Monday, June 30, 2014

Will July be just a lazy summer month?

July is just around the corner. Usually the pace slows down in mid summer. Lots of people are on vacations. Markets seem to slow down some. Significant news events seem fewer in the summer months. Will July be just another lazy summer month? We'll find out soon. 

Here are some topics we will be covering in July:

-we'll explore the IMF in more detail with Jim Rickards. Jim did an interview recently where he went into much more detail than usual on his views about the IMF and its role going forward. We will look at that interview and highlight some key points he made in the interview.

-we'll keep an eye on the (so far) regional conflicts still ongoing that could flare up into bigger things at any time. Iraq, the Ukraine, Syria, the China Sea, and really the entire Middle East are in unrest right now. Oil prices could turn even more volatile as well.

-what will happen with the Argentina debt? They have until the end of July to avoid a default. 

-Is there another set of asset bubbles building in the West? The BIS (Bank of Int'l Settlements) just issued a warning that there are. We'll look at what they said in their warning statement.

-What about China? Will it have problems of its own to deal with in its banking system? Some say there are hidden problems lurking in their "shadow banking system".

-Don't forget the BRIC's summit will be held in July where they will establish a large currency reserve fund and are supposed to provide more details about the new planned BRIC bank.

-Remember  that unusual speech that Christine Lagarde gave  at the first of the year to the National Press Club where she kept talking about the number seven? (see first 10 minutes) Some people thought she was talking in code that something important might happen in the 7th month of this year (that would be July). I guess we will find out soon if there is anything to that idea.

-2014 is the 70th anniversary of the Bretton Woods Conference and some will start celebrating this event as early as July.

-as always there are plenty of rumors on the internet on alternative news sites that significant events are about to unfold soon. Usually they don't pan out, but we'll see if July is different.

We'll look at all the above and always keep an eye out for anything that might lead to major monetary system change. If July turns out to be just another lazy summer month, that's OK too.

We may post fewer articles if things turn out to be pretty slow in July. We'll see how it goes.

Update 7-1-14: We have gotten some links to some interesting relevant articles sent in by readers here in our email recently. We will post links to these articles sometime in the week of July 1st - July 7th.

Saturday, June 28, 2014

For New Readers: What is the Purpose of this Blog?

Once a month or so we welcome new readers to the blog. Our statistics are telling us we get a fair number of new readers regularly as this blog now has 30,000 page views in its history since it began early this year. A question new readers may ask is: What is the purpose of this blog? We try to answer in the Q&A below:

Q: What prompted you to start this blog?

A: Around the first of this year there was a lot of "buzz" on the internet surrounding the idea of a coming "global currency reset". There were a lot of various credible sources using the term "reset" and talking about what that might mean. Many expected a "reset" to happen this year. So we decided to start this blog based on the idea that monetary system change is coming and follow the related news to see what happens.

Q: What do you mean by "global currency reset" or just the term "reset"?

A: What we mean here is major global monetary system change that results in the US dollar losing its status as sole global reserve currency. The kind of change that comes from a decision to rewrite the "rules of the game" as Jim Rickards puts it. We believe it will happen at some point so that is our bias here. We follow all news we can find that may relate to this coming change and try to present it on this blog.

Q: There are tons of sights that talk about this. Why read this blog?

A: True. This blog may not be needed by many people who already understand the issues we cover here. However, what we see is more and more new people interested in learning about this topic. As they see events take place where they live, they instinctively feel that some kind of major change is coming and want to learn more about it. We hope to provide a site here where they can find solid, credible information and point readers to what we think are some of the best sources of information to do more research for themselves

We might list our goals as follows:

-provide solid, credible information resource leads on coming monetary system change.

-sift through the large number of articles on this topic for readers who don't have time to do it themselves and present sort of a summary of relevant news and credible opinions.

-try to filter out sources we feel are lower credibility that may have an agenda if possible.

-be viewed as a credible free source of information that people know they can trust to deliver relevant news on this topic (this is hugely important to us).

-build an historical archive of solid information so that as new readers find this blog they can explore the historical posts (linked on the righthand side of the blog) to learn more about various aspects of this topic that interest them. There is a ton of free information there.

If we can accomplish the above, we have met our objectives here on this blog.

Q: Doesn't everyone have an agenda or bias?

