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FDIC Assigns Gold A “Zero Risk Rating” When Calculating Bank Capital

June 22, 2012 by Leave a Comment

Although Federal Reserve Chairman Ben Bernanke refuses to acknowledge that gold is money, another major regulatory agency views the value of gold money as a risk free asset for calculation of Tier 1 regulatory capital by banks.   Meanwhile, as Ben Bernanke dismisses the value of gold, other central  banks around the world continue to increase gold reserves.  As the world financial system spirals closer to a complete breakdown, it is the holders of paper currencies that are squarely placed at the highest point of the risk spectrum.

TDV Golden Trader examines the current state of the financial system, the role of gold in wealth preservation and suggestions for protecting your gold from government confiscation.

Gold Becomes a Tier 1 Asset Class for Banks

Despite what the Main Stream Media (MSM) or “Financial Pundits” tell you, the gold bull market is far from over.  In fact, it is just starting, in our opinion.  While the misdirected financial world tell you that gold is in a bubble and it has burst, the central bankers and government organizations all know it is far from over.  In fact, gold is moving towards the banking system and not away from it.  We all know that many central banks are now net buyers of gold and their holdings are increasing as their need to diversify away from risky assets and foreign bonds only grows.

Central banks around the world are continuing to stock up on gold. We can now add Kazakhstan’s central bank to the grow list of bankers wanting to hold gold as a part of their currency reserve.  The Kazakh central bank intends to have 20% of reserves in gold, this is up from the current 14-15% currently held.  They plan to purchase 20 tonnes of gold this year, mostly from local producers.  They also mentioned a few weeks ago that they would cut their Euro holding to 25 % from 30%.  We can also add Kazakhstan to the growing number of central bankers which are building up gold holdings including China, Russia, Mexico, Colombia and South Korea.

The price of gold is now hitting all time highs in India, one of the biggest buyers of gold around the world.  Prices have reached an all-time high of $544.74 US (Rs 30420) per 10 grams.  With a slowing economy and low demand for the Indian rupee, it has been losing value lately and still remains weak.   However, gold demand is still robust even at these elevated prices as investors in India still consider gold a safe haven as it counters the effects of inflation and exchange rate fluctuations.

Over the past five years, gold has provided Indian investors with a 27.19% annualized return versus a pathetic 2.67% in the equity market.  This trend and move to gold has only grown in the last year.  Gold assets under management by funds have increased almost 100% $1.83 billion by April 2012, last year the value was $981 million.  In 2011, the gold ETFs in India saw a net inflow of $725 million.  For thousands of years the Indian culture has had an affinity for gold, and that will never change, and neither will their demand for physical at elevated prices.  Why?  Indians understand that gold is money and a true form of saving.  It’s the only way to protect assets and wealth from government theft, something the West is still learning.

Even the good ol’ USSA is starting to recognize gold as a tier one asset class. The Federal Deposit Insurance Corporation (FDIC) just issued a notice regarding a new policy proposal on how banks should revise the measurement of risk-weighted assets by implementing changes made by the Basel Committee on Banking Supervision (BCBS) to international regulatory capital standards and by implementing aspects of the Dodd-Frank Act.  Under the proposal the following assets would carry a zero percent risk weighting, notice how gold bullion is listed as the second item:

A. Zero Percent Risk-Weighted Items

The following exposures would receive a zero percent risk weight under the proposal:

  • Cash;
  • Gold bullion
  • Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organizations
  • Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria (as discussed below).

So regardless of what the MSM says, we continue to see more central bankers buying and hoarding gold.  New proposals by government banking agencies are being introduced into the system and gold is included as a tier one asset to hold with ZERO RISK.  All the signs are in place and what the MSM hasn’t been told yet is that gold is coming back into the banking system.

We are in a world where currency wars are being fought daily, and as the system continues to collapse under its own weight of paper printing, gold will be the go to asset and possibly the last man standing.  Don’t be fooled by what the MSM says, they rarely know what they are talking about and are paid to misdirect the puppets. Gold is here to stay.

European Capital Controls and a Flight to Safety

The Greek Elections are over and the pro-bailout New Democracy party won with approximately 29.7% of the vote.  By winning the popular vote, they were given a 50-seat bonus.  This combined with the support of the Pasok Socialist (who took 12.3% of the vote), will have 162 seats in the 300 seat parliament.  Combined, they have the ability to pass government policy with a majority vote, so they can now rig policy for keeping with the Euro.

