Reading time: 8 – 13 minutes

When a daisy chain of retrocessionaires exists, a single weak link can pose trouble for all. In assessing the soundness of their reinsurance protection, insurers must therefore apply a stress test to all participants in the chain, and must contemplate a catastrophe loss occurring during a very unfavorable economic environment. After all, you only find out who is swimming naked when the tide goes out. At Berkshire, we retain our risks and depend on no one. And whatever the world’s problems, our checks will clear. – Warren Buffett in the 2001 Berkshire Hathaway Chairmen’s Letter

Having read all of the Berkshire Hathaway Chairmen’s letters I can attest that there are many pearls of investing wisdom contained therein.  I prefer to keep my capital safe and not dependent on insolvent banks, which are barbarous relics compared to digital gold currency, in order for my checks to clear.  Just look at the FDIC failed institution list.  Nevertheless, the Great Credit Contraction grinds on and it appears the next round is imminent; a Laboon is coming.  As Asturalia’s News reports for the week of 6 Feburary 2010,

Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.

If the recovery is doing so well and if the credit crisis has subsided then why all the secrecy?  Why not tell everyone, openly, the true state of affairs?  Why does the Fed deny release of gold swap information under the FOIA requests from GATA?  But we know why.  Vampire squids operate in the shadows of secrecy and evaporate in the sunlight of truth.

THE LAST DAYS OF LEHMAN BROTHERS

Over the weekend I watched The Last Days Of Lehman Brothers and found it pretty entertaining.  For those who have not seen it I would recommend picking up a copy.

The day of reckoning has only been delayed and will be intensified.  This round will be attacks against currencies not investment banks.  Perhaps that day of reckoning is coming sooner?

EURO BEGINS EVAPORATING

The only plausible fiat replacement for the FRN$ is the Euro.  But if you think the FRN$ has problems the Euro’s are a multitude greater.  But after the Euro evaporates, and it will eventually, then it will be time for the FRN$ to evaporate.  There is only one alternative for the world reserve currency.

On May 20, 1999 Alan Greenspan testified before Congress, “And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

WHEN THE TIDE GOES OUT THE LABOON COMES

In Southeast Asia on the coasts of Thailand and Burma (Myanmar) live the Moken people who catch fish for their sustenance.  For hundreds of years the tribal knowledge of the sea has been passed from father to son.  One sign of particular importance is when the water recedes.  Why?  It heralds the ‘Laboon‘ – a wave that eats people.

The elders of the village saw this terrible sign in December of 2004 when the massive tsunami slammed Southeast Asia killing over 200,000 people.  I am sure the greyheads shouted and hooped and hollored in an attempt to warn everyone to run to higher ground.  And like humans are I am sure not everyone listened or was liquid enough to move and undoubtably some, but no Mokens, must have perished in the Laboon.

In the financial world, gold is the highest ground to protect against financial asset destruction because it is the King of Commodities, the ultimate means of payment and is always accepted.  Gold can stay at the bottom of the ocean for 500 years and still have the same amount of value when you pull it out.  In other words, you can wait any crisis out indefinitely.

On the other hand, when you are in money market funds, auction rate securities, the massive bond market, (nationalized) retirement accounts, frozen bank accounts in Greece or Iceland, Monex, Failure-To-Delivers that weave the fiction of liquidity on the NYSE through the DTCC, or any other multitude of financial asset then you do not own an asset with intrinsic value.  That asset can become either worthless or not be accepted for value like with ARS, CMBS, and etc. which makes H.R. 4248 The Free Competition In Currency Act of 2009 all the more important.

THE GOLD PULLBACK WAS HIT

On 28 December 2009 in Third Round Of Gold Upleg Ready To Start I concluded,

Sure, the third round of the upleg could not materialize for any number of reasons such as interest rates being raised, the mythical Cibola being discovered, etc.  As the upleg progresses the gold to silver ratio should probably close from the current 63.27 towards a more normal 50-55.  The better time to buy gold, silver or platinum was before the first or second rounds of this upleg.  But if the precious metals are absent from one’s portfolio then the second best time to buy them is now although the real bargain may be around $1,050-$1,080 but we may not see that.

With gold trading around $995 on 9 September 2009 in Gold Party Barely Started I wrote, “This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms”.  With the current silver to gold ratio at 70.8 silver looks increasingly cheap.

I reiterated the opinion of $1300 by Q2 2010 on 9 October 2009 when interviewed on BNN.  About a month later I was joined in the $1300 price target by Paul T. Jones II of Tudor Investment Corporation and on 4 February 2010 John Embry of Sprott Asset Management, a long-time gold advocate, chimed in with a similar opinion.

Gold should continue to consolidate over the next few weeks but, the next big move is likely to be up.

This is the view of Sprott Asset Management’s chief investment strategist John Embry, who says he is looking for the price of the yellow metal to hit around $1,350 to $1,400 by late spring.

CONCLUSION

The Last Days of Lehman Brothers, like the movie Rollover, is playing out before our eyes but not with investment banks but with currencies, the common stock of nations.  A memorable quote was, ‘Nothing is something.’  And that is the reason to own gold.  As The Great Credit Contraction grinds on capital will oscillate in waves between gold, the FRN$ and the Euro as capital seeks safety and liquidity which results in the fictitious capital being evaporated.  For those who have not secured their financial castle on high ground, now is not the time to be hunting around for sand dollars in the retreated water.

The bailouts, quantitative easing and gigantic government enforced Ponzi scams known as retirement schemes will only cause the Laboon, which currently races towards the financial shore at a breakneak pace, to be that much larger and more intense.  Despite what Geithner shrills, Treasury debt will not only lose its Aaa status it will eventually become worthless.  The impotent costumed officials will be no more successful at holding off the Laboon than King Cnut was in ordering the sea to go out.

DISCLOSURES: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., Euros or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.

RELATED POSTS:

1. The Coming Market Crash
2. The DTCC And Market Liquidity
3. Gold And The Oil Majors Revisited
4. The Case For A Rise In The FRN Dollar
5. Massive Institutional Gold Market Change

Reading time: 8 – 13 minutes

H.R. 627 The Credit Card Act of 2009 is a sweeping reform of credit card law. Many consumers are concerned over how this act will affect their spending capacity throughout the new year. The act is called into effect in February, meaning consumers will have very little time to determine how to use the act to their advantage.

While there are advantages to the consumer in 2010, the act may also adversely affect the economy, according to some analysts. However, conclusions are anything but cut and dried. For those that need a little more information, here are some details about the way the first serious credit card reform in history may affect you—and the economy at large—in 2010 and beyond.

WHAT IS H.R. 627 – THE CREDIT CARD ACT OF 2009

H.R. 3639 The Expedited Credit Card Accountability, Responsibility, and Disclosure Act of 2009, also known as H.R. 627 The Credit CARD Act of 2009, will dramatically affect regulations on credit cards beginning in 2010. The act aims to improve transparency between credit card companies and the American public, many of whom hold credit cards, under what the government calls an “open-end consumer credit plan.”

The act requires first and foremost for credit card companies to give consumers a month and a half (45 days) of notice if any increases in interest rates are going to be enacted. It also gives card owners the right to cancel their credit cards and pay any outstanding balances once these hikes are enacted.

Credit card companies are prohibited from retroactively increasing their interest rates for cardholders in good standing with the company, and the act does not allow credit card companies to arbitrarily change their agreement with cardholders. Finally, the act prevents companies from imposing unfair or excessive fees on cardholders, which will likely effect those with subprime and secured credit cards.

In summary, the bipartisan measure is meant to protect cardholders from unfair or unclear actions on the part of credit card companies and the big banks like Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and etc. along with their nefarious cohort Visa (V).

POSITIVE EFFECTS OF H.R. 627

It is no secret that some credit card companies and big banks have been acting unfairly for years, like Monex, and that the fees they collect from the general public are not clear and reasonable. Unfair fees and interest adjustments have been banned, meaning that consumers will be given information on how credit card companies are changing their terms at least 45 days in advance.

“Overdraft” coverage will also be opt-in instead of opt-out, which means that over limit charges may not be incurred automatically due to consumer unawareness, and that the card may be denied if you are over the limit and this may have a positive effect with credit cards and identification with potential credit report issues.

The terminology of credit card companies must be made clear in advance, with promotions being disclosed in plain and simple language, and terms that do not change during the first year of a contract. Terms of credit cards marketed to youths and college students must be plainly stated by both the company and the university. Finally, fees may not be placed on store credit cards and gift cards which have not been used for a period of time.

NEGATIVE EFFECTS OF H.R. 627

Unfortunately, as with any piece of legislation the CARD act is not without its drawbacks. The reason that companies are able to keep interest rates so low is that they are not accountable to a governing body for the terms of the contracts and promotions that they use to entice customers. Under the credit card act, it is likely that interest rates will rise substantially. This will make new credit cards unobtainable for many individuals with poor or no credit.

No-fee credit cards will likely disappear as a result, and credit score checks, especially on the best credit cards, will probably become stricter, limiting the number of individuals who can apply for new cards. Although many Americans expect a freeze on interest rates until the act takes effect, most credit card companies will continue to raise rates until they are prohibited by law.

The result may be a slowing economy—many individuals expect to buy and borrow on credit; if they cannot, they will not buy at all. Without consumer purchases stimulating economy, the slump could last longer and consumers could end up frustrated with the lack of options. Less spending means less stimulus, and less spending may be the result of the act.  This is a good example of credit contraction.

IMPACT ON BANK EARNINGS

Andrew Martin of The New York Times recently wrote an extremely high quality article about the ginormous fees Visa (V) charges and nefarious practices in the credit card industry between Visa, Mastercard and the banks.  He wrote:

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Visa has managed to dominate the debit landscape despite more than a decade of litigation and antitrust investigations into high fees and anticompetitive behavior, including a settlement in 2003 in which Visa paid $2 billion that some predicted would inject more competition into the debit industry.

The Visa, Mastercard and the big banks like Bank of America, Citigroup, etc. are profiting tremendously while charging outrageous fees to merchants and consumers.  The populist call is to “Starve the vampire squids!” and that is precisely what this legislation is intended to do.  But legislation has an interesting way of working unintended consequences.

This act will likely contribute to a decline in fees and profits for the large banks like Bank of America, Citigroup, Wells Fargo, etc. while also increasing their exposure to credit risk with debtors that are carrying balances and interest rate risk by not being able to maneuver as efficiently in response to interest rate increases by the Federal Reserve.  According to Bloomberg Wells Fargo already raised rates while sacrificing about $1B on a bet that interest rates will rise.

CONCLUSION

The banking industry and credit card companies are facing a public relations nightmare; after all, they get to privatize the gains with massive bonuses while socializing the losses through multi-billion dollar bailouts.  Matt Taibbi described it best:

The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

H.R. 627 and H.R. 3639 are intended to be the Nanny State coddling the American public and protecting them from the evil big banks.  But this type of legislation will most likely have unintended consequences such as raising the cost of credit, decreasing its availability and preventing the savers, not that there are any real savers and producers in the economy anymore as they have all left for Galt’s Gulch, from being able to efficiently allocate their capital to the entrepreneur.

While I am no fan of the big banks and their vampire squid blood funnel there is an easier way to blunt their beak and starve them while at the same time providing a sound foundation for the American economy: buy gold, silver or platinum, use them as currency and pass H.R. 4248 The Free Competition In Currency Act of 2009 which would repeal the capital gains on the precious metals that is the major deterrent to their circulating as currency in ordinary daily transactions.

DISCLOSURES: Long physical gold and silver with no interest in BAC, JPM, WFC, C, V or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.

RELATED POSTS:

1. Fair Value Lying
2. Starving The Vampire Squids
3. Bankrupting For Profit
4. Global Quantitative Easing
5. The Great Credit Contraction Is Available

Reading time: 17 – 28 minutes

On 9 December 2009 Representative Ron Paul introduced H.R. 4248 the Free Competition in Currency Act of 2009.  This Act has the potential to impact the investment world more than any other legislation that has been enacted for decades.  The impact on the bond market, Treasury market, stock market and general economy would be tremendous and disruptive.

The aims of the Act are fairly simple to (1) repeal federal law which currently decrees unconstitutional forms of currency legal tender, (2) prohibit federal taxes on gold, silver, platinum, palladium or rhodium bullion, (3) prohibit States from assessing tax or fees on any currency or monetary instrument used in interstate or foreign commerce that has legal tender status under the United States Constitution, (4) repeal federal criminal code pertaining to gold, silver or other metal coins and nullify any previous convictions under those codes.

Like he has often been when attempting to restore the checks and balances of the Constitution on this issue with H.R. 4248 Dr. Ron Paul is the lone voice in the wilderness and has no co-sponsors.  To my knowledge the only legislation Dr. Ron Paul has introduced that has been approved and enacted is Public Law 99-185 and Public Law 99-61 which require under 31 United States Code 5,112 that ‘the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which’ contain .999 fine silver or fine gold.  When the public wants to buy gold or silver, lawful money, there should be enough!

H.R. 1207 – FEDERAL RESERVE TRANSPARENCY ACT OF 2009

On 26 February 2009 Representative Ron Paul of Texas introduced H.R. 1207 the Federal Reserve Transparency Act of 2009.  Most in the financial establishment chuckled, politicians ignored it and the general public was clueless as to its effect.  But because of rapid education of the public and the political pain they exerted on the politicians the bill now has 317 co-sponsors.

To fully understand the impact of the H.R. 4248 legislation it is important to take a short journey through American legal history.

CONSTITUTIONAL LEGAL TENDER

Under Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin Money, regulate the Value thereof’.  Notice the Constitution does not say what money is only that it is something that is coined rather than printed.  The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”  The Constitution operates on the principle that if a power is not specifically delegated then it is prohibited.

In this case, the Federal Government is given no authority to make anything legal tender.  The Federal Reserve Act of 1913 was enacted by Congress creating the Federal Reserve and it would not be the first unconstitutional legislation.  They habitually violate their own laws.

Because Congress does not have the power to declare anything legal tender and because the Federal Reserve was created by Congress therefore it follows that the Federal Reserve cannot declare anything legal tender.  The individual States do retain the power to declare things legal tender but are restricted under Article 1 Section 10 Clause 1 from making any ‘Thing but gold and silver Coin a Tender in Payment of Debts’.   The creature cannot exceed the creator.

The Founding Fathers strongly supported the hard money system.  After all, they had just fought a Revolution after living through the tyranny of King George with the Stamp Act, Writs of Assistance, destruction from the the Continental hyperinflation and implosion of the economy.

Despite the constraints of the Constitution the monetary system of the United States has been perpetually in violation.  For example, the United States Dollar or Federal Reserve Note Dollar went poof multiple times last century including on 5 April 1933 when FDR decreed gold to be a dangerous weapon of mass financial destruction, deemed it a controlled substance and threatened any United States citizen with jail time for owning it,  on 4 June, 1963 and 24 June 1968 when silver certificate redemption was completely ceased and 15 August 1971 during the Nixon shock.

WHAT IS A DOLLAR?

Dr. Edwin Vieira, J.D., is the author of the preeminent legal treatise on monetary jurisprudence in American law Pieces Of Eight, holds four degrees from Harvard and practices law before the United States Supreme Court.  I highly recommend reading Dr. Vieira’s entire essay, What Is A Dollar?, which is quoted only in small part here:

2. Do the present monetary statutes intelligibly define the “dollar’”?

Unfortunately, the present monetary statutes do not define the “dollar” in an intelligible fashion.

a. Federal Reserve Notes. Most people associate the noun “dollar” with the Federal Reserve Note (“FRN”) “dollar bill,” engraved with the portrait of President George Washington. This association is mistaken.

No statute defines – or ever has defined – the “one dollar” FRN as the ”dollar,” or even as a species of “dollar.” Moreover, the United States Code provides that FRNs “shall be redeemed in lawful money on demand at the Treasury Department of the United States * * * or at any Federal Reserve bank.”⁴ Thus, FRNs are not themselves “lawful money” – otherwise, they would not be “redeemable in lawful money.” And if FRNs are not even “lawful money,” it is inconceivable that they are somehow “dollars,” the very units in which all “United States money is expressed.”⁵

b. United States coins. The situation with coinage is more complex, but equally (if not more) confusing. The United States Code provides for three different types of coinage denominated in “dollars”: namely, base-metallic coinage, gold coinage, and silver coinage.

c. Currency of “equal purchasing power”. The UnitedStates Code provides no answer to this perplexing question. Indeed, it mandates that the question should not even be capable of being asked. For the Code commands that “the Secretary [of the Treasury] shall redeem gold certificates owned by the Federal reserve banks at times and in amounts the Secretary decides are necessary to maintain the equal purchasing power of each kind of United States currency.¹⁴

The term dollar is used in Article 1 Section 9 Clause 1 and the Seventh Amendment.  Neither the slave-trade faction nor the right to trial by jury would have accepted these provisions without a clear definition of what the dollar is.

Therefore, their support of these provisions inferentially establishes what a literal reading of them straightforwardly suggests: to wit, that the noun “dollar” refers, not to a mere name applicable to whatever Congress whimsically might decide thereafter to call a “dollar,” but instead to a particular coin so familiar in American experience as to be beyond political transmogrification. … Obviously, Jefferson’s free-market, scientific approach is a world apart from the arbitrary way in which Congress has set up the mutually incompatible and internally irrational sets of silver, gold, and base- metallic coins that exist today.

2) The Coinage Act of 1792. Little more than a year after Hamilton’s Report, Congress enacted its principles into law.

Section 9 of the Coinage Act of 1792 contained the monetary definitions for the United States monetary system and defined

DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

THE COINAGE ACT OF 1792

It is interesting to see the difference between how the Founding Fathers and the current politicians deal with those who engage in quantitative easing.  For example, on 21 November 2002 at the National Economists Club in Washington DC Federal Reserve Chairman Ben Bernanke said,

A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

Section 19 of the 1792 Coinage Act provided:

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

As David Reilly of Bloomberg reported on 29 January 2010 in Secret Banking Cabal Emerges From AIG Shadows:

Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.”

Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark. …

Now, I’m not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.

Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

Reuters reported on 8 December 2009 that the Chinese do not put up with this type of financial terrorism:

Yang Yanming was sentenced to death in late 2005 and took the secret of the whereabouts of 65 million yuan ($9.52 million) of the misappropriated funds to his grave, the Beijing Evening News said.

The report added that Yang was the first person working in China’s securities sector to be executed. …

Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.

It will be interesting to see if there is swing in the political attitude of the people towards the Federal Reserve engaging in quantitative easing.  As Dr. Ron Paul was the lone voice in the wilderness with calling for an audit of the Federal Reserve, is currently a lone voice about competing currencies and while he is joined by an increasingly shrill chorus condemning the bailouts he may yet become a lone voice in championing in introducing stiff legislation as a deterrent instead of rewarding the nefarious behavior with bailouts.  If legislation like the 1792 Coinage Act were to be passed then there would likely be a lot of rounding up to do.  Financial criminals, whether engaged in something large like unconstitutional legal tender or something small like a potential Monex fraud, should take heed.

CURRENCY CONTROLS

Many currency controls are in place which support the FRN$ by hindering its competitors such as gold, silver, platinum, palladium or rhodium.  H.R. 4248 intends to remove these barriers.  More may be implemented and holders of FRN$ may their usefulness and velocity frozen.

For example, there are ‘qualified intermediary’ rules the Infernal Revenue Service require foreign banks to follow even where legislation protects bank privacy.  The PATRIOT Act allows for ’sneak and peak’ warrants along with the ability to confiscate cash at will and in secret.

A particularly insidious but scarcely mentioned currency control was implemented by the United States Mint on 14 December 2006 which provided:

The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.

“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”

Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.

The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.

Better be careful with the amount of pocket change you take across the border into Mexico to buy gum.  You may find yourself unjustly criminally liable and headed to jail!

ECONOMIC IMPLICATIONS

The Federal Reserve Note is a bill of credit, a debt instrument.  As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression, “It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market.  But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.”

Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”

H.R. 4248 would hasten the liquidation of the FRN$ credit instruments and hobble the government and central bank’s ability to inflate further.  Because the monetary metals are safe stores of value it would encourage savings.  The cascading effect this would have on wage rates, prices and the inability to subsidize unemployment would allow the country to recover from this greater depression much quicker.

UNAVOIDABLE COLLAPSE

The current unconstitutional monetary system will collapse.  It is not a matter of if but when.  Tremendous resources are being mashelled in an attempt to stop the collapse but it is about as effectual as a lone man putting forth his arm to stop the might Amazon from flowing or some costumed King named Cnut decreeing that the tide should not rise.  Economic law will takes it course.

As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’

The fiat currency system with the Federal Reserve Note dollar as the world reserve currency is in the process of and will eventually completely breakdown and fail.  There is no easy solution.  The more capital is misallocated through bailouts the more painful the liquidation and correction will be.

Dr. Ron Paul’s legislative prescription to the monetary ailments is like taking a drug addict off drugs; the simplest, most ethical and most likely solution to put America back in a position to generate freedom, peace and prosperity.  To ignore H.R. 4248 and continue with the current monetary system is like giving an alcoholic a stolen bottle of whisky to cure his headache; while it may mask the pain in the short term it causes more damage, is immoral to steal the whisky and will lead to a worse headache later.

CONCLUSION

With unlimited greed, insatiable and imprudent desires in Wall Street and Washington it must be that the whole operation must combine and climax in an unsustainable debt bubble that either implodes in a depression or erupts in hyperinflation.  But in the grand design, gold and silver’s primary role are not as economic tools, insurance against depression or hyperinflation, but guarantors of liberty when actually used in ordinary daily transactions.

Gold, silver and the other precious metals protect against confiscation through inflation which is a form of taxation without representation or due process of law.  These shiny metals are not mere barbaric commodities but essential checks and balances in the American political machinery.

Thus, the fight over of competing currencies is about more than just wealth.  It is a fight with only two destinies:  freedom of choice or coercion.  To realize the first and vanish the second will not have too high a price because without it you will have paid the ultimate anyway without a return.

Dr. Ron Paul’s H.R. 4248 the Free Competition in Currency Act of 2009 would return America to a Constitutional monetary system, lay the foundation for freedom, peace and prosperity and clear up the unintelligible federal law in these regards.  For these reasons I endorse this legislation.

Disclosures: Long physical gold and silver with no interest in the problematic SLV or GLD ETFs or the platinum ETFs.

RELATED POSTS:

1. Define The Dollar Or Else
2. Audit The Fed And Apportionment
3. Current Dollar Currency Controls
4. Gold Bug Bit The Tudor
5. The Case For Withdrawing Nickels

Reading time: 8 – 13 minutes

The Great Credit Contraction grinds on as the system continues evaporating.  People are realizing the true nature of the worldwide fiat currency and fractional reserve banking system that is built on a fraudulent premise and has become a Ponzi scam of epic proportions, the largest in the history of the world.  Capital, both real and fictions, has begun burrowing down the liquidity pyramid while the upper layers evaporate.  Recent developments in the one month United States Treasuries appear to portend another round of credit crisis.

THE TREASURY BUBBLE

A year ago I discussed how the Treasury bubble was the largest of all and explained both how and why it would burst.  I prognosticated:

However, as more capital piles into them it drives rates lower and lower.  Eventually Treasury Bill rates reach 0% or even go negative.  This presents a problem.

Why hold a Treasury Bill with a bank, broker, custodian bank or the Federal Reserve itself when you could take possession of physical Federal Reserve Notes?

Taking possession eliminates at least two types of risks.  First, is any potential counter-party risk with whoever is holding the Treasury Bill for you.  Second, ‘political risk’ which is a much larger threat. …

As the yields on Treasury Bills approach 0% they have the return of cash but do not have the benefits of cash as they may be impregnated with counter-party risk or have decreased liquidity.  In other words, Treasury Bills and cash have the same benefit profile but not the same safety and liquidity profile.  This analysis also applies to demand deposits with the bank such as checking accounts or CDs.  All the downside but none of the upside.

Predictably the Treasury bubble burst.  Poof!

PILING INTO ONE MONTH TREASURIES

The one month Treasury has recently traded with negative rates.  This portends another round of the credit crisis which could very easily have its catalyst in either another sovereign debt downgrade of either Japan or Portugal or in Austria with banks owning a large amounts of primarily mortgage assets denominated in foreign currency in primarily Slovakia but also the Czech Republic, Hungary and Croatia.

The last few weeks shows just how close the rates are towards 0%.  Of course, real interest rates are already negative.  But a weak FRN$ would help meet Obama’s goal to double exports which would not be helped by his proposed discretionary spending freeze.

MONEY MARKET FUNDS

One tool many investors use as a proxy for their cash are money market funds.  Many view these as like-cash vehicles just like many viewed auction-rate securities as like-cash vehicles for 25 years.  On 18 September 2009 I explained that I closed my Paypal money market fund because money market funds had lost government backing.  On 27 January 2010 Nasdaq.com reported:

The U.S. Securities and Exchange Commission approved by a 4-1 vote Wednesday rules designed to shore up the resiliency of money- market mutual funds, with general support from the industry, although fund representatives are uncomfortable with a few points. …

The rules also would permit a money-market fund’s board of directors to suspend redemptions if the fund is about to “break the buck” by having a net asset value fall below $1 per share. Currently the board must request an order from the SEC to suspend redemptions.

“The halting of redemptions will stem the motivation for runs. It also will eliminate the need for a failing fund to sell securities into a potentially de- stabilized market and further drive down prices,” Schapiro said.

For those with too much time on their hands who want to see what the proposed rule looked like I would direct you to page 32,714 of the 8 July 2009 Federal Register under proposed rule 22(e)-3.  I find the discretion of the Director of the Division of Investment Management in this instance to be particularly egregious.

Treasuries are below money market funds in the liquidity pyramid because there is more safety and liquidity.  If a money market fund has redemptions suspended then that asset is not very liquid and will likely find their value evaporate.  This is precisely what happened with auction-rate securities and in some cases overnight investors went from thinking they held a like-cash instrument to finding themselves holding 40 year student loans that received no payments for several years.

WHERE IS REAL SAFETY AND LIQUIDITY

On May 20, 1999 Alan Greenspan testified before Congress, “And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

Because of massive governmental intervention for decades through either patent activities such as legal tender laws, the tax code, etc. or latent activities such as surreptitious leasing of gold into the market the result is a massively suppressed gold price.

The tremendous amount of evidence accumulated by the Gold Anti-Trust Action Committee ought to be examined by any serious investor or money manager.  As Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, asserted years ago, “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”

Nevertheless it is very difficult to assess an accurate value of gold, silver or platinum in this era and for a specific time period where almost all financial professionals are infected with the financial insanity virus, the system is riddled with chronic fingers of instability and it somehow muddles along like a terrifically abused zombie.  There is already a one world currency, gold, and it poses a mortal threat to fiat currency.

CONCLUSION

As the next round of the credit crisis plays out it may be worse than the earlier iterations.  All of the interventions have not addressed the root causes and are actually textbook responses for someone who would want to intentionally exacerbate the greater depression.

As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’

New credit creation is nearly non-existant, banks are hoarding reserves so they can win the Friday bank failure lottery and the velocity of currency has slowed to glacial speeds.  Because gold and the FRN$ abut in the liquidity pyramid they tend to have an inverse correlation.  Buying gold and other tangible assets, I particularly like the extremely rare and useful platinum, is the only place to go for safety from the specter of the FRN$ evaporating through hyperinflation because of all the quantitative easing.

After all, with a gold coin in hand, or with a reputable third party like the company GoldMoney, I can remain solvent longer than the market can remain irrational.  Gold is not an investment but real cash because it is ‘risk-free’ and an instrument for wealth preservation not wealth generation.  Far into the future and long after these money market funds are frozen, retirement accounts are nationalized to buy FRN$s that are evaporated into nothing via hyperinflation the gold or platinum coin will still have value because they are tangible assets that are not subject to counter-party risk.

What, if anything, have you done to protect yourself from these looming issues and what would you recommend to your fellow readers?

DISCLOSURE:  Long physical gold, silver and platinum with no interest TLT, the problematic SLV or GLD ETFs or the platinum ETFs.

RELATED POSTS:

1. Gold And The Oil Majors Revisited
2. Gold Party Barely Started
3. Political Risk Is Evaporating Treasuries
4. Inflation With Gary North Or Deflation With Mish
5. The Coming Market Crash

Reading time: 8 – 12 minutes

The great monetary scientist Isaac Newton, who served as England’s Master of the Mint for 24 years, also did some ancillary work in physics.  The laws of Newtonian physics are known by nearly everyone and are often used by analogy to apply logical reasoning in other fields.  In this case, a few of these laws are particularly applicable in discussing the impending state of the economy in 2010 based on the massive momentum of 2009.

LAWS OF MOTION

Stated in layman’s terms the three great Newtonian laws of motion are:

1.  A body persists in a state of uniform motion or of rest unless acted upon by an external force.

2.  Force equals mass times acceleration” or “F = ma.

3.  To every action there is an equal and opposite reaction.

In regards to human action a body seems to stay at rest rather than work unless acted upon by some type of force.  The force can be either internal such as hunger, the desire for self-actualization or anywhere in between on the Maslow hierarchy of needs or external such as a saber-tooth tiger, boss or customer.  To sustain life the human body must consume fuel.

Capital is the means of production and the difference between production and consumption flows into or out of the store of capital.  Out of this dynamic human society has attempted to efficiently allocate capital to produce more and this has resulted in institutions, large and small, where individuals work in the attempt to produce in order to meet their needs and wants.  Of course, the great fiction of government is that everyone can live off someone else’s production.

MASSIVE FAILING INSTITUTIONS

The chains of habit are too weak to be felt until they are too strong to be broken.  The mass of the economy times its speed in the Information Age has resulted in a tremendous force.  But this mass has largely been built from the atomic level upon something which is inherently unstable and undefinable leading to chronic fingers of instability.  What Is A Dollar?

The problem is debt and because psychology is changing, The Great Credit Contraction has begun and the rate at which the mass of the economy is evaporating is truly scary.  While many attribute the ongoing financial crisis to the subprime mortgage mess, which is surely a contributing factor, the problem is much more systemic than a few defaulted mortgages.

UNEMPLOYMENT

But now the second wave of Option ARMs are getting ready to reset at the same time the Federal Housing Administration is requiring higher down payments.  But where are these renters going to find a job when over 6.1M people have been unemployed for 27 weeks or more?

And what about all the discouraged workers who are not included in the labor force because they have ceased looking for non-existant jobs?  The Detroit News reported:

Despite an official unemployment rate of 27 percent, the real jobs problem in Detroit may be affecting half of the working-age population, thousands of whom either can’t find a job or are working fewer hours than they want …

Mayor Dave Bing recently raised eyebrows when he said what many already suspected:  that the city’s official unemployment rate was as believable as Santa Claus.  In Washington for a jobs forum earlier this month, he estimated it was “closer to 50 percent.”

With so many unemployed almost all of the States, with California being the poster child, are under severe financial pressure.  For example, 40 state unemployment insurance funds are either broke or moving in that direction.  While there are people starving in the chaos of Haiti about 37M Americans are now on welfare state food stamp programs, the rate of acceleration is expanding at about 20,000 per day and 1.4M Americans filed for personal bankruptcy in 2009.  And this is a rosy situation considering the FRN$ is still the world’s reserve currency!

RETIREMENT CHAOS

The Baby Boomer generation has driven trends their entire lives because of their mass and acceleration.  From Gerber baby food to the housing booms and busts caused by costumed government officials gallivanting in genocide which caused serious aberrations in demographics and are now getting increasingly explosive politically as the 2016 election will see 78M Baby Boomers pitted against 112M Millennials.

Social Security and Medicare are out of control kudzu that are strangling the economy.  Additionally, virtually all pension funds in the United States are massively underfunded with epic games being played with the discount rate.  As Forbes reported:

The GAO study found that states’ cumulative unfunded liabilities were $405 billion, while Novy-Marx and Rauh figure $3.2 trillion is a more accurate number.

All those tax eating costumed government officials are going to be extremely happy when they realize their retirements evaporated.  But with unemployment benefits draining the capital of the economy like vampires while the productive members of society are punished via increased taxation and regulation the entrepreneur has either learned how to vanish or been turned to stone by the local Gorgons.

The result has been massive declines in State and local tax revenues.  Even Federal corporate income tax receipts were down 55% for the fiscal year ended 30 September 2009.

KICK THE CAN

So like a classic Ponzi scam the answer has been to attempt to bailout the State and local governments via Federal resources.

For example, a chief bailout recipient Citigroup is accepting California IOUs indefinitely at face value; a surreptitious Federal bailout of California in a preemptive attempt to keep them from seceding monetarily by taking the next step of unconstitutionally decreeing the IOUs legal tender for all debts public and private.  The Euro faces the same type of structural issues.

But if the States unconstitutionally decree FRN$ legal tender then why not their own little colored coupons? With 13% of US GDP a $30B deficit California should have nothing to worry about with a mere $30B+ cash-flow issue.  After all, the California Dollar could have a bear on it; the Florida Dollar an alligator, the Texas Dollar a long-horned bull and the New York Dollar a vampire squid.  They would be such fitting symbols!

And so the adjusted monetary base has exploded.

The FRN$ is destined to evaporate and the increase in debt is only hastening the rate.

CONCLUSION

Despite propagandist cheerleaders on television the economy is in horrible condition.  The Obama administration’s attempt to alter the speed and direction of the economy is textbook action for intentionally exacerbating the greater depression.  Like in the recently released movie Daybreakers soon the starving vampire squids of Wall Street, Washington DC, State and local governments will run out of their productive human livestock and only a few understand their true predicament.  They think they can ’save or create 3M jobs’.  Seriously?

No one knows how this ginormous mess will play out.  But the massive momentum of 2009 has largely shaped the direction for 2010.  While the FRN$ may rise in the short term it is an extremely risky play because of how fast hyperinflation could strike the FRN$.

Of course, among the chief uses of silver and reasons to buy gold, platinum and lead are to keep you and your property safe from the costumed vampire tax eaters who will likely spring Obama’s retirement trap by nationalizing retirement accounts and forcing purchases of US debt to bolster Treasuries.

Using force or intimidation against innocent people or their legitimately acquired property is unfair, immoral and unsustainable.  The current state of the economy and where it is headed is merely the result of cause and effect from economic law.  George Mason, the father of the Bill of Rights, observed this principle hundreds of years ago in his writings contained on page 966 of The Papers Of George Mason:

As nations cannot be rewarded or punished in the next world, so they must be in this. By an inevitable chain of causes and effects, Providence punishes national sins by national calamities.

Please, leave your thoughts on how you think 2010 will play out.

DISCLOSURE:  Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs, the platinum ETFs or Treasuries.

RELATED POSTS:

1. The Coming Market Crash
2. Massive Institutional Gold Market Change
3. Quantitative Easing By Fed Is Predictably Failing
4. Help Out Someone With Past Posts
5. Gold Party Barely Started

Reading time: 7 – 11 minutes

Over the past few days I have received insane Facebook status updates from a close friend.  The stream that followed has left me with profound respect and caused me to reflect on some lessons that can be learned.

14 January 2009 9:54 a.m. I am packing for Haiti… so many things bring to help. How am i going to carry all this?

15 January 2009 12:26 p.m. I am STUCK in Dominican REpublic trying to arange a chartered flight to get us and the 36 rescue workers 4 dogs and 7,300 pounds of rescue gear to get them on the ground in Haiti. it is FAR too dangerous to cross on land WE NEED A FLIGHT. can you help in ANY way?

17 January 2009 7:33 p.m. I was put in that situation NO ONE EVER wants to be put in tonight… I got to ground zero to a hospital in the capital of Haiti, we were told needed us. The doctor pulled us aside and to a woman that had a gash in her calf big enough to put a football in, he siad, what do you do? I quickly replied, a turnicuit 1.5 inches above the knee… he said perfect DO IT.

WOW

There are two options:  coercion and force or freedom of choice.  My friend exercised his freedom of choice to spend his own money, which he has very successfully and morally earned through many entrepreneurial ventures, to board a plane and fly straight into a third world hell hole where it is estimated that hundreds of thousands of people have died in the recent earthquakes.  Despite the economic conditions an estimated $10M of donations has been raised for Haiti relief efforts.

Fortunately my friend, like so many other good people, still has enough resources to perform this service while Obama struts around like a hero for using extorted tax revenue for aid.

THE DRIVE TO SURVIVE

Life has an unquenchable drive to survive even at the expense of other life.  It is the ability to reason that largely separates humans from the rest of the animal kingdom.  But that is not to say that humans, both in rags and pinstripe Wall Street suits, do not act like animalistic barbarians trampling other’s freedom of choice.

When times get tough it is the rare human that showcases the supernal spark by willingly sharing the last breadcrumb or boarding a plane and descending into chaos with the intent to relieve suffering.

THIN VENEER OF ORDER

Sure, there is the bad man who may steal or even rob a piece of bread.  But we can have at least some sympathy for this behavior when considering the totality of the circumstances.  And the bad man also realizes his badness.

But the truly evil man is the one that struts around thinking he is doing good by robbing the piece of bread from another to then allocate how he sees fit.

America, like Haiti and the rest of the world, has a tiny fraction of the population which produces the food.  When there are disruptions, whether it is a hurricane in New Orleans or an earthquake in Haiti, the thin veneer of order tends to evaporate for many reasons.

SURVIVALISM IN THE SUBURBS

The Telegraph reports that Royal Caribbean International, who has pledged $1m to relief efforts, maintained the schedule to send its cruise ship to dock at a private beach a mere 60 miles from the devestated Port-au-Prince.  Of course, some keyboard rescue workers think providing revenue for the locals in that city is insensitive and the trip to Labadee should have been canceled.  But that is about the worst thing that could be done.  But how far away from a disaster zone should activities be canceled?  60 miles?  600 miles?

Sure, dialing an 800 number or texting a $5 donation is commendable.  But to make a real lasting impact the issue is the need to be prepared locally with medical supplies, food, power, etc.

I compiled a collection of suggestions in Survivalism In The Suburbs for how an individual can be better prepared for possible disruptions and the dissolving of social order.  Being prepared bestows a position of power and the ability to act with a higher standard rather than resort to baser animalistic impulses.

Additionally, I recommend people have a ‘last plane account’ which answers the questions:  if you have to take the last plane out of your city then (1) where do you go and (2) how do you maintain your standard of living?  I have used my own preparations several times over the years.

THE REAL CAUSE

Since the earthquake is just the most immediate action in the causation chain it is credited with killing the tens or even hundreds of thousands of people.  But how many deaths could have been prevented but for do-gooder politicians voting to send foreign aid and market restrictions that destroy wealth and thus prevent the ability of the Haitian population to make adequate preparations?  But for these giant wealth destroying machines how many more resources would be available to respond to and relieve suffering?

Like the socialized roads in America that result in about 40,000 deaths per year; in this instance the blame is not being squarely placed on the criminal gangs costumed in government regalia who have made serious decisions months or years before that are both actual and proximate causes in the deaths of hundreds of thousands.

It is so much easier to lay the blame on an unaccountable ‘act of God’ in an attempt to absolve the truly culpable parties.  Ideas have consequences and bad ideas have bad consequences which are resulting in hundreds of thousands of dead Haitians.

GOOD IDEAS

I am grateful for those who have donated to help relieve the suffering in Haiti.  I admire my friend who has traveled into chaos to look his benefactors in the eye.  Hopefully he returns safely.

The Haiti earthquake of 2010 can be a teaching experience for us all.  When considering physical preparation I think the best insurance is a three month supply of food and a 72 hour kit.  We can inventory and bring current our supplies.

But to strike at the root we need to help others understand the source of humans rights and the proper role of government.

Since individuals are “endowed by their Creator with certain unalienable rights” and because individuals form governments to protect property, life, and liberty, it follows that individuals are superior to their creation of government.  Individuals can grant to their creation at most only those rights they possess.

No individual possesses the right to unjustifiably infringe on another individual’s autonomy, and because individuals create governments, no government can possibly be justified in the possession of such a right.  Neither does an individual possess the moral authority to use coercion and force to compel another to perform charity against their will.  Therefore, legitimate government must act within the constraints of the Non-Aggression Axiom.  Otherwise those actors are merely criminal gangs costumed in government regalia.

Government represents one of the most powerful forces on earth.  Therefore, an individual’s political beliefs reveal with perfect clarity his or her moral character.

Over just the past five years I have been in hurricanes and earthquakes in America, a massive civil disturbance in Argentina and several other life threatening situations. It can happen here and there.  Once we understand the philosophy then we can live in harmony with it and attempt to persuade others to do likewise.

You can not feed someone else when your own stomach is empty so why not at least get a 72 hour kit.  You can also persuade others through your example.  What better way than your local food bank or getting on a plane like my good friend?

RELATED POSTS:

1. Survivalism In The Suburbs
2. Civil Unrest In Iceland
3. US Dollar in Hyperinflation
4. A Free Speech Infringment Against Tallan Lanz

Reading time: 6 – 10 minutes

I like round numbers because they are easier to count.  For example, on 14 July 2009 I recommended buying platinum at $1,118 and today it trades at $1,618.  I like an unrealized gain of $500 per ounce in 6 months which translates into 44.7% in little colored coupons or 17.5% in gold.  But is platinum overvalued and how can we tell whether we should buy more, hold or sell?

VALUE CALCULATION

Commodities are produced because they add value to society.  Wheat is to eat, oil is for fuel, steel is for building and platinum is mainly for catalytic converters in automobiles.  Why is gold produced?  There are plenty of tons of it in aboveground stockpiles, decades based on annual consumption, so why burrow miles into the earth to bury it in a vault?

The value gold adds to society is in its ability to assist us in performing mental calculations of value.  When using gold as the numeraire a much more accurate assessment can be made when allocating capital.  The third round of this gold upleg is just starting.

TECHNICAL ANALYSIS

In July 2009 the platinum to gold ratio was below 1.2 and currently it is around 1.41.  The extrinsic value of platinum has risen about 17.5%, when priced in FRN$ about 45% and when compared to the earlier upleg in April platinum is looking pretty expensive.  But as Professor Jastram explained in The Golden Constant all commodities tend to return to orbit around gold.  So where is platinum’s natural orbit?

The natural orbit for platinum is around 1.8 to 2.1 ounces of gold per ounce of platinum.  But this is just a cursory technical analysis.  To be sure of one’s assertion an analysis of the fundamentals under the Austrian school of economics is also important to undertake.

FUNDAMENTAL ANALYSIS

Platinum is an extremely rare but widely used precious metal.  For example, the annual worldwide platinum mining production is valued at about $7.8B compared to about 75M ounces of annual gold production or the FDIC’s $0 of reserves and a $500B line of credit with the Treasury to cover $4,831B of insured deposits.  In other words, platinum is a lot rarer than gold and gold is a lot rarer than little colored coupons.

According to the USGS 2006 Minerals Yearbook of the 239 tonnes of refined platinum sold in 2006, 130 tonnes were used for automobile emissions control devices, 49 tonnes were used for jewelry, 13.3 tonnes were used in electronics, and 11.2 tonnes were used by the chemical industry as a catalyst. The remaining 35.5 tonnes produced were used in various other minor applications, such as platinum jewelry, platinum rings, electrodes, anticancer drugs, oxygen sensors, spark plugs and turbine engines.  Platinum uses, like uses of silver, are multitudinous.

The giant wealth destruction team headed by the Vampire Squid In Chief Obama thinks that destroying perfectly functioning automobiles, with perfectly functioning catalytic converters, is a recipe for economic prosperity.  Additionally, billions of dollars of federal funds are being directed towards the Green Economy.  What do new cars and the green economy need?  Lots and lots of platinum.

And we all know the giant wealth destruction machine known as government always buys at a good price.  As their little colored coupons continue evaporating in The Great Credit Contraction holders of capital will continue scrambling for tangible assets.  But evaporating platinum takes a lot of effort because its melting point is 1,768.3 °C or 3,214.9 °F compared to gold’s 1,947.52 °F, silver’s 1,763.2 °F and it is important to remember that paper ignites at 451°F.

Because of the rising demand for platinum from both public and private parties, the shortage of alternatives for little colored coupons, platinum’s excellent monetary attributes and the ability to easily function as currency through innovations like GoldMoney therefore the future looks bright for the silvery-white metallic element.  The same principles for buying gold or silver safely apply when considering how to buy platinum.

PLATINUM PRODUCTION

Platinum producers are extremely rare.  There have been chronic problems with open cast deep underground platinum mining in South Africa.  There is Angloplat (AMSJ.J) which produced 2.5M ounces in 2007, Impala Platinum (IMPUY.PK) which produced 1.9M ounces for year ending 30 June 2008 and is up about 50% since I recommended platinum, Lonmin and Norilsk Nickel (GMKN.MM).  Stillwater Mining Company (SWC) is the only one domestic United States platinum producer, are majority owned by the Russian Norilsk and up about 137% from when I recommended platinum in July.

With commodity producers there tends to be a leveraged effect on earnings relative to the commodity price.  Consequently, a significant rise in platinum without hedging will tend to exponentially affect their bottom line either positively or negatively.

CONCLUSION

Platinum has had a tremendous run over the past 6 months and I am pleased with the performance.  Platinum is not nearly the incredible value today as it was then and the 50dma and 200dma are not at strategic entry points.  Nevertheless, it is a prime substitute for little colored coupons, goes into the cash portion of the balance sheet, is easily purchased with low margins, is extremely rare relative to the other precious metals, has bright demand prospects and still appears to be undervalued relative to gold by about .4-.7 ounces of gold per ounce of platinum.

So I recommend doing what I have done since being bitten by the platinum bug:  accumulating fully paid for physical metal on a consistent regular basis.  While I have not exchanged my gold or silver for platinum, largely because of tax considerations, I have shunted most of my gold and silver demand into allocated physical platinum.  After all, platinum, like gold and silver, can never become worthless.

DISCLOSURE:  Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs, the platinum ETFs or in the Angloplat, Impala Platinum (IMPJ.J), Lonmin and Norilsk Nickel (GMKN.MM) or Stillwater Mining Company (SWC).

RELATED POSTS:

1. Platinum Liquidity Increases
2. Gold Party Barely Started
3. The Coming Market Crash
4. Gold And The Oil Majors Revisited
5. The Case For Withdrawing Nickels

Reading time: 6 – 10 minutes

Hugo Chavez, president of Venezuela, started 2010 off by devaluing the Venezuelan bolivar by 50% from 2.15 per dollar from 4.3 per dollar, along with several other silly little limits.  This is continuing the theme of currency devaluations from late 2008 and 2009.  But the evaporation of currency is not only limited to third world socialist governments with eroding infrastructure but also happening to every major currency.  For cash balances the precious metals are the only refuge.

EVAPORATED CURRENCIES

The speed with which currencies can lose their purchasing power is astonishing.  For example, on Tuesday 3 February 2009 it took 109,759 tenge, the Kazakhstan currency, to purchase one ounce of gold.  On Thursday 5 February 2009 it took 123,346.  And that was small compared to the bolivar’s evaporation.

On 4 March 2009 the Armenian Dram went poof losing 30% of its value, shortly later on 15 April 2009 the Fiji dollar lost 20% in a devaluation event and in November it was Vietnam dong.  In October 2008 the Iceland Krona went poof which has harmed the infrastructure and led to civil unrest in Iceland.   During 2008 the British Pound went poof and hundreds of years ago the Continental Dollar went poof prompting the Founding Fathers to craft particular monetary powers and disabilities in the United States Constitution.

GOLD AND SILVER CANNOT EVAPORATE

Water’s boiling point is 99.974 °C or 211.95 °F.  The average temperature on the surface of the earth is 15 °C or 59 °F.

Gold’s boiling point is 2,856 °C or  5,173 °F.  Silver’s boiling point is 2,162 °C or 3,924 °F.  The temperature on the surface of the sun is 5,400 ºC or 9,800 ºF.  Additionally, gold is extremely resistant to corrosion and can sit at the bottom of the salty ocean for centuries and still retain its luster.

I suppose gold could go poof on the surface of the sun but on earth physical gold cannot evaporate when used as a currency in ordinary daily transactions or when hoarded safely in vaults.  At all times and in all circumstances gold remains money.  When the Zimbabwe dollar evaporated the people quickly found out you can always trade gold for bread; assuming there is bread available which is an excellent reason to follow provident living principles and prepare for survivalism in the suburbs.

On 20 May 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

GOLD’S 2009 PERFORMANCE

I always get a chuckle out of the paper bugs who cling with so much tenacity to their little colored coupons.  So to the paper bugs, do you like numbers?  How do you like them numbers? (from the Academy Award Winning Goodwill Hunting)  I am waiting for gold to be devalued to $0 so that I can buy all of it.

The results become even more stark when using gold as the numeraire, or presentation currency under International Accounting Standard 1.  I shudder to think of the change in a Venezuelans financial statements in a single day from this devaluation if most of their wealth was located in Venezuela.  But the income statement and balance sheet destruction is not limited to Venezuelans but taking place in all major currencies.

VENEZUELA’S ERODING INFRASTRUCTURE

One unfortunate consequence of fiat currency and the attendant inflation is the result of misallocation of capital that leads to malinvestment and in many cases neglect of important infrastructure.  Venezuela is no different.

Venezuela’s electrical infrastructure, heavily reliant on hydroelectric with 73% coming from the Guri Dam which has been seriously enervated by a drought and has already been neglected, underdeveloped and overuse for years.  Venezuela’s mushrooming demand coupled with shrinking supply is resulting in a slide towards darkness with several major electricity failures in 2008 and 2009 with unplanned blackouts and brownouts reminiscent of California’s.

With the Guri Dam’s water levels at extremely depressed levels Columbia has cut natural gas exports about 70% from 7 million cubic meters per day to a paltry 2.3 million.  At the same time Chavez has implement subsidies which have resulted in increased demand.  Coupled with theft the electrical usage per capita is among the highest in all of Latin America with national demand around 17 gigawatts.

Because of neglect of the infrastructure it has become increasingly inefficient with tremendous amounts of electricity being lost or stolen by the typical Latin creativity where they just tap into the power lines with makeshift wiring systems.  Because the low utility prices artificially stimulate demand and leads to less resources for the electricity producers therefore their ability to police the lines is greatly hampered.  With consumption barely below production the system is extremely vulnerable to spikes which can cripple the system in a similar way to what happened in the gigantic 2003 blackout in the US Northeast that affected about 55 million people from Toronto to New York City.

Price controls lead to shortages and shortages lead to rationing. Venezuela is no different and announced in December 2009  electricity rationing requirements.  Due to the power being cut off there have been tremendous production complications; particularly among the metals industry with some aluminum producers cutting as much as 40% of their production.  Gold production will likely  continue trending lower also.  What is next for Venezuela? A typical response from a vampire squid criminal costumed in government regalia would be to implement aluminum rationing.

There is no feasible substantive solution to the electrical crisis in Venezuela.  Like almost all crisis this one is created by governmental intervention in the market and after initial negative unintended consequences the government interferes more causing even more negative effects.  This is a prime example of how government is a weapon of mass wealth destruction.

And because America is implementing similar policies therefore it would be irrational to think America will have different consequences.  Just wait until your 104k, IRA or other type of retirement account gets nationalized to support United States Treasuries.  There is comfort in the thought that at least you will not be able to boot up your computer to check your balance!

CONCLUSION

The fiat currencies represent the common stock of governments and all are evaporating which is predictably leading to civil unrest.  In response, governments which are weapons of mass wealth destruction, respond with draconian measures like Venezuela has done with price subsidies, rationing and currency devaluation and these measure further exacerbate the situations.  Such customer service is to be expected when your enemy is your customer.

Of course, Venezuelans could have protected themselves by casting the ultimate vote of no confidence in Chavez and buying gold.  At least then their capital would not have evaporated.  This is just the prelude to 2010 which will be an interesting and exciting year!

DISCLOSURES:  Long physical gold, silver and platinum with no position the problematic SLV or GLD ETFs.

RELATED POSTS:

1. Illusions Evaporate Even On Tax Day
2. Current Dollar Currency Controls
3. Platinum Liquidity Increases
4. Help Out Someone With Past Posts
5. Gold And The Oil Majors Revisited

Reading time: 6 – 10 minutes

The Federal Government is running massive budget deficits which is creating a massive supply of Treasuries.  But there is no demand and so the Federal Reserve is monetizing the debt.  But these colored coupons merely amount to certificates of confiscation.  Where will Congress find the capital to buy Treasuries?  Most likely, your retirement account and screwing up your retirement calculator.

MASSIVE BUDGET DEFICITS

The Obama administration is on track to need approximately $2T of new debt sales or about 300% of 2008 debt to fund their aggressive spending.  But an disproptionately large amount of purchases come from the ‘Household Sector’.  Eric Sprott of Sprott Asset Management enlightens us:

We must admit that we were surprised to discover that “Households” had bought so many Treasuries in 2009.  They bought 35 times more government debt than they did in 2008. … Amazingly, we discovered that the Household Sector is actually just a catch-all category.  It represents the buyers left over who can’t be slotted into the other group headings. …

Our concern now is that this is all starting to resemble one giant Ponzi scheme.  We all know that the Fed has been active in the market for T-bills.  Under the auspices of Quantitative Easing, they bought almost 50% of new Treasury issues in Q2 and almost 30% in Q3.  It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing.  We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. …

As we have seen so illustriously over the past year, all Ponzie schemes eventually fail under their own weight.  The US debt scheme is no different.

Ponzi schemes fail when capital seeks safer and more liquid assets by burrowing down the liquidity pyramid.  This is similar to the process that happens in a credit contraction.  As I wrote earlier, the Federal Reserve will fail with quantitative easing.

CERTIFICATES OF CONFISCATION

Treasury instruments have been, are and most likely always will be certificates of confiscation.  The saving retirement calculators are almost guaranteed to fail because of this uncertainty.  Here is a visual explanation so you can understand the math.

So likewise Treasury Inflation Protected Securities (TIPS) are just an invitation to be stolen from.  This makes your simple retirement calculator even less useful.

RETIREMENT ACCOUNTS

Congress looted the Social Security Ponzi scam many years ago.  The social security retirement calculator is completely broken and predictably riddled with fraud.

Where is the next largest pool of capital for these vampire squids?  Yes, your 401k (now a 104k), SEP-IRA, Roth IRA, etc.  How will these tax eating parasites slurp that value?

The Telegraph reported,

The Argentine state is taking control of the country’s privately-managed pension funds in a drastic move to raise cash. … So, over $29bn of Argentine civic savings are to be used as a funding kitty for the populist antics of President Cristina Kirchner.

On 8 January 2010 Kirchner has attempted to fire the chairman of the central bank because he has refused to use about $6.6B of the funds to pay international debt that falls due in 2010 but a federal judge has ruled Mr. Redrado should be reinstated at the independent central bank.  What a mess!  The President wants to fire the banker because he will not hand over everyone’s pension money to overseas bankers.

Businessweek has reported,

Seven in 10 U.S. households object to the idea of the government requiring retirees to convert part of their savings into annuities guaranteeing a steady payment for life, according to an institute-funded report today. … The institute’s member companies manage $11.6 trillion of assets in mutual funds, including employer-sponsored 401(k) accounts.

While the state sponsored retirement accounts may appear alluring, particularly when your employer matches your contribution, you may get more than you bargained for.  Like this English man if you contribute to your state sponsored retirement accounts then you may find unwittingly find yourself in an uncomfortable situation and have no one to blame but yourself.  The tax eating looters and moochers will attempt to force you to become infected with their lecherous colored coupons.

CONCLUSION

The nation does not need Washington DC and individuals do not need Washington DC usurping their retirement accounts and forcing the purchase of Treasuries.  Doing so is simply attempting to sustain the unsustainable.  But that is most likely what will happen.

Now is the time to begin reducing your exposure to this political risk and safely sheath your capital in safer assets outside of these retirement accounts.  For a reliable and free retirement calculator use the Numeraire Spreadsheet and realize that for hundreds of years a one ounce silver coin will buy you approximately one steak dinner.  For the ultimate no confidence vote just buy gold, silver or platinum and learn some good hawala techniques like the Argentines.

DISCLOSURES:  Long physical gold, silver and platinum with no position the problematic SLV or GLD ETFs.

RELATED POSTS:

1. Quantitative Easing By Fed Is Predictably Failing
2. Gold And The Oil Majors Revisited
3. Help Out Someone With Past Posts
4. The Coming Market Crash
5. The Case For A Rise In The FRN Dollar

Reading time: 4 – 6 minutes

The most important decision an investor can make is what to use as the numeraire. But few investors even know what a numeraire is let alone have put deliberate thought into choosing their numeraire.  With advances in technology using a reliable numeraire is easier than ever.

CAPITAL ACCUMULATION

Investing is the process of allocating capital. Capital is the result of consuming less than what is produced.

For example, if 10 pounds of corn are produced and 7 pounds of corn are eaten then there are 3 pounds of surplus corn. This 3 pounds of corn is capital that can then be allocated and produce a return.  That return can be measured using financial statements, like an income statement and balance sheet, and an accurate numeraire.

As individuals or society wisely allocate capital that generates a return then the standard of living will increase. For example, enough capital may be stored and then allocated resulting in a the farmer being able to purchase and use a shovel instead of his hands to produce more corn. Now the farmer can spend the same amount of time but produce 2-3x as much corn because of the capital that has been stored and allocated into shovels, plows, tractors, semi-trucks, etc.  This is called increased productivity.

On the other hand, if an individual or society consumes more than they produce then they begin to erode their capital. Generally, this is unwise and will lead to a lower standard of living.  Remember the old advice:  do not eat the seed corn.

Like gravity does not care whether the sentient human or inanimate rock knows their condition as they hurl towards the earth from thousands of feet in the air so likewise economic law does not care whether individuals and society can accurately measure whether their capital is being accumulated or eroded.

VALUE CALCULATION

In this process of investing an individual makes a value calculation about whether to consume or save resources.  The key role interest rates play is in regulating production and consumption over time. Generally, low interest rates encourage consumption while high interest rates encourage saving.

Individuals produce commodities because they add value.  Corn is for food, oil is for fuel, steel is for buildings and water is for drinking.  Commodities are vital to sustain life.  Consequently, accurately measuring the demand for commodities over time is equally important so that the market can provide supply and avoid consequences such as starvation, dehydration, malnutrition, etc.  The Founding Fathers understood these economic principles and with the 1792 Coinage Act answered the question:  What Is A Dollar?

NUMERAIRE

In economics, the numeraire is an item or commodity acting as a measure of value or as a standard for currency exchange.  In accordance with Article 1 Section 8 Clause 5 and Article 10 Section 10 Clause 1 of the United States Constitution the Coinage Act of 1792 provided in Section 9:

DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

However, government has strayed with unconstitutional legal tender laws and along with central bank intervention in the gold market the environment is extremely difficult, if not impossible, to accurately perform mental calculations of value. The result is a broken pricing mechanism.

Additionally, most people are completely oblivious to the importance of choosing an accurate numeraire.  More daunting is that for the small percentage of people who measure their financial vital signs few use a precise numeraire to do so.

To assist you in performing these two tasks for an example I have created The Numeraire Spreadsheet.  It functions as an example of how to implement provident living principles using an alternative numeraire.

CONCLUSION

Keeping financial statements such as an income statement and balance sheet takes diligence.  It also takes persistence and diligence to use an accurate numeraire.  But doing so will allow you to view your financial condition with improved clarity and which will likely increase your ability to perform better allocations of capital which will help you multiply your net worth.  For the New Year make it a goal to spend about 15-30 minutes per month to accurately measure and track your financial condition.

If you have an suggestions for The Numeraire Spreadsheet or any stories from using it then please leave a comment.

RELATED POSTS:

1. Provident Living Principles
2. Define The Dollar Or Else
3. Bankrupting For Profit
4. Predictably The DOW Crashes Again
5. Audit The Fed And Apportionment

Reading time: 7 – 12 minutes

The recent gold upleg has proceeded fairly predictably based on previous trends.  Like the October correction and consolidation the December correction and consolidation has laid a firm foundation for the third round of the upleg.

FIRST ROUND

With gold trading around $995 on 9 September 2009 in Gold Party Barely Started I wrote, “This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms”.

Slightly later on 9 October 2009 with gold below $1,050 I was interviewed on BNN:

BNN HOST: You said the credit crisis has not been calmed but intensified. Why? … So as we get more and more concerned with the top of that pyramid, the derivatives play, you are talking about $1,300 bullion. How do you get to that figure?

TRACE: $1,300 bullion comes from looking at the 200 day moving averages and where gold has consolidated and where it goes based on the usual uplegs.  It looks like we are following the same thing that happened in 2004 with the rise in 2005, the consolidation in 2006, which went to the rise in 2007, and the consolidation in 2008, and it looks that it will lead to a similar rise in 2009 and 2010 which will take gold to $1,300 which should be a little bit above its 200 day moving average. But in the same trading ranges as we saw in 2005 and 2007.

For the rest of October we saw gold consolidate and prepare for the second round of this upleg.  The credit crisis intensified with CIT and Dubai.  Commercial real estate is still frozen and about $600B needs to be refinanced during 2010.  The spread between 2 and 10 year Treasuries has been getting omnious at highs not seen since the early 1980’s.

SECOND ROUND

On 28 October 2009 with gold trading at $1,031, the lowest price since the BNN interview, in Gold Party Intermission Nearly Over, I wrote:

While the probability for a profitable trade is not nearly as high as it would be should the price relative to the 200dma be significantly below the 200dma there is still room for the price to run as we enter winter.  The October intermission is likely coming to a close. …

The current correction and consolidation of gold appears to be within trend and expected based on the seasonality.  November is the strongest month and this recent correction on low volume is laying a strong foundation for a large move upwards.

Within 26 trading days gold for LBMA delivery was $1,218.75.

THIRD ROUND

Gold is currently trading at about $1,105 with a 50dma of $1,114.57 and a 200dma of $989.68 or a current price of 1.116x the 200dma.

There has been no substantive change to the quality of US Treasuries and the Federal Reserve is failing with quantitative easing.  The Greater Depression is still being intentionally exacerbated by the Obomba administration.  States are in even worse shape; so make sure you keep nothing in a safety deposit box or it may end up on Ebay.  The bond market, in the 28th year of a secular bull market, is due for a secular bear market as real interest rates (using gold as the presentation currency) continue rising.

One substantive change is that private ownership of gold now surpasses officially reported central bank holdings.  Big players like John Paulson with over $4B in gold investments is flanked by David Einhorn of Greenlight Capital and Paul T. Jones of Tudor Investments and the sheeplike investment community is beginning to change its attitude towards the Ancient Metal of Kings.  Freedom is good for business and private gold ownership is good for freedom.

As Ludwig von Mises wrote,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.

After seeing the record and the numbers I chuckle at some of the Establishment ‘financial professionals’.  For example, in January 2009 on my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA of AB Analytical Services and fellow Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘Own Gold? Time to Fold‘ where he stated, “Gold remains a sucker’s bet…”

Since Mr. Brochstein’s article gold has powered from $772 to $1,104.  But gold is not a portfolio asset; everything else is.  For those who perform mental calculations of value using gold as the numeraire the results are truly stunning and likely to lead the market entrepreneur to be shell-shocked.  It appears that following the advice of most of these ‘financial professionals’ peddling paper coupons was the real sucker’s bet.  Scoreboard.

CONCLUSION

Everything appears in place for the third round of gold’s upleg.  The previous two rounds have followed the same predictable pattern found during 2005 and 2007.  The fundamental reasons for owning gold have not changed.  Quantitative easing is failing as little colored tickets evaporate, federal budget deficits are ballooning, States are bankrupt, extremely respected money managers are moving into bullion, the world needs a new reserve currency and private ownership of gold is at record highs.

Sure, the third round of the upleg could not materialize for any number of reasons such as interest rates being raised, the mythical Cibola being discovered, etc.  As the upleg progresses the gold to silver ratio should probably close from the current 63.27 towards a more normal 50-55.  The better time to buy gold, silver or platinum was before the first or second rounds of this upleg.  But if the precious metals are absent from one’s portfolio then the second best time to buy them is now although the real bargain may be around $1,050-$1,080 but we may not see that.  And by all means, avoid the GLD ETF despite the caterwauling of the prospectus challenged illiterate apologists as it is merely a paper ticket that struts around like the precious metal.

DISCLOSURES:  Long physical gold, silver and platinum with no position the problematic SLV or GLD ETFs.

RELATED POSTS:

1. Gold Party Barely Started
2. Gold And The Oil Majors Revisited
3. Gold Party Intermission Nearly Over
4. Gold Rising As A Currency
5. The Coming Market Crash

Reading time: 5 – 8 minutes

The COMEX has raised the margin requirements for gold and silver futures contracts. Additionally, gold is trading in minor backwardation but this is probably not serious. The margin requirement rise validates the strength of the bull market. There will likely be additional margin requirement increases during this upleg.

MARGIN REQUIREMENT

A margin, or performance bond, is collateral that the holder of a position in futures contracts, securities or options has to deposit to cover credit risk.  The use of margin greatly amplifies either the gain or loss with a position.  The higher the margin requirement the more capital is required to control the same amount of the underlying asset.

One consequence that can result from using margin to purchase assets is a margin call.  If the margin posted in the margin account is below the minimum margin requirement then the broker or exchange issues a margin call.  The investor has to either increase the margin deposited or close the position and can be accomplished by selling the securities, options or futures if they are long and by buying them back if they are short.

If they do not do any of this the broker can sell his securities to meet the margin call.  If the exchange is unsuccessful in executing margin calls and receiving enough capital then the exchange could fail.

The COMEX has recently raised the margin requirements for gold and silver contracts.

The result of these increases in the margin requirements will likely be somewhat bearish for the metals in three to six months.  This is because it will require more capital to control the same amount of the commodity and will serve to dampen some of the speculative hot money which has been flowing into the metals lately.

Margin requirements and other exchange rules are what put a damper on the Hunt brother’s plans.  Overnight the rules were changed without notice and it resulted in tremendous losses and margin calls to the Hunts.  The effect of margin requirements on the instruments of the gold price suppression scheme does cause some questioning.  For example, are they even subject to the requirements?

GOLD AND SILVER BACKWARDATION

As of 16 December 2009 there has been some minor backwardation appearing for both gold and silver.  For example, gold for delivery in December 2009 was higher than the January, February and April contracts.

Likewise the LBMA silver forwards have been showing some particularly interesting activity since about 24 November 2009.  For example, the SIFO for one month was higher than all other months on 15 December 2009.  The 16th showed similar unusual activity.  Silver only recently slippped out of significant and prolonged backwardation in June 2009.

This bout of both silver and gold with backwardation is likely minor or immaterial.  With gold it is likely due to delivery considerations.  With silver there would need to be a prolonged condition to merit much more attention.  Either way this is a condition to observe.  Backwardation in the monetary metals implies loss of confidence in the paper instruments and both the desire and ability to take immediate possession without the use of margin.

PRECIOUS METALS BULL

As the gold, silver and platinum precious metals bull continues gaining intensity it will gather in more capital.  With their use as currency in ordinary transactions, through services like GoldMoney, it will continue to increase the percentage of the total market that is owned outright.  Already, most physical gold bullion is owned outright without any attaching liabilities in jewelry, coin or bar form by either individuals or massive central banks.  This adds stability to the market because when an asset is owned outright then the owner cannot be margin called.

By analogy one of the reasons the US residential property market, which is heavily purchased on margin, is in such dire straits is because of the constant ‘margin calls’, the surplus inventory which is put on the market after foreclosure which results in further declines in market prices and more margin calls.  In contrast, real estate in Argentina is 93% owned outright with only 7% encumbered.  This adds tremendous stability to prices.

The increase in margin requirements on the precious metals will only serve to strengthen the bull market.  But in the short term the effect could be to depress the price because of margin calls to speculative hedge funds.

CONCLUSION

There is old advice that the market can remain irrational longer than you can remain solvent.  But this advice applies if margin is used.  Gold, silver or platinum that is completely paid for becomes sovereign wealth, cannot be margin called and therefore the owner can hold it indefinately without fear of insolvency.  Unlike with a margin call there is no forced selling.  Holding the monetary metals in such a way is in harmony with provident living principles and a safe way to buy gold.

DISCLOSURES: Long physical physical gold, silver, platinum and no position the problematic SLV or GLD ETFs.

RELATED POSTS:

1. Potential COMEX Gold Fail
2. Silver Trending Towards Backwardation Again
3. Silver Slips Out Of Backwardation
4. Potential December Gold and Silver COMEX Failure
5. Gold Oil And Your Stomach

Reading time: 3 – 5 minutes

The FRN$ has been the world’s reserve currency for decades.  As a result, the breadth and depth of the capital markets add tremendous liquidity to the fiat currency illusion.

This is one of the reasons the FRN$ is near the bottom of the liquidity pyramid and rises in value with each round of the credit contraction. But as continuing pressure keeps being added to the FRN$ through bailouts, inflation, swaps, etc. it will hasten towards the fiat currency graveyard as commodity currency alternatives gain prominence.

The secular gold bull market has entered stage two and continues pulling in capital.  This has led to a large multiple of the gains inverse to the FRN$ decline.  But more importantly and more often gold and the FRN$ are strengthening together.  This is because of their respective positions in the liquidity pyramid.

So as the FRN$ continues its evaporation the Ancient Metal of Kings will do what it has always done; preserve capital.  As it has performed this function over the last eight years it has also increased in purchasing power.  As gold enters the third stage of the bull market, which is still likely several years away, it will strengthen even more often while the FRN$ both advances and declines.

HOW TO PREDICT THE PRICE OF GOLD

Jeff Clark, Editor, Casey’s Gold & Resource Report

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

And keep up on the gold and precious metals markets in Casey’s Gold and Resource Report. Each month I’ll bring you the best research and investment recommendations in the business. And until December 18, you can get a subscription for 50% off the regular price and receive a free gift worth $79. Click here to learn more.

RELATED POSTS:

1. Gold Party Barely Started
2. Inflation With Gary North Or Deflation With Mish
3. Define The Dollar Or Else
4. Gold Oil And Your Stomach
5. Gold Bug Bit The Tudor

Reading time: 10 – 17 minutes

The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. – Matt Taibbi, “Inside the Great American Bubble Machine”

Goldman Sachs (GS) gangbangers are engaged in public service, or more appropriately pillaging, as fast as possible even while the victims are getting increasingly shrill in their protests.  No means no and the gangbangers are not being respectful.  Bankers, financiers, hedge fund managers and others are being exterminated under suspicious circumstances.  Even senior gangbangers have issued guidelines for Goldman Sachs (GS) employees congregating in public.

You cannot make this stuff up.  So, in the culture of Goldman Sachs (GS), if their employees start getting exterminated then how will it affect the stock and how can the situation be played for profit?

TENSENESS IN THE OFFICE

The Goldman Sachs (GS) gangbanger’s public pillaging is being increasingly revealed and the hundreds of millions, even billions, of people they have stolen from and wronged are getting rightfully upset.  This is bound to create some tenseness and nervousness around the gangbanger’s hideout.  Bloomberg’s Alice Schroeder, author of The Snowball:  Warren Buffett and the Business of Life, reports:

The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank. … Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs …

The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.

My the tangled web that Goldman Sachs (GS) gangbangers weave.

WARNINGS

Lloyd Blankfein, Chief Gangbanger for Goldman Sachs (GS) and whose wife does not like to wait in line at charity events, proclaimed that Goldman Sachs (GS) was ‘doing God’s work’.  Interestingly, CNBC reported, Lloyd Blankfein “added that he understood, however, that people were angry with bankers’ actions: “I know I could slit my wrists and people would cheer.”

As the Huffington Post reported:

L’Osservatore Romano is reporting that Goldman Sachs is indeed Doing God’s work, and His Former Holiness Joseph Ratzinger has confirmed the unsolicited hostile takeover. Writing under his pen name Benedict XVI, Ratzinger verified that total control of the popular religion has been transferred to Goldman Sachs and His New Holiness Lloyd Blankfein.

But seriously, the Bible has many examples from Elijah with the chariots of fire to Daniel in the lion’s den of those who did God’s work being protected.  And what type of work did Jesus do?  Mark records:

And they come to Jerusalem: and Jesus went into the temple, and began to cast out them that sold and bought in the temple, and overthrew the tables of the moneychangers

But instead of relying on God’s protection the Business Insider has reported, “all Goldman Sachs employees received [voicemails] earlier this month. They were told not to organize small [12 maximum] parties even if no firm money goes to pay for them.”

So during the holidays remember to keep that Christmas spirit.

WAGING OF WAR

During the Panic of 1873 many investment houses went bankrupt.  Tensions got so heated the United States Army was deployed to New York City to protect the bankers.

When the rich wage war its the poor who die in Afghanistan but when the cake eating poor wage war its the rich who died in France.  This time around the Goldman Sachs (GS) gangbangers are going to want security provided by highly trained troops, or former troops, whose parent’s pensions have been stolen and whose best friends have died in their arms in foreign lands.

A few days ago I was talking with a friend who had just returned from an overseas war deployment with the United States Navy.  I jokingly recounted how the armed forces protected the bankers in 1873 and asked him ‘What would you do if ordered to protect the bankers?’  He jokingly replied to the effect, ‘I would go, stand between the angry crowd and the banker and when the time was right I would grab the bankers and throw them to the crowd.’

COINAGE ACT OF 1792

The Founding Fathers were not impressed with the thieving advocates of paper currency.  They wrote specific safeguards into the United States Constitution.  Additionally, under the Coinage Act of 1792 financial crimes, like the Goldman Sachs Gang is currently perpetrating, were severally punished.

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

Because of the current lack of legal protection primarily due to the deep capture of the political machinery by these parasitic vampire squids therefore it appears that the victims have begun resorting to vigilantism.  What other possible recourse do they have against such immoral and unjustified aggressors?

EXTERMINATED VAMPIRE SQUIDS

I can understand why the leading gangbangers at Goldman Sachs (GS) are getting nervous as the number of parasitic vampire squids that have been exterminated keeps growing.  Andrei Kozlov, Russian central banker, was riddled with bullets.  Dead hedge fund managers include Seth Tobias, Oleg Zhukovsky, Rene-Thierry Magon de la Villehuchet, Michael Klein, Peter Wuffli and Kirk Wright.

The list goes on.  It includes David Kellerman, Freddie Mac CFO and even James MacDonald the CEO of the Rockefeller family offices.  I suppose we should wish their famlies the best; except for New York tax attorney William Parente.  Whoever he angered worked corruption of blood and his wife and two children were also murdered.  There are many more examples.  My advice to them:  Get out of dodge and take a vacation to Cape Cod.  Look, I am a poet and did not know it.

SERVICE BUSINESS

Goldman Sachs (GS) is primarily a service business and dependent upon the individuals who receive an average bonus of about $700,000 from a total pot of $16.7B.  When a company’s workforce is so universally hated and have wronged so many millions, even billions, of people there is a possibility that retribution will be taken.  If retribution is taken then how could that affect earnings and how could the company benefit from the unfortunate circumstances?

Wall Street is full of sociopaths and you cannot grow a conscience if you do not have one.  Unfortunately, for this exercise we will have to analyze like the Goldman Sachs (GS) gangbangers; with the lack of a moral compass.

Key-man insurance can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the individual specified on the policy. The policy’s term usually does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity.

Not only is there a very real threat to Goldman Sachs (GS) gangbangers from the outside, evidenced by the weapons permits and limitations on sizes of gatherings, but there is a potential conflict of interest from the inside.  Sure, if Goldman Sachs (GS) gangbangers were to start targeting their own employees to benefit from key-man insurance it would be illegal and they should be prevented from receiving proceeds because of killer and slayer statutes.

But perhaps the gangbangers will get their vassal politicians to create ex-post facto legislation to provide immunity.  As CNET reported:

A federal judge in San Francisco has tossed out a slew of lawsuits filed against AT&T and other telecommunications companies alleged to have illegally opened their networks to the National Security Agency.

U.S. District Judge Vaughn Walker on Wednesday ruled that, thanks to a 2008 federal law retroactively immunizing those companies, approximately 46 lawsuits brought by civil liberties groups and class action lawyers will be dismissed.

Which employees should the upper brass target?  If you have spent the last 5-15 years putting in 80-100 hour weeks then how much would you sell your health for?  An even better question may be how much would your boss sell your health for?  Why should they share profits with you?

CONCLUSION

The Goldman Sachs gangbangers are among the largest hordes of parasitic vampire squids on the planet.  The absence of their aggressive theft would increase the standard of living for millions even billions of humans.  As a peacemaker who believes that force should never be used aggressively against innocent people or their legitimately acquired property I would prefer to starve the vampire squids I am opposed to and not be an instrument of extermination.  It is unfortunate that the parasitic Goldman Sachs Gang has been and continues to be so aggressive that their host victims may feel they have no other choice than to act in self defense by gunning for Goldman Sachs gangbangers.

Should this happen then through the use of key-man insurance and ex post facto legislation to provide immunity for illegal behavior the Goldman Sachs Gang can tremendously increase the gang’s profitability and the bonus share for the senior partners.  If the gang’s leaders do happen to find themselves in an uncomfortable situation then they will likely be bailed out, if possible.  Nevertheless, I would not tamper with such a filthy instrument either way.

DISCLOSURES:  Long physical gold but neither long nor short GS and neither long nor short (except for being a US citizen) any GS employees.

RELATED POSTS:

1. Corruption And Chinese Corporate Hardball
2. Fair Value Lying
3. Bankrupt Banks
4. The DTCC And Market Liquidity
5. The Coming Market Crash

Reading time: 11 – 18 minutes

The ‘gold bugs’ assert that at all times and in all circumstances gold remains money.  For some irrational reason the ‘paper bugs’ cling to their increasingly worthless colored coupons asserting their importance as currency.

The Great Credit Contraction has begun and in the macro sense there is no practical solution to the end of the current worldwide monetary system.  But in the micro sense the individuals and companies that will survive, thrive and prosper will be those that are liquid.  It will be those who can make payroll.

GOLD IS MONEY AND CURRENCY

On May 20, 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

For these reasons gold, silver and platinum belong in the cash portion of the balance sheet.  The precious metals are the ultimate form of currency.  Unlike their comptition, the colored coupons, the precious metals can never become worthless, are always accepted and are the ultimate means of payment.

The ‘gold bugs’ will always be able to purchase something while the ‘paper bugs’, if they have physical notes and not mere digits in a database, are eventually left with an instrument that only has a single use after defecation.  What intrinsic value!

GOLD ANTI-TRUST ACTION COMMITTEE

During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

GATA’s alleged central bank gold price suppression scheme may include the COMEX’s participation.  Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”

GATA alleges that the central banks have less than half the physical gold claimed.  The central banks carry gold in the vault and gold out on loan as the same line item.  In effect, they report cash and accounts receivables as the same thing.  Ever tried making payroll with an accounts receivable?

INDIA’S PURCHASE

It seems some countries are getting a little nervous and demanding their phsyical gold.  For example, the IMF by-law F-1 states, “Gold depositories of the Fund shall be established in the United States, the United Kingdom, France, and India.”

With the lack of transparency it makes one wonder whether India’s recent ‘purchase’ of 200 tons of gold from the International Monetary Fund was a bona-fide purchase or the taking of physical possession of ‘paper gold’ they had previously purchase on the open market and whether this was done of the IMF’s free-will or through coercion because of the ancient rule that possession is 9/10th’s of the law?  Perhaps this is why India, not China, got to purchase this large block of bullion.

But such is just speculation, like the tungsten rumors, based on circumstantial research and there are no real credible and verifiable sources that I have been able to find but it does highlight the issue:  actual physical gold is tremendously limited relative to the amount of colored coupons.

ADVICE TO THE OIL MAJORS

Nearly a year ago on 16 December 2008 in Oil Majors Should Just Buy Real Gold I wrote:

Combined these five companies [Exxon (XOM), Chevron (CVX), Total (TOT), British Petroleum (BP), Conoco Phillips (COP)] had current assets exceeding $300B. … The entire eligible COMEX stockpile represents an immaterial 0.36% of the current assets of the five oil majors.  The oil majors could drain the COMEX with a rounding error.  It would be 14% of what Exxon Mobil was spending per quarter buying back stock.  Why buy back stock when oil is so cheap compared to gold?  Why not just buy physical gold and truck it away?

What has happened since then?

At the end of Q3 2009 Exxon (XOM) had $57.3B of current assets; Chevron (CVX) had $35.5B in current assets with $7.6B cash on hand; Total (TOT) had $48.4B in current assets and $13.8B cash on hand; British Petroleum (BP) had $66.7B in current assets and the runt,ConocoPhillips (COP), still possessed $22.3B in current assets.  Combined these five companies had current assets exceeding $250B and cash on hand exceeding $50B.

While the risk of a potential COMEX failure to deliver gold is a possibility for brevity I will not explain the mechanics nor current state of the warehouse.

The approximate two million ounces of registered gold in the COMEX inventory represents about 62 metric tons or a mere $2.3B.  For compaision, Bloomberg reported on 17 November 2009 that The Bank of Mauritius bought 2 metric tons for about $71.7 million.  Mauritius had a 2008 GDP of $8.65B or about .5% of the 2008 total revenue of the five oil majors.

On my article ‘How the Treasury Bubble Will Burst and Why‘ at Seeking Alpha I received a comment from Alan Brochstein, CFA and fellow Seeking Alpha Gold Standard Contributor who provides analytical services for hire. He said, “Trace, sorry, but this makes absolutely no sense…” This is not surprising considering his 8 Dec 2008 article ‘Own Gold? Time to Fold‘ where he stated, “Gold remains a sucker’s bet…”

On 8 December 2008 gold closed at $772.25 and by 27 November 2009 gold closed at $1,177, a 52.4% gain.  Not bad for a different currency; it makes one consider whether the FRN$ is in hyperinflation.

PLATINUM AND SILVER

Platinum, a tangible asset, is incredibly safe and has now, with GoldMoney, gotten more liquid.  There is a miniscule amount of platinum compared to the illusions in the liquidity pyramid.  For example, the entire annual worldwide platinum production is valued at about $8B compared to the five oil major’s $50B of cash.

While no one really knows what the total above ground silver stock is; Ted Butler, a noted silver analyst, suggests there are about one billion ounces which is about $20B.

SHARE REPURCHASES

In 2008 the five oil majors repurchased about $54.2B of stock.  Exxon with $35.4B, Chevron with $6.8B, Total with $1.3B, British Petroleum with $2.6 and Conoco Phillips with $8.1B.  The average price of gold in 2009 through October was about $941.

So let me get this right. Instead of holding increasingly worthless colored coupons the oil majors could have diversified their currency holdings to ensure they could make payroll and with about a third of what was spent on the share repurchases could have bought the entire annual production of platinum and the entire above ground stockpile of silver.  Or assuming the average price of gold they could have bought about 1,791 metric tons of gold.

The 1,791 metric tons of gold would make the five oil majors the fifth largest holder behind the United States, Germany, the IMF and France, but who knows how much physical gold the Western central banks really have, and have about twice the 1,054 tons of the sixth place China.

At the current price of gold the $54.2B of stock repurchases from five measly companies will only yield about 1,432 metric tons of gold or about 359 less tons than the hypothetical.  For comparison Venezuela is the 16th largest holder with 363.9 tons and the United Kingdom is the 17th largest holder with 310.3 tons.

This is one reason the ‘new gold monetarists’ should be taken seriously.  Even on CNBC, a starving vampire squid (Neilsen ratings are down 52% year over year) which hates gold like werewolves hate silver, had a serious discussion about the ‘new gold monetarists‘ which included the quote, “That is what the new gold monetarists are saying.  If you take all the world’s GDP and divide it by the amount of gold that is above ground that is available then you get a price that is somewhere between $11,000 per ounce and all the way up to $50,000.”

CONCLUSION

Too many people have too much faith in worthless irredeemable colored coupons and their companion digital counterparts.  The Federal Reserve and other central banks are failing with quantitative easing.  And after all, the worldwide monetary system is just a confidence game and when confidence is lost it does not so much collapse as evaporate.  For example, auction rate securities, mortgage backed securities, Bear Stearns, Lehman Brothers, AIG, the Kazakhstan tenge, the drooping Vietnam dong, the British Pound or the FRN$ (more than 50% loss in a year is pretty bad!).

The current worldwide monetary system is failing.  Why will another fiat system not replace it?  The market will not permit such irrational behavior.  The monetary authorities are on the defensive. They have lost the confidence of the market and are unable to regain it with more secrecy, more bailouts and more of the same.  The market is forcing them to do what everyone in the past has had to do.  They are being forced to show the market the money.  Real money and not some colored coupon currency.  Money that is a real and tangible asset that can be put in someone’s hand or trucked away to a different vault.

Sure, what the new gold monetarists say seems incredible and may lead some financial professionals to declare ‘this makes absolutely no sense’.  But this population of financial professionals has been systematically miseducated to despise precious metals and be ‘paper bugs’.  But as confidence continues evaporating those same professionals will demand that precious metals return to the center of financial life.  On the macro scene society will learn some very real and very hard lessons.  But on the micro scene there are tremendous opportunities to benefiit from the largest transfer of wealth the world has ever experienced.

The future is clear.  Gold will return to its historic role as the center of gravity for the Western and worldwide monetary system.  Sure, the Establishment, costumed officials and financial professionals do not welcome the change.  But it is not their choice because the market will force their hand and the market is more powerful than all of them combined.

After all, it will be the companies and governments with the monetary metals in the cash portion of their balance sheet that will be able to make payroll and those without will simply evaporate.  The number one killer of businesses is cash-flow.  Remember the first rule of panic:  do it first!

DISCLOSURES: Long physical physical gold, silver, platinum and no position the problematic SLV or GLD ETFs or XOM, CVX, TOT, BP or COP.

RELATED POSTS:

1. Gold Party Barely Started
2. A Herd Of Single Digit Midgets
3. Gold Oil And Your Stomach
4. The Coming Market Crash
5. Gold Rising As A Currency

Reading time: 6 – 9 minutes

On 26 November 2009 the State Bank of Vietnam devalued the dong by about 5%.  This is the third instance of currency devaluation in two years.  The FRN$ is likewise being devalued against gold.

A few weeks ago I observed that those buying gold in Vietnam are paying a premium and that:

Gold is money and is reasserting itself as currency in Vietnam.  After 18 months of failed policies the helpless government has retreated from the import restrictions because the market is more powerful than governments.

Bloomberg reported,

The State Bank of Vietnam set a dong reference rate for tomorrow that is 5.2 percent lower, at 17,961 per dollar, compared with 17,034 today, it said in a statement on its Web site. Policy makers narrowed the dong’s daily trading band to 3 percent, from 5 percent, effective tomorrow, and increased the benchmark interest rate for the first time since January, to 8 percent.

GOLD PARTY GETTING STARTED

As I observed on 9 September 2009 when the gold party was getting started, with the price at $995.75:

200 day relative price of gold is at 1.08x … Based on seasonal trends gold and silver will be strengthening, with the strongest months in September and November

This upleg in gold and silver will have significant strength because of the long period of consolidation just like in 2004 and 2006 which provided the foundation for the uplegs in 2005 and 2007 that took gold from $400 to $700 and $650 to $1,000, respectively.  If the current upleg is similar to the previous two then the 200 day relative prices for gold and silver at the top of this upleg would be about 1.5x and 1.7x, respectively.

This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms

GOLD PARTY DUE FOR A BREAK

On 25 November 2009 Reuters reported:

Gold struck a record high for a second time this week, rising above $1,178 an ounce on Wednesday, as the dollar slipped and a newspaper reported that India was “open to buying” more gold from the International Monetary Fund.

Gold has jumped nearly 13 percent since the beginning of this month as investors poured money into the precious metal after India’s central bank announced it had bought 200 tonnes of bullion from the IMF.

The current price of gold is about $1,175 per ounce with silver at $18.70.  Like I predicted November has been a strong month for both of the metals.  The 200dma for gold is $967.86 and $14.73 for silver.  This puts gold at 1.217x its 200dma and silver at 1.27x its 200dma.

WHAT AND WHEN TO BUY

Usually in a strong bull market silver will trail gold and then rapidly play catch up.  The vast majority of silver’s gains happen in a relatively very short period of time.  If gold is like owning a cruise ship then silver is like owning a speed boat.

Because gold and silver have moved so quickly so fast, seasonality and the need for consolidation of these rapid gains therefore it is likely prudent to protect some gains while still maintaining exposure to the upside; for example, using put options.  While over halfway there from when I predicted; I still think $1,300 gold and $25 silver is within range but there will likely be some correction and consolidation between here and there.

Thus buying gold is not nearly as attractive as buying silver or even buying platinum which is up $340 per ounce since I recommended platinum about four months ago.  I am still extremely bullish on platinum and if acquiring a physical store of the precious metals and given an efficient and cost effective option, such as with GoldMoney, between platinum, gold or silver then I would recommend platinum.

SUPER DROOPY VIETNAM DONG WHEN PRICED IN GOLD

With the 5.2 percent devaluation against the FRN$ and with the FRN$ losing nearly 13% against gold in November alone and $358 or 43% over the last 12 months the only conclusion is that the Vietnam dong is taking a beating when priced in gold.  In other words, it has gone from 18.4M dong per ounce in January to a high of 28.85M or about 57%!

With Vietnam’s widening trade deficit, the current account deficit, the demand for dollars and gold instead of droopy Vietnam dong, the global economic slowdown which will dampen exports (surely one of the reasons for the devaluation) and evaporating foreign exchange reserves therefore the monetary policy and condition of Vietnam will continue to erode which will place further pressure on the already droopy Vietnamese dong.

CONCLUSION

Vietnam is having a terrible time attempting to maintain their monetary policy.  Economic law is being applied and gold is playing its prominent role like it always does.  The government can resist but resistance is futile.

Likewise the FRN$ is evaporating before the just heat of gold.  Gold is nowhere near a bubble which is difficult to blow when when so much of the demand is fully paid for and not subject to margin call or default.

But the real bubble is the FRN$ and demand is showing the first significant hints of declining.  After all, it is becoming the carry-trade currency.  Americans with the monetary metals will be as fortunate as Vietnamese because all the barbarous relics of fiat currencies are evaporating.  The Great Credit Contraction has arrived and grinds on.

DISCLOSURES:  Long physical gold, silver, platinum and no position the problematic SLV or GLD ETFs.

Vietnam hotel online reservation,travel to vietnam Up to 75% Off - Vietnam hotel online reservation.Offers tours & best discount hotels from 1000++ hotels in Vietnam by TUN Travel.

RELATED POSTS:

1. Gold And The Oil Majors Revisited
2. Gold Already Trading At $1,300 Per Ounce
3. Interview With Ian Gordon
4. Gold Party Barely Started
5. The Coming Market Crash

Reading time: 6 – 10 minutes

I am always amazed by the diversity of readership and Germany is my fifth largest audience behind the US, Canada, United Kingdom and Australia.  I do wonder how the tens of thousands of Germans understand my site but Google Translate works wonders.  That is how I understood the front-page MMNews article Die Grosse Kredit-Kontraktion about my liquidity pyramid.  The Germans love their gold and GoldMoney is catering to this market.

REMONETIZATION OF PRECIOUS METALS

Chief Chicken Little, Chris Powell of GATA, said in the video, “I think GoldMoney is probably the most revolutionary thing going on today.  It is a very convenient remonetization of gold and silver [and platinum].  It is putting gold and silver back to work for ordinary people in a very convenient way as a form of savings and as a form of payment.  I am a very satisfied GoldMoney customer of many years.”

I have not found a more efficient way to buy physical platinum and with the increased monetization of platinum I think there is more upside profit potential for platinum than either gold or silver.  It is up $320 per ounce in the four months since I recommended buying it.

For example, if anyone wants to purchase The Great Credit Contraction and settle the transaction via GoldMoney then I will offer a discount (0.74 gold grams, 1.5 silver ounces or 0.6 platinum grams).  The last time I offered taking payment in platinum I had people from Sweden, the US and other countries take me up on it.  So, just contact me to make arrangements.

MY RECOMMENDATION

Due to the tremendous inquiries seeking advice I wrote an in-depth page on how to buy gold, silver or platinum.  In essence, besides getting a coin or bar in your hand the only third-party arrangement I can recommend is GoldMoney.  But I think the service is fairly expensive for IRA or 401k funds and I would not use them for that purpose.  Nevertheless, I think the service is equally useful to the person buying a few hundred grams of gold to those buying millions of dollars worth and everyone should have a functioning account.

MY REVIEW

Ability to Demand Delivery of Gold. According to the User Agreement under VIII. Storage “E. A User may, by providing GoldMoney with delivery instructions, which instructions must be in the form prescribed from time to time by GoldMoney and the Vault, at any time request GoldMoney to change the goldgrams and silver ounces in his Holding into grams of gold or ounces of silver that are available for physical delivery to the User, provided that there are sufficient goldgrams and silver ounces to take delivery of a London Good Delivery bar of gold, which bar weighs approximately twelve thousand five hundred (12,500) grams, or bar of silver, which bar weighs approximately one thousand (1,000) ounces. GoldMoney will not charge a fee for its service, but fees may be charged by the Vault for acting on the delivery instructions.”

SHADY CHARACTERS

Physical delivery at any time is the standard from a party you can trust.  This is particularly important considering the shady dealings of some in the industry.

For example, I recommend staying away from unnecessarily complex instruments even if issued through perceived reputable firms.  For example, in June 2007  Morgan Stanley & Co. (also involved with the problematic GLD ETF – part I; part II) settled a class action lawsuit for $4.4 million where the complaint alleged

that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store.  But Morgan Stanley either made no investment specifically on behalf of those clients, or it made entirely different investments of lesser value and security.

OTHER RECOMMENDATIONS

Several investment professionals have reviewed and recommend GoldMoney including billionaire Eric Sprott, John Embry, Mike ‘Mish’ Shedlock, Doug Casey, Peter Schiff, Mike Maloney, Jim Willie, Ed Steer, and many others.

CONCLUSION

You can reduce risk by keeping your cash balances in the precious metals. This reduces the demand for fiat currencies and like pinching an esophagus it eviscerates the lung’s source of oxygen.  The remonetization of precious metals with 100% reserves is a revolutionary way to starve the vampire squids of one of their prime sources of food!

GoldMoney accounts are free to open and you will even get 6 months of storage fees waived (you should get an email shortly after signing up)  So why not?

I would love to hear the opinion of other GoldMoney customers.  Please comment!

RELATED POSTS:

1. Gold Party Barely Started
2. The Coming Market Crash
3. Gold And The Oil Majors Revisited
4. Massive Institutional Gold Market Change
5. Inflation With Gary North Or Deflation With Mish

Reading time: 6 – 10 minutes

If you are unfamiliar with hawala banking then I recommend reading Hawala Banking And Currency Controls Part I to become familiar with the concept before reading further.  If you are familiar with how hawala banking works then you will probably know that hawala transactions are not inherently wrong and should not arouse any suspicion in the mind of a moral person.

However, there may be formal reporting to government depending on the peculiar nature of some of the assets depending on applicable rules for sale and transfer.  In many countries there are legal rules which may impose civil and/or criminal penalties for each one of the transactions that I have described in earlier articles because they are considered money laundering by their governments.

HOW CURRENCY CONTROLS AFFECT HAWALA BANKING

The laws and regulations of various governments regarding financial transactions across the globe cover the entire spectrum from no regulation to very strict regulations. This is not a critique or recommendation based on any particular legal framework but only the fundamental principles surrounding the issue. Therefore, consult a local attorney before engaging in any financial transactions.

Currency controls can take many forms. Probably the most common form is the restriction, limitation or prohibition of the sale, purchase or exchange of certain goods or currencies within a country or between countries. Some of these controls include reporting requirements for financial transactions, registration of Money Service Businesses, record keeping requirements when you buy gold or sell silver, and identification requirements for transactors.

The informal nature of traditional hawala banking and the private nature of the transactions allows individuals to avoid interference with their fundamental human rights by currency controls which put a limit on transactions or demand “transparency” requirements. Even so, many nations have made hawala banking subject to these laws, but the laws suffer from these immoral fundamental flaws.

TRANSACTIONAL LIMITATIONS

The limitation, regulation or prohibition of some exchanges makes the goods or currencies like real estate in that they can no longer be freely moved from one country to the next. Things like official foreign currency exchange rates and limits to the amount of cash that can be taken into or out of a country are typical examples.

The solution to this problem, where it is not illegal to do so, is to effect the transaction using one, or a combination, of the examples in Part I. This way the transactional limitations can be lessened or even avoided completely. Nobody likes competition and therefore many vampire squid banks through the governments have made such transactions illegal. Even in the cases shown in Part I, where there is a legitimate reason or purpose behind “avoiding” the transactional limitations, most legal systems which outlaw avoidance would find these methods to be illegal as well.

TRANSPARENCY REQUIREMENTS

Transparency requirements are those laws like the ones found in the ironically named USA PATRIOT Act which require “know your customer” identification requirements, registration with the government to transmit money, record keeping requirements and mandatory Currency Transaction Reports and Suspicious Activity Reports. This framework was suggested by the IMF to governments around the world.

However, these laws are much like the Stamp Act of 1765. In both cases the requirement was unnecessary and used to fund activity which provided no benefit to the people taxed. The Stamp Act was quickly repealed after ardent opposition by the colonists in America.  A young John Adams heard James Otis, Jr., a Boston attorney, vehemently speak out about these nefarious Writs of Assistance:

But Otis was a flame of fire! … American Independence was then and there born.  The seeds of Patriots and Heroes, to defend the non sine Diis animosus infans;- to defend the vigorous youth were then and there sown.  Every man, of an immense crowded audience, appeared to me to go away as I did, ready to take arms against writs of assistance.*  Then, and there, was the first scene of the first act of opposition to the arbitrary claims of Great Britain-then and there the child Independence was born.  In fifteen years, i.e. in 1776, he grew up to manhood, and declared himself free. [Annals Of The American Revolution Or A Record Of The Causes And Events, page 225]

The fundamental nature of hawala banking, an informal transaction among trusted individuals, makes all of these requirements superfluous and unnecessary for the hawaladars to operate successfully. The history of hawala banking shows that without any of the record keeping and regulation that banks are subject to, hawala banking is far more efficient, less expensive, is not subject to institutional or political risk, has been the source of vital funds for war torn and impoverished nations and is much faster than other systems of exchange. So why force people to use the Pony Express rather than the Internet?

FIGHTING CRIME: Pretending To Be Batman

The competing claims that underlie this clash are between the right to privacy and the protection of innocent people against criminal activity. The argument used to justify the regulation of the informal hawala system is that it is necessary to identify and prevent crime and terrorism. Although it is untrue based on credible and verifiable sources, we will assume it is true that terrorism and organized crime use hawala transactions as a significant source for funding. The question then becomes, how much privacy may be sacrificed to ferret out crime and terrorism?

The Stamp Act opponents relied on the English Constitution for an argument against the Stamp Act, taxation without representation. The same offenses to liberty and human rights are present with anti-hawala laws but the same constitutional argument is not necessarily applicable here. The stronger one is to look to the US constitution, the Fourth Amendment which states:

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

It cannot be more clear that in order to protect individuals from crime, before there is a search through private papers, there must be probable cause and a warrant issued to do so.

No transparency requirement as adopted in the USA PATRIOT Act or other financial regulation of hawala banking meets this critical test. Because the transactions are private, there should be probable cause and a proper warrant to search. In addition, the fundamental human right to freedom to contract gives the individuals and the hawaladars the freedom to agree not to maintain records of the individual transaction if they so choose. The same legal argument might not be available in all countries, but the fundamental rights of privacy and freedom of contract are the same for all people.

Thus, just like Batman does not always follow the law to ferret out crime, governments think they can ignore the law and legal principles to fight crime. But unlike Batman, costumed government officials do not actually succeed in reducing crime or terrorism by these means but they do manage to parasitically draw a paycheck from the productive members of society.

CONCLUSION

Hawala banking, where legal, provides opportunities to profit for hawaladars and significant other benefits for the parties to the transactions. Currency controls and other laws passed to regulate hawala banking are not only offensive to fundamental rights of freedom of contract and a right to privacy, but short of complete totalitarian control are impossible to effectively enforce in an informal system such as hawala. The private and informal nature of hawala banking makes detection of hawaladars extremely difficult. And it is the very currency controls that incentivize individuals to use the informal hawala banking system rather than the formal institutions which are slower, more expensive, less efficient, more intrusive and less secure.

RELATED POSTS:

1. Hawala Banking And Currency Controls Part I
2. Current Dollar Currency Controls
3. The Case For A Rise In The FRN Dollar
4. COMEX Gold And Silver Margin Requirements Raised
5. HR 4248 Free Competition In Currency Act Of 2009

Reading time: 6 – 9 minutes

On HowToVanish many people have been asking questions in response to an article I posted about hawala banking. It is a great topic and one that I enjoy talking about so I thought I would respond by fleshing out what kinds of transactions take place in a hawala system and then answer the biggest question by far; how do I find a hawaladar?

HAWALA BANKING TRANSACTIONS

There are a few archetypical transactions that most hawala transactions will resemble. The first is the most common; remittances. For example: a person from very poor country X is working in country Y. He sends home $100 USD of purchasing power to his family twice a month. The cost to bank wire this amount is $10 USD or more and costs him a large percentage of his minimal remittance amount. It is difficult to save up and send larger sums on a less frequent basis because banking is unreliable at best in country X and large amounts of cash are not safe to store with his elderly parents, wife and children who are living alone. An exchange through two hawaladars will efficiently facilitate such a transaction on a regular basis at a much lower cost.

The second situation is that of the transactional broker. For example, I want to buy options on a certain stock but I do not have enough money in my trading account to meet the margin or liquidity requirements. My good friend is planning on purchasing options on the same stock so I give him some money and he buys a few extra options which he will pay me for when I want to cash out. My friend has acted like a hawaladar for the exchange.

A third situation is that of the repatriation or expatriation of wealth. Real estate is a good example because, regardless of legal restrictions, you cannot take real estate away from or add it to a country, with the exception of Iraq, California which is going to fall into the ocean and Dubai whose palm tree shaped coastline is not a natural phenomenon. If you own real estate in country A but live in country B you cannot simply tuck it into your pocket like a gold coin and repatriate that wealth. You will need to find a buyer of that property to convert the wealth into mobile wealth that can be taken out of country A and brought into country B. Once the wealth is more liquid then it can be transferred to someone acting like a hawaladar for the transaction.

HOW ACCOUNTS ARE SETTLED

The main characteristic of a hawala transaction is that they are informal exchanges made relying on the trust of the parties and generally outside of a structured banking system. In each of these scenarios there must be some settlement made for the transactions. The remitting and receiving hawaladars will maintain a tally of the total amount owed between them and settle their account at a later date. Almost all hawaladars destroy the records of the individual transactions once they are completed.  They can then wire the money all at once, or they may simply offset the balance against another account between the two.

What if the debtor on the tally sheet does not have cash to pay the debt? Because this is a private transaction, they may settle the debt using any value they wish. The hawaladars remitting and receiving money might both have sufficient wealth in both countries and will be able to settle their debts with each other through the intra-national exchange of the amount in cash. In addition they might choose not to settle in cash.  The hawaladar in poor country X may accept payment in chickens or vampire squids rather than in cash. The friend who bought the option for you might settle what he owes by buying gold for you or a nice steak dinner. The real estate purchaser may not have the cash for the property but gives you his sailboat which is at a slip near your home.

HOW DO I FIND A HAWALADAR?

These situations and a combination of them are representative of most hawala transactions. Now remains the biggest question that I recieve about hawala banking:  how do I find a hawaladar?

For a person who is not already part of the culture where hawala banking takes place, finding hawala services is not easy but here are a few suggestions.

BECOME A PART OF THE RIGHT COMMUNITY

The main use of hawala is to remit money to the home country of an immigrant worker.  Thus you can find where these people are, befriend them and ask to be connected to a hawaladar.

Remember that hawala is the formal name given to an informal system so they might not even know what the word hawala means.  Simply look for someone offering the kinds of services you want.  Some good communities to look for would be people from Mexico, which receives more money in remittances from the United States than any other country. Middle Eastern countries, East African countries, and South and South Central Asian countries have a long history of hawala practices.

I have had rather good discussions with one person in particular about the cultural barriers to interacting with these kinds of communities.  If direct interaction is out of the question, you may need to hire a private courier or messenger to be the intermediary for your search for a hawaladar.  My new friend came up with a great idea of hiring a bellhop or a taxi driver because they can move easily in and out of the complex social structures.  Another suggestion for those living in a foreign country would be to find a westerner who has a local spouse.  The local spouse will likely have more access to these kinds of communities than westerners.

SEARCH ADVERTISEMENTS

Sometimes hawaladars will advertise their services in the local ethnic newspaper.    Of course if you do not speak the language of the paper, you may want to hire a translator.  A website like Craigslist or other discussion forums might even list some of these kinds of services.  It is probably a good idea to look for the exact services you want rather than the word hawala or hawaladar.

UTILIZE YOUR NETWORK

Ask people you know.  Given the financial incentives that may come with the transaction, many people are willing to use their network of friends to engage in these kinds of transactions, especially if it is to help another friend or family member.   I have used this method numerous times for all kinds of transactions.  A good person to ask might be a friend with a liquid cash position such as a pawn shop owner or a rich uncle.

CONCLUSION

There are significant benefits to hawala banking in many kinds of transactions. Although for many westerners finding hawala services from hawladars on demand may be difficult, the need may become more acute because of the exacerbation of current currency controls and it is likely that these kinds of hawala services will become much more commonplace. In the meantime, it is good to be prepared and have access to those services.

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Reading time: 4 – 7 minutes

Back in June of 2008 after the Cambridge House Investment Conference I wrote about how Vietnam had limited gold imports but with all the updates to RunToGold it appears the article was lost to the Internet ether.  The last time I was in Vietnam to visit a few factories, including one of Nike’s, I found the people so nice and gracious, learned about the mangosteen for the first time and had the best ice cream in the whole world.  And the chocolate pancakes were amazing.  The extremely low prices would amaze you.

Bloomberg reported on 12 November 2009 that ‘Vietnam will resume gold imports for the first time since June 2008 … Five or six companies will be allowed to bring in unlimited amounts of gold’ [emphasis added].

The Vietnamese, like most in the East such as China, India, etc. have a severe case of gold bugitis.  Vietnam, a tiny country of about 86 million people with an average per capita GDP of $1,042, is the largest gold retail investment country ahead of India.  Of course, this is somewhat misleading because the GFMS distinguishes between jewelry and investment demand.

GOLD TRADING AT ABOUT $1,300 PER OUNCE

Bloomberg also reported:

The price of gold in Vietnam was 27.5 million dong ($1,539) per tael today, according to a telephone directory information service run by Vietnam Posts & Telecommunications. It earlier reached a record high of more than 29 million per tael, online newswire Dan Tri reported, citing local jewelers. One tael is about 1.2 oz of gold.

Some simple math reveals that $1,539/1.2=$1,282.50 or 29/27.5*$1,539/1.2=$1,352.45.

VIETNAM DONG EVAPORATES

The Vietnam Dong has been rapidly evaporating and losing their purchasing power.  Many contracts, such as real estate sales, are being made using gold.  Gold is money and is reasserting itself as currency in Vietnam.  After 18 months of failed policies the helpless government has retreated from the import restrictions because the market is more powerful than governments.

CONCLUSION

Gold buyers in Vietnam have been buying gold at about $1,300 per ounce of physical gold in the spot market.  The restriction on gold import restrictions by the Vietnamese government will lower the cost of gold in the Vietnamese spot market.  We can assume, everything else being equal, that gold demand will increase because of the lower price.

This is almost entirely real physical gold demand and not phantom paper products like the problematic GLD ETF or other tools of the gold cartel engaged in the central bank gold price suppression scheme.

If the Vietnamese are willing to trade their paper illusions at such a discount then what happens when holders of the larger currencies that are lower in the liquidity pyramid decide to do the same?  Oh wait, India already did and the gold price quickly jumped 5%.  The Great Credit Contraction has just begun and the fiat currencies are hastening their evaporation.

Note: Roger Knights was the first to hone in on the issue over at Seeking Alpha with ‘Is it possible they’re using ordinary ounces, not Troy ounces? If so, that would put their price in line with the price elsewhere. … ‘PS: What I mean is this: were ordinary ounces used in the conversion from taels?’

Nice Roger!  You honed in on the issue: What is an ounce? A tael is 37.429 grams. There are 28.35 grams per ounce and 31.1 grams per troy ounce.  Would sure be nice if we could likewise resolve the issue: What is a dollar?

DISCLOSURES:  Long physical gold, silver and platinum no position in the problematic SLV or GLD ETFs.

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