Paper Currencies vs. Gold During War Times

I just had a fascinating conversation with a 90 year old woman. Her memory isn't great on every day stuff, but her childhood memories are still sharp to the minute detail. Since Vietnam was colonized by the French at various times, they controlled the money supply (piasters). But when the Chinese and Japanese would invade, the paper money would expire worthless. Many upperclass members of society would perish, as rice was either confiscated or destroyed by the invaders.

Her mother would resort to hoarding rice, beans and grapefruit, as they were staples that wouldn't rot quickly. Some peasants survived because they had access to food (farmers), while those in the cities starved

Fortunately, her mother also hoarded gold, as her family had means. She would cut up the flattened gold with a knife, and use it to buy rice, vegetables, and fruit on the black market. One has to survive the Great Depression and world wars to recall this. Unfortunately, this is happening in real-time today in Venezuela, Argentina, and other hollowed out countries devastated by war and/or government financial mismanagement.

The Global Run On Silver & What It Means Going Forward

This essay on the difference between silver and paper currencies is brilliant due to its simplicity.  It clarifies the two functions of silver:  as a medium of exchange and a store of value.  If I sound redundant, it's because people may hear it, but they aren't internalizing it.  Perhaps after reading this piece, they will finally put this debate to rest.  Own the physical.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/5/6_The_Global_Run_On_Silver_%26_What_It_Means_Going_Forward.html

What Is Market "Certainty"?

http://www.zerohedge.com/news/what-market-certainty

This Will End In Inflation & Destruction of Paper Currencies

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/7/2_This_Will_End_In_Inflation_%26_Destruction_of_Paper_Currencies.html

James Rickards: Paper, Gold or Chaos?

http://www.chrismartenson.com/blog/james-rickards-paper-gold-or-chaos/71504

'Not Owning Gold is a Form of Insanity': Chartist

http://www.cnbc.com//id/40997445

Gold will eventually rally exponentially and investors who don't own the precious metal are "insane," and may be showing "masochistic tendencies," Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.

"I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention," Griffiths said.

Gold, along with other metals such as copper, has been making new all time highs, which is a strong buying signal, according to Griffiths.

"Although it's been a top performer for each of the last ten years, it's still in a linear trend. Eventually it will go exponential and make more in the last little bit than the whole of the ten year trend," he said.

Griffiths said that any short-term declines in the price of gold represent a buying opportunity and the asset is still not an "over-owned trade".

"Real assets hedge paper money being printed into oblivion, so you've got to own gold and you've got to own other commodity-related investments still,"  he said.

As gold [XAU=X  1380.45    6.00  (+0.44%)   ] is likely to continue its rise, the value of the dollar [.DXY  80.93    0.05  (+0.06%)   ] is likely to remain in a long-term downtrend against other major currencies as the Federal Reserve maintains its policy of quantitative easing to stimulate the economy, according to Griffiths.

"The downward trend in the dollar is awesomely powerful. It's vital to get yourself out of the dollar long-term on any significant rally. Continuing to own a currency that is going to be printed virtually into oblivion … is crazy," he said.

BIS gold swaps (part 2)

Thanks to Dick for bringing up this article.

http://www.zerohedge.com/article/guest-post-gold-swap-signals-roadmap-ahead

See BIS gold swaps (part 1) here.

Here are my unedited comments:

I read another article which hinted that Portugal was indeed the country that swapped out their gold to cover the bills. The BIS is a very private organization that meets 10 times a year in Basel. It's in a building that has no signs. Swiss citizens pass it every day and don't even know it exists.

Think of them as a big pawn shop for central bank gold. If you need cash, whether in Euros, dollars, etc., just swap out your gold, and receive the currency requested. If you fail to repay the cash, you lose the gold. That article correctly states gold is double-counted--I'll extend that argument further and say it's counted 45 x, which means the other 44 people who think they have ownership to the gold (unallocated), don't really own that gold. They are paper certificates with no ownership rights.

I'll connect the dots, and declare if/when we transition away from the USDollar, whether it's another paper currency like the SDR, gold as priced in USDollars, will soar. In fact, eventually, the SDR will lose its luster too, because it's made up of a basket of four other paper currencies: the USDollar, yen, British pound sterling, and Euro--none of which are backed by gold either.

So they are merely replacing one paper currency for another, although the SDR will give a semblance of stability, since the devaluation risk is spread out between 4 doomed currencies, instead of one. I don't see how the Chinese and Russians will like this solution either.

But whether the SDR becomes the de facto currency or not, and whether a gold-backed currency becomes the new reserve currency, it spells doom for the USDollar, priced against gold. And since our trades are based on a higher price for gold in USDollars, we will do well. How well is the question. If the transition goes well, and the paper chase is concealed for another decade, gold will rise to $2500. If the formula doesn't work well, gold will be $6300....priced in US Dollars, of course.

I'm more convinced than ever this scenario will happen, and that markets will react violently after the Ponzi schemes of central bankers are exposed. The sad truth is that it doesn't have to happen. Imagine if gold were worth $12,000 an ounce tomorrow, ten times what it is worth right now in the spot market. All of a sudden, the US balance sheet looks a lot better, because the Assets side of the ledger just went up by a huge amount, somewhat offsetting our huge Liabilities (I'm assuming the Fed still has the gold they claim to have in Ft. Knox and the New York Fed, which is a big assumption, given there has been no independent audit since 1953).

But government officials and bankers are too worried about what soaring gold prices signal to the markets, and they're too worried their Ponzi schemes being exposed. Re-valuating gold at much higher prices would be an admission of guilty for decades of price manipulation. But it would also relieve them of the huge burden of being too under capitalized, much like an insolvent bank is.

When your crown jewels are re-valuated at much higher prices, you now have much more equity from which to make loans against. For example, if your house value increased from $1 million to $10 million, you can now tap that additional equity of $9 million and put it to work for you. Government officials and central bankers are more worried about soiling their reputations, so they continue on their search to extend the shell game, instead of focusing on fixing the structural problems of RECAPITALIZING THEIR ASSET BASE and producing income again to pay off their enormous debts.

FDR did this in 1933 by confiscating private gold at $20.67 and later re-valuating gold officially at $35. Obama and Bernanke will have to do this also, but their revaluation would have to be significantly higher for it to accurately reflect the huge supply of USDollars sloshing around worldwide, not just in the US. After all, USDollars are held in private hands, commercial banks, as well as in reserve vaults at foreign central banks. Only then will the US Dollar have any link to gold, which encourages sound monetary policy. In our mad world of derivatives, swaps, and endless printing of paper currencies, nothing is backed by nothing, which is exactly why we had the financial collapse in 2008. Lack of collateral caused the collapse of the subprime securitized mortgage bonds when prices of US residential homes went south. Until currencies are backed by gold, a repeat is inevitable.

Re-valuating central bank gold reserves to accurately reflect global money supply will re-energize the sinking world economy, at least in the developed world, as the most indebted European countries and the US have the most gold in their reserves. Emerging growth countries have a disproportionately low percentage of gold in their reserves and are accelerating their gold holdings.

Of course, central bankers won't take steps to restore gold-backed currencies for the aforementioned reasons, but when the world wakes up to the shell game they have been playing, the markets will force their hand, because gold will be priced at much higher levels.

Who is buying US Treasuries?

http://www.zerohedge.com/article/chinese-treasury-dump-brings-its-total-holdings-one-year-low-uk-continues-exponential-accumu

The reason: in it we read that in May 2010, China dumped $33 billion in Treasuries, bringing its total to the lowest since June 2009. Furthermore, Japan also offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet total foreign Treasury holdings increased from $3,957 billion to $3,964 billion almost exclusively as a result of ongoing exponential UK accumulation. It is time someone in the mainstream media asked just who is doing all this "UK-based" buying? It is not hedge funds, which operate out of Caribbean Banking Centers,...

Yet in what is (and continues to be) the most perverse observation, that proceeds without any questions from the mainstream media, the otherwise broke UK, once "bought: a stunning amount of Bonds, or just over $28 billion in the month of May, consisting of $27 billion in Bonds, and $1.3 billion in Bills. The "UK" accumulation patterns continues growing in an exponential pattern, and the country which owned "just" $180 billion in USTs in December, has doubled its holdings to $350 billion in less than half a year.

This is increasingly appearing as shadow Fed debt monetization operation, operating out of the United Kingdom.

