Is Gold in a bubble?

Weekly Wanderings 24 December 2009

In the final Weekly Wanderings for 2009 we cover….

• Don Coxe on gold – courtesy of Zero Hedge‎
• Harry Schultz on Deflation
• Chris Martenson to speak at UN
• John Hathaway on whether gold is in a bubble

Don Coxe on Gold - from Zero Hedge

As the only major financial asset that never pays interest or dividends, gold’s performance could be the clearest, purest example of Zero-Based Investing:

 

With a 25% rise this year, Gold has beaten the S&P roughly 7%. As measured by the XAU, gold mining stocks’ total return is 35%.

But gold’s investment return was exceeded by the amount of publicity and debate it generated. Its late-year blow-off past $1200 briefly made it a Page One story—thereby automatically guaranteeing a sharp correction.

The media were filled with authoritative explanations:

Hyperventilating Commentators’ Explanations:

• the collapse of the dollar;
• the repudiation of Obamanomics;
• a warning of a coming financial collapse, leading to Depression;
• a signal of the runaway inflation to come;
• China has only begun to convert its dollar holdings into bullion: the best is yet to come;
• a short squeeze on gold ETFs which are misrepresenting how much bullion they hold: beware of counterparty risk: buy bullion, not paper;
• a coming Armageddon in the Mideast.

Sophisticated Explanations

• gold is the only asset that is nobody’s liability and is therefore a haven in an increasingly uncertain world;
• capitulation by hedged gold miners, notably Barrick;
• India’s purchase of 203 tonnes from the IMF, removing the overhang in bullion markets;
• China’s announcement that its gold holdings are higher than were previously revealed;
• “Peak gold” discussions, as investors ponder the failure of gold mines to maintain—let alone increase—their production despite record bullion prices. The classic expression for getting rich quick is to find a gold mine—but it takes time, experience and capital to bring on a mine. Reported gold companies’ reserves haven’t been rising, but soaring gold prices will change that: millions of tons of low-grade “resources” that haven’t been booked as ore reserves will be reclassified if gold prices remain near or above current levels;
• recognition of the longer-term implications of central banks’ astounding levels of creation of fiat money at a time they are collectively becoming net buyers of gold—after decades of sustained selling;
• respect for gold’s future because prices have managed the remarkable feat of setting new records at a time jewelry demand—traditionally the main support for gold—is slumping sharply;
• portfolio diversification by sophisticated investors who seek a haven at a time of zero returns on Cash—with no indications that central banks are about to abandon their Zero policies.

Clients can undoubtedly add other justifications and explanations to their lists.

We were in Toronto the week gold prices were setting records daily, and were asked—on TV—to explain the dramatic run-up. Various prominent commentators were falling all over themselves to issue ever-higher targets for bullion prices.

We admitted that we couldn’t explain the sudden rush and the dramatic daily leaps. When asked for our price target, we suggested….

“As an historian, I seek some historic data to assist our predicting. When gold broke through $1,000, we began considering appropriate targets. As every English schoolboy knows, 1066 was the Norman Conquest—the first gold target. The next important date was Magna Carta—1215—and gold has now managed to attain that level. The next big date is the Provisions of Oxford 1258 [when Simon de Montfort forced important constitutional changes on Henry III].

“My one-year target for gold is 1345—the onset of the Black Death.

“Apart from that, I really can’t say how high gold could ultimately go, although longer-term it should reach 1485, when Richard III fell in the Battle of Bosworth, launching the Tudor monarchy, and giving us the enduring quote, “My Kingdom for a horse!” The interviewers laughed, and changed the topic.

Next day, Goldman issued its authoritative target price for next year: 1350.

We were called for comment, and graciously accepted that prediction because it was the end of the Black Death.

The point of these musings is that no one really has any idea of the longer term price of gold that can be justified by sober analysis.

All that we can sensibly say is that gold’s price entered a 20-year Triple Waterfall collapse in 1980, falling from $825 to $250, and has risen every year in this decade. If it can maintain its strength at a time jewelry demand is shrinking, then investors and speculators are in charge; their motivations include momentum and malaise: Gold looks good because it keeps going up, and they’re scared about what the Fed and Obama and other central banks and governments are doing, and have no great confidence that there will be a sustained, noninflationary economic recovery, so gold is a good place to hide.

Gold has been the best-performing major commodity since the financial crisis began:

 

We see no big reason why that outperformance should be over. After its breathless run to $1220, it’s entitled to correct back toward $1,000—or even a bit below that chiliastic level—without ending its bull market.

Finally, gold may even be decoupling from the dollar. The sheer scale of foreign exchange reserves in China, Hong Kong, India and other countries whose currencies are pegged, directly or otherwise, to the dollar may be opening a whole new demand for gold. Just to maintain even tiny percentage exposure to gold in forex reserves means these nations must remain on the buy side. The euro was once seen as a worthwhile alternative to the dollar in Asian forex accounts, but the unfolding problems of its Eastern European and Mediterranean members are exposing the euro’s internal contradictions as a viable alternative to the dollar.

In a world in which nearly all paper money has problems, and in which the sheer supply of paper money is expanding far faster than global GDP, gold has its best claim as a constituent of foreign exchange reserves since Bretton Woods booted it out sixty-five years ago. [emphasis Zero Hedge]

Harry Shultz on Deflation

From Rick’s Picks, an excerpt from Harry Shultz’ latest newsletter…

“Deflation suddenly is looming, crowding out the prevalent global view that only higher inflation can ‎possibly be ahead. QE (Quantitative Easing) isn’t working; money pumping, once thought a flawless ‎cure for crises, now falls flat, from lack of confidence. QE is, in fact, having the opposite of the ‎intended effect as it’s obviously a ploy, & QE simply adds to debt, which now chokes the holders. ‎Gold can handle deflation nicely, but not much else can.”

 

Chris Martenson to Speak at UN…‎

Chris Martenson whose opinion we follow closely is set to speak at the U.N.  Maybe someone who understands the current state of the global economy can get the Bureaucrats to see some sense and see that tax and spend isn’t the answer!  Hope springs eternal…

After Copenhagen: Understanding the Energy Trap for Policymakers

Tuesday, February 2, 2010
1:00 to 2:45
United Nations Headquarters
760 United Nations Plaza
New York, NY

Co-sponsored by the NGO Sustainability and the Mission of Slovakia to the United Nations

This presentation will discuss the macro trends of our economy, energy structure and environment, as they will affect the decisions we make as individuals and policy-makers. Touching on the outcomes of the Copenhagen Climate Summit, Dr. Chris Martenson will explore why and how a financial system dependent on infinite growth will continue to create disastrous friction with the resources and ecosystems of a finite planet.  To enter the solution-space in confronting these timely issues, we will need to understand how these “Three E’s” are inextricably linked, and break apart the myths we tell ourselves as a society to build towards a future of sustainable prosperity.

 

John Hathaway on gold…‎

John has been featured in these pages before (see Gold and Central Banks).  He is one of the most experienced and knowledgeable ‎commentators on the gold market around. It is worth noting that Mr Gold himself, Jim Sinclair, holds ‎John’s expertise in high esteem. In another recent interview with Eric King, John expresses his views ‎on the gold market, and more. The link to the audio interview is here, and we summarize the content below.‎..

 

It is patently false that gold is in a bubble, even though Nouriel Roubini has become the cheerleader for ‎the gold bubble story. However, the gold price we have now is in the context of massive money ‎creation and provision by the Fed of money for speculation at an interest rate of effectively zero. ‎

It’s possible that the current correction in the gold price could see a dip below $1,000, but this would ‎represent a terrific buying opportunity. The sustained break that we have seen above $1, 000 marks a ‎new phase in this gold bull market, one of much increased volatility – both up and down. Jim Sinclair ‎has also expressed this view, by the way.‎

The opinion that paper currencies are deeply flawed is moving mainstream, and with it the idea of ‎investment in gold. Currently, for example, pension funds, which contain large pools of capital for ‎investment, have virtually zero exposure to precious metals. As investing in gold becomes more ‎fashionable, at least some portion of these pools will stream into the gold market, creating increased ‎buying pressure.‎

Consider the gold ETF.  Currently, it has a value of around $67 billion. Many people view this as ‎high, but John envisages it easily reaching 10 to 15 times this value! From this one perspective, gold ‎is under-owned.‎

Gold at over $1, 000 seems as undervalued today as it did in 2000 at less than $300. This is the case ‎because of the very different financial environment today, when the measures being taken to reflate ‎assets are so extraordinary, and regard for the integrity of the US dollar is so low. The financial system ‎has been ruptured, and government policies are compounding the damage. The potential pitfalls we ‎face today are demonstrably more dangerous than the ones we faced going into 2008.‎

Gold shares are currently very undervalued compared to the gold price. Gold mining has been a very ‎tough business over the last few decades, but now, with the gold price over $1, 000, well run mining ‎companies will start to generate significant profits and returns on capital.‎

Silver remains significantly undervalued, relative to gold. One cautionary note though; if we entered a ‎depression type environment where industrial demand plummeted, then silver might not do so well.‎  However, under the inflationary scenario that the Fed seems determined to engineer, silver should do ‎very well.‎

Prof Fekete: Why is the Chinese Government urging its people to buy gold and silver?

