This Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks

After all I've read on this thread I ponder this quote:

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease ... But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.
  • J.M. Keynes
Peace!

it didn't really answer anything.  Sorry.  You just created a circle jerk, that gets no one off IMO.
 

LogansRun,Are you suggesting that the US Central Bank … who is deeply "involved" in QE 4-ever isn't buying MBS (possibly distressed) to support its member banks?
Just because they buy anything, it doesn't make it money. It is money because it is money first and foremost. They function to serve their owners. Their member banks need them to buy defunct mortgages to hide the fact that the member banks are insolvent.
(By the way, they also buy gold.)
Grover
PS Again, Damnit. Don't make me defend those bastards!

http://www.silverseek.com/commentary/price-smash-%E2%80%93-who-what-how-and-why-10991

excerpt

For me, explaining what took place is easy, since the price plunge occurred in the confines of how I analyze gold and silver. First, what exactly did happen? Basically, a neutron price bomb was detonated in certain NYMEX/COMEX markets that selectively targeted gold, silver, copper, platinum, palladium and crude oil prices. On just about every other market, like stocks, bonds, currencies, grains, meats, soft commodities yesterday was non-eventful pricewise. The importance of this distinction that only selected markets experienced unusual price weakness is that it eliminates many general knee-jerk explanations about prices being impacted by broad macroeconomic factors. How could broad economic factors influence certain commodities and not the stock or currency markets? Looking deeper, the commodities experiencing price weakness all have different supply/demand fundamentals relative to one another, so as to eliminate the possibility that all those unique fundamentals changed yesterday in synch. Commodity fundamentals change glacially; it’s impossible for the supply/demand equation of many various commodities to change overnight.

I think that to undersand the global movement of markets, you've got to go up to 10,000 feet and get into subjects that are extremely controversial (which is why I have stayed way from these discussions, except to urge people to get out of the system to the extent possible). At this point I don't care to spend more time understanding the aglo-american empire and it's historical origins or what it's up to today and what forces are fighting and arrayed against it. Absolute power corrupts absolutely.  The boys at the big banks gaming the system are just the tip of the iceberg, I think that  it is safe to say whatever needs to be done will be done to protect the power and wealth of a fairly small group of people.  I am not conspiratorial, but I think at that rarified level, it is a smaller world than we think.  With the rise of the nation state, the corporate power structure and concentrated energy sources, there is sort of a balance of terror between a relatively small number of forces that has evolved organically over time.
What has been done, is being done, and will be done would raise the hairs on the backs of all our necks I am sure.  Nation states that have tried to get out of the dollar system have been bombed into the stone age, all in an effort to keep the dollar system afloat (although very different reasons have been given to those activities).  That has more to do with the strenght of the dollar and the price of gold than we would all like to admit.  IMHO, when you are gambling on the price of gold, you are gambling on the lives of millions of hapless people accross the globe, becuase gold has become a financial weapon in an epic global battle at the end of an age.

I know that precious metals have taken on the banner of righteous indignation for those who feel cheated by a system that has become perverted and out of control.  I would lke to humbly suggest that those true and good emotions be kept safe from the projection on any single idea or thing, but be made flexible in the way they express themselves in this rapidly evolving and changing world.  As an aside (Two things can be true about something at the same time, light is both a particle and a wave, it's behavior is dependent on our observation of it.  I would like to suggest that gold behaves in the same fashion, both as money and as a commodity, depending on relative circumstances.)

Perhaps PM's has a role to play, and maybe purchasing it will expose the fraud and bring the corruption to an end by exposing the paper counter fitters, but in that sense it is more of a political act than an economic one.  If that is the case, than we should be willing to ride the waves that come with such activity.  There is certainly also a economc gold ownership argument based on the logic regarding money (currency) printing and the value of true money (or asset). True money should hold the value of our rightfully earned wealth, but in a system so devoid the rule of law, what assurance do we have that economic or physical controls will not continue to be put into play to constrain the expression of its true nature indefinately? Especially, as so many have pointed out, if it's ture value is such a threat to the "system" (as long as the system is around).  Doesn't that drive round to a plolitical act again?

I wish those well who want to own PM,s but there is a lot more to this story than technical charts and bottom supports, its a lot to think about (as I have said before, I may in the end purchase some).  Sorry for perhaps a little more gas on the fire of an already heated discussion, a little more detail than perhaps I should have given about how I feel about gold.

