Where does one begin? Firstly quantitative easing (newspeak for ‘creating money out of thin air’) has become a global reality. It started in the United Kingdom on March 13th, but went global three days later through the IMF joining in and issuing of their basked of currencies of so called Special Drawing Rights. But it gets better: Bernanke told the Senate Banking Committee at the 24th of February that there is “a reasonable prospect” of recovery beginning next year if the president, Congress, and Fed succeed in restoring stability. Wait - did I hear that right? People who live long die old? Well gee wiz! Who would have thought…

It soon became clear however, that Helicoper Ben would not take long to take bold new action in unfreezing the credit market by announcing a whole new round of $US1.25 Trillion in quantitative easing at the 18th of March and thereby ushering in the first steps in the long feared destruction of the US Dollar sending Gold and the Euro soaring. The Chinese in the meanwhile keep raising their voice, worried about an irresponsible US inflating their US bond holdings towards worthlessness while at the same time backing Russia in calls to strip the US Dollar from its global reserve currency status. A notion that will next week be officially proposed by the U.N. Commission of Experts on International Financial Reform.

Not willing to wait for such a move central banks across the world have already turned into net buyers of Gold to the tune of 1.1 million ounces in January 2009. And by the way: why do we have to hear about the Gold manpulation in the Russian media? How else is one to explain negative gold lease rates? Add to that the fact of Silver being in backwardation since January 21st and you get an appreciation why holding anything but physical bullion in your hot sweaty hands becomes an increasingly risky proposition. Zimbabwe in the meantime is two steps ahead of the US now and has stoped beating up their currecny by finaly declaring their Dollar to be dead after 231 milion percent of hyperinflation. How long until the Fed realizes that you simply can not reinflate a burst bubble?

Where does one begin? Firstly quantitative easing (newspeak for ‘creating money out of thin air’) has become a global reality. It started in the United Kingdom on March 13th, but went global three days later through the IMF joining in and issuing of their basked of currencies of so called Special Drawing Rights. But it gets better: Bernanke told the Senate Banking Committee at the 24th of February that there is “a reasonable prospect” of recovery beginning next year if the president, Congress, and Fed succeed in restoring stability. Wait - did I hear that right? People who live long die old? Well gee wiz! Who would have thought…

It soon became clear however, that Helicopter Ben would not take long to take bold new action in unfreezing the credit market by announcing a whole new round of $US1.25 Trillion in quantitative easing at the 18th of March and thereby ushering in the first steps in the long feared destruction of the US Dollar sending Gold and the Euro soaring. The Chinese in the meanwhile keep raising their voice, worried about an irresponsible US inflating their US bond holdings towards worthlessness while at the same time backing Russia in calls to strip the US Dollar from its global reserve currency status. A notion that will next week be officially proposed by the U.N. Commission of Experts on International Financial Reform.

Not willing to wait for such a move central banks across the world have already turned into net buyers of Gold to the tune of 1.1 million ounces in January 2009. And by the way: why do we have to hear about the Gold manipulation in the Russian media? How else is one to explain negative gold lease rates? Add to that the fact of Silver being in backwardation since January 21st and you get an appreciation why holding anything but physical bullion in your hot sweaty hands becomes an increasingly risky proposition. Zimbabwe in the meantime is two steps ahead of the US now and has stopped beating up their currency by finally declaring their Dollar to be dead after 231 million percent of hyperinflation. How long until the Fed realizes that you simply can not reinflate a burst bubble?

For understanding everything that is wrong about how the government is handling the economic crisis in one handy, neat little package on need go no further than to watch this video. Further distress is surely on the way.

May you live in interesting times. Just as we thought we could stop holding our collective breath as the subprime tsunami starts to recedes, new specters appear on the horizon and you probably have not heard of them - yet. Meet subprime mortgage’s ugly cousins: Option ARM and Alt A mortgages. ARM stands for Adjustable Rate Mortgage  and guess what: the rates are not about to go down. As Whitney Tilson explains on 60 minutes using data collected by Credit Swiss, this will cause default rates to sky rocket as even the relatively low teaser rates are already too much for cash strapped home owners.

As far back in September 2006 Business Week called the Option ARMs nightmare mortgages and elaborated as following:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance. […] The option ARM is “like the neutron bomb,” says George McCarthy, a housing economist at New York’s Ford Foundation. “It’s going to kill all the people but leave the houses standing.”

Two years later to the day Bloomberg picked up on the Alt-A menace:

Homeowners lured by low introductory rates to Alt-A mortgages, which typically require little or no proof of a borrower’s income, may fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods, according to RealtyTrac Inc., an Irvine, California-based foreclosure data provider.

In other news: eBay premiums of American Gold Eagles and American Buffalo 1 ounce gold coins continue to rise and now stand at just under 20% over spot as of last week. This comes as little surprise since worried investors increasingly prefer to hold gold in hand and gold coin shortages show no signs of abating. Throw in the $23 Trillion of troubled assets in eastern Europe and you have a formula for disaster.

Personally I am starting to get really worried when hedge funds are picking up on gold and Warren Buffet’s Berkshire Hathaway is assessed with a 13% chance of going bankrupt in the next 5 years. Interesting times these are indeed.

(yellow = percent premium paid on eBay, blue = COMEX spot price weekly average, red = eBay price weekly average)

In the meantime feel free to check out these great sites:

• US Coin facts
• About Coins
• Coin Update
• Coin Collecting News
• Coin Collector’s Blog
• Numismaster
• eBay Coins
  
• Amazon: Coin Books

Today I once again found the time to update the charts comparing spot prices of gold as well as silver with investment grade American gold eagles, gold buffaloes and silver eagles as sold on eBay. In a nutshell: premiums remain high. However, there are perceivable differences between gold and silver premiums. While silver premiums continue to recede and investors are now ‘only’ willing to pay as much as 33.8% over spot, gold premiums have actually seen an increase of 50% from 10% over spot on February 8th to 15% over spot today.

(yellow = percent premium paid on eBay, blue = COMEX spot price weekly average, red = eBay price weekly average)

These premiums can be understood as thermometers of trust as well as manipulation. On the one hand, investors, eager to posses physical gold or silver, are flocking to eBay in order to convert untrusted cash into trusted ‘can-bury-in-the-yard-and-trade-for-bag-of-potatoes’-physical bullion. This represents the perceived danger posed by counter party risk when owning paper gold/silver - meaning future contracts - known as ‘GLD‘ and ‘SLV‘ respectively in combination with an expected rise of inflation.

Gold as well as silver prices again rose sharply in the past 30 days. Silver however shot up 20% while gold saw a respectable yet comparatively moderate 10% rise in prices. Add to that, that silver manipulation appears to now be concentrated in a single bank and a drop in premiums for silver bullion becomes understandable. Silver prices are moving where they should be faster than do gold prices.

There are however two additional bits of information that are of particular interest to me. For one, the price of gold has recently decoupled from EUR/USD and has since then been rising independently from currency fluctuations. Additionally, gold is honing in on the long term Gold/Dow ratio of 1/1 or 1/2 which according to Mark O’Byrne means that:

Given the degree of money printing and credit creation we believe that soon deflation will abate and will be superceded by virulent inflationary pressures. This could lead to a Dow/Gold ratio of 1:1 or 2:1 at higher levels ( the DJIA at 5000 and gold at $5000/oz or the DJIA at 6000 and gold at $3,000/oz).

Hear hear. A major concern this week continues to be eastern European banks who apparently require a mega bailout. In light of this situation and if Der Spiegel is correct, the German finance ministry is drafting rescue plans to prevent default on the edges of the eurozone that is feared to lead to a full-blown collapse of Europe’s monetary system in a chain reaction of debt defaults.

All of this is of course dwarfed by the US situation, considering that depending on how you slice it, US obligations of $US65 Trillion exceed the entire world GDP and that recently four banks have gone bust in a single day.

What is one to do? Not having had the experience of a Weimar Republic style hyperinflation the US may very well proceed to become a nation of dirt poor Trillionairs. The EU on the other hand with an inflation shocked Germay may very well opt for a series of defaults and takeovers. The former would thereby socialize the effects and wipe out all savings, pensions and debt thus creating a blank slate. The latter would see a severe cash squeeze with selected individuals being left with nothing while a few lucky winners will have hit the jackpot of having chosen the right bank or insurance company.

Time for some best practice sharing:

• Protect Your Wealth from Collapsing Monetary Systems
• The Great Depression II Survival Strategies
• Dmitry Orlov on Social Collapse Best Practice at the Long Now Foundation
• Dmitry Orlov’s book Reinventing Collapse: The Soviet Example and American Prospects
• Invest in Gold and Silver coins

There is something that is not only new, but something that for the most part has been overlooked by the majority of the news outlets that at least I use to frequent. When GCC leaders concluded their 29th annual summit meeting in Muscat, Oman at the 31st of Dec 2008 with a final approval for the creation of a single currency for the six-nation economic bloc the I certainly did not hear about. Meet the Khaleeji. It is the upcoming common currency of the Gulf Cooperation Council (GCC) scheduled to go live in 2010. In light of the worsening financial crisis earlier worries of a delay until 2015 have apparently been dispelled.

That I have not heard about the Khaleeji until about a week go is surprising to me for two reasons. Firstly, the common currency for the GCC has apparently been mulled since at least 2002 by the IMF giving more than enough time for the word to spread. Secondly - and here is when it becomes interesting: speculation is about for the GCC currency to be backed by gold. And why shouldn’t it? Not only has the introduction of a then still called ‘Islamic Gold Dinar‘ as a global currecny been suggested since early 2001. No, in addition a group of Saudi businessmen has purchased gold to the tune of $3.5 Billion in an off market transaction in November 2008. Add to that impressions of the world renowned Dubai Gold Souk and I would be very surprised if gold does not at least become a major component in the basket of goods lending punch to the new currency.

But there is more. The Arabic word ‘khaleeji’ (خليجي) stands for ‘of the gulf’ which would explain the ‘G’ symbol with the by now customary central bar. I however favor another explanation: just as the ‘$’ symbol once so aptly stood for ‘unit of silver‘ why can’t the Khaleeji be understood as a ‘unit of gold’? The most convincing argument for such an interpretation is that having a gold/silver backed currency is considered the final leg to remove Riba (ربا ‘interest’ or ‘usury’) from the financial system, which is forbidden arcording to Islamic economic jurisprudence.

Add to the mix that Martin Wolf, chief economics commentator for The Financial Times believes that the U.S. is simply too “politically frightened” to admit truth about the banks, that the US Dollar is effectively backed by China, whose government is likely to ask freshly minted secretary of state Hilary Clinton for guarantees that the U.S. will not engage in “reckless policies” threatening to erode its $US682 billion holdings of U.S. government debt and the collapse of the U.S. Bond market practically underway and you have a perfect storm in the making.

So, what else is new? Well, the IMF keeps insisting that it will sell its 400+ tons of ‘gold’. Surely China won’t mind. Dr. Doom & the Mr. Black Swan in the meanwhile continue to predict the worst while being prodded for stock picks on CNBC. And before I forget: precious metal prices are still believed to be manipulated. Reminds me, below for your information the latest analysis of real precious metal prices paid on eBay for 1 ounce U.S. silver eagles as well as 1 ounce gold eagle and buffalo bullion coins:

(yellow = percent premium paid on eBay, blue = COMEX spot price weekly average, red = eBay price weekly average)

Specifically, the very figures of the Commodities Futures Trading Commission (CFTC) showed that two US banks had increased their silver short positions from 6,199 contracts in July 2008 to 33,805 contracts in August 2008 as pointed out by Ted Butler in one of his commentaries. Since then, far from returning to normal levels, the manipulative short positions only grew more concentrated as pointed out by Gene Arensberg in early December last year. Past experience in similar cases and vested interests to maintain the status quo unfortunately left little hope for a serious investigation to take place.

The last word on the matter was yet to be spoken however: In what can only be described as a surprise U-turn the Wall Street Journal reported on September 25 that the CFTC did indeed now move ahead with an investigation after asserting only a few weeks earlier in May 2008 that every claim of manipulation in the silver market was either “implausible” or “tenuous”. There are still signs and wonders. Evidence for ongoing silver market manipulation in the meanwhile continued to grow and calls to reveal CFTC conclusions in the matter became ever louder.

As I showed in my recent analysis of the real price of gold when I calculated the eBay premiums for one ounce gold eagles and buffaloes, a disconnect between paper gold and physical bullion can lead to a hefty increase in premiums of more than 25% as opposed to a more normal 5-7%. When it comes to a high value metal like gold these figures are indeed staggering.

In order to examine similar effects on the premium of 1 ounce silver american eagle bullion coins I used the same method and analyzed silver eagles sold on eBay from  early March 2008 until today and had some interesting results. After painstakingly cleaning up the data to remove items of primarily numismatic value - such as graded and proof coins - a massive 249′317 sold ounces (data available upon request) yielded the following picture and speaks volumes in regards to what kind of premiums buyers are willing to pay for real silver:

One can see that from what we can only assume to be pre manipulation premiums over COMEX spot of between 10 and 20% the premiums shot up to over 90%(!) over COMEX spot prices around the end of October 2008 when the Dow Jones Industrial  Average lost 25% of its value in a matter of days. These numbers become even more astonishing when one considers that the US mint recently revealed that despite it having doubled the output of generic silver eagles in 2008 to close to 20 million pieces compared to 2007 it still fell short of the huge demand for teh metal. This flight to safety by the masses willing to pay huge premiums can only be interpreted as support for market manipulation claims since the COMEX spot price of silver not only staid on its depressed levels but continued to fall well into November of 2008 before starting to recover in early December.

Only now have premiums come down again and receded to about 50% on top of spot - which is still much higher than what one would expect assuming the same market forces of supply and demand are at play for eBay and COMEX. In comparison to Gold premiums which almost quadrupled from about 7.5% in the first half of 2008 to a bit over 25% at the peak in early November 2008, the premiums on silver jumped a whooping 8 fold!

A bit of perspective seems to be in order. With a very real fear of hyperinflation in China and either that or bankruptcy for the US and Great Britain - the latter of which by the way just recently dropped interest rates to the lowest point in its 315 year banking history - one can not evade the question of how a return to sound money will effect the prices of both gold as well as silver.

Well - gold could take on the role of representing large denominations by either backing relevant notes or serving as metal for coinage and silver could do the same for smaller denominations. Rather straight forward - no? But not so fast there cowboy! As opposed to gold - of which almost all that has ever been pulled out of the ground over the course of history is still available today - silver has a far more pronounced double function of industrial as well as monetary metal.  As a result Ted Butler estimates that only about 2.5% of historically produced metal is still available today. At current prices that equates to about $1.65 of metal for every man,woman and child on the planet. Meaning that silver will have to appreciate markedly to serve as anything resembling pocket money and serve as small change once we return to sound money.

The fact that relevant legislation has been introduced not only in Indiana but New Hampshire as well makes these discussions far from academic.

Fresh on the heels of my recent commentary on the backwardation of gold in early December, rumors are spreading, that the International Monetary Fund will start to dump gold 1′000 tons at a time as early as Dec 10th in order to punish gold investors while propping up fiat currencies, potentially sending the price of gold to the mid US$400 range in a matter of weeks. Now that would hurt pretty bad now - or would it?

Probably not actually, because this would be the move China might have been waiting for to jump in and diversify out of their US$1.9 Trillion to increase its gold reserves. Doing so they would merely follow through on intentions predicted earlier when sources were quoted asserting that China wants to do this exact thing and in fact do so to the tune of 4′000 (!) tons. As huge as these moves appear at first glance, anyone can easily calculate that at current rates 4′000 tons of gold would represent a merer 5% of China’s vast reserves. So why would China not jump on this opportunity? Robert Mundell of ‘father of the Euro’ fame and winner of the Nobel price for Economics in 1999 certainly thinks it is a good idea and considering that he is an advisor to the Chinese government I would be surprised if he would not have made his feelings known to them at an opportune juncture.

Now throw in the fact that not only does one of the top managers of China Investment Corp, the country’s US$200 Billion sovereign wealth fund, reckons current dollar strength is temporary but that China is also not squeamish when it comes to deploying beggar thy neighbor policies as demonstrated in their reported intention to severely devalue the RMB in the short term to boost exports and the pieces should be starting to fall together. By the time the devaluation idea was applauded in China’s official foreign language news outlet, the deal seems unlikely to be all but done and sealed actually. Add to that China’s stated unwillingness to bail out western firms and the question arises what can China do with its wealth beside investing US$586 Billion very wisely over the next two years into domestist infrastructure projects? A moved mirrored by president elect Obama by the way.

In the face of these numbers, why would the Chinese not spend US$25 Billion for every 1′000 tons of gold the IMF is willing to part with? Beats me.

I took this piece of news as a trigger to update my attempt at calculating the real gold price of late August 2008.  Back then I demonstrated an increase of roughly 2/3 for the premium over spot of 1 oz Gold coins based on actual eBay data and came to the result that gold coins demanded a hefty 11.26% premium over spot. Having now repeated the calculation for US 1 oz gold bullion coins (Eagles and Buffalos) sold on eBay the premium has now roughly doubled again (see chart). 

But why would gold coins sell for 25% over the actual price of gold? For that one needs to understand two things: the price of gold and the nature of money.

The gold price - or spot price of gold - is determined by the sale price of so called future contracts at the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX) the world’s largest physical commodity futures exchange, located in New York City. Future contracts are a promise to deliver gold at a certain date in the future. And this is were it starts to get interesting: because most investors are content with owning the future contract - so called ‘paper gold’. The reason is convenience: instead of going through the hassle of taking delivery of physical bullion, having to worry about how to safely store the metal, and finally doing the whole process backwards again when wanting to sell, they own the contract. For this reason, the vast majority of these contracts are being perpetually rolled over into the next moth without ever being executed and the COMEX gets away with holding a mere fraction of actual bullion to settle the few contracts that are not being rolled over.

Now that the spot price is significantly below the price of actual bullion, a bunch of investors are bound to demand delivery and pocket the 25% difference minus a (relatively) small production cost of turning the 100 oz COMEX bars into 1 oz coins and this is precisely what is happening right now. No problem, right? All that will happen is that the COMEX will open its vaults and let the market balance this temporary imbalance and all is fine again. Well - not quite. Apparently the huge interest of central banks to make their currencies seem more valuable than they actually are, has led them to manipulating the price of gold downward and there is a growing concern that a lot of the promised paper gold is not backed up by physical bullion. Ouch!

Which leads us to the nature of money. Ask anyone on the street what money is and they will reply that money represents value. You will be surprised to learn however, that in fact the exact opposite is the case: money is debt. Meaning once all debt is repaid, there would be no money. There was a time when money was backed by gold and silver and anyone could go and get a fixed amount of bullion for their paper. This system however was continuously eroded and eventually abolished completely by Richard Nixon in 1971. Since then money is based on a fiat currency whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government’s order (fiat) that it must be accepted as a means of payment.

Do the pieces fall together yet? The ongoing financial crisis and continued incompetence to deal with it is putting the final nails in the coffin of the dollar fiat currency and are causing the chickens to come home to roost.