WHAT DOES THE EUROPEAN COLLAPSE MEAN FOR GOLD INVESTMENTS?

May 31, 2012

Lately the price of gold has been in a steep correction caused by appreciation in the US dollar, the world’s reserve currency of choice.

The dollar has experienced unexpected demand from investors and institutions exiting the euro, the common currency of the 17 nations of the European Union.

The euro is in freefall and in danger of disintegrating altogether because of a severe economic and financial crisis which has gripped Europe. That crisis was originally caused by an acute and chronic fiscal disaster. European nations have been spending themselves into oblivion and running up unsustainable debt levels. Now, Greece, Spain, Portugal, Italy and Ireland are all in various stages of recession or outright depression. (In Spain the unemployment rate is 24% and in Greece unemployment for those under 25 is an astonishing 51%.)

For now the dollar has been the beneficiary of all this crisis as investors vacate the euro and replace their euro assets with dollar assets. As the value of the dollar increases, the price of gold has fallen.

But can this situation last?

We don’t think that it can.

First of all, the European crisis is likely to get worse and it will eventually begin to impact the US economy and financial markets in earnest. This is inevitable because of the counterparty risk associated with economic and financial globalization. Banks and financial institutions are no longer national, they’re international. They have operations overseas and relationships with foreign financial institutions, including big banks in Europe. There is simply no way that the US economy and financial markets can escape the impact of this still brewing crisis. When our economy and markets begin to suffer, the dollar will start to falter as demand for dollars will inevitably fall back down to earth.

After all, the same fiscal woes that have contributed mightily to this crisis in Europe certainly exist in the US—except our fiscal woes are actually worse in some cases. Our debt and deficits are larger to be sure. There is simply no way that the dollar can be considered a safe haven from a world debt crisis with America being the world’s largest debtor nation.

When this reality sets in in the not-too-distant future, investors will move into gold as the ultimate form of safe money. Gold has been trusted for 5,000 years as a secure store of value and medium of exchange.

Those who had the foresight to buy gold investments BEFORE the crisis in Europe migrated across the Atlantic Ocean will be rewarded particularly handsomely.


Jim Rogers Blasts the Dollar & Goes Long in Gold

May 16, 2012

Yesterday, commodities expert Jim Rogers of Rogers Holdings spoke on CNBC ‘s  First On show about Gold, the Dollar & a variety of other economic concerns. He gave support to Gold in the long term stating, Gold has been in an 11 year rally it is due for a correction, but it is not finished making gains long term. He went on to further state the Dollar is a horrible currency and every one  hates it, but in times of crisis people run to it as a safe haven which is the wrong thing to do.

Finally on QE3 he said the Fed & Bernanke will print money it is all they know to do. It is the wrong thing to do but they will do it anyway. They are printing money now but they are not calling it QE3. With all of this happening and the precious metal/rare coin markets at the lowest premiums in decades now is the buying opportunity not seen since 2002 when gold was trading below $300.  To quote Rogers, 2013 is going to be a huge mess & 2014 will be a real mess. 

Watch the full interview here:


CNBC – Gold Pullback Presents Opportunity in the Long Run: Pros

May 15, 2012
Published: Monday, 14 May 2012 | 6:15 PM ET
By: Lee Brodie
Producer

Gold bugs are getting squashed.

During Monday’s session, the price of gold [GCCV1 1556.20 -4.80 (-0.31%) ] fell to a 4-1/2-month low to $1,556.61 an ounce, its lowest since December 30, 2011 before paring some of those losses.

For the past several months, gold has declined as growing turmoil in Europe sent investors into the safety of the US dollar [.DXY 80.92 0.31 (+0.38%) ]. A stronger dollar is bearish for gold as well as other commodities nominated in dollars because it becomes more expensive for investors using other currencies.

“Gold is under severe pressure. As long as the dollar is appreciating against the euro it will weigh on the price,” says Daniel Briesemann, analyst at Commerzbank in a Retuers interview.

“I wouldn’t be surprised if we test the December low of around $1,520 an ounce and if we don’t stop there we could go below $1,500.”

