Monetary Crisis Could Lead to Wild Gold Spike

Monetary Crisis Could Lead to Wild Gold Spike Chris Mayer

When the proverbial fecal matter hit the fan during the week of May 3, one asset shined above all others. It was the humble yellow metal, gold, doing its part in times of panic and crisis. It held up. On May 7, gold closed above $1,200 for the first time in five months - up more than 2.5% during a week in which U.S. stocks endured a freefall. Just five days later, it hit an all-time high of $1,243.10. And the largest physical gold fund recorded its largest inflows since early 2009.

In what follows, we turn our eyes again to gold, that curious inert metal with the monetary heritage. The topic comes with baggage. It’s hard as an investor to look at it objectively. Many investors make a case for gold laden with ideological fury over the government’s printing press. These investors are always saying buy gold. Their arguments are timeless, but not timely.

Of course, buying gold all the time is not really an investment strategy. If you bought gold in the 1980s and 1990s, your return was abysmal. So, as with all assets, there are times when gold is a really good buy and there are times when it is not. Sounds obvious, but many people seem to want to think that gold is an exception to the order of things. It isn’t.

But how do you know if gold is cheap? Well, intelligent people usually advance a couple of arguments:

1) On an inflation-adjusted basis, gold is 30% less than its all-time high in 1980. Okay, that’s true, but it’s not particularly timely because by that measure gold has been cheap for three decades. And who’s to say that the 1980 gold price is a benchmark we should pay attention to, anyway? By that way of thinking, the NASDAQ is a bargain, too, because it trades at a big gap from its 2000 high. But is it? I think not.

2) The other point often advanced by the “gold is cheap” crowd is the old monetary base argument - that gold’s price tends to track the monetary base over long periods. The monetary base is essentially bank deposits and currency. It’s like the seedlings of inflation.

This second argument is a little more interesting. Yet, as the government has added huge piles to the monetary base in the last year or so, the gold price has responded in a muted way. This next chart shows what the gold price would have to be to “catch up” to the monetary base.

The hedge fund QB Partners really likes this argument. QB writes:

“True capital has already begun to flow where it is being treated best - to capital-producing economies and to global stores of wealth, from paper money and financial assets to hard money and hard assets...

“The graph shows visually how much U.S. dollar purchasing power has been lost. We think gold is cheap by a factor of almost 7 times.”

If a gold price of $7,000 an ounce doesn’t strike you as implausible or absurd, QB’s next comment might. QB says the chart “does not necessarily imply a target price for spot gold. The gold price could move higher than that if it experiences a blow off top, like all other bull markets tend to do before exhausting themselves.” So, $7,000 an ounce, you see, is just some kind of base case.

Maybe it’s not so implausible. Strange stuff happens all the time in markets. If I had told you on May 6 that Accenture - a $40 stock with a $29 billion market cap - would trade for a penny a share the next day, you would have thought I was nuts. Yet, on May 7 it did just that, if only for a second.

As investors, we tend to think too narrowly within the confines of what seems probable. Yet, the really big money lies in the outlying events. As QB puts it:

Most investors allocate to the markets by playing the odds, which by definition gravitates capital to the middle of a bell curve of possible outcomes. This fools the investor into thinking that the probability of future events is somewhat predictable. Of course, history is rife with startling social, economic and political tail events. Stuff happens - things like earthquakes, the bombing of Pearl Harbor, the 1980 U.S. Olympic hockey team, the demotion of Pluto, dot-com bubbles, liar loans and even periodic global economic failures and the re-assertion of gold as money.

This is essentially the familiar “black swan” argument made popular by Nassim Taleb. This is really the best argument for gold in my view. It is a hedge against really bad stuff happening. And when really bad stuff happens, gold holds up.

Of course, over the last decade, it has more than held up. Gold has been the best-performing asset class from December 1999 to December 2010.

People often invest by looking in the rearview mirror. They feel better investing in stuff that has done well. Even professionals feel this way. It’s easier to recommend gold to your clients; all you do is show its price chart. Money follows performance, which is why so many investors get mediocre results. They hop into the hot fund or sign up for the hot newsletter just as it is about to go cold. They abandon apparent losing strategies and sell poor-performing stocks just as they are about to turn up.

But the gold market is different because it’s so small. Even a small amount of interest in gold will send it up a lot. Just imagine if people decide a small sliver of that tall bar of financial assets should be in gold. We’re talking about some serious pressure on the gold price.

