“I know of only two men who really understand the value of gold,” Rothschild reputedly joked in the mid-19th century – “an obscure clerk in the basement vault of the Banque de France and one of the directors of the Bank of England.

Ben Bernanke vs. Rothschild’s Obscure Clerk

BEN BERNANKE, today’s most powerful banker, said this week that nobody really understands gold prices, including himself. Victorian Europe’s richest man, and bullion broker to the Bank of England, N.M.Rothschild at least took the trouble to check.

“I know of only two men who really understand the value of gold,”Rothschild reputedly joked in the mid-19th century – “an obscure clerk in the basement vault of the Banque de France and one of the directors of the Bank of England.

“Unfortunately, they disagree.”

The US Fed chairman in contrast shows only a cursory interest in gold. That’s despite being an economic historian (and 3,000 years of history say people buy gold as a store of value) as well as sitting on top of the world’s largest hoard (the New York Fed vaults some 6,700 tonnes for both the US and foreign governments. The United States’ own gold reserves total 8,133 tonnes – some 5% of all the gold ever mined).

Asked in Congress on Thursday, however, why 2013 gold prices have fallen 25%, Bernanke was in fact close to an answer. “People are less concerned about extreme outcomes,” he said, “and therefore they feel less need for whatever protection gold affords.”

This drop suggests “people have somewhat more confidence. [So] the gold price going down is not necessarily a bad thing.”

Rothschild’s obscure clerk might well agree, at least with regards to Western investors. People buy gold, and drive the price higher, when they fear bad things ahead. War, financial crisis and stockmarket crashes…such horrors make rare, indestructible gold appealing like nothing else. (The US government’s own hoard confirms that.) But five years after Lehmans collapsed, many investors are now bored with the crisis. That makes gold – proven crisis insurance – look boring as well.

Asian households, on the other hand, buy gold whenever they can. So their rising incomes mean India and China now account for one ounce of gold in every two sold worldwide. And not understanding gold prices today starts with ignoring Asia’s rapid ascent.

Ben Bernanke was also half-wrong to say people buy gold as an “inflation hedge”. Because he missed the equally big role played by interest rates – and that’s a telling blind spot. After all, the Fed chairman slashed the returns to cash to zero. More than four years later, he promises to hold rates at zero “for an extended period” in future as well.

This might not matter if inflation stayed “low” as he keeps claiming. But when inflation overtakes interest rates? Gold tends to rise in value when cash savings fall in real terms. That’s been as true under the free-floating prices of the last 42 years as it was under the 19th century’s classical Gold Standard.

Put another way, if inflation is rising faster than your savings are growing, your cost of living would be falling if you held that money as gold instead.

Since Richard Nixon cut the Dollar’s last formal ties to gold backing four decades ago, the official US cost of living index has outpaced US savings rates in 198 months. Gold prices have risen in 163 of them, gaining an average – in real terms and after accounting for today’s US capital gains tax – of 14.2% per year. That made the Consumer Price Index fall for gold-owning savers.

The reverse is true too (and again, in the main. We’re as tired of saying you can’t time real rates and gold as everyone else is of hearing it). In those 305 months when cash savings grew in real terms, gold lost value almost two-thirds of the time, dropping an average 4.0% from a year earlier and so making life more expensive for gold-owning savers.

Yes, the plunge in gold prices this year far outweighs the steadying cost of living for bank savers. But no one said fighting the Fed would be easy, or cheap. And the lesson for central bankers meantime?

Back in the 19th century, if people began exchanging their paper money for gold, central banks would raise interest rates, defending the value of cash and encouraging savers to stay in paper instead. With that convertibility long gone, however, central banks now have what Bernanke calls “flexibility” – the ability to keep rates below inflation, and even create more money at will. This bid to boost the economy comes at the expense of cash savers. So when people choose to buy gold in the 21st century they are signaling in fact the “success” of US Fed and other central-bank policies.

No doubt Ben Bernanke understands that more than he lets on. Savers would do well to understand his repeated desire for higher inflation. Never mind understanding the aims of his likely successors.

Adrian Ash

BullionVault

Gold price chart, no delay   |   Buy gold online at live prices

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold and silver ready-vaulted in Zurich or Singapore for just 0.5% dealing fees.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

…..in the last 12 to 18 months has been the US. So you have most markets in the world going down and the US going up. It is very likely that the US market has already peaked out at 1687 on May 22nd on the S&P and if the market makes a new high it would be only with a few stocks making new highs. The majority of stocks will not make new highs. (Ed Note: New S&P 500 High Today)

There wont be much Tapering

Central banks around the world will continue to pursue easy monetary policies and there will be very little tapering. But in the unlikely case, where the US economy were strong and showing strong growth, in half an year or year’s time, then they will reduce the purchases of assets.