Grover - 

I hate having to answer this. They buy all kinds of crap from the banks. They're recently into buying bad mortgages. Does that turn bad mortgages into money? (Hell NO!)
I'm curious what you mean when you say "all kinds of crap" and "bad mortgages" - take a look at the current Fed balance sheet.  Can you point to the item(s) that you feel are "crap"?  All I can see under the heading of MBS are fannie/freddie guaranteed mortgages.  Fannie/Freddie (us) are on the hook for any losses, so I don't see the downside for the Fed there. http://www.federalreserve.gov/releases/h41/current/h41.htm Go to section 8, that's where they talk about their assets. Perhaps you are referring to the Maiden Lane portfolio which really was crap they picked up in 2008/2009 from Bear and AIG.  It used to be much larger, but they've sold most of it off.  Took losses too, from what I recall.  But its down to 1.4 billion.  Chump change in a 3.2 trillion dollar balance sheet. The Fed is doing crazy things.  But we need to differentiate between fact and story.  

[quote=davefairtex]The Fed is doing crazy things.  But we need to differentiate between fact and story.
[/quote]
Dave,
You are absolutely correct! I was thinking of TARP, TALF, and all the other 4 letter acronyms instituted during the 2008 meltdown when I said "all kinds of crap." I was also making a logical leap - if they loan money based on collateral, they are buying the collateral if the loan defaults. Looking at this report, TALF and Maiden are all that remains. The amount is smaller than I would have expected.
On the mortgage quality, is there any way to find out the amounts in different quality categories? Just because a mortgage is guaranteed, it doesn't necessarily rate in the highest category - simply that another entity is on the hook when a default occurs.
Finally, they list gold as an asset. Why would they consider gold to be an asset? (This isn't a flippant question.) Is there any way to know how much they really have in their vaults and how much is lent out?
Grover

Grover -The only reason I know this is because I thought the same thing you did - but then I wanted to get a handle on just how bad the problem was.  I too was surprised to find out it was mostly high quality stuff, and that TAF/TALF/ML1-3 were mostly all gone.
Here's a more detailed breakdown of what's on the sheet as of Q4 2012.  Its a pretty interesting deeper dive into what the Fed owns.
http://www.federalreserve.gov/monetarypolicy/quarterly-report-20120930.htm
How much does the Fed cost to run?  3.1 billion per year
How much net income? $86.6 billion/year - $81.6 billion refunded to Treasury
They've made money on most of their MBS purchases, based on their valuation assessments and the current low mortgage rates.  However were rates to rise, I think those MBS will stick around on the sheet for a very long time, especially the low coupon stuff.  I mean, 3.5-4%?
You can see in the ML breakdown just how crappy it all really was.  I recall going back and looking at old versions of this report (2010, 2011) and seeing billions in losses per quarter from ML - all swamped by interest income from Treasury and MBS holdings.  I mean, we paid for all those ML losses via less interest refunded to the Treasury, but if you look just at the Fed in isolation, the losses were within the range of risk that could be absorbed by all that interest income.
Its a really awesome business - this printing of money, buying debt instruments with the printed money, and then living off the interest.  The more you buy, the bigger your income!  Avg per-person salary burden at the fed: $149k (2.8 billion in salaries + benefits divided by 19k employees).
As to why they own gold…the place has been in business for 100 years.  A theory: the original owners loved the stuff, and New Guy doesn't dare sell it just in case it comes back into fashion.  He doesn't want to be "that guy" who the history books label as "the idiot who sold gold at exactly the wrong time."  Well, its one theory anyway.

This is stage one, 
http://www.youtube.com/watch?v=2RtA0x24q9s&NR=1&feature=endscreen

What happens when this fails, what does stage two look like, god only knows.  I have a feeling it will not be pretty.

I wonder how times the FED can backstop the slam down.   Using the futures market is easy for the FED to conseal, no?  As long as this behavior is blessed by the powers that be gold could become a punching bag.

What I am keen to figure out, is what is in the Fed's "Other Assets" bucket on their balance sheet.  It totals $233 billion at present, nearly a quarter of a trillion dollars, and we know nothing about it besides it's a bucket labelled "other."
A simple audit would reveal much I think.
If this bucket consists of a lot of junk, which is possible, then the next question is from whom was this junk bought.  Again, I suspect the answer would be quite interesting.
I know we toss around big numbers all the time, like trillions, but to me $233 billion is still a significant number and it's rather odd that the Fed now sports a line item that is fully 25% the size of its pre-crisis balance sheet with nary an explanation.

Is it possible that the 233 billion or “other” might be “We The People’s” gold? With all the crazy accounting how big of a stretch would it be for someone in the government to think that what is ours is theirs?
Just a fleeting thought.
AK Granny

http://www.youtube.com/watch?v=YnJQ5fkIKlY

Dave,Thank you for an excellent post, very thoroughly explained.  Agree with the thought that we have to be careful to ascribe Fed planning behind every move.  Your examples are helpful and explain things well.
I still think there is a disconnect here.
Don't know if you agree with my belief, and what I think others are trying to convey.
Which is that, as opposed to active daily management of gold price, what may be more likely is that the Fed has likely given a set of 'generic directives' to commercial banks and some ground rules.  One could see BB having a sit down at lunch with our friends and say something like this:

  1.  PMs must not have an overall, average rising trend on a trajectory of X% increase per year (pick a number, I have not gotten into the scenario-playing that deep- say not higher than the CPI on average).  Of course you realize this is part of our plan to keep faith in the USD and keep USTs manageable.  We can't have people losing trust in the USD and jamming up UST rates.   Also, maybe a limit on % increase on any given day (3%), no % limit to the downside or a much higher limit.  If the market can favor gold over currency (safe haven, currency collapse fears), you know what that means for the USD and your balance sheet.
  2.  You may create naked contracts to achieve #1.  Just be reasonable about interventions.  Don't be too obvious (side note- I think this has already been violated, probably to the irritation of the Fed- see numerous blog comments about selloffs in thin-markets).  You have my word and I have it on good authority from CFTC that we will not investigate, regulate, prosecute.  You know, because this is for the good of the nation.
  3.  Don't get greedy.  Not to exceed X% of your quarterly profits from this sector during manipulation
  4.  Of course you can count on QE and ZIRP to continue to provide you with high amounts of dry powder.  I will let you know well in advance if those money-streams ever may dry up.  We may find other quiet ways to continue the dry powder as necessary.
    4b)  As you know, we have significant reserves of actual metal, should you get into a temporary bind where buyers are demanding delivery.  Just let me know.
  5.  Keep your cell phone handy, we will call if we see too many obvious or clumsy market manipulations, or if conditions warrant.
  6.  See you in a couple of months, have fun!
    The above seems much more likely than daily puppet-string pulling by the Fed.
    Edit- If I ran the CFTC- Common Sense rules
  7.  Position limits- no entity greater than X % of total contracts (10%?, 5%)
  8.  Audit- a citizens board that oversees audits for the CFTC to engage in one full audit of every custodian for every commodity that is traded.  Reports published on the internet within 48 hours of signoff.
  9.  No leverage.  Period.
  10.  Limits on price changes per 24 hour period.
    I believe in the concept of futures markets.  However, the 4 simple rules above would make things work as they are supposed and get much of the corruption out of the system

My fear is that this "other" set of assets on the Fed's books are some sort of accounting gimmick, at least in part. Remember, according to Generally Accepted Accounting Practices (GAAP), any debt an entity holds is counted as that entity's asset. It even works with potential debt, such as limits on credit lines. For example, even if you carry no balance on a credit card, if I understand the GAAP rules credit card companies can claim your full $5,000 potential debt as an "asset." That is why the full amount of potential credit card indebtedness is counted against you when you apply for any other loans. (Any accountants out there? Tell me if I am correct.)
Other "assets" might be not just the toxic mortgages mentioned by others in this thread, but other debt instruments like, say, loans to the EAU, the IMF, or other underwater institutions.

As Chris stated, an audit of these nebulous assets would indeed be welcome.

My question was about commodities, not worthless paper.  Or do you consider MBS to be commodities?  Sorry, if I came off harsh, your answer was self explanatory IMO, and didn't help to explain why Gold is money, and not a commodity.
We know the CB's are buying worthless paper (MBS) with money printed out of thin air.  But why are they also buying Gold, which isn't "Worthless"?  It's not to offset the losses they'll incure when they mark to market the MBS paper, as they bought that with printed money at no expense.
Again, what other commodity does any CB buy other than Gold?  And again, if there isn't any, then I argue GOLD IS MONEY, not a commodity!

[quote]We know the CB's are buying worthless paper (MBS) with money printed out of thin air.  But why are they also buying Gold, which isn't "Worthless"?  It's not to offset the losses they'll incure when they mark to market the MBS paper, as they bought that with printed money at no expense.[/quote]Perhaps I'm behind in my news gathering, but as far as I know, only eastern CBs, (Russia, China, India, etc) are buying gold.  The western CBs, (Europe, US) are not.  Did I miss something?
Doug

Yes, mostly from the non-Western World Central Banks.Sprott Report
But as the report says, there's an agreement between the Western CB's that allows only so much buying/selling on a yearly basis.  But that agreements report shows NOTHING over the past 24 months…hmmm.  No audit available either…shocker.
 

When I looked at the quarterly balance sheet, I didn't see any such beast, but when I looked at the weekly sheet, there it as.  240 billion dollars and a quick check at FRED showed this particular line item is going up like a rocket ship!Assets: Other Factors Supplying Reserve Balances: Other Federal Reserve Assets: Week Average (WOTHAST) | FRED | St. Louis Fed
Of course the chart looks more impressive since its a 30 year chart but still.  240 billion is real money.
So according to the notes accompanying this series, this is a catch-all bag for all the random crap that doesn't fit neatly into any one category.  Clearly it would be a nice place to hide misdeeds.  Here's what the notes say are the "large items" in this bag along with my guesses as to amounts:

  • assets denominated in foreign currencies (best I can figure - about 25 billion)
  • warehoused currency for Treasury (not sure)
  • accrued interest on money destined to be paid to Treasury (between 0-20 billion, fluctuating)
    * premiums paid on securities bought (perhaps 50-100 billion)
    This last one is a bit of a mystery as to size.  When anyone buys a bond, if they pay 100 cents for the bond, they're buying it with no premium and no discount.  But if interest rates drop, high-yielding bonds start to carry a premium.  So let's say prevailing rate on 10 year treasury bonds are 6%, and then rates drop to 3%.  Those older 6% notes now sell at a premium - say they're 110 cents on the dollar.  When the Fed buys one of these, the 10 cent "premium" gets dropped as an "other asset" into this bucket, and the 100 cents is put into the main account for Treasury bond assets since the Fed will only receive the 100 cents upon maturity.  Of course the Fed makes up for this "loss" by getting 6% coupon payments every 6 months instead of 3%.
    Back of the envelope calculation:  WOTHAST went from 90 billion to 240 billion at a time when the Fed bought perhaps 1 trillion in bonds net.  If it were paying a 10% premium on each bond (likely because of Operation Twist - the longer the duration, the bigger that premium will be) that would account for perhaps 50% of the rocketship growth of this account.  It still leaves perhaps 50-90 billion unaccounted for.
    Here's the Fed accountant-speak for this section of this bucket - more detail is available at the link above.
Premiums paid on securities bought: This release reports Federal Reserve holdings of securities at face value, not necessarily at market value. If the Federal Reserve pays more than the face value for securities it purchased, the premiums over the face value are amortized as the securities mature. Part of the premium is transferred daily to the earnings category as a "negative earning." As the premium in "Other Federal Reserve assets" is reduced, a simultaneous balancing reduction is made in "Other liabilities and capital." Securities purchased at a premium over face value are accounted for in this way because, at maturity, the Federal Reserve Banks receive only the face amount of the securities, not the amount actually paid.
So I can account for perhaps 2/3 of this 240 billion.  The remaining amounts...remains a mystery.  Fed seems like it needs another audit, especially for this account that is growing like crazy.  Hidden places like this are always where the bad things end up appearing. Perhaps I'll nose around a bit more and see if anything comes up.

Dave,
Thanks for providing those links and the followup on Chris's question about the "other" category. When I opened your first link, I saw that entry and wondered the same thing. The footnote listed foreign reserve currencies and it didn't seem that out of line. They appear to have a well run overt operation that is repairing the damage from the 2008 meltdown.

I still don't like them. I don't trust them. I abhor the power they have.

They list gold as an asset and that got me wondering (just as LogansRun is wondering.) That is the only non-debt instrument they list. They don't list the value of their facilities, the value of their trademark on "Federal Reserve", or anything else that a normal business would list. They also reevaluate their foreign currency holdings, but not the gold value. Does that seem odd to you?

Grover