Frankly, the gold market is set up perfectly these days. You couldn’t design it better. Bad stuff is happening - see the crisis in Europe. And you can surely bet more bad stuff will happen, given all the debt and leverage that still remains in the system. Even if you don’t know exactly what will happen or when it will happen, you know a monetary crisis is good for gold.

As an added bonus, gold has a track record, which will attract fans soon enough. And when it does, it can’t really accommodate many buyers because the market is small. This means the chance of the gold price spiking upwards are pretty good. It’s like being in the lifeboat business on the Titanic. No price will seem too high!

Regards, Chris Mayer

Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris is the editor of Capital and Crisis and Mayer’s Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider.

whiskeyandgunpowder.com

Immigration: Slightly Different Take

Immigration: Slightly Different Take Fred Reed

A few thoughts, that will probably get me lynched, on the immigration of Mexicans:

Immigration is not something Mexico did to the United States, but something the United States did to itself. Decades ago it changed its laws to favor Latin immigrants, gives immigrant children born in the US citizenship, avidly employs the illegals, forbids police to check their papers, give them social services and schooling, establishes “sanctuary cities,” and in general does everything but send them engraved invitations. And then expresses surprise when they come.

We hear endlessly that Mexicans are “taking the jobs of Americans.” Not quite. Reflect that every time a Mexican gets a job, it is because a shiny white noisily patriotic American businessman gives him that job.

I could take you to whole restaurants in the metropolitan area of Washington, DC, where if I yelled, “Migra!,” the entire staff would disappear out the back door. The owners know perfectly well who they are hiring. Mexicans are easily recognized. They are brown and speak Spanish. Businessmen do not hire them despite their being illegals, but because they are illegals, and therefore cheap.

I always find amusing the claims of love of country and civic responsibility that emanate from businessmen. These frauds will, and do, send American jobs to China, to make a buck. They will, and do, hire Indian programmers to replace more expensive American programmers. They will, and do, sweat children in Indonesian factories to make a buck. And they will hire illegals. If they didn’t, there would be no illegals. They come to work. No work, no come.

’Nuther topic: I suspect that not one American in twenty has even heard of the Mexican-American War, and maybe one in a couple of hundred can distinguish between the Treaty of Guadalupe-Hidalgo and, say, the Treaty of Westphalia. Mexicans know that in that war the US simply grabbed half their country, to include little places like, you know, California. The attitude of Americans, if they were told of this war, predictably would be, “Oh. Well, that was some other time, whenever. Tell them to like, get over it.” But Mexicans are not over it. Countless towns and cities have a Calle or Avenida Ninos Heroes commemorating the children who marched out, like the cadets of VMI in another example of Washington’s aggression, to try to stop the oncoming federals.

Don’t expect a lot of sympathy when Mexicans move back into what they regard as theirs in the first place.

Speaking of getting over it, the US will sooner or later will have to entertain the idea of getting over Latin immigration. Allowing the immigration in the first place was a terrible idea, since diversity regularly proves disastrous, but now there is precious little to be done about it. Nativist fantasies notwithstanding, the US is not going to round up thirteen (give or take) million people at gunpoint and force them across the border. If it doesn’t do this, few illegals will leave.

I encounter all manner of fury from conservatives at the idea of granting amnesty to the illegals. Rounding them up is the very thing, they figure. How do you round up thirteen million people who don’t want to be rounded up?

Perhaps at three a.m. you put a lightning cordon of Marines around a ten-block region and then go house to house, kicking in doors and dragging screaming people out. These you would throw into sealed eighteen-wheelers, drive them to the nearest border, and perhaps literally kick them across. Most of the children would be American citizens, but not Mexican. The idea of deporting a couple of million US citizens to a foreign country is fascinating.

Note that large and growing numbers of Hispanics are American citizens. (“Hispanics” are people who speak Spanish, which growing numbers of these folk don’t, but never mind.) In several states Latinos are a majority. Their children rise through the schools toward voting age. Politicians being politicians, legislatures in these states will find it difficult to deport a group when over half the voting population is of that group. That leaves the feds, who do not seem energized by the matter. Short of a Nazi-style war of extermination or forced depuration, America is going to have a very sizable population of Latino origin.

Adding to the complexity is that the country is far from united in wanting mass deportation. As I understand it, some two-thirds of the US wants illegal immigration ended, which means sealing the border. But this is a very different thing from massive expulsion of those already in the country. Laws of the sort recently passed in Arizona may have some effect, but, again, most will remain.

While few will care, it is of perhaps minor interest that after ’48 (the year of both Westphalia and Guadalupe-Hidalgo) a large number of Mexicans, and thus their descendants, became American citizens. These people have been Americans longer than, say, anyone whose ancestors arrived in the great immigrant waves around 1900.

Now, a reasonable question might be, “OK, Fred, what would you do?” If I had the power, I would seal the border to stop the influx, declare blanket amnesty for those already in the country, and get on with life. Part of “getting on” would be to encourage assimilation since the last thing the US needs is another indigestible and permanent underclass.

Note (as I have never seen noted) that keeping them illegal forces them into something close to an underclass. If Pablo wants to start a restaurant or auto-bodywork business, he can’t, because he will be asked for papers and eventually shut down.

The country seems to be trying to cause what it most doesn’t want. Some state or other wants to stop letting the children of illegals attend school. Oh, good. Let’s create a population of angry illiterates who can’t possibly be assimilated. What could be wiser?

The underlying problem is that no solution, or attempted solution, has enough support to get put into effect. Business wants the labor, politicians eye the vote, polls show young Americans as being much less worried about the whole question than their elders.

Conservatives – those, anyway, who are not profiting by immigration – talk of putting the military along the border, but support seems lacking. On Fox News I see people urging the characteristic American solution: high-tech this and that. Anyone with experience with dispersed guerrillas will see the prospects of success. A lot of liberals think immigration is heart-warming and all.

As is so commonly the case in semi-democracies, whatever might work is politically impossible, and whatever is politically possible won’t work.

What now, gang?

May 31, 2010

Fred Reed is author of Nekkid in Austin: Drop Your Inner Child Down a Well and A Brass Pole in Bangkok: A Thing I Aspire to Be. His latest book is Curmudgeing Through Paradise: Reports from a Fractal Dung Beetle. Visit his blog.

Copyright © 2010 Fred Reed

www.lewrockwell.com

Federal Reserve System – Banking Fraud

Greg Hobbs

Real Money

(Editor's Note: To most of you, my posting of articles like this one are akin to my "singing to the choir". On this Memorial Day, 2010, I post this explanation of the most insidious organization ever conceived in the hope that one new reader will open his eyes and realize that the Federal Reserve is the single most responsible component of all the economic ills that plague our planet. Until these miscreants are jailed, and this abomination, and all like institutions, abolished, our problems will only intensify. Interestingly, today, about three percent of Americans are aware of the problem. By Labor Day (just three short months away) the problems will be so much more apparent that, I predict, fully ten percent of Americans will be ready to take action. Hopefully, it will not be too late. - JSB)

What is the Federal Reserve Bank (FED) and why do we have it?

The FED is a central bank. Central banks are supposed to implement a country's fiscal policies. They monitor commercial banks to ensure that they maintain sufficient assets, like cash, so as to remain solvent and stable. Central banks also do business, such as currency exchanges and gold transactions, with other central banks.

In theory, a central bank should be good for a country, and they might be if it wasn't for the fact that they are not owned or controlled by the government of the country they are serving. Private central banks, including our FED, operate not in the interest of the public good but for profit.

There have been three central banks in our nation's history. The first two, while deceptive and fraudulent, pale in comparison to the scope and size of the fraud being perpetrated by our current FED. What they all have in common is an insidious practice known as "fractional banking."

Fractional banking or fractional lending is the ability to create money from nothing, lend it to the government or someone else and charge interest to boot. The practice evolved before banks existed. Goldsmiths rented out space in their vaults to individuals and merchants for storage of their gold or silver. The goldsmiths gave these "depositors" a certificate that showed the amount of gold stored. These certificates were then used to conduct business.

In time the goldsmiths noticed that the gold in their vaults was rarely withdrawn. Small amounts would move in and out but the large majority never moved. Sensing a profit opportunity, the goldsmiths issued double receipts for the gold, in effect creating money (certificates) from nothing and then lending those certificates (creating debt) to depositors and charging them interest as well.

Since the certificates represented more gold than actually existed, the certificates were "fractionally" backed by gold. Eventually some of these vault operations were transformed into banks and the practice of fractional banking continued.

Keep that fractional banking concept in mind as we examine our first central bank, the First Bank of the United States (BUS). It was created, after bitter dissent in the Congress, in 1791 and chartered for 20 years. A scam not unlike the current FED, the BUS used its control of the currency to defraud the public and establish a legal form of usury.

