Tuesday, September 28, 2010

Here's The Problem - And Why Gold Will Go MUCH Higher...

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence.  Destroyers seize gold and leave to its owners a counterfeit pile of paper.  This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values."   - Atlas Shrugged

August 15, 1971.  That date should be etched in everyone's mind and it should be tattooed on the forehead of ass-absolutes like "Mish," Prechter, Denninger and every other imbecilic deflationista out there. Here's the chart, which I took from the free access to Nick Laird's http://www.sharelynx.com/ and added the two date-markers:

This is the key to the understanding the root cause of the collapse of the United States - economically, politically, morally, spiritually.

The Bretton Woods agreement in 1944 established the U.S. dollar as the world reserve currency.  The proviso was that all U.S. debt obligations were to be backed 1:1 with the gold owned by the United States.  While this was only a partial currency anchor, you can see that from 1944 - 1971, the amount of Treasury debt outstanding barely increased.

Then, on August 15, 1971, all hell breaks loose.  The terms of BW allowed foreign sovereign holders of U.S. debt to exchange that paper for gold at the Fed "window."  The U.S., in order to pay for the largesse of 8 years of Democratic socialist programs and Viet Nam, had issued a lot  more paper to foreigners than was backed by gold in Ft. Knox.  Charles deGaulle had figured this out and decided to turn in all of the U.S. debt held by France in exchange for gold.  Nixon had no choice but to close the gold window or risk an unmanageable political and economic crisis:  it prevented a run on gold that U.S. did not have.  Wars are started over issues like this.

For whatever reason for which I have yet to find a plausible explanation, the rest of the world accepted this U.S. Government default under Bretton Woods and continued to accept the U.S. dollar as the global reserve currency.  The only thing I can think of is that at the time the U.S. was by far the strongest economy, had military presence in close to 200 countries and by far had the most nukes to fling.

Now, if I were to dig up a long-term chart of M3 thru March 2006 and extended it with M2 + assumptions thru today, you would see a similar chart pattern to the one in the Treasury debt chart above.  Serious price inflation is percolating in the system and will soon be felt by everyone.

And now our system is mired in an irreversible debt/death spiral.  At some point our Asian/Anglo financiers will say "NO MAS" and then we'll really see the meaning of Bernanke's infamous "helicopter" speech.  The Fed will have no choice but to hyperinflate the money supply in order to fund the Government and keep our system from collapsing.  I'm not sure where Bernanke is coming from, because for a supposedly educated PhD economics expert, he sure is ignorant.  I guess the joke's on us...

Richard Nixon and every subsequent President, Arthur Burns, G. William Miller, Paul Volker, Alan Greenspan and now Helicopter Ben Bernanke are ALL destroyers of money.  Do you know where your gold is?


  1. That Ayn Rand quote is a prime example of IDOLATRY OF MONEY. Believing that money makes the world go round.
    It doesn't make the world go round. Not even now. It doesn't make the world go round because as you so rightly pointed out in the above post.. THERE IS NOTHING BEHIND IT (and even the gold behind it before was never any replacement for... FAITH, TRUST, all the positive values that a society must BELIEVE IN and put into practice IN ORDER FOR ITS MONEY TO BE WORTH ANYTHING AT ALL).
    Money is the base of existence for AMORAL men and women.
    Why did the world continue to accept the U.S. dollar as reserve currency ?
    IN PART because of the arguments you advance above, but certainly not exclusively.
    As far as Europe was concerned, pro-American sentiment after WW2 was enormous, and many European peoples felt a TREMENDOUS DEBT to the U.S. for intervening in WW2 to help them out of a hellish predicament. GRATITUDE was part of what enabled the U.S. to achieve its status as a superpower after WW2.
    I can believe that Charles De Gaulle could have called a U.S. "bluff", but would want more confirmation on it than what appears here. Consider this... at the end of WW2, the American government was ready and waiting to establish a protectorate in France. Nice place to set up some of those military bases that were all over Germany, and just recently got dismantled, huh ?? (Look at HOW MANY OF THOSE NICE BASES ARE ALL OVER THE PLANET THESE DAYS !!!)
    De Gaulle manoeuvred to take control of communications right after the liberation of Paris. And the radios publicly announced how grateful the French government under De Gaulle was for that help from its American allies... Ouff.. no protectorate.

