GOLD loves Negative real rates - How about Negative nominal rates?

On July 18th, 2012, the German government sold US$5.13 billion worth of 2-year bonds at an average yield of -0.06%.

 Please note the negative symbol in front of that yield number.

What this means is that the German government was able to borrow money for less than nothing.

When those specific bonds expire in two years’ time, the German government will pay back the original $5.13 billion minus 0.06%.

Welcome to the new normal.

Germany is not alone. Over the past six months, the countries of Netherlands, Switzerland and France have also issued short-term government debt at negative yields.

Meanwhile here in the US the Government is borrowing money for two years at .28 percent.  

While according to metrics used by the US Government in 1980, annual consumer inflation is running at 7 percent.

Yeah, I know, we have vicious asset deflation which is far more pernicious than consumer inflation.  If you have assets.  If you're middle class: - uh oh.  Not to mention your pension: the SP 500 aggregate pension is now running a 700 Billion dollar deficit, while Public Pensions are running a 2 trillion dollar deficit.

This first world borrowing cost is the  sole relevant metric that shows the first world is in a massive economic depression.

It doesn't feel that way yet, because the US and EU governments have been mortgaging the future with massive debt for 40 years, and we're all the beneficiaries.  Our children will all bear the burden of our incalculable greed.  Here in the US it all started with Reagan; the man who engineered the greatest debt party in the history of the world.

And now it's over.

And what are the solutions being offered by ROMBAMA?

Well Rombama 1 wants to raise my taxes to give himself a tax break.  He boasts that he only pays 13 percent while he makes 130 million a year.  That's his entire plan - which will significantly increase the deficit.  Oh, yeah, he also wants to close planned parenthood and PBS and the department of Education.  That will cut .00000000000000001 from the budget.  Oh yeah, he wants to close down Rombama 1's health care plan and start over.  That will do exactly nothing for the budget.

And Rombama 2?  He wants to continue doing exactly nothing but print his way out of debt.  Which means borrow his way out of debt.  That will add to the deficit.

So what will change over the next 4 years?

Nothing - except all the debt will get much larger.  

Especially because the central banks fear asset deflation and are willing to create infinite consumer inflation in order to fight it.  And that mean negative real rates - and now negative nominal rates out into infinity. 

Now, let me make one thing clear: I don't love gold.  I started buying it 10 years ago because a massive debt crisis seemed inevitable.  I'm still buying it because the massive debt crisis is getting worse.

GOT GOLD?

Fed signals easing: Soros, Paulsen, Goldman Sachs already knew

Aug. 22, 2012, 2:14 p.m. EDT

Get ready for QE3

Commentary: FOMC signals another round of bond buys soon

By MarketWatch

WASHINGTON (MarketWatch) — Get ready for QE3.

ECONOMIC PERSPECTIVE

Top officials of the Federal Reserve are leaning strongly toward a third round of bond buying by the Fed, known colloquially as QE3, according to the minutes of the Aug. 1 meeting of the Federal Open Market Committee.

Here’s the money quote from the FOMC minutes: “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

 Some people already knew this was going to happen:

GEORGE SOROS:

 Billionaire financier George Soros has sold all of his equity positions in major financial stocks according to a 13-F report filed with the SEC for the quarter ending June 30, 2012.

Soros, who manages funds through various accounts in the US and the Cayman Islands, has unloaded over one million shares of stock in financial companies and banks that include Citigroup (420,000 shares), JP Morgan (701,400 shares) and Goldman Sachs (120,000 shares). The total value of the stock sales amounts to nearly $50 million.

At the same time he was selling bank stocks, he was acquiring some 884,000 shares (approx. $130 million) of Gold via the SPDR Gold Trust.

GEORGE SOROS IN HIS OWN WORDS: “I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career,” Soros tells Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”

And John Paulsen:

By Frank Tang

NEW YORK | Tue Aug 14, 2012 7:09pm EDT

(Reuters) - Prominent hedge fund manager John Paulson raised his stake in gold in the second quarter of 2012, boosting investor confidence that bullion prices have more room to rise this year, a U.S. regulatory filing showed on Tuesday.
  

Home » Goldman Sachs Reiterates Bullish Gold Forecast

GOLDMAN SACHS REITERATES BULLISH GOLD FORECAST

July 16, 2012

 Goldman Sachs reiterated its recommendation for buying gold. Analysts at the bank noted that gold is again moving inversely to U.S. interest rates as measured by yields on inflation-protected government 10-year government bonds. Goldman's economists expect to see "subdued growth and further easing by the Fed," the bank said, adding that gold prices may climb toward its six month forecast of $1,840 a troy ounce.

There's gold at the source of DeNial

For 5500 years of recorded history gold has been the source of monetary stability.  

