Emerging markets stepping up to the gold window

Foreign central banks are snapping up gold bullion for their reserves for several reasons. Foremost is their diversification away from the USDollar, as too much exposure to the sinking dollar has caused their asset values in reserves to decline. Their economies are stronger relative to developed countries, so they need to boost their gold reserves accordingly to reflect their newfound economic health. In other words, their strong currencies need to be backed by gold vs. the USDollar.

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=8970ea5d-3ab9-4ad2-87a8-f76cca63c961

In the past, central banks could sell their gold holdings, in order to suppress the price of gold, as low gold prices enable sovereign governments to borrow at low interest rates. This support allows governments to run perpetual deficits and reduces their debt obligations in the form of low-yielding bond issuance.

But with mounting fears that governments worldwide are reckless in their deficit spending--debasing ALL currencies in the process, gold as re-emerged as a safe haven for monetary store of value.

In another article, the Reserve Bank of India hinted at buying the balance of the IMF's planned 403.3 tons of gold, of which 201.3 tons remain. India purchased 200 tons two weeks ago in a surprise move, as most observers expected China to buy the bulk of the planned sale. However, purchase of the IMF gold by ANY central bank is bullish for the yellow metal, as it further validates central bank net buying--not net selling.

http://www.mydigitalfc.com/plan/india-plans-buy-more-gold-imf-410

Supply side of gold

There has been much focus on the fundamentals of the rally in gold prices, mostly on increasing demand for nonmonetary (jewelry, art, industrial) and monetary (investment) reasons. Gold has a consistent record of having store of value over centuries, and has been a useful hedge against inflation, financial crises, and currency debasement.

But the supply side of the equation hasn't been addressed by the mainstream financial media. The bullish case on the supply side is equally compelling. Gold production peaked in 2001 and is in steady decline, despite much higher prices. Higher demand and lower supply can only have one long-term outcome.

http://www.brisbanetimes.com.au/business/miners-were-running-out-of-gold-20091125-jqqy.html

Gold missing in Canadian mint

Back in June, after an audit by Deloitte & Touche discovered $15 million of missing gold bullion, the Canadian Mint called in the Royal Canadian Mounted Police for an investigation. It turns out mint official "double-counted" gold sales by mistake.

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20091124/mint_mystery_091124/20091124?hub=TopStoriesV2

I'm not buying it, as central banks are notorious for performing gold swaps, and leasing out the same gold ounce multiple times to each other, in a surreptitious gold and silver price suppression scheme (scam).

The Canadian mint has now agreed to an independent audit of their precious metals inventory every three months--which is a big change of policy and one that contrasts sharply with the US Federal Reserve Bank. The Fed's gold reserves haven't been independently audited since 1953, which means no one has any idea how much gold is in the vaults of Ft. Knox, Kentucky and the Federal Reserve Bank of New York.

FDIC is broke

The FDIC isn't almost broke--it IS broke.

http://www.fdic.gov/news/news/press/2009/pr09212.html

The number of institutions on the FDIC's "Problem List" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

As projected in September, the FDIC's Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September...

First India, now Russia

The Indian central bank shocked the financial community when they snapped up 200 tons of gold from the IMF's planned sale of 403 tons, as many observers believed the Chinese central bank would be the largest buyer. A few other central banks have since purchased gold on the open market, or from the IMF.

Russia's central also has been accumulating gold into their reserves, as has China's central bank, which has doubled its gold reserves since 2003.

http://in.reuters.com/article/fundsNews/idINGEE5AM1A020091123

HSBC kicking out retail customers holding gold

According to the Wall Street Journal:

Fleets of armored trucks piled with gold bars and coins have been streaming out of midtown Manhattan in one unexpected consequence of the gold craze.

Amid gold's rise -- it has gained 32% this year and reached a record on Monday -- investors have been loading up on bullion and coins. One big problem now is where to store it. The solution from HSBC, owner of one of the biggest vaults in the U.S.: somewhere else.

HSBC has told retail clients to remove their small holdings from its fortress beneath its tower on New York City's Fifth Avenue.

HSBC and other banks don't earn fees from clients buying physical gold and silver. I guess that's why they kicked clients out of their safety deposit boxes.

Robert Landis on government, central banks, and gold

Viva la Restoration

Remarks of Robert K. Landis

finews.ch Gold Conference

Zurich, Switzerland, November 17, 2009


"It is an honor and a pleasure to be here among so many good friends and great minds.

