China Will Blink and Gold Will Soar

Republics are created by the virtue, public spirit, and intelligence of the citizens. They fall, when the wise are banished from the public councils, because they dare to be honest, and the profligate are rewarded, because they flatter the people, in order to betray them.
– Justice Joseph Story

When it becomes serious, you have to lie.
– Jean Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister in 2011

The Game Continues
I have no idea why anyone is making a big deal about The Bernank’s testimony to Congress today.  There was no way he was going to come out with anything meaningful.  The only thing our favorite Keynesian sorcerer wants to do is get through the session in as painless a manner as possible.  It would be completely foolish to rock the boat in any way during such testimony, as it would just invite all sorts of aggressive questions and make the entire thing more of a spectacle than it already is.  It would also increase the likelihood of a verbal blunder, so there is just no need.  In fact, I am 100% certain that The Bernank merely wants to toe the line as carefully as possible and at the same time get some nice propaganda out there to the sheeple.  In that sense, I think he achieved his goal.

Mapping the Next Five Months
Everyone has an opinion and on days like today people really like to come out and spout theirs so I suppose I may as well join the club.  In a recent article, I wrote that The Big Print is Coming and in this piece I want to follow that one up with exactly how I think it all will manifest between now and the election.  Of course, no one can predict the future, but what I want to do is attempt to outline how I think Central Planner policy will unfold from now until the U.S. Presidential election in early November.

Ok so let’s start with the FOMC meetings.  Between now and election day there are four.  The first one as everyone know is June 20th, followed by August 1st, September 13th and then October 24th.  Many pundits claim that if the Fed is going to act they may as well do so well before the election so as not to appear to be “influencing the election.”  I’m not so sure about that.  Maybe in times past, when the power structure was a bit more reserved and less blatant about their corruption and manipulations.  They don’t hide that stuff anymore.  The “elites” in America today are simply gangsters.  We have already been officially christened as a Banana Republic.  The criminal behavior that now governs our political and economic system is now all out in the open for anyone with eyes to see.  They don’t care.

What I want to make clear in this piece is that just because I think a massive wave of liquidity is coming from the Central Planners, that doesn’t mean I expect it to happen in June.  There is no doubt that The Bernank is now doubting all of his academic theories of the past and is scared out of his mind to “do more.”  He is afraid it won’t work, he is afraid of the demand for physical gold and silver that it might spark, and he is also afraid to use the bullets now with asset prices where they are.  He wants to save it for when he needs it and he knows he will need it.

So the game continues.  Talk up the economy, talk down printing and pray.  The beige book and today’s testimony represented textbook Fed strategy in 2012.  Strategy that I have discussed many, many times in months prior.  They can talk all they want and give all the reassurances they want but talk from monetary magicians does not alter the reality on the ground.  As I have stated repeatedly in the last two weeks, I think the Fed is more behind the curve than at any point since 2008.  Back then, The Bernank assured us that there was no housing bubble and that subprime was contained.  Big bank CEOs were pimped out on CNBS to claim their solvency weeks before going under or needing a bailout.  The only strategy left was to lie.  Despite the fact that it didn’t work then doesn’t stop them from trying now.  Why?  They are insane.

Barring a market catastrophe in the next two weeks I do not expect the Fed to act at the June meeting.  With rates where they are and stocks where they are there is little upside to action; however, this lack of action is precisely what will set the stage for the massive action that must come later.  One of the main things that has allowed the Fed to kick the can down the road as long as it has is the fact that ever since 2008 they have acted aggressively on the first hint of weakness.  While the beige book pointed to relatively rosy conditions for the U.S. economy, I think that is because they were looking at data from early April through late May together.  If you look at the U.S. economic statistics, the data didn’t start turning for the worse in a serious manner until late in the second half of the month of May.  The Fed knows this but they are purposefully misleading the market.  In reading a Bloomberg article about the beige book the following quote stood out to me:  “’The Beige Book is clearly at odds with the hard data we’ve been seeing,’ said Millan Mulraine, senior U.S. strategist at TD Securities in New York. ‘We’ve seen a dramatic slowdown in economic growth momentum that you’d think would be reflected in a few, if not the majority, of districts.’”  Move along folks…nothing to see here.

As a result, if the market heads into the Fed meeting at current levels it runs the risk of being disappointed.  If this is combined with continued economic weakness then the real set up happens between the June meeting and the August one.  It is in that interim period that the market could throw another one of its hissy fits and beg for more liquidity.  Money supply growth is extremely sluggish right now all over the world.  The velocity never happened and the global economy is rolling over.  The Fed is already behind the curve and so when they are forced to act the infusion will have to be huge just to stem the momentum.  What will really be interesting is if they will be able to stem the momentum.  I have no idea but the longer they wait the less likely they will be able to.

China Will Blink and Gold Will Soar
To illustrate the point.  Take a look at China’s M2 Monthly year-over-year growth in the chart below.  Do you really think they are going to allow that trend to continue?  If they do what do you think the implications are for the world?  For the U.S.?  Want to bet on decoupling?  I don’t.

China’s M2 Monthly year-over-year growth

The big point is that China will act and in a meaningful way.  What I suggest people do is go back and look at different asset classes from the prior two lows in China’s M2 year-over-year growth rate.  The first one occurred in late 2004.  The M2 growth rate then accelerated until around mid 2006.  In that time period gold prices went up around 85% and the S&P 500 went up 20%.  In the second period of acceleration from late 2008 to late 2009 gold was up 60% and the S&P500 was up 15%.  We are at one of these inflection points and considering the DOW/Gold ratio is still holding gains from its countertrend rally from last August of almost 40%, this is probably one of the best entry points to buy gold and short the Dow of any time in the last decade.  Oh and if you want more juice, when China blinks silver does much, much better than gold…

Peace and wisdom,



16 thoughts on “China Will Blink and Gold Will Soar

  1. Thanks for the insight Mike. My only hope is that I can add to my stack rather than have to decrease it just to stay afloat. I hope Martin Armstrong is wrong in how long (2016) this could possibly take to finally blow.

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  4. Bernanke is a Bilderberger (2008, what a coincidence) and despite being blinded until now by Keynes, he will do what he is told to do. Jamie Dimon is on the board of the Fed for your information. China cut rates very mildy and it gives you a clue of what is happening. The notion of face is very important in Asia. When China cut the rates so few, it is in order to not lose face (huge housing bubble, exports dropping like production, deflation in retail prices…). What it tells you is that, when China, after 4 years (they put the rates higher) of worldwide bottom rocked rates, cut them…something is wrong…Wait and see, but something is definitely wrong for China.

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  8. I think the more significant factor would be the Basel3 Accord raising gold bullion from Tier 3 status to the TOP Tier1, making it more desirable to hold as reserves for ALL banks, not just the Central Banks in many nations that have been adding to their gold reserves in recent months.

    If this proposal is actually enacted then it could weigh heavily on the DEMAND side of the equation that would lead to higher prices to which mining shares would likely respond positively.

    So yes, I would agree, unless there is a disruptive uncontrolled event in the Euro zone credit crisis, it is likely major action will be delayed, however, in the usual summer doldrums, anything can happen, the only SURE thing is that more fiat currency creation whatever the name tag it is given is inevitable as is the rise in the price of precious metals which people in ever greater numbers will turn too as a hedge against fiat currency losses in purchasing power.

  9. Gold is the number one enemy of every central bank. Issuing fraudulent fiduciary medias is a very florishing business.When people buy gold or silver, these fake money goes into real money. With fractional reserve banking, it pushes the crooks to “recapitalize” (steal taxpayers’ money for today’s standards) themselves through the central banks’oligarchs. Fiat money is a fraud, but fractional reserve banking is the root of this Ponzi scheme. Governments won’t allow the credit crunch to happen and will print until the last moment. The crisis in Europe s looming and the debt ceiling in the US is waiting to be reached soon. More QE’s coming in the next few months, for sure. When elections are off, worry. But for now ,more money printing is a certitude . The BIS is not worrying about the solvency of the other central banks. They just see that people are waking up(China, Russia, Mexico and a lot of other countries) about the fiat money Ponzi scheme. The Basel mafia cares only about the “trust” (indoctrination) of people into paper money. If you back it with 20% gold for example (fractional reserve expands the money supply even more), people will find it more secure. Anyway, we wil WITHOUT ANY SINGLE DOUBT come back to a gold standard. But the savers and also most of the people will get ripped off. Such monetary standard would presuppose a massive devaluation of the currencies, but we only have the choice between that, hyperinflation or the nastier deflation ever. Things will progressively happen, but there is no doubt that we are going back to a gold standard.

  10. In China all mined gold must be sold to the Chinese government (at market prices). They have increased their holdings some 400% over last year. Their purpose may be to create a gold backed currency with the yuan. This could become the next world reserve currency, as trust in the USD dwindles.

  11. I’m still trying to figure out why more people aren’t commenting on an article at Zero Hedge called:
    “Brodsky On “Gold Monetization And The Big Reset”

    This guy says the Federal Reserve will buy the Gold from US TReasury and a huge reset will take place. It seems to me this is a very scary scenario, but I’m not expert, only waiting to hear what others say….So far nobody seems interested.

    • P.S.
      In the above article at ZH read the Conclusion, where it talks about the fed buying the gold from the Treasury. It sounds like this may be a ploy for the Big bankers to get the Gold (since the Fed mostly a private entity).

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