http://dollardaze.org Investor orientated commentary on economic and monetary issues from a free market perspective. Policies discussed include sound money on a gold standard and limited role of government. Investment research focuses primarily on both precious and base metal mining companies. en-us http://dollardaze.org/blog/?post_id=00751 The official gold reserves in the United States steadily increased during the first half of the 20th century. Accumulation was particularly rapid following the Gold Reserve Act of 1934 which officially raised the price of gold from US$20.67 to US$35 per troy ounce. Large shipments of gold bullion went west across the Atlantic as the European central banks sold off their gold reserves for American currency. December 7, 2009 http://dollardaze.org/blog/?post_id=00089 An LME base metal charts update has been posted. November 29, 2009 http://dollardaze.org/blog/?post_id=00746 Since achieving a peak collective holding of just over 37 thousand metric tonnes in 1963, central banks around the world have been dishoarding their gold. Recent events have indicated that this trend of central banks being net sellers of gold is now reversing. November 25, 2009 http://dollardaze.org/blog/?post_id=00748 The U.S. dollar has changed from being a paper certificate for a tangible asset to a fiat currency - a paper note declared legal tender. By looking at the history of American paper money one can clearly see the distinction. November 18, 2009 http://dollardaze.org/blog/?post_id=00747 The Mission Statement of the Federal Reserve, as stated on their website, is "...to provide the nation with a safer, more flexible, and more stable monetary and financial system." Below is a graphical representation of the fall in value of the U.S. dollar since the Federal Reserve took control of the monetary system. November 18, 2009 http://dollardaze.org/blog/?post_id=00744 On Friday November 13, 2009 Vietnam lifted its ban on gold imports. The State Bank of Vietnam had stopped granting quotas in June 2008 for gold bar imports, stating that the country needed to "economise" on foreign currencies for the importing of essential goods for domestic consumption. November 14, 2009 http://dollardaze.org/blog/?post_id=00743 Perhaps the most persistent modern monetary fallacy is the belief that economic growth must be accompanied by a corresponding growth in the money supply. This is cited as a reason why precious metals are unsuitable for money in the modern age because they are not sufficiently "flexible" due to their limited supply. November 14, 2009 http://dollardaze.org/blog/?post_id=00719 The expansion of global currencies has exceeded nine percent over the last year. This essay investigates which currencies are contributing the most to this development. One hundred currencies from 95 sovereign nations and five monetary unions have been examined. November 13, 2009 http://dollardaze.org/blog/?post_id=00742 In early 2008 it was reported that at least some of the gold bars in the vaults at the National Bank of Ethiopia were fake. The discovery was made when bars shipped from Ethiopia to South Africa were returned after they were identified as being gilded steel. Gilded steel is a very unconvincing form of fake gold because the density of the iron alloy is significantly less. A steel bar identical in volume to the standard 400 troy ounce gold bars commonly used in bank-to-bank trades would weigh only 162.5 troy ounces (about sixty percent lighter). Anyone familiar with handling gold bars would easily identify them as fake. November 11, 2009 http://dollardaze.org/blog/?post_id=00741 India's deal to buy 200 metric tons (6.4 million troy ounces) of gold from the International Monetary Fund (IMF) is a huge deal - not just the fact that the New Delhi government is handing over $6.7 billion for the metal, but what it may mean for gold going forward. India, the world's largest gold jewelry market, is making a rational and bullish call on gold. The supply of gold continues to decline - the biggest supply is from governments with socialist policies that are selling their gold to pay for social welfare and bailout programs. The IMF is a classic case of this. November 10, 2009 http://dollardaze.org/blog/?post_id=00740 In Part 1, I introduced readers to the different categories of miners, and outlined some of the basic characteristics which these companies possess. In the second part, I will provide some guidance on what to look for in separating the "contenders" from the "pretenders". November 10, 2009 http://dollardaze.org/blog/?post_id=00739 Most analyses of the gold market consider the annual change in the amount of gold produced by the mining industry to be an important determinant of the gold price, with bulls regularly supporting their case by citing the mining industry's inability to ramp up production and bears sometimes claiming that increasing mine production will eventually weigh the gold price down. Our contention, however, is that the annual supply of newly-mined gold is so small relative to the existing aboveground supply that changes in mine production should be ignored when assessing gold's prospects. November 9, 2009 http://dollardaze.org/blog/?post_id=00738 I started collecting coins back in 1976, when I was just 8 years old. My interest was piqued when a kid brought an old Franklin half-dollar to school one day. I'd always liked the Kennedy halves since there were relatively rare, and getting one in change was a special event. But that Franklin half was something else entirely - like something from another planet! Even as a second-grader, I could tell there was something qualitatively different about it. It just felt different. It was heavier, and had a certain elegant dullness to its finish. It was dirty and worn around the edges in a way that made you think it was no stranger to work. November 9, 2009 http://dollardaze.org/blog/?post_id=00737 ...wait until you see what's in the cards for commercial real estate. That's right, the next train wreck will be in commercial real estate. Couldn't be worse than last year's residential market crash? That remains to be seen. But it's coming soon, probably as early as the second quarter of next year, and there's nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what. November 9, 2009 http://dollardaze.org/blog/?post_id=00736 While gold is not commonly considered as a medium of exchange like paper currency, it still acts as an excellent store of value. On August 15, 1971 the so-called "gold window" was closed. Previously, the US dollar was redeemable by non-Americans at a rate of US$35 per troy ounce. Shortly after this event, General Motors came out with a new version of the Cadillac Eldorado - the longest running American personal luxury car. November 9, 2009 http://dollardaze.org/blog/?post_id=00735 Much has been written in the last two days about the surprising purchase by the RBI (Reserve Bank of India) of some 200 tonnes of gold bullion, valued at about $6.7 billion, from the IMF (International Monetary Fund). Is this really a significant event? Judging by the price of gold since the announcement was made - up about $50 an ounce and showing no signs of stopping anytime soon - it certainly must have been significant. But why? November 6, 2009 http://dollardaze.org/blog/?post_id=00734 The Reserve Bank of India (RBI) has concluded the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF), under the IMF's limited gold sales programme. This was done as part of the Reserve Bank's foreign exchange reserves management operations. The purchase was an official sector off-market transaction and was executed over a two week period during October 19-30, 2009 at market based prices. November 6, 2009 http://dollardaze.org/blog/?post_id=00733 Common sense tells us that if phenomenon A causes problem B, then B cannot be rectified unless A is first removed. As an adherent of the Austrian School of economics, I can confidently tell you that a sustainable US recovery is not at hand. An upward blip in the GDP reading (itself a flawed measure of material well-being) must not be mistaken for a sustainable recovery, especially when government borrowing is unprecedentedly high and a lot of the input parameters, not the least of which is the GDP deflator, can be fudged. November 6, 2009 http://dollardaze.org/blog/?post_id=00732 Who cares about the dollar? It turns out quite a few do, except for those who could put it on a course to long-term recovery. First of all, you should care, as the purchasing power of your dollar savings is at risk when the dollar plunges versus other currencies. Let's examine a couple of groups, what they have at stake and how influential they may be. November 5, 2009 http://dollardaze.org/blog/?post_id=00731 The stock market has enjoyed a significant rally since the end of the first quarter. The Bureau of Economic Analysis reported last week that the economy grew at a 3.5% annual rate in the third quarter--a figure they achieved by that claiming inflation was running at only a 0.8% annual rate, despite a sharp drop in the dollar, a spike in commodity prices and record highs for gold. November 5, 2009 http://dollardaze.org/blog/?post_id=00730 On November 3, 2009, the Reserve Bank of India (RBI) announced the purchase of 200 tonnes of gold from the International Monetary Fund (IMF) for US$6.7 billion. This represents the largest one-time central bank purchase in recent history, reminiscent of the period of steady US purchases of bullion in the 1930s and 1940s. The purchase was an official off-market transaction and was executed during October 19 - 30 at market-based prices averaging US$1,045 an ounce. November 3, 2009 http://dollardaze.org/blog/?post_id=00729 The following chart shows that bank reserves held at the Fed have increased 100-fold over the past 14 months -- from around $10B in August of 2008 to around $1000B ($1T) today. It is important to understand that while this explosion in the reserves of US depository institutions has rightfully prompted much discussion and consternation, it hasn't directly added to the total supply of US dollars (bank reserves are not counted in monetary aggregates such as M1, M2, M3, MZM and TMS). The reason that bank reserves aren't added to the money supply is that they do not constitute money available to be spent within the economy; rather, they constitute money that could be loaned into the economy or used to support additional bank lending in the future. November 3, 2009 http://dollardaze.org/blog/?post_id=00728 The current investment climate is more perilous than ever. The Federal Reserve's balance sheet continues to grow stuffed with the dubious paper purchased from the too-big-to-fail banks that are now wards of the state. The music stopped and there were no chairs, but the Fed and the Treasury snapped their fingers and trillions of dollars later the chairs appeared, the band played on and the banks live on. The taxpayers are now the not-so-proud owners of AIG, General Motors, Fannie and Freddie and dozens of banks. Where did the money come from? Out of thin air. November 2, 2009 http://dollardaze.org/blog/?post_id=00727 A growing number of Americans are becoming aware of the Federal Reserve System, what it is, how it has precipitated our financial crisis, and how it continues to pursue policies that delay economic recovery and weaken the dollar. The Fed's actions, combined with the federal government's bailout bills and stimulus packages, have struck a nerve in the American people. November 1, 2009 http://dollardaze.org/blog/?post_id=00726 The eighties brought us Japan's "miracle economy". The '88 Dukakis presidential campaign delivered the "Massachusetts miracle" - not many years later renamed "Massachusetts miserable." The Asian Tiger "miracle economies" (and markets!) were all the rage in the mid-90s - until their systems blew apart. Here at home, there was all the "New Paradigm" and the "New Era" hoopla. And until the recent crisis and double-digit GDP downdraft, many bravely trumpeted Ireland's Celtic Tiger miracle. October 31, 2009 http://dollardaze.org/blog/?post_id=00725 The year 2009 will most likely expire without commemorating the centenary of a most momentous event in history that figures prominently as the main cause of the Great Financial Crisis of the century. This event was the so-called legal tender legislation in 1909. The bank notes of both the Banque de France and the Reichsbank of Germany were made legal tender by law, first in France and then, a very short time later, also in Imperial Germany. The rest of the world followed suit. In this way all roadblocks were removed in the way of financing the coming world war through credits and monetizing the resulting debt through the issuance of bank notes. October 30, 2009 http://dollardaze.org/blog/?post_id=00721 On March 23, 2009, China made public announcements to overhaul the global monetary system, thereby questioning the role of the US dollar as the reserve currency.1 Chinese officials have gone on record saying they want to move the global currency peg away from the dollar in favour of currency diversification as indicated by China's push for OPEC to price oil in a basket of currencies (including the yuan) instead of dollars. October 29, 2009 http://dollardaze.org/blog/?post_id=00723 Over the past two years, the federal government and the Federal Reserve have dispersed trillions of public dollars, run up enormous deficits, and kept interest rates at zero. In just about any economic textbook, this combination of policies would be described as the perfect recipe for inflation. Yet, with the exception of the usual increases in health care and education, prices by and large are not rising. Many have concluded that our economic leadership has simply outsmarted the textbooks. October 29, 2009 http://dollardaze.org/blog/?post_id=00722 It is a long-established pattern of the precious metals sector that in any long-term bull market the precious metals miners outperform bullion, itself - with this especially being true at any medium-term tops and (of course) at any long-term top. The fact that relatively few investors know anything about these companies is one indication that this market is many years away from peaking. However, with gold recently reaching a new nominal high it is only natural that investor curiosity about these companies should start to grow. October 27, 2009 http://dollardaze.org/blog/?post_id=00720 Even within the ranks of analysts who have some understanding of the problems caused by fiscal and monetary "stimulus", it is commonly held that an economic/financial crisis requires "liquidity injections" and government intervention in order to overcome the immediate obstacle. It is acknowledged that the 'assistance' provided by the government and the central bank will have negative consequences in the long run, but it is generally argued that the long-term negatives can be dealt with after the dust settles. October 27, 2009 http://dollardaze.org/blog/?post_id=00718 As of September 2009, the total amount of physical paper bills and coins throughout the world is approaching US$4.5 trillion. The following figure indicates the countries and monetary unions included in this analysis. October 26, 2009 http://dollardaze.org/blog/?post_id=00717 It seems nobody in this country wants to take responsibility for the secular decline in the value of the U.S. dollar. When Fed Chairman Ben Bernanke is asked about the currency's decline, he refers the query to the Treasury Department. When the president is asked about the dollar, he often gives the tired old platitude that the U.S. has a strong dollar policy, but his vacuous words seem more like perfunctory utterances than a bona fide dollar-boosting strategy. October 26, 2009 http://dollardaze.org/blog/?post_id=00716 I received some great feedback this week that really got me thinking in a different direction other than analysis of gold, markets, economic news and gold stocks. I posted an article late last week titled Gold IS and this covered how I see gold as the only viable asset class and investment game in town. The feedback related to investor perceptions on the subject of gold investment. October 26, 2009 http://dollardaze.org/blog/?post_id=00715 Our willingness to engage in risks drives our prosperity. We urgently need a public debate on risk, one driven by reason, not emotion. Without risk, individuals are bound to lose the purchasing power of their savings; corporations that don't take risk will fade into oblivion; and governments that regulate away risks destroy the growth engine of their nation. October 26, 2009 http://dollardaze.org/blog/?post_id=00714 MarketNews International (Steven K. Beckner): "Federal Reserve Vice Chairman Donald Kohn said Thursday that prices of mortgage-backed securities are likely to fall when the Fed eventually begins selling MBS from its portfolio. He gave no indication when that might be. But Kohn, echoing earlier comments by New York Federal Reserve Bank President William Dudley, said the Fed may well avoid any losses on its asset holdings, as well as on its liquidity facilities. 'These programs may be unwound without loss,' Kohn said, commenting from the audience at a Boston Federal Reserve Bank conference. He said the Fed entered the market 'when prices were depressed by high premiums' and so 'the Fed could finance without risk.' That in turn will mean they can be 'unwound without loss.'" October 24, 2009 http://dollardaze.org/blog/?post_id=00713 For the most part, the value of the dollar is given cursory attention by the financial media. Typically, its movements are assigned an importance on par with much less determinative metrics such as natural gas futures and construction permits. It's only when major milestones are reached that anyone really takes notice of the dollar. We are living through one of those times. October 23, 2009 http://dollardaze.org/blog/?post_id=00712 The continuing financial crisis has made clear to many people the deep problems that exist within our financial system. One of the key decisions to be made in any of the reform proposals floating around deals with the Federal Reserve System and its powers. For nearly 100 years the Federal Reserve has operated largely in the shadows. The Fed's monetary policy operations, including open-market operations and agreements with foreign governments and central banks, are exempt from audit by the Government Accountability Office. October 23, 2009 http://dollardaze.org/blog/?post_id=00711 Gold IS the best game in town and when the music stops it may be the ONLY game in town that can yield any sort of return. The music I refer to here is the sound of spin given some measure of credibility (only to the un-initiated) by massive stimulus spending which has kept this farce of an economy on its last legs through various stages for 9 years. October 22, 2009 http://dollardaze.org/blog/?post_id=00710 It is now time for the tables to turn once again. It is now time for the paperbugs to take their medicine. It is now time for the "Don't Worry, Be Happy and Invest in Stocks Forever" crowd to come to realize they were not only wrong, but arrogant in the face of overwhelming evidence to the contrary. October 21, 2009 http://dollardaze.org/blog/?post_id=00709 The "circular flow of income" theory favoured by Keynes and his disciples holds that one man's spending is another's income, the implication being that if consumer spending is boosted then economy-wide income will be boosted and the overall economy will strengthen. It follows from this theory that an economy-wide increase in savings will lead to a weaker economy, since the only way to increase savings is to reduce current spending. This is what the Keynesians refer to as the "paradox of thrift". In their minds a paradox exists because while it can be shown that an increase in savings will often be a good thing at an individual level, it causes problems if practiced throughout the economy. October 20, 2009 http://dollardaze.org/blog/?post_id=00708 The government has splattered lots of money onto the economy, working hard to reflate the bubble that got us into trouble in the first place. The Dow is back at 10,000. What are you to do? If you are a wealth sustainer, you should not be drawn into the market simply because it has gone up. Instead, take a step back, look at the market dynamics and see what risks you can afford to take. I am not preaching to hide in a hole awaiting armageddon - there are always opportunities, but they may be very different from what the pundits may want you to believe. October 20, 2009 http://dollardaze.org/blog/?post_id=00707 "Bad money drives out good money." This aphorism has been known as Gresham's Law for almost 500 years. Sir Thomas Gresham never said it exactly like this. The statement is wrong in its familiar form. Bad money does not drive out good money in a free market. The free market rewards producers of customer-satisfying products and services. Good money drives out bad money on a free market. The definition of bad money is money that the free market refuses to use. Gresham's law, as stated, is incorrect. The opposite is true. October 17, 2009 http://dollardaze.org/blog/?post_id=00706 Dr. Krugman, like so many economists of our time, is an inflationist. He, like so many before him, sees easy Credit and the government printing press as the solution to unemployment and other economic problems. And - in our age of electronic "money" and unbounded global finance - there are apparently no longer any bounds to U.S. fiscal and monetary stimulus. October 16, 2009 http://dollardaze.org/blog/?post_id=00705 It was the mid-'70s. I was helping my Dad build a dirt road to our barn and he wasn't happy. Not about the hard work or humidity, but from what was happening to the dollar. Inflation was starting to kick into high gear, grabbing headlines that even a girl-chasing teenager could understand. October 15, 2009 http://dollardaze.org/blog/?post_id=00704 It is a cliche that if we do not study the past we are condemned to repeat it. Almost equally certain, however, is that if there are lessons to be learned from an historical episode, the political class will draw all the wrong ones - and often deliberately so. Far from viewing the past as a potential source of wisdom and insight, political regimes have a habit of employing history as an ideological weapon, to be distorted and manipulated in the service of present-day ambitions. That's what Winston Churchill meant when he described the history of the Soviet Union as "unpredictable." October 14, 2009 http://dollardaze.org/blog/?post_id=00703 Many commentators are of the view that the biggest threat to the economy is deflation rather than inflation, because of the present economic slack. The United States used only 69.6% of its industrial capacity in August, against 77.6% in August last year and the historical average of 81.1% since January 1967. In Q2 this year, the real GDP stood 7.6% below the potential real GDP. This gap stood at 6.8% in Q1 and 1.6% in Q2 last year. October 13, 2009 http://dollardaze.org/blog/?post_id=00702 Robert Fisk's article in The Independent on October 6, "The Demise of the Dollar," has created many shock waves in the currency markets. Fisk reported that major Arab nations are secretly planning to dump the current petrodollar scheme in favor of pricing oil in a basket of currencies. Included in this basket will be the yen, yuan, euro, a new, pan-Arab currency, and gold bullion. Co-conspirators include Saudi Arabia, Russia, Brazil, China, France, and the formerly compliant Japanese. This validated my July prediction that the Persian Gulf states will eventually accept yuan in exchange for oil. October 13, 2009 http://dollardaze.org/blog/?post_id=00701 Most people would admit to hoarding money only with a tinge of guilt, because to be a hoarder carries with it the suggestion of being a miser -- a Scrooge. And yet, every participant in an economy based on indirect exchange holds some amount of money and can be said to be hoarding it, that is, declining to spend it. Hoarding is a strategy for achieving personal goals or for dealing with economic uncertainty. However, some economists argue that hoarding money causes recessions. In the Keynesian universe, hoarding is a great evil because it means people are stifling demand for the economy's products and services. October 12, 2009 http://dollardaze.org/blog/?post_id=00700 I recently received an e-mail asking about the price of gold. This person presented two gold-pricing models in the body of the e-mail along with an estimate of what price gold might command in the future in dollars. October 12, 2009 http://dollardaze.org/blog/?post_id=00699 Renewed U.S. dollar weakness has evoked calls for Washington to implement a true strong dollar policy. Larry Kudlow is calling for a supply-side cut of marginal corporate tax rates and for the Federal Reserve to hike rates 25 bps in support of our currency. He knows "none of this is gonna happen." Others believe the focus should be trimming our massive federal deficit. A move to fiscal and monetary restraint is surely needed to help stabilize the dollar. Restraint is not going to happen. October 10, 2009 http://dollardaze.org/blog/?post_id=00698 With their money and banking system having presented them with a case of system failure by disintegrating before their eyes and taking the economy with it, America's economic experts who support and run the FED's central banking-inconvertible paper dollar system cannot place the blame for this where it belongs, which is on the system itself, its supporters, and those who make its policies. They cannot bring themselves to diagnose the system's ills and rectify them because they are at the center of them. They cannot stare the failure of inconvertible paper money squarely in the face and move to eliminate it. If they did, they'd be out of jobs and out of power. October 8, 2009 http://dollardaze.org/blog/?post_id=00697 When John Law was faced with crippling sovereign debts in eighteenth century France he issued a lot of successful paper money and made the country feel rich. He was clever, brave, charming, honest and - for a while - extraordinarily popular. Unfortunately he also caused virtually everyone who had any money in France to lose it, which tends to overshadow those other qualities. How it happened is worth understanding; and never more so than now. October 1, 2009 http://dollardaze.org/blog/?post_id=00696 One of the arguments put forward by deflationists (people who are forecasting deflation) is that today's monetary system is credit-based and hyperinflation is not possible under such a system. What they mean by "credit-based" is that new money is borrowed into existence, the implication being that in order to get a net increase of $1 in the total money supply there must be a net increase of at least $1 in the economy-wide debt burden. As a result (so the argument goes), the more the supply of money is inflated the more the economy is weighed down by debt, thus improving the odds of an eventual deflationary outcome. September 28, 2009 http://dollardaze.org/blog/?post_id=00695 During a market corner, a buyer accumulates an asset with the intention of driving the price higher without any regard for its true value. Additionally, the buyer amasses such a large holding that market prices cannot remain elevated without continuous buying. For example, when the Hunt Brothers cornered the silver market, silver rose from $11 per ounce in September 1979 to nearly $50 an ounce in January 1980. Eventually, the Hunt Brothers stopped buying silver as they ran out of capital and the market for silver dried up. As happens with all market corners, when the buyer disappeared from the market, the price of silver spiraled downward. The Federal Reserve, knowingly or not, has cornered the credit market. September 26, 2009 http://dollardaze.org/blog/?post_id=00694 Coming into September the markets had the potential to experience either a deflation scare or a mini blow-off in inflation-related plays. Within the first few trading days of September it became apparent that it was more likely going to be the latter. The blow-off in inflation-related plays is taking most equities and commodities higher, with gold and silver stocks leading the way. It will probably end within the next two months, but it hasn't ended yet. September 21, 2009 http://dollardaze.org/blog/?post_id=00693 Like a battering ram in a medieval siege, gold keeps hammering away at the gate. For the third time in less than twelve months, the yellow metal is once again crashing into the $1,000 per ounce level. As of press time, it looks like gold will close above that level today and will set a new record in the process. Even if the breach is fleeting, who can doubt that it will mount another assault soon? In the meantime, there is no shortage of market analysts who are not buying gold while questioning the motives of those who are. Although they offer a variety of strained reasons, they nearly all agree that it has nothing to do with inflation, which is nearly universally considered dead and buried. As a self-confessed gold bug, I can assure all that inflation is the only reason I buy gold. And recently, I'm buying a lot. September 12, 2009 http://dollardaze.org/blog/?post_id=00691 It's Labor Day, but there's nothing to celebrate. On July 24 this year, the government raised the minimum wage to $7.25, which is another way of saying that unemployment is mandatory for anyone who is otherwise willing to work for less. You have no freedom to negotiate or lower the price for your service. You are either already valuable at this rate or you are out of the game. September 7, 2009 http://dollardaze.org/blog/?post_id=00690 In our 5th August commentary we explained that the central bank couldn't simply withdraw monetary stimulus in order to avoid an inflation problem, because injecting new money doesn't just alter the general price level; it also changes the STRUCTURE of the economy. In the world of economics there are few things of greater importance than the concept of how monetary inflation really works, and yet hardly anyone understands it. Of special relevance, the current Fed chairman appears to have absolutely no idea how monetary inflation affects the economy. We'll therefore take another shot at explaining it; this time, for the sake of clarity and brevity, in point form. September 1, 2009