Originally posted in 2017, still relevant and even more so today.
This Is The Mechanism Of The Gold Price Reset As A Product Of The Market Place
originially posted May 15, 2017
Due to its criminal hyper-manipulation, gold¹s price has become a paradox.
Paper gold’s weakness actually reflects the forthcoming strength of the physical gold market. I feel this statement, as paradoxical as it seems, hits the nail on the head.
Contained in this statement is the basis for my conclusion and the formation of long term plan since gold made its high in it last bull run from 1968 to 1980.
Those that read my writings have heard the plan at least once a year since my exit from the paper gold business in 1980.
In the period of 1968 to March 1980 it was rumored that I was the largest volume gold trader in the world. If there was someone larger I never met them.
In 1980 the Wall Street Journal ran an article “Bull Takes off his Horns,” which I hold as a reminder of that period.
The statement that GG points out in the opening note to me finds its roots in the school of “Free Gold.” This group of thinkers is absolutely correct on its main subject, gold itself. Like any other group there are offshoots that hold various views that can cloud the main thesis. In my opinion, their foundation is the only correct answer to what gold is, how gold functions in the economic system, why the paper gold market was started, by whom it was started and for what purpose the paper gold market actually exists. This school of thought goes on to predict that the future of gold’s value is not as an alternative currency for the exchange of good and services but as a storehouse of value for holders both public and private.
In March of 1980, which was the end of the 1968 gold bull market, a client of one of my firms came to visit. He was extremely happy for the experience and came to thank me. I told him that he was thanking the wrong person. His great success was based on his courage and understanding that made him so successful. The client was Carl Seaman of Seaman’s furniture in the New York metropolitan area. Carl had made himself one of the first 1% due to inherently knowing Jesse Livermore’s discipline that major fortunes are when you are right and do not deviate. He was one of the world’s greatest traders.
I asked Carl if he would wait for me for a few moments. I called the accounting department on the 8th floor requesting a check for the collective balance in all of Carl’s accounts. That check was indeed a hum dinger. I held it and asked how many feet away was the revolving door to my firm’s main office. He replied about 20 feet. I handed Carl his checks and asked him never to come back again, to call me only as a friend. We will never do this again in the way we did based on paper gold.
I told him I anticipated a bear market in gold of no less than 15 years and that I was in the process of selling all my firms and then I would walk out the same door.
The next fortune in gold will be made via long physical gold margin free in an enormous way. Due to the volatility of the price of gold there can be no margin involved nor paper gold derivatives.
The formula is simple to expound but very hard to exercise. It called for full utilization of our capital individually to identify a huge deposit of gold relatively inexpensive to mine. The key is NOT to sell the gold produced but to get your leverage from bullion refiners, not banks, that loan to producers as part and parcel of their business. The strategy is to own a gold mine that mined its product, paid the host government their royalty and other charges, then use the production as the basis to borrow funds required for operations at an inexpensive rate. We then put all our funds in US 10yr. T Bonds yielding almost 15%.
What I proposed was a public mining company that held all it’s gold refined and above ground not in a bank, but in a non-financial company, in a refinery that is not in North America and does make loans to its clients based on refined to market product. The price that I envisioned the entity might be worth is many billions assuming my final prediction is correct.
The fight to build this has been enormous. It has required close to everything I have and 19 years of life.
The strategy has required 100% dedication of my time and finance to fight in many instances attempts at the largest claim jump in history by the Chinese, using every modern method known to financial engineers.
They have not succeeded. There is much more to be done and risk therein, but survival has been the key so far in this field while awaiting the next bull leg in the final gold bull market.
A recent NI 43-101 for the first time has hinted at the developing size of this strategy that I believe will write history because of the basic tenets of “Free Gold” in a somewhat different way that “Free Gold” anticipates.
In 2013 CIGA Belgium wrote the following letter that I feel you should read and re-read now. If you do you will be one of the very few that really understands all about gold and its outrageous future. You will understand the huge selling into the paper market and why it is limited in time by its own construction.
CIGA Belgium has permitted me posting excerpts as long as his identity is confidential.
Dear Jim, (written to me on February 18th 2013)
We are only just now arriving at a time period that will bring about “The Currency Wars”. Everything prior to this was only a preparation period to build an alternative currency. The years spent traveling this road were done to prepare the world for an escape medium when the dollar finally began it’s “price” hyper-inflation stage.
Few investors can “grasp” that in reality, our dollar has already been hyper inflated, but without the higher price effects. Years of deficit spending, over borrowing, debt expansion have created an illusion that the dollar was immune to price inflation. This illusion is evident in our massive trade deficit as it carries on with no negative effects on dollar exchange rates. Clearly other investors, outside the Central Banks were helping in the dollar support process without knowing they were buying into a dying currency system.
The only thing that kept this process from showing up in the prices of everyday goods was the support other Central Banks showed for our currency through exchange intervention. As I pointed out in my other writings, this support was convoluted at best and done over 15 to 20 years. Still, it’s been done with a purpose all this time. That purpose was to maintain the dollar for world economic trade, without which we would all sink into depression. Indeed, the mainstay of this support required an ever expanding world dollar base. There is simply no way the old dollar debts along with the new ones could have been serviced without this money expansion.
The entire long term process is/was very clear to a few major financial players as they prepared for the dollar’s retirement as a reserve. Their main strategy for dealing with this was found in several positions. One was a long term buying of real physical gold. The other was the acceptance that all trade and investments would eventually transition away from dollar use. To combat this they began to denominate their paper assets and business transactions in other currencies (now the Euro holds the main transition flow). This was done because, as the dollar prices of real things first show real signs of rising, all forms of dollar derivative contracts would begin to unravel.