In the near near-term the forecast appears bearish.

However, if you have a long-term time horizon, the Fast Money pros consider the current weakness to be an opportunity.

“What I think we’re seeing right now is the decline squeezing some big players out of their positions,” says trader Guy Adami.

However, he sees the growing uncertainty and the ‘race to debase’ as two powerful bullish catalysts.

“A year from now, I expect gold will be trading north of $2000,” he says. Trader Steve Grasso is also positioned for upside. “I’m long the GDX [GDX 40.70 -0.27 (-0.66%) ],” he says, “and I’m not selling my position.”

Posted by CNBC’s Lee Brodie


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:


Daily Reckoning: Musings on the Work of Harry Browne

April 27, 2012

By Eric Fry

04/26/12 Denver, Colorado – After a quick whistle-stop tour through Chicago and Atlanta, your California editor’s Pullman screeched to a halt in Denver, Colorado last night. Upon arrival, he stepped down from his Pullman, which bore an uncanny resemblance to a Boeing 757, hailed a porter, which bore an uncanny resemblance to a conveyor belt, climbed into his awaiting Packard Phaeton, which bore an uncanny resemblance to a Ford Fiesta rental car…and rolled down the motorway to his father’s house.

Your California editor’s father turns 88 years old in one week, so your editor took the occasion to stop in and wish Dad an early Happy Birthday! But let’s not let these modest festivities stand in the way of our daily reckonings…

A few weeks back, your team here at The Daily Reckoning highlighted the groundbreaking work of Harry Browne, creator of the Permanent Portfolio.

“A few decades ago,” we remarked, “a guy named Harry Browne devised an investment strategy he dubbed the ‘Permanent Portfolio.’ The idea was so simple it seemed almost moronic. And yet, with the passage of time we have discovered that his idea was pure genius.

“He suggested building an investment portfolio out of only four components: gold, bonds, stocks and cash.

The Permanent Portfolio

“The idea was that at any given time, two or three of these four components might underperform — but the other portfolio components would perform so strongly, you’d get an overall gain that would outpace any increase in the cost of living. Incredibly, this simple strategy has delivered some surprisingly strong investment results.”

After providing more detail about the history and underlying philosophy of the Permanent Portfolio, we invited our Dear Readers to ask themselves the following questions:

1) Is Harry Browne’s original allocation still ideal for today’s macro-economic environment?
2) If not, how would you revise his original allocation for the next 30 years?

We called this little exercise the Daily Reckoning Group Research Project and as usual, our Dear Readers responded with some fascinating suggestions.

Several readers struggled to comply with the rules of the Group Project. For example, some readers could not stop themselves from recommending specific companies; others argued that some of the very best Permanent Portfolio allocations do trade on a public exchange.

One such reader suggested buying grazing land as part of his Permanent Portfolio. Another recommended buying a house. And a third named potash as one of his allocations. We sympathize with these readers who “drew outside the lines.” The financial markets do not possess a monopoly on attractive investment opportunities. We also sympathize with those readers who could no longer stomach the idea of buying Treasury bonds as a “risk free” allocation.

“Mr. Browne’s formula was based on the idea of a functioning and fair government and not a criminal enterprise,” writes a reader named Kent. “I would bet he would eliminate most government bonds since today they really are nothing more than counterfeit and would substitute ammunition, food or fuel.”

A reader from Buenos Aires (not Joel) offers a similar observation. He points out that the Permanent Portfolio mutual fund (PRPFX) has held a large position in both US Treasuries and Swiss bonds. “[This allocation] has been great so far in this über bond bubble. But will it stand the test of time?… I looked at the permanent portfolio’s performance in this century, which yields an increase of about 130%… However, looking at its performance from 1996 to 2002 is quite disappointing. Moving around like a cork on the water’s surface, just bouncing around in the waves. It takes off in 2002, when Greenspan lit the fuse beneath the bond bubble. What will happen when the bond bubble ruptures?”

Not surprisingly, most of the folks who had no use for Treasuries had plenty of use for hard assets.