As we mentioned in this previous article (China and the introduction of paper money), in November we attended a conference in Canberra Australia hosted by the Gold Standard Institute.  The main speaker was Professor Antal Fekete.  Professor Fekete is an author, mathematician, monetary scientist and educator.  Below we paraphrase the Professors lecture on the final day of the conference, where he gives his thoughts as to why the Chinese Government is urging its people to buy gold and silver.  He also gives a few ideas as to what else China should do to strengthen their financial position. 

Hopefully we’ve recalled the gist of the Professors argument accurately enough.  We’ve also added a few thoughts of our own in italics.

What should China do?  A 7 point manifesto:

1.  It was far sighted of China to legalise and in fact encourage the purchase of precious metals.  In fact an incredible move for a government.  But he would urge China to make it a constitutional right of the people to save in the form of gold and silver.  [Gold and silver can now be readily bought across China including at many banks.  It was only a few years ago that ownership of precious metals was illegal for the Chinese].
2. What should China do with her 2 Trillion plus of US dollars of fiat currency?  This is far too big an amount to just buy US property.  And if the bonds were sold in significant amounts it would destroy the US bond market and so obviously be very bad for China’s remaining holdings.  So therefore the obvious choice is to simply hedge it with Gold.  Buy gold on weakness and then tell the world you will continue to accumulate gold and set an example to other countries.  Therefore the gold price will keep steadily going up protecting Chinas existing gold holdings.  And when a substantial part of the Chinese treasury hoard is spent on gold it simply won’t matter what happens to the rest.  [We would also add that China would then likely end up with the largest gold reserves on the planet, just as the US did after WWII].
3. Open the Chinese Mint to Gold and Silver.  Create an unconditional right for the people of China to convert bullion into coins free of seigniorage (as the US Constitution says) i.e. There would be no charge to mint bullion into coins.  This would result in tremendous demand as gold in coin form is worth more than in bullion form as it is more readily exchangeable.  So people would actually take their gold to China to effectively get something for nothing.  The cost to China would be made up for by the massive amounts of gold coming into their financial system.
4. Establish the world’s first Gold Bank.  There has been no gold based bank  since the Bank of International Settlement (BIS) abolished having its “books” in gold units in 2002.  The idea being that people will have some trust little by little and release some gold from their hoard that will make it into circulation.  Once the Chinese Mint is open to gold worldwide, more and more gold will be attracted to China as a safe place to save.
5. Establish the worlds first Gold Life Insurance Company.  This would grant Annuities and Life cover to anyone who would pay the premiums in gold.  The policies would also be paid out in gold.  This would give the policy holders a fair return on their premiums paid.  Unlike life cover currently where you pay premiums for many years in today’s dollars to receive a pay out in the future in depreciated dollars.  Whereby the policy holders lose in the long run.  This would also prove very attractive.
6. Start “Real Bill” circulation in the world.  “Real Bills” are commercial paper that matures into gold in 90 days or less.  Basically a short term bond that matures into Gold and is bought at a discount.  London used to be the clearing house centre for Real Bills prior to WWI when Real Bills were still in place.  World trade could effectively be financed by Real Bills.   [For more on Real Bills see this interview with Professor Fekete.  Basically the Professor states that without Real Bills as part of a gold standard it is doomed to failure, as they provide the elasticity in the system during the changing “seasons” when demand for different products alters.  The interview is well worth a read as it covers many other subjects too including China currently being the biggest hoarder of silver.]
7. Proletarians of the world unite in Gold!  “You have nothing to lose but your chains!”  The professors 7 Point Manifesto is a title borrowed with tongue firmly in cheek from Karl Marx’s communist manifesto.  But the Professor did say Marx “wasn’t a complete idiot” as he did say Money is Gold and Gold is money.  The World is waiting for someone to break the ice.  [We would add that China certainly seems to be holding the ice pick!]

At the conclusion of the Professor Fekete’s lecture, there was some discussion about China’s poor human rights record and why would they want to give people even more freedom given it remains a communist nation.  However Darryl Schoon who we featured in the previous article on the Gold Standard Institute Seminar, answered the most adroitly in that “It is far easier to rule a happy and prosperous people”.  Food for thought indeed and we reckon the western rulers may be setting themselves up for even tougher times in the not too distant future.

An Unbelievable Investment Opportunity in Gold

Today we hear again from J.S. Kim on why, contrary to what you may hear in the mainstream, gold is not in a bubble and that if you haven’t bought any yet you will indeed regret it 5 years from now.

Last month J.S. wrote a brilliant article especially for us on The Current Stage of the New Zealand Real Estate Market, which if you haven’t yet read you must check out now.   Todays article is taken from seeking alpha where he also posts articles regularly…

 

Yes, there is no typo in the headline of this article. Today there is still an unbelievable opportunity to invest in gold that will disappear over the next several years as this monetary crisis deepens. Despite the general widespread sentiment of Western financial advisers that they have missed the run-up in gold and now it is too late to buy, this is not true at all. In fact, to illustrate how little people understand about the reasons to buy gold, of all my friends that I urged to buy physical gold more than six years ago when gold was less than half of its current price, I only know of one that has bought any gold, and it still took five years of my prodding, four times a year, for this single person to purchase gold.

This is how incredibly misunderstood an asset gold remains today despite its enormous run higher in the past 8 years. This brief anecdote aptly illustrates the bias against gold and the foolish belief that gold is a bubble that persists today due to the massive propaganda and disinformation campaigns waged by bankers against gold. It is ironic today that public mistrust of bankers can be at such a high level at the same time that the public is still enormously willing to follow all of the bankers’ propaganda about gold. This great twist of irony illustrates just how powerful the bankers’ century long misinformation campaign about money and gold has been. Few people even understand how money is created let alone why gold is a protector of people’s rights.

Even if gold continues to correct this week, and the bullion banks, the US Treasury, the US Federal Reserve and the Bank of England are able to engineer a further decline in gold prices in the futures markets, this event will not be the bursting of the gold bubble as it will be, and always has been, described by many Western media sources. Even if gold loses another $120+ an ounce from its current price, this event would not mark the bursting of the gold bubble. The incorrect description of corrections in the gold markets, or downright meddling of Central Banks into the suppression of gold prices, as the bursting of a bubble is just as erroneous as the recent descriptions of rising stock markets as signs of economic recoveries. And this is the legacy bankers have created – confusing the masses to believe the exact opposite of what is true.

Though I’m not going to tell you the price point at which I believe gold will start rising again, it is not impossible to time markets as investment charlatans will lead you to believe as well. In fact, at the very beginning of this month, we told all subscribers of my Crisis Investment Opportunities investment newsletter to sell out of their precious metal stocks right before this steep correction in gold and silver occurred to lock in their profits and we’ll tell them to re-enter (or have told them to re-enter) when we feel that a low-risk, high-reward time to reposition our assets has materialized once again.

By understanding the rigging game in gold and silver markets and in stock markets, we’ve more than tripled the returns of the S&P 500 this year. In all honesty, however, bankers have filled most investors’ heads over the years with so many lies about gold that for the majority of investors, it would be a futile effort to try to time the market anyway. Most would be better off just understanding the fundamentals behind why they need to own gold and to buy and hold on through the dips and rises until it reaches the mania stage.

Being able to predict the recent steep correction in gold and silver in advance of its occurrence merely requires understanding the manipulation and rigging game in these markets. Understand the rigging game behind gold and it is quite possible to repeatedly time the gold markets with a fair amount of accuracy.

Even if you refuse to acknowledge the indisputable signs that the gold market is, and has been rigged for decades, you only need realize one thing – that despite the best efforts of the US Federal Reserve, the US Treasury and the Bank of England to suppress the price of gold, gold’s long term trend since 2001 when it bottomed at about $250 an ounce, has been up. And if you are astute enough to realize that the gold markets have been, and still are rigged, then observing gold’s rise from $250 an ounce eight years ago to more than $1200 an ounce just a week ago should give you the utmost confidence, that despite the best efforts of bankers to wreck gold’s price, its long-term trend will remain higher for quite some years to come.

Still, no matter what side of the “gold is rigged” debate you stand on (and there is lots of evidence to believe the “gold is rigged” side of the debate thanks to the tireless work of GATA.org), the public’s stated reasons for not owning gold are not only absent of logic but they are downright foolish. Two of the most frequently given reasons I’ve heard from Westerners as to why they will not buy gold are parroted banking propaganda that make absolutely no sense. The first reason people often give as to why they are reluctant to buy gold is that gold pays no interest. People would realize how foolish this stated reason was if they only realized that all paper money is issued as debt. If there were no debts in the system, there could be no money, yet people gladly accept an instrument that is issued as a debt and believe that it is a pure asset.

