ISSUE 109

01 August, 2012

INSIDE THIS ISSUE

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Gold Silver

A banking license would allow the European Stability Mechanism (ESM) more firepower to fight the debt crisis as it would be able to borrow large amounts of cash from the ECB and greatly expand its bailout capacity beyond the current 500 billion euros (100 billion euros of which is going toward the Spanish bailout). The operation of the ESM has been delayed until at least September as the German Constitutional Court considers an initial Sep 12 preliminary ruling on a constitutional challenge to the ESM and the fiscal pact. The comments from Ewald Nowotny prompted traders to cover their short positions in the euro as it rallied against most major currencies on Wednesday, recovering from a two-year low against the dollar. Meanwhile, Bundesbank officials argue the programme is tantamount to so-called monetary financing, where the central bank effectively prints money to pay off a country's debt, something which is expressly forbidden under the ECB's statutes. If the ECB does whatever it takes one thing you can bet on, is that the ECB will be forced to print more money. And, while we can expect to see the ECB take this course of action in the future, worse-than-expected economic data from the US together with poor data from Europe and China has many traders believing that monetary stimulus is coming, not only in Europe and China, but also in the US. Thanks to the mismanagement of our political elite, countries have become insolvent. And, as our global financial policy makers continue to attempt to solve the current debt crisis with more debt and promises to pay, things are going to spiral out of control. Ludwig von Mises once said. "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." -- Ludwig Von Mises But, what amazes me more than anything is the amount

Only last Thursday, European Central Bank (ECB) president, Mario Draghi, made a few very bold statements regarding the euro. Draghi stated that the ECB will do everything in its power to save the euro. ECB President Mario Draghi indicated that the institution is ready to resume purchases of Spanish and Italian government bonds in a bid to bring down borrowing costs and ensure the survival of the euro. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro, said Draghi, at a conference in London. Believe me it will be enough. Personally, I think that Draghi actually meant to say that the ECB is ready to do whatever it takes to save the European banks from collapsing and to bring down the borrowing costs of sovereign debt. Immediately after Draghis comments, there was a strong rally in gold. However, the catalyst for the current rally were the statements made the previous day by the ECB Governing Council member Ewald Nowotny who said he could see grounds for giving Europes rescue fund a banking licence.

of lying and cheating going on in our corrupt financial system. Spanish political leaders have often denied the fact the Spains banking sector has serious problems. I recall very distinctly the numerous times when the former prime minister of Spain, Jos Luis Rodrguez Zapatero, vehemently denied that Spain needs any financial assistance. And, whenever Zapatero affirmed that the country had no need for financial assistance, I urged people not to believe him and instead believe the opposite. The only reason why I mention this is to remind individuals that just because your political leader says its so, it does not necessarily mean it is so. In fact, in most cases they cannot be trusted. It was not long ago when the current Spanish prime minister, Mariano Rajoy, stated publicly that he would not raise VAT; another blatant lie. One of the measures that Rajoy now intends to introduce is an increase of sales tax (VAT). And, in addition he has proposed cutting the benefits for the newly unemployed after six months from 70% of basic salary to 50%. Previously, the reduction had been to 60%. This is simply another perfect example of how our current leaders will do whatever it takes to preserve the current corrupt monetary system even if it means lying, cheating and defrauding the public. In what is going to become the biggest transfer of wealth we have ever seen, governments around the world are conspiring to find ways how to tax their people to pay for all their own reckless spending. Recently, the US Fed Chairman, Ben Bernanke, said economic uncertainty is increasing, mainly due to the European debt crisis and the looming fiscal cliff in the U.S. Risks to economic growth have increased, he said, and Europes financial markets and economy remain under significant stress. "The Fed stands ready to do more asset purchases when needed," he said. "Any actions would likely involve the [Fed's] balance sheet." Bernanke also claimed that Operation Twist has been effective in easing financial conditions and promoting strength in the economy, Bernanke said. Large-scale asset purchases have also contributed to economic growth. What economic growth was he referring to? While the cost of sovereign debt surges in certain countries, the largest debtor nation in the history of the world - the United States - has managed to bring down interest rates on its sovereign debt. This has been done by

