Great New Words From Egon Von Greyerz

Great New Words From Egon Von Greyerz
by Egon von Greyerz – October 2012

1. Worldwide money printing continues unabated

2. Just In 10 years $120 trillion have been printed making global debt $200 trillion

3. World GDP has gone from $32 trillion to $70 trillion 2001-2011

4. Thus $120 trillion debt is required to produce a $38 trillion annual increase in GDP

5. The marginal return on printed money is negative in real terms

6. Thus the world is living on an illusion of paper that people believe is money

7. This illusionary paper wealth will implode in the next few years

8. The initial trigger will be the collapse of the world’s reserve currency – the US dollar

9. The dollar is backed by $120 trillion of US government debt and probably NO gold

10. All currencies will continue their race to the bottom and lose 100% in real terms against gold

11. This will create a worldwide hyperinflationary depression

12. All assets financed by the credit bubble will go down in real terms

13. This includes stocks, bonds, property and paper money of course

14. The financial system is unlikely to survive in its present form

15. The banking system including derivatives has total liabilities of around $1.2 quadrillion

16. With world GDP of $70 trillion, the world is too small to save a financial system which is 17x greater

17. This is why there will be unlimited money printing and hyperinflation

18. The only asset that will maintain its purchasing power is gold Click here for chart

19. Gold has been money for 5,000 years and will continue to be the only currency with integrity

20. Western countries’ 23,000 tons of gold is probably gone. See recent article by Eric Sprott.

21. The consequence is that most of the gold in the banking system is likely to be encumbered

22. This means that Central Banks one day will claim it back against worthless paper gold IOUs

23. Thus gold and all other assets within the banking system involve an unacceptable counterparty risk

24. Gold should be held in physical form and stored outside the banking system

Sumitomo Mistui Chief Strategist: US Dollar will cease to be the world reserve currency

When you start to see long term supporters of the USD making statements like this, you know this isnt just a drill.

The inverse trade to the USD is gold.

Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says

By Shigeki Nozawa

Oct. 15 (Bloomberg) — The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

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Dollar Dead-Pool

Ut-oh…this cant be good. (Unless you own something that does well when to dollar goes down)

Russia ready to abandon dollar in oil, gas trade with China

Putin in Talks with China

Putin in Talks with China

BEIJING, October 14 (RIA Novosti) – Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.

The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis.

“Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans,” Putin said.

He stressed that “there should be a balance here.”

On Tuesday, Russia and China agreed terms for Russian gas deliveries at a level of up to 70 billion cubic meters a year. China also imports oil from Russia.

The Russian prime minister said the issue would be addressed among others at a meeting of Shanghai Cooperation Organization (SCO) finance ministers, who are to convene before the end of the year in Kazakhstan.

Britain’s Independent newspaper reported last Tuesday that Russian officials had held “secret meetings” with Arab states, China and France on ending the use of the U.S. dollar in international oil trade.

The countries are reportedly seeking to switch from the dollar to a basket of currencies including the euro, Japanese yen, Chinese yuan, gold, and a new unified currency of leading Arab oil producing countries.

The Independent said the meetings have been confirmed by Chinese and Arab banking sources.

Original Article

The Fed will be the ultimate buyer of US Notes

Federal Reserve

Federal Reserve

Did I not say the Fed would be the buyer of all these new Treasury Issuances??

If you are in the bond markets, why?

Get safe while you can. This can end only one way. Dollar Deadpool.

Fed Extends Bond Purchases Until October But Not Amount

(Reuters) – The US Federal Reserve said Wednesday the economy was showing signs of leveling out after 20 months of recession and it will extend the duration but not the size of a program to buy long-term government securities to minimize any disruptions from completing it.

The U.S. central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period.

“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the Fed said in a statement at the conclusion of its policy-setting meeting.

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The Fuse is Short and Lit – China Goes Hostile

China - Hungry Dragon

China - Hungry Dragon

I have been saying for a long time that China has been aggressively stockpiling commodities, buying mineral rights all over the globe, and buying up companies that produce products of the earth.

This signals a new tactic for the Chinese: outright unsolicited offers for mining companies.

Normally the Chinese are more reserved, tactful, willing to be patient and win via masterfully executed maneuvers – much like Sun Tzu’s Art of War.

It seems their patience, as well as their willingness to depend on the dollar retaining its value (and thus the buying power of their portfolio) is coming to an end.

I think this is the beginning of an ever more aggressive stance towards purchasing commodities and raw materials. They know the dollar is going to the deadpool of currencies, and want to buy while it still commands the value it does.

Gold will again reign as the king of currencies.

China makes unexpected grab for Canadian miner

State-controlled Jilin Jien launches a surprise bid for Canadian Royalties, a stark change in tactics for the Asian superpower

ANDY HOFFMAN

From Tuesday’s Globe and Mail Last updated on Wednesday, Aug. 12, 2009 02:44AM EDT

China’s insatiable hunger for natural resources has officially turned hostile.

State-controlled Jilin Jien Nickel Industry Co. Ltd. launched a surprise $148.5-million unsolicited takeover bid for Canadian Royalties Inc. yesterday, marking one of the first times the Asian economic superpower has gone after foreign resource assets without first winning a friendly agreement with management.

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Commercial Loans may be the next epicenter of disaster

Hat tip to the great blog ‘The Big Picture‘.

Remember what the ‘sub-prime’ catastrophe did to the economy?

Get ready for market panic 2.0

Remember Sub-Prime?

Remember Sub-Prime?

Interesting piece from Deutsche Bank on rapidly deteriorating Construction loans. DB predicts that “construction loans will be the epicenter of bank loan problems”

• By far the riskiest type of loan product in bank portfolios;
• Substantial portion represents loans to homebuilders;
• Market currently penalizing properties with vacancy issues extremely severely;
• Newly constructed (or only partially constructed) properties are the poster children for vacancy problems in CRE;
• Values of most newly constructed properties are down massively;
• Expect extremely high default rates and extremely high loss severity rates, both likely to be in excess of 50%;
• Total expected losses of 25% or more.

Commercial Loan Delinquency

Commercial Loan Delinquency

China stocking up on commodities while the fiat money has its current value

Alex’s Notes: Hold on to your gold, and buy more.

The Chinese are pretty smart cookies. Ya, I know, I go on and on about the Chinese, but why shouldn’t I?

In many ways, they are taking the exact same path the US took in its rise to dominance.

The US used to have strategic stockpiles of virtually everything, from base metals to rare metals used in military applications, to silver, gold, oil, etc. Today, those stocks stand depleted, or completely sold off.

China on the other hand is buying raw materials hand over fist. The copper consumption of the Chinese is off the charts for example. This is a simple and expedient way for China to diversify their massive stockpile of USD denominated foreign reserves (roughly $2Trillion) and buy up commodities while the USD is still retaining its value, as well as position themselves in the investments that will hold the greatest value moving forward.

If I were diversifying out of my reserves I would also buy US Treasuries, not because I thought they were worth anything, but because it maintains the buying power of my other $2Trillion USD…call it the cost of doing business. Keep in mind, the Chinese have also found a means of using their USD Treasuries as collateral for direct exposure to the commodities markets via hedge funds…this puts a backstop in place that if the US wanted to slam commoditites prices to prop up the dollar it would do so at the potential risk of devaluing the Treasury instruments the Chinese are using as collateral for their margin calls. Quite brilliant.

Then, when the fiat system resets, China will be holding the aces…commodities…both in raw form and the companies that produce them.

Gold and silver will be much more relevant as money moving forward, do not forget there are 1.4 QUADRILLION dollars worth of OTC derivatives currently in the process of blowing up…it is the biggest paper market on earth..that virtually no one knows about or talks about. As the current fiat currency cycle hurtles towards a reset, people will rush into ‘honest money’.

China to deploy foreign reserves

By Jamil Anderlini in Beijing

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

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10 Compelling Reasons Why Gold Is Going To Do Very Well !

Alex’s Notes: Just found an interesting post by mosesman over at socioecohistory.wordpress.com:

* I still see a global monetary collapse. A crisis of confidence in fiat currencies triggered by a USD collapse. Gold will do well. Here are the 10 reasons :

The Stimulus Effect:Including $1 trillion in cash infusions, the stimulus plan will pump $9.7 trillion into the economy, according to Bloomberg. As the Globe & Mail reports flatly, “Many believe that the monetary stimulus efforts will cause a spike in inflation,” driving gold higher.

COMEX Traders Predict $1,600 Gold… by December: If gold trades at or above $1,600 by December, some 100,000 call option contracts will be “in the money.” Big-money players Goldman Sachs and JPMorgan are reportedly helping to drive the action, ahead of a huge purchase of gold futures contracts.

“Big Money” Inflows:In 2008, NYC-based hedge fund Paulson & Co’s flagship fund returned 37%, as the world markets burned. Paulson’s bullish on gold, big time, including the Mar. 17 purchase of 39.9 million shares of AngloGold, worth $1.28 billion. Other major hedge funds are piling into gold, too, including Eton Park Capital, Green light Capital and Hayman Advisors.

China’s Doubling Down! China just revealed that it has doubled its gold holdings to 1,054 tons. Yet that still only equals 1.6% of its overall reserves. As China moves out of U.S. Treasuries and into gold, this will help fuel the next leg of the run-up.