This bank practiced fractional lending at a 10:1 rate, ten dollars of loans for each dollar they had on deposit. This misuse and abuse of their public charter continued for the entire 20 years of their existence. Public outrage over these abuses was such that the charter was not renewed and the bank ceased to exist in 1811.

The war of 1812 left the country in economic chaos, seen by bankers as another opportunity for easy profits. They influenced Congress to charter the second central bank, the Second Bank of the United States (SBUS), in 1816.

The SBUS was more expansive than the BUS. The SBUS sold franchises and literally doubled the number of banks in a short period of time. The country began to boom and move westward, which required money. Using fractional lending at the 10:1 rate, the central bank and their franchisees created the debt/money for the expansion.

Things boomed for a while, then the banks decided to shut off the debt/money, citing the need to control inflation. This action on the part of the SBUS caused bankruptcies and foreclosures. The banks then took control of the assets that were used as security against the loans.

Closely examine how the SBUS engineered this cycle of prosperity and depression. The central bank caused inflation by creating debt/money for loans and credit and making these funds readily available. The economy boomed. Then they used the inflation which they created as an excuse to shut off the loans/credit/money.

The resulting shortage of cash caused the economy to falter or slow dramatically and large numbers of business and personal bankruptcies resulted. The central bank then seized the assets used as security for the loans. The wealth created by the borrowers during the boom was then transferred to the central bank during the bust. And you always wondered how the big guys ended up with all the marbles.

Now, who do you think is responsible for all of the ups and downs in our economy over the last 85 years? Think about the depression of the late '20s and all through the '30s. The FED could have pumped lots of debt/money into the market to stimulate the economy and get the country back on track, but did they? No; in fact, they restricted the money supply quite severely. We all know the results that occurred from that action, don't we?

Why would the FED do this? During that period asset values and stocks were at rock bottom prices. Who do you think was buying everything at 10 cents on the dollar? I believe that it is referred to as consolidating the wealth. How many times have they already done this in the last 85 years?

Do you think they will do it again?

Just as an aside at this point, look at today's economy. Things are booming. Why? Because the FED has been very liberal with its debt/credit/money. The market is hyper inflated. Who creates inflation? The FED. How does the FED deal with inflation? They restrict the debt/credit/money. What happens when they do that? The market collapses.

Several months back, after certain central banks said they would be selling large quantities of gold, the price of gold fell to a 25-year low of about $260 per ounce. The central banks then bought gold.

After buying at the bottom, a group of 15 central banks announced that they would be restricting the amount of gold released into the market for the next five years. The price of gold went up $75.00 per ounce in just a few days. How many hundreds of billions of dollars did the central banks make with those two press releases?

Gold is generally considered to be a hedge against more severe economic conditions. Do you think that the private banking families that own the FED are buying or selling equities at this time? (Remember: buy low, sell high.) How much more money do you think these FED owners will make when they restrict the money supply at the top of this current cycle?

Alan Greenspan has said publicly on several occasions that he thinks the market is overvalued, or words to that effect. Just a hint that he will raise interest rates (restrict the money supply), and equity markets have a negative reaction. Governments and politicians do not rule central banks, central banks rule governments and politicians.

President Andrew Jackson won the presidency in 1828 with the promise to end the national debt and eliminate the SBUS. During his second term President Jackson withdrew all government funds from the bank and on January 8, 1835, paid off the national debt. He is the only president in history to have this distinction. The charter of the SBUS expired in 1836.

Without a central bank to manipulate the supply of money, the United States experienced unprecedented growth for 60 or 70 years, and the resulting wealth was too much for bankers to endure. They had to get back into the game. So, in 1910 Senator Nelson Aldrich, then Chairman of the National Monetary Commission, in collusion with representatives of the European central banks, devised a plan to pressure and deceive Congress into enacting legislation that would covertly establish a private central bank.

This bank would assume control over the American economy by controlling the issuance of its money. After a huge public relations campaign, engineered by the foreign central banks, the Federal Reserve Act of 1913 was slipped through Congress during the Christmas recess, with many members of the Congress absent. President Woodrow Wilson, pressured by his political and financial backers, signed it on December 23, 1913.

The act created the Federal Reserve System, a name carefully selected and designed to deceive. "Federal" would lead one to believe that this is a government organization. "Reserve" would lead one to believe that the currency is being backed by gold and silver. "System" was used in lieu of the word "bank" so that one would not conclude that a new central bank had been created.

In reality, the act created a private, for profit, central banking corporation owned by a cartel of private banks. Who owns the FED? The Rothschilds of London and Berlin; Lazard Brothers of Paris; Israel Moses Seif of Italy; Kuhn, Loeb and Warburg of Germany; and the Lehman Brothers, Goldman, Sachs and the Rockefeller families of New York.

Did you know that the FED is the only for-profit corporation in America that is exempt from both federal and state taxes? The FED takes in about one trillion dollars per year tax free! The banking families listed above get all that money.

Almost everyone thinks that the money they pay in taxes goes to the US Treasury to pay for the expenses of the government. Do you want to know where your tax dollars really go? If you look at the back of any check made payable to the IRS you will see that it has been endorsed as "Pay Any F.R.B. Branch or Gen. Depository for Credit U.S. Treas. This is in Payment of U.S. Oblig." Yes, that's right, every dime you pay in income taxes is given to those private banking families, commonly known as the FED, tax free.

Like many of you, I had some difficulty with the concept of creating money from nothing. You may have heard the term "monetizing the debt," which is kind of the same thing. As an example, if the US Government wants to borrow $1 million - the government does borrow every dollar it spends - they go to the FED to borrow the money. The FED calls the Treasury and says print 10,000 Federal Reserve Notes (FRN) in units of one hundred dollars.

The Treasury charges the FED 2.3 cents for each note, for a total of $230 for the 10,000 FRNs. The FED then lends the $1 million to the government at face value plus interest.

To add insult to injury, the government has to create a bond for $1 million as security for the loan. And the rich get richer. The above was just an example, because in reality the FED does not even print the money; it's just a computer entry in their accounting system.

To put this on a more personal level, let's use another example.

Today's banks are members of the Federal Reserve Banking System. This membership makes it legal for them to create money from nothing and lend it to you. Today's banks, like the goldsmiths of old, realize that only a small fraction of the money deposited in their banks is ever actually withdrawn in the form of cash. Only about 4 percent of all the money that exists is in the form of currency. The rest of it is simply a computer entry.

Let's say you're approved to borrow $10,000 to do some home improvements. You know that the bank didn't actually take $10,000 from its pile of cash and put it into your pile? They simply went to their computer and input an entry of $10,000 into your account. They created, from thin air, a debt which you have to secure with an asset and repay with interest. The bank is allowed to create and lend as much debt as they want as long as they do not exceed the 10:1 ratio imposed by the FED.

It sort of puts a new slant on how you view your friendly bank, doesn't it? How about those loan committees that scrutinize you with a microscope before approving the loan they created from thin air. What a hoot! They make it complex for a reason. They don't want you to understand what they are doing. People fear what they do not understand. You are easier to delude and control when you are ignorant and afraid.

Now to put the frosting on this cake. When was the income tax created? If you guessed 1913, the same year that the FED was created, you get a gold star. Coincidence? What are the odds? If you are going to use the FED to create debt, who is going to repay that debt? The income tax was created to complete the illusion that real money had been lent and therefore real money had to be repaid. And you thought Houdini was good.

So, what can be done? My father taught me that you should always stand up for what is right, even if you have to stand up alone. If "We the People" don't take some action now, there may come a time when "We the People" are no more. You should write a letter or send an email to each of your elected representatives. Many of our elected representatives do not understand the FED. Once informed they will not be able to plead ignorance and remain silent.

Article 1, Section 8 of the US Constitution specifically says that Congress is the only body that can "coin money and regulate the value thereof." The US Constitution has never been amended to allow anyone other than Congress to coin and regulate currency.

Ask your representative, in light of that information, how it is possible for the Federal Reserve Act of 1913, and the Federal Reserve Bank that it created, to be constitutional. Ask them why this private banking cartel is allowed to reap trillions of dollars in profits without paying taxes. Insist on an answer.

Thomas Jefferson said,

"If the America people ever allow private banks to control the issuance of their currencies, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered."

Jefferson saw it coming 150 years ago. The question is, "Can you now see what is in store for us if we allow the FED to continue controlling our country?"

Explanation of Derivative Markets

Explanation of Derivative Markets Frank Bouffard

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.

Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers' loans). Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets.

Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in Government.. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi's bar.

Now do you understand?

The Silver Bear Cafe