Gold and Silver Update 10/24/11

Submitted by: Francis Soyer

In terms of currency revaluation on the heels of global currency collapse i.e. failure of the Euro and then the inevitable failure or default on the U.S.D. the global reserve currency, the article below ends up on the higher end of the range when central bank assets get a global reset and then tied to the hard asset value of Gold and Silver. In short the valuation in this article comes in at around $10,000 per ounce on Gold roughly a 5 multiple from here which would give us $150 per ounce on silver. Pretty scary stuff but the work from these fund managers appears to be reasonable. As for the timing of such events, this analyst expects this scenario to play out roughly by the end of 2012. The article is below with the link.

Best,

Francis

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/10/19_KWN_Special__Dollar_Devaluation_Coming,_Gold_to_be_Revalued.html
With continued worries surrounding the metals markets, today King World News spoke with the firm that is calling for $10,000 gold.  Paul Brodsky, who co-founded QB Asset Management Company, explains, “We spent twenty odd years as bond traders before deciding there was no value anywhere in the interest rate arena at all.  As that background would imply, we like to know what fair value is for things.  So we went back and knowing that gold was fundamentally cheap we wanted to find where purchasing power parity would be based on all past monetary inflation.”

Paul Brodsky continues:

 

“We figured you should take the monetary base and divide it by official gold holdings.  That would give you the price in terms of monetary inflation that it would be worth today.  Coincidentally, after we came up with that theory we went back and looked at what they used to use, the formula for arriving at the Bretton Woods dollar exchange value with gold at $35 and it was the same formula.  So if you were to divide base money by official gold holdings today, after QE2, you would come up with a price just north of $10,000 an ounce.”

When asked how he sees this playing out, Brodsky responded, “At some point the Fed will have to formally devalue the dollar vs gold and I think all central banks, economies and treasury ministries will have to fall in line with that.  The way this would be accomplished might look very similar to the way they have been targeting interest rates through the Fed funds market....

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“We may go into a weekend and if confidence continues to erode to the point where global trade really falls off a cliff and commercial exchange drops dramatically because fewer people have confidence in the currencies they are receiving, then I could see the Fed or the Treasury opens the drawer and they take out plan B.

This would mean they say, ‘Ok, on Monday the Fed would be tendering all gold at $10,000 an ounce,’ or some number that would cover that debt.  So if the debt is $53 trillion and the monetary base is not quite $3 trillion, then they would come up with a number where bank assets or loans would be covered and that would be the magnitude of the devaluation. 

They tender for gold, using this example, at $10,000 an ounce.  The proclamation itself would not be inflationary, but the act of purchasing private sector gold at $10,000 an ounce would demand they print a bunch of money and that would be inflationary.  That is how the system would be de-levered.

That would have good ramifications, even though it’s highly inflationary and it devalues the dollar dramatically, it would have politically expedient benefits to debt holders.  So we see that as being the end game.”

This is why it is absolutely critical to own physical gold and silver.  When the monetary system is rebooted and gold is revalued, you don’t want to be left holding fiat money.

BAC update 10/24/11

Submitted by: Francis Soyer

BAC is in trouble. At this point there simply is no doubt. In terms of their balance sheet a couple of Financial Journalists from Main Stream Media have picked up on it. The article with links is below.

If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble. The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, hasmoved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.
And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]
The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.
This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. [Background.] So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.
The FDIC is understandably ripshit. Again from Bloomberg:

 

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli,and I have NO doubt BofA and the craven, corrupt Fed will argue that moving the derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t survive undoing this brazen move, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.
Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to this new scheme to loot taxpayers and save a criminally destructive bank.

http://www.fourwinds10.net/siterun_data/government/banking_and_taxation_irs_and_insurance/social_security/news.php?q=1319245749