The Euro experiment may have been saved from breaking up for now, but the bailouts will continue for the foreseeable future.  Since the socialists are realizing that austerity is not working, a new movement and calls for a policy of growth are afoot.  We can expect lots more money printing coming out of Europe now and in the foreseeable future.   While in a normal world that would hurt the Euro, the markets relief that the Euro will not collapse immediately should stop the downward pressure on the Euro. In fact, we could see a slight bounce off the recent lows from this news, but I suspect that will be short lived.  None of the problems have been addressed and printing money to fund the bailout will still be the cure central bankers will prescribe to the Euro financial system mess.

Capital controls are already in place within Euroland and this trend is growing quickly as the hot days of summer go on.  Recently, major Italian banks have given notice that customer’s accounts would be frozen for one month because of financial difficulties. This caught many bank customers off guard and completely unaware that they would not have access to their funds.  This should not be startling news for TDV subscribers as we have been warning for months that capital controls are coming and Europe is fast out of the gates in implementation.  For weeks, Europe has been planning bank withdrawal restriction to deal with Greece exit, the only one that hasn’t told you about it is the MSM.

Recently, a businessman was stopped at the Swiss border with £1.6m worth of gold in his car only to have it confiscated by the authorities and was subsequently charged with smuggling.  Italians know very well that the trend of confiscation by the “Mafia” government has only grown recently.  They have been exporting gold to Switzerland and this trend has grown 35% year over year in February 2012.  About 120 tonnes of gold have left Italian boarder in 2011, that is up 65% from 2010.  The Italian Prime Minister Mario Monti has been promising a crackdown on tax evasion as he continues to fight the trend of people wanting to avoid paying extortion fees (taxes).  It was estimated that more than £96 billion [€119.6bn] in taxes were dodged in Italy during 2009.

As much as we like gold as an investment and store of wealth, you must take the necessary precaution of protecting your gold from confiscation.  As desperate European governments continue to steal your wealth via inflation and outright theft, you must create a plan of protecting your gold.  Keeping it close at hand where only you have access to it is the first step.

Secondly, you should consider diversifying your precious metals holding internationally, which seems to be more difficult as capital controls in Euroland become stricter.  At TDV, we saw this trend coming a long time ago and have been warning subscribers to plan ahead.  Earlier this year, we published a 100 page report on how to diversify and internationalize your precious metals holding called Getting Your Gold Out Of Dodge (GYGOOD).  If you live in Europe and are interested in protecting your precious metals, this report is something you should consider getting right away; your time to act may be limited by your own government.

Gold Update

The price of gold is still consolidating.   The price needs to stay above support at the 50 dma of $1615.  If this support holds, then it could move toward resistance at $1675 and the 200 dma.  A break below $1610 could trigger selling and the price could still see one more wave of selling to test support at $1530 or slightly lower again.   If we do get one more wave of selling, I suggest you consider backing up the truck as this could be that last time we see prices this low, possibly forever.

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

Fed Manipulating Markets In Zero Sum Game To Create Higher Inflation

March 8, 2012 by 4 Comments

Presidential hopeful Mitt Romney recently said that “You know, I’m not willing to light my hair on fire to try and get support. I am who I am.”  If only the Federal Reserve Chairman could be so restrained.  Based on recent comments from Fed Chairman Bernanke, it seems likely that he would gladly set both his hair and beard on fire in order to accomplish his mutually exclusive goals of increasing employment while maintaining price stability.

With a stubbornly high rate of unemployment, massive fiscal deficits, very slow economic growth, declining incomes and debt levels that are strangling the U.S. consumer, the Fed is facing a quandary.  How can economic growth be stimulated without simultaneously igniting inflation?

Lower interest rates, the most powerful tool in the Fed’s arsenal, has already been fully exploited while providing  a zero net benefit for consumers.  The zero sum game of lower rates did not prevent the housing market from crashing, has not helped it to recover and has resulted in dramatically reducing interest income for millions of consumers.  Every dollar of interest saved by one consumer means one less dollar of income for savers, many of them retirees who suddenly have seen their CD rates drop to near zero.

With rates at zero, the Fed is now forced to use the last resort option of QE, risking higher inflation as it stokes the economy with digitally created dollar bills.  Increased inflation is the high risk option that the Fed is willing to take as explained in  Bernanke Seen Accepting Faster Inflation as Fed Seeks to Boost Employment.

Federal Reserve Chairman Ben S. Bernanke spent six years pushing for an inflation goal. Now that he has it, some investors are betting he’ll breach the 2 percent target in the short run to lower unemployment.

“The chairman seemed to suggest they will tolerate a misdemeanor on inflation as unemployment continues to fall toward their goal” over several years, said Mark Spindel, chief investment officer at Potomac River Capital, a hedge fund that manages $250 million in Washington.

Policy makers at a March 13 meeting probably won’t deviate from their commitment to hold the main interest rate close to zero at least through late 2014, even if their forecast shows a burst of energy-driven inflation, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. They’ll probably be more concerned that rising prices will hold back real spending, impeding growth and improvement in the job market, he said.

Crude oil prices have risen 32 percent since the end of the third quarter of 2011 and 6 percent this year. Energy prices could hold the Federal Open Market Committee’s inflation target benchmark, the personal consumption expenditures price index, above the Fed’s 2 percent inflation objective for much of 2012, Crandall said. The PCE rose 2.4 percent for the 12 months ending in January.

Also, workers have weak leverage for increasing wages to compensate for higher costs. Real average weekly earnings have fallen for 10 consecutive months on a year-over-year basis. As energy costs eat up more of consumer expenditures, companies have difficulty raising prices on other goods and services.

“To the extent that PCE inflation is somewhere around 3 percent while unemployment is still above 8 percent, I think there will still be no reaction from the Fed,” said Worah, who’s based in Newport Beach, California.

The expectation among investors that the Fed will allow for a temporary overshoot on the price goal has been “unambiguously bullish” for Treasury Inflation-Protected Securities, Worah said.

Gold, up 18% over just the past year, is also telling us that the Fed is likely to shoot past its goal of attaining a 2% inflation rate.  Furthermore, the Fed’s goal of accepting increased inflation as an acceptable risk for increased economic growth is a self defeating zero sum game.  By driving up inflation, the Fed has increased living costs for the average consumer, negating any positive net affect from stronger economic growth. Consumers, whose spending makes up 70% of GDP, ultimately can’t spend more without real income growth.

In an interview with CNBC, Jim Grant of Grant’s Interest Rate Observer, and a frequent critic of destructive Federal Reserve monetary policies, says the Fed is manipulating interest rates for the sake of achieving “desirable macro outcomes”.  Discussing the Fed’s latest scheme to expand money printing, known as “sterilized bond-buying”, Grant says he is uncomfortable with the program which will create inflation and distortions that will destabilize the entire debt market.

Grant also feels that Bernanke, a self proclaimed “expert’ on the depression of the 1930’s is making fundamentally flawed decisions to forestall Depression II that many feel is looming in front of us.  According to Grant, Bernanke can’t “stop talking about the ’30s”, but when the economy fell off a cliff in 1920 – 1921, the government actually balanced the budget and the Fed raised interest rates and the economy soon recovered on its own and not due to running “immense deficits”.

The full interview with Grant is worth listening to. Please click on this link if the video below does not play.


The Fed has only one hand left to play and it will continue to print money, a fact that has not gone unrecognized by the gold and precious metals markets.

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

Gold and Silver Plunge On Bernanke’s Remarks – What Happens Next?

February 29, 2012 by 1 Comment

The price of gold and silver plunged today after investors concluded that the Federal Reserve had no immediate plans for further quantitative easing.  In testimony to Congress Fed Chairman Bernanke made positive comments on future U.S. economic growth.  When Bernanke gave no indication that further monetary easing  would be necessary, a selling stampede began in the precious metals markets.

In New York trading, gold closed down $87.20 for a 4.9% loss on the day and silver declined by $2.29, down 6.2%.  Platinum got rocked with a $40 decline to $1,685 and palladium gave up $18 to close at $707.

Why the violent sell off in precious metals when the Federal Reserve and other central banks worldwide are still printing money on a massive scale?  For some thoughts on today’s precious metals rout and what’s likely to happen next, here are some links to excellent gold and silver related stories and blog posts:

Gold Falls In “Manic” Plunge

Explanations from various money managers on why gold and silver sold off.  Investors expecting continued monetary easing were disappointed.  William O’Neill, partner at Logic Advisors said “Bernanke’s comments seem to have eliminated hope of U.S. quantitative easing coming anytime soon.”

Gold, Silver Tumble on Heavy Profit Taking

Importantly, the gold and silver futures markets were ripe for corrective, technical and profit-taking pullbacks following recent strong gains that had sent gold and silver prices to multi-month highs. The Bernanke testimony gave many traders and investors an excuse to “ring the cash” register and take some profits. Also, veteran commodity market watchers know these markets can make sudden, unexpected price moves to temporarily roil investors and traders.

Kitco Interviews GATA Chairman

Interview with GATA Chairman Bill Murphy on today’s smashdown in the gold and silver markets.

Bernanke Tries Talking Down Commodities

If one basically states that the economy is doing better – not out of the woods yet but better – and all the hedgies are leveraged to the gills because the FED GAVE THEM THE GREEN LIGHT TO DO EXACTLY THAT when it first announced that it would keep this near zero interest rate policy out to the end of 2014, then it is a simple matter of throwing a bit of uncertainty in that regards to generate a bout of selling. Toss in the same permabears as always capping at the highs of the day and the algorithms did the rest of the work as the stops were picked off.

First Eagle’s Eveillard Openly Suspects Gold Market Rigging

Gold fund manager Jean-Marie Eveillard has just told King World News that he suspects that today’s pounding of the gold price was a matter of central bank intervention:

Eveillard, who manages $50 billion in assets, is among the few respectables in the gold world, and his stunning acknowledgment today is the price the Western central banks must begin paying for their increasingly brazen market rigging. It is a sign that GATA is making progress, however slow.

Progress could be made a lot faster, as Eveillard and a few other respectables might blow the market rigging to smithereens if they mustered a little courage and activism, such as a donation to GATA, which has been documenting, litigating against, and screaming about gold market rigging for years:

Today Window Dressing Fall In Gold

Please do not be bothered by today’s intervention. The following news is what creates the absolute need for QE.

It is the thesis of my Formula of 2006 of no major recovery that gives the foundation to my thesis of QE to Infinity.

Has serial money printer Bernanke suddenly converted to become a staunch proponent of a sound dollar?  Don’t bet your gold on that one.  As noted in a previous post, The Federal Reserve Can’t Produce Oil, Food or Jobs But They Will Continue to Produce Dollars.

Late note – gold is up $20.60 in Asian trading.

Filed Under: Featured, Gold, palladium, Platinum, Silver Tagged With: , , , , , , , ,

Fed Lays Groundwork For Price Explosion In Gold

August 10, 2011 by Leave a Comment

Gold hit another all time high of $1,779.10 before pulling back to close at $1745.10, up $26.90.  Gold has advanced strongly over the past year as the Federal Reserve engaged in quantitative easing and extremely loose monetary policy.  Over the past 30 days gold has gained $198 and over the past year, a stunning $548.70 per ounce.

At the conclusion of the Federal Open Market Committee (FOMC) meeting on Tuesday, the Fed announced that it would maintain its zero interest rate policy through the middle of 2013.   The Fed does not normally make commitments that limit future policy flexibility and three of the seven members of the FOMC  voted against the pledge to maintain zero interest rates.

The Fed has held interest rates at zero for 32 months now with little to show for it as debt burdened consumers continue to reduce spending.  With inflation running at 5 to 10% (depending on whose stats you believe), real interest rates are negative and savers are seeing the purchasing power of their dollars destroyed by Fed policies.

The FOMC also said that they expect “a somewhat slower pace of recovery over the coming quarters” and that future action might be taken to “promote stronger economic recovery.”  Since the Fed has already exhausted all normal policy tools, the FOMC seems to be positioning itself for another round of quantitative easing.  Some analysts speculate that the Fed will discuss further easing measures later this month at the Fed’s annual conference in Jackson Hole, Wyoming, where QE2 was launched.

Further fiscal stimulus seems improbable given the restrictions put on future spending by Congress as part of the debt limit agreement.  In a sign of how desperate the financial condition of the United States has become, all eyes are now turned towards the Fed.

Since zero interest rates and two rounds of money printing have done little to turn around the US economy, the expectation is that the Fed will need to do more of what failured before, except on a grander scale.  I expect that as the economy continues to weaken, the Fed will announce a “shock and awe” campaign of massive money printing accompanied by an explicit statement that they are committed to higher inflation.

Federal Reserve policies have been the primary factor pushing the price of gold higher.  The inevitable announcement of further quantitative easing will be trigger that pushes gold prices thousands of dollars higher.

Consider the statement of the former Fed Chairman Alan Greenspan who on a “Meet the Press” interview arrogantly proclaimed that the United States could never default because “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”  This is what the United States has come to under the easy money policies of the Federal Reserve and a government that believes prosperity can be created by oceans of debt.  Is it any wonder that the currency is collapsing and the purchasing power of the dollar declining precipitously?

Meanwhile, Kenneth Rogoff (of This Time It’s Different fame) who attended Harvard with Bernanke, tells Bloomberg that the Fed should explicitly set a high inflation target and engage in massive quantitative easing.

Federal Reserve policy makers are likely to embark on a third round of large-scale asset purchases, moving “more decisively” to secure the U.S. recovery, said Harvard University economist Kenneth Rogoff.

“They certainly should do something right away,” said Rogoff, a former International Monetary Fund chief economist who attended graduate school with Fed Chairman Ben S. Bernanke.

“Out-of-the-box policies are called for, especially much more aggressive monetary policy, however unpopular that may be,” said Rogoff, 58, a former Fed economist who like Bernanke earned a Ph.D. from the Massachusetts Institute of Technology. The Fed is “going to move more decisively,” Rogoff said.

Rogoff recommended the Fed say in “very clear statements” that it’s trying to create “moderate inflation.” “In the classic classroom QE, it’s open-ended,” Rogoff said. “You say, ‘I’m trying to create inflation of, let’s say 2 or 3 percent, and I’m going to do whatever it takes.’”

The extreme policy measures recommended by Greenspan and Rogoff prove that the US has already passed the tipping point and has only one policy option left.  If the Fed does not print like crazy, the whole rotten edifice of towering debts will collapse, plunging the country into a deflationary collapse.

Gold will have price corrections as it continues to move upward but the ultimate price will be many thousands of dollars higher than today.  Gold investors should continue to accumulate positions, especially on price weakness and enjoy the unfolding of one of the greatest bull markets in history.

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

“Gold Is Not Money” – Ron Paul Shreds Bernanke

July 14, 2011 by 3 Comments

Ben Bernanke’s head must have been spinning after Ron Paul’s rapid fire series of questions on gold at a hearing by the House Financial Services Committee.

Ron Paul’s confrontational and decisive questioning left the former Princeton professor looking uncomfortable and befuddled.

Ron Paul started off by noting that instead of spending $5.1 trillion bailing out banks and enriching corporations with no discernible economic benefit, the Fed could have simply given each and every American $17,000.  Ron Paul also suggested that the huge amount of money injected into the economy by the Fed has caused a real inflation rate of about 9%, far above the government inflation statistics.

Bernanke, obviously annoyed with Paul’s remarks started to elaborate on why the Fed was actually a “profit center” for the government, but was quickly cut off by Ron Paul who noted that he had only five minutes of allocated time to ask questions.

Ron Paul then followed up with a series of devastating questions that left the Chief Money Printer reeling.

Paul:  “When you wake up in the morning do you care about the price of gold?”

Bernanke:  “I pay attention to the price of gold.  I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as protection against what we call tail risks, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis they have gold as a protection.”  (Editor’s note: Gold has been steadily rising for the past ten years.)

Paul: “Do you think gold is money?”

Bernanke: (after a long awkward pause) “No, it’s not money, it’s a precious metal”.

Paul:  “So even if it’s been money for the past 6,000 years, somebody reversed that, eliminated that economic law?”

Bernanke:  ”It’s an asset.  Would you say Treasury bills are money? I don’t think they’re money either but they’re a financial asset.”

Paul:  “Why do central banks hold it?”

Bernanke:  “Well it’s a form of reserve”.

Paul:  “Why don’t they hold diamonds?”

Bernanke: “Well it’s tradition, long term tradition”.

It’s unfortunate that Ron Paul was only allowed to question the Fed Chief for five minutes.  In a couple of hours, Ron Paul would have shredded the foundations of the dollar’s value.  In an interview with thestreet.com, Ron Paul says “Gold, if you pick up a coin minted 6,000 years ago, you’d still have your money. If you pick up a piece of paper printed a year ago, it might be worth half its value. So history is on my side of the argument.”  Gold as money has retained its value over the millennia – does anyone really expect any modern currency to retain value over the long term?

In Bernanke’s world he is right – gold is not money.   All contemporary monetary systems are now based on fiat money with no intrinsic value other than the full faith and credit of the government issuer.  Unfortunately, the world’s short term experiment with a fiat money system seems to be swirling towards financial disaster in Europe as nation after nation totters at the edge of default.

The real disaster is that the hoax of fiat currency has been very effectively promoted by Bernanke, Governments and Central Banks.  The middle class citizens of most countries still hold the unshakeable, religious conviction that their paper money will retain its value because it is backed by an all powerful government that can protect their bank savings, pension plans, etc.  If this profound belief in paper money did not exist, gold would be thousands of dollars higher as currency holders of insolvent countries such as Greece, Ireland, Portugal and Spain desperately lined up to buy gold.

As the looming financial crisis explodes, bank depositors will discover that a bankrupt nation cannot protect their savings.  It will be too late for many as bank holidays and the financial collapse of financial institutions prevent depositors from accessing their money.  Middle class savers will be financially destroyed.  If depositors eventually get paid back in printed paper money, it will be worth a fraction of its original value.

Bernanke can say that gold is not money but time will prove him wrong.

 

 

 

 

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

Steve Forbes Joins Ron Paul’s Call For Gold Backed Currency

June 24, 2011 by Leave a Comment

Steve Forbes, CEO of Forbes Magazine, said the U.S. should return to a gold backed currency to prevent further debasement of the U.S. dollar.  Mr. Forbes joins a growing chorus of intellectually honest Americans who view the Federal Reserve as the greatest danger to the American economy and way of life.

The quest to preserve the value of the U.S. currency and rein in the Federal Reserve has long been championed by Rep. Ron Paul.  Apparently, Ron Paul’s message is beginning to make sense to more and more Americans as they watch the purchasing power of their dollars decline daily.

http://youtu.be/3CG9UVagFQ0

Bloomberg is reporting that the public approval rating of Fed Chairman Bernanke has dropped to the lowest level in two years. Bernanke has an approval rating of only 30% compared to 41% in late 2009.  Bernanke’s response to every problem has been to lower interest rates and print money, which have done little to improve the fundamental financial health of consumers or the government.

According to Bloomberg, the public has grown increasing skeptical of increased debt and money printing since unemployment is still near 10%, home values are still in a free fall and the declining purchasing value of the dollar has lowered the standard of living for most Americans.  The Bloomberg Poll showed that a resounding two thirds of Americans think the country is on the wrong track, with 55% expecting their children to have a lower standard of living.

Professor Bernanke can wax eloquent on the benefits of “quantitative easing” but the average American is smart enough to know that a country that needs to print money to pay its bills is in desperate financial condition.

Steve Forbes noted that the ability of the government to print money encourages reckless spending since money can be created out of “thin air.”  According to Mr. Forbes, if the country returned to a gold standard, unlimited spending could not occur.  Ironically, the ability to expand credit and print money is exactly why the government abandoned the gold standard.  The concept of a Federal Reserve and a gold backed currency have become almost mutually exclusive concepts.

 

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

Why A Gold Backed Currency Is No Longer Possible

June 14, 2011 by Leave a Comment

It is ironic that one of the most eloquent proponents of a gold standard did the most to ensure that we will never have one.  Alan Greenspan’s 1966 paper entitled “Gold and Economic Freedom” expounded on the role of a gold backed currency in protecting wealth against inflation by restricting the amount of money that could be produced.

Greenspan notes that the creation of the Federal Reserve was based on the premise that a central bank could supply increased reserves to banks when necessary and thereby offset natural turn downs in the business cycle.

“But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.”

It was not long before the Fed’s ability to allow unchecked credit expansion by banks laid the groundwork for the economic collapse know as the Great Depression.  Greenspan states that in an attempt to offset a mild business contraction in 1927, massive amounts of new bank reserves fostered a speculative boom ending with the Wall Street Crash of 1929.

“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage… The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.”

Fast forward 75 years and we are looking at an eerily similar situation.  Unlimited credit creation by the Fed creates multiple asset bubbles that precipitate an economic crash and the dawn of Great Depression II.

Greenspan goes on to explain why there was ardent opposition to the gold standard despite the catastrophic results of unchecked  credit creation by the Fed in the 1920’s and why deficit spending is equivalent to the confiscation of wealth.

“But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold…The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

Ironically, the man who best understood the merits of a gold backed currency became the driving force behind the unlimited credit expansion that lead to the largest financial crisis in U.S. history.

Greenspan’s compromise of principles is beyond reproach for a man who understood the consequences of  ultra easy monetary policies, yet allowed himself to be corrupted by lobbyists, bankers and politicians.  Does anyone expect a better performance from current Fed Chairman Ben Bernanke, a man who blatantly prints money in an overt attempt to further debase the U.S. dollar?

Incredibly, Alan Greenspan disingenuously initiated another discussion on the need for a gold standard earlier this year.  In an interview with Fox News in January 2011,  Mr. Greenspan had the temerity to say:

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board or something to that nature, because unless you do that, all of history suggest that inflation will take hold with very deleterious effects on economic activity.”

http://youtu.be/yRJs5yL62BA

Three conclusions can be reached regarding a U.S. gold standard:

1.  Mr. Greenspan should cease talk about a U.S. gold standard and the dangers of unlimited credit expansion – his previous record  speaks for itself.

2.  The ability of the U.S. to adopt a gold backed currency has been overwhelmed by the debt and leverage which now threaten to bring on a deflationary collapse.  Ben Bernanke knows this which is why he has been printing money on an unprecedented scale.

Ironically, the creation of new credit may be the only factor preventing us from sliding into a deflationary depression  triggered by massive debt defaults.  Ben Bernanke’s prescription of inciting inflation and curing excessive debt with more debt may be the only poor policy option remaining to forestall an unimaginable economic nightmare.  With the global economy tottering on the edge of another financial crisis,  the adoption of a gold standard by the U.S. remains a very remote possibility.