I feel a special affinity for Zurich. It was the home of my friend and inspiration Ferdi Lips. It is the home of other friends like Tony Deden.

It was also the ancestral home of the Landis family.

In fact, this ancestral tie makes me a little nervous at the prospect of a question and answer session. The last time a Landis preaching a dissident message was questioned in Zurich, it was while he was stretched out on the rack. His answers irritated his questioners. So they cut off his head.

Hans Landis was a radical Protestant who denied the authority of the Pope and preached strict fundamentalism. In the passions of the early 1600’s, that was like being a gold bug who denies the legitimacy of the central bank and preaches sound money.

And so, as I stand before you this evening, I sincerely hope that over the course of the last four hundred years, Zurich has mellowed out.

Tonight I’m going to approach the subject of gold from a somewhat oblique angle. Please bear with me as I circle in on it.

Just over a year ago, the United States underwent a seemingly radical change, seemingly overnight. Its financial system had been revealed as insolvent under the weight of huge liabilities and worthless assets. The government refused to allow all the bankrupt institutions to fail, and thus permit the market to do its job of purging the rot from the system.

Instead, the authorities saved their favorites, effectively merging bank with state. They did so under cover of a witches’ brew of subsidies, guarantees and quasi-nationalizations bearing bizarre acronyms like TARP; PDCF; TAF; TSLF; and my personal favorite, the ABCPMMFLF, otherwise known as the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility.

And those were just the visible programs. The Fed, our central bank, dropped interest rates to zero and monetized additional trillions of dollars worth of problem assets, away from prying eyes. The nature and source of these assets remain matters of speculation, because the Fed to this day refuses to tell us what it bought and from whom.

When the smoke cleared, we Americans found ourselves the subjects of a gangster state, in thrall to a clutch of greedy, corrupt and incompetent banks which only days before had failed. We were now the guarantors of trillions of dollars in worthless assets that had generated billions in profits for those same banks in recent years. Their gains remained their gains; but their losses were now our losses. Our money, the reserve currency of the world, was now backed by toxic waste.

The events of last fall were, to all appearances, a bloodless coup, taking us from freedom to fascism virtually overnight. And all without a shot fired, or even, with few exceptions, an authoritative voice raised in protest.

How was such a thing possible in the United States, the supposed bastion of free market capitalism? The nation that had led the free world in the defeat of fascism some sixty years earlier, and in the defeat of Marxism-Leninism less than 20 years earlier?

And more importantly, how do we get out of this mess?

To understand how we got here, we must first understand that what seemed like major change, was actually just the illumination of existing reality. Bank and state had been a unitary phenomenon for many years. And what seemed abrupt, was actually the outcome of a gradual, accretive process.

Ideas have consequences, and bad ideas have bad consequences. What happened last fall can be seen as the aftermath of a war of ideas fought long ago, in which the wrong side won, decisively.

The vanquished were the heirs of a noble intellectual tradition, the English empiricist philosophers who developed in the modern era the concepts of private property and voluntary exchange. This tradition, which informed, among other things, the United States Constitution, was reinvigorated in the late nineteenth century by a remarkable succession of economists originally based in Vienna, hence the term “Austrian School” of economics. The Austrians, whose greatest exponent was Ludwig von Mises, and whose American voice was Murray Rothbard, developed a theory of economics based entirely on individual choice.

The victors were the heirs of a far less noble tradition, a long line of intellectual quacks and panderers to power. The line began with a Scotsman, John Law, reached a vigorous maturity in an Englishman, John Maynard Keynes, and entered a final, flamboyant decrepitude in the policies, if not the public posturing, of former Fed Chairman Alan Greenspan. In this tradition, the relevant analytic units are aggregates, broad abstractions. The individual scarcely warrants mention. Public power, not private property, is the heart of this tradition.

Keynesian economics is just a modern mutation of inflationism, a stealth tax levied by powerful insiders on ordinary people who can’t see it happening until it is too late. It is music to the ears of interventionist governments, because it ratifies what, if unchecked, they will do anyway, and it preys on the greed and gullibility of its victims, who are more than willing to believe you can get something for nothing.

