The recent furor over Germany’s request to audit its gold reserves being held by central banks in New York, London and Paris has highlighted the fact that there is even more reason to have one bar in hand versus two bars in the bush in today’s uncertain world.

The controversy arose after the Bundesbank’s official requests for a full audit of German gold reserves were apparently been turned down by the foreign central banks responsible for storing the bulk of German gold.

These central banks include the Federal Reserve Bank (1,536 tonnes), the Bank of England (450 tonnes) and the Banque de France (374 tonnes). The Bundesbank keeps just 1,036 tonnes of the county’s gold reserves in Frankfurt.

The Physical Premium

Of course, the whole point of buying precious metals as an investment in physical form is that they are a relatively easy way to store wealth for the common man. Nevertheless, the modern strategy would be to use the leverage available with precious metal ETFs, futures or options. 

The status quo also tends to scoff at paying any premium for physical precious metals, since you could just buy more paper ounces using the premium you would have paid for physical. 

They also argue that you may also have to pay to store the physical safely.

The physical premium is typically computed as a function of inventory management, including storage costs and time of delivery factors. Also included are the costs associated with keeping the doors to a low margin business open for all the fledging dealers, which is especially true for precious metal in bullion or non-numismatic form.

Unfortunately, for the elite or wealthy investor, the idea of taking physical possession is still a very radical concept. Only a relatively small percentage of the very small amount of precious metals allocated to the average portfolio is actually stored personally.

Sovereigns Scramble to Audit Their Gold Reserves

Apparently sovereigns like Germany found the idea of holding physical metal in their own vaults just as unromantic. Nevertheless, Germany has recently discovered that getting back all of its 2,360 tonnes of physical gold stored with other central banks may not be as easy as just asking for it. 

The reason for sovereigns participating in an overseas gold storage program are numerous, and for many countries are mostly political, but the overseas storage issue is providing a textbook case of the importance of direct control of some, if not all, of one’s wealth.

Now, with unprecedented issuance of debt and rampant paper money printing programs disguised as quantitative easing, the reasons for taking control of your assets are becoming a matter of economics. While this may be bullish for metal prices, the irony is that it could also be a precursor to a move to nationalize precious metal mines.

Venezuela was one of the first countries to request the repatriation of its gold reserves in modern times. More recently, the list of sovereigns repatriating gold has grown, and Germany has announced plans to repatriate 50 tonnes per year from the New York Fed over the next three years.

In addition to Germany’s audit requests, countries including Switzerland, The Netherlands and Ecuador have also requested audits of their gold reserves held abroad by other central banks.

Manipulation May Help Sovereigns Accumulate Metals

Like the Chinese government and many concerned individuals, these countries may all be stealthily accumulating physical gold, which is being facilitated by the ongoing paper market manipulation aimed at keeping physical precious metal prices low.

One wonders if they could be preparing for the eventual demise of the vastly overprinted U.S. Dollar, which may in turn herald the introduction of a new global reserve currency?

Obviously, none of these sovereigns is buying silver, because there is simply not enough physical silver left at prices anywhere near the current levels trading in the paper market.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit http://www.silver-coin-investor.com

The two critical questions on this tour have been what about the Hong Kong-Dollar Peg and the Swiss-Euro Peg? The answer is simple. NEVER in history has there ever been any PEG or STANDARD that has ever survived. Why? Because “shit happens” meaning there is a business cycle that incorporates weather and climate changes as well as war.

Trying to hold even a gold standard cannot be accomplished because the economy is not a flat line. Attempts at creating a gold standard (fixing its value) have always collapsed as was the case with Bretton Woods in 1971. Napoleon’s gold standard failed. Britain tried to switch to a gold standard and was forced to leave several times. Its attempt to PEG the Pound to the Deutsche Mark collapsed in 1992.

WHY do all PEGS and STANDARDS simply collapse? Aside from trying to eliminate the business cycle, why communism also failed, it encourages speculation. PEGS are the greatest gift to traders in history – the illusive and fabled GUARANTEED TRADE. It is like going to the casino and you bet 100,000 on number 23 at roulette. If you win, you get your 35 to 1 return. If you lose, the house returns your 100,000. It is a no loss game.

Speculators can jump on the Hong Kong PEG as well as the Swiss PEG. When the timing is right, they will build up the position with no risk of loss. If they lose, the state held the peg and simply returns their bets; they win either way.

Some in the Goldbug Fanatic camp hate my guts because they paint me as some sort of traitor because I do not support their idea that returning to a gold standard will save the world. Their entire focus is money and nothing else. They refuse to consider history and ask the basic question if the gold standard is such a magic cure, why has it never lasted?

The Goldbugs confuse gold as a medium of exchange and an investment (as now), both having independent value (former by politicians latter by the free market), with the idea that only gold should be MONEY. They do not understand MONEY really can be anything because it is simply an economic language being the medium of exchange between two tangible objects. They are fixed on this idea that MONEY is of some standard value and thus becomes a savings. That was the entire basis of the Wizard of Oz – the political satire about maintaining a GOLD STANDARD that created austerity and depression. Sound familiar watching events in Greece? This same argument about fixing money has been going on for thousands of years. It has always collapse because there is such a thing as the Business Cycle that even Paul Volcker had to admit the Keynesian Economics completely failed to eliminate that in his Rediscovery of the Business Cycle.

As soon as MONEY becomes a savings, you need a place to store it and you then create banks that lend the MONEY and you get leverage creating the VELOCITY of MONEY. Thus money is created by lending. Eliminate that to keep MONEY simply purely GOLD and then we are back to the Stone Age and you could only buy your house when you had cash since there would be no mortgages.

Why does MONEY have to have some fixed value when everything floats including your wages? Are you willing to work for a fixed sum for the rest of your life? Are you willing to sell the house for the same price you bought it at? Why invest if everything is a flat line and fixed? This debate has been going on for a long time but neither side listens to history.

The Fanatic Goldbugs further do not understand that to create a GOLD STANDARD is a derivative of Marxism – the idea of eliminating the fluctuations in the economy we call the Business Cycle. Just look at Southern Europe. Unemployment is off the charts. Social unrest is rising. The streets are often in flames. It is called austerity. This would be the same result introducing the GOLD STANDARD – the contraction of the money supply called DEFLATION. The Spanish youth have no future and a migrating to Brazil. Migration patterns such as this are common during economic crisis. A GOLD STANDARD would be more of the same.

The Fanatic Goldbugs’ superficial knowledge of monetary history serves only for slogans screamed from a tower with a loud speaker. Their logic is far from rational and amounts to basically if someone eats a carrot and died, gee, carrots must be dangerous. They childishly think money just has to be gold and all will be well. How does one create such a system without a Mad Max outcome? They have no idea.

This has been the debate even in the USA that has raged since the days of Andrew Jackson and the Bank War. Here is a picture of PUCK magazine from London showing America drowning in silver dollars which they valued more than Europe and led to massive gold migration from USA to Europe. That is why J.P. Morgan became famous lending the US Treasury gold in 1896 because politicians  manipulated the gold-silver ratio and did not understand international capital flows. It has never been WHAT is money that is the core problem – but the complete lack of fiscal responsibility. Jefferson had it right – prohibit government from borrowing.

Hamilton won the issue to create a national debt. Jefferson agreed on two terms. One it would be paid off, which it was. Secondly, the capital of the United States be moved next to Virginia becoming Washington, DC. Today, we have a national debt that is borrowing with no intention of paying it off. However, every pension fund is deeply invested in sovereign debt. It is the basis of reserve currencies for both local domestic banks as well as central banks. Going to a GOLD STANDARD would wipe out the world economy imposing major austerity

What do you do with the national debts? Do you now pay them off in gold? The bankers would love that and the treasury would be broke all over again. If we eliminate the level of debt, is new economic growth even possible? Just how can you pay down debt without creating money or restructuring the debt (devaluing it)? We only need to look at Greece to see what debt deflation creates. It is massively self-destructive to the brink of creating civil war.

On the other hand, not paying down debt but simply going bankrupt sets off a chain reaction where everyone’s pension funds vanish into the dark of the night. That too will lead to civil unrest and the Mad Max Effect – the total destruction of civilization. Perhaps it is just more practical to leave it alone and we simply inflate away. Society may hold together longer avoiding the civil unrest until they figure out they have less and less to show for their labor? But this lead government into authoritarian. They are already hunting down anyone with money. They create the Maximinus Effect – the hoarding of wealth and collapse of the economy as was the case with Rome.

So those proposing a simple return to the GOLD STANDARD cannot even begin to address these questions. This is not about what is MONEY, creating PEGS and STANDARDS that are simply derivatives of communism seeking to eliminate the business cycle. This is about trying to use history as a solution to save Western Civilization from the Debt Abyss not walking down the halls of Ivy.