Demand Building across the Board:Worldwide demand for gold jumped by $29.7 billion in the first quarter, a 36% bolt, according to the World Gold Council. Demand for gold ETFs (Exchange Traded Funds) rocketed 540%… another trigger for the coming gold boom.

The Paper Dollar’s 30% Drop: Since 2001, the U.S. Dollar Index has tanked 30%… while gold has risen 300%. With all the downward pressure on the dollar, and inflation on the way, this trend is about to pick up steam.

Gold/Dow Ratio Signals $8,000 Gold: During major gold bull markets (and corresponding equity bears), gold and the Dow converge at a 1-to-1 ratio. During the last gold bull, the Dow sank to 850 and gold rose to $850. The Dow is now over 8,000… But even if it fell to 4,000, we could see $4,000 gold before this bull run is over!

U.S. Treasury Dept. Signals $5,468 Gold: Currently, the U.S. government holds about 286.9 million ounces of gold. It has printed about $1.569 trillion worth of paper dollars. If each dollar were backed by gold, that would put the price at $5,468.80 an ounce.

Riding the “Commodity Super Cycle”: Jim Rogers expects the Commodity Super Cycle to drive commodity prices higher for another eight years… including gold. And he’s stockpiling the yellow metal by the day. Every pullback, says Rogers, is another buying opportunity. Considering he’s been dead right on every major trend of the past 40 years, we wouldn’t bet against him.

Historic Model Predicts $6,214 Gold: During the last gold bull, the yellow metal ran from $35 an ounce to $850, a 24-fold increase. This bull started with gold at $255.95, meaning that if historic trends hold, the price target would be $6,214 an ounce.

West continues to fall, East continues to Rise

Honolulu, Hawaii
July 13th, 2009AD

Here is a little global economy roundup:

Many still think the economy is on the verge of recovery. While the rest of the developing world continues to steam ahead plowing through obstacles, the western world continues to spiral downward. This still does not take into consideration ALT-A and ARM loan resets through 2011.

July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

Meanwhile, the rest of the world forges onward.

The IMF  claims Asia cannot decouple from the western world economies and will not continue to grow until the west recovers…this article doesn’t agree. Also….has the head economist of the IMF forgotten that China has almost $2 Trillion in savings that it can spend?

SAN FRANCISCO (MarketWatch) – China wrestled the new-car sales crown from the U.S. through the first half of the year, topping 6 million cars and trucks at a time when the long-time global sales leader grapples with historic declines.

Do you really think the worlds leaders believe all this BS about green shoots? If they did, would they be plowing money into commodities like this? Or maybe is it, that they know that if you print $13.5 Trillion (and growing) you will see massive inflation of real prices, so they are buying while its cheap and using lip service to keep the dollar value from dropping to preserve as much buying power as possible?

BEIJING, July 10 (Reuters) – China’s imports of unwrought copper and semi-finished copper products in June hit an all-time record for a fifth straight month of 475,999 tonnes, from May’s record 422,666 tonnes, data from the General Administration of Customs showed on Friday.

Rats from a sinking ship

More Diversification out of Dollar…Japan has always been one of the biggest supporters of the USD…and now there is public discussion of diversifying out of it…this is very bearish for the USD (and very bullish for gold)…this may be a prelude to a new ‘basket of currencies’ as an index to a new global exchange currency

July 13 (Bloomberg) — Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.

The next world reserve currency

President Medvedev has called for a gold backed currency over and over. This time, he isnt just calling for it, he is producing examples of it. He handed coins to the leaders of G8 delegations, a proto-type of a potential new global currency…and these coins were pure gold. Any move in this direction would be extremely bullish for gold. Read an article I wrote regarding shifting to a gold back currency to understand why.

July 10 (Bloomberg) — Russian President Dmitry Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a “united future world currency.”

My colleagues have been right so far, having called the current economic crisis over a decade ago. This video proves it: Millennium Money as it was produced in the mid 90’s.

Our portfolios also reflect the fact that those who listened to us over the last few years are doing quite well right now. Those who did not…maybe not so much.

I will be sending out a ‘Rapid Trends Insider’ email later today with an exclusive chance to listen in on a recent round-table discussion with my colleagues regarding the global supply / demand situation, as well as an interview we did with David Morgan, one of the worlds top recognized silver analysts.

You can join our newsletter here: Rapid Trends Insider

Russia, China should dump dollar in trade – Medvedev

Alex’s Notes: More moves around the USD.

For those of you who dont know, the USD is the world reserve currency, and for decades all world trade has been settled in it.

Governments of the world are not going to stand by until the US fixes it problems, China has been steadily putting the pieces in place to conduct global trade with or without the Dollar.

If using methods of trade settlement besides the dollar becomes common practice, it means further pressure on the dollar downward…which means dollars come home.
MOSCOW (Reuters) – Russia and China should consider switching to domestic currencies in bilateral trade without going to the dollar, Russia’s president Dmitry Medvedev said in an interview with Kommersant daily published on Friday.

China has already entered similar agreements with Brazil and Belarus. The deal involves a currency swap agreement between the two countries. Trade turnover between Russia and China reached about $50 billion in 2008 and is set to increase.

“I think that we can think about such positions, for example the rouble against yuan,” Medvedev was quoted by Kommersant as saying. Russia’s own attempt to switch to the rouble in bilateral trade with Belarus has so far not been successful.

Leaders of Brazil, Russia, India and China, known by their BRIC acronym, are meeting in the Russian city of Yekaterinburg on June 16 to discuss the role of the dollar in the global financial system among other issues.

Medvedev said bilateral currency deals between trade partners ease impact of the economic crisis in an environment when many countries have difficulties tapping international capital markets.

Original Article

The United States May Be The Next Banana Republic

With this announcement, the US has stepped into a realm formerly reserved for such lofty icons of global financial dominance as the Wiemar Republic, Argentina, and Zimbabwe.

We are now officially directly monetizing debt, and creating money out of thin air.

God forgive us for what we are about to do to our children.

Department of the Treasury Banana Republic

September 17, 2008
HP-1144

Treasury Announces Supplementary Financing Program

Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week.  To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve.  The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules.  Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.

http://www.ustreas.gov/press/releases/hp1144.htm

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Bernanke: ‘We have lost control’

Economist recounts talk with Fed chairman

By Joshua Boak | Chicago Tribune reporter
September 17, 2008

NAPLES, Fla. — Several months ago, economist David Hale had a private meeting with Federal Reserve Chairman Ben Bernanke, who was trying to ward off a recession by lowering interest rates and increasing the money supply in the economy.

“Ben, you are playing a very unique role in world economic history,” Hale recalled telling Bernanke, an expert in the Great Depression. “You are the first central bank governor of the United States to preside over a recession with no decline in commodity prices.”

“We have lost control,” said Hale, quoting Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”

http://www.chicagotribune.com/business/chi-wed_oilsep17,0,4833605.story

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Government steps in again, bails out AIG with $85B

By JEANNINE AVERSA, IEVA M. AUGSTUMS and STEPHEN BERNARD, AP Business Writers 1 hour, 30 minutes ago

In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world’s largest insurers and the right to remove senior management.

http://news.yahoo.com/s/ap/20080917/ap_on_bi_ge/aig;_ylt=AonHCCQ2_HZ__h1XWo5HDf2s0NUE

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Global credit system suffers cardiac arrest on US crash

By Ambrose Evans-Pritchard
Last Updated: 11:59pm BST 17/09/2008

The global credit system almost grinds to a halt as yields on US Treasury bills reach zero for the first time since the Great Depression, writes Ambrose Evans-Pritchard

The global credit system came close to total seizure yesterday. Key parts of the derivatives market shut down and a panic flight to safety depressed the yield on three-month US Treasury bills to almost zero for the first since the Great Depression in 1934.

The closely-watched TED-spread measuring stress in the interbanking lending market rocketed to 238 as the share prices of Morgan Stanley, Goldman Sachs, Citigroup, Wachovia, and Bank of America all went into a tailspin yesterday.
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The collapse in investor confidence is a harsh verdict on the judgment of the US Federal Reserve, which chose to ignore market pleas for a rate cut to halt what amounts to a modern-era run on the banking system. Almost none of the current Fed governors have market experience. Most are academic theorists.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/18/ccambrose118.xml

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Bright Side of a Total Financial Market Collapse: Michael Lewis 

We’ve just witnessed the largest bankruptcy in U.S. history and we know neither the inciting incident (though there is speculation that sovereign wealth funds decided to stop lending to Lehman Brothers Holdings Inc.), nor the deep cause. But there’s now a pile of assets and liabilities smoldering in New York awaiting inspection.

The assets include subprime mortgage-backed bonds and no doubt many other things that aren’t worth as much as Lehman hoped they might be worth. But it’s the liabilities that are most intriguing, as they include more than $700 billion in notional derivatives contracts. Some of that is insurance sold by Lehman, against the risk of other companies defaulting.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a9xtBHJoZTOw&refer=home

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Panic Is the Word of the Hour

Traders abandoned the NYSE temple visually defeated and immune to the TV crews waiting. The disastrous closing prices were flickering on the ticker above the NYSE entrance: American Express -8.4 percent; Citigroup -10.9 percent; JPMorgan Chase -12.2 percent. American icons, abused like stray dogs. Even Apple took a hit.

“I don’t know what else to say,” stammered one broker, who was consoling himself with white wine and beer along with some colleagues at an outdoor bar called Beckett’s. Ties and jackets were off, but despite the evening breeze, you could still make out the thin film of sweat on his forehead. His words captured the speechlessness of an industry.

http://www.spiegel.de/international/business/0,1518,578944,00.html

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New World Order: Likely Morgan Merger Leaves Goldman Last Man Standing

Posted Sep 18, 2008 10:48am EDT by Aaron Task in Investing, Recession, Banking

As of this writing, the fate of Morgan Stanley remains uncertain although continued independence seems unlikely. The investment bank is having merger talks with a variety of players, including Wachovia and HSBC, while China’s sovereign wealth fund is looking to raise its stake in the firm, according to various reports. (After rallying early Thursday on such reports, Morgan shares recently turned negative, about $2 below its early high of $22.32.

The bigger story is a Morgan merger would leave Goldman Sachs as the last remaining major independent brokerage firm, when four existed a week ago and five were operating at the beginning of 2008.

“A new world order is upon us. A seismic shift that is redefining the brokerage intermediary,” writes Todd Harrison, CEO of Minyanville.com.

http://finance.yahoo.com/tech-ticker/article/62699/New-World-Order-Likely-Morgan-Merger-Leaves-Goldman-Last-Man-Standing?tickers=MS,GS,WB,BAC,XLF,AIG

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In the Military, we called this “going to sleep on watch”, which during wartime was an offense punishable by death.

If we are not currently at war in the most desperate fight for our financial system and form of government, and if Congress is not falling asleep at the watch, then they need to reach down, grab a hold of their manhood, and put a stop to this before its too late.

Our Congress and Senate are the only powers within our laws that have full legal authority over the issuance of currency, and have only temporarily delegated it to the Federal Reserve. It is their DUTY and their RESPONSIBILITY to this generation and every generation of Americans to follow, to ACT and not GO HOME.

This is EXACTLY the reason our country is so incredibly screwed up right now.

Our “Leaders” are basically spineless, ignorant, “politicians” who have no clue as to how we got in this mess, let alone how to fix it.

But most important of all, it appears they do not have the courage to fix it, and that is what saddens me the most.

Democratic Congress May Adjourn, Leave Crisis to Fed, Treasury

By Kristin Jensen
More Photos/Details

Sept. 18 (Bloomberg) — The Democratic-controlled Congress, acknowledging that it isn’t equipped to lead the way to a solution for the financial crisis and can’t agree on a path to follow, is likely to just get out of the way.

Lawmakers say they are unlikely to take action before, or to delay, their planned adjournments — Sept. 26 for the House of Representatives, a week later for the Senate. While they haven’t ruled out returning after the Nov. 4 elections, they would rather wait until next year unless Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, who are leading efforts to contain the crisis, call for help.

One reason, Senate Majority Leader Harry Reid said yesterday, is that “no one knows what to do” at the moment.

“When you rush to judgment, you usually make mistakes,” said Sherwood Boehlert, a former Republican congressman from New York. “This is something you can’t go on forever without addressing, but Congress in a short span of time is best served by going home.”

http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aVPBaUbYV_qQ

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The result?

Gold soars as safe haven from Wall Street

By Alden Bentley

NEW YORK (Reuters) – Gold logged its biggest price advance ever on Wednesday and oil snapped a two-day rout as fears that the bailout of U.S. insurer AIG would not end the turmoil on Wall Street restored the luster of an established safe haven.

Gold’s 8.97 percent futures rally was the largest daily percentage gain in since February 2000. In absolute terms, bullion had a record day, leading a recovery across the commodities asset class after several days of liquidation sales to raise cash.

http://www.reuters.com/article/newsOne/idUSN1724013520080917?sp=true

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Summary: If this thing goes to hell in a handbasket it will happen very quickly.

If that occurs, you will not have time to fix it afterwards.

Anchor your finances in gold and silver now, while you still have time.

Smart Rapid Trenders are already doing this. We may end up taking care of everyone else.

May God watch over us all.

Buy Gold and Silver Bullion


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Beijing swells dollar reserves through stealth

Beijing swells dollar reserves through stealth

Last Updated: 3:24pm BST 26/08/2008
The Telegraph.co.UK

Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard

China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.

A study by HSBC’s currency team in Asia has concluded that China’s central bank is in effect forcing commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.

Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.

This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.

“China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June,” said Daniel Hui, the bank’s Asia strategist.

Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign “hot money”.

Given the sheer scale of China’s foreign reserves – now $1,800bn (£970bn) – any shift in its exchange policy now ripples around the globe. The covert buying may help to explain at least part of the explosive dollar rebound over recent weeks.

There is little doubt that the key driver behind the wild currency ructions this summer has been the blizzard of dire data from Britain, Europe, Japan and Australasia. The mounting danger of a full-fledged recession across the club of rich OECD nations appears to have caught the markets off guard.

The closely watched Dollar Index reached an all-time low in March. It crept up gradually in the early summer before smashing through resistance in July.

The world’s currency system is swivelling on its axis. Central banks in Asia and Europe have stopped raising rates, and some have begun to cut aggressively. The Federal Reserve is no longer nakedly exposed. Indeed, investors are already starting to look ahead to the next round of Fed tightening.

The 18pc slide in oil prices from a peak of $147 a barrel in July has added juice to the dollar rally. Russia and the Middle East petro-powers tend to recycle a high proportion of their vast earnings from oil into the eurozone, either by purchasing European bonds or expensive imports.

A Bundesbank study found 40 cents of every dollar spent by eurozone countries on oil imports comes back again one way or another. The figure for the US is just 10 cents. This trade bias has given oil a new character as a sort of anti-dollar driving the currency markets.

Even so, the China effect is a key ingredient in the dollar comeback. Beijing’s Politburo is clearly disturbed by the sudden downward turn in the economy as export markets freeze, and surging wage inflation in the country’s manufacturing hubs eats away at profit margins.

“They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view,” said Simon Derrick, exchange rate chief at the Bank of New York Mellon.

China’s PMI purchasing managers index fell below 50 for the first time in July, signalling an outright contraction in manufacturing output. Hong Kong’s economy contracted 1.4pc in the second quarter. The Politburo has rushed through special rebates for textile producers now caught in a ferocious downturn.

Much of the clothing, footwear and furniture industry has been hit, leading to mass plant closures in the Pearl River Delta.

“During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work,” said the National Development and Reform Commission. “Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy.”

Last week’s rebound on the Shanghai stock market stalled on fading hopes of a fiscal stimulus package. “It is unrealistic to expect the government to rescue the market,” said Li Ka-shing, chairman of Hutchison. “Speculators should be very cautious now. The worst is not over in the global credit crisis.”

Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a “vicious cycle”. House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China’s population.

Is the U.S. Banking System Safe?

by: James Quinn posted on: August 03, 2008

“Treasury Secretary Henry Paulson delivered an upbeat assessment of the economy, saying growth was healthy and the housing market was nearing a turnaround. ‘All the signs I look at’ show ‘the housing market is at or near the bottom,’ Paulson said in a speech to a business group in New York. The U.S. economy is ‘very healthy’ and ‘robust,’ Paulson said. (CBS Marketwatch 4/20/07)

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“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”  (Ben Bernanke during Congressional Testimony 3/2007)

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“We will follow developments in the subprime market closely.  However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.”  (Ben Bernanke 6/5/07)

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“It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”
(Ben Bernanke 10/15/07)

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“We’ve got strong financial institutions…Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong.”  (Henry Paulson 3/16/08)

Deception – Keeping the Ponzi Scheme Going

After reading the above quotes, it should be clear to you that these gentlemen do not have a clue. Our economy and banking system is so complex and intertwined that no one knows where the next shoe will drop. Politicians and government bureaucrats are lying to the public when they say that everything is alright. They do not know. Therefore, it is in our best interest to cut through all the crap and examine the facts with a skeptical eye.

Last week, bank stocks, which had been falling faster than President Bush’s approval rating, soared higher based on earnings reports that were horrific, but not catastrophic.

Again, the talking heads, like Larry Kudlow, were calling a bottom in the financial crisis. The bank with the largest increase in share price was Wells Fargo. Their earnings exceeded analyst expectations and the stock went up 22% in one day. Wells Fargo (WFC) has $84 billion of home equity loans, with half of those in California and Florida.

Coincidently, Wells Fargo decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout. A skeptical person might think that they did not change this policy out of the goodness of their hearts.

Maybe, just maybe, they changed this policy to reduce their write-offs for the 2nd quarter, to beat analyst expectations.

There are many stories of people who are still living in houses, twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings.

Is this due to incompetence by the banks, or is this a way to avoid writing off the loss? The FASB has joined the cover-up gang by delaying the implementation of new rules that would have made banks stop hiding toxic waste off-balance sheet. The new rule would have made banks put these questionable assets on their balance sheet and would have required a bigger capital cushion

What a surprise that bank regulators, the Treasury and Federal Reserve urged a delay in implementation. Manipulate the facts because the average American doesn’t understand or care. Sounds like Enron accounting standards to me.

