Saturday, May 15, 2010


Even gold bugs don't fully understand gold's store of value. Breaking news: gold's performance during deflationary times actually outperform periods of inflation. Not necessarily in nominal terms (since prices of everything generally increase nominally during inflation), but in real terms, gold actually does better in a deflationary environment. In other words, while gold is a great hedge against inflation (i.e., it maintains its purchasing power even as paper currencies are debased), it is an even better hedge during financial crisis and deflation (e.g., the Great Depression).

Second point: since official cpi numbers are understated, the inflation-adjusted price of gold should be $6300/oz., not $2400/oz., like you read in many gold-related trades. One can also arrive at the same outcomes by dividing the money supply by the amount of gold above ground, depending on which Mx metric you use for money supply. But it doesn't take a rocket scientist to track the Fed's exploding monetary base since 2008, money supply debates notwithstanding.

And if you believe the nation's unemployment rate is 9.9%, instead of the actual 22%, I've got some US Treasury bonds I'd like to sell you (or Greek bonds, for that matter).

3rd point: the bullion banks, with implicit authorization from central banks, allegedly are suppressing the prices of precious metals in London and at the COMEX. This was considered a lunatic fringe conspiracy theory, but is now being investigated by the US Department of Justice--and the normally shiftless CFTC, according to an article in the New York Post. JPMorgan was specifically named in the article. In other words, a phenomenon a few observers who cared to examine for years, is about to be blown wide open, much like the Goldman Sachs subprime mortgage derivative fraud case brought on by the other previously shiftless and incompetent enforcement agency, the SEC. Only in this case, JPMorgan and a host of other bullion banks are naked shorting silver and gold futures contracts with huge, concentrated positions.

4th point: in a related matter, the Federal Reserve Bank (Fed) has been complicit in surreptitious price suppression schemes with gold swaps, sales and leases to other central and bullion banks, with no independent auditing, and according to Ron Paul, with no authority. That's why he wants to audit the Fed, as the vaults at Ft. Knox and in New York have not been independently audited since 1953. If the gold is there, why has the Fed refused an audit for over 50 years? And if bullion banks are naked shorting precious metals, what happens to the price of a commodity if there are shortages and there is a run on inventory?

5th point: how did gold end up in Ft. Knox in the first place? Due to Executive Order 6102, FDR confiscated all private citizen's gold in 1933. Can our government do that again? Probably not, but if they did, the black market would thrive, as gold ownership is now a worldwide phenomena--among individuals, financial institutions, and sovereign central banks. Hedge fund managers, Swiss bankers, latin American overlords, oil sheiks, and 3 billion peasants in Asia are waking up to the reality of the paper currency Ponzi scheme.

6th point: the shortage in silver is even more pronounced, as it is an industrial metal, and since it is cheaper, the silver market is easier to manipulate. When the shortage hits, and "failure to deliver's" pile up, industrial silver buyers will pay any price to keep their production lines humming. We all want our iPad's yesterday, right? Industrial uses include solar panels, electronics, disinfectants, antibiotics, biotech, batteries--any green technology you can think of. Good luck on finding it when there's a run on silver.

And lastly, those on the sidelines have missed out on a decade-long bull market in precious metals. Sure, gold was the worst investment between 1980 and 2001, when the spot price declined from $850 to $250. That's because between 1983 - 2000, financial assets like equities had a historic run of about 12% return annually. But between 1971 and 1980, gold increased 24-fold. That's when the US was fighting a war it couldn't afford, the government was running a deficit, energy prices were going through the roof, and economic growth was stagnant (stagflation = stagnation + inflation). Sound familiar? Only this time, due to compounding interest on the liability side of the Federal government's ledger, our fiscal problems are much larger. If the government were to stop cooking its books and include unfunded liabilities like social security, medicare, medicaid, Fannie Mae, Freddie Mac, etc., our sovereign debt grows from $13 trillion to $60 trillion (or $100 trillion, depending on who you ask). No wonder the Fed and US Treasury are turning on the printing press.

So people have to ask themselves: are the US government budget deficit and debt problems getting better or worse? And if so, will the Fed bail out bankrupt states and municipalities also--or will they just step aside and let them undergo "austerity" measures like the Greeks have had to endure?

One guess is that they will continue to print currency, tanking the dollar further. The USDollar is only looking stronger because the euro is sinking faster. You can be the tallest midget in the room, but you're still a midget. The scary part is gold is appreciating in tandem with the USDollar, and has decoupled from its normally inverse relationship. What the markets are saying is that gold is the ultimate currency, the last man standing in a race to the bottom among paper currencies. After all, the logic goes, a weakened currency stimulates exports and employment, right?

This is not to say any asset values go straight up or straight down--there will continue to be violent gyrations from central bank intervention, and manipulation by financial institutions. But due to profligate printing and spending (and hence, the necessary obfuscation of said reckless policies), the trend of debased currencies and soaring sovereign debt will continue. Solving debt problems with more debt is lunacy, but the path our governments have chosen. It's either die now quickly, or inflate and die later. Owning precious metals is the only defense an individual has in this mad world of fiat paper currency.

See disclaimer on side bar.

Disclosure: long precious metals, long gold and silver mining shares.

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