Now I must concede, as a matter of historical fact, I’ve overdrawn the point. It wasn’t much of a fight, much less a war. The quacks had the field to themselves. They told powerful people what they wanted to hear, validating the intervention and deficit spending that was already occurring. They also had a head start of some 20 years, since it was not until relatively late in the day when the Austrians’ theories were even translated into English.

Nevertheless, I believe the events of last fall, and the road ahead, can best be understood in terms of the interplay between these two schools of economic thought.

Now, a detailed comparison of the two schools is just a bit beyond us this evening. But there are two contrasting theories that I’d like to mention briefly.

The first such contrast is the theory of depressions. In Austrian teaching, so-called business cycles are caused by official interference with money and credit creation. This interference – for example, setting interest rates below market – fools individual actors into overproducing, creating supply that exceeds actual demand. A depression is merely the process of clearing the resulting imbalance. It is inevitable, and it is necessary. Left to itself, the market will clear the excess of supply over demand through price adjustments. Government at this point has no role to play; it has done quite enough already.

In Keynesian teaching, by contrast, government is blameless in the business cycle, which just occurs naturally. In a depression, markets can’t be trusted to clear themselves through price adjustment. The government must step in and stimulate additional demand by means of deficit spending, more money creation, and more credit expansion.

The policy responses of last fall illustrate perfectly Keynesian doctrine in action. Our authorities refused to let the markets clear. Instead, they panicked, and attempted to prop up prices, reignite the credit expansion, and stimulate demand. All this is obvious to anyone who follows the news.

What is less obvious is how the crisis came about. Keynesians treat it like an act of God. Virtually no one in authority saw it coming. Applying Austrian theory, we see that the crisis was caused by Government intervention, decades of relentless credit expansion. It was entirely predictable. And, indeed, it was predicted. The nature and timing of the inevitable crash were endlessly debated for years all over the Internet by ordinary people unburdened by false doctrine.

A more important question, however, is why we tolerate unaccountable power in government. Why do we find it acceptable that government has the power to intervene so massively in the market that it can cause such a crisis in the first place? And why do we now tolerate more of the same, a putative cure that is doing even more damage?

This brings us to the other contrasting theory, the concept of money itself.

In Austrian teaching, money originates in the market: …all money has originated, and must originate, in a useful commodity chosen by the free market as a medium of exchange. The unit of money is basically just a unit of weight of the monetary commodity – usually a metal, such as gold or silver. Government has no role in the definition or selection of money, let alone its creation, price or quantity. That is the market’s function.

In Keynesian theory, by contrast, money originates in the state. Government has a total monopoly on money, starting with its very definition. It is not chosen in free exchange, it is imposed by force.

Keynes got his idea for state control of the means of exchange in the writings of a Prussian academic named Friedrich Knapp. Herr Knapp was the author of a book entitled the State Theory of Money, published in 1905.

According to Knapp’s theory, money is a creature of law, of state power. Money is whatever the state is willing to accept as payment for its taxes. It derives its value exclusively from the state.

Keynes was so delighted with the State Theory of Money that in 1924 he sponsored its first translation into English. In 1930, he adopted it explicitly in his Treatise on Money.

Now, it is a measure of the success of the Keynesian indoctrination to which we have all been subjected that this insidious theory strikes most people, even some who fancy themselves free market in orientation, as unobjectionable. They prefer to concentrate on other fallacies of Keynesian doctrine. Many of us are so used to hearing that the state properly has a monopoly on money that we have come to think it natural.

In fact, the State Theory was already defunct long before Keynes appropriated it. It had been demolished in theory as early as 1912 by Mises in his classic Theory of Money and Credit. It had been discredited in practice by its association with the German hyperinflation of the 1920’s. But inconvenient truth did not deter Lord Keynes. The State Theory was quietly incorporated into Keynesian dogma without further ado.

And there it sits, to this day, malignant and unexamined, a false theoretical postulate at the foundation of the entire corrupt edifice of inflationist theory and practice.

So why is this bit of intellectual history relevant?

Because bad ideas have bad consequences.

The State Theory of money, the obscure foundation of modern inflationism, left us intellectually defenseless against our government’s incremental shift to fiat money and away from any practical limitations on its power.

It left us defenseless against the depredations of our central bank, whose grotesque mispricing of money and credit over the years led in a straight line to the catastrophic serial bubbles in assets and credit whose threatened collapse triggered the open interventions of last fall.

And, unless we drag it out into the open and drive a stake through its heart, the State Theory will leave us defenseless still as we grope for a way out. If our assumptions are so flawed that we cannot properly articulate the conceptual problem, we will never understand, let alone fix, the institutional and behavioral problems.

Or, more to the point, defend ourselves against the next wave of monetary swindles by powerful insiders.

And so we come to the second question: how do we get out of this mess?

The short answer is, we don’t. There is no saving the dollar or the monetary system now based upon it.

Not that we should want to. Absolute power, Lord Acton famously observed, corrupts absolutely. The power to print a reserve currency out of thin air is the greatest power on Earth. Its very existence attracts and empowers people who wish to control other people. It corrupts all who enjoy it.

You have had direct exposure to the truth of this observation. Consider the relentless attacks on your gold by our authorities, and the relentless attacks on your bank secrecy laws by nearly everybody. The very same laws, ironically, that were developed in the 1930’s for the express purpose of protecting clients who were nationals of fascist states.

I believe it fair to say that as a society, we Americans have reached a dead end. We are bankrupt, and not just financially. Our leading institutions are corrupt and discredited. Our leadership class has betrayed its trust, openly and repeatedly.

Our financial and economic crisis will in due course lead to an intellectual and cultural crisis. We may yet avoid the fury and violence that have attended other paradigm shifts, other imperial collapses. But we will need to be very lucky indeed. That’s because on the one hand, this is about power which will not be voluntarily relinquished, and on the other, there is no reasoning with an angry mob.

So I believe it is a waste of time to talk about reform of the existing monetary system. There is no historical precedent for a fiat money surviving more than a brief span of years; and, in any event, the experience of the Soviet Union teaches that an economic system built upon a false dogma cannot survive.

We should instead focus on regeneration, the task of rebuilding out of the wreckage on the other side of that final monetary collapse. At that time, and not before, we will have the opportunity, however brief, to drive out these disastrous ideas along with those who used them to control and impoverish us. Only then will we have an opportunity, however long the odds, to restore our Constitutional republic.

In the meantime, what keeps the current system going?

You do.

You, meaning foreign investors, still lend us your savings. This just enables us to prolong the process, defer the resolution, and increase its ultimate cost.

When will it end?

Whenever you cut us off.

At some point, foreign holders will sell our debt in earnest, and buy gold with a conviction resembling panic.

And so, finally, I come to gold. This is, after all, a gold conference. Why then do I talk so much about politics?

Because I think it’s impossible to understand gold without understanding its political dimension. Gold is permanent, natural money, the antithesis of money made from nothing, money backed by force alone. It is a potent symbol of private property; of voluntary exchange taking place outside the control of the state; of limits on state power; and of resistance to the runaway state.

Left to its own devices, gold is the ultimate barometer of public confidence in government. It is also the ultimate means for ordinary citizens to opt-out of an oppressive, fraudulent system.

That is why gangsters who wield power in the name of the “people” always make ownership of gold a crime. So it was in France during the Revolution, in Germany during the Nazi era, in Russia during the Soviet era, in China during Mao’s rule, and in the United States from 1933 through 1974. It is why, even during periods when the ownership of gold is not outlawed, its price is ‘governed’, as one commentator puts it, or officially manipulated, as others of us put it.

It’s often hard for practical men of affairs to understand the vehemence of those of us who assert, seemingly ad nauseam, that gold is money. The truth is, our passion has more to do with the concept of liberty than with that of money. We know from history and experience that once the free market has lost control over the definition and creation of money, individuals have lost their liberty.

That’s why neither a central bank nor fiat money find support in the Constitution of the United States, and why our monetary system, which has these two elements as its very foundation, is unconstitutional on its face.

It’s also why, as we rebuild our institutions from the wreckage of the final monetary collapse, control over money must at all costs be kept away from government. It is not enough that gold return as money; government must keep its hands off.

Money must be real, tangible, circulating. As Mises wrote when considering the subject of monetary reform back in the 1950’s, “Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.” And I’m sure he would have added an approving reference to digital gold had the technology then existed.

Now, just to be clear, people must be free to choose whatever they want to use as money. We believe they will choose gold, given a chance, simply because people have already done so over thousands of years, and for very good reasons.

But creating the conditions within which an informed choice can be made, even – or perhaps especially - after the collapse of the system and the discrediting of its false ideology, will be extremely difficult.

