Aug 27, 2007

Aaron Russo's America: Freedom to Fascism

America: Freedom to Fascism

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Nelson Hultberg: Tribute to Aaron Russo

Tribute to Aaron Russo
by Nelson Hultberg

August 26, 2007

Aaron Russo lost his fight early Friday morning, August 24, 2007 to cancer. He was 64 years old and surrounded by family at Cedars-Sinai Medical Center in Los Angeles.

Like most Americans, I first became aware of Aaron through his award winning movies in the 70s and 80s. But I really began to take notice of the man because of his scintillating interview in Liberty magazine in 1995 that advocated the formation of a new third political party - the Constitution Party - to challenge the monopolized rule of the Demopublicans in Washington. It was one of those expositions of thought and panache that grabs you, lets you know that here is a man to be reckoned with.

I was first introduced to Aaron by GATA head, Bill Murphy in Dallas, in 2003. And I worked briefly with him in his pursuit of the Libertarian Party presidential nomination in early 2004. Immediately I recognized the immense talent of the man and his potential for furthering the freedom movement in America. The production of his film, America: From Freedom To Fascism, is a classic that will live for a hundred years and beyond. They say a picture is worth a thousand words. His film is worth a thousand books.

Aaron had truly found his calling with AFTF. While he was a great speaker and campaigner (he scared the pants off the Republican establishment in his run for the governorship of Nevada in 1998), his real talent lay in proselytization of his fellow men's minds through film. The campaign trail, with all its crudities, was not what he was meant to pursue, and it is to his credit that he realized it after 2004. Thankfully for us, he then embarked upon the real mission that he was meant for with his great creation of America: From Freedom to Fascism.

The Aaron Russo I knew was a tough, principled, fearless fighter willing to stare down the monstrous IRS and the Orwellian powers behind the Federal Reserve without blinking an eye. But then he was not about to let the Demopublican establishment get away with the usurpation of our rights and the wholesale destruction of everything America has stood for over 200 years. So it was no surprise to me when his blockbuster film was released with its confrontational style and "The Emperor is buck naked" message.

Russo could not compromise on such a resplendent flower as freedom. He could not, and would not, tone down the truth to appease the powerful. He could not and would not play the game that our contemptible pundits in Washington and on Wall Street play so disingenuously in order to gain the prominence they crave.

America's only hope is for men of the mind to truly stand for freedom, to make of themselves Gibraltar-like representatives of its attributes no matter what level of rejection, calumny and injustice is heaped upon them by the political grafters of the establishment.

Aaron Russo "truly stood for freedom." He refused to opt for popularity over principle in order to gain momentary celebrity. He spoke truth to power because he understood that freedom is not for the trepid. It is for the stalwart and the daring. He understood that if we, as a people, do not regain our love of freedom, the entire world will go back to its barbaric beginnings. He knew that we in America set the tone for the world. What kind of example we set will determine whether a new Dark Age settles over us in this upcoming century.

Aaron was one of our greatest patriots. He left us a powerful, wonderful, earthshaking legacy. His masterpiece of a film, America: From Freedom to Fascism, can light spectacular fires of reform throughout the country. If it can be widely circulated to American citizens in the upcoming years, Gargantua in Washington can be brought down. The tyrannical world government so ominously beckoning our leaders, can be averted. The Founders vision can be restored.

Nelson Hultberg
Americans for a Free Republic


Aug 24, 2007

The Great Global Warming Swindle - Supplementary Material

Are you being conned by the Global Warming Evangelists into the swelling end-of-the-world-as-we-know-it mass hysteria? Keep your distances and cool head with this additional, previously unseen, footage from the eye opening 'The Great Global Warming Swindle' documentary. A sobering production by UK Channel 4.

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Aug 23, 2007

John Rubino: Nope, That’s Not Money

John Rubino, co-author with GoldMoney's James Turk of "The Coming Collapse of the Dollar," has written a wonderful little essay, "Nope, That's Not Money," about the misperception of debt as money. You'll enjoy it even if you have a clue about what IS likely to be money:

Nope, That’s Not Money

John Rubino

Prudent Bear’s Doug Noland has for years been pointing out that one of the drivers of the credit bubble has been the ever-broadening definition of money. As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money. Thus mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely liquid. In Noland’s terms, credit gained “moneyness,” which sent the effective global money supply through the roof. This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.

With a few months of hindsight, it’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?

No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depend on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.

But here’s where it gets really interesting. The reaction of the world’s central banks to the freezing-up of the leveraged speculating community has, predictably, been to create massive amounts of new fiat currency and hand it to the banking system. They’re not dropping twenties out of helicopters yet, but functionally it’s the same thing. By swapping dollars, euros and yen for no-longer-money bonds that are plunging in price, creating some paper profits where there once were catastrophic losses, the Bankers hope to revive the animal spirits of the leveraged speculators. Specifically, they hope to stop the financial community from going further down the moneyness checklist and eliminating any more instruments.

But you don’t forget a brush with death that easily. The process of debt reclassification has a momentum that a few hundred billion new dollars won’t stop. And once corporate bonds and agency bonds and emerging market bonds have been crossed off the list, the system will start eyeing the dollar. Is it really a store of value after falling by half against oil and gold in the past five years? Didn’t the Fed just create a tidal wave of new dollars and promise to create infinitely more if needed? Isn’t the U.S. economy hobbled by the implosion of housing and mortgage finance and hedge funds and (soon) derivatives? Don’t Americans owe more per capita than any people in human history? And a realization will begin to dawn: Maybe the paper currency of an over-indebted country isn’t money either…

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Aug 21, 2007

Wall Street Journal: Fed fails so far in bid to reassure anxious investors

Fed Fails So Far in Bid to Reassure Anxious Investors

By Serena Ng, Grep Ip, and Shefali Anand
The Wall Street Journal
Tuesday, August 21, 2007

Investors largely shrugged off the Federal Reserve's attempt to restore order to the credit markets and bought up the safest government securities, triggering the biggest drop in yields on short-term Treasury bills in nearly 19 years.

While the stock market rose, conditions improved in currency markets and several companies successfully sold new bonds, investors refused to take any risk with their cash holdings. Instead, they accepted sharply lower yields in exchange for the safety of government bonds.

Their actions signaled that the Fed, which moved Friday to shore up confidence in the markets, has failed so far to persuade investors that problems in securities linked to subprime mortgage loans wouldn't cause widespread losses in normally safe securities.

To ease a worsening credit crunch, the Fed on Friday cut the interest rate it charges on direct loans to banks from its "discount window" to 5.75% from 6.25% and took other steps designed to increase the flow of cash to the nation's financial system. While the Fed didn't alter the key federal-funds rate, its target for short-term interest rates, it said that the "downside risks to growth have increased appreciably" and it was "prepared to act."

It made no mention of inflation, its principal concern for the past two years.

Stock and bond markets initially reacted positively to the Fed's overture, but grew more skeptical as this week began. The reaction yesterday in the Treasury-bill market can be seen as "a vote of no confidence in the Fed's move," said Larry Dyer, an interest-rate strategist at HSBC Securities in New York. "If people felt that the end of the problem was around the corner, yields would be higher. But we're still seeing a continued flight to quality, and that's not what the Fed wanted."

The latest wave of risk aversion in the credit markets is being led by managers of money-market funds, which are designed to behave like bank accounts and whose primary goal is to avoid losing money for investors. While some of these funds own only short-term Treasury bills, most also own corporate IOUs known as commercial paper and other highly rated, short-term securities.

Because both individual and institutional investors are worried about risks in the commercial-paper market, they have been shifting money to Treasury-only funds. That has forced funds that hold commercial paper to sell some of those holdings and Treasury-only funds to buy even more Treasury bills. Some funds that own both types of securities are shifting toward Treasurys.

Mutual-fund companies such as Vanguard Group and Fidelity Investments say they have been flooded with calls from investors asking whether their money-market funds hold commercial paper backed by mortgage securities. Vanguard said its money funds aren't exposed to subprime-mortgage assets, and Fidelity says it has "minimal" holdings of them. Still, in many cases investors have moved their money to lower-yielding Treasury funds.

In the final three days of last week, money-market investors overall poured $50 billion into these Treasury- and government-only funds, while pulling $21 billion out of so-called prime money markets, which can invest in other securities, according to iMoneyNet Inc., which tracks money-market mutual funds.

Money-market managers themselves are worried about losing money or "breaking the buck," a reference to the stable net asset value of these funds. Michael Cheah, a fixed-income portfolio manager at AIG SunAmerica Asset Management in Jersey City, N.J., says a colleague recently asked whether he should invest in a seven-day commercial-paper issue from a large U.S. bank. The paper bore an attractive yield of around 5.5%.

"I told him: This is all about safety. If we break the buck, we will lose our bonus and may get fired," says Mr. Cheah, adding it would be better to invest in Treasurys. The manager decided to put the money in a short-term Treasury repurchase loan that paid 4.3%.

"This is about dealing with what we don't know. There is little margin for error in money-market funds," adds Mr. Cheah.

As investors snapped up three-month Treasury bills yesterday, prices soared and the yield, which moves in the opposite direction, fell for the fifth straight day, tumbling 0.7 percentage points to 3.05%, the sharpest decline since January 1989. The three-month yield sank as low as 2.5% at one point during the day. The yield on one-month Treasury bills fell 0.61 percentage points to 2.35%.

"The market is clearly saying that what the Fed has done isn't enough. We're having a crisis of confidence, and investors with the cash have no risk appetite at all," said James Kauffmann, head of fixed income at ING Investment Management in Atlanta.

Still, many analysts say it is too early to measure the full effect of the Fed's effort to improve liquidity by encouraging banks to borrow. Stocks rose yesterday as investors digested the Fed's move. The Dow Jones Industrial Average gained 42.47 points to 13121.35, on top of Friday's 230-point advance.