Since Nixon took the first world off the gold standard in 1971 Gold has been the prime hedge against monetary instability.

Alan Greenspan famously boasted that the US would run its monetary policy AS IF pegged to gold.

Ha Ha Ha.

This statement hilights the tremendous DENIAL that lies at heart of the human condition.

Without the discipline of gold, politicians and bankers are free to plunder world economies by creating currency out of thin air and awarding it to themselves.

There is no way around this.  That's why the founding fathers stipulated in the constitution that ONLY gold and silver can be used as money.

The fundemental DENIAL of the fact that given the opportunity Governments and Banks will plunder world economies gives rise to a myriad of other incredible (or all too credible) feats of DENIAL:


A) We have a capitalist system.  A system with a central bank that creates money is the definition of a socialist system.

B) The Free Market which doesn't exist (when you have a central bank that controls the issue and distribution of money) will solve all problems

C) The claim that any current politician is concerned in any way with debt.  Ryan and Romney's budget increases the debt.  Obama's budget increases the debt.

D) Cutting taxes for the wealthy magically puts money into the economy.  Yes, cutting taxes in a surplus economy with a 70 percent tax rate, will lead to investment.  But cutting taxes in a massive deficit economy with a 35 percent tax rate will lead to massive capital flight.  Nobody  but a rank moron would invest when demand is collapsing. 

E) You can borrow you way out of a Debt problem.

F) You can have a monetary union without a political union.  

G)  You need massive military spending when the world economic system is collapsing.  For what?  Which wasteland should we invade next?

H) The idea that human society is always and ever improving (Positivism), so all problems are bound to be solved.  (See Dr. Pangloss).

When all these absurd exercises in DENIAL are resolved our monetary problems will be resolved and the  bull market in gold will be over.

Ron Paul, Geroge Soros, John Paulsen like gold

Ron Paul, Congressional Committee on Financial Services
          o vice-chairman of Subcommittee on Oversight and Investigations
          o Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth

"Sadly, Americans are far less free than many others around the world when it comes to protecting themselves against the rapidly depreciating US dollar:

Mexican workers can set up accounts denominated in ounces of silver and take tax-free delivery of that silver whenever they want.  

In Singapore and other Asian countries, individuals can set up bank accounts denominated in gold and silver.  Debit cards can be linked to gold and silver accounts so that customers can use gold and silver to make point of sale transactions, a service which is only available to non-Americans. 

The obvious solution is to legalize monetary freedom and allow the circulation of parallel and competing currencies.  There is no reason why Americans should not be able to transact, save, and invest using the currency of their choosing.  They should be free to use gold, silver, or other currencies with no legal restrictions or punitive taxation standing in the way.  Restoring the monetary system envisioned by the Constitution is the only way to ensure the economic security of the American people.

After all, if our monetary system is fundamentally sound-- and the Federal Reserve indeed stabilizes the dollar as its apologists claim--then why fear competition? "

Paulson, Soros Add Gold as Price Declines Most Since 2008

By Debarati Roy - Aug 15, 2012 1:09 AM ET

george Soros and John Paulson increased their stakes in the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008. Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier, a U.S. Securities and Exchange Commission filing for second-quarter holdings showed yesterday. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares.

Finding Value: Manipulation

There is almost nobody out there who believes or cares if the markets are manipulated.  There are more people putting up youtube videos accusing Bush and Cheney of demolishing the Twin Towers than there are sounding the warning about market manipulation.

The amazing thing is - this is in the face of MF Global Scandal, the Libor Manipulation Scandal, the Knight Capital Scandal, Operation Twist Rate Manipulation Policy, the fact that the Fed buys 70 % of all newly issued debt, The Plunge Protection Team, and the fact that 70 % of very light NYSE volume is accounted for by Supercomputers that front run your trades!  If that's not the definition of market manipulation, I can't imagine what is.

Still, if you raise the specter of Market Manipulation everyone from the Big Banks to little tiny traders who wish they were like the Big Banks roll their eyes and turn up their noses, and call you a conspiracy theorist and a whiner.

Why?  Because if they admitted there was Market Manipulation then all of their little SECRET RATIOS that have ACCURATELY CALLED TOPS AND BOTTOMS for the last UMPTEEN YEARS would be valueless.  All their stochastics and mean reversions and Fibonacci retracements and sentiment indicators would be a joke.

So don't believe me.  Don't worry about it.  Have fun trading - which these days just means donating your money to the guys over at Goldman Sachs.  They believe in market manipulation.  Happily.  Every last one of them.  And believe me, they're ecstatic that you don't.

Meanwhile, I'll stick with what's worked exceptionally well for the last 10 years, and will work exceptionally well for the next ten:

1/3 cash (you have to pay your bills).  1/3 gold bullion.  1/3 high grade rare gold coins. (for the last substitute any high end collectible you understand well).

Value is value is value.

Trading is fun.  But it has no value.  Unless you're the one manipulating the markets.  Then it's a great deal.

Finding value: Correlation vs Causation

There's a great scene in the Steve Martin movie "All of Me" where an Indian Holy Man is staying in a modern hotel and he flushes a toilet for the first time and the telephone rings.  He flushes again and the phone rings again.   So he thinks that flushing the toilet makes the phone ring.

Unfortunately, this gag describes the state of the human reasoning mechanism throughout much of modern human history.

To think that flushing the toilet makes the phone ring because these things happened together - they were correlated - at one time, forms the basis of almost all political and economic argument today.

This is a great sight gag.  And it is no dumber than saying, for example, that because for 40 years stocks went up, they will always go up over time.

Or saying that when Reagan cut the top marginal tax rate in 1980 from 70 percent to 55 percent in a surplus economy and the number we use to describe GDP got bigger, the same thing will happen in 2012 if we cut the top rate from 30 to 25 in a deficit economy.

Or saying that because a certain chart pattern occurred in 2001 and a stock or commodity went up - the same chart pattern will produce the same result in 2012.

Or by saying that when a certain law was passed in 1933 - certain stocks went up, so the same stocks will go up if a similar law is reenacted in 2012.

Or saying because at object realized a certain price in a recent auction therefor that is the "fair market value" of the object.

Or saying because a certain junior gold stock X found x ounces in the ground and its stock price went up, therefor when a certain junior gold stock Y finds x ounces in the ground it stock price should go up.

Or saying because Paul Wolfowitz is Jewish, US foreign policy is deployed in the service of Israel.

And the culmination of this sloppy thinking results in arguments that suggest a desired result (i.e. "bring down the deficit") is the same as having a viable plan to bring about the desired result.

In other words: I speak a sentence in which a desired result occurs (the correlation), therefor I will bring this result about in physical reality.

Put this way, this assertion sounds incredibly stupid, yet it lies at the heart of 99% of political and economic argumentation.

How does this apply to you finding value in the real economy today?

If you can see the fallacy in this type of argumentation you can begin to analyze things for yourself, in stead of relying on "experts."

And, unfortunately, thinking for yourself is the only way to find value in the modern political economy.

Rare World and Ancient Coins for the middle class

Most Americans collect US coins.  There are plenty of Americans who feel comfortable dropping $15,000 on a Lincoln Penny from the 20th Century if it has the right grade and markings.  Many of these same people would think you were out of your mind to spend the same amount on a gold stater of King Croesus of Lydia dating to 545 BC - the first gold coin (see above.)

The reason for this is simple.  Most Americans know who Lincoln was.  But they have never heard of Croesus of Lydia.  If you know who Croesus of Lydia is, you already have a tremendous advantage in  collecting/investing in Ancients.  If you know who Charlemagne - or Irene - or Basil Bugarokthonos was and why they were such a significant figures, you probably have a huge advantage in collecting late Byzantine era coinage.  If your know what Kthonos means you're even farther ahead of the game.

My point is simple: Collecting coins - especially Ancients - is all about collecting Historically Significant objects.  Understanding precisely why an object is historically significant is half the battle in valuing it.

Many people don't realize that for a person to be Historical, there needs to  be a Contemporary reference to that person.  Often the only extant contemporary reference is a coin or some other archeological artifact.  For example King Solomon is an historical figure because we've found objects dating to the first temple bearing his name.  Kind David is not an historical figure.  Neither is Moses.  It doesn't mean they didn't exist.  It just means there's no objective proof of their existence.  In coinage, for example, we know that Simon Bar Kosiba existed precisely because he is named on coins.  For many years coins bearing his name sold for very little.  But some people accurately figured out this these coins would appreciate because the rebellion he led against Rome led to the Diaspora.

Understanding the precise historical significance of a coin goes a long way towards forming a valuable and interesting collection.  Especially in high grade.  And especially when few other coins of a particular type exist.

And knowing about the history of Coinage (Numismatics) is also a great advantage, because some coins are valuable precisely because they are numismaticaly important: For example: collectors prize coins that bear important images that are later repeated down through history:  The first image of Christ on a coin.  The first reference to Christ on a coin.  The first image of the Lamb of God, the first Franc-a-cheval.  These are all prized by collectors

It's a knowledge game.  Those who are willing and able to learn can do well.  It's always wise to collect what you know.  The more you know, the bigger your advantage.

With Modern World coins it's also a knowledge game.  But there you need to understand which economies are thriving.  Which are growing.  Which are declining.  Because growing thriving economies tend to produce a wealthy middle class which tends to collect high grade coins - especially gold - that celebrate their own country and culture.

This is why we've seen a boom in Russian, then East European, then Chinese, and now Indian coinage.  What's next?  And which economies are failing and thus likely to produce a decline in the price of their coinage?

I have my ideas.  But that would spoil it for you.  The whole fun of this game is to analyze and figure it out for yourself.  That will give you a great advantage in collecting/investing in World Coins.

UNDERSTANDING HOW TO GRADE - AND VALUE ANCIENTS

In buying any sort of art: condition is always paramount.  But ancient coins are unique in that they are dug up out of the ground after thousands of years and cleaned.  And they were hand struck from hand-engraved dies, so no two are ever the same.  This makes grading - and thus valuing - coins a challenge.

There are Four major considerations;

First: State of preservation: the overall condition that could range from as struck/mint state to About Uncirculated to Extremely Fine to Very Fine, to Good to Poor.

Obviously collectors value Mint State highest,  It is important to know however how many mint state coins there might be of a certain type to assess the value of the grade.  And it is important to know that  this is only one of four metrics.  And often not the most important.

Second: Strike: which includes centering.  A well struck well centered coin is terribly important.  A coin can be mint state but poorly struck and still have very little value.  A coin can be mint state with poor centering and have very little value.  As a rule images must be clear and well centered.  Occasionally some writing can be a little indistinct or even a few letters may be off the flan and the coin might still be highly valued.  But for top coins all images and lettering should be well struck and centered.

Third: Surfaces: this includes quality of metal as well as nicks, digs and scratches.  For many sophisticated collectors Quality of Metal is paramount. Especially with silver.  Gold is inert so the issue is less salient.  Still, a gold coin that has spent much time in a river (for example) might have an unappealing quality of metal that hurts the value.  As for nicks and scratches, it really depends where they are and how visible.  As a rule, scratches on the image of a face can hurt the value of a coin - depending on how visible.  Scratches in the field, less so.

Fourth: Style:  Style is the most subjective and often the most important element in determining value.  Some beautiful silver pieces from the "signing period" (around 400 BCE in Sicily) can bring over a million dollars - in fine style and high grade.  Electrum Staters and hektes of similar grades bring wildly differing prices according to the quality of the style.   Fine style portraits _ especially Caesar Portraits can bring 10 or even 50 times the value of poor style coins of high state of preservation.

SLABS: Above I have shown an image of an NGC graded coin.  To their great credit: they grade a coin in all four important areas.  Further, they provide the virtue of informing the collector about damaged, altered (clipped, smoothed, tooled) and fake coins.  Many dealers - and auction houses - will not do this.  CAVEAT EMPTOR.  The most costly error a collector can make is buying a damaged, repaired, altered or fake coin that has not been described as such.  This is why I sell graded coins.

All these consideration are important.  It's a challenge to be able to artfully weigh them all in valuing an ancient coin.  It takes time and effort.

But remember this: a coin that is visually stunning - meaning it literally stuns you when you look at it, just as you might be stunned occasionally when looking at a member of the opposite sex - that's a coin worth possessing.

UNSUSTAINABLE

There are a lot of questions plaguing the gold investor at the moment:  Why is gold mired at 1600?  Why is gold acting as a risk asset?  Why is gold not reacting to the massive central bank money printing?  When will this correction ever end?

All of these are reasonable questions.  At the same time all of these questions are myopic.

In any type of investing big-picture long-term vision is the paramount virtue required for success.

This is why you get old value investing stock guys on the financial networks who are always finding reasons to invest in the stock market.  Their attitudes are absolutely correct.  The only question is: are they seeing the future, or are they looking for a future that echoes the past?

UNSUSTAINABLE:

The most difficult thing to acknowledge in a society built on institutions (every society) is that those institutions are fundamentally unsustainable.

Unfortunately their are several fundamental institutional pillars of the modern politcal economy that are clearly unsustainable.

A) a global banking system that exists to promote growth through debt, sucks capital out of the global economy, and is too big to fail, restructure, or prosecute.

B) a global debt load far too big to allow any possibility of further growth - except illusory growth through inflation.

B) a political system that is far too weak to confront the banking problem - and far too dependent on the debt created by its central bank to care.

C) a population that is rapidly losing faith in the banking and political system, yet also entirely dependent on the debt-funded entitlements.

If this is what you see, all short term considerations for buying, trading, timing gold are irrelevant.  Just keep accumulating gold, because currencies issued by unsustainable institutions will fail,

If this is not what you see, don't buy gold at all.  Buy stock in the above mentioned institutions.