But in a scenario where the economy stays weak and continues to disappoint, I do not think that they will taper much. In fact, Mr. Bernanke is most likely to retire and some other Fed members will try to make Mr. Bernanke look like a hawk and they have argued for unlimited QEs forever and that is likely to be the case.

There will be a Massive Deflation in Financial Assets

I feel deeply uncomfortable to hold cash in a bank and I think we are in an environment where financial assets are going to come under a lot of pressure at some point , Now will that some point be with Dow Jones at 20 000 , or 15 000 or 30 000 ? who knows ? but all I know is that the financial sector is disproportionately large to the global economy and that there will be a massive deflation in the financial assets 

…… In Fox Business News interview : click here to watch the full interview >>>>>>>(Ed Note: 4:13 clip)

GOLD : we never know exactly which is the high and which is the low that’s why there are more poor people than rich people

Well he (Jim Rogers ) may know more than I do , and it is possible that (Gold) drops further , it is also possible that given the incredible bearish sentiment that exists about the outlook for gold price and given the fact that gold has already declined by almost 40 percent and also given the money printing , that we have around the world that gold is making lows right now , who knows ? my sense is that , we never know exactly which is the high and which is the low that’s why there are more poor people than rich people otherwise everybody will buy at the low and sell at the high the same day.

 Click HERE to watch the full interview (Ed Note: Same 4:13 clip as above)

Europe’s debt-crisis strategy is near collapse. The Wheels Are Coming Off the Whole of Southern Europe. The long-awaited recovery has failed to take wing. Debt ratios across southern Europe are rising at an accelerating pace. Political consent for extreme austerity is breaking down in almost every EMU crisis state. And now the US Federal Reserve has inflicted a full-blown credit shock for good measure. None of Euroland’s key actors seems willing to admit that the current strategy is untenable. They hope to paper over the cracks until the German elections in September, as if that is going to make any difference. A leaked report from the European Commission confirms that Greece will miss its austerity targets yet again by a wide margin. It alleges that Greece lacks the “willingness and capacity” to collect taxes. In fact, Athens is missing targets because the economy is still in free fall…and that is because of austerity overkill. The Greek think-tank IOBE expects GDP to fall 5pc this year. It has told journalists privately that the final figure may be -7pc. The Greek stabilisation is a mirage.

Portugal pushed closer to the brink

Portugal’s borrowing costs have spiked dramatically after key political parties failed to agree on a national salvation front, raising the risk of a snap election and an anti-austerity revolt.

….more by Evans-Pritchard HERE

OECD fears jobless threat to social fabric

The unemployment gap between the US and eurozone states will reach the highest levels in modern history next year, according to a report by the OECD

….more by Evans-Pritchard HERE

The Biggest Government Lie in History?

Welcome to the world’s most secure vault…

Completed in 1936, it’s encased in 16,000 cubic feet of granite and 4,200 cubic yards of cement.

The vault door weighs an astounding 22 tons and is made of a 21-inch-thick material that’s resistant to drills, torches and explosives.

It comes with a bombproof roof, too.

Additional layers of physical security include: video cameras, minefields, barbed wire, electric fences, armed guards – even unmarked Apache helicopter gunships.

Oh, and it’s stationed on a 109,000-acre U.S. army post.

So what’s inside?

Well, it depends on who you ask.

The government will tell you that almost 5,000 metric tons of gold, or roughly 3% of all the gold ever refined throughout human history, is safely sealed inside the vault.

Others will tell you that the vault (the United States Bullion Depository – known as Fort Knox) is totally empty.

What if the skeptics are right? And all this protection is just an elaborate cover-up? 

What if there’s actually no gold at Fort Knox?

Let’s dig a little deeper… 

Send the Auditors to Fort Knox! 

In light of the revelations from NSA whistle-blower, Edward Snowden, it’s even harder now to trust Washington politicians.

The government has been doing a lot of things that it said it wasn’t for years (i.e. – spying on citizens). And that naturally makes me wonder what else it might be up to.

I’m not alone, either.

Three-time presidential candidate, Ron Paul, has long questioned the amount of gold at Fort Knox. He even went as far as introducing legislation in 2011, which proposed an audit.

One thing we can all agree on is this: Lack of transparency always leads to corruption. So Paul’s audit demand seems reasonable. Especially considering that the world’s publicly traded companies must undergo annual audits. Why should the Federal government be immune?

Amazingly, though, the last audit of Fort Knox occurred in 1953, right after President Eisenhower’s inauguration. Except no outside experts were permitted, and only about 5% of the gold was tested. So there’s been no full audit in over 60 years!

Over that time, however, the government has sold its gold – reducing its holdings from about 20,000 metric tons in the 1950s, to the current level of 8,133 metric tons.

So are we just supposed to trust that the government stopped selling? In this day and age, that’s a pretty tall order!

Just ask the Germans.

In late 2012, Germany’s federal court ordered its central bank to conduct annual audits and physically inspect gold deposits worldwide – including in the United States. For decades, the Bundesbank had relied on written confirmation.

Why the sudden change of heart? It makes me wonder…

A More Fundamental Question 

Let’s give the government the benefit of the doubt for a (brief) moment and ask: Why do we even have gold reserves?

The gold bars, packed tightly into a secure vault, were supposed to give us confidence in our country’s currency. But we cast off the gold standard in 1971 and stopped redeeming currency for gold. So nowadays, gold reserves are nothing more than an asset on the Fed’s balance sheet, not an integral part of our monetary system.

So what gives with clinging tightly to it?

Fed Chairman Ben Bernanke says that it’s the result of “long-term tradition.”

Mark Zandi, Chief Economist at Moody’s Analytics says, “It may lend some confidence to investors that we have large gold reserves. But it’s more symbolic than substantive.”

Meanwhile, former Fed Chairman Alan Greenspan reportedly said, we hold onto the huge reserves “just in case we need it.” (That’s comforting.)

In the end, if there’s no real purpose for the gold reserves, then why worry about an audit at all?

A Crisis of Confidence

One reason the government might not want an audit is because it would lend importance to an asset that it swears is unimportant.

Or as hedge fund manager James Rickards puts it, “An audit would give gold too much credit and start to erode the official propaganda that gold is not a monetary asset. After all, no one audits the number of acorns in the national parks… They are too unimportant.”

Makes sense. Yet, I don’t think that’s substantive enough to justify the refusal.

What’s more likely is that an audit would raise more questions than it answers. Like, if the gold is really there, does it really all belong to the government?

I say that because central banks routinely lease or lend out gold. But current reporting guidelines don’t require them to distinguish between gold owned outright and gold swapped with another party.

Instead, the U.S. Treasury simply states its holdings as “gold (including gold deposits and gold swapped).” Or in the British government’s case, “gold (including gold swapped or on loan).”

Again, such a lack of transparency opens the door to abuse. Not only could all the gold be on loan (perhaps on unfavorable terms), but banks could also be “re-loaning” that very same gold, thereby creating a “paper pyramid of gold.”

The process is known as “rehypothecation,” and it’s exactly what happened during the mortgage crisis with collateralized debt obligations. And we all know how that ended.

An audit might also reveal that the government dumped some gold on the world markets to manipulate prices. (Yes, governments have done that before.) And if the U.S. government even sold a little without telling us, trust would be irreversibly broken.

More spectacularly, an audit might reveal that Fort Knox is littered with gold-painted tungsten. Here, too, a precedent exists, ascounterfeit bars turn up from time to time. Although I doubt a government would confess to being so incredibly duped.

Fort Knox: A New Stimulus Project

It would reportedly take 400 people, working full-time for six months, to test all the gold at Fort Knox for purity. It would cost at least $15 million, too. For me, that’s not a deterrent, though.

Sounds more like an economic “stimulus” project. Lord knows we’ve squandered way more tax dollars on projects with no tangible benefits. Besides, we could use some new jobs.

Bottom line: If you believe the government routinely lies or covers up its actions, we can’t simply laugh off the idea that there’s no gold in Fort Knox. Until an audit is done, the facts provide more questions than answers.

And while I don’t believe Fort Knox is completely devoid of gold, it’s certainly possible that our gold reserves are lower than reported and/or not wholly owned by the U.S. government.

So what does that mean for the price of gold? Stay tuned for tomorrow’s column. I’ll address that question to provide a real-world, logical price target for gold.

Ahead of the tape,

Louis Basenese

It was a time not all that long ago that all of the attention in the coming week would be focused on one thing and one thing only in corporate earnings. And with a large number of major companies scheduled to report their quarterly results over the next few days, it should be the primary thing to which most investors should be paying attention. However, the post crisis market environment no longer seems to care all that much about fundamentals. Sure, it still makes a difference on a stock specific level, but the eyes of investors on the most part are now focused elsewhere. Instead, it is now all about monetary stimulus and the words of key policy makers. And it will be two key events over the next several days that have the potential to send the market swinging wildly along the way.

Act 1: China GDP

The first key event takes place on Sunday night before the U.S. markets open on Monday morning. This is the release of China’s second quarter GDP data.

…..read more about China & Act 2: HERE