We are beset by propaganda, falsehood and spin from all sides. Truth is of no consequence; the Fed has bought and paid for virtually the entire economics profession in the United States.

Our universities are riddled with apparatchiks who at the very least must toe the party line to advance in their careers, and in many cases are directly dependent on Fed largesse.

The financial press, now concentrated in ever fewer hands, is captive to the same false dogma, and is little more than an apologist for the current monetary regime.

We desperately need credible new sources of information on money if we are going to have any shot at a sustainable regeneration.

In this connection, I have reason to hope that from the talent assembled here this evening, we will see a new initiative in the very near future. Stay tuned.

Thank you."

CNBC exposes gold suppression by the Fed

I almost choked on my juice this morning when I saw this segment on CNBC, when Rick Santelli blurts out that Lawrence Summers, former Treasury Secretary and current National Economic Policy director, published a paper on the suppression of gold prices by central banks. Watch the whole 10 minute segment:

http://www.cnbc.com/id/15840232?video=1339705681&play=1

In fact, Summers' white paper was coined (pun intended) "Gibson's Paradox and the Gold Standard", and is available here:

http://www.gata.org/files/gibson.pdf

The willingness to hold the stock of gold depends on the rate of return available on alternative assets. We assume that the alternative assets are physical capital and bonds, both earning a real rate of return r.

The economic mechanism is clear. Increases in real interest rates raise the carrying cost of nonmonetary gold , reducing the demand for it. They also reduce the demand for monetary gold as long as money demand is interest elastic. The resulting reduction in the real price of gold is equivalent to an increase in the general price level.

Santelli basically validates to mainstream financial TV audiences what gold bug conspiracy theorists have been clamoring about for at least a decade--that it's in the central banks' best interests to keep a lid on the price of gold, in order to keep interest rates low. Low interest rates allow central banks to fund deficits at a lower cost.

The guest speakers in the segment speculate that gold, once unshackled by central bank suppression schemes, will eventually be re-priced to its natural price, somewhere north of $11,000, based on supply and demand fundamentals.

Now THAT sounds crazy, but given the USDollar's demise, it is no longer unthinkable.

US government--lender or borrower of last resort?

http://dailyreckoning.com/the-golden-years/

And over at The Financial Times in London, Gillian Tett asks “Will sovereign debt be the next sub-prime?”

Everyone knows what when wrong with sub-prime. When you lend money to people who can’t pay it back, you’re asking for trouble. So, if you’re out of a job and looking for a sub-prime loan to buy a double-wide trailer you’re out of luck. Bankers won’t give you a dime.

But now, the world’s lenders are doing something just as dumb. They’re lending to governments. Imagine you were a banker. And the US government comes to you for a loan.

“Do you have enough income to cover the payments,” you ask.

“Well, no,” comes the answer. “In fact, our revenue has fallen off a little. Because of the recession, you know. Like everyone else.”

“How bad is it?”

“Uh…we spend nearly two dollars for every dollar of income.”

“Oh…and you expect us to lend you money? What do you have for collateral? What is your net worth position?”

“We were hoping you wouldn’t ask. The most recent tally of our obligations comes to $113 trillion.”

“Well, don’t you have assets?”

“We have some buildings in Washington…military bases around the world…things like that. But as a practical matter, you could never foreclose on them.”

“Oh, I see…”

What is interesting is that the world’s investors are beginning to see that the US and many other governments are bad credit risks. This is an extraordinary event. Until now, the US government has been able to finance and refinance its debts at the lowest rates in three generations. Lenders have wanted to lend the feds money, because they believed they were the safest credits in the world.

Bankers can always be counted on to find the worst investments at the worst time. They are at the tail end of the chain of insights that begins with the sharpest, most independent-thinking analysts…runs through the broker/hedge fund community…passes on to the financial journalists and the TV pundits…arrives at the lumpeninvestoriat through the popular media…and finally gets to bankers when they pick up the Wall Street Journal and read about what’s going on.

Now, the bankers are buying sovereign debt – government paper – because they think it offers a “risk free” return. In fact, it is one of the riskiest investments you can make.

The collapse of the Weimar Republic

http://mises.org/web/4016#pg182

'The population is ripe,' Joseph Addison wrote home to Alexander Cadogan,* (Later Sir Alexander Cadogan, O.M., Permanent Under-Secretary of State for Foreign Affairs, 1938-1946.) 'to accept any system of firmness or for any man who appears to know what he wants and issues commands in a loud, bold voice.'

