It's All About Gold

By Greg Hunter’s USAWatchdog.com

At the beginning of this month, the G20 met in France to try to find a way to solve the European sovereign debt crisis. It ended with world leaders in disarray over a way to come up with a solution. At first blush, it appears that nothing of any importance came of the meeting of the 20 leading economies of the world, but that is not the case. It was widely reported the G20 came up with the idea that Germany might put up its gold reserves to back a bailout fund called the European Financial Stability Facility or EFSF. Of course, Germany, with its more than 3,400 tonnes of gold (number 2 in the world), quickly shot that idea down. End of story? Quite the contrary–the gold story is just beginning to get interesting.

You see, the G20 did something accidentally that was very important, and that was confirm that gold has a place in the monetary system, especially in times of extreme turmoil. Why doesn’t the EU use sovereign bonds to back the EFSF? They are considered a store of value and are held as reserves in many European banks. The simple answer is the world is waking up to the fact that debt can’t back up debt. Europe finds itself in a tough spot, and the leaders there know it. Reuters reported Monday, German Chancellor Angela Merkel said, “Europe is in one of its toughest, perhaps the toughest hour since World War Two,” she told her Christian Democrats, saying she feared Europe would fail if the euro failed and vowing to do anything to stop this from happening.” (Click here for the complete Reuters story.) Well, anything but put Germany’s gold up as collateral. Maybe Chancellor Merkel will be the next leader to exit the European stage? Who knows, but what I do know is that gold is once again going to become an important part of the world monetary system.

In a new book called “Currency Wars,” Wall Street insider Jim Rickards examines how countries try to get out of financial trouble by devaluing their currencies. Rickards says, “Today, as yesterday, countries are attempting to devalue their way out of trouble. Following the strategy of beggar-thy- neighbor, the U.S., Europe, China and Japan all want to weaken their currencies. The flaw in the tactic should be clear. “Not everyone could cheapen at once,” Rickards writes. “The circle still could not be squared.” (Click here to read a book review by Bloomberg.) Rickards predicts the U.S. dollar’s future is not bright, and if there were a “catastrophic collapse of investor confidence,” the dollar’s buying power could suffer suddenly and dramatically in a global sell off.

Gold would be the big beneficiary if the dollar declined, and Rickards’ top price for gold per ounce is–wait for it–$44,552! That price is the absolute highest possibility. Rickards and others predict that in the next few years, America will go back on some sort of gold standard. Meaning, the dollar will be backed by gold, butRickards has stated on many occasions that there probably will not be a100% gold backed U.S. dollar. Instead, Rickards contends it will be more in the neighborhood of 40%. If that is the case, then gold would be$17,821 per ounce using Rickards numbers. It appears gold prices are going much higher.

The main factor in determining gold price is money printing, and one of the biggest currency creators on the planet is the Federal Reserve. It created enormous amounts of money in the wake of the 2008 meltdown, and it looks like it is getting ready to unleash mountains of even more cash to stop the impending Euro-land meltdown. This week, St. Louis Fed President James Bullard indicated the central bank would take action if the EU sovereign debt crisis turns chaotic. According to a Wall Street Journal report, “Bullard said that if overseas events worsened significantly, the Fed could respond, saying “the Fed can re-open some of the liquidity facilities that were used during 2008-2009″ to reduce related market disruptions. “It will be fairly clear if some sort of crisis occurs in financial market that causes trust to break down,” it would then be time for the Fed to take action to alleviate the market tumult, he said.” (Click here to read the complete WSJ report.) It looks to me the Fed will be forced to print money to stop another financial meltdown. It is only a matter of time, and time appears short.

Renowned economist Martin Armstrong says, “What this is really about is it’s the entire Western civilization that’s starting to crumble.” In an interview Monday on King World News, Armstrong warned,“Everything is falling apart and the politicians will not address it because it means having to change the system and that’s what they do not want to do. The real big money that I speak to, they are really starting to look beyond Italy, Greece, Spain and Portugal. They are starting to look at France and Germany.” (Click here for the complete KWN Armstrong interview.) Armstrong goes on to say, “They have borrowed year after year with no intention of paying it back. The US had $1 trillion of debt when Ronald Reagan took office in 1980. We are now pressing $15 trillion of debt.” The debt crisis throughout the Western world will push the price of the yellow metal higher even though it is currently range bound. Armstrong says, “Basically what you are doing is you are building a sideways type of base. Eventually gold is going to take off to the upside, but largely when people begin to see the Emperor has no clothes and we’re getting close to that. I would only give it a few more months.”

When the next financial calamity hits, the Fed and other central banks will have two choices. They can print money to try and save the system they love, or let it implode. That means this is really all about gold now.

Original Source

Get Ready for Gold and Silver Christmas Rally

During 18 of the last 22 years, gold has rallied between US Labor Day and Christmas. Will the pattern this year follow the historical pattern? We will analyze the fundamentals, look at some charts and try to draw a conclusion. The charts in this report are courtesy Stockcharts.com unless indicated.

• First a quote by President Andrew Jackson: "Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in breadstuffs of the country. When you won, you divided the profits among yourselves, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out and by the Eternal God, I will rout you out." (Spoken to a delegation of bankers requesting the extension of the 1832 Bank Renewal Act).

Several news items during the past ten days were very bullish for gold. The first was an announcement by the Swiss National Bank that they were planning to buy Euros with Swiss Francs. This action effectively removes the Swiss Franc as a convenient alternative to gold, and it moves the SNB into the camp of the money printers.

The second item concerns an announcement by five major central banks (FED, ECB, SNB, BOJ and BOE), to provide dollar liquidity for a number of European banks that suffer from exposure to Greek banks. This dollar liquidity operation will last until the end of the year and will enable dollar funding for European banks, which were struggling. It shows that the Federal Reserve, the ECB and also British, Swiss and Japanese banks have the will and the ability to cooperate at sensitive times, whenever they feel the system needs a 'nudge'.

Another factor that is very bullish for gold is the current 'negative real interest rate' environment. Regardless of whether we believe the 'official' CPI numbers, or the more realistic numbers provided by Shadowstats.com, anyone with money in the bank, or holding short-term Treasury notes, is losing money to price inflation. 10-year Treasuries are paying a miserly two percent. With inflation at 4.8%, these 'so-called investments' are losing 2.8% of their value over 12 months According to J. M. Keynes, and many other economists, whenever 'real interest rates' turn negative, gold will rise. Keynes called this "Gibson's Paradox", and stated that there are no exceptions.

Finally, the most bullish facilitator of rising gold and silver prices is the supply of money (see chart below).

This chart courtesy Mises.org shows the True Money Supply continues to rise exponentially. A rising money supply is bullish for gold and silver, as it increases the amount of money available for the purchase of precious metals. As long as the Central Banks keep the banking system supplied with money, the banking system will survive. This principle is far more important to the Central Banks than the integrity of the currency. Historically, 'monetary inflation' always causes 'price inflation'. The U.S. consumer-price index (CPI) increased 0.4% in August. That's an annual inflation rate of 4.8%!

The TMS chart also shows that, according to the people as Mises.org, the recession is ongoing (grey area). During recessions, there is less money coming in to government, while expenses such as unemployment benefits, food stamps, welfare payments etc. increase. This in turn causes deficits to rise, and deficits provide energy for gold prices to rise.

Featured is the daily gold chart. Price is carving out a bullish pennant. The supporting indicators are at levels where they have found support many times in the past. The fact that the 50DMA is in positive alignment to the 200DMA (green oval), while both are rising, is bullish. A breakout at the blue arrow will mark the beginning of the next rally.

According to the weekly Kitco survey of gold analysts, a minority 32.1% of the analysts are bullish for this week, 53.6% are bearish and 14.3% neutral. From a contrarian point of view that is bullish for gold!



This chart courtesy Cotpricecharts.com shows commercial traders reduced their 'net short' position to 215,000 from 228,000 last week. The 'up-to-date number' will likely be even lower since the gold price dropped for two days since data for the report was compiled. At 215,000 the commercial traders are at the lowest level since July 8th. On that date gold traded at $1544 and over the next few months price rose up to $1924.

Featured is the GDX gold producers ETF. Price broke out from beneath the 64 resistance level last week (blue arrow), and since then a test of the breakout is the result as the bears press their case. Price appears ready to try again and a close above the green arrow will confirm the breakout and thereby turn the trend bullish. The SIs are positive. The fact that GDX outperformed GLD on Friday is bullish.

Featured is the weekly silver chart. Price is carving out a bullish pennant. The supporting indicators (green lines) are positive with a lot of room on the upside. A breakout at the blue arrow sets up a target at the green arrow. The 50WMA is in positive alignment to the 200WMA (green oval) while both are rising.

The following item courtesy Silverdoctors.com: JP Morgan Allegedly Telegraphed Silver Price Smashes Using Massive FAKE TRADES on Saxo Bank Platform

The class-action lawsuit against JP Morgan alleging silver price manipulation has exposed several shocking revelations regarding JP Morgan's alleged price suppression of silver- including the PURPOSE of major smash-downs occurring in the hours leading up to options expiration.

The suit alleges that JPM orchestrated monthly options-expiry smash downs with the express intent of blowing up the "delta" risk of holders of short, far-out-of-the money options, suddenly forcing them to cover their positions, thus handing JPM silver futures positions at prices far below market prices only minutes prior.

The suit also alleges that JPM made over 25 massive FAKE TRADES using Saxo Bank during sparse Globex evening hours prior to major silver raids for the express purpose of TELEGRAPHING AN IMPENDING SILVER SMASH TO THEIR BUDDIES!

Summary: Gold and silver are less expensive today than they were in 1980 due to the fact that there is far more paper and digital money in existence today than was the case in 1980. According to the inflation calculator provided at USinflationcalculator.com (using data supplied by the US government), the price of gold would need to rise to $2336, to match the inflation adjusted price of $850 (the 1980 peak). In the case of silver the price would need to rise to $137 to match the inflation adjusted price of $50 (the 1980 peak).

The most bullish fundamental for gold and silver is the fact that there are now 2.5 billion people who were not around in 1980. Most of these people live in China and India. By coincidence these people live in a country where the economy is growing and furthermore they love silver and gold!

Conclusion: Based on the observations presented in this report the expectation is that the annual Christmas rally in gold and silver is 'right on course'.

Happy trading!

By Peter Degraaf

Physical Gold Hoarding, Global Demand to Produce Undeliverable Futures

Source: Seeking Alpha

As we've noted several times over the past several weeks, the fundamental backdrop of precious metals market remains extremely firm with a plethora of global monetary and fiscal issues producing massive tailwinds for both gold and silver, and we continue to believe long precious metals remains the best bet in all financial markets at this time. What we'd like to add to this thesis now is that we believe sometime over the next 6-12 months, we will in fact see gold futures become undeliverable as demand for physical gold bullion far outstrips available supply (i.e. long gold futures holders looking to take delivery at expiration will not be able to take delivery due to insufficient supply).

We believe this scenario will take hold due to significant hoarding of physical gold bullion by literally every type of major market participant from global central banks, hedge funds, endowment funds, investment banks, all the way down to the retail investor which will in our opinion produce a massive supply shortage relative to demand. Note when central banks (biggest buyers of precious metals at this time) take delivery of hundreds of tons of physical gold, this supply will not see the light of day for years as central banks are now clearly committed to diversifying out of major fiat currencies (i.e. this gold investment is not a trade, but a long-term investment). Secondly, with demand for gold and silver remaining extremely high due to ongoing eurozone sovereign debt/banking issues, potential U.S. credit downgrade, voracious demand out of China as it looks to up its gold allocation of foreign exchange reserves from 1.7% to likely 10% , and most importantly the threat of continued dollar printing by the Fed (aka QE3) in order to stimulate an economy which has yet to show any signs of achieving sustainable growth, we expect demand for physical gold will significantly outpace supply sometime over the next 6-12 months and produce a major parabolic move in both gold and silver with gold likely to hit $2,700-3,000/oz, and silver $60-65/oz.

We really see no way around this thesis coming to fruition as we believe large amounts of physical gold continue to be taken off the market every single day by major long-term investors, and moreover we see demand for physical gold continuing to increase at an extremely rapid pace such that prices must invariably go significantly higher from even these elevated levels.

Disclosure: I am long GLD, SLV.

Most American's Don't Believe the U.S. Dollar Will Collapse

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price.

As you scroll through the currencies below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born.

So what’s the one word for the “thousand pictures” below? Worthless.


Yugoslavia – 10 billion dinar, 1993


Zaire – 5 million zaires, 1992


Venezuela – 10,000 bolívares, 2002


Ukraine – 10,000 karbovantsiv, 1995


Turkey – 5 million lira, 1997


Russia – 10,000 rubles, 1992


Romania – 50,000 lei, 2001


Central Bank of China – 10,000 CGU, 1947


Peru – 100,000 intis, 1989


Nicaragua – 10 million córdobas, 1990


Hungary – 10 million pengo, 1945


Greece – 25,000 drachmas, 1943


Germany – 1 billion mark, 1923


Georgia – 1 million laris, 1994


France – 5 livres, 1793


Chile – 10,000 pesos, 1975


Brazil – 500 cruzeiros reais, 1993


Bosnia – 100 million dinar, 1993


Bolivia – 5 million pesos bolivianos, 1985


Belarus – 100,000 rubles, 1996


Argentina – 10,000 pesos argentinos, 1985


Angola – 500,000 kwanzas reajustados, 1995


Zimbabwe – 100 trillion dollars, 2006

So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.

With that in mind, consider the following:
Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” On our current path, analyst Michael Murphy projects we’ll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” This year’s U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve’s creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don’t know how – or don’t wish – to keep the currency strong.

Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the possibility of the greenback being added to the above list grows every day. And this will lead to serious and painful consequences in our standard of living. While money is only one of many problems we’ll have to deal with, you can protect your assets with the one currency that can’t be debased, devalued, or destroyed by irresponsible leaders.

Don’t be the investor who dismisses this message from history. Use gold (and silver) as your savings vehicle. Any excuse you have now will be meaningless and irrelevant when we enter that fateful period. Make sure you own enough precious metals to make a difference in your portfolio.
Because when it comes to money, worthless is not a fun word.

[Owning physical gold is good protection from the sinking value of the U.S. dollar; investing in the right gold miners can yield even higher returns. BIG GOLD focuses on the larger miners that have strong profit potential, and will help you build your wealth. Give it a ninety-day risk-free trial. Details here.]

© 2011 Copyright Casey Research - All Rights Reserved

Gold: Independent Money

Gold and Silver: We Were Right - They Were Wrong

Submitted by Brandon Smith of Alt Market

Only now, after three years of roller coaster markets, epic debates, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway. Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).

Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse: http://krugman.blogs.nytimes.com/2011/07/19/the-glenn-beck-debeers-connection/

To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/13/AR2010061304881.html?hpid=topnews

So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.

Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.

Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Debt Ceiling Debate A Final Warning Sign
If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.

Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”

What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.

If the U.S. defaults after August 2^nd, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”: http://www.reuters.com/article/2011/07/22/us-greece-iif-idUSTRE76K6VX20110722

With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.
Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly.The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.

Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.

If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma: http://news.yahoo.com/obama-officials-clash-p-over-downgrade-threats-200358261.html

Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+: http://www.bloomberg.com/news/2011-07-18/egan-jones-cuts-u-s-rating-to-aa-on-spending-cut-concern-1-.html

Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the Greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions): http://uk.reuters.com/article/2011/07/24/china-iran-oil-idUSLDE76N0DJ20110724

So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.
This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.

What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…

European TARP?
The MSM blatantly glossed over the EU decision on the latest Greek bailout, as many pundits heralded the plan as decisive action on the part of Europe. But, what was the EU solution to the possibility of Greek default? In the end, their solution was to LET GREECE DEFAULT! Brilliant!
http://blogs.reuters.com/felix-salmon/2011/07/21/greece-defaults/

EU proponents of the plan for Greece are calling the solution a “selective default”, which I suppose, is meant to make it sound less default-ish. However, this is, indeed, a default, and many Greek bondholders are going to lose substantial sums of money as the Greek government decides who they are going to pay back, and who they are going to give the finger. Strangely, this plan also includes the creation of a kind of European Monetary Fund, or a European TARP. This means a broader strategy is being put into motion that involves continuing bailouts and fiat injections of Euros, not just into Greece, but into other countries as well, including Ireland, Portugal, Spain, and even Italy: http://www.zerohedge.com/article/goldmans-complete-summary-european-council-decisions

Extended printing of Euros means devaluation, and devaluation means greater international interest in gold and silver. The EU Council plan is a blinding flashing neon sign telling us to BUY PRECIOUS METALS, while we still can.

Stock Market Facade Is Over And Inflation Is Here
The “great bull run” over the past two years has been somewhat successful in fooling a certain percentage of Americans into believing all the recovery talk was real. The fundamentals, though, show that this run is entirely fabricated. Besides a static real unemployment rate of around 20%, housing market hellfire, and crushing inflation in commodities, trading volume in stocks is also at a three year low: http://finance.yahoo.com/news/Wheres-the-volume-Stock-apf-2486403790.html?x=0&sec=topStories&pos=4&asset=&ccode

This means that the overall value of the Dow is being driven by a much smaller pool of investors. A smaller pool of active investors means a more volatile market, with a greater chance of wild swings or inflated values. This lack of stock participation also leads one to question the validity of the bull run as a whole. What, we might ask, has really been holding the markets up for so long, if so few people are feeding the machine?

We must keep in mind that since the credit crisis began the Fed has held interest rates at near zero.That’s almost 3 YEARS of near zero interest rates; far beyond the predictions of many mainstream analysts. The reason? Easy fiat from the Fed is the only thing keeping markets alive. Without it, they would crumble. We hear only of the fiat pumped into the system through bailouts and quantitative easing, but rarely do we hear about all the printing that goes on in-between these public events. The extent of Fed currency creation is made more apparent by the St. Louis Fed’s Adjusted Monetary Base:



According to the Fed publication ‘Monetary Base In An Era Of Financial Change’, the AMBSL is an index measuring the central bank balance sheet, including open market operations, statutory reserve requirements, and foreign exchange market interventions. The index, though, includes only what is reported by the fed, and without an audit, it is impossible to determine its accuracy. In all likelihood, it actually under-reports the amount of fiat being flooded into markets.

Can the Fed prop up the markets forever? No. The volume versus value conflict is too revealing, and I believe we have reached a point at which the weight of negative data is preventing any further significant climbs in the Dow even in the face of manipulation. A kind of critical apex is created; a point at which two forces once balanced meet and derail each other. Stocks, at this time, are very vulnerable, especially when they are supported by a central bank induced fiat framework.

When investors realize that the bull run is fake, not to mention over for a very long time, that dollar devaluation is a certainty, and that bonds are a deathtrap, where will they turn to protect their savings? That’s right…gold and silver. The price potential for metals going into the final half of 2011 is extremely high. Lows can strike abruptly, and they do often under such volatile circumstances, but unlike MSM talking heads, we look well beyond week to week progressions. The long term trend is really what matters, and the long term trend for gold and silver has been impressively positive.

To those who chose not to take my advice over the past three years, or the advice of countless other alternative analysts and economists, I can only say we stand by our record. Our purpose is to help you secure the safety of your buying power as much as possible in these dangerous days. That is all.It is not too late to establish a foundation in precious metals, and it is not too late to accept the reality of our country’s quandary. Warnings, though, are just a small window in time, and they are only useful, so far as they are heeded.

Original source

Dollar seen losing global reserve status

By Jack Farchy in London

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.

More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.

The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet.

“Right now there is great concern out there around the financial trajectory that the US is on,” said Larry Hatheway, chief economist at UBS.

The US currency has slid 5 per cent so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies.

Holders of large reserves, most notably China, have been diversifying away from the dollar. In the first four months of this year, three quarters of the $200bn expansion in China’s foreign exchange reserves was invested in non-US dollar assets, Standard Chartered estimates.

The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers.

Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.

The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.

The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.

Copyright The Financial Times Limited 2011.

http://www.ft.com/cms/s/0/23183a78-a0c6-11e0-b14e-00144feabdc0.html

Get Out of Stocks - Mike Maloney

Ron Paul Says Sell Gold to Pay Down National Debt? No Chance

From Mish's Global Economic Trend Analysis:

People have been sending me an article all evening that says Ron Paul proposes selling gold to pay down the national debt. The article is nonsense and it took me all of 5 seconds to spot the error.

Somehow the New York Sun confused Ron Paul with some clown I have never heard of named Ron Utt, or the Sun misrepresented a statement Paul made.

Please DON'T consider Selling Gold at Fort Knox Emerges as Next Big Question in Debate on Federal Debt Limit

The next big question on the federal debt limit could be whether to start selling the government’s holdings of gold at Fort Knox — and at least one presidential contender, Ron Paul, has told The New York Sun he thinks it would be a good move.

The question has been ricocheting around the policy circles today. An analyst at the Heritage Foundation, Ron Utt, told the Washington Post that the gold holdings of the government are “just sort of sitting there.” He added: “Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak.”

His comment came in the wake of not only the government having reached the statutory debt limit of $14.29 trillion but also the release of a report by the Heritage Foundation of a report on asset sales. The report outlined how a “partial sales of federal properties, real estate, mineral rights, the electromagnetic spectrum, and energy-generation facilities” might garner the federal treasury $260 billion over the course of the next 15 years.

Amazingly this nonsense is circulating, and even more amazing is the fact that several bloggers believed the story.

The most ridiculous of the lot comes from Trader Dan's Market Views

Those of you out there who believe that Ron Paul can do no wrong, would be well advised to read his comments proposing that the US sell some of its gold reserves to pay its debts.

Chalk up a hair-brained idea from the Congressman from Texas. While we are at it, why not just sell off the Brooklyn Bridge, Yosemite, Yellowstone and the Everglades. And to think that I actually believed he was very solid on monetary matters.

The Republican party, which by the way has control of the House of Representatives, could simply refuse to raise the debt limit and insist on obtaining strict spending cuts to get the US economic house in order but that would require something that most of our elected representatives do not have. AFter all, all spending bills are required to originate in the House. If the House does not approve the spending bill, the money cannot be spent.

Instead the proposal reeks of the same sort of desperation seen by spendthrifts who end up scouring their old dresser drawers and boxes in their closets looking for family heirlooms and other valuables to go hock at the local pawn shop. The very fact that this idea is actually floating around out there fills me with complete disgust and disdain for the political class. These damn fools spent us all into the toilet and now are considering having to sell what belongs to the US citizenry to cover their rear ends.

Ron Paul--Buy Gold



The above video is the real Ron Paul. I sense a huge apology coming from the New York Sun and others who actually believed this Ron Paul sell gold to pay down the debt story.

The US dollar should be backed by gold and Paul has advocated a 100% gold backed dollar. That is vastly different than selling gold to pay down the national debt. How can you have a 100% gold backed dollar if you sell all the gold?

Either the Sun has confused Paul with Utt or it has confused what Paul is saying, and so have others that bit on the story.

Addendum:

I have read the Sun article several times now looking for other possibilities. The only other thing I can come up with is the possibility Paul may have said something to the effect of wanting the government to mint and sell more gold coins, but that does not equate to selling gold reserves to pay down debt.

Thus, I keep coming back to the thesis that the Sun is inadvertently mixing statements of Ron Paul with Ron Utt or the Sun has misinterpreted or worse yet, hugely misrepresented a statement Paul said.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Silver Price: The Least You Should Worry About

By Jeff Clark, BIG GOLD

I heard some disturbing reports about silver supply last month that I felt every investor should know. And while precious metals are currently in correction mode, the long-term concerns with supply won’t disappear anytime soon. In attempt to get a handle on the bullion market, I spoke to Andy Schectman of Miles Franklin, who has contacts that run deep in the industry. What he sees everyday might just compel you to count how many ounces you own…


Jeff Clark: Andy, tell us about your industry contacts and how you get the information you're privy to.

Andy Schectman: We source our product from three of the largest six primary U.S. mint distributors. Having 20 years of experience with these sources, as well as the dealers in the secondary market, we're as tied into the industry as anyone.

Jeff: You made some interesting comments to me about supply and premiums. Tell us what you’re hearing and seeing in the bullion market right now.

Andy: I feel as though I'm the boy who cries wolf or that I've been beating the same drum for too long. But in reality, it has been my feeling since late 2007 that ultimately this market will be defined less by the price going parabolic – which I think ultimately will happen – and more by a lack of supply. You see occasional reports that state it’s just a lack of refined silver or lack of silver in investable form. But as far as I'm concerned, there is a major supply deficit issue, and it’s getting worse.

Take the U.S. Mint, for example. Right now, as we talk, you can barely get silver Eagles. We’re seeing delivery delays of three to four weeks, and premium hikes of a dollar or more in the last three weeks. Most of the suppliers in the country are reluctant to take large orders on silver Eagles because they don’t know (a) when they’ll get them, and (b) what the premiums will be when they arrive.

I was talking to the head of Prudential Bache and asked him about silver Eagles. He said, "You know, as soon as the allocations come in, they’re sold out. We can't keep them in." This is coming from one of the largest distributors of U.S. Mint products in the country.

And this is all occurring in an environment that has only minimal participation by the masses. Few people in this country have ever even held a gold or silver coin. So, if it's this difficult to get bullion now, what's it going to be like when it becomes evident to the masses they need to buy? This is what keeps me up at night.

Jeff: Some analysts say it's a bottleneck issue, that the mints have enough stock but just need more time or more workers to fabricate the metal into the bars and coins customers want.

Andy: No, I don’t believe that. What business do you know that if they had that much profit potential wouldn’t increase production and hire more workers to meet demand? To me, the “inefficient model” argument is an excuse.

Look at what the U.S. Mint alone has done: they haven’t made the platinum Eagle since 2008. They make maybe one-tenth as many gold Buffalos as they do gold Eagles. They’ve made hardly any fractional-ounce gold Eagles. Heck, they can’t even keep up with the demand for the products they do offer. Does that sound like a bottleneck to you? Or is it because there is far more demand than there is available supply? It’s pretty clear to me it’s the latter.

Jeff: What are you seeing in the secondary market; are investors selling bullion?

Andy: There is no secondary market. Absolutely none. Nobody is selling back anything, at least not to us. Think about that: if this was a traditional investment and your portfolio went up 100% in the last year, like silver has, you’d think some investors would take some profits and ride the rest out – but nobody’s selling anything.

This is why I think the lack of supply is the single biggest issue in this market. And in time, I think it will become much more obvious. [Ed. Note: We’re using the term “secondary market” in this instance to mean sellers of bullion and not the scrap market.]

There are only five major mints – U.S., Canada, South Africa, Austria and Australia. Yes, there is a Chinese Mint and a couple Swiss Mints and some private refiners, but they amount to very little in the overall scheme of things. We’re in a situation where the mints are limiting the selection and raising the premiums, and this is occurring at a time when most people own no bullion. As it becomes more apparent that people want bullion instead of paper dollars, I think you'll see premiums go parabolic and supply get even tighter.

Jeff: Are you getting a lot of new buyers to the bullion market?

Andy: More than ever. One of the interesting things we’re seeing is a lot of younger people dipping a toe in the water, buying little bits of silver here and there. We’re also seeing bigger orders, as well as more frequent phone calls from financial advisers asking us if we can help their clients. So yes, the base is broadening.

Jeff: That's very interesting. So are you seeing more demand for gold or silver right now?

Andy: 90% of the new business is in silver. And I think that’s indicative of the state of the economy. People are trying to get into precious metals, but they think gold is too high. I think they’re buying silver because they realize the fundamentals for owning gold also apply to silver. They think the profit potential is better in silver, too. This has actually made the supply for gold better than it is for silver right now, and a lot of that has to do with price.

Jeff: Why are premiums fluctuating so frequently?

Andy: Premiums are almost impossible to gauge right now. Because the availability of product is getting smaller and smaller and the demand is getting stronger and stronger, premiums are changing literally overnight. And it doesn’t take many large investors around the country to force premiums higher.

The net of this is that it's really hard for us to be able to say what the premium for a specific product will be two weeks out.

Jeff: You mentioned increased interest from fund managers. Tell us the kind of comments you’re hearing and why they’re buying bullion.

Andy: I think it’s coming from their clients. It’s my impression that people are taking it upon themselves to study a little bit more, to be more accountable for their assets, and I think they’re telling their financial advisors to buy gold. And in some cases it’s because they don’t want a paper derivative.

It’s no secret that financial advisors don’t like gold and silver. Once money goes to a bullion dealer, it’s not coming back to a stock portfolio anytime soon, so they discredit it. But now it’s my impression they’re being asked by their clients to buy it. So it’s not necessarily because the financial advisor wants gold as much as it is the client requesting it.

Here’s a good example. There’s a firm here in Minneapolis that represents the Pillsbury fortune, and they asked me to talk to their partners about precious metals a few months ago. At the end of the conversation they said, "Okay, we're going to place an order for one of our clients.” Upon hearing it was for one client, I thought it would be in the range of $50,000 to $100,000. Well, the order was for $5 million.

There are two astonishing things about this. First, that’s twice as big as the largest order I've ever had. It was one order, for one client, who’s brand new to the market. How many more potential buyers are out there like that? Second, they made it abundantly clear to me that it was out of pressure from one of their clients that they sought me out. So clients are increasingly demanding bullion, regardless of what their financial advisers say.

Jeff: Hearing about all this new buying might make some think we’re near a top in the market. Could that be the case?

Andy: No, no [chuckles]. I think Richard Russell says it best: "Bull markets die of exhaustion and overparticipation." Well, we’re nowhere near that point when so few people in this country own gold and silver. Heck, I’m a bullion dealer, and most of my peers don’t own any gold and silver! Yes, you're seeing more commercials, but there are just as many commercials to buy gold as there are to sell it. I think that’s an indication this market is not exhausted.

Remember that in the year 2000 everyone and his brother had some NASDAQ shares. That’s an example of an exhausted or overparticipated market. We’re nowhere near that.

Jeff: Where are the best premiums for silver?

Andy: The very best buy in silver right now is junk silver. And by the way, I think the term “junk” is unfair. It isn't junk anymore. It used to be junk in the ‘90s when silver was 3 or 4 bucks an ounce and it was sold basically at melt value and carried no premium. So I’d call it “90% dimes and quarters.” Anyway, junk silver has the lowest premium right now and, in my opinion, offers the best upside potential.

Next would be 10- and 100-ounce silver bars. And then one-ounce silver coins – but the Eagles are very expensive at the moment, if you can get them. The Austrian Philharmonic has the best value in a one-ounce silver coin right now, and they’re available. But again, premiums for all silver coins are escalating.

Jeff: What about gold?

Andy: Gold is not as bad. In fact, I would say that gold availability is decent right now for one-ounce coins and bars. There isn’t much available in fractionals. And Buffalos are still kind of hard to get. Other than that, the one-ounce coins with decent availability are Canadian Maple Leafs, Australian Kangaroos, and Krugerrands. And they all have decent premiums.

Jeff: So the take-away message is what?

Andy: First, I think you said it best with your recommendation to “accumulate.” Not only will it smooth out the volatility in price and premiums you pay, it will also give you a bird in the hand. If I'm right about this market, and I really believe I am, it will be defined by lack of availability of refined product. To combat that, just accumulate month in and month out, and be thankful when you're able to get what you want.

Second, it’s about the number of ounces you own. You want to get as many ounces as you can without being penny wise and pound foolish. Stick with the most recognized products – don’t buy 1,000-ounce bars, for example, because they’re illiquid. You want to maximize your liquidity, and you do that by buying the most common forms of bullion – one-ounce coins, bars, and rounds; 10- and 100-ounce products; and junk silver.

Last, keep in mind that premium and commission are two different animals. Commission is what the dealers make on top of the premium. Premium is what the industry bears. So if the U.S. Mint is selling silver Eagles for $3 over spot to the distributors, that's before they’re marked up to the public. So even though the “premium” is high, you're actually going to get most of that back when you sell. [Ed Note: It’s not uncommon for the buyer to recapture most of the premium when they sell, particularly during periods of high demand.]

So, buy gold and silver while it’s available, even if you don’t buy it from me, because if I'm right, getting it at all could soon be your biggest challenge.

Jeff: Thanks for your insights, Andy.

[We just concluded our spring Casey Summit, "The Next Few Years," a truly blockbuster event that included detailed investment recommendations from 35 of the most successful experts. We covered all facets of precious metals, energy, interest rates, the economy, real estate, and more. It's the single best way to prepare both your finances and family for what's ahead. You can catch every minute of the entire Summit with a full 20-hour audio CD set, available here.]

The Heavens Declare the Glory of God

Psalm 19
1 The heavens declare the glory of God,
and the sky above proclaims his handiwork.
2 Day to day pours out speech,
and night to night reveals knowledge.
3 There is no speech, nor are there words,
whose voice is not heard.
4 Their voice goes out through all the earth,
and their words to the end of the world.
In them he has set a tent for the sun,
5 which comes out like a bridegroom leaving his chamber,
and, like a strong man, runs its course with joy.
6 Its rising is from the end of the heavens,
and its circuit to the end of them,
and there is nothing hidden from its heat.
7 The law of the Lord is perfect,
reviving the soul;
the testimony of the Lord is sure,
making wise the simple;
8 the precepts of the Lord are right,
rejoicing the heart;
the commandment of the Lord is pure,
enlightening the eyes;
9 the fear of the Lord is clean,
enduring forever;
the rules of the Lord are true,
and righteous altogether.
10 More to be desired are they than gold,
even much fine gold;
sweeter also than honey
and drippings of the honeycomb.
11 Moreover, by them is your servant warned;
in keeping them there is great reward.
12 Who can discern his errors?
Declare me innocent from hidden faults.
13 Keep back your servant also from presumptuous sins;
let them not have dominion over me!
Then I shall be blameless,
and innocent of great transgression.
14 Let the words of my mouth and the meditation of my heart
be acceptable in your sight,
O Lord, my rock and my redeemer.

Robin Griffiths - Silver Could Eclipse $450, Gold $12,000

King World News

With gold over $1,500 and silver around the $35 level, today King World News interviewed one of the top strategists in the world, Robin Griffiths of Cazenove. Cazenove is one of the oldest financial firms on the planet and is widely believed to be the appointed stockbroker to Her Majesty The Queen. When asked if this time around silver will eclipse the 38 fold up-move which took place in the 70’s Griffiths replied, “Yes, I think getting to $50 was a slam dunk certainty, you test the old all-time high. We now have a consolidation for let’s call it two months and I think then we are going to go on up because the paper monies are still being printed.”

Griffiths continues:

“I’ve got it (silver) as a ten bagger from current levels. You don’t want to be wobbled out here because of a few champagne bubbles. You want to be able to stay with and add to your long-term holdings. Bulls (bull markets) are very successful at wobbling people out at the wrong time.”

When asked if his $350 target was a realistic price level for silver Griffiths stated, “That is absolutely not unrealistic. If you adjust the old all-time high for inflation...that gives you $450 for silver. Then you add in the fact that they are printing money, you can take it higher than that without any difficulty at all.”

When asked about gold specifically Griffiths remarked, “The run-up to the peak in markets like gold is between now and 2015. I think it will all be over by 2015, a lot of it depends on how aggressively paper monies get printed from here on in. I think $3,000 is an absolute minimum target. I can believe in targets certainly above $5,000 and it’s theoretically possible to go to $12,000, that’s dollars an ounce for gold.

If Mr. Bernanke stays on his current agenda I think those higher numbers will be what you will see. We’re looking at the trashing of the dollar. As Marx pointed out, it’s the most assured way of destroying your economy.

There’s a book called ‘The Road to Serfdom’ by Hayek, pointing out that when a country is in debt, getting deeper into debt as Lord Keynes said, ‘Doesn’t work.’ All it does it make the problem worse and it takes longer to solve.

We’re moving away from the dollar being the main reserve currency on the planet...We’re going to move into an era where world trade is done in mixes of renmenbi, rupees and baskets, and the baskets of currencies will need to be weighted by something can’t be printed like gold.”

Gold Daily and Silver Weekly Charts - Currency Wars

Jesse's Café Américain



With five margin increases in ten days, one could suggest that the CME and their do-nothing friends in the CFTC are machine-gunning the lifeboats, and the refugees from the currency wars.

There is no problem with the exchanges and regulators increasing margin requirements per se, and of course restraining leverage is a good thing. I would just like to see it done more transparently and in a 'rule-based' manner, as opposed to the ad hoc, cronyistic way in which it is done today, most often for the benefit of insiders who control the exchanges, and call for help and rule changes when they get in trouble. And they get into trouble through lax regulation and excessive leverage.

There are 'crash' silver calls down to below 30 to 22 abounding. Keep in mind I sold my short term silver trading positions last week, and was short term bearish. I have just started buying back in to gold and silver yesterday and a little before with hedges. Also bear in mind that this decline is accompanied by a sell off in equities as we had suggested it would. Hence our hedging strategy has worked.

People ask, why do not the sovereign silver and gold bulls, the BRICS, fight this? The answer is that they are long term bullion buyers, and this short term paper strategy benefits them greatly.

I think the comparisons to the Hunt Brothers silver bubble might be a bit difficult to sustain, very big picture to the point of meaninglessness. The circumstances between then and now are very different, with the only thing in coincidence being the technical price action. But a concentrated effort by the government and the banks could write history and draw the graphs to suit themselves.

I think there is more to this than meets the eye. It really centers around a major struggle with regard to international currency, and the methods by which countries denominate their trade, and store the liquid reserves portion of their wealth. This is a currency war.

Certainly there are almost no bull calls for the precious metals here, and only a few neutrals. I am changing from short term bearish to neutral, and holding new light positions, most of them revolving around a few 'special situations.' I am neutral, which implies uncertainty. When in doubt, stay out.

I have touched none of my long term positions.

Let's see how the Non-Farm Payrolls number looks, and how it is received. If there is a liquidation panic in the weeks ahead, then all bets are off of course.

This is going to pivot on the stock market and the Fed's short term liquidity actions. The market swings are being triggered by the opaque and irregular management of the markets and the money supply, and the fraud which still taints much of the financial system. Even the staid Economist magazine is questioning US government economic statistics.

The American oligarchs may be having their own Mubarak moment in the not too distant future.

What has been hidden will be revealed, and what has been whispered will be shouted from the rooftops.

But one day at a time, so let's see what happens tomorrow.

Can I sell my gold and silver?

Sponsored Post by Lear Capital

Gold prices seem to be setting new highs daily. Of course those would be highs not adjusted for inflation or debasement of the dollar. If we were to set real highs, we would have to see gold prices rise near $2400 per ounce - maybe higher! Obviously, a dollar today is worth far less than a dollar was in 1980 when gold and silver hit long-standing record highs of $850 an ounce and $54 respectively.

Just to help you put things into perspective, in 1980 a postage stamp was $.15 cents, a gallon of gas was $1.25 and the Median Household Income was $17,710.00. Our entire Federal Debt was just $909.1 billion and government spending was a paltry $590.95 billion. Here's one more little tidbit, the Dow reached a high of 1000 and a low of 759.

These things considered, it's no stretch to say gold would have to triple its 1980 record high in order to claim the title of, "New Record Holder". Of course, most realize the $850 an ounce price marked the end of a bubble. Gold prices, as did silver, made parabolic moves higher and then quickly dropped off their highs to enter a new age of easy credit, higher wages and economic expansion. Thank you Ronny.

Is that what gold and silver investors have to look forward to again? Reaganesque growth? The stigma attached to precious metals investors is that they hope for doom, economic collapse, hyperinflation, currency failure and every other kind of market debacle. I believe the contrary. I believe precious metals investors would gladly trade gains from higher metal prices for a return to the days when real estate had value, stocks were constantly driving to new highs and jobs were plenty.

Enter budget, deficits and debt. The prospect of a return to utopia seems to grow weaker each day. Hence, more gold and silver are being bought - not less! So when do we sell? Have prices topped? Is it time to liquidate and take profit?

If we believe gold's 5000 year history as a preserver of wealth, we have to begin to compare the gold price to the markets and weigh its value in comparison to our Federal Budget our deficits and our debt. Are precious metals now working to preserve wealth? This is where it gets interesting.

Let's take the Dow for example, to buy an equivalent position in the Dow today as existed in 1980, it would cost you 12 times as many dollars.

Note: The Dow is a very convoluted and subjective measure. The Dow components themselves are subject to change by committee in order to better reflect current economic conditions. In fact, did you know GE is the only remaining of 11 original components? Then, in order to account for things like stock splits, additional calculations are made to keep the measure accurate. See this link for a complete explanation on the History of the Dow.

As we relate today's gold price to the Dow, you see why some say gold could be trading as high as $10,000 an ounce in order to pace growth in the Dow average. If we look at budgets and debt, the case for gold at an even higher price per ounce can be made. Today, Federal spending is 6 times what it was in 1980 and debt - which we could reasonably argue should pace inflation and debasement of the dollar - is nearly 16 times greater. . . and rising!

Now to the question, "Can I sell my gold and silver?"

Obviously it's a question I hear more often as prices move higher. I believe that is a question each person has to answer for themselves. I usually ask some questions in return, "Do you need the money?", "If you sold, what would you put the dollars in?" . . . and, "Why did you decide to own gold and silver to begin with?

Let's keep in mind that, really, very few individual investors own either gold or silver. (See this previous report that puts into perspective the actual size of the metals market in comparison to world financial markets.) The price has risen because central banks are buying it, countries are buying it and huge investors who see the collapse of currencies on the horizon, are all buying gold. Do you think just because gold and silver have climbed this far, (not even to inflation adjusted highs) that those big players are licking their chops to sell?

When I ask the question, "Why did you decide to own precious metals to begin with?" the answer is usually something to the effect, when the world money collapses I want something real as protection. Bingo! That is the same reason central banks and countries like Brazil, Russia, India and China (others too) are all buying gold and silver. As far as I can see, there has been no real currency collapse to this point. We still print it, spend it and use it to pay our bills and buy things. Hyperinflation is at bay. The illusion is alive.

So, if the purpose for owning gold and silver and other precious metals is to protect against collapse, wouldn't selling it now defeat the purpose? And if currencies do not collapse? Then great, the plan to print our way out of depression and collapse worked and we can all go back to work, borrow some money and speculate in real estate again.

Freegold Theory: the massive revaluation of gold after the collapse of paper assets

By GoldSubject on March 12, 2010

This post describes my understanding of the so-called Freegold theory, which the brilliant blogger FOFOA has been eloquently and convincingly writing about for a couple of years. FOFOA’s blog consists of many extremely long and erudite posts that keep referring — often tangentially — to Freegold theory. This is a brief explanation of Freegold theory as I currently understand it, for those who are flummoxed by the enormous quantity of information on FOFOA’s outstanding blog.

In my last post I explained why I (along with many other people) believe that all paper assets will vaporise sooner or later, because there is not enough physical wealth in the world to satisfy the demand implied by those paper documents. The whole point of a paper asset — including fiat money itself — is that the owner can redeem it for the actual physical assets on demand. Paper assets have no value if they cannot be redeemed for the tangible assets they are supposed to represent. Sooner or later the system will have to default en masse as investors realise that all they hold is worthless paper and scramble to get out (convert the paper into money, and money into physical assets). The first few to get out will probably manage to convert their paper wealth into tangible assets; everyone else will be out of luck.

* Ultra-simple summary of the above: if you own money, stocks, bonds or other securities, you think you are wealthy because you can use these documents to obtain money and then use that money to buy houses, cars or whatever else you fancy. The problem is that there simply aren’t enough physical goods in the world to satisfy the demands of all the money and other paper wealth that exists. What would happen if everyone decided to get rid of money and other paper wealth and exchange it for cars, houses and other goods? There aren’t enough goods to satisfy all the money and paper wealth that exists. This means that much of the “wealth” represented by all this paper is non-existent. Plain and simple.

Hence the system is bound to collapse, because it is essentially a Ponzi scheme, and Ponzi schemes cannot last forever, because sooner or later an “investor” makes a claim that the Ponzi scheme cannot satisfy, at which point the whole thing collapses and all of the “investors” realize that they have lost their wealth.

The question is: when this giant default happens and worldwide confidence is completely lost in paper, how will value be stored? So far most of the wealth has been stored as fiat money, stocks, bonds and other paper assets. It was wrong to do so, because paper is too easily manipulated and cannot be trusted, but that is what happened.

So, again, when paper can no longer be trusted to store and represent wealth, how will savings be stored? The answer is that after the massive default of paper wealth — after “paper will burn”, as Another said — all of that value will be poured into gold. Gold will go back to its historic role as the best and most reliable store of value there is.

This means that they will be an absolutely gigantic, one-off revaluation of gold. Gold will become the numéraire for all the wealth of this planet, which means that it will be the unit of account used to describe the value of all goods and services in the world. The value of gold will be massively higher than $1100 per ounce. Some say the buying power of gold will increase 50-fold; others say it will increase 100-fold. Either way, this should give you an idea of how important it is to buy physical gold as soon as possible.

After the total failure and repudiation of all paper assets, paper money will still be used, but only for transactions, not for the storage of value. The long-term storage of value will be the preserve of gold and gold alone.

This means that whenever you get paid for a job, you will be paid in local currency, and you will keep part of that currency to satisfy your immediate expenses, and use the rest — the money that you want to save — to buy gold.

In one of my early posts I wrote that fiat money represents a liability on someone’s balance sheet, whereas gold is 100% equity and no one’s debt. This is why whenever you get paid, you should figure out how much of this money you intend to put away for the long term, and use that amount to buy gold. Only when you have converted fiat currency to gold can you truly consider yourself to have been paid in full.

One key aspect of Freegold theory is that the price of gold — its buying power, if you prefer — will be set by the free market instead of being manipulated by bankers and other sinister entities. I guess this is why this theory is called “Freegold”.

This is Freegold theory as I understand it. It is very straightforward and intuitive when one realises just how much paper assets have been inflated and manipulated, to the extent that an implosion is inevitable, at which point the only store of value that can be trusted is gold.

A corollary of Freegold is that those who buy physical gold now are making the investment of the century. I usually have a very strong aversion to using the term “investment” to describe gold, because gold is for the storage of wealth, not for its generation, but if Freegold does happen, the gargantuan increase in the buying power of gold will indeed make it the investment of the century for those who bought it BEFORE Freegold kicks in. If Freegold ever becomes a reality, it will be a gigantic transfer of wealth from those who own paper assets to those who own gold.

Ultra-brief summary of Freegold theory:

Money, stocks, bonds etc. represent more wealth than really exists –> massive default inevitable –> paper no longer trusted to store value –> only gold is trusted to store value –> buying power of gold massively increases. Value of gold set by free market; money used for transactions; gold used to store value. The biggest and most dramatic revaluation in history.

FOFOA insists that Freegold is an inevitable outcome; others are skeptical. In a future post I will consider the arguments for and against Freegold.

If you find this theory exciting, you are not alone. There is something undeniably intoxicating about the thought of buying a 1-ounce gold coin now for $1100 and then see its buying power rise to the equivalent of $50,000. I was initially excited about this theory, then thought it was too good to be true, and after much thought and research, I have come to the conclusion that it is inevitable. Buying gold to store wealth was always a good idea, but the reality of the Ponzi-scheme nature of all paper markets (including fiat money) now makes buying gold not only smart, but also urgent.

University Of Texas Fund CEO Shares His Views On Gold

Is Gold in a Bubble?

The Bedrock of the Gold Bull Rally

US Global Investors-Frank Talk

Last week I had the pleasure of participating in a webcast for Bloomberg Markets Magazine regarding gold investing. It was a very insightful presentation and I suggest you view the replay at www.bloombergmarkets.com. What struck me on the call was the negativity surrounding the gold market. Call it a bubble, a frenzy or mania, there seems to be a large number of voices in the marketplace who just are not fans of gold, whether prices are moving up, down or sideways.

Naysayers started calling gold a bubble back when prices hit $250 an ounce and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200 and now $1,400 an ounce.

However, gold prices appear asymptomatic of the signs generally associated with financial bubbles.

For instance, we haven’t seen price spikes. Despite rising from under $1,000 an ounce to over $1,420 over the past six months, that represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS). The average standard deviation move of other bubbles—Japanese equities in 1986, the tech boom in 1999, the GSCI in 2005 and gold in 1979—is 5.3. Gold’s 180 percent move in 1979 represented a 10.3 standard deviation move, more than 14 times the magnitude we see today.

The reality is that gold doesn’t possess the traits necessary for a financial bubble to form. Rodney Sullivan, co-editor of the CFA Digest, has done some great research on the history of markets and bubbles going all the way back to the 1600s. He discovered three key patterns in the 47 major financial bubbles that occurred over that time period.

These three ingredients of asset bubbles are financial innovation, investor exuberance and speculative leverage. The process begins with financial innovation, which initially benefits society as a whole. In the exuberance stage, usage of these innovations broadens; they become mainstream and attract speculation. The third step, the tipping point for a bubble to form, is when these speculators pile on massive leverage hoping to achieve greater success. This excessive leverage adds increased complexity, which mixes with irrational exuberance to create an imbalance in the marketplace. Eventually, the party comes to an end and the bubble bursts.

This is what happened with the housing bubble in the U.S. as Main Street home buyers leveraged themselves 100-to-1, Fannie Mae leveraged itself 80-to-1 and Wall Street investment firms leveraged themselves over 30-to-1.

Gold as an asset class is far from being overbought by speculators. Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

Sprott estimates that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period.

Gold equities have seen even lower levels of investment. From 2000 to 2010, $2.5 trillion flowed into U.S. mutual funds, but only $12 billion of that went into precious metal equity funds. Of course, those figures were significantly impacted by the advent of gold ETFs during the decade. Despite the growth of the SPDR Gold Trust (GLD), which held more 1,200 tons of gold as of March 31, gold remains largely underowned as a portion of global financial assets.

The bar chart from CPM Group shows gold as a percentage of global financial assets over time. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”

That point is magnified by the pie chart from Casey Research. Dr. Marc Faber included it in his April newsletter to show just how small a portion gold and gold stocks are for large institutional investors like pension funds.

Investors who don’t think gold is a bubble but fear they’ve missed the boat need to look at the short- and long-term factors supporting gold at these historically high price levels. In the near-term, gold prices are being buoyed by continued weakness in the U.S. dollar.

The Trade-Weighted Dollar Index (DXY) is just above the lows experienced during November 2009 and is only 8 percent above the “critical” March 2008 low, according to BCA Research. BCA says the U.S. dollar’s weakness is driven by four factors:

• Federal Reserve balance sheet expansion via QE2
• Combination of low real interest rates, steeply upward-sloped yield curve and perky inflation expectations that should continue in the U.S.
• Plans by the European Central Bank to raise rates later this month
• Willingness of Chinese authorities to allow for yuan (RMB) appreciation when the U.S. dollar is weak

This is part of what we call the Fear Trade. This graphic illustrates that the Fear Trade is a function of two separate government policies: monetary and fiscal. Whenever there is a structural imbalance between a country’s monetary and fiscal policies, gold tends to perform as a “safe haven” currency. Currently, the quantitative easing measures implemented by the Federal Reserve and the significant size of the deficit spending by the government to increase entitlements to ward off a recession have created a significant imbalance between monetary and fiscal policies. This has devalued the U.S. dollar which, in turn, has boosted gold prices.

We believe that as long as the U.S. government refuses to trim entitlement and welfare programs and continues to keep Treasury bill yields below the inflation rate to battle deflation, gold will remain an attractive asset class.

Longer-term, our experience shows that whenever you have increased deficit spending, rapid money supply growth and negative real interest rates—that’s when the inflation rate is higher than the nominal interest rate—gold tends to perform well in that country’s currency. So far we have not seen rapid money supply growth here in the U.S., but the other two factors have been the main thrust behind gold’s record rise.

GFMS CEO Paul Walker echoed those drivers in an interview with MineWeb this week. Walker said that “ultra-low interest rates, macro-economic dislocation, fears of global imbalances…the wrath of these things still remain solidly in place and that’s really the bedrock of the gold bull rally.”

CS says the combined $6.3 trillion of excess leverage in the G4 economies (U.S., eurozone, Japan and Great Britain) means that their central banks will be forced to push real interest rates down to abnormally low levels. You can see from the chart that this is quite bullish for gold prices. Any time the real Fed funds rate is below 2 percent, gold tends to rise.

Current projections from the Congressional Budget Office (CBO) have the U.S. federal deficit at $1.5 trillion this year. To show the effect this has had on gold prices, we overlaid the rise in U.S. federal debt with the price of gold.

You can see from the chart that gold’s bull run began in 2002, about the same time federal debt began to rise significantly. Gold played catch up at first, but the two have tracked each other rather closely. Since 2002, gold prices have risen 308 percent versus a 119 percent increase in federal debt. This means that gold’s sensitivity to a rise in federal debt is just over 2-to-1. With lawmakers in Washington, D.C. still squabbling over where and by how much to cut the budget, it’s unlikely the federal debt level will recede any time soon.

This is very constructive for long-term gold prices, but just how bullish depends on who you ask. The team at CS sees gold at $1,550 per ounce by year end. BCA estimates gold to remain in the $1,400-$1,600 range in 2011. Walker of GFMS said he believes gold will surpass the $1,500 mark by year end because “all of the structural factors supporting gold are in place.” Perhaps the most bullish forecast has come from Rob McEwen, former gold analyst and founder of GoldCorp, who said late last year, and reiterated last week, that he thinks gold could hit $5,000 per ounce in the next three to four years.

It’s important to remember the strong cultural attraction that many people in emerging countries have toward gold. It’s a much stronger connection than that of the developed world and essential for rising gold demand.

We like to compare the G-7 countries to our E-7—the world’s seven most populous nations. Interestingly, the G-7 is 50 percent of global GDP but only 10 percent of the total global population. The E-7, on the other hand, represents roughly 50 percent of global population but only 18 percent of global GDP. We would like to point out that money supply and GDP per capita is rising substantially faster in the E-7 than it is in the G-7, 17.7 percent money supply growth in the E-7 versus 3.7 percent in the G-7. If money supply growth in the E-7 continues at a rate of 15 percent or more for the E-7, it would be a strong catalyst for higher gold prices.

In conclusion, based on the above factors and trends, we believe gold could double over the next five years.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The S&P GSCI Spot index tracks the price of the nearby futures contracts for a basket of commodities. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12/31/10: Goldcorp, SPDR Gold Trust (GLD).