Another Day, Another Downgrade

November 29, 2012

Evidence continues to mount of trouble in the world economy and financial system.

The latest evidence comes in the form of yet another downgrade of a nation’s credit rating by a major international investment rating firm.

This is the type of trouble for which hard assets, such as rare gold coins, are ideally suited to protect personal wealth.

The latest trouble does not come from the USA and its impending “fiscal cliff.” Nor does it come from the European Union, whose members Greece and Spain are in deep fiscal trouble.

The latest trouble spot is Argentina. Argentina’s financial position is so poor that Fitch rating services has downgraded the country to a rating so low that default is expected soon.

The impact of this on world financial markets is yet to be seen, but in today’s interconnected world, we can be sure that it won’t be limited to Argentina…

CNBC: US Is Coming Off Stimulus Induced High

May 3, 2012

This video is everything we have attempted to make our clients aware that is fundamentally wrong with our current printing press economy. Peter Schiff CEO, Euro Pacific Capital tells CNBC the U.S. economy is coming off a stimulus induced high. He goes on to forecast the collapse of the US Dollar along with the oncoming hyper-inflation. You will find he recommends Gold as an asset to hold during the coming collapse.  See more below:

Forbes: Gold, Money Creation, and the Monetization of Debt

March 30, 2012
Jerry Bowyer, Contributor
OP/ED |3/29/2012 @ 11:20AM |2,986 views

In the previous article in this series I pointed out that even after recent dramatic sell-offs gold prices are still higher than one would expect if one saw them as being driven only by money creation. And this state of affairs has been sustained for a period of years, which suggests that it is not driven by a panic reaction, because panics by definition tend to last for a short period of time.

Having noticed that although gold did fall to the top end of my expected value range using money metrics, I wondered why it did not fall at least to the middle range.

Trying to solve the puzzle, I reasoned that perhaps gold is not just a function of domestic money creation, but of international money creation as well. In other words, gold prices might go up in dollar terms even more than the excess creation of dollars alone would dictate. If other countries also debased their paper currencies, the citizens of those countries would similarly demand gold as a hedge against inflation. And since much of the world seemed to be at least partially following the U.S.’s lead in weakening their currencies, perhaps global gold demand was driving gold even higher than dollar devaluation would suggest.

This is an interesting theory, but there are some problems with this view.

First, the view that global inflation drives domestic gold prices has an obvious theoretical problem. Yes, global inflation would lead to global growth in demand for gold, but it would also lead to growth in global supply. Gold is a commodity with both a demand curve and a supply curve, and if it has both curves it has an equilibrium price and the equilibrium price for gold and dollars is a function of the comparative demand and supply of each of those.

If among the three billion new capitalists around the world there is a certain proportion of gold buyers and consumers, then among those three billion capitalists around the world there is also a certain proportion of gold producers and sellers. As gold goes up in price, the incentives to discover it increase proportionately. That’s how the global economy kept its monetary equilibrium for millennia before the emergence of the global fiat money system.

Second, the biggest problem with the global inflation as driver of domestic gold price theory is that it doesn’t work. If one had used global inflation to try to predict dollar gold prices, or used dollar gold prices to try to predict dollar inflation, one would have had very little success. Global inflation does not seem even to explain the times in which gold prices detach themselves from currency debasement factors.

It seems that gold investors are not just concerned about how much money the Fed has created, nor are they principally concerned about how much money the Fed-wannabes around the world have created; they are worried about something else, and they might have good reason to be. What they are worried about, and what seems to be driving current gold prices, is that public debt levels have risen to the point where the debt will be paid off in highly debased currency. In other words, they’re afraid of what is called ‘debt monetization’.

Debts are monetized when governments decide to use their monetary authorities (in theU.S.context, that is the Fed) to create new money which is then lent to the government. This tends to happen when the government has borrowed up to its capacity and decides to continue borrowing above its credit capacity. When that happens, private lenders are no longer willing to take the chance of lending to an over-indebted government. At that point, governments often attempt to verbally intimidate private lenders, especially banks which are subject to very high levels of government oversight. Sellers of bonds are verbally assaulted as vigilantes and speculators, and in more extreme cases attacked for their ethnicity or religion. Jews have been frequent targets of this type of attack.