Secondly, they state, you can’t buy anything with gold. You can’t pay for many items with euros in many American stores or buy items with US dollars in many European stores either, but that doesn’t mean the euro is worthless to own if you live in America or that the dollar is worthless to own if you live in Europe. Both will still have some value in buying goods and services. Thus, to not own gold because “you can’t buy anything in stores with a gold coin or gold bar” is an answer devoid of any logic whatsoever.

Throughout history, gold has always been accepted as a form of money. In fact a gold coin in ancient Roman times would buy you about the same things today as it would have back then. With US dollars, you now need twice as many dollars to buy the same things today as you would have needed just 8 or 9 years ago. If a wealthy eccentric man walked into a Maybach auto dealership and insisted on paying for four custom made Maybachs with $2.4 million worth of gold bars, I guarantee you that the dealer would find a way to accept the gold bars and make the $2.4 million sale, knowing that he could choose to hold on to the gold or to convert it into Euros, Yen, Pounds or Dollars at a later point and time. Thus, there is no reason to believe that gold can not be used to purchase items. Gold may be an inconvenient form of money, but it will be much more inconvenient to watch your fiat money crash and burn and for much of your wealth to be wiped out when the second phase of this monetary crisis commences sometime in 2010 or 2011.

Secondly, psychology plays a huge role in the foolish bias of Westerners against gold. Were Westerners to live in China for just one year, where almost everyone knows multiple people that own physical gold, I guarantee you that their perception of gold, upon returning to America, would be drastically changed. They would be inclined to buy more gold just because of the sheep herd mentality that would make them much more comfortable purchasing physical gold after watching many of their friends and associates engaging in the behavior of buying gold for an entire year. Though in China, this herd behavior happens to be correct, just because everyone is doing the same thing, does not by default, make it the correct behavior. In fact, in investing, just the opposite is normally true. When everyone is doing (or not doing) the same thing, they almost always are wrong.

Think of US hedge fund manager John Paulson and his enormous coup of earning $4 billion of profit for himself in 2007. Paulson stood on the opposite side of the subprime mortgage bet from the rest of all of Wall Street. Regarding a recent book based entirely upon Paulson’s enormously successful bet to short the US housing market, one reader stated: “The most amazing thing is that no one seemed to believe [Paulson] until the market crashed and by then it was too late.” Though Paulson was a lone wolf among very few lone wolves that existed at the time regarding his beliefs that the subprime mortgage market would crash and burn, he ended up being right and all of Wall Street ended up being wrong. With buying physical gold, it will also pay to think like a lone wolf if you are a Westerner.

However, here’s the lesson most investors still refuse to learn about Paulson’s enormously successful investment play. The majority of investors never take the next crucial step of investigating the reasons why no one believed Paulson’s comments about the US housing market. If they did, they would discover that the reason nobody believed in Paulson’s enormous bet back then was due to the propaganda of bankers like Ben Bernanke and politicians that assured the American people that the housing market would be fine.

Many times the masses immediately accept a person’s statement as truth with no critical analysis of that statement just because that person is a public authority figure. But how naïve would you have to be to believe President Obama’s recent statement on the American TV show 60 Minutes that “[he] did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” Goldman Sachs’s (GS) Political Action Committee was the second largest contributor to President Obama’s election campaign, so were it not for the money of “fat cat bankers”, Obama may very well not even have been elected as President in 2008. Knowing this, do you really believe that Obama has zero obligations to the second largest contributor to his political campaign?

Furthermore, were you to merely analyze President Obama’s financial decisions since he has taken office, the disingenuous nature of his above comment would be readily exposed. Almost every single financial policy decision of his administration has benefited “fat cat bankers” to the detriment of everyday US citizens. Again, those blinded by political or racial loyalties at the expense of logic will be sure to foolishly digest my statement as a politically-biased statement, though there is no evidence to support that conclusion.

Any reader can easily check my past history of public statements and discover that my criticisms against the foolish political policies of the Clinton and Bush Administrations are just as numerous as my criticisms levied against the Obama Administration. If you are serious about never wanting to be fooled or bamboozled by a politician again, then never look to a politician’s words, but only to his or her actions, to unearth a politician’s true character and nature. Only a fool would ever accept a politician’s words as an accurate representation of a politician’s intent.

Likewise, you would be very wise to apply the above maxim to bankers as well. Investors should look towards bankers’ actions and not their words when trying to decipher their intent. Bankers are responsible for the propaganda that gold is a barbarous relic. Bankers are responsible for the propaganda that gold is a cumbersome asset to own because it pays no interest. These are their words. Yet if you look toward their actions, Central Bankers all over the world were net buyers of gold this past year. Shouldn’t that alert you to the fact that bankers are a bunch of conniving liars in everything they tell the masses about gold?

When Paulson first assumed his position shorting the subprime mortgage market, it was not only bankers, but also chief executives at large commercial investment firms that derided him, stating that the subprime mortgage market would be fine. I personally heard many of the same criticisms when I started telling people to buy physical gold six or seven years ago – that I was crazy for thinking that the US dollar would get into trouble and that the US dollar would be fine, that owning gold was a stupid and foolish investment. People actually laughed at me for buying gold.

A top investment strategist at Citigroup stated that gold was a bubble in 2005 when gold reached $500 an ounce. And even though the gold critics have been wrong now for eight years in a row, they still use every gold correction as an opportunity to deceive Americans into believing that gold is a bubble and about to collapse. And amazingly, Americans continue to look not towards bankers’ actions but to their words only. The overwhelming majority of Americans believe the bankers’ WORDS that the US dollar will be fine, and foolishly point out every bear rally in the US dollar as proof that the dollar will be fine.

Ninety-five percent of what I’ve heard financial advisers state about gold is wrong. Ninety-five percent of what I’ve read in the public domain about gold is wrong. Ninety-five percent of what I’ve read from the Western media about the US dollar is wrong. And ninety-five percent of the arguments I’ve read against owning gold, even when filled with supposed “facts”, are wrong.

Many of the arguments against gold sound convincing, even though they are deeply flawed because erroneous data are used to produce flawed conclusions. But this is the very definition of propaganda – arguments that use erroneous data presented as “facts” to draw convincing conclusions that are highly flawed, though to the undiscerning eye, they seem quite logical. The reason that bankers have always spread so much propaganda about gold is because gold is the kryptonite of bankers. Gold allows people to preserve their wealth against their fiat currency debasement schemes.

Hank Paulson, in testimony before Congress, stated that it was necessary to bail out Goldman Sachs through the bailout of AIG because the people, “were unhappy with the big discrepancies in wealth, but they at least believed in the system and in some form of market-driven capitalism. But if we had a complete meltdown, it could lead to people questioning the basis of the system.”
If Americans really wanted to expose the fraud of the entire financial system, all they would have to do is to put just a tiny part of their entire savings into physical gold. If all Americans put perhaps as little as 5% of their entire savings into physical gold, this would likely be more than adequate to expose the fraudulent basis of the financial system by which firms such as Goldman Sachs reap such ungodly profits year after year. What frightens the bankers the most is the possibility that people will fully understand the basis of the system, and this is why Western Central Bankers continually wage so many disinformation campaigns against gold.

Consider this story about HSBC and its retail gold clients that was reported last month:

“The British bank, which has sizeable vaults underneath its US headquarters overlooking Manhattan’s Bryant Park, has told retail customers – many of whom are middle-men and custodian services which store gold with HSBC on behalf of hundreds of their own clients – that all their gold must be out of its facility by July 2010. The decision has seen fleets of armoured cars laden with gold ferrying the precious metal out of New York. An HSBC spokesman declined to comment, but it is understood that the increased demand for physical storage of gold by corporate clients is behind the move to end the retail service, which HSBC inherited when it took over Republic Bank a decade ago.”

With banks, it’s never about doing what’s best for their clients. It’s always about doing what’s most profitable for their executives. For HSBC’s individual retail clients that were intelligent enough to own gold, HSBC most likely realized that larger, much more profitable relationships could be built with corporate clients that wanted to buy gold versus their retail clients. Thus, their retail clients got the axe despite the fact that HSBC knew that such a decision would be incredibly inconvenient for them.

Just as was the case with subprime mortgages when almost all of Wall Street got it wrong, the only reason anyone believes that gold is a bubble today is because people have forgotten how to think for themselves, foolishly believing that there are not hidden ulterior motives behind the beliefs spouted by Wall Street, and for some inexplicable reason, still internalizing and accepting all banker propaganda against gold while at the same time, they claim to distrust them. That’s why no matter how much further gold drops before this correction ends, if you don’t make the move to buy physical gold if you don’t own any, you will look back with regret five years from now and realize that you missed an unbelievable opportunity.

About the author:

J.S. Kim is the Managing Director & Chief Investment Strategist of SmartKnowledgeU™, a financial and research consulting company that offers hard-hitting investment guidance to help investors prosper during the ongoing and continuing global financial meltdown. His investment newsletter, the Crisis Investment Opportunities newsletter, has not suffered a single down year since its launch, returning +23.78% in just six months in 2007, +3.21% in 2008 and returning 37.54% YTD as of the end of September 2009. For more information, please visit http://smartknowledgeu.com

Jim Rogers: silver and agriculture are the best opportunities right now

Jim Rogers was recently interviewed on CNBC (full video below).  He thinks the US dollar will rally in the short term before continuing it’s long term down trend.  He likes silver more than gold right now although will buy more gold if it drops a bit further.  Although he “wouldn’t think of selling [gold]” at the moment either.  

He also currently rates agriculture over other hard commodities like copper which has also risen sharply this year.  He tells the interviewer as he has done to others previously, that if she wants to make money to become a farmer!

And while he mentions there are and will be many opportunities in foreign currencies, how’s this for a sound bite…

“Paper money throughout the world is being printed everywhere, so all paper money is suspect.  We may have to wind up with all our paper money in commodities, cos there is no paper money we can trust.”

And while Jim could be accused of “talking his book”, (he has direct involvement in farmland investments and designed the Rogers International Commodity Index ( RICI ) in 1998), we’d recommend taking notice of someone who’s made millions in the past, rather than the central bankers who print millions or rather trillions!

Specifically Rogers co-founded the quantum fund with George Soros in 1970 which made 4200% in the next decade during the last commodities bull market, while the broad stock market made less than 50% over that time.  So he knows a thing or 2 about long term trends, particularly in commodities.

Ted Butler: Potential for closure of paper silver futures market

Weekly Wanderings 16 December 2009

In this weeks musings we feature…‎

• Society of Fat Cats speaks out
• The Automatic Earth, on the speed of the financial collapse
• Ted Butler, on the possible default of the paper Silver market
• Bob Chapman, with important inside info on possible US dollar devaluation

From The Reformed Broker by Joshua M Brown

Whiskers O’Rourke, American Fat Cat Society

To Whom It May Concern:

It has come to our attention that your President made the following statement when referring to a group of  banker CEOs:

“I didn’t run for office to be helping out a bunch of fat cat Wall Street bankers.”

Frankly, we in the Fat Cat Community are outraged at the President’s callous remark and we are offended at being associated with bankers or Wall Street CEOs in any way, shape or form.

In contradistinction between the zaftig feline kind and the objects of the President’s ire, most cats (including fat ones) are patriotic, pragmatic, cunning and blessed with an inherent instinct for survival.

The only similarities between cats and the TARP recipient banks are the fact that we all possess several lives and survive falls that we should not have been able to.

In conclusion, we would like to remind the President that batting around balls of yarn did not put the country into $12 trillion dollars in debt…easy money and securitized lending did.

We can look past being called fat but the banker association is, frankly, unmeowable.

We await your apology…under the neighbor’s car.

Sincerely,

Whiskers O’Rourke

The American Fat Cat Society

 

 

 

From over at The Automatic Earth blog, comes this reflective piece, talking about the speed of the ‎ongoing financial collapse. Added emphasis is ours.‎

Ilargi: Went to see the movie adaptation of Cormac McCarthy’s The Road last night. I know, I should have been working, but since we were going with a good friend and I’m off to Europe for a while this weekend, I went anyway.

The movie, starring Viggo Mortensen, Charlize Theron, Robert Duvall and Kodi Smit-McPhee, remains very close to the book. Which is an absolute gem. And books that good make one’s mind work overtime in producing its own visuals, so I didn’t know if seeing the film would be a good idea. Still don’t, really. The movie is great, and I recommend it to everyone. It outdoes the book in the sense that it grabs you by the throat even more and leaves you with nowhere else to turn.

The collapse McCarthy envisions is not the one we address here at The Automatic Earth. A credit collapse, and whatever it is that comes after, is not the same as the fall-out of large-scale nuclear disaster. The main common thread here may well be that of the worries parents have for the future of their children. Once you’re no longer there to protect them, what is going to happen? That is a general theme, a worry as old as the world, made more poignant by crises of virtually any kind. The Road provides an extreme version of the theme, but the reality of our economy is, for those willing to listen, extremely threatening as well. The chances that your children will be better off than you are fast approaching the freezing point, you just don’t know how much worse off they’ll be, and therein, in the uncertainty, lies the main threat.

After the movie, the good friend said that, in his view, things -referring to the credit collapse- are developing very slowly. I replied that they are not, that it’s just his viewpoint that makes him see it that way. If and when you follow a development as closely as we do, that is, you read extensively about it on a daily basis, you risk having your view distorted. When I said that part of him wishes for things to unfold faster, he predictably denied that, and even took it as being accused of having “collapse cheerleading” views. Apparently there are places on the web where that exists. But that’s not what I meant. When you want to watch a flower grow, camping out 24/7 next to it can easily make the process seem real slow.

I have things like this John Williams graph in mind when I think of how fast or slow things are unfolding.

US unemployment, no matter how you measure it, U3, U6 or SGS, has gone up about 100% in the last 20 months, and 60% in the past year alone. And if you call that slow, than what is fast? You’d have to get to a speed that would be hindered simply by practical reasons. To lose jobs any faster than this you’d need something like government ordered mass closings, or a bank holiday or something. In other words, you’d have to do the exact opposite of what the US government does, which is to keep anything open that is broke. And that, more than anything, should make you sit and think. These unemployment numbers are here despite everything the government tries.

People like my friend and I do have the tendency to want to see it go faster, in order to have our fears, our ideas confirmed. We know it’s inevitable, so let’s have it already, that sort of thing. That’s not the same as cheerleading though. We’re simply so focused on the topic that our perception of time gets warped. There’s nothing slow about the development of US unemployment.

There’s also nothing slow about the collapse of available credit in the US, another area of miscomprehension. Even if that’s apparently hard to understand, borrowing money from a bank is not the same as borrowing money from yourself. Which is what you do when you sign up for a great looking 3.5% down mortgage covered by the FHA, a government agency. Or, if you want to make it a notch or two worse, if you’re not the one getting the loan, it’s your neighbor who borrows your money to buy a home (s)he in all likelihood (just look at the stats) will default on a mere few years down the line, leaving you with any losses (s)he can’t pay.

So if Jane Doe who flips burgers or Joe Blow who’s a Wal-Mart greeter, are purchasing homes putting their $8000 tax credit towards a 3.5% downpayment, that’s not credit, not in the way we have always defined credit. That’s a government trying with all the means it can think of to perpetuate the lie that home prices are stabilizing or even going up again. Credit, the way we should define it, consists of one market party lending out money to another because it is confident the money will be returned, along with a profit in the form of interest.

Under the present circumstances, no commercial lender will touch these home-buyers with a ten-foot pole, simply because they are not confident the loan will be repaid. Moreover, the securitization craze that characterized the start of this millenium is over. Mortgage backed securities are as popular as holes in the head. And even though home prices have fallen some 30%, there is no sign of a return of confidence in the market. Which means there are two options going forward towards a market equilibrium. You can either let prices come down to a level that both lenders and borrowers are comfortable with (traditional credit), or you can set up a gigantic system of government intervention (not traditional credit). The choice Washington has made is glaringly obvious. The taxpayer underwrites 95% of all new mortgages, while the Federal Reserve has bought up even more in mortgage-backed securities.

That choice is not hard to explain. It keeps up appearances. It keeps banks alive. It keeps people in their homes and out of bankruptcy. And most importantly, it keeps them believing in magic for a while longer. Come to think of it, that’s what makes The Road different: there’s no reason or space for pretending. The flipside is that the lift Washington’s choice provides to home prices is completely artificial, and temporary: when the support is withdrawn, prices must and will tumble, since they have been kept high by that support only. And when that tumble comes, your debts will have grown by a trillion here and a trillion there. So far, the artificial boost has cost roughly $1 trillion per month.

Credit, defined the way we used to define it, is gone. We throw TARP funds and FHA loans at the problem, and make people think they are the same sort of credit they have always known, that nothing has changed, just a minor bump in the road. But that same sort of credit will not return for a very long time, if ever. Both lenders and borrowers are profoundly broke, and they can neither lend nor borrow the way they used to. The system now runs on your money. Which you don’t have.

My friend perceives things as unfolding slowly, until he takes a better look. Many think that there is something greatly reassuring in losing ‘only’ 500.000 jobs per month, in a rising gold price, in a sheikh who claims Dubai is strong and persistent, and most of all in a rising stock market. But the stock market is not the real economy. And neither is it representative of that economy, in fact it’s probably less so now than at any point in the recent past. And it can turn in a second and on a dime.

But it still works. People claim there’s plenty credit still to be had, that the markets can keep on going up, that things seem to remain pretty much normal. Still, if the only “credit” you can get is the one that goes from your left pocket to your right one, and if unemployment numbers are 60% higher than they were a year ago, with no sign of abating, things are by no means pretty much normal, and it makes no difference if they look to be from where you happen to be sitting. 17.5% unemployment is an astounding number, says Howard Davidowitz. Amen.

I sent my friend, who’s an associate university professor, an email last night after I got home:

 

You can be impatient without being a [doom] cheerleader. It’s just a different sort of impatience. I have it too, it’s inevitable when you spend an abnormal amount of hours reading on it.

 

 

That’s why it’s important to ask yourself when you think it’s all going slow: really?

 

My friend sent a reply today:

 

True.

 

 

Things are not going slowly. It is a matter of perspective. My circumstances are simply better than many at present. That will change soon, with, for example, forced furloughs of public servants in Ontario, of which I am one.

 

Thanks for the wake-up.

He then finished with a quote from the book version of The Road, in what in the film is a conversation between Viggo Mortensen and Robert Duvall:

From among the many memorable scenes of The Road, the comments on “prepping” hit home with me:

 

They bivouacked in the woods much nearer to the road than he would have liked. He had to drag the cart while the boy steered from behind and they built a fire for the old man to warm himself though he didnt much like that either. They ate and the old man sat wrapped in his solitary quilt and gripped his spoon like a child. They had only two cups and he drank his coffee from the bowl he’d eaten from, his thumbs hooked over the rim. Sitting like a starved and threadbare buddha, staring into the coals.

 

 

You can’t go with us, you know, the man said.

 

He nodded.

How long have you been on the road?

I was always on the road.

You can’t stay in one place. How do you live?

I just keep going. I knew this was coming.

You knew it was coming?

Yeah. This or something like it. I always believed in it.

Did you try to get ready for it?

No. What would you do?

I don’t know.

People were always getting ready for tomorrow. I didn’t believe in that. Tomorrow wasn’t getting ready for them. It didn’t even know they were there.

I guess not.

Even if you knew what to do you wouldn’t know what to do. You wouldn’t know if you wanted to do it or not. Suppose you were the last one left? Suppose you did that to yourself?

Do you wish you would die?

No. But I might wish I had died. When you’re alive you’ve always got that ahead of you.

Or you might wish you’d never been born.

Well. Beggars cant be choosers.

You think that would be asking too much.

What’s done is done. Anyway, it’s foolish to ask for luxuries in times like these.

I guess so.

Nobody wants to be here and nobody wants to leave.

 

Ted Butler is widely regarded as the foremost authority on the silver market. In the article below, he ‎speculates about the possible closure of the paper market for silver futures and options trading. As Ted ‎says below, it is impossible to know the precise outcome of a default or closure of the COMEX, but ‎holders of paper long contracts in silver would likely be “royally screwed”. The only safe position to ‎have for such an outcome is to hold physical silver.‎

Extreme Speculation

By: Theodore Butler

(This article was released to subscribers on Nov. 17, 2009. For subscription information please go to www.butlerresearch.com) 

Recently, I have raised the possibility that silver trading might be terminated on the world’s largest silver exchange, the COMEX (The Commodity Exchange, Inc.), now owned by the CME Group, which in turn is the largest futures exchange in the world. I hope everyone realizes that this is an extreme speculation on my part, and that the likelihood of such an event must be considered remote. Still, I am somewhat haunted by this possibility and I would like to share the reasoning behind my concern. Even if my fears never come to fruition, I feel I would be doing a disservice to subscribers by not fully airing the subject. 

Any cessation of trading of COMEX silver would be a very big deal indeed. It would send shockwaves of unprecedented proportions throughout the silver world. It’s not hard to imagine shockwaves extending beyond silver. That’s because the COMEX is the most important pricing mechanism for silver. All silver pricing throughout the world emanates from the COMEX. In this day and age of instant electronic price and news dissemination, any interruption of trading on the COMEX would have immediate and profound implications.  

The COMEX has evolved into the dominant silver trading venue over the past half century and sits at the pinnacle of the silver trading world. Some would argue that trading in the OTC or LBMA markets are bigger, but my long time analysis suggests otherwise, particularly now that strict regulation appears probable in the OTC market.  Ask yourself this – if the COMEX did suddenly stop trading silver, where would most silver trading take place? I don’t have a good answer to that question even though I have thought on it long and hard. I do know that any COMEX silver trading halt would be a shock to the silver system. 

The main reason for my recurring thoughts that silver trading may be terminated on the COMEX someday is because that exchange is at the heart of the silver manipulation. If we are closer than ever to witnessing the end of the long-term silver manipulation, as I believe, it must mean an end the extreme concentration on the short side of COMEX silver futures. But the concentrated short position in COMEX silver futures is so extreme, that it is hard to imagine how it can be resolved in an orderly manner. The most recent data from the CFTC indicate that one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces. You have not seen anyone refute those findings, nor is it likely that you will. 

So extreme is JPMorgan’s silver short position that it cannot be closed out in an orderly fashion. How could such a large position be closed out quickly, or otherwise, without strongly disturbing the market? If it could be closed out, it is reasonable to assume it would have already been closed out or greatly reduced to avoid the allegations of manipulation it raises. It’s not like the banks are presently universally loved and admired. The intent of anti-concentration guidelines and surveillance is to prevent the precise monopoly that JPMorgan has amassed on the short side of COMEX silver. Having erred egregiously in allowing this concentrated short position to develop, the CFTC is stuck with coming up with a solution to disband it. There is no easy solution. 

Further, it is not just JPMorgan’s 200 million ounce COMEX silver short position that threatens the continued orderly functioning of COMEX silver trading. As extreme as JPMorgan’s position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity. This makes claims that the COMEX short position represents a legitimate hedge of mine production a lie. The total short position represents almost 100% of the total visible and recorded silver bullion in the world, and 50% of the total one billion ounces thought to exist. These are truly preposterous amounts. By comparison, the net total short position in COMEX gold futures, admittedly no slouch in the short category, represents a little over 2% of the gold bullion that exists (45 million oz total net COMEX short position versus 2 billion oz). When it comes to the amount of real material, or mine production, in the world backing up the COMEX silver short position, the word “inadequate” takes on new meaning. 

Because of the extreme mismatch between what is held short on the COMEX and what exists or could be produced to be potentially delivered against the short position, a very dangerous market situation exists. It is this dangerous situation that haunts me and causes me to contemplate a closing of the COMEX silver market. It has to do with what I see developing in the silver physical market and by putting myself in the other guy’s shoes. The other guy, in this case, is Gary Gensler, chairman of the CFTC. 

It seems to me that there may be real stress in the wholesale physical silver market. All the factors I look at, including flows into ETFs, the shorting of SLV, the decline in COMEX silver inventories, the strong retail and institutional investment demand in silver, the now growing world industrial demand, etc., suggest tightness and the potential for a silver shortage like never before. This, in essence, is the real silver story. In spite of a large and growing concentrated short position, the price of silver suggests that it is the manipulation that is under stress. At some point, a physical silver shortage will destroy any amount of paper short selling. We may be very close to that point.  

When the silver shortage hits, the price will explode. On this, there is no question. Industrial users, at the very first sign of delay in silver shipments, will immediately buy or try to buy more silver than they normally buy, in order to protect against future operation-interrupting delays. This is just human nature. The world has never experienced a true silver shortage ever, so the price impact is clearly unknown. I’ll try not to overstate how high I think the price will go in a true silver shortage and how quickly it will occur, so that I don’t sound too extreme. But the price move will give new meaning to “high” and “fast.”  

Please remember, I am only talking of the price impact of the industrial users scrambling to secure silver supplies for their operations. This has always been my “doomsday machine” future silver price event. I am not speaking of new investment demand or short covering.  Users, anxious to keep their assembly lines running and their workers employed will care less about price and more about availability and actual delivery. The users will buy with an urgency and reckless abandon rarely witnessed. That the price explosion caused by user buying will destroy the shorts is beyond doubt. So certain and devastating will be this destruction, that you must start asking questions as to what the regulatory reaction is likely to be. This is where you must try to put yourself in the other guy’s shoes. When the industrial silver shortage hits and prices explode, what would you do if you were Chairman Gensler? 

The question of what you would do if you were him is also a question of what you can do. Certainly, Chairman Gensler will not be able to secure adequate physical supplies to satisfy a world-wide silver user inventory buying panic. That price fire must burn itself out. But, it appears to me that he might be able to take some fuel away from the fire by trying to eliminate the additional potential panic buying of 500 million ounces worth of short covering that exists on the COMEX. A shut down of COMEX silver trading will eliminate any panic short covering. It will open up a Pandora’s Box of other consequences, no doubt, but it will eliminate panic futures short covering. This is not about choosing solutions from a long list of attractive alternatives. This is about choosing from a very short list of decidedly unattractive solutions. The CFTC certainly has the power to order such a market shut down.  

Please understand, I am not advocating or recommending such a COMEX silver shutdown. In fact, this possible event is something I have worked hard to cut off for 25 years. My background is in futures and it pains me to see the current extreme situation, despite all my best efforts to end the silver manipulation. The possibility that COMEX silver trading may be terminated at some point is the direct consequence of the long term manipulation. If the manipulation did not exist, the possibility that COMEX silver trading might be halted would not exist. But the silver manipulation is as real as rain and so is the possibility of a COMEX silver shutdown. What does this mean for you? 

First, any COMEX silver trading halt will cause the price of silver to explode, all things being equal. All things, most likely, will not be equal, as other events will be driving silver prices higher at that time. But the closing of COMEX silver trading will be a unique bullish factor on price. That’s because the principal mechanism of the silver manipulation, the unlimited short selling of paper futures contracts, will suddenly no longer exist. Silver prices will surge when the yoke of manipulative short selling is lifted. In addition, many long holders whose paper futures positions were eliminated will be forced to buy other forms of silver that would include real physical purchases, including ETFs. This will also exert a very bullish impact on price.  

I’ve been asked how such a potential COMEX silver shutdown might take place. I think the model would be patterned after the Maine Potato default of the mid-1970’s. All contracts were closed out and settled at an arbitrary price. Longs and shorts alike were credited or debited at that price, relative to their original purchase or sale price. The scary thing is that the mechanical aspect of such a shutdown is really quite a simple thing to accomplish. I would be very surprised if the regulators have not been discussing such a possible outcome. 

Those holding COMEX silver certificates stored in exchange-approved warehouses should not be affected. Those warehouse receipts are separate and distinct from futures trading. If anything, such receipts should grow in value, above and beyond the price increases in other forms of silver. I don’t see anything particularly troubling to holders of COMEX warehouse receipts or other forms of physical silver in the event of a closing of silver futures trading on the COMEX. True, you may not be able to tender those receipts against a futures contract, but there should be such high demand for those receipts, in the event of a COMEX shutdown, that a sale should be easy to arrange. 

The real losers in a COMEX silver trading halt would be the long holders. There is no nice way of putting it, so I won’t try – these holders will be royally screwed. How bad the screwing will be will depend upon what the arbitrary close-out price will be. Perhaps the price will be high enough so that it may not appear at first that the longs were cheated at all. But the real screwing will become obvious in short order, after any trading halt is enacted. As silver prices soar after a possible COMEX shutdown, closed-out longs will be deprived of profits that should have accrued to them. I guess there’s no way to get the paper shorts off the hook by not cheating the paper longs. 

What can the long COMEX silver futures holders do about the possibility that this extreme speculation of mine might come to pass? As always, common sense is the rule of the day. My speculation is so extreme that it is important to remember that it may never happen. I hope it doesn’t come to pass. But it wouldn’t hurt much if long COMEX holders took some precautions, particularly those whose silver holdings exclusively or predominantly consist of COMEX futures and options contracts. Take out a little insurance. Don’t have all your silver eggs in the COMEX basket. I know that the attraction to holding COMEX contracts is the extreme leverage they afford. As I said, that’s my background. You can’t get that leverage in holding pure physical; even though that’s the most secure way of participating in a silver price explosion. If leverage is your goal, maybe try some leverage with ETFs or mining shares, or options on either. Please understand where I’m coming from. I’m not telling anyone to immediately abandon all COMEX positions, just if you are very heavy there, try diversifying a bit. How bad would it be if you got shut out of the coming silver move due to an abrupt closing of silver trading on the COMEX? How bad would it be if I had these real fears and didn’t share them with you? 

Although it has long been a consistent theme of mine, the case for owning fully paid for physical silver has never been more compelling. Even if my fears of a COMEX silver shutdown never come to pass, I just “know” that the surest winners in the coming silver price explosion will be those who own real silver for which they paid cash on the barrel head. Sometimes it pays to keep it simple.  

Ted Butler

November 17, 2009 

 Bob Chapman of “The International Forecaster” reports that his source at the top of the banking ‎industry has told him that 2000+ banks are in imminent danger of collapse, the FDIC will be closed ‎or collapsed by Sep 2010 or year end and official devaluation will happen by the end of 2010. The ‎source has been queried about making room for a new currency.

The following information may be the most important we have ever published. One of our Intel ‎sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received ‎TARP funds have been informed by the Federal Reserve that they must further restrict any ‎commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which ‎is a compensating balance.
‎ 
The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by ‎June, which would collapse the economy, or face hyperinflation. This is why the Fed has ‎instructed banks to inform them when and how much of the TARP funds they can return. At best ‎they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.
‎ 
We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they ‎cannot risk allowing the undertow of deflation to take over the economy. The system cannot ‎stand such a withdrawal of funds. They also must depend on assistance from Congress in ‎supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such ‎funding would send the economy and the stock market into a tailspin. Even with such funding the ‎economy cannot expect any growth to speak of and at best a sideways movement for perhaps a ‎year. 
‎ 
We have been told that the FDIC not only is $8.2 billion in the hole, but they have secretly ‎borrowed an additional $80 billion from the Treasury. We have also been told that the FDIC is ‎lying about the banks in trouble. The number in eminent danger are not 552, but a massive 2,035. ‎The cost of bailing these banks out would be $800 billion to $1 trillion. That means 2,500 could ‎be closed in 2010. Now get this, the FDIC is going to be collapsed before the end of 2010, which ‎means no more deposit insurance. This follows the 9/18/09 end of government guarantees on ‎money market funds. Both will force deposits into US government bonds and agency bonds in an ‎attempt to save the system. 
‎ 
This will strip small and medium-sized banks and force them into shutting down or being ‎absorbed. This means you have to get your money out of banks, especially CDs. We repeat get ‎your cash values out of life insurance policies and annuities. They are invested 80% in stocks and ‎‎20% in bonds. Keep only enough money in banks for three months of operating expenses, six ‎months for businesses. Major and semi-major banks are being told to obtain secure storage for ‎new currency-dollars. They expect official devaluation by the end of the year.
‎ 
We do not know what the exchange rate will be, but as we have stated previously we expect ‎three old dollars to be traded for one new dollar. The alternative is gold and silver coins and ‎shares. For those with substantial sums that do not want to be in gold and silver related assets ‎completely you can use Canadian and Swiss Treasuries. If you need brokers for these ‎investments we can supply them.
‎ 
The Fed also expects a meltdown in the bond market, especially in municipals. Public services ‎will be cut drastically leading to increased crime and social problems, not to mention the ‎psychological trauma that our country will experience. Already 50% of homes in hard hit urban ‎areas are under water, nationwide more than 25%. That means you have to be out of bonds as ‎well, especially municipals.‎
 

China and the introduction of paper money

We were recently in Australia attending a conference hosted by the Gold ‎Standard Institute – a body which aims to educate on the need for “sound ‎money”.  Or rather an unadulterated gold standard.  Captain amongst the ‎speakers was Professor Antal Fekete, whose writings we have featured ‎previously.‎

But our award for the “most passionate performance” at the conference went ‎to Darryl Schoon.  Darryl, while being an American is of Chinese descent and ‎majored in East Asian political science, so is well versed in the history of the ‎region.  The following is (hopefully) a simple summary of his lecture which ‎covered the early days of paper money or fiat currency, which began in China, ‎and which quite appropriately may now be in the process of also being ‎terminated by China.  (Keep an eye out for more on this in a future article - ‎Professor Feketes 7 Point Manifesto on “What should China do?”)‎

And so onto our very brief history lesson and what it might teach us today…‎

Paper Money originally started in China as a means of exchange between ‎trading houses.  The trading houses noticed this means of exchange was ‎trusted and eventually its use spread through all of Chinese society.‎ 

However they printed more and more and so eventually (as has been ‎repeated many times since) they crossed the invisible line and inflation started ‎to appear.  This eventually led to the paper money system collapsing.‎

In the 13th century the Polo’s travelled to China and witnessed this paper ‎money in action.‎

On return from his travels, Marco Polo was captured in a war between Genoa ‎and Venice and imprisoned.  It as here he told the tales of his travels to his ‎cell mate who published stories of “burning rocks for heat” (coal) and of the ‎‎“great Kublai Khan” who took bark from trees and converted it to money by ‎writing on it.‎

The Khan was sharp enough to have a simple rule that saw his paper money ‎widely used - if you didn’t accept his “legal tender”, you were executed!‎
Meanwhile Polo noted that the Khans own treasury was full of gold and silver.  ‎‎(hhmmm – notice the interesting parallel to the monetary system of today, ‎where Central Banks hoard the gold and the people are required to use the ‎paper money – although thankfully you just get imprisoned and not beheaded ‎today!).‎

 

Anyway, Marco Polo was well trusted by the Khan who asked he become an ‎ambassador for him and to communicate with the pope.  Polo took this paper ‎money to the Pope who thought it was the work of the devil and burned it – ‎maybe we should do the same now!‎

Jumping forwards a couple of centuries and there were many episodes of ‎paper money before China eventually outlawed it in the 1600’s.‎

Meanwhile in the west in 1694 King William was heavily in debt from fighting ‎various wars (again notice any similarities with the present day???).  The ‎bank of England went to the King and had him agree to give them the ‎authority to issue the “coin of the realm” in exchange for unlimited borrowing ‎from them.  (Not coincidentally this is the same arrangement that central ‎banks have today with their respective governments.)‎

However unlike today, the paper money was issued alongside the gold and ‎silver coins.‎

The bankers had charged interest on lending other peoples coins, but then ‎they had the revelation that they could also do this with the paper which they ‎created out of nothing!  The perfect business model!‎

‎(As a side note, when USA’s President Roosevelt outlawed possession of ‎gold coins in the 1930’s it too was because of an economic crisis and ‎collusion between the powers – the government and the bankers.)‎

Anyway, this system worked so well, because it coincided with the industrial ‎revolution and huge expansion of British society.  ‎

In the 17th Century the British credit based system allowed them to raise an ‎army and conquer many lands.  So the expansion of debt was a success - the ‎British Empire rose on this tide of debt.‎

However they were halted in China and Russia where Marx’s ideas took hold ‎and economic, civil and financial powers were combined to turn back the ‎English.‎

Quite a few centuries have gone by, but there is a very peculiar symmetry in ‎play now.  It is now China and Russia who are embracing the free market and ‎‎“real money” and the west who is steadily turning to Statism and Socialism.‎ 

And while most of us westerners have successfully been brainwashed to steer ‎well clear of gold, the Chinese Government is actually encouraging its citizens ‎to put at least 5% of their savings into gold and silver.‎

So keep an eye on China – they invented paper money, and so therefore ‎know first hand the problems that accompany it only too well.  It could well be ‎China that eventually forces a return to a global gold monetary standard.‎

(For more detail on the monetary history of the last century and it’s implications for you today, get access to our Gold Investing eCourse here.)

Shadowstats John Williams: Hyperinflation will break in the next 5 years

Weekly Wanderings 10 December 2009

In this weeks musings…  

·         Meredith Whitney speaks

·         Hyperinflation, according to John Williams  

Meredith Whitney was the banking analyst who predicted the looming disaster in the banking system a couple of years ago.  

Now (care of CNBC in the US) she’s sounding a warning again…..

Government ‘Out of Bullets’; Consumers in Trouble: Whitney

By: Jeff Cox
CNBC.com

The government is running out of ways to help the economy as the US faces major issues regarding credit and employment ahead, banking analyst Meredith Whitney told CNBC.

cnbc.com Meredith Whitney

“I think they’re out of bullets,” Whitney said in an interview during which she reinforced remarks she made last month indicating she is strongly pessimistic about the prospects for recovery.

Primary among her concerns is the lack of credit access for consumers who she said are “getting kicked out of the financial system.” She said that will be the prevailing trend in 2010.

Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace. The Federal Reserve said Monday that consumer lending dropped 1.7 percent on an annualized basis in October, the ninth straight monthly decline.

With consumer spending making up about 70 percent of gross domestic product, the inability of even credit-worthy consumers being able to be able to borrow could put a severe crimp in future growth.

“What’s so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit,” Whitney said.

“You’re going to get a situation where you revert from a consumer standpoint,” she added, “where those that had bank accounts for the first time, credit cards for the first time, homes for the first time get kicked out of the system and then fall prey to real predatory lenders.”

The problems taken together also will pose difficulties for investors.

“I have 100 percent conviction that the consumer is not getting any better and there’s not more liquidity,” Whitney said. “So if everything touching the consumer is going to be represented in the S&P, then the S&P is going to be under pressure.”

The solution, she said, is for the government to take proactive steps that will give consumers more money to spend.

“I don’t think you can cut taxes enough to stimulate demand,” Whitney said. “For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it’s a real issue. You can’t get around it. This has never happened before in this country.”

Video above: Meredith Whitney, CEO of the Meredith Whitney Advisory Group, shares her insight on the financial sector and the economy.

 

Over at King World News, Eric interviews John Williams of Shadowstats.com. We have mentioned ‎John before in these pages - he does a great job of deconstructing the official US Government statistics,  ‎providing a much more accurate road map of the unemployment data, amongst many others.  We ‎summarize the contents of the interview below.‎

The financial crisis we have experienced over the last two years is but a precursor to a much more ‎
severe hyperinflationary Great Depression, with a consequent debasement in the value of the US dollar ‎and in fact a dislocation of the US financial system as a whole.‎

The average household has not been able to sustain its income with respect to the cost of living over ‎time. Using the Government’s own figures, the average household income today is down 10-15% from ‎the peak level in 1972.‎

This is a real economic problem because the economy is driven by consumer demand arising from ‎increasing purchasing power - hence the requirement for continual borrowing. ‎

John warned of a looming hyperinflation problem in 2005 -  to be told by Government officials that ‎this problem “was too far in the future to worry about”. However, the day of financial reckoning is now ‎arriving, or about to arrive.  ‎

Government finances are in much worse shape than is commonly realized. Right now, the US ‎Government has 75 trillion dollars NPV  (5 x GDP) of unfunded liabilities. There is * no way *  this ‎can be paid. The consequent hyperinflation crisis will break within the next 5 years, and possibly ‎within the next year.‎

The Federal Reserve is debasing the currency - printing money - without limit. This new money is not ‎showing up in general circulation because the banks are not lending – they are using the money to prop ‎up their own reserves and to play games with the Fed. ‎

Despite this, commodity prices tell us what is happening. It is not an accident that gold is now priced ‎at over $1100 per oz.‎

Up till now, the breakdown in the dollar has been orderly, but at some point the dam will break…‎

The steps you need to take are to acquire some physical gold and silver, and to diversify into currencies ‎outside the dollar. The most important point is to preserve the purchasing power of the wealth you have ‎‎– the investment opportunities afterwards will be extraordinary.‎

Over this period, owning gold and silver coins will be important, because they will be accepted without ‎the need for assaying. ‎

A hyperinflation would cause severe disruption in the food supply chain and in financial electronic ‎systems. Readers are advised to prepare as for a natural disaster – to have dried and canned food ‎supplies in storage, preferably enough for six months or longer.‎

A barter system will evolve as the dollar collapses. Make sure you have items such as miniature bottles ‎of spirits that you can swap for other items.‎

You can use physical gold or silver to maintain the purchasing power of the dollars you put into it. ‎This is a really important concept. Gold is not “worth $1130 dollars per ounce”; instead the dollar is ‎worth 1/1130 th of 1 ounce of gold.‎

The number of unemployed workers in the US, in the broadest sense, is currently running around 22% ‎‎- the greatest since World War 2.  It could rise to as much as 35%, to match the Great Depression.‎

One last point – in a hyperinflation, cash would become in very short supply. Hence the need to have a ‎supply of gold and silver coins, and bottles of Scotch.‎

 

NZ gold miner in joint venture talks with Chinese

Heritage Gold is in talks with potential joint venture partners in China to develop the historic Talisman mine. 

The NZX listed New Zealand gold miner has been granted a 25 year permit to mine in the hills of the Karangahake Gorge between Waihi and Paeroa, with potential to produce gold and silver worth 75 million a year.

Full NZ Herald article here.

U.S. Mint sells out of 1/10th ounce gold coins in one day

Further evidence of the increasing demand for gold comes by way of the U.S. Mint.  Just one day after releasing it’s new one tenth ounce gold coin they have sold out.  And the new half ounce and quarter ounce coins are now also extremely limted. 

Amazingly they sold 345,000 coins in one day!

This just a week after the Mint suspended sales of it’s one ounce American Gold Eagle coin as the supply had been depleted.

Full details can be found here.

Gold is not going up – paper money is going down

by Egon von Greyerz – Matterhorn Asset Management

This month we will discuss the illusion of gold going up. We will  examine the destiny of the dollar and why it will reach its intrinsic value of zero. We will also demonstrate why money printing will accelerate rapidly in the next 12-24 months.

Paper Money Collapsing against Gold

The problem with paper money is that governments can create unlimited amounts. This is what they have done throughout history and especially in the last 100 years and which has led to the total destruction of most currencies. Most people don’t even understand that their government makes their money worthless. Money printing gives them the illusion of being richer whilst all they have are pieces of paper with more zeros on them.  But there is one currency that governments can’t print which is gold. Gold has been real money for almost 5,000 years and it is the only currency that has survived throughout history. Gold can’t be printed and no government controls it. Therefore gold will, over time, always reveal governments’ fraudulent actions in creating money out of thin air. And this is what we are experiencing currently. Gold is not going up. Instead gold is doing what it has always done, namely maintaining its value and purchasing power.

What we are seeing currently is the total annihilation of paper money whether it is Dollars, Pounds or Euros etc. The chart below shows the US dollar against gold. In the last 10 years the dollar has declined by 79% against gold. Most currencies have declined by similar percentages. So it is an illusion to believe that gold is going up when it is the value of paper money that is going down. All gold is doing is to reflect the virtually limitless printing of paper currencies. Since gold can’t be printed, it is the only honest currency that exists. This is why many governments don’t like gold increasing in value against their paper money since it exposes their total incompetence in running their country’s economy.

The chart above shows how the purchasing power of the dollar has declined in real money – gold – in the last 10 years. And if we take the period from 1909 to 2009 it shows the total destruction of paper money. In 1909, $1,000 bought 50 ounces of gold. Today it buys 0.83 ounces. This means that in the last 100 years the dollar has declined by 98.3% against gold. So in real money terms the dollar is now only worth 1.7% of what it was worth a century ago. Thus, the US government (as well as most other governments) has totally destroyed the value of real money by issuing unlimited amounts of paper money and in the next few years they will also kill off the remaining 1.7% of value to make the paper dollar reach its intrinsic value of zero. The chart below reflects various currencies fall against the dollar since from 1900 to 2004.

