by David Levenstein

www.lakeshoretrading.co.za

Gold, a Hedge Against the Financial Predators of Our Society.

As far as I am concerned, corrupt governments that engage in reckless spending, banks and financial institutions that defraud, lie and deceive their own customers are all financial predators.  Governments and politicians are meant to serve the people and not themselves so when they spend money on their own personal indulgences, or in futile wars and aid programed which only enrich the leaders of impoverished nations, in effect they are squandering tax payer’s money. And, when governments debase their own currencies reducing the purchasing power of their national currency, they are impoverishing their middle-class who rely on their savings for retirement.

Yet, these very governments use all sorts of media tactics to take the blame from themselves and instead blame individuals.

Sometimes I wonder if what I see and hear on TV is for real. The amount of fraud going on with US banks is unbelievable, and now governments can’t even afford to service their own debts without having to resort to trickery such as suspending “mark-to-market” accounting rules and printing more money to buy their own bonds (effectively a Ponzi scheme). Frankly, all they are doing is perpetuating the chaos that is already occurring in the currency markets. Yet, the regulators simply make it more difficult and more frustrating for the average person to go about his daily banking business.

Prior to September 11, 2001, banking was so much easier and not everyone was regarded as a money launderer, drug dealer, arms dealer, or terrorist. But, thanks to the US government a new legislation introduced post 9/11, beguiled individuals around the world into believing that in an attempt to curtail the flow of funds to terrorist organizations, a new law “know your customer,” was necessary. Suddenly, individuals around the world were harassed by their banks. Even though they may have held accounts at their banks for many years, they were forced to provide all sorts of meaningless documentation. And, new account holders were given an even more difficult time.

Suddenly, all your hard earned cash was not wanted. And, heaven help you if you wanted to deposit a little more than a few thousand dollars in cash. Now you have to give an explanation as to why you have some money. This egregious act has little to do with money laundering and financing terrorism, and has more to do with governments expanding their network of tax payers who they can then pillage. Money launderers, criminals and terrorists can all provide proof or residence. And, someone depositing a few thousand dollars is hardly going to be a threat to world stability. Sure, I would understand if some red lights flashed if someone walked into a bank with several hundred million in cash, but not a paltry sum of say ten thousand dollars.

At a recent forum, OECD Secretary-General Angel Gurria congratulated the delegates and said.  “At a time of stalled economies and a crisis of politics, your collective tax work is a tangible example of countries moving together in a mutually beneficial direction that will help those trying to extricate themselves from the crisis. Governments have signed more than 700 agreements to exchange tax information. We know that 20 countries have taken advantage of this more transparent environment, putting in compliance initiatives which have already yielded €14 billion in additional revenues from more than 100 000 wealthy tax payers who had hidden assets offshore and that there’s more in the pipeline.”

In a frightening contrast, the US federal government’s debt increased by $203,368,715,583.63 in the month of October. This is more than 16 times the amount recovered from 100,000 tax payers and it happened in one month! At the end of September, the total national debt stood at $14,790,340,328,557.15 and by the end of October, it had risen to $14,993,709,044,140.78.

With so much effort and time Gurria proudly stated how much they had recovered from more than 100, 000 individuals. Yet, with less effort and time, a handful of governments, banks and financial institutions could save hundreds of billions never mind a few billion by simply stop squandering tax payer’s money. How many billions have been wasted in futile wars and how many billion in foreign aid have merely enriched the political leaders of those countries. But, if we add the billions governments have squandered in reckless spending; the amount recovered from 100,000 wealthy tax payers is miniscule. And, instead of threatening hard working individuals, organizations such as the OECD should be spending more time monitoring the activities of their own members’ governments.

Although the mission of the Organization for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world, all it has done is make sure that world governments have unfettered access to financial transactions. Many governments even want to ban cash transactions over a certain amount. The OECD is funded by its member countries. National contributions are based on a formula which takes account of the size of each member’s economy. The largest contributor is the United States, which provides nearly 24% of the budget, followed by Japan. Is it any wonder why they do what they are told by the US government?

As this organization tries to cripple offshore banking and as individuals right to privacy is invaded by banks and financial institutions, theses very same companies, are the ones lying, cheating and deceiving customers. It is the retail customer that should be doing due diligence on these companies and not the other way around.