A: Frankly most do. It is human nature. We admit to one here. Our bias is that we believe that major monetary system change is coming and we post articles and information here that support that view. Where we hope to be different is by keeping an open mind on how and when this could happen. Or even that we could be wrong and the present system might hold on for much longer than we would expect. So readers here should be aware we are coming from this bias. We don't try to say if the change will be good or bad. We just try to watch for signs of it so people can be prepared and make better planning decisions.

Q: Why should anyone care? Why is this important to the average person?

A: We think this topic is very important because if major change takes place that causes the US dollar to lose reserve currency status it will impact everyone substantially. The dollar will sustain a large devaluation (the dollar will buy a lot less than it does now). Depending upon how the change takes place all kinds of existing investments, retirement plans, and even what we use for money could be significantly impacted. We think everyone should care how this might impact their lives and prepare as they see fit for their circumstances.

Q: So how will this change happen? And in what time frame?

A: We can't answer those questions because we don't know. The information that has been posted to this blog provides solid credible information that change is coming and, in fact, is already underway. The information here provides a variety of credible views on how and when this could happen such as:

-a slow and steady conversion on a global level leading to the IMF becoming a global central bank and using the SDR as a kind of new global reserve currency (slower drawn out process)

-a rapid change prompted by a major global "black swan" event that leads to a new global financial crisis. The IMF steps in as lender of last resort to solve the crisis by global consent (could happen at any time)

-an East/West split unfolds where the BRIC nations leave the existing global framework within the IMF and World Bank. They become a competitor and promote their own new system and currency or currencies to bypass the US dollar system (happening right now)

-change takes place in steps on a regional trial basis first which eventually leads over time to a new centralized global system that uses the most successful trials tested in various regions (happening right now)

-a sudden unexpected "black swan" event takes place that takes down the existing system in a chaotic way such that no centralized authority emerges. Instead change takes place by the world becoming very de-centralized and regional. A lot of competing currencies and trading blocs emerge. (could happen at any time)

We have presented solid credible evidence on this blog that any of the above could happen in the coming months and years. We think the more information readers have the better. We encourage readers to keep an open mind and stay informed as events unfold. 

Over time, for those who take the time to stay informed, it will become obvious which of the above scenarios is happening. Our job is to stay on top of events related to all the above and post them here as best we can. In our view, nothing is more important than being informed to deal with whatever does happen.

Q: Will you ever commercialize this site?

A: No. This site will always be free and will not even run ads so that readers can feel confident that there is no commercial interest behind any information presented here. We do not make income of any kind from this site and never will. We have no affiliations with any sites we link on this blog. 

Q: What is wrong with making money?

A: Nothing. We are a big supporter of free enterprise and find nothing wrong with any site that makes money using any legal means. However, it is important that readers at this blog feel confident that no information is presented here in an effort to lead them into buying something. 

This will insure that our credibility is unquestioned. This blog is intended to be a free learning resource site for people new to these ideas and issues. Hopefully, they will feel comfortable sending others to this blog as well.

Q: How do you make a living?

A: I am employed in the oil and gas industry in accounting and have been for over 30 years and my wife is a former full time teacher who now works part time as a substitute in the local school district. This blog is just a hobby which requires no money to operate. It does require some time which I am happy to donate if enough people find the information useful.

Q: Why are you doing this?

A: It feels like there is a need out there. This site can fill a niche to reach out to people who sense something is not quite right, but don't know exactly what is wrong. People who might not usually have an interest in this topic or might think the topic is too complicated.

The hope is we can provide educational material here and point those people to what we think are the best sources for more information to become informed.

This blog is an effort to provide a public service just because it is the right thing to do. If we need good information for our own family decisions, surely others do too. Please invite others to visit. Any legitimate questions or comments are always welcome via our email: .  

In addition, relevant articles suggested by readers are very welcome. We have gotten many excellent tips this way and have met some great people who read this site. It has helped us in our own education on this important topic. We have some amazing readers here from all over the world!

A big thank you to all readers here!! Help us reach others if you feel the information here is of value! 

China moves forward to "Globalize" the Yuan

China is clearly a major player now in the global financial system. We know that in July they will be a leader in the BRICs summit meeting which will establish a new reserve currency fund and publish details of the new BRIC's bank which would offer an alternative to the World Bank. China is clearly aligning with Russia in an effort to offset the US and EU and promote wider use of currencies other than the US dollar.

