Where We Are At In the Global Precious Metals Markets - A Framework

One has to see the big picture here.  I have found Jesse wise and smart.

The world is watching.  As Jesse points out, change is going to come.

From Jesse's Cafe:

The general hypothesis I have put forward over a period of time at this café is that with the spike in the price of gold up to $1900, the central banks of the West became greatly concerned, and opted for a lower price, and a more orderly rise.  And so the price of gold was smacked down into a trading range between $1540 and $1780 through the various price and market operations of some central and bullion banks in what we can think of as a gold pool.

As you may recall, the great sea change was that central banks turned from being net sellers to net buyers of gold, slowly over a ten year period from 2000-2010 approximately.  This change of policy was not uniform, but driven largely from the emerging and re-emerging nations. It ought not to surprise us. No fiat currency has survived for long in historical terms, and even fewer as the world's reserve currency, unless backed by an unassailable empire. They will fall to Triffin's Dilemma, and the decay of power to self-serving and short-sighted corruption.  

Forces similar to those that are working against the EU monetary union, without a comprehensive political union, are working against the dollar global reserve currency, on a much larger and slower paced scale.  This is why a global currency issued and controlled by one central entity tends to presume a one world governance, or at least a cohesive governance of a rather large piece of it.  It is not incidental to their financial goals.

Apparently the people of Asia for the most part did not agree with the Western economists and brokers that gold was undesirable, for whatever reasons they hold, with a strong basis in human history I should add.  Let's call it a difference of opinion amongst 'peers.'

In a very real sense we should remember that gold is gold, and the price of gold is more like a currency exchange rate than the price of a commodity.  And so one can think of this entire scenario as a major defense of the dollar at some ideal exchange rate to gold, in much the same manner that the Bank of England sought to defend a particular valuation of the pound.

So here we are today, with gold at a level somewhat below $1250 and silver at $20.  And the Comex deliverable gold is at record lows, and indications, albeit somewhat difficult to obtain, of continuing strains for producers (e.g. miners) to continue adding to supply, in the face of a shrinking discretionary market for physical gold (scrap, ETFs, exchanges).  And those who are managing the floats in the market, the unallocated, forward sold, and rehypothecated, are fundamentally shitting their pants, and seek to sit in it with smiling faces lest they give their vulnerable positions away.

What is driving this current dynamic is what is called the 'currency war,' which is shorthand for a difference of opinion amongst the world powers over the existing global currency trade regime, and the trustworthiness of the financial system that supports it.

China, Russia, Brazil, Venezuela et al. have lined up their interests against the Anglo-American banking cartel which rides the wave of dollar hegemony.   

If you think about this a bit, how would you feel if China's yuan was the world's currency, in which your country held its savings, and with which it paid for important and useful things like oil.  And what if China decided it could print as many yuan as it liked for its own purposes, thank you very much, and distributed them as they wished to its favorite banks and friends.  You would not like it one bit, it would make you rather uneasy, especially if the Chinese mouthpieces in academia started talking about trillion yuan platinum coins to resolve their own internal political corruption.

So, the most likely outcome is a compromise, in which a basket of currencies and a commodity or two like gold, are bundled together into an artificial currency for world trade.  This way no one country, or group of countries, held the 'exorbitant privilege' of owning the world's currency.  

Quite to the point, I think much of what we are seeing now is the 'negotiation stage' of this process.  It is not so much a question of outcome, but rather, of price.  What is to be included and at what valuation to the various world currencies.  I would be stunned if there was a return to an actual gold standard.  I would prefer to see the price of gold float freely without an official government valuation or the thinly disguised monkey shines of the Comex.  But such antics seem to be de rigueur in most financial markets as we have recently learned.

the existing power structure might choose to continue to fight this rather aggressively, since there are no such enjoyable privileges as exorbitant ones.  Especially if there is a partnership between the political and financial class to maintain their privilege for themselves and their favorite one percent of their constituents.  But they must also contend with their waning power, and significantly low approval and discontent at home.  Pushing questions of one's authority are ill-advised when you cannot be sure of the answer.

So here we are.  Those who think they know what will happen next probably have not given it sufficient thought.  I have a range of ten scenarios, in four major groupings, that are all fairly plausible.  There are some very large exogenous variables involved that no one can predict with much accuracy. 

Perhaps some day I will categorize them more cleanly and attempt to lay them out. But for now it is enough work to know what to look for. Watch the UK as I have said, as it may be a bellwether for various reasons of size and composition, and continental Europe, to see if they will accept the role of a 'patsy' for the Gold Pool.   And of course watch China and Russia, and the areas of tensions around them.

What happens next is that one way or the other change will come. Of that I am sure.

http://jessescrossroadscafe.blogspot.kr/2014/01/nav-premium-of-certain-precious-metal.html