Nov 30, 2007

Reg Howe: "Gold derivatives: options galore"

Reginald H. Howe, proprietor of Golden Sextant Advisors and consultant to GATA, has reviewed the Bank for International Settlements' semi-annual derivatives report and finds explosive growth in gold options. Howe also notes that foreign-owned gold has started to be withdrawn from the the New York branch bank of the Federal Reserve.

So, in his new essay, "Gold Derivatives: Options Galore," Howe writes: "Both the explosion in gold options and the resumed exports of foreign-earmarked gold suggest that managing the gold price is becoming an ever-more-difficult task. No surprise, then, that gold prices have turned sharply upward during the second half of the year. However, the price managers still have one thing operating in their favor: the apparent willingness of hedge funds and other supposedly sophisticated large players to make their bets on gold through paper derivatives, not the acquisition of physical metal."

November 30, 2007 (RHH)

Gold Derivatives: Options Galore

On November 21, 2007, the Bank for International Settlements released its regular semi-annual report on the over-the-counter derivatives of major banks and dealers in the G-10 countries and Switzerland for the period ending June 30, 2007. The total notional value of all gold derivatives came in at $426 billion, $37 billion less than previously reported for year-end 2006 but a whopping $214 billion less than the revised year-end figure. Period-end gold prices increased from $636 to $651 (London PM). Gross market values fell to $47 billion from an unrevised $56 billion.

As detailed in table 22A, forwards and swaps rose marginally to $141 billion from $139 billion, also unrevised. Options, however, fell from a revised $501 billion to $285 billion. The previously reported year-end 2006 figure for options was $324 billion, $177 billion less than the revised number. In the past, although there have been occasional minor adjustments in the data for the prior six months, none have been close to this magnitude.

Converted to metric tonnes at period-end gold prices and based on the revised data for year-end 2006, total gold derivatives rose by nearly 8,200 tonnes in the last half of 2006, and then fell by 10,495 tonnes in the first half of 2007. Forwards and swaps, which declined just over 700 tonnes in the second half of 2006, fell another roughly 60 tonnes in the first half of 2007. Options, which rose almost 8,900 tonnes in the last half of 2006, fell nearly 10,900 tonnes in the first half of this year.

At the same time that it released its regular semi-annual report on the OTC derivatives of major banks and dealers in the G-10, the BIS also released the first part of its regular triennial survey on OTC derivatives of a wider universe of market participants from some 50 jurisdictions. This report, too, contained an eye-popping number. According to Table A, total gold derivatives over the three-year period rose from $359 billion at end-June 2004 to $1,051 billion at end-June 2007, or in tonnes at period-end gold prices, from 28,200 to 50,250.

The data is summarized graphically in the three charts below, updated from the prior commentary on this subject. For the G-10 and Switzerland, total forwards and swaps now stand at approximately 6,800 tonnes, options at 15,850 tonnes, and total gold derivatives at 22,650 tonnes. The triennial survey, or at least the first part of it, does not provide separate data for forwards and swaps and for options. Due to the wide intervals between these reports, the triennial totals are shown only in tonnes in the third chart.

The $177 billion upward revision in year-end 2006 OTC gold options equates to over 8,450 tonnes in notional value. According to an e-mail message from the BIS, "two reporting countries provided revisions" for year-end 2006, with "mainly one reporter" responsible for the adjustment to gold options. Since country data is confidential, the BIS declined to provide any further detail. However, to identify any single reporting country that might even under extraordinary circumstances be "mainly" responsible for an error of this magnitude is far from easy.

Data published annually by the Swiss National Bank shows total precious metals derivatives of all Swiss banks as of year-end 2006 at CHF 151 billion, or approximately US$123 billion at the year-end exchange rate (CHF 1.225 = US$1.00). Of this amount, CHF 91 billion (US$74 billion) were in options. Data published by the Office of the Comptroller of the Currency on the gold derivatives of U.S. commercial banks (primarily J.P. Morgan Chase, HSBC Bank USA and Citibank) shows total gold derivatives at year-end of $94 billion. What is more, the OCC reports this data quarterly, and neither the report for the first nor for the second quarter of 2007 shows any revisions to the 2006 year-end data.

Accordingly, the finger of suspicion with respect to the reporting snafu seems to point in the direction of one or more big U.S. investment banks, e.g., Goldman Sachs, which are not included in the OCC data. But whoever the culprit, the numbers themselves suggest that the gold options involved in the revisions have now been transferred to market participants outside the regular semi-annual reporting system but covered by the triennial survey.

Indeed, it would appear that these options were never intended to be picked up in the regular semi-annual report. One plausible hypothesis is that one or more big U.S. investment banks are effectively running large gold options books through non-reporting entities covered only in the triennial survey, and that due to errors of accounting, timing or otherwise, these banks were forced by their auditors to recognize on their own books at year-end gold options that they believed were on the books of others.

Another intriguing development of the past few months is the resumed outflow of foreign earmarked gold from the United States. From the end of 2003 through January of this year, there was virtually no change in the total amount of gold held under earmark at the New York Fed for foreign and international accounts, mostly foreign central banks. However, from February through September, the latest month for which figures are available, these accounts are down by a net 169 tonnes, from $8,967 to $8,737 million at $42.22/ounce, or from 6,606 to 6,437 tonnes.

Both the explosion in gold options and the resumed exports of foreign earmarked gold suggest that managing the gold price is becoming an ever more difficult task. No surprise, then, that gold prices have turned sharply upward during the second half of the year. However, the price managers still have one thing operating in their favor: the apparent willingness of hedge funds and other supposedly sophisticated large players to make their bets on gold through paper derivatives, not the acquisition of physical metal.

The reported figures indicate that the mountain of gold options now almost certainly exceeds 30,000 tonnes -- an amount roughly equal to the world's total claimed official gold reserves. How many of these options are cash settlement only? Have the bullion banks actually committed to delivering physical gold in anything like these notional amounts?

If so, they have put themselves and the fiat monetary system of which they are a part at a new level of risk, one scarcely hinted at in the ongoing unraveling of various forms of credit derivatives. Large players currently content to take paper cannot be expected to remain blind to its risks forever. When they finally awaken to the difference between claims on gold and physical possession of bullion itself, the world is likely to witness a bank run and gold rush of epic proportions.

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ECB rate cut pleas grow as Euribor goes mad

By Ambrose Evans-Pritchard
The Telegraph, London
Friday, November 30, 2007

A clutch of Europe's top economists have called on the European Central Bank to cut interest rates at its policy meeting next week, warning of severe downturn unless confidence is restored quickly to the banking system.

The concerns came as one-month Euribor spiked violently by 60 basis points to 4.87 percent today, the sharpest move ever recorded. Italy's financial daily Il Sole splashed on its website that the Euribor had "gone mad."

The three-month Euribor rate used to price floating-rate mortgages in the Spain, Italy, Ireland, and other parts of the euro-zone rose to 4.77 percent, near its August high and far above the ECB's 4 percent lending rate.

Thomas Mayer, Europe economist for Deutsche Bank, said the authorities should take pre-emptive action to unfreeze the debt markets and reduce the danger that events could spiral out of control.

"If they don't do anything, this could go beyond just a normal recession. With this credit crisis it could turn into a very uncomfortable situation, with a real economy-wide crunch that we cannot stop," he said.

"We're still seeing considerable stress in the European banking system, especially for smaller banks that can't get credit. I am afraid we could have another Northern Rock case," he said.

It emerged today that Germany's IKB bank had racked up losses of E6.15 billion on subprime ventures, although it has been rescued by a pool of German banks.

Mr Meyer is one of six members of ECB's Shadow Council to vote for a rate cut at a gathering in London today.

The group of bank economists and leading academics -- organized by Germany's Handelsblatt newspaper -- meets before each ECB vote. It serves as barometer for eurozone opinion.

Veronique Riches-Flores, Europe economist at SociΓ©tΓ© GΓ©nΓ©rale, said investors were deluding themselves if they believed that Europe and the rest of the world could carry on growing briskly as the housing slump engulfed America.

"The idea people have in mind that emerging markets can decouple is completely wrong. Emerging markets are only OK as long as the US consumer is OK," she said.

She warned that the surging euro had become a bigger long-term threat to the region than people realized.

"The problem of the exchange rate is urgent. The euro has appreciated 50 percent against the Asian currencies this decade and that really worries me."

It is unclear whether the grim mood at the shadow council foreshadows a policy shift at the real ECB. A German-led bloc of monetary hawks in Frankfurt has been on the war path in recent weeks, fearing that inflation could soon become lodged in the system and set off a 1970s-style wage-price spiral. The ECB's dovish faction tends to keep silent but may have more votes.

German CPI inflation reached 3.3 percent in November, the highest since the launch of the euro. It is approaching levels that could start to erode popular support for the single currency in Germany.

Austria's ECB governor, Klaus Liebscher, said this week that inflation had become "alarming," citing a jump in oil, commodity, and food costs, as well as capacity contraints in industry, and a spate of fat wage rises. "There's a good number of reasons why we can't be complacent," he said.

Joachim Fels, head of economic research at Morgan Stanley, said it was an error to dwell on inflation at time when the economy is tipping over, dismissing the latest spike as a hangover effect that would subside next year. The greater risk is monetary overkill. The surge in Euribor spreads amounts to three rate rises, he said.

While 13 of the shadow board voted to keep rates unchanged (none voted for a rise), most agreed that the world is facing an ugly cocktail of buckling demand combined with an oil shock, a stagflation mix that is extremely hard for central banks to combat.

Jacques Cailloux, Europe economist for RBS, said there already clear signs that the US slowdown is spilling over into Europe and the rest of the world, although the markets had yet to wake up to the full implications.

"We're seeing a contraction in German exports to Asia. I don't see any evidence that decoupling is happening. The biggest five European banks have $2 trillion of claims on the US economy," he said.

Jean-Michel Six, Europe economist for S&P, said the great unknown was whether deflating house prices in the Club Med region and Ireland would trigger a serious downturn, and whether banks still had enough oxygen as the credit crunch ground on and on.

"What will be the effect if they have to repatriate mortgage securities onto their books on a massive scale? It could be a major constraint on their ability to lend. This is the first test since the Basel II rules came into force, so we'll see what happens," he said.

There is a fear the restrictive Basel II code could force banks to tighten further to meet reserve asset requirements, compounding the credit crunch.

* * *

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Nov 28, 2007

Mineweb: Volatile gold tracking backwards through $800

The recent gold price surge has been shortlived again as a dollar rise has led to a fall back to below the $800 level and may move lower. The gold price thus continues to be very volatile moving up and down on dollar strength perceptions.

Author: Lawrence Williams
Posted: Wednesday , 28 Nov 2007

If you want to take a view on gold and where the price is going you have to first take a view on the US dollar. Gold moved sharply upwards on a falling dollar last week, but this week, as some strength has been seen in the US currency, the gold price has rapidly tracked back downwards through the $800 mark - and if the dollar stays where it is, or shows even the smallest sign of strength - however temporary - we could see a return to the mid to high $700s over the next few days.

But, if the dollar starts to move lower again against the major currencies, gold will almost certainly bounce back upwards, and whether it achieves the $850 all time high in the near future will depend almost entirely on the weakness, or perceived weakness in the greenback in the next few months.

If US interest rates move down another quarter point, as many feel likely, then the dollar value against the basket of currencies will probably move down again too and gold will likely move up. If the Fed decides against cutting the rate, then this could be seen as a positive sign for the dollar and gold could slip back as a result to the mid $750s.

The dollar weakness is also being curtailed as non-US economies may also consider cutting their own interest rates to try to ward off any business downturn as a result of a static or contracting US economy, and their own industries becoming less competitive internationally against US output as the dollar declines.

But, gold production worldwide is, at best, flat and probably falling, and with the cancellation of major projects like Galore Creek, coupled with a credit crunch which could see more marginal or risky projects struggle to raise development funding, the decline may be greater over the next few years than analysts have been estimating.

There is also an impression that the rate of Central Bank gold sales may be declining in the face of higher prices and there are indications that some banks may even be buyers in the market to increase the size of their foreign reserves.

The pattern makes for increasing gold price volatility, such as we have been seeing over the past few weeks with recent short term peaks and troughs in the gold price being up and down as much as $70 an ounce - perfect for smart traders to move in and out of the metal and make good profits if they judge the market right - which in turn increases the volatility quotient.

Overall, though, not withstanding worldwide currency manipulation and the impact of various Central Bank policies, the trend in the dollar value remains downwards for the moment, and the gold supply situation is not likely to improve. There is additional offtake from the market through ETFs, although of course this can be divested more easily too. So, gold price fundamentals remain good, dollar fundamentals remain weak and thus the medium term gold price outlook should be very much a positive one.

If there are any serious shocks ahead for the US economy - which is certainly a possibility - and the dollar moves back down again, the gold price will rise and re-test recent peaks. It will be the strength or otherwise of such a dollar decline which will determine whether gold will at last breach the $850 level, but the general consensus of market followers is that this will happen sooner or later, but exactly when few are prepared to define.

Analysts also cite the oil price as being a driver for gold, but it seems more likely that dollar strength or weakness is both the driver of the oil price and the gold price, as both are traded in US dollars. Oil, though, is more open to market manipulation by the producing nations which can increase or reduce supplies at very short notice - an option not really open to gold miners.

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Nov 26, 2007

Antal Fekete: Our diseased monetary bloodstream

Economist Antal Fekete explains in his new essay, "Our Diseased Monetary Bloodstream," why gold remains crucial to a decent and successful international financial system, a system that puts government and corruption in their places -- which also explains why crooked government needs to subvert gold. Fekete appeals to sovereign minorities to help set things right by putting gold back into circulation in their jurisdictions.

Dear Fellow Deviants,
Dear Fellow Travelers standing by for the next flight to Genius,
Ladies and Gentlemen:

Synergy Be With You!

One of the truly spectacular sights is from the airplane as it makes its approaches to Los Angeles International Airport at dusk. Down below is the illuminated “live” map of Los Angeles with its winding and intersecting freeways, with an endless flow of white headlights and an opposite flow of red tail-lights. It reminds me of the human bloodstream with its flow of white and red blood corpuscles. As I was flying in the other day I could not help but contemplate that possibly just a handful in a million people down there may realize what a fatal year 2007 has been, as the rest are completely oblivious to the great dangers awaiting the world on this Thanksgiving Day.

Over the last thirty-five or so years people have been de-sensitized to the ‘chill-and-fever’ syndrome epitomized by the gyrating value of the dollar. It had its ups and downs but, here we are, still doing business using the services of ‘Old Trusty’. People appear to be forgetful that the dollar is steadily losing value, losing purchasing power, losing the all-important respect of foreigners. They have been brainwashed into thinking that inflation, like continental drift, is God-ordained. There is nothing human beings can do about it. It would never occur to people that they are victims of deliberate plundering by their own government, and deceitful pilfering by their banks, covered up by the mendacity of academia and the financial media.

By this fall we have reached the threshold, we have crossed the continental divide, we have passed the ‘point of no return’ as it is becoming obvious that bad debt in the system has reached and surpassed ‘critical mass.’ The chain reaction has started. In the fullness of time the nuclear explosion is bound to occur.

The history of the dollar boasts two Waterloo’s. The first one was in 1933. That year marks the default of the U.S. government on its domestic gold obligations, accompanied by the confiscation of the people’s gold by F.D. Roosevelt. He appealed to patriotism saying that in complying with his Executive Order people were saving the country from economic ruin. The bad faith behind this capricious and unconstitutional act was shown by the fact that no sooner were people forced to give up gold in their possession than the government would write up its value by 69 percent, pocketing the difference as ‘profit’. So much for the provision of the Constitution that “…nor shall private property be taken for public use without just compensation.”

The monetary bloodstream of this nation was given the cancerous qualities that characterized the currency of both Soviet Communism and Nazi Socialism, neither of which has survived the test of times. Nor will the irredeemable dollar.

There was a second Waterloo for the dollar, in 1971, marking the default of the U.S. government on its international gold obligations. In economic terms this event was even more devastating than the first. It triggered a snow-balling process as revealed by the price charts of commodities such as wheat, sugar, copper, not to mention crude oil, and the destabilization of foreign exchange and interest rates, making debt proliferate and rendering government bonds totally unsuitable for the purposes of saving.

I have been often asked the question: “why gold?” I avoid giving an answer in terms of the physical or chemical qualities such as weight, inertness, and the like. My answer usually refers to the nation’s monetary bloodstream which becomes corrupted as the disease-fighting gold corpuscles are removed.

Debt is an indispensable economic instrument. It has a great beneficial impact on human welfare. But like fissionable nuclear material, it is shot through and through with extreme danger. If its quantity exceeds critical mass, then chain reaction is bound to set in causing a nuclear explosion. The role of gold is precisely to prevent that from happening. Gold is the agent that can detect bad debt and stop its proliferation in good time. Thanksgiving 2007 is special because we are just re-learning the ancient lesson that no banking system can safely operate without gold. You cannot measure the quality and quantity of debt in terms of another, just as you cannot measure the length of an elastic band in terms of another.

What has happened this fall is that the presence of bad debt in the economy has been established. However, bad debt is in hiding. Who is hiding it? “Nobody alive is above suspicion!” One bank can no longer trust another in accepting an overnight draft. Maybe the other feller is trying to pass on bad debt. True enough, banking is based on trust. But if you are not allowed to test debt, or to spot bad debt through demanding payment in gold, then trust is not justified. All debt becomes sub-prime. Why should a client trust his bank, if banks cannot trust one-another?

Thus, then, my answer to the question “why gold?” is that the gold corpuscles fight incipient leukemia in the nation’s monetary bloodstream. It’s not that withdrawing them causes sudden death. But it inevitably causes death in the long run. A rather painful and ugly death.

Since currency touches practically all our people, everybody is contaminated by a corrupted monetary bloodstream. The effects of monetary leukemia are many and in some respects subtle. The withdrawal from the monetary bloodstream of the gold corpuscles which, within broad limits, keep other money and credit corpuscles in good order, has produced the typical results: profligate government spending, extravagant growth in public and private debt, the monetization of government debt, extensive socialization, artificial exhilaration (not to say irrational exuberance), bloating, intoxication, fever, chills, nervousness, irritability, irresponsibility, dishonesty, immorality, decline in the purchasing power of the currency and, characteristically, the insane fear of gold ― as the drug addict fears the withdrawal syndrome. All these mixed with elements of a pronounced monetary revolution and the scattering of dollars and other resources among the nations of the world. The dishonesty involved in, and flowing from, the use of irredeemable currency permeates practically all aspects of our economic, social, and political system and provides yet another instance of how “corruption grows as naturally as fungus on a muck heap” (Andrew Dickson White in his classical book Fiat Money Inflation in France).

The pulsation of this corrupt monetary bloodstream through an economy finally weakens and undermines the nation involved; and unless removed before the logical and final consequences are reached, eventually brings destruction ― economic, political, and social.

When the people of a nation operate with a redeemable currency every individual is able to exercise direct control over the government’s use of the public purse to the extent of his purchasing power. If he is disturbed by government profligacy or unsound banking practices, he can conserve his purchasing power by converting it into the gold coin of the realm. He is not compelled to join forces with others to form a third political party in an effort, usually futile, to protest the profligacy of government and the duplicity of the banks. But if a considerable number of people demand redemption of non-gold currency in gold, the banks experience the impact in the form of diminishing bank reserves which is passed on to the U.S. Treasury and thence to Congress. These demands for redemption are the flashing red lights on a central signal-board ― signals the banks and the government respect. The wires were crossed at the signal-board when gold corpuscles were removed from the monetary bloodstream. Ever since signals deliver the wrong message.

It is true that a redeemable currency may, and frequently does, depreciate in a pronounced degree because of the misuse of credit and debt; but it cannot depreciate to the same extent irredeemable currency can. The limit in case of the latter, as it will be most dramatically demonstrated by the dollar, is zero.

When the government cut all the wires from individuals to the central signal-board in Washington, it opened the way to an orgy of profligate spending, to an unlimited depreciation of the dollar, to the ultimate destruction of this nation, and to the overthrowing of world order. The government and the banks, freed from their proper responsibility of meeting their promises to pay, now have an unrestrainable control over the lives of the people of this nation. Freedom is lost. We have all become slaves. It is this control that the government and the banks want to perpetuate through the regime of the irredeemable dollar.

The fact that the people have lost control over the public purse constitutes a mortal danger threatening the well-being of the United States ― and that of the world as shown, for example, by the usurpation of war-making powers by the president.

The proof, if one is still needed, that the removal of gold corpuscles from the monetary bloodstream ultimately leads to cancer, is the exploding derivatives market. Its size has exceeded the $ ½ quadrillion (500 trillion) mark. Compare this with the annual GDP of the U.S. at about $ 14 trillion. Worse still, the derivatives market is growing at a pace of 40 percent per annum, roughly doubling in size every other year. This is cancer, which mainstream economists and politicians want you to ignore.

What is the solution? The answer is obvious. Put the gold coins back into circulation. Restore a healthy monetary bloodstream. Unfortunately, this is easier said than done. The failure of the initiative of Malaysia to revive the Islamic Gold Dinar is a case in point. Mainstream economists call me an old foggy-bottom and an unreconstructed belly-acher. They point to the Gold Eagles, Gold Maple Leafs, Gold Pandas, and Gold Koalas, in addition to the Islamic Dinar. “See, they are all sitting out there and refuse to circulate. They go into piggy-banks and cookie-jars. Gold just does not behave as it used to, they say. Gold is passé. You can’t put spent tooth-paste back into the tube”.

I want to explode this kind of disingenuous reasoning for once and all. The gold coins which governments have sold for profit were not meant for circulation. Governments don’t want them to circulate. They are souvenir coins, conversation pieces that people will not spend, and for a very good reason, too. People are not sure they can get them back on the same terms.

By contrast, gold coins issued constitutionally will circulate. The Constitution mandates the striking of the coin of the realm free of seigniorage. People surrender the exact weight and fineness of gold at the Mint in exchange for the coin of the realm free of charge. The right to convert is unlimited. If the government opened the U.S. Mint to gold, then people would start spending their Gold Eagle coins because they would know they had a constitutional guarantee to get replacement for their coin on the same terms. This is the wisdom of Isaac Newton, Master of the Royal Mint in London, who put England on the gold standard.

We may take it for granted that usurpers at the Federal Reserve and the U.S. Treasury have no use for Newton. They will not relinquish without a fight their monopoly of charging 100% seigniorage, as against the constitutionally mandated 0%, on issuing new money.

So how are we to restore gold corpuscles to the monetary bloodstream? It may well be that the solution is in the hands of minorities such as native Hawaiians, American Sovereign Indian Nations, or the First Nations of Canada, to establish a Mint on their reservations or territory. They don’t need more gambling casinos or more liqueur outlets. They need a Mint in order to open it to gold. The police scientists at the Federal Reserve and the U.S. Treasury may stop short of putting the Mint owned and operated by minorities out of business using Waco-type violence.

If the minorities did open a Mint to gold, it would be “their finest hour.” A grateful posterity would remember them for their heroism in defying slavery insidiously imposed by a reactionary monetary regime on them as well as on the rest of the world.

If they did that, we could truthfully say that “never have so many owed so much to so few”.


Session Three of Gold Standard University Live (GSUL) will take place in Dallas, Texas, U.S.A., from February 11 through 17, 2008. We are happy to announce that this program is sponsored by Mr. Eric S. Sprott, LL.D., C.A., CEO of Sprott Asset Management Inc. of Canada. The program is in three parts:

(1) A course on Adam Smith’s Real Bill Doctrine and its Relevance Today, consisting of 13 lectures. Professor Lawrence H. White of the University of Missouri, St.Louis, has been invited to represent the opposing view. Date: from February 11 through 14.

(2) A debate on the Economics of Gold Mining. The failure of Barrick Gold’s hedging program. True or Bilateral hedging. With industry participation. Date: February 15-16.

(3) A panel discussion entitled Gold Profits in Troubled Times where paraphernalia such as the gold and silver basis, gold and silver lease rates, NAV of gold and silver ETF’s, the bimetallic ratio, and the variation of these will be discussed with invited experts. Please note that this is a new departure in gold and silver investing through bimetallic arbitrage. Date: February 16-17.

The registration fee for GSUL Session 3 covers participation in all three programs, the course during the week February 11-14 and the debates during the week-end of February 15-17. It is also possible to register for the week-end programs separately at a reduced fee. Participation is limited; first come first served. Participants pay their own hotel and meal bills. The cost of the closing banquet is included in the registration fee.

For the benefit of European friends of Gold Standard University, Session Three will be repeated, March 10-16, 2008, at Martineum Academy in Szombathely, Hungary, where the first two sessions of GSUL were held, provided that a sufficient number of people register.

For further information please check or inquire at

We are pleased to announce that a new website is now available. It contains e-books, archives, news about GSUL, and material of current interest.

November 24, 2007.

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Nov 23, 2007

Richard Russell: A Primary Bear Market

A Primary Bear Market

Richard Russell Dow Theory Letters
Extracted from the Nov 21, 2007 edition of Richard's Remarks

It was a noble battle, it was a battle that seemed almost endless. But today the great battle ended. Today the D-J Industrial Average closed below its August 16 low of 12845.78, thereby confirming the prior violation of the Transportation Average. In so doing, the stock market and the Dow Theory have spoken -- they have confirmed the existence of a primary bear market.

One of the precepts of the Dow Theory is that neither the duration nor the extent of the primary trend can be predicted in advance. I have absolutely no idea whether this is fated to be a mild bear market or a severe one.

Well, there is one hope and one hint. The most authoritative bull or bear signal comes when both Averages, Industrials and Transports, break through critical levels simultaneously. That is not what happened in the current instance.

The Transports broke under their August 16 low of 4672.35 back on November 7. Today the Industrials finally confirmed, so the bear signal was not given simultaneously. If there is even a hint that this bear market will be "kind," this is the hint, but I'll admit that this line of reasoning may be far-fetched. The fact that we must operate on is that the primary trend of the stock market is now definitely bearish. The great primary trend of the market is pointing down.

I've done my best to prepare my subscribers for this possibility. True, I did continue to "hope" that the Dow could stave off a break below 12845.78. The Dow did resist that situation for week after week. Alas, today the support gave way, and the Dow succumbed.

What to do now? I don't have any magic formula. Prudence dictates that we be light, very light, in our holdings of common stocks. Those subscribers who are holding top-grade dividend-paying equities may decide to sit tight. Those subscribers in the "compounding business" with large reserve funds may decide to weather the storm, collect the dividends, and continue to compound, buying additional shares at whatever price the market may offer at the time.

Those with large stock holdings may simply decide to cut back. After all, a lot can be said for the luxury of a good night's sleep. Personally, I've chosen what I call the "way of the sleeper." I'm very low on common stocks, in fact the only common stocks I now hold is a limited position in GDX, the exchange traded fund for precious metal shares.

Thought -- the market was oversold or actually severely oversold as of yesterday's close. A big break today renders the stock market oversold to the extreme. This could lead to a rally very shortly, and such rallies often take the Averages back to test their initial breakdown levels. If we do get such a rally, it would provide subscribers with a second chance to lighten up.

Note that the S&P and the Wilshire have NOT confirmed the Dow. In one of the strangest situations I've ever dealt with, neither the S&P 500 or the Wilshire 5000 have confirmed the Dow in that neither the S&P nor the Wilshire have violated their August 16 lows. What is the meaning of this absolutely weird situation? I don't know -- honestly I really don't know. But it is certainly something to think about.

Does the superior action of the S&P and the Wilshire cast doubt on the Dow Theory bear signal? I don't know. I've never in fifty years of watching market action seen this type of situation.

There isn't a lot more that I can say that is worth saying. The market has told its story. The scene has changed. I've lived through these changes before, and so have my subscribers. A few of my subscribers have been with me for almost 50 years. We've survived and done pretty well over those 50 years. We will continue to survive, regardless of the mildness or ferocity of this bear market.

click for magnification
click for magnification
charts courtesy of

This is an adage that I dreamed up many years ago, but I'm afraid that it's just as true today --

"In a bear market, everyone loses, and the winner is the one who loses the least."

lots more follows for subscribers...

Nov 21, 2007
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
© Copyright 1958-2007 Dow Theory Letters, Inc.

Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

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Nov 22, 2007

Will Dow-gold ratio hit one-to-one again?

Newmont vice-chair Pierre Lassonde looks back at where the price of gold was, and how high it might rise, in this interview with business reporter Lisa Wright.

Q. What do you make of this correction of gold prices?

A. Hey, a year ago it was at $600-and-something (U.S.), so it's still pretty good. We're just getting a bit of a pullback, which is healthy. But I do believe that over the next year or two we'll break right through the $850 (barrier). At some point in the next five years you'll see gold with three zeroes after the first number, we just don't know what number that's going to be.

Q. So where is gold headed?

A. I'll bring out my crystal ball (laughs). But everything is pretty well unfolding the way that we had anticipated and gold is responding primarily to the devaluation of the U.S. dollar. That correlation is the most important in terms of the gold price. We had foreseen that we were going to chase the old highs, the $850 (range), and just almost touched it last week.

Q. What's your theory on the price?

A. Something I've been pointing out since 1999 in our Franco-Nevada annual report is the Dow Jones industrial average divided by gold price. It will blow you away. The Dow represents financial assets while gold represents hard assets. And, over a 100-year period from 1920 to today, there are cycles. There are times to own financial assets, when the ratio goes up, and then there are times to own hard assets, when the ratio goes down because it's one against the other.

So from 1920 to 1929, you wanted to be in financial assets. From 1929 to 1935 you really wanted to be in gold. This is a very interesting thing because the financial asset peak was in 1966. And then the hard asset peak was 1980, so this was a 14-year bull market in hard assets. When you think about it gold went from $35 to $850. If I told you in 1966 that gold is going to $800, you'd say `Lassonde you're completely out of your mind. You're wacko.' But oil went from $2.50 to $50 in that same time. And you know what happened to real estate prices in Toronto in the '70s.

Now here's the real kicker. At the top of the hard-asset bull market, (1933), the Dow, which had been 370 at the top, bottomed at 37, and gold peaked at (about) $35. The ratio was essentially one-to-one. In 1980, the Dow was (about) 800 and gold was $800. One-to-one. You know where the Dow is today – (just over) 13,000. Gold is $800. In every bull market in the last 100 years the ratio came down to essentially one-to-one.

Q. Is this Dow versus gold theory picking up steam?

A. When you tell portfolio managers this, it scares the heck out of them. If the Dow was to lose 90 per cent of its value and go down to 1,200 and gold is at $1,200, you have one-to-one. But then they're wiped out. They're kaput. Or is the Dow going to come down to 6,000 or 8,000 and gold is going to go to $6,000 or $8,000? That's what happened in 1980. The Dow only lost 20 per cent of its value but gold just went straight up.

Q. What do you realistically see happening?

A. When people say to me, what's going to propel gold to $2,000 or $3,000? I don't know. How could I have foretold the events of the 1970s, for instance? Here I think we have a multiplicity of events. We have an industry that's shrinking. We have central banks that are going to turn into buyers, not sellers. And the European central banks are going to run out of gold .... So I do think we're going to continue to see good times in this industry for a generation.

Q. People don't think gold has been in as big a bull market as base metals.

A. That's right. Copper went from 65 cents to $4. That's seven times. Gold is up three times. Oil went from $12 to $96. That's eight times. So, in effect, gold has been the lagging commodity in this hard-asset bull market.

Q. Are these exciting times?

A. Well, the 1970s were a lot of fun but they're generational bull markets. You have to wait 20 years in between. You've got to keep yourself busy. I must admit, being a bit older (and) having more money, this is even more fun.

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Liberty Dollar (backed by P.M.)

If you're wondering the reason why the FEDs are trying to knock the Liberty Dollar concept down (before it spreads like wildfire!), then take a look at this short video (made before the FED raid) for your answer...

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More than 700 tonnes worth $19Bn now held in gold ETFs

Both short-term factors as well as longer-term movements in supply and demand suggest the outlook for gold in the medium to long term is strong says WGC CEO.

Author: Atul Prakash
Posted: Monday , 19 Nov 2007

MUMBAI (Reuters) -

The investor base of gold exchange traded funds has been growing, with inflationary fears and uncertainty in the financial markets attracting significant inflows, the World Gold Council's chief executive officer said.

"We are seeing inflows from all types of investors who recognise this as a secure, low cost way to owning gold bullion without the additional costs normally associated with insuring, storing and transacting in physical gold," London-based James Burton of the industry-funded council told Reuters on Monday.

"While retail investors are an important component to the success of ETFs as they are traditionally long-term investors, we are also seeing investment from institutions, including pension funds, who are increasingly investing in commodities as a way of diversifying their portfolios, he said."

Speaking on the sidelines of a global precious metals conference organised by the London Bullion Market Association, Burton said that the funds attracted a significant amount of investment in recent weeks due to uncertain market conditions due to dollar weakness and nervousness in financial markets.

Strong fundamentals also encouraged investors to pour money into the products that are traded on stock exchanges. Investors do not need to take physical delivery of the metal as the issuers buy matching gold to keep in their vaults.

World Gold Council-sponsored gold ETFs now hold more than 700 tonnes of gold worth nearly $19 billion.

Gold holdings by New York-listed StreetTRACKS Gold Shares, the world's largest gold-backed ETF, hit a record high of 599.5 tonnes earlier this month before slightly falling to 588.74 tonnes last week. The fund has surged 45 percent in volume terms in the past one year.


Burton said both short-term factors as well as longer-term movements in supply and demand suggested the outlook for gold in the medium to long term was strong.

"Continued weakness in the U.S. dollar, inflationary fears fuelled by rising oil and unstable financial conditions have all been factors that have helped boost gold in the short term.

"In volatile and uncertain times, we often witness a 'flight to quality,' when investors seek to protect their capital by moving it into assets considered to be safer stores of value."

Spot gold hit a 28-year high of $845.40 an ounce earlier this month and was just $5 away from its historical high of $850, fixed in London in January 1980.

The metal was quoted at about $789 an ounce on Monday.

Burton said gold supply and demand fundamentals also remained strong, with a reduction in mine output in recent years and no new major gold finds by the mining industry.

"This is at a time when the demand for gold has continued to increase. Strong economic growth and sustained promotion in the key gold jewellery markets of India, China and the Middle East are leading to strong demand for gold jewellery," he said.

"Both institutional and retail investors are increasingly familiar with gold's portfolio diversification benefits, whilst they also have easier access to investing in gold through exchange traded funds." (Reporting by Atul Prakash; Editing by Peter Blackburn)

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....por que no te callas? (cancion)

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Nov 18, 2007

A perfect storm for gold as mines left empty...

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, November 15, 2007

The era of "peak gold" has arrived.

Try as they might, miners cannot find enough ore at viable costs to replace their fast-depleting reserves, even if they dig miles into the centre of the earth.

"There's not much gold out there," said Gregory Wilkins, chief executive of top producer Barrick Gold.

"Global mine supply is going to decrease at a much faster rate than people generally believe. Many of the new mines that people are anticipating will never come into production," he told the RBC Capital Markets gold conference in London.

"There is a great disparity between the money spent on exploration and success. It's hard to say where the price of gold is going because we're in uncharted waters. I would say it could easily move to $900, $1,000, or beyond. It could happen very quickly," he said.

We know from the US Academy of Sciences that some 26 percent of all the copper and 19 percent of all the zinc that ever existed in the earth's crust has already been lost to mankind, mostly wasted in milling or smelting or buried in landfills.

Data has never been collected for gold, and the 5 billion ounces of gold mined over history is still around. Roughly 1 billion are in central bank vaults. But the same patterns of exhaustion are emerging.

South Africa's output is down to the lowest since 1932. Much of what remains elsewhere is locked up in no-go countries run by demagogues or serial expropriators.

"You don't put yourself in harm's way. It's a non-starter to invest in a country that takes your mine away from you," said Mr Wilkins.

"The list of countries where we won't go is getting longer. There's Venezuela, and all the countries in Latin America that are influenced by (Hugo) Chavez.

"In Ecuador they withdraw licences after they have been issued. You can't tolerate that kind of instability. Russia is another country where things are deteriorating," he said.

Kevin McArthur, chief executive of Goldcorp, said his group was not setting foot outside North America.

"We won't build a mine where we won't go on holiday. We're even tending to stay out of the US because that has some of the highest political risk in terms of mining investment," he said.

The gripe is that revisions to the 1872 Mine Act in the United States will add royalty costs and allow regulators to shut down projects on a whim.

Mr McArthur said global output was on a relentless slide. "We'll see four-digit gold. It will have to reach $2,500 an ounce to equal the 1980 record in today's terms, so we have a long way to go," he said

Gold reached a 27-year high of $846 an ounce in early November following rate cuts by the US Federal Reserve, though it has fallen back on profit taking.

Investors seem to be betting on a "Bernanke reflation," suspecting that the Fed will turn the liquidity tap back on to cushion the US property slump.

Tony Fell, chairman of RBC Capital Markets, said the world money supply has been growing by 5-10 percent while the stock of mined gold has been rising at 1.6 percent, creating a mismatch that must be covered.

Mr Fell says the total debt burden in the US has exploded to 340 percent of GDP, in stark contrast to the steady levels of around 150 percent of the postwar era.

It almost insures further dollar debasement. "We're in the very early phases of a prolonged bull market," he said.

RBC argues that the global dollar system known as Bretton Woods II is "coming apart at the seams" as Asian, Mideast, and Latin American states start to break their dollar links to avoid importing US inflation.

The result is to resurrect gold, which is fast regaining its role as the world's benchmark currency.

It was the last currency bust-up -- caused by America's attempt to the fight the Vietnam War and fund the Great Society without adequate taxes -- that lay behind the 1970s bull market in gold.

"The fact that monetary policy in the core was too loose for the periphery triggered the demise of Bretton Woods 1. The late 1960s saw first France and then Germany and Britain all start to swap their dollar reserves for gold. We may well be witnessing a similar situation today as price pressures build in the emerging world," RBC said in a new report.

However, the bank warned that gold was looking toppy after the blistering autumn rally and faced a likely selloff in coming weeks, perhaps to $725-$750.

India's gold-buying season is coming to an end with the Diwali Festival. The country accounts for 22 percent of world gold demand.

The level of speculative "long" positions on New York's Comex futures market has remained above 20 million ounces for five weeks in a row. This sort of pattern is typically followed by a sharp slide, although the global credit crunch and bank scares may change the game this time.

RBC says any correction is likely to be short, with gold probing record highs of $900 an ounce early next year.

Whether the gold mining shares will at last join the party is far from clear. Many have languished through the bull market, and some are trading well below levels reached when gold was half the price.

Costs are rising at $60 an ounce annually. They will average of $460 by next year. From tires to diesel fuel and the geologists' salaries, mine inflation is running at 15 percent.

Ian Cockerill, head of Gold Fields, said the industry had "shot itself in the foot" by touting production cash costs that were not even close to the real figure.

Hence the fury of shareholders left trying to understand how so many mines could have gone bust when alleged costs per ounce were half the spot price of gold.

"We've deluded ourselves and we've deluded investors by failing telling them about all the other bills we have to pay. Until we tell them the total cost per ounce, we'll never have credibility," he said.

RBC is betting that the gold mining shares will soon start to shine again, enjoying their famed leverage to the spot price.

At $1000 an ounce, it forecasts a share feast: Barrick up 65 percent, Newmont 80 percent, IAMGOLD 90 percent, NovaGold 90 percent, and Centerra 100 percent.

Purists will always prefer ingots of glistening metal.

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Gold: the Big Picture...

...stay focused with this series of superb charts (in pdf) drawn by Trader Dan (Norcini) from J.S. Minest: HERE

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Mistakenly disclosed affidavit outlines case against Liberty Dollar

Dear Friend of GATA and Gold:

The federal raid on the Liberty Dollar organization was the product of an elaborate undercover operation and was based on a claim that Liberty Dollar's products were "intended for use as current money" in violation of Title 18, Section 486, of the United States Code.

The government's complaint is outlined in the raid's seizure warrant affidavit, which was temporarily disclosed by accident in U.S. District Court in Charlotte, North Carolina, and then posted on the Internet by vigilant libertarians. The affidavit can be found here:

The government's complaint also alleges that Liberty Dollar's marketing practices justify charges of mail fraud and money laundering.

But the government's main objection seems to be what it considers excessive similarity between government-issued coins and what Liberty Dollar calls its medallions, which, the government contends, causes the medallions to be mistaken for government currency.

This case will be important for its bearing on constitutional law and individual rights to possess and trade in gold, silver, and copper, even as it may turn on the issue of likeness. Liberty Dollar might be in a stronger position if it did not use the word "dollar" or the dollar sign on its medallions and instead denominated its medallions only by weight in metal. Still, it is hard to see how people could be deceived into thinking that the Liberty Dollar products are issued by the government and are legal tender "for all debts, public and private," rather than devices for barter.

In any event Bill King, editor of The King Report, may have had the most telling observation on the controversy: that the government would have had no problem with the Liberty Dollar organization if, like the wildly unregulated gangsters in the Wall Street financial houses, it had been pushing collateralized debt obligations instead of honest money.

A Washington Post Weblog story that disclosed the libertarians' posting of the Liberty Dollar raid affidavit is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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In Ron Paul Coins, Federal Agents Don't Trust

By Alec MacGillis
Washington Post
Friday, November 16, 2007

As if Ron Paul's supporters needed any more motivation to storm the battlements and wreak havoc on the Republican presidential primary, now comes this: The feds are trying to take away their money.

Federal agents on Wednesday raided the Evansville, Indiana, headquarters of the National Organization for the Repeal of the Federal Reserve and Internal Revenue Codes (NORFED), an organization of "sound money" advocates that for the past decade has been selling what it calls Liberty Dollars, a private currency it says is backed by silver and gold stored in Idaho, with a total of more than $20 million in circulation, according to the group.

NORFED officials said yesterday that the raid occurred just as they were preparing to mail out the first batch of about 60,000 "Ron Paul Dollars," copper coins sold for $1 and decorated with the craggy visage of Paul, the libertarian Texas congressman, Iraq war opponent and sound-money advocate who has sparked a surprisingly vigorous insurgent campaign for the GOP nomination. The group says that it in recent months it already shipped out about 10,000 in silver Ron Paul dollars that sold for $20.

Bernard von NotHaus, NORFED's founder and executive director, said in an interview from his home in Miami Friday night that his employees in Evansville had received the copper dollars late last week and managed to mail out only about 3,500 of them so far. After a six-hour raid, he said, the agents left with the rest of the coins, which weighed about two tons total, as well as smaller amounts of silver Ron Paul dollars, gold Ron Paul dollars that sell for $1,000 and platinum Ron Paul dollars that sell for $2,000. There was a separate raid, NotHaus said, of Sunshine Mint in Coer D'Alene, Idaho, a company that prints the organization's coins, where von NotHaus said agents seized the huge pallets of silver and gold worth more than $1 million that the organization says back the paper certificates issued to its customers.

"They took everything, all of the computers, everything but the desks and chairs," said von NotHaus, who says he served 25 years as the mintmaster for the Royal Hawaiian Mint. "The federal government really is afraid."

The Indianapolis branch of the FBI declined to comment on the raid and referred calls to the U.S. Attorney's office for Western North Carolina in Charlotte. That office's spokeswoman, Suellen Pierce, also declined to comment. But bloggers at the libertarian Reason Foundation posted on-line a 35-page copy affidavit for a search warrant filed last week with the Western District in Asheville laying out the government's case against NORFED. Pierce said that the search warrant in the case had been accidentally made public by a court clerk and has since been sealed, under court rules.

In the affidavit, an FBI special agent states that he is investigating NORFED for federal violations including "uttering coins of gold, silver, or other metal," "making or possessing likeness of coins," mail fraud, wire fraud, money laundering and conspiracy. "The goal of NORFED is to undermine the United States government's financial systems by the issuance of a non-governmental competing currency for the purpose of repealing the Federal Reserve and Internal Revenue Code," he states.

The agent states that the investigation started two years ago. And the U.S. Mint a year ago issued a warning against using the Liberty Dollar, prompting a lawsuit by NORFED. But that has not kept Liberty Dollar fans from speculating on-line that the raid was prompted by Paul's strong campaign -- which recently raised more than $4 million in a single day -- or by the precipitous recent decline in the value of the dollar.

A Paul campaign spokeswoman, Kerri Price, said yesterday that while Paul also supports abolishing the Federal Reserve, the campaign "does not have any affiliation with Liberty Dollars at all." von NotHaus confirmed this, saying that he knows Paul because they "move in the same circles" but that he had expressly not talked with Paul about his plans for the special coins so as not to violate federal election rules.

But the coins have been another rallying point for Paul's supporters, who have asked Paul to pose for photographs with the coins on the campaign trail. Jim Forsythe, a Paul organizer in New Hampshire who ordered 150 of the copper Ron Paul dollars, said yesterday that the seizure of the coins would likely fuel more support for Paul, who scores close to double-digits in some New Hampshire polls. "People are pretty upset about this," he said. "The dollar is going down the tubes and this is something that can protect the value of their money and the Federal Reserve is threatened by that. It'll definitely fire people up."

Von NotHaus, meanwhile, is urging Liberty Dollar supporters to express their outrage by donating to Paul, saying on the group's Web site that "in light of this assault on our financial freedom, it is clear that we need Ron Paul to lead this country more than ever." He said that all of his bank accounts have been frozen and that he expects that a federal indictment will soon be in the offing, saying that "once the federal government starts an investigation like this and takes it to a grand jury, they can indict a ham sandwich." Should he be charged, he said, "I'll turn it into my golden opportunity to validate the Liberty Dollar as a legal lawful currency and save the country from a monetary collapse."

What he's most concerned about for now, though, is the thought of all his customers waiting for their Ron Paul dollars. "People aren't going to get their orders, and they aren't going to get them for a while," he said.

That is good news, of course, for those already holding the coins. On eBay, the silver Ron Paul dollars that were purchased for $20 were selling for more than $170 last night.

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Nov 15, 2007

Feds raid Liberty Dollar and seize and freeze everything

The FED's "Untouchables" sensing real danger from real money competition couldn't help it but strike at the "evil counterfeiters". But who's the Real Counterfeiter here?...

"...You and I would go to jail if we dared to "print" money. Counterfeiting is a crime. However, the Federal Reserve has the legal monopoly of writing unlimited checks. In short, the Fed is "legal counterfeiter".
While we have to work to obtain money, the Fed has the power to inject newly created money into the banking system to stimulate the economy and lubricate the wheels of commerce
..." (from Murray Sabrin's "Bernanke and the Panic Button")


Dear Friend of GATA and Gold:

The Liberty Dollar organization announced this morning, via the letter appended here, that federal agents today raided its offices in Evansville, Indiana, and confiscated all its property and equipment.

This moves seems extraordinarily bold considering that Liberty Dollar's right to operate already was being litigated in federal court.

Let's hope that Liberty Dollar soon can force the government to answer in federal court for today's action.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Liberty Dollar Company Announcement
Thursday, November 15, 2007

Dear Liberty Dollar Supporters:

I sincerely regret to inform you that about 8 this morning a dozen FBI and Secret Service agents raided the Liberty Dollar office in Evansville, Indiana.

For approximately six hours they took all the gold, all the silver, all the platinum, and almost two tons of Ron Paul Dollars that were just delivered last Friday. They also took all the files and computers and froze our bank accounts.

We have no money. We have no products. We have no records to even know what was ordered or what you are owed. We have nothing but the will to push forward and overcome this massive assault on our liberty and our right to have real money as defined by the U.S. Constitution.

We should not be defrauded by the fake government money.

But to make matters worse, all the gold and silver that backs up the paper certificates and digital currency held in the vault at Sunshine Mint has also been confiscated. Even the dies for minting the gold and silver Libertys have been taken.

All this has happened even though Edmond C. Moy, the director of the U.S. Mint, acknowledged in a letter to a U.S. senator that the paper certificates did not violate Section 486 and were not illegal.

But the FBI and Secret Service took all the paper currency too.

The possibility of such action was the reason the Liberty Dollar was designed -- so that the vast majority of the money was in specie form and in the people's hands. Of the $20 million Liberty Dollars, only about a million is in paper or digital form.

I regret that if you are due an order, it may be some time until it will be filled, if ever. It now all depends on our actions.

Everyone who has an unfulfilled order or has digital or paper currency should band together for a class-action suit and demand redemption. We cannot allow the government to steal our money.

Please don't let this happen.

Many of you read the articles quoting the government and Federal Reserve officials saying the Liberty Dollar was legal. You did nothing wrong. You are legally entitled to your property. Let us use this terrible act to band together and further our goal -- to return America to a value-based currency.

Please forward this important alert so everyone who possesses or uses the Liberty Dollar is aware of the situation.

Please go here to sign up for the class action lawsuit and get your property back:

Thanks again for your support at this darkest time as the damn government and its dollar sinks to a new low.

Bernard von NotHaus, Monetary Architect
Liberty Dollar
Evansville, Indiana

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Gold Bugs Riding Wave of Rising Prices

Gold Bugs Riding Wave of Rising Prices

By David Nicklaus
St. Louis Post-Dispatch
Wednesday, November 14, 2007

For the last 25 years, people who wanted to own gold have had a slightly kooky reputation. Mostly older males. Survivalists, maybe. Pessimists, certainly.

Now, with gold at $800 an ounce for the first time since 1980, Dennis McCormick is providing a primer on precious metals to a lot of people who don't fit the stereotype. Men and women, young and old, are coming into his Missouri Coin store in Des Peres. They've never owned bullion before, or gold or silver coins, but they want some now.

They're not doom-and-gloomers who want to convert all their savings into gold, McCormick says, but they see the metal as an important diversification tool, a hedge of sorts. After all, they saw credit markets seize up this summer, and they've been watching the dollar decline.

Last month Missouri Coin sold seven times as much gold and silver as it did a few months earlier. And interest is continuing to build.

"A week ago was the first time I saw fear in their eyes," McCormick said. "They were fearful of the dollar's collapse. ... They wanted to diversify their portfolio and have something in hard assets."

The gold buyers coming into McCormick's store are part of a global parade that's rapidly turning into a stampede. The spot price of gold has risen nearly $100 in the last two months and $300 in the last two years.

That puts it within hailing distance of $850 an ounce, the record price reached in January 1980.

Gold traditionally is a safe haven in times of conflict, and the bull market in precious metals started almost simultaneously with the Iraq war in 2003. It's also a hedge against inflation, which erodes the value of paper assets, and inflation fears seem to be driving the recent rise.

Wistar Holt, a partner at Holt & Shapard Capital Management in St. Louis, has had most of his clients' money in gold-mining stocks since 2001. When he last calculated his returns in June of this year, his portfolio had gained an average of 27 percent annually, net of fees.

Holt believes that the dollar will continue to weaken -- and gold to strengthen -- while the Federal Reserve tries to prevent a recession. The Fed has lowered interest rates twice since September, making dollar-denominated bonds less attractive to foreign investors. Many of those foreigners -- including the Chinese, South Koreans and Russians, Holt says -- are buying significant amounts of gold.

For the average American, investing in gold is easier than ever. If you don't want to go to the trouble of buying physical gold, or understanding the finances of mining companies, you can buy an exchange-traded fund that tracks the metal.

Still, many Americans scoff at the shiny stuff. "I think the U.S. investment community is basically still out of this rally," Holt said. "Before we see the peak, U.S. investors will be very much in it the way they were back in 1980. And when U.S. investors get involved, the returns could be enormous."

Adjusted for inflation, the peak 1980 price amounts to more than $2,400 today. Holt thinks gold could challenge that record, and he says it will easily surpass $1,000 in coming months.

How will he know when to take his winning bet off the table?

Only when Wall Street firms start touting gold like they push technology stocks, Holt says, will his favorite investment be in danger of losing its shine.

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Nov 14, 2007

Ron Paul vs Ben Bernanke on the nuances of Inflation

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Nov 10, 2007

Ron Paul (there's still hope for America)


Nov 9, 2007

Bretton Woods II: coming apart at the seams

By Russell Jones (Global Head of Fixed Income and Currency Research for the Royal Bank of Canada Europe Limited)

· The Bretton Woods II thesis of a sustainable symbiosis between a deficit prone core and a capital rich and export focused periphery was always based on questionable history and optimistic assumptions.

· And today, it is clear that the economic costs of this regime are increasingly outweighing the perceived benefits.

· As happened with Bretton Woods I in the late 1960s, inflation risks and worries about the dollar are disrupting the cartel.

· Emerging market currencies are on the move and the risk is of a further down leg for the US currency that could develop into a disorderly crescendo.

· Going long a basket of emerging Asian currencies is an attractive option.


Since 2003, it has regularly been asserted that the tendency of certain countries to tie their currencies formally or informally to the dollar amounted to a new system of international finance. This system has been christened "Bretton Woods II" because of the perceived similarities to the system of fixed exchange rates that prevailed in the initial post-war decades. Just as was the case 40 or 50 years earlier, this new system had the US at its core, with a number of less mature peripheral countries linking their currencies to the dollar at artificially low rates. But this time around, rather than Europe and Japan, the periphery was composed of emerging Asia and additional nations in Latin America and the Middle East.

Nevertheless, it has been stressed that the symbiosis between the core and the periphery operated much as it had done before. The periphery was able to enjoy stable export-led growth via a cheap currency, the corollary of which was the accumulation of low yielding reserves issued and denominated in the currency of the core. The core, for its part, achieved cheap financing for a mounting external deficit and was able to extend the period during which it could live beyond its means.

Such was this mutually satisfactory outcome that it was believed this state of affairs could prevail for an extended period, perhaps even indefinitely.


In reality, the historical similarities between the two periods and systems have frequently been exaggerated, and some of the significant differences all too easily glossed over. For example:

· The peripheral countries are much more numerous and heterogeneous today than in the 50s and 60s, when much of the developing world was not yet fully integrated into the international economy.

· In the prior period, the US current account balance never hit the extreme levels recorded of late. Indeed, the US was actually in surplus, and therefore exporting capital to the rest of the world, until the onset of the Vietnam War.

· The US currency was at the time fixed to gold - a hard currency peg - while it is now freely floating and the US authorities' commitment to keeping it stable is so limited as to be virtually worthless.

· And the old system was for years only sustained by a complex range of capital and other controls. Indeed, for much of the latter stages of its existence, Bretton Woods I required constant patching up as it lurched from one crisis to another and was increasingly seen as a source of international instability. When it finally broke down in the early 1970s and the US abandoned its gold peg, it left in its wake an unholy mess of sharply rising inflation, exchange rate and interest rate volatility and fractured political relationships.


It is also true that, rather than an exercise in rose-tinted nostalgia for the swinging sixties, Asia's predilection for export-led growth in the current millennium had rather more practical origins. In short, it grew out of the Asian financial crisis of the late 1990s. At that time, a number of countries with external deficits and limited foreign reserves found themselves at the mercy of sudden shifts in risk appetite and financial flows, and were rapidly forced into gut-wrenching fiscal and monetary adjustments to re-establish confidence in their currencies. Reserves also had to be rebuilt from scratch and what began as an understandable effort to restore a semblance of international credibility subsequently rather developed a life of its own.

But whatever the shortcomings of the historical analysis, the fact is that much of the emerging world has been quite happy over recent years artificially to depress their exchange rates to sustain export growth, improve their current account positions and recycle much of the money earned back into the US via reserve accumulation and the purchase of dollar fixed income securities. The latest IMF Economic Outlook estimates the external surplus of the Asian NIEs in 2007 at 5.4% of GDP, that of the ASEAN 4 at 4.7%, China's at 11.7%, the Middle East's at 16.7% and Latin America's at 0.8%.


However, there are now growing signs that the Bretton Woods II system is breaking down as the economic costs associated with it increasingly outweigh the benefits of stable export-led growth.

Bretton Woods II has generated a perverse constellation of capital flows and a misallocation of resources in both the US and those countries whose currencies are linked to the dollar. Capital, rather than flowing from the relatively mature and low return core to an opportunity rich periphery, as economic theory and common sense would suggest (no jokes please), has been moving in the opposite direction. Meanwhile, in the US, domestic spending, and in particular consumption, is being subsidised at the expense of exporters and those competing with importers, while there is less incentive for the US to adjust its policy-mix in an optimum manner. Interest rates are depressed and lower borrowing costs encourage the government to spend more. Outside the US, the subsidisation of exporters and import substitutes reduces current incomes. Such distortions are bound to encourage a political backlash from affected interest groups, of which US protectionism - which, it should be noted, also often enjoys a new lease of life in election years - is perhaps the most obvious manifestation.

Part and parcel of this process is that those countries adhering to the Bretton Woods II model adopt a cost of capital determined by US monetary policy rather than by their own domestic conditions. With the Fed latterly in easing mode, this has meant that monetary conditions in the periphery have loosened and that they could well get looser still, should, as seems likely, the US central bank deems it necessary to provide further support to a traumatised financial sector and domestic activity in general. In most of these economies, an independent monetary regime would have seen the domestic authorities tightening over recent months rather than loosening and, not surprisingly, we have seen a growing reluctance on the part of some, not least the Saudi Arabian Monetary Authority, to march in lockstep with Dr. Bernanke and his colleagues.

Reserve accumulation has gone well beyond the prudent. China now has more than $1.4tr in fx reserves and, as the table below illustrates, seven of the top ten holders of fx reserves are in Asia, with Russia and Brazil also on the list. Not just in these economies, but in a broader range of emerging market economies, reserves run far in excess of six months of imports and 20% of GDP, which in any context would represent extremely conservative insurance policies against an interruption of international capital flows. In the meantime, the return on these assets, which are typically short term and low risk in nature, is well below the average rate of return available on domestic assets. Former US Treasury Secretary Larry Summers estimated more than a year ago that the opportunity cost of the excessive wealth tied up in reserves was some 2% of those economies' GDP, or the equivalent of global foreign aid or the next round of gains from global trade liberalisation! And, of course, there is also the threat of major capital losses on these assets should the dollar continue to decline. Ten H

Top Ten Holders of

FX Reserve ($bn, latest)











South Korea








Hong Kong


The sterilisation of fx reserves is a further problem, especially in countries with relatively underdeveloped money markets. Commercial bank balance sheets can become saturated with sterilisation instruments, forcing interest rates on them higher and adding to the cost of the process. China, for example, is suffering consistent problems in controlling monetary growth and is now seeing rapid asset price inflation spill over into more elevated rates of increase in goods and service prices. An alternative mechanism to limit monetary growth is to raise the reserve requirement ratio, which China has been doing consistently of late. But while this is not costly for the central bank, it does represent a tax on the banking sector and can promote disintermediation as non-banks seek to by-pass the requirements.


It was worries about inflationary policies and the fact that monetary policy in the core was too loose for the periphery that triggered the demise of Bretton Woods I. The late 60s saw first France and then Germany and Britain all start to swap their dollar reserves for gold as they questioned why they should continue to accumulate assets at depressed yields in a currency that was only going to go one way - down. We may well be witnessing a similar situation today, as spare capacity is increasingly exhausted and price pressures in the emerging world build - the greater the instability in prices, the greater the likelihood of currency realignments.

And the members of Bretton Woods II have already begun to adjust their behaviour. For some time now, they have been gradually diversifying their fx reserves away from dollars. The dollar share of global reserves was more than 71% in the late 1990s. It is now under 65%, with the Euro (25.6%) and Sterling (4.7%) the prime beneficiaries of the rebalancing. In addition, a number of countries have set up, or are in the throes of setting up, sovereign wealth funds in an effort to achieve a higher rate of return on their reserve assets by investing in a broader range of assets. Korea and China are just two examples of those choosing to go down this path.


And finally, countries are proving more willing to let their currencies rise. China has widened its intervention band from 0.3-0.5% and officials have talked openly of the pressures building for a faster pace of appreciation. But attitudes to revaluation have evolved right across the emerging world, from Brazil to India, from Russia to Turkey, and from Vietnam to Kuwait.

Although not without some merits - for example, it encouraged us to consider how national balances of payments fit together as interdependent elements of a larger system - the Bretton Woods II thesis was, in truth, always a stretch. It was based on a superficial view of history and encompassed a good deal of complacency about the negative aspects of the regime. It implied the existence of a cohesive bloc of countries happy to act in their collective self-interest for a protracted period - in effect a cartel. But cartels tend to break down under strain. And just as in the late 1960s, it is in the interest of each member to exit the cartel before the dollar collapses.

If Bretton Woods II is, indeed, now unwinding, then there are some clear market implications. First, the dollar is going to fall further, perhaps substantially so, and second, a number of pegs and quasi pegs will be broken, or at the very least evolve in some way, shape or form. Of course, politics will play a part in the precise timing and nature of this evolution, especially in countries like Saudi Arabia or Hong Kong, but generally speaking, the currencies that will probably gain most will be those that have the largest current account surpluses and most dynamic economies - in this sense buying a basket of emerging Asian currencies would appear to be a sensible strategy. In the meantime, asset diversification will provide greater support to equities and remove some support from US Treasuries, although whether this rebalancing of demand will be sufficient to dominate the effects of the underlying cyclical dynamics in the world economy is open to question.

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Nov 8, 2007

James Turk: Gold's Infallible Indicator - Six Months Later

"...Over the years, this indicator has been one of my favorites. It has been so good that I call it “gold’s infallible indicator”. True to form, this indicator is still scoring 100%."

To read about J. Turk's infallible gold indicator please click HERE

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Nov 7, 2007

Bill Murphy's 'Midas' commentary posted at GoldSeek

Is this gold move a big deal? No … $1350 bid would be a big deal. Right now there is little belief, understanding, or enthusiasm over the moves in gold and silver. Most observers are looking cross-eyed at the price rises and remain clueless as to what is happening and why.

Café members who have been around for some time know exactly what the deal is … and it is so simple to comprehend … the price of gold (and silver) was artificially suppressed by a bunch of white collar, Mafia-like crooks. These bums are now losing control of their rig because they are running out of enough available central bank gold to meet the burgeoning demand.

To understand what is going on (a review has always helped me), one only need read the brilliant commentary of Frank Veneroso at the GATA African Gold Summit in Durban, South Africa on May 10, 2001. Frank nailed it, not only saying what would happen, but when. For newer Café members, here it is (the gold price was $256 per ounce at the time)...

To read the entire GATA Chairman Bill Murphy's "Midas" commentary for tonight at, headlined "Manipulation of U.S. Financial Markets Has Gone Bonkers," posted in the clear at GoldSeek, please click HERE

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John Dizard: Treading the foothills of a gold bull market

By John Dizard
Financial Times, London
Monday, November 5, 2007

With spot gold now hovering around the $800 an ounce price level, you would think the goldbugs would be joined by a frenzied public snorting up of gold shares and Krugerrands. Volatility should be jumping to record levels, and the long-neglected managers of gold unit trusts and mutual funds should be ushered past the velvet ropes and into the VIP rooms.


If you enter "2007 gold bull market" (without the quotation marks) in the English Google search box, the algorithm will report more than 1.9 million entries. That is not, however, the same thing as people buying metal or shares.

John Hathaway, the portfolio manager of the $1.128 billion (L541 million, E778 million) Tocqueville Gold Fund in New York, had a total return of 38.2 per cent from October of 2006 to September of this year. Not bad, but, as he says, "It's all performance, not money flows."

Over that time, new purchases of fund shares were $330 million, while withdrawals were $280 million, for a net inflow of $50 million. If the public had really bought into this bull market story, then we would be looking at something better than annual net inflows of 5-6 per cent.

As a precious metals hedge fund manager points out: "Implied volatility for one month gold is around 20 per cent. Back in the real bull market of 1980, it was up to 50 and 60 per cent. Silver vol was over 100 per cent in 1980. You have this clinical signal that the bull market hasn't started yet."

The relatively subdued interest of the investing public, if not the investment newsletters and columnists, is actually good news for those long the metal. It means there are a lot of people left to buy the stuff, which is not the case at bull market peaks.

In recent weeks, as the gold price has approached the $800 level, the rate of increase in the price, the momentum of buying interest, has slowed, one sign that a correction in the uptrend could be at hand. Even so, the low volatility and low level of public interest both suggest that even with a short or intermediate correction, we are only in the foothills of the gold bull market.

For example, one of the main supports for the gold price in recent years has been the closing out of mining companies' hedge books. Throughout the 1980s and 1990s, the mining companies effectively sold much of their future production using a range of derivatives contracts. This protected their earnings from price declines, at the expense of giving up the cash flow benefits of price increases.

In this decade, under pressure from shareholders who wanted leveraged exposure to gold price increases, the mining companies bought back their hedges. In 2001, the gold miners had hedge books totalling some 3,400 tonnes; now they are down to a total of about 1,000 tonnes. This unwinding was a significant part of the total demand for gold in the past several years.

Interestingly, the quarterly reports just out for AngloGold Ashanti and Barrick showed that they were not big buyers of gold in the past quarter. So some other people were supplying the fuel for the summer and early fall rally. "The quality of demand, not just total demand, rose over the quarter just past," as a longtime gold sceptic told me when the third quarter hedge books were disclosed last Thursday.

All this has been going on as many of the "gold" mutual funds available to the public became "hard asset" funds. In recent years, the price of gold has not risen as much as, say, nickel, copper, or lead. To keep the money coming in, most portfolio managers re-positioned themselves as commodities or metals investors. They may want to consider another makeover.

From mid-August, when the credit squeeze finally became a headline, to the end of October, the spot gold price was up over 19.3 per cent, while the CRB index, a commodities basket, increased by 12.6 per cent. This makes some macro sense, as the demand for commodities such as copper will be reduced by the US housing slump, not to mention substitution effects, while the hesitant Bernanke reflation is helping gold.

However, the reluctance of the big central banks as a group, not just the Fed, to recognise the hole they are in will stretch out the reflationary process. The Fed's statement after the 25 basis point cut last week was far more "balanced" than it probably should be. It is clear that the board will be reacting to weakness, rather than forestalling it. European central bankers are using even more hawkish language. Both the Americans and Europeans will have to see more real-time, real economy effects before they abandon their models and aggressively reflate. They will.

Gold is both a monetary instrument and a commodity, but the size of its above-ground supply makes the monetary element more significant. That means attempts to estimate its future price track by looking at annual mine supply or jewellery demand will be misleading.

As Mr Hathaway says: "Mervyn King's effective guarantee of the liabilities of the British banking system is much more significant than declining South African gold production."

So, even at about $800 an ounce, the real gold bull market has not begun.

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