If you want an extremely graphic illustration of what is of REAL importance to the powers that be in our political and financial world at present, this week has given you one. The food riots in so called third world countries have been going on for much of this year. Up until very recently, they have escaped much of the mainstream press, especially in the English-speaking world. But no longer. Food prices have exploded upward in the US and the rest of the "developed" world, to the extent that cereal grains, notably rice, are being swept off supermarket shelves. The stores themselves are now rationing the amount that can be bought and there is even talk of a government-imposted rationing system for grains in the US.
This is NOT a supply problem, harvests this year have hit record levels. It is exclusively a MONETARY problem - the latest and most potentially damaging (to the powers that be) manifestation of the credit squeeze. More important, it is a direct result of the desperate government and central bank actions which have been and are being taken to meet that squeeze. If the western politicians are not aware of that fact, the western central bankers and financial potentates are. No matter. If the choice has to be made between a famine and a financial collapse, their actions speak loud and clear. A famine it must be.
Five weeks ago, with Gold poised just above the $US 1000 level for the first time ever, the GLOBAL money and banking system came closer to absolute implosion than it has at any time since the beginning of the fiat money era in 1971-73. To meet this crisis, the Fed stepped in and threw away the rule book. It brokered the "takeover" of Bear Stearns by JP Morgan and it let it be known in no uncertain terms that its "discount window" stood wide open to accept any type of toxic debt paper in return for Treasuries. Since this action was taken, the central banks of Britain and Australia have taken very similar steps. So has Canada, which in addition abruptly cut its controlling interest rates by 0.50 percent over the past week.
What has happened, in effect, is that the central banks (and Treasuries) of these nations (and many others) have stepped in to "nationalise" their entire financial systems. They have bailed out the tottering banks by taking their toxic debt paper onto their own books. This action has caused the "lull" which The Privateer analysed in our Late March 2008 issue (#600 - published on March 30). It has, to an extent, reliquefied the system. The cost has been the acceptance of risk deemed utterly unacceptable by the private financial system by the government. And, of course, the ultimate risk takers involved in all this are the long suffering productive taxpayers of the nations which have taken this course of action.
In "normal" times, that is in times when the viability of more and more of the debt paper churned out by the credit money system was not in question, this increased liquidity would not be a problem. It would flow, as it has for more than two decades, into the markets for paper (financial) assets. Today, that is NOT happening. The standing of more and more of the paper in this system has been dealt a death blow. The very fact that almost nothing in the way of debt paper which does not have an explicit or implied government "guarantee" can be sold is ample proof of this.
But the new "purchasing power", so necessary to prevent a systemic meltdown, has to go somewhere. And it has. It has gone into REAL goods. In this case, the most basic and fundamental of all REAL goods. It has, literally, gone into FOOD.
It has not, of course, gone into Gold. Just the opposite. As you know, Gold was sold off heavily on April 23-24 this week and ended the week below the $US 900 level for only the second time since it first breached that level back in January. The first time was during Gold's first precipitous descent from $US 1000 in the wake of the Bear Stearns bailout of mid March.
At least it has not gone into paper Gold. In the world of physical Gold, demand still outsrips supply as it has done every year for more than two decades. But "institutional" selling on the futures markets, by the same institutions which have now been "nationalised" by the Fed absorbing their toxic sludge", proceeds apace. In more recent times, these institutions have been augmented by the precious metals "Exchange Traded Funds" (ETFs). These funds have taken over from the Gold mining companies which held the Gold price down for years by selling their production forward. This week, the ETFs' reported holdings of Gold (and Silver) were down substantially.
In the US, "liquidity" is still being produced and taken up. With the interest rates set by the Fed now 2 percent below the official level of price inflation (and 9-11 percent below the REAL level), the "cost of money" is much better than being non-existent. REAL interest rates are negative in the US to an unprecedented extent. But as "cheap" as this new money now is, it is still not flowing into financial assets and still not "unfreezing" the credit system. It is going into REAL goods. It is NOT going into REAL money. Not yet anyway.
The reason for this is as simple as it is unchanging. The only viable money, and therefore the only foundation for a viable financial and banking system, is a SOUND money. "Money" produced at the whim of government and backed by nothing is inherently unsound. The entire global financial system which is now unravelling is based on this type of "money". Sound money, historically proven over millenia, consists of physical Gold coinage. The transition back to this form of money is inevitable. But what is equally inevitable is that those who derive their wealth and power from being able to conjure up money out of thin air will fight this transition to their last breath.
That is what they are now doing. The irony is that with every new distortion of the market and every new "rule" they pass, they bring the demise of THEIR system closer. The problem is that the interim period, the one we are now going through, is always tough to take.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in two large "spurts" since then, the most recent taking it all the way down below the $US 885 level. Two weeks ago, Gold had recovered about half of its sell-off. Then came the second big sell-off, which began with the $US 27 fall on April 18, and now we are back below the $US 900 level again.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March. But then came the big Gold sell-off - in two stages - the second of which has yet to find a bottom.
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