Let me break down Bond Markets 101. The Fed and US Treasury have to issue a lot of debt in the form of US Treasury bonds (long expiry) and US Tresury bills (expirations of less than a year). They are basically IOU's with a coupon promise to pay a certain interest rate to the lender (i.e. bond investor). They have to issue trillions in debt to fund our overspending government. As long as demand is there for this debt (i.e. buyers), the yields or interest rates buyers demand will remain relatively low.

However, if supply exceeds demand, yields must increase in order to attract buyers. Hence, interest rates rise. Higher interest rates are problematic for the economy, because loans of all types are indexed to said bond yields. For instance, 30-year mortgage rates may be indexed to 10-year US Treasury yields. If interest rates rise, fewer homes and cars are purchased, and fewer businesses borrow money to fund their operations. That's why sharply rising interest rates are detrimental to economic growth.

Now, the Fed and US Treasury know this, and they know that foreign appetite for US Treasury bonds is waning--and for good reason. The US government is broke, and will never be able to pay back their debt obligations. But in order to maintain a semblance of the status quo (i.e., the US government is the borrower of last resort, the borrower with the highest credit rating), the Fed must artificially create demand and thus, prop up bond prices, while simultaneously suppress yields and interest rates (remember: when bond prices increase, yields decrease, and vica versa, by definition).

In other words, the Fed is buying its own US Treasury bonds, in order to keep interest rates low--and they're doing it surreptitiously through banking affiliates in the UK, in order to not spook the bond markets (which are several orders of magnitude larger than equities markets). But with this so-called debt monetization (which is really acceleration of the printing of currency), the Fed is flooding the market with USDollars, which ultimately devalues the currency. Once the bond market vigilantes wake up to this, they will drive the USDollar down even further, much like a predator senses weakness in its prey.

George Soros did exactly this in 1992 to the British Pound Sterling, driving rates up and bankrupting the UK. Remember: when a sovereign nation's currency is devalued, bond investors demand higher yields in order to compensate for the extra devaluation risk. Combine that with high sovereign debt levels, and bond prices plummet in a self-fulfilling death spiral. This, of course, devalues the currency even further, into a debt spiral with no escape. This also happened to Greece, Portugal and Spain recently, which had to issue bonds at much higher interest rates when high sovereign debt levels spooked the bond markets. In a nutshell, due to high debt levels, their creditworthiness was downgraded, causing their borrowing costs to soar.

The US, of course, has a huge advantage because the USDollar is the world's reserve currency, and that it can issue debt in USDollars, while the 16 Euro zone countries can only raise debt through Euros. Hence, the Fed can hide our Federal government's insolvency by issuing even more debt to pay off previous debts. But as any sane person knows, no household can solve their debt problems with more debt. It's the same for corporations, states, municipalities, and yes, sovereign nations like the US Federal government. Eventually, the creditors go into collection mode. And apparently, our biggest creditors in China and Japan have told the US government "enough is enough."

So the Fed is forced to go offshore with our allies in the UK to hide their purchases of its own US Treasury debt, because the American public has bailout fatigue--we now understand digging a deeper debt hole has bad consequences. This signals desperation on the government's part, and the gargantuan US Treasury bond market may be on its last legs. The shell game can be extended as long as confidence in the USDollar is intact. But when the "con" is up, the bursting of the bubble in the US Treasury bond market will be cataclysmic--much larger than the subprime mortgage bond market bubble.

Many entities may hold US mortgage-backed securities, but every sovereign entity holds USDollars and/or US Treasuries in their foreign reserves. When that bubble bursts, the global financial system itself would collapse.

Gold and silver may be the last currencies standing. Which is another reason why central bankers abhor increasing prices in precious metals, as it signals a crisis in confidence of paper currencies.

See disclaimers in the side bar.

Disclosure: long TBT, long gold, long silver.

JPMorgan analyst bullish on gold (part 2)

http://www.gata.org/files/JPMorganGoldReport-05-11-2010.pdf

GATA's comments:

That observation hints at why Western central banks and the International Monetary Fund backstop the London Bullion Market Association and the New York Commodities Exchange in their sales of unlimited and largely unbacked paper gold: so that the world may be deceived into thinking that the gold supply is a lot larger than it is, so the world is deprived of its traditional hedge against monetary debasement, and so potentially "unlimited" demand for gold can be met with unlimited supply of imaginary gold, thereby sustaining confidence in government currencies and the power of governments to inflate and reap the profits and power of the hidden tax of inflation.

See part 1.

The Fear trade

Most pundits believe the USDollar and the price of gold (priced in dollars) have an inverse relationship. As the USDollar weakens, the price of gold rises--with the inference that it takes more dollars to buy that same ounce of gold. Likewise, as the USDollar gains strength, the price of gold should naturally decline. Hence, gold is an apt hedge against a weakening dollar--and rising price inflation. Gold keeps its monetary value even while paper currencies decline. We're seeing that in Europe and the United Kingdom, as the Euro is sinking faster than the USDollar, due to the spreading fiscal problems in Greece, Portugal, Spain, and other European countries. Priced in the sterling pound and the Euro, gold prices are at an all-time high (priced in USDollars, gold is currently 5% below it's all-time peak).

Generally, in normal times, this gold/USDollar inverse relationship is intact.

However, in periods of financial crisis, when trust in government finances is low, the relationship between gold and the USDollar can be linear. In other words, even though the USDollar can gain in strength (as measured by the USDollar Index), gold can also rise in tandem, as both may be considered safe harbors for scared capital.

However, the inverse relationship may return if fear in the USDollar returns, which would be even more bullish for gold. Markets remain nervous and tenuous, and currently, markets are betting on a worldwide economic recovery. Increasing risk exposure (and attempting to increase returns) is back in vogue. Hence, the carry trade (borrowing USDollars, investing the proceeds in higher-risk trades) will have a dampening effect on the dollar, which is bullish for precious metals.

But the next crisis-triggering event will cause a return flight to the dollar, which could temporarily put a damper on gold's rally. But once cooler heads prevail, gold will resume its rightful place as a hedge against not only inflation, but also against financial crisis and currency debasement. We saw this in late 2008, after the Lehman blow up, when gold and silver prices collapsed briefly, but have both resumed their decade-long rally ever since.

See disclaimers on sidebar.

Disclosure: long physical gold and silver, and long gold and silver mining shares.

Alan Greenspan quotes

Former Federal Reserve Bank Chairman Alan Greenspan quotes:

Before he was Fed Chairman:

"In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. ... This is the shabby
secret of the welfare statists' tirades against gold. Deficit spending
is simply a scheme for the confiscation of wealth. Gold stands in the
way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the
statists' antagonism toward the gold standard." - Alan Greenspan, 1966, pre-Fed Chairman.

Post-Fed Chairman:

“Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies… What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."
–Alan Greenspan, 9 September 2009

This is in stark contrast to what he was saying during his multiple appointments as Fed Chairman. And his easy money, zero-interest rate policies mirror what current Fed Chairman Ben Bernanke is endorsing today. But the Fed is allegedly unbiased and independent, right?

I Served the King of England

The subtitled feature film is set in pre- and post-WW II Czechoslovakia, and is a light-hearted fictional narrative with real documentary passages, but has some serious, dark undertones. The movie is thematic of power and corruption, sovereignty, social disorder, and the fickle nature of paper currencies and stamps. Throw in a quirky, disturbing, but heart-warming love story, and the movie will hold your attention.

It's a bit slow at first, but gathers steam as the plot thickens and messages become more apparent. It is not surprising that it won several film festival awards. It's worth renting--here's the trailer. Enjoy.

USDollar debasement

James Grant, editor of Grant's Interest Rate Observer, is widely followed by financial professionals on and off Wall Street alike, for his keen insight and witty historical references.

This Wall Street Journal op-ed clearly and succinctly maps out the history and fates of paper currencies (you may need a subscription to read the whole article):
http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html

This excerpt is particularly poignant:

Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money.

Pension funds joining the gold party

Gold bugs have been bullish on the yellow metal for years--and have profited immensely as a result over the last decade. Hedge funds joined the party earlier this year. Sovereign funds, as well as governments from China and India are encouraging retail investors to invest in silver and gold as diversification away from paper currencies, especially the USDollar. Now, big pension funds are providing support levels as they enlist in buying "financial insurance" against dollar debasement and future inflation.

The commercial bullion banks with their permanent short positions are running against formidable foes.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAvwe3Ed.E.Q

Alan Greenspan-isms

These quotes by former Fed Chairman Greenspan have been mentioned on this blog before, but since they are so relevant, I felt compelled to include them again:

Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies...What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.

-Alan Greenspan, 9 Sep 2009

The other quote:

Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

From "Gold and Economic Freedom" a 1966 Essay by Alan Greenspan