Wednesday, December 14, 2011

Full Faith And Credit?

As I see it, if you don’t own some physical gold and silver, you are going to be in a bad way as the impact of the MF Global collapse continues to ripple through the markets. All of us are facing some difficult times in the weeks and months ahead as this global financial bust plays itself out, but trying to contend with this fallout without owning physical gold and silver is like going into a war without any bullets.   - James Turk
This current market "correction" in gold and silver is an absolute gift.  I say "correction" because there is no doubt that the Fed/Wall Street is piling on in order to make the metals look undesirable to the unsuspecting.  Time and again they've done this over the last 10 years.  But to be able to go out and move more of your increasingly devalued U.S. dollars to acquire physical gold and silver at prices that are 15% cheaper for gold and 40% cheaper for silver cheaper than 8 months ago is an absolute gift.

I had an interesting conversation with a good friend earlier this week. He was thinking about liquidating all of his investment accounts and moving everything to cash, fearing that all "investments" were going to get annihilated. My response was, why would you move into a pile of cash that you keep in a bank? Do you really trust the banking system? Just like customer cash accounts at MF Global vaporized overnight, your bank account is nothing more than an electronic entry in a bank computer that is not really any more secure than an a cash account at a brokerage firm. Seriously.

But even more troubling would be the idea that someone would want to move into cash - into U.S. dollars. By law - a law which is in direct violation of the U.S. Constitution, mind you - all money issued by the Government is backed by the "full faith and credit of United states Government." Think about that statement for a moment. Let's break it down to its basic meaning.

"Full credit" of the Government. The credit rating of the U.S. Government was recently downgraded from triple-AAA by S&P. This means that the credit rating of the U.S. Government is deteriorating. It is actually deteriorating quite rapidly. In fact, if it weren't for the fact that the U.S. Government - unlike the individual countries of the EU - has the ability to print money in unlimited quantities, the actual credit rating of the U.S. Government would be "CCC-," which means that it is on the cusp of default. So when you keep your wealth in the form of U.S. dollar "cash," on a de facto basis you are storing your "wealth" in an "investment" that is on the verge of bankruptcy.

Now, let's examine the idea of "full faith" in the U.S. Government. This implies the notion that we collectively have complete "faith" in our Government and the leaders that implement our Government. Is that true for you? Do you have "faith" in the Obama administration? Would you have "faith" in a Gingrich or Romney administration? How about Congress? We know from recent polls that the approval rating for Obama is at an all-time record low for any President with one year remaining in his first term. Record low. We also know that the approval rating for Congress is now well below 10%. Do those ratings convey the idea that Americans have "faith" in their Government?

Now, I'm dead serious about this. IF the implicit credit rating of the U.S. Government is, realistically, near the level of default and IF the overwhelming majority of the people in this country have little or no faith in our Government, the HOW THE HELL CAN THE U.S. DOLLAR HAVE ANY REAL LONG TERM VALUE AND HOW CAN IT BE CONSIDERED A STORE OF WEALTH? Seriously? Why the hell would you want to move your wealth into U.S. dollar-based "cash?"