The Future FDIC Bailout

During the S&L crisis in the early 1990s, 1,500 banks failed. So far, seven banks have failed in 2008, the largest being IndyMac. The FDIC has about $53 billion in funds to handle future bank failures. The IndyMac failure is expected to use $4 to $8 billion of those funds. Average Americans will lose $500 million in uninsured deposits in this failure. The FDIC says that they have 90 banks on their “watch list”. They do not reveal the banks on the list, so little old ladies with their life savings in the local bank will be surprised when they go belly up. Based on the fact that IndyMac was not on their “watch list”, I wouldn’t put too much faith in their analysis.

There are 8,500 banks in the U.S. Based on an independent analysis by Chris Whalen from Institutional Risk Analytics, they have identified 8% of all banks, or around 700 banks as troubled. This is quite a divergence from the FDIC estimate. Should you believe a governmental agency that wants the public to remain in the dark to avoid bank runs, or an independent analysis based upon balance sheet analysis? The implications of 700 institutions failing are huge. There is roughly $6.84 trillion in bank deposits.

It is almost beyond belief that $2.6 trillion of these deposits are uninsured. There is only $274 billion of the $6.84 trillion as cash on hand at banks. This means that $6.5 trillion has been loaned to consumers, businesses, developers, etc. The FDIC has $53 billion to cover $6.84 trillion of deposits. Does that give you a warm feeling?

Based on the chart below, I would estimate that we are only in the early innings of bank write-offs. The write-offs will at least equal the previous peaks reached in the early 1990s.

If a large bank such as Washington Mutual (WM) or Wachovia (WB) were to fail, it would wipe out the FDIC fund.

If the FDIC fund is depleted, guess who will pay? Right again, another taxpayer bailout. What’s another $100 or $200 billion among friends.

click to enlarge images

What is a Level 3 Asset?

Other banks have been moving assets to Level 2 and Level 3 in order to put off the inevitable losses. The definition of these levels according to FAS 157 are as follows:

  1. Level 1 Assets that have observable market prices.
  2.  Level 2 Assets that don’t have an observable prices, but they have inputs that are based upon them.
  3. Level 3 Assets where one or more of the inputs don’t have observable prices. Reliant on management estimates. Also known as mark to model.

This is Warren Buffet’s view on the financial institution practice of valuing subprime assets on the basis of a computer model rather than the free market price.

In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to ‘model’ rather than to market.

So, the managements of the banks that loaned money to people who could never pay them back are now responsible for estimating what these assets are worth. According to Bill Fleckenstein,

Recently, the portfolio of Cheyne Finance, one of the more infamous structured-investment vehicles, or SIVs, was sold at 44 cents on the dollar. I suspect that similar assets are not marked anywhere near that valuation on financial institutions’ balance sheets. So, the game of “everything’s contained” continues, albeit in a different form.

Source: Company records

Merrill Lynch – Poster Child for Lack of Bank Credibility

John Thain is the Chairman and CEO of Merrill Lynch. He makes in excess of $50 million per year in compensation. He previously held positions as President, COO and CFO at Goldman Sachs. He is a good buddy of Hank Paulson. Here are a few recent quotes from Mr. Thain:

“…These transactions make certain that Merrill is well-capitalized.” (January 15, 2008 — Thain in a statement after selling $6.6 billion of preferred shares to a group that included Japanese and Kuwaiti investors)

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“…Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market.” (March 8, 2008 — Thain in an interview with France’s Le Figaro newspaper)

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“We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future.” (April 8, 2008 — Thain to reporters in Tokyo, as reported by Reuters)

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“Right now we believe that we are in a very comfortable spot in terms of our capital.” (July 17, 2008 — Thain on a conference call after posting Merrill’s second-quarter results)

Merrill Lynch reported a loss of $4.7 billion for the 2nd quarter on July 17. On July 28, eleven days after this earnings report they announce a $5.7 billion write-down and the issuance of $8.5 billion of stock. Thain, the $50 million man, is either lying or completely clueless regarding the company he runs. The SEC needs to investigate him, rather than short-sellers. Their books are a fraud and anything their CEO says cannot be trusted.

Below is Barry Ritholtz’ assessment of the Merrill Lynch deal:

  • Merrill appears to be moving $30.6 billion dollars of bad paper off of their books.
  • This paper was carried at a value of $11.1, meaning there was almost $20B in prior   related write downs. 
  • After this transaction, Merrill’s ABS CDO exposure in theory drops from $19.9 billion to $8.8 billion (hence, the $11.1B number). 
  • The $6.7B purchase price relative to the $30.6B notational value is 21.8% on the dollar.
  • Merrill is providing 75% of the financing –- and MER’s only recourse in the event of default is to retake the CDO paper back from the buyer.
  • While Merrill hopes to be made whole, the reality is they still have potential exposure to these ABS CDOs via the financing; 
  • Actual sale price = 5.47% on the dollar 

Less than five and half cents on the dollar? That’s an even cheaper sale than originally advertised. What this transaction actually accomplishes is getting the paper — but not the full liability — off of Merrill’s books. How very Enron-like!

Merrill Lynch has a market cap of $24 billion and has raised $30 billion since December just to keep making their payroll. How long will investors be duped into supporting this disaster? You can be sure that the other suspects (Citicorp (C), Lehman Brothers (LEH), Washington Mutual) will be announcing more write-downs and capital dilution in the coming weeks.

Is Housing Near the Bottom?

The one person who has been consistently right regarding the housing market is Yale Professor Robert Shiller. (He also called the top in the stock market in 2000).

The following chart clearly shows that home prices are so far out of line with historical averages that there is no doubt that further decreases are in store.

Home prices have historically tracked inflation and are likely to revert to the mean. The latest data from Case-Shiller does not paint a pretty picture. Sale prices of existing single family homes declined by 15.8% in the past year, with markets in California declining by 22% to 28%. Over 10% of the U.S. population lives in California. Bank of America (BAC), Wells Fargo, Washington Mutual, and Wachovia have a large exposure to California.

Many pundits have been downplaying the resetting of adjustable rate mortgages, saying that the worst is over. I don’t think so. There are $440 billion of adjustable mortgages resetting this year. That means that the majority of foreclosures will not occur until 2009. This means that the banks will still be writing off billions of mortgage debt in 2009. The reversion to the mean for housing prices and the continued avalanche of foreclosures is not a recipe for a banking recovery. Home prices have another 15% to go on the downside.

Fannie & Freddie  Fiasco

President Bush signed the Housing Recovery bill this week. We are now on the hook for all of their bad decisions. We believe in capitalism when there are obscene profits, but we prefer socialism when it comes to losses. The CBO estimates that we will pay $25 billion for their mistakes, with a 5% chance that it reaches $100 billion.

The only problem is that they have been given an open ended guarantee. According to former Fed governor William Poole, Fannie Mae (FNM) is technically insolvent. Their shareholder equity was $35.8 billion at the end of 2007. It plunged by $23.6 billion to $12.2 billion as of March 31, 2008. Does anyone think that as of June 30, they have any equity left? We’ll know shortly. Fannie Mae has guaranteed $2.4 trillion of mortgages.

According to the Mortgage Bankers Association, as of June, 2.5% of U.S. mortgages were in foreclosure and 6.4% of mortgages are delinquent. Fannie and Freddie (FRE) are on the hook for $5.2 trillion in mortgages. It doesn’t take a rocket scientist to figure out that about 4% of the $5.2 trillion of guaranteed mortgages will default. This would be $208 billion in defaults. If they are able to recover 50% (current recovery rate) from foreclosure sales, their losses would be $108 billion.

Oh yeah, that would be our losses. This is assuming things don’t get worse.

Next Shoes to Drop – How High Will the Losses Go

Banks and security firms have reported $468 billion of losses thus far. Bridgewater Associates, a well respected analytical firm, thinks things will get much worse.

According to Bridgewater, the models used have grossly underestimated the actual losses. They doubt the financial institutions will be able to generate enough capital to cover the losses. According to the report,

Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12 trillion worldwide unless banks could raise fresh capital.

Not all of these losses are in the sub-prime market. According to the report, more than 90% of the losses from sub-prime loans have already been written off. Unfortunately, the losses from the prime and Alt-A loans could be much larger than we have already seen. The sizes of these loan portfolios are much larger than the sub-prime portfolios. Further, Bridgewater expects about $500 billion in corporate losses that must be written off. This leads to the current estimate of more than $1 trillion in losses yet to be written off.

Bill Gross, the well respected manager of the world’s largest bond fund, expects financial firms to write down $1 trillion.

About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices. The problem with writing off $1 trillion from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth.

Nouriel Roubini, economist at NYU, believes that losses could reach $2 trillion.

The other shoes have begun to drop. Last week Amex reported a 40% decline in earnings as their wealthy super-prime customers are not paying their bills. So, even the well off are struggling.

This week, CB Richard Ellis, the largest commercial real estate broker in the country reported an 88% decline in earnings. So, commercial real estate is imploding. Bennigans’s and Mervyn’s filed for bankruptcy this week. The consumer is being forced to cut back on eating out and shopping. The marginal players will fall by the wayside. Big box retailers, restaurants, mall developers, and commercial developers are about to find out that their massive expansion was built upon false assumptions, a foundation of sand, and driven by excessive debt.

The U.S. banking system is essentially insolvent. The Treasury, Federal Reserve, FASB, and Congress are colluding to keep the American public in the dark for as long as possible. They are trying to buy time and prop up these banks so they can convince enough fools to give them more capital. They will continue to write off debt for many quarters to come.

We are in danger of duplicating the mistakes of Japan in the 1990s by allowing them to pretend to be sound. We could have a zombie banking system for a decade. There is good reason for this gentleman to have a splitting headache.

My advice is:

  1. Absolutely do not have more than $100,000 on deposit with any single institution.
  2. Do not buy financial stocks. There are years of write-offs to go.
  3. When you see a bank CEO or a top government official tell you that everything is alright, run for the hills. They are lying. They didn’t see this coming and they have no idea how it will end.
  4. Educate yourself by reading the writings of Ron Paul, John Mauldin, Barry Ritholtz, Mike Shedlock, Bill Bonner, Paul Kasriel, John Hussman, and Jeremy Grantham. They will tell you the truth. Truth is in short supply today.

Interview with Nick Barisheff: Gold is Money

Interview with Nick Barisheff: Gold is Money

by: Pierre Daillie posted on: July 27, 2008

This week we interviewed Mr. Nick Barisheff, President & CEO, Bullion Management Group, and discussed with him the importance of gold bullion. Mr. Barisheff founded Bullion Management Group Inc. in 1997, and is the portfolio manager of BMG BullionFund, Canada’s only open-ended fund investing purely in gold, silver, and platinum bullion.

GreenLightAdvisor.com: What’s the most important thing people need to understand about gold?

Nick Barisheff: Many people think gold is a commodity like copper, zinc or pork bellies, but it has 3,000 years of history as money. It was money that no government created by edict. It was just adopted for usage by itself, and it was and still is the best form of money. Currently, we have a 37-year global experiment in paper money. All prior paper money experiments ended in hyperinflation, with the currencies becoming worthless. All previous hyperinflations were contained within a single country, but this time, because of the reserve status of the US dollar, it is likely to be global in nature.

Right now, the price of gold is rising while most currencies are losing purchasing power as well as their value against gold. Gold comes back into its monetary role when there’s a loss of confidence in the financial system or in paper money, and that’s when people are attracted to it.

Before 1971, the monetary system was governed by the Bretton Woods Agreement. Under that agreement, the US dollar was backed by gold, and other currencies were pegged to the dollar. Other countries could trade their US dollars for gold. Essentially, US gold indirectly backed all other currencies. Then things changed. As the US was getting into the Vietnam War and into President Johnson’s policy of guns and butter, US gold reserves started declining.

Countries holding dollars were presenting their US dollars and asking for gold in return, and that led to US gold reserves dropping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, President Nixon “closed the gold window” and stopped the exchange of US dollars for gold. Closing the gold window was a euphemism, but basically the US declared bankruptcy. When you can’t meet your obligations when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat currency monetary system.

Since 1971, when the dollar was freed from the constraints imposed on a currency backed by gold, the US has experienced increasing federal government and current account deficits. The US is now borrowing $800 billion annually to fund its consumption of foreign-made goods and commodities, and the federal government is running a deficit of almost $350 billion. At some point, foreigners will become unwilling to continue funding US expenditures, forcing the Federal Reserve to expand the money supply at a faster pace. This will result in rising inflation, rising interest rates and a continuous decline in the US dollar.

GLA: We’ve had the fastest money supply growth in almost 40 years that’s resulting in increased inflation. Why would an investor want to go into T-bills, given that interest rates don’t even cover half of the stated inflation rate, which we know isn’t even the real inflation rate?

NB: For the first time in history, we have an unlimited ability, by all central banks, to print, however much money we want, so to speak. Apart from the US M3 money supply growing at about 20%, we also have India and China growing theirs at about the same rate. China is at 18%, India is at 20%, and Russia is at 45%. As China or India sell goods to the US, they take in US dollars and they print yuan or rupees against those US dollars. Japan’s a little different; there, individuals and corporations can take their US dollars and buy US assets themselves. In China you have to turn your US dollars in to the central bank.

In today’s inflationary environment, many who invest in fixed income investment do not appreciate that instead of being “safe” investments, they are in fact guaranteed losses of purchasing power when you take inflation and taxation into account. We have done some analysis into a systematic withdrawal from our Fund for those investors requiring income. Based on the fact that precious metals have a long track record of staying ahead of inflation, an investor would be far better off in precious metals in terms of maintaining principal after inflation and having more after-tax cash flow to spend.

GLA: What did you think of John Embry’s (Sprott Asset Management) recent article about the manipulation of the price of gold? His assertion was that the central banks are deliberately keeping gold below $1,000 per ounce.

NB: John and Eric Sprott have recently written an extensive report called Not Free, Not Fair. The report brings forth a great deal of evidence that the precious metals markets may be manipulated. While it may seem like there’s a conspiracy to suppress the gold price, I think it’s simpler than that. It’s a well know fact that it is the job of central banks to manage their country’s currency, that’s part of their mandate. Central banks understand that gold is a currency, but one that they can’t expand as easily as paper money. I don’t think there is any lack of understanding on the part of central bankers that gold is an alternative currency.

GLA: Isn’t gold considered to be just a commodity with no real monetary role anymore?

NB: I’d like to refer to an article by Tony Fell , and it’s particularly interesting, given that he was chairman of RBC Capital Markets at the time of writing. He talks about how gold has three attributes: it’s a commodity, a store of value and a currency. He says so many people now think of gold only as a commodity or jewellery, or as an archaic relic, that there’s a feeling of “who needs it anymore?” People don’t think of it as money.

However, the daily sales volume gives a conclusive indicator that gold is much more than an industrial commodity. The physical turnover of gold by members of the UK’s London Bullion Marketing Association is about *$25 billion per day. We’re talking about net turnover between the LBMA members. The volume is estimated at 7-10 times that amount.

It’s pretty clear that these are currency transactions. That’s why gold, silver and platinum trade on the currency desks of all the banks and brokerages, not the commodity desks. What people need to know is that gold is a currency [like dollars or euros or yen]. Gold is not trading at these volumes as a commodity or as some archaic relic.

GLA: What are your thoughts on technical analysis, given that gold is a currency?

NB: Technical analysis works if you’re looking at widely distributed stocks like the S&P 500, for example, where there are many, many transactions that accurately reflect public sentiment. The price of gold, however, can be impacted by one country, or one very wealthy individual who wakes up one morning and decides to buy, and then you can throw the charts away. Or when a government decides to sell or a government intervenes. I’ve looked at technical analysis for gold in the past and tried to back-test with various techniques and found that they don’t work more often than they do. In the most recent case, there is no justification for the drop in gold price; it should have been rising because nothing has fundamentally changed. In fact, the fundamentals got worse and the gold price should have rallied. None of the problems went away; nothing was solved; the conditions are as bad as or worse than they were previously. So the drop in gold’s price has been a false decline.

GLA: So, it’s the value of paper currency that changes, not the value of gold [so to speak]?


NB: One of the attributes of gold as money is that you can’t simply create it at will, like paper money. It’s no one else’s promise of performance and it’s not someone else’s liability. It’s not going to zero, no matter what. And, whether we’re moving the measuring stick of inflation or deflation really doesn’t matter, because the way gold should be measured is in terms of purchasing power. It doesn’t matter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its purchasing power in either circumstance.

The first important step in the big picture of understanding gold is that it is a store of wealth with a 3,000 year history, and it’s money. Over the long term, it retains its purchasing power. That’s why they say that an ounce of gold will always buy a man’s suit.

Apart from that, the US dollar is down 85% in purchasing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce. With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy several cars or a luxury car with 100 ounces, and a mansion with 1,000 ounces. You could also buy more units of the Dow Jones Industrial Average with your ounce today than you could in 1971. So that ounce has preserved its purchasing power while currencies have lost over 80% of their value.

GLA: Apparently, in the last 40 or 50 years, there’s only been three years that there was net selling by gold investors, three years out of almost half a century. Is this true?

NB: People who hold bullion tend to hold it for a long time, as the core of their entire wealth. It’s not sold once you understand its basic characteristics, because you have to have a reason to sell it, you have to use it to buy something better. I tend to look at investment performance as to whether I end up with more gold ounces or less gold ounces rather than percentage returns; you get a different conclusion then. For example, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.

This current cycle is not a conventional bull market in precious metals; I think we’re in the midst of a change in the global monetary system. This is not going to be like a typical commodity cycle where we go up for four years and down for four years; I think we’re witnessing a transition into another monetary system, whatever form that may take. At the end of this period the US dollar will no longer be the world’s reserve currency.

GLA: What happens if the US dollar ceases to be the standard?

NB: What happened when the British pound ceased to be the standard? It just ceased to be the standard. Its decline in value is still ongoing. It’s happened to every empire throughout history: the British, the Roman, the Greek, the Spanish, the Persian, and the Chinese. Every single empire ended up debasing their currency in order to maintain the empire.

GLA: Is gold likely to increase further going forward or has it topped and investors have missed out?

Currently, we have a lot of noise in terms of the credit contraction, real estate bubble, record high debt at all levels, dangerous derivatives vulnerabilities and unsustainable US current account and trade deficits. These could still blow up into bigger problems at any time. However let’s hope they get resolved or at the very least postponed somehow.

But there are two factors that are not changeable in all of this.

First: The US has to print money on an accelerating basis. Has to – because of the underfunded Social Security and Medicare obligations – which at present are about $60 trillion. If you took all of the net earnings of US individuals and companies it would not be enough to pay that off. You can’t tax people enough and politically you cannot tell everybody, “Sorry, we can’t give you your Social Security – we don’t have the money. And no Medicare either.” So they have to keep printing money.

Second: The issue of Peak Oil – it used to be a debate as to when the production of oil would peak. Now it looks like that has already happened, in March 2006. As a result we have a situation where oil production is declining while demand is increasing, particularly from India and China. This will result in ever-increasing oil prices, and also increasing prices for almost every product and service.

As these two forces – increased money printing and peak oil – interact, the result is a declining dollar alongside constantly increasing oil prices. This leads to even greater oil price increases in an effort to offset the dollar decline. These two highly inflationary factors are working in tandem, and they can’t be changed.

Therefore, as oil rises and the dollar declines, commodities – and particularly precious metals – will continue to rise.

GLA: What’s the relationship between oil and gold?

NB: There’s not necessarily a great deal of correlation between the two in the short term. However, in the longer term, the correlation has been in the order of about 16 barrels of oil for every ounce of gold.

GLA: Has that been consistent long term and what is the outlook for precious metals?

NB: With only short-term fluctuations, this ratio has held up over the long term. At this point the price of gold is undervalued compared to the price of oil. Gold should be closer to $1,500 an ounce if you use this measure.

On top of this kind of inflationary issue eroding financial confidence, we’re at peak production in gold. When the price of gold was low, miners employed high-grading to get the most easily attainable gold out of the ground. As the price rises, miners resort to lower-grade mining, which has become worthwhile – but in some cases you have to sift through tonnes of ore for each ounce.

Platinum, for instance; it takes six months to get an ounce of platinum out of roughly 10,000 tonnes of ore. Right now, almost all the platinum produced originates in South Africa, and the mines are miles underground, and electricity intensive. Power shortages in South Africa are interfering with production and slowing things down. All these forces are coming together, slowing production and driving up prices.

With silver, most of the aboveground reserves have been depleted – most of the silver that is produced is consumed each and every year. Silver also has two demand drivers – monetary and industrial. The number of industrial applications are growing every year while the monetary demand has also been growing in the past few years. It is important to remember that “silver” means “money” in several languages.

GLA: Why is gold so important as an element of diversification for investors?

NB: Take a look at the cycle from 1968 to 1982 – during that time it took stocks the whole 14 years to break even. If you factor inflation into it, it actually took until 1995. So stocks didn’t look so good in the past cycle, and they are not looking very good now. The DJIA is well below its inflation-adjusted highs. Its performance is much worse when measured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs. It’s like taking the Zimbabwe stock market and saying, “Look how well Zimbabwean stocks have done; the market was up 8,000%.” But what if we adjust for the 100,000% inflation in that country? Not so good, is it?

BMG BullionFund is internally diversified. We buy physical gold, platinum, and silver in equal amounts. While some people like to focus on gold, they would miss out on the fact that silver and platinum have both outperformed gold since the beginning of this cycle in 2002.

GLA: What do you do about inflation?

NB: First, it is important to look at real inflation. What is real inflation? The real number is around 9%, not 3%. The calculations the government uses for the Consumer Price Index [CPI] are really meaningless as a true inflation indicator. The real definition of inflation is an increase in the money supply that leads to an increase in prices. Prices do not increase on their own unless you have a shortage; when you increase the money supply, what you’re really doing is debasing the currency, and as the purchasing power of the currency declines prices appear to be rising. So with the US money supply (M3) growing at 20%, Canada’s growing at 9%, and most other countries’ growing at around 15%, that’s going to result in rising prices and real inflation.

If you take real inflation into account, Wainwright Economics suggests that the appropriate bullion allocation for a bond investor’s portfolio is 18%, and for the equity investor’s portfolio 40%, and that’s just to break even with inflation. Although this may sound incredible, think of the 1970s. How much bullion was required just to break even in an equity portfolio? Bullion went up 2,300%, while equities were flat on a nominal basis. Inflation was 15%.

So without even getting wrapped up in a discussion about the complex subject of money, those two points are fairly straightforward. Ibbotson Associates confirmed that precious metals are the most negatively correlated asset class to the traditional financial assets, so it gives the biggest bang for the buck for the least amount of allocation. In the process you also achieve a more balanced, diversified portfolio. Advisors would do well to have an allocation to precious metals to protect their clients from under-diversification.

GLA: Do you think this pullback in gold is an opportunity to add to positions at this time?

NB: Yes as long as there hasn’t been a major change in the fundamentals that drive the price. When these pullbacks occur, you always get some technical interpretations, whether it’s conventional technical analysis or Elliot Wave, coming out with the idea that the bull market in precious metals is over and that it’s now going down forever and so on.

When these things happen, you have to ask if anything changed fundamentally to justify that decline. If nothing changed fundamentally, the only conclusion you can draw is that something’s wrong in the technical interpretations. In all likelihood the technical interpretation is wrong because there’s been an intervention by monetary authorities. Technical analysis only works when the markets are working freely.

GLA: Well, whatever it is they’re trying to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, silver up close to 19% and platinum prices over 30%.

NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a substantial increase, and performance-wise, we’re about 20% year-to-date.

GLA: Thank you very much for sharing your knowledge with us.

*All amounts expressed in US dollars, unless otherwise noted.

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Gold as Money Means A Potentially Massive Rise In Valuation

One thing that the world has forgotten for the most part, is that gold is money. It has been parroted around for three generations as a commodity only, with little industrial use or demand, and no value as a currency.

Humans have this interesting tendency to forget history, even though through all of time it consistently repeats itself.

The cycle I am speaking of is the one where societies and economies cycle back and forth between paper fiat money backed by nothing but a governments promise that it has value, and currency that is backed by gold and silver.

This is not new, and in my opinion will happen again, as it always has, for thousands of years.

For a while now I have been going on about how the Chinese, OPEC, and other nations that have trillions of USD in their reserves are not going to simply sit on it and watch it devalue by 16%-20% a year because of a rampant monetary inflation policy of the Federal Reserve.

“Dollar crisis looms, says Nobel laureate Mundell
Reuters June 3, 2008 at 8:36 AM EDT

VALENCIA, Spain — A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6-trillion (U.S.) reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mr. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.”

If you were China and seeing this happen to your National Treasury, would you sit there and do nothing or look for a solution?

The answer is obvious.

“China is worried about its pile of about $1.6-trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates. “

The excerpts from the above Reuters article shows that China seems to be interested in a gold backed system. If this were to occur, we need to take a serious look at what it means for the price and demand of gold.

I will give you one simple equation, which you can then apply to any nation, or the economy at large. If the USA were to go to a gold backed standard, that means each dollar in circulation would then have to be redeemable in gold. The current measure of USD in circulation based on private firm analysis is above $14 Trillion USD. The US Treasury claims it has 261,498,899.316 ounces of gold according to its website http://www.fms.treas.gov/GOLD/current.html . If we were to divide the number of USD in circulation by the amount of gold claimed to be on hand in the US Treasury, it would make the price of gold $53,537.00 per ounce.

You can perform this calculation on any nations currency, if you know the amount of currency in circulation and the country’s claimed national reserves in gold.

The bottom line is, if the world heads to any form of gold backed currency system, or any world government chooses to make its own currency backed in gold, then two things would happen:

1. That country will be the best runner up for the next world reserve currency

2. The valuation on gold will skyrocket beyond the angels

“Without reform, the global monetary system is headed for a dollar crisis within years, Mr. Mundell believes. “

I sure hope you own some gold before that happens.

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Simon Heapes: In ages past it was the Byzantine Empire, today is it China and OPEC?

Alex’s Notes: This quick note was fired to me from Simon Heapes, Director and Treasury Officer of The Anglo Far East Bullion Company. This was his comment and response to my post on the possibility of China holding the next world reserve currency:

2,000 yrs ago As Rome debased its currency and expanded via inflationary methods, the question must be asked who was buying the tangible productive assets?

It was the Byzantine Empire! When the Byzantines finally did over run Rome, they did not collapse it, they merely replaced Rome’s leadership with their own leadership, and effectively ran Rome as a defacto Empire keeping all the same systems in place for another 200yrs.

Finally, the Byzantium leadership broke apart from a Moral decay into the nations we call Europe today!

So the Question now, is China & the East going to do the same thing and keep the current system running further expanding globally and running inflation even further sending the cost of tangibles higher for many yrs to come? It certainly looks that way!

– Simon Heapes, The Anglo Far East Bullion Company

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Sesit: Dollar Reserve Status Is Tale of Fading Glory

Alex’s Notes: I happen to concur with the authors thought in this article. Much of the worlds international settlement systems have grown up for half a century around the dollar as the reserve currency, so it is unlikely this will change overnight.

There are, however, a few things that could accelerate the process. A run on the dollar by any country or group of nations that is a major holder of dollars as a part of their reserve base, Sovereign Wealth funds becoming even more aggressive than they are now in securing hard assets versus paper cash holdings, or OPEC/China deciding to divest its dollar holdings into something else, such as Euro or gold.

