You may or may not have heard the potentially major news report that Iran is discussing with India the possibility of transacting oil purchases in gold rather than in US dollars.  It hasn’t been widely reported.  We first noticed it on debka.com, since then it has also been reported on RT.   In the last few days there have been reports that India may settle payment in Rupees. These measures are said to be in response to US led sanctions against Iran.

The following article gives some history into how the petrodollar system came about and why the US has and will continue to be so keen to protect it.   It also draws some conclusions on the USA’s rationale for increasing the pressure on Iran recently.  We note that although not mentioned in this article, it has been theorised that last years attack on the Gaddafi regime may have been in response to the Libyan leader’s plans to launch a unified African gold dinar currency.  This was to replace the US dollar as accepted payment for Libyan oil.

So by the time you’ve read the following you may quite likely determine that there is a trend developing in which of these “rogue nations” the US chooses to attack and that it is the form of payment that is key not necessarily the oil itself…

By Marin Katusa, Casey Research

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran’s oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.

But that line doesn’t make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.

The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar’s value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.

We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. That is not the picture of a world superpower worthy of the privileges gained from having its currency back global trade. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. A major portion of the dollar’s valuation stems from its lock on the oil industry – if that monopoly fades, so too will the value of the dollar. Such a major transition in global fiat currency relationships will bode well for some currencies and not so well for others, and the outcomes will be challenging to predict. But there is one outcome that we foresee with certainty: Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

The Petrodollar System

To explain this situation properly, we have to start in 1973. That’s when President Nixon asked King Faisal of Saudi Arabia to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi Arabian oil fields from the Soviet Union and other interested nations, such as Iran and Iraq. It was the start of something great for the US, even if the outcome was as artificial as the US real-estate bubble and yet constitutes the foundation for the valuation of the US dollar.

By 1975, all of the members of OPEC agreed to sell their oil only in US dollars. Every oil-importing nation in the world started saving its surplus in US dollars so as to be able to buy oil; with such high demand for dollars the currency strengthened. On top of that, many oil-exporting nations like Saudi Arabia spent their US dollar surpluses on Treasury securities, providing a new, deep pool of lenders to support US government spending.

The “petrodollar” system was a brilliant political and economic move. It forced the world’s oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world’s oil for free, since oil’s value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won’t need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.

So here’s an interesting thought experiment. Everybody says the US goes to war to protect its oil supplies, but doesn’t it really go to war to ensure the continuation of the petrodollar system?

The Iraq war provides a good example. Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq’s oil for food in euros, not dollars. In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela. In April 2002, Iranian OPEC representative Javad Yarjani was invited to Spain by the EU to deliver a detailed analysis of how OPEC might at some point sell its oil to the EU for euros, not dollars.

This movement, founded in Iraq, was starting to threaten the dominance of the US dollar as the global reserve currency and petro currency. In March 2003, the US invaded Iraq, ending the oil-for-food program and its euro payment program.

There are many other historic examples of the US stepping in to halt a movement away from the petrodollar system, often in covert ways. In February 2011, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), called for a new world currency to challenge the dominance of the US dollar. Three months later a maid at the Sofitel New York Hotel alleged that Strauss-Kahn sexually assaulted her. Strauss-Kahn was forced out of his role at the IMF within weeks; he has since been cleared of any wrongdoing.

War and insidious interventions of this sort may be costly, but the costs of not protecting the petrodollar system would be far higher. If euros, yen, renminbi, rubles, or for that matter straight gold, were generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless. As the rest of the world realizes that there are other options besides the US dollar for global transactions, the US is facing a very significant – and very messy – transition in the global oil machine.

The Iranian Dilemma

Iran may be isolated from the United States and Western Europe, but Tehran still has some pretty staunch allies. Iran and Venezuela are advancing $4 billion worth of joint projects, including a bank. India has pledged to continue buying Iranian oil because Tehran has been a great business partner for New Delhi, which struggles to make its payments. Greece opposed the EU sanctions because Iran was one of very few suppliers that had been letting the bankrupt Greeks buy oil on credit. South Korea and Japan are pleading for exemptions from the coming embargoes because they rely on Iranian oil. Economic ties between Russia and Iran are getting stronger every year.

Then there’s China. Iran’s energy resources are a matter of national security for China, as Iran already supplies no less than 15% of China’s oil and natural gas. That makes Iran more important to China than Saudi Arabia is to the United States. Don’t expect China to heed the US and EU sanctions much – China will find a way around the sanctions in order to protect two-way trade between the nations, which currently stands at $30 billion and is expected to hit $50 billion in 2015. In fact, China will probably gain from the US and EU sanctions on Iran, as it will be able to buy oil and gas from Iran at depressed prices.

So Iran will continue to have friends, and those friends will continue to buy its oil. More importantly, you can bet they won’t be paying for that oil with US dollars. Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold, supported by a few rupees and some yen. Iran is already dumping the dollar in its trade with Russia in favor of rials and rubles. India is already using the yuan with China; China and Russia have been trading in rubles and yuan for more than a year; Japan and China are moving towards transactions in yen and yuan.

And all those energy trades between Iran and China? That will be settled in gold, yuan, and rial. With the Europeans out of the mix, in short order none of Iran’s 2.4 million barrels of oil a day will be traded in petrodollars.

With all this knowledge in hand, it starts to seem pretty reasonable that the real reason tensions are mounting in the Persian Gulf is because the United States is desperate to torpedo this movement away from petrodollars. The shift is being spearheaded by Iran and backed by India, China, and Russia. That is undoubtedly enough to make Washington anxious enough to seek out an excuse to topple the regime in Iran.

Speaking of that search for an excuse, this is interesting. A team of International Atomic Energy Agency (IAEA) inspectors just visited Iran. The IAEA is supervising all things nuclear in Iran, and it was an IAEA report in November warning that the country was progressing in its ability to make weapons that sparked this latest round of international condemnation against the supposedly near-nuclear state. But after their latest visit, the IAEA’s inspectors reported no signs of bomb making. Oh, and if keeping the world safe from rogue states with nuclear capabilities were the sole motive, why have North Korea and Pakistan been given a pass?

There is another consideration to keep in mind, one that is very important when it comes to making some investment decisions based on this situation: Russia, India, and China – three members of the rising economic powerhouse group known as the BRICs (which also includes Brazil) – are allied with Iran and are major gold producers. If petrodollars go out of vogue and trading in other currencies gets too complicated, they will tap their gold storehouses to keep the crude flowing. Gold always has and always will be the fallback currency and, as mentioned before, when currency relationships start to change and valuations become hard to predict, trading in gold is a tried and true failsafe.

2012 might end up being most famous as the year in which the world defected from the US dollar as the global currency of choice. Imagine the rest of the world doing the math and, little by little, beginning to do business in their own currencies and investing ever less of their surpluses in US Treasuries. It constitutes nothing less than a slow but sure decimation of the dollar.

That may not be a bad thing for the United States. The country’s gargantuan debts can never be repaid as long as the dollar maintains anything close to its current valuation. Given the state of the country, all that’s really left supporting the value in the dollar is its global reserve currency status. If that goes and the dollar slides, maybe the US will be able to repay its debts and start fresh. That new start would come without the privileges and ingrained subsidies to which Americans are so accustomed, but it’s amazing that the petrodollar system has lasted this long. It was only a matter of time before something would break it down.

Finally, the big question: How can one profit from this evolving situation? Playing with currencies is always very risky and, with the global game set to shift to significantly, it would require a lot of analysis and a fair bit of luck. The much more reliable way to play the game is through gold. Gold is the only currency backed by a physical commodity; and it is always where investors hide from a currency storm. The basic conclusion is that a slow demise of the petrodollar system is bullish for gold and very bearish for the US dollar.

[Smart investors realize oil, like gold, is destined to rise dramatically and that investing in the right energy companies now will be like getting into the yellow metal 10 years ago.]

Following on from last weeks article looking at previous corrections in gold and the time it took to make new highs, we’ve also done the same thing with this new article from Casey Research.

We’ve looked at 3 major corrections in New Zealand dollar priced silver since 2005, comparing how deep the corrections have been and how many weeks it then took to break the previous highs.

So have a look at the chart below and compare it to the numbers for corrections in US dollar terms in the article below.

The first thing we can see is that the 3 corrections in New Zealand dollars didn’t all appear at exactly the same time as they did in US dollar priced silver.  However the depth of the corrections are quite similar.  Although the deepest correction in NZ dollars at 45.8% was not as steep as the US dollar correction of 57.6%.  Also not dissimilar to the USD chart is the fact that silver in NZ dollars can also take some time to work it’s way back to break previous highs after a steep correction.  The 2006  correction effectively went sideways for a long while, taking 94 weeks to reach a new high.

The current correction (and we believe it is still a correction, not an end of the precious metals bull market), at 45.4% is basically equal to the 2008 correction, so it will be interesting to see whether it takes a similar period of time (49 weeks) to reach a new high, or some time longer.  At todays price of $40.29NZ it seems to have bounced nicely off the low of $34.23 reached over the holiday break.

Anyway, read on for sound sound reasoning on silver…

By Andrey Dashkov, Casey Research

In last week’s Metals, Mining, and Money from Casey Research, Jeff Clark estimated that given the magnitude of the correction that started last September, it may take until May 2012 for gold to reach a new high. Let’s take a look at how long it may take for silver to rebound.

It’s a commonly known fact that silver is more volatile than gold. Already in this decade, silver has risen by a factor of 12 from its ten-year low ($48.70 vs. $4.07), while gold has seen about a sevenfold climb ($255.95 vs. $1,895).

This volatility – as you’ll see in a minute – holds for corrections as well. On average, silver’s retreats have been deeper and longer than gold’s. The three big gold corrections we looked at last week averaged 22.8%. Take a look at the three biggest for silver, along with how long it’s taken to recover and establish new highs.

(Click on image to enlarge)

The three biggest silver corrections in the current bull market average to 42.1%.

Our recent correction is the second biggest on record since 2001, but what really makes it stand out is the duration. The 2004 and 2006 declines took only five and four weeks respectively to reach their low points. And it was 31 weeks after the crash of 2008 that silver bottomed. Our current decline, measured from the peak reached on April 28, 2011 to its December 29, 2011 low, spans 35 weeks… quite the determined downtrend.

It also takes silver longer to recover than gold: gold’s three biggest corrections required an average of 57 weeks and 6 days to regain their old highs, while it’s taken silver’s three biggest falls an average of 98 weeks and 4 days to catch up.

So how long will it take to recover from the 2011 slump? We don’t know the future, of course, but the current correction is close to the average of the three in the chart, so let’s apply the average recovery time to our current situation. The average 42.1% correction took 98 weeks and 4 days to recover; using the same ratio, a 46.3% correction would take 108 weeks and 3 days. Counting from the previous peak of April 28, 2011, we wouldn’t break the $48.70 high until May 26, 2013 (based on London PM Fix prices).

It shouldn’t come as a surprise that silver will take longer to return to its old high than what we found with gold in last week’s article. Why? Half of silver’s use is industrial, so a weak economy can drag down its demand. We certainly saw that in 2008.

And an exact date is pure conjecture, of course, and ignores fundamental factors that directly influence the price. 2011 is not 2008. In fact, we’ve already seen an interesting shift in investment activity in both gold and silver markets. The Silver Institute pointed out in a recent market report that “investor activity” was the biggest contributing factor to both last April’s rally as well as September’s selloff. Meanwhile, demand for physical metal has not only held firm but was projected by GFMS to reach a new record high in 2011.

Investment demand is rooted in the metal’s monetary characteristics. It’s not a stretch to say that we expect silver to regain its currency appeal soon, given the amount of worldwide fiat currency destruction. This will be perhaps the strongest catalyst for prices going forward. We wouldn’t want to be without any silver.

If there’s anything that sticks out from this bird’s-eye view of the past ten years of data, it’s that corrections are normal. And just as obvious is the fact that corrections end.

As with gold, the silver bull market is far from over, regardless of any weakness we may see in the near term. Don’t be the impatient investor who gives up too early. And trying to time the market for a short-term profit shouldn’t be the strategy in the midst of a long-term bull market. Instead, keep silver’s fundamentals in mind: its industrial uses are growing and, like gold, silver is money.

That said, we believe that the window for buying silver at $30 won’t be open for too long. The profit you someday realize from silver will be made buying now, when the price is low.

[Precious metals and precious metal stocks can be a solid way to store wealth, but only if you invest wisely. Don't let yourself be robbed.]

- Gold Confiscation – Could it happen in NZ?

- China’s gold imports from Hong Kong surge

- Big buyer in Hong Kong

- India back buying too

- Chart of the week

First up our feature article this week is in response to a reader question…

Gold Confiscation – Could it happen In New Zealand? We discuss the history of confiscation and then our thoughts on the likelihood of it happening in NZ and what options there may be to consider.  As usual links to all 3 of this weeks articles are at the end of this email.

As we mentioned last week, Obama has now officially asked the US Congress to raise the USA debt ceiling by $1.2 Trillion (or as we read somewhere a more appropriate term would be “debt target” since it seems the aim is to breach it!).

Seems it is a formality and as expected it has had very little mention in the mainstream.

China’s gold imports from Hong Kong Surge

But the really big news this week we think was the report that China’s gold imports from Hong Kong have surged to their highest ever level.

“Mainland China’s imports from Hong Kong surged to 102,779kg/oz from 86,299kg/oz in October. This is a 20% increase from the already high number seen in October and a 483% y/y increase.”

And this Reuters chart shows visually this staggering rise over the past year…

Along  with  Chinese consumers and investors buying gold in response to rising inflation and falling share and property markets, the report speculates that both Chinese commercial banks and the Peoples Bank of China (Chinese Central Bank) were likely buyers in this period.

Another telling statistic was that China also recently passed India to be the largest market for gold jewellery.

But what is also very significant about this data is the fact that it is illegal to export gold from China.  So if they  are importing large amounts it shows that gold bullion is in strong hands in China.

Big buyer in Hong Kong

As anecdotal evidence of this huge buying in the East, last night we were reading one of our favourite investment newsletters we subscribe to, The Weber Global Opportunities Report.  One of Mr Weber’s subscribers from Hong Kong had written in to report he had just been in to pick up an order for gold and silver.  The person in the metals shop told him he was lucky to have bought when he did because a day later a customer had come in and bought their entire inventory of large gold and silver products.  The dealer said the man had spent 8 figures (Hong Kong Dollars) which in US dollar terms would be somewhere between 1 and 10 million dollars!  The dealer would have no more metal until February!

So it would seem that the “strong hands” are replacing the late comers at the current prices in gold and silver.

Indians back buying too

While China may have taken over India in the Jewellery buying department, India remains a big player in the global gold market.   And in one of this weeks articles (Why has gold been down?), we briefly mention that Indian buyers are returning to the gold markets too.  The Indians and Chinese are usually the more astute buyers preferring to buy generally on price dips rather than close to highs.  So more proof strong hands coming in to the market buying when there is more value.

Chart of the week

Also from the above mentioned article is the following “chart of the week” which speaks for itself we’d say (the green writing on the chart also helps!)

If you agree that Gold may have recently found a bottom and so think now’s a good time to buy then give us a call for a quote…

0800 888 GOLD ( 0800 888 465 )

orders@goldsurvivalguide.co.nz

If you’re a first time buyer we’re always happy to answer any questions you may have (actually we’ll even answer you questions if you’re not a first time buyer for that matter!).

Have a golden week!

This weeks articles…

Was 2011 a Dud or a Springboard for Gold?

2012-01-10 03:27:40-05

We’ve just completed our own 2011 review of gold and silver in NZ dollar terms.  In the following article Jeff Clark shows us that surprisingly US treasuries were the best performing sector of 2011.  So is this the place for our money in 2012 or does gold still look strong from a fundamental point of [...]  read more…

Why Has Gold Been Down?

2012-01-12 19:39:04-05
Outlined in this article are some of the reason as to why gold has been falling in recent months.  (On top of these someone a bit closer to home, Bron Suchecki of the Perth Mint, has outlined how Indian demand has been a big factor too.) So, has the bull market in gold finished?  Well [...]  read more…

Gold Confiscation – Could it happen in New Zealand?

2012-01-16 23:50:45-05
We recently received a question from reader J.M… “I just wanted to know if you had any info on if the NZ Government has the ability to ‘confiscate’ investors gold & silver. I have read some articles about this happening in the USA in the thirties and wonder if our govt. has the power/laws to [...]  read more…

Here’s some great stats on how long it has taken gold to reach new highs in each of the 3 previous large corrections in the current gold bull market of the past 11 years.  While the below article is based upon the US dollar price of gold, it can give an indication of what to expect.

However we thought it was useful to look at the largest correction in the New Zealand dollar price of gold as a form of comparison.  Since we don’t have the manpower of Casey Research we haven’t gone back over all corrections and calculated the numbers down to days and decimal points but it is still a useful comparison we think.  (You might want to read the rest of the article first and then come back up to our NZ dollar gold price comparison for it to make the most sense.)

As you can see from the chart above, the biggest fall so far in New Zealand dollar terms for gold was from late February 2009 (NZ$1975) through to late August 2009 NZ$1375.  In this time gold in NZD dropped approximately 30%.

It took 106 weeks to reach the old high again, but a total of 128 weeks to stay above the old high of $1975 (until 8 August 2011).

So that’s significantly longer than the USD corrections shown below.

An interestingly side note from the chart is that the old high of $1975 now seems to have become, in technical speak, “support”.  The price of gold in NZD has bounced up from around this $1975 level twice since breaking through it.

So this really puts the current fall into perspective.  From the intraday high of $2358 on 6 September 2011 to the recent low of $1995 on 29 December 2011, we have only fallen 15%.  We’d be surprised if it took anywhere near 106 weeks to reach this high again (but who knows?).  Food for thought anyway.  Read on to see the size of past corrections in US dollar terms.  Then leave us a comment at the end of the article with your guess as to when a new high will be reached (if you think it will!)…

By Jeff Clark, Casey Research

Some investors are frustrated and a few are worried that gold seems stuck in a rut. This stall in price has happened before, of course, but since 2001 it’s always eventually powered to a new high. Unless one thinks the gold bull market is over, it’s natural to wonder how long might we have to wait before seeing another new high.

Absent some sort of global shock that sparks another rush into gold (easily possible in today’s climate), I think the answer may lie in examining the size and length of past corrections and how long it took gold to reach new highs afterward.

It makes sense that big corrections would take longer to reach new highs than small ones, but I wanted to confirm that assumption with the data. I also wanted to determine if there were any patterns in past recoveries that would give us some clues that we can apply to today.

Gold set a record on September 5 at $1,895 an ounce (London PM Fix) and to date has fallen as low as $1,531 (December 29), a decline of 19.2%. In order to determine how long it might take to breach $1,895 again, I measured how long it took new highs to be mounted after big corrections in the past.

The following chart details three large corrections since 2001, and calculates how many weeks it took the gold price to a) breach the old high, and b) stay above that level.

(Click on image to enlarge)

As you can see, it took a significant amount of time for gold to forge new highs after big selloffs. And yes, the bigger the correction, the longer it took.

In 2006, after a total fall of 22.6%, it took a year and four months for gold to surpass its old high. After the 2008 meltdown, it was a year and six months later before gold hit a new record.

Our recent correction more closely resembles the one in 2003. After a 16.2% drop, gold matched the old high seven months later. It took another two months to stay above it.

So when do we reach a new high in the gold price?

Let’s apply the same ratio from the 2003 correction and recovery: If it took 29 weeks and four days to reach a new high after a 16.2% correction, a 19.2% pullback would take 35 weeks and 0 days. That works out to Monday, May 7, 2012.

An exact date is pure conjecture, of course. On one hand, gold could drop below the $1,531 low if the need for cash and liquidity forces large investors to resume selling. On the other hand, Europe and/or the US could resume money printing on a large scale and send gold soaring overnight. The point of the data is that it signals we shouldn’t be too surprised if we don’t hit $1,900 for another four months yet. And if it takes another two months or so to stay above it.

Think that’s too long? There are some important reasons to not let it discourage you…

Once gold breaches its old high, you’ll probably never be able to buy it at current prices again.

That’s a rather obvious statement, but let it sink in. Buying now at $1,600 and then watching the price fall to, say, $1,500, wouldn’t be fun – but it’ll probably hit $2,000 or higher before the year’s over, never to visit the $1,600s again this cycle. If that turns out to be correct, the next four months will be the very last time you can buy at these levels. You’ll have to pay a higher price from then on.

Look at it this way: If the “rebound ratio” is similar to the one in 2003, you have four months and counting to buy whatever gold you want before it’s no longer on sale. It’s entirely possible that by this time next year you will never again be able to buy gold for less than $2,000 an ounce – unless maybe it’s in “new dollars” or some other currency that circulates with fewer zeros on the notes.

The data can also help you ignore the noise about gold’s bull market being over and other nonsense spewed from mainstream media types. If gold doesn’t hit $1,900 until May, you’ll know this is simply normal price behavior and that they’re overlooking basic patterns in the data. And when September rolls around – seasonally the strongest month of the year for gold – and the price is climbing relentlessly and they’re caught off guard by it, you’ll already be positioned.

Regardless of the date, we’re confident that a new high in the gold price will come at some point, because many major currencies are unsound and overburdened with debt – and they’re all fiat and subject to government tinkering and mismanagement. Indeed, the ultimate high could be frighteningly higher than current levels. As such, we suggest taking advantage of prices that won’t be available indefinitely.

After all, you don’t want to be left without enough of nature’s cure for man’s monetary ills.

[Traditional savings accounts simply do not cut it in today's economic environment – government-promoted robbery means they often lose money overall. Learn how you can protect your assets –and even get ahead.]

“I just wanted to know if you had any info on if the NZ Government has the ability to ‘confiscate’ investors gold & silver. I have read some articles about this happening in the USA in the thirties and wonder if our govt. has the power/laws to do so?”

Gold confiscation: a (very) short history lesson

Firstly, a little background in case you didn’t know.

What J.M. is referring to above is the 1933 Executive Order (pictured to the right) issued by U.S. President Franklin D Roosevelt (FDR), which effectively outlawed the ownership of gold bullion for US citizens.  They were required to turn any gold bullion and coins (collectible coins were excluded) into the Federal Reserve under penalty of, what was for the times, a massive $10,000 fine or 10 years imprisonment.

The effect of this law change was it allowed the US government to devalue the US dollar over the next few months against gold, having increased the US Treasuries gold hoard.  The idea was basically to force people into spending their paper money and thus end the depression.  It just happened to be at the expense of the citizenry and as a result of theft but hey, government will be government.

Here is the full wording of the order including what was excluded… http://www.the-privateer.com/1933-gold-confiscation.html

There’s plenty of information on this across the “interweb”.  If you want to learn more just Google “gold confiscation”.  Also James Rickards new book Currency Wars is perhaps one of the best summaries of this period and is highly recommended as a history lesson.

So where does New Zealand stand on Gold confiscation?

Firstly there was no gold confiscation in New Zealand at the time of FDR’s Executive Order in 1933.  Why was this?

Well, Britain left the gold standard in 1931.  New Zealand (along with Australia) had, prior to 1931, already left the Gold Standard, so it could be argued that there was no need for the government to confiscate gold as it had been removed from the NZ monetary system already.  They were free to devalue their currency as the likes of France had done in 1925 and as Britain later did in 1931.

So for starters we have got history on our side in that there has not been a confiscation of gold here in NZ to date.

Secondly, unlike Australia, which already has a gold confiscation law in place but not enacted (as per this recent Daily Reckoning Australia article), no such law exists here in NZ.

But the fact that it doesn’t exist currently of course doesn’t preclude it from being written in to law at some point in the future.  But it would at least mean there would be some warning with any luck.  Whereas in Australia, it would merely take a stroke of the pen from the Governor General to enact the existing provision.

The difference between now and the US G-man’s theft of gold in the 1930′s is that the dollar was still gold backed in 1933.  So taking it from the people enabled the US Government to devalue their currency following the confiscation with the stroke of a pen, and the people then had no recourse.  They could no longer take their dollars to the bank and swap it for gold.  Today Governments the world over are free to devalue their nations currency to their hearts content without needing to confiscate gold.

Another difference is that citizens today would seem to have a lot less trust in government than they did in the 1930’s.  Whereas by all accounts most people followed along with FDR’s Executive Order, perhaps today with the internet and social media there would likely be a backlash of sorts against such a move.  (Although this is perhaps balanced out somewhat here in NZ by the fact that holders of gold still seem to be pretty few and far between).

What else might the G-man resort to?

This article on SovereignMan.com discusses 3 things that the government may do to discourage gold ownership:

Step 1: Just make gold ‘harder’. To buy. To transport. To own.

 

Think about the changes we’ve seen over the last two years; government-regulated exchanges are continually hiking their gold margin requirements, increasing investors’ burden to buy.

 

On the physical side, the US government buried some insane regulations deep within last year’s healthcare bill. The new rules required a mountain of paperwork such that anyone who purchased a single ounce of gold from a coin shop would have to submit a special 1099 form to the IRS.

 

(The rule was later modified under intense pressure from various lobby groups, but it still gives you a good idea of what these people are thinking…)

 

Then there’s the new Dodd-Frank legislation that makes it nearly impossible for US citizens to trade securities and commodities from overseas accounts beyond the reach of the federal government.

 

Then there’s the Liberty Dollar debacle in which the US government used obscure counterfeit laws to seize millions of dollars of silver coins that were owned by the firm’s customers!

 

Then earlier this year, the Financial Crimes Enforcement Network (FinCEN) issued new guidance requiring that US taxpayers who hold gold in certain offshore financial accounts report such holdings on their annual FBAR. Conveniently, this ruling put up a barrier for Americans to use GoldMoney.

 

Step 2: Plant seeds of doubt [via economists and media]…

 

Step 3: Tie gold to terrorism. Plant evidence.

However the counter balance is that in New Zealand gold does pass under the radar significantly more than in the USA.  There is no capital gains on gold unlike the USA, and there’s no GST on pure gold or silver bullion either.  Plus none of the instances mentioned in the above SovereignMan.com article have occurred in New  Zealand.

But if New Zealand continues to run budget deficits of the current magnitude it’s likely the NZ G-man will look at where else it can get some revenue.

So there is always the possibility of a tax on “excess profits” or some such law whereby the Government gets it’s pound of flesh based upon any “gains” in gold.  In fact, if Labour had been elected in the recent election, their proposed capital gains tax would have likely also affected gold and silver.

What about silver confiscation?

Another consideration is that silver was not confiscated in 1933. Although according to this article a year later it did…

“Silver also suffered the fate of gold. On August 9, 1934 a Presidential Proclamation ordered all silver bullion surrendered to the Treasury within 90 days and a 50 percent tax was levied on any profits from the sale of silver. The sellers were paid 50.1 cents per ounce.”

However silver certificates in the USA could still be redeemed for silver up until 1964.  So in the event that gold was confiscated in the future, you could argue that silver may well be at slightly lower risk than gold.

Other options to hedge against confiscation?

You could consider holding some numismatic or collectible coins as these were excluded from the 1933 Executive Order.  The downside is these sell often for a large premium over the spot price of gold, so you will pay for this hedge against confiscation.  Plus of course if it were to happen there’s no guarantee numismatic coins would not be targeted this time.

So , what are the odds of an NZ government gold confiscation?

Who knows really?  The odds are the government will need to grab more revenue in the future, as it seems unlikely they are prepared to cut spending significantly.  This revenue grab could be through higher taxes, higher inflation, and who knows what else?

But given the current low rate of people holding gold here in New Zealand, it would perhaps be more likely they would go after “wealthy” property investors with a new tax.  After all the government did just that last year with a rejig of property depreciation rules.

So in summary, like most everything these days it’s anybody’s guess. Making financial plans can be difficult when the rules are not set in stone.  If we had to make a guess with a gun to ours heads we would say the odds would be against it.

But, either way we believe we’re better off having some gold (and silver) than not.  As the risks of not having any gold (e.g. currency devaluation, sovereign debt, negative real interest rates, etc), seem much higher than the risk of holding some.  And if we didn’t act because of a possibility in the future then it’s likely we’d make no decisions in this life!

By Jeff Clark, Casey Research

After all, in spite of some short-term fixes, there remains no real resolution to the sovereign debt issues in many European countries. We’re certainly not spending less money in the US, and now we’re bailing out Europe via currency swaps with the European Central Bank. Shouldn’t gold be rising?

Yes, but nothing happens in a vacuum. There are some simple explanations as to why gold remains in a funk.

1.  The MF Global bankruptcy, the seventh-largest in US history, forced a high degree of liquidation of commodities futures contracts, including gold. Many institutional investors had to sell whether they wanted to or not. This is similar to why big declines in the stock market can force funds and other large investors to sell some gold to raise cash for margin calls or meet redemption requests.

2.  The dollar has been rising. Money fleeing the Eurozone has to go somewhere, and some of it is heading into US bonds, which means first converting the foreign currency into dollars.

3.  It’s tax-loss selling season, something that’s also impacting gold stocks. Funds and individual investors are selling underwater positions for tax purposes. Funds also sell their big winners to lock in gains for the year and dress up quarterly reports.

These forces have all acted to depress the gold price.

Notice I didn’t say that gold has suddenly become viewed as a poor safe haven. Nor that many of the world’s major currencies are no longer being debased… nor that global sovereign debt issues are resolved… nor that interest rates are positive. No, the fundamental reasons for owning gold are still intact. So don’t let the selling depress you.

Let’s put gold’s recent price action into perspective. It peaked on September 5 at $1,895 (London PM Fix) and has thus been in decline for about three months. Yet look at the bull market’s biggest three-month correction in relationship to the ultimate trend.

Gold fell 20% from August 1 to October 31, 2008, the biggest rolling three-month decline in our current bull market. And yet, it eventually powered much higher, in spite of many investors and industry experts thinking it had peaked at the time. The final quarter of 2011 ended down 5.5% over the previous quarter.

The point? Don’t confuse short-term volatility with long-term forces. The investor who looks only at today’s headlines is prone to making ill-timed decisions.

I realize that prices could trade lower – but this is why we keep a high level of cash. By the time this bull market is over, our current pullback will probably look something like the small red box in the chart above, with far higher prices in the intervening months and years.

Which makes current prices a buying opportunity. I don’t know if we’re at the bottom of our recent decline or not – but I do know where gold and silver are ultimately headed Casey Research’s Chief Economist and Editor of The Casey Report, Bud Conrad, is convinced gold will hit $2,000 in the first half of this year. If he is right, the opportunity to buy at today’s levels will be fleeting.

In the meantime, stay the course with your precious metals investments, no matter how the short-term picture looks. Gold stocks remain undervalued, and these are turbulent times. They appear to be far from over. Gold remains the #1 asset protector.

[Don't let your savings continue to be robbed by government policies. Start protecting your wealth today.]

-Time for reflection

-Predictions for 2012?

-A fine time to be closed

-Gold and silver both on sale

-Silver in Backwardation

Happy New Year and welcome to 2012, the year when the world ends!  Or at least that’s what some would you have believe.  Actually we mention the Mayan calendar because one of this weeks articles makes some comments on it.  CHINA, 2012 AND VON MISES’ CRACK-UP BOOM.  As usual links and intros to the rest of this weeks articles are at the end of this article.

Time for reflection

We hope you took some time out with family and friends over the holidays and reflected on the important things in life.  We managed to get to the beach during the fine spells and even a spot of fishing.  Now that we’re back on deck we’ve also reflected on the performance of gold and silver in New Zealand dollars over the past year.  We also pondered a bit on what might be in store for 2012 prices.

Predictions for 2012?

Making predictions is a suckers game for sure in this strange world.

But a safe bet would be more volatility.  There’s just too many troubles on the horizon for it not too be.  Not long before Christmas we had the announcement that the Fed was basically bailing out the EU with dollar swaps.

Then just days prior to Christmas we had the next “saviour” announced – the ECB lending to big European banks at close to nothing who then buy the bonds of the failing nations that the ECB is forbidden from buying.  The banks pocket a handsome spread, the ECB effectively is buying the bonds as they allow the banks to hold them as collateral and then rinse and repeat.  So one way or another it’s likely we’ll see more funny money sloshing around from one market to the next searching but never finding a home.  Thus sending prices in various sectors up and down.

And let’s not forget about the USA’s amusingly titled “debt ceiling”.  This has had virtually no publicity but the debt ceiling has almost been breached again and so Obama will request another raising of the limit this month sometime to the tune of $1.2 trillion.  It will be interesting to see if it gains much publicity this time around or whether the troubles in Europe (conveniently/ coincidentally?) keep the magnifying glass off the US a while longer.

The precious metals bull market will remain intact while the likes of the issues mentioned above continue.

A fine time to be closed

The period from 24 December 2012 until Monday the 9th January was an interesting time to have most of our suppliers shut down, as gold and silver both weakened further from where they were in just the week prior to Christmas.  And so when the lows came in there weren’t too many buying options for those interested.  Since then they have bounced back up slightly but to our way of thinking the prices are looking very cheap for both at the moment.

Gold and silver both on sale

In fact, for the first time in quite a while we think gold and silver are both at good levels for buying right now.  For most of 2011 either one or the other was generally a better buy, but as we write gold is only just above it’s 200 day moving average at NZ$2052 and silver is still well below it’s 200 day moving average.  And as we contemplated in this weeks feature article which we mentioned already, could the lows be in already?

It’s also obvious that sentiment towards gold and silver is very low.  We’ve not seen either mentioned in the mainstream press lately – another indicator of it being a better time to buy.

Silver in Backwardation

Another reason why silver in particular looks ripe for the picking was an article we read over the break by Keith Weiner explaining how silver is in backwardation.

We’ve met Keith a couple of times at the Professor Fekete Gold Symposiums in Auckland and he is an expert on tracking what is known as the “basis” in the futures market.  Now we know this futures stuff can be tough to get your head around and we have been writing and rewriting trying to explain this in simple terms.

Then as luck would have it we just got an email from the MoneyMorning.com.au who had also picked up on this subject so we will instead “borrow” some of their explanation…

“The main sign [that the correction in silver is over] comes from the silver futures market.

It is now cheaper to buy a silver futures contract than real, physical silver. Silver rallied more than 60% the last time we saw this happen towards the end of 2010. As I write this, physical silver is US$28.98 / ounce. A silver futures contract is $28.93 / ounce.

This 5-cent difference may sound like small bickies but it is very important. Futures contracts are usually higher than the price of the commodity. Not so much as a price predictor but more to reflect the cost of storing the commodity and the opportunity cost of the capital.

When the futures price dips below the commodity price like this, even by just 0.2%, it is a clear signal to expect higher prices. The market calls this ‘backwardation’.

The silver market went into backwardation a few weeks ago on 28 December 2011. The next day, silver started a three-day bounce that increased the silver price by 12%. This included silver’s biggest one-day move in over three years – a 6.6% jump.

Backwardation tends to happen when there is a shortage of a commodity. The result is a much higher commodity price, which encourages people to sell. Backwardation was in play during the last silver rally that drove the price from $25 / ounce to its peak of $49.50 / ounce.

This is a very exciting development for silver investors. It’s also good to put the silver market in some historical context to see what the next few months could bring.

Like gold, silver tends to set its low point for the year in the first six weeks of the year.

In six of the last 10 years, the low price for the year was set by 8 February.

With a significant correction behind us, and backwardation now in play, it’s easy to imagine we may see the 2012 low point for the silver price very soon. That’s if we haven’t seen it already.”

By Jeff Clark, Casey Research

2011 was remarkable in many ways for the precious metals markets. Gold soared to new highs in early September, hitting at an intraday record of $1,920/ounce on the fifth. Silver screamed to within a hair of $50 on April 28. Corrections ensued, and the metals ended the year on a disappointing note for silver and an underwhelming note for gold. Equities for the sector were down, to way down for junior ventures, logging their worst annual return since 2008.

Here’s a table of 2011 returns from most major asset classes:

(Click on image to enlarge)

Gold registered its eleventh consecutive annual gain, extending the bull market that began in 2001. The yellow metal gained 10.1% – a solid return, though moderate when compared to previous years.

Silver lost almost 10% year over year, due primarily to its dual nature. Currency concerns lit a match under the price early in the year, while global economic concerns forced it to give it all back later.

Gold mining stocks couldn’t shake the need for antidepressants most of the year, and another correction in gold in December dragged them further down.

Meanwhile, those who sat in US government debt in 2011 were handsomely rewarded, with Treasury bonds recording one of their biggest annual gains. In spite of the unparalleled downgrade of the country’s AAA credit rating, Treasuries were one of the best-performing asset classes of the year. The driving forces there are expanding fear about the sovereign debt crisis in Europe, combined with the Fed’s promise to keep interest rates low through 2013.

But perhaps it would be more accurate to look at 2011 in a larger context. How did these investments perform over the past three years?

(Click on image to enlarge)

There’s a lot to be said about the chart above, but we’ll cut to the chase: Despite the higher volatility, we’d much rather be investing in the assets on the left side of the chart than those on the right.

But 2011 is now part of the history books. The important question before us is: Is gold still one of the best places for money going forward? Let’s take a look at what we might expect in 2012 based on what we just left behind…

The Fundamental Case for Gold Remains Rock Solid

Gold demand from investment and central banks grew tremendously last year. Further, the geography of gold buying was widespread, with big purchases coming from Europe during the initial bouts of their crisis and Japan after the Fukushima accident. Small investors and monetary authorities alike purchased gold due to economic, financial, monetary, and political concerns. Quite frankly, we see none of these factors changing anytime soon.

Further, many countries continue to debase their currencies at phenomenal rates (see Bud Conrad’s related article below). While US Treasuries may be a good temporary parking spot for cash, don’t kid yourself about what’s behind it all: nothing. The dollar is a fiat currency, no more. A true safe haven is something that cannot be debased, devalued, or destroyed by any government. After accounting for inflation, your dollars are worth less every year.

The reasons for gold’s bull market aren’t going away anytime soon. Make sure you have enough exposure to make a material difference to your portfolio.

Don’t Be Deceived by Promises of Economic Growth

The US economy ended the year on a high note – the job market is improving, gas is cheaper, consumer confidence grew, real estate showed signs of recovery, and the holiday shopping season turned out better than most economists expected. So, can the US grow its way out of the debt burden? Can we forget about further money printing schemes that are bullish for gold?

We think there’s little chance that growth will be sustainable in 2012. First, the biggest chunk of GDP growth in 2011 came from personal consumption – savings cuts and income growth in particular.

(Click on image to enlarge)

Strong GDP growth comes from production, not consumption. As Doug Casey has stated many times, it’s also the secret to personal wealth: “Produce more than you consume and save and invest the difference.”

Second, according to a recent Time article, “The government says that once you adjust for inflation, weekly earnings dropped 1.8% from November 2010 to last month” [November 2011]. As a result, “Consumers have used savings or credit cards to finance their purchases.” This is hardly a sign of a strong economy.

Combining these facts with surging government debt and ongoing deficit spending means the “growth” in GDP is largely supported by… debt. US debt surpassed GDP last year for the first time since 1947, and if the Keynesians get their way, the cure for our massive debt overhang will be… more debt. Any such scheme, regardless of its name, is very bullish for gold.

Preserve your wealth with gold, not fiat currency.

The Gold Price Will Continue To Be Volatile

The average annual gold price in 2011 was $1,571.50/ounce, which was 28% higher than the prior year’s average. As we outlined in a recent article about gold corrections, the average retreat in gold since 2001 (of those greater than 5%) is 12.5%. Declines of this degree are normal. They will happen again. Thus, expected price behavior leads us to get excited when gold and related stocks go on sale, not depressed about the dips.

If you buy gold during corrections, your gain by the end of the year will be higher than the annual advance.

Gold Equities Are (Still) Dirt Cheap

Yes, precious metals stocks have lagged the underlying commodity price throughout the year. Yes, they were a disappointment in 2011 – but 2011 is only one chapter in this gold bull-market story. For most miners, margins are high, dividends are increasing, and valuations are extremely low, despite the recent fall in metal prices. We can’t tell you exactly when the turnaround will begin, but we’re confident that the time is coming when gold stocks will once again bring us leveraged performance, particularly when the greater investment community recognizes their value and clamors for increased exposure to the gold market.

The old adage to buy low and sell high still applies. When it comes to gold stocks, we’re at the “buy low” part of the formula right now.

So, if you’re feeling like 2011 was a dud for your gold portfolio, we suggest you shake off the funk. It is precisely when such feelings abound that contrarian buying opportunities are at their best. The way to buy low is to buy when others are selling. Using the current weakness in prices to get positioned for the next liftoff is the way to play this. Remember that volatility cuts both ways: just like dips, a springboard to the upside will come – of that we’re certain. And given the tenuous state of global finances and the temptation to print, one of these liftoffs is going to be life-changing.

[2012 could be one for the record books for gold and gold stocks, based on the simple fact that big climbs follow big falls – and Casey Research expects many more big climbs in this bull market. Learn how Jeff Clark boosted his mother's IRA over 90%... something you can do, too.]

Richard Russell the “grandfather” of Investment Newsletter writing recently noted that…

“This year’s close for gold marks the 11th year for higher year end gold closing.  To my knowledge this is the longest bull market of any kind in history in which each year’s close was above the previous year.  This fabulous bull market will not end with a whisper and a fizzle.  I continue to believe that the upside gold crescendo of this bull market lies ahead.  We are watching market history.”

So how did gold do in NZ dollar terms then?

We’ll it started the year at NZ$1821 and finished 2011 at NZ$2037.77 for a gain of 11.90%.  Or rather as we prefer to put it your good old kiwi dollar lost 9.25% of it’s value for the year!  NZ dollar gold was briefly as low as $NZ1710 at the end of January and reached over $2300 on 3 occasions during the second half of the year.

Gold since 2000 in NZD

How about over a longer timescale – say the first 11 years of this millennium?

Gold began the millennium on 1 January 2000 at $551NZ and finished last year at $2037.77 for a gain of 269.83%.  Not too bad.

How did silver do in NZ dollars in 2011?

What about gold’s sister metal silver?  Silver started 2011 at $39.60 and ended it $36.18 for a loss of 8.64% for the year.  Silver certainly lived up to it’s reputation as more volatile than gold last year.  Silver reached as high as $62.50 and on 3 occasions briefly dipped below $35.00 for a range of $27.50.

Silver in NZD since 2000

How has silver fared over the last 11 years then?  Not too differently from gold as it happens – coming in at a gain of 250.58% for the millennium.  So 2 and a ½ times your money over the past 11 years is not too bad again.

Where to from here?

If we knew the answer to that we’d be lying on a beach somewhere sipping something cold!

Since just before Christmas when we wrote gold was approaching it’s 200 day moving average it proceeded to drop below this level over the holidays while most of our suppliers were closed. It is now back above the 200 day MA (the red line in the chart above) but only just. We’d guess that in the long run the current price is likely to be a pretty good entry point we’d say.

How about silver?

Silver too dropped lower over the holidays down to about the next level of support we talked about in our last article of around $35. It’s currently sitting just above this level at about $36.60. Again if we had a gun to our head we’d guess this will likely end up being a good entry point. We put our money where our mouth was just before Christmas and added to our personal holdings also.

A “bob each way”

So with gold up slightly for the year and silver down slightly you can see why when people ask us should I go for gold or silver we prefer to answer “Both!”.

The 2 often don’t perform in exactly the same way at exactly the same time.  So having some of each can smooth out the volatility somewhat.  If you’d had a bit of both last year you’d have come out slightly ahead of where you started the year – which is a good result in a year of extreme volatility and where most global share-markets have actually lost money.

Who knows exactly what 2012 will bring – but some surprises are almost certain.  It wouldn’t surprise us to see it take a good part of the year before gold and silver beat their previous highs.  During previous corrections it has taken many months to get back to old highs.  But there’s plenty of uncertainty in the world still.  Talk of war with Iran.  Unresolved debt burdens in the Eurozone.  And the US is again approaching it’s debt ceiling already (Yes in case you’d forgotten it’s not all beer and skittles over there either).

So there’s plenty of catalysts brewing for further gains in gold and silver.

That’s not to say we couldn’t see further falls.  As we’ve mentioned before, in the 1970’s gold and silver both dropped by half in the middle of that bull market before the big gains were in.
And like it or not the masses still run to the USD, when things get sticky.

But if we had to guess we’d say we may well have seen the lows in both already over the holiday break –  a big call to make when the years only 10 days old!  But as we mentioned earlier if you look at the chart above you can see that when gold dropped below it’s 200 day moving average (the red line) it was a good time to buy last year, so we reckon that could make now a good time to buy too.  We’ll look to see if we have egg on our face a year from now!

The credit boom is built on the sands of banknotes and deposits. It must collapse… If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.

Ludwig von Mises, Human Action, 1949

I first attended the Canton Trade Fair in October 1976. All Chinese men and women were dressed in blue shirts and blue pants, bicycles were China’s main mode of transportation, Chairman Mao had just died and China’s mantra, “We will continue to support the policies of Chairman Mao Tse-Tung and criticize the policies of Deng Xiao-Ping”, was heard everywhere.

But three years later when I received White House invitations to attend the Washington DC reception for the Vice-Premier of the Peoples’ Republic of China, it was Deng Xiao-Ping who arrived; not a hard-line inheritor of Chairman Mao’s revolutionary precepts.

In 1977, Deng Xiao-Ping wrested power from China’s conservative communist ideologues and in 1978, opened China’s socialist economy to private ownership. By 2005, China’s private sector had expanded to 70 % of its economy and China became an economic power in only 25 years.

While Mao Tse-Tung had successfully steered China away from Western suzerainty, it was Deng Xiao-Ping who put China on the path to financial and geopolitical power; a path that would be as rapid as it would be unsustainable—for China’s explosive growth was founded in large part on excessive credit creation in the West.

http://upload.wikimedia.org/wikipedia/commons/b/b3/Prc1952-2005gdp.gif

The remarkable rise in China’s GDP reflects the just as remarkable rise of the Dow during the same period.

The correlation between the rise of China’s GDP and the rise of the Dow is unmistakable. It’s also the reason why China’s growth is unsustainable. China’s rapid growth was fueled by the unprecedented expansion of the US money supply—an expansion directly responsible for America’s exploding appetite for consumer goods from China and the US dot.com stock market bubble in the 1990s.

http://www.goldmoney.com/gold-research/alasdair-macleod/money-supply-explosion-will-lead-to-accelerating-inflation.html

Appointed Fed chairman in 1987, Alan Greenspan presided over the greatest credit and monetary expansion in US history, an expansion which led to America’s three largest speculative bubbles; the 1992-2000 dot.com bubble, the 1991-2006 consumer bubble and the 2002-2006 real estate bubble; three bubbles whose cumulative collapse would derail the world economy and set in motion Ludwig von Mises’ crack-up boom.

THE CRACK-UP BOOM

As von Mises wrote in Human Action in 1949 … If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders…

Von Mises’ crack-up boom, or more correctly Greenspan’s crack-up boom, had its origins in the 1980s when the US greatly increased spending yet cut taxes and initiated unprecedented levels of borrowing to make up for lost revenues, consequently flooding America with excess liquidity which would set in motion America’s largest stock market bubble since the 1920s.

Although Alan Greenspan had the intellect of an über-economist, he lacked the courage to stand up to Washington DC and Wall Street. In the 1990s, when the Dow began rising far out of proportion to economic growth, Greenspan moved to stop the developing bubble in stocks by raising Fed interest rates:

I think we partially broke the back of an emerging speculation in equities. – Alan Greenspan, February 1994

But Greenspan’s rate increase didn’t stop the bubble. Share prices continued higher so Greenspan continued raising rates. After seven consecutive increases between February 1994 and February 1995 and another increase in March 1996, Wall Street demanded Washington DC stop Greenspan from further Fed tightening.

Greenspan capitulated.

…it was not the policy of the Fed to prick bubbles by monetary means. – Alan Greenspan, March 1997

In 1998, Greenspan lowered Fed interest rates three times allowing the dot.com bubble to continue its dizzying liquidity-driven ascent. Finally, in 1999, the Fed was forced to prick the dangerously large stock market bubble which Greenspan now denies recognizing.

My video, Dollars & Sense show #11, titled The Fix Is In, explains Greenspan’s flawed tenure at the Fed, see video below; and, while there are reasons to explain Greenspan’s shortcomings, none can reverse the damage he has done.

Because of his inability to just say no, Greenspan left a legacy of three historic credit bubbles whose catastrophic collapse would trigger Ludwig von Mises’ crack-up boom and send America and the world into the greatest economic meltdown since the Great Depression.

THE GOAT RODEO OF CREDIT DISTORTED DEMAND

The bankers’ artificial injection of credit into free markets ultimately overwhelms supply and demand fundamentals. This distortion, conveniently overlooked during expansions, becomes painfully apparent during contractions when demand disappears leaving behind excess capacity, defaulting debts and high levels of unemployment.

Capitalism’s foundation of debt-based money was destabilized by America’s expansion of its monetary base after 1980; resulting in the eventual overcapacity of supply in the East, e.g. China. Japan, Korea, whose economies had expanded to satisfy the artificially inflated demands of the West, e.g. the US, the UK, Europe.

Capitalism, an always uneasy imbalance between credit and debt, is now trying to regain its balance. It can’t. The present crisis, created by decades of excess credit, is being treated with even more credit; a dangerous palliative that will exacerbate, not solve, what is happening

Credit expansion is the government’s foremost tool…to contrive everlasting booms, and to make everybody prosperous. – Ludwig von Mises, 1949

Today, China’s late run at capitalism’s table is fueling the very collapse von Mises predicted; for if Greenspan’s credit expansion was excessive—and it was—China has set in motion an even larger expansion.

To offset the global collapse in demand, China expanded its money supply in 2008 by an extraordinary 150 %, an increase driven by China’s need to maintain economic growth or risk losing political control.

Modern monetary debauchery is no longer a Western phenomenon. China has now joined the party and in a very big way.

2012, GREAT WAVES AND THE COMING COLLAPSE

The ending of the Mayan calendar in 2012 is as misunderstood as the interplay between credit and debt and supply and demand; but the coincident collapse of the current economic paradigm and an arcane indicator of change should not be dismissed.

Professor David Hackett Fisher in The Great Wave, Price Revolutions and the Rhythm of History writes that for the last eight hundred years, periods of economic and social stability have been intermittently interrupted by waves of rising prices.

Each of these great waves according to Professor Fisher culminated in the economic and societal collapse of the existing order, bringing to an end the Middle Ages, the Renaissance, the Age of Enlightenment, etc.

During each great wave: …Food and fuel led the upward movement. Manufactured goods and services lagged behind. These patterns indicated that the prime mover was excess aggregate demand, generated by an acceleration of population growth, or by rising living standards, or both.

… Prices went higher, and became increasingly unstable. They began to surge and decline in movements of increasing volatility. Severe price-shocks were felt in commodity movements. The money supply was alternately expanded and contracted.

Financial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate…Wages, which had at first kept up with prices, now lagged behind.

Returns to labor declined while returns to land and capital increased. The rich grew richer. Inequalities of wealth and income increased. So did hunger, homelessness, crime, violence, drink, drugs, and family disruption.

..Finally, the great wave crested and broke with shattering force in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence

pp. 237-238, David Hackett Fisher, The Great Wave: Price Revolutions and the Rhythm of History, Oxford University Press, 1996

Great waves take 80 to 160 years before they end in the eventual decline and collapse of existing epochs. Today, another great wave is about to crest and break; and the changes could be even more extreme as the amplitude of change is greater than in any previous wave.

The current great wave began in 1896. That it could crest and break in 2012 could be a coincidence. Or, it may not.

GOLD AND THE CRACK-UP BOOM

…[during] the crackup boom…the flight into real values begins, and the whole monetary system founders. – von Mises

Von Mises’ predicted flight into real values—gold—is now underway despite the best efforts of today’s kreditmeisters to diminish the allure of the only safe haven left to those fleeing paper money’s now burning mansion.

One of the foremost proponents of the flight to gold is famed stock market analyst, Richard Russell. According to the Hulbert Financial Digest, Russell’s The Dow Theory Letter is tied for top place as a market timer on a risk adjusted basis since 1980.

A leading financial analyst with a stellar reputation timing stock market trends, Russell’s comments regarding today’s stock markets and gold should be seriously considered and, if appropriate, then acted upon.

On December 17, 2011, Richard Russell wrote:

…The talkers on Bloomberg are discussing stocks to buy.  They are unswerving bullish.  It never occurs to them that hard times lie ahead and that this is not the time to buy stocks…My advice — sell any stocks you still own — sell into all rallies, or stay out of stocks completely.

I continue to like gold in all its forms, but I’m afraid that gold mining stocks will tend to go with the general market.  Personally, I’m staying with my gold mining stocks until the bitter end.  I continue to believe that we’ll see a final hysterical blow-off in gold (the metal) that will carry the mining stocks with it.

On December 31, Russell noted 11 consecutive years of gold closing higher confirms that gold is in a record bull market headed towards an even more explosive high:

This year’s close for gold marks the 11th year for higher year end gold closing.  To my knowledge this is the longest bull market of any kind in history in which each year’s close was above the previous year.  This fabulous bull market will not end with a whisper and a fizzle.  I continue to believe that the upside gold crescendo of this bull market lies ahead.  We are watching market history.

The crackup boom will end as von Mises predicts in monetary disarray, i.e. the debasement of currencies and possible hyperinflation where paper money loses all value. Today, money is no longer a store of value. It’s a trap for the unsuspecting that has already been sprung.

The 300 year viral spread of the banker’s fraudulent paper money is best explained by Gresham’s Law wherein bad money drives out good. But the global success of the banker’s debt-based money has led to its own undoing; for when there’s no good money left, only bad remains.

In 1971, after which gold no longer backed the bankers’ now fiat money, the growth of credit and debt became exponential. Today, they are reaching their limits. Tomorrow, those limits will be exceeded.

Yes, Dr. Keynes, Dr. Friedman, Dr. Greenspan, Dr. Bernanke, et. al. while there are no limits to economic hubris, there are limits to monetary imbalances.

Throughout history, time and time again monetary chaos has led to the explosive rise in the price of precious metals. It’s happening again today.

MIDNIGHT AT THE CASINO

If you haven’t yet cashed in your chips, you should. It’s almost midnight and the casino owners are worried. A run on the cashier’s window would show them to be bankrupt; the casino’s only assets being customer IOUs and banks upon banks of increasingly worn chip-making machines.

The management’s recent offer of unlimited chips to the money changers still on the floor was done in the desperate hope it would convince the remaining gamblers of the house’s solvency.

It won’t work. It’s too late. It’s 2012.

Buy gold, buy silver, have faith.

Darryl Robert Schoon

www.survivethecrisis.com

www.drschoon.com

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