In recent years, the amount of bank fraud going on, particularly in the USA, is unbelievable. Well-known banks are being sued for securities fraud, mortgage backed securities fraud, insider dealing, and lying to clients… the list of claims is endless.

In June of 2007, Morgan Stanley agreed to pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, when in fact it was alleged that Morgan Stanley wasn’t physically storing their gold and silver at all.

Last April, the Securities and Exchange Commission (SEC) targeted Goldman Sachs in a civil fraud case. The lawsuit alleged Goldman sold investors a synthetic collateralized debt obligation (CDO) linked to the performance of certain mortgages without disclosing that John Paulson’s hedge fund, Paulson & Co., helped design the CDO (named Abacus) and was shorting it. As mortgage prices collapsed, the buyers of Abacus – including ACA Financial and German bank IKB – lost nearly $1 billion.

On July 15, 2010, Goldman settled with the SEC for $500 million. The bank neither admitted nor denied the allegations. It said the marketing materials for Abacus contained “incomplete” information.

JP Morgan Chase was fined $228 million for a bid-rigging scheme involving municipal bonds. The Chase ruling is the latest to come down in a series of fines involving a number of banks, including Bank of America and UBS. This scam that Chase, Bank of America and UBS were involved with was no different in any way, really, from old-school mafia-style bid-rigging scams.

What these banks did is they got together and carved up territory between them, arranging things so that they wouldn’t be bidding against each other in municipal debt auctions. That means the 18 different states involved in these 93-odd deals all got screwed out of the best prices, leaving the taxpayers in those places severely overcharged for their public borrowing.

A few months ago, the Federal Reserve slapped an $85 million fine on Wells Fargo & Co for allegedly steering borrowers into high-cost subprime mortgage loans even though they qualified for safer loans. The fine is the largest civil monetary penalty the Fed has ever assessed in a consumer-protection enforcement action, the central bank said.

Recently, Harry Markopolis the man who brought down Bernie Madoff’s $65 billion Ponzi scheme told King World News that, “Bank of New York is going to go down, Eric.  Between Bank of New York Mellon and State Street, these two institutions have stolen between $6 to $10 billion from tens of millions of Americans retirement savings accounts.  It’s been a hell of a crime spree for the bank, but now they are being brought to justice.” Markopolos has led the team that spearheaded this investigation from the beginning.  Harry and his team were the first to expose this fraud. Markopolos also told KWN, “The New York Attorney General filed suit on Tuesday (against Bank of New York Mellon) for stealing money from pension funds on currency transactions.  This theft has been from tens of millions of Americans, policemen, firemen, librarians, municipal workers, judges and the list goes on and on and they’ve been doing it for decades.

Just more than a week ago, Goldman Sachs Group was hit with a new $1.07 billion lawsuit for having allegedly sold risky debt that it expected would tumble in value to an Australian hedge fund, causing that fund to become insolvent. The lawsuit by the Basis Yield Alpha Fund alleges fraud, breach of contract and negligence, and seeks to recoup $67 million of losses plus $1 billion of punitive damages.

Last week,  MF Global, one of the largest Futures Commissions Merchants (FCM) in the world filed for bankruptcy. On Monday, The Federal Reserve Bank of New York said that it has suspended MF Global from conducting business with the bank.

Initially, MF Global couldn’t account for nearly $1 billion. That amount has since dropped to $700 million. Then, in statement released, all of the missing money was being held by JP Morgan. But, JP Morgan Chase denied this and said that like other banks, it has been holding MF funds and awaiting instructions from the bankrupt company’s trustee. The bank said the funds are not the missing client funds and the account has always been “transparent” to MF and its trustee. Regardless, something’s amiss.

A few years ago, MF Global took over the company REFCO, which was at the time the largest FCM in the world.  At one time, I was trying to establish an IB for REFCO in South Africa and they hit me with pages and pages of questions, all in the name of this ridiculous law – “know your customer”. They called it compliance.  At times I was so agitated at some of the plain dumb questions that I had to answer, I almost gave up with the idea. But here’s the kicker. After I finally passed their due diligence, REFCO filed for bankruptcy after their CEO had allegedly swindled the company of half a billion. That is when MF Global stepped in. Today, both REFCO and MF Global are bankrupt and a small company such as mine is still going strong. I only wish I had done due diligence on both these companies.

In 2008 a client of mine who lives in Indonesia suffered an enormous loss. His dream house burned down. When submitted his claim to his insurance company which was AIG, they refused to pay him. He then took legal action against AIG, and even his attorneys were totally ineffective. He then submitted an article about his ordeal to one of the newspapers in Indonesia. Before publishing his article the newspaper contacted AIG for their side of the story. The article did not go into print because AIG eventually settled 80% of his claim. This ordeal took my client 16 months. But when AIG was in trouble, the US FED bailed them out in a matter of days or was it hours.

I could continue, but suffice to say, the best thing any individual can do is to protect their wealth by investing in precious metals, in particular gold and silver. There is no third-party risk so you never have to worry about being cheated. Provided you have your core holding kept somewhere safe and preferably away from any bank, when the global monetary system collapses, you will be fully protected. Since it seems that governments are not going to change their monetary policy we can expect them to print more money. The consequence of this action will be a decline in value of these respective currencies and your wealth will slowly disintegrate… the purchasing power of your money held on deposit at the bank will become worth less. For centuries, gold and silver have acted as a hedge against the declining values of these fiat currencies, and if history repeats again, the outcome will be the same.  We are already seeing, governments imposing more controls on the flows of money, increased currency wars, and unstable currencies. And, it seems that the current state of the global monetary system is not improving but deteriorating. And, as I have been stating for years, this is why everyone should own some gold and silver. It is also important to keep some of your assets away from the main-stream banking system and use the facilities offered by offshore banks.

Act now, before it is too late. Add gold and silver to your investment portfolios.

TECHNICAL ANALYSIS

There are some positive signs developing in the price of gold, mainly good support above $1700 as well as $1750. Also, the price of gold has pushed through the 50 day MA. I expect prices to breach $1800 an ounce shortly.

By David Levenstein

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About the author: David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.

You Still Have Time to Invest in Precious Metals

By Greg McCoach
Tuesday, May 17th, 2011

Get ready. We are now entering the final stages in the collapse of the U.S. dollar…

And it’s not going to be pretty.

The establishment argument against gold comes down to the statement that it is a collectible that earns no yield.  Art, rare coins, stamps and gold and silver bullion do not earn a yield.  Stocks, bonds and real estate earn yields, so the prudent investor should focus on these assets rather than gold or precious metals.

First, let us examine a hole in this argument.  Let us look at bonds and other fixed income investments.  The best instrument here is T-bills because they are virtually risk-free (not counting the risk from the depreciation of the currency).  A study of the yield on T-bills going back to 1933 (which is the beginning of the modern monetary system) shows that the yield paid on T-bills bought at almost any time over the past 75 years has been completely eaten up by the depreciation of the currency.  For example, right now you can buy a T-bill yielding 1%.  But the (official) Consumer Price Index is rising by 4% per year.  So at the end of 12 months time, you receive $1,010 (from your original $1,000 investment) and can buy goods which at the start of the 12 month period had cost $970.  In reality, your money has shrunk in value and you have received negative interest.  It hasn’t been this bad all the time, but the average over the past 75 years shows a return of (very close to) 0% real interest.

This eliminates T-bills as an establishment investment, and it pretty much eliminates any riskier fixed income investment as well.  Because all you are receiving beyond the T-bill rate is a small risk premium.  Yes, you get some extra return, but you have to take extra risk.  The game is not worth the candle.  And if you try so-called inflation protected Treasury securities, they are only protected against the “inflation” reported in the official Consumer Price Index.  Interestingly, it was right at the time that these were introduced that the Bureau of Labor Statistics began to introduce fraudulent statistics into the CPI so that it no longer truly measures the rate of price increase in our society.

What is needed during this period when the U.S. currency is depreciating (as measured against goods) is an economic good which protects you against currency depreciation and which also has a yield.  Stocks have yields because (most of) the companies have earnings.  Real estate usually has a yield (unless it is raw land).  In both of these cases, it is possible to protect yourself against the depreciation of the currency and still earn a return on your capital.

