Tag Archives: Gresham’s Law

Physical Gold And Silver Continue To Disappear

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I was watching one of the Fed Governors who made the assertion that “low interest rates would be here for a long time” and I thought to myself this guy must be on drugs because the U.S. has had low interest rates for 12 years now, which is already a long time.

The current shortage in physical gold and silver was developing many months before anyone ever heard of “coronavirus.”  In fact, what’s happening now as Central Banks print trillions of paper currency further validates Gresham Law. Bad money drives out good money – physical gold and silver will be hoarded and fiat paper Central Bank money will be used for transactions.

Rob Kreinz of GoldSilverPros invited me onto his podcast to discuss the ramifications of rampant money printing and the rush into physical gold and silver:

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Gresham’s Law And The Gold And Silver Squeeze

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“Bad money drives out good money.”  When Gresham put forth this proposition, sovereigns were diluting gold and silver coins with metals of lesser value yet the diluted coins were given the same value for legal tender purposes as the more pure coins. Gresham observed that the more pure coins were hoarded and the lesser value coins were used for trade.

Sound familiar?  Go find pre-1964 dimes, quarters and half-dollars and try to buy them for their legal tender value.  Pre-1964 silver coinage contains 90% silver.  Post-1964 silver coins are made from nickel and copper.  No one who holds pre-1964 coins would use them for their face value. They have disappeared from circulation. The melt-value of the silver in a 1963 quarter currently is $2.60.

The disappearance of gold bars from the LBMA and Comex is Gresham’s Law in action. Though the virus crisis exacerbated the problem, shortages were developing on both trading venues well before anyone heard of “coronavirus.”  As an example,  Russia dumped its Treasury bond holdings and used the dollars to buy gold for its Central Bank. China, which holds 12x more Treasuries than Russia held, has been slowly converting its dollar reserves into gold for several years.

Chris Marcus of Arcadia Economics and I discuss the current developments on the Comex and LBMA in our latest weekly conversation:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

“Wanted to send through a note of thanks and support.

I felt in my gut that something was amiss with the markets a year or so ago and started reading up on sound money/macro. At that time I had most of my money in UK stocks but wanted a way out and a way into the metals. I needed guidance thus why I signed up to your short seller and mining journals.

Today I am way down on the mining stocks and somewhat down on physical silver and gold. But I have offset 80% or so of those paper losses with paper gains on a raft of put options on indexes and sector ETFs. I had limited options experience prior to these purchases.”   – Mike in the UK

Negative Rates, Gresham’s Law And A Parabolic Move In Gold

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Thomas Gresham observed in the 1500’s that “bad money drives out good.”  The concept applied to gold and silver coins and the value of precious metals metals used in the coins relative to their face value.  Back then silver coins would be debased by replacing some of the silver content with base metals.  Of course, that practice of monetary debasement goes back to ancient Rome.

But the idea applies today in the sense that, as fiat currency continues to be devalued with money printing and artificially low interest rates, those paying attention will begin to convert cash savings into physical gold and silver and use the devalued fiat currency for transactions settlement. This is likely part of the reason the prices of gold and silver are at all-time highs in almost every fiat currency globally.

But I got to thinking about the further imposition of negative rates after absorbing Alasdair Macleod’s must-read essay, “Deeply negative nominal rates are on their way.” In this brilliantly written explanation of the problems with negative rates, Macleod references two working papers from the IMF which address the problem of hoarding cash if commercial banks impose a negative rate on cash balances by “taxing” cash withdrawals. This would be the implementation of negative rate on money held at banks. Money spent electronically would not be taxed like this.

As preposterous as that may seem, if the International Monetary Fund (“IMF”) is publishing working papers which discuss taxing those who attempt to remove cash from the banking system, it likely means implementation of this policy is being considered not only by the IMF but also the BIS.

The imposition of a negative rate policy in the form of a “tax” on cash withdrawals will likely lead eventually to a run on the banks by large depositors, who will “smell” this policy in advance. This cash – or “untaxed good money” – will be removed from the financial system. Currency needed for daily use would remain in the banks and used electronically – this would be the “bad money.”

In a sense, we’re already seeing Gresham’s Law in the sovereign bond market. Large pools of capital are flooding into sovereign bonds as the price of these bonds grinds inexorably higher. It would be absurd to pay a huge premium above face for a bond knowing that if you hold it to maturity you’ll be repaid substantially less than the price you paid for the bond (i.e. a negative return on these bonds held to maturity). So it’s rational to assume that savvy players will eventually sell before the price of the bond is below the price paid.

It’s performance-chasing that gives the investor a better return than simply holding cash if he sells at the right time. The alternative is holding the cash in short term money market type investments which guarantees a negative return. To visualize this dynamic, here’s the price chart of a 100yr Austrian sovereign bond:

As Bloomberg describes it: “this type of debt carries heavy risks. After all, it will only redeem at 100% of its face value (or par) so investors who have bought in at much higher prices would suffer if yields returned to levels seen as recently as the start of this year – and the price of the bond fell. Furthermore, while interest might not be the priority for many investors in ultra-long maturities, the Austrian paper is only yielding 60 basis points currently. That won’t butter many parsnips.”

Again, as I argued above, rationale investors will begin to sell paper like this and look for alternatives. At some point, as the monetary policies of the Central Banks become more totalitarian, rational investors will turn to gold and silver rather than chase bond prices into even more negative territory. Unfortunately for them, institutional investors will be confined to gold and surrogates like GLD and SLV, both of which have seen massive inflows of capital already. But wealthy investors will soon be converting cash into physical gold and silver and safekeeping it outside of the banking system, thereby effectively removing good money – i.e. untaxed large bank deposits – from the system and using gold and silver as wealth preservation assets.

This in will turn into a real gold rush and the prices of gold and silver will go parabolic. To visualize what this will look like, refer to the chart of the 100yr Austrian bond above.

I agree with Alasdair Macleod’s conclusion that deeply negative interest rates will lead to a collapse of fiat currencies – probably not as soon as this year but, then again, a bell won’t ring when it’s time get out of fiat currencies and bank accounts:

Given the rapidity with which the global economy is now declining, we will be lucky if a credit crisis leading to deeply negative nominal rates doesn’t happen this year. The pace at which depositors in the banks then become aware of what is happening to their fiat currency will determine the speed and extent of the currency collapse. 

Silver And Gresham’s Law

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Gold is unobtainable for most people in the world the way it’s priced right now. If a global crisis hits silver is going to be remonetized by the free market. If it’s not just an industrial metal, like it is today, if governments and central banks start holding it (silver), and this is a copy-cat effect, because obviously you know this, once one of the central banks does something the rest will do it because they don’t want to be different. – Lior Gantz, The Daily Coin, Silver Will Be Re-Monetized By The Market

In 1965 Lyndon Johnson signed the Coinage Act of 1965, which removed the silver content from dimes and quarters and took the silver content in half-dollars down to 40%.   In 1970 silver was removed completely from the half-dollars.   The excuse given was that the country was running out of silver.    But the truth is that the U.S. Government in conjunction with England was dumping its Central Bank stock of silver  (and gold) onto the market in order to prevent the price of these precious metals from rising against the U.S. dollar, which had been effectively the world’s reserve currency for 20 years.

In fact, the silver-based U.S. coins were disappearing from the market because the value of the silver content in these coins had risen above the face value of the coins.  It was real-time proof of Gresham’s Law.   In effect, it was an effort by the U.S. Government to de-monetize silver, which has been civilized history’s oldest monetary metal.  The U.S. could not yet de-monetize gold because, based on the Bretton Woods Agreement, the U.S. was required to back all Treasuries bonds issued to foreign buyers with gold.   But a year after the last remnants of silver were removed from U.S.-minted coins, the Nixon Government disconnected gold from the reserve currency.

Ultimately, silver will become re-monetized.  Silver has been, is and always will be “poor man’s gold.”  In today’s episode of The Daily Coin, we discuss the eventual re-monetization of silver.   As a bonus, we describe the fraudulent nature of Tesla’s latest earnings report.

No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts. – U.S. Constitution, Article 1, Section 10, Clause 1

Did Gresham’s Law Invade JP Morgans Comex Gold Vault?

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Gresham’s Law states that bad money drives good money out of the system.  People will use inferior money in their daily “bartering” for goods, services, investments etc and hoard good money.

We are seeing Gresham’s Law work in the gold market, where eastern hemisphere Central Banks, investors and populations are in the process of hoarding all the gold the west will send their way in exchange for the constituent country fiat currencies.  “Here, take our currency and convert it to dollars and sell us your gold.”

And the gold seems to disappear from sight.   Can anyone hazard a guess how much gold the People’s Bank of China controls or where it’s safekept?

Recently my friend and colleague Craig “Turd Ferguson” Hemke – TFMetals Report – noticed an usual amount of gold was being removed from the “registered”/investor account in JP Morgan’s Comex vault.    Last Friday, for instance, 24% of the eligible gold disappeared from JPM’s registered vault account and disappeared to destinations unknown:  LINK

Again yesterday another chunky 160,750 ozs of gold fled the questionable custody of JP Morgan’s eligible account (click on image to enlarge):

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The amount of gold removed yesterday represented 32% of the amount of gold remaining the eligible account after last Friday. In total, this entity or entities has/have removed 49% of the gold that was sitting in “investor safekeeping” section of JP Morgan’s Comex custodial vault.

We can only speculate what might of “spooked” the entitled owners of that gold to take it away from the Comex.

However, I will say this confidence:   whomever removed that gold decided that they no longer trusted JP Morgan to safekeep it.  It’s interesting because the Comex offers storage rates that are a significant discount to market rates to investors who take delivery off the Comex and use the Comex vaults for safekeeping.

Whatever the case may be, nearly 50% of ALL of the gold in Comex vaults has been removed since 2011 (source:  24hgold.com, edits are mine – click to enlarge):

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From Dystopia To Armegeddon

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When the going gets weird, the weird turn pro.  – Hunter S. Thompson

I mentioned the news reports of fist-fights breaking out at traffic intersections in Denver. Then yesterday I hear two different news reports of random gun shots.  One of shots fired into someone’s house in a not so great part of Denver (Aurora).  The second report of bullets flying across one of Denver’s busiest highways and hitting cars.  Then I learn last night that bullets flying into cars driving on highways in Arizona have become part of everyone’s daily routine.

We’re sliding into the “Mad Max” scenario which many of us for a long time have envisioned eventually hitting this country.  I would have thought that this environment would have started engulfing this country in 2008.  But the Government pulled what appeared to be a rabbit out of its hat which enabled it to kick “Mad Max” down the road for a bit.  That “rabbit” by the way, while preventing an all out collapse and actually making life better for the people closest to the money spigot, was nothing more than a disguise designed to help the elitists confiscate even more wealth from the middle class.

The population’s hatred for the Government grows stronger by the day.  The popularity of Trump’s candidacy for President is a reflection of this intensifying despise.   A growing segment of the population cheers harder for Trump everyday as he lashes out with insults at the politicians everyone now hates.  Let’s be honest, Trump is at least as corrupt as the career politicians he’s humorously defacing.  He would be a horrible President.  Of course, so would every other candidate on the roster for both Parties.

Perhaps the best – yet least understood – evidence of the darkness which is slowly engulfing the the U.S. is the disappearance of physical precious metals from the global financial system.   Gold and silver is being removed hand-over-fist from public view.  Most of the gold is being moved from west to east, where it’s being removed from the bullion exchanges by the 10’s of tonnes on a daily basis.  For instance, the Hong Kong Metals Exchange just had its largest daily withdrawal – 19.7 tonnes – in its history.   Roughly 100 tonnes per week is now being removed from the Shanghai Gold Exchange.  This is Gresham’s Law in action, folks.

We already know about the growing shortages for minted silver products around the world, especially in the U.S.   And the disappearance of gold from the Comex bank vaults is nothing short of stunning.  The ratio of fraudulent paper gold to deliverable physical gold hit 229:1 to yesterday.  To say this is “silly” is an insult to the word “silly.”  This reflects and epitomizes the extreme degree of corruption, fraud and theft which is burying the United States.

I was exchanging emails this morning with GATA’s Bill “Midas” Murphy.  We were marveling at just how extreme and blatant the manipulation of the precious metals market has become.  I find it beyond amusing that mainstream financial media – which rolls out charts of stocks and select commodities all day long – has failed to put on display the chart that shows that gold gets hit 90% of the time only when the Comex floor trading is open.  Funny non-coincidence, that.

I suggested to Bill that something really bad is going to hit our system:

Think about the manipulation of the metals market that occurred just before the Lehman, AIG/Goldman collapses. They took silver from $21 in March that year to $7 by late October.

Now think about how much more brutal this manipulation is both in the context both of the intensity and the disappearance of physical metal from the system.

I’d estimate that the manipulation now is probably 5x worse and more blatant than in 2008. Which means whatever is going to hit the system will be at least 5x worse than 2008.

I know most people who understand what is going on would like to see a collapse and thorough flush of the system.  Unfortunately, the dystopic behavior starting to show up in the general population will be met with brutal force by the near-totalitarian U.S. Government in an attempt to control it.   The inevitable systemic collapse will enable the Government to impose totalitarian control on the country to a degree that would be heartily admired by history’s despots.

It’s going to start to get really weird in this country (as if it has gotten weird enough already)…

More Surprises In The Physical Gold Market Reaffirm Gresham’s Law

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While I don’t follow the data reporting on the Comex on a day-to-day basis – primarily because 1) I don’t have the time, 2) enough people do follow it and report on anything unusual and 3) I don’t fully trust what is reported.

However, Avery Goodman posted an article on Seeking Alpha, The Big Long,  that caught my eye.  He noted that Goldman Sachs and HSBC reported delivery of 7.1 tons of gold into their “house” accounts on August 6.   Goldman stopped 3.2 tons and HSBC stopped 3.9 tons.

This equates to 250,438 ozs of gold, or roughly 2,500 contracts.    It also coincidentally, or not coincidentally, represents just a little less than the amount of gold that JP Morgan moved from its “eligible” account to its “registered” account in order to meet the  JP Morgan issued delivery notice on 2,750 contracts on August 4.   So it would appear as if Goldman and HSBC “stopped,” or took delivery in their house account of most of the gold what was delivered from JP Morgan’s customer house account.

My initial response to this development is that it should not surprise us that Goldman may be accumulating a long position in physical gold despite having noted analysts at the firm issuing bearish gold research reports.  Goldman is infamous for taking the other side of trades that it convinces clients to implement.

What I will say, however, is that we can’t necessarily assume that the Goldman and HSBC gold was ultimately destined for their respective banks’ proprietary positions.  For instance, it could well be the case that Goldman is on the hook for delivery of physical gold to a counterparty of one of its OTC precious metals derivatives contracts.  If that’s the case, perhaps the easiest source of gold to fulfill that obligation was to take the other side of some of JP Morgan’s reported Comex vault inventory.

Similarly, while its conceivable, perhaps even probable, that HSBC might be building its own “nest egg” of golden eggs, it’s also quite possible that HSBC needed to source gold for the GLD vault, of which it is the custodian.  Yes, GLD uses 400 oz bars and the Comex “traffics” in 100 oz bars, but it would be easy enough to do a gold bar swap in order to convert 100 oz bars into LBMA 400 oz. bars.

My point here is that the available information on Comex gold transactions is opaque by design.  But having said that, the relevant piece of information here is that a significant amount of physical gold has been removed from the visible of publicly reported vault holdings.

It seems that the above-ground, available supply of physical gold and silver continues to disappear down rabbit holes all over the world, further reaffirming Gresham’s Law.

 

Gresham’s Law: No More Retail Gold In Europe

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“Bad money drives out good money.”   Gresham’s law is an economic principle that states:  “When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”  – Murray Rothbard

Gresham’s Law is also known as Copernicus’ Law, as Nicolaus Copernicus first formulated the theory in 1519.   The idea is that when a system has different forms of currency circulating and one of the currencies is perceived to be overvalued relative to the alternative currency, the undervalued currency will be hoarded and the overvalued currency will be used for transactions.

From The Dollar Vigilante:

I’ve been in Europe a couple of days now and one of my main goals here, other than protesting the G7, Bilderberg and visiting Liberland, was to find out if what Martin Armstrong wrote about – that there is a shortage of gold at the retail level in Europe – is true. What I’ve found is that, indeed, it is true, as in many European countries one is no longer able to buy retail gold coins for investment.

Shops are buying precious metals still, but no one is selling. Spanish banks that once sold gold to the public have shut down in Spain, and if people leave Spain wearing a lot of jewelry, authorities weigh and inspect the precious metals, as Armstrong reports.

You can read the rest of this here:  No More Retail Gold In Europe

The article above is based on reports from Martin Armstrong.  If the author for The Dollar Vigilante had not verified the assertions from Armstrong, I would not have published the report.

Armstrong never misses a chance to throw in some kind of reasoning for why he thinks gold is going lower.  He erroneously correlates demand in China with reported shipments of gold from Switzerland to Hong Kong.  That’s laughable because anyone who writes about gold should know that China also imports gold through Beijing and Shanghai and those numbers are a State secret.  Through the week ended May 22, withdrawals from the Shanghai Gold Exchange are up 20% vs. 2014 and 8% over the same period in 2013, which was a record year for withdrawals (2,197 tonnes).