He reminds us that “in 1933 the US government banned the ownership of gold by US citizens and purchased all but rare gold coins from the US public. They did this, at $20 an ounce. Two years later they revalued gold to $35 an ounce, a 75% revaluation” which instantly gave the government a lot of new, but still 100% gold-backed money to spend!

What a blatant, brazen theft! And nobody says anything! But let me take a few bucks out of the employee pension fund, petty cash drawer or the coffee jar, then it is some kind of “big deal” around here and everyone wants me to get fired! What kind of crap is that, huh?

Anyway, so how much gold are we talking about? Well, the total amount of gold above ground that you can put your hands on is estimated to be about 140,000 tonnes, which is approximately 90% of all of the gold that has ever been mined, which is estimated to be 160,000 tonnes.

Added to that, there is an annual mine production of roughly 2,500 tonnes of gold, but which is becoming harder and more costly to find and mine.

Perhaps it is all this talk of confiscation of gold that has Doug Hornig of Casey Research’s Gold & Resource Report commenting that when FDR made private ownership of gold illegal in 1933, the dollar was on the gold standard and thus 100% backed by gold.

The difference between then and now is that “we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation” which is (insert sound of trumpet fanfare) the winner of the coveted Mogambo Award For The Understatement Of The Week (MAFTUOTW).

It wins for two reasons, the first being that is so terrifyingly true! There are no constraints on the government getting the Federal Reserve to create as many dollars as it, or anyone, needs or wants, and thus it is beyond ludicrous to even compare the 1933 gold-backed dollar against the pathetic piece of almost-worthless fiat money that the dollar has become, to which Mr. Hornig alludes when he says that Obama has it easy, as “However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash.”

And he is, alas, absolutely right. Unlimited amounts of money can be created just by asking for it. In fact, no one has ever disputed that fact, as it is the whole reason behind having a fiat currency! Hahaha!

In relation to the prospects for a confiscation of gold, he asks, “Given this kind of clout, what does he need gold for?” which is exactly right! If you can print money to spend, why do you need gold to sell to get money to spend? Hahaha!

Unfortunately for Mr. Hornig, he does not go on to the Mogambo Bonus Round (MBR) because I must deduct points from his score since he is grammatically incorrect to end a sentence with “for”, as in his “need gold for?”

Instead the sentence should have properly read, “Given this kind of clout, for what does he need gold?” which IS grammatically correct, so you can see the crucial difference!

And perhaps it is this “correct grammar” thing that makes the colossal incompetence of the Federal Reserve even more terrifying when adding that undertone of grammatical precision to the nightmare that the Fed created so much money and credit that it allowed the dollar to lose so much purchasing power since 1933 that gold is now almost $1,000 per ounce, up from the $20-to-$35 per ounce rip-off that financed the whole New Deal for a decade! Grrrr!

Of course, I would love to go on and on from there, waxing evermore contemptuously lyrical and angrily ever-louder about why I despise the un-Constitutional, un-holy Federal Reserve and everything it stands for, which is summed up in the Mogambo Big Book Of Economic Stuff (MBBOES) as “Purposeful inflation in money and credit by a central bank to create unprecedented amounts of debt for unbelievable of amounts of consumption that inevitably leads to ruinous inflation in consumer prices and ruinous deflation in asset prices such that it destroys the entire economy, which will soon lead to many, many poignant stories of ordinary men and women who, along with their doomed children, are wandering around, dazed and lost, living under bridges and overpasses, calling themselves Lost Children Of The Mogambo (LCOTM), forever bleating for pity that they did not listen when he told them to buy gold because their government was acting so insanely with fiscal and monetary policy, and now they are being cruelly punished by persistent price increases against which these people can only offer falling or stagnant nominal wages and collapsing real, inflation-adjusted wages, devalued assets, vanished wealth and disappearing jobs, which means a drastically falling standard of living until they are finally reduced to eating lawn clippings and miscellaneous bugs while screaming for revenge, whereupon the world then devolves into a dreary, post-Apocalyptic, dog-eat-dog world where, once again, for the umpteenth time in history, we learn that the dogs that eat well are going to be the ones who switched to gold when their governments started wallowing in such fiscal and monetary lunacy, which is why you ought to be out buying some more gold right now.”

I would probably end the Predictable Mogambo Tirade (PMT) with something in the vein of drawing an eerie parallel between the Fed creating too much money and credit, which leads to disastrous, ruinous, murderous inflation in prices, and the fact that the American government once gave smallpox-infected blankets to the Indians, which seems so, so apropos, which deliciously rhymes so you know it must be true.

Or maybe I would angrily relate how I, a normal, tax-paying citizen, call the CIA and demand to know under the Freedom Of Information Act if they are spying on me, or if any other jackbooted, government-Gestapo thugs are spying on me or tampering with my stuff, such as messing with my dishwasher which, after about 12 years of perfect performance, is now making this strange intermittent groaning noise, like a belt slipping or something that goes rrrrRRRrrrrrRRRrrrrrr, and then they put me on hold, and then they come back on the line and tell me that nobody is spying on me, but you can tell from their voices that they are lying.

Mr. Hornig is not sure that the CIA is out to get more or that a confiscation of gold is in the cards, although “An argument can be made that the yellow metal is still useful. It runs like this: Creating money out of thin air is inflationary, and a large stash of gold, even if it doesn’t officially back anything, serves as a sort of counterweight. People around the world will have greater confidence in your currency knowing that, as a last resort, you can pay your bills in gold. And the more gold you have, the better.”

Nevertheless, Mr. Hornig speaks for both of us when he says, “all things considered, a modern-day gold confiscation is not high on our list of financial worries”, although he adds the caveat that “Never say never where government stupidity is involved”, which sums it up perfectly, making it almost unnecessary that I jump up and yell, “Buy gold, silver and oil to save your worthless butt whenever your own government is acting with fiscal and monetary stupidity, which they are doing right now, which means” (insert musical soundtrack with heavy backbeat) “you should be buying these things RIGHT NOW because investing is easy when you KNOW HOW!”

Source: Why the Government Doesn’t Need Your Gold

One such figure came up yesterday. The total ‘value’ of global derivatives – financial instruments which are priced on the back of the underlying assets that they track – has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.

That started the warning lights flashing…

So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?

Let’s start by putting it into context. We can do this by checking out what the world actually made last year. The overall value of goods and services produced is measured by Gross Domestic Product (GDP). And for 2007, GDP for planet earth was reckoned by the International Monetary Fund to be just shy of $65 trillion. No less an organization than the CIA has come up with a similar estimate, at £65.8 trillion, so it must be about right.

So when the Bank for International Settlements (BIS) tells us that last year the total derivatives market grew by 44%, its fastest pace since the Basel-based bank started keeping records just over ten years ago, up go the antennae straightaway. And when that figure of $596 trillion crosses the radar screen, equivalent to more than nine times world GDP, the numbers are looking quite scary.

The money at risk is equivalent to a quarter of world output

Of course, the $596 trillion is a ‘notional’ amount. It’s the nominal value of all the underlying assets against which bets have been placed. But the actual amount of ‘real’ money at risk is still a massive $15 trillion, equal to almost a quarter of world output.

And within the individual areas there’s one even more eye-catching statistic. The value of contracts in credit default swaps (CDS) – a form of market insurance that investors can buy to protect themselves against corporate bond defaults – more than quadrupled last year to $2 trillion, covering a notional $58 trillion of loan debt.

The very size of all these numbers is just about enough to give the jitters to anyone, on the basis that when things can go wrong, they probably will.

When I wrote on this subject before, one respondent claimed that the topline numbers aren’t important because derivative markets are beautifully balanced. His theory was that if every derivatives position were hedging a risk relating to a specific transaction or asset, then derivatives would actually stabilise the world economy. All those noughts would be good news.

Sounds a bit too good to be true. And there are three reasons to be sceptical about this optimistic line of thinking.

Three reasons to be worried

Firstly, what we can call knowledge risk. That’s when derivatives players don’t know what they’re getting into.

A story on Bloomberg at the end of April summed this up pretty well. The chief finance officer of an Indian company was persuaded by his bank to start dabbling in the currency derivatives market. Although the CFO explained to the bankers that he didn’t understand how these products work, apparently they chauffeured him round and bombarded him with charts showing how his company could make a profit with a zero investment.

Too good to be true? Clearly it was. Three months later, two of the contracts had turned sour, incurring losses of $1.5 million and prompting the bank to issue a bankruptcy notice to recover the cash. Meanwhile, our poor CFO had no idea that these derivative bets could go so wrong. But he’s not alone. Indian companies could lose up to $4bn on derivatives, according to Hong Kong-based brokerage CLSA Ltd. Naïvety? Maybe. But we’re all good at repenting at leisure.

Which brings us onto the next potential problem, counterparty risk. That’s when the deal you’ve just done comes unstuck because the people on the other side of the trade can’t settle their side of the deal. A bit like backing the Derby winner, then finding the bookie can’t pay up because he’s run out of money.

Indian banks may lose up to $400m if they can’t enforce derivatives contracts they’ve set up with smaller companies, says CLSA. This is because 10% of these smaller companies may renege on their agreements because they haven’t the cash to settle the deals.

And this is just one country. BNP Paribas analyst Andera Cicione believes that total world CDS losses could hit $150bn. As the CDS market is unregulated, there are no public records showing whether sellers have the assets to pay out if a bond defaults. George Soros himself has warned this week that CDS counterparty risk is “a Damoclean sword waiting to fall.”

What’s worse – and here we come to the third problem – some buyers have now found out that the derivatives they’ve bought haven’t matched up to “what it said on the tin”.

The ratings agency Moody’s has just admitted awarding incorrect ratings to $4bn worth of debt instruments because of a bug in its computer models. Some ultra-complex derivative products, known as “constant proportion debt obligations” and thought up at the height of the credit bubble, incorrectly received over-optimistic triple A – i.e. top notch – ratings. And it took Moody’s nearly a year to find the problem.

As the derivatives market gets bigger and bigger, stories like these only make us ask: do the people who play around in it really know what they’re doing?

Turning to the wider markets:

On May 9, retired CIA operative Philip Giraldi posted an item on the American Conservative magazine’s blog: “There is considerable speculation and buzz in Washington today suggesting that the National Security Council has agreed in principle to proceed with plans to attack an Iranian al-Qods-run camp that is believed to be training Iraqi militants.” Defense Secretary Robert Gates, according to Giraldi, is the only senior decision-maker who’s not yet fully on board. The final decision rests with the president, and while there’s no evidence he’s ready to issue the order, there’s also no evidence he’s not.

Yesterday morning, Giraldi mused on why his reporting hadn’t been picked up by more mainstream media sources. Hours later, Israeli Army Radio reported that Bush was determined to attack Iran before the end of his term, the Likud-leaning Jerusalem Post picked up the story, and it was quickly plastered at the top of Drudge. Not exactly the New York Times or CNN, but it was enough to draw a non-denial denial from the White House. A very quick one. So quick that the story was instantly lost amid the anticlimactic primaries in Kentucky and Oregon, Sen. Ted Kennedy’s cancer diagnosis, and curiously enough, the news that oil was approaching $130 — an increase in which the Iran story evidently figured not at all.

As usual, it bears watching where the U.S. aircraft carriers are located. And as near as we can tell, the Navy spokesman who said late last month that the presence of two carriers in the Persian Gulf was a short-term situation was telling the truth. The Truman has been sailing the Mediterranean for the last ten days or so, leaving the Lincoln alone among the carrier fleet in the Gulf.

Source: The “X” Factor