This is the solution that will be presented at the Berlin Conference. This is the subject of the movie. This is not about me. This is about trying to come up with a solution reviewing history just for once to develop that solution. An alternative approach is the only answer. But it requires understanding the REAL role of the MEDIUM OF EXCHANGE since it has been everything from cowrie shells to paper.

How did Germany solve its hyperinflation? It replaced the Papiermark by the Rentenmark, which was an interim currency backed by the Deutsche Rentenbank, owning industrial and agricultural real estate assets – land. The French at one time also tried backing currency with land. Nonetheless, in 1924 the Rentenmark was replaced with the Reichsmark which was a permanent replacement. The Reichsmark was put on the gold standard at the rate previously used by the Goldmark, with the U.S. dollar worth 4.2RM. While the GOLD STANDARD was abandoned, during the Second World War, Germany established fixed exchange rates between the Reichsmark and the currencies of the occupied and allied countries, often set so as to give the Germans economic benefits.

These are just the real questions that have to be answered at the Berlin Conference(English: All-English / German All-German). Returning to a GOLD STANDARD because money should be REAL, is not practical, will lead to the Mad Max Effect, and accounts for nothing from history why all attempts to fix currency values have failed WITHOUT EXCEPTION since the legal code of Hammurabi who first attempted to fix the prices of everything in the first known STANDARDIZATION attempt in society of flat-lining the business cycle.

To the Goldbugs who demand a GOLD STANDARD so they can become rich, sorry. You are going to have to make money the old fashioned way – trade or work. This is not about saying gold is worthless. It is a object that retains value and is a recognized unit of value around the world. The only major commodity that is the same everywhere. It should remain as a hedge against government and should be a free market at all times.

We’ve been surprised at the recent action in the precious metals complex. During the recent correction the shares were showing quite a bit more strength than the metals. Then the shares took a dive below support yet the metals maintained their recent lows! How do we interpret this wild volatility in the relationship between the shares and the metals? Quite often we look at daily and weekly charts. Now is the time to take a look at the monthly charts which can help us get a better read on the larger trends at hand.

The monthly chart of Gold shows the yellow metal in a very healthy consolidation between $1550 and $1800. Gold’s current retreat from $1800 has lasted two months. Back in 2009, Gold brokeout to a new all-time high in the seventh month of its consolidation. Presently, Gold’s bollinger band width is at a multi-year low and its three-month volume average is at a two year low. Also, the RSI has bottomed and made a higher low. Even if Gold touched $1600, it would remain in healthy position for a breakout in 2013.

Gold’s companion Silver is currently trading in a tighter consolidation with $35 as resistance and $27 as support. Note that Silver has tested and held above $27 six times in the last fifteen months. Silver also held above the rising 40-month moving average which supported the market in 2009 and 2010. The RSI has also made a higher low and volume has trended down during the past seven months.  

Meanwhile, the gold stocks (HUI) look weaker than the metals. Momentum hasn’t confirmed its bottom as the market is in a clear range from 400 (support) and 525 (resistance). Note the current 11% decline in the HUI for the month while Gold and Silver are still in positive territory. Nevertheless, if and when the HUI prints a monthly close above 525, this chart would like quite bullish and general sentiment would certainly pick up.   

The evidence argues that the bottoms remain well intact and the metals are consolidating before the next breakout which entails Gold breaking $1800 and Silver $35. However, these breakouts are by no means imminent. Since we are dealing with monthly charts that means potentially three or four more months of consolidation. Furthermore, sentiment data such as the COT structure and public opinion polls need some improvement before the market could sustain a breakout. Thus, more consolidation could be the order of the day for the metals.

Continued consolidation in the metals also helps explain recent weakness in the HUI, which is simply testing the lower half of its own consolidation. The shares see the weakness in the overall market and perhaps sense that an immediate breakout in the metals is unlikely Furthermore, while central banks have put themselves in position to act they haven’t actually done anything yet. When the market senses their action it will likely mark a final low within this consolidation.

The good news is the metals remain in fine shape and so to do most of the mining equities we follow. If we are indeed correct that the metals and shares will remain range bound then your task is simple. Prepare yourself for further consolidation by having your buy list ready and then be ready to act when the time comes. A wise friend once told me that in a bull market the goal is to accumulate positions at the lowest prices possible. With mining equities trading well off their highs, now is the time to do your research and find the companies that will lead the next leg higher and outperform the gold stock sector. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com