ECONOMIC VIEW - All of the Central Banks are Printing Money So Why Are Gold and Silver Lower?

Arcadia Economics Consulting
Monday, December 17th, 2012
-Chris Marcus

All of the Central Banks are Printing Money So Why Are Gold and Silver Lower?
Think about what's happened in the past 4 months. On September 6th European Central Bank president Mario Draghi "announced a new program of open-ended, unlimited buying of distressed government bonds." When a central bank purchases bonds they have to create (print) money to do so, meaning that in this case the European Central Bank said that it was going to printing an unlimited amount of Euros.

One week later the Federal Reserve announced QE3 in which it said it would begin purchasing $40 billion per month of mortgage securities and also stated that it would be willing to print as much money is required until the economy improves (unfortunately the economy won't improve until they stop printing money). Two weeks ago they launched QE4, which added an additional $45 billion per month of treasuries to the pile. This means they are now on schedule to print over $1 trillion next year.

Over in Japan new Prime Minister Shinzo Abe ran on a platform of unlimited stimulus and quantitative easing (money printing) and now that he has been elected president he is already putting pressure on the bank of Japan. So the natural question is that with all of this money printing why are both gold and silver well off their highs of the year and actually even lower than where they were trading before all of these rounds of currency debasement? Gold was trading at $1700 on September 6th and opened up trading $1660 in far east trading Sunday night, while silver has declined from $33 to as low as $29.50 last week.

There were two main reasons offered by Wall Street and the mainstream media for the recent declines. One hypothesis was that hedge fund manager John Paulson (who has a substantial position in gold) was liquidating large amount of his holdings due to customer redemptions. While at first glance this seems like a plausible explanation it does not explain why silver has also dropped over $4 since the day QE4 was announced. There have been no reports of Paulson holding any substantial silver positions. In fact it would actually be hard for Paulson to even acquire a sizeable amount of silver relative to the size of his portfolio given how much money he has under management and how small the silver market is.

The other explanation offered was that that the move had already been priced in (this is the typical Wall Street stock line used whenever an asset price does not seem to respond normally to a particular development). If that's really the case then it has been priced in incorrectly. The price of gold and silver are the inverse of the value of the dollar as metals are priced in dollars per ounce. An ounce of either gold or silver is still an ounce of gold or silver and the only thing that's changed is that the supply of dollars has increased. Therefore in a normal market the price of both metals would have increased substantially in terms of dollars per ounce.

In actuality the real actual explanation is that these markets are both being manipulated which is rapidly becoming more and more well known. The important thing to remember is that the manipulation occurs in the paper trading of the futures contracts. The same piece of physical metal has been sold many times setting up a situation where there will likely be a shortage of metal (especially in silver) and a default on the COMEX. In that case the price of precious metals would rise substantially and if you hold physical gold or silver you would benefit. However holders of futures contracts will likely be cash settled at a far lower price. This means they would receive the old price silver was trading at and not the higher price that occurs after the shortage is realized. This is an incredibly important point to understand and if you still have questions I strongly encourage you to post them on Arcadia's Facebook page so we can you understand.

Many people and investors are often frustrated about events like the mortgage bubble and Bernie Madoff's Ponzi scheme, and they wonder why no one ever speaks out in advance. However in actuality in both of those cases there were people who spoke out in advance but they were largely ignored. And again in this case there is a whistleblower named Andrew MaGuire who has not only specifically detailed how the crime occurs but has also informed the CFTC (and recapped it again here), which is the regulatory body governed with ensuring fair and equitable markets for both precious metals. The CFTC has an investigation that has been ongoing for 4 years now, and although one of their commissioners (Bart Chilton) has acknowledged in public as well as in a personal e-mail to me that he is aware that there is manipulation, there has still been no formal response or action by the CFTC. Instead they let a crime that they are aware of continue to occur.

In the financial markets there occur certain occasions where the mind's strength is truly tested. It is difficult for many people to buy gold and silver as an inflation hedge, see endless money printing, and still watch their holdings go down in dollar value. There is the temptation to think that there was something wrong in their decision-making when in fact the price action is just a reflection of short-term liquidity machinations. Many people feel that the banks on Wall Street often take advantage of the public and this specifically is one of the manners in which they do so.

But what separates those who are able to avoid these traps from those who became victims is the willingness to understand the fundamentals and focus on a longer-term perspective. As Gerald Celente pointed out in a recent King World News Interview (Gerald is the author of The Trends Journal one of the top trends forecasters in the world with an impressive track record of forecasting global economic, political, and social trends) the alternatives are to buy Dollars, Euros, or Yen. Does that sound like a better option when the powers in control just said they are going to print endless amounts of each?

This is not how markets should operate and it is a shame that it is occurring, especially when the regulators have direct knowledge of what is going on. As a former equity options specialist on the New York Stock Exchange I would have been quickly arrested if I had ever attempted any of the manipulative actions that are occurring in these markets. Fortunately however there are people like Ted Butler, GATA, and Ed Steer who have all done amazing research in organizing and detailing a small army of evidence that leaves very little mystery of what's really happening.

If you are holding physical gold or silver, or were considering buying either metal you don't need to be panicked by the short term liquidity issues. If you decide against purchasing metals for other reasons then of course you should always do what you feel is in your best interests. However if you are wondering why the metals are lower despite the economic events that have taken place, this time you can finally prepare for one of these scandals before it occurs.

chris@arcadiaeconomics.com