The Great Depression: What We Can Learn From It Today

The Mises Circle in Colorado; sponsored by Limited Government Forum of Colorado Springs and hosted by the Ludwig von Mises Institute. Recorded Saturday, 4 April 2009.
You can watch all 5 videos HERE.

Jon Herring: Gold is manipulated but buy it anyway

A contributor to Investors Daily Edge, Jon Herring, takes note of GATA's work in his new essay:

"Gold Is Manipulated ... And You Should Buy It Anyway"

The United States Bureau of Labor Statistics has an “inflation calculator” on their website. It allows you to enter an amount of money and a previous year and then tells you how much money you would need to have today to match the same buying power.

Just for kicks, I put the year 1980 in the calculator to see what would come out. If you had $25 then, you would need $64.54 today to purchase the same goods and services. If you had $5,000 then, you would need $12,907 to have the same buying power today.

So, what if you had $850 in 1980? How much would you need today to match the same buying power? The government tells us that number is $2,194. Perhaps you see where I am going with this.

The previous all-time high in gold was $850 an ounce, reached in 1980. So, by the government’s own calculation (which many have shown to be biased to the downside), you would need about 160% more dollars today to match the same buying power you had in 1980.

So how is it that gold – “the world’s greatest inflation hedge” – is roughly the same price today that it was in 1980, after 30 years of inflation? Keep in mind that gold only hit $850 for one day in 1980. The average price of gold that month was only $650. But the point is still valid.

The biggest reason is… manipulation.

It used to be that you didn’t speak about market manipulation in polite company. Everyone knows those conspiracies don’t exist. Who could do such a thing? We now know those sentiments are woefully naïve. There is now a deep and wide body of evidence that points to willful and ongoing, official and unofficial suppression of gold prices. Much of this evidence has been compiled and documented by the good folks at the Gold Anti-Trust Action Committee (www.gata.org).

Why would politicians, central bankers, commercial banks and Wall Street institutions have any interest in suppressing the price of gold? That’s easy. Gold is like a burglar alarm. It serves notice that politicians are spending more than they take in. And it emits a screeching siren when central bankers inflate the money supply. Wall Street and commercial banks hate gold because it represents competition for your investment dollars and savings… and because they can’t make any money on it.

A rapidly rising gold price signals to the masses that all is NOT right with our money and in the financial system. When the price of gold is going up, savers and investors begin to wonder why in the world they are holding dollars in the bank. There are some VERY powerful interests that would like to keep the price of gold in check.

So, how do they do it?

There are a number of ways the banking and political establishment have tried to keep a lid on gold. The first is simply the war of propaganda. Make gold savers out to be the lunatic fringe and denigrate gold itself. This is where the term “gold bug” came from. It was meant to be a disparaging term for people who believe in sound money and honest government. This is also where the talk of gold as a “barbarous relic” originated.

But that argument falls on its face immediately. If gold is such an ancient “relic” and so unnecessary and un-useful in today’s world of modern finance, then why do central banks still insist on holding gold in their vaults? And why do these same banks use gold among themselves to settle final accounts?

They do this because they don’t trust each other. They know that paper money is too easy to fabricate from nothing, while gold is rare and must be labored into existence. Despite what they say, central bankers know that gold is vitally important to the modern financial system and that there is no substitute for it.

Other than the war of words, the banking and political establishment put pressure on gold in other ways as well. One of these is central bank “leasing” of gold. I put leasing in quotes because usually when you lease something out, you expect to get it back (more on that in a moment). For years, central banks have been “leasing” the gold in their vaults to “bullion banks,” operated by institutions such as Goldman, Citi, Morgan, HSBC, etc.

And what a lucrative racket it has been. For years, the bullion banks received massive amounts of gold from official vaults at the “good buddy” interest rate of about 1% a year. They then sold this gold into the market and invested the proceeds. How much money could you have made in the ‘80s and ‘90s if you were able to borrow billions of dollars at 1% and reinvest those dollars at 5% risk-free… or even higher if you were willing to take on some risk? Let’s just say it was a pretty good deal, if you could get it.