Even as China works to "globalize the yuan" as this article notes, some are questioning if China will suffer problems from its own massive debt and the possibility that Chinese banks may have a lot of troubled loans on their books. This week Bloomberg runs an article  explaining how China found billions in fraudulent loans where commodities like gold were sold multiple times to back loans. 

So what is the potential impact of all this on the global monetary system? 

China will obviously continue to work steadily to internationalize the yuan. This is described in the article linked above as a 5 step process. Here is a quote from the article:

"Analysts widely forecast five steps in yuan internationalization: 1) yuan used and circulated overseas, 2) yuan as a currency of account in trade, 3) yuan used in trade settlement,4) yuan as a currency for fundraising and investment
and 5) yuan as a global reserve currency."

We see here that establishing the yuan as a "global reserve currency" is one of the steps. But this process is described in this article by Chinese officials as a 10-15 year project. Not something they expect to happen soon. 

While that is ongoing, what are the problems China might have to deal with? The second article linked above notes that the path of Chinese debt is "unsustainable" just as the path of US debt is unsustainable. Here is that quote from the article:

"The buildup of total debt, unprecedented in recent history, is leading to mounting repayment pressures. The bank estimated that interest payments were equivalent to 13 percent of GDP in March, up from an average of 7 to 8 percent in recent years. This high ratio is eating up an increasing share of corporate profit and government revenues and crowding out new investment, which makes a pick-up in growth momentum in 2014 all the more difficult to achieve.   . . . . . . 

"While we do not believe a debt crisis is around the corner, partly because some of this debt is 'evergreenable', it is clearly dragging on investment and will continue to do so for the foreseeable future," the report said. "This trajectory is unsustainable. "
Then we have this article which explains how even the $4 Trillion in reserves China now holds might not be enough if there were a banking crisis in China. Here is this quote from the article:
"And $4 trillion simply might not be enough cash. Officially, Chinese commercial banks’ bad loans make up only 1% of total outstanding loans. That sounds very comforting, but it’s also risibly wrong. Chinese banks are notorious for rolling over loans and undercounting bad debt. Even if the PBoC could use dollars to recapitalize its banks, at 18% of China’s total outstanding debt, they very likely wouldn’t be enough."

Earlier this year Jim Rickards wrote this article titled "The China Bubble is Bursting" in which he says, "China is on the verge of a financial collapse of unprecendented magnitude". Rickards explains that many older Chinese are invested in something Chinese banks promote called "Wealth Management Products" because normal interest rates are so low. Rickards describes the problems with these investment products:

"These wealth management products are offered by banks but are not guaranteed by them. Investor assets are pooled into the products and then invested in commercial projects with the proceeds shared among the investors.
The banks promise high returns on these products, which resemble the notorious collateralized debt obligations popular in the U.S. before the Panic of 2008. Actual performance on the wealth management products is below the promised returns in many cases. Banks cover this up by selling new products and using the proceeds to pay off the old ones. This is exactly how a Ponzi scheme operates.
Eventually some event such as a project failure or admitted fraud will start a panic in which investors demand that the banks redeem their wealth management products all at once. The banks will be unable to do so and will suspend redemptions on the products. Investors will claim that the products were backed by the banks but the banks will deny this. A run on the banks will commence that only government intervention and bailouts can contain. The result will be a general collapse in Chinese asset values for real estate, stocks and bonds as investors hoard cash, buy gold and move to the sidelines."
How does all this potentially impact the global monetary system? As we see it, it means that even China with the largest surplus reserves in the world can easily become a source of global financial instability. Because of all the debt overhanging the world, the expansion of derivative products tied to that debt (now far in excess of total world GDP), and the interconnected nature of the global financial system, a crisis that starts anywhere could spread everywhere in a short time frame. That could lead to major change very rapidly once that chain of events is triggered.
Meanwhile, many analysts believe that as China loosens capital controls money will begin to flow out of China all over the world. If Chinese investors are concerned about the stability of their banking system, money could flow into a variety of global investments including gold and other tangible assets. It could also trigger much higher inflation in the West.
If you step back and look at the whole big picture what you see is a gigantic global fiat currency system that is unstable and everyone admits is "unsustainable". Even in China where they have a massive $4 Trillion in surplus reserves. Understanding all this, it is easy to see why China is accumulating massive quantities of gold now. And why the IMF continues to hold nearly 3,000 tons of gold. And why Central Banks all over the world hold tons and tons of gold in their reserves. 
They know that if and when the massive fiat system fails, hard assets like gold will be the last resort asset left standing. So even as they jockey for position within the current global fiat system, they want to hold some last resort assets in case the whole system implodes and a "reset" of the rules of the game is forced upon them. In that situation, the tangible assets of each nation will take over as the basis for the value of currencies and national wealth.

Friday, June 27, 2014

China-Russia Partnership enters New Stage

The chess moves around the globe are interesting to watch. This article in the BRICSPOST shows how Russia and China are forming closer ties to try and offset the influence of the EU and US. The article also reminds readers of the upcoming BRIC's summit in July where the new BRIC bank will be discussed. The full article is pasted below.

"At a forum on developing cities around China’s Yangtze and Russia’s Volga rivers, top Chinese State Councilor Yang Jiechi said the China-Russia strategic partnership has “entered a new stage”.
Yang held talks with Valentina Matviyenko, Chairperson of the Federation Council of Russian Federation on Tuesday in Moscow.
Yang co-chaired the forum in the Russian city of Samara in the southwest earlier this week, which is expected to boost Moscow’s diplomatic and economic ties with China.
Yang said, “China is willing to carry out strategic cooperation with Russia” to promote “world and regional peace, stability and development”.
“The cooperation between noncontiguous regions of the two countries should be strengthened for a win-win deal,” he added.
The forum is seen as a step to implement the consensus reached by Chinese President Xi Jinping and Russian counterpart Vladimir Putin at a conference held in Shanghai last month.
Xi hosted Putin in China last month during which the two allies signed a massive $400 billion natural gas supply deal.
The deal is aimed at offsetting attempts by the EU and US to throttle the Russian economy through sanctions over the Ukraine crisis.
Russia is a major trade partner of China. In the first four months of 2014, trade volume grew by 3.4 per cent year on year to $29.06 billion, official statistics showed.
Russian President Vladimir Putin will meet “ally and friend” Xi Jinping during the 6th BRICS Summit in Brazil on July 15th.
Apart from strengthening the BRICS bloc of emerging economies, the two leaders are slated to hold bilateral talks."

Added note:   Meanwhile the Ukraine signs a trade deal with the EU irritating Russia.

Wednesday, June 25, 2014

UN Issues Statement of Concern over Argentina Debt ruling

We felt like this was probably an important story when we first mentioned it. Now we are certain it is. Today a UN agency issues a statement of concern over this ruling.

Below are some key quotes from this new article and then some followup comments:

"(Reuters) - The United Nations trade agency UNCTAD said on Wednesday that the recent U.S. court ruling on Argentina's debt erodes sovereign immunity and does not comply with the country's own U.S. Foreign Sovereign Immunities Act."

"... those rulings "set legal precedents which could have profound consequences for the international financial system", UNCTAD said in an unusual online commentary here.
"The rulings could open floodgates to other similar cases depending on interpretations given by courts under New York law, British law or other laws," UNCTAD said.

"Copycats will abound."
"UNCTAD said the court rulings could have far-reaching future consequences."
"The rulings have made future debt restructuring much more difficult as debtors are left with only moral suasion and foreign relations as weapons to encourage creditor coordination," the agency said.
"They have also strengthened the hand of creditors even though their behavior can be among the underlying causes of debt crises."
The U.N. agency said the "chaotic context" - in which it was questionable "whether the IMF is best positioned to give timely and fair judgments" reinforced the need for a globally agreed sovereign debt workout mechanism."
Added comments: Please read both the statements from the IMF and the UN here. They both are clearly concerned that this ruling could "have profound consequences for the international financial system". Also note that the UN agency calls for "a globally agreed sovereign debt workout mechanism". The UN paper issued today expresses much concern about this situation.

Refer now to our last post on this where we discuss the SDRM (Sovereign Debt Restructuring Mechanism) proposal that still sits quietly at the IMF. The US opposed this along with the 2010 IMF reforms and holds veto power at the IMF.
Recall that Jim Rickards and other credible voices are predicting that we will have another global financial crisis at some point. Rickards says that this time it will be too big for the US FED and the IMF will have the only "clean balance sheet" left in the world to try and resolve a crisis. This implies that some sovereign debt will be in trouble.
Now think about this SDRM proposal lying in wait at the IMF. We can logically expect that this proposal will move front and center if there is such a new global crisis. We can expect some sovereign debt will default in a crisis that big. That is why we are posting this information here and encourage readers to research this and learn as much as they can about it
This Supreme Court ruling will now call into question how effective the SDRM could be if the IMF attempted to use it in a future crisis as we understand this story. That makes it potentially a very important story.

