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Let’s look at two different topics where we are seeing contradictory “evidence”.  First up is what’s happening in the gold and silver markets.  Never before have I seen sentiment as poor as it is today.  Nor have I seen so many negative articles about gold in the various mainstream publications.  It has gotten so bad, gold has even been compared to “pet rocks”!  While we have seen food fights before, the name calling as of late has become deafening led recently by Martin Armstrong and Cliff Droke.  I wonder how or what their response is to the physical side of the argument?

As you know, there have been “air pockets” in the price of gold over the last three years.  Nearly always, these take downs occur at night and in particular Sunday nights.  The last one a couple of weeks back, saw $2.7 billion worth of gold sold over a two minute span.  I have asked the question many times, “who” controls this much gold and if we could identify someone or some entity, “who” would ever sell in a manner to destroy pricing if a profit motive truly exists?  Can anyone conjure up an answer to this while including the phrase “profit motive”?  I dare any of the gold bashers to answer these two very simple questions!  Front running just a bit, any real answer I would imagine must have “desired lower gold price” as part of the explanation.

A very real problem or flaw in logic exists in the current gold and silver markets.  If there is in fact so much selling (panic selling), how is it possible the U.S. Mint had to stop selling Silver Eagles nearly a month ago?  It can only be for one of two reasons.  Either they had enough silver but could not produce coins fast enough to satisfy demand, or, they could not source enough silver to make the coins.  But this does not make any sense.  How could there be “too much demand” if everyone is selling?  Also, how could there not be enough silver available if everyone is selling and has sold?  Where did all of this “sold” silver go to?  Again, I dare anyone to come up with a logical answer to this.

We are also seeing the same thing in gold.  It is trading in backwardation ($7 plus) in London and with substantial premiums in India and throughout Asia.  If the masses are dumping gold then supply should be plentiful, how can physical tightness exist or premiums over the paper price exist if recently sold gold is falling out of dump trucks on their way to refineries?  Any logical answers for this?  The gold bashers say “see, the price is down, there is your proof”.  Do Armstrong and crew deny that the only thing necessary to sell a COMEX gold or silver contract short is the ability to post margin?  Do they deny that “money” (margin) can be and is created for free ?  And then used to “water down” the futures in the same manner as a company over issues stock or a country over issues money supply?

There is a very real distinction between paper gold and physical gold, this will soon become apparent.  The difference is physical in your own control is no one else’s liability.  Paper gold on the other hand is the liability of the issuer of the contract.  Currently, COMEX has a whopping 11.7 tons left of deliverable gold left.  JP Morgan claims to have less than four tons, these are the lowest numbers I can ever remember.  To put it in perspective, 11.7 tons of gold is worth less than $400 million dollars.  The COMEX can now be broken and exposed with petty cash!  As sure as the Sun will rise tomorrow, there will eventually be a “call” on real gold.  Not only on COMEX gold but ALL paper gold …any call will not be met because the gold does not exist to meet the call.  There are now more than 100 paper ounces of gold sold for every one ounce of real gold that exists to deliver.  If there were 100 fake shares of IBM trading and watering down every one real share in existence, the price of IBM stock would be trading in the low single digits!  The fake shares would alter perception but not the reality of what the company is worth as an ongoing concern.

Another area to touch on is the “threat” of the Fed raising interest rates.  I view a rate hike as ONLY a threat at this point and will get into that shortly.  Looking back, the Fed has floated the idea of rate normalization ever since early 2010.  It was always six months out …and continually extended.  But this time they really mean it?  The consensus is now for a rate hike in September.  I can only say one thing to Janet Yellen and the gang, I DARE YOU!  In my opinion, if the Fed were to raise rates we might only have a functioning financial system for about 48 hours, I cannot see more than a week or two at the most.

Why is this you ask?  Let’s count the ways … First, global trade is already imploding.  China is entering a margin call scenario on many fronts.  An already strong dollar is pressuring an over indebted world that owes in dollars.  Internally, the U.S. is missing on many cylinders, retail sales and housing turnover already weak will become disastrous.  Reported economic numbers are barely treading water even with bogus assumptions and accounting.  Tightening credit will also have a negative effect on the banking system with razor thin margins and even more so in the derivatives complex.  Higher rates on their own will create margin calls, not to mention investors scrambling for the door in fear of even more rate hikes.  Panic begets panic in other words.

The way I see it, there is a very real probability the Fed not only does not raise rates in September, a very real chance exists for QE4 to be announced and implemented in a panic.  It should be added that the possibility of forced U.S. Treasury sales by China is a distinct possibility.  They may be forced to do this to shore up their panicky markets.  Who will be the buyer?  Yes of course, the Fed and ONLY the Fed!  It is my belief the Fed is about to be tested beyond breaking not only as lender of last resort but also “buyer of only resort” when it comes to the Treasury market.  Liquidity is already quite tight world wide, can the Fed really exacerbate the situation by raising rates?  Is any economy anywhere in the world strong enough to bare higher rates?  Any financial system solid enough?  I DARE THEM to raise rates …I bet they will instead be forced to do the opposite and pump unprecedented new liquidity!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome!