Strange chart divergences... Coincidence?

Michael Panzer has posted a couple of interesting charts on his Financial Armageddon web site recently which show some interesting if not strange divergences.   The first is a chart showing the divergence between
the consumer confidence sentiment readings and the share prices of stocks which have historically depended on consumer confidence.  He calls the recent divergence "the dope gap" as in only a dope doesn't think something strange is going on here.  There are many reasons that this could be happening, but none of them are likely to be very sustainable over the long run.  The most obvious of the reasons is what Panzer quoted someone else as saying: "...the percentage of incomes provided by government transfer payments has remained elevated.  What this implies is that for a large segment of the economy, the government is subsidizing consumption levels."  Well Duh!  Government is subsidizing everything in the economy and they are using debt to do it with.  We have a fake, debt fueled GDP which will last as long as our government can borrow money cheaply.  When bond holders eventually demand higher interest rates, and they will at some point, the game will collapse.

Having said that, I'm not sure that so called Robin Hood "transfer payments" can really account for the gap in share prices vs consumer sentiment.  Transfer payments are a form of welfare.  They do not go into the stock market.  They go into filling the expanding gap between salaries and the cost of living.  Think "cash for clunkers", house purchase incentives and other monumentally stupid government driven programs. 

The more likely cause for Panzer's "dope gap" is that banks and other big money houses (insurance companies, etc.) have excess liquidity (elite-speak for fake money in the form of credit) that they are gambling in the markets with because US treasuries don't pay any interest that would make them attractive investments.  Keep in mind: banks have issued certificates of deposits and insurance companies have sold annuitites and pension funds have payout plans which promise returns that are significantly higher than what anyone can get from government bonds.  These Ponzi Promises require main street to participate in the stock markets so that there are suckers to fleece.  But when the middle class gets whacked there is less disposible cash for it to go into the markets with.  Also, who is going to invest in a falling market?  Money houses need, nay, require the markets to stay bouyed (somehow, anyhow) in order to attract new suckers so that they can be fleeced in order to meet all these outstanding commitments.  When the suckers run out, the money houses will be forced to admit that they are nothing but frauds and never have been anything but Ponzi schemes (just like Social Security). 

Another potential reason would be that the Federal Reserve might be secretly colluding with big US banks to prop up the stock markets.  In fact, the mechanism for doing this, if it is occurring, is probably the provision of excess liquidity to the banks in the first place.  In other words, Bernanke could be saying to the banks, "Here is a bunch of very low cost credit - almost free.  Take out a loan from the fed and recapitalize your bank, improve your reserves, make your bank less likely to collapse."  And then with a nod and a wink, "...and while you are at it, throw a couple of bucks into the stock market since everyone believes that higher stock markets drive more confidence leading to more spending".

Panzer's second chart points out a gap between the credit market and the price of the equities as referenced by the S+P 500.  The norm is that a good chunk of bank-lent credit ends up being used for speculation in the
stock markets but with bank lending down right now the S+P 500 is still mysteriously holding up.  With such unprecedented, unbridled government involvement in the economy and in the markets one can only guess that the government is responsible for this gap as well.

Lots of people believe that the government is capable of controlling the economy forever.  These same people actually believe the government creates real, sustainable, economically viable jobs as well.  They have nearly given their lives over to government control.  Truth be told, the government is trying to convince everyone that these attributes about it are true and that it possibly can maintain a viable economy, stable employment, and all the other spew that is listed in the Federal Reserve's so called "mandate".

The charade will continue, just as it did for the Greeks, the Spaniards, the Italians, and the rest of the Euroscammers until the price of credit associated with US government borrowing goes up to the point where just rolling over the existing debt is impossible, forget about taking on new debt.

It's a debt Ponzi, folks.  It will end some day like all Ponzis always have to end.

Volume changes precede price changes

In a past post relating to the Aussie real estate market (bubble), I reminded readers of the commonly known truth that volume changes precede price changes in markets.  In other words, if there is little trading in the prior direction of movement then the market for the item (stocks, commodities, housing, anything) is likely ready for a turn south.  Conversely, when the volume runs out of a bear market sell off, that signals that the herd is all run out of the market and that a buying opportunity is at hand. 

Today, Karl Denninger points out that the S+P futures market is seeing extremely low trading interest by market participants.  I've written many times that a con is over when either of two things occur:

• The patsy gets wise
• The patsy is fleeced so badly that he can no longer participate in the con even if he wanted to

The patsy in this con has always been the middle class and as the middle class shrinks there are simply less patsies to fleece along with the fact that the ones who have gotten whacked already are now gun shy.  Denninger’s conclusion: "The fraud, the phony bids and offers and the high-frequency ripoffs have driven everyone away."  

It cannot help that super-widely read economic blogger Mike Mish Shedlock is now writing, ”Embrace the fact: Banks cannot be saved”.  Mish is known for withholding his final call on a matter until there is enough evidence to support his conclusion in even the most cut throat debate.  When Mish makes such a definitive statement your odds are very poor if you bet against him.  The odds of another banking crisis in the next few quarters or years which is even bigger than the last one are very high.  When it happens the FDIC will be revealed to be bankrupt and people who foolishly believed government assurances about the safety of the banks will get creamed IMO. 

If that happens, don't look at me for a bailout.  I will wondering why you didn't heed the multiple warnings being given by the market.  I will be questioning why you didn't get out of the banks completely knowing that the FDIC is a bankrupt sham that cannot save itself much less insure your deposits in a real crisis.  I will also be concerned that you didn't store a significant portion of your personal wealth in something outside the global fiat currency scam (like gold and perhaps some silver). 

But not concerned enough to bail you out. 

The time is now to think and act.  Don't wait for the bottom to fall out and then whine for the sympathy of others because everyone will be in hard times of one form or another at that point.

Hysteria or healing?

It irks me to no end how, when everything is bubbling up due to the expansion of credit and debt, the mainstream media calls it "a miracle" while on the backside of the collapsing bubble it's called "hysteria" or "a panic".  Case in point: a recent article in The Telegraph which dubs as hysteria the push back by the German people against their government's attempts (aided by its central bank) to piss away more of the country's wealth on propping up the collapsing debt Ponzi/vendor finance scam in that region.  Dear Ms. Merkel: read my lips: Cut your losses and run.  The scam is in collapse.  The people have gotten wise to you.  Get out while you still can, con-girl.

That the German people did not want the European Union in the first place is a matter of historical record.  However, in order to ram it down their throats, the Euroscammers made unkeepable promises in the form of the Maastricht Treaty.  The four main rosy promises covered inflation rates, government finance (debt to GDP limits), exchange rates between members and long term interest rates.  Given these impossible sounding goals, intelligent people pushed back and so the framers of the Euroscam threw in another unkeepable promise in the form of Article 103, Section one, the clearly stated "no bailout rule":

"The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project."

Given these worthless assurances, opposition caved and the German elite got to push forward with their creation of the great European vendor finance scam in spite of objections from informed and intelligent German people.  Of course, we now know that none of the 4 main principles of the original Maastricht Treaty have been kept and that the no bailout rule has also been proven to be the unkeepable promise that it always mathematically had to be.

How did the bailouts happen despite the no bailout clause?  Because government con men left themselves a backdoor catch-all bailout mechanism in the form of Article 100, section 2:

"Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision taken."

So what in essence the ruling elite did was to con the people by telling them that bailouts would be illegal while putting in place a mechanism for doing exactly that whenever they damned well felt the need to do so. 

I have to interrupt my own chain of thought here for a second to point out the wording used in that con-statement.  Read it: "Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control...".   Notice how they suggest that this clause, which is in effect a master override of all truth and honesty in the treaty, would only be put into effect if there was a natural disaster or some act of God which demanded it.  What a total red herring!!  I guess that just sounds better than saying "...when this debt / vendor finance Ponzi finally collapses under its own corrupt weight...".   And in what way is PIIGS over consumption of German and French exports beyond their control?  Of course consumption is under your control.  Not wanting to control debt based consumption is not the same as not having control of it.  The people who wrote this clause up clearly knew what they were doing and none of it was good for the rank and file worker.  It was a massive scam from day freaking one.

Let there be no doubt that the German government is not saving its own people with these bailouts of other EU countries like Greece.  The elite in German government is trying to save themselves.  They couldn't care less about the people who actually worked to build the country up out of the dirt.  If the debts are ever allowed to collapse then everyone is going to wonder what good the EU ever brought to anyone except leveraged producers (supported by bankers and politicians) in Germany and France.  If collapse occurs then it could again become time for pitchforks and torches in Euroland with elitist con men getting dragged into the streets and beaten or worse.  I mean "when" collapse occurs.   A collapse is mathematically guaranteed at some point.  It is the nature of a debt Ponzi to eventually collapse.

So is it hysteria that the German people are crying "Genug!!!" or is it a return to sanity?  Is it panic when people run away from government gone wild or is it merely self preservation?  It is criminal to question the ruling elite or just common sense?

The "Buy Like Buffett" game is wearing thin.

Wikibin Great Depression research recounts a tale of "leadership buying" by the banks in order to bolster the confidence of the people in the stock market con game that was collapsing back then:

"From the very beginning of Black Thursday, things went downhill... Across the country, boardroom tickers showed a frightful vertical collapse. By 11:30 everyone was trying to sell. They did not know what was actually going on and, it was a true panic. ... At noon, reporters learned of a meeting to be held at 23 Wall Street, the head quarters of J.P. Morgan. It would include the heads of all the major banks, who would meet to figure out how they could come together to put a stop to the panic.

They reached a decision in record time, and by 12:30 the bankers had gone to the Stock Exchange and began strategically buying stocks, in an attempt to stop the landslide. When the people saw the bankers buying on the floor they also began to buy; they were reassured by the fact that the banks had come together and formed a plan to stop the blood letting. The bankers also went out of their way to send high level, highly recognizable figures down to the floor to place the bids. Also, they acted very calm and self confident. It is not known how much the banks spent that day to try to keep the economy floating. It is estimated that it was $250 million collectively."

Of course, none of the efforts mattered in the end.  The people had grown wise to the fact that stock markets which do not pay a dividend are mainly a Ponzi scheme.  The Dow continued on from that day to crash 89% from its high before finally putting in a sustainable bottom. 

Well, we've come a long way since then even if it has probably been nothing more than progress in a great circle.  Warren Buffett seems to be taking the leadership role in calming the un-calmable herd this time.  $5 billion appears to be today's price tag for calming the herd (up quite a bit from $250 million of yesteryear) as Warren Buffett recently took a massive stake in Bank(rupt) of America.  In the first wave down of the crash, Buffett bought a similar stake in Goldman Sachs which has since been repaid.  Buffett looked like the hero on that one because shortly after his Goldman investment the government suspended accounting rules which meant that the big boys no longer had to admit they were bankrupt.  Buffett thus was able to recoup his investment in Goldman this year based on the dead cat bounce the rule changes created.  You can determine for yourself whether or not Buffett had advance knowledge of that coming action through his contacts in government and in the banking arena. 

But rule changes don't change the facts, they just change the group of people who know the facts.  Rule changes also pick new winners and new losers.  But most of all, the rule changes simply allowed the corrupt con men who ran their banks into the ground even more time and opportunity to spirit more money out the back door thus making the problems much larger in the future.  Nothing has been fixed, the can was simply kicked.

With his latest move Warren Buffett builds upon his recent and even more recent legacy of acting as a banking-government shill, trying to spread calm upon the people while telling us that higher taxes in any form are beneficial.  Buffett knows better than that.  He knows that any taxes paid to government will be in large part pissed away by waste fraud and abuse of the federal government and its military machine.  Buffett wants us all  to see him asking for more taxes even if it is only being done in order to save the corrupt system that he gamed into becoming incredibly wealthy.  He is trying to buy our confidence and our compliance.  It is the same type of "leadership spending" that the con men tried to do in the collapsing stock market that led to the Great Depression.  They all cry "follow me, men" and act like they are jumping out of the trench into the withering fire of a losing economic battle.  Of course as soon as they are done with the public show they slide back into the trench and run for cover leaving anyone foolish enough to have gotten conned into battle to take the bullet. 

Personally, I am having none of it and I suggest that everyone consider the stupidity of listening to advice from those captured by the system as well as the type of person who has been sucking value away from working people via his intuitive knowledge of how the scam works.  I also want to point out that uber rich minus more taxes still equals ridiculously uber rich.  Buffett's ramblings about giving up a billion dollars means nothing.  He's within 5-10 years of meeting his maker anyway.  He could give it all up except for 10 million and still live like a king for his remaining years.  When he gives all of it up and has no home, no car, no job, and no income then I might start taking his calls for more taxation seriously.  Until then his calls for higher taxes are nothing more than a disingenuous shout out to the patsies to continue participating in the con.  While foolish people will think that more taxes on the rich is a good thing they overlook that there is no such thing as just taxing the rich.  Once the additional tax gates are opened, everyone will be asked to "pay their fair share" toward keeping bloated government fat and happy.  Taxation of the rich is nothing more than a foot in the door.  We need smaller government and less taxes, not more taxes (no matter who pays them).  Smaller taxes and the cutting of debt based spending are the only ways to drive toward smaller government, more freedoms, more privacy.

Let me be a bit more clear: Warren Buffett is a workaholic.  I mean that in a good way.  He works hard, thinks hard, is practical and pragmatic.  He's not just intelligent - he's also calculating and cunning.  But in no way has he by his individual work contribution added billions of dollars worth of value to our economy.  One man simply cannot work that hard or that smart.  It is not within us to do so.  But still, he is worth billions somehow.  How did Warren get all that money?  Economically speaking it could only have happened by standing on the shoulders of other hard working people, not as their peer but as their overlord. 

In my past management of engineering teams we were able to accomplish some really cool things.  Yes, I was the leader and I had much of the vision for the work.  But I did not collect an outsized salary for this work even though I was often at it for 12 hours/day because management is just another function in the team.  I did not get to collect a portion of everyone's salary who was working for me because that's not how it works in an honest team working relationship.  All of the senior members of the team made about the same money because they all worked hard and contributed greatly to the success of the achievement albeit in different ways.  But Buffett somehow did get an outsized portion of the wealth generated by every person in each one of the companies that his fund owned.  He was effectively a king with the power of taxation. 

All new value is created by the labor of man and since Buffett is worth billions it means he has somehow received the payment associated with millions of man hours of work.  This is not possible in an equitable economy because no one man is so much better than another that his work is paid at a rate which is thousands of time higher than the rest of the workers in society. In short, Buffett conned the money out of other people.  It was an intricate con and one that used great leverage (a fine thing in casinos but not so much when people are all just working together trying to live and to care for their families).  IMO it was a con because Buffett fully understood the power of fiat currency and fractional reserve banking and the power of government to pick winners and losers.

I am NOT accusing Buffett of doing anything illegal at all because I don't think stooping to illegal acts is required in order to make huge sums of money given that the monetary system itself is so completely corrupt and fraudulent.  All you have to do is to understand that corruption and understand that fraud and to work within the rules of the corrupt, fraudulent framework.  Buffett has simply gamed the system very well while always staying within the law IMO.  Some might call him immoral for doing this because he knew he was fleecing those who were working hard but who did not understand the game.  Others might say that since everyone had the opportunity to play by these same rules that it is just sour grapes to complain when someone gets ahead.  I say that if a man cannot achive the value that he works each day for, something is terribly wrong and nobody should be happy with such a system.  Those calling to perpetuate the system are, like Buffett, the biggest beneficiaries.

