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Video - STATISM - Part I - Charles Hugh Smith - MACRO ANALYTICS

What Levels of Precious Metals Buying and Selling Triggers the IRS?

Here is a good excerpt from OwnTheDollar.com that gives their insight on when the IRS is involved with precious metals.

"What Levels Trigger IRS Reporting?

The Internal Revenue Service’s reporting requirements for precious metals dealers varies based on the type of gold or silver that is being traded. In most cases, reportable sales of gold are triggered when twenty-five or more ounces are traded in a single transaction. Incidentally, there is actually not IRS gold reporting requirements for American Gold Eagles regardless of the quantity traded. Only pre-1965 U.S. silver coins sales are reportable when the sale’s face value totals more than $10,000. Like most financial transactions, $10,000 is usually the magic number that draws IRS scrutiny. And IRS gold reporting is no different."

In short, if you engage is transactions less than $10,000 generally there is no IRS involvement at all.

The Love Trade for Gold

Indians and Chinese buy gold because they love it, not because they are fearful of the economy. This article describes this type of demand as the love trade.

Anyone who is serious about what affects the price of gold, must seriously look more deeply into the live trade.

Here's a direct quote and chart from the article:

"You can visually see the strength of the Love Trade below in the year-over-year change in total consumer demand in tons for gold jewelry, bars and coins. Indian demand grew the most, increasing 27 percent compared to the previous year. Demand for jewelry, bars and coins in the greater China area increased 20 percent, as “seasonal strength in China, related to Chinese New Year purchasing, exceeded all previous peaks, marking a new record quarterly high,” says the WGC. Even U.S. residents had a love for gold, with demand growing 22 percent over the previous year."

The False Free Market

Mario Draghi, European Central Bank President

Many people feel that we live in a free market. But what is a free market? Whenever government intervenes in the market, it hampers the free market. Free market economist Adam Smith said this about government's role:

"To protect its people against foreign invasion; to protect its people from one another; and to construct certain public works such as roads and infrastructure for which private individuals would not reap sufficient benefit to justify the cost."

When you look at contemporary governments, they have definitely swayed from Adam Smith.

European Union countries are in a financial mess. They are simply spending much more than they are taking it in. In a free market and I consider governments just one organization in a market, any entity that can't pay it's bills will go bankrupt or default on its bills.

However, the European Central Bank, led by President Mario Draghi feels they have to intervene. Instead of letting the free market take its course and allowing EU countries (Greece, Portugal, etc.) default, they are interfering.

One way of doing this is buying their debts. See, when a sovereign country needs money they issue government bonds. A bond is simply a way for a country to raise money. The problem is that for a country like Greece, the perception is that they are a greater risk to default on their bonds than other bonds. So to alleviate this concern in a free market bond buyers expect a higher interest rate to make up for the perceived risk. This is where the ECB comes in, per a Wealth Cycles article:

"In early September the European Central Bank (ECB) announced another program of buying up bonds issued by Eurozone nations in the secondary, or retail, market. The program, known as Overt (as opposed to covert) Market Operations, is said to be aimed at lowering the cost of borrowing for struggling Eurozone nations, several of which are buried in debt and declining economies. Of course history shows that interest rates rose in the most ironic of unintended consequences the last two times this was tried in Europe. The ECB’s intervention comes with strings; in order for it to buy a nation’s debt, the nation’s government must agree to the demands of EU leaders, implementing tax rate hikes, and other fake austerity programs."

The ECB has temporarily bailed out troubled EU countries that need money. By buying their bonds dubbed as Overt Market Operations, the EU is basically printing money to these EU countries that have overspent. As a result, these countries are now even worse in debt. Not only that but the EU has expanded the money supply and will probably cause long term inflation.

This bond buying by the ECB is nothing new. In the United States the Federal Reserve has been buying US Treasury bonds and other ot it's own government bonds for years.

Draghi justifies their government bond buying by saying:

Investors, he told the Bundestag, are “charging interest rates to countries they perceived to be the most vulnerable that [go] beyond levels warranted by economic fundamentals and justifiable risk premia.” This fear, he said, is “unfounded.” The market is wrong.

In other words Draghi is blaming the free market. That is what is wrong with most heads of central banks, they hate the free market. They want government intervention.

To me, however this is part of a bigger problem. In most countries the people vote politicians in who advocate this type of government intervention. In Europe, in America, in Japan the results are the same. The people keep voting government officials who want the government to "do something." What they don't realize is that the more governments "do something" the worse the problem becomes.

 

GATA

Gold is a barometer of financial health. It is a sign that inflation is rising, that unemployment is rising, that countries are in too much debt, that people are worried, and more fears. That is why governments and central banks want to keep the price of gold under control. They don't want gold to rise too fast. Because if it does it makes them look bad.

There is an organization out there that exposes this manipulation. GATA (the Gold Anti-Trust Action committee) looks at how central banks manipulated gold to keep the price suppressed.

Here is how GATA describes themselves on their own website:

The Gold Anti-Trust Action Committee was organized in the fall of 1998 to expose, oppose, and litigate against collusion to control the price and supply of gold and related financial instruments. The committee arose from essays by Bill Murphy, a financial commentator on the Internet (LeMetropoleCafe.com), and by Chris Powell, a newspaper editor in Connecticut.

GATA is not a fly by night organization. China and Russia has contacted them to get more information from them. They are definitely interested in what GATA has to say.