One positive sign from the credit markets is that several companies managed to sell new bonds yesterday. SABIC Innovative Plastics sold $1.5 billion in junk bonds to fund its buyout of General Electric Co.'s GE Plastics unit, agreeing to pay 9.5% interest on the debt. It was the largest junk-debt sale since a sale of loans by Chrysler Group in late July. Comcast Corp., Bank of America Corp. and Citigroup Inc. also issued new investment-grade bonds.

In addition to cutting the discount rate, the Fed also moved Friday to lengthen the term of any direct Fed loans to banks to 30 days from one day and reminded banks they could pledge a wide variety of collateral, including unimpaired subprime mortgages. Fed officials reassured bankers that they would view borrowing from the discount window as a sign of banks' strength. Such loans have developed a stigma because they have been viewed as a last resort for troubled banks.

While banks don't need the cash, the Fed hopes they will use it to lend to their own customers or to finance transactions in relatively safe securities, such as those backed by prime jumbo mortgages. So far, Deutsche Bank is the only bank that has said it has borrowed from the discount window, according to people familiar with the German bank.

Even so, the Fed hinted yesterday that it is expecting a sizable response by banks. It said it would redeem $5 billion of maturing Treasury bills in its portfolio to offset other factors that could expand its balance sheet, such as "discount window borrowings." Traders took that as evidence the Fed expects about $5 billion in such borrowings in coming days. The planned move has the added benefit of freeing up more Treasury bills for the public to buy. The Treasury Department also helped by selling a larger-than-expected $32 billion in new four-week Treasury bills at its auction yesterday.

Fed officials have indicated they expect it to take some time before they know whether their actions had restored confidence to the debt markets. Some economists say the Fed may have only a few days to wait for market conditions to improve. If conditions deteriorate, it will have to take the more aggressive step of cutting its main interest rate target, the federal-funds rate, from the current 5.25%.

Stephen Stanley, chief economist at RBS Greenwich Capital, said the Fed has given the impression it would prefer not to cut rates at all, and that if it had to, it would do so at its scheduled Sept. 18 policy meeting. "But given what happened today, I'm not sure they'll make it that far."

While the stock market rose and trading appeared to improve in currency and some bond markets, money managers said it was still difficult to make trades in some cases. Jeff Gladstein, global head of foreign exchange trading at AIG Financial Products Corp. in Wilton, Conn., said that trading liquidity in some of the high-yielding currencies, like those for many emerging-market countries, was the worst he had seen in a few years. "There's a repricing of risk going on," he said.

In other currency markets, volatility declined in comparison to last week. The relative calm "doesn't necessarily mean that nervousness is declining," said Jens Nordvig, a currency strategist at Goldman Sachs. "There's not much appetite to trade." The elevated uncertainty about where money-market rates are heading is also making it more difficult to price currency forwards, which are contracts used to trade a currency at some future date. If there's going to be abnormal volatility in prices, "You need a strong desire in order to trade at all," said Mr. Nordvig.

The European commercial-paper market also struggled despite recent injections of capital. Yesterday, traders in London said trading was difficult; investors demanded higher yields and shorter durations. In a research note yesterday, Deutsche Bank analyst Ganesh Rajendra said, "Never before in our memory has the European structured finance market looked so fragile."

The problems in the market caused troubles for another investment firm. London hedge fund and money manager Solent Capital Partners LLP said an affiliate might have to sell some assets, including securities tied to U.S. mortgages because it couldn't raise the funding it needs.

Solent, which had $8.8 billion under management in mid-July, said a debt vehicle it oversees may have to sell U.S. bonds it owns because it has found few buyers for the short-term debt the vehicle uses for financing. The Solent affiliate, registered in the Cayman Islands, is called Mainsail II Ltd. It owns about $2 billion in securities underpinned by assets including U.S. mortgage loans, according to a Fitch Ratings report in May.

Mainsail II sells short-term commercial paper to cover its existing debts and to buy assets that generate returns. A Fitch Ratings report said the main focus of Mainsail II is high-grade residential mortgage-backed securities.

In the U.S., Wall Street money-market specialists said that while some issuers of commercial paper backed by mortgage assets had to exit the market, most of the maturing short-term debt was being resold, albeit some of it at higher-than-usual interest rates and for shorter terms.

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Ron Paul: High Risk Credit

High Risk Credit

By Congressman Ron Paul
August 20, 2007

As markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.

More inflation is, however, never the answer to inflation.

The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.

In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.

The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground.

We’ve been headed in the wrong direction since 1971. This week marks the 36th anniversary of Nixon’s decision to close the gold window, which convinced me to seek public office to call attention to the runaway money train that would come in the aftermath of that decision. The temptation to print and spend money with impunity, like the temptation to max out lines of credit, is too strong to for government to resist. While Nixon brokered exclusivity deals with OPEC to prop up demand for the tidal wave of green pieces of paper the Fed pumped into the markets, the world is tiring of marching to the beat of our drum in order to secure their energy needs. The house of cards Nixon built is now on the verge of collapsing on our heads, and on our children’s heads.

As the dollar weakens, it becomes ever clearer that we need a return to sound, commodity-based money for a secure future. Money based on real value, not empty promises and secretive backroom machinations, is the way to get out of the current calamity without causing even bigger problems.

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Aug 19, 2007

Economy's 'China Syndrome' imminent?

Here's another "must read" by Doug Casey from this week's "The Room" - a subscribers only newsleter:

By Doug Casey

Over the last few weeks we’ve experienced extreme volatility, and fear, in the financial markets. The event itself wasn’t unexpected around here. After all, we’re on record as expecting to see the Greater Depression materialize in the years to come. Maybe even starting now.

But just because something is inevitable doesn’t mean it’s imminent. Some of you may be asking "OK, Casey, but what makes you think that a depression is inevitable – forget about imminent?" A proper answer to that would take a couple of chapters, and this isn’t the forum for that. Besides, I’ve done that in my book Crisis Investing for the Rest of the 90’s. Unfortunately, the book has been off the shelves for some years. If you have a copy, go over it, and see if the reasoning seems sound.

In essence, however, an economic depression is a period of time when most people’s standard of living drops significantly. More exactly, it’s a period of time when distortions and misallocations of capital – caused by government intervention in the economy, particularly by currency inflation – are liquidated. Inflation sends false signals to both businessmen and consumers; it makes consumers think they’re richer than they really are, so they spend more. Businessmen gear up to meet this artificially created demand, by hiring more workers and building more facilities. Currency inflation, in its early stages, gives the appearance of prosperity. It also tends to lower interest rates simply because interest is the price of money, and when you expand the supply of anything, its price tends to fall; so everybody tends to save less and borrow more. Later, however, rates rise, because people won’t lend without compensation for the currency’s depreciation. The process causes a phenomenon called the business cycle. A phony boom can cause a very real depression.

The long boom we’ve had since the bottom of the last cycle in 1982 – a time that was characterized by high unemployment, lots of bankruptcies, high interest rates, and a low stock market – has lasted 25 years. It could have ended badly a number of times along the way, such as 1987, 1993, or 2000. Each time the government propped the house of cards up higher by injecting more currency into the system. It’s analogous to someone driving a high-performance car on a mountain road with a stuck throttle. The driver can mash on the brakes, slowing it from 50 to 30. The car charges to 80, but this time the fading brakes can only bring it down to 60. After a couple of cycles, it’s going 140. And Ben Bernanke is no Michael Schumacher. Perhaps he can navigate the road. But the chances are better, at this point, that the economy will go off a cliff.

So, if we’re going to have a depression, what should you do about it? Our advice here has always emphasized owning a lot of gold. That’s because it’s the only financial asset that’s not somebody else’s liability. That’s important whether the depression is deflationary or inflationary in nature. Deflationary depressions are characterized by lots of bankruptcies and defaults; the only assets you can count on are those in your own possession, like cash or gold. Currency becomes more valuable because so much is wiped out in defaults. But gold is the ultimate form of cash. Inflationary depressions, however, wipe out the currency itself, which loses value rapidly, because the government creates so much more. Gold profits from this process.

Is this the start of something big and nasty? It’s impossible to say. But the slap the markets have administered upside the back of everyone’s head should alert them to the possibility. You want lots of gold. Limited debt. International diversification. And some situations – like our recommended gold stocks – that present some real speculative upside.

The ultimate cause of all the problems we’re facing is government, with its taxes, regulations, inflation. And wars, pogroms, confiscations, persecutions, and myriad other stupidities. But most people are more concerned today about the proximate cause of the recent unpleasantness.

The Proximate Cause

The genesis of the current crisis is subprime mortgages. For well over a decade, lenders have been making mortgage loans available to literally anybody with a pulse who wanted to own a house. Several times, in the mid-‘90s, I expressed astonishment at the fact lenders were loaning over 100% of the appraised value of a house. Even back then, it seemed that was the top of the housing bubble. But what do you know? It hadn’t even turned on the turbos… just going to show how hard it is sometimes to pick an actual top.

This leads to one of the more interesting distortions arising from a really big credit-driven boom. You know the old saying: If you owe a banker a little money and can’t pay, you’re in trouble. But if you owe a lot of money, he’s in trouble. That’s exactly what’s happened here. All those new homeowners are already having trouble paying their mortgages. As rates go up, their ranks will swell since they’re almost all on floating-rate mortgages. Higher rates and more distress sales will take housing prices lower. Which, in turn, will encourage more people to leave their keys in the mailbox and walk away.

On the other side of the trade are all the funds and institutions that bought the paper. They’ll eventually recover some percentage of their money, after the houses in question have gone into foreclosure and are taken over by new owners. The ones who will really be hurt are the hedge funds, which have become so popular in recent years. Hedge funds are investment pools, available only to sophisticated investors, which are essentially unregulated and can invest in anything, long or short.

