, this panic flight from the dollar would develop suddenly, and perhaps in undreamed of volumes. Doubtless, the speed and size of a stampede out of paper currencies and into precious metals will take many investors by surprise – just as the Credit Crunch in 2008 did. As the realization of currency catastrophe spreads, the price of silver may start to rise faster than even gold.

There’s an old saying that “the higher you fly, the harder you fall.” The US government is, by any measure, the luckiest government in centuries. It has risen to unforeseen heights of monetary excess – and has been rewarded for doing so. But it looks like lower flying planes are starting to stall out, and one can only imagine – from this height – how fast and how far the US may fall.

My humble advice is not to try to time it, but rather to use your golden parachute before it’s too late.

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.

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