Not only has this provided a welcome source of cheap capital for the insider banks, but a near constant supply of gold to the market meant that there were always big sellers to keep pressure on the price.

By no means is this the only way gold has been manipulated, but it is certainly one way. But for this to work in the bullion banks favor, the price of gold must fall or remain flat. Borrowing billions of dollars worth of gold at $300 an ounce and paying it back at $600 an ounce is a recipe for bankruptcy. So you can imagine the enormous incentive within the system to keep the price of gold from rising.

But they have not succeeded. These gold leasing operations were running full tilt in the early part of this decade when gold was in the $200s and $300s. Gold is now three times higher than it was then. And these banks are on the hook for billions of dollars worth of gold.

But remember, these are insiders. By now you know what that means. They have no intention to pay back the tons of gold they have borrowed. And the central banks have no intentions of calling these loans. To do so would require the bullion banks to buy gold at the market, paying prices several times higher than the price at which the gold was borrowed. This would instantly bankrupt these banks, though we know they would be insolvent anyway without taxpayer bailouts. Therefore, the central banks simply roll the “leases” over, again and again.

So, back to the subject of manipulation. Why would you invest in a market that is so clearly manipulated? First, because it is the right thing to do to favor honest money over fraudulent money. But the other reason is that the establishment’s power to manipulate public opinion of gold and influence the market itself is becoming weaker and weaker, and will soon fail altogether.

I was investing in gold and silver and precious metals equities when gold was $260 an ounce. The cries about manipulation of the market were as loud then as they are today. The manipulation was real. And yet, gold has risen 240% in that time. Gold stocks have soared even higher. Despite the best efforts of the establishment, gold has climbed steadily for eight straight years. And considering what is happening in the monetary realm, this trend shows no signs of abating.

However the manipulation due to central bank leasing operations will most certainly abate. These banks do not have an unlimited amount of gold to sell into the market. And their appetite for doing so is clearly waning. Central banks around the world are now adding gold to their coffers rather than divesting.

And despite propaganda efforts to the contrary, the public is gradually waking up to the fraudulent nature of the fiat-based monetary system and the shaky notion of holding unsound dollars in unsound banks.

In the realm of world finance, gold is a tiny market. It won’t take a huge shift in sentiment to stir up a massive increase in demand… demand that could not be met by the world’s miners and would have to result in a sharp increase in prices. Sentiment has already turned. But not nearly to the degree it will when the specter of inflation returns.
That day is coming. Got gold?

To Your Success,
Jon Herring

***

In uncertain times, all that glisters is a gold standard...

By Gillian Tett
Financial Times, London
Thursday, April 9, 2009


A few months ago, Terry Smith, head of Tullett Prebon, the interdealer broker, chaired a panel at the World Economic Forum meeting in Davos which was asked to produce one concrete recommendation to fix the global financial crisis.

The top pick? Not anything on toxic assets or fiscal spending. Instead, this gaggle of leading financiers called for a new reserve currency, akin to an old-style gold standard.

"Two-thirds of the world's assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement," explains Mr Smith, noting that "it seems ... the Chinese have now concluded that this is not acceptable."

Just a bit of pie-in-the-sky posturing of the sort that often occurs in high-altitude Davos? Perhaps. But Mr Smith is hardly a do-gooding, state-loving dreamer; on the contrary, Tullett Prebon is about as ruthlessly free-market as they come.

Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today's elevated prices.

"The logical conclusion of where we will end up eventually is with some type of gold standard," he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.

Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.

Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.

But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues - but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.

Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called "Gold and Economic Freedom":

http://www.financialsense.com/metals/greenspan1966.html

In the years since he penned this essay, Greenspan has partly backed away from those ideas (and he blatantly ignored their implications when he was at the Fed) But now they look prescient.

