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Is It Really Just A Coincidence?
By: Greg Maurer, Gold Harvest Under A Silver Moon
December 30, 2009
I'm doing my best to ignore the markets this week. The noise that seems to persist is but a cacophony of impudent thieves boasting of triumph. Hardly...
In the never ending effort to obfuscate the Precious Metals Markets, the CRIMEX goons this week have toed the company line and engaged in some of their most nefarious and blatantly obvious criminal activity to date. Pause for a moment and peruse the graphic above...and consider this:
On Monday, Tuesday, and Wednesday of this week the United States Treasury Department has been engaged in yet another desperate series of auctions of US Treasury Bonds to further fund the irresponsible excesses of our floundering government. The total raised for the week a staggering $118 BILLION. This weeks auctions will be the final installment of 2009 Treasury issuance, which will bring this years' gross coupon issuance to $2.183 trillion -- a daunting figure surely to be matched in 2010.
In an effort to make these "tokens of debt" attractive to investors, it was deemed imperative by the Grand Masters of National Debt to make the US Dollar look strong, and it's arch enemy Gold look weak. Marching orders were sent to the cartel's bullion banks to "press Gold" to throw investors off the scent of safety in the hope of luring them into the Treasury's little Den of Debt instead.
Is it really just a coincidence that the price of Gold rolled over each of these three past days precisely at the open of trading on the CRIMEX as shown clearly on the graphic above? Not bloody likely! Let the graphic above sear into your mind. It is the clearest picture of a "crime in broad daylight" you may ever witness. There is absolutely no sound fundamental reason for Gold to have sold off at PRECISELY 8:20AM est every morning the past three days. NONE! If Gold is such a poor investment, why then does it not get clobbered in trading around the rest of the planet each night?
Gold holds the TRUTH about the destruction of your country by a small group of thieves determined to put each and every one of you in the poor house and destroy your inalienable right to life, liberty, and the pursuit of happiness guaranteed by the Constitution Of The United States Of America. The US Government will stop at nothing to keep this TRUTH from you.
The US Treasury cannot sell US Dollar denominated debt on its own merit. Therefore, the Treasury must use it's minions at the bullion banks to make Treasury Bonds "look better" than any alternative, in particular Gold.
US Treasury Bonds are a bad bet, and the World grows wiser by the day to this TRUTH. We are told again and again by the financial media that these weekly debt auctions are "successful". Why? Does one more successful bond auction buy the government another week or two of kicking the can down the road before the TRUTH overwhelms the Bond Market? Why are "successful" bond auctions always reported as if it were a "relief" that the Treasury succeeded in selling some more of the nation's future?
Are investors really buying all this debt? Or are we being led to believe investors are buying ALL this debt when in fact the Fed is buying it "indirectly"? Who is buying all the bad debt instead of buying Gold? Eric Sprott & David Franklin may know the answer to this question, and I doubt the Treasury Department will be happy to know that their little Ponzi Scheme has been exposed.
In their essay: Is it all just a Ponzi scheme? Eric Sprott & David Franklin go to extraordinary lengths to reveal just who is buying all this US Treasury debt, and it ain't you and me folks.
In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. 1. So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was "Foreign and International Buyers", who purchased $697.5 billion worth of Treasury securities in fiscal 2009 - representing about 23% more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60% increase year-over-year.2 This increase appears to be a direct result of the Federal Reserve's Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009. While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the State and Local governments and US Savings Bonds groups will be net sellers of US Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.
So who was the third large buyer? Drum roll please,... it was "Other Investors". After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualize this rate of purchase, they are on pace to buy $680 billion of US treasuries this year - or more than seven times what they purchased in 2008. This is undoubtedly the group that made the US deficit possible this year. But who are they? The Treasury Bulletin identifies "Other Investors" as consisting of Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non- Corporate Businesses, Individuals and Other Investors. Hmmm. Do you think anyone in that group had almost $700 billion to invest in the US Treasury market in fiscal 2009? We didn't either. To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009.3. Within this grouping, the GSE's were small buyers of a mere $5 billion this year; 4. Broker and Dealers were sellers of almost $80 billion; 5 Commercial Banking were buyers of approximately $80 billion; 6 Corporate and Non-corporate Businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion. So who really picked up the tab? To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.
So to summarize, the majority buyers of Treasury securities in 2009 were:
1. Foreign and International buyers who purchased $697.5 billion.
2. The Federal Reserve who bought $286 billion.
3. The Household Sector who bought $528 billion to Q3 - which puts them on track
purchase $704 billion for fiscal 2009.
These three buying groups represent the lion's share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.
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. Given the financial condition of the average household in 2009, this makes little sense to us.
This is a MUST READ essay. Please take the time to read it in its entirety, and share it with a fellow investor. The TRUTH must be heard.
See related articles:
All I Really Need To Know About Money, I Learned From A Silver Dime
by Vincent Bressler
December 18, 2009
I was born in 1964. That was the last year that the USA coined real money for general circulation. Now imagine that you have two dimes in front of you, one of them is from 1964, one of them much younger. But the 1964 coin looks young, barely worn. That's because those coins went out of circulation starting in 1965. People held on to them. The metal was worth more than 10 cents.
Look carefully at the two dimes. It's easy to tell the difference between real silver money and the metal tokens that we use today. The silver coin is brighter. Its luster is almost creamy. The metal token has a harsh sheen and is not lustrous, as if the shine is painted on. Nicks and scratches stand out in stark relief to the hard shiny surface of the metal token, not so on the silver coin. Topple the coins over on a granite or tile surface. The metal token makes a dull sound, the silver coin rings.
Our monetary system today is in an advanced state of decay. If actions are taken during the next few years to re-establish a link between gold and the dollar, then the price of gold will stabilize somewhere between 5 and 10 thousand dollars per ounce. If not, any price is possible. Under most scenarios, the price of silver will likely reach better than 1/2 the price of gold before declining. I wrote an article about this a few years ago [link1 link2]. Today the price of silver is 1/65th the price of gold. I expect a long-term average price ratio between gold and silver to go back to its historical (in ground / constitutionally mandated) average of between 1/10th and 1/20th the price of gold.
This means that there is a tremendous opportunity in silver.
The bottom line is that our currency system is corrupt and rewards bankers at the expense of productive people. We are within a few years of the end of this system. We will see massive reduction of debt that can no longer be serviced. The fiat currencies (currencies by government decree) that we use today will be repudiated. Real money will once again arise. It is instructive to think in terms of the historical value of gold and silver in ages when there was no other money:
The Roman denarius contained about 3 grams of silver (the pre 1965 silver dime contains 2.2 grams of silver). The denarius was about 1 day's pay for a craftsman. Think of it as the equivalent of $300 today. That's about $100 per gram or $3000 per ounce. The ratio of the price of silver to gold in ancient times was 1/10th. That means gold was the equivalent of $30,000 per ounce. This sort of gold to silver ratio and gold price was also the case in Renaissance Italy, 1500 years later. However, since that time, debt based money has evolved and the value of gold and silver has gone down, down, down, until now.
We are living in a time of historic change that has been 500 years in the making. There are tremendous opportunities. You will profit a great deal if you think deeply about this, study it and take action. Everything you need to know is waiting for you on the Internet.
Silver Poised To Outperform Gold
The Hennessee Group - Press Release
March 17, 2009
The Hennessee Group LLC, an adviser to hedge fund investors, believes silver is currently underpriced relative to gold and is therefore advising clients to accumulate positions in the precious metal. Charles Gradante, Co-Founder of the Hennessee Group, stated "While we see both gold and silver as safe haven investments, particularly as a hedge against the longer term risk of hyper-inflation, we believe gains in silver will outpace gold." Gradante added, "The gold to silver ratio has reached elevated levels in recent months due in large part to gains in gold. And while we expect gold to continue experiencing gains, we anticipate silver to outperform on a relative basis and lead to a reversion in the gold to silver ratio." The Hennessee Group believes the supply/demand dynamics of silver present a strong case for the appreciation in the precious metal going forward, specifically due to its increased global industrial demand (caused by emerging markets) outpacing supply.
The Rise of the Gold to Silver Ratio
Gold benefited from a flight to quality in 2008 as the economic crisis deepened and investors fled risk assets for the safety of gold and treasuries; two of the few assets classes to experience gains for the year. Silver on the other hand suffered along with most other commodities over the same time period as fears of the deepening recession mounted. For the year, gold gained approximately +6% while silver dropped over -25%. Charles Gradante stated, "The dispersion in performance between these two precious metals has led to a drastic widening in the gold to silver ratio from 50x in early 2007 to its current level of 72x, the highest level since 2004."
Supply/Demand Story of Silver
Despite recent concerns regarding weakening economies and a subsequent pullback in silvers' price, the Hennessee Group believes the long term supply/demand story for silver remains intact. Charles Gradante stated, "Silver is unique relative to most other precious metals. The demand for silver not only stems from its use as a raw material to manufacture jewellery and silverware, but also from its numerous industrial applications. In fact, over 50% of silver demand comes from the industrial sector." Gradante added, "Silver is utilized across a wide range of industries including imaging, electronics, jewelry, coinage, superconductivity and water purification. While we could see a slowdown in demand in the near term due to the current global recession, we believe longer term demand will continue to rise and support higher silver prices." An additional source of demand we believe will continue to impact global demand for silver is the market for silver exchange traded funds (ETF). The iShares Silver Trust, created in 2006, has grown in popularity in recent years and has led to tremendous growth in the amount of silver backing the shares issued to investors. Growth in the silver ETF market is likely to continue going forward and will put additional strains on the supply/demand dynamics for silver.
The supply side of silver is unique as well in that only a small percentage of mines in the world are pure silver producers, rather silver is typically a by-product of mines mainly engaged in extracting lead, zinc and copper. According to the 2008 World Silver Survey, supply generated due to mine production has grown from 1998 to 2007 by +24%, while demand due to industrial applications has grown nearly 44%, creating a shortfall of nearly -20%. The Hennessee Group anticipates seeing similar shortfalls between supply and demand as the economy recovers and industrial demand accelerates.
The Hennessee Group believes that the breakdown in the gold to silver relationship that has occurred in recent months is creating a long term investment opportunity. Charles Gradante stated, "There has been a recent pullback in commodity prices, particularly precious metals. However, the Hennessee Group believes this is a short term correction in a longer term upward trend that is likely to be exacerbated by the recent aggressive fiscal and monetary actions, and the impending inflationary pressures they will create."
Disclaimer: Any opinions, estimates and forecasts offered in this article constitute the author's judgment as of the date of the materials and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information contained in this article to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice.
S&GS Notes: Posting more articles about gold, because (and I know I sound like a broken record - silver follows gold, and then outperforms it) The challenge (at least for me - because remember, I'm an investor also) is how to know whether you're in a 'dip' or not. Now that may not seem like rocket science to YOU, but I keep thinking… yeah, gold / silver is higher than it's been, so maybe I should wait till the price drops again…but what's going to happen tomorrow? Will it be even higher? Will the price correct again or NOT? In that case, today's price is still a bargain… and maybe I should grab it before prices get even higher…
I find that if I wait in indecision, then I could wait myself out of the market entirely, and that's worse than taking a chance at paying a few dollars more for metals now. They're going to get even higher in the future… so taking a long view, regardless of the price, it's still a bargain… as Larry Myles points out below.
Defining Gold Is An Easy Matter
In Defense of Gold
Nothing has changed…accumulate gold on the dips.
After spending nearly two weeks kicking rocks in a remote region of northern Nicaragua, and poking around Golden Reign Resources' lost and forgotten Spanish gold mines while encountering much in the way of encouragement and promise in all the right places; and finding perhaps even more love on two newly discovered zones, I made a decision to forgo an official Larry Myles Report for December. Alas, it was not to be….
Instead, after getting back to Vancouver and reading only a few dozen subscriber emails, I felt compelled to comment on the phony and highly contrived "gold-is-collapsing" story. The price of gold is not collapsing, it is correcting. For those of you not only reading....but understanding past LMR reports, if you really think it is all over for gold, then I suggest you to get out of the market and go find yourself a boringly safe and unchallenging government union job. The brave new recruits to bullion and junior market investing, relax and read on. May not your heart be troubled.
The recent 8 percent sell-off in gold has been welcomed by every serious bullion investor. Besides millions of retail investors, the list includes influential central banks, powerful world governments, and everyone else with half a brain who understands that nothing has changed over the last two weeks. What we are experiencing is an absolutely stellar buying opportunity.
Even when gold was trading north of $1200 central banks were jostling each other to buy the yellow metal. China made all kinds of noises that they wanted to pick up 400 tonnes of gold from the IMF, but they wanted 'a deal' on the price. In swoops India, gives China the bump and escapes with 200 tonnes of gold. And although China might still want to beat the price, they have indicated on numerous occasions that they intend on adding to their stockpile of gold. Backstopped by major countries like China and many of the world's central banks, the price of gold will not collapse; manipulated up and down, perhaps. But a serious deterioration of price for a long period of time, not a chance.
Not to be forgotten: for the last twenty years, central banks were net sellers of gold - and still the price appreciated from $225 to $1100 per ounce over the last ten years. With the banks on board, logic dictates the price of gold will increase.
"It's very positive for the price of gold," said Leo Larkin, equity metals analyst with Standard & Poor's. "We're at the early stages of central banks becoming buyers."
For those of us comfortable in the business of gold we understand the theory of the truth behind the hype on gold; probably, maybe…possibly, perhaps…one day the steady rise in the price of gold will get away from us and go into parabolic mode. I have been hearing this hard pitch for the better part of a decade. So far it has not happened; instead we have experienced ten year's worth of steady appreciation in the price of the yellow metal; with a few peaks and valleys just to make sure we were paying attention. Worth considering: If you have spent the last decade looking for profits from the Dow Jones Industrial Average, your investments have probably lost money - maybe even lots of money. Profit from gold over the last ten years? Check the chart, no comment necessary.
When it comes to the recent price of gold, the yellow metal hovered around the $900 level for nearly five months before deciding to move up by $100 to comfortably graze at the $1000 plateau. Then loitering less than a month at that level, gold made a spectacular (and premature) year-end dash for the stars - finally tagging out at $1225, give or take a dollar or two, before (thankfully) falling back. Be aware: there is absolutely not one chance in one hundred that gold's long-term trajectory has been permanently reversed. Reason: the fundamental underpinnings for owning gold have not changed - or have not changed to the detriment of gold. As a matter of fact, things have gotten slightly worse for those who cling to the idea fiat currency will magically prevail over gold (and silver).
It is all about the debt, and the perception that no one in Washington cares….
While every weak-brain was out celebrating some really lame increases in consumer spending and/or a markedly un-dramatic decrease in the number of people who were out of work in America, the current administration in Washington decided to raise the federal debt limit by nearly $2 trillion to address this year's deficit of $1.6 trillion. And if you think this is just another measly trillion or two dollars, not so. What the Senate is attempting to do is move legislation to raise the federal debt limit beyond $12.1 trillion to nearly $14 trillion.
I will forgive you if you have not heard as much as a peep about this very important story. The media has decided it was more important to rally just about everyone it could think of to tout the phony gold-is-collapsing narrative. Oh. And while they are at it….we are allegedly also on the road to recovery. For real this time. The con goes on to say that because of a single percentage point increase in last month's consumer sales the over-printed US dollar is on the verge of fiscal renaissance. I guess that some people need to hear this kind of pap and are also ready to hear that in the short term you add debt to avert a total collapse - so why not increase the debt ceiling of the country. I do not agree. At some point, all America will need to face up to the fact that long-term debt must be addressed. Why? Within a few years America's debt load will become unsustainable. Trust me, America is not too big to fail.
For a warm-up act one only has to look to Dubai, Spain and Greece. Wait a minute! Spain? Isn't that bankrupt country the model President Obama keeps referring to when he talks about green jobs and the many opportunities that the greening of America will provide to the US economy? Unfortunately that discussion will have to wait.
For now we should be paying attention to how the credit rating agencies have downgraded all three of these poorly managed, debt-ridden countries. Earlier this week Standard & Poor's lowered its outlook for Spain, while Fitch reduced its rating on Greece.
According to liberal opinion Spain and Greece are being 'punished' due to circumstance. Really? Closer to the truth is that Greece, Spain and Dubai are being held to account because they refuse to embrace meaningful deficit reduction plans after years of frittering away vast sums of money on unsustainable entitlement programs. Sound familiar, America? It is all so predictable; and proven time and time again - there is not a single government on the planet that is willing to make the hard decision; allowing their country-system to go through a painful 'reboot'. Okay, so fine…avoid the medicine and what follows will be inevitable - the collapse of domestic currencies; possibly being the early trigger warning for the next global financial crisis. Seriously, avoid faith-backed currencies of any kind and stick to gold and silver.
What I am trying to say is just because whim-based Washington wants to go ultra-green (Cap and Trade) and wants an expensive national health care plan and wants to ban mining in America and wants to kill nuclear power and wants to thwart off shore drilling, there are costs and responsibilities - and the current gang in Washington are following in the footsteps of Greece, Spain and Dubai by not wanting to deal with the reality of costs. Rest assured, America's creditors are aware of this and at some point, will strike hard and fast and snap shut their purse strings. Nations cannot spend their way into prosperity; what they can do is spend their way into oblivion. And America is heading down that road. When a nation heads down this road we can expect hard inflation or possibly hyper-inflation. The inflation narrative is already ongoing. What is surely beyond debate is the iron certainty that we will suffer through hyper-taxation. Comes with the territory. Taxing soft drinks and imposing a War Tax are only the first sign posts of what is to come.
Thus, when it comes to gold, I have heard nothing to indicate that I should deviate from my successful strategy of buying gold on the downward reactions. In other words, pay no attention to the legions of short sighted pro-dollar hacks and deluded gold bears. Continue to accumulate physical gold on the dips.
S&GS Notes: This just came to us from the National Inflation Association, and provides a great concise summary of what's happening with the recent price fluctuations in precious metals, some historical information about the gold/silver ratio, and just some good solid reasons why silver investing is a prudent choice for our times… enjoy.
NIA Declares Silver Best Investment for Next Decade
From the National Inflation Association
We are less than three weeks away from entering the next decade. The most important thing you need to know entering 2010 is that silver is the single best investment for the next decade. In our opinion, investing into silver is the only sure way to tremendously increase your purchasing power over the next ten years.
Throughout world history, only ten times more silver has been mined than gold. If you go back about 1,000 years ago between the years 1000 and 1250, gold was worth ten times more than silver worldwide. From year 1250 to 1792, the gold to silver ratio slowly increased from 10 to 15 and the Coinage Act of 1792 officially defined a gold to silver ratio of 15. The ratio remained at 15 until forty-two years later when the ratio was increased in 1834 to 16, where it remained until silver was demonetized in 1873.
The gold to silver ratio remained between 10 and 16 for 873 years! It is only over the past 100 years that the gold to silver ratio has averaged 50. History will look back at the artificially high gold to silver ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they're all an illusion. Next decade, the fiat currency experiment will end badly in a currency crisis. The wealthiest people will be those who bought silver today and were smart enough to research and pick the best silver mining stocks.
While the vast majority of the gold ever produced remains sitting in vaults, 95% of the silver produced has been consumed by industry for thousands of applications in such tiny amounts that most of it will never be recycled and seen on the market again. Nobody knows the exact above ground supply of silver today, but most likely it is somewhere in the neighborhood of 1 billion ounces. That's a total worldwide market value of only $17.4 billion, when the world has over $7 trillion in foreign currency reserves, mostly in fiat currencies that they will need to diversify out of due to rampant inflation.
Besides the fact that the world has been ignoring the monetary value of silver, silver prices are artificially low due to a large concentrated naked short position. It's not a coincidence that the day silver reached its multi-decade high of over $21 per ounce in March of 2008, was the same day Bear Stearns failed. Bear Stearns was a holder of a massive short position in silver. In our opinion, this was likely a naked short position because there is nobody in the world who owns such a large amount of silver for Bear Stearns to have borrowed.
The reason why we believe the Federal Reserve was so eager to orchestrate a bailout of Bear Stearns, is because Bear Stearns was on the verge of being forced to cover their silver short position. Because the silver market is so small and tightly held, if Bear Stearns was forced to cover their short position, silver prices could've potentially rose to $50 per ounce or higher overnight. The world would've seen how economically unstable our country is and confidence in the U.S. dollar would've rapidly deteriorated.
JP Morgan still holds the silver short position they inherited from Bear Stearns. The concentrated naked short position in silver today is the largest short position in the history of all commodities, as a percentage of its market size. Eventually, JP Morgan will have to cover this short position or it could jeopardize their existence.
The best evidence that the short position in silver is naked and not backed by real silver, is the differential between what silver trades for on the Comex and what real people are willing to pay for physical silver on eBay. Every hour on eBay, there are dozens of one ounce silver coins selling for approximately $25. That's about a 43% premium over the current spot price of silver. With so much demand for physical silver, we doubt the silver shorts in the paper market will be able to manipulate prices downward for much longer. A major short squeeze could be right around the corner and silver could take off in a way that shocks even those who are most bullish.
S&GS Notes: Breaking out mid-week here to bring you some Breaking news: Congressman Ron Paul just introduced the Free Competition in Currency Act on December 9, 2009. Some perspective on this - many have been predicting the rise of grassroots barter systems for awhile now and especially as the US Dollar's value has been continually eroded by the continual printing of more and more fiat currency by the Federal Reserve. The ideal 'currency' in a barter system would be precious metals, and, indeed many of the barter networks are based upon an exchange rate of silver.
Since I began investing in silver a little over a year ago, I have personally engaged in barter commerce to obtain several goods and services… we purchased an airplane this past year, dehydrated food supplies, ham radio gear, ate in restaurants, and obtained legal and business services in exchange for precious metals.
Statement of Congressman Ron Paul
United States House of Representatives
Statement Introducing the Free Competition in Currency Act
December 9, 2009
Madame Speaker, I rise to introduce the Free Competition in Currency Act of 2009. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.
This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for every-day transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.
Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.
At this country's founding, there was no government controlled national currency. While the Constitution established the Congressional power of minting coins, it was not until 1792 that the US Mint was formally established. In the meantime, Americans made do with foreign silver and gold coins. Even after the Mint's operations got underway, foreign coins continued to circulate within the United States, and did so for several decades.
On the desk in my office I have a sign that says: "Don't steal - the government hates competition." Indeed, any power a government arrogates to itself, it is loathe to give back to the people. Just as we have gone from a constitutionally-instituted national defense consisting of a limited army and navy bolstered by militias and letters of marque and reprisal, we have moved from a system of competing currencies to a government-instituted banking cartel that monopolizes the issuance of currency. In order to reintroduce a system of competing currencies, there are three steps that must be taken to produce a legal climate favorable to competition.
The first step consists of eliminating legal tender laws. Article I Section 10 of the Constitution forbids the States from making anything but gold and silver a legal tender in payment of debts. States are not required to enact legal tender laws, but should they choose to, the only acceptable legal tender is gold and silver, the two precious metals that individuals throughout history and across cultures have used as currency. However, there is nothing in the Constitution that grants the Congress the power to enact legal tender laws. We, the Congress, have the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender. Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender.
Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency. Gresham's Law describes this phenomenon, which can be summed up in one phrase: bad money drives out good money. An emperor, a king, or a dictator might mint coins with half an ounce of gold and force merchants, under pain of death, to accept them as though they contained one ounce of gold. Each ounce of the king's gold could now be minted into two coins instead of one, so the king now had twice as much "money" to spend on building castles and raising armies. As these legally overvalued coins circulated, the coins containing the full ounce of gold would be pulled out of circulation and hoarded. We saw this same phenomenon happen in the mid-1960s when the US government began to mint subsidiary coinage out of copper and nickel rather than silver. The copper and nickel coins were legally overvalued, the silver coins undervalued in relation, and silver coins vanished from circulation.
These actions also give rise to the most pernicious effects of inflation. Most of the merchants and peasants who received this devalued currency felt the full effects of inflation, the rise in prices and the lowered standard of living, before they received any of the new currency. By the time they received the new currency, prices had long since doubled, and the new currency they received would give them no benefit.
In the absence of legal tender laws, Gresham's Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society. Merchants would have been free to reject the king's coin and accept only coins containing full metal weight.
The second step to reestablishing competing currencies is to eliminate laws that prohibit the operation of private mints. One private enterprise which attempted to popularize the use of precious metal coins was Liberty Services, the creators of the Liberty Dollar. Evidently the government felt threatened, as Liberty Dollars had all their precious metal coins seized by the FBI and Secret Service in November of 2007. Of course, not all of these coins were owned by Liberty Services, as many were held in trust as backing for silver and gold certificates which Liberty Services issued. None of this matters, of course, to the government, which hates competition. The responsibility to protect contracts is of no interest to the government.
The sections of US Code which Liberty Services is accused of violating are erroneously considered to be anti-counterfeiting statutes, when in fact their purpose was to shut down private mints that had been operating in California. California was awash in gold in the aftermath of the 1849 gold rush, yet had no US Mint to mint coinage. There was not enough foreign coinage circulating in California either, so private mints stepped into the breach to provide their own coins. As was to become the case in other industries during the Progressive era, the private mints were eventually accused of circulating debased (substandard) coinage, and with the supposed aim of providing government-sanctioned regulation and a government guarantee of purity, the 1864 Coinage Act was passed, which banned private mints from producing their own coins for circulation as currency.
The final step to ensuring competing currencies is to eliminate capital gains and sales taxes on gold and silver coins. Under current federal law, coins are considered collectibles, and are liable for capital gains taxes. Short-term capital gains rates are at income tax levels, up to 35 percent, while long-term capital gains taxes are assessed at the collectibles rate of 28 percent. Furthermore, these taxes actually tax monetary debasement. As the dollar weakens, the nominal dollar value of gold increases. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases, the federal government considers this an increase in wealth, and taxes accordingly. Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals.
Just as pernicious are the sales and use taxes which are assessed on gold and silver at the state level in many states. Imagine having to pay sales tax at the bank every time you change a $10 bill for a roll of quarters to do laundry. Inflation is a pernicious tax on the value of money, but even the official numbers, which are massaged downwards, are only on the order of 4% per year. Sales taxes in many states can take away 8% or more on every single transaction in which consumers wish to convert their Federal Reserve Notes into gold or silver.
In conclusion, Madame Speaker, allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess. With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies and cosponsor the Free Competition in Currency Act.
S&GS Notes: I’ve struggled this week to try to determine which of the articles / commentaries to provide for readers. There is so much happening in the precious metals scene and economy in general, combined with the activities of JP Morgan Chase and Goldman Sachs short-selling massive amounts of precious metals to manipulate prices… Most of the experts like Ted Butler, Jason Hommel, David Morgan, are all still very bullish on metals… this week’s rapid price drop is something they say was ‘expected’… but noting that the drop wasn’t terribly significant in that metals are still rising and didn’t drop below previous highs (gold $1100, silver $18) … What they are still saying, in general, is to get as much as you can while you still can get it, because they expect prices to continue moving ever higher… and the dollar isn’t ‘improving’ as the media would have us believe.
Dubai’s Threat To US Banks
By Les Christie
From CNN Money
Although there's little direct exposure to Dubai World's default risk, U.S. financial institutions could take major indirect hits.
NEW YORK (CNNMoney.com) -- The news that the state-run investment company of Dubai requested a postponement of billions of dollars of debt this week could pose a big problem for U.S. banks.
Dubai World owes about $60 billion. It rang up much of that in a building boom that included the world's tallest skyscraper and the Palm Islands in the Persian Gulf, settlements shaped like palm trees.
According to CMA DataVision, which tracks credit markets, there's a 35.82% probability that Dubai will default on that debt.
What is Dubai World? - CNN
New York-based Citigroup (C, Fortune 500) has the most exposure to default risk at Dubai World, which a J.P. Morgan (JPM, Fortune 500) equity research note estimated at $1.9 billion. Citigroup declined to comment.
While other major banks in the United States are believed to have little direct exposure, the ripple effect could be more crippling, according to Richard Bove, a bank analyst with Rochdale Securities.
"There could be huge indirect exposure," he said. "One has to assume that U.S. banks will be hurt."
J.P. Morgan declined to comment, while Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) were unavailable for immediate comment. Morgan Stanley (MS, Fortune 500) said a Dubai World default "would have have no material impact on its earnings."
Bove said the underlying problem is that there is a lot of uncertainty floating around. For example, there's little information available about counterparty derivatives, guarantees that transfer default risk from lenders to other financial institutions. And it's unknown how much of Dubai World's debt guarantee is held by U.S. banks.
And while UK banks, such as Standard Chartered, HSBC (HBC), Royal Bank of Scotland (RBS) and Barclays (BCS) are much more exposed to Dubai World, with a total of more than $30 billion in default risk according to J.P. Morgan's note, U.S. banks have extensive dealings with UK institutions. Those include trading and guaranteeing debt, which could translate into losses for U.S. banks.
There's also U.S. banks' interactions with their German counterparts. Dubai has loaned a lot of money to Eastern European nations, as has Germany. Any losses from defaults there could expose U.S. banks to some risk. Finally, there's the impact of already reeling commercial real estate markets worldwide.
"Dubai may have to unload some very prestigious properties at distressed prices, and this will drive the price of all commercial real estate lower," said Bove. "That would clearly be a problem for American banks."
Bove also posited that the problems at Dubai World could add weight to the growing sentiment that is already strong in the U.S. Congress about beefing up regulation.
"Congress is demanding that anyone connected to the U.S. financial system has to be regulated," he said.
Rattling bank stocks
Bank stocks are particularly vulnerable to a market turndown triggered by the Dubai crisis, said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors. He said the run-up this year has led to an overvalued stock market.
"We had been looking for something to trigger a correction," he said. "This could be that catalyst."
It would add to a market already made volatile, especially with the approach of the end of the tax season for mutual funds, which has put a lot of money in motion. The impact could fall heaviest on the financial sector.
Sorrentino added that the risk of default will put a damper on all commercial credit markets. Institutions may have to set aside more reserve funds to cover default risk, leaving less cash to lend out, and, in general, take a more cautious underwriting approach.
If lending does decrease, that could cut into bank profits.
Commentary by Bret Rosenthal
Rosenthal Capital Management
Stock Market Investing: The above story, along with many others, has filled the airwaves and blogosphere over the last 4 days. I will refrain from adding my voice to the din. Moreover, endeavoring to postulate on the repercussions seems to me a fool's errand. The sheer plethora of moving parts and back room deals makes a supposition worthless.
I will, however, offer some insight to a more pressing question: How will this event effect the US$, the equity markets and the price of Gold?
An avid reader of this blog will find the answer both simple and familiar. Bad news on the global economic front equates to good news for the U.S. equity markets and the price of precious metals, Gold and Silver.
Investment Strategy: The legend for deciphering this market environment:
Neg.Eco.News = Con't.Q.E.; (Q.E. = Quantitative Easing; catchall for liquidity creation)
Con't.Q.E. = Con't.US$.Dval.; (US$. Dval = US$ devaluation)
Con't. US$.Dval = Exponential Gold and Silver price increases + higher US equity prices
This legend, in all likelihood, will remain in force until major policy changes occur within the White House, U.S. Treasury and Fed. Never in history has the systematic devaluation of a currency led to sustained economic recovery and long-term growth. However, without fail, said devaluation leads to inflation, often hyperinflation, and a flight out of the currency into hard assets. The move unfolding in the price of Gold and Silver will be for most unimaginable, but for the few, the proud, the aware, it will be a move of a lifetime.