China knows what is coming and they want some protection. The United States, Fed, Treasury, bullion banks (HSBC, JP Morgan, etc) want to keep gold prices in check.

GATA has labeled the gold manipulators as the Gold Cartels.

Sovereign Debt Auctions

Central Banks use what is called a Sovereign Debt Auction to raise money. For example, US Treasuries.

According to TreasuryDirect.gov:

"Marketable securities can be bought, sold, or transferred after they are originally issued. The U.S. Treasury uses an auction process to sell these securities and determine their rate or yield."

It is not important to know all the details of a security auction like the bidding and issuance process. What is important to understand is that Sovereign Debt Auctions are just one belief or tool that central banks use to feel they have adequate control of the market.

For more see Robert Fitzwilson's": We are headed to a historic collapse of the financial system.

However, this tool does not go exactly to plan all the time. According to a Der Spiegel article: A complete disastor, 

Germany held a bond auction but 2/3 of their sold. The rest went unsold and will go to the secondary bond market.

 

 

What is forward hedging?

To be a good investor, you gotta be able to speak the language. One term that I will go over in this post is forward hedging.

From Rapid Trends:

"Forward hedging is a form of gold leasing practiced by gold producers. The most famous of these is Barrick Gold, but there are many other producers who partake in forward hedging.

Forward hedging is when a producer presells gold on the spot market that has yet to be extracted from the earth. Most of the buyers want delivery of physical gold. So the producer leases gold from a CB, with the idea that it will pay the CB back with future production."

Barrick Gold, a Canadian firm, is the largest gold mining company in the world. They want to make sure that they make a profit. One way to do this is to control expenses and income. In this case income. So they lock in the price of gold to a buyer before the actual gold is extracted from the earth. This protects Barrick in the event of a large drop in the price of gold.

However, the price of gold has not had lots of downward swings in the price the last decade or so. This makes gold hedging not as useful or attractive to gold producers.

There could be problems with gold hedging. See, the gold is not actually extracted yet. Yet, the gold producer is selling the gold at the open market. So there is this extra supply of gold out there that is not there yet. Or maybe ever because, some could argue that a gold producer could intentionally forward hedge a larger amount of gold than they will actually have. In the short term, this could supress the price of gold.

 

Direct Leasing and the Futures Market

In a previous article, I explained as simply as I can how gold direct leasing works. A central bank (let's say the Bank of England) leases gold to a Bullion Bank (BB)(let's say UBS) for 1%. UBS then sells the gold on the open market through the London Bullion Market (LBM). UBS then takes the proceeds to buy a higher rate Treasury.

It is not as simple as that because eventually UBS has to give the gold they leased back to the Bank of England.  This is where it gets complicated because didn't UBS sell the gold in the open market. Also, when they have to give the gold back, what if the price of gold lowered and now they have to take a loss? UBS is at a risk to price swings.

So what does UBS do?

According to Rapid Trends:

So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.

The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.

In a perfect scenario, after the gold lease rate and price risk hedging, the bullion bank will walk with a modest 1–2% gain. The central banks will receive a return on their gold, keep the price of gold suppressed in order to keep real inflation suppressed, and get a boost in the demand for Treasuries. It’s a win-win situation for both the bullion and central banks.

The Big Lie that Gold Cannot Earn Revenue

There is a conception out there that gold does not earn an income stream. The thinking is, that if someone buys gold and then they place it in a safe deposit bank it just sits there and does not grow any income. That is true if you just let it sit there. But there is a way for your gold to earn an income. It is called Gold Leasing. This is how it works in a quick nutshell from Soberlook:

"A number of European banks hold gold as part of their asset portfolio. They haven’t been eager to sell it as they continue to be concerned about the stability of major currencies, particularly the euro.  They also enjoy the price appreciation gold experienced in recent years. However, they desperately need short-term dollars, so they lease out their gold. In a lease transaction typically a bank turns the gold over to a counterparty for say 3 months and receives gold “lease rate”. The counterparty in turn places dollars with the bank as collateral on which the bank pays “LIBOR-like” rate. Now the bank has access to dollars it needs. The demand for dollars has become so great, that banks are willing to accept negative lease rate, just to obtain term (1-12 months) dollars. Therefore negative lease rates is not a surprise."

So, let's say you are a European bank and you need cash quick. You have gold as part of your assets. But you need cash. So, you get your gold to another party and lease it to them for 3 months. In return the bank gets a "lease rate". The other party agrees to put dollars in the bank as collateral for the gold and the bank pays the "lease rate" to borrow the gold. So for 3 months the bank has the dollars it can use for what ever it wants and it has the "lease rate" money to use for what ever it wants. In some cases the lease rate is actually negative. This means at the end of 3 months, the bank gets their gold back and the other party gets their money back plus an additional amount. This additional amount is the negative lease rate amount. Why would a bank agree to a negative lease rate? Well, if they really need cash for that 3 month period, they may just agree to it.

The average investor may think that this stuff is complicated - and it is. However, just keep in mind that these types of complicated financial transactions happen every day. These things affect the price of gold wheter you like it or not. At the end, these things could blow up in the face to those individuals who are not holding the physical gold. It takes time to learn these complicated transactions. But if you don't take the time to learn the understandings of gold and the way the prices go up and down, then you may get caught in the wrong end of the cycle. Or, you could be just an average investor.