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COMMODITY FUTURES FORECAST
Prepared by Philip Gotthelf
The Swiss versus ISIS
(November 20, 2014) A few months ago, Republican hopes for capturing the Senate were weighed at 50/50 according to the polls. Contests at state and local levels were equally unsure for the GOP. Sprinkle in a little Ebola and some ISIS and see how the numbers changed! The Swiss are about to make a major decision about how their monetary system will run. The question is whether to preserve the gold tradition, or allow it to be diluted as it as been for other nations. According to recent polling, the referendum on gold will fail to pass. The vote takes place on November 30.
In response to polls, gold crashed 1% and silver followed to a lesser extent. Investors headed for the hills as the news was viewed as another abandonment of precious metals. I caution that polls are not necessarily a reflection of reality… particularly when there may be ulterior motives for the release of these results just 10 days before the actual vote. Reading between the lines, we should keep in mind that the Swiss National Bank (SNB) launched an aggressive campaign against the initiative known as “Save Our Swiss Gold.” The SNB believes the proposed measures would be too restrictive on how the bank operates; in particular, how the SNB and member banks can clear international transactions and maintain monetary balances.
Simply put, the SNB wants ultimate control over Swiss gold assets. It feels the need to be able to liquidate or accumulate gold at the bank’s discretion… free from any restrictions. Of course, this is the very point of the initiative; to restrict the SNB from squandering Swiss gold reserves and possibly joining a monetary system that is solely based upon government bookkeeping.
I believe the poll is bogus. While it shows just enough of a shift in sentiment to suggest the initiative will fail, it is not so bold as to predict a landslide. This avoids exposure to embarrassment should the referendum pass. From any logical perspective, the release of the polling data appears to be part of the SNB campaign to thwart efforts to bolster the Swiss gold tradition.
Switzerland is a very small nation; only three times as large as Los Angeles County. Aside from watches, chocolates, and cheese, all this tiny country has is its banking system. Swiss wealth has been based upon a steadfast adherence to privacy and monetary security. It has been the banking center for Western Europe and most of the world. Only recently, Switzerland has yielded to pressures from the U.S. and EU members to relax its secrecy standards and provide information to help other nations pursue wealth stored in Swiss banks.
We really do not know what is discussed by world leaders behind closed doors. There are three distinct perspectives: 1) those who believe in a global conspiracy, and 2) those who believe in global incompetence, and 3) those who haven’t a clue. I must confess to holding a hybrid view between 1 and 2. The fact that gold is rising to the level of a national Swiss referendum is suspicious on its own. The fact that these issues are also debated in Germany, Belgium, and even Finland suggests that gold is receiving increasing sovereign attention.
Lest we forget, Germany requested the return of gold stored in U.S. vaults. That process has yet to get underway and the U.S. has offered a multi-year repatriation process. I am reasonably certain any other requests for the return of gold from the U.S. will meet with the same dubious response. Hence the question, “Has the U.S. squandered the gold assets of trusting nations?” Are we about to see the “Mother of All Scandals” in the revelation that national gold assets have been usurped? What would be the consequences?
This brings me to my transition regarding ISIS; a/k/a the Islamic State. Less prominent in the news is the ISIS announcement that they intend to mint gold and silver coins. While the West repudiates a physical monetary standard, the caliphate that is disavowed by President Obama intends to create the most trustworthy currency in the world and the most credible exchange medium in the Middle East. Why am I not surprised?
Longer term subscribers should recall my exact discussions about the Arab Spring and its global monetary destabilization potential. I pointed out that the disruption in Libya left the country with not treasury and no currency.
Consider the Libyan currency featuring a prominent picture of Muammar Gaddafi. How much integrity do you think these notes have today? My sources informed me that Muammar and his sons transferred billions of national assets to clandestine depositories that remain undiscovered because idiots killed the only source of the information. The same is true for Tunisia… treasury empty! Egypt is more than bankrupt and I shouldn’t have to tell you about the economies of Iraq, Syria, and Iran… not to mention Lebanon and Jordan.
Suddenly, this vilified group calling for a caliphate offers the local populations a tangible alternative to paper. Gold coins minted in the image of ancient Muslim currency may be brought to the forefront in a war of confidence. What our news media explicitly misses in all of the beheading coverage is the positive side of the ISIS image and story. We look at the Islamic State with completely fogged glasses. For disenfranchised Sunni Muslims, ISIS is the solution rather than the problem.
