"Lenin was certainly right, there is no more positive, or subtler, no surer means of overturning the existing basis of society than to debauch the currency...The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million is able to diagnose." -- John Maynard Keynes
Neither Keynes nor Lenin would have envisioned currency debasement on a global basis yet that is exactly where we find ourselves today. As mentioned in last month's The Gold Owners Guide to 2013, it is as if John Law had been reincarnated simultaneously in every major nation state in the world. At this stage, it is difficult to gauge the potential effects though, as you are about to read, there is plenty of speculation. Though the price of gold remained range bound this past January, global demand for coins and bullion has been anything but restrained. The U.S. Mint reports the highest monthly sales ever for the Silver Eagle in January and the highest monthly total for the Gold Eagle in over two years. Similarly ETF gold holdings are up about 12% since last August reflecting strong interest among financial institutions and funds. Though Keynes was right about currency debasement, he missed the mark on the public's ability to identify the problem. Apparently, a good many understand the problem all too well.
Short & Sweet
Reuters reports that "the Russian central bank will continue to buy gold as it seeks to diversify its foreign reserves away from paper assets it views as risky".......Russia increased its gold holdings in 2012 to 958 tonnes, a significant 8.5% increase...........................Currency Wars author, James Rickards says that "late this year or early 2014, the Chinese will announce 'we've got 3000 tonnes or maybe 4000 tonnes." According to the last report issued by the World Gold Council China's gold reserves are now 1054 tonnes. Chinese authorities have targeted a future national reserve of 4000 to 6000 tonnes.......................Along these lines Stephen Leeb (Leeb Capital Management) says "China could (already) have the second largest gold reserve in the world, even ahead of Germany...They are importing as much as they can without trying to disturb the price of gold. You won't believe what's going to happen. I'm telling you in 3 years people will not believe the price of gold."...........................In the "Gold Owner's Guide to 2013" released last month, I mentioned the global predisposition to print money as one of the disturbing trends to monitor for the new year. That warning was unexpectedly echoed by Bundesbank chief, Jens Weidman, who went public in late January about the dangers of "a politicization of exchange rates."....................My old friend, cartoonist Ed Stein, weighs in on the issue to the left. His cartoon reminds me of Richard Russel's oft-cited dictum (with reference to the Federal Reserve): "Inflate or die!".............."Overall,” says Deutsche Bank, “we believe that the microeconomic environment for gold is turning more positive and forecast prices to exceed $2000 per ounce in the first half of 2013.....We believe the low-interest rate environment is likely to continue to enhance gold's attractiveness given the negligible opportunity cost and longer term fears regarding adequate stores of value and value/wealth preservations."..............George Soros once again upped his position in the SPDR Gold Trust in the third quarter (2012) to $215 million, a 49% increase in his holdings...........................William Kaye who once managed the arbitrage position for Paine Webber and now runs Hong Kong's Pacific Group says, "Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued. We're in the early stages, in our judgment, of what would likely be the world's largest short squeeze in any instrument.".....................Reports of very strong physical gold and silver demand keep cropping from a number of sources in various location around the world......................MoneyNews reports that a handful of billionaires are selling heavily into the latest stock market rally. Warren Buffett, it reports, is selling U.S. stocks at an "alarming rate.".....................Speaking of stocks, Gloom, Doom and Boom's Marc Faber believes we may be approaching a 1987-style bubble-top and crash in the stock market. As a result he says he is "selling shares. . .because euphoria is building.".......................In the "this is bad as it gets" category, Zimbabwe, the country most famous these days for the hyperinflationary destruction of its economy, now has a grand total of $217 left in the government's treasury. In a classic example of understatement, authorities said, "The government finances are in paralysis state at the present moment. We are failing to meet our targets." (Gulp)....................PIMCO's Bill Gross: "The US balance sheet, its deficit, and its 'fiscal gap' is in flames and that its fire department is apparently asleep at the station house." And the transfusion doesn't seem to be reaching the patient...................
The top five riskiest countries in the world are in order Greece, Argentina, Cyprus, Pakistan and Venezuela. The United States, it will surprise many American fiscal conservatives, ranks 65th and is situated among the least risky nations. The Nordic countries are the least risky - Denmark (66th), Finland 67th) Norway (68th) and Sweden (69th).......................Jim Rogers: "If gold goes down – I hope I'm smart enough to buy more. If it goes down a lot, I hope I'm smart enough to buy a lot more."........................Investment banking giant JP Morgan says that gold will trade at $1800 by mid-2013 the result of a mining crisis in South Africa, monetary stimulus in U.S., Japan and Europe and the risk of war in the Middle East......................By the way, with all the talk in the gold industry about the temporary shelving of Basel Accord adjustments to accommodate use of gold as collateral, we forget that J.P. Morgan implemented a "gold as collateral arrangement" with its counterparties in 2011 and is actively marketing the program globally. It is also taking gold as collateral in private loans with wealthy individuals...............In early January, JPM sold $35 million in notes tied to the gold price. The promised yield is three times the gain in the price of gold up to 15.6% with no protection in capital losses due to a decline in the price. By tying the notes to the price of gold, JPM offers an extra layer of protection to bond holders concerned about being repaid in depreciated dollars -- a sign of the times................Anyone remember James Dines? Here's his latest from an interview at King World News: "The function of gold is that of a circuit breaker, protecting against excess printing of paper money that causes an inflation, which steals proportionately more from the poor than it does the rich. The Fed is actually in charge of the blood bank here. In effect, the Fed is Dracula in charge of the blood bank."....................................Also from Dines: "The US gold at Fort Knox, Kentucky, is priced by America at $42.22, which is more 'Alice in Wonderland' fantasies. You can just see how they lie and play tricks, and it's your warning to do something to protect yourself. Adding a little inflation to the economy is wrong. Deflation cannot be healed by applying its cause. So we are headed for a much more serious result of deflation which could become a hyperinflation."........................Michael Belkin, who counsels some of the biggest hedge funds and once worked at top government security dealer, Salomon Brothers, describes the mechanics of money printing: "How this works is the Treasury issues debt, the government securities dealers buy the debt at auction, and then the Fed comes in and buys the debt from the government securities dealers. That's what debt monetization is. So when Salomon Brothers bought $5 billion of the 2-Year Notes at the auction, and then the Fed came in and did a coupon pass and bought $2 billion of that, they credited Salomon's account with $2 billion. That's counterfeited money. That's brand new, high-powered money. I had some mentors that were former Fed officials so I have a pretty cynical view on this whole process.".............From George Milling Stanley formerly the World Gold Council's managing director of government affairs and now an independent consultant: "There is still among most European central banks, even in those that are facing major economic problems, a sense that selling gold would undermine the faith in the government and the country. People feel better about buying the bonds of a country if there is gold that might potentially be unlocked to back them in the event of a crisis happening."................MK
Quote of the month
"You see, Maria, I want to tell you I buy gold because I am fearful. I am sorry to say, Maria, you do not own any gold and you are in grave danger because you don’t own any gold."
-- Gloom, Doom and Boom's Marc Faber in response to CNBC's Maria Bartiromo's asking him why he will never stop buying gold.
Overleveraged governments cause inflationary crisis, flight to gold
"If you look back through time at inflationary crises—from ancient Rome, to Ming China, to revolutionary France and America or to Weimar Germany—you'll find that uncontrolled inflations are caused by overleveraged governments which resorted to printing as the easiest way to avoid explicit default (whereas inflation is merely an implicit default). Some argue that equities hedge against inflation because they are a claim on real assets, but most of the great bear market troughs of the 20th century occurred during inflationary periods. A more obvious inflation hedge is inflation linked bonds, but governments can default on these too. More exotic insurance products like sovereign CDSs, inflation caps, long-dated swaptions or upside yield curve volatility all have their intuitive merits. But they all come with counterparty risk. Physical gold doesn't. Indeed, during the '6000 year gold bubble' no one has defaulted on gold. It is the one insurance policy which will pay out when you really need it to." -- Dylan Grice, Societe General (now with Eidelweiss)
Not to worry
"[Gold is in] a secular bull market. That as long as the central banks, do not take steps, which I do not think they will, to stop printing money, and as long as real interest rates are not positive, the conditions continue to be very good for gold. At some point, either the price (of gold) goes through the roof and the movement becomes parabolic, and that would indicate the end is near, or the central banks change their tune. But they don't seem inclined to do so. So as long as that (money printing) continues I think it's positive for the price of gold. Every now and then it will be weak for whatever reason, but as long as conditions are good one should not worry. I'm not selling any of the gold I own." -- Jean Marie Eveillard, First Eagle Fund
Best analysis of Germany's gold repatriation
"We noted that it is going to take 7 years or 10 shipments a year to move it to Germany. This is odd because it can be done much faster. Are they allowing the banks from which it is being drawn to pull it back from those to whom it has been leased? If this is the case and they have to go out and buy the gold to supply Germany with, will we see the three central banks [the Fed, the Bank of England and the Banque de France] enter the open gold market as buyers of the gold they can’t access in that time or has seven years been decided on because this matches the maturation of the leases? " Julian Phillips, The Gold Forecaster
Editor's note: Of all the commentary I have read on the repatriation of German gold, the one above by Julian Phillips comes closest to my view on the subject. In terms of impact on the market, I rank the decision to repatriate right up there with China's decision several years ago to purchase gold on the open market and keep its gold production within its borders. The two actions together will put a floor under the price as bullion banks responsible for returning gold deposits will likely enter the market on price dips. Phillips takes the discussion a step further:
"As we said above, the move of this gold to Frankfurt will allow time to ensure the central banks where the gold is held, to get hold of the gold if they do not have it at the moment. The prospect of developed world central banks now competing with those of the emerging world in the gold market may well start the next leg of the gold bull market because this new, persistent, price-insensitive buying has the power to take gold to a whole new level! We watch to see. If this does happen, then the whole nature of gold in the money system will change even before the changes are ‘officially’ accepted. Gold will be in a ‘de facto’ pivotal position in the monetary system again. It will be a short time from that point before it is ‘officially’ accepted then. The way will have been paved for China to arrive on the scene and gold to have a vital function in the monetary system between two very different and unconnected, politically and economically, power blocs, the developed world and the emerging world with China as its hub. The last time the world was divided on this basis was at the start of both world wars. The consequences to the monetary world then were so devastating and saw the destruction of national currencies on both sides, in Europe."
Gold follows monetary base over the long run
The Federal Reserve has increased its balance sheet to $3 trillion, and announced that it would continue to add $85 billion per month in various forms of government paper. Federal Reserve assets are important because they add to the monetary base. When people talk about printing money, it shows up in the monetary base. There is a direct correlation over the longer term between increases in the monetary base and the gold price as shown in the chart below.
Gold - a currency without a printing press
"For more than a millennium, gold has served as a store of value and a medium of exchange. It has broadly managed to maintain its real value, even as various currency regimes have come and gone. The reason is that the supply of gold is not at the whim of any governmental power; it is fundamentally supply constrained. Total outstanding above-ground gold stocks – the amount that has been extracted over the past few millennia – are roughly 155,000 metric tons. Each year mines supply roughly 2,600 additional metric tons, or 1.7% of the outstanding total. This is why gold can be thought of as the currency without a printing press.
The downside of gold is that it generates no interest. One ounce of gold today will still be only one ounce next year and the year after that. Because of this, gold is sometimes referred to as a non-productive financial asset, but we feel this characterization is misleading. Rather, we believe gold should not be thought of as a substitute for equities or corporate bonds. These have equity or default risk and therefore convey risk premiums.
Instead, gold should be thought of as a currency, one which pays no interest. Dollars, euro, yen and other currencies can be deposited to receive interest, and this rate of interest is meant to compensate for the decline in the value of paper currencies via inflation. Gold, in contrast, maintains its real value over time so no interest is necessary." -- Nicholas J. Johnson & Mihir P. Worah, PIMCO
Gold and silver bullion coin sales surge end of January
"A massive 7.4 million Silver Eagles were purchased from the U.S. Mint in January, considerably higher than the previous record from early 2011. After halting Silver coin production/sales for over a week, the Mint re-opened yesterday and demand once again surged. Having almost doubled from the first week in January, there remains two more days before the book is closed on January's sales. At 140,000 ounces, the Mint has also sold the most ounces of gold in January in almost three years, suggesting the rising 'currency wars' are stoking people's ongoing rotation from paper-to-physical assets as their 'wealth' slowing loses its value." -- Tyler Durden, ZeroHedge
Bundesbank president talks gold
“Concrete objects have served as money for most of human history; we may therefore speak of commodity money. A great deal of trust was placed in particular in precious and rare metals – gold first and foremost – due to their assumed intrinsic value. In its function as a medium of exchange, medium of payment and store of value, gold is thus, in a sense, a timeless classic.” Dr. Jens Weidmann, President, Bundesbank.
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Twelve years into the millennium - 612.46% return
The year 2012 was the 12th year in a row in which gold rose compared to the US dollar. During this millennium, gold has risen 612.46%, at an average annual rise of 16.72%. This was also the third year in a row in which the world's central banks added to their gold reserves, after decades of being large net sellers of the yellow metal. This cannot be viewed as a normal commodity bull market, but rather as gold slowly returning to its historical role as the universal medium of exchange, store of value, unit of account and ultimate extinguisher of debt. In other words: money. - Dr. Saifedean Ammous, Lebanese American University
$1800, $1900, $2200 per ounce price predictions
With the Bank of Japan now jumping into the money printing pool with the U.S. Federal Reserve and the European Central Bank (ECB), conditions remain ripe for continued purchases by emerging market central banks and individual investors as they all endeavor to retain the purchasing power of their money. Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS, said "Policies of ultra-low interest rates across the Western economies will persist in 2013. This will continue to support investor interest in gold." Klapwijk anticipates gold prices to move back into the $1,800 an ounce range. The London Bullion Metals Association recently said that gold could hit $1,900 an ounce this year. Money Morning's Global Resources Specialist, Peter Krauth, believes it is quite likely gold will see $2,200 an ounce in 2013. The reasons he cites includes the aforementioned money printing and central bank buying of gold along with the supply/demand fundamentals. -- ETF Daily News
The History of Gold
Charles DeGaulle's famous "Criterion" speech
Editor's note: I post this excerpt from Charles DeGaulle's famous "Criterion" speech nearly 48 years to the day from when these words were first uttered at the Palais de l'Élysée. There is an old saying that the more things change, the more they stay the same, and to the modern ear DeGaulle's speech on gold carries the ring of familiarity.
When the Bundesbank, Germany's central bank, announced its repatriation of gold reserves held overseas last month, a number of commentators likened the situation to the assault on the U.S. gold reserve in the 1960s. That "repatriation" of European gold, led by France, laid the foundations for gold's eventual bull market in the 1970s. Six years later, Richard Nixon announced the first formal devaluation of the dollar. It was not long until that devaluation fed through to virulent price inflation.
Today, as this issue emphasizes, most of the world currencies are in the process of being similarly debased. Though the policy is aimed at providing an export advantage, the net result is likely to be a universal reduction of purchasing power for the citizens of each state. In other words, inflation and gold demand could rise simultaneously in most of the richest nations on Earth.
James Sinclair, the widely-read gold commentator, called Germany's repatriation "the most important gold development since Charles De Gaulle called the US hand that it would stand by convertibility." Even the staid Financial Times voiced its approval of the repatriation as a blow for transparency in the gold market. FT ended its report by calling for other central banks to follow suit. At the very least, such copy-cat behavior would strain the gold lending system and add another major locus of physical demand to go along with China's consistent, but still secretive, reserve acquisitions.
What is striking with respect to the Bundesbank's gold repatriation are its stated reasons for doing so, i.e. "to build trust and confidence domestically." Forbes reported one Bundesbank official stating that the "relocation is in case of a currency crisis." One half of Germany's gold henceforth will be stored in Frankfurt; the other half will be split between New York (37%) and London (13%). As DeGaulle points out below, in times of currency turmoil the one criterion a nation state can rely upon is gold. The same standard of reliability, it should be said, applies to the private investor as well.
(Please see "Best Analysis of Germany's Gold Repatriation" above.)
* * * * * * *
The currencies of the countries of Western Europe have today been restored, to such an extent that the total gold reserves of the Six is today equivalent to that of the Americans. They decided to convert all the dollars that they had in their account into precious metals. In other words, the convention that gives the dollar an over-riding value as an international currency no longer has its initial basis, namely the possession by America of the great majority of the gold in the world. But in addition, the fact that a large number of countries accept, out of principle, dollars in the same way as gold to compensate, when appropriate, any deficits that arise to their advantage from the American balance of payments, leads the United States to become voluntarily indebted to foreign countries. Indeed, what they owe them, they pay them at least in part, with dollars that they hold just for these payments, instead of paying them totally in gold, the value of which is real, that you can only possess if you have earned it and that you cannot transfer to others without risk and without sacrifice. This unilateral facility which America has been given contributes to the idea that the dollar is an impartial and international symbol of foreign exchanges being blurred, while it is an appropriate means of credit for a country.
Obviously, there are other consequences to this situation. There is, in particular, the fact that the United States, for want of having necessarily to pay in gold, at least totally, for their negative balances of payment in accordance with the old rules, that required countries to take the required steps, sometimes rigorously, to remedy their imbalance, is suffering year after year from a deficit balance. No less because the total of their commercial exchanges is to their disadvantage. Quite the opposite! Their material exports always exceed their imports. But that is also the case for dollars, exports of which are always in excess of imports. In other words, capital sums are being built up in America, by means of what should really be called inflation, which, in the form of dollar loans granted to countries or to private individuals, are being exported. As, in the United States itself, the increase in currency circulation that results from this makes investments within the country less remunerative, there is an increasing trend there to invest abroad. This leads, for certain countries, to a sort of expropriation of some of their companies. Certainly, such a practice has greatly facilitated, and still encourages to a certain extent, the multiple and considerable aid that the United States is providing to a large number of countries, to be used for their development, and from which we, on other occasions, have ourselves widely benefited. But circumstances are such today that we can even wonder how far the problem would go if the countries that hold dollars wanted, sooner or later, to change them into gold? Although such a general movement would never take place, it is still the fact that there is an imbalance that is, to a certain extent, fundamental.
For all these reasons, France is in favor of the system being changed. We know that France said this, in particular, at the Tokyo Monetary Conference. Given the universal jolt that a crisis in this field would probably cause, we have every reason to hope that the steps to avoid it are taken in time. We therefore believe it to be necessary for international exchanges to be established, as was the case before the world's great misfortunes, on an unquestionable monetary basis, that does not carry the mark of any particular country.
What basis? Indeed, we cannot see that, in this respect, there can be any other criterion, any other standard, than gold. Oh, yes! Gold, which never changes its nature, which can be shaped into bars, ingots or coins, which has no nationality and which is eternally and universally-accepted as the unalterable fiduciary value par excellence. Moreover, despite everything that could be imagined, said, written, done, as huge events happened, it is a fact that there is still today no currency that can compare, either by a direct or an indirect relationship, real or imagined, with gold. Without doubt, we could think of imposing on each country the way it should behave within its borders. But the supreme law, the golden rule — we can truly say — that should be reapplied, with honor, to international economic relationships, is an obligation to make up, between one monetary zone and the next, by effective deliveries and withdrawals of precious metals, the balance of payments resulting from their foreign exchanges.
Source: The World Gold Council; Charles De Gaulle, 1971, 4, pp. 325-342, esp. 330-334. The English translation of this excerpt is drawn from Lacoutre, 1991, p. 381; Excerpt from a press conference of French President Charles de Gaulle at the Palais de l'Élysée calling for the return of a 'gold exchange standard'; February 4, 1965
Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.
Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.
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