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Sunday, December 07, 2008 11:19 PM

Nonsense About Gold Backwardation, Ameros,Yuan Devaluations, etc.

Mish Moved to MishTalk.Com Click to Visit.

Late last week through this weekend I started receiving numerous emails about gold backwardation theories, Amero sightings, Yuan devaluations, and all sorts of other stories that do not stand up to even the most casual of scrutiny.

Let's kick off the hit parade with Red Alert: Gold Backwardation

Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold.

Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system.
Nothing Special About Backwardations

A friend who has a seat on the NYMEX had this to say:

I have seen countless commodities go into backwardation for numerous reasons, the most frequent being a radical temporary divergence between immediate demand and overall demand. I have seen backwardations that have lasted years. The article is based on the assumption that a backwardation will necessarily lead to a breakdown of the delivery mechanism.

For every breakdown of delivery there have been thousands of backwardations. It is only if and when the actual breakdown occurs that the conclusions the author draws make any sense.

There is nothing special about backwardations. Period. OK they are rare in gold. So what?

Gold No Longer For Sale At Any Price?

That is simply a ridiculous claim. On November 24th I had the following conversation with James Turk at GoldMoney.
Mish: James what size bars of gold and silver do you buy?
Turk: Bars that meet the standards of the LBMA. Gold bars weigh approximately 400oz per bar, and silver 1000 per bar.

Mish: Any problems with deliveries?
Turk: Not yet, we buy in the spot market for cash. We have had difficulty though in finding bonded silver bars in London (i.e., bars in bonded warehouses which enables our customers to buy silver without UK's onerous 17.5% value added tax - by buying bonded bars, the tax is levied only if they take delivery of the bars). Consequently, we raised our fees in London to discourage buying there so that customers buy silver in Zurich instead, where we have had no problem finding bars.

Mish: What do you know about smaller sized bars and getting deliver of them?
Turk: Only what I have been reading, namely, that they are in short supply and premiums as a consequence have soared.

Mish: Can you address or speculate as to why manufacturers are not making smaller retail sized bars of silver and gold, as well as coins?
Turk: The manufacturers are primarily government owned mints. So one theory is typical government incompetence. There is another theory. Given that all government mints around the world are not meeting demand, the theory is that we are seeing a coordinated effort by governments to purposely not meet demand. Their objective is to keep people out of metal so that their money remains in the banking system.
My vote is for incompetence. Whatever you believe, it sure is not suppressing the price of gold coins or small investor demand. But the most important question to ask is .....

Why Pay A Premium?

I simply do not understand paying absurd premiums for gold or silver coins.

Note that GoldMoney is physical gold, not paper gold. Turk takes delivery, and stores it. The vaults are audited. If you want to own physical gold, this is one of the best ways to do so.

I reiterate I Like Gold Here.

For the sake of full disclosure, I will point out that I have an account and a relationship with GoldMoney. And finally, I will point out, the relationship does not affect the price anyone pays or receives when buying or selling.

China To Devalue Renminbi?

Next up on the hit parade was a barrage of emails about China devaluing the RMB (Yuan).

I received several of emails like this one:

"Rumors are flying that China and another nation are going to intentionally devalue their currencies within days by 30-35% in retaliation for the US (Henry Paulson and Heli Ben) having double-crossed the Chinese.

The rumor has it that the dynamic-duo promised the Chinese the US would bail them out of the hundreds of billions (trillions?) of garbage mortgage securities US bankers sold them over the past few years and would use TARP/EESA funds to do so. And, while making the case for the bailout before the Congress they used the threat of Chinese retaliation as leverage."

Here was my reply:

The facts are false.
The US government guaranteed the debt of Fannie and Freddie
China was holding US agencies. So was PIMCO.
Please see Bail-out hands Pimco $1.7bn payday

China could devalue, I just doubt it. But I am sure it will not be for the reason stated if it happens. There was no double cross.

