The Fed has no medicine for economic disorders other than more of what caused the disorder in the first place. It can add credit and can act to price credit more cheaply. The Fed cannot print resources or jobs nor can it add value to anything. In the real world the Fed is impotent. It can move finance markets which are basically Ponzi schemes to benefit participants who act out of  ‘faith’.

How Schumpeterian! Out of the ashes of speculative excess, flappers and bathtub gin rises the phoenix of honorable, manly industrial labor, complete with overalls and lunch pails ready to pull levers in factories all over the world!  Let’s not talk about the big shots, they aren’t going to be liquidated. Mellon would never liquidate any of his friends and neighbors, would he?

What finance has accomplished instead of catharsis is a massive gold bubble. The establishment concocts a vote of no- confidence against itself. How ironic! Eradicating the artifacts of fraud so that the phoenix of … God knows what? … can emerge. This may or may not be a step in the right direction but is certainly suggestive.

Liquidate automobiles, liquidate airlines, liquidate industrial agriculture, liquidate sprawl and industrial monopolies, liquidate predatory commerce and finance. The human race and the natural dependencies that are essential to our longer term survival might have a fighting chance. Then again, maybe not.

The short answer to ‘How do you trade QE?’ is ‘Buy Gold’. the gold bugs are generally wrong, but perhaps not at the end of it all? How can QE be considered anything other than a rear- guard action against the forces of history? Gold has become the ‘little man’s trade’; the rage against the machine, the rebellion of the empire … turned upon itself.

Check out the trend line on this chart  (all commodities charts from tfc charts):

There is a lot to like about this chart. The blow- off top in November, 2009 is noted; it was more like a head- fake. The overall multi- year trend is well established. Here is another chart:

Here is COMEX gold superimposed on NYMEX crude oil front months going back a year and a half. The divergence is hard to miss. In a way both charts are singing the same song; ‘Sayonara’! Crude oil is an excellent ‘wealth’ barometer for the world’s economies. What is wealth, anyway? ‘Mechanized goodies’ is the wrong answer!

Gold prices make the statement that global currencies converted to dollars are losing value. Currencies in the modern world have been proxies for production. Useless gold increases in value relative to production. What does that tell the astute trader? Liquidate automobiles, liquidate airlines …

Petroleum states the opposite; that currencies/dollars are becoming more valuable. With ‘value’ being relative,  currency becomes a proxy for petroleum itself, being freely exchangeable for a valuable physical commodity on demand. The rising value of gold does not invalidate the -deflationary – oil value of currency. Instead, the deflationary argument parallels that made by gold; to liquidate the mechanized junk as its use undermines commerce itself.

Using oil is ‘destroying capital’. How undermining can you get? The ‘production’ value of gold can be read separately from the oil- value of currency. I’ll leave to the reader to decide which of the two commodities is more necessary for modernity. (Hint: it’s gooey.)

Gold certainly is a bubble: there is wide public participation, a large flow of funds into it, a great ‘back story” and the absence of earnings other than asset appreciation: people buy gold because it is ‘going up’ in price.

Public participation validates bubbles. Cash is flowing into gold from central banks as individuals and businesses holding cash as the alternative is awkward. Since ‘money’ as a representative of commerce is a non- investment, cash has few other places to hide.

Meanwhile, the finance apparatus is well equipped to produce myriad gold derivatives. As time passes and the bubble inflates further there will appear more and more paper gold derivatives. Central bank cash plus the flood of derivatives act to make the bubble that much bigger.

I wrote about gold in December last year when Bernanke and the Fed were in the middle of QE 1.0:

Ben Shahn ‘Fiddlin’ Bill Henseley’

Gold ownership presumes that current economic difficulties are transitory and that the gold can be ‘sold back’ for currency sometime in the future at a profit. There is no other value- acquiring strategy to support gold ownership. The ‘gold bar/can of beans’ trade is not a good one … unless you really need that can of beans.

Nobody alive today is old enough to recall the corrosive speculation in gold by banks and others during the early 1930’s. Sovereign gold holders defaulted and abandoned gold. A large percentage of world’s … and US banks failed. 

Some consider gold to be an alternative form of currency against ‘other, fiat’ currencies. Willem Buiter points out in a fiat universe, all things including gold’s putative value are fiat. Gold is not a currency. No citizen buys gold today to elevate the condition of his neighbors by circulating his gold to facilitate commerce. Rather, he clutches his gold in his basement with one hand and a belt- fed weapon in the other with the intent of murdering his neighbors.

People become confused about credit and money creation. Finance creates credit denominated in some currency. Central banks and treasuries create the actual currency; the Federal Reserve pays for currency created by the Treasury with credit. Mr Bernanke is facilitating the laundering of illiquid dollar- denominated credit instruments into cash for his friends in finance. He and his partner-in-crime Mr Geithner are creating currency as fast as possible. Finance has many illiquid credit instruments; hundreds of trillion$ more of them than the Fed has available currency. Most credit instruments will never be converted; those ‘in queue’ are hoping against hope the current dollar slump lasts long enough so that they too … can trade their worthless ‘securities’ for cash.

As a consequence of Bernanke’s currency/securities trade, currency has vanished from circulation in large areas of the country. This is why the US is in a depression with millions of unemployed. In the real world, the effects of Bernanke’s ‘money printing’ are negligible.

There is physical gold and derivative gold or ‘paper’ gold which is the form most retail gold takes. There are numerous sites on the Internet pitching ‘you buy and we hold’ schemes. Since there are many more paper claims on gold than there is physical gold, the settlement of these claims will be done in currency. This is ironic; the gold basis has enjoyed an increase in value. The the paper claim in dollars against the metal may appreciate in value even more!