Update 11:02 pm: Tonight  USA Today runs a story on this and includes the UN comments.

Monday, June 23, 2014

Followup on Supreme Court Ruling on Argentina Debt

Bloomberg View gives its take on the recent Supreme Court decision to let stand a ruling that says Argentina has to pay some creditors full value on bonds that were in default. Here are a few quotes from the article:

"In effect, the U.S. Supreme Court has just rewritten the rules of sovereign borrowing -- and not in a good way. It did this indirectly, by refusing to intervene in the legal fight between Argentina and an unusually persistent creditor. The immediate implications may be confined to Argentina, whose outlaw tendencies have made it a special case. The longer-term implications go wider".

"Why, you may ask, is it wrong to give creditors legal recourse against sovereign defaulters? In a properly coordinated process such as bankruptcy, it wouldn't be. Without such a process, though, you've got problems: The next time a government is overwhelmed by its debts, creditors will be reluctant to take part in a restructuring because holdouts will see better prospects of success at others' expense. A disorderly default -- the worst outcome for everybody -- becomes more likely."

The Bloomberg article ends by mentioning what the writer feels would be a better way to solve this kind of problem (how to resolve sovereign debt that is in default). He says:

"Ten years ago, governments talked about creating the treaty-based Sovereign-Debt Resolution Mechanism. That's the right answer, but the idea went nowhere. There's no sign yet that Argentina's debacle is reviving interest. Sadly, it will take more than the plight of a government that had it coming to force action."

So what is the Sovereign Debt Resolution Mechanism (SDRM)? You can read about that here. Basically it is a proposal at the IMF that would allow "a sovereign and a qualified majority of creditors to reach an agreement that would then be made binding on all creditors that are subject to the restructuring". The IMF article points out that this proposal has been subject to intense and constructive debate. Because the 2010 IMF reforms are not yet approved this SDRM is not yet in place as the Bloomberg article noted.


As a side note, readers here might find  this essay on a coming "reset" thought provoking. The author of this article predicts not only that the IMF reforms will eventually be approved, but it will lead to implementation of the SDR as reserve currency and that this SDRM will be used to resolve the overhanging sovereign debt problems in the world. Here are some quotes of interest from the essay:

"Returning to the options on the table, rescheduling of debt and debt stock reduction, its time to discuss the SDRM, or Sovereign Debt Restructuring Mechanism.The SDRM will act as a form of creditor bail-in and help regulate debt.  But when it was first introduced by the IMF shortly after the events of 9/11 the SDRM was tantamount to default, which we know is not market friendly and is to be avoided.

Today the SDRM is considered a method of debt treatment.  Its not called default but all the measures of a default are included in the fine print, such as term out the loans, stop paying back existing creditors, and restructure or repackage the loans as SDR bonds.
Through the SDRM all workable debt will be restructured and packaged as SDR bonds.  The unsustainable debt will be dealt with by a method of debt stock reduction."
"Defaulting on sovereign debt is out of the question and the only path forward is debt restructuring.  This means using the SDRM and the International Monetary Fund.  If not, then why have all countries, including Russia and China, demanded that the 2010 reforms be implemented immediately?"
"What is being referred to as the global currency reset is the process of restructuring the sovereign debt of the world through the SDRM.  The workable debt will be repackaged as SDR bonds and the unsustainable debt will be cleared from the books by a method of debt stock reduction.
The currencies and commodities of the world will unpeg from the primary reserve currency of the world, the US dollar, and peg to the SDR, with the Chinese renminbi and possibly the Russian ruble, Canadian and Australian dollars, and a few others added to the SDR basket of currencies."

A lot of the above prediction in this article falls in line with what Jim Rickards is predicting. However, it adds in the component of the IMF using this SDRM to essentially write off debt that is viewed as unsustainable in the world and to convert the sustainable debt into "SDR bonds". Right now, all this is stalled because the IMF reforms sit unapproved. If a global sovereign debt crisis arose, things might change.

Update 6-23-14 4:00 pm:  AP runs a story on this that provides some Q&A.

Update 6-25-14: UN issues statement about Argentina debt ruling. This is obviously a very important issue when both the IMF and the UN issue statements of concern that the ruling could have "profound consequences for the international financial system" as the UN says in this article.

Saturday, June 21, 2014

What's up in the gold and silver markets?

We have identified the gold and silver markets as one of our keys to watch. When gold and silver move higher (and especially if they move sharply) it usually means the US dollar is losing value. It can also be a foreshadowing that something is happening that may be a shock to the system. What we watch for here.

Gold and silver made sharp moves higher right after the FED press conference. It caught many by surprise because most were expecting the FED to hint that they might tighten a little sooner due to some recent signs of inflation. Instead the FED comments were interpreted as more dovish and showing a lack of concern about inflation.

At this point we really can't know why gold and silver reacted so strongly this week. It could be the market senses inflation is coming. It could be due to the geopolitical instability around the world (oil supplies in the Middle East and ramping up of tension in the Ukraine). It could be just that gold and silver have been somewhat oversold on a technical basis and are correcting for that. Maybe it is a combination of all of the above. Or even some unknown event is coming that some market insiders know about and are trying to get in front of early. Jim Sinclair listed 30 reasons he thinks gold will go higher on his web site this weekend.

Whatever the cause, gold and silver are signposts to watch. If they continue to move sharply higher the rest of this year it could mean some system changing events are being anticipated.

We can't know the future, but the move this week has really stirred up a lot of interest and has many technical analysts proclaiming that gold and silver are preparing for a longer term move higher over the next year. These are the people that follow charts to make forecasts.

We won't even try to make any market forecasts here. But we will offer you an interesting prediction you can follow if you like (for fun if nothing else).

Bo Polny is a precious metals technical analyst who sometimes offers very specific predictions to the public. He runs a subscription service for investors that is very expensive; but now and then he will put out a few very specific predictions in terms of price and timing to attract potential subscribers to his service. 

A lot of people do this, but Mr. Polny has made some incredibly accurate public forecasts in the past. And when he puts out a forecast he is very specific so you can follow it and see how it turns out. We should mention that we are not promoting using his service. He is just someone that has gone public with these very specific predictions that can be tracked to see if he is right or wrong over time. We do this with Jim Rickards predictions on various things as well (he has a very good track record overall).

This month Mr. Polny offered his latest free public predictions. You can see them here on his website. Interestingly, in May 2014 he did this interview with Kitco and made some specific predictions at that time for May and June 2014. So far he has hit those with incredible accuracy. You can follow his predictions and see how they turn out. 

Here are the free comments he made during June on his web site that all were accurate (I followed them as he posted them). He called the exact moves gold made just before and after the FED press conference a few days ahead of time.

On June 5th (repeats general Kitco interview predictions)

On June 10th  (makes FED call before FED news)

On June 16th (repeats FED call before FED news)

Bottom line for 2014 is that he says gold will hit $2000/oz before year end and expects silver to come close to $50 in the Kitco interview. He posts the $2000 gold forecast on his website. He expects gold to hit a high for the summer in June, pull back for awhile after that, and then make a very strong move up into the end of 2014 to reach $2000.

Why do we mention this? For one thing his accuracy so far makes it interesting to see if he hits the big forecast for the end of this year. It is something we can easily track.

More significantly to what we follow here, if gold hits $2000 by the end of this year it will mean something very significant in terms of possible monetary system change has happened. Something we don't see right now.

Mr. Polny does not base his forecast on events (he uses cycles) so he does not offer any ideas on what events could cause this. But something big would have to happen to cause a huge move like that so soon. Since gold is one of our signposts to follow, we can have some fun at the same time and see if Mr. Polny turns out to be right or wrong by the end of this year. If he is right, we can expect the US dollar index will be much lower than it is now by year end. And that might mean the dollar is losing status as global reserve currency. Let's see what happens.

update 6-25-14: Today Bo Polny posts this update to his web site stating that tomorrow (June 26th) will be the high for gold for now. He then says not later than July 1st gold will start into a pull back and hit a summer low before later starting into a very sharp move higher to $2000. This will be pretty easy to track. Either he will be right about gold going into a pull back by July 1st or he won't.

update 7-1-14: It looks like Bo Polny may have missed his peak date for gold (July 1st) as it has yet to begin the pullback he predicted. Overall, his public calls  for May/June were pretty good and if gold were to start into a pull back this week he would still have hit his call pretty well. If gold does not pull back or rally from here, I think we can say he missed his turn date for the pullback however. We'll check it again in about a week to see how it turned out. 

update 7-2-14: Bo Polny posts this update on his web site. He says he still thinks June is the temporary high with a pullback to begin now for the summer. Then a sharp move up later this year. You can see if ends up being right or wrong. If gold is above or near $2000 by year end, he will have been right. But something significant related to the monetary system will probably also have taken place.

Friday, June 20, 2014

IMF Concerned about US Supreme Court Ruling on Argentina Debt

This is one of those stories that will not draw much attention. Most people will never read this news story. But it is one of those "little" stories that could have a lot of signifigance. It relates to what we follow here because it involves what happens when a nation defaults on its sovereign debt. It's a court ruling by the US Supreme Court that has the IMF concerned.

First let's get the background from the article:

"The South American country (Argentina) defaulted (on its bonds) in 2001 following its economic crisis, and has been in a legal battle with bondholders led by hedge funds NML and Aurelius Capital Management.

Argentina argues that the funds bought most of the debt at a deep discount after the default, and has since tried to impede the country's efforts to restructure.
Investors holding more than 92% of the defaulted debt agreed in 2005 and 2010 to write off two-thirds of their pre-crisis value, providing Argentina with time to re-build its economy.
But the hedge funds owning the remaining 8% held out against the restructuring."
Here we have a situation somewhat like has happened in Greece. Recently the IMF and the ECB took the position that bond holders can be forced to take losses (bailed in) when a sovereign debt takes place. This has been an ongoing topic of much discussion and debate within global financial circles. Can the financial authorities compel private debt holders (and also regular bank account owners) to give up their rights to make claims for the full value of their asset when a default takes place?

The answer to this question has huge implications worldwide as the risk of sovereign debt default has never been higher. Nations and Central banks like the US FED have been preparing "position papers" on this very issue. Some are taking the position that private debt owners and bank account owners can be "bailed-in" by compulsion. 

This is something Jim Sinclair and others have been trying to alert people about for some time now. People have always assumed their bank accounts were protected at least up to the amounts that are supposed to be "guaranteed" by entities like the FDIC in the US. But the IMF and others are attempting to stake out the position that "bail-ins" can be imposed by force in a default crisis situation. It appears they want to be able to change the rules if they think they need to. Even including bank depositors.

In this case, we have the US Supreme Court ruling in favor of some hedge funds that will be paid the full value of the debt they owned (the Argentina debt).  While this ruling only applies to bond holders, we wonder if it might apply as a precedent to any default situation? Here is that part of the story from the article:

"On Monday, a US Supreme Court ruling sided with bondholders demanding Argentina pay them 1.3bn.(£766m)."

"The Supreme Court rejected Argentina's appeal against an order to pay the full value of bonds that some hedge funds bought after the country defaulted more than a decade ago.
Also, the bondholders won the right to use the US courts to force Argentina to reveal where it owns assets around the world. The court's decision means that bondholders should find it easier to collect their debts.
Some analysts believe it is possible that the Supreme Court's ruling could encourage investors to hold out in other restructurings of sovereign debt."
Not surprisingly, the IMF was concerned about this ruling and the possible precedent. What if this means other creditors (and perhaps bank account owners) can challenge the bail-ins that many nations and the IMF have been trying to establish as a tool to deal with a crisis?

Here is the IMF reaction in the article:

"The IMF said it was concerned about "broader systemic implications".

"The Fund is considering very carefully this decision and, as we have said before, we are concerned about possible broader systemic implications," the IMF said. The Fund is usually closely involved in the financial restructuring of countries in trouble."

I would imagine the IMF, the US FED, and many other Central Banks are very much concerned about the "possible broader systemic implications" of this ruling.

I think these institutions pretty much take it for granted that they will be able to step in and impose whatever conditions they want in a debt default crisis. I don't think they expected a Supreme Court ruling that could either negate that or at least make it more difficult legally to implement. Those to be bailed-in might be more willing to fight after seeing this ruling.

This very much impacts what we follow on this blog. We have noted that a sovereign debt crisis is a very real possibility given all the debt and instability in the world. We have noted that a crisis could cause people to be willing to go along with allowing the IMF to step in. They might accept an increase in IMF authority to deal with the crisis. But if we now have an incentive for various parties to fight solutions that might be imposed, that adds another layer of complication to things. This ruling suggests they might win or at least tie things up in court for an extended period of time. This this ruling could make it harder for the IMF to step in.

So, even though most people will probably never see this article, it may be of great signifigance to them one day. And something readers here should know about.

update 11:47pm: Here is another article on this issue.

update 6-21-14 12:25pm: Here is an update on the story. Argentina wants to try and negotiate some kind of settlement under Argentina law.

Russia and Saudi Arabia to Meet and Talk

Russia has called for a war on the US dollar this week. Now Russian Foreign Minister Sergei Lavrov will be meeting with Saudi Arabia to "discuss the situation in Syria and Iraq."

The world is a chess board and moves are being made all over it. Russia and China are reaching out to the Middle East in places where the US has had the most influence in the past.

Of course the petrodollar which bases oil trading on the US dollar is an agreement that has been in place for decades now between Saudi Arabia and the US. Will Russia and the Saudi's be discussing that? Here are some quotes from the article:

"During the forthcoming meetings, they plan to discuss the situation in Syria and around it, the state of affairs in Iraq, matters of ensuring security in the Gulf, as well as topical aspects of Russian-Saudi interaction, including a political dialogue and cooperation in the trade-and-economic sphere," the official added."

"The two countries also develop economic cooperation, including in the energy sphere."

We have identified a number of sign posts to watch that can signal that the US dollar dominated system is reaching an end. The Mike Maloney presentation we posted here earlier this week does an outstanding job of creating a visual graph to show how this system is nearing the end of its life cycle. 

Some of the key signposts are:

- the US dollar index which we keep a chart of on the upper right side of this blog. If we see this index take a sharp dive that will be a key indicator

- the bypassing of the US dollar in trade agreements and commerce around the world. This has been steadily ramping up everywhere led by Russia and China who clearly want an alternative to the US dollar. As demand for dollars drops and the supply keeps increasing, the value of those dollars will continue to drop. This especially includes any announcement by the Saudi's that they will sell oil in any currency (not just in US dollars) which would kill the petrodollar.

-the gold and silver markets. We don't discuss them much here, but they are a key sign post for change. We can expect both gold and silver to move much higher when the US dollar system ends (for sure in terms of their price in US dollars). Depending on how the system changes gold may re enter the monetary system in a new and more modern way. We think it will.

-the loss of general prestige of the United States around the world. When a country loses status it is often reflected in the value of its currency. 

The premise of this blog is that the above trends will lead to major monetary system change. This change will involve the US dollar losing its status as sole global reserve currency. What comes next is less certain and what we are trying to follow here. It could be a global reserve currency issued at the IMF (the SDR). It could be that the yuan and ruble will step up to become competing currencies and the world becomes more regional. It could be that the world becomes more regional first and the consolidates after that on a global basis. It could happen over years on a steady pace or rapidly under crisis conditions.

It seems pretty sure that gold will become important again in terms of backing to reserve currencies so that the pubic will have confidence in them. Not a gold standard as used to exist in the US (where you could exchange your paper dollars for actual gold coins at the bank). Gold is still the backbone of the backing for money even though not used in everyday transactions or as legal tender. Central banks gold huge amounts of gold as key reserve assets. 

The IMF owns nearly 3,000 tons of gold. Central bankers understand that gold stored back in the vaults is important to the global monetary system even though many don't encourage citizens to own it. Here is what the IMF says about its gold:

"Gold played a central role in the international monetary system until the collapse of the Bretton Woods system of fixed exchange rates in 1973. Since then, its role has diminished. But it remains an important asset in the reserve holdings of several countries, and the IMF is still one of the world’s largest official holders of gold. "

The Russian and Chinese Central Banks are massively increasing their gold reserves. Middle Eastern countries and other Asian countries are as well. India is a big buyer. 

Don't let anyone kid you that gold is meaningless or that Central Banks think it is useless.

It can be used in a variety of ways to restore confidence in currencies and we think it will play a part in whatever "reset" is eventually done. New technologies may emerge that allow gold (and other assets) to be used in a more modern way to connect regular citizens and Central Banks.

So gold is another key signpost to keep an eye on. We will try to watch them all here.