- You heard it here first: Thursday was a great gold-buying opportunity
- The strange link between the global “super currency” and gold…
- … and only two suspects have the means, motive and opportunity
- Stocks rally but currencies gyrate
- Two crazy new updates on Bay Area real estate
- Trump vs. the Fed: Readers respond to Friday’s 5
Hope you followed our guidance and bought gold last Thursday.
We mentioned last Tuesday that gold had bounced off a crucial support level at $1,240 an ounce — zooming up past $1,250. We gently suggested that if you wanted to add to your stash and were looking for an attractive price, you might want to contact your favorite gold dealer Thursday morning after the Independence Day holiday.
Friday, gold closed at $1,254. As we write this morning, it’s up to $1,262. You’re welcome.
We have a few more things to say today about the price of gold — which, bear in mind, is a measure of confidence in the U.S. dollar.
We’re venturing deep into the weeds here… but once you come out the other side, you’ll be armed with knowledge currently limited to only a few hundred or so of the global power elite. Let’s get started…
First, we need to reintroduce you to SDRs, or “special drawing rights.”
SDRs are a super-currency issued by the International Monetary Fund. It’s circulated only among governments and central banks.
As our macroeconomic maven Jim Rickards has been telling us for years, the IMF has issued new SDRs on only three occasions since 1969 — all of them linked to a crisis of confidence in the dollar. He says it will do so again whenever the next big financial crisis hits… and you know it’s coming, because none of the problems that set off the Panic of 2008 have been fixed.
“A new system based on some hybrid of dollars, gold and SDRs is inevitable,” says Jim. “This new system could even include an encrypted distributed ledger or blockchain, and might revert to fixed exchange rates instead of floating.”
That’s a mind-bending concept by itself, but get this: Jim says there’s evidence this new system is already in place.
The analysis that follows is informed by a contact of Jim’s in Switzerland who, for our purposes, we’ll identify as D.H. Bauer.
Bauer undertook an effort to identify the price of gold denominated in SDRs. It’s not a figure you see very often compared with, say, the gold price denominated in dollars that we cite most every day in The 5. But there’s a dollar price of SDRs — right now one SDR is worth about $1.41 — so it’s not hard to extrapolate a gold price in SDRs.
Bauer did so, and plotted the figures on a chart going back to the start of 2015. It deserves careful study…
A few things about the chart…
- The solid top line is gold priced in dollars per ounce. The solid bottom line is gold priced in SDRs per ounce
- The vertical line marks Oct. 1, 2016 — the date the Chinese yuan was added to the “basket” of currencies the IMF uses to set the SDR’s value. Up to that time, only the dollar, euro, British pound and Japanese yen were included in the mix
- The dotted lines represent the overall trend in the gold price since the yuan was added to the SDR basket.
“Before China joined the SDR,” Jim elaborates, “both the dollar price of gold and the SDR price of gold were volatile. After China joined the SDR, the dollar price of gold continued to be volatile, but the SDR price of gold exhibited much less volatility, especially after the first few months.”
Indeed, since the start of 2017, gold priced in SDRs has traded in a very tight range between roughly 875–950.
“It takes a while to sink in,” Jim says. “Why did SDR/GLD go from normal volatility to no volatility overnight?
“The straight-line behavior of SDR/GLD after the Chinese yuan joined the SDR is impossible without some kind of intervention or manipulation,” Jim concludes.
“The odds of this happening randomly are infinitesimal.”
But how exactly would the powers that be pull off such a feat? How can SDRs be pegged to gold so tightly?
“To peg a cross-rate, in this case SDR/GLD,” Jim explains, “you need a large floating supply of both components or a printing press to make as much as you need. Basically you conduct open market operations.
“If the SDR price of gold falls below SDR900, you sell gold and buy SDRs (or the currency basket). If the SDR price of gold rises above SDR900, you buy gold and sell SDRs (or the currency basket). By monitoring markets and intervening continually with open market operations in gold and currencies, you can maintain the peg.
“There are only four parties in the world who could conduct such a manipulation: the U.S. Treasury, the European Central Bank (ECB), the Chinese State Administration of Foreign Exchange (SAFE) and the IMF itself. These are the only entities with enough gold and SDRs (or basket of currencies) to be able to conduct the open market operations needed to peg the price.”
So… who is it?
“We can eliminate the U.S. Treasury and ECB as suspects,” Jim tells us. “Both are relatively transparent about their total gold holdings, foreign exchange reserves and the SDR component of their reserves.” Any manipulations would show up in their official reports, but they don’t.
“That leaves SAFE and the IMF. Both are nontransparent. China has about 2,000 tons of gold (probably much more, but they don’t disclose the excess) and has been acquiring SDRs in secondary market trading in addition to official allocations to IMF members.
“The IMF has about 1,000 tons of gold and can print all the SDRs it wants with its SDR printing press. The IMF also makes loans and receives principal and interest in SDRs. The SDRs can be traded through the IMF’s secret trading desk.
“The gold can be traded secretly through the Bank for International Settlements (BIS), which traded Nazi gold in the Second World War. The BIS is super-secret and is controlled by the same people who control the IMF.”
We know this is a lot to wrap your mind around. What are the key takeaways?
In the near term, it appears the SDR-GLD trading range is a tool you can use to time your gold purchases. Last Tuesday, gold priced in SDRs approached the bottom of its range at 884.5 SDRs per ounce. “Gold rallied right on cue,” says Jim. There’s your explanation for the bounce off $1,240.
Jim is working on a tool you can use to trade alongside the Chinese and the IMF to bag short-term gold gains. Watch this space for updates.
