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Ron Paul Accuses The Federal Reserve of Devastating America

October 2, 2012 by Leave a Comment

While Wall Street cheers the Federal Reserve’s decision to engage in perpetual quantitative easing, Congressman Ron Paul says the Fed is devastating the U.S. economy through its blatant manipulation of interest rates.  According to Ron Paul, manipulating interest rates to the zero bound level has caused a massive misallocation of capital, destroyed the purchasing power of the U.S. dollar and will eventually lead to another financial crisis.

Ron Paul’s warnings have been routinely dismissed by both Wall Street and his colleagues in Congress.  The majority of the American public know that something is seriously wrong with our financial system but can’t quite connect the dots between the Fed and lower wages and higher prices.  Those who do understand how the Fed is destroying the U.S. economy and are worried about preserving their wealth, should simply copy the investment strategy of Ron Paul who has gone all in on gold and silver.

By Ron Paul

One of the most enduring myths in the United States is that this country has a free market, when in reality, the market is merely the structural shell of formerly free institutions. Government pulls the strings behind the scenes. No better illustration of this can be found than in the Federal Reserve’s manipulation of interest rates.

The Fed has interfered with the proper function of interest rates for decades, but perhaps never as boldly as it has in the past few years through its policies of quantitative easing. In Chairman Bernanke’s most recent press conference he stated that the Fed wishes not only to drive down rates on Treasury debt, but also rates on mortgages, corporate bonds, and other important interest rates. Markets greeted this statement enthusiastically, as this means trillions more newly-created dollars flowing directly to Wall Street.

Because the interest rate is the price of money, manipulation of interest rates has the same effect in the market for loanable funds as price controls have in markets for goods and services. Since demand for funds has increased, but the supply is not being increased, the only way to match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At some point the capital projects funded by the new credit are completed. Houses must be sold, mines must begin to produce ore, factories must begin to operate and produce consumer goods.

But because consumption patterns have either remained unchanged or have become more present-oriented, by the time these new capital projects are finished and begin to produce, the producers find no market for their goods. Because the coordination between savings and consumption was severed through the artificial lowering of the interest rate, both savers and borrowers have been signaled into unsustainable patterns of economic activity. Resources that would have been used in productive endeavors under a regime of market-determined interest rates are instead shuttled into endeavors that only after the fact are determined to be unprofitable. In order to return to a functioning economy, those resources which have been malinvested need to be liquidated and shifted into sectors in which they can be put to productive use.

Another effect of the injections of credit into the system is that prices rise. More money chasing the same amount of goods results in a rise in prices. Wall Street and the banking system gain the use of the new credit before prices rise. Main Street, however, sees the prices rise before they are able to take advantage of the newly-created credit. The purchasing power of the dollar is eroded and the standard of living of the American people drops.

We live today not in a free market economic system but in a “mixed economy”, marked by an uneasy mixture of corporatism; vestiges of free market capitalism; and outright central planning in some sectors. Each infusion of credit by the Fed distorts the structure of the economy, damages the important role that interest rates play in the market, and erodes the purchasing power of the dollar. Fed policymakers view themselves as wise gurus managing the economy, yet every action they take results in economic distortion and devastation.

Unless Congress gets serious about reining in the Federal Reserve and putting an end to its manipulation, the economic distortions the Fed has caused will not be liquidated; they will become more entrenched, keeping true economic recovery out of our grasp and sowing the seeds for future crisis.

Filed Under: Currency debasement, Featured, Gold, Silver Tagged With: , , , , , ,

Why The Fed Is Committed To Higher Inflation

September 20, 2012 by Leave a Comment

By Axel Merk

Is the Fed’s goal to debase the U.S. dollar? The Federal Reserve’s announcement of a third round of quantitative easing (QE3) might have been the worst kept secret, yet the dollar plunged upon the announcement. Here we share our analysis on what makes the FOMC tick, to allow investors to position themselves for what may be ahead.

We have heard policy makers justify bailouts and monetary activism because, as we are told, these are no ordinary times: extraordinary times require extraordinary measures. Acronyms are needed, as we are told that things are complicated. We respectfully disagree. It’s quite simple: we have had a credit driven boom; we have had a credit bust; and Fed Chairman Bernanke thinks monetary policy can fix it. Merk Senior Economic Adviser and former St. Louis Fed President William Poole points us to the fact that the Soviet Union, Cuba and North Korea have one thing in common: monetary policy could not have compensated for the shortcomings of the respective regimes. The successor nations to the Soviet Union, as well as China had economic booms because they opened up, not because of printing presses being deployed. Monetary policy affects nominal price levels, not structural deficiencies. In the U.S., the economy may be held back because of uncertainty over future taxes (the “fiscal cliff”) and regulation; monetary policy cannot fix these.