the US Federal Reserve buying up any debt not sold at the low rate set by the Treasury. Between December 2008 and June 2011, the Fed bought a whopping $2.3 trillion of U.S. bonds in two rounds of quantitative easing. The US Fed has now become the largest holder of US debt. But, just as the US Fed manipulates interest rates, the rigging of LIBOR has now been exposed. While most people have no idea about LIBOR or could care less about it, this is another example of the lying and cheating that occurs in our financial system. It seems that our banking system has to resort to fraud in order to keep the current financial system alive. Central banks together with banks around the world have attempted to manipulate LIBOR, gold, silver, bonds and currencies. And, while the US government together with the Organisation for Economic Co-operation and Development (OECD) spend millions each year on hunting down a few U.S.-based firms and individuals who are suspected of tax evasion, the real criminals are our financial leaders who have probably swindled hundreds of billions from the current monetary system. With such a corrupt system it is should come as no surprise why people and companies try to avoid taxes. Yet, none of the main perpetrators have been prosecuted or will be prosecuted. And when confronted, they all act like the three monkeys that heard no evil, saw no evil and said no evil. For years I have been trying to expose these corrupt financial leaders, but sadly even with all this proof, most people still dont believe it. My point is, if you dont see it now, you never will. And, if you can still trust these people, then there is no need to own gold. But, if you cant, you had better own some gold. Please note I only recommend investment grade gold bullion such as Krugerrands and gold bullion bars. And, I do not regard any limited edition medallion or commemorative medallion as an investment.

For the first time since March this year, the price of silver has popped back above its 50 day Moving Average which is a positive sign. For many, the performance of silver has been disappointing this year, but, looking at the bigger picture, the current low prices simply offer incredible value for money. For many years, the major bullion banks especially J.P Morgan have been involved in rigging the silver prices by

using futures contracts on Comex. On some occasions the daily turnover of silver on Comex has been equivalent to the real global annual production of silver, which means they are most certainly not hedging for any mining company. However, since the silver market is minute when compared to the LIBOR market, or the currency market, not much attention has been given to this constant manipulation and price suppression. The U.S. Commodity Futures Trading Commission (CFTC) has been investigating these allegations for more than 4 years now. And, recently CFTC Commissioner Bart Chilton claimed that the four-year probe of potential price manipulation in the silver market may be completed as early as September. I am hopeful and expect the silver investigation to conclude in the not-too-distant future, hopefully in September or October, Chilton, a 52-year-old Democrat, said in an e- mail. It has already taken way too long. Chilton, who didnt say whether the probe has uncovered evidence of manipulation, said previously that there had been repeated attempts to influence prices. There have been fraudulent efforts to persuade and deviously control that price, he said at an October 2010 hearing in Washington. Any such violation of the law in this regard should be prosecuted. The agency concluded in a May 2008 report, before starting the investigation, that there was no evidence of manipulation in the market between 2005 and 2007. The CFTC, in the preceding two decades, had received numerous letters, e-mails and phone calls from silver investors alleging that silver futures on the New York Mercantile Exchange had been manipulated downward, according to the report.

If the CFTC conclude that prices were being manipulated and institute new regulations to prevent such actions in the future, then I maintain that we will not see these low prices again for a long time, if ever. And, the next time there is a run on silver, we could see prices really explode. However, as the CFTC seems as corrupt as all the other regulatory bodies, who knows what they will say and do. Even if they conclude the prices were not rigged, prices of silver are still bound to increase due to increasing investor demand. Recently, ETF Securites released the Global Commodity ETP Quarterly for Q2 2012. In the second week of July ETF investors added 148.7 tons of silver to their holdings. However, what is interesting is that while silver ETPs, inflows and outflows tend to be dominated by US investors, some big silver buyers are emerging in Europe. This is very positive for silver because for the most part European investors have never really become widely involved in silver investing. The strong performance of silver ETPs in Q1 was largely driven by US buying. An amount of $591 million was invested in silver ETPs in North America while only $27 million came from Europe. The remaining $5 million came from investors in other regions. However in Q2, of the $269 million in net flows to silver ETPs, only $43 million came from North America while $224 million was invested in Europe and $2 million elsewhere in the world. European silver ETPs have had net outflows only one month this year. That occurred in February. In May, the $40 million of inflows nearly matched those in North America. Then in June, when the soured appetite of US investors largely returned, that in Europe nearly matched it again with investments of $114 million.

ABOUT THE AUTHOR

David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. Rand Refineries, the largest gold refinery in the world use his daily and weekly commentaries on gold. David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali. For more information go to: www.lakeshoretrading.co.za

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