December 5, 2022

Peak Gold – 75% of All Gold Deposits Have Already Been Mined

1933-double-eagle1The basic law of supply and demand dictates the quantity of goods offered for sale.  If prices are low and goods cannot be sold at a reasonable profit, producers will be unmotivated to increase production.  If prices  increase as demand for a product is soaring and producers can reap high returns, supply will increase as producers increase output to maximize profits.

When it comes to gold, however, the textbook equation for supply and demand can be thrown out the window.  Gold exists in finite quantities and has become increasing more difficult and expensive to mine.  In addition, major new gold deposits discoveries have dropped to zero in the past two years and ore grades have declined significantly to only 3 grams per tonne from 12 grams per tonne in 1950.

Even as gold exploded in price from under $300 per ounce in 2002 to $1,800 per ounce in 2011 gold production trended lower.  Despite much higher prices, gold miners were simply unable to increase supply.  According to the World Gold Council mine production over the past five years has not increased and average annual production has remained stable at approximately 2,690 tonnes per year.

On a long term basis gold production will continue to decline even further for the simple reason that most of the earth’s richest deposits of gold have already been mined and new gold deposit discoveries have declined significantly (see New Gold Discoveries Decline by 45%).

At the end of 2012 it is estimated that all the gold ever mined in history totaled approximately 173,000 metric tonnes.  According to the Perth Mint, a study done by Natural Resource Holdings estimates that there are only about 56,674 metric tonnes of recoverable gold reserves left.  If this bleak assessment is correct, over 75% of the world’s total gold reserves have already been mined as shown in the infographic below.

To keep things in perspective, the total global gold supply (including both mined gold and gold reserves) totals 230,000 metric tonnes worth about $9.2 trillion at the current gold price of $1,239.  By comparison, the U.S. deficit has exploded to over $17.2 trillion and the Federal Reserve has printed $4 trillion to drive down interest rates by purchasing mortgage backed securities and treasury debt.

In the bizarro world financial system created by the Federal Reserve and other central banks, the meaning of money has become distorted to the point where it is almost meaningless.  The recent decline in gold prices should be viewed as a long term opportunity to increase positions in a currency that central banks cannot create at will in infinite quantities.

Financial Repression and QE Guarantee A Bleak Future for Retirees

1986-gold-eagleBy: GE Christenson

A mid 60s woman was chatting with two friends at a Starbucks. I overheard the conversation. It went something like this…

“When my husband and I retired, our financial advisor said we had enough money to last until we were both 95 years old. Now he is concerned that our savings might not last until we are 80.”

It gets worse.

“But if either of us dies then our pension income is reduced and the survivor has to make a choice – pay the mortgage or eat.”

It gets worse.

“And we still have to worry about healthcare.” She went on about sky-high health care costs, Obamacare, and her pre-existing conditions that prevented her from changing insurance.”

She probably does not see how much worse it can become.

What is the Problem?

In simple terms the Federal Reserve has lowered short term interest rates to nearly zero (ZIRP – Zero Interest Rate Policy) and is “printing” $85 Billion per month (QE) to bail out bankers and our politicians who can’t balance the government budget or even pass a budget.

So What? Aren’t low interest rates good for the economy and for home prices?

Well, maybe in the short term they appear to be beneficial. The politicians and bankers have assured us of such. But politicians and bankers are benefitting from QE so perhaps we should question their assessment. Consider these points:

Would you loan your money for 30 years to an insolvent government that chronically spends far more than it collects in taxes? Would you consider that 30 year bond a wise investment if the government paid you less than 4% per year? Think back to what your expenses for gasoline, housing, food, and health care were in 1983 to help determine if 4% per year is enough to compensate for your guaranteed higher expenses and for the decline in the value of the dollar in the years to come. (Hint: NO!)

Retirement systems, life insurance policies, annuities, city and state government pensions and so much more depend upon the interest earned from government and corporate bonds, saving accounts, and Certificates of Deposit. If the interest earned over the past five years has been about 1% to 3.5% per year and most pension plans have assumed earnings in the (typical) 7% to 9% range, those pension plans have been underfunded by a larger amount each year. Think California public employees, Chicago public employees, New Jersey, Detroit and so on. Most pension plans for city and state employees are currently underfunded while they are optimistically assuming future interest earnings much higher than the Federal Reserve has repeatedly assured us will be possible.

mount-rushmore1

Conclusion

The ZIRP and QE are causing the retirement funds for many governments and corporations to be more underfunded each year. If your retirement comes from a government pension, it is less secure each year. It can’t remain underfunded forever. Ask the retirees from Detroit!

Corporate pension systems invest similarly. If your retirement comes from a corporate pension, it is less secure each year. Ask the retirees from a bankrupt airline or from Enron Corporation.

If your retirement is funded by your personal savings and you have been earning perhaps 1% per year for the past five years, you already know the devastation that ZIRP and QE have caused in your personal finances.