  2. My comments on the dollar reserve, currency devaluation, and China:




    JJ of WSB

  3. Except the fact that the US Treasury ( people)was being bleed dry under Bretton Woods. The US should have NEVER signed that BS utopian document.
    That's where the great error began.

  4. Dave,

    Looks like Silver Dragon Resources is making a move to getting a listing on the TSX with the appointment of Charles L. McAlpine to the Company's Board of Directors.

    McAlpine is a Chartered Accountant and a seasoned veteran with nearly 50 years experience at executive-level positions in the mining industry, most notably as a director of Hecla Mining, a major U.S. silver producer, from 1989 to 2007. Will Hecla Mining be a suitor of Silver Dragon down the line?

    -Ricky T

  5. Actually Debra, money does make the world go around. Honest money. Honest money is that which can not be counterfeited or created without the backing of some sort of good or service to be exchanged in kind. That's the whole point of Atlas Shrugged and Francisco D'Anconia's monumental speech. Now, you can give away goods and services for free, but you have to possess them free and clear first. The U.S. puppet-masters have taken freely from the world by using fiat dollars as their mechanism. All gold does is keep the barter exchange honest.

    In other words, use of gold for exchange means that Eliot Spitzer could not get blow jobs for free unless they were freely offered. The latter being the choice of the provider.

  6. erik,

    The Bretton Woods agreement that leads to the dollar reserve system we are still in, is the greatest money machine humanity ever created.

    You should read the posting I linked right above your comment.

    JJ of WSB

  7. Actually the Nixon default was just the expected endpoint of a gold backed dollar, as a consequence of America's dollar being the world's reserve currency. This is known as the Triffin dilemma.
    Ultimately, the US has to run a current account deficit, hence the government debt of your graph. America's demand for debt drives the world's productivity. Ultimately, this dilemma hollows out our domestic industry, as the world has a greater need for our currency than our products. In deflation, the dollar is in even more demand, as the world's debt is in dollars. Oddly, as more dollars are created, they are worth less, and even more are needed in an unbalanced world.

  8. So much to post so little time….

    A main reason foreign nations accepted the Bretton Woods agreement was due to the fact that foreign nations could exchange US Dollars for gold, which they did as soon as possible after World War II.

    This information comes from Donald J Hoppe’s book “How to Invest in Gold Coins” dated 1969.

    The amount of gold held by the US was, back in 1948, worth $24.4 billion dollars ( at $35 per troy ounce.)
    In 1969 the amount was $10.367 billion dollars (again, at $35 per troy ounce.)

    It wasn’t just the French exchanging US Dollars for gold, it was also Germany’s central bank, since Germans had seen their fiat currencies become worthless twice in a generation.

    Also from the book-

    By 1965 the amount of gold the US held was worth $15 billion, the amount of gold owed by foreigners via US Dollars to redeem was $27 billion. The Johnson administration repealed the 1946 law that required that gold reserves held by The US Treasury had to equal 25% of total of the Federal Reserve Bank deposit liabilities and 25 % of the amount of actual currency in circulation. After this was done the Secretary of the Treasury at that time Mr. Fowler promised that the government would eliminate the chronic defict in the future (and we all know how soon THAT happened…)

    If you can get a used copy of Donald J Hoppe’s book “How to Invest in Gold Coins” please do so. Mr. Hoppe wrote his book during the late sixties from his own first hand experience of what was going on in the realm of gold back then, giving his book a feel of current events rather than a history of what happened so long ago.

    Concerning gold, or gold backed money-

    “They who worship gold in a world so corrupt as this have at least one thing to plead in defense of their idolatry- the power of their idol. This idol can boast of two peculiarities; it is worshipped in all climates, without a single temple, and by all classes, without a single hypocrite.”

    C. C. Colton

    Sorry for the long post, I just thought it was important to mention it all.

  9. Ricky T: the mostly likely end game for SDRG will be its takeover by Shengda, China's largest silver producer and the 60% operator/developer of the Dadi property. SDRG has so much silver in China and Mexico that there's actually a lot of "exit" options.

    From what I know about Mexico, the silver they likely have in the ground there alone makes the stock worth $2-3/share. Shengda operates the largest silver mine in China, which is near the Dadi property and they think Dadi is going to ultimately prove out to be an even larger ore body.

  10. CC Colton. No apologies for posting an excellent comment and suggesting that book. It's officially on my reading list. Thanks!

  11. $715 is THE TOP!

    Minor beef: you cite 'socialist Democratic' policies, and 'Barney & Harry pole dancing'. But look at Laird's debt curve. The Reagan & Dubya presidencies are the biggest slope increases in the curve, while Clinton stands out as the biggest slope decrease. Credit where credit is due.

  12. Hey Dave,

    My only worry about SDRG is their management. The CEO Hazout doesn't seem to have much experience in the mining business and what do they have in the treasury. I don't think they have much from what I remember.

    Ricky T

  13. You guys are not going to like this, I bet, but... we have over 2000 years in this civilization of having prophets warn us diligently ABOUT THE EFFECTS OF GOLD AND MONEY worshipping.
    It is only in the past 50 years that this civilization has reached a point in secularization where its members have little idea what is in that BIG BOOK that guided our ancestors and gave meaning to their world.
    Before you dismiss me as a crackpot, think about this. 2500 years behind us, and the LAST GENERATION is suddenly proclaiming that it is all a bunch of horseshit ??
    Maybe.. THIS INCREDIBLE ARROGANCE has something to do with the predicament we find ourselves in these days ?
    Even the founding fathers, contrary to many misconceptions, did NOT DUMP on the Bible, or their Christian heritage the way that our culture is currently doing.
    Cutting ourselves off from our LONG LONG PAST, our traditions, our beliefs is one of the MAJOR REASONS why this debacle is occurring.
    The MONEY problem ? A symptom of a more violent crisis.
    While all our eyes are trained on it (idolatry of money oblige), the BIG CRISIS is one of.. LOST FAITH.

  14. Ricky, Hazout doesn't need to have mineral engineering degree from the Colorado School of Mines in order to put together and run a mining company when he has a very well respected geologist, David Wahl, who is a consulting geologist and prepares their 43-101s. I know he is extremely excited by all of dragons properties. If you look at their management team, Manuel Chan is the head of China ops and very well respected in the industry. Wahl has been focusing on Mexico and will soon be going to look at the two big China properties, Dadi and Laopondou.

    Take a look at the Strategic Advisory Board and then google the background of both Robert Fung and Michael Brown.

    As for Hazout, he was the person who put this whole company together by "stealing" 9 silver properties in China back in 2006 when silver was under $5 and the Chinese Govt didnt' care about silver. After that deal, China closed the door on allowing non-Chinese companies to develop precious metals properties.

    Hazout has done a remarkable job keeping the stock dilution low during this period of extreme tight credit and capital market access for junior exploration companies. And during this whole period he managed to piece together the Mexico property, which even the guy who sold him the original chunk - a guy known as Mr Silver in Mexico - has stated to people at conferences that he thinks Dragon's property could have up to 100mm ozs. on it.

    If sdrg can raise enough money, they have all the pieces in place in Mexico to actually start milling ore and producing revenues. I believe they have a deal with the Chinese to buy the silver concentrates once this happens.

    Look, every single junior stock is high risk. I believe sdrg has removed a lot of this risk and now it's just a matter of letting everything unfold.

  15. Ricky, SDRG has consulting geologist on the payroll, David Wahl, who is widely respected in the industry. He is incredibly excited by what he saw in Mexico and is heading to China in Oct to prepare a new 43-101 for Laopondao.

    As for Marc, he's business man. He put this whole thing together back in 2006 by basically buying the 9 (now 8) properties from the Chinese Govt when silver was still below $5 and no one cared about silver development properties. His vision was brilliant.

    Marc has done a Herculean job of keeping the stock float relatively low during the credit crunch and liquidity squeeze that was imposed on the junior miners since the summer of 2008. So far he's kept the primary float below 100mm shares. That's monumental comapared to the dilution that's occurred across the industry as a whole.

    Take a look at the resumes of the 2 Strategic Adivory Board members.

    SDRG has a lot very intereting things "cooking" behind the scenes and it's just a matter of time waiting for everything to unfold.

    Mexico alone has something like 24mm 43-101 ozs (the report is available on the website) and its thought by several that it may have as much as 100mm.

    I'm not trying to promote this stock or convince anyone to buy it. It's my largest personal holding and a large holding in our fund. Back in May 2006, silver juniors were being cap'd by the market at anywhere from $2-5/oz in the ground and silver peaked just below $15.

    Imagine the market cap that will be given to these things in the next big "run" with silver closer to $30...

  16. Bobby I agree. But it was the spending by our govt back in the 1960's that led to the depletion of our gold reserves.

    I'm a complete political agnostic. I hate both parties. Our system needs to burned down and rebuilt, starting with the original Bill of Rights and modelled on the philosphies of Thomas Jefferson.

  17. http://www.sprott.com/Docs/InvestorsDigest/2010/MPLID_082710_pg283Emb.pdf

  18. I'm a complete political agnostic. I hate both parties. Our system needs to burned down and rebuilt, starting with the original Bill of Rights and modelled on the philosphies of Thomas Jefferson.

    I love that statement...I'm stealing that, for myself!

  19. LOL. You don't have to steal it. You can have it!

  20. dave, well said. so very...ramblin' jack elliott/woody guthrie of you :)

    Elliott: "I was flattered. Dylan learned from me the same way I learned from Woody. Woody didn't teach me. He just said, If you want to learn something, just steal it—that's the way I learned from Lead Belly."s

  21. http://www.miningweekly.com/article/silver-heading-for-supply-deficit-morgan-2010-09-28

  22. Debra, it was the love of money that is the root of all evil, using money for day to day buying and selling AND giving money to the poor and tithes to the Temple were never considered sinful by either man nor God. If it were that great book would have said so.

    We who buy gold do not do so because we see gold as an idol to worship, we see it as a means to preserve our wealth as paper money loses its value.

    A few more gold quotes to 'steal' ;)

    GOLD has worked down from Alexander's time... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory.


    "Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium."

    Murray N. Rothbard

    "Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort."

    Antony C. Sutton

    "If you don't trust gold, do you trust the logic of taking a beautiful pine tree, worth about $4,000 - $5,000, cutting it up, turning it into pulp and then paper, putting some ink on it and then calling it one billion dollars?"

    Kenneth J. Gerbino

    "You have to choose [as a voter] between trusting to the natural stability of gold
    and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

    George Bernard Shaw

    "There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right.
    Unfortunately, there are three billion inhabitants of the world who believe in gold."

    Janos Fekete

  23. Ya'll are begging for a return to the Gold Standard while claiming Should this goverment stand up a decree that is no way the US has no Gold Reserves left...it would appear to me that you should be carefull what you wish for.

    There is an awful lot of gold in the world and if the US doesn't have it, somebody else does and whoever thy are, I'm not about to bow to them.

  24. Price increase in PM's internationally are dampening due to INR appreciation. From July 7 INR@47.12 to todays lowest quote INR@44.56, amounts to about 5.745% in less than 3 months.

    On a worry-some comment by anonymous :- "There is an awful lot of gold in the world and if the US doesn't have it, somebody else does and whoever thy are, I'm not about to bow to them." :-

    You don't need to bow to anyone as long as manufacturing and other creative activities start back again. I have graphic memories of American Grandma's revetting aircraft wings or women working on assembly line. Any of such things are happening now? People in 50's,60's have worked very hard to to create wealthy America.

    Dave has correctly stated the destroyers of wealth.

    At home here in India too, we have to stop being keyboard junkies and start producing real stuff. Most of our engineering talent is being wasted on working on call centers catering to American service sector. Right from kids toys to high tech communication equipment is being imported. This needs to stop.
    We don't need to bow to anyone. Everyone can live with respect as long as they work hard produce real stuff, either with gold or without gold.

    From India

  25. so anonymous, are you essentially voting for the system Gerbino described above?

    i think there are many of us who do not wish to see a gold standard (i.e. the price of gold tethered to the dollar), but wish to see the end to the immense amounts of wasted energy (negentropy) attempting to make gold appear a "barbarous relic." Such a proposition, as the quotes above suggest, is pointless over the long haul and when entropy is allowed to happen again, and the laws of thermodynamics and physics catch up, like a coiled spring, the price of gold is going to buy you a lot more pine trees.

  26. Sofa King thinks anonymous was a little sleepy when he posted.

    I think I understand what he is trying to say, but that is why the lessons Rand was trying to teach in discussing life at Galt's Gulch are so important. You must be useful to society, if you are, the gold will flow to you...no matter who starts off with it.