And, most important, in any amount of debt. In fact, what many appear to have been doing in recent years is borrowing money cheaply (perhaps paying 1% in yen), and then using the proceeds to buy high-yielding paper (like subprime mortgages yielding perhaps 8%). A million dollars of capital invested at 8% would impress nobody; a million dollars, plus another 9 million borrowed at 1%, however, would yield 64%. This was essentially what Long Term Capital Management was doing when it blew up in 1998. What’s happening today is a repetition of that misadventure, except on a much larger scale: it is said that some large percentage of the estimated 9,000 hedge funds in existence now control over a trillion dollars in debt. The future of those funds is very much in doubt.

The government will probably come up with some moronic and counterproductive scheme to keep people who can’t afford their houses – and should be renting, which is a much better bargain today – in them. That will also serve to save the investors’ bacon. What it will also do is add to already massive burden on taxpayers. And it will acutely accelerate the destruction of the currency. As an aside, it will also give the SEC an entrée to regulate hedge funds, which will serve no useful purpose.

What you’re really asking yourself, however, in view of the specialty of our flagship publication, the International Speculator, is: "What about our mining stocks?"

Mining Stocks

These, as you well know, are probably the most volatile securities on the planet. And you’ve just had a demonstration of how volatility can go both ways. Many have gone up by a factor of 10, or more, since the current bull market started in 2000. But on August 16th alone, the average stock went down about 10%. I’d say most stocks are off 40% from their previous highs. Many are asking themselves if the bull market is over. I’d say, almost certainly not. This is for several reasons:

1. We’re still in the Wall of Worry stage of the market. The Stealth stage ended in 2003, and the Mania stage hasn’t yet begun. The bulls and the bears are still fighting. Retrenchments like this happen. Bull markets naturally try to take as few investors along as possible; it simply wouldn’t do if everybody could make a living in the market. Who’d do the real work? But the market will continue to climb the Wall of Worry in my view. And we will have a Mania.

2. The public is still out of the gold market. I promise you that every market top I’ve witnessed in my life was accompanied by cocktail party chatter about the asset class in question. I have yet to have any indication the public has a clue that gold and other resources even exist. If this is a market top, it’s unique.

3. Extraneous factors, not fundamentals, caused the sell-off. In other words, gold went down simply because there was a bid for it, and sellers needed dollars to meet their obligations. All the other metals were in the same position. Hedge funds appear to have owned a lot of metals, simply because they offer a lot of leverage. And the stocks, which are always illiquid, were showing their usual leverage.

4. Governments all over the world are pumping hundreds of billions into the system. They’re doing that to ward off a credit collapse, and will almost certainly succeed. But all that extra purchasing media means higher inflation and brings us closer to the day that the foreign holders of $6 trillion will step up to the cashier and ask for their money back. The attention of the markets will soon shift to gold.

My guess, therefore, is that the ugliness for the mining stocks won’t last long. I don’t have any prediction about exactly when the golds will come back. But I think that by year-end, they’ll be heading strongly back toward new highs. I will say this: you want gold stocks, not copper, nickel, lead, zinc, or even silver. Gold is the cheapest asset out there. Uranium remains my second favorite.

We saw the meltdown of the subprime market coming. And correctly anticipated the government’s response. But we didn’t, I think, adequately clock how ugly it would be for the juniors. Why not? The fact is that once you sell, you tend not to buy back in. And trading is a sucker’s game; the odds are greatly tilted against you by the bid/ask spreads, commissions and, most importantly, your own emotions. So we only like to sell when we think a particular company is going in the wrong direction.

Recall the recent tech boom. There were numerous brutal sell-offs on the way to the ultimate top in March 2000. We’ll have other sell-offs in this market as well on the way to the top.

Rest assured, we’re anxious to give an all-out sell on all these resource stocks. At that point, we hope to have found a market sector that’s as cheap as they were back in 2000. But that’s not yet, and probably not for a couple of years.

Hang tough. Buy more of the best of the best.

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Aug 18, 2007

The Golden Thorn in the Flesh

For those of you still wondering and puzzled about the way your hard earned cash simply "withers away" and vanishes -given time- into thin air when handled by the Alchemists and Master Illusionists of all time -alias Central Bankers- here's a sobering aricle by Antal Fekete which, in the light of recent financial quakes and tremors, is right on target and very "prophetic":

Part One of a Series of Two

Antal E. Fekete
Gold Standard University

Soldiers throwing away ammunition before combat

The guessing game among gold market analysts is still on: will central banks resume gold dumping or won’t they, as the price of gold takes another shot at $700? In arguing the case pro and con, virtually all analysts miss one important point. Central bank sales of gold against the backdrop of deflation looming in the horizon is akin to soldiers throwing away ammunition just before combat. They should be doing the exact opposite. Soldiers should replenish their supply of ammunition. Central banks should reinforce their balance sheets by purchasing gold (as indeed several important ones, including those of China and Russia, are on record of doing). This is the only way to keep the powder dry. In a deflation it may be necessary to inject massive amounts of new credit into the system, but the only way to make the national currency more plentiful without weakening it (let alone destroying it) is through gold purchases. They are by far the most effective weapon of a central bank to combat deflation. Are we to assume that our central bankers are dummies who do not know this piece of elementary truth?

Dynamics of deflation

Gold reflects stability; both inflation and deflation reflect instability. It is a mistake to believe that currency values are only threatened during an inflationary spiral. Under the regime of irredeemable currency there is also a threat during a deflationary spiral, although it is more subtle. The deflationary scenario involves the impending danger of a domino-effect of insolvent firms falling, as they carry a crushing debt-burden which is further aggravated by falling interest rates and falling prices (or proxies of the latter: the loss of pricing power and market share).

As Leon Fisher of Unknown News said in his piece The Future Looks Very Bleak (March 26, 2007): ”The first indicators of economic collapse have already manifested themselves in the housing industry, and the Big Three automakers. Teetering on bankruptcy, they will be the first of the large economic dominoes to fall, and the rest will follow in short order. As a consequence, something on the scale of another Great Depression may be a possibility”. When firms go under, when capital and jobs are wiped out on a large scale, then instability in the economy becomes pervasive. Trade war, heretofore waged clandestinely, becomes a declared war. Competitive currency devaluations are made into a legitimate weapon to capture export markets. This is the most destructive tool in the hands of a government second only to starting a shooting war. In the present situation, it is coming with the inevitability of a Greek tragedy, drawing the protagonist to his doom.

Golden thorn in the flesh

In the meantime gold is still a thorn in the flesh of Western governments. They have not been able to live down the disgrace of their wholesale defaulting on their domestic and international gold obligations. The ’dog in the manger’ syndrome still prevails: if the governments cannot control gold, then they are bent upon destroying it. This neurotic attitude must change. Western governments should make peace with gold, as Eastern governments already have. They should accept the fact of gold hoarding as they accept the tide and ebb of the oceans. If Western governments really wanted to promote the welfare of the electorate (as opposed to that of special interest groups), then they should enlist gold on the side of construction, not on the side of destruction. With gold’s help they could set on a course of stabilization. Foreign exchange rates could be stabilized without any further delay, removing the threat of a trade war; as could the rate of interest, removing the threat of exploding debt burden to producers due to a falling rate structure. If Western governments did use gold constructively, then they could spare the electorate from much unnecessary economic suffering.

Don’t fix the gold price

In implementing a stabilization program the inevitable bone of contention is how to fix the gold price. This is a non-starter. You cannot build consensus that way. No gold price is ever high enough to the debtors and to gold bugs, nor is it ever low enough to the creditors and to the chrysophobic. The need is for restoring the people’s constitutional right to convert gold into the coin of the realm at the Mint. The government should open the Mint to the unlimited coinage of gold free of seigniorage charges.

The objection that gold coins from the Mint are already available is lame. These souvenir coins will never circulate unless seigniorage is reduced to zero. People will not part with their gold coins unless they are absolutely sure that they can get them back on exactly the same terms. Souvenir coins could not be used as the monetary standard or unit of value, unless the right to unlimited coinage is unconditionally guaranteed. A constitutional right of the citizens has been usurped by the government. No move towards restoring that right has been made. Nothing short of full restoration will do.

Note the hypocrisy of mainstream economists in suggesting that gold is passé. They say:
”the right of the people to own and trade gold was restored 30 years ago and, see, gold still refuses to circulate”. Lifting an executive ban subject to withdrawal is not the same as restoring the constitutional right of the people. Only after opening the Mint to the free coinage of gold can the eagle coin be promoted from a mere conversation piece to monetary standard and unit of value.

The determination of the exchange rate between the paper dollar and the gold dollar ought to be left to the market which would then force the Federal Reserve banks to post buying and selling prices for the gold dollar. The spread between these prices would show the quality of Federal Reserve credit for everyone to see. The wider the spread, the lower the quality.
This would mean a fair and open competition between the gold dollar and the paper dollar. Let the people decide which one they prefer, or what they want the Federal Reserve banks to do before they accept their paper as equivalent of gold. Let the unconstitutional privileges of the U.S. Treasury and the Federal Reserve to issue obligations without having the means and the willingness to meet them be abolished for once and all. Let no one have privileges without countervailing obligations.

Everlasting fair weather delivered by order of the government

The reason that the regime of irredeemable currency could survive so long (35 years, to be precise, longer than any previous experiment) is found in the uncritical embracing of the servile ideology of our age and the mindless faith in, or foolish longing for, government omnipotence. People cherish the myth of everlasting fair weather, and they fully expect their government and its central bank to deliver it. Awakening will be rude.

