Sell gold because of Draghi? Bank President Mario Draghi has been promising to pursue inflation with a vengeance. He recently vowed to "do what we must to raise inflation as quickly as possible." Draghi's efforts, which have driven down the euro, have somehow been taken by Wall Street as a great opportunity to sell gold. That's ridiculous. – CNBC
Dominant Social Theme: Whatever's going on, no matter what … sell! Gold, that is.
Free-Market Analysis: One of Wall Street's fundamental memes is that no matter what is going on in the larger market, one should always be prepared to sell gold. Precious metals could devalue down to nearly nothing and still the cry would be raised on Wall Street to "sell."
This analysis, excerpted above, was written by Michael Pento, president and founder of Pento Portfolio Strategies. He may be "talking his book," but that doesn't necessarily make his points less valid. Pento has discovered yet another anomalous Wall Street rationale for selling gold, and he points it out with a good deal of indignation, calling it "ridiculous."
Yes, Michael Pento reminds us that when currencies are debased, precious metals presumably become more valuable. Because Draghi wants to create inflation (a state-of-affairs that helps bankers stimulate employment according to twisted central bank logic), institutional gold-holders would presumably be in a buying stance. But that is not the case, Pento informs us.
The primary driver for the price of gold "is the direction of the U.S. Dollar Index (DXY)," he reminds us. Professional investors involved in rebalancing will "glance at the DXY, and to hit the sell button on paper gold ETFs if it is up."
But the DXY is only giving you a snapshot of the dollar's value against other fiat currencies, including the euro, which is weighted at nearly 60 percent in the DXY. These days, based on Draghi's statements, the euro is falling and the dollar, therefore, is rising. If the dollar is rising, Wall Street is inclined to sell gold.
And this is how Draghi's intention to debase yet another fiat currency turns into a selling signal for precious metals. "Ridiculous," is indeed the correct word.
Michael Pento suggests that Wall Street money managers ought to look at the intrinsic value of the dollar rather than an index like the DXY. He states clearly that one ought to examine "the level of real interest rates, the rate of growth in the money supply and the fiscal health of the U.S. government.
When analyzing the dollar using those metrics, it becomes clear that the intrinsic value of the dollar is eroding and, therefore, should cause the dollar price of gold to increase regardless of what is going on with other fiat currencies.
Is the dollar worth holding? Pento reminds us that real interest rates after inflation (even government calculated inflation) are negative for the dollar. Holders of dollars are paying for the privilege.
Additionally, negative interest rates impel dollar holders to seek out more dollars and this demand in turn stimulates central bank money printing. Finally, US debt is out of control, making the dollar an ever more risky currency to hold.
He concludes that even though the DXY is "in the green," professional investors who sell gold on this signal are acting in a simplistic way. He also notes that Draghi's announcement should send EU citizens into a panic – though so far it hasn't.
Other places in the world are more comfortable with gold and silver. China and India contain a consuming public with a sustained demand for precious metals. In the West, however, official antagonism to gold has retarded the public's interest in the yellow metal and it has also caused a good deal of distrust when it comes to how gold is priced and traded.
This may be changing, finally. Reuters reports a move to make the London gold market more "transparent." The London Bullion Market Association (LBMA) issued a statement on Wednesday asserting a determination to make gold markets more transparent and liquid.
Reuters claims, "Financial market transparency has been a major focus for regulators after evidence of price manipulation in lending rates between banks with the LIBOR scandal in 2012." But we would suggest that the real reason for the sudden interest in transparency has to do with the gravity of the gold market migrating to Asia.
To counteract this trend, the LBMA is proposing an electronic gold-trading platform that will make trading more efficient and "transparent." As there are some "$5 trillion of gold trades estimated to be made over the counter in London," an electronic facility would certainly be significant.
Our take remains a cynical one, however. In the money profession, an institutional bias against precious metals is not likely to be reduced by an electronic facility. The forces arrayed against precious metals are enormous and involve the fabric of Western society itself. If London is moving to address some of the issues around gold trading, you can probably bet it is in order to reassert control over world markets.
The sociopolitical and economic bias against gold remains a fundamental and stubborn fact. Elite institutions, in our view, are ultimately going to make it a good deal more difficult to purchase gold and silver, especially the physical stuff, as the world's economy inevitably unwinds.
Prudent investors and savers who understand the reality of precious metals will continue to find holding precious metals to be an important part of a well-balanced portfolio. Even if acquiring and holding precious metals ultimately becomes more difficult – and it probably will sooner or later – the acquisition of yellow and silver metals should not be abandoned.
Paul Rosenberg carried an interesting article on the subject this week in his Free-man's Perspective entitled "Golden Disobedience." Author Sandy Sandfort relates in this article how his parents practiced determined civil disobedience when it came to FDR's decision to put people in jail for buying and holding gold.
Back on April 5, 1933, His Majesty, Franklin Delano Roosevelt (FDR), had a pen and a telephone. So he issued Executive Order 6102, which made it a federal crime for Americans to own or trade gold anywhere in the world. There were some minor exceptions for some jewelry, industrial uses, collectors' coins, and dental gold, but the vast majority of the gold had to be turned in. My father instantly understood what was going on and he didn't like it. "They're going to devalue the dollar!" he predicted.
… My parents made the conscious decision to become outlaws. At every possible opportunity for the next three weeks (and substantially longer), my parents followed Gresham's law ("Bad money drives out good."), not federal law. They spent paper and collected gold …
Of course, we are not urging readers to break the law. However, Sandy Sandfort presents a kind of "human action" (via his parents) we often discuss. After all, history has its turbulent times, and nation-states can easily drift toward authoritarian abuse.
A corollary point: At some point, in some epochs, civil disobedience becomes a matter of survival rather than an anti-social trait. Gold and silver have helped preserve wealth and safety for eons. We have already mentioned one mining company that retains its gold "in the ground." You can read about it here.
NOTE: Today, we wish to thank all our readers for your continued support and wish all of our southern neighbors a very Happy Thanksgiving. We do indeed all have much to be thankful for, today and every day.