Tuesday, March 27, 2012

Got Gold?

We have entered the most favourable era for gold prices in our lifetime, and the share prices of the great mining companies will eventually outperform bullion prices...central banks are printing money and creating liquidity beyond the forecasts of all but the most paranoid goldbugs a year ago - Don Coxe, Strategy Advisor BMO (Bank of Montreal) Financial Group
By now a lot of you have either heard about or read Bernanke's statements about gold in a speech he delivered at George Washington University.  The speech was part of a series of five speeches which are part of the Fed's new "transparency" policies.  Of course, what is communicated in Bernanke's speeches has nothing to do with removing the veil from any of the Fed policies and actions that matter or need some explanation.  But I digress. 

Originally I did not want to dignify Bernanke's statements about gold with a rebuttal because the material he presented and the statements he put forth were pretty much either outright lies or outright complete ignorance.  Bernanke, to try and defend his arguments, distorted historical facts, perverted all known economic laws which underlie monetary theory and completely misrepresented the historical function of gold as a direct currency (which it has been for most of the last 5,000 years) or as a device to "anchor" the surrogated paper currency.  By this I mean the paper money that is issued against gold reserves in order to make gold as money fungible for the purposes of commericialism.

Rather than reinvent the wheel, I am linking three very compelling rebuttals to Bernanke's speech.  These rebuttals correct Bernanke's incorrect statements of historical fact and they demolish the core of Bernanke's arguments.  Quite frankly, when I read through Bernanke's speech, I found myself wondering how Bernanke was ever awarded a degree in economics, let alone a professorship and then the Chair of the Federal Reserve.

The first piece is from Paul Brodsky, a well-known money manager who has previously issued some of the most compelling work available on the current undervaluation of gold, silver and mining stocks: 
Has anyone asked why so many powerful people are going out of their way to discredit an inert rock? We think it comes down to maintaining power and control over commercial economies...
I sourced Brodsky's rebuttal from zerohedge.com and it's long but worth spending time reading:  LINK.  The second piece is short and to the point.  This one is from James Turk, who is one of the few elders in the gold investing community from whom I read every word published:  LINK.

Finally, to round out the rebuttal commentary, I thought it would be appropriate to throw in Alan Greenspan's "Gold and Economic Freedom" essay, written in 1966 five years before Nixon closed the gold window.  If the first two pieces are aren't clear, this one will be crystal clear:  LINK.  For someone who professed faith in currency by Government/Central Bank fiat while he was running the Fed, Greenspan in that essay lays out why gold is the perfect anchor for a surrogated paper currency.  Anyone who wonders why gold has been used for 50 centuries for this purpose will for sure understand after reading Greenspan's essay.  Isn't it funny that the most accurate commentary that ever came from Greenspan occurred 25 years before he ascended to the Chairmanship of the Fed?  I'm still waiting for seminal, intelligent work from Bernanke.  Maybe he's better suited to be the Talmudic scholar he always aspired to be...


  1. It's Official - The Fed Is Now Buying European Government Bonds

    As if the 'risk-less' dollar-swaps the Fed has extended to any and every major central bank were not enough, William Dudley just unashamedly admitted that the Fed now holds 'a very small amount of European Sovereign Debt'. Explaining this position, as Bloomberg notes:


  2. a currency without PM backing is like writing checks with no cash in the account.
    Call me old fashioned, but.....

  3. You got to remember, Bernanke is just protecting his reason for being...

    Bernanke’s Problem with the Gold Standard

    In his new lecture series, Federal Reserve (Fed) Chairman Ben Bernanke is going out of his way to discuss the "problems with the gold standard." To a central banker, the gold standard may be considered "competition," as their power would likely be greatly diminished if the U.S. were on a gold standard.

    The problem of all financial panics is not the gold standard - otherwise, the panic of 2008 would not have happened. The problem of financial panics is - again - that "longer-term, illiquid assets are financed by short-term, liquid liabilities." Missing from Bernanke's definition is a key additional attribute, leverage. A maturity mismatch without leverage might cause a lender to go bust, but - in our interpretation - does not qualify as a panic when a limited number of depositors are affected. The "panic" and the "contagion" may occur when leverage is employed, as it creates a disproportionate number of creditors (including consumers with cash deposits).

    There's a better way. To avoid having financial institutions serve as “panic” incubators, regulation should address the core of the issue. Bernanke shouldn’t use gold, as a scapegoat for all that was wrong with the U.S. economy previously, to justify a license to print money. First, failure must be an option; individuals and businesses must be allowed to make mistakes and suffer the consequences. The role of the regulator, in our opinion, is to avoid an event where someone's mistake wrecks the entire system.

    The easiest way to achieve a more stable financial system is to reduce incentives for leverage. A straightforward method is through mark-to-market accounting and a requirement to post collateral for leveraged transactions. The financial industry lobbies against this, arguing that holding a position to maturity renders mark-to-market accounting redundant.


  4. The difference is, if you bounce the check, you get sued and lose. If the U.S. Govt spends fiat currency it borrows and can't pay back, it has guns and nuclear weapons to make you accept the paper or it can just print more paper (bonds/currency). That's a currency by fiat lol.

    1. Then why are there still nations and investment funds buying worthless US treasuries for? I think most of it is bought up by the fed now but why did the nations before like Japan buy US bonds when all they do is set up military base and bomb other nations with the very savings their citizen work so hard to manufacture goods for the fat lazy americans to only turnaround and get bombed by the very people they're producing and lending money to??? Petrodollar?

  5. Definitive on Derivatives Blowup - Ponzi's Fail in Contraction

    "Ponzi schemes can go on for a long time under the mask of expansion; these frauds blow up during a contraction of new money being input into them.

    Such may be the story of credit derivatives as we see a working contraction in the notional value of these instruments as reported by the comptroller of the currency. In simple terms the number of these instruments has gone down to a mere 240 Trillion!

    The premise for this ponzi is the concept of netting whereby risks off offset on paper under the false justification that positions can become risk neutral. In this ponzi scheme the efficacy of the netting process has magically risen from 50% or so to an astounding 92.2%.. This means that the reported risk of 240 Trillion is only 8% of the notional amount.

    In less insane times the notional risk was reduced to a mere 50% through the netting process. Even with 8% risk not covered by netting the liabilities of JPM and others are far greater than their assets under management. The problem being that JPM's assets are secured by its liabilities and the liabilities of banks tend to be YOUR Savings.

    With changes to Safe Harbor rules the government is not only facilitating fraud with these netting assumptions but they are also putting your savings at risk by giving the coverage of derivatives priority should there be a dispute. This very issue is being worked out presently with MF Global."


  6. Dave,
    I love your blog and your very insightful looks at the realities of our world. Mostly silver but I am "all-in" with PM's-- and physical only. Why would anyone invest in anything else these days?
    I've said it before on this blog and I'll probably say it again. I hunt for PM's for a living and I know just how hard they are to find and develop to the mining stage. A hell of a lot more work than hitting a key stroke. Anyone who doesn't recognize real money is due for a BIG surprise some day. I just wish my friends would listen to me and stop thinking I am a kook! Sadly, between my PM's and my ever-growing in size garden I may have to feed them when the poo poo hits the rotating unit.
    Justin from Canada

    1. Thanks for the feedback Justin - I really appreciate it!

  7. Dave,

    thanks so much for the great blog. I love it, too. I find it to be grounding.

    My portfolio of miners is down 30% since my getting into them last year. I was at breakeven in February,, so it's down 30% even since February. I'm afraid this time they won't be coming back for a long time, and find myself losing hope.

    Is there still hope for the miners?

  8. Plenty of hope. On percentage basis this isnt' even the worst correction in the HUI bull market to date. Unfortunately you bought into the miners closer to the last high. If you hold or add here, you will be rewarded in the next 6-18 months. Unless of course the entire stock market collapses. In which case you'll have bigger problems than what's happened to your net worth...

  9. Danish TV Host Mocks Obama for His Rhetoric !!

    This clip has been played across Europe today.

    Obama tells every country "that they punch above their weight" and are closest allies.


  10. Just reading this makes you feel helpless if you invest in the markets...

    What happened is that a malicious, 100% intentional Nasdaq algorithm purposefully brought BATS stock to a price of 0.00 within 900 millisecond of the company's break for trading! This is open SkyNet warfare.

    The fact that the BATS exchange itself halted just prior to break only facilitated this (and could potentially be a case of malicious sabotage). But one thing is clear - as the data below shows, there is no doubt that an Intermarket Sweep Order originating on the Nasdaq exchange was unleashed to make a mockery out of BATS. It succeeded, and in doing so may have destroyed not only BATS chances for going public, but ultimately ruined the firm's credibility. Who would stand to gain from this? Why exchanges such as Nasdaq and NYSE of course, which already are scrambling for revenue, and in the aftermath of the failed Deutsche Boerse merger, it means that any dirty trick in the book to extend and pretend is now fair game. Such as the algo that crashed BATS.

    We fully expect that in keeping with its galactic stupidity of yore, the SEC will do nothing to address this situation which is nothing short of exchange warfare using rogue and malicious algorithms as agents of war. Further, in doing so, it will once more destroy any latent "credibility" that the stock market may have created with the retail investor following the 4 month ridiculous and centrally planned melt up (we doubt there is much faith to lose - as we pointed out last week, Joe Sixpack no longer wishes to be the big boys' patsy). Oh well - if the market and its regulators wish to make "investing" solely a provenance of central banks, ultra fast algorithms, and Primary Dealers, so be it. They can play in their sandbox all they want. Just don't expect the trillions in "money on the sidelines" but mostly in savings accounts, where it may earn 0% interest, but at least it won't be vaporized courtesy of some vacuum tube, to ever come back to stocks. Ever.

    In Nanex' own words:

    Start at line 192 -- these weren't stale quotes from Nasdaq by any means. These were highly accurate and precisely updated quotes from a sophisticated algorithm programmed to take BATS's price to 0.


  11. The author of gibsons paradox and ex U.S. Treasury secretary wants to bring you digital money...how convenient.

    "The article 'Gibsons's Paradox and the Gold Standard' by Lawrence Summers

    High priest: Larry Summers advised Obama on the economic recovery.
    Larry Summers and the Technology of Money

    The former U.S. Treasury secretary and Harvard president sounds off about innovation in online currencies and mobile payments.

    Less well known is that Summers is also a technologist at heart. Last year he joined the San Francisco venture capital firm Andreessen Horowitz as a special advisor, and he is on the board of Square, an online currency startup.

    One example of financial innovation is a currency system called Bitcoin, which is a way of digitizing money without control by one central authority. Can money exist without government and monetary policy?

    Conceptually, money can exist without a central authority. The United States only got a central bank in 1913, and we were a country with a functioning economy before 1913. There are also private issuers of things that function very much like money—think about Crimson Cash here at Harvard, or American Express traveler's checks.

    Bitcoin is one of many innovative technologies that are going to seek to take friction out and provide services to people. You can make a priori arguments about how it will work very well, and you can also raise concerns a priori. And I think if we know anything about new technologies, you just have to wait and see what happens in the marketplace. Everyone thought New Coke would be better than old Coca-Cola and take things by storm, and [former IBM CEO] Tom Watson thought there was only demand in the world for 10 or 12 computers. And so I think history teaches that you can't really forecast which kinds of innovations will ultimately become networked and get to scale.

    What does the word "money" mean to you in 2012? Is the definition changing as it becomes more digital?

    Money is a medium of exchange and a store of value, and I think it always has been. And you know, it's been a long, long time since most of the money was [hard] currency; most of the money has been deposits in a bank of one kind or other. I think many of the basic principles underlying money that economists understand—that if you create too much of it you will get rising prices, for example—actually are constant even as technology does change.


  12. "Gold goes as high as the debt hole goes low."

    Recently Ben Bernanke and other really smart people have been on a Gold bashing campaign which they are terming "transparency." Why now? Well, because they have to. They have to because as the debt hole gets deeper and deeper, more and more people understand that it can never be paid back and their minds begin to wander. The central banks of the world just don’t want these wandering minds to end up coming to the conclusion that their money really isn’t money at all. So Gold gets bashed with untruths and a smear campaign (not to mention the millions of fake paper contracts) so as to divert the wandering minds (as many as possible) from the truth.

    After what we have been through since 2007, you should probably now understand why. They don’t want Gold in the system. Gold takes actual effort, machinery, (real capital) to produce, and it is rare. Politicians and central bankers would be precluded from handing out free money to friends, cronies etc. at a whim. Bankruptcies would… well… be bankruptcies and bailouts wouldn’t exist. They couldn’t. Think about it, who would be stupid enough to give away something that is real, rare and valuable to save someone else? Surely not any of the greedy scum who run the show now. No, failures should simply fail and capital would be cared for and risk actually avoided. In this manner, capital would efficiently find its way to investments and the AIG’s, Fannies and Freddies, Solyndra’s, GM’s, and bridges to nowhere would not exist, be built or even contemplated.


  13. Matthew Lynn: Central banks need gold to manipulate currency markets

    So what is the best way to increase reserves?

    Most paper currencies are sinking fast. Reserves with the International Monetary Fund have no real secure value and the IMF's quasi-currency, known as the Special Drawing Right, is made up of four funny-looking paper currencies rather than just one.

    But reserves held in gold can be expected to grow in value every year. Indeed, cynically, by holding more gold central banks are insuring themselves against their own profligacy. They print money. They price of gold goes up. And if they hold a lot of the stuff in their vaults, they are the big winners from the rise in price. If you can pull it off -- and there isn't anything to stop you -- that sounds like an easy way to make a living.

    Central banks in the emerging markets increasing their holdings of gold has been a big part of the bull market in the metal. At the end of last year, official net purchases of gold started to rise dramatically. In the third quarter of 2011, central banks added 148.8 tonnes to their gold stocks, more than double the entire amount of government buying in 2010, according to the World Gold Council. Interestingly, the Greek central bank has been slowly adding to its holdings of gold, which would be sort of handy, should they happen to decide to re-introduce the drachmas one day.

    But the next phase will be developed-world central banks moving back into precious metal; the U.K., Germany, France, Switzerland, and potentially the United States as well.

    The U.K. has given the first hints that policy makers are at least thinking about it. Actual buying maybe some way off. And if they start, it will be done discreetly, otherwise the price will shoot up.

    But when it starts to happen seriously, it will provide the bull market in gold with a whole new impetus.


  14. Greyerz - European Leaders Lying, Trillions Need to Be Printed

    The needs will run into the trillions of euros. The one trillion euros printed in the last four months is nothing compared to what they need to print in coming months. We are talking many, many trillions of euros and it could be tens of trillions of euros over time.

    So don’t get fooled by politicians saying the news is better, it isn’t. There is nothing that can make it better because the whole financial world is rotten at its core.

    My message is consistent that investors must not listen to mainstream media. Investors need to follow their instincts to protect themselves and their families against collapsing currencies, and the way to do that is by owning physical gold.


  15. If you read nothing else in the commentary please read Willie's:

    The Gold Wars have significantly changed in the last two years in particular. From 2004 to 2009, the battle was to win a fair higher gold price. No longer. The war has turned the corner and reached an end game scenario. The objectives have changed. The tactics used have been altered. The upper hand by the Good Guys against the Crooked Boyz is evident. Some new confusion has entered the room. The objective is to remove gold from the bullion bank inventories and major bank inventories, all of it. This is a new battlefield in the war. Being a Zombie bank means losing all the gold in reserves, in a time hourglass process that reflects the reality of their balance sheets. By the end of 2013, no big bank will own any physical gold. They cannot defend against off-side positions in the sovereign bond market and the currency market. See what happened to JPMorgan in such a case, as it preyed upon MFGlobal accounts. Other big banks are losing all their gold from the balance sheet. UBS is a dead body on the field, their false story of a rogue trader having provided a little distraction. Few if any financial press stories are honestly told anymore. Certainly not the Libya story, where 144 tons of gold were confiscated as war booty by London. That supply filled some gaps but only temporarily.


  16. I would stay away from mining companies. When gold becomes money, only governments will be allowed to issue it. I expect many gold mines to be eiter: nationalized or super-taxed. What is happening now is far, far larger than the interest of a few traders or mining companies. They will be stepped on!

    Quebec budget curbs spending, explores mining

    "The budget also provides a blueprint for natural resource development via a new, state-owned investment arm, Ressources Quebec.

    In a Quebec first, it will stake out equity shares in natural resource extraction to generate future revenues."

    I'm fully invested in precious metals but absolutely no mining shares. My personal holdings are 90% gold and 10% silver. I prefer gold because: a) central banks only hold gold on their balance sheets and b) Iran is now selling their oil for gold. (If Iran is getting gold for their oil, then one can assume Saudi Arabia is getting gold for their oil.)

    Oil-for-gold: Iran to dodge US ban with metal shield?

    -Sicilian Gold

    1. ...but they won't nationalize the failing healthcare system...?
      ...and they won't nationalize the failing banking system..?

      So then what makes the US any different from Evo Morales? Go ahead nationalize mines and then what? Capital flees ....Investment declines..

      This will feed right into the East's hands...their system will be the better choice...all our wars and all the dead in the name of capitalism and democracy would be for naught. Think about that.