CPI INFLATION

The lady mentioned at the beginning understands that she and her husband are earning much less money in their retirement accounts than their financial advisor had projected, and so their retirement money will not last as long as originally hoped. What she probably does not realize is that her interest income will be kept low for the foreseeable future while her living expenses are very likely to substantially increase. In short, their retirement funds probably will be depleted well before she and her husband reach 80 years old. That is not a happy thought for her family and for millions of others who expected more “normal” interest earnings before the government and The Federal Reserve chose to bail out the financial industry. That bailout occurred at the direct expense of the taxpayers and at the indirect expense of savers, pension plans, and other retirement systems because of the unexpectedly low interest earnings created by the ZIRP and QE.

Karl Denninger has written a highly intelligent piece describing this process and the consequences. Read it for new insights. From that article:

“The bottom line is that QE produces what looks like a ‘benefit’ without cost at the start of the program, but that appearance is a con job.”

“In short at best QE is nothing more than pulling forward the ability to spend paid interest from tomorrow into today but for each dollar pulled forward to today it is taken from tomorrow’s spending.”

“How much harm are we talking about? Well, that’s difficult to determine, because you’d need a blended rate of interest across the entire lending continuum to figure it out. But it is certain that the $3 Trillion added to the Fed’s balance sheet is less than the actual amount pulled forward over that time.”

bernanke's paper

Summary

The Fed, through ZIRP and QE, has created $Trillions of benefits for the financial industry and much of that benefit has been created at the expense of government pension plans and individuals who depend upon interest earnings. This has a direct and negative consequence to many retirement plans, especially city and state public pensions.

It is especially destructive to those individuals who depend upon interest earnings to fund their cost of living.

Your savings are unlikely to last as long as you hoped.

Further Considerations

The Fed is “creating” $85 Billion per month for QE. This boosts the financial industry, the stock market and the bond market but the average person realizes little benefit from those markets. The average person is actually hurt by the lower than expected interest earnings in his personal accounts and in the pension accounts from which his pension is paid.

SILVER: The silver market is tiny. In very round numbers about a billion ounces are mined, worldwide, each year. This is approximately $20 Billion per year or only about one week of QE for bond monetization.

GOLD: The gold market is much larger than the silver market but still small compared to the QE process. In round numbers the worldwide annual gold mining market is 3,000 – 4,000 tons or about $ 130 – $170 Billion per year. Two months of QE “money printing” is enough to purchase all the gold mined each year in the whole world.

Does it seem “right or moral” to you that a privately owned central bank prints enough money each WEEK to buy the equivalent of all the silver mined worldwide in a year, or that TWO MONTHS of “printing” would purchase all the gold mined in a year? The politicians and bankers will not change this process but we can adapt to the consequences.

Does it seem likely that dollars, which are printed in excess every month, will retain their value against gold and silver?

Stated another way, does it seem likely that while gold and silver are limited in supply, and while the dollars used to purchase those metals are increasingly debased by both the central bank and the government, that the prices for gold and silver will remain stable or even decline?

The bullish case for gold and silver is reported in the alternate media and by numerous gold and silver “bugs” such as myself. The bearish viewpoint is easily obtained from the mainstream media, Goldman Sachs, and the Federal Reserve. Other intelligent individuals, such as Harry Dent and Robert Prechter, also promote the bearish viewpoint. I find the bearish analysis for gold and silver rather unlikely and often self-serving for those in the financial industry who make their living selling “paper.” But often it is valuable to analyze the perspective of those who disagree with you.

Decide for yourself! Your financial well-being and your retirement may depend on an intelligent assessment of the consequences of more QE, higher or lower gold and silver prices, and booms and busts in the stock and bond markets.

My vote is with gold and silver. Five thousand years of history support that viewpoint. Paper money does not retain its value or purchasing power. Hundreds of years of history support that viewpoint. Further, QE and ZIRP accelerate the decline in the value of paper dollars.

Gold and silver have been moving down, on average, for about 2.5 years. They might even be down another year, however I doubt it. In five years you might earn a total of 5 – 10% in a Certificate of Deposit. By contrast you are likely to double (quadruple or more) your savings if they are invested in gold or silver. Which will be more beneficial to your retirement?

Which sounds safer – gold or paper? Would you prefer something that has retained its value for 5,000 years or unbacked paper money – which has eventually and always declined in value to near zero?

GE Christenson
aka Deviant Investor

Gold and Silver Are in Long Term Uptrends

mount-rushmore1By: GE Christenson

The BIG Perspective: Examine the following “Point & Figure” chart from Ron Rosen. This type of chart plots price on the “y” axis while the “x” axis shows time but without uniform distance between years. The long term trend has been up since 1970 and 2001, while the intermediate trend has been down for the past 26 months.

Gold and silver will outlast hope, change, paper money, treasury debt, and political promises. Most people do not and will not understand why!

The following are logarithmic charts of the official U.S. national debt, gold, silver, and crude oil for the past three to four decades.

Clearly the long term trends are up. Why?

  • A debt based paper currency system must expand to survive!
  • The Fed needs an increasing money supply and more debt.
  • Congress and the administration aggressively spend money, borrow money, and increase the national debt. It will take a real crisis to change this – much worse than a phony debt ceiling crisis.
  • The financial industry wants to churn more paper assets, debt, derivatives, and volatility to increase their profits.

The inevitable conclusion is that, over the long term, money supply, debt, and prices will increase until there is a systemic reset or crash. What will endure throughout the inevitable inflation, deflation, and crash? Gold and silver will endure. Paper assets are only as good as the collateral backing them, and many of those assets could vaporize in a systemic reset. Gold and silver will survive and maintain their value, while the dollar and Treasury Debt may lose a good portion of their value and purchasing power.

maple-leaf-442x450

Hope & Change

Hope is not a good basis for an investment plan. Hope is not a viable foundation for a political philosophy or for the actions of a government. Hope will not pay the bills, reduce the debt, or return sanity to an out-of-control spending process.

Ask yourself how well these are working:

  • We spent the rent money on lottery tickets and booze. We hope something good happens soon.
  • We spent a few $Trillion on useless wars in the middle-east. We hope it helped.
  • We spent $17,000,000,000,000 more than our revenue. We hope it is not a problem.
  • We sold or “leased” much of our accumulated gold and sent it to China. We hope nobody noticed and that it will not matter.
  • We hope we don’t have another stock market or bond market crash.
  • We hope to increase taxes and reduce benefits while increasing consumer prices and we hope to keep the people happy and voting for the incumbents. (This is also change.)
  • We hope to actually pass a budget real soon. (Congress has not passed a budget in the past five years. Did anyone notice or care?)
  • We hope to reduce the deficit real soon.
  • We hope the Federal Reserve and the politicians will make it all better.
  • We hope that hope and change will begin to work real soon.

As for “CHANGE” – it can be positive or negative. Not all change is good. We “HOPED” for better government and we received Obamacare. Was that a positive change?

Gee, we hope that the 10 Million or so people whose insurance plans will be cancelled and who will be forced to purchase new health insurance policies at much higher rates are okay with the change, increased deductibles and the increased costs. We hope they don’t get upset or angry or think someone lied to them.

Liberty-Eagle
Gold and Silver!

Dr. Phil says that the best predictor of future behavior is relevant past behavior. Using that thought it seems clear that:

  • The official national debt will continue to exponentially increase like it has for more than four decades.
  • The dollar will continue to decline in purchasing power like it has for the past 100 years.
  • Gold and silver will continue to (erratically) increase in price like they have for the past 40 years.
  • Gold and silver will hold their value and purchasing power like they have for 5,000 years.
  • Government deficit spending and borrowing will continue.
  • There will be another budget crisis, and another, and another.
  • Politicians will talk, make promises, and become much wealthier while the middle and lower classes find their expenses increasing far more rapidly than their incomes. We will re-elect those politicians.
  • Hope and change will continue to produce what they have so far – nothing but more debt.

Gold and silver will outlast hope, change, paper money, treasury debt, and political promises. Most people do not and will not understand why!
So, place your bets!

  • Paper currency or gold and silver.
  • Debt based paper assets or real money – gold and silver.
  • Political promises or something of lasting value.
  • Futures contracts on a corrupt exchange or land.
  • Credit card debt or stacked silver in a safe.
  • Social security income in a decade or gold in hand now.
  • Obamacare or good health.
  • Nutritionally empty fast food or healthy nutritious food.
  • Artificial and phony or real and valuable.
  • Reality television or the Holy Bible.

Most people will stick with what they know – paper currency, debt based paper assets, political promises, hope and change, and reality television. The choice is yours, but you will have a better financial future and more peace of mind if you invest in something real and valuable.

GE Christenson
aka Deviant Investor

The Hard Facts About Gold, the Fed, and the U.S. Government

gold & barLet’s back away from the “smaller” questions like:

  • Will the Fed taper or not?
  • Is Obamacare a disaster or just a huge problem?
  • Is the S&P 500 index due for a correction?
  • Is the U.S. economy improving?
  • Why is most of the rest of the world angry with the U.S.?
  • If inflation is so low, why are my expenses increasing so rapidly?
  • Is the NSA spying on everyone’s cell phone and computer?

Let’s look at the really big picture!

  • The Fed wants higher stock prices. The Fed serves the needs of the wealthy and the wealthy have a large chunk of their wealth invested in stocks.
  • The Fed wants low interest rates, which keep bond prices high, because the wealthy are heavily invested in bonds.
  • The Fed and the U.S. government need low interest rates so the U.S. government’s debt service costs remain low, real estate is attractive, credit is inexpensive, and investors are forced to reach for yield, buy stocks, and maintain the bond and dollar bubbles.
  • The U.S. government wants to spend money, lots of money, and avoid the consequences. Congress lives to buy votes, increase their power, and collect “contributions.” Lobbyists want a piece of the action for themselves. Corporations want to “influence” legislation to increase their profits. Business as usual. Spend. Spend. Spend!
  • Central banks, especially the Fed, and western governments want lower gold prices, so their unbacked paper money still appears valuable, so the U.S. dollar retains relative value against other currencies, and so the world will continue sending goods and commodities to the U.S. in exchange for paper dollars and T-bonds.

Can the Fed and the U.S. government manage the markets to achieve low interest rates, higher stocks, low inflation, low gold prices, and a strong dollar, all while spending much more than revenues support and thereby running the national debt up to insane levels? My assessment is NO!

What does the data indicate?

  1. Assume that the world changed around the 9th month of 2001. Stocks had peaked and crashed, the Twin Towers came down, government expanded, and the U.S. declared a War on Terror. There were bubbles to be inflated, massive debts to be incurred, no-bid contracts to be awarded, huge profits to be generated, and stories to tell.
  2. Assume that the spending, increasing debt, bubble blowing, and military-industrial profit generating machine have been operating more intensely since 2001.
  3. Assume that “this time is NOT different” and that our current fiscal and monetary trends will continue for several more years.

Gold and the S&P 500 Index

american-gold-eagle

Graph 1 shows 25 years of the smoothed* monthly price of gold divided by the smoothed value of the S&P 500 index. The ratio went down from the 1980s to about 2001 and rose thereafter. Until 2001 investors wanted financial assets more than real assets like gold and silver. Since then the price of gold has risen more rapidly than the S&P 500 index. The Fed wants the S&P to keep rising and so we should expect QE will continue in the hope that it will levitate the stock markets. Unless this time is different, gold will continue to rise.

Gold and the National Debt

Graph 2 shows 25 years of the smoothed* monthly price of gold divided by the official national debt in tens of $Billions. The ratio went down from the 1980s to about 2001 and then started rising. Even though debt has been increasing rapidly since 9-11, the price of gold has increased even more rapidly since its bear market lows in 1999/2001. Knowing that politicians, corporations, and banks need the spending and debt to continue increasing, we should expect massive deficits and ever-increasing national debt – growing about 10 – 12% per year. Unless this time is different, gold will also continue to rise.

Gold and the Dollar Index

Graph 3 shows 25 years of the dollar index multiplied by smoothed monthly gold prices. In broad terms a higher dollar usually goes with lower gold prices (when priced in dollars) and vice-versa. The product removes most of the currency variation and shows the big picture trend for gold. Since about 2001 the trend has been upward. Unless this time is different, gold will continue to rise.

The Fed has incentive to continue QE – to levitate the stock and bond markets and keep interest rates low. But QE will eventually weaken the dollar with excess supply, reduced demand and reduced value. Expect gold to rise in price.

The politicians want to spend money, lots of money, and will borrow and print until they can’t. The national debt and the price of gold will increase.

Summary

Unless the financial world has materially changed, we can expect that an increasing S&P index will correlate with higher gold prices, and an increasing national debt will correlate with higher gold prices. Similarly, continued QE will correlate with a lower dollar and higher gold prices.

They say “don’t fight the Fed” and “don’t fight the administration.” Even if it looks like a train wreck during amateur hour, the incentives motivating both the Fed and the government all align with higher gold prices.

Maybe the Fed and the politicians can’t get everything they want, but we expect they will be happy with strong bond prices, higher stock prices, and more spending. Those conditions will co-exist with higher gold prices. Consequently we expect the Fed and the politicians understand that the price of gold must go much higher. Sacrifices, such as higher gold prices, must be made to maintain the “full steam ahead” status of our national train wreck in progress – deficit spending, ever-increasing debt, QE-forever, more wars and currency debasement.

Do you own a sufficient quantity of physical gold and silver?

More Thoughts:
Created Currencies…Are NOT GOLD

GE Christenson
aka Deviant Investor

American Silver Eagle Coin Sales On Verge of Record Shattering Year

american-silver-eagleThe American public’s love affair with the U.S. Mint American Eagle silver bullion coin continues unabated.   Ever since the financial meltdown of 2008 there has been an explosion in demand for the silver coins.  Average yearly sales of the silver bullion coins have increased by almost 500% since 2008 and sales for 2013 are on the verge of shattering all previous yearly sales records.

According to the U.S. Mint, sales of the American Eagle silver bullion coins totaled 3,087,000 ounces for October up slightly from September monthly sales.   Demand for the silver coins has remained robust throughout the year and total annual sales at the end of October reached 39,175,000 million ounces.

The all time yearly sales record for American silver bullion coins was 2011 when sales hit 39,868,500 ounces.  Based on current monthly sales the total number of silver coins sold in 2013 should be in the neighborhood of 45,000,000 ounces or almost 13% higher than the record hit in 2011.

Total yearly sales of the American Eagle silver bullion coins are shown in the chart below with the 2013 total through the end of October.

The market value of all silver bullion coins purchased since 2000 is $5.9 billion.  We know that silver prices will fluctuate over the years.  We also know that the “all mighty government” cannot produce silver coins by the trillions like they do with the U.S. dollar.  Based on the irresponsible financial conduct of both the Federal Reserve and the Federal government, is it any wonder that citizens are voting with their pocketbooks and moving into real stores of value such as silver?

SILVER DOLLARSThe American Eagle silver bullion coins cannot be purchased by individuals directly from the U.S Mint.  The coins are sold only to the Mint’s network of authorized purchasers who buy the coins in bulk based on the market value of silver and a markup by the U.S. Mint.  The authorized purchasers sell the silver coins to coin dealers, other bullion dealers and the public.  The Mint’s rationale for using authorized purchasers is that this method makes the coins widely available to the public with reasonable transaction costs.

The U.S. Mint American Eagle silver bullion coins remain a popular method of building wealth with periodic purchases.  The American public can’t seem to get enough of the bullion coins and the desperate actions of global central banks to keep the financial system afloat with a deluge of paper money can only cause more financial anxiety and more silver purchases going forward.

U.S. Mint Gold Coin Sales Soar 273% in October

gold-bullionAlthough sales totals vary from month to month, annual sales of the U.S. Mint American Eagle gold bullion coins are running at triple the levels prior to 2008 when the wheels came off the world financial system and central banks began an orgy of money printing.

From 2000 to 2007 the average yearly purchases of the American Eagle gold bullion coins totaled 341,500 ounces per year.  From 2008 to 2013 annual purchases of the gold coins have spiked by 300% to an average annual rate of 1,011,000 ounces.

After lackluster sales of gold coins in the slow months of August and September sales soared in October as investor demand for physical gold surged.  Total sales of the American Eagle gold coins for October 2013 came in at 48,500 ounces, an increase of 273% over the September total of 13,000 ounces.   October sales of gold bullion coins for the comparable prior year period totaled 59,000.

The U.S. Mint American Eagle gold bullion coins remain the premier method of building wealth through periodic purchases.  The American public can’t seem to get enough of the bullion coins and the desperate actions of global central banks to keep the financial system afloat with a deluge of paper money can only cause more financial anxiety and more gold purchases going forward.

2013 sales through October 2013

With two months still remaining in 2013, investors have already purchased almost the same amount of gold bullion coins that were sold for all of 2012.   Year to date sales of the American Eagle through October total 752,500 ounces compared to 753,000 ounces for all of 2012.

 

Gold Bullion U.S. Mint Sales Since 2000
         Year                           Total Ounces
2000 164,500
2001 325,000
2002 315,000
2003 484,500
2004 536,000
2005 449,000
2006 261,000
2007 198,500
2008 860,500
2009 1,435,000
2010 1,220,500
2011 1,000,000
2012 753,000
2013 752,500
 TOTAL                               8,755,000
(above 2013 totals through October 2013)

The American Eagle gold bullion coins cannot be purchased by individuals directly from the U.S Mint.  The coins are sold only to the Mint’s network of authorized purchasers who buy the coins in bulk based on the market value of gold and a markup by the U.S. Mint.  The authorized purchasers sell the gold coins to coin dealers, other bullion dealers and the public.  The Mint’s rationale for using authorized purchasers is that this method makes the coins widely available to the public with reasonable transaction costs.

gold-buffalo

The public is allowed to purchases numismatic versions of gold coins directly from the U.S. Mint.   One of the most popular numismatic gold coins is the American Buffalo, available in both one ounce gold reverse proof and one ounce gold proof.

Yellen Will Make Bernanke Look Like an Amateur When It Comes to Printing Money

2013-gold-eagleAxel Merk, Merk Investments

Fed Chair nominee Janet Yellen will take over where her predecessor Ben Bernanke leaves off. Not just operationally, but also philosophically. To understand where the Fed and the U.S. dollar may be heading, we take a closer look at where Bernanke and Yellen are coming from.

Bernanke has always considered himself a student of the Great Depression. He argued many times that one of the biggest mistakes made during the period was to raise interest rates too early. When faced with a credit bust, major deflationary forces are unleashed; in our assessment of Bernanke’s thinking, he believes the right policy response is to push back with accommodative monetary policy. But there’s more to it than low short-term rates.

Notably, Bernanke was faced with a crash in home prices, leaving many homeowners owing more on their homes than they were worth. Such “under water” homeowners had a couple of choices:

  • Downsize to homes they could afford. While this approach might be the best for long-term sustainable growth, it’s politically the most difficult one, as it embraces foreclosures and bankruptcy as a necessary evil.
  • Pay down their debt. That’s more easily said than done in an era where real wages stagnate.
  • Cross fingers in hopes the Federal Reserve would help to push up the prices, so fewer homeowners are under water.

To help push up home prices, the Bernanke Fed worked hard to lower longer-term rates by:

  • Talking down interest rates
  • Lowering interest rates
  • Purchasing Treasuries & Mortgage-Backed Securities
  • Engaging in Operation Twist
  • Introducing an inflation target
  • Introducing an employment target

Each one of these policy moves is an escalation from the previous one. Most notably, the introduction of an employment target signals to the market that rates may not be raised until employment has picked up sufficiently. In theory, longer-term rates stay lower the longer investors expect short-term rates to stay low, the introduction of an employment target to keep mortgage rates and other longer-term interest rates low is akin to using a sledgehammer to hang a picture frame.

peace dollar 1921-580x287

At the end of this road then came the “taper” talk. Even though “tapering” merely referred to a pause in additional easing, markets, never shy of jumping to conclusions, immediately started to price in a complete unwinding of the nonstandard policy measures. Since then, Bernanke’s taper talk has been tapered. Bernanke’s strategy hasn’t been helped by the fact that communicating an employment target isn’t all that easy, given the array of metrics, such as the labor force participation rate, that help provide a picture of how healthy an economy truly is. The most important market based gauge, the relationship between short-term and long-term rates (the yield curve), is so manipulated by the Fed, that policy decisions are ever more “data dependent.” And to make matters worse, the government shutdown has made access to reliable data a scarce resource.

With Bernanke out of ideas, out of steam, and out of data, it’s time for fresh blood. Yellen does not need to look back to the 1930s to arrive at her policy goal. It’s her starting point. In her speech accepting the nomination to succeed Bernanke, the first goal she stated was maximum employment.

Starting with an employment target is really much more than a signal interest rates will stay lower for longer. Historically, the Fed’s realm is monetary policy, controlling levers such as interest rates and/or money supply. However, once the Fed started to buy mortgage-backed securities (MBS), it started allocating money to a specific sector of the economy. That’s supposed to be in the realm of Congress. When the Fed engages in fiscal policy, powerful dynamics may be unleashed, not least of which is political backlash.

Yellen’s frame of reference, we believe focusing on an employment target suggests the Fed will be willing to cover for perceived shortfalls of fiscal policy. Of course, such “perceived shortfalls” are in the eyes of the beholder. Not being accountable to voters to make such decisions is, in our assessment, problematic. Needless to say, our elected officials appear to be at odds on how to run this economy. In fact, we would argue that our elected officials would only get their act together to engage in serious entitlement reform if pressured to do so. As voters appear to veer towards ever more populist politicians the one power that has shown effective in Europe to convince policy makers to engage in structural reform, is the power of the bond market. Once the bond market started to act up, governments in the Eurozone made tough choices to cut costly benefits that were no longer affordable.

I’m hopeful we will engage in structural reform in the U.S. as well, but it may also take the pressure of the bond market to convince policy makers it’s time to act to make deficits sustainable. With the Fed pursuing extraordinary measures that pressure may not come as quickly as it might otherwise, allowing policy makers to squander time bickering over a discretionary budget. The discretionary budget may matter little in a few years, as the cost of serving the nation’s debt along with entitlement spending may entirely crowd out the discretionary budget.

An employment target encourages social engineering. Yellen appears to be encouraged to pursue growth-oriented policies to help those that have not yet been able to participate in the economic growth of late. Never mind that substantial distortions might be caused in other segments of the economy, where those that have benefitted may be encouraged to engage in ever more speculative investments.

Investors may want to consider diversifying out of the dollar to see how this unfolds. Unlike the Eurozone, the U.S. has a current account deficit. That means should the bond market impose reform, the greenback might be more vulnerable than the euro has ever been. And in case Yellen keeps a lid on yields, the valve may well be the dollar. Just look at Japan: what will happen should yields rise? Will the Bank of Japan stand by, allowing the government to drown in its debt? In the U.S., while debt levels aren’t as extreme as in Japan, the ultimate dynamics may be related should central banks be increasingly lured into financing government deficits.

Please subscribe to Merk Insights and follow me on Twitter to learn how the “mania of policy makers” impact investors.

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

Gold and Silver Are the Answer to Endless Fed Printing

gold-buffaloBy: GE Christenson

THE SETUP

A century ago bankers created the plan for a U.S. central bank, bought enough votes to get it passed into law, encouraged deficit spending, government debt, and extracting the interest payments from taxpayers. The process has worked well for the bankers.

After several expensive wars and the expansion of social programs the U.S. had created considerable debt. In fact, debt and the money supply had increased so much that inflation became a serious problem in the 1960s. Further, the U.S. trading partners no longer wanted dollars but wanted gold instead since they could see that dollars were being created indiscriminately and were losing their value. Nixon (August 15, 1971) did what was good for the financial industry, severed the remaining connection between the dollar and gold, allowed the money supply and debt to increase to never-seen-before levels, and planted the seeds of self-destruction for the dollar and the US economy.

THE CRASH

The process continued until 2008 when the debt and derivatives bubbles had grown so massive that the economy could no longer sustain them. The economy and stock market crashed and financial and political leaders stared “into the abyss” of deflationary collapse, reduced Wall Street income and bonuses, loss of votes, and did what they perceived as necessary: printing money, Quantitative Easing (QE), injecting liquidity, bond monetization, extend and pretend, and so on.

Courtesy: coinupdate.com

Courtesy: coinupdate.com

THE “SOLUTION”

The choice was made to “solve” an excessive debt problem by creating more debt – Quantitative Easing (QE) and increased deficit spending. Deficits were increased to a $Trillion or so per year while the government bailed out the bankers and politicians and the public watched Reality TV. It appeared to work, somewhat, for a while.

So the economy (financial industry) and government are desperate for QE, and similar to being hooked on “meth,” they find it difficult to kick the habit and get off the “drugs” of QE, money printing, and central banking. As Gold Stock Bull says,

The economy is addicted to QE and reliant on central bank stimulus to stay afloat. The world now understands that the FED cannot end the bond-buying program and has no intention of doing so anytime soon. If anything, we are likely to see increased quantitative easing in the future, just as a drug addict must up their dosage in order to have the same impact. This monetization of debt increases the bullish outlook on gold, as the gold price has historically trended higher along with the FED balance sheet.

Marc Faber and Deepcaster:

“The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion], $200 [billion], a trillion dollars a month…”

“The Fed has boxed itself into a position where there is no exit strategy (and created) a colossal asset bubble…”

Continue QE and you get hyperinflation…”

“Halt, or even taper, QE and the markets crash.”

The picture, sans Fed propaganda, is increasingly clear. QE is necessary to supplement the financial industry and the voracious appetite of the U.S. government for more spending. Merely slowing QE will probably cause markets to crash, interest rates to rise, the government’s expense for interest on past debt will increase while tax revenues decline, and consequently the government needs more, not less, QE.

US debt to gdp

Of course there is always a way out – the “nuclear” option – let it crash and burn! But no one wants a crash as everyone will be hurt by that choice. Consequently the Fed and the U.S. government (the powers that be – TPTB) scramble desperately. What are the options?

  • More QE buys time. Less QE might well cause a crash. So TPTB choose more QE.
  • More spending keeps the big corporations (who make LARGE donations to congress) happy. If the government spends less, “everyone” complains. So TPTB choose more spending, more deficits, and more QE.
  • Higher interest rates mean that the interest expense for the U.S. government increases. More interest expense means larger deficits and so TPTB are forced to choose more QE.
  • Foreign purchases (China, Japan, Russia, etc.) of newly issued U.S. treasury debt are decreasing while some countries are actually reducing their current holdings of treasury debt. This forces the Fed to be the “buyer of last resort” and purchase, via more QE, the debt that normally would have been purchased by China, Japan, Russia and others. Fewer foreign purchases necessitate more QE.
  • A weaker economy and fewer people employed means less economic activity, diminished tax receipts and larger deficits. Those larger deficits guarantee more borrowing and more QE.
  • Obamacare will create more government expenses and less disposable income for average Americans, which means less consumer spending and therefore less tax revenue for federal, state, and local governments. There is no choice here – it is already law and we are going DOWN that road to much higher consumer costs, lower government revenue, and more government control. The result will be a government desperate for more revenue and more QE.

It does indeed look like a “QE trap.” So ask yourself:

  • More QE will weaken the dollar, on average, because more supply indicates less value for each dollar. What will that do to consumer prices for food and energy when the inevitable inflation works its way into the consumer economy?
  • What will happen to the prices for gold and silver when the realization finally hits the populace that interest rates are rising, QE is here forever, congress will never balance the budget, and the dollar will continue to weaken. (Hint: There is no fever like gold fever.)
  • It is clear that other countries increasingly dislike the U.S. dollar, U.S. treasury debt, and the current policies of the U.S. administration. How much will the prices for imported oil, gold, and silver increase as a consequence of the above?
  • What will a dollar collapse do to the prices of gold and silver?
  • Knowing the policies of the Fed, the congress, the administration, and the inevitability of QE, do you own enough gold, silver, platinum, land, diamonds, collectible art and other non-paper assets such that you can sleep well at night?

CONCLUSIONS

The U.S. government has spent itself into the “no-win” position whereby more QE is both necessary and dangerous. Most current policies, such as congressional gridlock, inability to pass a budget for five years, Obamacare, weakening economy and tax receipts, declining relations with foreign nations, massive deficits, declining total employment, inability to reduce spending, ongoing wars, probability of future wars, and more, suggest that QE must continue and probably increase.

Stocks may protect you  but gold and silver are the safer choice given the inevitability of more QE and a potential dollar collapse.

You decide!

GE Christenson
aka Deviant Investor (see full article here)

Ron Paul Talks About Economic Collapse and Lack of Federal Reserve Transparency

dickensIn an interview with CNBC, former GOP presidential candidate Ron Paul endorsed the efforts of his son, Senator Rand Paul, to hold up the nomination of Janet Yellen as Federal Reserve Chairman until laws are passed requiring more transparency from the Fed.

Senator Rand Paul has introduced legislation for an “Audit the Fed” bill which would require the Federal Reserve to disclose the details involving trillions of dollars the Fed has provided to both domestic and international financial institutions.

According to Ron Paul, “We don’t know the details of the trillions of dollars that were used to bail out banks and central banks around the world and corporations during the crisis.  The numbers that they give you I don’t think are all that revealing.”

Ron Paul has been one of the few voices in the American government pushing for financial responsibility by both the Federal government and the Federal Reserve.

After the most recent capitulation by Republicans to reduce the exponential increase in Federal government debt and spending, Ron Paul lamented the hypocrisy of the deal to end the government shutdown.

The latest spending-and-debt deal was negotiated by Congressional leaders behind closed doors, and was rushed through Congress before most members had time to read it. Now that the bill is passed, we can see that it is a victory for the political class and special interests, but a defeat for the American people.

The debt ceiling deal increases spending above the levels set by the “sequester.” The sequester cuts were minuscule, and in many cases used the old DC trick of calling reductions in planned spending increases a cut. But even minuscule and phony cuts are unacceptable to the bipartisan welfare-warfare spending collation. The bill also does nothing to protect the American people from the Obamacare disaster.

US debt to gdp

Members of Congress and the public were told the debt ceiling increase was necessary to prevent a government default and an economic crisis. This manufactured fear supposedly justified voting on legislation without allowing members time to even read it, much less to remove the special deals or even debate the wisdom of intervening in overseas military conflicts because of a YouTube video.

Congress surrendered more power to the president in this bill. Instead of setting a new debt ceiling, it simply “suspended” the debt ceiling until February. This gives the administration a blank check to run up as much debt as it pleases from now until February 7th. Congress can “disapprove” the debt ceiling suspension, but only if it passes a resolution of disapproval by a two-thirds majority. How long before Congress totally abdicates its constitutional authority over spending by allowing the Treasury permanent and unlimited authority to borrow money without seeking Congressional approval?

private debt gdp

Hopefully, those of us who understand sound economics can convince enough of our fellow citizens to pressure Congress to make serious spending cuts before Congress’s reckless actions cause a total economic collapse.

debt monster

Sound advice Mr. Paul, but the odds of preventing an economic collapse decline with each additional dollar borrowed by the government and each additional dollar printed by the Federal Reserve.  Debt at all levels is out of control and has overcome the ability of the nation to service the debt. Ironically, the only way to prevent a collapse today is through the Ponzi scheme method of further printing and borrowing which puts off the day of reckoning.

Realistically, Ron Paul has been ignored by the public and his fellow legislators for decades.  The odds of controlling the growth of debt by the U.S. and other major industrialized countries is almost zero since legislators are elected based on promises to extend the social welfare state and serve special interests.

The odds of central banks reducing quantitative easing is even more remote since an absence of money printing would hasten the economic collapse Mr. Paul warns about.  The future collapse predicted by Mr. Paul seems inevitable at some point and the only concern of an investor should be finding a safe haven for wealth preservation.

Global Debt Bubble Will Push Gold and Silver Prices Higher

money printingBy: GE Christenson

To paraphrase William Shakespeare, “the debt ceiling drama is a tale told by idiots, full of sound and political fury, signifying nothing.” We now have a reprieve for three months – the 11th hour deal, complete with payoffs and the usual corruption, will keep the world safe for more ineptitude, deficit spending, administrative hypocrisy and the guarantee of a sequel. All is well! Celebration! Champagne! Cut to a prime-time commercial promoting big government and Obamacare…

And back in the real world where people work and support their families, life goes on, few noticed the lack of government “services,” and in three months we will be blessed with another episode of our “Congressional Reality Show.”

Gold, Silver, and National Debt

Examine the following graph. It is a graph of smoothed* annual gold and silver prices and the official U.S. national debt since 1971 when the dollar lost all gold backing and was “temporarily” allowed to float against all other unbacked debt based currencies. All values start at 1.0 in 1971.

The legend does not show which line represents gold, silver, or the national debt. Why? Because it hardly matters! Government spends too much money to perform a few essential services and to buy votes, wars, and welfare, and thereby increases its debt almost every year, while gold and silver prices, on average, match the increases in accumulated national debt.

Our 435 representatives, 100 senators, and the administration listened to their corporate backers and chose to increase the debt ceiling, continue spending as usual, not “rock the boat,” and carry on with the serious business of politics and payoffs for another three months. It is safe to say that, on average, gold and silver will continue rising, along with the national debt, as they all have for the past 42 years. Further, like the national debt, both gold and silver (and probably most consumer prices) will increase substantially from here, until some traumatic “reset” occurs. What sort of reset?

  • A “black swan” event that is unpredictable, by definition.
  • Middle East war escalation.
  • Derivative melt-down.
  • A dollar collapse when foreigners say “enough” to the dollar debasement policies pursued by the Fed and the US government.
  • A collapse of the Euro or Yen for any number of reasons.
  • A banker admits that most of the official gold supposedly held in New York, London, and Fort Knox is gone and has been sold to China, India, and Russia.
  • You name the false flag operation.

My guess: Gold and silver prices will rise gradually for a while, and then quite rapidly after one of the above “financial icebergs” smashes into our “Titanic” world monetary system. Further, we will have difficulty locating physical gold available for sale after such an event occurs, even at much higher prices. Now would be a good time to purchase physical gold and silver for storage in a secure storage facility. Paper gold will not be safe…

Congress has acted. The President has spoken. The Federal Reserve will continue “printing” dollars to increase banker profitability, fund the government, and fight the forces of deflation. This is business as usual – as it has been for the past 42 years.

Here is the second version of the graph with gold, silver, and national debt labeled. Note how relatively undervalued silver is at the present time! Dashed lines indicate guesses for the future normalized values for gold, silver, and the national debt.

The debt ceiling drama and “Congressional Reality Show” will return to prime time in January and February, right after “Dancing with the Senators” and just before “House Wives of Salt Lake City.” Expect sound and fury signifying nothing.

Further commentary on the case for gold and silver:

The Reality of Gold and the Nightmare of Paper Silver: The Noise is Deafening
GE Christenson
aka Deviant Investor

* Gold and silver prices were smoothed by taking monthly closing prices and a 24 month simple moving average. Annual prices graphed are the average of the 12 average monthly prices per year.