This evening I see a headline that makes some sense.

China ‘Highly Unlikely’ to Reverse Policy, Weaken Yuan

Bloomberg is reporting China ‘Highly Unlikely’ to Reverse Policy, Weaken Yuan, Yu Says
China is “highly unlikely” to favor a weaker yuan because the government will rely more on spurring domestic demand than exports to support the economy, a former adviser to the central bank said.

Twelve-month forward contracts rose for a second day as traders scaled back bets on depreciation after Assistant Finance Minister Zhu Guangyao said last week China will keep the yuan stable at a reasonable and balanced level. The central bank last week allowed the biggest decline in the yuan since ending its fixed exchange rate in 2005, prompting speculation it favors a weaker currency.

“It is highly unlikely that China will reverse its course,” Yu Yongding said in an interview via e-mail. “The export sector can and should be helped by means other than devaluation. Why should China do something that is not in its long-term interests and whose impact in the short-run is uncertain?”
Amero Nonsense

I am tired of talk on the Amero. At least 10 people emailed me over the past week asking about Hal Turner's post *** URGENT *** NEW "AMERO" PAPER CURRENCY EXPOSED!

It is ridiculous to have to comment on such nonsense but in the sake of stopping the spread of that nonsense, as well as the emails and questions I get, I feel compelled to say something. Here is is:

Please Think!

Would the US give up control of its money supply?
Would Mexico?
Would the US want to merge currencies with Mexico? Why?
Would Canada want to merge currencies with either the US or Mexico?

The idea is pure lunacy yet these rumors manage to circulate. That they manage to circulate is a testimonial to the fact that people will believe anything without bothering to ask even a few simple questions such as those listed above.

Those that cannot think might have the common sense to check out such rumors on Snopes.
Amero Uproar

Neither the U.S. Mint nor the U.S. Treasury had a hand in creating these "Ameros." These coins are merely collectibles offered to the buying public by a private company in the business of manufacturing such curiosities.

On 31 August 2007, conservative radio host Hal Turner used images of the Amero tokens offered by Designs Computed as the basis for a far-fetched tale about his having been given a "real" Amero coin on the sly by an anonymous Treasury agent. In that story he claimed that a few days after he posted about the coin, a web site proclaiming Ameros to be fantasy coins (i.e., the Designs Computed site) was erected on the Internet as part of "a full blown effort to discredit my story and the images as fake." That was not the case. The Amero story was just another of Turner's outrage-provoking fictional tales.

In December 2008, Turner tried beating the same tired, apocryphal drum by claiming that he had obtained samples of Amero "paper currency notes."
Trump Sees Act Of God

Some things are just too silly to not comment on. This is one of those things: Trump Sees Act of God in Recession
Guess who is complaining that condominiums in Donald Trump’s latest big project are ridiculously overpriced. Donald Trump is. But he isn’t cutting the prices. He says the banks won’t let him.

The project is the Trump International Hotel and Tower in Chicago, which is to be the second-tallest building in that city (after the Sears Tower). By Mr. Trump’s account, sales were going great until “the real estate market in Chicago suffered a severe downturn” and the bankers made it worse by “creating the current financial crisis.”

Rather than have to pay the $40 million, Mr. Trump thinks the bank should pay him $3 billion for undermining the project and damaging his reputation.

Those assertions are made in a fascinating lawsuit filed by Mr. Trump, the real estate developer, television personality and best-selling author, in an effort to avoid paying $40 million that he personally guaranteed on a construction loan that Deutsche Bank says is due and payable.
Why any bank or anyone else for that matter would want to get involved with Donald Trump is beyond me. So whatever Deutsche Bank loses on this deal it deserves 10 times over. However, I will be more than happy to see Trump lose $40 million of his money as well. Indeed, Trump should fire himself for incompetence.

How many projects does "The Donald" have to wreck before banks stop lending him money? That's what I want to know.

Mike "Mish" Shedlock
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