“Dear Harry (RIP). Things are different now while the dollar is dying,” writes a reader named Susan. “It’s all ‘risk on’ as the world hangs in the balance… You must have your own grocery store at home… I want to be able to put my hands on at least a few of the things I need. All the clouds out there storing my stuff for me make me very nervous and I hope to end up with more than vapor and fumes at the end of the day.”

“There might have been a time when the permanent portfolio idea may have worked,” writes a reader named Ken, “but I believe that time has passed, which is why we avoid most bonds and buy gold and silver.”

A reader named Carl concurs. “I do not believe in a ‘permanent’ portfolio,” he writes, “because things work in cycles as you surely know… We are in our sixties and plan to stay conservative and just continue to buy silver bullion each month (dollar cost average). We have had more than a few of our stocks go to zero but we know that gold and silver, especially today, will never even approach that point… Mundus vult decipi, ergo decipiatur. (‘The world wants to be deceived, so let it be deceived’)”

Hard assets were not the only crowd favorites, however. Many readers suggested investing in real estate investment trusts (REITs) and other types of high-dividend-paying stocks. Biotech stocks also seemed to be a favorite.

So without further ado, here is a sampling of the Permanent Portfolios you submitted in response to the latest Daily Reckoning Group Research Project…

Eric Fry
for The Daily Reckoning

 


Forbes: Ben Bernanke’s Paper Dollar Embodies Systemic Risk

April 3, 2012

Fed Chairman Ben Bernanke

Charles Kadlec, Contributor
I cover economic/political issues with liberty as my polar star.
OP/ED|4/02/2012 @ 2:40PM |3,210 views

By Charles Kadlec

The paper dollar is now the single most important source of systemic risk to the financial system, the world economy, and the security of the American people.

That is the lesson of the past 100 years that Federal Reserve Chairman Ben Bernanke did not teach during his four lectures atGeorgeWashingtonUniversity’s Graduate School of Business. Instead, he celebrated the importance of the extraordinary powers he and his fellow governors have to manipulate interest rates and the value of the dollar in the name of economic growth and stability.

In so doing, he ignored completely that the ever growing need for heroic interventions by the Fed is itself being created by the paper dollar system he celebrates.

This failure is all the more telling because Mr. Bernanke states up front that central banks perform two critical functions: The first is to “achieve macroeconomic stability.” By that, he generally means “stable growth in the economy, avoiding big swings, recessions and the like, and keeping inflation low and stable.” The second is to provide “financial stability” by either trying to prevent or mitigate financial panics or financial crises.

On both counts, the paper dollar system in effect since the final link between the dollar and gold was broken in 1971 has failed and failed miserably when compared to the results produced under the gold standard.

Let’s begin by stipulating that we agree with Chairman Bernanke’s point that the gold standard is not a perfect monetary system. What is?

The more important question is which system, the gold standard or the paper dollar, provides more macroeconomic stability and fewer financial crises.

To answer this question, let’s examine the historic record beginning with the most difficult example, the Great Depression, which supporters of the paper dollar invoke to discredit the gold standard and thereby avoid defending the abysmal record of the paper dollar.

As Professor Brian Domitrovic pointed out in his recent Forbes.com column, the officials running the Federal Reserve in the critical period between 1928 and 1933 chose to ignore the rules of the gold standard, which would have forced them to increase the money supply in response to inflows of gold. Instead, the Fed exercised discretion and tightened, thereby making the deflation of the early 1930s worse that it otherwise would have been. Explains Domitrovic:

“Rather, as (Richard H.) Timberlake has shown, we know what guided Fed thinking in this period, and this was the doctrine that the Fed would refrain from issuing money unless it clearly would go to financing end-point economic transactions, as opposed to things like stock-market speculation and even investment. Whatever you want to say about this doctrine, it has zip to do with the gold standard. And it was at the root of the Fed’s weird decision-making 1928-33 where it presided over a radical narrowing of the money supply.”

What about the claim that, while the gold standard maintains a stable price level over longer periods of time, in the words of Chairman Bernanke: “over shorter periods, maybe 5 or 10 years, you can actually have a lot of inflation, rising prices, or deflation, falling prices.”

Continued on Pg. 2


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


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