Better said, the process of dollar contract failure would show up in the form of discounts on these derivatives from par value. Because most of our “end time” dollar world has built itself into a huge derivative game, this discounting will occur across the board in almost everything we deal in. Not just gold.
The first signs that official dollar support is winding down is seen in real world pricing and official policy. The most obvious “first” price sensitive arena to reflect a “real coming inflation” is not gold as so many think, it’s the stock markets. Their long term bull run, mostly starting around the early 80s completely reflected this official sanction of world dollar expansion without price inflation. It’s only in the last year that we can see where equity markets are telegraphing a transition into dollar expansion “without world support”. Better said, major price inflation is coming on a level equal to hyper status. Many stock markets have headed straight up in reflection of this.
Another area where we see this change is in crude oil. For years, every rise in crude prices was quickly shut down from added supply. Done to add the producers portion of help to the dollar support effort. Even war in the oil fields was not allowed to create a dollar destroying price rise. Once the Euro was born and seen in operation as a possible “backup” currency, added crude supply to keep prices low was no longer available. Prices have risen and fallen in a broken fashion that will continue it’s upward bias. This policy change is not only a vote of confidence in Euroland, it’s also a Euro reserve support function that will lead to much higher physical gold prices later. Oil around $30 (and $45+ later) now values gold upwards to $930 using the old one gram = one barrel from a pre 1971 gold dollar price ratio. This has fueled ongoing trade in gold by the BIS as it seeks more physical gold supply outside the LBMA paper contract world. A process that can only further destroy the present contract gold illusion as expressed in a paper dollar gold marketplace. Eventually, $930 gold crude will become the absolute bottom pricing range as real dollar price inflation begins.
The most recent example of official policy change toward the dollar was found in the Washington Agreement. It marks the end of Euroland support for the paper gold markets that helped maintain a dollar/ oil settlement bond. In the beginning (1980s) it was a joint effort by at least two factions that has today become only a single effort by one faction. The US/Britain.
Even with this, the US accepted a reworked IMF gold structure. Because of this, they (US) are today operating two policy positions that contradict each other. One tries to use an escalation of the gold price to maintain IMF support for foreign US debt, while the other tries to keep the “gold trading desk” of several market makers solvent through an even lower price.
This places Euroland, the BIS and major world physical gold players on a direct collision course with the US backed contract gold marketplace. The effects of this will “most likely” be seen in a literal flood of new paper gold entering this arena in an effort to maintain “bookkeeping” credibility for the market makers. Today we see the beginnings of this change impacting the market as it is evolving into little more than a large paper float that exists mostly for this “bookkeeping” purpose. It will stay viable until dollar price inflation dries up to physical supply that to date still sells into this market. No doubt, the mine companies will become the very last sellers to support this arena. Possibly, selling into it’s paper pricing all the way down.
For years, gold bugs have figured that gold would be the next dollar escape mechanism. Not another currency. They gave little thought to the reality that our modern world could not, would not price gold as a “reserve free trading asset” without a digital paper money reserve to do it in. Once the dollar begins it’s decline through price inflation, it’s use as a reserve and more importantly it’s use to establish a gold market will stop. This will cause an unexpected delayed positive impact on gold values as gold’s paper marketplace goes through tremendous convulsions. We may see dollar price inflation in all things, yet gold values fall as contracts fail from constricted supply. Eventually, even the mining sector will be forced from shareholder loses and poor contract price economics to abandon the dollar pricing contract system. I expect that during this time the physical price of gold will be soaring as it’s lack of trade constricts supply. Most paper gold traders today, don’t understand how a real dollar price inflation shrinks physical gold trade, no matter how high or low the price goes. Further, they continue to use the various dollar gold derivatives even as their paper supply mushrooms. A process that forces the contract gold price down. Yet, all the while they are proclaiming that they are “in the gold market” and bemoaning how the manipulation of the metal is giving them loses.
It’s important for new players to understand that no government or private banker in the world today can manipulate the dollar price of traded physical gold once real price inflation begins in the reserve currency. A failing currency system would find governments and bankers selling into a virtual “black hole” of demand.
Prior to dollar price inflation effects, the impact of official policy can only manipulate paper contract prices. Just because traders are willing to sell physical gold for a paper settled contract price doesn’t mean that’s the real gold value in the world today. More to the point, this is simply a temporary condition that could exhaust itself before price inflation, once physical delivered against paper prices dries up. Thereby forcing contract prices into discount and destruction.
This modern paper market is relatively a new concept in world gold trade. It was created by banks, western traders and mine operators themselves over the last 15+ years. They supported this market by buying into it instead of buying and trading only real gold. True, the paper promoters may have been dishonest in presenting the effects of this process, but no one was forced to use it! Without user cash flow giving credibility to these paper derivatives, the market would not exist in it’s present form. Yes, it’s true that the Euroland and dollar faction agenda, along with oil interest and indeed physical gold traders all benefited from this investors market making cash flow! But this is reality for any investment where a buyer of a contract abrogates the security of present real ownership into a paper position with counterparties risk. Even today, call option buyers give their money away in support of this illusion, instead of buying coins outright. Truly, western gold paper traders and gold stock investors today a have evolved and in no way represent what the term “gold bug” used to mean. Today, physical gold advocates are the real gold bugs as they now posses the real leverage paper players only think they have!
Bill Holter’s comment on the above is exchange is:
I believe it was Isaac Newton who theorized for “every action there is an equal and opposite reaction”. Just as stretching a rubber band too far, the “reaction” often times is much faster and far more violent! As an addendum, wasn’t it an “Apple” that fell on his head?