Each healthy person was put upon this Earth with the ability to feed and clothe and shelter himself and his family.  He was also given enough gifts in his youth (physical strength, intelligence, energy, motivation, endurance, etc.) to produce enough wealth in his youth so that he could afford to live a reasonable life in his retirement years when his deteriorating body (and in many cases even his deteriorating mind) no longer allows him to compete with younger workers.  When we start to see that large numbers of people cannot follow this model because all of the wealth is concentrated into the hands of the few then we have to question how it can possibly have come to this point in an honest and fair system.  In truth, it cannot which means that the system itself is neither honest nor fair.

And so we should expect to continue to see disingenuous people like Buffett making a big show in order to perpetuate the Ponzi because they stand to lose the most if it collapses.  At the end of the day their efforts will fail because too many people have woken up to the truth about the great Ponzi supported by debt (aka fractional reserve banking) and fiat currency (yet another form of debt).  In other words, people will stop accepting Wimpy Promises in exchange for their labor as Buffett et al. would like them to do.  The awakening populace will continue to scramble to convert their paper salaries into tangible stuff (commodities) and into real money (gold and even silver).  Without people accepting promises instead of actual payment the uber wealthy will collapse under their own corrupt weight and will be discredited.  Buffett shilling for the government and the banks is speeding the fall of his crediblity and of his stature in world economics.

All the con men are falling under attack: Blankfein on deck.

Lloyd Blankfein, CEO of Goldman "Vampire Squid" Sachs, has reportedly hired big time defense attorney Reid Weingarten.  We really don't know what for at this point but it's not too difficult to hazard a guess.  Blankfein is an arrogant con man IMO but he's no fool.  He knows that the sheeple are awakening and they are pissed.  In line with the concept of con men turning on each other to curry favor with the very pissed off public during the collapse phase of the con, the government (the lead con player in the fractional reserve banking scam) is likely going to try to nail him with whatever charges they can just to throw some raw meat to the angry crowd.  Scapegoating is a sign that the Ponzi is in the collapse phase.

In a post from June of this year I wrote, "They [Bernanke and his criminal banker cohorts] are laughing now for having fleeced the sheeple so boldly but I actually feel sorry for them because they do not fully understand the anger that they have incited in the general population.  I'm talking Reeve Valkenheiser type anger towards moneymen.  Once the collapse hits then it will be open season on con men and bankers.  Perhaps I will be proven wrong but at this point I suspect that bankers and moneymen will have a very difficult time enjoying their stolen prosperity into old age. When you get a scammer like  Lloyd Blankfein smugly telling the people that Goldman Sachs is "doing God's work" one can only imagine the thought processes this set off in some of the less stable, less economically fortunate among us."

Personally, I am quite sure that a public hanging of Lloyd Blankfein will fix nothing; the past damage is done and that bill will have to be paid by the future labor and suffering of the people.  However, going forward the very fact that the government is pursuing him is an eye-opener to all the other would be con men out there.  If Blankfein gets taken down, no con man anywhere is safe no matter how much money, power or legal resource he might have access to.  Blankfein needs to be taken down if for no other reason than that.  Years ago, con man Blankfein (a label that is of course, just my humble opinion), was untouchable.  He was like Rumsfeld - a “made man” in the criminal organization that took over from the Capone type mobsters: the Military Industrial Complex gang.  Now it seems both Blankfein and rummy better lawyer up.  The public wants to see heads roll and so heads will roll.

Open letter to the good people of Japan

Dear Hard Working People of Japan,

It is with sorrow and respect that I bring you the sad news that your economy is bankrupt and your banks and major corporations will leave little doubt as to this fact in the coming months and years.  You don't need this kind of bad news after the tsunami and the Fukushima incident but bad news generally travels together as the saying goes.  As evidence of this coming collapse, I present Toyota Motors.  Toyota is a great company but it was built on unsustainable debt and as deflation takes hold there will be little to economically distinguish it from General Motors in the USA. 