So what are the alternatives? Other than gold and silver, I really don't know of any alternatives. Actually, again I'm being serious, guns, ammunition, canned food and other "hard usables" would also maintain their value if things get really bad. But gold and silver have been "transaction/barter currencies" for the better part of 5000 years. This is not going to change. Despite what looks like a lot of volatility, or risk, with gold and silver, over the last 10 years the U.S. dollar has gone down in value 80% against gold and silver. 80%. It has another 20% to go before it goes where every other paper fiat currency in history has gone - extinct. On that obvious basis, why would you put your wealth in the U.S. dollar?
We have seen much worse market corrections/manipulated hits in the precious metals over the last 10 years.  And yet, over that time period, gold and silver have outperformed every other possible investment.  Every single one, without exception.   But we're getting to the point at which you need to start looking at gold and silver as being the best shot you can have at financially surviving what is coming our way.  2008 was bad but what is about to happen globally will be even worse.  Don't take it from me, consider what James Turk has to say.  James Turk is one of the smartest, most forward-looking market commentators that I have ever come across.  It just so happens that his views have paralleled mine over the last 10 years.  Although I don't know what his "off the record" true assessment would be, his vision publicly is not as gloomy as mine.  I think I'm going to be right.  But here's Turk's latest comments from Eric King's daily blog interviews:  LINK
Consider that, if you had a billion marks in the bank in Germany on November 13, 1923, when you woke up the next day you had one mark.  That is the power of a Government that issues fiat currency by enforcement of law and that is trying to survive.  But also consider that if you had all of your wealth in gold and silver, on November 14th your wealth position was the same as it was the day before.  Our Government is trying to survive right now and yet it keeps increasing its deficits and debt load.  Soon enough the Fed will be firing up its printing press yet again and your dollar in hand will become worth even less.  Gold will soon be probing new highs even though it may not seem like it at this exact moment.
I have laid out the truth and the facts today as they are.  My statements are backed by the events of history for 5000 years.  If you think that it's going to be different this time, then go ahead and keep your wealth in U.S. dollars and Government bonds.  But if you think and know, like I do, that eventually the ability of the U.S. Government to maintain any value in the dollar is going to disappear, then you need to use opportunities like the current one to move even more of your paper wealth into physical gold and silver.  Not GLD, not SLV, not any other ETF.


  1. meshugana

    The gold bugs are throwing in the towel

    Two weeks ago, when I last wrote in this space about a contrarian analysis of gold sentiment, this average stood at 13.7%.

    Today it stands at 0.3%, which means that the average gold timer is essentially keeping all of his gold-oriented portfolio out of the market.

    To be sure, I reported two weeks ago that, on the basis of the HGNSI being as low as 13.7%, contrarian analysis was already bullish on gold’s prospects. And yet, far from rallying, the yellow metal since then has fallen by more than $100 per ounce. Read Nov. 30 column.

    What assurances do we have that contrarian analysis will be any more successful this time around? We don’t, of course.

    But it’s worth stressing that contrarian analysis is right more often than it is wrong. For example, I have been measuring gold market sentiment for three decades, and have subjected the HGNSI to rigorous econometric tests.

    At the 95% confidence level that statisticians often use to determine if a pattern is genuine, gold bullion tends to do better following low HGNSI levels than high ones.

  2. Gold is GOOD.

    Best to you Kranny -JMAC

  3. Integrity, the quality of being honest and having strong moral principles, is disappearing from ALL systems in America and around the world.

    THIS is THE proverbial "collapse" that is manifesting on the planet.

    When the absence of integrity becomes the norm, as seen by the massive numbers of people in America lying and deceiving to get ahead, then who can we trust?

    How can one predict (forecast) the intent, motive and outcome of a system that has lost its integrity?

    Stay grounded and established in the Self; it's all you can depend on, and lay low while the storm passes over.

  4. Great post Dave thank you as always.

  5. The bottom of the pyramid leads to physical gold.

    Dave, u keep outdoing urself with these posts. Thank you.

    Man, these multi millionaires and likely some billionaires who do not manage their own funds and thus r likely getting advice from their money manager to keep funds in paper anything. All for a generous commission for 'advice'.

  6. 14 December 2011
    Gold Lease Rates Plunged to Record Low in Early December

    This is the reason for this sell off in my judgement.

    Central Banks were leasing gold for record low rates to the bullion banks like JP Morgan and HSBC. Silver lease rates also fell in sympathy.

    The bullion banks use this leased gold as collateral for more fractional paper short sales, breaking the price trend and forcing liquidation. Their sales are done in the so-called Dr. Evil manner, of dumping large numbers of contracts on light markets.

    There is also the liquidation factor from the collapse of MF Global, and the reluctance of small specs to engage in the futures markets at all because of capital risk and lack of confidence.

    This allows the bullion banks to arrange for a big price swing that allows them to cover their short positions and also obtain other assets on the cheap such as mining companies.

    Since the leased gold must be returned after a short term period, this is almost always a trading gambit, as opposed to outright net gold sales by the central banks which have virtually stopped in the past couple of years.

    As for the complicit central bankers, regulators, and politicians, justice must be restored and prosecutions made in order to halt the growth of the moral hazard of complicity in fraud and insider trading that is now endemic, if not epidemic.

  7. I am inclined to agree generally with Kyle Bass.

    Europe will collapse, the EU will fall apart, then Japan collapses. The money flees from Europe and Japan into the USD.

    Then the US collapses, and the dollar is toast. I believe Kyle's time frame for this shit is correct---3 to 5 years and Europe,Japan, and the US will all be in ruins.

    I believe that China will take over by attrition as the new #1 global economic power, and the USD will no longer be the world's reserve currency.

    I don't buy the "China is doomed" shit pushed by Chanos and ignorant media reps. China may have some serious bumps in the road because of their trade with Europe and the US, but China will remain standing while Europe,Japan, and the US falls.

  8. faith? hopeless...starts at 31 minutes

    Corzine Grilled Over MF Global Collapse After Witness Suggests Knowledge of Misused Funds

    Prins says. "When you see 5,500 arrests across this country for the
    Occupy movement and you see zero on the part of CEOs and senior
    executives from Wall Street who took trillions of dollars out of our
    economy, out of the European economy, [and] are going around the world
    doing the same thing to Asia now, it is absolutely heinous."

  9. Full faith and credit more like full force and coercion amirite?!

  10. The anti-roubini

    Von Greyerz - Currency Collapse, Hyperinflation & Social Unrest

    We have an unprecedented situation in the world. There has never been, in world history, a situation where all major sovereign countries are bankrupt. And, in addition, the whole financial system is bankrupt. As we know some countries can print money, like the US and the UK, so therefore their currencies are relatively stable now. It’s not going to last (their currency stability)....
    “The EU is under pressure only because there is only one bank, the ECB, that can print money and all of the individual countries can’t. Therefore the US, of course, loves the fact that Europe is under pressure and especially the eurozone because the problems in the US are just the same. The focus will soon shift to the US. The only way they can solve their problem is by printing unlimited amounts of money.

    Then you go to the banking system, as we both know, the banking system is bankrupt and is only surviving because banks are allowed, since 2008, the banks are allowed to state all of their toxic assets at full value. If they had stated them at market value no banks would be standing today, no major bank.,_Hyperinflation_%26_Social_Unrest.html

  11. You know obumma is in deep when this happens... that an

    Maddow "Ron Paul Is The Only Presidential Candidate That Doesn't Want To Start Another War!"

  12. I cannot wake anybody up. They are all sleeping. I keep prodding and teasing with articles and so forth to get them to take at least a 10-15% physical insurance position. All to no avail. Friends, relatives all asleep and frightened of the penalty (cost) and loss of capital? Many can smell the stink but believe the breezes will come and wash it all away. They are correct Summers breezes and associates are coming to Wash it all away!


  13. however in order to use my gold and silver coins to buy stuff I actually first must convert them into dollars
    or the currency of whatever nation I happen to be in

  14. David Stockman's Thoughts on the Coming European Train Wreck
    In his most recent email to me, Mr. Stockman expounds on some things that illustrate why the European banking system is on the verge of collapse:

    The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks--deposits, capital and collateral.

    BNP-Paribas is the classic example: $2.5 trillion of asset footings vs. $80 billion of tangible common equity (TCE) or 31X leverage; it has only $730 billion of deposits or just 29% of its asset footings compared to about 50% at big U.S. banks like JPM; is teetering on $500 billion of mostly unsecured long-term debt that will have to be rolled at higher and higher rates; and all the rest of its funding is from the wholesale money market , which is fast drying up, and from repo where it is obviously running out of collateral.

    This is all a product of the deformation of central banking and monetary policy over the last four decades and the destruction of honest capital markets by the monetary central planners who run the printing presses. Furthermore, this has fostered monumental fiscal profligacy among politicians who have been told for years now that the carry cost of public debt is negligible and that there would always be a central bank bid for government paper. Perhaps we are now hearing the sound of some chickens coming home to roost.

  15. (Dave)

    Good color on the Stockman email. But w/out looking at the financials, the deposit statistic is wrong. Deposits are liabilities for a bank, not assets.

    You can't compare European and U.S. banks because we don't know what the U.S. banks have off-balance-sheet and we don't know the true value of the assets because the market to market rules here suck so badly. In fact, JPM's off balance sheet activity IS part of the shadow banking world.

  16. Dave,

    is it wise to sit tight in one's mining shares after today. 2011 has been a heart-wrenching year, and it's only my first year owning mining shares. I feel like I want to give up on them. How long could it take the HUI to get back over 600? Or the XAU back over 220?

  17. Goodwill hunting...? I'm sure there is only 1 perpetrator of this behavior....hmmm...

    Kikukawa banked on takeover scheme to hide losses: report

    Olympus is alleged to have paid inflated prices for Altis Co, Humalabo Co and News Chef Inc and used the excess money to cover losses on securities investments hidden off its balance sheet, Nikkei said.

    In 2003-05, two investment funds set up by Olympus bought stock in the three companies for about 700 million yen ($8.96 million), the daily said.

    Subsequently, Olympus bought the funds' holdings, as well as shares owned by other parties for about 60 billion yen and invested 73 million yen in the three companies, the paper said.

    Olympus had initially planned to write off the goodwill from these acquisitions over a period of 10 years or so. But after auditors raised doubts, Olympus booked a 55.7 billion yen write-down in the year ended March 2009 and a further 1.3 billion yen charge in the following fiscal year, the daily reported.

  18. WTF?..

    Exclusive: Regulators know where MF Global funds went

    "We certainly don't want to lead anyone to believe we don't know what happened. We do know, and we see where all the transactions went," said Sommers, a Republican commissioner, in an interview on Wednesday.

    She declined to reveal details on the fund transfers until investigators have determined the purpose of all the transactions. Sommers could not estimate when regulators will complete their investigation, but said "really good progress" is being made.

    Fellow CFTC Commissioner Bart Chilton, a Democrat, tempered expectations. Chilton said in a statement after Sommers' remarks were published that a thorough accounting of all customer funds remains a work in progress.

    "Based upon the most up-to-date information available, I do not have confidence that we know where all the money went," Chilton said.


    Sommers said on Wednesday that just because money was transferred out of a customer account to the broker-dealer account "doesn't mean it was illegitimate."

    Two Tens for a Five?

  19. Dave;

    I don't know if you have seen this shit...but if you haven' are in for a real treat. Smuggling 145 billion in US bonds. I scratched me head two years ago, more proof has surfaced, and this just might be the weirdest thing I have seen in quite some time.

  20. Ray, I hear ya.

    And days like today they like pointing out gold/silver got pummeled :)

    We live in a paper world where belief is the value in paper. When people view the paper gold/paper silver price, they see the value in the current paper system and not as wealth in the new system.

    This change in mindset is inevitable, whether by their own volition or not.

  21. re sit tight and be right

    do whatever you are comfortable with. i'm sitting tight cuz i know that i'm right. i love that so many people are getting scared shitless and want to throw in the towel - classic sign of a capitulative bottom. if we are at or near a bottom, this correction/manipulated hit of the metals/miners is lame compared the ones in 2006 and 2008.

    the SPX has a lot of risk in it to the downside but i have complete faith that after a nice scare the Fed will come through with the printing press. if it doesn't, the U.S. Govt will go insolvent very quickly.

    I dont' know if this is the last of this sell-off in the miners, but i do know that ALL of the factors that driving the gold bull get stronger every single day.

    if anything, i would be inclined to remove hedges here and if we go lower start putting reserve cash to work.

    make your own decisions and due your own due diligence. what i know for sure is that 99% of ALL financial advisors and 100% of ALL "experts" that go on CNBC have gotten the gold bull wrong for nearly 11 years now.

  22. Say goodbye to the 1st, 5th, & 6th amendments!

    December 14 - Obama Will Not Veto the Assault on the Bill of Rights

    We begin with Shahid Buttar, the executive director of the Bill of Rights Defense Committee to discuss the contents of the Defense Authorization bill the President had threatened to veto but now appears willing to sign into law. We examine provisions in the bill the Pentagon and the FBI opposed which the White House now accepts and determine how much they pose a threat to the civil liberties of Americans exercising their constitutional rights under the first, fifth and sixth amendments.

  23. It will work its way up...

    Census data: Half of U.S. poor or low income


    WASHINGTON - Squeezed by rising living costs, a record number of Americans — nearly 1 in 2 — have fallen into poverty or are scraping by on earnings that classify them as low income.

    The latest census data depict a middle class that's shrinking as unemployment stays high and the government's safety net frays. The new numbers follow years of stagnating wages for the middle class that have hurt millions of workers and families.

    "Safety net programs such as food stamps and tax credits kept poverty from rising even higher in 2010, but for many low-income families with work-related and medical expenses, they are considered too `rich' to qualify," said Sheldon Danziger, a University of Michigan public policy professor who specializes in poverty.

  24. Faith in this?

    Too Big to Stop: Why Big Banks Keep Getting Away With Breaking the Law

    For the country's biggest financial institutions, it's still worth it to break the law, because the government has no way to make the banks pay for acting illegally

    The issue in the Goldman case was whether the bank properly disclosed that John Paulson, a hedge fund manager, was involved in the selection of securities for the deal, because he wanted to bet against them. This time, Citigroup's own proprietary "trading desk" asked its CDO "structuring desk" to create a debt instrument that it could bet against. The trading desk came up with a list of securities to include in the new CDO and passed it on to the structuring desk, which in turn sent it to a supposedly independent third party that would manage the CDO itself, called CSAC.

    In one email, the person on the structuring desk overseeing the deal wrote, "This is [the CDO trading desk]'s prop trade (don't tell CSAC). CSAC agreed to terms even though they don't get to pick the assets" (SEC complaint against Brian Stoker, paragraph 32.) Half of the eventual CDO was based on securities chosen by Citi's trading desk (paragraph 42). (Yves Smith has more, from the SEC's order against CSAC--which, by the way, is part of Credit Suisse, another big bank.) Of course, the structuring desk didn't do this just as a favor to the trading desk: "On November 14, 2006, Stoker's immediate supervisor informed Stoker that Stoker should take action to ensure that the structuring desk received 'credit for [the trading desk's] profits' on Class V III" (complaint, paragraph 33).


    The absence of a factual basis is a decent legal argument, but I think what Rakoff is really taking aim at is the problem of regulatory capture. For Citi, the settlement boiled down to two things: a $95 million penalty and a promise not to break the law in the future. Anyone who can do basic arithmetic can see that it's worth it to break the law under those terms so long as you have a two-thirds chance of getting away with it (and who thinks the SEC is catching more than one-third of all violations?). And earlier in the case, Rakoff asked the SEC how often it has actually enforced the promise by a bank not to violate the law in the future. The answer: never, at least not in the past ten years (pp. 22-23).

    In short, a settlement like this seems to have exactly zero value as a deterrent.

  25. You have to give this guy a chance even if you don't agree with everything he says..if he stays true to his words at least the corruption of the monetary system gets attacked. The rest are in on the status quo.

    A message from John Tate - Ron Paul Tea Party Money Bomb

  26. The Truth Hurts–And Heals (December 15, 2011)

    Confidence in a systemically corrupt financial system cannot be restored without a complete public exposure of all the lies, fraud, misinformation and complicity.

    The truth has a unique sting, and an equally unique ability to heal the destruction wrought by dishonesty, fraud and lies. The truth hurts, because the daylight of truth demands changes that the self-serving and those in denial desperately wish to avoid.

    But there can be no healing or reconciliation without the truth, baldly stated and plainly spoken without artifice or spin.

    If we can finally be truthful with ourselves as a nation, then we must admit that our financial system is fundamentally based on lies, fraud, embezzlement, misinformation, perverse filters and incentives, shadow systems that mock transparency and regulation, class privilege and the systemic flouting of the rule of law.

    This is the truth that hurts because it reveals the financial system as one stupendous exploitative fraud; but it also reveals the complicity and irrelevance of our judicial system and the complete capture of the legislative and Executive processes of governance.

    There is a system of government in which rule of law is merely a propaganda screen, where financial and political Elites run the show and escape the consequences of their actions: it’s called tyranny. The truth is that we live in a financial tyranny.