Another scenario that could rapidly accelerate the dollars demise includes the continued bail-outs of financial institutions by the Fed. If we are so simple as to believe the Wall Street talking heads that we are in the clear, we are being as silly as they are. The fact is less than half of the asset losses from the sub-prime fiasco of 2007 have been reported, and through 2011 we are going to see another mortgage related scenario unfold in the form of Alt-A and ARM resets that will make the sub-prime mess look like romper room in comparison. This would have a domino effect, in that as the Fed bails more failing institutions out, it will multiply not only US, but Global inflation.

Such a series of events would continue to devalue the dollar, and give ever more impetus to nations sitting on vast dollar reserves to get rid of their dollars while those dollars are still worth something. This means that those dollars will start coming home. The effect of that would be increased prices in the US for everything from food to gas to electricity (if you think it is bad now, you aint seen nothing yet!). The other effect of that would be accelerating the value the dollar, further spurring dollar holding nations to dump them.

Finally, any country that chooses to stand on its own and link its currency to a hard asset such as gold or silver would be a currency that is in high demand virtually overnight. Why stack billions in paper that is redeemable for nothing, when you can instead stack billions in paper that you can exchange for gold and silver? Our world’s governments are not stupid, and that’s exactly the way it would go.

The net effect of that would be of course changing gold and silver from commodity status back to monetary status. This isn’t a new idea, humans have used gold and silver linked to currency or as currency for thousands of years, because it is un-inflatable (if it remains pure), and forces governments to remain disciplined in their fiscal policies. It is only in the last 40 years that we have strayed from this wisdom, and we are witnessing its effects as I write this.

Societies throughout history have oscillated back and forth between currencies redeemable in things of intrinsic value, and paper that is redeemable for nothing for hundreds and thousands of years. As inflation continues to grow, inciting food riots and civil unrest around the world, the idea of having currencies that prevent the governments of the world from inflating the world’s currencies becomes ever more enticing.

This is not as far fetched as it might sound. I certainly consider it curious that China has invested so heavily into mining, mineral rights, and acquisition of operating gold and silver companies over the last ten plus years. They have made attempts at buying mega-mining companies such as Rio Tinto through proxies, they have been running all over Africa for years buying up mineral rights, they have become the worlds largest producer of gold, and China is among the top silver producers in the world. Metals are of course important to an emerging nations economy like China’s, yet gold can barely be considered an industrial metal, so why are they investing so heavily in it?

One of the primary reasons that the US Dollar became the world’s reserve currency in the first place is because it was redeemable in gold.

The Chinese are not stupid people, so as with all things we must apply ‘Cui Bono’, or ‘Who Benefits’, and ask ourselves, why are they doing this? The United States has enjoyed a unique ability to run massive trade deficits for half a century and borrow money from the entire world at low interest due to its currency status. The Chinese are hungry to move into a western style standard of living, so is it so far fetched that they would like to enjoy the same benefits?

Could the Yuan become the next reserve currency of the world? More importantly to those who understand how small the gold and silver markets are, is what effect would that have on the prices of gold and silver?

The results could be explosive to say the least.

—————————————————-

Dollar Reserve Status Is Tale of Fading Glory: Michael R. Sesit
Commentary by Michael R. Sesit
May 2 (Bloomberg) — Reserve currency status is like your health: Abuse it, and you risk losing it.

With the dollar’s 45 percent decline against the euro during the past six years and its 37 percent drop on a trade-weighted basis, there is a growing concern that the greenback’s six-decade reign as the world’s most important currency may be ending.

It’s not. The dollar is the world’s reserve currency, and absent some unexpected exogenous shock, will probably remain so for some time.

Nonetheless, the dollar’s premier status is under threat, especially as a store of wealth, by both foreign governments and private investors. Also, companies are using it less as a currency in which to invoice and settle international trade transactions.

Why care? Reserve currency status allows the U.S. government to borrow in its own currency, lets the U.S. run large trade deficits, and helps the government and American companies to fund themselves at low interest rates. It makes it easier for U.S. companies to do business and increases the international demand for U.S. assets.

Moreover, as the specie of choice, the dollar is blessed with seigniorage, the interest-free loan America receives from the hundreds of billions of dollars held overseas and hoarded as misfortune insurance.

Although the composition of official central-bank foreign- exchange holdings receives the lion’s share of attention when people talk about reserves, it is the private sector’s trade in goods and services that plays a dominant role in determining a currency’s international status.

Cash Reserves

Official reserves equal 33 percent of global imports, according to UBS AG. If a company in country A trades with a company in country B and the transaction is invoiced and settled in the currency of country C, that third currency will have reserve status. That’s because both companies are likely to keep cash balances in that currency.

“The dollar is the most important reserve currency in the world, but it is no longer the only reserve currency, nor even the overwhelmingly dominant choice as a reserve currency,” says Paul Donovan, a London-based economist at UBS.

When the Bretton Woods system collapsed in 1971, almost all Japanese exports were priced in dollars. Now less than half are. About 40 percent of Japan’s total exports are invoiced in yen, up from 34 percent in 2001.

Raw Materials

Seventy percent of Australia’s exports are denominated in U.S. dollars, reflecting the dominance of raw materials in their makeup. Apart from commodities, the dollar plays a smaller role. For instance, 59 percent of beverage shipments to other countries are denominated in Australian dollars, 19 percent in pounds and 16 percent in U.S. currency.

Data on country invoicing patterns are hard to come by. Still, the decline in dollars held outside the U.S. from 1.83 percent of world trade in 2002 to 1.22 percent in 2006 reflects the U.S. currency’s shrinking role as a medium of exchange.

Anecdotal evidence also suggests a trend. In November, India’s Taj Mahal said it would no longer accept dollars and take only rupees. International drug dealers are said to prefer euros to dollars.

Ditto, Copenhagen-based A.P. Moeller-Maersk A/S, whose container-shipping line, the world’s biggest, on April 1 began invoicing in euros for transporting containers from Europe and North Africa to Australia, New Zealand and the South Pacific. The shipping industry historically billed in dollars.

$4.9 Trillion

On the official side, developing countries have been steadily inching away from the dollar. Their foreign-exchange reserves surged to $4.9 trillion in 2007 from $1.2 trillion in 2000. Emerging-market countries accounted for 76 percent of total global reserves in 2007, up from 56 percent in 1997, according to the International Monetary Fund. Yet during that period, their dollar holdings shrank to 61 percent from 73 percent.

The euro has been the beneficiary, rising to 28 percent of developing-country reserves in the fourth quarter from 19 percent when the decade began.

Behind this dollar downgrade lies the U.S.’s rising debtor profile, an unpopular war in Iraq, the growing threat of trade protectionism, apprehension over the greenback’s decline and the subprime crisis.

“These factors have all conspired to weaken investor confidence in the buck and undermine the dollar’s position as the world’s top currency,” says Joseph Quinlan, New York-based chief market strategist at Bank of America Capital Management.

Asian and oil-exporting central banks also hold more dollars than they prudently need and are seeking to diversify their portfolios away from their traditional preference for highly liquid, relatively low-yielding Treasuries.

No Allegiance Owed

Many countries — including China, Russia, Kuwait, Singapore and Norway — are transferring tens of billions of dollars to sovereign wealth funds. Long-term investors with mandates to maximize returns, these entities owe no allegiance to the U.S. currency and over time their investments will probably result in their governments’ holding fewer dollars.

The durability of the dollar’s reserve-currency status owes more to the absence of a challenger than sound U.S. policies. The euro is hobbled by the lack of a single, pan-European capital market and its being a hybrid currency used by a mix of countries yet owned by none.

China’s yuan is a potential contender, but not until that currency becomes fully convertible, the nation’s financial markets more developed and internationally recognized laws more established — which is years away. Japan, meanwhile, has always resisted the yen being a reserve currency.

It isn’t ordained that the dollar surrender its position as the world’s go-to currency. Yet if Americans insist on living beyond their means, eschew sound fiscal policies, ignore the greenback’s weakness and remain tempted by protectionism, the dollar will in small bites begin to mimic the British pound — the currency of a once proud but spent imperial power.

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The True Meaning of Inflation

Alex’s notes: This is an outstanding article on inflation. Understanding what inflation truly is holds the key to understanding what is happening in our economy, and how wealth will be transferred to a select few over the next decade.

Inflation Is Baked Into the Cake
By David Galland
17 Mar 2008 at 03:45 PM GMT-04:00

STOWE, Vt. (Casey Research Advertorial) — The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is when the supply of money increases faster than the supply of goods and services. The other concept is price inflation, which is an increase in the overall level of prices for goods and services.

The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices – rather than the money-creating government that is the true culprit.

And make no mistake, as government spending continues on a steep ascent, piling up debt, there is no question that the government has to continue creating money like there’s no tomorrow. This situation is not unique to the U.S. Quite the opposite: the adoption of fiat monetary systems is now universal.

The results of over three decades of unhindered monetary creation are increasingly being felt in a rising tide of price inflation, whether it be the 7.4% increase in producer prices reported by the U.S. in the most recent quarter, or the news just out of China that consumer price inflation now tops 8% and is worsening … or, in the most extreme example, Zimbabwe, where the utter lack of restraint by an insane dictator now burdens that economy with an inflation rate of over 100,000% annually.