But the above experiences have something else in common: they refer to lessons of recent decades. Bernanke, in contrast, is a student of the Great Depression, the 1930s. Bernanke firmly believes that tightening monetary policy too early during the Great Depression was a grave mistake, prolonging the Depression. Never mind that there had been major policy blunders by the Roosevelt administration that might have been driving factors; Bernanke’s research squarely focuses on how history would have evolved differently had his prescription for monetary policy been implemented.

The reason why Bernanke thinks tightening too early after a credit bust is a grave mistake is because a credit bust unleashes deflationary market forces. Left untamed, a deflationary spiral may ensue driving many otherwise healthy businesses into bankruptcy. Nowadays, we hear “it’s a liquidity, not a solvency crisis.” With easy money, the Fed can stem the tide. Whenever the Fed has the upper hand, the glass is half full, “risk is on” as traders like to say; but then it appears that not quite enough money has been printed and, alas, the glass is half empty, “risk is off.” The high correlation across asset classes is, in our assessment, a direct result of the heavy involvement of policy makers. Sure, markets may move up when money is printed; the trouble is everything moves up in tandem, making it ever more difficult to find diversification, so that on the way down, investors find protection. It’s for that reason, by the way, that we focus on currencies: why bother taking on the noise of the equity markets if investors buy or sell securities merely because they try to front-run the next perceived intervention of policy makers? In our assessment, the currency markets are a great place to take a position on the “mania” of policy makers. Note that if one does not employ leverage, currencies are historically less risky than equities.

So we know Bernanke wants low interest rates. But there’s more to it: as we saw earlier this year, a string of good economic indicators sent the bond market into a nosedive. Treasuries were bailed out by subsequent mediocre economic news, allowing bond prices to recover. The challenge here, in our assessment of Bernanke’s thinking, is that the bond market can do the tightening for you. When Bernanke bragged in his Jackson Hole speech in late August that a well-behaved bond market is proof that his policies are well received, we had a more somber interpretation: the reason the bond market is well behaved is because the economy is in the doldrums. Let all the money that has been printed “stick”, i.e. let this economy kick into high gear. Sure, Bernanke says he can raise rates in 15 minutes (he can pay interest on deposits at the Fed), but given the leverage in the economy, any tightening that comes too early might undo all the “progress” that has been achieved so far. Differently said – and we are putting words into Bernanke’s mouth here – Bernanke has to err on the side of inflation.

But how do you err on the side of inflation, without the bond market throwing a fit? A central banker is most unlikely to ever call for higher inflation. You do it with “communication strategy”, a commitment to keeping interest rates low; you do it with quantitative easing, i.e. buying Mortgage-Backed and Treasury securities; you do it with Operation Twist, depressing yields by buying longer dated Treasury securities. But, “when inflation is already low…” as Bernanke stated in his 2002 “Helicopter Ben” speech, “the central bank should act more preemptively and more aggressively than usual.” How do you do that? First, you create an open-ended buying program, so that the market cannot price in all easing within moments of the announcements. And more importantly, you break the link between monetary policy and inflation. Bernanke wants to make sure investors realize that policy is now tied to a “substantial improvement in the labor market” rather than its inflation target. It’s only then that the Fed can go all out on promoting growth without having the bond market sell off.

Does it work? Judging from the initial market reaction, no. Bond prices have fallen, inflation expectations as expressed in the spreads between inflation protected Treasury securities (TIPS) and underlying Treasuries have shot higher. It might be because the dust from the Fed’s bombshell hasn’t settled; or it might be that the Fed hasn’t had time to intervene in the market by buying TIPS (while not extensively, the Fed has been buying TIPS on occasion) depressing inflation indicators.

Either way, however, many observers have wondered whether lowering interest rates a tad further is really the panacea the economy needs. Part of it is that mortgage rates aren’t falling at this stage, if for no other reason than banks have such dramatic backlogs, that they have little incentive to open the floodgates even more for further refinancing activity. But even without such backlogs, how many more projects are worth financing with the 10-year bond trading at 1.6% versus 1.8%? Interest rates are low, no matter how one slices it.