I believe ISIS will not be able to pull off its new currency. I am not sure they have access to sufficient supplies, nor do they have the sophistication to link gold to a minute-by-minute valuation system. Still, I believe the concept represents a direct threat to monetary stability. At a time when trust in government is waning, offering a gold-backed currency is nothing short of brilliant! Muslims have a religious affinity to gold. Gold is given to boys when they reach their circumcision at the age of 13. Gold is exchanged at weddings. Gold is spiritually significant. This is also true for traditional Chinese and Indian cultures.
At a time when the West is abandoning gold and silver, the rest of the world is engaging in a possible revolution back toward metal as their valuation standard. Nothing gives currency more credibility than gold. ISIS leaders know they must rapidly acquire legitimacy if they are to survive. They understand that it becomes increasingly difficult to deny the Caliphate if it establishes a government and an economy.
Follow by Example
Sweden has acknowledged a Palestinian state. England, Italy, France, Spain, and other nations are following. Although the United States and European Union members have declared Hamas to be a terrorist organization, various governments are willing to acknowledge a Palestinian state with no borders, no currency, no cohesive government structure, and no economy. Declaring such an independent entity is like passing Obama Care to “see what’s in it.” With virtually no structured plan, Sweden believes a recognition of Palestine will have significance.
ISIS has seen how Hamas captured legitimacy and is more strategically following the example. ISIS sees how the West is caving into Iranian demands and allowing this Shiite rival a window to develop nuclear capabilities. ISIS is following by example and fully intends to demand a place at the negotiating table. With an army and popular following… a stable currency and wide territory… the Caliphate is now a reality.
The reluctance of the West to engage ISIS is the very lifeblood of this new nation. It may seem ironic that ISIS will derive respectability and stability through gold. I must say that my visualization of this process has not been shared by other analysts or pundits at this time. I have reviewed the Wall Street Journal, New York Times, USA Today, and other print media. I have watched CNN and FOX News, the networks, and financial channels. The gold story remains a yawn.
There has been no political chatter about the ISIS gold-backed currency. On the other hand, I guarantee government officials are hotly debating the potential impact of a Caliphate currency that has the legitimacy of gold.
Gold was making a nice comeback after touching $1,130/oz earlier this month. Many analysts found the rise in gold incongruous with the decline in crude oil and other raw commodities. Even with constant talk about the “gold bubble” and the lost interest, December gold managed to rise above $1,200/oz this week. Now, there is a technical flag that implies even high gold prices if the upside is violated around $1,210/oz. This is often seen as a “continuation pattern.”
Without question, the actual Swiss vote on gold will play out powerfully in the market. I consider the prelude poll reaction a blip rather than a conformation of outcome. If the referendum fails, gold will drop. I believe the consequence of a rejection of the Save Swiss Gold initiative will be temporary. The more important consideration is the referendum by itself. A large enough segment of the Swiss population has spoken and the SNB would be wise to listen. Gold has become a big issue.
It would be incredibly unwise for the Swiss government to ignore the message. Almost half the population believes in their quasi gold standard and appreciates that Swiss monetary stability has consistently relied upon gold. There is a very good chance that the Swiss government will announce concessions to appease the gold advocates, no matter who wins. This will be an incentive to keep the faith and continue trusting gold.
Who is Thinking What?
Our economy is being driven forward on prospective technology. Wealth accumulation has been concentrated in technical sectors that include information processing, social media, cyber commerce, and communications. New standards are emerging that include messaging, picturing, and transactioning. We see this in Apple’s launch of Apple Pay and in the commercialization of Twitter and Facebook. This begs the question, “Is it enough?”
Are the massive valuations for Google, Apple, and Facebook justifiable? Is prospective technology a sustainable model? I ask this as we watch media dilute itself. When you view a YouTube® clip, you are likely to be accosted by an advertisement. Solicitations appear everywhere. The sustenance for new media is the advertising and these dollars are finite. At what stage does the media self sacrifice?
The market has not posed these questions in the open. I am sure the subject is on the table at investment strategy meeting and even in the board rooms of the institutions. When you see the rise and fall of technology as exemplified by RIM (Blackberry), there is appreciation for vulnerability. Unless global economies expand independent of information, there will not be enough marketing dollars to support the huge media diversity. Something has to give.
I sincerely hope we are not at the crossroads. We cannot afford another financial meltdown just as threats like ISIS expand. Yet, the situations are so volatile that any single event could act as a panic trigger. I have been wrong not to share enthusiasm for stocks in the latest rally. On the other hand, equities recovered immediately following the 1929 crash, only to sink further as the overall economy stumbled.
As mentioned, I do not believe many analysts are thinking about gold in the same context as I have briefly expressed in this report. Last week I avoided silver and gold after snatching some handsome short-side gains. The chart suggests this was a wise decision.
November 20, 2014
Commodity Futures Forecast
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