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . [but] in the absence of the gold standard ... there is no safe store of value," Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

Of course, for the moment all this muttering about gold is simply wild speculation. Even if Western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.

But what this debate does show is just how much cognitive dissonance -- and utter uncertainty -- continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events.

Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

* * *

Ebullient G20 spin batters gold - a little

Unwarranted post G20 euphoria drives gold downwards, but perhaps not for long

The plethora of misleading positive spin coming out of the G20 has misled the investment community into believing the worst may be over, but there could be some more mega shocks yet to come.
By Lawrence Williams
Tuesday , 07 Apr 2009

LONDON - When one looks behind the G20 spin, there would seem to be little substance for the euphoria which appears to have pushed markets up with the hope that the bottom has been reached and that now the only way is up! This total change in perception by investors has reduced the safe haven appeal of the precious metals and both gold and silver have been marked down over the past few trading days - gold by around 6% or more and the more volatile silver by around 10%.

But general market reaction, with indices rising on the G20 announcements, has already become muted and the feeling that the G20 hype was more of a PR exercise to try and convince a sceptical world that the authorities have got matters under control is taking hold. There may well be some green shoots of recovery around, but not yet sufficient to be able to withstand further wintry adverse market reactions as more failures are announced, more people become unemployed and the likelihood that there are still some major institutions out there that are yet to go to the wall - even some countries still look very vulnerable to default despite all the promised new money for the IMF which, on a second look is mostly nothing of the sort. So don't bail out of gold yet. There are still some very stormy waters out there where safe haven protection will continue to be a wise move.

The initial downturn in the gold price came alongside some very misleading - or perhaps downright dishonest - statements from various politicians with axes to grind against gold suggesting that a lot more of the IMF's metal than the already announced 403.3 tonnes would be sold for the benefit of poor countries. Of course nothing of the sort was agreed and the IMF has since been forced to clarify the matter with a statement that no talks were held regarding the sale of any more of the fund's gold, and even the sale of the amount agreed upon last April has still to be ratified.

Indeed most of the vast sums of Monopoly money bandied about in the post G20 statements as being forthcoming to ‘save the world' is not new money either. But in terms of generating sufficient hot air to turn the markets the G20 has to be deemed a one-week wonder. One suspects that once the week is past we will be back to roughly where we were before the event took place.

There are still some horrendous pitfalls out there. What was described to me today as the world's biggest ponzi scheme, which makes Bernie Madoff's activities just appear as small change, has yet to implode, although it looks as though it may be beginning to do so. In one word that is Dubai where feverish attempts are apparently being made by the sheikhs to ward off total economic collapse. Expatriates are deserting the Gulf state almost as quickly as they can find seats on airplanes out. Huge swathes of apartment blocks lie empty and, my source tells me that those wanting to sell out are being pushed into time-controlled sales, supported by the government, not that there are any buyers, as too much coming on the market at once would lead to the equivalent of a run on a bank. And given the trillions of dollars in investment that have gone into the state a run on Dubai would be disastrous for the global economy and the banks that are involved. It is effectively another subprime mortgage fiasco waiting to happen. You might want to question your bank's exposure to Dubai. Undoubtedly the risk is spread globally just like the subprime markets.

Add to Dubai serious problems still in Eastern Europe and even in some Western European countries and things may yet get worse for the bankers before they really start to get better - so don't get rid of your safe haven gold yet. It remains the best, and perhaps only, insurance against further financial collapses, and should eventually perform well when inflation strikes, which it inevitably will given the huge volumes of fiat money being pumped into the global economy.

And as for base metals - they seem to have benefited from the G20 just as gold looked less strong, but the industrial upturn hasn't even started to happen yet thus there is the likelihood that the recent price gains could well be shortlived and reversed. In the long term base metals are a good bet with all the cutbacks and deferrals out there leading to supply shortages down the road, but long term is probably a year or two, or more away still.