Addison had another significant point to make:

Economic distress is leading the people to be much more amenable to authority as representing the only hope of salvation from the present state of affairs. Unemployment is taking the gilt off the gingerbread of democracy, while the working classes realise that striking is useless since nothing would be more welcome to employers.

The "commands in a loud, bold voice" came from none other than Adolf Hitler.

Any historians of Germany want to chime in?

Porter Stansberry on the "role" of government

This rant needs no introduction.

I'd like to make you a business offer. Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal. But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business, each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits. You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.

Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business. Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth. After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children. All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail. That's how civil society is supposed to work, right? This is Amerika, isn't it?

That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

COMEX December gold and silver options

COMEX December gold and silver options expire tomorrow, Monday, November 23, which usually means the commercial shorts will go into overdrive to manipulate the price down. However, given the physical shortage, gold has been gapping up in anticipation of this date. Combined with the backwardation of gold as I blogged last Friday here, the price of gold is increasing this evening (in Asian Monday morning trading).

Should rumors of COMEX defaults on gold and silver actually occur, the exchange may just retroactively invalidate all delivery contracts, and merely slap a fine on short sellers who settle via cash. Physical buyers will be stiffed, despite receiving a cash premium.

To those who believe a COMEX default will never occur, refer to the London Metals Exchange default on nickel in 2006. Buyers did NOT receive the physical inventory, and short sellers merely had to pay a 10% fine above spot price.

http://www.lme.com/4670.asp

Should such a default occur with gold or silver, the price of physical gold and silver will soar, as will paper certificates allegedly backed by the precious metals. There will be huge dislocations in financial markets worldwide should such a default on COMEX occur. Gold bugs ridiculed for their conspiracy theories will have the last laugh.

The CFTC is also reviewing enforcement of position size limits in the energy and precious metals pits, which would force bullion banks to drastically reduce their concentrated permanent short positions. This will also catalyze gold and silver price spikes.

Are precious metals reaching bubble status?

This question has been raised by inflationists and deflationists alike. Most people believe the prices of gold and silver have increased too far, too fast. In my opinion, they are wrong.

Without forecasting specific targets, let's look at facts. The US government national debt has climbed above $12 trillion. The 2009 budget deficit was $1.4 trillion--and rising going forward. Entitlement programs including social security, Medicare, Medicaid, and two ongoing wars bring our unfunded liabilities to over $100 trillion. There are only a few ways to cut the deficits and pay down some of that debt: raising taxes, reducing government spending, increasing productivity and economic growth, and inflating the money supply. We should expect all four. Inflation devalues the USDollar, reducing the burden of those huge debts. But savers and creditors are punished by artificially suppressed interest rates and a debased currency.

To provide personal context, I've been long gold and silver since November 2008--and have been ridiculed the whole way up by almost everyone. For those who believe we are in bubble territory for precious metals, I will offer the following counter arguments.

Many Americans are becoming aware of gold as an asset class, but MOST AMERICANS HAVE NOT ACTED UPON THIS AWARENESS. Furthermore, financial planners don't earn fees when clients buy gold and silver bullion or coins, so they haven't been endorsing owning precious metals as a hedge against inflation and financial crises. Despite foreign governments encouraging citizens to own physical gold and silver, the US government downplays the fact that precious metals prices have soared over the last decade.

Americans have seen Cash4Gold commercials ad nauseum, but these television commercials entice people to SELL grandma's gold jewelry, allowing the general public to gladly pocket an extra few hundred dollars. The problem is they are only getting 50 cents on the dollar--selling into a bull market. In any case, the scrap market is dwindling, as consumers aren't selling as much as in previous rallies.

The smart money is taking the opposite side of the trade: hedge funds led by billionaires John Paulson, Jim Rogers, George Soros, Paul Tudor Jones, and David Einhorn are BUYING gold and gold-related vehicles. So are central banks worldwide, who have been net sellers in the past. They are now buying.

Of course, gold and silver will eventually reach bubble status--every asset experiences peaks and valleys over time. But the secular peaks aren't $1150 or $18 per ounce, respectively. As a reference point, $2400 and $140 represent inflation-adjusted peak values of $850 and $50 in year 1980 for gold and silver, respectively. With the world awash with more trillions of dollars today than in 1980, the true value of gold is $6300, according to French investment bank Societe Generale. Divide that by 15, the historical gold/silver ratio, and one derives a peak value of $420 for silver.

