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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
What Exactly is an Asset?
by Professor von Braun
November 14th, 2008
We are currently witnessing
the often predicted unraveling of the fiat currency-based banking
system on a global basis. The readers of the USAGold website and
Le Metropole Cafe website have had access to some of the finest
commentaries that have appeared on the internet since each of
these respective websites began.
Converting paper assets into gold has been recommended continuously,
and for those investors that took the advice that was offered
and purchased the metal over the following years, and those who
got out of debt and stayed out of the housing bubble debacle,
life can't be too bad at present.
Recently I had dinner with an old friend who is a stockbroker
and has been in the broking business since 1984. 2008 will go
down as the first year in his career that he has lost his own
money. He is only certain of one thing at present -- namely, that
there is no transparency in the market place. You do not
know what you are buying and there is, currently, no such thing
as full disclosure to the degree that you can have confidence
in what you are buying.
This is of course the problem that banks are having with making
loans to each other. It seems that each bank knows its own non-disclosure
portfolio and they are guessing that their counterparties have,
at the very least, a similar situation.
The failure by AIG to fully disclose its exposure to the credit
default market has bought about its near complete collapse. It
is on a life support system and seems to require an increased
amount of oxygen on a weekly basis. Which begs the question as
to how much oxygen does the Federal Reserve and the US Treasury
have? Other large name companies appear to be having a not dissimilar
problem; and it's a long list starting with the big three automakers,
GE, American Express, Goldman Sachs, etc, etc.
This is a global banking crisis, brought about by the adoption
of the fiat monetary system by all countries. There is no currency
out there worth a damn because few Central Banks have any 'official'
reserves that do not consist of other countries' liabilities.
In previous articles I have made the point that you cannot settle
a debt with another debt. Historically, every time this has been
tried before it has failed and this time is no different. The
wisdom of being on a gold standard means that trade deficits
can be settled and a balanced account obtained. The
gold standard provides a measurable unit of account.
Without a balanced account,
everything else is deferred settlement. That is the issue with
which the banking system is faced with today. Deferred settlement
is no longer possible by virtue of the fact that there is no one
left to make an inflated loan to.
The banking system was dependent upon the housing market for its
bread and butter, and this worked well for a number of years,
as long as house prices went up and there was a pool of first-time
buyers waiting in the wings. As the economy 'grew' the 25-year-olds,
now out of college, could save for a few years and buy their first
home. They would be replaced 10 years later by the next wave of
25-year-olds and so on and so on. An ongoing supply of first home
buyers was built into the market by virtue of the ongoing population
increase. By lowering the lending standards via dubious types
of mortgages without the historically required deposits, the mortgage
market makers managed to take in those who were not yet ready
for home ownership and essentially destroyed its own supply of
first home buyers, thereby creating a void of its own making.
The pool of first home buyers was the key ingredient in keeping
the deferred settlement game going and today this pool is gone.
It is interesting to note that the shortage of first home buyers
is not just a problem for the US banking industry, but is occurring
all over the globe. The UK, Spain, Ireland, Iceland, New Zealand,
Australia, to name a few, all have the same problem; which is
why this is a global banking crisis. Obviously, the recent actions
taken by several central banks in their takeovers of regional
and global failed banking giants demonstrate that this is indeed
the case. One has to ask the question as to whom Fannie and Freddie,
along with all other holders of failed mortgages, are going to
sell their foreclosures?
This brings me to the title of this discourse, which is "what
exactly is an asset?" Much has been said about the need to
be cashed up by several of the well known gloom and doom commentators.
Their reasoning, it seems, is based upon the fact that those with
cash in the early 1930's were able to buy bargains in most asset
categories. Indeed this is what happened, cash was king and that
cash was backed by gold, gold which was priced at $20.67 per ounce
and individual investors could trade their dollars for gold. Early
in 1933, President Roosevelt made gold ownership by US citizens
within the US illegal, and the dollar was no longer redeemable
for gold. Cash was no longer the cash it had been.
Today cash is about as far removed from the 'cash' of the early
1930's as it could possibly be. Indeed several of the gloom and
doomer's have consistently recommended not buying gold because,
so they say, when the crash that you need to conquer arrives,
gold too will deflate and cash will be king. "King of what?"
one has to ask. Now we have the long predicted crash and gold
can't be purchased in any quantity at all! That's ironic. Meanwhile
the cash you have now placed in the safe haven that U.S. treasuries
are supposedly offering are showing a near negative return.
That's apart from the fact that the U.S. Treasury Department is
increasing the debt levels at a rate never seen before.
So what is an asset? Does anyone actually know? The derivatives
market has been described as a ticking financial time bomb, as
financial weapons of mass destruction by none other than Warren
Buffet. The size of this market is believed to be in excess of
$684 trillion while the U.S. GDP is estimated to be $14 trillion.
How can a GDP of $14 trillion support a derivatives market of
$500 trillion? The answer of course is it can't and what we are
also seeing now is the mass financial destruction Warren Buffet
was referring to.
Derivatives are pure speculation, wild bets if you wish, that
can never be paid out. They are behind the collapse of Bear Sterns,
AIG, Merrill Lynch, Lehman Bros and are likely to take down many
more big name players before this is over.
The 'normal' asset classes, whether they be bonds, stocks, or
real estate all have either direct or indirect derivative contracts
written on them. Government guarantees are all well and good apart
from the fact that the biggest debtor is the one providing the
guarantee. There are dangers out there that we are not even aware
of and this is what my stock broker friend was referring to when
he said there is no transparency on any tradable asset
class.
This includes gold
stocks, which have also taken a pounding over the last few months.
Gold stocks today are not the gold stocks of the 1930's. They
too have become a target of the writers of derivative contracts,
as is any public entity that trades on an exchange. Any
index can be shorted and any commodity can be sold off via the
futures markets. The actual supply and demand situation for any
item is not reflected in the price and this is because of derivatives
and the leverage generated by them. Nowhere is this more evident
than in the gold market at present with a severe worldwide shortage
of physical metal not being reflected in the price... yet.
The right question that those who are cashed up and also holding
gold should be asking is how do I replace my gold if I have to
sell it and where do I put a portion of my cash to work? The answer
to that is to find an asset class that somebody wants to buy,
that has inherent upside potential that can be easily recognized
and is not obscured by the nonsense that is the financial markets
as they appear today.
Traditionally people invested in long term situations that were
connected to productivity and by that I mean people invested in
an entity that produced something tangible which was sold at a
profit. Productivity has been replaced over the years by speculation,
by hedge funds gambling with their clients' money, placing large
wagers on outcomes that were computer generated and had little
to do with productivity. When speculators enter the oil market
via the futures market and increase the number of buyers for barrels
of oil of course the price will go up, as long as more speculative
buyers enter the market. When they don't the price collapses,
often quickly, as the speculative longs cover their bets.
The essential ingredients of productivity are commodities and
labor. The banking industry stopped supporting productivity a
long time ago, preferring to engage in enjoying the fruits of
the productivity of the people while enslaving them in indebtedness.
This has changed and the banking system can not save itself from
its own expansionary model. The deferred settlement game is over.
Now is the time for the individual investor to be looking at situations
where productivity will be rewarded. Private ownership of gold
mines and of royalties from gold production, as well as an interest
in developing gold projects, is one asset class that fits the
category of an asset that has upside potential. Gold is money
and that is the real reason that gold companies did so well in
the 1930's, they were producing the equivalent of cash.
This is not yet the time to be buying publicly traded gold stocks
for the reasons outlined earlier in this article. Anything publicly
traded is not transparent by virtue of the tangled web that derivatives
have created. Now is the time to be taking a longer term view
of finding assets connected to mining that have the potential
to attract the attention of a producer when the gold market eventually
does what it did in the 1930's. Private ownership provides some
transparency and the author is aware of some situations that fit
the categories outlined above. Astute investors need to be working
together outside of the vicious circle of the ticking time bombs
that are derivative contracts.
I would like to end with a quote from Richard Russell's nightly
newsletter that was published 11/13/08, (ww2.dowtheoryletters.com)
which is of interest:
"Gold -- I've never been a big fan of the "gold is being manipulated" thesis. However, I'm now giving the manipulation thesis second thoughts. Most of the world's central banks are now in the process of fighting recession and deflation. This requires government spending and the production of enormous quantities of new fiat money. The last thing the central banks want is for the public to realize what they are doing. Normally, surging gold would be the signal for the public to ask questions -- rising gold is a red flag for the fiat money creators.
It's amazing and beyond coincidence the way gold rallies, and then immediately is hammered down below 740. I know that there are huge short positions in gold on the COMEX. I'm no longer a skeptic on the "gold is being manipulated" claim. Somebody is selling gold every time gold rallies toward a breakout above 870 or more properly gold at 840. I don't think the manipulators (if there are such people) can keep it up."
Once again I repeat that now is the time that astute investors do need to be working together to identify potential investments that contain real upside potential based upon productivity.
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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