warning for years that an inflationary storm was coming. I’ve recently tailored
my forecast to allow for a resurgence in deflation based on QE 2 ending and the
economy diving, but my long-term forecast remains the same: inflation WILL be
exploding in the years to come.
the biggest proponents of paper money (central banks) have begun to realize
that their grand experiment is coming to an end. Central banks officially
became net buyers of Gold last year. And we now find that they have acquired
the most Gold in over a decade.
The Financial Times reports:
Central banks have pulled 635 tonnes of
gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a
The move, disclosed in the BIS's annual
report, marks a sharp reversal from the previous year, when central banks added
to deposits of gold at the so-called "bank for central banks" rather
than lending it directly to the private sector amid growing concerns over
consider this. If you’re a central bank and you actually believe in the value of paper money and your ability to
create wealth by printing it…why would
you be loading up on Gold?
is simple: you see the writing on the wall.
banks of the world are in a competition to devalue their respective currencies
against each other. They will work
together to suppress a particular currency if a carry-trade gets too out of
control (see Japan earlier this year), but in general the ECB wants a cheap
Euro, the Fed wants a cheap Dollar and so on and so forth.
know that the financial system is broken. They’ve known it for over a decade
(Greenspan even admitted that derivatives could “implode” the market in 1999).
But they’re going to kick the paper money can down the road as long as they
can… primarily because the entire financial system is banking on their ability
to “fix” things.
Crisis was the first taste of systemic risk. The central banks threw everything
including the kitchen sink at the problem in an attempt to hold things up. And
it’s worked temporarily in the sense that the financial world still believes
central banks can handle the situation.
fact remains that the central banks actually didn’t fix anything. After all,
you can only fix a debt problem by paying the debt off or defaulting. Moving it
around and issuing more debt to meet current payments does nothing.
sense, the world’s central banks literally “bet the farm” on themselves and the
view that sovereign balance sheets can stomach this toxic waste. As we’re now
discovering in Europe, the laws of the markets (oversaturation of debt, default
and the like) apply to countries as well as private banks.
banks know this and are now acting accordingly. It is not coincidence that they
became net buyers of Gold within two years of the 2008 Crisis. Nor is it
coincidence that they are now loading up on Gold at the fastest pace in over a
decade. They KNOW (not think) that systemic risk is still on the table in a big
way and that they will be POWERLESS to address the next Crisis when it
already see this in their public statements. Bernanke himself even admitted the
Fed has no idea why the economy isn’t recovering. If you extend the
implications of this statement it becomes clear Bernanke and pals are realizing
that printing money is not going to patch up the financial system.
Hence the Gold purchases.
terms, the REAL Crisis, the Crisis that was put off temporarily during the last
two years, is coming. It will not be a Crisis of stocks or bonds. It will be a
Crisis of the financial system itself. A Crisis in which entire countries
default. And it will make 2008 look like a picnic.
every asset class is defined relative to sovereign bonds. So if sovereign bonds
begin defaulting… KA-BOOM. Round One (2008) of the Financial Crisis wiped out over
$11 trillion in household wealth. Round Two will wipe out…?
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