In some cases regulators require financial institutions to lend to the government anyway, often for reasons other than the stated ones. For example, recent changes in regulation associated with Dodd-Frank and the Basel Accords purport to act in the interest of financial stability by requiring banks to hold larger proportions of ‘Tier 1 capital’, such as Treasury Bonds, for the purpose of risk reduction. But the problem is that this public Tier 1 capital is in many cases riskier than, for example, the corporate bonds which it replaces. That’s one reason why the European sovereign debt crisis has been so devastating to the private banking system, because earlier versions of risk reduction forced extremely risky public bonds down the throats of the private system. What’s even more maddening is that after suffering through all of that, we still have to sit through political sermonizing about market failure in the banking system.

So, once private lenders have been brow-beaten, and then eventually law-beaten into buying as much public debt as they can possible stand, the rapacious public spending beast’s hunger remains un-slaked. That’s where monetization comes into play. Gigantic piles of money are simply created and then shoveled into the mouth of the Leviathan.

Continued on Pg.2

Fed Chair Ben Bernanke Back in School Trashing Gold

March 21, 2012

Fed Chairman Ben Bernanke delivered his first of four lectures to students at George Washington University trashing the Gold Standard.

Fed Chair Ben Bernanke is taking some time out of his busy schedule to go back to the class room and mold young impressionable minds.  After Rep. Ron Paul ambushed him in committee with the value of a Gold Standard, Bernanke seems to be hitting back with economic sunshine & no hint of QE3.

Yesterday he took the direct approach, while teaching a class at George Washington University attacking the Gold Standard as a waste of resources.  Gold retracted slightly in light of this but is moving back forward today as it steadies above $1650.

Mr. Bernanke can take his best shot at gold but until the global debt issues are resolved and global demand slows, the fundamentals of the yellow metal will continue to drive the price through the end of the decade.

Read further below:

Forbes – Bernanke: Gold Standard A ‘Waste Of Resources’

The problem with a gold standard is there just isn’t enough of the yellow stuff.

So said Federal Reserve Chairman Ben Bernanke Tuesday afternoon in the first of four lectures he will give at George Washington University over the next two weeks. (See “Bernanke Goes Back To School.”)

Paraphrasing economist Milton Friedman, Bernanke said it takes a lot of effort and work to go to South Africa, or somewhere else in the world, dig up a bunch of gold, then just put it back into another hole – in this case the basement of the New York Fed.

Later, during a Q&A period after his lecture, Bernanke acknowledged the main arguments for a gold standard, before dismissing them. Proponents, like Rep. Ron Paul (R-Texas), argue that a gold standard maintains the value of the dollar, under the premise that paper money is inherently inflationary. Bernanke dismissed this, arguing that while the argument may hold for long-run price stability it is not valid on a year-to-year basis. A gold standard, Bernanke said, also stops the central bank from being able to respond to booms and busts through monetary policy.

Such a standard is not practical though, Bernanke continued, as there is not enough gold in the world to achieve a global gold standard without tremendous cost (though that would undoubtedly be a boon for miners like Barrick Gold or Goldcorp).

The Fed chairman also mentioned the deflationary aspect of linking currency to gold, referring to William Jennings Bryan’s famous “Cross of Gold” speech, and noting how a gold standard links the policies of all countries on it, restricting the ability for region-specific monetary policy. (See Bernanke’s lecture and presentation materials here.)

Lastly, Bernanke acknowledged the fallibility of central banks. A gold standard only works if markets are convinced that maintaining that standard is the sole priority. Any hint of wavering and the currency becomes subject to speculative attacks.

Gold prices were down more than $21 to $1,645 an ounce Tuesday. The U.S. dollar index, a measure of the greenback against a basket of foreign currencies, was up 0.2% Tuesday afternoon to 79.59.

Phillip Coggan discusses Paper Promises: Debt, Money, and the New World Order

February 8, 2012

Philip Coggan a columnist for the Economist who has written extensively on hedge funds has taken an in-depth look at the fiat currency system we live in today.  The idea for his current book, Paper Promises: Debt, Money, and the New World Order, came out of his research into the 2008 crash & the ensuing recession.  Coggan discusses the history of debt and its relationship to paper money, now the trend towards electronic money. He is like a prophet in the wilderness using history, current trends & a bit of common sense to forecast the coming decade of impending financial collapse.

We don’t often have video or audio links on this blog but both of these interviews are worth listening to. This is a warning that should be shouted from the mountain tops!

The following links are two separate interviews on the book:

NPR Morning Edition: Amid Debt Crisis, A Trail of Broken ‘Promises’

The Economist: The Debt Crisis – Philip Coggan on ‘Paper Promises’

Forbes: Somebody Has Been Buying A Bunch Of Gold

January 31, 2012
Great Speculations Buys, holds, and hopes
Investing | 1/30/2012 @ 5:43PM |2,051 views
Adrian Ash, Contributor

After the Fed’s latest zero-rate promise pushed gold back to the financial front pages, it’s worth asking who’s buying in bulk, and why?

There’s plenty of noise, for instance, about Chinese households buying gold during last week’s New Year holidays.

Away from the massed decisions of private investors and savers, gold holdings amongst the world’s central banks have quietly risen to a six-year high, according to data compiled by the International Monetary Fund.

“There’s a perception perhaps that gold is no longer a crucial part of the financial system in the way that it was under the gold standard before 1970, 1971,” as Marcus Grubb of the World Gold Council put it in an interview last week. “But in fact that’s not really true because even with the ending of the gold standard, gold remains as an asset held by the world’s central banks.”

A good chunk of this weaving is due to official reserves. As our chart shows, central banks control a shrinking proportion of what’s been mined from the ground. A far greater tonnage of gold again is finding its way into private ownership, and it’s having a greater still impact on how money and finance work.

First, private individuals have led the rediscovery of gold bullion as a financial asset, rather than the decorative store-of-value it had become by the close of the 20th century. Institutional finance has caught up, however, and gold is now in front of the Basel Committee on global banking, proposed as a “core asset” for banks to hold and count as a Tier 1 holding for their liquidity requirements.

Turkey’s regulators already acknowledged physical gold as a Tier 1 asset for its commercial banks starting in November, with the cap of 10% worth some 5.5 billion lira ($2.9bn) according to Dow Jones. Also, a growing number of investment exchanges, meantime, as well as prime brokers, now accept gold as collateral, posted as downpayment by institutions against their commodity and other leveraged positions. Just on Friday, London market-maker Deutsche Bank was added to the CME’s list of approved gold custodians.

Gold pays no interest of course. But in our zero-yielding world, that only puts it ahead of where the capital markets are being herded by central-bank policy anyway. Nor does gold have much industrial use (some 11% of global demand in the 5 years to 2011), a fact which highlights its unique “store of value” attributes. Being physical property, gold is no one else’s debt to repay or default.

Being globally traded, it’s deeply liquid and instantly priced. Turnover in London’s bullion market, center of the world’s gold trade, is greater at $240 billlion per day than all but the four most heavily traded currency pairs worldwide.

And being both rare and indestructible, it couldn’t be any less like “money” today.

Scarcely a lifetime ago, gold underpinned the globe’s entire monetary system. Outside China, which tried sticking with silver, the compromised and then bastardized gold standard which followed first World War I and then World War II still saw the value of central-bank gold reserves vastly outweigh the paper obligations which those banks gave to each other.

Even three decades ago, 10 years after the collapse of what passed for a gold standard post-war, central-bank gold holdings still totaled some three times central-bank money reserves by value. Look at the decade just gone – the 10 years in which gold investment beat every other store of value hands down. Pretty much every currency you can name lost 85% of its value in gold. Yet the sheer quantity of new money pouring into central-bank vaults saw their gold holdings only just hold their ground.

Gold’s rise, in short, has been buried under wood-pulp. To recover its share of central-bank holdings as recently as 1995 would now require a further doubling in value. To get back to the 1980s average would require a 15-fold increase. Or, alternatively, a 93% drop in the value of foreign currency reserves relative to central-bank bullion holdings.

Such a trend is not yet in train, neither on the charts nor the fundamentals. The US Dollar remains the biggest reserve currency, weighing in at 62% of stated reserves according to IMF data, down from its peak above 71% in 2001 but more than equal to its share in the mid-1990s. Even so, as former FT columnist and current ButtonWood at The Economist Philip Coggan writes in his latest book, Paper Promises:

“If Britain set the terms of the gold standard, and America set the terms of Bretton Woods [in 1944], then the terms of the next financial system are likely to be set by the world’s biggest creditor, China. And that system may look a lot different to the one we have become used to over the last 30 years.”

Coggan rightly notes that China isn’t the only large creditor, and nor does it hold anything like the dominance which the U.S. held at the end of World War II. Whether this switch starts today or only starts to show 10 years from now, the risk of such a change of direction can hardly be discounted to zero.

Repudiation of government debt, the form which most foreign currency reserves take, will only begin with the Greek bond agreement, perhaps leading first to a rise in U.S. dollar holdings but also highlighting the ultimate risk of holding paper promises. And that fear, of having to write off money thanks to default or devaluation, is clearly driving the rise in gold demand from central banks already.

CNBC: Gold Is Investors’ Favorite Asset in 2012 – Poll

January 11, 2012
Published: Wednesday, 11 Jan 2012 | 8:47 AM ET
By: Antonia Oprita
Deputy News Editor,

Gold is investors’ favorite asset for 2012, and developed markets are preferred over emerging markets when it comes to putting money in stocks or bonds, according to a poll carried out by Japanese investment bank Nomura.

Of the 164 investors who took part in Nomura’s poll, 19.5 percent said they would choose to buy gold and hold it until the end of the year. Other favored assets were stocks and investment-grade corporate bonds in developed markets, with about 13 percent of responses.

Emerging market stocks came next, getting about 10 percent of the votes, on a par with developed markets’ sovereign bonds.

On the foreign exchange front, more than 40 percent said they would be long the US dollar [.DXY  81.39    0.58  (+0.72%)   ] this year, followed by about 14 percent who said they would be long the Chinese yuan [CNY=X  6.3149    0.0008  (+0.01%)   ] and a little over 10 percent who would be long the Japanese yen [JPY=X  76.94    0.10  (+0.13%)   ].

Around 10 percent said they would be long other currencies, and “the vast majority” were looking to be long the Norwegian krone [NOK=X  6.025    0.0368  (+0.61%)   ], the Swedish krona [SEK=X  6.9367    0.0414  (+0.6%)   ] or the Canadian dollar [CAD=X  1.0189    0.0027  (+0.27%)   ], according to the poll.

Around 60 percent of the respondents said one or more countries will leave the euro currency in 2012, with a majority of them believing that only Greece, and no other country, will leave the currency.

February, March, April and May were mentioned as months in which investors see yield spreads for bonds of periphery euro zone countries reaching their peak versus Bund yields, according to the survey.

The most popular choice for investors was March, with nearly 20 percent of the votes, followed by April, with around 16 percent and February and May with more than 10 percent.

For 10-year US Treasurys, respondents on average predicted a yield of 2.21 percent for the end of the year, a bit higher than the current one, which is hovering around 1.98 percent.

Asked whether the Federal Reserve is likely to embark upon a third round of quantitative easing, two-thirds said that the Fed will do so, but most see it as an event for the second or third quarter rather than sooner, the poll showed.

© 2012