3.  Since the government is not interesting in preserving the value of our currency, individual initiative becomes necessary.  Ten years of rising gold prices tells us the smart money is not waiting for a gold backed currency but instead is turning directly to gold.

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

Inflation Is “Transitory” – More Nonsense From Bernanke And A Buy Signal For Gold

June 7, 2011 by Leave a Comment

Federal Reserve

Federal Reserve Chairman Ben Bernanke, speaking at a conference of international bankers in Atlanta today, stated that “the recent increase in inflation will prove transitory.”   Citing the recent decline in commodity prices as an indication that future inflation will be subdued, Bernanke said the Fed will keep inflation under control “using whatever actions are necessary.”

It’s been awhile since a senior U.S. official had the audacity to assert official U.S. policy that is in direct contradiction to actual U.S. actions.   In June 2009, US Secretary Treasurer Tim Geithner told an audience of Chinese students in Beijing that the Obama administration would follow “very disciplined”  spending to reduce massive U.S. budget deficits.  In addition, Geithner stated that “We believe in a strong dollar.”

Finally, in response to concerns by Chinese economists who believed that holding U.S. debt was “risky, Geithner stated that “Chinese assets are very safe.” This final remark drew loud laughter from the audience of Chinese students.

The Chinese are not laughing today as the dollar has plunged in value and U.S. deficits have increased by trillions of dollars since 2009.

As the U.S. dollar continues its downward spiral, the Chinese have initiated actions to diversity out of U.S. dollars and into more stable stores of value by making large investments in natural resources and purchasing stakes in businesses worldwide.  The Chinese were not fooled in 2009 and Bernanke is not fooling anyone today by stating that inflation is transitory.

Bernanke was fortunate that his audience consisted of polite bankers who managed to subdue any overt laughter.  Inflation has been a continual event under our fiat monetary system.   Since officially coming off the gold standard in 1973, the dollar has seen a relentless loss of its value due to inflation and Bernanke knows it.

Bernanke also knows that his worse enemy is deflation which would make the repayment of debts impossible and propel the U.S. into a deep depression.  The U.S. cannot resolve its massive debt and unfunded spending commitments by either economic growth or increased taxation.  The only option left is inflation, which steals wealth by destroying purchasing power, but also allows debts to be repaid using debased dollars.   The Federal Reserve has consistently employed inflationary policies as shown by the BLS chart below.

Even as Bernanke was giving solemn assertions that the Fed would be vigilant in protecting the value of the dollar, the President of the Federal Reserve Bank of Atlanta, Dennis Lockhart, said that the Fed should establish a goal of 2% inflation as an “explicit numerical objective.”  Sorry Dennis, we are already way past 2% inflation.  An inflation rate of 2% may not ring alarm bells to the American public, but a 2% inflation rate equates to a whopping 18% loss of purchasing power over 10 years.

Despite Bernanke’s duplicitous assertion that the Fed will contain inflation “using whatever actions are necessary”, his greatest fear remains deflation. At the Fed’s 2010 summer meeting at Jackson Hole, Wyoming, Bernanke said the Fed would be “proactive” in preventing deflation and that  “The Federal Open Market Committee will strongly resist deviations from price stability in the downward direction.”

The relentless rise in the price of gold directly reflects the dollar debasement policies of the Federal Reserve.  Today’s statements by both Bernanke and Lockhart constitute a long term buy signal for gold investors.

 

 

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The Federal Reserve Can’t Produce Oil, Food Or Jobs But They Will Continue To Produce Dollars

May 26, 2011 by Leave a Comment

Federal Reserve

No bull market goes straight up without normal price corrections along the way.  The recent sharp pullback in silver prices and the more subdued correction in gold prices are likely to be viewed in hindsight as a superb buying opportunity.

Simple trend line analysis suggests that current prices for gold and silver are in a buying range.  Using the SLV and GLD as proxies for the metals, we can see that the recent sell off has brought prices to trend line support.   Combining the “trend is your friend” theory along with solid fundamental underpinnings for gold and silver, higher prices seem inevitable.  For patient long term investors, especially in the gold market, every pullback of the last decade has simply been another opportunity to exchange depreciating paper dollars into a better store of value.

The SLV recently hit its trend line in the low 30’s.

SLV - COURTESY ETRADE.COM

The GLD’s long term trend line does not even hint of parabolic price movement, contrary to mainstream press reports warning the public of the dangers of gold investing.

GLD - COURTESY ETRADE.COM

Despite the assertions of Fed Chairman Bernanke that inflation is not a problem, any one outside of the academic inner circle of the Federal Reserve sees inflation everywhere they look.  Soaring gasoline and heating costs have decimated family budgets and retail food inflation is projected to hit 4% or higher in 2011.  Constantly higher inflation, as measured by the Consumer Price Index, has prevailed ever since the U.S. officially went off the gold standard in the early 1970’s.  (See also Why Higher Inflation and $5,000 Gold Are Inevitable).

This week we have seen announcements of higher prices by Starbucks, Smucker Co, Nestle, McDonald’s and Whole Foods.  Walmart previously warned that the debasement of the dollar was translating into higher retail prices on imported items.  The upward price spiral in the cost of necessities is especially burdensome since incomes for the majority of Americans are not increasing.

In an excellent article in the Wall Street Journal this week, Ronald McKinnon persuasively suggests that the United States is entering 1970’s type stagflation, the result of high inflation, high unemployment and stagnant demand.  According to Mr. McKinnon,  “the U.S. economy again seems to be entering stagflation. April’s producer price index for finished goods, which excludes services and falling home prices, rose 6.8%. The Bureau of Labor Statistics reports that intermediate goods prices for April were rising at a 9.4% annual clip. Meanwhile the official nationwide unemployment rate is mired close to 9%.”

McKinnon argues that stagflation is being caused by the Fed’s zero interest rate policies (which besides robbing retirees and savers), has cause a global flood of hot money that has resulted in surging inflation in Asia and Latin America and a 40% rise in commodity prices over the past year.

The Federal Reserve’s policy options at this point seem limited to continuing their policies of cheap money and dollar debasement.  The Fed cannot produce oil as Bernanke recently commented.  Nor can the Fed produce food, jobs or higher housing prices.  The one thing the Fed can and has done is to produce paper dollars in extraordinary quantities.  Debt, when allowed to expand to levels that make repayment impossible, leaves the debtor with no good options – a point that we are rapidly approaching. (See also Why There Is No Upside Limit To Gold and Silver Prices).

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Why Higher Inflation And $5,000 Gold Are Inevitable

May 19, 2011 by 1 Comment

In his press conference on April 27, 2011, Federal Reserve Chairman Bernanke dismissed inflation worries, stating that “Our expectation is that inflation will come down and towards a more normal level”.   Should we believe him?  Not if you want to preserve your wealth and here’s why.

Chairman Bernanke has a perfect record of making inaccurate economic forecasts.

  • Bernanke, March 2007, prior to the historic housing crash said,  “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
  • Bernanke, February 2008, prior to the banking crisis that almost resulted in the collapse of the entire U.S. banking system  said, “I expect there will be some failures. I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
  • Bernanke, June 2008, prior to the worst recession and job losses since the 1930’s, said the danger of the economy falling into a “substantial downturn” appears to have waned.

Even if the Fed was able to keep inflation at a “benign” rate of 2% a year, the long term effects on savings are devastating.  Over ten years, a 2% inflation rate reduces the value of $100,000 to $82,034, resulting in an 18% loss in purchasing power.

According to the Bureau of Labor Statistics, inflation averaged 3.4% since 1980.  At the beginning of 1980, one dollar had the same purchasing power as $2.86 at the end of 2010.

The cost of living has spiraled upwards since the early 1970’s, correlating perfectly to the point at which the value of the dollar was decoupled from gold.  In 1971, the United States stopped exchanging dollars for gold to foreign official holders of dollars and the dollar gold standard was officially ended in 1973.

The Fed’s policy of pushing easy credit for the past 30 years to fuel economic growth has left Americans swimming in debt.  The housing collapse and declining incomes have resulted in millions of mortgage defaults and underwater homeowners.  The Government’s attempt to bailout a collapsing economy and over leveraged banks and consumers has resulted in trillions of dollars in new debt and a $1.5 trillion deficit.

Government debt has exploded to the point where the solvency of the U.S. Government is now being questioned.  Large tax increases to erase the deficit would spin the U.S. into a deep recession.  The President and Congress lack the political will to cut spending.  The U.S. has spent and borrowed itself to the eve of financial ruin and must “inflate or die” at this point (see Why There Is No Upside Limit For Gold and Silver Prices).

The Fed, with the experience of two money printing campaigns already under its belt, will have no problems extending this practice.  As Bernanke noted in 2002 before he became Fed Chairman, “The U.S. Government has a technology, called a printing press, that allows it to produce as many U.S. dollars as it wishes at no cost”.

The Fed’s cheap money policies and concerted efforts to debase the value of the dollar are just beginning, and that means the biggest move up in precious metals is still in front of us.  My minimum long term forecast for gold remains at $5,000 per ounce and silver at $170 per ounce.

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