I titled this piece “The ULTIMATE Collateral” for several reasons. First, I would like to copy and paste the definition of the word “ultimate” from Dictionary.com so that you have the definition handy:
ul·ti·mate /ˈʌltəmɪt/ [uhl-tuh-mit]
1. last; furthest or farthest; ending a process or series: the ultimate point in a journey; the ultimate style in hats.
2. maximum; decisive; conclusive: the ultimate authority; the ultimate weapon.
3. highest; not subsidiary: ultimate goal in life.
4. basic; fundamental; representing a limit beyond which further progress, as in investigation or analysis, is impossible: the ultimate particle; ultimate principles.
5. final; total: the ultimate consequences; the ultimate cost of a project.
Many may think that the word “best” is akin to “ultimate”, kinda sorta but not really, in any case the above is right out of the dictionary. The rest of my title is “collateral” which should be self explanatory but, it really is not. I will try to explain as I go.
OK, we live in a system of credit, of fractional reserve banking, of using collateral to leverage growth. Everything from soup to nuts financially and economically has leverage attached to it or debt against it and as you know, THIS has become and is the problem. We have reached the end of the road as evidenced by what is termed “debt saturation”. But there is also another way to look at this “debt saturation” which until recently was never even considered a potential problem. This flip side is the fact that the world in its entirety is running out of collateral.
We can see this particularly in Spain and Greece where the banks are running out of collateral with which to deposit at the ECB to receive bailout loans. If you think about it, THIS very same phenomenon is occurring in other areas, real estate for example. It not that there is not “enough” of it, it is that there is not enough equity left or pieces left that have not already been levered or borrowed against. I wanted to point this “shortage of collateral” out because it truly affects everything from the stock and bond markets to the worlds’ economies.
Now, back to the title. All you need to do is listen to none other than Alan Greenspan himself and you will understand that Gold, is “the ultimate collateral.” Yes, Gold is the “ultimate collateral” because it is the “ultimate SETTLEMENT!” When Gold is used to settle a debt, the debt is truly extinguished in finality rather than paid off with say, Dollars which are merely further “promises to pay.” The “settlement” aspect of Gold is for another written piece but it is very important that you understand this before I go further regarding its use as collateral.
Pretty much EVERYTHING on the planet is already “borrowed against”, in some cases, assets have been borrowed (or lent 5,10, even a hundred times over) against and equity no longer exists. Think, a home with a market value of $300,000 with first and second mortgages totaling $500,000. Or a business that has borrowed more than its total assets and now, even governments themselves. Japan for example has sovereign debt equal to over 200% of their GDP.
To make a long story short and get to the point, can you guess what “asset” has the least amount of private debt against it? Correct, Gold and Silver. Do you know why? Yes, correct again, because until a month ago they were NOT even eligible to borrow against in the U.S and at a rate of only 50% overseas. My point? Very little debt has been used against this collateral…by individuals or the private sector.
But…there is a sector that has not on only levered Gold, they have done so in such a fashion as can be called fraud. This is as you all know the ETF’s, futures contracts, pools and paper receipts etc… We knew this on our own but fortunately we received confirmation when Jeff Christian explained how the “cash” market was in fact not really “cash”, the LBMA according to him has only one ounce for every 100 ounces sold. So in the Gold market, we don’t have a “levered public”, we have a public that has been scammed and doesn’t really own what they think they do…old news. The latest Gold Ponzi scam:
Gold Fund’s Collapse Rattles Poland
The “ultimate collateral” that I wanted to write about is the fact that central banks and treasuries will soon in my opinion, collectively figure out that (they already have and already know this) the one thing that they have left (for those who have not encumbered it’s ownership), is their Gold.
Now I ask you, if, you were a central bank/treasury with Gold in your vault and you had already levered yourself to the gills, would you maybe be looking at your Gold as “the family jewels”? If you could “mark up” your Gold 10 fold or 100 fold or whatever amount and “fix” your financial follies and blunders with the stroke of a pen…would you? The thing is, everybody is in the same boat, everyone is overlevered and looking for a way out. “Collateral” and “ability” to lever up further are in very short supply which truly leaves THE only way out (other than outright printing which will not work and lead to this anyway) is for central bankers and treasuries to “magically” make their Gold worth more.
I have been saying this for quite some time now, it is not crazy, it is not illegal, it is not even a new concept. THIS “way out” has been used over the centuries and in fact was even used by FDR (of course AFTER he called in all the private Gold) back in 1933 where with the stroke of a pen “marked up” the price of an ounce of Gold from $20 to $35. You see, Gold reserves truly are “the family jewels.” The final solution or ultimate collateral, however you’d like to look at it. What you absolutely need to realize is that governments, collectively, look at Gold in this manner. Once the “decision” is made to mark up the price, it will be done and afterwards, slowly but surely we will again watch a system heal itself.
Think about the mindset after the Great Depression, debt was spurned, prudence and frugality prevailed. The system will again “lever itself” to insanity during our great grandchildren’s lifetimes and the cycle will peak again as it did back in 2007. This is THE only way out and probably most palatable to all involved. It will entail real pain and the wiping clean of $ Trillions of paper balances but it will allow the system to go forward with a money, currency, that the populous can have a confidence in. The biggest loser unfortunately will be the United States as we will no longer be able to produce the reserve currency and trade it for real goods without really paying for them.
This “mark up” that I am speaking of is THE last true option available and one that doesn’t “cost” governments anything. It is like they are “magically” getting something for nothing which we all know is their favorite modus operandi. “Tapping” the ultimate collateral (the family jewels) is not something that governments (especially the U.S.) would like to do because it is an admission of failure, BUT, it is THE only option left as everything else is already mortgaged to the hilt. This move by the way kills another bird with the same stone, the public will have new currencies that they can believe in after they get over being pissed about losing all of their paper balances due to the “mark up” (mark down of paper).
There will be little to no warning that this is about to happen, but rest assured, it always has happened and is happening again!
It seems to me the future of what you predict in this column depends greatly on whether the U.S. actually has the gold it claims to and that it be unencumbered. It has always seemed to me this is highly unlikely or an audit would have been accepted by the fed without fighting it like a rabid skunk. Now if it ain’t there, in whole or in part, I can’t see this playing out as you postulate. (Your column is a daily read for me.) Sneed
The “reset” that I speak about will be global. In other words some currencies will have bigger “resets” than others. If we don’t have the metal (which I believe we do not), all hell will break loose and the reset may be 100 to 1 instead of say 10 to 1. All speculation, but the “reset” part WILL come, just a matter of time. The current audits are being done I believe because foreigners have demanded it, this audit is of NY Fed Gold, not Ft. Knox, West Point etc… ie. it is custodial Gold that is being audited.
If gold is officially elevated in price by Governments would silver then follow in this price hike?
Probably much more so in my opinion. Silver is CHEAP right now in relation to Gold historically.
Thank you so much for your kind answer.