Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973

Editor's Note: The following writings first appeared as posts at the USAGOLD Forum and they are listed here in date order. For the most part they represent a continuation of ideas first explored in The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold. As such, we hope readers of the book will find value here, as well as those who are new to the notion of gold ownership.

The importance of real rate of return

(12/3/09)

From today's Bloomberg report --

". . .the low US real interest-rate environment to continue to provide strong support for gold prices in 2010 and 2011." --Goldman Sachs

Real rates of return* are what the old-style, big-time money managers watch, and this type of money manager is now back in style in the post- Bernie Madoff Era.

The future prospects for a real rate of return on most assets are not particularly good:

First, interest rates are likely to stay low for the foreseeable future. The Fed isn't going to do anything to upset any hopes of a recovery by raising them. Also, the Federal Reserve doesn't want to drive the federal government into technical bankruptcy by making the interest on the national debt too big a percentage of revenues. America's sovereign creditors might not respond to that type of situation very positively.

Second, and on the other side of the real rate of return equation: Inflation looms large the result of a nearly $2 trillion addition to the national debt year over year. In addition, no one with any common sense believes taxes can stay low in the current environment. With the ramp-up in Afghanistan, the new health program and God knows what bailouts will be needed in the future with phase two of the credit crisis kicking in, America's needs will weigh heavily on the federal government's woeful balance sheet.

As the press is now telling us ad infinitum, gold becomes the financially correct response. This time, though, the press has finally gotten it right.

If you, like me, hold the fundamentals dear when assessing future prospects, you might want to take Goldman Sachs' observation to heart. If you fail to achieve a real rate of return on your assets, you are losing wealth. If you are fortunate, or wise enough, to have achieved one, even a small one, you are substantially ahead of the game. For nearly a decade now, gold has delivered a real rate of return (and a good one) and it has maintained and built the wealth of those who own it.

Once again, it doesn't matter what price you pay for gold's protections, it only matters that you own it. I put it in those terms at $300 gold, $450 gold, $600 gold, $850 gold and now $1200 gold.

 * Real rate of return = your yield minus inflation and taxes.

Bond worry: Will China keep buying?

by By Liz Rappaport and James T. Areddy, The Wall Street Journal, 7/31/209

"Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt. A fuse was lit this week when traders noted China's apparent absence from direct participation in two Treasury bond auctions." Link

(8/1/09)

Is this the real reason for the gold spike yesterday?

Those of you who follow the commentary here know the connection between lack of demand for U.S. Treasuries and monetizing the debt, otherwise known as "printing money." The connection was not lost on forex and gold market traders Friday, i.e., the dollar plummeted and gold spiked higher.

This past week's developments in the bond market come at a time when the United States government is borrowing at three to four times the pace in recent years. Over the last 12 months, it has added over $2 trillion to the national debt. Those additions constitute the real deficit, not the convoluted, political version often quoted in the mainstream press. In the same period last year, the government borrowed $700 billion. In the same period the year before that, it borrowed $500 billion.

The lethal combination of accelerated borrowing and diminishing bond demand is troubling to say the least -- a disturbing trend which leads and transcends the endless parade of economic statistics important to gold (and dollar!) owners. If I am reading this correctly, the correlation just outlined may now have arrived front and center in the overall market psychology -- a development which could wreak havoc regularly given the fact the bond auctions are becoming larger and more frequent. Under the circumstances, the markets are likely to be on "China Watch" for a long time to come.

The graph immediately below reflects government securities held outright by the Federal Reserve. When the Wall Street Journal asks "Will China keep buying?", it is really asking "Will the rocket trajectory depicted on this chart continue unabated?"

A glass seen half full/empty...

(5/3/09)

A few thoughts about Alain de Botton's "For a happier life, shake off your misplaced optimism."

Financial Times Opinion [4/30/09]

I realize that I refer readers to Financial Times all too frequently, and I apologize for the repeated references. At the same time, it is probably one of the last journals where intelligent thinking and response is published on a regular basis, even if the leftward tilt seems sometimes evident.

What inspired this post was Sierra Madre's comment (at the USAGOLD Discussion Forum):

"We may go for years without hitting $1,000. Or it might happen next week. We should not allow our lives to center on 'what is the price of gold today?'. Life is too short. We have to get on with living our lives properly."

These are wise words indeed. But what is "living our lives properly." What should occupy our minds? How should we think about the rapid change of fortunes in the world economy, our personal portfolios, our lives?

There is so much in the Botton essay that rings true, at least for me, that as I started to write this post, I realized I would probably end up simply dissecting and re-presenting the piece in its entirety. I will say this much. His words have me migrating to the iTunes page to see if I can download some Seneca for my iPod.

Here's an interesting quote to tempt you (all of you):

"It is time to recognise how odd and counter-productive is the optimism on which we have grown up. For the last 200 years, despite occasional shocks, the western world has been dominated by a belief in progress, based on its extraordinary scientific and entrepreneurial achievements. On a broader perspective, this optimism is a grave anomaly. Humans have spent most of recorded history drawing a curious comfort from expecting the worst. In the west, lessons in pessimism have derived from two sources: Roman Stoic philosophy and Christianity. It may be time to revisit some of these teachings, not to add to our misery but precisely so as to alleviate our sorrow.

To focus on the first of these sources, the philosopher Seneca should be the author of the hour. Living in a time of financial and political upheaval (Nero was on the Imperial throne), Seneca interpreted philosophy as a discipline to keep us calm against a backdrop of continuous danger. His consolation was of the stiffest, darkest sort:

"You say: 'I did not think it would happen.' Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened?"

Seneca tried to calm the sense of injustice in his readers by reminding them -- in AD62 -- that natural and man-made disasters will always be a feature of our lives, however sophisticated and safe we think we have become." - End quote -

This sort of thinking runs very close to my own. I believe I have always thought this way, but as I have grown in years (and hopefully gained a modicum of wisdom), I've realized that there is nothing wrong with thinking like this. These are not the thoughts of the pessimist, but the thoughts of the realist.

I believe we have turned an intellectual corner with respect to gold and it is precisely because so many have come to the same conclusions as so beautifully extrapolated by Botton. Though his philosophy might be too dark for some, I strangely find comfort in it. (How many of you found Warren Buffet's recent comments out of place, out of sync?) How can we stand forthrightly (stoically) against the human condition, if we spend most of our day denying it?

Botton quotes the French moralist Chamfort: "A man should swallow a toad every morning to be sure of not meeting with anything more revolting in the day ahead." Now that might be a bit extreme, but, sometimes, one must exaggerate to make the more discreet point. We must not abandon hope, or live life with a cloud constantly hanging over our heads. At the same time, an optimistic fool is a fool nevertheless. It would not hurt to prepare for the possibility of the negative event. At any rate, Botton deals with these issues much better than I do in this post.

A little gold put judiciously aside remains a good remedy for those aspects of the human condition which manifest themselves in the financial realm -- another area of mutual interest touched upon in Botton's essay.

China and gold: In the footsteps of giants

(4/25/09)

There may be something of a misunderstanding with respect to the increase in Chinese reserves. The bulk of that gold has come from purchases of their own domestic production, not open market purchases. The impact on the price is therefore indirect. However, because China is the largest gold producer in the world, and it is retaining the bulk of its production for reserve diversification purposes, that impact is significant.

Consider, for example, if South Africa had been able to retain the bulk of its production during the years it was the prime producer. It would today be one of the richest countries in the world. As Pierre Lassonde reminded us in the recent past, there haven't been any large scale in-ground discoveries in many years. That puts China in a very strong position with respect to the gold market, and from what we can gather, it has decided to play that card. Because of its strong exports, it doesn't need to export gold like South Africa did to sustain and strengthen its economy. China will be able to build gold reserves and make the yuan stronger - its financial muscle the weight of its gold holdings which are likely to grow year to year, and perhaps even accelerate as new fields are brought into production. In addition, as the price of gold rises, so too will the value of its gold reserve. The currency advantage is the one thing the press reports yesterday and this morning overlooked, and as time passes, that may be the most important.

Now, I realize that all of this is not quite so glamorous as China buying up every loose official sector ounce, but, at the same time, what I have described above will have a greater long term impact than any purchase of a one-off official sector sale. China, true to its reputation for patience and steady, long-term progress toward its goals, has taken the golden path and now they want the world to know about it.

Last April in my Golden Gut Check essay I mentioned the importance of China keeping its gold production home. At the time, the market overlooked it as a major factor in future pricing considerations. Now, with publication of a reserve gain which occurred over a five year period, hard numbers are available. China seems to want to make a point and the general market seems to have recognized its importance. (The China gold story made the front page of today's Financial Times weekend edition.)

Taking this discussion a step further (and this might be worth another essay by itself) at some point, the Chinese might be very interested in a revaluation that compensates it for its dollar stockpile, and others might be willing to go along as the least offensive means to bringing balance to the international economic equation. That revaluation could occur informally with the market moving steadily higher over the years in a free-market dynamic, or it could occur formally as a return to the gold standard. I do not need to explain to this forum's readers and participants what that would mean to gold owners the world over.

While we ponder the meaning of Chinese gold reserve growth, let's not set aside the other major gold story from China during the past week. It's request to the IMF that it sell the entirety of its 3217 tonne reserve coincides with its announcement on reserves and is intended to deliver a message to the financial markets: It sees gold as an important part of the overall international monetary scheme - a scheme that may evolve to a system in time. If China were to purchase the full 3217 tonnes at $1000 per ounce, the price would be $103 billion. With current foreign reserves (of all description) at $1.95 trillion, the purchase price of all the IMF gold would amount to a paltry 5.25% of China's total reserves. China has made the IMF gold sale bludgeon look more like a wet noodle.

From China's perspective here's how it looks:

$1,950 billion total reserves
$ -103 billion cost of 3217 tonnes of IMF gold
______
$1,847 billion total reserves remaining

(And by the way China would then become the largest holder of gold in the world after the United States and the European Union.)

The message contained in China's actions of the past week is unmistakable. China knows that gold is making a comeback almost as a force of nature. Its return to the center of value will be dictated by history and events with or without the help of the world's governments. I believe China is preparing for that day, and from its perspective apparently it cannot prepare fast enough. The first step toward stability for both individuals and nation states is a step in the direction of gold and China has taken it.

Talk about following in the footsteps of giants (with a nod to my old friend, Another). . . . .
__________________

FOOTSTEPS OF GIANTS POST
Sat Jan 10 1998 21:03
ANOTHER (THOUGHTS!) ID#60253:
Someone once said, "noone wants gold, that's why the US$ price keeps falling". Many thinking ones laugh at such foolish chatter. They know that the price of gold is dropping precisely because "too many people are buying it"! Think now, if you are a person of "great worth" is it not better for you to acquire gold over years, at better prices? If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow! An experienced guide is not needed for this trail, look around you and see. The real money is selling ALL FORMS of paper gold and buying physical! Why? Because any form of paper gold is loosing value much, much faster than metal. Some paper will disappear all together in a fire of epic proportions! The massive trading continues at LBMA, but something is now missing? The CBs are no longer lending! They will not anymore! We have reached production costs. Oil will have nothing of "gold paper" if gold must stay in the ground! And a CB values the wishes of oil far above it's return of leased gold! Hear me now, "if gold tries to go lower than US$ $280 the BIS will buy it OUTRIGHT in the OPEN for all to see"! They must! They will! I know. For no currency system could stand if "Oil" were to bid for gold!

Oil has kept "the deal" as the CBs sold paper to lower golds price! All is fair. Asia will bid for gold not as in the past. They now know that the free flow of oil has more value than the Pacific economy. But the price that was paid may be more than the world currency system can endure.

To close:

The US$ has risen on a flight of fear. That will now end as the LBMA shorts are given to wolves. If this fire burns too hot, gold will turn and it's trading halted. The price of oil will explode as gold becomes the "world oil currency"! Even now oil has locked the IMFs gold, Asia will bid against them no more. We come to extreame times.
Risk not your wealth in paper, we enter a period of truth.

The complete writings of ANOTHER - (USAGOLD)

One more major crossroads

(3/25/09)

Britain's failure to sell out its gilt offer today highlights a much larger problem than simply funding that country's needs. One has to wonder if any country can fully finance its debt in this environment. Britain, in this respect, might simply amount to one borrower on a long list likely to come up short. The best private customers, once reliable, are now all on the ropes. Too, the funding relationships between nation states - like that of private counterparties - have broken down for lack of trust, the China/U.S. quid pro quo being a primary example. Too many - private and public - find themselves boiling in the same toxic stew.

So what happens next?

Do most of the industrial nations of the world join the United States in resorting to the printing press, or quantitative easing as the politically correct like to call it? That is likely, but what exactly does it mean to the rest of us who happen to have our assets denominated in those currencies? One problem is solved by creating another.

What has been extraordinary for me, as one who was watched this crisis unfold over the long term, is the straight out admission by the various monetary authorities that they are going to print their way out of it. I have never seen that before and it stuns me. In the past, even if the central banks did print money, they tried to cover it up, or pretend it wasn't a problem, and for obvious reasons. Best to at least try to keep them guessing. This group has no compunctions, holds no reservations nor seemingly feels any guilt. Borrowing from F. Scott Fitzgerald: And so they beat on - boats with the current, out of control and seemingly headed for some sort of spectacular wreck.

I find it odd . . . . An extension of the mind-set for which some on the governmental side of the fence have criticized the private sector. As I have said before, the real problem besetting the world economy is a moral one. We have come, it seems, to another major crossroads.

Fed chairman makes the case for gold (inadvertently)

(3/10/09)

Fed chairman Ben Bernanke, from a speech to the Council on Foreign Relations, as reported by Reuters, 3/10/09:

"Financial crises will continue to occur, as they have around the world for literally hundreds of years. Even with the sorts of actions I have outlined here today, it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system. Nonetheless, these steps should help make crises less frequent and less virulent, and so contribute to a better functioning national and global economy." [end]

Text of speech

For the past several months I have attempted in this series of Semper Aurum posts to drive home the point that we have crossed a bridge of understanding when it comes to gold ownership, and arrived in a new era and a new collective mind-set. Mr. Bernanke states it well and inadvertently makes my point. The certain knowledge that we live in an imperfect world prone to imperfect outcomes encourages gold ownership. Policy makers did not talk like this one year ago. Chastened, common sense has suddenly made a come back -- a ray of light in a pitch black room. While the policy makers struggle to sort things out, gold owners retain the advantage of a good night's sleep -- even during the worst of times -- and that's a heady advantage.

Gold coin shortage likely to become chronic

(3/8/09)

Is the U.S. Mint's production problem long-term or short-term?

What will be the effect on gold coin prices?

In 1999, at the height of the Y2K crisis and under the strain of record gold demand, the U.S. Mint produced 2,055,000 1-ounce gold American eagles.

In 2008, with the world embroiled in an unprecedented economic crisis and once again under the strain of record gold demand, the U.S. Mint produced only 710,000 1-ounce American eagles and 189,500 1-ounce American gold buffaloes -- just under half its 1999 production.

The Mint's ability to keep up with demand in the ramp-up to Y2K played a key role in suppressing premiums on bullion gold coins. The Mint's inability to keep up with demand in 2008 drove premiums to the double digits at one point and helped add 2 percent to the baseline cost of gold coin acquisitions in 2009.

When the American eagle shortages first cropped up in August 2008, the Mint blamed the problem on its vendors, saying they were "not able to supply enough 1-ounce gold bullion blanks to meet the unprecedented demand we are experiencing." The Mint promptly thereafter suspended all sales of the popular 1-ounce coins.

To understand the full implications of the Mint's production problems, two important pieces of information need to be taken into consideration.

First, all the 1-ounce gold blanks purchased by the Mint now come from one refiner in the western United States.

Second, with global refiners already running at capacity, Mint officials' attempts to line up additional blank manufacturers are likely to be rebuffed.

The prognosis under the circumstance is not a good one: The problem appears chronic and unlikely to resolve itself any time soon.

Unlike the Y2K event, which resolved itself as soon as New Year's Day 2000 came and went, the current strong demand is the result of a secular gold bull market deepened by the worldwide economic crisis. As such this is a whole new ball game for the gold market. Typically, in past bull markets the principal market driver was supply and demand for the metal itself. In the current bull market, it looks like there will be an additional driver to the price paid by those acquiring gold -- the premiums added to the price because of the combination of burgeoning demand and the diminishing supply of gold coins.

The role played by gold premiums -- the add-on paid over the melt value of a gold coin -- is little understood and frequently overlooked by gold investors. Usually, premiums remain relatively constant and cover the costs of minting and marketing the coins. When coin supply and demand get out of kilter, rising premiums are the mechanism that restores balance.

The bad news is that rising premiums can add significantly to acquisition costs for gold consumers. The good news is that rising premiums can add to the profits for those who already own gold coins and for those who were farsighted enough to buy early in the process.

A historical precedent can be found in the gold market of the late 1960s. At that time gold was pegged at $35. As the dollar crisis of the late 1960s and early 1970s unfolded, investors globally began moving into gold coins like the U.S. $20 gold piece, the British sovereign, the German 20 mark, Swiss 20 franc, et al. Though the gold price itself was fixed, premiums on gold coins were not. The demand drove premiums on these coins to unimaginable levels -- in some case four to five times melt value.

We got a whiff of that sort of thing when contemporary gold coins briefly reached premiums of 12 to 15 percent at the height of the gold rush in 2008. (Pre-1933 gold coins went to premiums in excess of 20 percent.) Once the market settled down, though, a base premium 2 percentage points above normal remained.

If the mints are indeed boxed in by the blanks problem, and it appears they are, there will be no easy way to keep those base premiums in check over the long run. It appears that the bullion gold coin shortage has become a chronic problem and something gold owners and accumulators will need to keep an eye on in the months to come.

Two disturbing trends revisited

(2/28/09)

It is very easy for us to become immersed in the minutiae of the present crisis and lose sight of the big picture. After all is said and done with the cascade of economic numbers and analysis of every description coming at us from every direction, two disturbing trends weigh heavy on the average investment portfolio and demand special attention:

First, the on-going crash of the stock market,

And, second, the horrendous, unprecedented and out-of-control growth of the federal debt.

The declining stock market - where does it all end?

The stock market has put in a distinct double top which can be seen by going to this long-term S&P chart supplied by MSNMoney. The chart in itself should be enough to dishearten even the most ardent stock market advocate, though it rarely receives any prominent play in the mainstream media. Double tops notoriously signal major long-term bear markets. However, before you hide this chart under the pile of papers on your desk, keep in mind that the stock market crash of the 1930s did not exhaust itself until 86% of the market value at the top had been eaten up. Apply that math to the present and you discover that the Standard & Poor's Index could visit the vicinity of 200 before all is said and done - a drop of another 535 points. History's lesson here is that secular bear market downside is rarely anticipated to the degree that it actually occurs. In short, if you haven't visited this possibility, you might want to incorporate it in your thinking.

The national debt - how high is high?

"I think we just have to admit we're broke."
John A. Boehner, House minority leader

$1,750,000,000,000.00

That's almost four times the largest deficit ever run by the federal government. It will increase the national debt (which now stands at $10.9 trillion) by 16% in a single year - a number that not just exceeds, but drowns anything before it. Keep in mind, too, that this is the "political deficit" (which is the one most often quoted in the press) not the much larger "real deficit" (which is the amount actually added to the national debt). When you take into consideration that President Obama simultaneously declared the federal government would be running "trillion-dollar deficits for years to come," one wonders just what it is we are being prepped for.

Numbers like this bring to mind the Weimar Republic nightmare inflation in 1920s Germany, and most of us know where that ended. If you do not, please take a look at this in-depth report. It is a good thing that lending rates approximate zero, because if they did not the interest on the national debt might well surpass military spending as a line item in the budget - an expense for which the American taxpayer gets absolutely nothing in return. The United States will be looking to its foreign trading partners to buy up a good portion of this debt. What it cannot place, it will monetize, and that is when a second and highly dangerous leg in America's Wiemarization will be put in motion. The stratospheric deficit numbers quoted by President Obama this past week will serve as warning.

Gibson's upside down paradox

(2/21/09)

Further reflection on Rogoff's call for a 6% inflation level. . . .

L.Summers interpretation of Gibson's paradox should theoretically work both ways. Run up the gold price and inflation should follow. . .at least in theory. To be more precise, perhaps we should say that the restraints on the gold price (if they indeed exist) need to be removed in order to create inflation. Alongside you also create a safe haven reality for those who choose to recognize the policy change. So Gibson's paradox goes upside down.

Is this part of Summers plan to foil the financial crisis?

One of the more interesting pieces of information to come along during this most recent run-up in the price came from a recent Financial Times by Steve Ellis (Thanks, Chris Powell):

"Speaking to central bankers, this is the first time I can recall them actually favouring a high gold price. Normally they see high gold prices as a lack of trust in the financial system (not to mention their ability as central bankers). Alan Greenspan, the former Fed chairman, for example, used to target a gold price of around $400 to $500 an ounce. Recently, the central bankers have become more enamoured of higher gold prices as it would suggest that their attempts to stave off deflation were starting to work."

I would suggest, my fellow goldmeisters, that this is an important piece of reporting which needs to be weighed in the balance and monitored. Note that Ellis says he is passing along what he heard "speaking to central bankers." If such a change in heart (and tactics) has indeed occurred, it carries important implications for gold owners who view their holdings as a form of savings. For one thing, gold's avowed opponents, the central bankers, will have become its friend, if that can be believed. For another, official sector gold sales, even IMF gold sales, would become unlikely under this scenario, since they would most certainly add to the ultra-feared deflationary pressure. When the Labor Department announced a .4% increase in consumer price index yesterday, it seemed to confirm that the policies are working and this, as Ellis points out, is what the central bankers want. Gold, just after the announcement, bolted over the $1000 mark.

Is it possible that the Obama administration is a friend of gold? No. . .that couldn't be, could it??

Ellis throws this in just before the report on his central bank contacts:

"I cannot say with any confidence that gold will not be without risk and volatility but at least it offers early participants plenty of upside reward to compensate them for the wild ride."

Gold's inflation adjusted price is $2224. One wonders what it might be using the much higher inflation numbers published by Shadow Government Statistics -- the numbers many believe to be a more accurate reflection of the situation.

"Our crowd. . ."

(2/16/09)

I had not seen those comments by James Sinclair* before, but coming from someone who spent his early life at Wall Street's epicenter with some of America's most important financial families, they come as a welcome addition to the national gold dialogue.

I have to say that an individual with any money to speak of would be a fool not to own gold under the circumstances. I am not surprised to learn that "Our crowd. . ." never strayed too far from the yellow brick road. The fact of the matter is that "the circumstances" are continuous, ever present and a constant threat to accumulated wealth.

That's what the old families know and understand and the one thing about money many of the rest of us are only now fully absorbing. We live in an imperfect world, and there is no way to perfect it. As we are seeing with (or are about to learn from) the various bailouts, government programs, et al, there are two sides to every coin - two sides to every political or economic machination. The masses who are quelled by political action today will be roiled again by its consequences down the road. That is why the wise make gold an evergreen portfolio item - and then keep that holding to themselves (a matter for family members only). That is why they can't be talked out of it.

Since economic danger is inescapable and ever-present, gold must be ever-present in its physical form to preserve whatever wealth we manage to garner in this world. In the end, that realization is why I became a gold broker so many years ago and why I remain one to this day. It matters not what the price does. It only matters that you own it.

*From James Sinclair's J.S. MineSet:

"..Thirty three years ago Bertram Seligman shifted his focus from equities into minerals and currency trading - almost 100% to be exact. The obvious answer for this quantum divergence from normal practice was that President Nixon took the US off the gold standard.

The simple answer, however, is that Seligman was a member of "Our Crowd" which was populated by many prominent families of that era including the Warburgs, Solomons, Lehmans & Rothchilds.

As with these other families, Seligman was part of a long term plan to preserve and increase their liquidity. Sure, they continued in the paper asset business which they'd been in for generations. These families had lent support to the government of the day because it had placed gold in its election platform as a standard of value - in effect protecting the liquidity of their investments. In the end, however, they felt betrayed and had no other recourse than the action they took...

I have shown you the massive Head & Shoulders formation which is extremely long term and is part of the puzzle. What created this formation is long term liquidation. I believe that the major families of European wealth have been dollar liquidators over this long term period. They knew the dollar eventually would be doomed due to the removal of the gold standard. That is why I believe "Our Crowd " - the real old money - has been collecting gold on the cheap."

The Fed ties one hand behind its back in any future inflation fight

(1/19/09)

A couple of days ago, I posted the following here at the USAGOLD Forum:

"The talk among establishment economists (mostly of the Keynesian genre) is that inflation can be controlled down the road by simply draining liquidity at the rate the central bank deployed it. Life experience tells us though that, once you let the inflation genie out of the bottle, it is very difficult to get it back in - Zimbabwe being a good example. Instead, it tends to feed on itself only worsening until the currency inevitably hits a wall."
Building on this trajectory. . . .

Floyd Norris of the New York Times points out this morning that following past recessions when inflation ramped up, the Fed would sell Treasuries to drain excess liquidity from the market, and thus quell the inflation. Now the Fed has pumped a boatload of cash into the banking system and holds, in return, a raft of illiquid mortgage credit obligations (along with Treasuries) - the very same toxic trash that nearly brought down the banking system.

Norris frets that the Fed may not be able to sell these questionable "assets" as readily as it would Treasuries - thus leaving the inflation to fester in the system. (Can you imagine the banks buying this stuff back?) If this is true, the Fed has already printed money in copious quantity with little hope of draining it back out. The deed is done, and in the process, the Fed has tied one hand behind its back in any future anti-inflation fight.

Public anger, the global muddle and the failure of the media

(12/30/08)

The United States will muddle along. Nothing much will change. It won't matter much in the overall scheme of things though because all nations are going to do the same - muddle along, that is. And for the same reasons.

For the time being the Obama presidency will defer the urgency to reform. That is how modern democracy works. Just when the public clamors loudest for change and reform, the politician comes along promising just that, i.e., change and reform, but all he is really doing is doubling down. You don't cure the gambling addiction by betting more. You cure it by taking your chips off the table. He calls it change, but the reality is that his policies are dangerously more of the same. By the time the public wises up, we, as a society (and I mean globally), will be in that much deeper, and primed for the next round of promises. . .

The wheel turns. . . That's why I never put much faith in the political process as a cure for economic ailments.

I came across this letter in the Financial Times this morning which echoes your projections of the great public anger to come. I have been working on an article with a similar theme, but this letter echoes my concerns so closely I'm simply going to reprint it here (See below).

This is the time of year the pundits trot out their reprospectives on the year end, and this years batch offers a bit more interesting reading than usual given the fact that 2008 will go down as one of the worst in financial history. The recurring theme this year is "no one saw it coming" - it, of course, being the disastrous economic crisis. The implication is that, since "no one,' including the world's top economists, saw it coming, the mainstream media should not be held accountable. That comes off as a bit self-serving amongst a group which sells itself to the public as the watchdog of the nation. Seems the watch dog fell asleep on the job.

The fact of the matter is that there were a great many who warned of the impending disaster including myself in "The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold." The very title serves as warning, and the core of the book, the Disturbing Trends section outlines in detail the scenario the mainstream media shunted to the back burner and largely underplayed. Thousands who read the book got the message, acted in their own best interest and have come through the first wave of the financial storm in fairly good shape via the simple expedient of gold coin and bullion ownership.

Those Disturbing Trends, by the way, still lie at the heart of what's wrong with the American economy. The government is now in the bailout business. The Federal Reserve threatens to drowned the credit crisis in a river of printed money, and Mr. Obama has vowed he don't deviate from this destructive course, but give it a shot of adrenaline instead.

To make a long story short, despite the most recent election and everything the Fed and the federal government has done and is about to do, the warning implicit in "The ABCs of Gold Investing" still hangs over the entrance to the financial markets, as it did when the updated version was first published in 2005.

Financial Times' Letter to the Editor, 12/30/08

Sir, I am deeply saddened to find that my newspaper of choice for more than 30 years is indulging in the same shabby rewriting of history as our prime minister. One expects this from politicians, not from the FT.
Your editorial "Why free markets must be defended" (December 27) is grossly disingenuous (not to mention over-simplistic). To say that "incompetence, and in some cases outright fraud, had grown so quickly that by the time market participants woke up to the problem, the entire financial system was threatened" suggests that nobody saw the problem coming. Of course they did. I suggest you read some of the brilliantly prescient articles written five years ago by your own journalists, some of which you have featured recently in advertisements for the FT.

A great many people saw this coming. Many have made huge amounts of money backing their judgment, and others such as myself took action to protect what they had. The rest stumbled on blindly and are about to pay the price.

The fact is that we failed to protect the financial system in the same way we have failed to protect so many valuable components of our society because of complacency, lack of accountability and the failure to attach value to anything. Opportunism, recklessness and fraud were bound to fill the vacuum this created.

That large numbers of people in the financial sector have made huge amounts of money while acting irresponsibly, recklessly, incompetently or dishonestly is beyond doubt. That huge numbers of "little people" are now going to pay the price for this is also beyond doubt. That this should not have been allowed to happen, and that politicians, bankers, regulators, economists and bit players such as financial journalists (with a few honourable exceptions) have been complicit in what has happened, is also beyond doubt.

Please, the facts are simple, and the FT, as one of the "friends of the market", has a duty to write the truth, otherwise politicians in a typically cowardly attempt to appear blameless will regulate the market out of existence.

What has happened is rooted in incompetence, recklessness and criminality of such grotesque proportions yet of such a simple and obvious nature that to suggest this was a complex and unforeseen failure of the market is a gross and self-serving distortion of the facts.

Whatever happened to "Without fear and without favour" ? Shame on you.

Tim Elster,
Alton, Hants, UK

In the end we have at least two things we can rely upon:

First, this website
Second, gold coins and bullion

Bernanke officially launches federal helicopters

(12/17/08)

. . . . . . Or to put it another way, if you can push on a string in Zimbabwe, you can certainly accomplish the same in the United States. Or to put it still another way, you can destroy the value of any paper currency if you try hard enough. In watching money markets (always through the prism of gold) for over 35 years now, I cannot recall a Federal Reserve ever openly talking about printing money, and in massive quantities, like it did yesterday.

We have talked about the Weimarization of America here for many years. It seems that day has arrived. The Fed has made known its intentions. The commitment to print and helicopter drop money, through the wide expanse of the U.S. economy and financial markets, as Bernanke promised in the early 2000s, has now officially been launched.
Take the time to peruse today's Financial Times if you can (starting with Martin Wolf's article linked above). Today's issue offers an important information base for your future understanding of the economy and financial markets. This Fed meeting in future years is likely to be widely viewed as a watershed and historical turning point.

In fact, yesterday's meeting, in a certain sense, may have been the most gold significant event since Nixon's first devaluation of the dollar in 1971. The stage has been set for a massive devaluation of the dollar in the only way it can be done in the fiat money era via the printing press. Only time will tell the full implications on a global basis.

What next?

We have already seen the reaction in the gold market - soaring toward $880 as this is written. The talk among establishment economists (mostly of the Keynesian genre) is that inflation can be controlled down the road by simply draining liquidity at the rate the central bank deployed it. Life experience tells us though that, once you let the inflation genie out of the bottle, it is very difficult to get it back in - Zimbabwe being a good example. Instead, it tends to feed on itself only worsening until the currency inevitably hits a wall. Wolf puts it this way, "curing deflation is child's play in a 'fiat money' - a man-made - money system." Inflation - and hard, tough, big-time inflation - is another story. Wolf ends by saying that the result will be "unexpectedly high inflation though probably many years hence."

If he is right, we will use gold to cover systemic risk now then heavy inflation down the road. We stand at the gateway to a new era for gold - one present gold owners, as well as newcomers, will need to fully understand in order to accomplish the goal of preserving one's assets in what could become even more perilous economic times in the years to come.

Madoff

(12/14/08)

The difference between the situation with Madoff and his $50 billion fiasco and the rest of the meltdowns we have experienced over the past several months (AIG, Bear Stearns, Lehman, the Fannies, et al) is that, in this case, the government, should a bailout have been comtemplated, would have been asked to bail out an admitted fraud. This is one bailout that isn't going to happen. Look for the Madoff situation to have much bigger impact on Wall Street than what people are thinking this cold Sunday evening in December. $50 billion is a big meltdown. . . many are affected on both sides of the pond. And as I have warned repeatedly, the problem with this sort of breakdown is the contagion effect experienced by other counterparties. Note the number of hedge funds who have already come public saying they are grievously damaged or completely wiped out.

The best opportunity to buy gold since the $300 range in the early 2000s

(10/30/08)

Following up on Pete Grant's report this morning, I do think that buying gold at these levels is akin to buying at $300 back in the 2001 to 2003 period. Back then many of us knew in our gut gold should be trading in the $400 to $500 range, and took advantage of the "bargain prices." I see a similar situation developing now where a suppressed gold price spells "opportunity" in big, capital letters.

There are a few differences between now and then.

­ One is that awareness about gold is at a much higher level among people all over the world.

­ Another is that the financial crisis in which we are immersed is a far greater motivation than anything we faced in the early 2000s.

­ Still another is that scores of well-heeled investors now know that gold should play a central and crucial role in the investment portfolio (do not believe anyone who tells you it shouldn't, if your financial advisor is anti-gold he or she is living in the financial dark ages).

As a result, the potential for volatility to the upside and continuing shortages are both more of a presence now than they were earlier in the decade. Competition for the available physical metal has stiffened, and this is something gold buyers need to factor into their thinking. There could be more downside in this break, or even some sideways action that could last a while until the market sorts things out. But that shouldn't matter if you keep in mind the real reasons why gold is an important asset in the overall scheme of things.

(Editor's Note: On 10/30/08, gold traded in the $750 per ounce range.)

Please consider. . .

"Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters." ­Benjamin Franklin

Why gold ownership is so important. . .

(10/24/08)

"The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire."

William Strauss and Neil Howe, The Fourth Turning, 1997

"We are in the midst of a once in a century credit tsunami. . .Those of who have looked to the self interest of lending institutions to protect share holders' equity, myself especially, are in a state of shocked disbelief."

Alan Greenspan, 10/23/08, Congressional testimony

"I don't know if we're entering the most difficult period since, not since the Great Depression - since the American Revolution. . .Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding its properties. Now you understand why I'm worried. I hope I'm wrong. I wake up every morning - actually I don't wake every morning now, I start to wake up at night the past couple weeks hoping I'm wrong. Begging to be wrong. I think that we may be experiencing something that is vastly worse than we think it is."

Nicholas Taleb, author, The Black Swan, PBS interview, 10/21/08

Taken together, these three quotes summarize the current situation, not just as an assessment, but as a call to action. Those of you who have read my writings over the years know that I put stock in the idea of fractals and chaos theory, though I think "chaos theory" a misnomer. There is a great deal of structure to the chaos Mandelbrot and Taleb describe. Thus, I was very interested in the interview linked here by gLod (Thanks, sir!).

In this context, an event like the Iceland breakdown, for example, is important not so much in that it will cause further, knock-on problems in the financial system. It is important because it is the result of circumstances which exist everywhere, i.e., provocative circumstances in place system-wide. Iceland becomes a template, by this this way of thinking, for what might occur elsewhere, and thus, not an isolated event. In essence, Iceland might be seen as a fractal. It follows then that Icelands may exist everywhere because of the global spread of fiat money systems - economies prone to stagflationary breakdown.

As I have said before, the first stagflationary breakdown of this type was the United States in the 1970s. The same sort of breakdown occurred in Asia in the 1990s, as well as in Mexico, Argentina and a host of others thereafter - same symptoms, same disease. And now - some 35 years later - we have come full circle back to the United States. In this wave, the number of state participants has risen, i.e., the nature of the crisis as Mandelbrot and Taleb point out has become global with global consequences.

I can see why Taleb is having trouble sleeping nights. He is not the only one. Individual investors/citizens should take note. In the same way, what is happening in the gold market is not an isolated event. Gold could be a fractal in its own right signaling what might happen in other commodities, most notably, oil, natural gas and foodstuffs if collapsing prices cause shortages. Be aware. This is not a time to beg off as a casual observer.

(10/21/08)

This link is making the rounds behind the scenes amongst serious gold types (within the industry). . . .

Unprecedented coin demand

The question is:

How could the U.S. Mint under similar circumstances in 1998 and 1999 (in the ramp-up to Y2) manufacture four times the coins it did in 2008? While at the same time complaining about "unprecedented" demand?

An anomaly worth considering. . .One that frankly has many of us scratching our heads. . . . .

Robert Mundell, Gold, China

(10/18/08)

I really do believe that, given the opportunity, China would be a buyer of any large tranches of official sector gold made available, including from the IMF. It is interesting that Professor Mundell would state so publicly. His statement is double important in that he is a chief advisor to China on monetary matters, including the disposition of reserves.

Back in September, I alluded to the Mundell-China connection in my essay Six Situations to Monitor for the Rest of 2008:

"When the New York Times reported that China's central bank was running out of capital, some took the report as preposterous. How could a country have so much money and be broke at the same time? To answer that question all one has to do is to hold in his or her hand a stack of the multi-million mark notes issued by Germany in 1923. Technically, what you have in your hand qualifies you as a multi-millionaire, possibly even a billionaire. There's one problem: That stack of notes wouldn't have bought a cart full of groceries.

For China ultimately it will get down to the value of the money it takes in after it ships something out. As the Times reported, "Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People's Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institutional losses. He said the officials blamed the United States and believed the controversial assertions set forth in the book Currency War, a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value."

Conclusion: Doesn't that sort of thinking qualify China's central bank as a future gold accumulator? There were reports earlier this year that Robert Mundell, the Nobel Laureate in economics, was advising China's central bank. Mundell has always believed that gold should play a strong role in central bank reserves because currencies issued by nation states are always subject to depreciation and even the prospect of total collapse. Any significant sale of gold by the central banks will likely be met by significant purchases from other central banks. And the Peoples' Bank of China likely sits at the top of the buyers' list."

Prof Mundell's suggestion is particularly meaningful in the context of all the discussion about a new Bretton Woods alignment. Though Trichet, for example, might think a fixed exchange rate regime would reimpose some discipline, one wonders how in practicality that might be brought to an every day reality when U.S. trade deficits, as one example (deterrent), are so much a fixture in the global economic order. In the original Bretton Woods design, gold anchored the system and the dollar, the world's reserved currency, was defined by a certain weight of gold. If you ran deficits, you gave up gold. If you ran surpluses, you gained gold. Is this what Trichet is talking about when he refers to a new Bretton Woods? If so, gold would have to be priced well north of $3000 per ounce for starters simply to clear the dollar reserve problems in places like China, Japan and the petro-states. Needless to say such a repricing would be welcomed by clients of USAGOLD-Centennial Precious Metals, and most of the posters here.
Mundell, in this context, is right to advise China to become a gold buyer. Even as the world's top gold producer, it cannot mine gold fast enough to accomodate the problem and prepare for a sudden official revaluation of international gold reserves.

In the end, though, the references to Bretton Woods may become more a metaphor to underline the importance of a new monetary architecture than an actual template. By necessity, a long-term evolution in the monetary order might be more likely in the offing than revolutionary change. Gold's role wouldn't change much if that were the case. Central banks might choose to use gold as an important aspect of their portfolios, but that will be in the course of things, not by complicated design - much as it is now being used by individuals in their own portfolios across the globe (and by the European Central Bank). That seems a more likely outcome, than a true return to the Bretton Woods regime. Either way, though, new Bretton Woods or business as usual, gold's importance to both the individual and the official sector is underlined.

All the talk about a new monetary order should serve as warning to the individual investor. These references are not occurring in a vacuum. Something is amiss. Be on the lookout and make sure the gold portion of your portfolio is where you want it to be.

Creepy socialism

(10/18/08)

The New York Times reports today that the Great Bailout of 2008 now stands at $5.1 trillion - a figure sure to concentrate the minds of many Americans if not our presidential candidates. Many of us wondered how deep a hole the government was digging. Now we know. . .and I caution: This is just the first number published. If the trend on this number is the same as other numbers throughout the financial crisis, it is likely to grow as we move along.

Simultaneously, a poll published in the same newspaper shows that 53% disapprove of the Big Bailout and only 23% approve. Both presidential candidates presumably would have landed in the 23% category since both voted in favor of it, not that their vote indicates much. (On the one hand the candidate admits he doesn't understand much about economics, while on the other, the candidate recently went to great lengths to cement his standing as little more than another tax-and-spend liberal in the mold of John Kerry and Al Gore.)

As for me, as I have tried to indicate at least in an indirect way, I am pretty much agnostic on the Big Bailout (as is 24% of the population if you extrapolate the polling numbers). In the political economy of our day, it was to be expected, as are further bailouts. At the same time, I know, and you know, that $5.1 trillion bailouts do not slide idly through the economy without consequences. The chief economist at Morgan Stanley recently suggested that the 2008-2009 federal government deficit could reach $2 trillion - up from the $500 billion (or so) deficit of this year. I should also point out that the figures bandied about here refer to the "political deficit" which is not the "real deficit." The real deficit is the actual addition to the national debt which last year approached $1 trillion. Such additions to the national debt could instigate a transition from crisis to disaster and I do not feel that I am exaggerating since we are talking about a 20%+ growth in the national debt. If the same doubling factor between the political and real deficits were applied, the 2008-2009 "real deficit" could be in the area of $4 trillion, though that seems a bit of a stretch. At the same time, when the $2 trillion figure first made its appearance, I had to blink to make sure I wasn't seeing things.

But back to the bailouts.

In a big-brotherish fashion President Bush proclaimed, "The government intervention is not a government takeover [of the banks]. Its purpose is not to weaken the free market. It is to preserve the free market." And hate is love, war-peace, etc. . . . After all is said and done and the present crisis has dissolved in a sea of paper money, what will be left standing is the bureaucracy created by Messrs. Paulson and Bush. The road to hell, they say, is paved with good intentions.

TARP is no more a temporary measure than Keynes famous view on government deficits which were sold to public in the Roosevelt years as 'temporary.' A more telling quote comes at the end of the article, and it has a chilling tone about it. "I think the government will be a risk manager extraordinaire," said the Brookings Institute's Robert Litan, "they're not going to tell the banks where to lend. But high risk kinds of things, they have the role of saying no, no, not there." If you will recall from an earlier essay, I have some misgivings about the Wall Street-Treasury Department merger.

There is a creepiness (and I am referring to the verb, not the adjective) about all this that kind of leaches to the top as you absorb what has gone on in Washington in recent weeks. The Litan quote above summarizes why many are ill-at-ease.
____________

This time of year (and throughout this gold bull market), I have resurrected from time to time a piece of writing by Edgar Allan Poe which I have always thought of exceptional quality. It comes at the start of The Fall of the House of Usher (a title that has symbolic value in this context) and sets the tone for the rest of the novella. It both chills the temperature and draws the reader in:

"DURING the whole of a dull, dark, and soundless day in the autumn of the year, when the clouds hung oppressively low in the heavens, I had been passing alone, on horseback, through a singularly dreary tract of country ; and at length found myself, as the shades of the evening drew on, within view of the melancholy House of Usher. I know not how it was - but, with the first glimpse of the building, a sense of insufferable gloom pervaded my spirit. I say insufferable ; for the feeling was unrelieved by any of that half-pleasurable, because poetic, sentiment, with which the mind usually receives even the sternest natural images of the desolate or terrible. I looked upon the scene before me - upon the mere house, and the simple landscape features of the domain - upon the bleak walls - upon the vacant eye-like windows - upon a few rank sedges - and upon a few white trunks of decayed trees - with an utter depression of soul which I can compare to no earthly sensation more properly than to the after-dream of the reveller upon opium - the bitter lapse into everyday life - the hideous dropping off of the veil."

Gulp.
Creepy.
Creepy times.
Creepy socialism.
'Tis the season of the witch.
And don't forget . . . a time of year when things have been known to go bump in the night.

I would like to put one erroneous concept to rest. . . .

(10/11/08)

A great many pundits are calling the current financial crisis a breakdown in capitalism. You pick up a financial newspaper, dig just below the surface and there it is - "a crisis in capitalism," "a breakdown in the capitalist notion of free markets," etc. etc.

Time out. . . .

What we have witnessed over the past several months has not been a breakdown in capitalism. Capitalism was shunted aside in the 1930s, when market socialism was introduced in the United States, Europe and elsewhere, never to return.

The current economic crisis is a failure in market socialism. Whatever solutions the world's political leaders have in store for us, you can bet they will have little to do with the free market approach. Instead, capitalism will be blamed as the culprit. A higher degree of market socialism will be promoted as the remedy when, all the while, the real culprit was market socialism in the first place.