Throughout history, the passing of the torch of the eminent empire has had a rhythm to it which can be compared to the seasonal weather cycles of the earth or the consistency of rising and receding tides. The balance of power in the world has always shifted over time.
These shifts are marked by common themes: High debt levels, failures in currency systems, moral deterioration of societal values, class warfare between government elites and common citizens, over-taxation and the state turning on its own citizens to pay for its lack of fiscal responsibility or solvency, an increase in authoritarianism and suppression of freedom for the working class leading to revolts, over-farming or failure of agricultural or water systems, a breakdown of infrastructure such as roads and waterways, a lack of reserves, the inability of the empire in power to stay at the forefront of technology, and the failure of powerful militaries not due to more powerful enemies but due to failures in supply lines and financial strength to pay troops and service the machines of war.
Complex societies which find themselves facing these situations have proven to be susceptible to un-anticipated shocks in the economy, environment, food and water supply or energy. In the end, gold always flows to the seat of world power and is accumulated there until another power assumes the position. This has been true for thousands of years, and it is still true today. I offer you a snapshot of that repeating cycle.
"Unless we begin to close this (fiscal) gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline. Bonds would be burned to a crisp, and stocks would certainly be singed; only gold and real assets would thrive." - Bill Gross, Co-Founder, PIMCO October 2012
US National debt has exceeded 16.889 Trillion Dollars - a debt of $148,042 per taxpayer. This is also before factoring in the 125.126 Trillion Dollars of unfunded obligations in the form of Social Security, Medicare, and Medicaid. This is a liability per taxpayer of $1,096,767. I cannot imagine what upcoming generations of Americans must think when they look at these numbers, but it probably isn’t good.
The US Tax system now ranks 94th out of 100, right behind Zimbabwe.
The Fed appears to be especially proud of unemployment rates dropping; however, what they are not highlighting is the data indicating that the USA is moving towards a “part time” labor force. Jobs reports are showing 953,000 new jobs for 2013, but only 23% of these are full time. In other words, the “new economic recovery” consists of 77% part-time employees such as wait staff and burger flippers. The second largest employer in the United States is now a temporary agency. Some analysts feel this shift towards a part-time labor force is being prompted by Obamacare, which incentivizes employers to cut full-time employees and hire employees as part-time only.
The mere mention of “Tapering” of bond purchases by Ben Bernanke has sent the bond markets into a nosedive with ten-year treasury yields continuing higher. These are not good signs for the Fed. It means Quantitative Easing will not likely stop and may have to be expanded. If you have any doubts about whether or not this is sustainable, the Fed currently owns 30.5% of the US treasury market. At the current rate of purchases, some projections have the US owning virtually all of it by 2018.
China | India
China now leads the USA in the Space Race, which has strategic implications. The accuracy of ballistic nuclear weapons is determined by how strong your technology is in understanding the guidance of objects which reach partial orbit before falling back to earth. In 2012, the three most prolific space-faring nations were Russia, with 29 launches and 27 successes; China, with 19 launches, all of which succeeded; and the United States, with 13 launches, of which 12 succeeded and one was a partial failure. It is important to note that US space agency NASA finished 2012 with a budget of 17.7 Billion Dollars and had 13 space launches with an 87% success rate to show for it. The Chinese National Astronautics Bureau had a 100% success rate with 27 launches on a budget of only 1.3 Billion Dollars. China and Russia have recently conducted joint military operations and are developing closer relations as they see themselves ever more likely to “face similar maritime threats.”
The mantle of the world’s fastest super computer has passed to China. China’s Tianhe-2 can process in excess of 30 quadrillion calculations per second, which is almost double the USA’s fastest super computer known as Titan which resides at Oak Ridge National Laboratories. The Oak Ridge system can do 17.59 quadrillion calculations per second.
China has shown an amazing affinity with gold. Part of this may be due to the fact that the man in charge of China’s .5 Trillion in reserves is allocated by a man who used to work closely with Bill Gross of PIMCO who has some strong views when it comes to gold.
Many are familiar by now with the massive draw downs in gold at COMEX as well as GLD and the LBMA market in London. According to Bloomberg, the Shanghai Gold Exchange delivered 1,098 metric tons of gold in the first half of 2013 versus 1,139 metric tons in 2012, more than double the annual gold production in China in 2012. Gold is clearly flowing from West to East.
Gold demand into India has not slowed despite government attempts to discourage gold investment among Indian people. World Gold Council's India Managing Director, P.R. Somasundaram, sees India gold imports hitting up to 965 tons for 2013.
"The Eurozone is still engulfed in a severe crisis." - Benoît Coeuré, Board Member, European Central Bank
The Eurozone economy has contracted for six consecutive quarters, and the IMF is again revising its estimates for the region downward expecting it to shrink by .6% in 2013. Greece is in its sixth year of recession, Spain’s unemployment rate is at 27%, and Italy’s credit rating has been downgraded. There is concern that many of Europe’s banks will end up as “zombie banks” similar to Japan.
It is no wonder that the ECB is urging the EU to accelerate acceptance of “Bail-In” legislation, which would allow governments to directly confiscate depositors' funds to recapitalize failing banks. 
We consider this to be one of the greatest risks to people’s wealth. AFE continues to encourage our clients to reduce cash positions in banks and to get their liquidity out of the system in the form of gold and silver. If there is such urgency to pass these laws, it is not because they do not intend to use them.
The Middle East has once again become a proxy war between the United States and Russia. Posturing by both nations over support of various factions in the region continues as unrest in Syria, Egypt, and Saudi Arabia continue. Oil has hit 7.66 per barrel. We are closely watching the situation going forward, as the entire region is a tinder-box which could be the trigger for larger economic scenarios if oil supply is affected.
NSA and Your (Lack Of) Privacy
A short list update from Washington’s Blog on just how far this has gone:
- The government is spying on just about everything we do
- The government has adopted a secret interpretation of the Patriot Act which allows it to pretend that “everything” is relevant … so it spies on everyone
- The government’s mass spying doesn’t keep us safe
- NSA spying did not prevent a terror attack on Wall Street
- There is no real oversight by either Congress or the courts (also see this and this)
- Even a Federal judge who was on the secret spying court for three years says that it’s a kangaroo court
- Experts say that the spying program is illegal, and is exactly the kind of thing King George imposed on the American colonists … which led to the Revolutionary War
- We can keep everyone safe without violating the Constitution … more cheaply and efficiently than the current system
- The top counter-terrorism Czar under Clinton and Bush says that revealing NSA spying programs does not harm national security
- Whistleblowers on illegal spying have no “legal” way to get the information out
- A high-level intelligence source says “we hack everyone everywhere“
- Some people make a lot of money off of mass spying
- Spying started before 9/11 … and may have stemmed from an emergency program only meant to be activated in the case of a nuclear war
- Governments and big corporations are doing everything they can to destroy anonymity
- Mass spying creates an easy mark for hackers
- Polls show that the public doesn’t believe the NSA
- While leaker Edward Snowden is treated as a traitor by the fat cats and elites, he is considered a hero by the American public
- While the Obama administration is spying on everyone in the country – it is at the same time the most secretive administration ever (also see background). That’s despite Obama saying he’s running the most transparent administration ever
- Top constitutional experts say that Obama and Bush are worse than Nixon … and the Stasi East Germans
- Surveillance can be used to frame you if someone in government happens to take a dislike to you
- Government spying has always focused on crushing dissent … not on keeping us safe
- An NSA whistleblower says that the NSA is spying on – and blackmailing – top government officials and military officers (also see this)
- High-level US government officials have warned for 40 years that mass surveillance would lead to tyranny in America
NSA hacks undersea fiber cables. This includes recordings of phone calls, the content of email messages, entries on Facebook, and the history of any internet user's access to websites -- all of which is deemed legal even though the warrant system was supposed to limit interception to a specified range of targets.
Xkeyscore is an NSA tool that can gather incredible amounts of information about your online activity. This includes email content, chats online from Twitter to Facebook, all Facebook information ever posted, search terms used, and web-browsing history. It is the widest-reaching system at their disposal and can intercept what you are doing in real time.
To view the original presentation on Xkeyscore: https://www.theguardian.com/world/interactive/2013/jul/31/nsa-xkeyscore-program-full-presentation
The problem with the war on terror is that it has no criteria of success that is potentially obtainable. It defines no level of terrorism that is tolerable but has as its goal the elimination of all terrorism, not just from Islamic sources but from all sources. That is simply never going to happen, and therefore PRISM and its attendant programs will never end. These intrusions, unlike all prior ones, have set a condition for success that is unattainable, and therefore the suspension of civil rights is permanent. Without a constitutional amendment, formal declaration of war or declaration of a state of emergency, the executive branch has overridden fundamental limits on its powers and protections for citizens.
For a long list of tools you can use to protect your privacy and enhance your safety: https://prism-break.org/
As an aside, this is also why you do not want to store all of your gold with a company that hosts its data (has its offices or servers) in the United States or other Western jurisdictions. There are a lot of newsletter writers who have been hyping up an American-based solution over the last year or so. I knew from the moment I saw it that it was going to be a bad idea. For those of you who care about international diversification, I encourage you to not put all of your eggs in a single NSA-observed basket. Every scrap of data is theirs and will be used against you at the whim of government.
"Nations, differing in language, religion, habits, and on almost every other subject susceptible of doubt, have, during a period of nearly four thousand years, agreed in one respect: that gold and silver have, uninterruptedly to this day, continued to be the universal currency of the commercial and civilized world." - Albert Gallatin, US Treasury Secretary
There has been a great deal of discussion lately about “backwardation” in gold. I recently found an excellent description of what GOFO is at Screwtape Files:
For those desiring only a quick refresher, GOFO is related to GLR via LIBOR (London Interbank Offered Rate) according to the formula GOFO = LIBOR - GLR. When GLR is greater than LIBOR, GOFO is negative, the corollary being that when GOFO is greater than LIBOR, GLR is negative. Contrary to the naïve assumptions of the less well-informed commenters out there on the gold blogosphere, a negative GLR does not mean that folks will pay you to borrow their gold; it just means that it costs less to borrow. According to Bron (above), GOFO is the “amount that can be earned from the gold carry trade,” which amounts to selling gold to buy dollars when the latter yields higher interest. So, when the GLR is higher than LIBOR and GOFO is negative, it simply means that it costs more to borrow gold than dollars.
Basically, what is important to understand right now is the part that 'it costs more to borrow gold than dollars,' because this is a very rare occurrence. The only two times this has happened was in 1999 and 2008 after which gold went into massive new uplegs. This reflects an unwillingness to lend gold and suggests how tight physical markets for gold truly are.
We are still of the view that the SPX remains strongly overbought and is due for a correction. Gold, as well, remains in very negative sentiment. If you believe in contrarian investing, you will recognize this as an opportunity. COMEX speculative net longs in the futures markets are at a 4.5-year low which has not occurred since January of 2009 when gold immediately went 167% higher.
Everything we are seeing indicates that physical holders of gold are not selling but have instead used the price dip to add to positions. The price drop has been almost exclusively paper market. These paper speculators may be surprised by the lack of physical availability when the pendulum swings and the market reverts to mean while physical holders stubbornly refuse to release their gold.
The major question on everyone’s mind is does gold go up from here or is there a chance it could go lower? If the Fed announces tapering at the September 18th meeting, the economy could actually stall and move into deflation. If we see a rapid deflation, gold could indeed go lower; however, in that environment, everything would be heading lower as well. In that case, the question to ask is what loses the most? Gold in that scenario should lose less than the SPX and would still be a better option. The other possibility is for the Fed to continue QE and possibly even increase it, which we view as likely. Should this occur, it will set the stage for gold to move into a new upleg.
I leave you with a parting quote:
“The few who understand the system will either be so interested in its profits or be so dependent upon its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” - The Rothschild Brothers of London writing to associates in New York, 1863, laying the groundwork for the eventual passage of their catastrophic Federal Reserve Act on December 23, 1913.