Jim Sinclair: Stay Gold

As the economy tanks, doomsayers and commodity traders say it's time to invest in the shiny stuff

By Nathan Paluk
Hartford (Connecticut) Advocate

On a chilly, silent day in early March, James Sinclair sits in his refined home office in Sharon, Connecticut. His small white dog is on his lap, his secretary is in the other room, and the price of gold is right under $940 an ounce. You'd think that Sinclair, a former trader and speculator, a precious-metals expert who directs a gold exploration company from that office, would be basking in bullish gold glory. The last time gold was at such high price levels was in 1980, and he reportedly profited $15 million. But Sinclair, 68 years old now, is deeply concerned.

"Gold is a bell, like a church bell, but when it rings, it's not good news," says Sinclair. "It's screaming right now."

Gold is at its highest price in more than 25 years because of demand from investors who are growing fearful of owning anything else. Invest in stocks, when major corporations and the financial system are on the brink of collapse? Buy treasury notes, when the U.S. government just decided to take on record debt? And dollar bills? Those worry Sinclair the most.

"The concern is the increased amount of paper currency," Sinclair says. He is certain that inflation will arrive soon, caused by the federal bailout plan and rampant use of over-the-counter derivatives (those unregulated financial hedging contracts used disastrously by AIG). "Anywhere in the world, when the currency comes into question, gold comes into demand."

Gold — soft and yellow, wonderfully malleable and so difficult to find — is taking center stage in our frighteningly unstable world economy. Investors are rushing to buy gold bars, old coins and gold stocks to preserve their wealth. Gold enthusiasts say "I told you so," the metal is not a commodity and needs to be respected as a standard for currency. There have been reports of hobbyists and prospectors alike panning for gold in the river beds of the mountains of Virginia and California. The rest of the population, meanwhile, is raiding their jewelry boxes and cashing in, lured by the high prices and an abundance of buyers. They go to jewelry stores and temporary setups in hotels; they mail their jewelry to companies and even invite buyers over for "gold parties."

Sinclair gets up from his chair and returns with two bills from Zimbabwe. The first is a 50 billion Zimbabwe dollar bill, printed on May 15, 2008 and worth $312. The second bill is 100 billion, only worth $9 the day it was printed 6 weeks later. The inflation-stricken country recently chopped 12 zeroes off its currency and many of its citizens are desperately fleeing to South Africa.

Is Sinclair really saying that Zimbabwe-like inflation is going to happen?

"That's the trend," he says. "The same economic policies and to the same degree are happening here that happened in Zimbabwe." He then pulls back and admits he doesn't think it will really happen, but "shouldn't someone raise the alarm?"

Sinclair has been making bold predictions and sounding alarms since the '70s. He famously predicted that gold would reach $900 per ounce, and in 1980 it almost did, creeping up to $875 (that's around $1,900 in today's dollar).

"You couldn't open the newspaper in the '70s without seeing his name in the paper," says Monty Guild, a friend of Sinclair since 1968. "He was probably the most widely quoted expert in gold."

Sinclair has been profiled in major magazines and newspapers the past several years and is a guest expert on financial shows.

"Ask me a question and I'll tell you the truth," Sinclair said in a March, 2009, Bloomberg radio interview.

His newest major prediction is that gold will reach $1650 per ounce, then oscillate between $1400 and $1800.

After selling his position in gold in 1980, Sinclair closed his brokerage firm, moved to Sharon with his family and began other entrepreneurial pursuits. (He also became a twin-engine and helicopter pilot and could make it to the Wall Street heliport in 28 minutes, although the town of Sharon denied his request for his own heliport in 2003.)

In 2002, after having first traveled to Tanzania in '89 to check out mining possibilities, Sinclair became CEO of a Tanzania Royalty Corporation, which is currently exploring 4,154 square miles directly south of Lake Victoria.

He's not in it for mere speculation this time around, he says. Sinclair, now a widower, wants to leave a company for his three daughters.

Well-heeled businessmen, not just doomsayers and gold bugs, are going out and buying bricks of bullion. A recent Newsweek article described a man walking out of the vaults of a New York City HSBC branch carrying a newly purchased gold bullion bar, worth almost $100,000, in his briefcase.

Monty Guild, who heads an investment firm in California, believes that most of the gold-buying in the U.S. is to store wealth; it's not speculative. He receives calls about twice a day from primarily older, wealthy individuals who ask how to buy gold. "People call us all the time and they say 'I have 5 million dollars, and I want to buy 2 million dollars in gold,'" he says.

The World Gold Council reports that Americans bought 77.8 tons of gold in 2008 for investment purposes — 34.8 tons in the fourth quarter alone — compared to 16.6 tons in 2007. During the same time period, worldwide gold investing jumped from 410 to 769 tons. In dollar amounts, this means the world exchanged $9 billion for gold in 2007 and $21 billion in 2008.

On Saturday, March 20, David Curland was in a small conference room in a Manchester Courtyard Marriot, with a file, a black honing stone, an electronic scale, a calculator, and droppers labeled "Gold Testing Solution" spread out on the table. Several others were waiting in the room, including the middle-aged woman sitting across from Curland and two young female assistants on standby.

He placed a small gold chain on the scale, punched numbers on the calculator then told the woman a price, grimacing slightly. "Sorry, but it's so light. ... Remember, we do everything by weight," he said. "I never wear it," she responded. "I'll take the $20."

Curland, 31 years old, tall, fit and affable, was buying jewelry for Gold Buyers of America, a Florida-based company that had representatives in 45 different hotels throughout the country that weekend, including Seattle, Phoenix, Tennessee and Maryland. The company buys approximately 400 to 500 pure ounces of gold per week (picture about 4,000 wedding bands), according to CEO Matthew Zvacek. The company has 200 qualified buyers and is one of the nation's largest jewelry buyers.

Candice Gagnon, 41, of Rocky Hill, was next up for Curland's appraisal. She brought a zip-lock bag with several pieces of jewelry, including her uncle's New London High School graduation ring and a few items from her grandmother. The two chatted as Curland checked the jewelry's purity. He filed a small part of a spherical bauble to get past any plating, rubbed the piece on the black stone, and dropped acid solution on it. The yellow marks quickly disappeared, signaling that the piece has no gold. He announced the price of the pieces, $285, and gave Gagnon a high five.

"We meet with people and develop trust," Curland said later when the room cleared out.

Gold Buyers of America gives sellers up to 70 percent of the spot value of gold, Curland explained. "A lot of people come in here and think they'll get retail value. But jewelry stores usually do a 300 percent markup." Then they ship the jewelry back to Florida, where it's refined and sold immediately, mostly to the New York Mercantile Exchange.

One of Curland's colleagues arrived and started teaching the two assistants how to test for purity. They were being trained to buy at gold parties, the social gatherings at private residences where people — almost exclusively females — sell their gold to a buyer.

Suzanne Griswold, of New Jersey, has been organizing gold parties independently for the past year after her job in estate sales and appraisals started slowing down. "This gold thing just exploded," she said over the phone before heading off to a gold party on a recent Friday night. She is booked with gold parties every Friday and several weekdays through April, mostly in New Jersey but also in New York and Connecticut.

"The best part is that everyone is happy with this," she says. "Everybody has such a good time; it's like a night out for the women. They have babysitters or husbands watching the children and sometimes they even go out after."

It's very simple: Griswold finds a woman with gold-bearing friends to host the gathering and arrives at the house with a gold buyer, a dip spread, wine, dessert and a black velvet tray to place the jewelry. An average party usually gets 15 women and exchanges $5,000 worth of jewelry; the hostess and Griswold each get roughly 10 percent of the total.

Griswold says the women at her gold parties are mostly lower-middle class, although not desperate for cash. They're taking advantage of the high prices and participating in the gold rush, since, as Griswold says, "It's the thing to do now." The items that Griswold most commonly sees are jewelry given by ex-boyfriends, 1980s-style chains, school pins and rings, and whole teeth with gold fillings.

Sinclair, Monty Guild and two others write daily commentary about the markets, economic policy and gold at jsmineset.com. The site describes itself as a "service-orientated teaching forum that uses the daily market as its text and blackboard," and Sinclair says it receives 40 million hits per month.

In a recent post, he introduces an Associated Press article on the projected federal deficit with a typically concise and dire sentence, preceded by a salute to who he calls his "Comrades in Golden Arms": "Dear CIGAs, The Death of the Dollar is set in cement."

Guild also uses similar scary, sometimes capitalized statements, like this one on March 25: "INFLATIONARY DEPRESSION NOW COMING TO AN ECONOMIC SYSTEM NEAR YOU."

"We're both quite optimistic by nature," Guild said via telephone. "But we're more than happy to tell the facts as they are."

In person, Sinclair is neither a crazed doomsday prophet, nor an arrogant Wall Street type. He is friendly, welcoming and genuinely wants to impart knowledge. "What I do is educate people," he says. Sinclair receives hundreds of e-mails a day and steady calls from people seeking advice. One man called Sinclair up and asked "did anything change in the past 25 minutes?"

Sitting almost cross-legged in his chair, wearing a powder-blue shirt and suspenders decorated with financial spot charts, he looks like a dapper financial sage. His talk flows, nonstop and hypnotic, and while it's difficult to understand all his tangents and occasional jargon, the listener can quickly become a believer.

"We have a question that is on a lot of people's minds: 'Well, look, Jim, if all of this does break down at some point, what are we going to buy a loaf of bread with?'"

It is Sinclair again, educating away, but this time he is conducting a fireside chat on his self-produced DVD, "Protect Yourself With Gold." He continues:

"The answer is: dollars. ... The currency of the realm is exactly what you're going to continue paying in, and all of these hyper-inflationary periods end by a new currency of the realm. So the whole game here is to have a standard, a standard that will guarantee your value. The standard is gold."

It's important to remember that Sinclair owns a gold royalty corporation and wants to profit from the extraction of gold. Is his gold-promotion self-serving?

No, he insists, during the early March interview. "I firmly believe in gold," he says.

Paul Becker, owner of Becker's jewelry store in West Hartford, also firmly believes in gold, even though for the past few months, several people per day come in his store to sell their jewelry, and U.S. demand for gold jewelry declined 31 percent in 2008 compared to 2007.

Becker is not concerned about people abandoning jewelry. There will always be engagements, weddings and anniversaries, he says. "Whether it hits 1,000 or 3,000 dollars [per ounce], people will want it."

A jeweler since 1968, Becker appreciates how gold retains value. But for him, the most important part of it all is even simpler: "Gold is beautiful. The way it glitters, the way it feels, the way it looks. It identifies the individual. When you have fine jewelry, it's a form of art."

U.S. key economic charts

The following charts are provided by the St. Louis Federal Reserve Bank and are automatically updated as the Federal Reserve and the federal government make various statistics public.

They provide an opportunity to regularly monitor important statistical developments. As they are chosen from an immense supply of economic data, they isolate areas of particular interest to the gold owner, i.e. the national debt, money supply, inflation and unemployment numbers, securities held outright by the Federal Reserve, foreign-held debt, adjusted monetary base, etc.

A quick review of the charts as they stand at the moment reveals a brave new world of government finance and central banking. An array of disturbing trends which buttress the principle argument for gold ownership, as a means to insuring one's assets.

Bookmark this post and come back often to monitor the state of the US economy.