One may well deplore the hoarding of marketable commodities under the regime of irredeemable currency as wasteful, anti-social, and dangerous as it may ignite and stoke the fires of the inflation-deflation cycle. But for the marginal bondholder hoarding is a last resort. He has been disenfranchised, abused, and the credit system has been rigged to his prejudice. He is left out in the cold. He will not take it lying down. Disenfranchised as though he is, he won’t be pauperized if he can help it. In every historical episode when hoarding was criminalized (sometimes punishable by death, e.g., in the various episodes of debasing the coinage of the Roman Empire; John Law’s system, and under the regime of the assignats of the French Revolution) the people could ultimately prevail in forcing a return to sanity | or else the Empire collapsed.

Indictment of the regime of irredeemable currency

These remarks spell a most devastating indictment of the regime of irredeemable currency.
This regime is totally insensitive to the rights, the needs, and the wishes of the savers in spite of the fact that they are the very providers of the wherewithal of economic progress. It blots out danger signals sent out by the markets. It denies the power of disposal over one’s savings to anyone outside of a small elite. The natural outcome of this insensitivity is the paucity of savings in socially usable or desirable forms that could be available for economic development. Spontaneous savings, such as there are, take the form of inventory-padding, leads at the input and lags at the output level, e.g., artificially slowing output at the well-head, the farm-gate, or at the mill of the mine, and other forms of hoarding, are motivated by sheltering savings from plunder. Thus savings are generally unavailable for economic development and capital accumulation, except as part of stock-market speculation. To that extent the regime of irredeemable currency is guilty of turning savers into speculators, and accumulators of capital into gamblers. It is the most wasteful and uneconomic system of managing natural and human resources since the primitive food-gathering economies. To this injury to human cooperation must be added the insult to human intelligence. On the top of all that, the regime has inflicted and will continue to inflict great sufferings on innocent bystanders. The inflationary-deflationary cycle hits people indiscriminately.

Next to guns, irredeemable currency was the main tool of coercion of the totalitarian governments in the 20th century: soviet bolshevism and nazi socialism, before their downfall.
It was utterly disgraceful and deplorable that Westerm democracies were willing, not to say eager, to stoop so low as to embrace such a tainted instrument with gusto. By now politicians are firmly wedded to the regime of irredeemable currency | in callous disregard of the constitutional issues involved such as the sanctity of contracts, the right of the individual to property and due processes of law and, last but not least, the ideal of limited government. As Gold Standard University has set out to show, no less callous is the disregard for sound economic principles.

Is it not time that the political leaders of Western countries finally admit that the regime of irredeemable currency was not the outcome of natural progressive forces, as formerly trumpeted, but the result of a calculated series of confidence tricks played on a gullible people? Is it not time to say publicly that the experiment was an abysmal failure, and to call it off? Is it not time to allow free discussion of the demerits of such a dubious, debasing, and derogatory tool, and of the eternal merits of a constitutional monetary system?

Gold Standard University

The Inaugural Session of Gold Standard University took place at the Martineum Academy in Szombathely, Hungary, in February, 2007. Session Two is scheduled for August 15 – 29, 2007, which will include a blue-ribbon panel discussion on the gold and silver basis as a most sensitive theoretical tool of market analysis which is being developed by a team of researchers at Gold Standard University, under the title: The Last Contango | the First Sign of Disintegration of the International Monetary System. For further information please contact:

March 31, 2007.

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Aug 17, 2007

Jim Sinclair: Commercial Paper Market All But Shuts Down

Now the credit derivative implosion problem has worked its way into the commercial paper market which since last week has declined by $90 billion. The word is that the commercial paper market for all purposes is closed down, yet Professor Bernanke sleeps on. No one can say with a straight face that a shut down commercial paper market will fail to shut down the US Economy. It will.

The Dow was down 300 points until rumors of a secret meeting being held at the Fed made their rounds. When that one ran out of steam the next rumor was a major injection of cash was going to be made into Bear Stearns. That has to give you an idea what people think about Bear Stearns's financial condition and therefore most other major investment banking firms with prime names.

This is the real thing. The Fed better damn well wake up or the implosion in the credit derivatives will work itself through the entire derivative market on all items via the fact that every derivative has an interest rate component.

I would certainly suggest your funds be in T bills according to your preference of Cando, Swiss or USD. I feel it is a great time to buy Swiss and/or Canadian Federal Treasury Bills.

This is a time to be careful of all financial houses because the Fed could remain asleep at the switch.

If you want a comparison of the last time commercial paper dropped by a number like $90 billion, in 2001 the Fed promptly dropped the discount rate by one full point.

The system financially is hanging by a thread. Of the total $2.2 trillion, $1.2 of the commercial paper market is mortgage backed. Action is either taken by Professor Bernanke immediately, or Bernanke is a reincarnation of Nero and the US is standing on the "Burning Platform" as the Financial Times said last week. No action and very soon you can kiss the US economy goodbye for at least a generation, maybe longer.

What has occurred here is just what has been anticipated that completes the foundation of gold at $1650 or better. At this point actions to hold the financial system together is bullish for gold and to leave the problem alone as Bernanke and Poole rhetoric implies is the blast that will launch gold higher.

The sins of the Father is visited today upon the Son who has done more sinning than the Father ever even considered. What then comes next?

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In a credit crunch cash is king. In which case, gold's just been crowned emperor

Autumn in August

Adrian Ash
Bullion Vault
16 Aug, 2007

In a credit crunch cash is king. In which case, gold's just been crowned emperor...

At least the weather here in London suits the markets. More like October than August, the constant drizzle is broken only by chill gusts of wind, rattling the windows like a late autumn gale.

Unseasonable? Yes - even for a British summer! But it's perfect weather for losing your shirt as yet another bubble turns to bust.

Just like the Bankers Panic of 1907, the Great Crash of 1929... Black Monday in 1987... and the "mini-crash" triggered ten years later by the Asian Crisis... any trader bored of tanning his hide on the Cote d'Azur can now come home to find October in full swing. And if he's seeking a snow-white pallor for autumn, he can turn white as a sheet within minutes in Mayfair, watching his funds under management shrink with each breath.

Wednesday 15th August marked the deadline for hedge-fund investors to withdraw what's left of their money before the third quarter ends 45 days from now. Tuesday saw one fund, Sentinel Management Group, ask the US authorities if it could "allow it to halt client redemptions until it can conduct them in an orderly fashion." No dice, said the CFTC to the puny $1.6 billion fund. A disorderly fire-sale might now be expected.

Further north, in Canada, two trusts said that they'd failed to sell new securities needed to refinance loans that are due for repayment. A bank had also refused to provide liquidity, according to news reports, making August '07 a real crunch for those trusts, if not yet for all of their peers.

"Everyone always waits until the last second to get out, and [Wednesday] is the last second," said Mike Hennessy of Morgan Creek Capital to Reuters today. But in fact, redemption notices began "piling up weeks ago" says the newswire. The proximate cause remains the collapse of Bear Stearns' two highly-geared mortgage bond hedge funds in June. Those wipe-outs sparked the current turmoil in world financial markets.

"The longer this credit crunch goes on, the more likely that gold will attract safe haven buying," reckons John Reade, head of metals trading at UBS in London. In the short-term, "we do not expect institutional buying of gold to trigger any sharp move higher; we suspect that position closing and de-leveraging will be the focus of these investors' attention.

"[But] any move to gold will probably come from private investors. As such, the listed exchange-traded funds in gold will signal this interest."

Confirming the move into gold by a growing number of anxious private investors, the StreetTracks gold ETF reported a record holding of more than 510 tonnes on Tuesday. In London, the gold fund run by ETF Securities saw a trebling of holdings last week alone. According to AFX News, some 200,000 ounces of gold was bought in one day!

(Here at BullionVault - the world's fastest-growing route to outright gold ownership between April and June - gold sales are also markedly higher. As ever, gold stored securely in Zurich, Switzerland is proving the most popular choice with new gold owners).

But it's not only private investors who are choosing solid gold bullion over paper promises right now. The last two weeks have seen a huge surge in gold leasing rates - the price charged by the major members of the London Bullion Market Association to lend out their gold. Put in plain English, the banks of ScotiaMocatta, Barclays, Deutsche, HSBC, J.Aron & Co, J.P.Morgan Chase, the Royal Bank of Canada, Société Générale and UBS have become less likely to put their gold at risk by lending it out.

After all, in a credit crunch, cash is deemed to be king. In which case, gold owned outright has just been crowned emperor.

The move in gold lease rates, spiking inside a fortnight [2 weeks] from 0.15% to a 33-month high of 0.32% above Dollar lending fees, would also contradict claims that the US Fed and its fellow central bankers are dumping fresh gold loans onto the market. Such a forced increase in gold-for-hire would have pushed gold leasing rates down, not up. But whether or not you hold with the theory that central banks are wantonly quashing the gold price - despite it doubling since 2002 - it's clear that the Fed and its friends have got plenty to fret about besides bullion right now. The US Dollar, after all, is up versus the Euro. It's everything else which is down, besides gold, Treasury bonds, and the Japanese Yen.

Last Friday's open-market operations by the Federal Reserve saw it accept mostly mortgage-backed bonds - precisely those unsellable "assets" undermining faith in the financial system today. That left the big houses free to trade their outstanding positions in both Treasury bonds and the more secure agency-backed notes, a gift from the Fed that points to how serious this credit crunch is beginning to prove.

To date, the quarter-trillion in central-bank cash lent to the world's biggest investment houses has failed to prevent the asset-price bubble - way up there in the stratosphere of new or near all-time highs - from hitting a series of air pockets, bid-free. The ECB's money on Tuesday failed to save Europe's 300 largest stocks from losing an average of 1.2% of their value. The S&P closed the day 1.8% lower, while the Nikkei dropped 2.2% by the close in Tokyo on Wednesday. Here in London, the FTSE100 has now dropped nearly 650 points - bang on that 10% slump deemed to mark a "correction" - inside one month.

No wonder then that lower interest rates are now priced into bonds. Traders foresee an 88% chance the Fed will cut rates to 5.0% at its Sept. meeting, says Bloomberg, followed by odds of 47% for a further cut by December.

There's no risk of monetary policy allowing the bubble to burst, in short. Or at least, that's what everyone thinks... even as the bubble bursts despite super-fast action in central-bank policy. "My worry is the Fed will cut too little, too late," said Nouriel Roubini, NYU professor and a former advisor to Bill Clinton, in an interview this week. And besides, if the money markets are freezing up with Dollar rates at 5.25%, will anyone become more likely to lend money at just 5.0% or 4.75% this Christmas... ?

Now that cash is once again king - and the Dollar has seized the throne with its twisted sidekick the Yen playing court jester - we think you might do well to keep an eye on the Spot Gold Price. Even with spot prices ticking sideways amid the sell-off in paper, a break from the close correlation between equities and gold starting in 2003, the smart money looks keen to keep hold of its bullion.

Versus the resurgent Dollar, the price of gold remains little changed right now from a week or even a month ago. Indeed, it's risen against Sterling and Euros - a little-reported fact that US investors wanting to take advantage of this spike in the Greenback may like to note.

15 Aug, 2007
Adrian Ash

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Aug 16, 2007

Antal Fekete: Keeping Our Eyes Peeled for the Silver and Gold Basis

Keeping Our Eyes Peeled for the Silver and Gold Basis

By Antal Fekete
Aug 15 2007 2:31PM

Setting up the trip-wire

Gamblers shorting the dollar and bonds beware. Rumors about the imminent demise of the dollar and the bond market are grossly exaggerated. Bear in mind not only that the casino owner rigs your odds. He is also rigging the value of chips in which payoffs are made, thereby confusing the issue further.

The teetering of the dollar at the 80 mark, according to some the most important chart point ever in the history of charting, smells like a bear-trap. A lot of analyst predict that if the dollar violates that support, then it is bound to go into a free-fall. Nobody is seriously considering the possibility that this chart point, like everything else about the dollar, is rigged. It is the trip-wire set to trip up the bears.

The demise of the US long-bond market has been talked about for years. Analysts are so busy in writing the post mortem that they have no time to look at the charts. Yet the charts clearly show that the price of the 30-year US Treasurys is in an upward channel, where it has been for past 25 years. This in spite of the dollar index being in a downward channel, where it has been for the past 35 years. How is it that nobody sees a contradiction here that cries out for explanation? That nobody sees the hand of the master-rigger setting up the trip-wire?

Ticket to riskless profits

Here is a question for the discriminating observer. How is it that interest-rate derivatives do not obey the Law of Supply and Demand? The more there are of them, the more they are in demand. Half-a-quadrillion (500 trillion) dollars’ worth are out there at last count (in comparison the US GNP is a paltry 13 trillion), and it is increasing at the rate of 40 percent per annum. At that rate volume doubles about every other year.

Everything in human experience will tell you that such a thing is not possible. The more of anything exists, the less it will be appreciated. If the quantity of a security increases exponentially, then its value is bound to decrease exponentially for the stronger reason. Yet here we are, derivatives doubling in quantity every other year and, far from losing value, they are ever more in demand. Why?

Because derivatives are tickets to risk-free profits. As such they are the straw on which the world’s banking system swims or sinks. Swims, as long as interest rates are falling; sinks, as soon as they start rising in earnest.

Have the Chinese been tricked?

Enormous fortunes have been made on the long side of the bond market by the bulls during the past 25 years, among them by the Chinese, of all people. Make no mistake about it: their $1 trillion kitty is not all trade surplus. So much of it is the wages of adroit gambling on the long side of the bond market for the past 25 years. In 1982 the Chinese were astute enough to realize that US 30-year treasurys yielding 16 percent per annum were a fantastic bargain. Not only did they lock in an income at 16% for 30 years, but they held out a promise for capital gains by doubling in value at least twice as interest rates fell from 16% to 8%, and then again from 8% to 4%.

The Chinese are not naive as suggested by the analyst. They wrote the book on irredeemable paper currency when the paleface treasurers in the Occident were still experimenting with the alchemy of diluting silver and gold coins in circulation for the benefit of Old Coppernose. The Chinese invented paper without which Helicopter Ben could not do his air-drops of Federal Reserve notes.

Noises from China about their efforts ’to diversify’ the dollar portfolio is meant for the gullible. Whenever they are ready to diversify in earnest, the Chinese will not tell you about it in advance. Moreover, the fate of the dollar is already pretty well in their hands. The Chinese have the power, through their continued buying of US long bonds, to drive interest rates further down, all the way to the Japanese, chalking up fabulous capital gains on their bond portfolio in the process. Most importantly, they can do it even in the face of continuing erosion in the purchasing power of the dollar.

Fast breeder of bonds not fast enough

The bond market today is immensely different from that of the 1980’s. Not only have T-bonds been created through fast-breeders, bond gambling has been further escalated through the creation of interest-rate derivatives. A new generation of derivatives is „invented” every few months. The first generation was to hedge the value of bonds. The second was to hedge the value of the first hedges. The third is to hedge the value of the second. And so on and so forth, ad libitum.

There is never enough of those derivatives because new risks crop up with the rise of every new generation of hedges. Academic economists see in them an admirable sophisticated instrument. Pity our poor forefathers. They had to do without them.

Financial journalists want to stay blissfully ignorant of the fact that derivatives have put the Law of Supply and Demand into abeyance. „See no evil, hear no evil.” Cockaigne is here. Perpetual motion has been invented. Enjoy it. Don’t ask questions. Sit down, sit down: you are rocking the boat!

The con-conundrum

As I have said, the more of those derivatives have been created the more are demanded, because they are considered a ticket to riskless profits. So they are in Japan, and so they are in the United States. When the casino-owner sells tickets to riskless gains, the law of suppy and demand is suspended. Both supply and demand tends to become infinite. Ask Charles Ponzi. He’s been there. Interest-rate derivatives are proxy for bonds. They are new chips that you can use at the casino. They augment a supply the size of which already boggles the mind. On that count alone bond prices should be approaching zero and, interest rates, infinity. Instead, what do we see? Bond prices are still marching upwards. A conundrum indeed, if there ever was one. A con-conundrum.

Who says higher interest rates are necessary?

Those who still believe in the dictum of 19th century textbooks on bonds, that it takes higher interest rates and lower bond prices to perk up excitement in a lethargic bond market, are victims of the most brilliant confidence trick of all times. The gambling spirit in the twenty-first century is being upheld, not by higher interest rates, but by issuing ever more tickets to risk-free profits, that is, ever more derivatives on interest rates. Those who still think that it is necessary to bribe foreign suckers to buy more US bonds by the stratagem of printing ever higher coupon rates on the new bonds are hopelessly antediluvian. They have never heard of the miracle of creating capital gains through pushing interest rates ever lower.

Analysts still fail to see the real purpose of the derivatives monster. It has been sprung on the world in order to keep bond values buoyant, so that the game of musical chairs could go on.

The dollar has fallen through 80. So what?

But what about the US dollar index, allegedly showing that foreigners are getting tired of the infinite supplies of US dollars of diminishing value that keep coming at them? It is nibbling at the all-time low of 80 which, if taken out, you may never hear the dollar to hit bottom. Analysts tell you that you cannot fool Mother Nature. The dollar’s value is closing in on its intrinsic value: zero.

Don’t buy that. The dollar index, just like the CPI number, is manipulated in order to fool the uninitiated. Should the dollar fall through 80 and approach 70, foreign central banks will see to it that their paper follow suit. They are all too eager to match every point of the fall of the dollar. That will reverse the trend. The Chinese, in particular, have a vested interest to keep the fall of the dollar controlled and orderly. What is more, they have the power to do so. They don’t mind taking a loss on the dollar here and there, as long as it does not eat significantly into their mountain of paper profits on the bond portfolio.

Central bank bag of tricks

There is no way to predict the future scientifically. I would be a fool if I tried. I am simply saying that a dollar collapse is extremely unlikely at this juncture. I am inclined to lay far greater a store by the chart showing the US long bond in a 25-year uptrend, than by the chart showing the dollar in a 35-year downtrend. Of course, I know that the dollar, the yen, the euro are all being manipulated lower, each by its own issuer. Why, the name of the game is „all fall down”, isn’t it? But fall they must at a controlled pace. Central banks have a bag of tricks with which they can slow down the depreciation of currency values. The bag is infinitely deep. Furthermore, central banks also have all the marbles. They make most of it. So you want to win by placing a wager against the dollar? Good luck to you, but your odds are infinitesimally small.

I stand by my earlier statement that US interest rates are likely to fall more, replicating that of the Japanese, violation of support at 80 notwithstanding. The world is not now at a crucial turning point in 2007, like it was 25 years ago, in 1982, when the Kondratyeff long-wave cycle switched from rising to falling mode. I expect more of the same: falling interest rates, firms losing market-share and pricing-power, stockpiles of commodities ever more onerous to carry, which add up to a falling price level in disguise. The dollar index? Forget it. It’s for the birds.

The Volcker-bluff

Why am I so stubborn in sticking to the deflationary scenario? Here is my reasoning.

Hyperinflation almost engulfed the world in 1980. When in a spectacular coup interest rates were allowed to go to heights unheard-of at 20+ percent by the maverick Chairman of the Fed, Paul A. Volcker, virtually all the banks of the world became insolvent (as the value of their dollar assets was wiped out by the high-interest-rate regime). The banks were bailed out unexpectedly by the new regime of falling interest rates.

It is ridiculous to suggest that Volcker gave us a strong dollar in 1980 - a repeatable feat. In actual fact Volcker gambled: he staked the world’s banking system on saving the dollar from sudden death. Luckily for him, the gamble worked. Before the bluff could be called, the cascading of interest rates started fuelling bullish speculation in the bond market.

Please note that the Volcker-bluff is non-repeatable. In 1982 the world was riding high on the Kondratyeff long wave; 25 years later, in 2007, it is languishing in the depths of the trough. Helicopter Ben could not take his foot off the throttle. If he did, all deflationary hell would break loose, and he knows it. The debt-pyramid would collapse in a fashion more spectacular than that of the World Trade Center.

Keep our eyes peeled for the basis

How could central banks work the miracle of making interest rates fall in the face of running the printing presses overtime, and keep them from rising again? That’s just the best part of it. They have let the genie of the derivatives monster out of the bottle. The genie is mushrooming over the world economy, growing at a clip of 40 percent per annum. Right now it is half-a-quadrillion dollar strong, doubling in about every second year. It is the derivative monster that keeps interest rates low, and makes them fall further. Remember, derivatives are just tickets to riskless profits in bond speculation on the long side. It is as simple as that.

Does this mean that the Ponzi-scheme of derivatives creation will go on forever? Of course not. We have it on the authority of the Bible. Read the biblical story of the Tower of Babel. But how do we know when the Derivatives Tower of Babel will start to unravel? Forget the chart point 80, it is not your clue; nor is any other. Keep your eyes peeled for the silver and gold basis. This is the subject of a blue ribbon panel discussion at the next session of the Gold Standard University in August, 2007 (see below).

Do central banks have all the marbles?

It may appear that central banks have all the marbles. Indeed they do - except for one. They have foolishly let the most important marble slip through their fingers. That marble is the gold marble. The only wager against the dollar that has a chance of winning in the long run is the one staked out by the gold marble. Ironically, it is also the simplest, and anyone can play it, even people of modest means. That wager consists in scale-down purchases of physical gold. Buy on every dip of the gold price. Upon bigger dips, buy more. In doing so you may ignore all the indicators with the exception of the basis: the CPI, the dollar index, bond prices, foreign exchange rates, COT reports. You keep buying, and never sell. Your gold is fully paid for. It should be a source of infinite joy to give up worthless (well, make that ultimately worthless) paper against acquiring gold marbles.

The music stops when the basis turns permanently negative, heralding the curtain on the last contango in Washington. It tells the world that all offers to sell physical silver and gold have been withdrawn in the markets. The monetary metals are not for sale at any price. The game of musical chairs is up. Fear not: your gold marble has reserved a chair for you.

If personal misfortune overtakes before that happens, you still won’t sell. In an utmost emergency you borrow, but not sell. Remember, interest rates are kept at an artificially low level by the managers of the con-conundrum, offering you a gift.

Theirs is a gift that you may accept.

Gold Standard University Live

Session Two of Gold Standard University will take place between August 17 and 29, 2007, at Martineum Academy in Szombathely, Hungary. It will feature a one-week course (13 lectures) entitled Gold and Interest, as well as a blue-ribbon panel discussion entitled The Last Contango - Basis As an Early Warning Sign of the Collapse of the International Monetary System. Tom Szabo will be present. He is one of the world’s foremost expert on the gold and silver basis who on his website has been tracking them for half a year. He is a member of the research team of GSUL.

The second week is reserved for sight-seeing and recreation, including the famous Savaria Roman Festival featuring Roman togas and other habits, Roman cuisine, Roman games, etc. Enrolment is limited; first come first served. For more information please contact:


For a chart exhibiting the upward channel of the price of the 30-year US Treasury bond that has been in force since 1985, see:

Antal E. Fekete
Gold Standard University


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Antal Fekete: Peak Gold! A Primer on True Hedging, Part One

Antal E. Fekete
Gold Standard University Live
Aug 16, 2007

Maximize life, not profits!

In a previous article Gold Vanishing Into Private Hoards I have examined the future of gold from the demand side. Now in Peak Gold! I examine it from the supply side.

For the title I am grateful to Tom Szabo of He said in his comments dated August 3, 2007: "the unanswered question is: are we approaching 'Peak Gold'? We often hear the term 'Peak Oil', but there are probably some pretty good arguments against being able to predict when the 'peak' date will arrive. Certainly no oil company has put out a prediction of peak production, much less one predicting that oil output will drop by 10 to 15% within a decade."

In this new series of articles I wish to provide a definitive answer to Tom Szabo's question: yes, we are approaching 'Peak Gold' if we have not already passed it. The last twenty-five years in the history of gold mining has been a gross aberration during which gold was mined as if it were a base metal, namely, at the top grade of ore reserves (that is, most recklessly). This is in the sharpest contrast with how gold has been mined traditionally as dictated by the economics of gold mining, namely, at the marginal grade of ore reserves (that is, most conservatively). The world is witnessing a sea change: gold, having been mined qua a base metal, is once more being mined qua a monetary metal.

By marginal grade of ore is meant that grade which can still yield a profit (i.e., is payable), however, any lower grade is already submarginal (i.e., is non-payable). Clearly, marginal grade varies inversely with price: it goes higher as the price goes down, and vice versa. Gold mining used to be the very opposite of base metal mining which must, of necessity, maximize profits, just like any other enterprise. Not many people realize that gold mining is the only exception to this rule. The goal of the gold miner is not to maximize profits. Far from it. His goal is to maximize the life of the gold property. There are several reasons for this, the outstanding one being that gold is the monetary metal par excellence. Whenever private enterprise rather than the government or its central bank controls its creation, new money is not railroaded (should we say air-dropped by helicopter?) into circulation. Money creation is then guided by economic rather than political considerations.

Worst grade first, top grade last

Historically, the propensity of governments is to debase the currency rather than maintaining its value. The longer gold stays underground locked up in the gold-bearing ore, the longer it stays outside of the government's reach. We must remember that gold in the ground can still be an efficient store of value.

The aberration of the last twenty-five years of mining gold at break-neck speed, and selling it forward, in some case as much as fifteen years of mine production, is ending. All mines will realize that premature exhaustion of their gold property is suicidal. They will have to learn again the wisdom of gold miners of old: worst grade first, best grade last. Ben Franklin's dictum that "experience runs an expensive school, but fools will learn in no other" applies here as well and, therefore, the learning process may take some time. Be that as it may, the smartest gold miner has probably shifted back to mining at the marginal grade already. He reasons as follows: "If I can only keep my mine operational long enough, dollar debasement will catch up with my submarginal grades and will make them go through a metamorphosis. My submarginal grades of ore will become payable. My expiring gold mine will be rejuvenated and given a new lease on life, thanks to the misguided monetary policies of spendthrift governments. Ergo I had better work my mine as conservatively as possible and lengthen its working life by all available means". This line of thinking is well summarized by the adage: "in and out of ground gold teaches man husbandry".

Barrick bringing good tidings for gold bugs

The present negative roller coaster ride for monetary metals is leading to an increase in absolute terms of the price, which appears unstoppable. (Negative, because an ordinary roller coaster ride ends at the lowest, not the highest, level.) The latest confirmation has come from a most unexpected source. Barrick, the gold miner held in contempt by most gold bugs (for its presumed activities in trying to cap the gold price, nay, to club it down) is now saying that the price of gold will rise during the next five to seven years because supplies from the mines will drop more than anyone in the market can anticipate. This is an extraordinary statement coming, as it is, from a gold producer with a millstone-size and weight of a hedge book around its neck.

As Dorothy Kosich reports on Mineweb in her article Barrick Opines on Gold Supply and Price (Aug. 3, 2007), during a conference call Barrick delved into its future prospects including gold prices. President and CEO Greg Wilkins, and Executive Vice President and CFO Jamie Sokalsky revealed that Barrick has been "digging in very deeply on the supply side of the business" working with a research firm to uncover evidence and trends increasing Barrick's optimism for the future gold price. Mark the word optimism. Perhaps it should read pessimism. Barrick's hedgebook is so hopelessly under water that the company cannot afford to buy it back, as did Newmont making it the largest 'unhedged' gold mine, while the going is still good. The future gold price spells disaster for Barrick that cuts the pitiable figure of a moose standing on the train track fixated on the headlights of the fast approaching train.

"Timeo Danaos et dona ferentes"

Barrick is still studying the research reports, but Sokalsky already told analysts that "our initial analysis shows the buy side (sic) is likely to drop a lot quicker and more than most in the market are anticipating." While he insisted that "it is still too early to talk about any specific numbers", Barrick's research has uncovered much that "should be a lot more positive for the gold price". Sokalsky has divulged that a 10 to 15% drop should occur in overall mine supply of gold within the next five to seven years. That's a volte-face if there ever was one. Ten years ago gold was fetching $300 an ounce and Sokalsky boasted that if horribile dictu the gold price went to $600, Barrick would still be O.K. It could not get a margin call on its gold leases for fifteen years. It need not sell into its hedge book at a loss. It could always sell its output in the open market at a profit. 'Barrick would make every cent of that increase'.

Every cent? The gold price presently is well over $600, and the same Sokalsky is talking about much higher gold prices for the next five to seven years. He must have Santa Claus for bullion banker who carries Barrick's short position most cheerfully, regardless of staggering losses. (Since then we have been told that there is no Santa Claus, not in the gold mining business anyway. The bullion banks have barred Barrick from speculating in the bond market with the proceeds from the sale of leased gold. Moreover, they took away Barrick's freedom to sell its output in the open market without putting a prescribed amount of gold into the hedge book. In effect, Barrick's gold production is in escrow. In all but name the company is foreclosed on its gold leases. The 15-year moratorium on margin calls is a myth that has been exploded by the market.)

Tom Szabo seems to be a bit skeptical about Barrick being the first to report the bad news (bad, that is, from the point of view of those who have endeavored to cap the price of gold during the last decade of the last century. Who knows, maybe the research shows an even bigger than 15% decline in output, but Barrick has opted to tamper with the data in order to show a smaller anticipated decline in gold production than justified by the research, as part of its undending quest to keep the lid on the gold price. Tom Szabo adds that, joking aside, these projections are incredibly bullish for the long-term gold price. What Barrick implies, in effect, is that despite billions of dollars thrown at exploration during the past 2 or 3 years, there are not enough new projects even in the early discovery stage (much less in the late development stage) to maintain the current level of output, as production at the existing sites will start to decline in the next few years.

I myself am also skeptical. "Timeo Danaos et dona ferentes" (Virgil, Aeneid, ii.49): I fear the Greeks especially when they bear gifts. President Wilkins is on record that, while reducing its hedge book some, Barrick will retain its hedge plan as an "essential risk-management tool" and a means of "stabilizing revenues". It gives Barrick "needed flexibility" and, Barrick's creditors, necessary collateral. I think Wilkins should have come clean during the conference call. The talk about 'risk-management' and 'stabilizing revenues' is for the birds. Wilkins should repudiate the hedge plan in no uncertain terms and put the whole unpleasant affair behind him for once and all. Barrick and its creditors need the so-called hedge plan as they need pain in the neck. Unless... unless... there are yet more skeletons in Barrick's cupboard.

Logic would dictate that Barrick lift its short hedges first, and release the research report afterwards. Doing it in the wrong order could cost a pretty penny. Barrick brings the dictum of Cicero to mind: Mendaci neque quum vera dicit, creditur (a liar is not to be believed even when he speaks the truth).

Ruthless exploitation

During the past twenty-five years gold was mined following the worst traditions of ruthless exploitation of a resource. Barrick served both as brain-trust and ring-leader, by mining gold at the top grade of ore defying the tradition and economics of gold mining, and by promoting a thoroughly mendacious, false, and self-defeating forward sales program under the banner of 'hedging'. At one point during the past fifteen years Barrick had to close down operations at no fewer than ten of its gold producing sites as a result of exploitation, because ore reserves became submarginal in the wake of the falling gold price. For years, Barrick has been selling gold forward with wild abandon at ridiculously low prices, in effect blocking its own escape route to short covering should the need arise. It is hard to imagine a gold mine managed more incompetently from a global point of view. Of course, Barrick's highly touted 'hedges' are no hedges at all. In so far as they mature over one year, and their volume exceeds one year's mine output, they are naked forward sales misrepresented as hedges. The whole scheme has been a mindless and extravagant exploitation of a world resource.

In all likelihood it has also been a 'gold laundering' scheme. I have coined this expression to describe clandestine transfer of shareholder equity, either to management (a.k.a. embezzlement), or to an unnamed third party (a.k.a. defalcation). We do not know whether Barrick is guilty of embezzlement, defalcation, or both, and perhaps never will.

Forewarned but not forearmed

We need not keep guessing. I submit that Barrick has been put on notice that its so-called hedge plan would invite charges of unfaithful stewardship as soon as the bear market in gold is over. I warned Sokalsky in person ten years ago at Barrick's headquarters. The meeting took place at the suggestion of Chairman Peter Munk with whom I exchanged letters on the matter. Sokalsky and I discussed Barrick's hedge plan for an hour and a half. I can testify that he understood my point very well. At the end of our meeting I presented to him a 50-page document entitled Gold Mining and Hedging: Will Hedging Kill the Goose To Lay the Golden Egg? which treated this issue exhaustively. He promised to read it and to pass his comments on to me within a month. I have never heard from him again.

In my document the process whereby a rising gold price inevitably makes world gold output shrink (in terms of tonnes) is very clearly demonstrated. To explain this, first I have to discuss another remarkable difference between the ways gold and base metals are traditionally mined. This is the deliberate variation of the rate at which mill capacity is being utilized. The base metal miner is under constraint to mine at the top grade of ore. But he is free to vary the rate of mill capacity utilization in response to changing market conditions.

Accordingly, he will increase it if he has to increase output, and vice versa. Not so the gold miner, who is under constraint to run his mill full time, as close to capacity as practicable. But he is free to vary the grade of ore at the mill in response to changing market conditions. Whenever the price of gold rises he decreases, and it falls he increases the grade. He does this because the marginal grade of ore varies inversely with the gold price. If he is to run his mine economically, the gold miner is compelled to go after the marginal grade of ore and leave the better grades alone. He knows that premature exhaustion of his gold mine means dissipating shareholder equity and wasting capital resources. The prematurely exhausted gold mine would have a lot of valuable ore-reserves left behind that would become payable later when the dollar is sufficiently debased. But then it would be too late. Once the gold mine is closed down, it could be prohibitively expensive to re-open it.

Mechanism of Peak Gold

For example, whenever the gold price rises, the marginal grade of ore falls as heretofore submarginal grades become payable. Since gold mines run their mills close to capacity, output shrinks every time the gold price has reached a new high plateau, provided that they are managed economically. Uneconomically managed gold mines get exhausted prematurely and fall by the wayside, as they well deserve.

Peak Gold can be confidently predicted since the increasing gold price (an inevitable consequence of deliberate dollar debasement) causes a world-wide shift in the marginal grade of every gold mine. The marginal grade of ore drops. Since the combined milling capacity of the world's gold mines is a given quantity, and it can only be increased slowly, after a great capital outlay which management may well be reluctant to make (as it would eat into profits and shorten the life of the gold property to boot), the upshot is that the gold content of mill output is falling. World production of gold shrinks (in terms of tonnes) with the rise in the price of gold.

But what about opening new gold mines? As Tom Szabo has hinted, the artificially induced bear market in monetary metals between 1981 and 2001 has resulted in a great reduction in prospecting, exploration of known sites, and development of mines at proven sites. We must realize, however, that the whole episode of explosive increase in world gold production from 1914 through the end of the century was a great anomaly. Even though it was engineered by governments on the warpath, the feat cannot be repeated. The inflationary escapades of governments, either acting in solo or in concert will of course continue. The governments can stay on the warpath and can expand their pet welfare projects as long as they want. In vain: the nexus between the welfare-warfare state's inflationary design and the value of gold, or the tectonics of marginal gold ore underground, has decisively been broken. Governments have expended their ephemeral power to work the miracle of multiplying cash gold through multiplying paper gold. Ditto, no longer can they pretend that gold locked up in ore deposits below surface is a valid substitute for cash gold. From now on it is "cash gold on the barrel". Falsecarding in the gold business has been exposed and discredited.

The great increase in world gold output during the twentieth century was a non-repeatable event, largely due to the inflationary propensities of governments under the gold standard artificially suppressing, as they did, the value of gold. This has caused a world-wide shift in the marginal grade of ore in every gold mine. The marginal grade was boosted and, with it, the world's gold output. That is the background that has created Peak Gold in the first place: a reckless exploitation of a world resource whose production would have increased much more evenly in the absence of inflationary escapades.

But this is history. The present reality is that uneconomic increases in production and naked forward selling are over for good. On the supply side, limited and diminishing injections of newly mined gold shall replace unlimited and ever increasing dumping of paper gold. When you need gold, you demand cash gold, the supply of which from the mines is going to decrease from now on. It is satisfying to see Barrick acknowledge this first.

Hedging proper

In the next part of this series Peak Gold! I shall explain, as I have explained to Jamie Sokalsky ten years ago, the principles of proper hedging. I suggested to him that Barrick should announce a bilateral hedge plan to succeed its notorious unilateral plan. The latter involves short hedges (forward sales) to the exclusion of long hedges (forward purchases). The former involves both.

Just as its forward sales are balanced by Barrick's need to market future production, forward purchases, had they been entered, could have balanced Barrick's future need to acquire new gold properties in anticipation of the exhaustion of its ageing sites. Had Barrick listened to my advice, Peak Gold would not have been to its chagrin. Not only would profits on the long hedges have outstripped losses on the short ones; they would have covered the hefty increases in the price that Barrick has now to pay for new gold properties. Barrick could have scaled Peak Gold with the flying colors, and without a penny loss on its short hedges. What is more, it could have plenty of money left on its long hedges to pay for the acquisition of fresh gold properties in preparation for a bright future bringing higher gold prices in its wake. Barrick would have been ready for the new bull market and could contemplate its own future with genuine optimism.

Gold Standard University Live

Session Two of Gold Standard University is taking place between August 17 and 24, 2007, at Martineum Academy in Szombathely, Hungary. It is featuring a one-week course (13 lectures) entitled Gold and Interest, as well as a blue-ribbon panel discussion on the subject of Last Contango - Basis As an Early Warning Sign of the Collapse of the International Monetary System. Tom Szabo will chair the panel. He is the world's foremost expert on the gold and silver basis who on his website has been tracking the basis for half a year. He is a member of the research team of GSUL.

Session Three is planned to take place in Bessemer, Alabama, U.S.A., in February 2008. It will feature a one-week course entitled Adam Smith's Real Bills Doctrine. An advocatus diaboli from neighboring Mises Institute will be invited to challenge the wisdom of Adam Smith. The session in Alabama will also feature a blue ribbon panel discussion on the subject of True Hedging for Gold Mines. Representatives of hedged and unhedged gold mines will be invited to participate. The present series Peak Gold! is a primer on true hedging.

This is a preliminary announcement only. Stay tuned. For more information please contact:


A. E. Fekete, Have Gold Bugs Been Barricked by the U.S.?, July 12, 2007

A. E. Fekete, Gold Vanishing Into Private Hoards,, May 31, 2007

Charles Davis, So Big It's Brutal, Report on Business, The Globe and Mail: Toronto, June 2006, p 64.

Bob Landis, Readings from the Book of Barrick: A Goldbug Ponders the Unthinkable,, May 21, 2002

Richard Rohmer, Golden Phoenix: The Biography of Peter Munk, Key Porter Books, 1999

A. E. Fekete, The Texas Hedges of Barrick,, May, 2002

Ferdinand Lips, Gold Wars, Will Hedging Kill the Goose Laying the Golden Egg? p 161-167,
New York: FAME,

A. E. Fekete, To Barrick Or To Be Barricked, That Is the Question,
August 11, 2006

George Bush's "Heart of Darkness" - Mineral Control of Africa, Executive Intelligence Review, January 3, 1997, see in particular:

Barrick's Barracudas
Inside Story: The Bush Gang and Barrick, by Anton Chaitkin
George Bush's 10 billion giveaway to Barrick, by Kark Sonnenblick
Bush abets Barrick's Golddigging, by Gail Billington
See also:

August 17, 2007
Antal E. Fekete
Gold Standard University Live



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Aug 12, 2007

Doug Casey: The Unfolding Crisis (an interview)

Doug Casey, chairman of Casey Research is a renowned investor, best-selling author and editor of the monthly newsletter International Speculator, now in its 27th year of providing independent-minded investors with unbiased recommendations on investments with the potential to double or better within a 12-month horizon. He has made it his life's work to study financial crisis and how investors can protect themselves and profit, sharing his results in New York Times best-sellers such as Crisis Investing and Strategic Investing.

With global markets in turmoil, we turned to Doug to give us his interpretation of the big picture.

Q. The dollar is under increasing pressure. Do you think it's realistic that the U.S. dollar could lose its status as the world's reserve currency anytime soon? What are the implications and how soon do you think it could happen?
A. The U.S. dollar will eventually reach its intrinsic value; it's simply a question of time. The Forever War in the Middle East is greatly accelerating the process. The whole idea of a reserve currency is meaningless if the currency is backed by nothing but the good will of the issuing government. That's why gold has always been used as money; you don't have to rely on anyone's full faith and credit, good will, competence, trade surpluses, self-restraint or anything else. And it's why gold will again be used, in everyday transactions, as money.
The dollar is a hot potato. There are trillions -- nobody knows exactly how many -- floating outside the U.S. But only Americans have to accept them, and only the U.S. Government can create them (although the North Koreans do their best). The Chinese have good reason to worry about all those dollars. When they tried to buy the Unocal oil company, they were turned away by the U.S. Government. So, obviously, their dollars weren't good for that. When Dubai wanted to buy companies that manage six U.S. seaports, they found their dollars had no value.
At some point there's going to be a panic out of the dollar. When it happens, it's likely to be the biggest financial upset since the 1930s. Part of the question is what they'll panic into. The euro? As I have said many times, if the dollar is an "I owe you nothing," the euro is a "Who owes you nothing?" I think the big beneficiary will be gold. The problem for the world's economy is that just a trillion dollars -- which is only about 1/6 of the dollars outside the U.S. alone -- can buy a billion ounces of gold, even at $1,000 an ounce. But only about four billion ounces have ever been mined.
It's an explosive situation. The one thing you can count on when there's a crisis is that the government will "do something," which means controlling its subjects -- not, God forbid, itself. And that something is likely to be foreign exchange controls. A small straw in the wind is the new regulation making it illegal to export more than $5 worth of pennies and nickels, because their metal is worth more than their face value -- even though there's no longer much copper in the pennies or nickel in the nickels.
If an American doesn't get significant assets outside the U.S. now, it may be impossible in the future. The best thing to do is buy real estate abroad, since it's currently not reportable, like bank and brokerage accounts, and they can't very well make you repatriate it. I expect, however, very few people will take my advice, even though they may agree with it. But everybody gets what he deserves, so it's not a problem..

Q. Looking at the broad picture, it seems like the U.S. government is facing nearly insurmountable odds. The cost of government has soared to something over 50% of GDP, weighing heavily on the private sector, yet there is no end in sight to the wide river of can't-stop spending... on the military, on Social Security and Medicare -- especially in the face of the baby boomers beginning to retire. How does the country manage to maintain that?
A. Nothing lasts forever. I'll be surprised if the U.S. is able to maintain its present geographic boundaries for this century. The Mexicans talk of the Reconquista; the gringos stole the Southwest from them in the 1800s, and they're likely to take it back. What do you think the odds are that a young Latino male in California, 20 years from now, is going to pay 20% of his wages in Social Security and Medicare to support some old white broad in Massachusetts? Especially since he knows he's never going to get an aluminum nickel back? Even today, polls show that more kids believe in aliens than believe they'll see any Social Security money.
We've had really good times for a whole generation. People become fat and sassy, or in the case of Americans, obese and arrogant, during good times. They don't think of hanging their leaders from lamp posts until things get seriously bad.
I don't know how bad things will get. But when I'm asked, I'm prone to quip "Worse than even I think they'll get."

Q. You and the team at Casey Research have been vocal about expecting a major inflation. Yet, other than occasional surprises, inflation doesn't seem to be much of a problem. What gives?
A. Things that you expect to happen usually take longer than you'd think. But once the process gets underway, they usually happen much more quickly. It's like a boulder balanced on the edge of a cliff; nothing seems to happen until it happens all at once. Just adjust that analogy to the scale of a human lifespan.
The word "inflation" covers two different concepts, and it's important to keep them separate. One concept is monetary inflation, which is an increase in the supply of money that outruns growth in the supply of goods and services. Papering over problems with yet more money is now the default solution for governments around the world. Case in point, when faced with the growing problems associated with the subprime mortgage sector, the European Central Bank announced that it would make "unlimited" funds available to the banking sector. The Fed will, predictably, react in the same way, running the printing presses overtime.
The other concept is price inflation, which is an increase in the overall level of prices for goods and services.
The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices -- rather than the money-creating government that is the true culprit.
We're now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What's really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode.
It's just a matter of time. But I think it's going to happen this cycle.

Q. How do you think the Chinese currently view the U.S.? Recently they threatened to use the "nuclear option", dumping their U.S. dollar reserves in response to anti-Chinese legislation making its way through the U.S. Congress. Do you think there is any scenario under which they would let the dollar collapse, given that they own about one trillion of the things?
A. It's said the Chinese need us to provide a market for their goods. Which is absurd. Markets are about trade. You send me a load of VCRs; I send you a new Cadillac. Right now the Chinese are getting nothing in return for their VCRs but IOUs. If those IOUs aren't redeemed -- and at this point there are so many I'm not sure how they could be -- they might as well send their goods to the North Koreans in return for IOUs. Or dump them into the ocean, if the only idea is to keep the factories humming and people employed. At some point the Chinese will want payment in something other than dollars.
In the meantime the yuan will go higher. It's a good thing for them. It will lower the cost of importing capital goods, technology and raw materials. It will force their manufacturers to be even more efficient. It will make buying foreign companies cheaper. It will raise the standard of living of the average Chinese, defusing some political problems. A strong currency is a good thing. Too bad the U.S. will be on the opposite side of that trade. It was a pathetic embarrassment to see Bernanke and that other buffoon from Treasury lecturing the Chinese on how to manage their currency.

Q. You are on record as leaning toward an inflationary meltdown versus a recessionary one. But what about all the debt? Won't people paying down their loans and refusing to go further into debt -- because for one thing, pretty much everyone who ever wanted a house now has one -- result in less spending? And less money chasing more goods would seem to suggest a recession.
A. The first point is not to confuse terms. In today's vernacular, a recession can be defined as a very mild or short depression. A depression can be given any of three definitions. One, most broadly, is a period when most people's standard of living drops significantly. Two, it's a period when the business cycle climaxes. And, three, it's a period when distortions and misallocations of capital are liquidated. There's much more to be said on all of these, but now's not the time.
Inflation, on the other hand, is a monetary phenomenon. You can have either an inflationary depression, like Germany in the '20s, or a deflationary one, like the U.S. in the '30s. The opposite of depression isn't inflation; it's prosperity. And you certainly don't need inflation to create prosperity. Inflation is a drag on prosperity; it's a tax on cash, because the government gets to spend the new money it creates while your old money depreciates.
What do I think is likely? Certainly a depression, probably of the inflationary type. But if there are widespread defaults in the mortgage market because of a housing bust, hundreds of billions of dollars worth of buying would disappear, which is deflationary. You could have both things happening at once, in different parts of the economy.

Last year you went on record early calling for gold to top $700, which it did. But you expected it to end the year at about $750. Currently, it trades at around $665. Why do you think it didn't hold up? And, just for entertainment purposes, how high do you think it will trade in 2007?
A. I'm sure the government, directly and indirectly, did everything it could to keep the price down. The last thing they want to see is a gold panic. So the short run is hard to predict. But we're still relatively early, certainly in terms of price, in what will be a bull market for the record books. It's as if you can see the perfect storm brewing. Since I've been involved in the markets, there have been a number of times when things could have come unglued -- '70-'71, with the stock market crash and the devaluation of the dollar, '73-'74, with another market meltdown and financial crisis, '80-'82, when commodities and interest rates both went through the roof, '87, '92, '98, the tech meltdown... Throughout that time, I've always tended to be a bear. In other words, I've tended to make my money during the crises; it's relatively easy to make money during good times. As the tech boom proved, any idiot who knows nothing about the markets or the economy, can do it.
My guess is that the next crisis is going to be breathtaking. And it's not going to be just financial, but economic, social, military and political. Of course, I hope I'm wrong. If I'm wrong, I'm not likely to get hurt, for a number of reasons. But I don't want to be inconvenienced if I'm right.
So where is gold going? I notice that it is starting to move counter to the equity markets in this current crisis, as it should given the inflationary implications of the massive government bail outs and the increased likelihood that the Fed will be forced to rates, making the dollar a less attractive holding for foreigners. I hate making predictions, but if things continue down this path, I think we could see gold going over $1,000 within the next 12 months, and maybe even before year-end. And then the mania starts for the mining stocks...

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