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THE
ROCKET SCHOOL OF ECONOMICS


Keep Your Eye on the Ball!
by Professor von Braun

April 8th, 2006

It might well be time to pay attention to what's happening in ALL financial markets right about now. All is not well in monetary land, and paper assets -- such as stocks -- just may have reached the end of the recovery rally from the 2002 lows.

In fact anything that has been going up, whether it be in a bear market rally mode such as stocks or a bull market such as we are seeing in commodities, most likely will take a breather here.

There has been a surplus of cash chasing just about anything that moved to the upside, while CNBC has been targeting the Mom & Pop's with the likes of Jim Cramer's aptly named Mad Money shows airing 3 times a night. Recently he has been touting Poland (can you believe that??) as the next 'hot' market. Yep, right Jim, but for what -- sausage???

The preservation of wealth should be the focus of investors from now on in as the US-based world financial system is over-extended, over-hyped, over-borrowed and over-due for a severe correction.

Commodities are where the action has been for some time, and this is going to continue after a pause, albeit a brief one.

Asset classes need to be re-prioritized, and owning actual commodities in the physical form (as in gold and silver) along with a basket of base metals should be, if it is not already, the number one priority. The safest form of ownership of these metals is to take delivery, thereby providing actual ownership as opposed to a piece of paper that says you own them.

Moving from one currency to another, say from the dollar to the Euro, the Yen, or the Aus dollar, will not provide anywhere near the protection that ownership of the metals will. All currencies are the creation of a fiat money banking system and this requires the 'inflate or die' modus operandi that has been so neatly described by Richard Russell (www.dowtheoryletters.com), so there really is not such a thing as a safe currency. Some may well be safer than others but they all pale in comparison when it comes to ownership of the metals.

Another asset class that needs consideration is rural land holdings that contain mineral rights, preferably with some form of commodity contained within. These could include coal, natural gas, gold, silver, base metals, water rights, trees and agricultural potential.

Where is your cash flow going to come from when part 2 of the bear market that began in 2000 kicks in? Do you know? Have you thought this through? The world is awash with promises to pay, whether they are in the form of retirement programs, mortgages, health care, social security, or credit card debt. But "pay with what?" one must ask.

As mentioned in an earlier article "What Came First?" we will see commodities acting as currencies, which was of course their historical role. The suppression of the gold price has for all intent and purposes ended. It no longer is possible for Central Banks to 'mobilize gold reserves should the price rise' as Greenspan once said several years ago. Apart from the fact that there is a serious disconnect between the supply and demand of the precious metals, there is a more serious disconnect between the amount of US $ denominated IOU's floating around and what there is left that's safe to buy and hold with all of this so called liquidity. The trillions of dollar-denominated paper assets will become more illiquid as time goes by, raising the price of suitable assets accordingly as concern for the survival of the monetary system as it currently appears to be increases more and more.

The suppression of the gold price is not so much an attempt to discourage investment or ownership of the metal as it is a cover up, one which involves maintaining the apparent existence of the monetary fraud that fiat banking systems are at the expense of the very metals that are at the base of their existence.

When a fraudulent system gets out of control it tends to correct back to the starting point which was in this instance when an ounce of gold was worth $20.67 per ounce. Yet the purchasing power of the dollar has diminished by 92 - 95%, or put another way, it now costs 95 times more to purchase the same item. Meanwhile the gold price has so far increased by about 28 times.

Any paper asset that is a product of the fiat monetary system should be treated with caution, while hard assets such as the metals should be seen for what they are -- the base upon which the fiat system was built and no doubt will after-the-fact be rebuilt again.

Paper assets include stocks, all stocks, and this includes gold stocks which are, to begin with, unlikely to escape a serious downturn in stock markets in general. There is also still the unresolved issue of the forward sales programs adopted by several of the larger mining companies. To date margin calls have been conspicuously absent but what happens if gold reaches $1000 per ounce? Share registers of these companies show a large percentage of shares being held by mutual funds, and in a downturn what will they sell first to meet redemptions?

It will likely take several years for the inherent flaws in the current worldwide US-based monetary system to resolve. The demand for commodities may even decrease but they are the building blocks of the industrial revolution we have seen over the last 300 years. Their ongoing usage is crucial in all aspects of daily life. Growing demand from India and China, both of which are going through their own versions of an industrial revolution, will still be there, and supply is diminishing and has been for several years.

Bull markets in commodities tend to coincide with the occurrence of wars, examples being 1913 to 1920, 1942 to 1951, 1972 to 1980 and the current one which kicked off in 2002. Now if the situation in Iraq is not a war I don't know what is. And it appears to be a long way from ending.

Has anybody connected the current shortage of heavy machinery tires reported by several mining industry executives to the current military demand for replacement parts for equipment? Should Iraq ever get with the Bush program and start rebuilding, won't that also require base metals?

On average commodity bull markets, which also could be called periods of currency depreciation, seem to occur every thirty years and last about 8 years which suggests that we have at a minimum about 4 years to go, four years during which the pressures on the fiat monetary system will be intense and its weakness exposed for all to see.

The inherent absurdity of a monetary system that expands by issuing debt which can never be redeemed for anything other than more debt is becoming apparent and this is showing up in rising commodity prices. By this I mean that 'old' money may already be accumulating the metals for their own account.

The 'ball' that one should be keeping ones eye on is the price of both the precious and the base metals and their relationship to paper assets.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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