In recent weeks, while the eurozone has suffered escalating levels of systemic stress in government bond markets and its banking system, the gold price has fallen under $1,600. One would have thought that – but for the occasional fat-finger trade – gold would rise in all this instability, not fall. Putting aside short-term considerations, the simple reason has to be that the investment establishment, which has bought into the bond market bubble, does not believe that gold is any longer an alternative to paper money.

We can understand why they think this. Though the Keynesian vs Austrian economic debate is attracting increasing attention, financial services companies recruit economists who have been trained in the traditions of Keynes and Friedman. They are thus immersed in economic disciplines that assume gold is old-fashioned and has no meaningful place in a modern economy. While they might accept that gold has an historical attraction for some investors, they see it as a “risk-on” investment. This is jargon for something you buy when you want to take risks, the opposite of gold’s traditional role.

For further proof, you need look no further than the average level of portfolio exposure, which across the global investment management industry is said to average less than one per cent. This is certainly not compatible with the level of risk in today’s markets, with many nations on the edge of bankruptcy. The result is that flaky gold bulls are experiencing the discomfort of rising panic.

Let us go back to fundamentals. The Keynesians and Friedmanites are oblivious to the debt trap faced by all major currencies. Central banks are printing money to fund government deficits at the lowest possible interest cost. The inevitable consequence of printing money is price inflation, and price inflation always leads to higher interest rates. Higher interest rates exacerbate budget deficits.

You cannot put it more simply than that. The alternative is to stop printing the money and jack up interest rates, but in that event at the head of the insolvency queue is government itself, so this can be ruled out as a deliberate policy. That is what a debt trap is all about: whichever way you turn, there is only one outcome: bankruptcy.

When a government goes bust, its paper is valueless: not just its bonds, but its fiat currency as well. On the surface it is different in euroland, because the nation states do not issue their own currency. On this basis the demise of the euro is an event one step removed from the bankruptcy of individual nation states. The relationship with the other major fiat currencies is direct.

The destruction of fiat currencies themselves is becoming more likely by the day. Meanwhile, the weakness of “risk-on” gold has led to a serious mispricing in the market. This has happened because the financial community, sucked into the bond market bubble, has not even begun to discount the debt threat to government paper from sovereign bankruptcies.

When this mispricing is inevitably resolved, it is unlikely to be gradual. It will be so swift that those old-fashioned enough to own gold for insurance purposes will have the protection they sought. Those that fall for modern neo-classical economics will learn a very sudden lesson about what gold is actually for.

Mr Mcleod's website

The interview:

The Emperor is Naked: David Stockman

Dear Friend of GATA and Gold:

GATA isn't an investment adviser but rather, as a matter of law, a non-profit educational and civil rights organization incorporated in Delaware and recognized as federally tax-exempt by the U.S. Internal Revenue Service. As a more practical matter we aspire to be a sort of liberation movement, since, as was written in ancient times, the truth makes you free. We don't know exactly when this will happen.

Insofar as the price of gold is an international political decision as much as a market decision, we particularly do not know when crucial political decisions affecting the gold price will be made. But they have been made before, they will be made again, and we are seeing now so many developments that correspond to the developments immediately preceding the last great revaluations of gold, in 1968 and 1971.

Back then, when gold price suppression was openly a big part of U.S. economic and foreign policy, gold moved from West to East -- particularly from the United States to Europe. Then came the collapse of the London Gold Pool and the Bretton Woods Agreement, when the U.S. government decided that the drain on its gold reserves caused by its policy of price suppression had become too great:

http://en.wikipedia.org/wiki/London_Gold_Pool

While gold price suppression is now a largely (but not entirely) surreptitious policy, once again we see gold flowing from West to East -- only now the East includes the rapidly developing countries of Asia. This flow has been tempered by the supply of imaginary gold conjured by derivatives, but it is a strong flow nevertheless.

At what point will the government or governments still supplying metal to the market for price suppression change policy to relieve the threat to what remains of their gold reserves? Will the U.S. government, as geopolitical analyst Jim Rickards has suggested, end the price suppression scheme by confiscating the gold reserves it holds in custody for other nations?

Maybe there are answers to those questions in the documents the Federal Reserve was able to withhold from GATA as a result of the decision last year in our somewhat successful freedom-of-information lawsuit against the Fed:

http://www.gata.org/node/9917

We don't know. But we do know from history that the biggest circumstances with gold, and thus gold's valuation, tend to change overnight, when all is revealed suddenly. The central bankers won't be calling us or you about this a day or two ahead of time. They'll be calling their agents at JPMorganChase and HSBC. All we can do is strive to hasten the day of change. And such days do happen, and have happened in times much like the ones we are experiencing now.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Recently on CNBC we have heard from Charlie Munger who is the vice chairman of Berkshire Hathaway and consequently Warren Buffet's deputy. Mr Munger points out that civilized people do not own gold and that investment in productive businesses is what counts. We at forsoundmoney partly agree with him that produvtive enterprise is necessary in civilized society but where we disagree with him on is that gold is not necessary in civilized society.

We think Mr Munger has lost sight of the fact that in a civilized society the diversity of products and services produced by private enterprises are indirectly exchanged for other goods and services and a sound money system that facilitates the indirect exchange of these goods and services is an essential component of the system. Mr Munger does not realize that our monetary system has been severely damaged since the closing of the gold window back in August of 1971 and that under the current fiat money system the weight of debt necessary to keep the system functioning will eventually destroy the monetary system and thereby disrupt the functioning of a modern civilized society in which indirect exchange is paramount.

It is a shame that Messrs Buffet and Munger do not see the importance of gold as money in a free and civilized society. Howard Buffet, the late congressman from Nebraska and Warren's father, saw it otherwise and he let the world know what he thought of gold as money in this article he wrote in 1948 for the Commercial and Financial Chronicle.

Howard Buffet ends his article with the following warning:

Investment guru Marc Faber says gold ownership is still very low and that more people own Apple Corp. stock. He compares Apple to Japanese stocks in the late 1980s in that almost everyone owned it and dot.com stocks in the late 1990s.

An interesting article in Moneyweek Magazine.

Ben Bernanke journeyed across town to give a 4-part seminar to 30 undergraduates at George Washington University. This was clearly a public relations stunt. Why would the head of the world's most powerful central bank lecture to 30 undergraduates? This was not quite the equivalent of George W. Bush reading "My Pet Goat" to third graders, but it was close. Think of it as "My Pet Peeve." His first speech was an overview of central banking. He used PowerPoint to create slides. The presentation had 49 slides.

Any experienced lecture listener, had he known of this in advance, would have headed toward the exit. Here is the man whose verbal skills produce narcolepsy in normal people who have slept at least 10 hours. To this he added 49 slides. This violated Guy Kawasaki's 10-20-30 rule: 10 slides, 20 minutes, 30-point font. The slides are here.

UNDERGROUND GOLD

In his speech, he introduced some of the classic arguments of the fiat money advocates. Warren Buffett has invoked it:

Gold gets dug out of the ground in Africa, or someplace. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

This was Buffett's reply to his father's policy of defending the gold standard in Congress in the late 1940s. His father had far greater understanding of the gold standard than he does.

The thought of all those itching Martian heads apparently bothers Bernanke, too. So, he repeated the argument.

We have heard this morning that the Swiss National Bank or SNB has almost doubled its reserves of pound sterling or British pounds to £14.52 billion in the first quarter of 2012 as they try to diversify away from the euro. With that in mind we dug a bit deeper into the activities of this central bank and especially their gold sales that took place between 1999 and 2008.

Prior to the SNB gold sales Switzerland had gold reserves of 2590 metric tonnes. From 1999 to 2005 the SNB sold 1300 metric tonnes and then from June 2007 to September 2008 they sold another 250 metric tonnes so as of today the total Swiss gold reserves is at 1040 metric tonnes. According to a Philipp Hildebrand speech at the Bank for International Settlements or the BIS in May of 2005 the SNB raised CHfr 21.1 billion from the sale of the 1300 metric tonnes of gold that took place between 1999 and 2005. The last 250 metric tonnes were sold in a period where the median price of gold was roughly CHfr 900.

The proceeds of CHfr 21.1 billion of the first 1300 metric tonnes work out to an average price of CHfr 504.85 per troy ounce while we will use a price of CHfr 900 for the last 250 metric tonnes sold which corresponds to a total of CHfr 7.23 billion raised. 1550 metric tonnes is 49.8325 million troy ounces so if we take the total of CHfr 28.33 billion raised from the sales we get a total average price of CHfr 569. The current price of gold is CHfr 1510 so the SNB's current loss on this trade is CHfr 941 (1510-569=941) per troy ounce or a grand total of CHfr 46.89 billion which corresponds to $51.28 billion.

Swiss gross domestic product or GDP for 2011 was $523.77 billion so the loss on this SNB trade is equivalent to 9.79% of GDP! Let us hope that the current trade or diversification into pound sterling and other fiat currencies does not end as badly for the Swiss people!

There has been a great deal of talk about intervention in the currency markets and especially in gold and silver of late. Zero Hedge has done a great job investigating the central banks' banker called the Bank for International Settlements or the B.I.S.. Yesterday gold dropped almost $15 out of the blue and many in the mainstream are saying that it was a "fat finger" which happens when a trader or a broker input the wrong price and/or amount onto their trading systems thereby causing unusual price movements.

We at For Sound Money have been closely following the price of gold for many years and we do not buy the talk of a "fat finger" and would tend to side with Zero Hedge and put these sharp moves, usually down, to intervention or manipulation by the Western central banks and their agents. The Bank of England, for example, even admits it on their website that they operate in the foreign exchange and the gold markets.

The trend that we and others have noticed in the last decade is that the Asians usaully buy gold overnight and then the Americans sell it when their markets open from around 8AM New York time. As you can see from the chart below the gold price once again dropped sharply during U.S. hours (chart is London time or 5 hours ahead of EST) today after looking like it was ready to break out through the $1670 level. Could it really be that we have gotten a case of two "fat fingers" in two days or is it more a case of price management by the central banks?

The transcript of the speech: