- It’s Time!
by Lee Quaintance & Paul Brodsky, QB Asset Management, via www.gata.org
Gold bugs can’t understand how the public can be so unaware, how highly intelligent policy makers can be so immoral, and how the mainstream media can be so incurious. We can’t understand why more men and women in the investment business haven’t joined some of the more successful ones that have come around to precious metals and have taken substantial positions in them for their funds and personal accounts. The list of high profile independent-minded investors that have come out of the proverbial closet is impressive and growing: Kyle Bass, John Paulson, David Einhorn, George Soros, Bill Gross and Paul Singer, to name only a few.
Mmmm, maybe. We certainly agree that gold should fundamentally be priced much higher than where it is presently and that the way gold futures seem to be reliably stepped-on before Treasury auctions and Fed meetings is a bit snarky, but as for the progenitors of the crime? It might be better to look east. Conspiracy theorists should consider foreign dollar reserve holders that would like to take delivery of as much physical gold (and silver?) as possible in a very short time, and do so at cheap prices. It would be simple to do: fund offshore hedge funds that continually short gold futures through US bank accounts, thereby keeping the spot price and London fixings down. Physical gold could then be delivered to sovereign accounts directly from mines and through exports at the suppressed prices.
Why would sovereigns like China, Russia, even Japan and South Korea want to take physical possession of bullion at current prices and so quickly? The short answers are that they could not buy size required on exchanges without driving prices multiples higher and because there is likely to be a reset of the global currency system, soon. Again, we have discussed this before and are talking our book so take it with a grain of salt, but the logic supporting a coordinated move is too clear to ignore.
First, we think all currencies are in the process of being devalued against global resources. Ask yourself what $3 trillion in Chinese dollar-denominated reserves is worth when it takes an act of parliament to spend CAD $15 billion on an energy acquisition? Clearly, the future purchasing power of surplus dollar reserves is not equal to its current notional amount in natural resource terms. What is the motivation of Chinese businesses to continue trading cheap human resources for US dollars so that they may use those dollars to buy global natural resources (at any price)?
We expect the rational Asian (and South American) mind is already discounting the real forward purchasing power of the US dollar and all other fiat currencies exchangeable for it. Given the necessary future currency de-leveraging among debtor nations, we would not be surprised if economic policy makers of creditor nations have already discounted the present value of their currency reserves (e.g., $3 trillion in today’s USDs should have the purchasing power equivalent of $500 billion in a few years).
Our speculation goes beyond natural market incentives and how economic participants have already reacted. We presume Western policy makers have also been quite aware of currency-based incentives, which would explain why ongoing meetings between representative treasury officials have also included State Department officials (check). And diplomatically, we would speculate that creditor nations would also continue purchasing US Treasuries at negative real rates until they amass enough of whatever it may be that US dollars would be devalued against (check, check).