That leaves one other interpretation open. Don’t take our word for it, but read the 2002 Helicopter Ben speech: “Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today [in 2002], it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.” The argument here is that a lower dollar boosts exports and thus the economy. Ignored is the fact that Vietnam might try to compete on price, but an advanced economy should work hard to compete on value added. As such, we are only providing a dis-incentive to invest in competitiveness if the Fed’s printing press provides the illusion of competitiveness. We use the term printing press because it is Bernanke in the aforementioned 2002 speech that refers to the Fed’s buying of securities (QEn) as the electronic equivalent of the printing press.

So don’t let anyone fool you. Things are not complicated. In our assessment, the Fed may be out to debase the dollar. Investors may want to get rid of the textbook notion of a risk-free asset, as the purchasing power of the U.S. dollar may increasingly be at risk. There is no risk-free alternative, but investors may want to consider a managed basket of currencies including gold, akin to how some central banks manage their reserves, as a way to mitigate the risk that the Fed is getting what we think it is bargaining for.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies. Engage with me directly at Twitter.com/AxelMerk to comment on Merk Insights and to receive provide real-time updates on the economy, currencies, and global dynamics.

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , ,

Japan Joins The QE Race – Who Can Print The Most Money?

September 19, 2012 by Leave a Comment

After what appeared to be a coordinated effort by Europe and the U.S. to print their way to prosperity, Japan quickly joined the race to eternal QE with the surprise announcement of additional monetary easing.

TOKYO—The Bank of Japan took surprisingly strong steps to further ease its monetary policy on Wednesday, following similar steps by the Federal Reserve, as it tries to tackle entrenched deflation, an export-sapping strong yen and the impact of slowing global growth.

The central bank’s policy board decided at the end of a two-day meeting to increase the size of its asset-purchase program—the main tool for monetary easing with near-zero interest rates—to ¥80 trillion ($1.01 trillion) from ¥70 trillion.

The move came after the Fed introduced another round of quantitative easing last week, which put renewed upward pressure on the yen.

“These measures in pursuit of powerful monetary easing will make financial conditions for such economic entities as firms and households even more accommodative by further encouraging a decline in longer-term market interest rates and a reduction in risk premiums,” the central bank said in a statement released together with the rate decision.

Board members voted unanimously to expand the scope of the asset-purchase program. The BOJ also decided to leave its policy rate, or the unsecured overnight call loan rate, unchanged in a 0.0%-0.1% range.

Japan has been in an endless loop of money printing ever since stocks and real estate crashed in the early 1990’s after one of the biggest financial bubbles in history.  Twenty years of quantitative easing and monetary stimulus have resulted in stagnant wages, the largest debt to GDP ratio in the world and a stock market that is still off 75% from its high.  Except for printing additional money, Japan seems flat out of options for reviving its economy.

Courtesy yahoo finance

Does anyone really expect this desperation tactic to cure Japan’s problems?

Filed Under: Currency debasement, Featured, Gold Tagged With: , , , , , , , ,

$10,000 Gold Possible As Fed Ramps Up Money Printing

September 17, 2012 by Leave a Comment

In the wake of the near death of the financial system in 2008, the Federal Reserve engaged in two rounds of quantitative easing and pumped trillions of dollars into banks and other financial institutions.  Ben Bernanke insists that such drastic actions by the central bank were necessary to prevent a depression, a claim that economists will no doubt be debating for decades.

What may not be open to debate, however, is the wisdom of the Fed’s decision to engage in non stop money printing with the announcement of QE3.  A policy tool previously applied to prevent a financial collapse has now become a routine operation in a desperate attempt to ramp up economic growth.  The Federal Reserve seems oblivious to the fact that no nation in history has ever increased its wealth and real economic growth by resorting to the printing presses.

Three most probable outcomes of the Fed’s open ended money printing operations:

1. Continued decline in economic growth.

Following the Fed’s announcement of another round of permanent QE, Egan-Jones Cuts U.S. Rating.

Egan-Jones Ratings Co. cut its credit rating for the U.S. one level to AA-, citing the potential for the Federal Reserve’s third round of large-scale asset purchases to weaken the dollar and drive up inflation.

U.S. debt to gross-domestic-product has risen to 104 percent from 66 percent in 2006, Egan-Jones said today in a report. The firm lowered the U.S. to AA in April. Yields on 10- year Treasuries have fallen five basis points since the end of that month to 1.86 percent.

The Fed’s latest program will “stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality,” Egan-Jones said. “The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers, thereby reducing consumer purchasing power.”

The Fed yesterday announced its third round of large-scale asset purchases since 2008, saying it will buy $40 billion of mortgage debt a month. The central bank didn’t set any limit on the ultimate amount it would buy or the duration of the program. Policy makers also extended the prospect of near-zero interest rates until mid-2015 and said policy will stay accommodative “for a considerable time” even after the economy strengthens.

2. Continued destruction of the purchasing power of the U.S. dollar. 

Federal Reserve policies have contributed to a dramatic decline in the purchasing power of the U.S. dollar for decades, resulting in a lower standard of living for Americans.  Expanded money printing will accelerate this trend.

3. Continued increase in the price of gold.

Courtesy: Kitco.com

The decade long rally in gold will dramatically accelerate.  A Barron’s interview asks Could Fed Miscalculations Lead to $10,000 Gold?

These are times that try an asset manager’s soul. The world’s economy is a soft-paste porcelain vase set on a wobbly plant stand in the heart of an active earthquake zone. The Middle East is sending out foreshocks of war. The South China Sea is a smoking caldera of tension. Social unrest in the EU threatens tidal waves. And, according to the agitated rats and snakes of the financial press, China is headed into a recession.

Hedging against the most pessimistic case without crippling the upside potential of a better or even miraculous case appears to be as unsolvable as the proverbial Gordian knot. Alexander the Great “solved” the intellectually challenging knot riddle by severing it with his sword. Scott Minerd, chief investment officer of Guggenheim Partners, offers a more reasoned but equally simple solution to the hedging conundrum: gold. In extreme circumstances—like miscalculations regarding inflation by the Federal Reserve—the metal could hit $10,000 per troy ounce, he asserts. Thursday, after the Fed disclosed its latest financial-stimulus scheme, the metal rose about 2% to $1,768.

Minerd frets about the Fed’s ability to reduce its swollen $2.9 trillion balance sheet if rates suddenly were to rise. Because the assets have longer-term durations, their market value immediately would tumble. If rates rose 1%, the Fed would have a $150 billion capital deficit, he says. This would have negative ramifications for the dollar. Minerd says the über-wealthy have been migrating toward hard assets like gold, real estate, and art. Every portfolio should be partially composed of such assets, he asserts. Is yours?

Gold and Silver Blog has long argued that gold would eventually advance to at least $5,000.  The latest Fed actions make that price target seem conservative.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , ,

Fed’s Open Ended Money Printing Will Destroy The Purchasing Power Of U.S. Dollar

September 14, 2012 by Leave a Comment

By Axel Merk

May we suggest a Twitter version of today’s FOMC statement: “Don’t worry, be happy! ” – No, the economic outlook hasn’t improved. In fact, the Fed may want you to take a valium to stomach the ride ahead. Alternatively, if you don’t get mollified by the Fed’s “communication strategy”, you may want to consider taking action to protect the purchasing power of your hard earned dollars.

Here’s the challenge: the Federal Reserve (Fed) wants to keep interest rates low across the yield curve (from short-term to long-term rates) to aid the economic recovery. But good economic data might send the bond market into a tailspin, i.e. raise long-term rates and thus cause massive headwinds to the economic recovery. We got a taste of how quickly the bond market can sell off earlier this year when the economy appeared to pick up some steam. Higher interest rates would further encourage the major deleveraging that market forces still warrant, not a desirable scenario from our understanding of Fed Chairman Bernanke’s thinking.

Engaging in further rounds of asset purchases (“Quantitative Easing”, “QE3”, “QEn+1”) may alleviate some of those upward pressures on interest rates, but the moment a program is announced, the market prices it in and looks ahead, threatening to mitigate any lasting impact of QEn+1. Picture the Fed as trying to hold a carrot in front of the donkey, well, market, to make us believe another stimulus is coming, without actually giving it. That way, the Fed can print less money to achieve its goals. The Fed calls it communication strategy.

Some have suggested a more open-ended approach to asset purchases. But that would likely come with some sort of guidance as to when to stop it, such as when a certain level of unemployment or nominal growth is reached. Given that everything Bernanke has done has been signaled well ahead of time (the blogosphere is full of the “best kept secret”, the likelihood of more QE), introducing a completely new concept is rather un-Bernanke-ish. You may not agree with Bernanke, but as an investor please don’t act surprised.

In recently released FOMC minutes, the Fed tells us that it might communicate to the market that rates may remain low even as the economy recovers. Bingo! We have long argued that Bernanke considered the early monetary tightening during the Great Depression as a grave mistake, as it undid all the “progress” that had been achieved. But more to the point, the Fed needs to get our attention away from the economy. By keeping the link to the economy, the Fed will always struggle to keep the upper hand on the bond market. So forget about the carrot: we need valium, not carrots. By communicating with the market that rates will remain low independent of how the economy might perform, the bond market just might not be selling off as aggressively as economic growth picks up.

That’s exactly the path we believe the Fed is going to go down. It will be interesting, however, to see what the Fed’s explanation will be. We doubt they will use the valium analogy. Some Fed watchers would like to see a nominal GDP target or something similar, but don’t bet your donkey on Bernanke going that far.

The basic challenge is – and we are interpreting here as we don’t think the Fed or any central banker in office would ever frame it this way: the Fed wants to have inflation, wants to move the price level higher to bail out home owners, wants to push up nominal wages, and wants to push up nominal GDP to make the debt burden more bearable. But the Fed doesn’t want the market to price in inflation, as that would push interest rates up.

That’s why we may be heading ever more into the “Land of Make-Believe.” But as investors enjoy their valium, the U.S. dollar is at risk of melting away under their feet. Drugged up, we are too busy laughing at Greece and doling out advice to Europe to notice that our “don’t worry, be happy” approach might lead to rather unhappy purchasing power. If you think you are above the fray, let me just ask whether you have watched the euro in recent months? As of late, that perceived weakling of a currency appears to be giving the greenback a run for its money. We are not suggesting that investors dump their U.S. dollars and exchange them all for euros. However, we would like to encourage investors to consider embracing currency risk, for example through a managed basket of currencies, as a way to manage the risk posed to the purchasing power of the U.S. dollar. Adding currency exposure to a portfolio may have valuable diversification benefits.

Some sympathize with the ever greater complexity of monetary activism around the world. But it’s really rather simple: there’s too much debt in the world. To deal with the debt, countries may deflate, default or inflate. In the US, we have what both Bernanke and his predecessor Greenspan have called the printing press; as such, so their argument goes, the U.S. dollar is safe – in nominal terms at least. Greece is not capable of procuring valium, which creates a different set of challenges. But stop pitying Greece and consider taking action to protect your purchasing power at home.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies. You can also engage with me directly at Twitter.com/AxelMerk where I provide real-time updates on the economy, currencies, and global dynamics..

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

Filed Under: Bullion Sales, Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , , , ,

Why Gold Will Outperform Bonds

September 14, 2012 by 2 Comments

By Vin Maru

This past week was a major catalyst for the precious metals, as they closed the week up strongly based on strong fundamentals for the sector. We have been anticipating the next catalyst for the PM sector to start making a strong advance, and we got it with a coordinated effort from central banks around the world. They will print whatever is necessary to fight off deflation and another financial collapse. Here are a few headlines we saw from the media lately:

“Gold Prices Gain on German Ruling”, “ECB to launch ‘outright monetary transaction’ plan”, and “IMF’s Lagarde backs ECB-bond buying plan”

This afternoon, the FOMC meeting concluded and was followed by a press conference by Ben Bernanke. The precious metals market has been on a strong uptrend over the last month in anticipation of additional bond buying and stimulus (AKA Quantitative Easing).  Over the last month, the fed has hinted that they will stimulate if needed but never actually pulled the trigger. Precious metals still rose in anticipation of coming QE.  Well, he finally did it and the metal prices are up on this news, below is some commentary on what the fed announced. See Reuters article about this QE.

This looks to be stimulus like the original QE 1 and 2 and this is super bullish for gold, like it was back in 2009 and 2010.  This starts off another major uptrend for gold and it will be going to $3500 over the next few years.  Now is the time to be getting invested again, it’s almost an all in moment on any pullback and then its onwards and upwards from here.  We can expect this QE to last indefinitely just like we can expect a low interest rate environment for an extended period of time.  It’s QE to infinity and gold will definitely shine.

ECB Bond Buying Program

With headlines like these, the world markets are proven to be irrational in their approach to dealing with debts; the central banks around the world will print and by up bonds as needed. The West may have saved themselves for the moment, but this really opens up the door for moral hazard and the mindset that debts don’t matter has been rationalized around the world. The Western central planners rationalize their action by stating the bond buying program will be sterilized. The hazard is that other central bankers around the world will also engage in sterilized bond buying and supporting of governments, all of which is backed by nothing except faith. They claim the bond buying is sterilized because the central banks print money to buy bonds of the governments to keep yields low and then make up new bonds to sell to other central banks and all of this financial alchemy is based on buying and selling of foreign currency bonds. To learn more about currency intervention and how the bonds could be sterilized, you can read about it here.

They claim the net effect is there is no increase in the monetary base, but any rational human can see this is pure manipulation and gaming the system. With no new monetary base, the money supply in the system does not increase and it is very similar to Operation Twist. The net effect of the new bond buying program is there will be no direct stimulus to the economy and the governments will continue to be supported by the central banks. The new bonds issued by the government will carry lower interest rates, which will then be supposedly paid back to the CBs over an extended period of time. The old government debt will be rolled over and extended from this bond buying program and only small amounts of additional interest will be paid on these new bonds, which tax payers will eventually have to pay one way or another. The governments will then have to accommodate the additional interest payments on the new debt which could eat into budgets, so they will either tax more or reduce some of their spending. The paper currency Ponzi scheme will be allowed to continue and coup d’état over the financial system has been accomplished by the central bankers. The idea is that bad loans and debts do not matter anymore in an attempt to keep the system afloat, eventually that will fail and precious metals will prosper as a result.

With keeping interest rates low, bonds have virtually no upside from here since interest rates can’t go much lower from here.  Savers will be forced to speculate in order to create yield and precious metals will benefit over the next few years from a negative yield interest rate environment.  Business with tons of cash on the sidelines will be forced put that money to work in search of economic returns and banks with tons of cheap cash on hand will be loaning out more money to qualified people and businesses. Deflation and collapse is no longer an option, the system will be supported and soon the market will be talking about expansion and growth again. Money will be put to work even though the western economies may stagnate over the next decade. The market will soon look beyond the Euro and US mess and move forward in search of yield.  It may continue looking at emerging markets for growth and opportunities, but it definitely look to precious metals for safety from the depreciation of paper currencies.

Once we start seeing this money turning over in the system, the velocity of money will increase significantly which will then lead to higher inflation, this is when we can expect gold to really shine.  While the upside for bonds will be limited in a low interest rate environment, the upside for gold is unlimited from endless printing of fiat currencies and bonds by all central bankers and governments around the world.  The upside for the price of bonds is limited to interest rates going to zero and they can be printed to infinity.  The amount of gold available in the world is fixed to current inventory plus expected additional supply.  Because supply is limited, gold’s price could go to infinity to equally match the unlimited printing of bonds and currency units which are used to purchase them. So in the end, bond prices are limited on the upside while supply is infinite, while gold supply is limited and it’s price is limitless in a world based on fiat currencies—which would you rather own?

Gold Update

In the last 2 weeks, gold has made a great break out move above $1620 and then $1660-$1680. The price is now holding strong above $1720 as central bankers are planning on bond buying programs and additional stimulus in a coordinated effort to avoid a deflationary spiral. This opens up the door to QE to infinity, they will print since there is no other option and precious metals will benefit from this. Gold and silver are going much higher in the years to come, but it won’t be in a straight line. Expect volatile moves to the upside and swift corrections, but the general trend for the next few years is towards higher prices. Keep with the trend and buy the dips and sell into major strength if you plan on trading the paper markets. If you purchased the physical metals during this past summer, you may want to consider holding on to them, we may not see these prices again, ever.

The RSI is rising and starting to move above 80, which could be getting into overbought territory, however the MACD is in a slow steady trend higher over the last couple of months. Look for new support to be around $1680 (which would be a good opportunity to add to positions) and short term overhead resistance to be at $1780-1800 (sell trading positions currently open) which has been overhead resistance back in November and February, at which time we could see a significant correction. If the gold market clears $1800 and holds on a closing weekly basis, we could retest the previous highs and go on to make new highs .

The HUI Gold Miners Index

The HUI clearly broke the downtrend line by gapping up above it late last week. The RSI is still rising and so is the MACD. If gold makes a move to $1800, expect the HUI to rise towards 500 before taking a break and correction. This would be a great time to sell open trading position in the next few weeks, especially after any news from the Fed about stimulus and QE. The fact that gold and the HUI has risen so much in the last month based on expectations for QE and the indicators are getting close to  overbought territory.  We may see an initial jump in price for the HUI index after any announcement, then a minor correction as much of this news could be priced into the metals and the miners.  Watch the reaction of the metals and the HUI later this week and next, but if the advance higher starts stalling out, you may want to consider closing trading positions and book some profits.

More than likely towards the end of this month/early next month, we could start to see a minor correction going into October and November as election approach, the market may take a breather. We may also see some strong year end selling this year, especially coming from the US as their tax laws on capital gains are scheduled to change next year. It would be a good time to start new positions or add to current holdings during that correction.  We can expect the trend to continue higher as the metals go on to make higher highs and higher lows over the next 6 to 9 months.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Filed Under: Currency debasement, Featured, Gold, Gold Stocks, US Debt Crisis Tagged With: , , , , , , , , , ,

There Is “A Limited Amount of Gold, An Unlimited Amount of Paper Money”

September 11, 2012 by Leave a Comment

Legendary bond king investor Bill Gross, who presides over the world’s largest bond funds makes a compelling case for owning gold in an interview with Bloomberg TV.  Lead manager of influential Pacific Investment Management Company (PIMCO) since 1987, Bill Gross reputedly made $200 million in 2011.

The PIMCO Total Return fund has produced a fat 9.5% return for investors over the past five years, trouncing the returns on the S&P 500 and the vast majority of competing bond funds.  Total funds managed by PIMCO total a staggering $1.8 trillion.

PIMCO’s success has in large part been due to Bill Gross’s ability to accurately assess the macroeconomic picture.  Bill Gross’s bullish position on gold is not something to be lightly discounted by investors.

According to Bill Gross, the bullish outlook for gold rests on the endless expansion of credit by central banks.  Gold has a considerable store of value that paper money does not and there is a “limited amount of gold, an unlimited amount of paper money.”

When world central banks engage in a long term period of money printing and start writing checks in the trillions, it is best to have something that’s tangible and can’t be reproduced like gold. Gross expects that central banks, which have trillions of dollars in reserves, will continue to expand their holdings of gold rather than invest in 10 year government bonds that pay a paltry 1% interest.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , ,

Gold and Debt – What Would Benjamin Franklin Have Said?

September 8, 2012 by Leave a Comment

Benjamin Franklin, one of the most eloquent wordsmiths in American history, coined one of the most famous quotations of all time in a letter to Jean-Baptiste Leroy in 1789.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Contemplating the nation’s growing indebtedness lead me to wonder what immortal phrase Ben Franklin would conjure up to describe the current state of our financial affairs.

Recently and without much public drama, the national debt ticked up by another trillion dollars.  Including off balance sheet liabilities for social security, medicare and a host of other government guarantees brings the true national debt figure up to around a cool $70 trillion.

The majority of the public is either unable to comprehend how much a trillion is or doesn’t much care.  One way or the other, however, the debt falls upon the backs of American families who are already being crushed by zero rates on savings, job losses, lower income and a higher cost of living.  Viewing the debt burden per household gives us a perspective on how bleak our economic future may become.

The official national debt per America’s approximately 118 million households is $136,000.  Throw in the off balance sheet liabilities and we get up to $593,000.  Consider that the median annual household income is only $49,445 and has been declining for the past 20 years.

Are things really as hopeless as they look?  Doesn’t the United States hold the world’s largest amount of gold reserves?   The good news first – yes the U.S. owns 8,133.5 metric tonnes of gold, more than twice as much as second place Germany with 3,395 metric tonnes.   The bad news is that at today’s undervalued gold price, total U.S. gold reserves are only worth $454 billion.  Gold reserves per American households amount to only $3,847, a fraction (0.65%) of total household debt.

Exactly how the Fed’s Frankenstein experiment in fiat money creation will end, nobody knows – but it won’t end well for most of us.  Right now, increases in both the value of gold and the amount of debt seem as certain as death and taxes.  I wonder how Ben Franklin would have phrased it?

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , ,

India’s Attempt To Curb Gold Purchases Will Ultimately Fail

September 5, 2012 by Leave a Comment

India may increase the import tax on gold for the third time this year in an attempt to shore up the weak rupee.  Purchases of gold and silver account for a huge 12.5% of all Indian imports and are contributing to a record current-account deficit according to Bloomberg.

“The government may look at increasing the duty to 7.5 percent,” Prithviraj Kothari, president of the Bombay Bullion Association, said in a phone interview. D.S. Malik, a finance ministry spokesman in New Delhi, declined to comment.

The tax on bars and coins was doubled to 4 percent in March after imports jumped to a record 969 metric tons in 2011. A further increase may deter jewelry buyers and investors during India’s festival season, which starts this month, as a decline in the rupee against the dollar boosts domestic gold prices to an all-time high. Imports plunged 42 percent to 340 tons in the first half, according to the producer-funded World Gold Council.

Curbing shipments of gold will help the country to narrow the current-account deficit as the drop in rupee boosts the cost of crude-oil purchases, according to the finance ministry. The shortfall widened to a record 4.2 percent of the gross domestic product in the year ended March from 2.7 percent in 2010-2011.

The rise in the deficit, the broadest measure of trade, was due to slower exports and so-called relatively inelastic imports of petroleum products, gold and silver amid a rally in global prices, Finance Minister P. Chidambaram said on Aug. 23.

Will India’s attempt to restrict import of precious metals be successful and what impact will this have on the price of gold and silver?  Let’s consider the following:

1.  The Indian government should know better.  In 1962, India passed the Gold Control Act which prohibited Indian citizens from owning gold bars and coins.  The result was the instant creation of a huge black market that continued to supply gold and silver throughout India.

The (Gold Act) legislation killed the official gold market and a large unofficial market sprung up dealing in cash only. The gold was smuggled in and sold through the unofficial channel wherein, many jewelers and bullian traders traded in smuggled gold. A huge black market developed for gold.

In 1990, India had a major foreign exchange problems and was on verge of default on external liabilities. The Indian Govt. pledged 40 tons gold from their reserves with the Bank of England and saved the day. Subsequently, India embarked upon the path of economic liberalization. The era of licencing was gradually dissolved. The gold market also benefited because the government abolished the 1962 Gold Control Act in 1992 and liberalized the gold import into India on payment of a duty of Rs.250 per ten grams. The government thought it more prudent to allow free imports and earn the taxes rather than to lose it all to unofficial channel.

2.  India should be more concerned with maintaining a currency that offers their population a stable store of value rather than depriving their citizens of viable alternate currencies such as gold and silver.

3.  The centuries old tradition in India of holding gold and silver as a source of liquidity and for capital preservation is unlikely to change.  The rupee, like most other paper currencies, has been systematically debased.  Inflation in India over the past decade has made holding rupees a losing proposition.

Courtesy: inflation.eu

4.  The reduction in gold demand during the first half of the year by both China and India has been widely touted in the mainstream press as a reason for a continued sell off in the precious metal markets.  Right.  Despite the reduction in gold demand by China and India, gold based out in the $1,600 range before rallying sharply to $1,697.   Gold is now $99 or 6.2%  higher than it was on the first trading day of 2012.

courtesy: stockcharts.com

5.  By attempting to restrict gold purchases, India has simply advertised the rupee’s intrinsic lack of value to their citizens which will ultimately create an even greater demand for gold and silver.

Filed Under: Currency debasement, Featured, Gold, Silver Tagged With: , , , , , , , , , , ,

Ron Paul – “The World Will Abandon The Dollar As The Global Reserve Currency”

September 3, 2012 by 4 Comments

In August Ron Paul accused the U.S. Treasury “guilty of counterfeiting dollars” by virtue of its monopoly power on money in America.  Paul noted that the expanding role of the Federal Reserve in monetizing government debt has resulted in a massive debasement of the purchasing power of the U.S. dollar.

Continued reckless money printing by the Federal Reserve and massive government deficits will ultimately result in the loss of confidence by holders of  U.S. dollars.  Ron Paul sees the U.S. dollar inexorably losing its status as global reserve currency unless the dollar is backed by precious metals or commodities.

Evidence of the horrendous loss of purchasing power by the U.S. dollar is not hard to understand.  The average citizen sees it everyday as higher prices and lower incomes relentlessly lower our standard of living.   The systematic destruction of the U.S. dollar’s purchasing power can be seen in a chart published by the Federal Reserve Bank of St. Louis.

How Long Will the Dollar Remain the World’s Reserve Currency?

By: Congressman Ron Paul

We frequently hear the financial press refer to the U.S. dollar as the “world’s reserve currency,” implying that our dollar will always retain its value in an ever shifting world economy.  But this is a dangerous and mistaken assumption.

Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency.  This means the dollar became an article of faith in the continued stability and might of the U.S. government.

In essence, we declared our insolvency in 1971.   Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it– not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC in the 1970s to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.

In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.

In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers.  The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S. dollars.  These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world’s reserve currency, a threat which partially explains our ongoing hostility toward Tehran.

While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar’s status in the Middle East, an even larger threat resides in the Far East.  Our greatest benefactors for the last twenty years– Asian central banks– have lost their appetite for holding U.S. dollars.  China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever.  Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.

If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies.  If not, the rest of the world will abandon the dollar as the global reserve currency.

Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt.  We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , ,