Thursday, October 23, 2008
Former Fed Chairman Greenspan advocates a Return to the Gold Standard
Now this was a position that Alan Greenspan actually advocated in the 1960's before he sold his soul to the Devil. It's nice that Alan, now wants the Gold Standard back, but you can't wash your hands of the crimes that you have committed. The use of Fiat money always leads to perpetual War and violence. This is the true legacy of Alan Greenspan, he is part of the problem, not the solution.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Wednesday, October 22, 2008
Government Bailouts Herald New Era of Taxpayer Slavery-Ron Paul
In the midst of highly unpopular bailouts of Wall Street, many justifications have been given about why Washington feels the need to act. Some claim that capitalism and the free market are to blame, but we have not had capitalism. If you compare our financial capital to our aggregate debt, this would be obvious. In the same way, we have not had a truly free market. The monetary manipulations of the Federal Reserve, a complex tax code, the many "oversight" agencies and their mountains of regulations show that we are far removed from a free market economy.
Another unsatisfying argument is that certain entities have to be bailed out because of their economic importance. Supposedly, some entities can be so big, so important, that no matter what they do, citizens must perpetually sustain them.
Even limited government has a basic duty to defend against force and fraud. Some argue that force is somehow permissible just because the entity engaging in it is "economically significant." But one could use this reasoning to prop up slavery. It could be deemed unfortunate but economically beneficial, and indeed these arguments have been used historically to deprive people of their liberty. But slavery should never be tolerated regardless of any economic benefit, just as systemic fraud should not be tolerated. Some banks on Wall Street should fail. Fannie and Freddie should fail. They are perpetrating fraud against the people. Yet, government insists on rewarding behavior which should instead be investigated, prosecuted, and punished.
There has been much evidence of fraud at Fannie and Freddie, but when one man, Franklin Raines, defrauded the organization out of millions of dollars through illegal accounting tricks, and ends up agreeing to pay back just a fraction, one could argue that it was well worth it to him. Fannie went on to only get more deeply involved in subprime mortgages after this investigation. Several organizations are suffering right now precisely because the free market is trying to work and punish mismanagement, if only the government would get out of the way and let it.
Perhaps banks are not lending to each other because they know that complicated accounting standards, created in part to defend against confiscatory tax policy, enables false fiscal pictures to be presented, which erodes trust. But this is not a time for the government to step in with more burdensome and complicated regulations, or more foolish liquidity injections. This is a time for some banks to fail, and remaining banks to deal honestly and transparently once again. More regulations will only result in more lies.
Just as economies that turned away from slave labor had a transition period, our economy would transition as well, but in the end, if we turned to honest, sound money and a truly free market, we would end up with a more just society, founded on truthfulness and decency, not subject to the violence of force or the whims of fraudulent institutions. Unfortunately, it seems we are headed into a new era of slavery, however, where all taxpayers will be forced to render to the Fed and big banking interests the bulk of the fruits of their labor, possibly through higher taxes but definitely through the eroding force of inflation.
Source
Another unsatisfying argument is that certain entities have to be bailed out because of their economic importance. Supposedly, some entities can be so big, so important, that no matter what they do, citizens must perpetually sustain them.
Even limited government has a basic duty to defend against force and fraud. Some argue that force is somehow permissible just because the entity engaging in it is "economically significant." But one could use this reasoning to prop up slavery. It could be deemed unfortunate but economically beneficial, and indeed these arguments have been used historically to deprive people of their liberty. But slavery should never be tolerated regardless of any economic benefit, just as systemic fraud should not be tolerated. Some banks on Wall Street should fail. Fannie and Freddie should fail. They are perpetrating fraud against the people. Yet, government insists on rewarding behavior which should instead be investigated, prosecuted, and punished.
There has been much evidence of fraud at Fannie and Freddie, but when one man, Franklin Raines, defrauded the organization out of millions of dollars through illegal accounting tricks, and ends up agreeing to pay back just a fraction, one could argue that it was well worth it to him. Fannie went on to only get more deeply involved in subprime mortgages after this investigation. Several organizations are suffering right now precisely because the free market is trying to work and punish mismanagement, if only the government would get out of the way and let it.
Perhaps banks are not lending to each other because they know that complicated accounting standards, created in part to defend against confiscatory tax policy, enables false fiscal pictures to be presented, which erodes trust. But this is not a time for the government to step in with more burdensome and complicated regulations, or more foolish liquidity injections. This is a time for some banks to fail, and remaining banks to deal honestly and transparently once again. More regulations will only result in more lies.
Just as economies that turned away from slave labor had a transition period, our economy would transition as well, but in the end, if we turned to honest, sound money and a truly free market, we would end up with a more just society, founded on truthfulness and decency, not subject to the violence of force or the whims of fraudulent institutions. Unfortunately, it seems we are headed into a new era of slavery, however, where all taxpayers will be forced to render to the Fed and big banking interests the bulk of the fruits of their labor, possibly through higher taxes but definitely through the eroding force of inflation.
Source
When Inflation Comes Back, Gold will Erupt
By: The_Gold_Report
Expect short-term hesitancy in the upward movement of the gold price until liquidity returns to the markets, says Frank Holmes, CEO and chief investment officer at U. S. Global Investors and co-author of the new book “The Goldwatcher:Demystifying Gold Investing” (John Wiley & Sons). In this exclusive interview with the Gold Report, he predicts gold will go to $1,000, even $2,000, over the next two years. A growing money supply due to a change in government policies will help lift some juniors out of their misery, too. Holmes advises selective nibbling until conditions improve and names a few companies to consider.
TGR: Can you start off by telling us what's going on?
FH: Based solely on global economic indicators, commodities should be in a cyclical bear market with no bottom in sight. But there's intense pressure on policymakers to fill the deflationary vacuum that's been created by both Main Street and Wall Street. Main Street's plummeting housing prices stretched the limits of the financial system, but lawmakers in an election year will find it easier to blame Wall Street than Main Street.
TGR: Both sides are at fault.
FH: The abuse of leveraging is the biggest culprit. Mike Milken spoke at a conference I attended last week in Hong Kong. He said that at the height of his career he was leveraged 4-to-1. Goldman Sachs now is leveraged 20 times, so a 5% mistake would wipe them out. The combined impact of Sarbanes-Oxley, FAS 157 (mark-to-market regulations) and leverage abuse has cost New York its position as the world's financial capital. No one expected this escalation of write-downs.
When Warren Buffett bought General Re Insurance in 2002 he warned about notional valuations because he tried to sell some of the derivatives, and lost billions of dollars. He called derivatives “weapons of mass financial destruction.” Everyone ignored him, and the derivative market increased 500% in five years.
TGR: Wow.
FH: If you make a 2% mistake in the $500 trillion derivative market, that's $10 trillion. What's $10 trillion? Well, the world's total GDP is $50 trillion. The total amount of U. S. dollars in circulation is roughly $15 trillion. A 2% mistake wipes out 20% of the world's GDP.
We're actually experiencing huge deflation—in housing and on Wall Street. It's not inflationary yet. The Paulson package is a stopgap measure that could lead to inflation. This meltdown is just like 1974 or the Depression of the 1930s, not the 1987 quick crash. It continues to destroy confidence. Another thing that propelled this meltdown to more disastrous proportions was the rule that removed the uptick rule for short-selling.
TGR: What will fix this situation?
FH: That's a good question. Adding untested regulations is dangerous, and the law of unexpected consequences is often negative. The combination of Sarbanes-Oxley, FAS 157 and the no uptick rule for shorting basically became toxic and led to the destruction of Lehman Brothers and Bear Stearns. Also, “ideas” like printing more money and the debasement of currency do not solve the credit crisis and are not good long-term solutions.
The dollar's not going to collapse due to loss of Asian support. All countries will support the dollar. The reason is that they can't afford for it to fall too far because then suddenly the U. S. would be exporting products and not importing. All the currencies will slowly debase themselves against gold and keep the dollar as the currency for global trade.
It appears we are now going through that inflection point moving from deflationary forces to an inflationary cycle. We had a little bit of run-up in inflation when oil ran to $150 a barrel, which was very excessive. What didn't make sense was the fact that gold didn't rise along with oil. On the historic 10-to-1 ratio, gold should have gone to $1400 to $1500. That leads to suspicions that a few people were manipulating the price of oil because gold failed at $1,000 per ounce. On another note, it is important to remember policymakers will do everything in their power to create liquidity and, historically, liquidity is bullish for commodities. However, our research suggests it'll take several quarters before this will affect commodity prices.
TGR: Will the market stagnate until this liquidity flows through and moves the commodities up?
FH: You'll have to be a very selective buyer for another couple of quarters. The price correction should lose downward momentum and create a “U” shaped bottom as the capital markets begin to reflect the policies being implemented.
TGR: When you say the price correction will lose its downward momentum, do you mean this wholesale sell-off of everything?
FH: Right.
TGR: We saw yesterday that Goldcorp (TSX:G) (NYSE:GG) was down 16%.
FH: That downward momentum will start to slow.
TGR: When you say commodities, do you mean gold?
FH: Asian economic activity has a big influence on the purchase of gold. At the London Gold Bullion Traders Conference in Kyoto, I was amazed to find the magnitude of the shortage of gold and silver coins. In Germany, they aren't having the crisis we're having here, but Germans were lining up to buy gold.
TGR: Do they have supplies?
FH: No, but they have gold in the kilo bars. Everything is sold as soon as they get it.
TGR: I tried to buy some Swiss 20 Francs today and couldn't find any.
FH: People are paying a large premium for small coins, and the purchase of safety deposit boxes is on the rise. People have been actually stuffing dollars in them, along with gold. It's not really a 1980-style mainstream panic. People are continuing to buy. The growth of gold ETFs attests to that. Now let me try to explain some of these huge price swings in commodities, equities and emerging markets.
Your readers might be interested to know that banks all have this software called VAR, or Value At Risk. It triggers an alarm indicating a need for more capital due to escalating debt defaults. You'd think that banks would go to their prime brokerage arm and rein in hedge funds trading mortgages and de-leverage them because that's where the risk is. Your business model says, “I have defaulting mortgages, so I need to be sure our hedge fund and prime brokers aren't having similar problems.”
TGR: Right.
FH: Well, the banks reacted by calling every hedge fund and de-leveraging all asset classes, equities, banks and commodities. So, starting August 12, 2007, some of the S&P stocks moved 15% in a day internally. This same margin call has now taken place about four times this past year. U.S. banks in Japan yanked loans to small cap companies, so those guys were scrambling to replace those loans. Situations like that are happening everywhere and they illustrate the long reach of this credit crisis.
A lot of emerging marketing investors got their noses bloodied when the U.S. called for its loans to be repaid. They will not be so quick to repeat that mistake. This ripple effect is hurting businesses. That is a concern that I heard over and over. Fortunately, the governments of emerging markets have huge surpluses and are better equipped to handle this crisis than they were in the 1990s.
All of this is good for commodities and gold rises in step with commodities. When inflation erupts everywhere, then gold will take off on its own with a bigger move.
TGR: When will that happen exactly?
FH: Over the next two years gold will be well over a $1,000, maybe running up to $2,000. The number-one Asian analyst, Chris Wood, is advocating a 30% gold exposure to institutions. Now, this is the number-one brokerage firm in Asia and their research is excellent.
TGR: What's the name of the firm?
FH: CLSA-Asia Pacific Markets. It recommends a portfolio allocation of 30% gold:15% gold bullion and 15% unhedged gold stocks. When an analyst of his stature advises putting 30% of your portfolio into gold, you have to take note. We tell our clients to put a maximum of 5% into bullion and no more than 5% toward gold equities.
TGR: Doug Casey's latest missive rounded it up to 30% too.
FH: The significance here is that the institutional side is getting on board with gold. That's a big deal.
TGR: Because the gold market is so small compared to the market caps these institutions deal with, even a small change in percentage would make a huge difference.
FH: All the brokers are getting their marching orders simultaneously. What happens is that non-correlated assets begin to correlate as people seek liquidity. So everyone's saying, “I have to get cash.” It's important to remember that brokers were leveraged 20 times and low-income house buyers were leveraged 99 times. This creates a chain reaction and knocks down the commodities. Several of these hedge funds have blown up, and if our holdings are similar to theirs, they've hurt us.
We went into this correction with a big cash position back in June, and we never expected such a huge correction, but our models were showing that it should be 20% to 25% cash. Then we start to nibble as things get clobbered, but they continue to get clobbered.
TGR: Yes.
FH: Last week the markets hammered every stock with liquidity. Many funds have been hit by this problem. Margin calls are driving this. It has nothing to do with the demand for gold or the supply and discoveries.
TGR: But that should work itself out fairly quickly by the end of the year.
FH: It was estimated that by the end of the year there would be $22 billion of resource stocks coming out.
TGR: Do you mean coming out of the hedge funds?
FH: Yes. Hedge funds have been forced to shut down. It's really interesting to look at the TSE Venture Index. When the asset-backed paper problems happened last summer, retail sponsorship dropped dramatically. The U. S. went through something similar in February when suddenly the small caps and mid-caps started losing liquidity. What we noticed was that the auction rate paper is exactly ten times the size of Canada's asset build paper crisis—$330 billion versus $33 billion. It was just before tax season, so a lot of American investors had to scramble for cash by redeeming their equity funds to pay their taxes.
TGR: Do you follow Richard Russell's Dow Theory Letters?
FH: You mean regarding the relationship between the Transports and the Dow Industrials?
TGR: Yesterday both were down so Dow Theory now confirms that we are in a bear market.
FH: Yes.
TGR: What happens to gold stocks in a bear market?
FH: Whether you have big deflation or big inflation driving the bear market, gold does well. If it's just a normal cyclical inventory recession or whenever interest rates are above the CPI rate, gold doesn't do well. Today, the Fed's funds are below the CPI rate and the printing presses are busy.
TGR: So, what are we in now?
FH: I think we're at the tipping point moving from deflation to inflation.
TGR: So, we've been on the negative side of that.
FH: We saw gold run to $1,000 twice because of deflation, not inflation. Massive liquidations are deflationary. Collapsing housing prices are deflationary. The price of oil running up was inflationary but it was triggered by the dollar deflation and gold moved with it. In the '30s, when you had a big deflationary cycle, gold was the best asset class. In the '70s, when you had a big inflationary cycle, gold was the best asset class.
TGR: Right.
FH: In the '90s when there was no big inflation or deflation, gold just meandered along.
TGR: So when do you think we will reach that tipping point from deflation to inflation?
FH: The money supply has basically been flat for the past three months. The correlation of commodity price action and emerging market money supply has an R-squared value over 80—highly correlative. We track the G-7 countries versus the E-7 (the seven most populated emerging countries in the world with available data) and track their money supply. The money supply has not been growing rapidly. We need to get the money supply up and this will happen with the $700 billion bailout. So, we're going through a transition over the next couple of months.
TGR: When will gold respond?
FH: There's been a six-week lag with the money supply, the same with NASDAQ. If the money supply spikes, there's a 70% probability that within six weeks the NASDAQ will start to rise.
TGR: Why would an increase in the money supply impact NASDAQ?
FH: People have more cash to spend.
TGR: So they're moving into the NASDAQ?
FH: Yes. The money supply has one of the highest correlations to the gold commodity as a whole. When you look at stocks individually, the number-one driver is the production per share growth. After that, it's cash flow, and then reserves. You can eliminate 80% to 90% of all the noise by calculating production and the cash flow.
TGR: What would you tell someone who has just inherited a million dollars?
FH: I'd put 5% into gold bullion and 5% into unhedged gold stocks.
TGR: Unhedged producers?
FH: Yes, and if you want to go down to the smaller caps like Jaguar (JAG. TO) , that's where you get your biggest potential returns.
TGR: Can you share a few names on your list of unhedged gold producers?
FH: We like companies that have a royalty business, such as Royal Gold (RGLD) . We also look at those with the strongest per-share-growth rates coming over the next 12 – 18 months. That list includes Agnico-Eagle Mines (TSX:AEM) , Kinross Gold (KGC-NYSE; K-TSX) , and Goldcorp—all of which have very healthy growth profiles relative to the Newmonts of the world. Goldcorp isn't a pure gold play, because it also produces a high percentage of base metals. But we expect that within two years those base metals will really start taking off.
TGR: Is that prediction based on anticipated growth in China?
FH: Yes. China has structurally gone through a quiet phase, but the government has policies in place that are designed to invigorate growth. As that growth starts to pick up steam over the next six months, you're going to see increased demand for the basic commodities. Of course, the economy is spending a lot of money for infrastructure right now, and that might put a temporary lag on commodities.
TGR: But you believe China's growth will drive the commodities market higher?
FH: Yes. The credit crunch created by the collapse of U. S. financial institutions will slow things down for a while, but ultimately, China will grow.
TGR: What other companies do you like?
FH: Unless they have two grams of gold (per ton) or a million ounces, junior explorers have been drifting lower and lower. Historically in situ reserves have traded at one-tenth of an ounce of gold. So, if gold is $600, then your reserves are worth $60 per ounce. When gold was $300, they were worth $30. That was the model for determining a fair market cap for junior explorers. With gold at $850, these companies should be worth $85 per ounce of reserves, but they're not. This amazes us. And when one of these companies is bought out, it's usually paid more than the ten times ratio. But valuations are now drifting down to $40 and $35 per ounce. So the market is basically valuing a company that has 8 million ounces as if it had only 4 million ounces.
TGR: This is a short-term phenomenon, right?
FH: Yes.
TGR: So, when this situation changes, how quickly will producers and majors start buying up the juniors?
FH: That's a different point. The seniors are going to buy only those juniors that have two grams of gold per ton or a million ounces. The other juniors will just work their way out of the system or go bankrupt.
TGR: What other criteria do you use to evaluate juniors?
FH: We ask some simple questions:Is the CEO technically competent? That is, is he a geologist? If not, that may be okay, but does he have a broad network to make up for that lack of technical knowledge? Does he know the newsletter writers, like Doug Casey, for instance? Does he know the investment bankers?
We've found that if the CEO does not know the Street, and doesn't know the newsletter writers, it doesn't matter if he's a geologist or an engineer. There's going to be no liquidity in the company's stock, unless there is a multimillion ounce discovery with a grade of greater than 2 grams per ton. But if you have a company whose CEO knows lots of newsletter writers, gets lots of coverage, knows the value in the Street and gets research for it, that company is going to have a higher price-to-book valuation, which makes it a much more attractive investment.
TGR: Anything else you look for?
FH: Financing is crucial. Companies that are rapidly spending money are going to run out of cash in about six months. The market undervalues them until they have financing in place.
Cont' at Source
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Expect short-term hesitancy in the upward movement of the gold price until liquidity returns to the markets, says Frank Holmes, CEO and chief investment officer at U. S. Global Investors and co-author of the new book “The Goldwatcher:Demystifying Gold Investing” (John Wiley & Sons). In this exclusive interview with the Gold Report, he predicts gold will go to $1,000, even $2,000, over the next two years. A growing money supply due to a change in government policies will help lift some juniors out of their misery, too. Holmes advises selective nibbling until conditions improve and names a few companies to consider.
TGR: Can you start off by telling us what's going on?
FH: Based solely on global economic indicators, commodities should be in a cyclical bear market with no bottom in sight. But there's intense pressure on policymakers to fill the deflationary vacuum that's been created by both Main Street and Wall Street. Main Street's plummeting housing prices stretched the limits of the financial system, but lawmakers in an election year will find it easier to blame Wall Street than Main Street.
TGR: Both sides are at fault.
FH: The abuse of leveraging is the biggest culprit. Mike Milken spoke at a conference I attended last week in Hong Kong. He said that at the height of his career he was leveraged 4-to-1. Goldman Sachs now is leveraged 20 times, so a 5% mistake would wipe them out. The combined impact of Sarbanes-Oxley, FAS 157 (mark-to-market regulations) and leverage abuse has cost New York its position as the world's financial capital. No one expected this escalation of write-downs.
When Warren Buffett bought General Re Insurance in 2002 he warned about notional valuations because he tried to sell some of the derivatives, and lost billions of dollars. He called derivatives “weapons of mass financial destruction.” Everyone ignored him, and the derivative market increased 500% in five years.
TGR: Wow.
FH: If you make a 2% mistake in the $500 trillion derivative market, that's $10 trillion. What's $10 trillion? Well, the world's total GDP is $50 trillion. The total amount of U. S. dollars in circulation is roughly $15 trillion. A 2% mistake wipes out 20% of the world's GDP.
We're actually experiencing huge deflation—in housing and on Wall Street. It's not inflationary yet. The Paulson package is a stopgap measure that could lead to inflation. This meltdown is just like 1974 or the Depression of the 1930s, not the 1987 quick crash. It continues to destroy confidence. Another thing that propelled this meltdown to more disastrous proportions was the rule that removed the uptick rule for short-selling.
TGR: What will fix this situation?
FH: That's a good question. Adding untested regulations is dangerous, and the law of unexpected consequences is often negative. The combination of Sarbanes-Oxley, FAS 157 and the no uptick rule for shorting basically became toxic and led to the destruction of Lehman Brothers and Bear Stearns. Also, “ideas” like printing more money and the debasement of currency do not solve the credit crisis and are not good long-term solutions.
The dollar's not going to collapse due to loss of Asian support. All countries will support the dollar. The reason is that they can't afford for it to fall too far because then suddenly the U. S. would be exporting products and not importing. All the currencies will slowly debase themselves against gold and keep the dollar as the currency for global trade.
It appears we are now going through that inflection point moving from deflationary forces to an inflationary cycle. We had a little bit of run-up in inflation when oil ran to $150 a barrel, which was very excessive. What didn't make sense was the fact that gold didn't rise along with oil. On the historic 10-to-1 ratio, gold should have gone to $1400 to $1500. That leads to suspicions that a few people were manipulating the price of oil because gold failed at $1,000 per ounce. On another note, it is important to remember policymakers will do everything in their power to create liquidity and, historically, liquidity is bullish for commodities. However, our research suggests it'll take several quarters before this will affect commodity prices.
TGR: Will the market stagnate until this liquidity flows through and moves the commodities up?
FH: You'll have to be a very selective buyer for another couple of quarters. The price correction should lose downward momentum and create a “U” shaped bottom as the capital markets begin to reflect the policies being implemented.
TGR: When you say the price correction will lose its downward momentum, do you mean this wholesale sell-off of everything?
FH: Right.
TGR: We saw yesterday that Goldcorp (TSX:G) (NYSE:GG) was down 16%.
FH: That downward momentum will start to slow.
TGR: When you say commodities, do you mean gold?
FH: Asian economic activity has a big influence on the purchase of gold. At the London Gold Bullion Traders Conference in Kyoto, I was amazed to find the magnitude of the shortage of gold and silver coins. In Germany, they aren't having the crisis we're having here, but Germans were lining up to buy gold.
TGR: Do they have supplies?
FH: No, but they have gold in the kilo bars. Everything is sold as soon as they get it.
TGR: I tried to buy some Swiss 20 Francs today and couldn't find any.
FH: People are paying a large premium for small coins, and the purchase of safety deposit boxes is on the rise. People have been actually stuffing dollars in them, along with gold. It's not really a 1980-style mainstream panic. People are continuing to buy. The growth of gold ETFs attests to that. Now let me try to explain some of these huge price swings in commodities, equities and emerging markets.
Your readers might be interested to know that banks all have this software called VAR, or Value At Risk. It triggers an alarm indicating a need for more capital due to escalating debt defaults. You'd think that banks would go to their prime brokerage arm and rein in hedge funds trading mortgages and de-leverage them because that's where the risk is. Your business model says, “I have defaulting mortgages, so I need to be sure our hedge fund and prime brokers aren't having similar problems.”
TGR: Right.
FH: Well, the banks reacted by calling every hedge fund and de-leveraging all asset classes, equities, banks and commodities. So, starting August 12, 2007, some of the S&P stocks moved 15% in a day internally. This same margin call has now taken place about four times this past year. U.S. banks in Japan yanked loans to small cap companies, so those guys were scrambling to replace those loans. Situations like that are happening everywhere and they illustrate the long reach of this credit crisis.
A lot of emerging marketing investors got their noses bloodied when the U.S. called for its loans to be repaid. They will not be so quick to repeat that mistake. This ripple effect is hurting businesses. That is a concern that I heard over and over. Fortunately, the governments of emerging markets have huge surpluses and are better equipped to handle this crisis than they were in the 1990s.
All of this is good for commodities and gold rises in step with commodities. When inflation erupts everywhere, then gold will take off on its own with a bigger move.
TGR: When will that happen exactly?
FH: Over the next two years gold will be well over a $1,000, maybe running up to $2,000. The number-one Asian analyst, Chris Wood, is advocating a 30% gold exposure to institutions. Now, this is the number-one brokerage firm in Asia and their research is excellent.
TGR: What's the name of the firm?
FH: CLSA-Asia Pacific Markets. It recommends a portfolio allocation of 30% gold:15% gold bullion and 15% unhedged gold stocks. When an analyst of his stature advises putting 30% of your portfolio into gold, you have to take note. We tell our clients to put a maximum of 5% into bullion and no more than 5% toward gold equities.
TGR: Doug Casey's latest missive rounded it up to 30% too.
FH: The significance here is that the institutional side is getting on board with gold. That's a big deal.
TGR: Because the gold market is so small compared to the market caps these institutions deal with, even a small change in percentage would make a huge difference.
FH: All the brokers are getting their marching orders simultaneously. What happens is that non-correlated assets begin to correlate as people seek liquidity. So everyone's saying, “I have to get cash.” It's important to remember that brokers were leveraged 20 times and low-income house buyers were leveraged 99 times. This creates a chain reaction and knocks down the commodities. Several of these hedge funds have blown up, and if our holdings are similar to theirs, they've hurt us.
We went into this correction with a big cash position back in June, and we never expected such a huge correction, but our models were showing that it should be 20% to 25% cash. Then we start to nibble as things get clobbered, but they continue to get clobbered.
TGR: Yes.
FH: Last week the markets hammered every stock with liquidity. Many funds have been hit by this problem. Margin calls are driving this. It has nothing to do with the demand for gold or the supply and discoveries.
TGR: But that should work itself out fairly quickly by the end of the year.
FH: It was estimated that by the end of the year there would be $22 billion of resource stocks coming out.
TGR: Do you mean coming out of the hedge funds?
FH: Yes. Hedge funds have been forced to shut down. It's really interesting to look at the TSE Venture Index. When the asset-backed paper problems happened last summer, retail sponsorship dropped dramatically. The U. S. went through something similar in February when suddenly the small caps and mid-caps started losing liquidity. What we noticed was that the auction rate paper is exactly ten times the size of Canada's asset build paper crisis—$330 billion versus $33 billion. It was just before tax season, so a lot of American investors had to scramble for cash by redeeming their equity funds to pay their taxes.
TGR: Do you follow Richard Russell's Dow Theory Letters?
FH: You mean regarding the relationship between the Transports and the Dow Industrials?
TGR: Yesterday both were down so Dow Theory now confirms that we are in a bear market.
FH: Yes.
TGR: What happens to gold stocks in a bear market?
FH: Whether you have big deflation or big inflation driving the bear market, gold does well. If it's just a normal cyclical inventory recession or whenever interest rates are above the CPI rate, gold doesn't do well. Today, the Fed's funds are below the CPI rate and the printing presses are busy.
TGR: So, what are we in now?
FH: I think we're at the tipping point moving from deflation to inflation.
TGR: So, we've been on the negative side of that.
FH: We saw gold run to $1,000 twice because of deflation, not inflation. Massive liquidations are deflationary. Collapsing housing prices are deflationary. The price of oil running up was inflationary but it was triggered by the dollar deflation and gold moved with it. In the '30s, when you had a big deflationary cycle, gold was the best asset class. In the '70s, when you had a big inflationary cycle, gold was the best asset class.
TGR: Right.
FH: In the '90s when there was no big inflation or deflation, gold just meandered along.
TGR: So when do you think we will reach that tipping point from deflation to inflation?
FH: The money supply has basically been flat for the past three months. The correlation of commodity price action and emerging market money supply has an R-squared value over 80—highly correlative. We track the G-7 countries versus the E-7 (the seven most populated emerging countries in the world with available data) and track their money supply. The money supply has not been growing rapidly. We need to get the money supply up and this will happen with the $700 billion bailout. So, we're going through a transition over the next couple of months.
TGR: When will gold respond?
FH: There's been a six-week lag with the money supply, the same with NASDAQ. If the money supply spikes, there's a 70% probability that within six weeks the NASDAQ will start to rise.
TGR: Why would an increase in the money supply impact NASDAQ?
FH: People have more cash to spend.
TGR: So they're moving into the NASDAQ?
FH: Yes. The money supply has one of the highest correlations to the gold commodity as a whole. When you look at stocks individually, the number-one driver is the production per share growth. After that, it's cash flow, and then reserves. You can eliminate 80% to 90% of all the noise by calculating production and the cash flow.
TGR: What would you tell someone who has just inherited a million dollars?
FH: I'd put 5% into gold bullion and 5% into unhedged gold stocks.
TGR: Unhedged producers?
FH: Yes, and if you want to go down to the smaller caps like Jaguar (JAG. TO) , that's where you get your biggest potential returns.
TGR: Can you share a few names on your list of unhedged gold producers?
FH: We like companies that have a royalty business, such as Royal Gold (RGLD) . We also look at those with the strongest per-share-growth rates coming over the next 12 – 18 months. That list includes Agnico-Eagle Mines (TSX:AEM) , Kinross Gold (KGC-NYSE; K-TSX) , and Goldcorp—all of which have very healthy growth profiles relative to the Newmonts of the world. Goldcorp isn't a pure gold play, because it also produces a high percentage of base metals. But we expect that within two years those base metals will really start taking off.
TGR: Is that prediction based on anticipated growth in China?
FH: Yes. China has structurally gone through a quiet phase, but the government has policies in place that are designed to invigorate growth. As that growth starts to pick up steam over the next six months, you're going to see increased demand for the basic commodities. Of course, the economy is spending a lot of money for infrastructure right now, and that might put a temporary lag on commodities.
TGR: But you believe China's growth will drive the commodities market higher?
FH: Yes. The credit crunch created by the collapse of U. S. financial institutions will slow things down for a while, but ultimately, China will grow.
TGR: What other companies do you like?
FH: Unless they have two grams of gold (per ton) or a million ounces, junior explorers have been drifting lower and lower. Historically in situ reserves have traded at one-tenth of an ounce of gold. So, if gold is $600, then your reserves are worth $60 per ounce. When gold was $300, they were worth $30. That was the model for determining a fair market cap for junior explorers. With gold at $850, these companies should be worth $85 per ounce of reserves, but they're not. This amazes us. And when one of these companies is bought out, it's usually paid more than the ten times ratio. But valuations are now drifting down to $40 and $35 per ounce. So the market is basically valuing a company that has 8 million ounces as if it had only 4 million ounces.
TGR: This is a short-term phenomenon, right?
FH: Yes.
TGR: So, when this situation changes, how quickly will producers and majors start buying up the juniors?
FH: That's a different point. The seniors are going to buy only those juniors that have two grams of gold per ton or a million ounces. The other juniors will just work their way out of the system or go bankrupt.
TGR: What other criteria do you use to evaluate juniors?
FH: We ask some simple questions:Is the CEO technically competent? That is, is he a geologist? If not, that may be okay, but does he have a broad network to make up for that lack of technical knowledge? Does he know the newsletter writers, like Doug Casey, for instance? Does he know the investment bankers?
We've found that if the CEO does not know the Street, and doesn't know the newsletter writers, it doesn't matter if he's a geologist or an engineer. There's going to be no liquidity in the company's stock, unless there is a multimillion ounce discovery with a grade of greater than 2 grams per ton. But if you have a company whose CEO knows lots of newsletter writers, gets lots of coverage, knows the value in the Street and gets research for it, that company is going to have a higher price-to-book valuation, which makes it a much more attractive investment.
TGR: Anything else you look for?
FH: Financing is crucial. Companies that are rapidly spending money are going to run out of cash in about six months. The market undervalues them until they have financing in place.
Cont' at Source
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Tuesday, October 21, 2008
Silver and Gold Guarantee Freedom Part 2
By Dr. Edwin Vieira
The state banks violated Article I, Section 10, Clause 1, of the Constitution. But at least they operated only regionally. The national banks violated Article I, Section 8, Clause 2, and operated throughout the country. But at least their emission of paper currency was limited by the amount of public debt a generally thrifty Congress was willing to incur.
The Federal Reserve System, though, is a corporative-state (or fascist) structure that purports to delegate Congress' supposed monetary powers to private interests; and the system's bubble of both public and private debts will expand to the limit of the avarice of the cartel's operators, their clients, and their political henchmen.
Nonetheless, as unconstitutional and economically unsound as they were and are, all these schemes operated and even now operate under color of the national sovereignty and laws of the United States, subject in principle to overarching control by the American people. Indeed, Section 30 of the Federal Reserve Act still explicitly reserves to Congress the right to repeal, alter, or amend the system at will. But with the Federal Reserve System the bankers and politicians have gone about as far as they can go within the economic and political institutions of the United States. And they have separated paper currency from the discipline of free markets about as far as possible, while still pretending to maintain some semblance of a connection to free markets.
So as the Federal Reserve System shakes itself to pieces, the likelihood is that first, a new currency will arise outside of the United States in some regional supra-national entity such as the proposed North American Union; and, second, the value of this new currency will not be controlled by free financial markets but, instead, propping up the currency's value will be the excuse for extensive governmental intervention in and manipulation of the markets.
This plan is so alien to the experiences and desires of most Americans that its implementation will probably require a controlled meltdown of the Federal Reserve System to bludgeon them into accepting the North American Union as the only way to obtain a new, supposedly stable currency and to return to something approaching economic normalcy. Yet even a controlled meltdown, along with the accompanying absorption of the United States into a new Northern Hemispheric political order, will unavoidably generate extensive economic, social, and political unrest that will threaten the financial establishment's power.
Even dumbed-down Americans will not long suffer conditions of depression akin to those of the 1930s, let alone South American levels of inflation as well. Desperate people will ask questions and assign blame. Perhaps not just a few will abandon debt currency altogether and substitute silver and gold as their media of exchange. They and others will conclude that the Federal Reserve System is unconstitutional -- and therefore that its operations are arguably a complex of criminal offenses. (See 18 U.S.C. §§ 241 and 242 Color of Law violations at A MINIMUN.)
Many will realize that the establishment's scheme for replacing Federal Reserve Notes with a supra-national currency is a political crime on a more stupendous scale yet, because it depends upon destroying both the Constitution and the Declaration of Independence. Then an aroused people will take political action against the institutions and individuals responsible for foisting the funny-money scheme on their country.
On the other side, the establishment will not be idle. It will do anything and everything possible to maintain its position. Obviously the Constitution and the Declaration of Independence will be expendable, because the establishment has been trying to whittle away the former on a piece-by-piece basis over the years, and intends to do away with the latter at one fell swoop in the near future, if the people of America do not interven and stop them. So this country, as an independent nation, will be expendable too. And if this country, why not the freedom and prosperity of common Americans as well?
Will ordinary Americans -- at least 80 to 90 million of whom are armed -- meekly put up with a program aimed at their own country's assisted suicide? Why should they, when they have nothing to lose economically or politically? If they refuse to knuckle under, the establishment's only recourse will be to attempt to lock down the whole country under a para-militarized police state, perhaps with the assistance of "peacekeepers" from Canada and Mexico (for the employment of whom negotiations are apparently already in progress).
That is why careful observers conclude that the paranoia being generated by politicians and the big media over "homeland security" -- and the frenetic para-militarization of law-enforcement agencies at the national, state, and even local levels in the name of "homeland security" -- are not caused by or aimed at foreign "terrorists" at all, but instead target ordinary Americans in their own home towns.
The establishment is preparing to force justifiably angry Americans into line when its financial house of cards comes tumbling down, either in a controlled demolition or otherwise.
Americans will not be the only victims of such repression. The establishment must prevent other peoples, in other parts of the world, from jumping off the financial treadmill of political currency. That will require the use not only of economic and political pressure, but also -- indeed, especially -- of military coercion. For the provision of which the establishment will attempt to force common Americans to pay, and to send their sons and even their daughters off to fight, die, and be maimed and sickened in foreign lands. Little good, then, will it do for an ounce of gold to soar to $2,000, $3,000, or higher -- and for silver to increase in value proportionately too -- if the ultimate consequences are a police state in America, then a supra-national regime replacing the United States, accompanied by endless military conflicts throughout the world. In the grand scheme of things, gold and silver are far less important as economic investments or hedges against hyperinflation or depression than as guarantors of individual freedom -- and then to the fullest extent only when they are actually used as media of exchange throughout society. Silver and gold as currencies supply the foundation necessary for economic democracy and limited government; whereas fiat currencies inevitably function as the tools of fascism, socialism, and every other form of financial imperialism.
Thus, the fight over gold and silver as media of exchange is about more than mere money, let alone making money. For it is a fight with only two possible outcomes: either control of their own lives by the people themselves, or control of the people and their lives by political and economic elitists. To achieve the first and avoid the second no price will prove too great to pay. ----Edwin Vieira Jr. is a lawyer, author of "Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution," and a consultant to GATA. He lives in Virginia.
Help Keep GATA Going GATA is a civil rights and educational organization
based in the United States and tax-exempt under the
U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
The state banks violated Article I, Section 10, Clause 1, of the Constitution. But at least they operated only regionally. The national banks violated Article I, Section 8, Clause 2, and operated throughout the country. But at least their emission of paper currency was limited by the amount of public debt a generally thrifty Congress was willing to incur.
The Federal Reserve System, though, is a corporative-state (or fascist) structure that purports to delegate Congress' supposed monetary powers to private interests; and the system's bubble of both public and private debts will expand to the limit of the avarice of the cartel's operators, their clients, and their political henchmen.
Nonetheless, as unconstitutional and economically unsound as they were and are, all these schemes operated and even now operate under color of the national sovereignty and laws of the United States, subject in principle to overarching control by the American people. Indeed, Section 30 of the Federal Reserve Act still explicitly reserves to Congress the right to repeal, alter, or amend the system at will. But with the Federal Reserve System the bankers and politicians have gone about as far as they can go within the economic and political institutions of the United States. And they have separated paper currency from the discipline of free markets about as far as possible, while still pretending to maintain some semblance of a connection to free markets.
So as the Federal Reserve System shakes itself to pieces, the likelihood is that first, a new currency will arise outside of the United States in some regional supra-national entity such as the proposed North American Union; and, second, the value of this new currency will not be controlled by free financial markets but, instead, propping up the currency's value will be the excuse for extensive governmental intervention in and manipulation of the markets.
This plan is so alien to the experiences and desires of most Americans that its implementation will probably require a controlled meltdown of the Federal Reserve System to bludgeon them into accepting the North American Union as the only way to obtain a new, supposedly stable currency and to return to something approaching economic normalcy. Yet even a controlled meltdown, along with the accompanying absorption of the United States into a new Northern Hemispheric political order, will unavoidably generate extensive economic, social, and political unrest that will threaten the financial establishment's power.
Even dumbed-down Americans will not long suffer conditions of depression akin to those of the 1930s, let alone South American levels of inflation as well. Desperate people will ask questions and assign blame. Perhaps not just a few will abandon debt currency altogether and substitute silver and gold as their media of exchange. They and others will conclude that the Federal Reserve System is unconstitutional -- and therefore that its operations are arguably a complex of criminal offenses. (See 18 U.S.C. §§ 241 and 242 Color of Law violations at A MINIMUN.)
Many will realize that the establishment's scheme for replacing Federal Reserve Notes with a supra-national currency is a political crime on a more stupendous scale yet, because it depends upon destroying both the Constitution and the Declaration of Independence. Then an aroused people will take political action against the institutions and individuals responsible for foisting the funny-money scheme on their country.
On the other side, the establishment will not be idle. It will do anything and everything possible to maintain its position. Obviously the Constitution and the Declaration of Independence will be expendable, because the establishment has been trying to whittle away the former on a piece-by-piece basis over the years, and intends to do away with the latter at one fell swoop in the near future, if the people of America do not interven and stop them. So this country, as an independent nation, will be expendable too. And if this country, why not the freedom and prosperity of common Americans as well?
Will ordinary Americans -- at least 80 to 90 million of whom are armed -- meekly put up with a program aimed at their own country's assisted suicide? Why should they, when they have nothing to lose economically or politically? If they refuse to knuckle under, the establishment's only recourse will be to attempt to lock down the whole country under a para-militarized police state, perhaps with the assistance of "peacekeepers" from Canada and Mexico (for the employment of whom negotiations are apparently already in progress).
That is why careful observers conclude that the paranoia being generated by politicians and the big media over "homeland security" -- and the frenetic para-militarization of law-enforcement agencies at the national, state, and even local levels in the name of "homeland security" -- are not caused by or aimed at foreign "terrorists" at all, but instead target ordinary Americans in their own home towns.
The establishment is preparing to force justifiably angry Americans into line when its financial house of cards comes tumbling down, either in a controlled demolition or otherwise.
Americans will not be the only victims of such repression. The establishment must prevent other peoples, in other parts of the world, from jumping off the financial treadmill of political currency. That will require the use not only of economic and political pressure, but also -- indeed, especially -- of military coercion. For the provision of which the establishment will attempt to force common Americans to pay, and to send their sons and even their daughters off to fight, die, and be maimed and sickened in foreign lands. Little good, then, will it do for an ounce of gold to soar to $2,000, $3,000, or higher -- and for silver to increase in value proportionately too -- if the ultimate consequences are a police state in America, then a supra-national regime replacing the United States, accompanied by endless military conflicts throughout the world. In the grand scheme of things, gold and silver are far less important as economic investments or hedges against hyperinflation or depression than as guarantors of individual freedom -- and then to the fullest extent only when they are actually used as media of exchange throughout society. Silver and gold as currencies supply the foundation necessary for economic democracy and limited government; whereas fiat currencies inevitably function as the tools of fascism, socialism, and every other form of financial imperialism.
Thus, the fight over gold and silver as media of exchange is about more than mere money, let alone making money. For it is a fight with only two possible outcomes: either control of their own lives by the people themselves, or control of the people and their lives by political and economic elitists. To achieve the first and avoid the second no price will prove too great to pay. ----Edwin Vieira Jr. is a lawyer, author of "Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution," and a consultant to GATA. He lives in Virginia.
Help Keep GATA Going GATA is a civil rights and educational organization
based in the United States and tax-exempt under the
U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Silver and Gold Guarantee Freedom Part 1
com Address by Edwin Vieira Jr.
Gold Anti-Trust Action Committee Inc. conference
GATA Goes to Washington -- Anybody Seen Our Gold?
Hyatt Regency Crystal City Hotel, Arlington, Virginia
Friday, April 18, 2008 Silver and gold are not merely valuable commodities, investments, and media of exchange. More importantly, they are key "checks and balances" in America's legal and political institutions.
The fight against the use of silver and gold as money that has been waged by bankers and rogue politicians since the 1870s as to silver and the 1930s as to gold --and will intensify as fiat currencies collapse throughout the world -- is ultimately directed against America's national independence, her constitutional government, and every common American's individual liberty and prosperity.
The Constitution of the United States adopted a monetary system consisting of silver and gold coin, in which the standard is the "dollar," containing 371 1/4 grains (troy) of fine silver, with the values of gold coins to be measured in "dollars" according to the free market's rate of exchange between silver and gold. Neither the general government nor any state is authorized to emit paper currency.
These restrictions prevent rogue public officials from turning public debts into currency, as a means for redistributing wealth from society to political elitists and their clients in special-interest groups.
Furthermore, although the Constitution does not mention banks, either public or private, its only correct construction requires separation of bank and state -- extirpation of all inherently fraudulent fractional-reserve banking schemes -- and rigorous regulation of all other fractional-reserve arrangements that might operate fraudulently. (See Edwin Vieira Jr., "Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution," second revised edition, 2002.)
But since the early 1800s rogue politicians and bankers have steadily subverted the Constitution by forging an increasingly tight relationship between bank and state. Through the grant of one abusive special privilege after another, politicians have immunized fractional-reserve banking against the just economic and legal consequences of its own inevitable failures, so that public officials and bankers could turn both public and private debts into currency -- thus separating the supply and the purchasing power of currency from the economic discipline of the free market, and rendering those matters largely political in nature.
Under the Federal Reserve System, Americans no longer enjoy "money" in the economic sense but are subjected to what must be denoted as "political currency," with emphasis on the adjective. Political currency is emitted on the basis of political debts --that is, either 1) public debts or 2) private debts for the payment of which the creditors expect public bailouts if their debtors default.
Unfortunately, the Federal Reserve System is inherently unstable, and must lurch from one self-generated crisis to another, each increasing in severity, until its house of financial cards self-destructs.
Having separated society's medium of exchange from the production of real goods and services in the free market -- and instead linked the currency to creating, packaging, marketing, servicing, and eventually salvaging political debts -- the Federal Reserve system encourages, facilitates, and rewards irresponsibility on the part of both lenders and borrowers, in the private as well as the public sector.
For those who benefit from the system to continue to loot society, the supply of political currency must expand. For that supply to expand, political debts must increase.
True enough, political debts can increase, even geometrically, because political currency can be created (as the saying goes) "out of nothing" to float them. But real wealth cannot be generated simply by the emission of paper promises. Neither can new paper promises pay off old ones.
So, avarice being unlimited, insatiable, and imprudent, the whole operation must cumulate and culminate in an unsustainable bubble of debts that either implodes in a depression or explodes in hyperinflation.
Although the Federal Reserve System is fatally flawed, the wealth and power of elitists in high finance, big business, and the political class depend on maintaining it -- or replacing it in a timely fashion with something of equal serviceability for their ends.
As it cannot long be maintained, it must and will soon be replaced. With what remains a matter for speculation. Not open to the slightest doubt, however, is that, as crises have rocked the system, the establishment has always moved farther away from the Constitution -- deeper into the sump of lawlessness -- to shore up the banking cartel, and always at the expense of common Americans.
In the 1930s, in response to the collapse of the fractional-reserve racket, rather than reforming the operations of the banks, the Roosevelt administration and a pliant Congress seized the American people's gold and outlawed almost all public and private contracts promising to pay in gold. In the 1950s and through the 1960s, until the Nixon administration terminated redemption of Federal Reserve notes in gold in 1971, the inflationary policies of the Federal Reserve System drained off more than half of America's national stock of gold to foreign banks and the profiteers operating through them. And during the last few decades, surreptitious manipulation of the precious-metals markets has kept the price of gold (measured in Federal Reserve notes) suspiciously low, even as this country's financial structures have become increasingly shaky.
The price of gold has been manipulated for two reasons, one being the suppression of evidence, the other the throttling of monetary evolution.
First, an ever-increasing price of gold reflects the breakdown of the Federal Reserve System -- just as an ever-increasing temperature reveals that the human body is sick, and when it reaches a critical point that death is imminent.
Second, those who fatten off of political currency need to prevent ordinary people from realizing that only a return to silver and gold as common media of exchange can stabilize America's economy, and especially from actually employing silver and gold in preference to Federal Reserve notes in their day-to-day transactions. However, as the Federal Reserve System experiences ever-more-frequent, ever-more-serious, and ever-less-tractable problems, downward manipulations of the prices of gold and silver will become impossible. And that the system is beyond repair will become apparent to all.
At that point, the question will arise -- and behind the scenes doubtlessly already has arisen among bankers and politicians -- as to how and with what to replace the banking cartel.
When a political currency has failed, the traditional trick of the bankers and politicians has been to introduce a new, supposedly more stable currency -- often within a new, supposedly more stable banking apparatus. This was the sleight of hand that moved America from the independent state banks in operation prior to the Civil War, through the partially cartelized national banks created in the 1860s, to the fully cartelized Federal Reserve System established in 1913.
Throughout this devolution, the progression of illegality became increasingly stark.
The state banks violated Article I, Section 10, Clause 1, of the Constitution. But at least they operated only regionally. The national banks violated Article I, Section 8, Clause 2, and operated throughout the country. But at least their emission of paper currency was limited by the amount of...to be continued in Part 2.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Gold Anti-Trust Action Committee Inc. conference
GATA Goes to Washington -- Anybody Seen Our Gold?
Hyatt Regency Crystal City Hotel, Arlington, Virginia
Friday, April 18, 2008 Silver and gold are not merely valuable commodities, investments, and media of exchange. More importantly, they are key "checks and balances" in America's legal and political institutions.
The fight against the use of silver and gold as money that has been waged by bankers and rogue politicians since the 1870s as to silver and the 1930s as to gold --and will intensify as fiat currencies collapse throughout the world -- is ultimately directed against America's national independence, her constitutional government, and every common American's individual liberty and prosperity.
The Constitution of the United States adopted a monetary system consisting of silver and gold coin, in which the standard is the "dollar," containing 371 1/4 grains (troy) of fine silver, with the values of gold coins to be measured in "dollars" according to the free market's rate of exchange between silver and gold. Neither the general government nor any state is authorized to emit paper currency.
These restrictions prevent rogue public officials from turning public debts into currency, as a means for redistributing wealth from society to political elitists and their clients in special-interest groups.
Furthermore, although the Constitution does not mention banks, either public or private, its only correct construction requires separation of bank and state -- extirpation of all inherently fraudulent fractional-reserve banking schemes -- and rigorous regulation of all other fractional-reserve arrangements that might operate fraudulently. (See Edwin Vieira Jr., "Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution," second revised edition, 2002.)
But since the early 1800s rogue politicians and bankers have steadily subverted the Constitution by forging an increasingly tight relationship between bank and state. Through the grant of one abusive special privilege after another, politicians have immunized fractional-reserve banking against the just economic and legal consequences of its own inevitable failures, so that public officials and bankers could turn both public and private debts into currency -- thus separating the supply and the purchasing power of currency from the economic discipline of the free market, and rendering those matters largely political in nature.
Under the Federal Reserve System, Americans no longer enjoy "money" in the economic sense but are subjected to what must be denoted as "political currency," with emphasis on the adjective. Political currency is emitted on the basis of political debts --that is, either 1) public debts or 2) private debts for the payment of which the creditors expect public bailouts if their debtors default.
Unfortunately, the Federal Reserve System is inherently unstable, and must lurch from one self-generated crisis to another, each increasing in severity, until its house of financial cards self-destructs.
Having separated society's medium of exchange from the production of real goods and services in the free market -- and instead linked the currency to creating, packaging, marketing, servicing, and eventually salvaging political debts -- the Federal Reserve system encourages, facilitates, and rewards irresponsibility on the part of both lenders and borrowers, in the private as well as the public sector.
For those who benefit from the system to continue to loot society, the supply of political currency must expand. For that supply to expand, political debts must increase.
True enough, political debts can increase, even geometrically, because political currency can be created (as the saying goes) "out of nothing" to float them. But real wealth cannot be generated simply by the emission of paper promises. Neither can new paper promises pay off old ones.
So, avarice being unlimited, insatiable, and imprudent, the whole operation must cumulate and culminate in an unsustainable bubble of debts that either implodes in a depression or explodes in hyperinflation.
Although the Federal Reserve System is fatally flawed, the wealth and power of elitists in high finance, big business, and the political class depend on maintaining it -- or replacing it in a timely fashion with something of equal serviceability for their ends.
As it cannot long be maintained, it must and will soon be replaced. With what remains a matter for speculation. Not open to the slightest doubt, however, is that, as crises have rocked the system, the establishment has always moved farther away from the Constitution -- deeper into the sump of lawlessness -- to shore up the banking cartel, and always at the expense of common Americans.
In the 1930s, in response to the collapse of the fractional-reserve racket, rather than reforming the operations of the banks, the Roosevelt administration and a pliant Congress seized the American people's gold and outlawed almost all public and private contracts promising to pay in gold. In the 1950s and through the 1960s, until the Nixon administration terminated redemption of Federal Reserve notes in gold in 1971, the inflationary policies of the Federal Reserve System drained off more than half of America's national stock of gold to foreign banks and the profiteers operating through them. And during the last few decades, surreptitious manipulation of the precious-metals markets has kept the price of gold (measured in Federal Reserve notes) suspiciously low, even as this country's financial structures have become increasingly shaky.
The price of gold has been manipulated for two reasons, one being the suppression of evidence, the other the throttling of monetary evolution.
First, an ever-increasing price of gold reflects the breakdown of the Federal Reserve System -- just as an ever-increasing temperature reveals that the human body is sick, and when it reaches a critical point that death is imminent.
Second, those who fatten off of political currency need to prevent ordinary people from realizing that only a return to silver and gold as common media of exchange can stabilize America's economy, and especially from actually employing silver and gold in preference to Federal Reserve notes in their day-to-day transactions. However, as the Federal Reserve System experiences ever-more-frequent, ever-more-serious, and ever-less-tractable problems, downward manipulations of the prices of gold and silver will become impossible. And that the system is beyond repair will become apparent to all.
At that point, the question will arise -- and behind the scenes doubtlessly already has arisen among bankers and politicians -- as to how and with what to replace the banking cartel.
When a political currency has failed, the traditional trick of the bankers and politicians has been to introduce a new, supposedly more stable currency -- often within a new, supposedly more stable banking apparatus. This was the sleight of hand that moved America from the independent state banks in operation prior to the Civil War, through the partially cartelized national banks created in the 1860s, to the fully cartelized Federal Reserve System established in 1913.
Throughout this devolution, the progression of illegality became increasingly stark.
The state banks violated Article I, Section 10, Clause 1, of the Constitution. But at least they operated only regionally. The national banks violated Article I, Section 8, Clause 2, and operated throughout the country. But at least their emission of paper currency was limited by the amount of...to be continued in Part 2.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Real Money- Silver Protects from Pirates and Bankers
by Jason Hommel, October 19th, 2008
SilverStockReport.com
When I first discovered the fundamentals of the silver market ten years ago, I was as giddy as a schoolgirl, and I knew I had to get as much as possible, as soon as possible. But I had little money. But my dad had money, and he wanted to invest in something, but not silver. Fortunately for my readers, my father was a skeptic, and offered every counter argument in the book, for several years, until he finally decided it was time to buy silver in bulk. This is how I first learned to argue about silver. Dealing with my dad. He was a skeptic, because he ran an advertising agency. See, he exaggerated for a living, and his cosmic punishment seemed to be that he was never able to trust anyone. Eventually, he was convinced to buy silver. After all, he finally reasoned that I had no reason to lie to him, and he was right. For the first few years after he bought, he kept thinking about all that money he spent and "wasted" on silver at $5/oz. Since he started buying in 1999, it was emotionally painful by 2003, 5 years later, to see silver down 25% to bottom out at $4.15 by that spring. It actually took him a few years after we bought silver, by the time silver hit about $6-7/oz., and after the Enron and Worldcom bankruptcies hit, for him to later remark offhand, "I'm so glad I have so much of my money safely locked up in our safe." When he said it, I was flabergasted at the change in his perspective. I was so proud of my father, because I knew he finally understood.
The fundamentals of silver sound just too good to be true. The few million ounces that remain are staggering when you consider the historical implications and comparisons of prices.
A silver dollar was the daily wages of a miner in my hometown in the early 1900's. A silver ounce per day, or less, was also the daily wages for people in 1980, but they didn't earn silver. In 1980, with silver at $50/oz., and minimum wage at $3.10/hour, you'd have to work 16 hours for an ounce.
http://usgovinfo.about.com/library/blminwage.htm
More silver than is mined each year is consumed by industry, and as late as 2007, less than 10% was demanded by investors. The silver market spiked up starting in 2003, not so much from investor buying, but because investor selling began to slow down just a bit.
This year has been a amazingly good year for silver; tremendously exciting things have happened. When silver hit $20, investors turned buyers bigtime, and nearly stopped selling, and this sea change in the market cleaned out most of the major silver dealers in North America, by March.
Silver Shortage: 19 dealers reported "Sold Out" March 19, 2008
Since then, the shortages have only gotten worse, as I predicted.
What was stunning, and what I was not prepared for, was the extent of the manipulation to the downside to try to shake off and reduce investor demand. Two major banks sold, over the span of a month, contracts of promises to deliver 130 milion ounces of silver, to gamblers who never had any intention of taking delivery of silver, which broke the back of the paper market, and caused a panic sell off in paper silver. This caused further gamblers to have to sell their paper long positions of silver, which further depressed prices, and which also did not bring any new silver to market.
First, the biggest fraud is the COMEX. 90% to 99% of contracts don't result in delivery, but this market dominates the price.
http://www.cftc.gov/dea/options/deacmxsof.htm
With 142,578 contracts outstanding, for 5000 oz. each, that's 712 million ounces, which is more than all the world's silver mines produce each year, which is about 550 million ounces according to the CPM group.
The COMEX warehouses only store 133 million ounces, and not all of that is registered for delivery against a contract, therefore, there is paper contract fraud selling going on, which manipulates the price down.
I understand that paper contracts can also allow the silver price to be manipulated higher than normal. For example, if 85% of the positions of paper longs were concentrated and held by 2 traders who were short term gamblers who did not intend to take delivery, and if all of the sellers were only the mines who had every intention of delivering silver, prices would be manipulated higher as the paper long positions were purchased.
Likewise, if paper futures are sold, by entities such as banks who have no silver, and don't sell any silver, and don't have any intention of delivering any silver, then that would manipulate prices to the downside.
Many people continue to write to the CFTC to investigate and end the fraud. I don't think they will, since it's the nature of futures contracts themselves that is the essence of the fraud.
The second biggest fraud in the silver market is the LBMA London Bullion Market Association. These are a collective of banks who have 75 million ounces of silver, but trade 30 billion ounces of silver per year, according to statistics compiled by the CPM Group. Clearly, there is fraud there, and they admit it at their website, regarding "bullion accounts":
http://www.lbma.org.uk/london/accounts
Unallocated Accounts
This is an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest and most commonly used method of holding metal.
The units of these accounts are one fine ounce of gold and one ounce of silver based upon a 995 LGD (London Good Delivery) gold bar and a 999 fine LGD silver bar respectively. Transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties.
Credit balances on the account do not entitle the creditor to specific bars of gold or silver, but are backed by the general stock of the bullion dealer with whom the account is held. The client is an unsecured creditor.
Should the client wish to receive actual metal, this is done by ‘allocating’ specific bars or equivalent bullion product, the fine gold content of which is then debited from the allocated account.
By their own words, they admit that their standard "bullion accounts" do not have silver, are not backed by silver, but are only a debt or liability of the bank, and the owner of a bullion account is only an unsecured creditor.
Those idiot commentators who write to say that "gold is nobody's liability" ought to wake up. Of course many banks have liabilities of gold, in gold, they owe gold. Those unbacked gold and silver liabilities are part of what is going to drive the gold and silver prices much, much, much higher!
Gold is a liability for all men who practice financial fraud. God is an asset only for honest men. Since the world is so full of fraud, gold is a liability for most men!
You ought to check to see if your bank is listed among the LBMA members; most major banks are members, and for them, silver and gold are a major liability.
There are several long lists of bank names, market making members, ordinary members, and associates.
http://www.lbma.org.uk/assocn/mktmembs
They, too, like COMEX, are safe as long as their clients don't demand real silver, and for the most part, they don't. Or if they do, they discourage them, and talk them out of it, or claim they only have 1000 oz. bars available, and they will lie about mysteriously costly "assay" fees, which are actually free, and "expensive" shipping, which should cost no more than 2% of the value of the silver. Or they will flatly say they are 'sold out', or that there are high commissions, or that "nobody asks for silver" or that they are unfamiliar with how to proceed, or that if you need real silver and don't trust them, then "we" are all doomed. No, it's they who are doomed, not we.
The third biggest silver fraud is probably the SLV ishares silver trust. It's like the roach motel, you can check in, but you can't check out. Easy to buy, but impossible to take delivery of the silver. You have to be an LBMA member bank to get delivery. How cozy and convenient.
A lot of us don't trust the SLV ETF. Supposedly, it has 6901 tonnes, or about 221 million oz. of silver, worth about $2.2 billion.
There are at least 6 brokers between you and your money, and they all need to get paid when you buy or sell shares in the SLV.
1. The sponsor, Barclays.
2. The custodian, JP Morgan, who is supposed to hold the silver.
3. The sub custoidans, which can have further
4. More sub custodians
5. The market making brokers who buy and sell the actual metal, futures, and/or shares in lots.
6. Your own brokerage account that holds your SLF shares for you.
SLV is not silver. It is promises and sub-promises of unauditable brokerage houses, and JP Morgan is an LBMA member, and is the bank with the largest portfolio of derivatives in the world, over $80 trillion. How can the SLV pay up to 6 middlemen or more, and give you a good spread? Think.
The entire reason behind owning silver is thwarted with the SLV.
Silver cannot default. SLV can.
You own silver to protect against bank failure and brokerage failure.
SLV cannot protect you in case of brokerage failure or custodian failure or sub custodian failure or Barclays failure, or short selling failure to deliver, or your own brokerage failure. Six brokers means 6 chances of failure.
For the SLV, consider Taxes: Physical silver purchases, for the most part, are non reportable. SLV sales are reportable.
For the SLV, consider Confiscation: If the Government changes a law, to confiscate silver, which silver is more vulnerable? Silver in your safe that that they cannot find and don't know about? Or silver in the SLV, which would have to be turned in or converted to "paper"?
The fourth biggest fraud in the silver market is probably the Perth Mint Certificate program.
Where's the Abundance of Perth Mint Rounds?! September 6, 2008
The Perth Mint now has a $1.5 billion precious metals liability to Certificate holders.
http://www.bloomberg.com/apps/news?pid=20601012&refer=commodities&sid=asmvRlbfitV8
To get out of holding the certificates used to cost about 15% in fees just to get your cash, and then another 15% hit to buy real silver. Today, the spreads are much worse.
I've explained and warned numerous times about the Perth Mint's metals debt. It is a legacy fraud, from a legacy debt, probably going back decades. They transfered a bullion debt that they owed to the banks, to the public, though a wonderful public relations campaign, and many bought it hook, line, and sinker, because the people wanted the securty of promises, rather than silver.
The many contradictory statements coming out of the Perth Mint are enough to make your head spin. They say they only buy 20 tonnes of silver at a time, yet they buy every ounce of silver at every time anyone buys a silver certificate. Well, it can only be one, and so it's probably neither. 20 tonnes is barely enough to back 1/2 of 1% of their certificates, and is probably what they need to stay solvent from redemptions that started since I began telling people to get their physical out of there!
The fifth biggest silver market fraud is probably monex.com. A few years ago, I did a video interview with them for a CD promotion that I regret now doing. See monexfraud.com. It's bad enough that they offer silver on "leverage" terms in their atlas account. But what is worse is that the IRS is suing them for back taxes for about $400 million. If they even have that much silver on account for their investors, I sincerely doubt that it's there. Going short in the silver market was a wonderful "business" strategy when silver prices went down for 20 years, but will eventually bankrupt anyone in a rising market. But for the very old man who owns monex, in the short run, he'll be dead from old age, so what does he care?
I probably have had over 100 people complaining to me about the nature of the fraud inherant in the leveraged monex atlas account over the years, over three times as many as have contacted the Better Business Bureau. According to monexfraud.com, monex has an F rating with the BBB, which is very hard to accomplish. It's like you'd have to be actively seeking to defraud people for that to happen.
The sixth biggest fraud in the silver market is relatively tiny by comparison, so tiny, it's almost not worth mentioning, but so many complain to me about them, I should mention it.
NorthWest Territorial Mint Says they Have Silver March 25, 2008
Silver Market Structure: Shortages And Sources March 25, 2008
I just don't like the NorthWest Territorial Mint's policy of a wait time of 3-4 months to get your silver. They were sued by the Washington State's attorney general, and they recently paid a fine and settled, perhaps because the State's attorney general didn't understand the silver market enough to understand how to prosecute. A 3-4 month wait time means the company is likely floating on customer money. I can't prove that, and as a private company, their books are private, but it smells like that to me. Longer and longer wait times, which have been taking place, ought to be alarming.
My calculations, based on their admitted business volumes, show this might be about a 1 million ounce blow up when, or if, it happens. But who knows? In this market, they could earn enough money to be ok in the long run. Interestingly, companies can operate "on the edge" like this for years before a bankruptcy. Lower silver prices, and higher premiums for real product, should be the key to unlock their danger of bankruptcy, and should have shortened their wait times, but it didn't, which is telling. Perhaps they are afraid that if they raise prices, they will lose new orders? Instead, their wait times have gotten longer. Further, they have more and more creative deal incentives for people who are willing to wait. As long as I continue to hammer home to people to not trust long wait times, they should lose new customers, and if they depend on that for a float, then wait times will continue to increase. I get many, many complaints about NWT Mint, but not as many as I used to get, now that they are more upfront with how long the wait will be. I only got one complaint about them today.
If you have bought from them, you ought to be alarmed. What would I suggest you do? Don't order any more! Wait it out, or complain to the Washington State Attorney General. But you likely don't have a complaint, since the company likely told you how long you would have to wait, and you likely already agreed, and the company's delivery deadline is probably not been hit, so tough deal for you, you just agreed to buy a futures contract for delivery, and paid full price, and now you have to worry about counterparty risk.
The seventh biggest fraud in the silver market is likely Kitco. They have been saying for over a month now, that delivery of silver is indefinite, and if you want to cancel, you have to pay a fee. Outrageous. They operate a pool account. Sounds like a precious metals liability. How telling.
Nadler, Kitco, Perth, Matthey; Sold Out! September 3, 2008
All these people telling you that you have to wait, is bullshit.
Even the radio host, Alex Jones, is touting a metal dealer who offers silver for 4-6 weeks for delivery.
http://www.midasresources.com/index.html
Here's a bit of silver industry info. Penoles will deliver 300 of the 1000 oz. comex bars in 2 weeks at 16 cents over spot. Unfortunately, you need to order 300,000 ounces at a time. Too rich for my blood, but maybe that bit of knowledge will be helpful for some of the "big players" listed above who might be having trouble finding silver. It should shorten wait times. But if they cannot afford that silver, because they are teetering on bankruptcy, it won't help them.
Contact info:
http://www.penoles.com.mx/penoles/ingles/productos/metales/silver.php
Meanwhile, since I found out where I can get real silver, through other honest dealers, almost immediately, I can offer silver for immediate delivery.
How can we do this when everyone else is backordered for months? Simple. We follow a long forgotten and neglected Biblical principle. We don't sell what we don't have. We only sell what we have.
There is so much fraud out there, and real silver is so scarce, you ought to get silver immediately.
I have two major auctions running at seekbullion.com, one ending tomorrow, Monday morning, the other Wednesday at noon, Pacific time.
Details:
http://silverstockreport.com/2008/auction-5.html
I'll ship the SAME DAY that wires come in, and all winning bidders must wire within 24 hours. I can ship, "same day" because I'll have all the silver pre-packaged, because I know what I'm selling, and when. I just don't know at what price. You decide what real silver is worth. You tell me, as you place your bids.
http://www.seekbullion.com/
You have nothing to lose. You will likely either pay less than you bid, due to the nature of the very small automatic proxy bid increment of $1.01 automatic bid increases, or you will simply not win, and owe nothing.
If you cannot afford a $9000 bag of silver, or a $1200 bar of silver, see my mom's ebay store, here:
http://shop.ebay.com/merchant/jkesilver
Oh yes, more fraud. Since my mom is a new "ebay-er", they put a hold on over $8000 of cash that they now cannot access, and so, they cannot repurchase silver; they are locked out, for an unknown time frame. What fraud! They are so worred about fraud protection for buyers, they fraudulently withhold money and practice fraud themselves. The solution to end fraud is simple. It's a real silver bullet! It's simply silver. If you can understand it. My father finally got it. Do you?
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
SilverStockReport.com
When I first discovered the fundamentals of the silver market ten years ago, I was as giddy as a schoolgirl, and I knew I had to get as much as possible, as soon as possible. But I had little money. But my dad had money, and he wanted to invest in something, but not silver. Fortunately for my readers, my father was a skeptic, and offered every counter argument in the book, for several years, until he finally decided it was time to buy silver in bulk. This is how I first learned to argue about silver. Dealing with my dad. He was a skeptic, because he ran an advertising agency. See, he exaggerated for a living, and his cosmic punishment seemed to be that he was never able to trust anyone. Eventually, he was convinced to buy silver. After all, he finally reasoned that I had no reason to lie to him, and he was right. For the first few years after he bought, he kept thinking about all that money he spent and "wasted" on silver at $5/oz. Since he started buying in 1999, it was emotionally painful by 2003, 5 years later, to see silver down 25% to bottom out at $4.15 by that spring. It actually took him a few years after we bought silver, by the time silver hit about $6-7/oz., and after the Enron and Worldcom bankruptcies hit, for him to later remark offhand, "I'm so glad I have so much of my money safely locked up in our safe." When he said it, I was flabergasted at the change in his perspective. I was so proud of my father, because I knew he finally understood.
The fundamentals of silver sound just too good to be true. The few million ounces that remain are staggering when you consider the historical implications and comparisons of prices.
A silver dollar was the daily wages of a miner in my hometown in the early 1900's. A silver ounce per day, or less, was also the daily wages for people in 1980, but they didn't earn silver. In 1980, with silver at $50/oz., and minimum wage at $3.10/hour, you'd have to work 16 hours for an ounce.
http://usgovinfo.about.com/library/blminwage.htm
More silver than is mined each year is consumed by industry, and as late as 2007, less than 10% was demanded by investors. The silver market spiked up starting in 2003, not so much from investor buying, but because investor selling began to slow down just a bit.
This year has been a amazingly good year for silver; tremendously exciting things have happened. When silver hit $20, investors turned buyers bigtime, and nearly stopped selling, and this sea change in the market cleaned out most of the major silver dealers in North America, by March.
Silver Shortage: 19 dealers reported "Sold Out" March 19, 2008
Since then, the shortages have only gotten worse, as I predicted.
What was stunning, and what I was not prepared for, was the extent of the manipulation to the downside to try to shake off and reduce investor demand. Two major banks sold, over the span of a month, contracts of promises to deliver 130 milion ounces of silver, to gamblers who never had any intention of taking delivery of silver, which broke the back of the paper market, and caused a panic sell off in paper silver. This caused further gamblers to have to sell their paper long positions of silver, which further depressed prices, and which also did not bring any new silver to market.
First, the biggest fraud is the COMEX. 90% to 99% of contracts don't result in delivery, but this market dominates the price.
http://www.cftc.gov/dea/options/deacmxsof.htm
With 142,578 contracts outstanding, for 5000 oz. each, that's 712 million ounces, which is more than all the world's silver mines produce each year, which is about 550 million ounces according to the CPM group.
The COMEX warehouses only store 133 million ounces, and not all of that is registered for delivery against a contract, therefore, there is paper contract fraud selling going on, which manipulates the price down.
I understand that paper contracts can also allow the silver price to be manipulated higher than normal. For example, if 85% of the positions of paper longs were concentrated and held by 2 traders who were short term gamblers who did not intend to take delivery, and if all of the sellers were only the mines who had every intention of delivering silver, prices would be manipulated higher as the paper long positions were purchased.
Likewise, if paper futures are sold, by entities such as banks who have no silver, and don't sell any silver, and don't have any intention of delivering any silver, then that would manipulate prices to the downside.
Many people continue to write to the CFTC to investigate and end the fraud. I don't think they will, since it's the nature of futures contracts themselves that is the essence of the fraud.
The second biggest fraud in the silver market is the LBMA London Bullion Market Association. These are a collective of banks who have 75 million ounces of silver, but trade 30 billion ounces of silver per year, according to statistics compiled by the CPM Group. Clearly, there is fraud there, and they admit it at their website, regarding "bullion accounts":
http://www.lbma.org.uk/london/accounts
Unallocated Accounts
This is an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest and most commonly used method of holding metal.
The units of these accounts are one fine ounce of gold and one ounce of silver based upon a 995 LGD (London Good Delivery) gold bar and a 999 fine LGD silver bar respectively. Transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties.
Credit balances on the account do not entitle the creditor to specific bars of gold or silver, but are backed by the general stock of the bullion dealer with whom the account is held. The client is an unsecured creditor.
Should the client wish to receive actual metal, this is done by ‘allocating’ specific bars or equivalent bullion product, the fine gold content of which is then debited from the allocated account.
By their own words, they admit that their standard "bullion accounts" do not have silver, are not backed by silver, but are only a debt or liability of the bank, and the owner of a bullion account is only an unsecured creditor.
Those idiot commentators who write to say that "gold is nobody's liability" ought to wake up. Of course many banks have liabilities of gold, in gold, they owe gold. Those unbacked gold and silver liabilities are part of what is going to drive the gold and silver prices much, much, much higher!
Gold is a liability for all men who practice financial fraud. God is an asset only for honest men. Since the world is so full of fraud, gold is a liability for most men!
You ought to check to see if your bank is listed among the LBMA members; most major banks are members, and for them, silver and gold are a major liability.
There are several long lists of bank names, market making members, ordinary members, and associates.
http://www.lbma.org.uk/assocn/mktmembs
They, too, like COMEX, are safe as long as their clients don't demand real silver, and for the most part, they don't. Or if they do, they discourage them, and talk them out of it, or claim they only have 1000 oz. bars available, and they will lie about mysteriously costly "assay" fees, which are actually free, and "expensive" shipping, which should cost no more than 2% of the value of the silver. Or they will flatly say they are 'sold out', or that there are high commissions, or that "nobody asks for silver" or that they are unfamiliar with how to proceed, or that if you need real silver and don't trust them, then "we" are all doomed. No, it's they who are doomed, not we.
The third biggest silver fraud is probably the SLV ishares silver trust. It's like the roach motel, you can check in, but you can't check out. Easy to buy, but impossible to take delivery of the silver. You have to be an LBMA member bank to get delivery. How cozy and convenient.
A lot of us don't trust the SLV ETF. Supposedly, it has 6901 tonnes, or about 221 million oz. of silver, worth about $2.2 billion.
There are at least 6 brokers between you and your money, and they all need to get paid when you buy or sell shares in the SLV.
1. The sponsor, Barclays.
2. The custodian, JP Morgan, who is supposed to hold the silver.
3. The sub custoidans, which can have further
4. More sub custodians
5. The market making brokers who buy and sell the actual metal, futures, and/or shares in lots.
6. Your own brokerage account that holds your SLF shares for you.
SLV is not silver. It is promises and sub-promises of unauditable brokerage houses, and JP Morgan is an LBMA member, and is the bank with the largest portfolio of derivatives in the world, over $80 trillion. How can the SLV pay up to 6 middlemen or more, and give you a good spread? Think.
The entire reason behind owning silver is thwarted with the SLV.
Silver cannot default. SLV can.
You own silver to protect against bank failure and brokerage failure.
SLV cannot protect you in case of brokerage failure or custodian failure or sub custodian failure or Barclays failure, or short selling failure to deliver, or your own brokerage failure. Six brokers means 6 chances of failure.
For the SLV, consider Taxes: Physical silver purchases, for the most part, are non reportable. SLV sales are reportable.
For the SLV, consider Confiscation: If the Government changes a law, to confiscate silver, which silver is more vulnerable? Silver in your safe that that they cannot find and don't know about? Or silver in the SLV, which would have to be turned in or converted to "paper"?
The fourth biggest fraud in the silver market is probably the Perth Mint Certificate program.
Where's the Abundance of Perth Mint Rounds?! September 6, 2008
The Perth Mint now has a $1.5 billion precious metals liability to Certificate holders.
http://www.bloomberg.com/apps/news?pid=20601012&refer=commodities&sid=asmvRlbfitV8
To get out of holding the certificates used to cost about 15% in fees just to get your cash, and then another 15% hit to buy real silver. Today, the spreads are much worse.
I've explained and warned numerous times about the Perth Mint's metals debt. It is a legacy fraud, from a legacy debt, probably going back decades. They transfered a bullion debt that they owed to the banks, to the public, though a wonderful public relations campaign, and many bought it hook, line, and sinker, because the people wanted the securty of promises, rather than silver.
The many contradictory statements coming out of the Perth Mint are enough to make your head spin. They say they only buy 20 tonnes of silver at a time, yet they buy every ounce of silver at every time anyone buys a silver certificate. Well, it can only be one, and so it's probably neither. 20 tonnes is barely enough to back 1/2 of 1% of their certificates, and is probably what they need to stay solvent from redemptions that started since I began telling people to get their physical out of there!
The fifth biggest silver market fraud is probably monex.com. A few years ago, I did a video interview with them for a CD promotion that I regret now doing. See monexfraud.com. It's bad enough that they offer silver on "leverage" terms in their atlas account. But what is worse is that the IRS is suing them for back taxes for about $400 million. If they even have that much silver on account for their investors, I sincerely doubt that it's there. Going short in the silver market was a wonderful "business" strategy when silver prices went down for 20 years, but will eventually bankrupt anyone in a rising market. But for the very old man who owns monex, in the short run, he'll be dead from old age, so what does he care?
I probably have had over 100 people complaining to me about the nature of the fraud inherant in the leveraged monex atlas account over the years, over three times as many as have contacted the Better Business Bureau. According to monexfraud.com, monex has an F rating with the BBB, which is very hard to accomplish. It's like you'd have to be actively seeking to defraud people for that to happen.
The sixth biggest fraud in the silver market is relatively tiny by comparison, so tiny, it's almost not worth mentioning, but so many complain to me about them, I should mention it.
NorthWest Territorial Mint Says they Have Silver March 25, 2008
Silver Market Structure: Shortages And Sources March 25, 2008
I just don't like the NorthWest Territorial Mint's policy of a wait time of 3-4 months to get your silver. They were sued by the Washington State's attorney general, and they recently paid a fine and settled, perhaps because the State's attorney general didn't understand the silver market enough to understand how to prosecute. A 3-4 month wait time means the company is likely floating on customer money. I can't prove that, and as a private company, their books are private, but it smells like that to me. Longer and longer wait times, which have been taking place, ought to be alarming.
My calculations, based on their admitted business volumes, show this might be about a 1 million ounce blow up when, or if, it happens. But who knows? In this market, they could earn enough money to be ok in the long run. Interestingly, companies can operate "on the edge" like this for years before a bankruptcy. Lower silver prices, and higher premiums for real product, should be the key to unlock their danger of bankruptcy, and should have shortened their wait times, but it didn't, which is telling. Perhaps they are afraid that if they raise prices, they will lose new orders? Instead, their wait times have gotten longer. Further, they have more and more creative deal incentives for people who are willing to wait. As long as I continue to hammer home to people to not trust long wait times, they should lose new customers, and if they depend on that for a float, then wait times will continue to increase. I get many, many complaints about NWT Mint, but not as many as I used to get, now that they are more upfront with how long the wait will be. I only got one complaint about them today.
If you have bought from them, you ought to be alarmed. What would I suggest you do? Don't order any more! Wait it out, or complain to the Washington State Attorney General. But you likely don't have a complaint, since the company likely told you how long you would have to wait, and you likely already agreed, and the company's delivery deadline is probably not been hit, so tough deal for you, you just agreed to buy a futures contract for delivery, and paid full price, and now you have to worry about counterparty risk.
The seventh biggest fraud in the silver market is likely Kitco. They have been saying for over a month now, that delivery of silver is indefinite, and if you want to cancel, you have to pay a fee. Outrageous. They operate a pool account. Sounds like a precious metals liability. How telling.
Nadler, Kitco, Perth, Matthey; Sold Out! September 3, 2008
All these people telling you that you have to wait, is bullshit.
Even the radio host, Alex Jones, is touting a metal dealer who offers silver for 4-6 weeks for delivery.
http://www.midasresources.com/index.html
Here's a bit of silver industry info. Penoles will deliver 300 of the 1000 oz. comex bars in 2 weeks at 16 cents over spot. Unfortunately, you need to order 300,000 ounces at a time. Too rich for my blood, but maybe that bit of knowledge will be helpful for some of the "big players" listed above who might be having trouble finding silver. It should shorten wait times. But if they cannot afford that silver, because they are teetering on bankruptcy, it won't help them.
Contact info:
http://www.penoles.com.mx/penoles/ingles/productos/metales/silver.php
Meanwhile, since I found out where I can get real silver, through other honest dealers, almost immediately, I can offer silver for immediate delivery.
How can we do this when everyone else is backordered for months? Simple. We follow a long forgotten and neglected Biblical principle. We don't sell what we don't have. We only sell what we have.
There is so much fraud out there, and real silver is so scarce, you ought to get silver immediately.
I have two major auctions running at seekbullion.com, one ending tomorrow, Monday morning, the other Wednesday at noon, Pacific time.
Details:
http://silverstockreport.com/2008/auction-5.html
I'll ship the SAME DAY that wires come in, and all winning bidders must wire within 24 hours. I can ship, "same day" because I'll have all the silver pre-packaged, because I know what I'm selling, and when. I just don't know at what price. You decide what real silver is worth. You tell me, as you place your bids.
http://www.seekbullion.com/
You have nothing to lose. You will likely either pay less than you bid, due to the nature of the very small automatic proxy bid increment of $1.01 automatic bid increases, or you will simply not win, and owe nothing.
If you cannot afford a $9000 bag of silver, or a $1200 bar of silver, see my mom's ebay store, here:
http://shop.ebay.com/merchant/jkesilver
Oh yes, more fraud. Since my mom is a new "ebay-er", they put a hold on over $8000 of cash that they now cannot access, and so, they cannot repurchase silver; they are locked out, for an unknown time frame. What fraud! They are so worred about fraud protection for buyers, they fraudulently withhold money and practice fraud themselves. The solution to end fraud is simple. It's a real silver bullet! It's simply silver. If you can understand it. My father finally got it. Do you?
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Saturday, October 18, 2008
Silver is Undervalued Relative to Gold 100-1.
The Real Gold/Silver Ratio
Part II
By
Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
I’d like to continue on a theme I wrote about last week, namely, attempting to uncover the true relative value of silver compared to gold. You see, I am convinced that the most widely used yardstick, dividing the price of gold by the price of silver, may be inadequate and even misleading. I don’t believe that enough information is provided by price alone. It’s kind of like trying to determine the weather by temperature alone – 72 degrees Fahrenheit sounds pleasant, but not if you’re in the grip of a hurricane.
Therefore, one should apply as many data points as possible to determine the truest condition of anything. That was why I started to analyze the relative value of silver compared to gold by the market capitalization method, using both price and the actual amount of each metal in existence, instead of just price alone. It’s more objective and scientific that way. For instance, just because one company’s stock price may be higher than another’s doesn’t mean the company itself is worth more – you have to compare total shares outstanding as well.
After I wrote the first article, I realized that I could have provided many more data points to aid both the reader and myself to understand the real gold/silver ratio. While I found it certainly amazing that the gold metal market capitalization was 200 times larger than silver’s, I provided no reference scale to allow anyone to measure just how amazing that difference was. Fortunately, the data needed to construct such a reference scale is relatively easy to obtain.
What I set out to do was to determine how the differences in the current market caps for both gold and silver compared historically. Was the current market cap difference large or small when compared over the last 100 years? After all, the widely used price-only ratio was stuck somewhat in the middle, at 50 or so, of the 100-year trading range of roughly 15 to 100. Would the market cap ratio parallel the pattern of the price only ratio?
The short answer is that the results astounded me, as I think they will astound you. I must confess - it takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me.
Before I present the data in the following tables, let me explain my methodology and reference my sources. I’ve relied principally on data from the World Gold Council, the US Geological Survey and the Silver Institute. Since the data over the past 30 years is unquestionably more accurate than data from 100 years ago, I have worked backwards, from current world above ground amounts for gold and silver, to get to historical amounts.
Admittedly, gold above ground amounts are easier to pinpoint than silver amounts. That’s partly because gold is still held and recorded by world governments, but also because gold is so valuable that virtually none of it is ever destroyed by non-recoverable industrial consumption. Therefore, every ounce of gold that is mined annually is added to above ground total amounts.
Silver, of course, is different from gold in that it is industrially consumed. In fact, for more than 60 years, more silver has been consumed than has been mined annually, even allowing for recycling. Existing inventories were drawn down to balance the structural production deficit. Therefore, we know there is a lot less silver in existence than 30 or 60 years ago. The highest estimate for existing silver bullion equivalent (bullion plus "junk " coin) is one billion ounces, with most estimates falling in the mid hundred million-ounce range. I will use the billion-ounce amount to be conservative.
I think there are billions of ounces of silver in non-bullion equivalent form (silverware, artifacts, jewelry, etc.), but no one knows at what price, if any, that silver could enter the market. Certainly, there has been remarkably little of such silver released to the market to date, in spite of previous predictions of a flood of such silver starting at $7 or higher. If such silver does come to market in the future at much higher prices, and that silver is not absorbed by other investment or industrial buying, that circumstance will have to be factored into the silver supply/demand equation. The great thing is that such an event cannot go unnoticed and we will all stay alert to its possible coming. At the very least, it is not a factor now. To conclude that silver is not a good investment at current prices, strictly because more supply may come to market at higher prices is patently absurd.
According to the World Gold Council (WGC) we have a gold above ground stock of 5 billion ounces http://www.gold.org/value/markets/supply_demand/mine_production.html This is higher than the 4 billion ounce figure I stated last week, so I am revising my current market cap comparison to gold being 250 times larger than silver. I’ve rounded all the numbers to provide for easier comparisons.
Year
Gold Market Cap
Silver Market Cap
Ratio (Price)
Ratio (Market Cap)
1900 $20 Billion
(1 billion oz x $20)
$8 Billion
(12 billion oz x 65 cents)
30 2.5
1950 $70 Billion
(2 billion oz x $35)
$8 Billion
(10 billion oz x 80 cents)
44 9
1975 $450 Billion
(3 billion oz x $150)
$20 Billion
(5 billion oz x $4)
38 23
2006 $3 Trillion
(5 billion oz x $600
$12 Billion
(1 billion oz x $12)
50 250
I would like to make a couple of observations about the data displayed above, before introducing another table. I will follow all the data presented with overall conclusions. The data above point out the fallacy of comparing by price alone. Over the course of more than 100 years, the fluctuation in the old price-only ratio was not unusual, from 30 in 1900, to 44 in 1950, to 38 in 1975, to 50 presently. Nothing to get excited about there. But by looking at the temperature only to gauge the weather, you would never know if the wind was blowing 150 miles per hour. Likewise, the gold/silver price ratio is an inadequate measurement. By comparing with a market capitalization ratio, we can indeed confirm that a Cat 5 is howling through the relationship between gold and silver.
While the conventional price-only comparison has changed little, the market cap ratio has increased dramatically by 100 fold over the course of 106 years. The numbers speak for themselves – silver is 100 times more undervalued to gold than it was 106 years ago. Period.
Additionally, the data clearly indicates that the market cap for gold has increased dramatically on an absolute basis over the past 106 years, from $20 billion to $3000 billion ($3 trillion), or 150 times, due to increased prices and growing inventory. While gold is said to be a small market, there are not many specific assets that command a $3 trillion market cap. Trillion is a very big number.
Silver over the same period only increased in market cap by 1.5 times, in spite of an increase in price, due to the draw down of inventory by more than 90%. Because we are comparing metal with metal, there is no currency or inflation adjustment necessary. This is a true apples to apples comparison.
The next table compares some of the data above and includes world population and the per capita dollar amounts of gold and silver (rounded to nearest dollar).
Year
World Population (billions)
What this table tells us is that, on a per capita dollar basis, the world’s citizens have never owned more gold or less silver than they do today. The world’s citizens own more than 35 times more in gold, expressed in dollars, than they owned 106 years ago. Yet at the same time, the world’s citizens own less than 40% of dollar-denominated silver than they did 106 years ago. Once again, these figures should shock you, just as they shocked me. And please remember, this is also an apples to apples comparison.
Strictly on a simple arithmetic calculation, the following examples indicate what the price of silver would be today if it had maintained its parity with gold on two different measurements. One, if the silver market cap had equaled the growth in the gold market cap from 1900, and remained valued at 40% of the gold market cap (as it was in 1900), the current price of silver would be $1000 an ounce ($1200 billion divided by 1 billion ounces.)
Two, if the per capita amount of silver in 1900 grew at the equivalent rate that the gold per capita grew, the current price of silver would be $175 an ounce (35 times the amount they held in 1900.) I’m sure if you play with the numbers, you’ll come up with other price points for silver. All much higher than current prices.
Are these my price targets for silver? Not necessarily, but only because they seem so outlandish when compared to the current price of $12. That’s because I am human and the human mind is restricted by the influence of price patterns known and observed in one’s lifetime. After all, we are all bound by our own life’s experiences.
But I can tell you that the data is accurate and I have tried to be objective in its presentation. $1000 silver seems crazy, but less crazy than gold having a market cap 250 times silver. I don’t think anything could be crazier than silver being at its most undervalued ever relative to gold, at precisely the time that silver inventories are approaching extinction. As always, it’s up to you to take the data and form your own conclusions.
I want to be very clear in what I am concluding. I am not saying that gold is overvalued, or that gold can’t or won’t go up in price. I am on record as having recently depicted the gold market as bottoming out, with little risk and decent, if unknown, upside, based upon the COTs. I am not expecting or rooting for gold to go down in price. Gold going up in price is good for silver. I am not a gold bug, but nor am I an enemy of gold. I was the very first to publicly expose the fraud and manipulation of gold leasing/forward selling, the termination of which has been the principal factor in the doubling of the gold price.
Some might suggest that the great value disparity between gold and silver points to the realization of the superiority of gold as the one true money. Perhaps. But why is this disparity showing up only against silver? Gold compared to the other precious metals (platinum, palladium, rhodium, iridium), the base metals, oil, broad commodity indices, real estate or the stock market, does not suggest a gold overvaluation. As I said, this is severe silver under valuation, not a gold over valuation.
While I was somewhat surprised by the high per capita dollar amount of gold, I was more surprised with the low per capita dollar amount of silver. That the world only owns less than $2 worth of silver amazes me. The real story here is the under ownership of silver. It is that real story that promises an investment bonanza. Certainly, such a piddling amount of per capita silver does not suggest wholesale liquidation.
Please keep in mind that due to its very nature, the market cap of gold is most likely to continue to grow, certainly because the amount of gold above ground must continue to grow, but also perhaps because of further price increases. In 25 years, at current mine production rates, another 2 billion ounces of gold will be added to total above ground amounts, to a total of 7 billion ounces. We also know that world population is expected to grow by 1.7 billion souls, to 8.2 billion, in 2030.
In silver, I doubt the physical inventory will grow much, but neither can it fall at the rates it has fallen over the past 50 years. After all, we have fallen by 10 billion ounces in bullion equivalent inventories since World War II, to the current 1 billion ounces. Since there is no such thing as negative inventory, we can only fall to somewhere between current levels and zero. The point here is that the deficits must end at some point, certainly long before 2030. Not to be repetitive, but the only way the mandatory end to the deficit pattern can be achieved is by price rationing caused by shockingly high prices.
A few other points. It should be obvious that there has to have been a great force, or explanation, in existence to account for this unbelievable distortion in the value relationship between gold and silver, two items whose history dates back thousands of years. While not the subject of this article, that force or explanation is the silver manipulation, from government acquisition and disposal of silver, to the Silver Users Association, to leasing and the current paper short selling by big concentrated COMEX interests. The current value distortion between gold and silver did not come about through free market forces or happenstance.
As much as the above data suggests a massive correction in silver’s current under valuation to gold, it is not just history alone and common sense that will dictate the price correction. While the data in the tables does strongly suggest that silver inventories are headed clearly towards zero and a shortage condition, it is not possible for the data to imply just what an industrial shortage of silver would mean for the price of silver on an absolute basis or relative to gold.
When comparing the true value of gold and silver in price, it is important to always be aware of the true nature of each metal. Silver is an industrial metal, first and foremost, and an investment metal second. Gold is not an industrial metal, but solely an investment metal, sought for its value and beauty. Only industrial metals can go into shortage. Gold can go to any price you imagine, but not on the basis of an industrial shortage. Silver not only can go into an industrial shortage, but as the data above clearly indicates, it will go into an industrial shortage at some point, due to disappearing inventories.
To appreciate the eventual and inevitable impact of an actual shortage on the price of silver, one has to rely upon human imagination and prior experience with other shortages. This is the stuff that, quite literally, causes me to shudder when I contemplate how high the price could go. In a true shortage, sellers freeze up and are afraid to sell at almost any price, while buyers emotionally panic into bidding at irrational prices. Short time durations, but extreme price movements characterize such emotional periods. This condition is coming to silver.
I think I know certain things for sure. I know that one-half of one percent is a very small percentage. One-half of one percent of the gold market capitalization is $15 billion. While $15 billion is a relatively small number in the gold market, it is a very large number for the silver market. Fifteen billion dollars is more than the entire global silver market capitalization. Because there is so much less silver than gold, and because the price of silver is so low compared to gold, a $15 billion switch from gold into silver would send the silver market flying and break the backs of the manipulators. In turn, the resultant price rise in silver would probably fuel a further price rise in gold. Remember, I am talking about a one-half of one percent switch out of gold into silver.
I also know that very few people in the world appreciate the extreme under valuation in silver compared to gold, especially on an historic basis over the past 100 years. How could they? While I admit to being overly pre-occupied with silver (a nice way of saying silver nut), even I didn’t fully comprehend it, until I sat down and did the calculations. In my opinion, it is the lack of awareness of this data that prevents people from rushing to take advantage of a truly incredible investment opportunity. But now you are aware of it, and I challenge you to disprove it or act on it.
Why do I keep harping on folks to sell gold and buy silver, even though I don’t expect or want gold to go down? It’s simple – the data. It’s like the classic answer the famous bank robber, Willie Sutton, gave when asked why he robbed banks. "It’s where the money is." There’s $3 trillion in gold and only $12 billion in silver. If you have cash, buy silver. If you have only gold but no cash, sell gold in order to buy silver. Obviously, a lot of people own gold - $3 trillion worth. The potential audience is large and still mostly unaware.
This is not an invitation or suggestion that anyone trade the gold/silver ratio on a leveraged basis. Too many bad things have and can happen when one is leveraged in the most manipulated market of them all. This is a call to rebalance fully paid for gold and silver holdings. After all, gold holders, by virtue of the doubling of the gold price over the past few years, are in the fortunate position to be able to take advantage of their gold buying power. This is a switch that not only should be done, it can be done.
A switch from gold to silver would seem to satisfy the most important requirement in any investment decision, namely, the reduction of risk. Due to silver’s dramatic under valuation relative to gold (and just about everything else in the investment world); the risk of loss in silver relative to gold (or anything else) appears very limited. That’s some potent combination – low risk and high reward.
In summary, the data above leads me to the certain conclusion that silver must rise dramatically in price on an absolute basis and rise dramatically in price relative to gold. Everyone has to make up their own mind on what to do with their own money, so I’ll speak for myself. I have many gold friends who claim to be fully represented in silver because they have one or five or ten ounces of silver for every ounce of gold they own. I think they are missing the boat and are kidding themselves.
If you want to own all silver and no gold, I can whole-heartedly and enthusiastically agree with that. If you have to own gold and silver, it should be at least in equal total dollar amounts, namely 50 ounces of silver for every ounce of gold. If that requires you to reduce your gold holdings, I believe that will only be temporary. Later, you’ll be able to buy more gold with your silver profits. If you insist on owning all gold and no silver, even after fully considering the above data, good luck to you. Just don’t say that you weren’t aware of the data.
Source
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Part II
By
Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
I’d like to continue on a theme I wrote about last week, namely, attempting to uncover the true relative value of silver compared to gold. You see, I am convinced that the most widely used yardstick, dividing the price of gold by the price of silver, may be inadequate and even misleading. I don’t believe that enough information is provided by price alone. It’s kind of like trying to determine the weather by temperature alone – 72 degrees Fahrenheit sounds pleasant, but not if you’re in the grip of a hurricane.
Therefore, one should apply as many data points as possible to determine the truest condition of anything. That was why I started to analyze the relative value of silver compared to gold by the market capitalization method, using both price and the actual amount of each metal in existence, instead of just price alone. It’s more objective and scientific that way. For instance, just because one company’s stock price may be higher than another’s doesn’t mean the company itself is worth more – you have to compare total shares outstanding as well.
After I wrote the first article, I realized that I could have provided many more data points to aid both the reader and myself to understand the real gold/silver ratio. While I found it certainly amazing that the gold metal market capitalization was 200 times larger than silver’s, I provided no reference scale to allow anyone to measure just how amazing that difference was. Fortunately, the data needed to construct such a reference scale is relatively easy to obtain.
What I set out to do was to determine how the differences in the current market caps for both gold and silver compared historically. Was the current market cap difference large or small when compared over the last 100 years? After all, the widely used price-only ratio was stuck somewhat in the middle, at 50 or so, of the 100-year trading range of roughly 15 to 100. Would the market cap ratio parallel the pattern of the price only ratio?
The short answer is that the results astounded me, as I think they will astound you. I must confess - it takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me.
Before I present the data in the following tables, let me explain my methodology and reference my sources. I’ve relied principally on data from the World Gold Council, the US Geological Survey and the Silver Institute. Since the data over the past 30 years is unquestionably more accurate than data from 100 years ago, I have worked backwards, from current world above ground amounts for gold and silver, to get to historical amounts.
Admittedly, gold above ground amounts are easier to pinpoint than silver amounts. That’s partly because gold is still held and recorded by world governments, but also because gold is so valuable that virtually none of it is ever destroyed by non-recoverable industrial consumption. Therefore, every ounce of gold that is mined annually is added to above ground total amounts.
Silver, of course, is different from gold in that it is industrially consumed. In fact, for more than 60 years, more silver has been consumed than has been mined annually, even allowing for recycling. Existing inventories were drawn down to balance the structural production deficit. Therefore, we know there is a lot less silver in existence than 30 or 60 years ago. The highest estimate for existing silver bullion equivalent (bullion plus "junk " coin) is one billion ounces, with most estimates falling in the mid hundred million-ounce range. I will use the billion-ounce amount to be conservative.
I think there are billions of ounces of silver in non-bullion equivalent form (silverware, artifacts, jewelry, etc.), but no one knows at what price, if any, that silver could enter the market. Certainly, there has been remarkably little of such silver released to the market to date, in spite of previous predictions of a flood of such silver starting at $7 or higher. If such silver does come to market in the future at much higher prices, and that silver is not absorbed by other investment or industrial buying, that circumstance will have to be factored into the silver supply/demand equation. The great thing is that such an event cannot go unnoticed and we will all stay alert to its possible coming. At the very least, it is not a factor now. To conclude that silver is not a good investment at current prices, strictly because more supply may come to market at higher prices is patently absurd.
According to the World Gold Council (WGC) we have a gold above ground stock of 5 billion ounces http://www.gold.org/value/markets/supply_demand/mine_production.html This is higher than the 4 billion ounce figure I stated last week, so I am revising my current market cap comparison to gold being 250 times larger than silver. I’ve rounded all the numbers to provide for easier comparisons.
Year
Gold Market Cap
Silver Market Cap
Ratio (Price)
Ratio (Market Cap)
1900 $20 Billion
(1 billion oz x $20)
$8 Billion
(12 billion oz x 65 cents)
30 2.5
1950 $70 Billion
(2 billion oz x $35)
$8 Billion
(10 billion oz x 80 cents)
44 9
1975 $450 Billion
(3 billion oz x $150)
$20 Billion
(5 billion oz x $4)
38 23
2006 $3 Trillion
(5 billion oz x $600
$12 Billion
(1 billion oz x $12)
50 250
I would like to make a couple of observations about the data displayed above, before introducing another table. I will follow all the data presented with overall conclusions. The data above point out the fallacy of comparing by price alone. Over the course of more than 100 years, the fluctuation in the old price-only ratio was not unusual, from 30 in 1900, to 44 in 1950, to 38 in 1975, to 50 presently. Nothing to get excited about there. But by looking at the temperature only to gauge the weather, you would never know if the wind was blowing 150 miles per hour. Likewise, the gold/silver price ratio is an inadequate measurement. By comparing with a market capitalization ratio, we can indeed confirm that a Cat 5 is howling through the relationship between gold and silver.
While the conventional price-only comparison has changed little, the market cap ratio has increased dramatically by 100 fold over the course of 106 years. The numbers speak for themselves – silver is 100 times more undervalued to gold than it was 106 years ago. Period.
Additionally, the data clearly indicates that the market cap for gold has increased dramatically on an absolute basis over the past 106 years, from $20 billion to $3000 billion ($3 trillion), or 150 times, due to increased prices and growing inventory. While gold is said to be a small market, there are not many specific assets that command a $3 trillion market cap. Trillion is a very big number.
Silver over the same period only increased in market cap by 1.5 times, in spite of an increase in price, due to the draw down of inventory by more than 90%. Because we are comparing metal with metal, there is no currency or inflation adjustment necessary. This is a true apples to apples comparison.
The next table compares some of the data above and includes world population and the per capita dollar amounts of gold and silver (rounded to nearest dollar).
Year
World Population (billions)
What this table tells us is that, on a per capita dollar basis, the world’s citizens have never owned more gold or less silver than they do today. The world’s citizens own more than 35 times more in gold, expressed in dollars, than they owned 106 years ago. Yet at the same time, the world’s citizens own less than 40% of dollar-denominated silver than they did 106 years ago. Once again, these figures should shock you, just as they shocked me. And please remember, this is also an apples to apples comparison.
Strictly on a simple arithmetic calculation, the following examples indicate what the price of silver would be today if it had maintained its parity with gold on two different measurements. One, if the silver market cap had equaled the growth in the gold market cap from 1900, and remained valued at 40% of the gold market cap (as it was in 1900), the current price of silver would be $1000 an ounce ($1200 billion divided by 1 billion ounces.)
Two, if the per capita amount of silver in 1900 grew at the equivalent rate that the gold per capita grew, the current price of silver would be $175 an ounce (35 times the amount they held in 1900.) I’m sure if you play with the numbers, you’ll come up with other price points for silver. All much higher than current prices.
Are these my price targets for silver? Not necessarily, but only because they seem so outlandish when compared to the current price of $12. That’s because I am human and the human mind is restricted by the influence of price patterns known and observed in one’s lifetime. After all, we are all bound by our own life’s experiences.
But I can tell you that the data is accurate and I have tried to be objective in its presentation. $1000 silver seems crazy, but less crazy than gold having a market cap 250 times silver. I don’t think anything could be crazier than silver being at its most undervalued ever relative to gold, at precisely the time that silver inventories are approaching extinction. As always, it’s up to you to take the data and form your own conclusions.
I want to be very clear in what I am concluding. I am not saying that gold is overvalued, or that gold can’t or won’t go up in price. I am on record as having recently depicted the gold market as bottoming out, with little risk and decent, if unknown, upside, based upon the COTs. I am not expecting or rooting for gold to go down in price. Gold going up in price is good for silver. I am not a gold bug, but nor am I an enemy of gold. I was the very first to publicly expose the fraud and manipulation of gold leasing/forward selling, the termination of which has been the principal factor in the doubling of the gold price.
Some might suggest that the great value disparity between gold and silver points to the realization of the superiority of gold as the one true money. Perhaps. But why is this disparity showing up only against silver? Gold compared to the other precious metals (platinum, palladium, rhodium, iridium), the base metals, oil, broad commodity indices, real estate or the stock market, does not suggest a gold overvaluation. As I said, this is severe silver under valuation, not a gold over valuation.
While I was somewhat surprised by the high per capita dollar amount of gold, I was more surprised with the low per capita dollar amount of silver. That the world only owns less than $2 worth of silver amazes me. The real story here is the under ownership of silver. It is that real story that promises an investment bonanza. Certainly, such a piddling amount of per capita silver does not suggest wholesale liquidation.
Please keep in mind that due to its very nature, the market cap of gold is most likely to continue to grow, certainly because the amount of gold above ground must continue to grow, but also perhaps because of further price increases. In 25 years, at current mine production rates, another 2 billion ounces of gold will be added to total above ground amounts, to a total of 7 billion ounces. We also know that world population is expected to grow by 1.7 billion souls, to 8.2 billion, in 2030.
In silver, I doubt the physical inventory will grow much, but neither can it fall at the rates it has fallen over the past 50 years. After all, we have fallen by 10 billion ounces in bullion equivalent inventories since World War II, to the current 1 billion ounces. Since there is no such thing as negative inventory, we can only fall to somewhere between current levels and zero. The point here is that the deficits must end at some point, certainly long before 2030. Not to be repetitive, but the only way the mandatory end to the deficit pattern can be achieved is by price rationing caused by shockingly high prices.
A few other points. It should be obvious that there has to have been a great force, or explanation, in existence to account for this unbelievable distortion in the value relationship between gold and silver, two items whose history dates back thousands of years. While not the subject of this article, that force or explanation is the silver manipulation, from government acquisition and disposal of silver, to the Silver Users Association, to leasing and the current paper short selling by big concentrated COMEX interests. The current value distortion between gold and silver did not come about through free market forces or happenstance.
As much as the above data suggests a massive correction in silver’s current under valuation to gold, it is not just history alone and common sense that will dictate the price correction. While the data in the tables does strongly suggest that silver inventories are headed clearly towards zero and a shortage condition, it is not possible for the data to imply just what an industrial shortage of silver would mean for the price of silver on an absolute basis or relative to gold.
When comparing the true value of gold and silver in price, it is important to always be aware of the true nature of each metal. Silver is an industrial metal, first and foremost, and an investment metal second. Gold is not an industrial metal, but solely an investment metal, sought for its value and beauty. Only industrial metals can go into shortage. Gold can go to any price you imagine, but not on the basis of an industrial shortage. Silver not only can go into an industrial shortage, but as the data above clearly indicates, it will go into an industrial shortage at some point, due to disappearing inventories.
To appreciate the eventual and inevitable impact of an actual shortage on the price of silver, one has to rely upon human imagination and prior experience with other shortages. This is the stuff that, quite literally, causes me to shudder when I contemplate how high the price could go. In a true shortage, sellers freeze up and are afraid to sell at almost any price, while buyers emotionally panic into bidding at irrational prices. Short time durations, but extreme price movements characterize such emotional periods. This condition is coming to silver.
I think I know certain things for sure. I know that one-half of one percent is a very small percentage. One-half of one percent of the gold market capitalization is $15 billion. While $15 billion is a relatively small number in the gold market, it is a very large number for the silver market. Fifteen billion dollars is more than the entire global silver market capitalization. Because there is so much less silver than gold, and because the price of silver is so low compared to gold, a $15 billion switch from gold into silver would send the silver market flying and break the backs of the manipulators. In turn, the resultant price rise in silver would probably fuel a further price rise in gold. Remember, I am talking about a one-half of one percent switch out of gold into silver.
I also know that very few people in the world appreciate the extreme under valuation in silver compared to gold, especially on an historic basis over the past 100 years. How could they? While I admit to being overly pre-occupied with silver (a nice way of saying silver nut), even I didn’t fully comprehend it, until I sat down and did the calculations. In my opinion, it is the lack of awareness of this data that prevents people from rushing to take advantage of a truly incredible investment opportunity. But now you are aware of it, and I challenge you to disprove it or act on it.
Why do I keep harping on folks to sell gold and buy silver, even though I don’t expect or want gold to go down? It’s simple – the data. It’s like the classic answer the famous bank robber, Willie Sutton, gave when asked why he robbed banks. "It’s where the money is." There’s $3 trillion in gold and only $12 billion in silver. If you have cash, buy silver. If you have only gold but no cash, sell gold in order to buy silver. Obviously, a lot of people own gold - $3 trillion worth. The potential audience is large and still mostly unaware.
This is not an invitation or suggestion that anyone trade the gold/silver ratio on a leveraged basis. Too many bad things have and can happen when one is leveraged in the most manipulated market of them all. This is a call to rebalance fully paid for gold and silver holdings. After all, gold holders, by virtue of the doubling of the gold price over the past few years, are in the fortunate position to be able to take advantage of their gold buying power. This is a switch that not only should be done, it can be done.
A switch from gold to silver would seem to satisfy the most important requirement in any investment decision, namely, the reduction of risk. Due to silver’s dramatic under valuation relative to gold (and just about everything else in the investment world); the risk of loss in silver relative to gold (or anything else) appears very limited. That’s some potent combination – low risk and high reward.
In summary, the data above leads me to the certain conclusion that silver must rise dramatically in price on an absolute basis and rise dramatically in price relative to gold. Everyone has to make up their own mind on what to do with their own money, so I’ll speak for myself. I have many gold friends who claim to be fully represented in silver because they have one or five or ten ounces of silver for every ounce of gold they own. I think they are missing the boat and are kidding themselves.
If you want to own all silver and no gold, I can whole-heartedly and enthusiastically agree with that. If you have to own gold and silver, it should be at least in equal total dollar amounts, namely 50 ounces of silver for every ounce of gold. If that requires you to reduce your gold holdings, I believe that will only be temporary. Later, you’ll be able to buy more gold with your silver profits. If you insist on owning all gold and no silver, even after fully considering the above data, good luck to you. Just don’t say that you weren’t aware of the data.
Source
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Silver 5X More Rare than Gold. Peak Price $250-$5000 oz
"THE SILVER STORY"
by Shelby Moore III
Careful analysis of the official historical supply & demand reports for silver, proves without a doubt that silver is between 0.25 to 5 times more rare than gold above ground, in terms of metal that can be brought to market within several years after a drastic rise in silver price (to that 0.25 to 5 ratio to gold price).
For example, with gold at $1000 per oz, the minimum peak price we could expect for silver is $250 to $5000 per oz, and very soon.
The above statement will seem ludicrous, until you understand the intricate details of the supply & demand analysis, and then understand the motive for the bankers to suppress the "spot" price of silver so severely. In this new era of $trillions of (hidden & publicized) bailouts, the motive of the bankers is becoming naked for all to see (as I will explain).
Boz = billion oz (i.e. 1000 million oz)
Moz = million oz
The 1991 official CRA study, concluded that there was worldwide 1.4 Boz bullion + 1.2 Boz old coins (e.g. 90% silver, 40% silver, etc) + 16.5 Boz of silverware/art for total of 19 Boz. David Zurbuchen corroborated (the total silver above ground in) that CRA report, using multiple data sources. Of that 2.6 Boz of above ground investment silver in 1991, an official report stated that 1 Boz of it had been consumed by industry as of 1998:
...Between 1990 and 1997, cumulative silver fabrication demand has exceeded mine production by 2.2 billion ounces. That gap has been filled by recycled silver scrap and by the drawdown of more than 1 billion ounces of silver bullion inventories...
From 1998, there was 347 Moz coin fabrication minus 191 Moz more "Net Disinvestment" from above ground investment silver:
World Silver Supply and Demand
(in millions of ounces)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Supply
Mine Production 542.2 556.9 591.0 606.2 593.6 600.6 621.1 643.8 647.4 670.6
Net Government Sales 33.5 97.2 60.3 63.0 60.3 88.4 60.2 67.5 78.2 42.3
Old Silver Scrap 193.9 181.6 180.7 182.7 187.5 184.0 183.7 186.0 188.0 181.6
Producer Hedging 6.5 -- -- 18.9 -- -- 9.6 27.6 -- --
Implied Net Disinvestment 48.2 44.8 87.2 -- 10.8 -- -- -- -- --
Total Supply 824.3 880.4 919.1 870.4 852.2 872.9 874.6 925.0 913.7 894.5
Demand
Fabrication
Industrial Applications 316.3 339.0 374.3 335.2 339.2 349.8 367.3 405.3 424.8 455.3
Photography 225.4 227.9 218.3 213.1 204.3 192.9 178.8 160.3 144.0 128.3
Jewelry 140.6 159.8 170.6 174.3 168.9 179.2 174.9 173.8 166.3 163.4
Silverware 114.2 108.6 96.4 106.1 83.5 83.9 67.3 67.8 61.2 58.8
Coins & Medals 27.8 29.1 32.1 30.5 31.6 35.7 42.4 40.0 39.8 37.8
Total Fabrication 824.3 864.4 891.7 859.2 827.4 841.5 830.7 847.4 836.0 843.7
Net Government Purchases 0.7 -- -- -- -- -- -- -- -- --
Producer De-Hedging -- 16.0 27.4 -- 24.8 20.9 -- -- 6.8 25.0
Implied Net Investment -- -- -- 11.2 -- 10.5 44.0 77.6 70.8 25.8
Total Demand 824.3 880.4 919.1 870.4 852.2 872.9 874.6 925.0 913.7 894.5
Silver Price
(London US$/oz)
5.544 5.220 4.951 4.370 4.599 4.879 6.658 7.312 11.549 13.384
SOURCE: World Silver Survey 2008
Thus, as of 2007, there was 2.6 Boz - 1 Boz + 156 Moz = 1.75 Boz of above ground investment silver in world. However, of that original 2.6 Boz, the CRA study concluded that 1.5 Boz could not come to market "Under any set of foreseeable realistic market conditions", and the remaining 1 Boz not for less than $20 in 1991 dollars (which is $80 in 2008 non-liar inflation adjusted dollars). Yet as stated in that official report above, 0.85 of that 1 Boz has already come to market at less than 25% of that $80 price. The CRA study apparently did not anticipate the alleged diabolical selling of bullion at "spot" prices, that is still promised to paper silver "owners"! The CRA report anticipated 54 Moz (0.05 Boz) of silverware/art to come to market at $5 ($20 in 2008 dollars), but that still leaves 0.8 Boz of 1000oz bars allegedly stolen from paper silver "owners" (apparently most of them are duped by legalese).
So thus there is roughly 19 Boz - 0.85 Boz = 18 Boz of above ground silver in any form, which implies that silver above ground is 0.25 as rare as the 5 Boz of above ground supply of gold. But most of this silver can not come to market, at any "foreseeable realistic" price. First, realize that only 1.75 Boz - 0.8 Boz = 0.95 Boz of investment silver remains (which agrees with Ted Butler's 1 Boz calculation), but 1.5 Boz of that would never have to come to market at any "foreseeable realistic" price (much higher than $80 in 2008 dollars) if the paper silver "owners" had been aware they've allegedly been robbed. So the only way additional investment silver can come to market is by continued alleged theft from the paper silver "owners". That explains the current silver shortage, except for 1000oz bars.
As for the remaining 17 Boz of silverware/art, since it is held by the owners, then it is not subject to hidden theft by the bankers, and thus only 1.15 Boz of it is expected to come to market at $80 (in 2008 dollars, to be adjusted upward with $trillions in bailout inflation underway). Thus silver above ground is 5 times more rare than the 5 Boz of above ground supply of gold.
The remaining 16 Boz of silverware/art will not come to market at any "foreseeable realistic" price. For example, billions of people around the world own sterling (92.5%) silver jewelry, with the typical item being say 0.4oz in affluent and 0.2oz in developing countries. Most people can not justify the time and expense to locate and transport to where to sell such an item, for less than $200 in affluent countries and say $20 in developing countries, which would be $500 and $100 per oz silver respectively? And by the time silver reaches those prices, people won't want to sell their jewelry, they will want to buy more. One of the peculiar properties of monetary metals (gold & silver), is that people hoard them as they move up in price, and vice versa. If you do similar calculation for 14k gold jewelry, 0.4oz is already worth $233 at $1000 gold, that is why 95% of all gold ever mined can more readily come to market at sufficently higher prices (although some would argue that people of India might not sell at any price).
Also much of that silverware/art is sentimental heirlooms and even silver plated items, which will never come to market at any price. And due to the low "spot" silver price over the past two decades, there are insufficient, especially specialized for plated items, refineries to process all that silverware/art into investment silver any way. Ramping up such refineries, ditto the mines, will take several years AFTER the moonshot rise in the silver price.
That 17 Boz of tightly held silverware/art makes it impossible for the government to issue a mass confiscation of silver, as they did with gold in 1933. The government didn't dare attempt it for silver, because people have received silver heirlooms for their weddings and keepsakes from dying parents and grandparents. And this is why the bankers hate silver, because they can not own it all and control it all, as they increasingly do with gold. That is why the bankers have manipulated the "spot" price down by short selling orders-of-magnitude more paper silver (on futures markets and at the bullion banks like Perth Mint), than exists physical silver. The bankers understand that when the price of monetary metals increase faster than all other possible investments in the economy, then the masses will leap from dollars, in which case the bankers would lose all their wealth and power. This is because the fractional reserve system is a fraud that grows the wealth of bankers at the expense of everyone else.
One possible reason that I arrived at 18 Boz of total above ground silver in any form, and David Zurbuchen arrived at 20 Boz, is because David was apparently assuming all old silver scrap recycling as coming 90% from industrial sources (80% photography). However, the use of silver in photography declined by -43% from 1998 - 2007, and most of that was after 2000 (due to rise of digital cameras & printers). And the loss in photography demand was offset by an increase in electronics demand:
http://www.gfms.co.uk/Market%20Comme...esentation.pdf (page 12)
http://silverinstitute.org/supply/index.php##wssd
If you read the report David referenced, you see that recovery of scrap from electronics is too costly and thus miniscule, as compared the level of recycling from the lost photography usage of silver.
Some have claimed that gold & silver have peaked in price, because they erroneously claim we are in a deflationary period. For example, doomsday proponent Gary North (a history major apparently with no formal education in economics nor math), who is has been published over 650 times by LewRockwell.com, bases his thesis on his erroneous assertion that M3 is not a reliable indicator of price inflation. See page 10 where North discusses the M3 chart. Note North says M3 increased from roughly 2,400 in 1984 to 11,300 in 2007. He claims that CPI only rose 2x during that period. But we all know that CPI is a lie, we see the actual non-liar price inflation in that period was about 5x, which is roughly the same as the M3 increase in the same period. This visual chart from this NowAndFutures M3 page illustrates this. And North's favored M1, didn't even come close to the real price inflation. Gary North has especially wailed against silver:
http://www.garynorth.com/public/997.cfm
http://www.lewrockwell.com/north/north437.html
http://www.lewrockwell.com/north/north436.html
But does North understand the reality of the silver shortage which is taking place right now, and the supply and demand behind it which is explained on this page? Apparently not, since North was already proven wrong by the market. With the $trillions in bailouts coming worldwide, M3 will continue to rocket out-of-control, prices will continue to skyrocket, and as the dollar dies as a result, then silver is going to the moon and far beyond. And this coupled with the severe silver shortage occuring now, means that day is not years from now.
Jeff Christian of CPM Group, the source of much of the official data on silver above, says in this video, that as of 2006 investors were buying more silver than they were selling (positive "Net Investment"), which has only happened twice before in history of our fiat dollar: in 1960s when investors drove the USA off the silver coin standard, and in 1979 driving the price up from $5 to $50.
Ted Butler points out that silver in bullion form is about 1 Boz, versus 2 Boz for gold, but much of that gold is held by central banks who will likely continue to sell in order to keep their fiat power alive. And that if industrial demand dips (while input cost inflation accelerates) then most of the silver is produced as a by-product of base metal mines, so the mine production of silver would drop more than the industrial demand for silver would drop. Also the industrial uses for silver are always increasing (faster than any macro-economic dip), because silver is most reflective, conductive, and a natural anti-bacterial. And silver is used in minute quantities relative to the cost of the end-user products, so increases in silver price has nearly no effect on industrial demand, but do cause massive sea changes in net investment demand as Jeff Christian pointed out in previous paragraph.
Source
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
by Shelby Moore III
Careful analysis of the official historical supply & demand reports for silver, proves without a doubt that silver is between 0.25 to 5 times more rare than gold above ground, in terms of metal that can be brought to market within several years after a drastic rise in silver price (to that 0.25 to 5 ratio to gold price).
For example, with gold at $1000 per oz, the minimum peak price we could expect for silver is $250 to $5000 per oz, and very soon.
The above statement will seem ludicrous, until you understand the intricate details of the supply & demand analysis, and then understand the motive for the bankers to suppress the "spot" price of silver so severely. In this new era of $trillions of (hidden & publicized) bailouts, the motive of the bankers is becoming naked for all to see (as I will explain).
Boz = billion oz (i.e. 1000 million oz)
Moz = million oz
The 1991 official CRA study, concluded that there was worldwide 1.4 Boz bullion + 1.2 Boz old coins (e.g. 90% silver, 40% silver, etc) + 16.5 Boz of silverware/art for total of 19 Boz. David Zurbuchen corroborated (the total silver above ground in) that CRA report, using multiple data sources. Of that 2.6 Boz of above ground investment silver in 1991, an official report stated that 1 Boz of it had been consumed by industry as of 1998:
...Between 1990 and 1997, cumulative silver fabrication demand has exceeded mine production by 2.2 billion ounces. That gap has been filled by recycled silver scrap and by the drawdown of more than 1 billion ounces of silver bullion inventories...
From 1998, there was 347 Moz coin fabrication minus 191 Moz more "Net Disinvestment" from above ground investment silver:
World Silver Supply and Demand
(in millions of ounces)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Supply
Mine Production 542.2 556.9 591.0 606.2 593.6 600.6 621.1 643.8 647.4 670.6
Net Government Sales 33.5 97.2 60.3 63.0 60.3 88.4 60.2 67.5 78.2 42.3
Old Silver Scrap 193.9 181.6 180.7 182.7 187.5 184.0 183.7 186.0 188.0 181.6
Producer Hedging 6.5 -- -- 18.9 -- -- 9.6 27.6 -- --
Implied Net Disinvestment 48.2 44.8 87.2 -- 10.8 -- -- -- -- --
Total Supply 824.3 880.4 919.1 870.4 852.2 872.9 874.6 925.0 913.7 894.5
Demand
Fabrication
Industrial Applications 316.3 339.0 374.3 335.2 339.2 349.8 367.3 405.3 424.8 455.3
Photography 225.4 227.9 218.3 213.1 204.3 192.9 178.8 160.3 144.0 128.3
Jewelry 140.6 159.8 170.6 174.3 168.9 179.2 174.9 173.8 166.3 163.4
Silverware 114.2 108.6 96.4 106.1 83.5 83.9 67.3 67.8 61.2 58.8
Coins & Medals 27.8 29.1 32.1 30.5 31.6 35.7 42.4 40.0 39.8 37.8
Total Fabrication 824.3 864.4 891.7 859.2 827.4 841.5 830.7 847.4 836.0 843.7
Net Government Purchases 0.7 -- -- -- -- -- -- -- -- --
Producer De-Hedging -- 16.0 27.4 -- 24.8 20.9 -- -- 6.8 25.0
Implied Net Investment -- -- -- 11.2 -- 10.5 44.0 77.6 70.8 25.8
Total Demand 824.3 880.4 919.1 870.4 852.2 872.9 874.6 925.0 913.7 894.5
Silver Price
(London US$/oz)
5.544 5.220 4.951 4.370 4.599 4.879 6.658 7.312 11.549 13.384
SOURCE: World Silver Survey 2008
Thus, as of 2007, there was 2.6 Boz - 1 Boz + 156 Moz = 1.75 Boz of above ground investment silver in world. However, of that original 2.6 Boz, the CRA study concluded that 1.5 Boz could not come to market "Under any set of foreseeable realistic market conditions", and the remaining 1 Boz not for less than $20 in 1991 dollars (which is $80 in 2008 non-liar inflation adjusted dollars). Yet as stated in that official report above, 0.85 of that 1 Boz has already come to market at less than 25% of that $80 price. The CRA study apparently did not anticipate the alleged diabolical selling of bullion at "spot" prices, that is still promised to paper silver "owners"! The CRA report anticipated 54 Moz (0.05 Boz) of silverware/art to come to market at $5 ($20 in 2008 dollars), but that still leaves 0.8 Boz of 1000oz bars allegedly stolen from paper silver "owners" (apparently most of them are duped by legalese).
So thus there is roughly 19 Boz - 0.85 Boz = 18 Boz of above ground silver in any form, which implies that silver above ground is 0.25 as rare as the 5 Boz of above ground supply of gold. But most of this silver can not come to market, at any "foreseeable realistic" price. First, realize that only 1.75 Boz - 0.8 Boz = 0.95 Boz of investment silver remains (which agrees with Ted Butler's 1 Boz calculation), but 1.5 Boz of that would never have to come to market at any "foreseeable realistic" price (much higher than $80 in 2008 dollars) if the paper silver "owners" had been aware they've allegedly been robbed. So the only way additional investment silver can come to market is by continued alleged theft from the paper silver "owners". That explains the current silver shortage, except for 1000oz bars.
As for the remaining 17 Boz of silverware/art, since it is held by the owners, then it is not subject to hidden theft by the bankers, and thus only 1.15 Boz of it is expected to come to market at $80 (in 2008 dollars, to be adjusted upward with $trillions in bailout inflation underway). Thus silver above ground is 5 times more rare than the 5 Boz of above ground supply of gold.
The remaining 16 Boz of silverware/art will not come to market at any "foreseeable realistic" price. For example, billions of people around the world own sterling (92.5%) silver jewelry, with the typical item being say 0.4oz in affluent and 0.2oz in developing countries. Most people can not justify the time and expense to locate and transport to where to sell such an item, for less than $200 in affluent countries and say $20 in developing countries, which would be $500 and $100 per oz silver respectively? And by the time silver reaches those prices, people won't want to sell their jewelry, they will want to buy more. One of the peculiar properties of monetary metals (gold & silver), is that people hoard them as they move up in price, and vice versa. If you do similar calculation for 14k gold jewelry, 0.4oz is already worth $233 at $1000 gold, that is why 95% of all gold ever mined can more readily come to market at sufficently higher prices (although some would argue that people of India might not sell at any price).
Also much of that silverware/art is sentimental heirlooms and even silver plated items, which will never come to market at any price. And due to the low "spot" silver price over the past two decades, there are insufficient, especially specialized for plated items, refineries to process all that silverware/art into investment silver any way. Ramping up such refineries, ditto the mines, will take several years AFTER the moonshot rise in the silver price.
That 17 Boz of tightly held silverware/art makes it impossible for the government to issue a mass confiscation of silver, as they did with gold in 1933. The government didn't dare attempt it for silver, because people have received silver heirlooms for their weddings and keepsakes from dying parents and grandparents. And this is why the bankers hate silver, because they can not own it all and control it all, as they increasingly do with gold. That is why the bankers have manipulated the "spot" price down by short selling orders-of-magnitude more paper silver (on futures markets and at the bullion banks like Perth Mint), than exists physical silver. The bankers understand that when the price of monetary metals increase faster than all other possible investments in the economy, then the masses will leap from dollars, in which case the bankers would lose all their wealth and power. This is because the fractional reserve system is a fraud that grows the wealth of bankers at the expense of everyone else.
One possible reason that I arrived at 18 Boz of total above ground silver in any form, and David Zurbuchen arrived at 20 Boz, is because David was apparently assuming all old silver scrap recycling as coming 90% from industrial sources (80% photography). However, the use of silver in photography declined by -43% from 1998 - 2007, and most of that was after 2000 (due to rise of digital cameras & printers). And the loss in photography demand was offset by an increase in electronics demand:
http://www.gfms.co.uk/Market%20Comme...esentation.pdf (page 12)
http://silverinstitute.org/supply/index.php##wssd
If you read the report David referenced, you see that recovery of scrap from electronics is too costly and thus miniscule, as compared the level of recycling from the lost photography usage of silver.
Some have claimed that gold & silver have peaked in price, because they erroneously claim we are in a deflationary period. For example, doomsday proponent Gary North (a history major apparently with no formal education in economics nor math), who is has been published over 650 times by LewRockwell.com, bases his thesis on his erroneous assertion that M3 is not a reliable indicator of price inflation. See page 10 where North discusses the M3 chart. Note North says M3 increased from roughly 2,400 in 1984 to 11,300 in 2007. He claims that CPI only rose 2x during that period. But we all know that CPI is a lie, we see the actual non-liar price inflation in that period was about 5x, which is roughly the same as the M3 increase in the same period. This visual chart from this NowAndFutures M3 page illustrates this. And North's favored M1, didn't even come close to the real price inflation. Gary North has especially wailed against silver:
http://www.garynorth.com/public/997.cfm
http://www.lewrockwell.com/north/north437.html
http://www.lewrockwell.com/north/north436.html
But does North understand the reality of the silver shortage which is taking place right now, and the supply and demand behind it which is explained on this page? Apparently not, since North was already proven wrong by the market. With the $trillions in bailouts coming worldwide, M3 will continue to rocket out-of-control, prices will continue to skyrocket, and as the dollar dies as a result, then silver is going to the moon and far beyond. And this coupled with the severe silver shortage occuring now, means that day is not years from now.
Jeff Christian of CPM Group, the source of much of the official data on silver above, says in this video, that as of 2006 investors were buying more silver than they were selling (positive "Net Investment"), which has only happened twice before in history of our fiat dollar: in 1960s when investors drove the USA off the silver coin standard, and in 1979 driving the price up from $5 to $50.
Ted Butler points out that silver in bullion form is about 1 Boz, versus 2 Boz for gold, but much of that gold is held by central banks who will likely continue to sell in order to keep their fiat power alive. And that if industrial demand dips (while input cost inflation accelerates) then most of the silver is produced as a by-product of base metal mines, so the mine production of silver would drop more than the industrial demand for silver would drop. Also the industrial uses for silver are always increasing (faster than any macro-economic dip), because silver is most reflective, conductive, and a natural anti-bacterial. And silver is used in minute quantities relative to the cost of the end-user products, so increases in silver price has nearly no effect on industrial demand, but do cause massive sea changes in net investment demand as Jeff Christian pointed out in previous paragraph.
Source
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.
Friday, October 17, 2008
Evil Bankers Recieve 70 Billion in Payoffs, I mean Compensation
This makes me sick to my stomach. I think it is safe to say that Bankers have now surpassed, lawyers as the most hated profession in the world.
# Simon Bowers
# The Guardian,
# Saturday October 18 2008
Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.
Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.
Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.
The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.
At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.
In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.
At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.
Continued at the Source
# Simon Bowers
# The Guardian,
# Saturday October 18 2008
Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.
Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.
Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.
The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.
At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.
In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.
At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.
Continued at the Source
The Collapse of a 300 year Ponzi scheme: Financial Sovereignty or Socialism
“Admit it, mes amis, the rugged individualism and cutthroat capitalism that made America the land of unlimited opportunity has been shrink-wrapped by half a dozen short sellers in Greenwich, Conn., and FedExed to Washington, D.C., to be spoon-fed back to life by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. We’re now no different from any of those Western European semi-socialist welfare states that we love to deride.”
–Bill Saporito, “How We Became the United States of France,” Time (September 21, 2008)
Last night, the Presidential candidates had their last debate before the election. They talked of the baleful state of the economy and the stock market; but omitted from the discussion was what actually caused the credit freeze, and whether the banks should be nationalized as Treasury Secretary Hank Paulson is now proceeding to do. The omission was probably excusable, since the financial landscape has been changing so fast that it is hard to keep up. A year ago, the Dow Jones Industrial Average broke through 14,000 to make a new all-time high. Anyone predicting then that a year later the Dow would drop nearly by half and the Treasury would move to nationalize the banks would have been regarded with amused disbelief. But that is where we are today.1
Congress hastily voted to approve Treasury Secretary Hank Paulson’s $700 billion bank bailout plan on October 3, 2008, after a tumultuous week in which the Dow fell dangerously near the critical 10,000 level. The market, however, was not assuaged. The Dow proceeded to break through not only 10,000 but then 9,000 and 8,000, closing at 8,451 on Friday, October 10. The week was called the worst in U.S. stock market history.
On Monday, October 13, the market staged a comeback the likes of which had not been seen since 1933, rising a full 11% in one day. This happened after the government announced a plan to buy equity interests in key banks, partially nationalizing them; and the Federal Reserve led a push to flood the global financial system with dollars.
The reversal was dramatic but short-lived. On October 15, the day of the Presidential debate, the Dow dropped 733 points, crash landing at 8,578. The reversal is looking more like a massive pump and dump scheme – artificially inflating the market so insiders can get out – than a true economic rescue. The real problem is not in the much-discussed subprime market but is in the credit market, which has dried up. The banking scheme itself has failed. As was learned by painful experience during the Great Depression, the economy cannot be rescued by simply propping up failed banks. The banking system itself needs to be overhauled.
A Litany of Failed Rescue Plans
Credit has dried up because many banks cannot meet the 8% capital requirement that limits their ability to lend. A bank’s capital – the money it gets from the sale of stock or from profits – can be fanned into more than 10 times its value in loans; but this leverage also works the other way. While $80 in capital can produce $1,000 in loans, an $80 loss from default wipes out $80 in capital, reducing the sum that can be lent by $1,000. Since the banks have been experiencing widespread loan defaults, their capital base has shrunk proportionately.
The bank bailout plan announced on October 3 involved using taxpayer money to buy up mortgage-related securities from troubled banks. This was supposed to reduce the need for new capital by reducing the amount of risky assets on the banks’ books. But the banks’ risky assets include derivatives – speculative bets on market changes – and derivative exposure for U.S. banks is now estimated at a breathtaking $180 trillion.2 The sum represents an impossible-to-fill black hole that is three times the gross domestic product of all the countries in the world combined. As one critic said of Paulson’s roundabout bailout plan, “this seems designed to help Hank’s friends offload trash, more than to clear a market blockage.”3
By Thursday, October 9, Paulson himself evidently had doubts about his ability to sell the plan. He wasn’t abandoning his old cronies, but he soft-pedaled that plan in favor of another option buried in the voluminous rescue package – using a portion of the $700 billion to buy stock in the banks directly. Plan B represented a controversial move toward nationalization, but it was an improvement over Plan A, which would have reduced capital requirements only by the value of the bad debts shifted onto the government’s books. In Plan B, the money would be spent on bank stock, increasing the banks’ capital base, which could then be leveraged into ten times that sum in loans. The plan was an improvement but the market was evidently not convinced, since the Dow proceeded to drop another thousand points from Thursday’s opening to Friday’s close.
One problem with Plan B was that it did not really mean nationalization (public ownership and control of the participating banks). Rather, it came closer to what has been called “crony capitalism” or “corporate welfare.” The bank stock being bought would be non-voting preferred stock, meaning the government would have no say in how the bank was run. The Treasury would just be feeding the bank money to do with as it would. Management could continue to collect enormous salaries while investing in wildly speculative ventures with the taxpayers’ money. The banks could not be forced to use the money to make much-needed loans but could just use it to clean up their derivative-infested balance sheets. In the end, the banks were still liable to go bankrupt, wiping out the taxpayers’ investment altogether. Even if $700 billion were fanned into $7 trillion, the sum would not come close to removing the $180 trillion in derivative liabilities from the banks’ books. Shifting those liabilities onto the public purse would just empty the purse without filling the derivative black hole.
Plan C, the plan du jour, does impose some limits on management compensation. But the more significant feature of this week’s plan is the Fed’s new “Commercial Paper Funding Facility,” which is slated to be operational on October 27, 2008. The facility would open the Fed’s lending window for short-term commercial paper, the money corporations need to fund their day-to-day business operations. On October 14, the Federal Reserve Bank of New York justified this extraordinary expansion of its lending powers by stating:
“The CPFF is authorized under Section 13(3) of the Federal Reserve Act, which permits the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations. . . .
“The U.S. Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the New York Fed in support of this facility.”4
That means the government and the Fed are now committing even more public money and taking on even more public risk. The taxpayers are already tapped out, so the Treasury’s “special deposit” will no doubt come from U.S. bonds, meaning more debt on which the taxpayers have to pay interest. The federal debt could wind up running so high that the government loses its own triple-A rating. The U.S. could be reduced to Third World status, with “austerity measures” being imposed as a condition for further loans, and hyperinflation running the dollar into oblivion. Rather than solving the problem, these “rescue” plans seem destined to make it worse.
The Collapse of a 300 Year Ponzi Scheme
All the king’s men cannot put the private banking system together again, for the simple reason that it is a Ponzi scheme that has reached its mathematical limits. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5 The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. This spiraling interest problem and the need to find new debtors has gone on for over 300 years -- ever since the founding of the Bank of England in 1694 – until the whole world has now become mired in debt to the bankers’ private money monopoly. As British financial analyst Chris Cook observes:
“Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth’s resources.”6
The parasite has finally run out of its food source. But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money. Fortunately, we don’t need the credit of private banks. A sovereign government can create its own.
The New Deal Revisited
Today’s credit crisis is very similar to that facing Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s plan failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.
The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the private banks with which it was competing, the RFC had to have the money in hand before lending it. The RFC was funded by issuing government bonds (I.O.U.s or debt) and relending the proceeds. The result was to put the taxpayers further into debt. This problem could be avoided, however, by updating the RFC model. A system of public banks might be set up that had the power to create credit themselves, just as private banks do now. A public bank operating on the private bank model could fan $700 billion in capital reserves into $7 trillion in public credit that was derivative-free, liability-free, and readily available to fund all those things we think we don’t have the money for now, including the loans necessary to meet payrolls, fund mortgages, and underwrite public infrastructure.
Credit as a Public Utility
“Credit” can and should be a national utility, a public service provided by the government to the people it serves. Many people are opposed to getting the government involved in the banking system, but the fact is that the government is already involved. A modern-day RFC would actually mean less government involvement and a more efficient use of the already-earmarked $700 billion than policymakers are talking about now. The government would not need to interfere with the private banking system, which could carry on as before. The Treasury would not need to bail out the banks, which could be left to those same free market forces that have served them so well up to now. If banks went bankrupt, they could be put into FDIC receivership and nationalized. The government would then own a string of banks, which could be used to service the depository and credit needs of the community. There would be no need to change the personnel or procedures of these newly-nationalized banks. They could engage in “fractional reserve” lending just as they do now. The only difference would be that the interest on loans would return to the government, helping to defray the tax burden on the populace; and the banks would start out with a clean set of books, so their $700 billion in startup capital could be fanned into $7 trillion in new loans. This was the sort of banking scheme used in Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly well. The spiraling-interest problem was avoided by printing some extra money and spending it into the economy for public purposes. During the decades the provincial bank operated, the Pennsylvania colonists paid no taxes, there was no government debt, and inflation did not result.7
Like the Pennsylvania bank, a modern-day federal banking system would not actually need “reserves” at all. It is the sovereign right of a government to issue the currency of the realm. What backs our money today is simply “the full faith and credit of the United States,” something the United States should be able to issue directly without having to draw on “reserves” of its own credit. But if Congress is not prepared to go that far, a more efficient use of the earmarked $700 billion than bailing out failing banks would be to designate the funds as the “reserves” for a newly-reconstituted RFC.
Rather than creating a separate public banking corporation called the RFC, the nation’s financial apparatus could be streamlined by simply nationalizing the privately-owned Federal Reserve; but again, Congress may not be prepared to go that far. Since there is already successful precedent for establishing an RFC in times like these, that model could serve as a non-controversial starting point for a new public credit facility. The G-7 nations’ financial planners, who met in Washington D.C. this past weekend, appear intent on supporting the banking system with enough government-debt-backed “liquidity” to produce what Jim Rogers calls “an inflationary holocaust.” As the U.S. private banking system self-destructs, we need to ensure that a public credit system is in place and ready to serve the people’s needs in its stead.
Source
–Bill Saporito, “How We Became the United States of France,” Time (September 21, 2008)
Last night, the Presidential candidates had their last debate before the election. They talked of the baleful state of the economy and the stock market; but omitted from the discussion was what actually caused the credit freeze, and whether the banks should be nationalized as Treasury Secretary Hank Paulson is now proceeding to do. The omission was probably excusable, since the financial landscape has been changing so fast that it is hard to keep up. A year ago, the Dow Jones Industrial Average broke through 14,000 to make a new all-time high. Anyone predicting then that a year later the Dow would drop nearly by half and the Treasury would move to nationalize the banks would have been regarded with amused disbelief. But that is where we are today.1
Congress hastily voted to approve Treasury Secretary Hank Paulson’s $700 billion bank bailout plan on October 3, 2008, after a tumultuous week in which the Dow fell dangerously near the critical 10,000 level. The market, however, was not assuaged. The Dow proceeded to break through not only 10,000 but then 9,000 and 8,000, closing at 8,451 on Friday, October 10. The week was called the worst in U.S. stock market history.
On Monday, October 13, the market staged a comeback the likes of which had not been seen since 1933, rising a full 11% in one day. This happened after the government announced a plan to buy equity interests in key banks, partially nationalizing them; and the Federal Reserve led a push to flood the global financial system with dollars.
The reversal was dramatic but short-lived. On October 15, the day of the Presidential debate, the Dow dropped 733 points, crash landing at 8,578. The reversal is looking more like a massive pump and dump scheme – artificially inflating the market so insiders can get out – than a true economic rescue. The real problem is not in the much-discussed subprime market but is in the credit market, which has dried up. The banking scheme itself has failed. As was learned by painful experience during the Great Depression, the economy cannot be rescued by simply propping up failed banks. The banking system itself needs to be overhauled.
A Litany of Failed Rescue Plans
Credit has dried up because many banks cannot meet the 8% capital requirement that limits their ability to lend. A bank’s capital – the money it gets from the sale of stock or from profits – can be fanned into more than 10 times its value in loans; but this leverage also works the other way. While $80 in capital can produce $1,000 in loans, an $80 loss from default wipes out $80 in capital, reducing the sum that can be lent by $1,000. Since the banks have been experiencing widespread loan defaults, their capital base has shrunk proportionately.
The bank bailout plan announced on October 3 involved using taxpayer money to buy up mortgage-related securities from troubled banks. This was supposed to reduce the need for new capital by reducing the amount of risky assets on the banks’ books. But the banks’ risky assets include derivatives – speculative bets on market changes – and derivative exposure for U.S. banks is now estimated at a breathtaking $180 trillion.2 The sum represents an impossible-to-fill black hole that is three times the gross domestic product of all the countries in the world combined. As one critic said of Paulson’s roundabout bailout plan, “this seems designed to help Hank’s friends offload trash, more than to clear a market blockage.”3
By Thursday, October 9, Paulson himself evidently had doubts about his ability to sell the plan. He wasn’t abandoning his old cronies, but he soft-pedaled that plan in favor of another option buried in the voluminous rescue package – using a portion of the $700 billion to buy stock in the banks directly. Plan B represented a controversial move toward nationalization, but it was an improvement over Plan A, which would have reduced capital requirements only by the value of the bad debts shifted onto the government’s books. In Plan B, the money would be spent on bank stock, increasing the banks’ capital base, which could then be leveraged into ten times that sum in loans. The plan was an improvement but the market was evidently not convinced, since the Dow proceeded to drop another thousand points from Thursday’s opening to Friday’s close.
One problem with Plan B was that it did not really mean nationalization (public ownership and control of the participating banks). Rather, it came closer to what has been called “crony capitalism” or “corporate welfare.” The bank stock being bought would be non-voting preferred stock, meaning the government would have no say in how the bank was run. The Treasury would just be feeding the bank money to do with as it would. Management could continue to collect enormous salaries while investing in wildly speculative ventures with the taxpayers’ money. The banks could not be forced to use the money to make much-needed loans but could just use it to clean up their derivative-infested balance sheets. In the end, the banks were still liable to go bankrupt, wiping out the taxpayers’ investment altogether. Even if $700 billion were fanned into $7 trillion, the sum would not come close to removing the $180 trillion in derivative liabilities from the banks’ books. Shifting those liabilities onto the public purse would just empty the purse without filling the derivative black hole.
Plan C, the plan du jour, does impose some limits on management compensation. But the more significant feature of this week’s plan is the Fed’s new “Commercial Paper Funding Facility,” which is slated to be operational on October 27, 2008. The facility would open the Fed’s lending window for short-term commercial paper, the money corporations need to fund their day-to-day business operations. On October 14, the Federal Reserve Bank of New York justified this extraordinary expansion of its lending powers by stating:
“The CPFF is authorized under Section 13(3) of the Federal Reserve Act, which permits the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations. . . .
“The U.S. Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the New York Fed in support of this facility.”4
That means the government and the Fed are now committing even more public money and taking on even more public risk. The taxpayers are already tapped out, so the Treasury’s “special deposit” will no doubt come from U.S. bonds, meaning more debt on which the taxpayers have to pay interest. The federal debt could wind up running so high that the government loses its own triple-A rating. The U.S. could be reduced to Third World status, with “austerity measures” being imposed as a condition for further loans, and hyperinflation running the dollar into oblivion. Rather than solving the problem, these “rescue” plans seem destined to make it worse.
The Collapse of a 300 Year Ponzi Scheme
All the king’s men cannot put the private banking system together again, for the simple reason that it is a Ponzi scheme that has reached its mathematical limits. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5 The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. This spiraling interest problem and the need to find new debtors has gone on for over 300 years -- ever since the founding of the Bank of England in 1694 – until the whole world has now become mired in debt to the bankers’ private money monopoly. As British financial analyst Chris Cook observes:
“Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth’s resources.”6
The parasite has finally run out of its food source. But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money. Fortunately, we don’t need the credit of private banks. A sovereign government can create its own.
The New Deal Revisited
Today’s credit crisis is very similar to that facing Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s plan failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.
The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the private banks with which it was competing, the RFC had to have the money in hand before lending it. The RFC was funded by issuing government bonds (I.O.U.s or debt) and relending the proceeds. The result was to put the taxpayers further into debt. This problem could be avoided, however, by updating the RFC model. A system of public banks might be set up that had the power to create credit themselves, just as private banks do now. A public bank operating on the private bank model could fan $700 billion in capital reserves into $7 trillion in public credit that was derivative-free, liability-free, and readily available to fund all those things we think we don’t have the money for now, including the loans necessary to meet payrolls, fund mortgages, and underwrite public infrastructure.
Credit as a Public Utility
“Credit” can and should be a national utility, a public service provided by the government to the people it serves. Many people are opposed to getting the government involved in the banking system, but the fact is that the government is already involved. A modern-day RFC would actually mean less government involvement and a more efficient use of the already-earmarked $700 billion than policymakers are talking about now. The government would not need to interfere with the private banking system, which could carry on as before. The Treasury would not need to bail out the banks, which could be left to those same free market forces that have served them so well up to now. If banks went bankrupt, they could be put into FDIC receivership and nationalized. The government would then own a string of banks, which could be used to service the depository and credit needs of the community. There would be no need to change the personnel or procedures of these newly-nationalized banks. They could engage in “fractional reserve” lending just as they do now. The only difference would be that the interest on loans would return to the government, helping to defray the tax burden on the populace; and the banks would start out with a clean set of books, so their $700 billion in startup capital could be fanned into $7 trillion in new loans. This was the sort of banking scheme used in Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly well. The spiraling-interest problem was avoided by printing some extra money and spending it into the economy for public purposes. During the decades the provincial bank operated, the Pennsylvania colonists paid no taxes, there was no government debt, and inflation did not result.7
Like the Pennsylvania bank, a modern-day federal banking system would not actually need “reserves” at all. It is the sovereign right of a government to issue the currency of the realm. What backs our money today is simply “the full faith and credit of the United States,” something the United States should be able to issue directly without having to draw on “reserves” of its own credit. But if Congress is not prepared to go that far, a more efficient use of the earmarked $700 billion than bailing out failing banks would be to designate the funds as the “reserves” for a newly-reconstituted RFC.
Rather than creating a separate public banking corporation called the RFC, the nation’s financial apparatus could be streamlined by simply nationalizing the privately-owned Federal Reserve; but again, Congress may not be prepared to go that far. Since there is already successful precedent for establishing an RFC in times like these, that model could serve as a non-controversial starting point for a new public credit facility. The G-7 nations’ financial planners, who met in Washington D.C. this past weekend, appear intent on supporting the banking system with enough government-debt-backed “liquidity” to produce what Jim Rogers calls “an inflationary holocaust.” As the U.S. private banking system self-destructs, we need to ensure that a public credit system is in place and ready to serve the people’s needs in its stead.
Source
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