How can Toyota be in trouble if it makes such good cars?  If you are asking this question it shows that you don't understand economics.  The question is, how much debt does Toyota have and can it afford to pay it?  IF the debt is too high then it proves that Toyota's manufacturing capacity was borrowed, not earned.  Borrowing to overproduce is the sin of every exporting nation in the world that is foolish enough to believe that exporting is a sustainable profit generation mechanism.  Like fractional reserve banking and fiat currency, it appears to work for a number of years but it eventually proves to be an unsustainable scam.  The scam of exporting as a mechanism of wealth generation is only made possible by the vendor finance scam.

As I have explained before, the only true value of exporting (another word for trade) is to achieve diversity of consumption.  Japan is darned good at making cars but it cannot consume all the cars that it makes.  It must export them in hopes of getting other things that it needs but does not produce internally.  The problem is that Japan has gotten so good at making cars that its customers can drive them for a very long time if they want to before buying another one.  In fact, it it is not difficult to get 200k miles out of a properly maintained Toyota.  At the same time, Korea and China have followed Japan's fine example and are now making quality cars of their own.  Competition for the small car market has never been more fierce.

The only fundamentals you need to know about Toyota right now are that they have $157 B-B-Billion in debt (and growing) and only 45 billion in cash according to Yahoo finance.  When I was telling people about the coming demise of TM a couple years ago it only had $125 bn in debt.  So it is accumulating debt about as quickly as the Japanese government itself.  At the end of the day, the Japanese government will default on its debt (which has recently exceeded 200% of GDP) and the default of Toyota Motors will probably precede that by some short period of time.  Toyota will go the way of General Motors before this economic
crash is over.  As to when this will happen, I fear it will be sooner rather than later.  The Elliott Wave model of the TM stock chart tells me that the sucker bounce is most likely (herd-watching is a game of odds, not certainties) over and that we are now into the C wave.  This is just a model so take it for what it is worth (which is no more than what you paid to read it).  However, if that red support line from 2003 breaks down then I think TM stock will be technically broken and looking to create a significantly lower low.

幸運と多幸をお祈り
-The Captain

Paper promises for GLD are not the same thing as gold

I believe that wherever there is an opportunity to bend the rules, cheat, sneak, commit quiet fraud, and so on, such happenings will occur.  It falls under the same classification as Bill Clinton's self proclaimed reasoning for futzing around with Monica Lewinski:  "Because I could".  It's just the nature of man.  There's an old saying, "don't tempt an honest man".  Fiat currency and fractional reserve banking have few rivals when it comes to their power to tempt men.  

This brings me to the topic of the GLD fund.  People have been told that it is "like gold" or that it "trades in step with gold" but since it is not gold wise people will be looking at it sideways wondering when the gold plating is going to wear off.  In short, paper promises for gold are not the same as gold in the hand.  In a fair economy where people don't have their heads up their a$$es, nobody would ever value paper promises for gold in the same way they would physical gold.  Why?  Because gold is a crisis haven and in a crisis possession often becomes 9/10ths of the law.

As the credit con collapses, people again return to their senses.   They begin to value what is honest and right, and they begin to look down again on things that are corrupt and worthless.  The credit con had that flipped completely on its ear, but with its ongoing collapse the healing process is upon us and so I expect to see lots of interesting stuff happen.

One thing I have always warned my family and friends to be on the look out for is when the GLD ETF begins to diverge from the price of physical gold.  Why should that ever happen?  After all, doesn't the GLD fund actually own enough gold to completely back investors in it?  Yeaaah, right.  To believe this is to ignore the nature of man as expressed at the top of this post.  The GLD fund allows certain people to tell everyone their gold is present and safe without actually having to prove it to anyone.  In other words, "trust me".  Only a fool trusts someone else to hold his money during an economic collapse.

