I got up early this morning – 5:30 Eastern Time here in Boca Grande, FL. Gold was up $12.30 to $1073.30. Silver was up $0.14 to $13.97. That’s a nice way to start off the New Year.
Susan and I have been staying with our friends Jim and Diane Cook in Boca Grande since last Wednesday. Jim owns I.R.I. and is one of the pioneers of the precious metals industry. He started I.R.I. in the early 1970s and I started my career in gold and silver working for him in 1983. I like spending time with Jim because both of us talk the “same language” and we see the problems and solutions in much the same way. Our firms are very different but not our views on gold and silver, the dollar, the economy and politics.
Jim and I discussed where we thought gold and silver are headed in 2016. He said, “Wherever JPMorgan wants them to go.” His views are strongly shaped by Ted Butler, who writes for him. I follow Ted too. I replied, “JPMorgan is known as “the government’s bank”. I don’t see how they will be ‘allowed’ to back off and let the prices fly during an election year.” There is much more than paper profits to consider here. If the stock market crashes and gold rapidly moves up, Donald Trump will occupy the White House next year.
I am not saying that gold and silver will experience another year of falling prices; but short of a large Black Swan event, I expect gold and silver to soon establish a bottom, if one is not already in, and then start to move up in a “controlled fashion.”
Last Saturday, Jim and I and Susan and Diane went to see The Big Short. I will cut to the chase here: see it; don’t miss it! Several years ago, I read Michael Lewis’ book by the same name. I thought the movie followed the book reasonably well – as I remember it. This is an important movie because it will open a lot of eyes to the greed and hubris that is the foundation of Wall Street.
The problem is presented as a collapse of the housing market that caught most people off guard. Actually, the real problem was derivatives. Highly leveraged bets, sold over and over again that assumed housing would never fail. They were called CDS (credit default swaps), and were basically “insurance against failure” that was packaged and sold with the belief that the issuer would be able to sit back and rake in the premiums and never have to pay off the loses, because housing “never fell, it always went up.” And so it did, until it didn’t.
When the shit hit the fan, Hank Paulson got on TV and told the American public that we had to bail out the banks or it would be the end of everything. Paulson, you know, was a former CEO of Goldman Sachs. And he made sure the bailout gave enough money to AIG so they could pay up their (CDS) losses to Goldman Sachs and Deutsche Bank and spare them from losses. A perfect case of government taking care of the Wall Street big banks. AIG is an insurance company, not a to big to fail bank and should never have been given a helping hand. Yet the U.S. taxpayer forked over $182 billion to them to cover their losses and allow them to transfer the taxpayer. It’s part of the mentality whereby they win, they keep the profits; they lose, we pick up the loss.
During the credit boom, AIG sold “insurance” on all sorts of financial instruments to other firms but never bothered to put money aside to pay the claims. In 2008, it was looking at a death spiral: cut credit ratings, claims on the policies, and collateral calls. By the late summer, AIG was functionally bankrupt—unable to meet financial obligations or raise new cash. And its management had no clue. “We think they are days from failure,” Bernanke (writing as Edward Quince) told colleagues, it was revealed in court last week. “They think it is a temporary problem. This disconnect is dangerous.”
When companies go bankrupt, stockholders are wiped out, and the creditors (people to whom the company owes money) take a haircut on their claims. But the Federal Reserve and the government decided AIG couldn’t be allowed formally to file for bankruptcy, as that would force virtually all the world’s financial institutions to take big financial write-downs at a time of already high stress. The solution was a bailout—of AIG, and of the financial system as a whole. The Fed and Treasury made virtually unlimited funds, $182 billion in all, available to AIG so that it could make payments to counterparties like Goldman Sachs and Deutsche Bank, and thus spare them from losses.
In exchange for offering such a huge sum, the government demanded that the taxpayers should receive interest payments and an 80 percent ownership stake in AIG. At the time, that was a little like receiving polluted land as compensation for spending a ton of money to clean up a toxic waste site.
I was writing about derivatives and CDS (Credit Default Swaps) for a couple of years before everything came tumbling down. People like Jim Sinclair and Warren Buffet called them Financial Nuclear Time Bombs. And they were. A manageable amount of debt was leveraged up to hundreds and hundreds of trillions of dollars and there was not enough money on the planet to cover the coming losses, if they had to be covered.
It was as clear to people like Jim and me that a collapse was inevitable and money would be made – or lost when reality set in. I made a great deal of money in gold, silver, platinum and mining shares at the time. And so did our clients. Not the kind of money the heroes of The Big Short made by shorting the CDS mortgages, but even the “crumbs” we got were substantial.
In 2007, 2008 I wrote about the collapse that was coming. In early 2000, I wrote about the collapse of the NASDAQ six months in advance and what it meant for gold. I do not have a crystal ball, but trust me; it was not that difficult to see what was coming. Bubbles can be spotted before they burst, in spite of what Alan Greenspan says. And we have another one here in front of us once again – several in fact, that are as easy to spot as the ones we navigated through in 2001 and 2008. Take your pick: the stock market; the petro dollar; debt; the bond market. Add a few more if you wish. Just because I was correct in 2001 and 2008 does not guaranty I will be correct in 2016, but I am going on the premise that I will be – again. These were bubbles. Gold and silver were not in a bubble. Their collapse was not a natural occurring event. We have written many articles about how the government participated in stonewalling gold at $1900 and silver at $50 as they panicked at the message the precious metals were sending. No need to go over it again, but suffice it to say, their demise was engineered. It wasn’t all that hard to keep the prices falling since the global economy, led by China, was falling prey to Deflation and the entire commodity sector, from oil to copper was in a serious retreat. Since when is gold a “commodity?” I always thought gold was “money.”
The result was gold and silver got way too cheap as new financial bubbles started to form. And that’s where we sit right now.
Jim and I couldn’t help but look at each other and smile throughout the movie. At last the average American could get a glimpse of what goes on on Wall Street. Who went to Jail? The movie says “only one poor Schmuck.” Nothing really changed. The problems today are of the same magnitude, if not greater, than they were eight years ago. A lot of money will be made, and lost, in the next year or two. And most people will scratch their head and say, “Why didn’t I see this coming?” Just like in the aftermath of The Big Short.
The greatest scandal in gold is yet to come and it is not the Comex on paper but at your trusted place of storage. Read your customer papers and read the entire prospectus for GLD. Where exactly did you say your physical is? Are you in for a surprise? – Jim Sinclair
– A Heavily-Troubled 2015 Has Recognition Is Likely Early in the New Year
– Real S&P 500 Sales — Net of Stock-Buyback Distortions — Showed No Post-2009 Recovery in the Economy, but Instead Showed Low-Level Stagnation that Shifted Recently to Intensifying Downturn
– Deepening U.S. Contraction Should Hit the U.S. Dollar Hard, Where a Temporarily-Sidelined FOMC Touts an Economic Focus, and Federal-Deficit, Systemic-Solvency and Treasury-Funding Issues Come to the Fore
– Federal Reserve and Other Central Banks Have No Way Out as Dangers from the Panic of 2008 Persist
– Heavy Dollar Selling Should Generate Rallying Gold, Silver and Oil Prices U.S. Electorate Likely Will Vote Its Pocketbook
Set Up 2016 for Disorders in the Financial Markets, Systemic Stability and the U.S. Political Arena
Formal “New” Recession – John Williams, Shadowstats