Longer term, it will be impossible for the Chinese and the IMF to keep these manipulations going. “The Chinese peg of SDR900 is far too cheap to be sustainable given the scarce supply of gold and the growing supply of SDRs,” Jim says. “More to the point, the IMF will print trillions of SDRs in the next global financial crisis, which will prove highly inflationary.”
But that’s OK from Beijing’s perspective. For them, it’s all about “de-dollarization” — a keen desire to get out from under Washington’s thumb. The Chinese (and the Russians) are leading the way in the global trend of nations trading with each other using local currencies instead of the dollar. The gold-SDR link is the next logical step in that plan.
[Ed. note: Jim’s connections in Washington have just tipped him off to a “secret” bill making its way through Congress — one that’s serving up a huge trade opportunity.
He’ll tell you more about it in a short audio message at this link. We suggest you listen to it now because the window of opportunity could slam shut as early as Wednesday.]
The on-again, off-again trade war jitters are off again.
Well, that’s the mainstream explanation for the Dow jumping 250 points on the day. At 24,700 the Dow is its highest in three weeks. Blue chips are rallying harder than small caps, but the major indexes are up across the board.
Currencies are gyrating a bit on the news that British Prime Minister Theresa May’s government is falling apart. Foreign minister Boris Johnson resigned this morning because he doesn’t like the direction that “Brexit” talks with the European Union are going — he’s a pro-Brexit hard-liner. The pound is falling off a small cliff, from $1.335 to $1.324 in the space of two hours.
Before we get to the mailbag, a brief update on the nutty state of Bay Area real estate.
First, a report from Paragon Real Estate Group says the median home price in San Francisco has shot up $205,000 in just the last six months… to $1.6 million. (Best quip comes from a submitter at Fark: “Although people there can still pick up a midsized Amana refrigerator box in Ghirardelli Square for around $400,000.”)
Meanwhile in Silicon Valley, a one-acre vacant lot in Palo Alto is on the market for $15 million.
“Location! Location! Location!” says the listing on Redfin
The upside? It’s only minutes away from the headquarters of Google and Tesla — among others. The downside? “The property’s future owners would not only need to shell out the $15 million for the property, but likely millions more to build on top of it,” Business Insider points out.
“Visualize an Exquisite Villa with Vineyard,” says the Redfin listing. “Plus build a detached Guest House for Family or Au Pair. Plus Detached garage with possible basements.”
You get the sense they’re trying a little too hard?
“Also Permitted & Conditional Permitted usages other than residential,” they point out.
Hmmm… The lot’s been on the market since March 2014. Is the asking price too steep, or are California building regulations so onerous no one wants to bother?
“OK, so the Fed just told Kudlow to piss upwind on rate hike speed, and that has me wondering how this will all pan out,” a reader writes after Friday’s 5.
“Tariffs, in my opinion, are stealth tax increases (as far as the people are concerned) that have no benefit other than fattening the government’s coffers.
“Those tariffs, if and when they are passed on to consumers, will cause price inflation, right? Does the Fed know (or even care) that not all inflation is created equally? Price inflation due to tariffs/taxes is not the same price inflation as caused by a hot economy and upward wage pressures. My concern is that the Fed will use tariff-based price inflation as an excuse to raise rates and tank the economy. Your thoughts?
“Here is another question. If the Fed is supposed to be independent and free from politics, why does it use the Fed minutes as essentially a political statement/tool? Perhaps we need to learn from the Chinese and end the Fed as a supposed independent entity.”
The 5: We’d be happy if the Fed were ended altogether. But that takes us out of the ranks of the Very Serious People who populate Washington and Wall Street.
You raise an interesting proposition: Would the Fed purposely undermine Trump by jacking up rates in response to price increases, even if those price increases are attributable mostly to tariffs?
“I didn’t see where, in Kudlow’s remarks that you quoted, he was actually dictating to the Fed what they should do,” another reader points out.
“It was just the president’s top economic adviser, who presumably should know a thing or two about economics in general and monetary policy in particular, giving the Fed some advice.
“Now that advice might come with the veiled threat that the Fed will be held accountable for the results of its actions. Kudlow could be suggesting that, since he understands the potential impacts of the Fed’s tightening policy on the U.S. economy, his boss, the president, understands too. And everyone knows that the current president is no Pappy Bush; he’s not the type of guy to just lay down and take the fall for someone else’s screw-ups.
“Bigger picture, our whole separation of monetary policy from politics through an ‘independent’ Fed is bizarre. It’s an admission by incompetent and/or corrupt politicians that they can’t be trusted with the keys to the national cash register — which has a printing press inside.
“Thanks for The 5. Its brevity, content richness and impartiality are much needed in these times, making it must-reading for me each day.”
The 5: It’s been an interesting charade under Clinton, Bush 43 and Obama — the White House making a big point about not publicly saying what monetary policy should be.
The reality of the situation was spoken rather plainly by Arthur Burns — the hapless Fed chief who turned on the monetary spigots to help Richard Nixon win re-election in 1972, an act that set the stage for near-runaway inflation in the late ’70s.
Asked by a German reporter why he pursued such a reckless policy, Burns is said to have replied that a Fed chairman must do what the president wants or else “the central bank would lose its independence.” Heh…
But, picking up on the other reader’s suggestion, maybe it doesn’t work that way under Trump. The Deep State, after all, isn’t limited to just the “national security” and intelligence realms…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. While the world is distracted with trade wars, the midterm elections and Hillary running in 2020 (!)… Jim Rickards is following the fortunes of a “secret” bill making its way through Congress.
“I haven’t heard anyone talking about it, but I believe it’s a sure bet to pass and trigger a massive trading opportunity.”
Jim’s recorded a short audio message about it. Click here to listen.