If your timing is good and you bought gold early enough, a paper gold trade might be a very good trade, indeed!

If and when the economy truly collapses, the paper claims will be repudiated. Gold purchasers will have neither gold metal nor currency. Suckers!

In the futures market there are also more long positions than physical gold for delivery. This implies a large short position held by the exchange itself and its banker(s) including Goldman Sachs. Uh oh …

If contract holders want to settle rather than roll over into new contracts, ‘delivery’ will be in currency not physical. This dollar/gold derivative trade is part of Bernanke’s money laundering racket. The gold itself is meaningless, what matters is margin being converted to cash. It’s a big reason gold prices have risen against the dollar, ditto stocks and bonds against the dollar. Don’t fight the (crooked) Fed!

When the market turns and holders want to or have to sell to meet margin, there will only be one buyer … Goldman- Sachs! Sorry ’bout your gold trade, dude! See Hunt brothers’ silver corner for more info.

It is also likely the Saudis and other Middle Eastern purchasers are partially behind the recent strong rise in gold prices. The Saudis have been buying physical gold for a long time. Since the Saudis have indicated they will hold crude oil prices below $85 they may be buying gold as they sell oil, transferring increases in the oil price above $80 ($70) to the metal. In other words, the dollar- debasement trade is shifted from dollar/oil to dollar/gold by arbitrage.

Etc.

Just because gold is a bubble does not mean it isn’t a good trade, ‘good’ as in ‘it makes money for the trader and to hell with everyone else’! I do schadenfreude as well as the next guy. The gold bubble looks like a ‘shooting fish in a barrel’ trade. A hyperbolic move is in the future. Gold could get to $2000 an ounce. The ‘no- confidence’ that gold sells along with itself ignites a reinforcing feedback loop. $2000 gold suggests that not just currencies but entire economies are falling worthless, an idea that amplifies the gold price further.

The Fed and the ECB have gotten themselves into a tremendous mess, how can they get out? The short answer is they really can’t! The entire economies are falling worthless! Like an animal trapped in quicksand, struggling to escape the inevitable simply causes the establishment to sink that much faster.

Gold bug denial repaints; ‘Central Banks Sell Gold’ as ‘Central Banks Buy Gold’. Central banks are in the currency business. They have to sell currency. Central banks are just like ‘regular’ banks. They are stores that ‘sell’ money. If they don’t sell money they go out of business the same way hat stores that don’t sell hats go out of business. Pimping gold is part of the central banks’ strategy; to depreciate currencies and force consumption to restart ‘Business As Usual’. Nevertheless, the back- story is a good one! Central bank activities give assurances to the ‘little guy’ investors who buy gold.

At the same time, the only way to profit by a bubble is to recognize one for what it is; a Ponzi scheme. Those who buy in and sell early in the ‘game’ -the smart money – will profit. All others will be left holding the bag, A disciplined investor will already own gold. He is looking now for a place to sell and take profits. Keep in mind that deflation rules gold as it does all other derivatives. When margin calls are made it will be the gold holdings sacrificed first on the altar of ‘moral responsibility to creditors’. They will among the few kinds of assets with any residual value.

There is more to the gold bubble than currency ‘depreciation’ and loss of confidence. The gold market is constrained by its microscopic size. Sez the Financial Times:

Another resource constraint in action: Peak Gold.  American Barrick Gold closing its long- running gold hedge was the form of public announcement.

Like Peak Oil, a decline in price is not out of the question as commerce cannot ‘afford’ the higher cost. The difference is that oil represents a larger ‘input tax’ on output than gold does and falls most heavily on the productive physical economy. Oil IS different from gold. All the oil that has ever been ‘mined’ has been burned up; it circles the atmosphere like an avenging god. Burning oil consumes its value; commerce that ‘uses’ oil bankrupts itself at the same time.

All the gold that has ever been mined more or less still exists in the world in some useful form. Its endurance places it within the ambit of finance, closest to the output of central banks … whose business is to sell money. Gold becomes a surrogate or proxy for cash. No wonder the gold bugs become confused! Gold really isn’t money, being swapped directly for it mimics money’s utility!

Speaking of doing good as opposed to ‘Doing Really Good’, let’s look at some more charts:

Here’s Chicago CBOT Corn front month! Check out the consequences of bad weather world- wide. Is Al Gore wrong? Do you really want to find out? By weight corn is the world’s most important food crop. High corn prices are not a net- positive for a world jam packed with hungry humans and their livestock.

Here is CBOT Wheat front month. Charts are from TFC Charts.com. Anyone long cereals looks to make some real money as the harvests don’t look so hot even with good storage carry- over from last year.

Even with mediocre crops a question mark the effects of the ‘currency wars’ – competitive devaluations – will increase the money- costs of basic foodstuffs. This is an unintended consequence which requires some subtlety on the part of the establishment to deal with. Food shortages are destabilizing which calls questions on finance firms taking central bank cash and using it to fuel food price bubbles.

Here it is possible to make the ironic Al Gore into a Malthusian dandy with the good taste and fortune to be born into a Mellon- esque family and to marry well. Along with the gold bubble, the food price bubble looks like the inhuman exercise it is, profiting against misery: it is at the same time a theatrical prop for financialism and modernity in their death throes. How are the two concepts reconciled?

Maybe they don’t have to be.

PART ONE.

END OF PART TWO: GOLD AND COMMODITIES.

PART THREE: MONEY AND VALUE OF COMMERCE.