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Wednesday, March 30, 2011

What's so horrible about debt anyway?

So what if we run up a huge debt if the debt is is in dollars and we can just print dollars and force our creditors to take them because we're the biggest economy with the strongest army?

It's just the way the world has always worked.

We're just like that huge kid and it's our ball, and so we make up the rules and if the other smaller kids don't like it they can go play somewhere else. And the rules favor us and we always win. So what's the problem? Maybe some cranks hate us because we're exceptional and better than they are, but that's their problem.

Okay, but here's our problem: this big kid playing with crooked rules that favor him over littler kids finds that he can smoke and drink and sleep til noon and still win. So he does. Because he knows he's exceptional and can get away with it. And eventually he gets fat and lazy and stupid.

And suddenly a few other big kids move in to the neighborhood. Maybe not quite as big, but these kids get up at six and do a thousand sit ups and a thousand push ups and run drills and play by a stringent set of rules. And they let the big fat lazy kid play because he's still big, and he has a ball, and he takes up room on the court, but they know he sucks. And eventually they take his ball away, and tell him it's tough - go home.

Suddenly he realizes he's lost control of his game, and his ball, and he can't even imagine how it happened.

Same thing when you fuel a boom with debt.

Everyone begins to think they're a genius, because they all seem to get rich as all asset prices skyrocket, and people start paying themselves tremendous salaries for doing stupid banal activities, like town supervisors who get pensions of 200,000 dollars a year for a lifetime of 3 hour work days making third grade level decisions, or bank executives who make 200 million dollars a year for overseeing moronic trading strategies that lose billions of dollars - that they don't even understand. And everyone in between who feel deprived if they can't drive around in a military issue humvee that costs 500 dollars to fill up a tank of gas and takes up three parking spaces on the street while they talk on phones that can stream 1000 hours of pornographic movies they can watch while they drive.

Yeah, sure there are some very smart people who work real hard. Like George Soros. Who end up sucking the rest of the productive capital out of the system - because it's their right, because they can.

But then you get to a point where debt stops fueling a boom. Nobody knows exactly when that point happens. But it always happens.

More and more people are unemployed. And unemployable. Because all those countries where folks have to work 12 hours a day for very little have taken their jobs. But still, everything's more and more expensive as all that speculative debt money has pumped up all commodity prices. And the banks keep pumping out debt/money so prices keep rising while people go hungry. And the people at the banks keep paying themselves more and more because they're still making money off the pumped up commodity prices. And when they lose money the Federal Uber Bank just takes the bad bet off their balance sheet anyway and charges it to the starving people. Because they can.

And finally other countries where folks work longer and harder and have much less and will be happy with much less and they think only of working hard so their children with have a little more, come along and tell us they don't want our debt anymore.

And we wonder how it all happened.

Are we there yet? I don't know. We're getting closer though.


"Interest rate differentials are again in the driver's seat, and 'risk' trades are riding shotgun, forcing safe haven trades into the back seat. "

Quoted from the always interesting Daily Pennig currency blog.

Risk trades are everywhere and always Debt Trades.

In currency trades you BORROW low yield currency to buy high yield currencies and pocket the yield differential.

In stock trades you buy on Margin. Margin is another word for debt. (There are so many of them, aren't there?)

In Futures you buy on Margin (debt), in order to trade vast amounts of commodities that don't really exist for delivery.

In Banking you get money (reserves) free from the Fed (not such a big risk) but then you can legally gamble it at Twelve times the amount of reserves. If you bet money you don't really have, it's the same as borrowing it from the counterparty in the bet. Just another form of Debt.

In government you spend money you don't have, you destroy regulatory agencies who oversee risk/debt, and most of all you work with the Fed/banking system to make sure all bad debt incurred by very large players and institutions is monetized (taken onto the Fed's balance sheet so that it's magically hidden from view - as the Fed can't be audited.) And the bill is passed on to the taxpayer - who is busy screaming his head off about the iniquities of teacher pay. (Oh yeah, and taking money away from those greedy pigs over at PBS. That will solve our structural risk problem),

What about Madoff and his 60 billion dollar Ponzi Scheme, they caught him, right? Yeah, sure. His mistake was that he was too small. And his clients were insignificant. If he'd managed to scam 600 billion dollars from insurance companies (like Goldman Sachs), then the Fed would have gladly taken over his debts. Systemic risk, you know.

The astonishing thing about this massive RISK ON trade is that it's all based on the idea that no matter what happens the FED will BAIL US OUT by creating TRILLIONS of new debt. The Fed has made that very clear. Everybody knows it. And all the banks and insurance companies are getting rich off it while the middle class foots the bill though higher prices, lower wages, and a distressed dollar.

An all only two years since the system almost collapsed. RISK ON.

(but keep your eye on JUNE 30 - the announced end of QE2 - at which point the game either ends, or intensifies beyond reason.)

Tuesday, March 29, 2011

Inflation, Deflation and Gold

The two charts above give as good a picture of the economy as you will find. The first is the money supply which is obviously exploding. For every dollar the Fed adds to the system, they create a dollar of debt.

How is that? Because the Fed adds money to the system by buying debt from the Treasury. The Treasury gives the debt to the banks (that own the Fed). The banks sell it to the Fed. The Fed puts electronic credits into a Treasury Account at the banks. The banks can then lend or gamble twelve times the amount in the account. Money floods the system.

According to the first chart this should be wildly inflationary. Austrian economics would predict that it must be. But it's not necessarily. Why?

Because in a productive economy the money will be lent to businesses that use it to expand, build, hire. This creates real economic activity. People are employed, earn money and spend it. This is how money multiplies through the system.

But look at chart 2. Money is not multiplying through the system. In fact, the opposite is occuring. As we explode the debt and flood the money supply, money is stagnating. This is highly deflationary.

Where then does all this money/debt go? It is gambled in the risk markets (including the stock market) by the banks. If they win their bets they award themselves huge bonuses. If not, the Fed takes the bet off their balance sheet and gives then banks more money to gamble:

This chart, of the S and P 500 has become an illustration of bank gambling. How do I know it's not a picture of a healthy economy? Return to chart 2. In a healthy economy money multiplies through the system. This is not rocket science. It is common sense.

What does all this mean for gold?

It means that inflationary push from the government and the deflationary pull from a stagnating economy loaded with debt will hold all assets in relative stasis until one force wins out over the other. If inflation wins, gold will rocket upward. If deflation wins, all assets will fall. The government will flood the system with new debt, and then gold will rocket upward.

Meanwhile, the only thing we know for sure is that the currency is being eroded by the ever increasing money/debt load. And gold trends steadily higher.

Monday, March 28, 2011

Whither Gold?

From the weekly chart above you can clearly see a steady entrenched move upwards in the price of gold. You can also see that gold is near the top of the trend and can easily correct down another 80 dollars without affecting the overall trend one iota. That's not to say that it must, but at some point it will hit the bottom trend line. It always has. Then it will keep heading up.

But what about Japan? What about the middle East? When will go explode upwards in reaction to these dangerous world events?


Gold doesn't react to world events. Gold reacts to financial events. Yes, world events have financial implications. But gold is NOT a safety play. Gold is not a bet that things will go wrong in the world.

Gold is a bet that the current financial solution to all problems - which involves taking on increasingly large amounts of debt - will result in the distress of all paper currencies. Thus gold moves steadily upward over time, as long as this financial strategy persists.

Will gold ever explode upward?

Yes. When an event occurs that makes it somehow clear that no amount of debt will be sufficient to deal with the problem.

What could that be?

It happened two years ago when the banking crisis occurred, and gold shot up 80 dollars in about 30 minutes. Then the markets decided that 3 trillion dollars of additional debt would cure everything. Gold settled back down and continued its slow steady appreciation.

That gold continues upward shows that smart money is worried that debt may not solve all the world's problems. Who is this smart money? Central banks of the world. And little players like George Soros and John Paulsen.

But it's not until all the dumb money joins in (like the dullards who pontificate on radio and TV, peppering their econo-speak with nonsense phrases like "If you will") that gold will explode. And that won't happen until conventional wisdom decides that the debt solution is no longer viable.

Sunday, March 27, 2011

Bill Gross asks: Why the Dollar?

Mar 10, 2011

PIMCO Total Return dumps U.S. gov’t-related debt

NEW YORK (Reuters) – The world’s largest bond fund has gone ultra bearish on the United States, dumping all of its U.S. government-related debt holdings.

The move by Bill Gross’s $236.9 billion PIMCO Total Return fund completed last month comes in the wake of a vicious Treasury market sell-off and just days after he questioned who will buy Treasuries once the Federal Reserve halts its latest round of bond purchases in June.

Gross, who also helps oversee a $1.1 trillion investment portfolio as PIMCO’s co-chief investment officer, has repeatedly warned against U.S. deficit spending and its inflationary impact, which undermine the value of government debt and push up yields as investors demand more compensation for risk.

Over the last five months, worries over the ballooning U.S. budget gap estimated at $1.645 trillion for 2011, political stalemate in Washington over how to narrow it and inflationary fears have all contributed to a steep sell-off in Treasuries. The benchmark 10-year note has seen its yield, which moves inversely to price, rise more than one percentage point since early October to 3.46 percent by Wednesday’s close.

Saturday, March 26, 2011

What is a Dollar?

Gold-stater question of the day:

What is a dollar? Do you know? Take a minute and try to come up with a definition.

Ron Paul asked this question to Ben Bernanke. Bernanke answered with several long rambling Econo-speak paragraphs that mentioned a basket of goods and services, a basket of international currencies, stability, employment, the current banking crisis, regulation and oversight.

Used to be that a dollar was a note redeemable by a set amount of silver and gold. Period.

Thus it was a medium of exchange and a store of value: money.

Unfortunately even that direct convertibility led to a terrible inflation because the Fed issued 60 times as many convertible notes as there was gold in its vaults. In 1933, when the economy turned down a second time after a crisis of confidence, Roosevelt confiscated and outlawed bullion ownership, in order to prevent a redemption of those notes which would have resulted in a run on the Fed.

At that point a dollar was only a medium of exchange and no longer a store of value.

In 1980, when Alan Greenspan was asked what a dollar is, he replied that it is a promissory note, which though not tied to gold, should be administered as though it were tied to gold. (say what?)

You see, in his youth Greenspan wrote a treatise on the Necessity of Gold as a protection against Wealth Confiscation by the Government. Once he became Fed Chairman, he issued more paper notes tied to nothing than any human in the history of the world - until he was outdone by Ben Bernanke who continues to set records.

In accounting terms, any promissory note - like the dollar - is worth the Present Value of the Cash Flow of the Issuer. What does this mean? It means that whomever issues the note must be earning something after all costs and expenses are paid. If you take those earnings over time and divide them by the number of outstanding notes you should be able to come to some reasonable present value for the note.

If there are no earnings after expenses and obligations over time - you have a negative cash flow - like the United States of America - then the notes can only be fobbed off on a Greater Fool who will accept them, though they have no present value whatsover. This is what we call a Ponzi Scheme. (in econo-speak we say the notes have no transversality - which means they are a Ponzi Scheme.)

Such notes always lose value over time. There are no exceptions either in theory or in reality. Or in history. All incontrovertible paper money in the history of the world eventually became worthless.

The dollar has lost 95 percent of its purchasing power since it lost its convertibility into gold in 1933.

And gold? It is recorded that a Roman senator's suit at the time of Augustus (complete with the purple murex striping) cost about 4 aurii: 1 ounce of gold. Now an Armani suit costs $1400 dollars, or an ounce of gold. A pretty good store of value over the last 2000 years.

This is why gold, as long as it is priced in these incontrovertible promissory notes backed by a government with negative cash flow must continue to rise over time.

Do not try to time the gold bull. Accumulate gold.

Friday, March 25, 2011

Why Bullion?

Above is the chart comparing the recent move of bullion silver (black) to the silver tracking stock (blue).

Physical silver is clearly developing a huge premium over the spot price. Why?

For one thing, the spot price is based on the Futures price (near term contract). And as everyone who follows the precious metals markets knows, many more futures contracts are traded than there are ounces of bullion available for delivery. This is true for both silver and gold.

About 100,000 gold contracts are traded each day on the comex. Each contract represents 100 ounces of gold. If every contract were held to maturation, at the very least 10 millions ounces of gold would be delivered every month. Within five months the entire year's world wide production of gold would be delivered. Within 10 years all the gold ever minted in world history would have been delivered.

Clearly, as in all financial schemes based on paper - which is to say "the honor system," someone's not playing fair. And in fact, if you, a small time player, decided to take delivery of one contract - you'll find you won't be able to do it. Go ahead try it. I did.

However, if Goldman Sachs decided to take delivery, you know the Comex (gold exchange) will be damned well obliged to get them their gold. And at some point, someone with leverage will decided to take delivery. Then you will see the premium of physical explode.

And at that point you won't be able to buy physical any more. Unless you are Goldman Sachs.

Gold And Capitalism

Can there be capitalism without a gold standard of currency? Almost everybody in America would argue that of course there can, and there is. America is the shining example.

But how are we Capitalist? We have a Central Bank, that issues money and distributes the money on a preferred basis to whomever it likes (the private banks that own the Central Bank), in whatever quantities it sees fit. The private banks can then lend or gamble twelve times that money in any market it sees fit. If they win their bets they keep their winnings. If they lose, the Central Bank takes the losses on to its own balance sheet and charges the public.

How is that capitalism? That is the definition of Socialism. It is a planned market economy.

True, within the Socialist Structure, we allow for private initiative. Any genius like Mark Zuckerberg of Face Book, or Larry Ellison of Oracle, can make billions.

But in Communist China they do the same. They also have a Central Bank that operates just as ours does. And they also allow for private initiative within the Socialist Structure. True, they don't have nearly as many social programs as we do. So they're not quite as socialist as America.

In all though the Chinese Communists are far more Capitalist than the Americans in that they encourage private ownership of Gold.

How does private ownership of gold promote capitalism? Because true capitalism can only flourish when Capital can be amassed privately, independent from government oversight and control.

But the Chinese use the yuan as currency just as we use the dollar.

Yes, true. But for how much longer? Why are they buying up gold mines at such an alarming rate? Why are they increasing their gold reserves as we decrease ours? Why are they actively campaigning for the citizens to amass both gold and silver?

Nobody knows for sure. But it's a sure sign that the communists in China are currently far more capitalist than the capitalists in America.

Wednesday, March 23, 2011

One of these things is not like the others, not like the others, not like the others... One of these things just doesn't belong.....

A) International
Portuguese prime minister resigns after austerity plan is rejected by parliament, casting fresh doubt on European Union's efforts to control debt crisis.
Vote shows another debt-plan flaw (First Take)

B) markets
Bulls build on gains
Stocks finish up again, with investors taking a
more optimistic view on the global economy.
After Hours: Red Hat shares are red-hot

Gold soars to record
Gold closes at $1,438 and copper zooms up 2.7%.
Japan quake price-tag spurs mining rally
Oil rises near $106 with Middle East in focus

D) Financials
Fed rejects B. of A. plan
Shares of Bank of America slip after the bank says the Federal Reserve rejected its dividend request,.
Reinsurer leans on catastrophe bond
Credit unions sue Wall Street banks

Can you guess which one it is?

IS IT A. B. C. OR D?

The first conceptual art

Concept art involves the commodification (or "reification" in more specific but less accessible terms) of a thoroughly investigated idea. In other words an object becomes the means for sophisticated human communication. This is to be distinguished from "fine" art in that "fine" art involves the communication between the artist and his audience. Here it is only important that the medium of communication be mastered. Ideas are secondary.

The conceptual artist of our generation is undoubtedly Mark Zuckerberg. Facebook, his art commodity, has already earned billions. His idea involves the exploration of "cool" and "exclusivity" in human interaction. His work eclipses that of minor concept artists like Jeff Koons and Damian Hirst who exploit the same idea in primitive and thoroughly cynical ways. (In fact, their idea is that anyone with a lot of money and little self esteem can be swindled by the promise of cool and exclusivity. True, perhaps, but not very interesting.)

But the first Concept Artist was Alyattes of Lydia. His art piece - the first inscribed coin - is pictured above. His idea was that the use of this art commodity would change the face of human communication and interaction forever, by creating a universal medium of exchange. Twenty five hundred years later the sophisticated web of world markets is still very much dependent on this conceptual art piece.

And the very piece invented, designed and issued by Alyattes of Lydia is up at auction, estimated at about 1/1000 of the price of a "shark in formaldehyde" which will certainly be forgotten within ten years.

Tuesday, March 22, 2011

Eveything's fine folks, move along, nothing to see here....

  • TODAY"S BLOOMBERG HEADLINE: All Clear Sounded as Markets Shrug Off Multiple Black Swans
    All Clear Sounded as Markets Shrug Off Multiple Black Swans

    Global markets are signaling that sustained economic growth will more than make up for Japan’s worst disaster since World War II, rising commodity prices and uprisings throughout the Middle East and North Africa.


    Gold-stater comment: The Fed, The markets and Gold:

    Anyone following the markets knows that the June 30th end date for the Fed's stated campaign of market manipulation (Called QE2) is drawing near. Ben Bernanke has stated openly that the measure of success of this campaign is the percentage rise in the S and P 500 stock index. His stated idea is that as long as the stock market rises the economy should be okay.

    As everybody knows the campaign works as follows: The Fed purchases Treasuries from the banks at inflated prices. The banks plow the money into the markets. Market analysts who work for the bank relentlessly tout the fact that as long as the Fed is plowing money into the market (Which they call "Expanding their balance sheet") the markets rise 86 percent of the time.

    Bank analysts and brokers tout this program relentlessly to their clients. The machine has worked well to prop up the markets during this operation.

    However, come June 30th the operation is set to expire. This is a little like saying that as long as we keep 200,000 troops on the streets of Baghdad, violence decreases so everybody should invest in Iraq. But then the 200,000 troops will by removed on June 30. What do you think would happen to your investment in Iraq?

    Either one of three things will happen as we approach June 30th:

    A) The economy is healed and the markets will continue to climb without any more help from the Fed. If this happens sell all your gold.

    B) The markets will fall steadily - or collapse - until the Fed announces QE 3. If this happens, all assets (including gold) should fall. Then - (With QE 3 - and/or a collapse of confidence) gold will explode upward for a prolonged period.

    C) The Fed will announce they are honoring the June 30th End date, but they will keep purchasing treasuries at the same rate through Caribbean shell banks and other proxy organizations. Analysts who track this activity will demand accountability, the Fed will refuse. A new level of mistrust will be created between the government and the citizens. The markets will fall slowly (without the Fed's explicitly stated support) , and gold will move up as levels of mistrust intensify.

    Monday, March 21, 2011

    Black Swans and the Markets

    Multiple choice question: Market Watch headlines thunder the upswing in the market in response to: A) A third war in the Middle East: Lybia, and the loss of Lybian oil on the world markets. B) The tensions in Bahrain and Saudia Arabia that promises to further destabilize the entire region. C) The destruction of the world's third largest economy (Japan) and their on-going nuclear crisis. D) A takeover deal in the Telecom sector.

    The answer of course is D. If you live on planet Denial.

    The real answer, is that Japan had dumped another 500 Billion dollars into their economy (roughly the size of QE2) to prop up the markets in the short term in order to avoid a complete financial meltdown. The US markets in turn understand that this money is not intended for "Reconstruction" but will go directly to the Japanese banks and then into the Japanese stock market - and of course other markets outside of Japan. The Nikkie rallies and the futures go up here in the US.

    Why is this good news for the US markets? Because it shows the governments of the world will support the financial markets ad infinitum in the belief that if they can float their stock markets long enough and high enough eventually their economies will follow. It lends credence to the hope that the Fed will follow QE2 with QE3, QE4 etc etc. And of course they will. Because they don't know how to do anything else.

    The politicians all talk tough as long as the markets seem healthy. Because all their money is in the markets. The minute the markets tank, all the "Conservative" tough talkers suddenly are clamoring for the Fed to "Do something." And what could that something be? Oh, yes, funnel more printed money into the banks, so that they can dump it into the markets.

    Can this strategy work forever? It's working right now. Today. It has worked for the last forty years, though the market has flatlined for the last ten. (Yes, it's gone up and down, but it's still at the same level it was at ten years ago.) Recent History - the history of the last 40 years - is on you side if you say it will continue working. The rest of the 5000 years of human history is against you.

    Sunday, March 20, 2011

    A Flock of Black Swans


    Airstrikes on Libya enter second day

    Fighter jets zoom across Libya as an international military coalition hammers air defense positions near the capital for a second day. FULL STORY

    Emergency declared in Yemen as violence rages

    From Mohammed Jamjoom, CNN

    Japan's Efforts to Ease Nuclear Crisis Hit Setback as Reactors Face Unexpected Rise in Pressure

    Published March 20, 2011


  • Hundreds protest in Syria where clashes killed 5

    AP – 23 mins ago

    BEIRUT - Witnesses and activists say hundreds of Syrians are protesting in a tense southern city where security forces earlier killed at least five protesters this week. Full Story »

  • Israeli military: Rocket from Gaza hits Israel

    AP – 31 mins ago
    An Israeli soldier holds a bowl full of mortar shells fired by... AP

    JERUSALEM - Palestinian militants fired a rocket into southern Israel on Sunday, while Israeli troops killed two Palestinians in a fresh wave of violence along the volatile border with Gaza. Full Story »

  • Yemeni president's own tribe demands he step down

    AP – 34 mins ago
    Anti-government protestors gesture, while chanting slogans during... AP

    SANAA, Yemen - The Yemeni president's own tribe has called on him to step down after a deadly crackdown on protesters, robbing the embattled U.S.-backed leader of vital support in a society dominated by blood ties. Full Story »

  • Bahrain hospital on frontline in protest crackdown

    AP – 2 hrs 10 mins ago

  • Hundreds of security forces block Saudi protest

    AP – Sun Mar 20, 5:02 am ET

    CAIRO - Outnumbered by anti-riot police, dozens of Saudi men and women protested outside Riyadh's Interior Ministry, demanding the release of thousands of detainees held without trial for years. Full Story »

  • Bahrain rights activist questioned by authorities

  • Yemen army urged to ignore orders, minister quits

    AFP – 2 hrs 24 mins ago
    A Yemeni anti-government protester performs noon prayers during... AFP

    SANAA (AFP) - Muslim clerics urged Yemeni soldiers to disobey orders and a third minister resigned after the gunning down of more than 50 protesters calling for an end to President's Ali Abdullah Saleh's rule. Full Story »

  • Clinton warns Iran over meddling in Persian Gulf

    AP – Sat Mar 19, 1:35 pm ET
    U.S Secretary of state Hillary Clinton, right, and French President... AP

    PARIS - U.S. Secretary of State Hillary Rodham Clinton warned Iran on Saturday to stop meddling in Bahrain and other Arab states in the Persian Gulf, but also called on the kingdom's leaders not to use force against anti-government protesters.

  • Saturday, March 19, 2011

    WHY GOLD? (Part 2)

    We've explored in prior essays how the private ownership of gold and silver in the form of stamped coins occurred at exactly the same time that Democracy developed in Ancient Greece (circa 600 BCE.)

    Does the fact that these two seminal events in human history developed together prove causality? No. But common sense provides a link: the private ownership of currency with a universal intrinsic value provides the private citizen with a certain amount of autonomy from the State. This is so because private citizens can then conduct private transactions without the consent, regulation or even the knowledge of the State.

    If private citizens can not conduct private transactions without the consent of the state - can there then be true Democracy? Our Founding Fathers clearly did not think so, as they declared in the constitution that only Gold and Silver could constitute currency.

    Thomas Jefferson (a scholar of Ancient Greece) wrote extensively on the subject of how wealth and power is confiscated from the private citizen when Banks are allowed to issue fiat currency:

    "The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution....Bankers are more dangerous than standing armies......(and) if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and CORPORATIONS that will grow up around them will deprive the People of all their property until their children will wake up homeless on the continent their Fathers conquered."

    Yet today less than two percent of the American public owns gold.

    What then do they own?

    One hundred percent own dollars. But the dollar has no intrinsic value. It has only a notional value dictated and controlled by the state.

    It is true that dollars provides the owner with some transactional power. Yet every transaction must be reported to the government so that it can be regulated and taxed. Every dollar held in a Bank is recorded and reported to the government. Every credit transaction is recorded and reported to the government. Yes, small transactions are settled in cash and not reported to the government. Yet the government still controls the value of your cash in that they can print unlimited quantities and distribute it to whomever they wish (mostly the Banks.) And their fiscal and monetary policies can cause the dollar to lose all of its notional value so that it returns to its intrinsic value: Zero.

    Seventy percent think they own their own house. Yet less than ten percent of these have no mortgage. If you have a mortgage you do not really own your house. You are making a bet on a house - that it will hold or increase in value long enough for you to eventually own it. You can not sell it, or trade it without the consent of the Bank. Many facets of your house is owned by the State. They can tax your house, tax your water usage, tax your electrical usage, and even confiscate your house if they deem it to be for the "Greater Good."

    Fifty percent of the population think they own Stock. But what do they own? They own a bet that a piece of paper will appreciate or depreciate in dollar value. They have no say over the company that the stock represents. They can trade the stock only through an exchange that is regulated by the government. This is to say they can cash in their bet as regulated by the government. Ownership of Stock provides no private transactional power.

    Less than two percent of the American public owns gold. Gold can be held in private vaults. Its value over the long run can not be affected by the US government. But does gold give the owner power to affect private transactions? Only if two private citizens agree that it should. And if they do, the government will not know and can not do anything about it. That's Democracy: which means: Power (Kratos) to the People (Demos.)

    Thursday, March 17, 2011


    Above you can see a run of the first inscribed gold coinage. (Click on the image to view a larger image.) These coins were recently discovered in present day Turkey, taken to Germany and then sold to some US coin dealers. They are part of a small horde that is showing up at major auctions. These coins will be quickly bought by world collectors who understand the significance and value of these artifacts and they will henceforth return to the open market on very rare occasions.

    They date to about 625 BCE. At that time international trade deals that involved goods such as wine and olive oil, were often settled for quantities of weighed precious metal such as gold and silver. The jugs of olive oil and wine were stamped with an image and a word (usually a word such as Melek which meant "Of the King."). This stamp guaranteed that the jugs contained a certain weight and purity of content.

    It occurred to King Alyattes of Lydia (present day Turkey) to stamp the quantities of gold and silver in a similar fashion. He used the image of a lion and stamped a word that is generally interpreted as "Walwel" - though this interpretation is certainly speculative. See the image above.

    This was the origin of coinage. This invention spread quickly down from Lydia through Persia and down through Greece. It became an integral facet of the movement from Tyrany to democracy, as power moved from the Tyrant into the hands of individual traders, farmers, shopkeepers, etc.

    But why gold and silver? Because even at that early date, these had been used as mediums of exchange for several millennia. This may seem arbitrary to some. Aristotle thought about this issue and came up with this answer: "Gold is durable, not like wheat, divisible, not like diamonds, convenient, not like lead, constant, not like real estate, and best of all, as jewelry, it has intrinsic value."

    Whether or not this answer satisfies you, the fact is, in recorded history, it has always been thus with humans. In recent history it only since Richard Nixon closed the gold window (the convertibility of paper money into precious metal) in 1971 that the world has left off the use of gold as money. And once again power - and wealth - is being concentrated in the hands of central governments - or Tyrants.

    But there have been many such experiments in the history of humanity and they have all ended the exact same way. Paper money always ends up returning to its intrinsic value - which is close to nothing. And gold always regains its status as real money.

    Wednesday, March 16, 2011

    Is there a way out of this mess?

    There's always a way:

    Japan is the second largest holder of US debt

    Not only is Japan the world's third largest economy, but also the second largest holder of US debt. Yesterday's flow of funds data indicated that China, the second biggest holder of US debt, cut back on its purchases by 5 percent for the fourth consecutive month. (The Fed is by far the biggest holder of US debt - which means we - the US - issue debt and we - the US - buy that debt).

    Japan (and China) buy our debt because we borrow (from ourselves by printing money) to buy their goods. Rather than using those dollars to purchase their own currencies (which would send the price of their currencies skyward) they take those dollars and purchase dollar denominated debt.

    This keeps their currencies from appreciating too much and this keeps our interest rates from spiraling out of control.

    But we will not be buying goods from Japan for the foreseeable future. So they will not need to sterilize these purchases by buying our debt. China is cutting back. The gulf states are having their own problems. And the Caribbean banks are shell operation operated by the Fed. That doesn't leave much.

    When this game stops we will be in the difficult position of being the only buyers of our own debt. And since our debt is growing at a 4 billion dollar a day rate - we will have to print 4 billion dollars a day to buy that new debt.

    Can you spell H-Y-P-E-R-I-N-F-L-A-T-I-O-N?

    Gold may be selling off now - so buy it now as it drops. There may not be another chance.

    43% of Americans spend more than they earn

    Gold-Stater Gold comment:According to a recently published Federal Reserve Board study: 43% of Americans spend more than they earn each year.

    It may sound simplistic to say that each person living in this way is causing poverty, misery and starvation all around the world. However, this is indeed the case.

    How so? Each and every person living in this manner bids up the price of commodities that go into making that which they consume. Grains, cotton, sugar, oil, etc. As these commodities are bid up, they become that much more expensive to those living on subsistence wages: those who can not afford to purchase more than they earn as they have no access to credit.

    The economic relationship between this lifestyle of consumption based on debt and the destruction of the lifestyle of consumption based on subsistence wage labor is a simple economic fact of life.

    It's true that the US government is the most egregious debt spending offender in the history of the world. Still, every US citizen who spends more than they earn is directly contributing to the food riots spreading across the face of the globe.

    America and Americans can only continue this debt orgy as long as the world accepts the US dollar as the reserve currency. This is because the US government can simply print more and more dollars to pay off their debts, and bail out failing lending institutions so they can keep funneling dollars to US consumers.

    This no secret to the central bankers of the world. They all know it. This is why the dollar is being sold by these world banking institutions, and gold is being purchased. It is why countries are banding together - China, India, Briazil, Russia and even France and Germany, as well as many South American and African nations, to settle commodity trades in currencies other than dollars. This is happening right now. This drives down the value of the dollar and makes consumer staples ever more expensive right here in America.

    The dollar will continue to lose value as the US debts mount. And gold will be the major beneficiary of this movement.

    Tuesday, March 15, 2011

    Japan, Black Swans and Gold 3

    Above is a Daily chart of gold. You can see that Gold has fallen down to its 50 day (exponential) moving average. When markets deleverage (this means everybody sells everything they have borrowed money to buy) everything gets hit. This is a buying opportunity in Gold.

    Does this mean gold can't fall farther? Of course not. But gold is only falling because people who have borrowed money to buy it are panicking. Others who do not understand why they have bought it also panic. Cooler heads will step in and eventually buy here when they feel that "weak hands" have all let go.

    This brings us to the TWO GOLDEN RULES of INVESTING.

    RULE 1. BUY WHAT YOU UNDERSTAND. Do not buy because your friend told you to. Or because that news letter told you to. Or because your investment advisor told you to and he's really smart. If you feel like something might be a good idea, research it, and make sure you understand why you are buying it. If you do not know why you are buying something when a round of deleveraging hits you will panic sell. Or worse, when the reasons to buy have changed, you won't know it and you won't sell. Then you'll lose everything.

    Are you a software engineer who understands Apples' unique positioning? Great. Go for it. Is your friend a software engineer who understands Apples' unique positioning. Stay the hell away. When Apple makes a big mistake your friend will know it, but you won't.

    Are you a lawyer that gets why some ruling helps some biotech company? Great. Go for it. Is your friend that lawyer? Stay the hell away. When conditions change your friend will know it. You won't.

    RULE 2. DON'T BE A DICK FOR A TICK. It's an old trading maxim. It means: if an investment is a good buy, don't wait for it to become a great buy. You'll miss your buy. And when an investment begins to sour, don't try and get the last few cents out of it. You'll end up taking a huge loss.

    If you can do those two things you can manage your own money.

    But I don't understand anything in the markets, you might say. Good. Then go to cash. But at least research cash. Try to understand what cash is. And try to get into the right form of cash.

    In my opinion Gold qualifies as good form of cash. But don't take my word for it. Figure out why. I explain my views at

    But figure it out for yourself.

    Monday, March 14, 2011

    Japan Adds $183 Billion to Economy, Doubles Asset Purchases

    The Bank of Japan poured a record amount of cash into the financial system and doubled the size of its asset-purchase plan to shield the economy from the effects of the nation’s strongest earthquake on record.

    The central bank pumped 15 trillion yen ($183 billion) into money markets today to assure financial stability amid a plunge in stocks and surge in credit risk. Governor Masaaki Shirakawaand his board enlarged a program buying assets from government bonds to exchange-traded funds by 5 trillion yen, about one- tenth the size of the Federal Reserve’s quantitative easing.

    Policy makers said they were concerned corporate and household sentiment will worsen, with production set to decline in the aftermath of the temblor and an ensuing tsunami. The March 11 catastrophe killed an estimated number of more than 10,000 people, shut down factories, prompted rolling power cuts and sparked the risk of a meltdown at a nuclear power plant.

    Sunday, March 13, 2011

    Japan and the Black Swan and Gold II

    Another remarkable aspect of the Japan Disaster can be seen in the "lessons" that are being learned in the press. The major lesson we can all take away, as we hear every ten minutes, is the amazing structural planning of Japan's Architects and engineers, who made disaster preparedness a central facet in their architectural design.

    In fact, we would consider an architect who didn't plan for natural disaster to be something of a fool.

    Odd then that not one commentator has observed that another lesson might be that economists should also plan structurally to accommodate disaster.

    Odder still that we consider an economist who plans for disaster to be a fool. "You can't plan for disaster." "You can't live your life expecting disaster." "Seize the day!" "Live in the moment." This is conventional (and juvenile) wisdom, promulgated by the vast leisure and entertainment (and beverage) industry, that has been seized up by economic planners serving both individuals and governments.

    So, how do you plan to accommodate disaster? Through savings. Why would this be anathema to economic planners? Because savings can't be exploited to generate revenue.

    And, when disaster hits everyone knows that governments can simply print more money. So why do they need savings? What a quaint idea. They can just generate debt that will never be repaid.

    Unfortunately individuals can't go down to their basement and print money. They'd get thrown in jail. The only way they can protect themselves is to acquire a reserve currency that can't be eroded by their government. Yes, that would be gold.

    It's this attitude towards disaster that creates a tremendous bull market in gold. Not the disaster. The attitude.

    Saturday, March 12, 2011

    Japan and the Black Swan and Gold

    It would be only too easy to jump on the Tragedy of the devastation in Japan and say: "See that's why you buy gold."

    This type of logic draws a specious connection between disaster and the function of gold. Too many people view gold as a doomsday possession whose value becomes activated when misery rains down on humankind. Nobody sitting on a hoard of gold in Japan is any better off today than they were yesterday. And in fact, the price of gold didn't budge one dime in response to the disaster in Japan.

    However, Japan's monetary health was on life support before this disaster. Japan currently runs a budget deficit that's 200 percent of GDP. Japan ran up massive debt in a massive property bubble twenty years ago and has been fighting the result with massive Quantitative Easing (Read: negative rates fostered by the Japanese Central Bank buying massive quantities of Japanese Government Bonds) ever since.

    Now Japan must face this tragedy without any Reserves set aside. They will have to go much more deeply into debt. Hard to conceive for a country drowning in debt. If they had run a 10 percent surplus, year in and year out, then this disaster, as horrible as it is, would be perfectly manageable.

    And this is at the core of the Black Swan Theory, which says that events like the one that just occurred in Japan are unforeseeable; they don't show up in any of the economic planning models used by Governments and Banks, and they occur with alarming frequency. THEREFOR, every prudent government (and family) must accrue SAVINGS (Read: Reserves: Budget Surpluses) in order to survive Black Swan Events.

    Gold only becomes valuable in the absence of this type of prudent fiscal planning. It's not the disaster that makes gold valuable. It's the DENIAL that this type of disaster is part of the fabric of life.

    The Absurd government projections for growth, revenue, and GDP are almost always wrong. Because they don't take into account any sort of Black Swan Event of any magnitude.

    They do this in First World Countries with Reserve Currencies because they are used to printing money to throw at disastrous events. The debts mount. The events hit. And tipping points are reached.

    This is where Gold comes in. When all other currencies fall, gold rises. Not because it thrives on disaster. Because it represents savings that can not be debased in an environment that has denied the value of savings.

    Thursday, March 10, 2011

    Shooting and injuries before Saudi day of protest

    Shooting and injuries before Saudi day of protest

    RIYADH | Thu Mar 10, 2011 7:45pm EST

    RIYADH (Reuters) - Saudi police fired in the air to disperse protesting Shi'ites and three people were injured on the eve of a day of protests called for Friday by activists using the Internet.

    Protests were planned in other Gulf countries such as Yemen, Kuwait and Bahrain. The time after Friday prayers has proved to be crucial in popular uprisings that have brought down Tunisian and Egyptian rulers who once seemed invulnerable.

    On Thursday, shots were heard near a protest by about 200 Shi'ites in the town of Qatif in Eastern Province, home to some of the world's largest oil fields and a large Shi'ite minority.

    The clampdown was a sign that the Saudi government was serious about enforcing a ban on the protests called by Internet activists emboldened by demonstrations that toppled the leaders of Egypt and Tunisia before spreading to the Gulf.

    "There was firing, it was sporadic," one witness said, adding that the sound of gunfire was interspersed with the noise from stun grenades.

    A spokesman for the Saudi Interior Ministry said police fired over the heads of the crowd after they attacked a police officer who was documenting the protest, and said two protesters and a police officer were injured.

    The ministry said later two protesters received hospital treatment for gunshot wounds but it was unclear who had fired the shots. One was wounded in the hand, the other in the leg.

    "We have launched an investigation. We investigate what type of guns are used and what bullets," said ministry spokesman Mansur al-Turki.

    He said police fired live rounds in the air after shots were fired from among the protesters.

    "A number of people from within the crowd fired live ammunition. I don't know where they fired and how they fired," he said

    The U.S. government said it was aware of protests being dispersed in Saudi Arabia and reiterated its support for the right to peaceful assembly.

    Witnesses gave conflicting accounts of whether police in the Sunni-dominated kingdom, an absolute monarchy where protests are forbidden as being against Islam, used rubber or live bullets.

    "They were not targeting the people directly. It was indirect firing," said one Shi'ite activist who asked to be identified only as Hussein.

    "It seems they don't mean to kill. We think this is a message not for Qatif but for all Saudis about tomorrow (Friday)."

    A Facebook page calling for nationwide protests in Saudi Arabia gathered more than 30,000 followers. In Riyadh police boosted their presence, parking vehicles with their lights flashing at major junctions and patrolling the roads.

    THE END OF QE2: the end of the Risk Trade.

    Gold-Stater comment: When QE2 ends, so will the risk trade.

    The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010. The markets, all of them, are higher than they would be without this money. $4 billion per trading day is an enormous amount of money. It's gigantic by historical standards. As soon as the QE program ends, (June 30th) the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.

    The Fed dumps cash on the risk markets by purchasing treasuries from primary dealers (banks and security brokerages) who then pour that money into risk trades: stocks and commodities.

    In the past, Treasury buyers have been 50% foreigners, and 40% public institutions and individual savers, with the Fed purchasing the remaining 10%.

    Recently, however, the Fed has accounted for 70% of the buying while foreign entities comprise about 30% of the purchases. Of those foreign entities, about 20 percent appear to be off-shore shell banks set up by the Fed to purchase treasuries.

    So the big question after June 30th, 2011 is who will fill in the hole left by Fed when they exit QE2?

    Certainly they can continue to purchase treasuries through shell banks and by other "non-traditional" procedures. However, Fed watchers have become quite sophisticated in their methods of detection and surveillance. It will be difficult for them to continue their purchases while claiming to have ended quantitative easing.

    Clearly, that they have announced the end of QE2 along with a termination date, will in itself cast a pall over all risk trades. Count on it. Markets are sentiment driven. Even if the Fed seeks to mitigate the effect of their termination date it will be very difficult to sway sentiment without a public announcement of the continuation of Quantitative Easing.

    The markets will demand it.

    Will the political will be there to support it?

    Not until the politicians see the effect of a dead risk trade in markets that subsist on risk.

    At some point, when all the fiscal conservatives talking a big fiscal game see their own retirement accounts, as large as they may be, shrink by 50-80 percent, they'll be the ones leading the charge for QE3.

    Count on it.

    Until then... duck and cover.

    Wednesday, March 9, 2011


    Gold Stater Comment: Gold shares can (and do) lag bullion in a bull market.

    If you read the comments of gold gurus you find almost to a man the idea that at some point, in a true bull market gold shares must explode upward and lead the price of bullion. Gold shares provide true "leverage" in a gold bull market they claim.

    And they are right. Which is exactly why, in an era of deleveraging gold shares will always lag bullion.

    As I've pointed out many times, Leverage is synonymous with Risk. What are the risks associated with gold shares? Let me count the ways:

    A) Fraud - accounting fraud, fraud in the mining reports, fraud in representation of the quality of mines.

    B) Mismanagement. Poor acquisitions, bad hedging strategies, poor drilling strategies, poor marketing strategies.

    C) Dilution. Gold companies can issue stock in unlimited quantities diluting whatever stock you hold.

    D) Stock multiple contraction that brings down the value of all stocks leading to:

    E) Broad market collapse that has investors selling all stocks.

    The fact is the bull market is 10 years old. While Bullion has quintupled, the leading gold stock NEM has tripled. The same is true for the broad gold stock market. (You can always find a junior gold stock that has soared, while most have collapsed to Zero)

    Many analysts point to the great depression when gold stocks did in fact soar. But that was because there was a bullion confiscation.

    Could that happen again? Unlikely, because the bullion confiscation occurred back then because the Treasury had issued sixty times as many Demand Notes (dollars) that were convertible into bullion, as the Fed had bullion on hand to redeem those notes. They had to confiscate gold or there would have been a run on the Fed.

    Now Demand Notes (dollars) are convertible into NOTHING. So there's not need for a bullion confiscation.

    The fact is that bull markets occur for different reasons. This time it is because investors are losing faith in PAPER ASSETS. it stands to reason that they will not have great faith even in PAPER GOLD ASSETS.

    I'm not saying don't buy gold shares. Many issues will perform well. But make your core holdings bullion.

    Tuesday, March 8, 2011

    China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year

    "China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year," the central bank said on Wednesday, as part of plans to grow the currency's international role. In a statement on its website, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily."

    Why is this good for gold? Because right now many of these cross border trades are settled in Dollars. This reduces the demand for dollars. The price of the dollar will follow demand downward, while the supply is ever increasing. As the demand and price for the dollar drops, gold will rise.


    Sun Mar 6, 2011 6:06pm EST

    DUBAI (Reuters) - Saudi security forces have detained at least 22 minority Shi'ites who protested last week against discrimination, activists said on Sunday, as the kingdom tried to keep the wave of Arab unrest outside its borders.

    The unrest has toppled regimes in Egypt and Tunisia and has spread to Saudi neighbours Yemen, Bahrain, Jordan and Oman.

    More than 17,000 people backed a call on Facebook to hold two demonstrations in Saudi Arabia this month, the first one on Friday.

    IF THIS PROTEST HAPPENS FRIDAY MARCH 11: Look for major market unrest.