So far the establishment argument is looking good.  Both stocks and real estate, like gold, can protect you against the depreciation of the currency.  But unlike gold they pay a yield.  The problem with this argument, however, is that it is true only for the long term.

Starting with the Kennedy tax cut of 1963, budget deficits and the creation of money became the operating policy for both political parties.  Indeed, the (official) Consumer Price Index has risen every year since that date.  However, different goods react differently to the easing of credit and the printing of money.  The result of this has been the development of what I call the commodity pendulum.  First, commodities lag behind the rise in other prices and become undervalued.  Then they play catch up and rise rapidly.  When they go too high the cycle starts again.  For example, commodities were undervalued in 1971 and dramatically outperformed stocks through the decade of the ‘70s.  In the ‘80s and ‘90s, the situation was reversed; commodities declined, and stocks rose.  Starting early in the new century commodities were once again undervalued and began another rise, and this will soon lead to large scale declines in bonds and stocks.  That is, the first part of this century will be a repeat of the 1970s.

So although the establishment point is correct for the very long term, it is too long for practical trading.  Yes, stocks can give you protection against the depreciation of the currency as well as yield.  But that did not help the stock investor from 1966 to 1982 because he lost 70% of his capital in real terms.

The argument for gold now is the same as it was in the early 1970s.  Gold, and other commodities, are coming off a giant oversold condition.  Over the ‘70s, gold multiplied by a factor of 25 times.  What will happen during this swing of the pendulum cannot, as yet, be predicted.  But it is likely to be quite similar.

Take the establishment supporter who bought stocks in 1966.  It was the recognized “wisdom” of that day to buy “good, sound stocks for the long pull.”  They laughed at the foolish gold bugs buying gold stocks with the price of the metal at $35/oz.  Gold, after all, was a collectible.  This situation is repeating in our day.  The same forces which pushed gold upward then are pushing it upward now.  The ethanol bill plays the role of the Russian wheat deal.  The establishment type who buys “good, sound stocks for the long pull” today is quite likely to sit through a 70% decline in real terms over the next dozen or so years.

We all know what the establishment did in the 1970s.  When gold raced over $800 in January 1980, they said, “We will pretend that this whole affair never happened.  It is too embarrassing to admit that we were wrong and the gold bugs were right.”  Those who do not learn from history are condemned to repeat it.  And repeat it (the seventies) they are.

But when the commodity pendulum is finally over (and that will be quite some time in the future), and the cycle is ready to switch back in the other direction, when the day comes that gold is overvalued and stocks undervalued (similar to 1980-1982), I will be perfectly happy to get out of gold and buy stocks again.

But as I remember the advice of the economic establishment over the past generation, they were as bullish as they could possibly be on stocks in 1966.  And then they turned as bearish as the gloom of night in 1982.  I am confident that they will do the same thing on this second swing of the commodity pendulum.

Thank you for your interest.

Howard S. Katz

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Is gold the true store of value in uncertain times? Will the impending flood of inflation destroy my financial house? How can I protect my wealth with gold and precious metals? These are the type of questions addressed in issues of The One-handed Economist. Subscriptions are available for $300/year online at www.thegoldspeculator.com, or for $290 ($10 cash discount) by sending your check to The One-handed Economist, 614 Nashua St. #142, Milford, NH 03055.

While most investors are fretting about unemployment and weak housing reports, a bonanza is happening in one tiny area of the market…

It’s an area that doesn’t worry about housing reports… and it hasn’t been hampered at all by the 6 percent decline in stocks since April. It’s an area that maybe one investor out of a thousand follows.

That area is “junior” gold stocks… and the returns this sector is generating right now are extraordinary.

These “junior golds” are the bloodhounds of the gold business. They are tiny companies (typically under $250 million market cap) that scour the world looking for the next big deposit of precious metals. When one of them finds a huge deposit, shares can absolutely skyrocket.

For example, in 2005 Esperanza Silver made an amazing discovery called San Luis. And with each hole the company drilled, it found more gold. Here’s what happened to the stock…

As you can see from the chart, shares of Esperanza soared from $0.25 in summer of 2005 to more than $4 by early 2007. That’s 1,500 percent in just over 18 months.