So has the divergence been happening?  Yes, it has.  The divergence is still small at this point but it is steady.  At some point I expect that the divergence will grow rapidly, perhaps with exponential speed.  Here is a recent snapshot of gold vs. GLD:  As you can see, the average slope of that relationship is up and to the

right.  In December of 2009, the average ratio between spot gold and the GLD fund was 10.150:1 (its supposed to be 10:1).  Now it is 10.251:1 with an instantaneous ratio of 10.350:1.  That's a 3.5% divergece.   That may sound like a small number but keep in mind that GLD claims it has 66.14 billion USD in reserves according to Yahoo Finance.  3.5% of that is 2.3 billion with a B.  As in missing.  Gone.  Up in smoke.  Absconded with.  IMVHO of course.

Of course a billion isn't what it used to be but if certain things happen in the world, confidence could be lost in the GLD fund and it could diverge rapidly from the price of real, physical gold leading to very large losses for investors in it.  In fact, that is exactly what I expect that we will see happen in the coming years.

I suspect (as in it's just my opinion) that the GLD fund is a fractional reserve system.  It probably takes in money from investors, buys some of the gold it says it owns, and then buys options or some other leveraged paper claim on gold to account for the rest of its stated gold holdings.  There is no telling what the ratio of physical gold to paper promises is but the more of this they get away with, the more they will try to get away with.

Why would the GLD fund do something like this?  To try to increase profits of course.  It is not free to store gold metal (security costs, etc.), yet nobody who owns the GLD fund pays storage fees.  Investors think they are getting something for nothing but they are really just getting chiseled.  In fact, they might be getting "the business".  As in fraud.  As in the GLD fund could be taking the money they are not spending on physical metal and using it to gamble in other markets.  You can think of this as gambling with your money without you knowing about it which is, unfortunately, very similar to what fractional reserve banks do.  In fact, intelligent people understand that GLD is likely a way to fractionally reserve the physical gold stocks of the world, thus creating a fake, paper supply of gold that isn't worth the stock ticker it trades under.

So what is the end game for something like this?  In short it’s the same as the end game for fractionally reserved banks: a run on the bank.  In other words, customers wake up to the reality of the economic crisis and begin to fear that their money might not be safe.  As a result they withdraw their money leaving the fractionally reserved system even more fractionally reserved than it was before.  At some point there is a default (no gold left to return to those whose accounts say they have some on deposit) and people get stiffed.  Nixon in 1971, anyone?

What might a run on the world gold system look like?  Well, when you see big gold players demand their money back from the gold storage banks that they have used for years, that would be the best indicator.  In fact, the 15th largest gold holder in the world, Venezuela, is doing exactly that as I type.  They want all of their 200+ tons of gold that are stored in vaults around the world returned to them right now.  Gee, this is strange timing for that, ya think?

The final thing I will leave you with is this:  why would anyone choose to buy paper gold in the GLD fund instead of owning the physical metal?  Physical gold is nearly indestructible and it is very small and so easy to hide.  So why are sheeple lined up to plunk down their hard earned cash for paper gold?  The bottom line is that they still don't trust the physical metal because they have been brainwashed into believing that the only real money in the world cannot be trusted or is in some way "risky".  They want to be light on their feet so they can be the first one out of the "bubble" when it pops.  That's hard to do with physical items, but just a mouse click away with an ETF. 

All I can say about that is that it is the same thing Madoff victims thought.  They knew something was wrong with the outsized returns he was giving but they just thought they would be faster than everyone else getting to the door if a collapse hit.  But by definition, most people trying to exit a fraudulent situation have to lose out.  That is the nature of fraud.  I thus predict that before this crisis is over, GLD will prove to be a fractionally reserved fund to a significant degree (think 20% but it could easily be higher - they are short by perhaps 20% of the stated gold IMO) whose paper claims on gold are not worth nearly what people were promised they would be.  People in GLD will someday wish they hadn't tried to be slick dick market traders.  Keep your eye on the gold:GLD ratio.  It is the canary in the fractional reserve GLD fund coal mine.