The Casey Research Global Inflation Survey

To get a better sense of things, Casey Research recently conducted a survey of the world’s top 30 economies, broken down on a region-by-region basis. The snapshot below offers a glimpse at the big picture.

Commodities on the Rise

Most pundits focus on commodities as a central culprit in today’s higher price inflation. Why are commodity prices rising? There are many reasons, most importantly: supply and demand fundamentals, speculation and a weakening U.S. dollar, the “universal currency” in which oil, gold and many other commodities are priced.

Of those factors, supply and demand and speculation are fairly fluid. Which is to say they can vary over time based on politics (a threat to cut off oil sales by Venezuela, a war in the Middle East, legislation favouring biofuel production) or for more technical reasons (power shortages impacting mining in South Africa, or the shutdown of the Gulf of Mexico during a hurricane). This relatively short-term variability largely neutralizes the value of these factors as predictors of future inflation. Simply put: who can know the unknowable?

Instead, we look to longer-term trends. In that regard, two are apparent. The first has to do with the concept of “peak” commodities. While it has been Marion King Hubbert’s theory of Peak Oil that has received the most attention, credible arguments can also be made for peak metal (the dearth of major new discoveries), and even peak food. While these arguments have merit, they were beyond the scope of our survey, other than noting them as potentially rising in significance over time.

The second long-term trend is, in our view, of immediate consequence and worth a more detailed discussion: per above, the limitations and risks inherent in the fiat monetary systems now in universal favour around the world. It is this fiat monetary regime – the attempt to manage monetary policy based on flexible guidelines, and without the anchor previously provided by a gold standard – that we believe is the single most important driver of the rising price inflation now apparent around the world.

Losing Control

Simply, while the central banks of a handful of countries are (just) managing to contain inflation through restrained monetary and fiscal policy, the vast majority are finding the task politically inexpedient and are losing control. While we may point with some well-deserved derision at Mr. Mugabe’s comedic attempts to paper over his inflation with yet more paper, all nations are currently making the same errors, albeit at differing levels of failure.

To understand this point, we share a simple but accurate way of thinking about inflation as the result of too much money chasing too few goods. On that front, the chart just below paints a picture of the largely unfettered global growth in money since the early 1970s plotted against industrial production, a proxy for “goods” in their many varieties.

That chart begins to get under the hood of the problem, but one further view is necessary to understand what happened in the early 1970s that unleashed the tidal wave of money. The chart below presents a ratio of the above two measures, and includes a marker indicating President Nixon’s cancelling of the link between the U.S. dollar and gold in 1971 as the likely trigger. Once this anchor was removed, all that remained was a pure fiat monetary system.

While cancelling the gold standard was a U.S. policy decision, its impact was felt around the world. That is because of the historic Bretton Woods agreement struck between representatives of over 40 countries in 1944, as World War II came to an end.

Leveraging its position as “last man standing” following the devastating war, the U.S. pushed forward a wide-ranging set of agreements – the net result being that, from that point forward, the U.S. dollar would be the de facto global reserve currency, with all the nations of the world pegging their currencies to the dollar. New institutions, including the International Monetary Fund and the International Bank for Reconstruction and Development, were fathered at Bretton Woods, but they were nothing more than enforcers for the new regime, ensuring that the other countries stayed in line, buying and selling dollars as needed to maintain a stable peg.

For its part, the U.S. guaranteed gold convertibility at $35 “forever.”

But as is inevitable when dealing with governments, “forever” really means “for as long as it is politically expedient.” When it became inconvenient, in the late 1960s when the French under Charles de Gaulle decided that they’d prefer to have the gold, Nixon cancelled convertibility.

Once President Nixon cancelled that convertibility, which took effect in 1971, the world’s central bankers, left with no other immediately obvious or more viable alternative, continued using the U.S. dollar as a key component of their reserves. It also continued to be used in international trade, to price globally traded commodities, such as oil. Yet the end of gold convertibility represented a fundamental change; from that point forward the creation of U.S. dollars and, by extension, all of the world’s currencies, was restrained by nothing more than political expediency.

It is our contention that the size of the politically motivated governmental spending, spending which has no “hard” limiting factor or defined discipline, will continue apace and, in fact, significantly worsen due to compounding interest on government borrowing and the coming wave of irrevocable social commitments – on Social Security and Medicare in the U.S., for example. Against the backdrop of a global fiat monetary regime, the only limitation to government spending is that which the politicians believe will be politically unacceptable to a population. This is, generally speaking, no real limitation at all, given that the public is now apathetic about, and numb to, the real world implications of large numbers.

Inflation: Baked in the Cake

In light of the cause and effect between monetary inflation and price inflation, and given the clear findings in our “Global Inflation Survey,” we can only conclude that inflation in both its commonly understood forms is now baked into the proverbial cake.

As investors, that keeps us focused on gold, the world’s longest-serving form of money and an investment we have been profitably beating the drum about since 1999. Importantly, a quick scan now finds that gold is rising against a large number of currencies. This is a very useful view of the current inflation trend in that it demonstrates that the trend has expanded considerably beyond just a weakening U.S. dollar, and is now affecting fiat currencies around the world, almost without exception.

Are we seeing the end of the experiment in fiat monetary systems? It’s too early to say one way or another, but it’s not too late to shift at least some percentage of your portfolio into gold and, for leverage, gold shares.

© Casey Research, LLC. 2008

David Galland is the managing director of Casey Research. The above was excerpted from the Casey Research Global Inflation Survey. The full 38-page survey, which includes commentary by Casey Research Chairman Doug Casey and an interview on the inflation/deflation debate with Casey Research Chief Economist Bud Conrad, is available on request.


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Paul Craig Roberts : Watching the Dollar Die


By Paul Craig Roberts
March 13, 2008

I’ve been watching the dollar die all my life. I sometimes think I will outlast it.

When I was a young man, gold was $35 an ounce. Today one ounce gold bullion coins, such as the Canadian Maple Leaf, cost more than $1,000.

Our coinage was silver. Our dimes, quarters, and half dollars had purchasing power. Even the nickel could purchase a candy bar, ice cream cone or soft drink, and a penny could purchase bubble gum or hard candy. If a kid could collect 5 discarded soft drink bottles from a construction site, the 2 cents deposit on the returnable bottles was enough for the Saturday afternoon movie. Gasoline was 32 cents a gallon. A dollar’s worth was enough for a Saturday night date.

Our silver coinage was 90% silver. People sometimes melted coins in order to make silver spoons, known as coin silver, which can still be found in antique shops. Except for the reduced silver (40%) Kennedy half dollar which continued until 1970, 1964 was the last year of America’s silver coinage. The copper penny departed in 1982. As Assistant Secretary of the Treasury, I opposed the demise of America’s last commodity money, but I couldn’t prevent the copper penny’s death.

During World War II (1941-1945), nickel was diverted from coinage to war, and the US mint issued a wartime silver (35%) nickel.

It is not easy to find items to purchase with today’s US coins, but the silver coins of the same face value still have purchasing power. The 10 cent piece of my youth contains $1.42 worth of silver at today’s silver price. The quarter is worth $3.55, and the half dollar contains $7.10 of silver. The silver dollar is worth 15.2 times its face value. These are just the silver values of coins that might be worth far more depending on condition and rarity. The silver in the wartime nickel is worth $1.10, which is 22 times the coin’s face value. Even the copper penny is worth 2.5 cents.

When I was a young man enjoying travels in Europe, the German mark or Swiss franc traded four to one US dollar. The euro, which is today’s equivalent to the mark or franc, costs $1.55.

People who haven’t accumulated much age have little idea of the corrosive power of “acceptable” inflation. Unlike gold and silver, fiat money has no intrinsic value. When money is created faster than goods and services it drives up prices, thus driving down the value of the money. If freely traded currencies are excessively printed or if inflation, budget deficits, and trade deficits drive currencies off their fixed exchange rates, prices of imports rise as the foreign exchange value of the currency falls.

Today the US, heavily dependent on imports, is subject to double-barrel inflation from both domestic money creation and decline in the dollar’s foreign exchange value.

The US inflation rate is about twice as high as the government’s inflation measures report. In order to hold down Social Security payments, the government changed the way it measures inflation. In the old measure, inflation measured the nominal cost of a defined standard of living. If the price of steak rose, up went the inflation rate. Today if the price of steak rises, the government assumes that people switch to hamburger. Inflation doesn’t go up. Instead, the standard of living it measures goes down.

This is just one of the many ways that the government pulls the wool over our eyes.

With the dollar value of the euro rising through the roof, today a vacation in Europe is far more costly than in the past. Thanks to China, so far Americans have been sheltered from the greatest effects of the dollar’s declining value. Our greatest trade deficit is with China. The prices of the goods from China have not risen, because China keeps its currency pegged to the dollar. As the dollar goes down, China’s currency goes with it, thus holding down price rises.

The resignation of Admiral William Fallon as US military commander in the Middle East probably signals a Bush Regime attack on Iran. Fallon said that there would be no US attack on Iran on his watch. As there was no reason for Fallon to resign, it is not farfetched to conclude that Bush has removed an obstacle to war with Iran.

The US is already over stretched both militarily and economically. An attack on Iran is likely to be the straw that breaks the camel’s back.

Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider’s Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice.


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