Again, these are not forecasts, but valuation models based on historical precedent. One could argue gold will fall to $250, or silver back to single digits--back to year 2001 levels. No one has a crystal ball, but all we can do is make educated calculations, based on economic fundamentals and previous history. The commodities markets, specifically precious metals, are a very volatile asset class. Equity shares in resource companies producing said commodities can be even more volatile. Hence, the disclaimers. A long bet on commodities is a bet against central banks worldwide, which by extension is a vote of skepticism against sovereign governments' inability to keep their fiscal house in order. Some will accuse these trades to be unpatriotic. I view them as protection against the abuses of central bankers gone wild--a means to preserve the diminishing purchasing power of an impaired currency--the USDollar.

This is one potential scenario, but one that is becoming increasingly apparent, despite skepticism from our government economists, academia, banks, and the general public. I admittedly swim upstream when it comes to populist Keynesian economics. On the other hand, mainstream financial models haven't exactly worked like clockwork, either. Look at the carnage of collapsed banks and government agencies guaranteeing home mortgages, for instance. And look at equities and real estate. It hasn't been pretty...

Whether one chooses past performance, or money supply vs. above-ground gold supply dynamics, the prices of precious metals appear to be headed higher--much higher. With any bullish trend, it won't run straight up, so the corrections will be painful, but the spikes will be breath-taking--and unpredictable. Trading the tops and bottoms will be difficult to time due to high price volatility. Buying and holding, while averaging in on dips may be prudent. When and if the gold mania kicks in, I'll know it when the headlines are splashed across the major media outlets. I will probably average out at that point. And when bartenders and cab drivers recommend obscure gold mining companies, giving advice on "how to make a killing" on the next hot trading tip, I will be heading for the exits. We are not even close to that mania phase yet.

These are my opinions only, and not specific recommendations. No specific targets or position sizes are implied. Past performance does not guarantee future results. Do your own due diligence. Investing is risky and investors can lose most or all their capital. Holding US dollars could be just as risky.

Disclosure: long gold and silver mining shares.

The hazards of our huge national debt

Persistent deficits and huge debts eventually make it tough to even pay the interest on that debt. So the government must continue to print more currency.

http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm

Gold in backwardation--again

If the title of this blog entry appears redundant, it's because it is. Gold appears to be in backwardation again this Friday evening / Saturday morning, as the spot price exceeds the forward contract--only this time the premium is not a few cents, but $4. Obviously, there's a shortage of the physical inventory overseas.

Gold in Vietnam has persistently been priced at a premium above spot from $20 to as high as $60, a sure sign the black market is thriving.

President Obama regarding China

“I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time,”

- President Obama during his recent trip to China.

The Chinese must have had a good laugh, given the US government is in the process of abandoning market-oriented exchange rates.

FHA problems looming

http://www.bloomberg.com/apps/news?pid=20601087&sid=arqAG5n7wEVw&pos=3

"Yesterday's subprime is today's FHA."

- Toll Brothers CEO, Robert Toll.

Toll Brothers is the largest U.S. luxury homes builder. You would think he would spin things positively.

Note: Robert Toll has sold almost 7.5 million insider shares of his company stock in September, 2009 alone. Apparently, he's not just sounding the alarm bells randomly--he's acted upon it.

GDX vs. GDXJ

A few have invested in GDX, the ETF tracking major gold producers, in an effort to gain more leverage and upside for the increasing price of gold. Here's a synopsis of the differences between GDX and GDXJ, the newest entrant in gold mining shares.

http://www.hardassetsinvestor.com/features-and-interviews/1870-rethinking-gold-miner-etfs.html

Jim Rickards on the weak Dollar and gold

Watch the video to the end on the weak dollar and its implications:

http://www.cnbc.com/id/15840232?video=1336090735&play=1

To provide context, I am including again his interview in September on the Dollar, central banks, and the relationship with gold:

http://www.cnbc.com/id/15840232?video=1275511738&play=1

In the interview, he makes the following observation:

"When you own gold you're fighting every central bank in the world."