To talk about gold being over-extended at these levels is in our view absolute nonsense. As we will discuss later, money printing can only accelerate in the coming months and years. And when worthless pieces of paper are printed, gold will always reveal such a fraud by maintaining its value against the ever increasing supply of paper called “money”.

The Real Move in Gold is Still to Come

In our view we have not seen the real move in gold yet although we have gone from $250 to $1,226. The reasons are many:

• Money printing will accelerate as government deficits increase and problems in the financial system re-emerge.
• There is a high risk of default of major financial institutions or sovereign states with unpredictable consequences for the world economy.
• The fourfold increase in gold since 1999 has taken place without the participation of most investors. It has so far been a stealth market. But this will soon change and there is likely to be a major “gold rush” in the next couple of years.
• The average fund manager, pension fund manager, asset manager or individual investor has virtually no exposure to gold today but in the next couple of years they will all invest in gold.
• The gold market will soon become primarily a physical market because no one will trust paper gold or quasi physical gold such as Comex, ETF’s or unallocated gold. Nor will the market trust governments many of which might have lent out most of their gold. The last audit of the gold in Fort Knox was in 1953!
• Gold production is going down every year and is currently only $90 billion p.a. There will not be sufficient physical gold at current prices to satisfy increased demand.
• There is only $900 billion of physical gold held privately for investment purposes. This is circa 0.7% of world financial assets. A mere doubling of the allocation to gold, which is likely, would make the gold price surge. See chart below.
• Central banks are now net buyers of gold. Many countries which are underweight in gold such as China, India, Russia, Japan, Singapore Brazil, Korea and many more are major buyers of gold. This means that gold will be underwritten by several sovereign countries for many years to come. Central banks are not fickle investors and a policy decision to increase their gold holdings is unlikely to be reversed for a very long time.
• Although difficult to predict, the geopolitical risk in the next few years is substantial. Pakistan, Iran, Afghanistan, Al Qaeda, Middle East, Israel, acts of terrorism in the West etc. The preceding list is potentially explosive and the likelihood that something will happen in one these areas is very high. This would have a major effect on the gold price.

Gold has outperformed most stockmarkets

In the last ten years the Dow Jones has declined against gold by 80%.  The graph below shows gold expressed in local currencies against the Nikkei, Dax, FTSE and S&P in the last 10 years (Nov 1999 – Nov 2009). For example gold in yen has appreciated by 233% whilst the Nikkei has fallen by 46%. The graph shows how badly most stockmarkets have performed measured in “real money” i.e. gold.

The Precious Metals market is minuscule

The graph below shows how small the gold and silver industries and markets are in relation to major US corporations and to total world financial assets. The market capitalisation of the silver industry is only $ 9 billion and of the gold industry $ 200 B whilst Microsoft is valued at $250 B and Exxon 350 B.

Both the silver and gold industries as well as the physical markets are so small that any increase in demand is likely to drive prices very substantially higher.

 

Quantitative Incr-easing

Governments and especially the US are making noises that money printing will soon cease. This statement is as credible as their statement about “a strong dollar policy”. Let us be very clear; just as there is no chance whatsoever that they actually want a stronger dollar or that the dollar can go up. There is even less of a chance that  money printing or Quantitative Easing will be withdrawn. Instead we will have what we call QI – Quantitative Incr-easing. The Fed will in the next couple of years do what Helicopter Bernanke always promised; i.e. print unlimited amounts of worthless paper which will complete the move of the dollar to its intrinsic value of zero.  This will totally destroy the US economy, thereby creating a frightening political and social climate.

The reasons for an acceleration of money printing are manifold:

1. Unemployment increasing

US unemployment adjusted for short- and long-term discouraged workers is now 22% as shown in the chart below. This is an absolute disaster and will have very severe ramifications for the US economy. And it is likely to get a lot worse. During the 1930s depression non-farm unemployment reached 35%. Since the real problems in the economy have not started we would expect the US unemployment to reach at least 35% in the next 2-3 years and possibly a lot higher. With over 30 million people unemployed, this will put enormous strain on the US economy with a major reduction in GDP and tax revenues and a major increase in social payments. A country that is already bankrupt today is unlikely to cope with this additional burden. Currently 36 million Americans receive food stamps, an increase of almost 3 million in the last 6 months.

2. Financial system still very vulnerable

The $12 trillion which the US government has injected to stave off an implosion of the financial system and economy has only benefited the financial sector. Banks that have received these funds have not lent them on to the real economy.

All they have done is to prop up their balance sheets and pay out record bonuses. But even with this massive injection of funds into the banking system virtually all banks are still bankrupt if their assets are taken at market value:

• With the blessing of the government, banks have been allowed to value their toxic assets at totally phoney amounts. Instead of valuing these assets at market value they can be valued at expected maturity value which of course banks assume is 100%. This is just another fraudulent collusion between government and banks.
• Mortgage loans are deteriorating at a rapid rate. In October 2009 another 330,000 properties went into foreclosure. There are 7 million US homes waiting to be repossessed. Resets of interest rates on Option ARM and ALT A mortgages in 2011-12 will lead to a massive increase in foreclosures and mortgage lender losses.
• Commercial property values are declining fast and vacancy rates and defaults are surging. Values have declined by 35-50% but banks are so far not recognising the full reduction in values. For smaller banks, which make up 90% all US banks, 74% of loans are in commercial real estate. There is $1.4 trillion to be refinanced in the next four years much of which is property which is in negative equity or empty. It will be virtually impossible to refinance this amount.
• More derivatives are being issued by the banks. The top four US banks now have $200 trillion outstanding. A big percentage of this could not be sold at anywhere near market value.
• Over 130 US banks have failed so far in 2009. Values realised when the assets are sold are substantially below the stated values, making a mockery of the current valuation rules. Not to value at market is a crime and against all sound accounting principles. But this is of course done with the total blessing of the government since, if assets were valued at market, there would be no banking system.

3. Government Deficits will escalate

The increase in unemployment and the continued problems in the financial system are two of the major contributing factors that will make government deficits surge. But there are many other problem areas that will necessitate acceleration in money printing:

• Tax revenues are falling rapidly
• Many states in the US are already bankrupt and most others will follow.
• Cash for clunkers and tax credits to new housing buyers are just two of many schemes that the government will launch to support failing industries.
• Pension fund deficits will escalate rapidly and the government will need to subsidise pensioners.
• Insurance companies will fail and the government will need to step in.

The list of areas which will need government support is endless and the US government will  inevitably print money to “save” the economy.

Zero percent interest rates and unlimited money-printing = Lunacy

To artificially set interest rates at zero and to print whatever money is needed goes against every single principle of sound money and a sound economy. Interest should be set by the market in order not to violate the laws of supply and demand. And money printing should be totally illegal.  So why is it done? For governments to stay in power and bankers to prosper! Nobody else is prospering. Normal people are being conned into taking enormous debts that they will never be able to repay. And the value of their paper money is being totally destroyed as we have demonstrated above.

We have in the last few years made clear to our investors and readers that there will be very serious consequences arising from the actions of the government:

• Government deficit will surge. The current borrowings of $12 trillion are likely to increase to over $30 trillion as we have discussed in previous reports. Interest rates could then be 20% or more and the US government would have absolutely no possibility to finance the interest on this debt.
• The dollar will collapse. It is only due to the fact the dollar is the reserve currency of the world that the US has been able to dupe the rest of the world into accepting its worthless currency and financing its enormous debts. But this will not last much longer.
• There will be hyperinflation. A deflationary implosion of credit and assets financed by a credit bubble is the necessary precondition to hyperinflation. In order to counteract these deflationary factors, the government will be printing unlimited amounts of money. It is the fall of the currency that causes hyperinflation and the US will be no exception. The fall of the dollar will lead to a hyperinflationary depression in the US.
• There will be major social and political consequences. The economic devastation caused by the mismanagement of the economy will not only create poverty and famine but also social unrest. There will be major changes in the political system and leadership.

Protection

This report has mainly discussed the United States since what happens there has major consequences for the rest of the world. But what is likely to happen in the US is just as likely to happen in the UK and many other countries.

Many investors now feel that the worst is over with stockmarkets recovering. In our January 2009 Newsletter we forecast that the stockmarket could have a 50% recovery. We have now had that recovery, mainly fuelled by massive liquidity injection by the government and cost savings in corporations. In our view the resumption of the downtrend could start at any time.

It is not our purpose to frighten investors or to be sensational in our views and reports. Our purpose is to warn investors of the major dangers which make asset protection absolutely vital for financial survival in the next few years.

“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS THE RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION OR LATER AS A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.”

Ludwig von Mises – Austrian Economist (1881- 1973)

7th December

Egon von Greyerz
matterhornassetmanagement.com
goldswitzerland.com

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