Thursday, February 2, 2012

Got Gold?

"Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating." … Alan Greenspan, ex-US Federal Reserve Chairman, August 23, 2011
Just had an interesting conversation with a long-time good friend of mine who has spent most of his career in wealth management for big banks and knows a lot about financial theory. He commented that the only solution that makes sense for wealthy people is to put their money into very short duration Government bonds and don't worry about rate of return because anything else that might pay a higher yield is just too risky right now.

WRONG! The best answer for someone who is wealthy and looking for a place to invest is that they s
hould be putting at least 1/2 of their wealth (really more) into physical gold and silver.  Ultimately any paper "investment" is only as good as the guarantor behind that investment. Does anyone really ultimately trust the U.S. Government? Seriously. At some point the Government will have issued so much debt that in order to pay it back, it will have to restructure. This can come in many forms. But here's one very plausible scenario: let's say that you are invested in 3 month T-bills and it is obvious to everyone that the Government can't pay these off unless they print money. Well, they don't have to print money. They can hold the equivalent of a gun to your head and offer this deal: they exchange your 3 month paper for a new piece of paper that matures in 10 years and pays a coupon that increases each year, but starts at zero. You'll have no choice but to take this deal because otherwise the Government will default, rip up the bond
indentures and start over. You get nothing. The problem is that the new bond will trade at something like 30-50 cents on the dollar, because the market will price in heavy default risk and the fact that it will pay little or nothing to start. Now how does it feel to have all your money in short term Government paper?

Think this can't happen? 10 years ago did you think ANYTHING that's happening now couldn't happen? Look at Greece. Spain, Italy and Portugal are next. It just so happens that as I was composing this commentary, posted a report that contained a Treasury pitchbook for issuing floating rate debt:  LINK  Clearly the Treasury is looking for gimmicks to induce demand. And, quite frankly, the outsized demand for short term Treasury debt issuance is largely coming from European banks who buy the short term paper and then turnaround and use it as collateral to obtain 3-yr financing from the ECB.

At the end of the day, ANY paper claim is only as good as the entity that issues it and promises to repay it. There are plenty of other ways for the Government to devalue the claims against it. The most likely next step in this country will be something like the 3-yr LTRO program going on in Europe right now. This is essentially a program that lets Governments print up more bonds, sell them to banks and then the banks turn around and put them up as "collateral" for 3 yr "repo" financing at the ECB. Technically its not "QE" but in reality it is and it's a de facto non-transparent mechanism for the Fed to finance the enormous bond issuance requirements of the Obama Government.

How is this different from just an extension of the perpetual Ponzi financing going on at all levels of the economy? In fact, it's really just money printing in disguise because the Governments over there simply print up bond certificates, sell them to the banks who then monetize them at the ECB. The only reason its not considered an expansion of the money supply is because it's "debt." For now. But defaulted debt becomes "equity" which has to be monetized. At the end, it's still money creation - and the creation of it is going parabolic. 
(M2 - Money Supply) 

(U.S. Treasury Debt Outstanding, as reported.  Does not include $7 Trillion In Agency Debt)

Tautologically, the devaluation of the U.S. dollar is in the formation of an inverse parabola.  If you own dollars, that's what's happening to your wealth - the value of it is in inverse parabola formation.  Still like short term Treasuries?  At the end of the day, debt issued by any Government that is either "restructured," defaulted on or devalued via inflation/QE is nothing more than fraudulent money.  Gold is the only true, honest form of money.  So says "The Maestro" himself (see opening quote).


  1. Yep, and the deflation-tards cling to their misguided belief that any minute now, the USD is going to SOAR to epic highs, allowing them, with $800 in worldly assets to become the king of their barrio.

    Well, I guess its always best to have suckers on the other end of a trade! LOL!

  2. Treasury Considers Going Negative on T-Bills - US Business News Blog - CNBC

    Afternoon Dave, tell your
    buddy..respectively...Good luck. Me I'll keep buying Gold and Silver on the cheap while I still can.

  3. You mean like this?...How do you know what the purchasing power of that annuity stream is in the future?

    New rules to bring annuities to 401(k)s, IRAs
    Obama administration seeks to help workers manage longevity risk
    Hello, deferred income annuities

    One of the proposals, if adopted, would make it easier for employers to offer deferred income annuities, also known as longevity insurance.

    With these annuities, a worker or retiree uses part of his savings to purchase an annuity that doesn’t start paying a monthly income stream until, potentially, decades into the future. For example, a 60-year-old worker would fork over 20% of his savings for an annuity that starts paying a monthly sum when that person is 85.

  4. Some people lay it all out for others to absorb...think!

    Mike Krieger Explains Why It's The Leadership, Stupid

    It’s the Leadership Stupid

    The reason I put the Taleb quote at the top is because it is such a phenomenal interview and I request that every one reading this takes the time to listen to it this weekend even though it is very long. In the part just prior to the quote I used he talks about how society is now separated into three categories. The category that he has the most disdain for are those with “no skin in the game.” These are the self-proclaimed “elite” of the Western world today. This group is varied but generally consists of politicians, Wall Street executives, the CEOs of large state-connected and protected multi-national corporations and mainstream media “journalists” or as Gerald Celente likes to call them “presstitutes.” As Taleb notes, these “elites” have no honor or courage. They are groveling little manipulator parasites. They have created a world in which they are able to reap all of the upside and have no downside. When things go against them they just bail themselves out on the back of the rest of society.

    Then of course there is the group with “skin in the game.” This group consists of the unconnected wealthy, the middle classes and the poor. This is why class warfare is such an absurd thing. OWS is not about class warfare. It is about the battle between those with skin in the game versus the “elite” that rig the game and call it capitalism so they can later demonize it and consolidate power further. It is about the 99.9% of humanity against the technocrat and crony capitalist alliance.

    In Honor of the 70th Anniversary of the Munich Students Movement - Die Weiße Rose - 2nd Leaflet

    And thirdly, because there is compelling evidence and advice in these pamphlets for our world of today, although we can hope it is quite early and still innocent. If you think these things cannot happen here or ever again, amongst a free and educated people, you are under that most arrogant of delusions, exceptionalism. Every people, every would be empire, that goes badly first considers themselves to be different, better than the rest, above history and even God, uber mensch.

    Then they came with clubs, bullets, and gas. But sometimes it is with finance, fraud, and official corruption. If they come for the weakest, to rob and even murder them, and the people allow it by saying nothing at all, then the hour will be late, and the die may be cast.

    And if you cannot see this, see this tendency to rationalize even the greatest injustices in our own time and understand it, then perhaps you are in denial, or willfully asleep.

  5. What confuses me is the deflationists argument that a far greater amount of debt is being destroyed than the amount of increase in M2.
    Hence they say, this money creation by the FED isn't anything to be alarmed by. They say no way that it's inflationary.

    I'd be curious as to your thoughts on this matter Dave

  6. Facebook???

    Rob Arnott - The Coming Inflation is Going to Destroy Fortunes

    Rob Arnott continues:

    “For those who are listening, I would offer the observation there is mobility between affluence and the middle class and the poor. That mobility can cut both ways. Inflation can be the great equalizer. You can be wealthy in notional terms, not lose your wealth in notional terms, but lose it in real terms if you are not ready.

    Inflation can wind up destroying great fortunes, even as it is doing grave damage to the poor and the middle class. The current, immediate victims have been the poor and the middle class. They are just being crushed, it’s really quite tragic.

    When the printing presses are being run, the money has to go somewhere and it will often go into commodity and asset price inflation. That’s exactly what’s happening. So what we have is a central policy induced crushing of the middle class. As I said, it’s really devastating, it’s tragic....

  7. Dave,

    I enjoy reading your blog. Your tone, content, and overall disdain for the current system is refreshing.

    I agree that storing wealth in physical gold is far superior to government paper, whether that is short-term debt or cash.

    To quote Ender, Gold is an asset based currency, thus it represents payment in full, whereas fiat currency is a debt based currency that represents a claim in the system. In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid.

    Storing wealth in a fiat money system works until confidence is lost, and everyone tries to convert to real world assets at once. The evaporation of (perceived) paper wealth as it runs into real world assets, i.e. hyperinflation, is where we are heading.

    In saying that, between here and there we may well see much lower gold prices/stronger USD due to debt deleveraging. I think this process will shake many weak hands out of physical gold at just the wrong time.

    I do not know if you have come across the work of FOFOA or Blondie? If you haven’t here are their blogs. I am sure you will find their work of interest.



  8. Dave,

    Gold is moving like a bat out of hell - my myriad mining positions are flat - how about yours?

  9. Oliver, thanks for the feedback. Where are you seeing debt deleveraging? I did a blog post a couple weeks ago demonstrating with real numbers how the concept of "deleveraging" that is being promoted by analysts and the media is total bullshit. Debt levels in aggregate are going up everywhere.

    Conway, the stocks we have in the fund are kicking ass. A lot of it depends on which juniors you have if you have the right ones. Our Wildcat Silver was up almost 20% today. SA was up 17% and is up about 40% from the recent low. I bought TRX at 2.35 about 3 or 4 weeks ago and it closed at 3.40 today. EXK has done well, ANV. Rye Patch had near double in December. That's our 2nd largest position. Eurasian Minerals is up like 30% since it's low. I added to our position about 6 weeks ago or so when it was around $1.80. Oh. Threegold Resources has doubled in the last 5 or 6 weeks. Unfortunately it is a smallish position.

  10. I wonder if fiancial experts advised their clients to buy "safe" government bonds during the Wiemar Republic, during the time John Law was issuing paper money in France or just before Zimbabwe cranked out the half billion zimbabwe note. Gold. Silver. The price of each of these metals have fluctuated throuout history, but neither became worthless. Fiat, another story altogether.

  11. I read you every day and really love your work.

  12. Employment Report: Blatant And Outrageous Lies

    There are times when one questions a report as possibly being wrong or in error, and then there are times when one has to raise a flag and say "This is an intentionally false picture being presented by a government agency."

    I'm in the latter camp with this one, and it is rare for me to brand something as not possibly wrong and in error, but intentionally fraudulent.

    "Not in labor force" numbers leaped upward on an annualized basis (seasonally adjusted the "right way") and what's worse on a raw basis 1.572 million people exited the labor force last month.

  13. thanks amor, i appreciate the feedback. that's my compensation since i refuse to put advertising or a tip-jar on here.

    re: jobs report. i am going to hopefully write something on it this weekend. i have a feeling that Obama called the BLS and said "give me jobs and a lower unemployment rate, I dont' care how you do it." The labor force participation rate is at a new low and is now below 64%. Mainstream media will not be reporting that.

  14. Well - what can one say? We can't really blow a fuse - its not healthy. Will have to wait a longer time for confidence to erode in an instant further down the line!

    Silver - the Devil's metal - when news is supposedly great Silver is put into the monetary metal camp and not the commodities - conversely when news is bad its a commodity and not a currency.

    Never mind over the long term silver is still up but to break a downtrend?????

  15. If The Economy Is Improving….

    Regardless of what the media or official government stats say…this post lists all the reasons why it is looking more and more like a depression and not a recovery. But you probably already knew that.

    But right now there are some "bright spots" in the economy, and you are bound to run into family and friends that will repeat to you the nonsense that they are hearing on the television about how the economy is recovering.

    When they try to convince you that the economy is getting better, ask them these questions....

  16. Jim Sinclair, presented by

    Lars Schall spoke with Jim Sinclair about the policy of gold by central banks. The starting point was a statement by Chris Powell of the Gold Anti-Trust Action Committee:

    “The currency market is the most powerful mechanism of imperialism.

    Occupying a country militarily is nothing compared to controlling its currency market. If you control a currency market, you can get everybody to work for you as your slave. … If we can determine the value of the dollar, we can value our currency so much above what would be a market value of their currencies, we can buy their production much less expensively.”

    Sinclair addressed the purposes and intentions of this control scheme and the role of gold in it.

  17. MF Global, Stock Market, Brokerage Account Safety?, Farmers

    Part 1 or a larger conversation to follow; Warren Pollock and Karl Denninger (The Market-Ticker) - have a discussion which starts with Louis Freeh, MF Global, Vanishing Money, the Safety (or lack of) regarding brokerage accounts, physical world effects of MF Global on Farmers and Airlines. Solution suggestions for Farmers.

    Is anyone going to be forced to cough up the MF Global Cash. If you or I receive stolen property we are liable to return the money to the rightful owner. Law has been eroding property protections via exceptions. We talk about illegal conveyance, the CME. We go on to question the safety of brokerage accounts. I (Warren) asked Fidelity investments if the same thing could happen in my brokerage account as what happens with MF Global.

  18. What a game....

    Counterfeit Value Derivatives: Follow The Bouncing Ball

    3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.

  19. Banks suspected of cartel activity
    The Swiss Competition Commission (Comco) has opened an investigation against UBS and Credit Suisse, as well as against more than ten foreign financial institutions.

    Comco said on Friday it had received information regarding potential unlawful agreements among banks. Specifically, collusion between derivative traders which might have influenced the reference rates LIBOR und TIBOR.

    Furthermore, market conditions regarding derivative products based on these reference rates might have been manipulated too.