Paul
Joseph Goebbels was the Minister of Propaganda in Nazi Germany from 1933 to
1945. He once said that if you tell a big enough lie and keep repeating it,
people eventually come to believe it.
Today's
governments together with the mainstream media seems to have taken Goebbels'
comment to heart. They omit facts and distort the truth to suit their agenda,
while a completely different point of view is presented by highly qualified,
intelligent analysts through blogs, websites and Internet articles. This
article by Raul Ilargi Meijer gives an excellent overview of the
propaganda disseminated by the press today.
For
investors, it is up to each individual to carefully examine the arguments
from both sides and come to his or her own conclusion about what is reality
and what is propaganda. This knowledge will allow them to make the right
decisions and prosper, and avoid painful mistakes in the coming years.
In the
area of economics and finance, the manipulation, distortion and outright lies
should be obvious to anyone who cares to do even the slightest amount of
research outside of the normal channels. At the root of the coming economic
disaster is Keynesian economic philosophy of increasing debt implemented by
Western central banks. The experiment that started in 1933, and peaked in
1971 with the abandonment of gold convertibility, has gone into the
hyperbolic stage, with Japan being the poster child of an economic system
gone mad.
Once
the world's second-largest economy, with land in Tokyo selling by the square
inch and the Nikkei Index peaking at 38,957 in December 1989, today Japan has
the world's highest debt-to-GDP of about 230%, and the Nikkei is still down
about 55% after 25 years. David Stockman, former Assistant Treasury
Secretary, does an excellent job of summarizing Japan's gruesome statistics
in this article: 'The Keynesian End Game Crystalizes In Japan's
Monetary Madness'.
Japan
is the canary in the coalmine, and should be closely monitored by investors
all over the world, because the same thing is already happening in South
America, Europe and Asia. Even though the US appears to be in recovery
following the near collapse of the financial system in 2008, a closer
examination of the facts leads to a considerably different conclusion. Wall Street
was euphoric at the reported "5% growth in third quarter US GDP,"
and the DOW surpassed 18,000 on this news. John Williams, however, presents a
different, more accurate view, on his website.
Mike
Shedlock has written an article on how
GDP is distorted by the Bureau of Economic Analysis
Peter
Schiff also covers
the manipulation.
Apart
from examining statistics, a simple look at some of the obvious realities
brings the official numbers into question. When one considers that, while the
official unemployment rate is supposedly 5%, when you use the methodology
established in the late 1980s the real unemployment rate is approximately
23%. This is confirmed by the declining labour participation rate of 63%, the
lowest in thirty seven years. Real wages have seen no improvement, and are at
the lowest level in thirty six years. Food stamp usage is at a record high,
with nearly half the US population dependent on some form of government
handout. This reality means that recovery is an illusion (at best), or a lie
(at worst). Aldous Huxley, the writer and philosopher, said, "Facts do
not cease to exist because they are ignored." Jim Quinn quotes Huxley in
his article "Should You Believe What They Tell You or What
You See?," which provides an excellent explanation of the
many distortions and lies the mainstream media is asking us to believe.
Nowhere
is the propaganda and distortion of economic reality more pervasive than in
the negative media barrage against gold. The biased commentary, rife with
misrepresentations and purposeful omissions, is spun by the media almost on a
daily basis. No other asset class or investment category is subject to this
level of bias and misrepresentation. Anyone who cares to look outside of the
mainstream media propaganda will conclude that the drop in gold prices was
clearly an orchestrated event, first in 2011 with a one day drop of 7.2%, and
then in April 2013 for an 8.5% drop. In the early morning hours of January
6th, 2014, 12,000 gold contracts representing $1.5 billion of naked short
selling was forced onto the paper gold COMEX market. Without speculating
about who did it or why, it should be obvious that no trader would sell that
much gold into the market at one time, effectively minimizing their sales
proceeds. Dr. Paul Craig Roberts provides a detailed overview in "Rigged Gold Price Distorts Perception of
Economic Reality."
What
most observers miss is the connection between the paper COMEX markets and the
exchange-traded fund, GLD. Unless you have read the original 2005 Prospectus
and the Authorized Participant Agreement, it is impossible to understand how
GLD, and in fact all ETFs, work. ETFs are not like open-end mutual funds with
low management fees. They are designed as tracking vehicles that use assets
borrowed by Authorized Participants in exchange for ETF shares that are sold
to the public, while the Authorized Participants keep all the proceeds of
sale. It is not about earning management fees. This
article by David Ranson details some of the concerns with GLD.
When
the gold price declines due to orchestrated naked shorting on the COMEX,
redemption requests increase at the GLD. The Authorized Participants, likely
the same entities that naked shorted gold on the COMEX exchange, redeem ETF
shares for the borrowed physical gold. Either the gold is returned to the
central banks from which it was borrowed, or it is sold to China via their
sovereign wealth fund after being refined in Switzerland.
When
China eventually announces that it now holds 5,000 to 6,000 tonnes of gold,
the quants among us will have to figure out where that gold came from,
because mainstream supply/demand statistics have already accounted for all
the gold. What mainstream statistics do not account for is leased gold that,
by some estimates, has averaged over 1,500 tonnes per year, when mine supply
has averaged 2,800 tonnes per year. In addition, the US Geological Survey
shows annual exports of about 700 tonnes over mine supply. This amount of
gold can only come from aboveground central bank holdings. When China makes
their announcement it will seriously undermine the credibility of Western
central banks, and bring into question how much gold, and how many gold IOUs,
they hold. In 2002 Frank Veneroso estimated that central banks only held
about 16,000 tonnes vs the 32,000 tonnes they claimed. Recently Don Popescu
provided a detailed analysis in "How Much Gold is on Loan Worldwide?".
While
many think that this manipulation of the gold price makes any investment in
gold a losing proposition, the reality is that when the manipulation can no
longer be sustained, gold will skyrocket as the public loses confidence in
fiat currencies. Paul de Sousa discusses this in a video presentation, "Why the Manipulation of Gold is the Greatest Investment
Opportunity of this Century."
What
should investors do - believe the government statistics and mainstream
propaganda? Do they have the strength to challenge the propaganda and change
their mindset, or will they simply follow the herd over the cliff at the next
financial crisis? Today, being without gold in a portfolio is like not having
flood insurance when the hurricane is bearing down on you. There are a host
of events that could topple the world economy's delicate balance:
Geopolitical concerns; a bubble in the DOW, the strength of which is based
solely on Federal Reserve policy, unsustainable stock buybacks and financial
engineering; derivatives at the major banks that have grown by about 54% from
$450 trillion in 2007 to $691 trillion by the second quarter of 2014. Of
course, corporate debt around the world may be the trigger for the next
financial crisis. In "The Biggest Economic Story Going into 2015 is Not Oil",
Raul Ilargi Meijer discusses the corporate debt around the world, and the
vulnerabilities it causes.
With
all of these vulnerabilities it goes without saying that, in order to reduce
risk and improve returns, a diversified, balanced portfolio is the best way
to preserve capital. Yet most portfolios are neither balanced nor
diversified, and contain only three of the six asset classes of cash, stocks,
bonds, real estate, commodities and precious metals. Precious metals have the
least correlation to financial assets such as stocks and bonds, and provide
the greatest protection for the least amount of allocation. Standard
Deviation, the Sharpe Ratio and the Sortino Ratio are improved, and adding
gold reduces the number of years with losses, and average loss. A traditional
US portfolio of 60% stocks and 40% bonds would have yielded 10.5% over the
last 43 years, with volatility of 12.8%. A portfolio that included a 20%
allocation to gold would have yielded 10.8% return, with a significantly
reduced volatility of 9.2%. In Canada, a traditional portfolio would have
yielded 10.2% return, with 11.4% volatility, while one with 20% gold would
have yielded 10.4% again a significantly lower volatility of 9.8%.