Unemployment Chart

Despite declaration of the end of the recession last summer, unemployment continues to soar. To get the full "color" on the extent of the problem, click on the following chart:

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

United Kingdom's fiscal troubles

The UK shares the same fiscal troubles as the United States: high deficits, huge debts, insolvency, high taxation, a low manufacturing base, high regulation, high unemployment, a deep recession, replacement of private sector debt with public debt, and bankrupt entitlement (social) programs.

Their government response has been equally similar: quantitative easing--or creation of money supply. And the results will be identical--a huge default--via inflation or outright default.

Here's an insightful Australian perspective on a British problem.

http://www.moneymorning.com.au/20091109/britain-death-economy.html

Societe Generale

Societe Generale is one of France's largest banks with a worldwide presence, so they aren't some fly-by-night operation. For a mainstream investment bank to release this to their clients is astonishing. Investment banks don't make money by pitching gold--they don't earn fees from gold purchases by the investing public (they earn a commission when investors buy gold equities, but that is a disproportionately small sector--which, by the way, works to our advantage when the public rushes in and bids up prices of gold mining shares).

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

One-by-one, major investment banks will tout gold, driving up prices going forward. Bank of America's Merrill Lynch became a gold bull last week.

I'm waiting to see when Dave Ramsey pumps up gold--that would signal a market top. Until then, I'm going to watch the fireworks in the COMEX precious metals pit.

Smart money

I keep seeing "bubble talk" on the price of gold, and perhaps we're due for a correction, but the bullish trend in precious metals will continue, imo. I'm not fighting the trend, even tho I took a little off the table.

John Paulson, David Einhorn, Paul Tudor Jones, Jim Rogers, and George Soros are all loading up on gold and gold equities. What's the common element? They're all billionaire hedge fund managers, who put their book where their mouths are.

The suckers in this play are selling grandma's jewelry to "Gold4Cash" outfits for 50 cents on the dollar, thinking they're getting a good deal. Scrap selling will eventually run dry, even as gold prices keep appreciating.

Staying with the supply side part of the equation, gold production peaked in 2000 and has steadily declined since. South Africa, once the world's largest producer (China is now the #1 producer), is now #4, and reserves are vastly over-reported.

Gold increases in price because supply growth is not keeping up with the increase in money supply. Gold's supply grows 2% a year, while the monetary base of dollars is growing at a much faster pace (15+%). The double-edged sword is that monetary easing also debases the USDollar, making gold even more attractive.

Let's be honest: gold and silver compete against the USDollar--and against every other major currency. A bet on gold is a bet against every central bank in the world with the ability to print currency. That's why they hoard it and that's why they hate gold bugs.

The downside of gold is that it doesn't earn interest or pay a dividend--it earns 0% interest. When interest rates are high, the demand for gold is low. But when interest rates are suppressed to near 0%, the flight to gold is justified, as no one wants to hold paper that is not earning a meaningful rate of return. To make matters worth, that same paper is losing value very week.

Do I think we are due for a correction? Perhaps, but the smart money (and more importantly, central banks themselves) are lining up on the long side of the trade, despite higher prices. As long as Congress and Obama continue to spend money they don't have (e.g. healthcare reform), I don't see any other alternative than Bernanke and Geithner stepping up the printing presses.

Just my opinion. See the normal disclaimers in the side bar.

Disclosure: Long gold mining shares.

Warren Buffett on deficit spending

Warren Buffett, of Berkshire Hathaway fame, was recently the Charlie Rose talk show. Here is an exchange:

Charlie Rose: This question is asked frequently: Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we're in a crisis?

Warren Buffett: We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion... so these numbers are unsustainable over time, what we're doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt. And then, one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy...

The Federal Reserve Bank has been monetizing the debt since March, 2009, catalyzing a rally in equities, commodities, and bonds to a lesser extent. It keeps short-term interest rates artificially low, in an attempt to stimulate the economy. As it did in the early 2000's under former Fed Chairman Alan Greenspan, it also created a massive bubble in certain asset classes, namely the housing market and equities.

With government bailouts and buying of collaterized debt securities, toxic assets have been shifted from the private sector (banks) to the public sector (government agency and US Treasury debts). The mortgage problems haven't been solved--it just shifted to the FHA. And when the bubble in government securities bursts, foreign sovereign governments won't be there to pick up the pieces.

Democracy

Alexander Tyler, a Scottish history professor at the University of Edinburgh, wrote the following about the fall of the Athenian Republic:

A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.

Tyler published this in the late 1700's.