Believe it or not, this kind of climb happens often. A good discovery (gold or otherwise) blows the lid off these shares. Here are some other recent examples:

• Ventana Gold went from $0.14 a share to $12 in 12 months.
• Canplat jumped from $0.27 a share to $5.28 in six months.
• Hathor rose from $0.47 a share to $4.34 in seven months.
• Underworld Resources went from $0.13 a share to $2.64 in six months.

The junior gold industry exists because major mining companies do little of their own exploration. Big mining companies prefer to let thousands of these tiny companies do the work of looking for big deposits. Then they simply swoop in and buy the small company.

To give you an idea of the extreme difference in the size of juniors versus large miners, consider a junior gold stock with a $30 million market cap versus giant Newmont Mining, which sports a $30 billion market cap. Newmont is 1,000 times bigger.

Now that gold is well above $1,000 per ounce, large gold stocks are finally enjoying a solid increase in cash flows… and shares in big gold companies like Newmont are up 15 percent 30 percent this year (while stocks in general are flat). But the juniors are ringing up much larger gains…

For example, last October I recommended buying shares of a tiny gold exploration firm called ATAC Resources to readers of Phase 1 Investor, an exclusive trading service. ATAC has found a potentially huge gold deposit in Canada’s Yukon Territory. Recent drill results have been positive. This news helped send ATAC up nearly 120 percent in August… and up 540 percent since my recommendation.

ATAC isn’t an isolated case, either. Another gold stock we’ve held in the Phase 1 portfolio is tiny AuEx Ventures, a gold prospector like ATAC. A potential buyout sent AuEx shares up 80 percent in August. Many other junior golds are up 30 percent to 50 percent in the past few months.

These extraordinary gains are an example of what can happen when folks get just a little interested in this sector. As legendary mining speculator Doug Casey often points out, the gold stock sector is tiny compared to most other sectors… so if there’s a big rush to own gold stocks, “it will be like trying to siphon the contents of the Hoover Dam through a garden hose.” Since folks are interested in buying all things related to gold in general, the juniors are really flying, thanks to their small size.

I can’t guarantee you these sorts of gains will continue all year. All I can say is gold is the strongest uptrend anywhere in the world right now. It’s a trend that benefits from worries over government debt and the soundness of paper currencies. I can also tell you uptrends in gold stocks can last longer than most people would believe.

That’s why I recommend all investors become interested in gold stocks right now — and stay interested in the coming years.

Good investing,

Matt Badiali
Editor, S&A Resource Report

P.S. While super-small junior golds are simply too small to recommend to a large audience like readers of my S&A Resource Report, we are still making extraordinary gains in gold and silver. I’ve prepared a short video that details how you can get in on these gains right now. Click here to watch it.

$2,500 Gold Could Easily Result in $178.50 Silver – Here’s Why!

By Lorimer Wilson Sep 20 2010 11:49AM www.FinancialArticleSummariesToday.com

More than 95 respected economists, academics, analysts and market commentators are of the firm opinion that gold will go to $2,500 and beyond before the parabolic peak is reached. In fact, the majority (55) think a price of $5,000 or more -even as high as $15,000 – is actually more likely! As such, just imagine what is in store for silver given its historical price relationship with gold!

Precious metal bull markets have 3 distinct demand-driven stages and we are now quickly approaching or perhaps even in the very early part of the last stage which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. go parabolic) in price.

Gold

Gold went up 24% in 2009 and is up 16% YTD and, as such, there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year (from a $216.55 closing price on Jan. 1, 1979 to a closing price of $843 per ounce barely a year later on Jan. 21, 1980) and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks! A 289% increase in the price of gold from $1275 would put gold at $4,960. (More on what that might mean for the future price of silver is analyzed below.) That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don’t seem quite so far-fetched. (For a complete list of the economists, academics, market analysts and financial commentators who maintain that gold will go parabolic to $2,500 -$15,000 in the near future please see:

http://www.munknee.com/2010/09/5000-gold-bandwagon-now-includes-these-55-analysts-got-gold/

Silver

Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle along with gold. The 49% increase in silver in 2009 (and 23% YTD) attests to that in spades. During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the current price of almost $21 would represent a future parabolic top price of $175. (For what that might mean for the future price of gold see the analysis below.) Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.

Gold:Silver Ratio

The current gold:silver ratio has been range-bound between 70:1 and 60:1 for quite some time which is way out of whack with the historical relationship between the two precious metals. It begs the question: “Is now the perfect time to buy silver instead of the much more expensive gold metal?”

How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship – the correlation – of one to the other over time which is called the gold:silver ratio. Based on silver’s historical correlation r-square with gold of approximately 90 – 95% silver’s daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver’s price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attest.

Let’s look at the gold:silver ratio from several different perspectives:

- Over the past 125 years the mean gold:silver ratio (i.e. 50% above and 50% below) has been 45.69 ounces of silver to 1 ounce of gold.
- In the last 25 years (since 1985) the mean gold:silver ratio has increased to 45.69:1
- The present gold:silver ratio has been range-bound between 60:1 and 70:1 (61.3:1 as of September 17/10).
- Interestingly, during the build-up to the parabolic blow-off in 1979/80 silver outpaced gold going up 732.5% vs. gold’s 289.3% causing the ratio to drop from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January,1980.

Let’s now look at the various price levels for gold and the various silver:gold ratios mentioned above one by one and see what conclusions we can draw.
First let’s use the Sept. 17, 2010 price of $1276.50 for gold and apply the various gold:silver ratios mentioned above and see what they do for the potential % increase in, and price of, silver.

Gold @ $1276.50 using the current 61.3:1 gold:silver ratio puts silver at $20.82 (Sept. 17/10)
Gold @ $1276.50 using the above 45.69:1 gold:silver ratio puts silver at $27.94 (i.e. +34.2%)
Gold @ $1276.50 using the above 13.99:1 gold:silver ratio puts silver at $91.24 (i.e. +338.2%)

Now let’s apply the projected potential parabolic peaks of $2,500, $5,000 and $10,000 to the various gold:silver ratios and see what they suggest is the parabolic top for silver.

@ $2,500 Gold

Gold @ $2,500 using the gold:silver ratio of 61:1 puts silver at $41
Gold @ $2,500 using the gold:silver ratio of 45:1 puts silver at $55.50
Gold @ $2,500 using the gold:silver ratio of 14:1 puts silver at $178.50

Before we go any further the above analyses bears closer scrutiny. In paragraph four above it was noted that “During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year.” Such a percentage increase from the current price of almost $21 would represent a future parabolic top price of $175.

It is interesting to note that the above $175 is almost identical to the $178.50 that would result from a reversion to the mean in the gold:silver ratio with gold at $2,500. For the gold bugs who believe that gold is going to go even higher it can only mean a very much higher price for silver as the analyses below suggest.

@ $5,000 Gold

Gold @ $5,000 using the gold:silver ratio of 61.1 puts silver at $82
Gold @ $5,000 using the gold:silver ratio of 45:1 puts silver at $111
Gold @ $5,000 using the gold:silver ratio of 14:1 puts silver at $357

@ $10,000 Gold

Gold @ $10,000 using the gold:silver ratio of 61:1 puts silver at $164
Gold @ $10,000 using the gold:silver ratio of 45:1 puts silver at $222
Gold @ $10,000 using the gold:silver ratio of 14:1 puts silver at $714!!

From the above it seems that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate substantially greater returns than investing in gold bullion.

Summary

History will look back at the artificially high gold:silver ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they are all an illusion. This fiat currency experiment will end badly in a currency crisis and when that happens, as it surely will, gold will go parabolic and silver along with it but even more so as the gold:silver ratio adjusts itself to a more historical correlation. The wealthiest people in the future will be those who put 10% to 15% (or perhaps more – much more!) of their portfolio dollars into physical silver today and were smart enough to research and pick the best silver mining/royalty stocks and warrants to maximize their returns.

Indeed, while gold’s meteoric rise still has room to run, silver’s run is yet to get started. As such, it certainly appears evident that now is the time to buy all things silver.

Please Note:

- This is a one-of-a-kind article which no doubt will get a great deal of attention and be posted on a large number of other financial sites and blogs. This is encouraged but to avoid copyright infringement the author’s name must be included with a hyperlink to the original article.

Lorimer Wilson
September 19, 2010

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Lorimer Wilson is the Editor of both www.FinancialArticleSummariesToday.com (a sight/site for sore eyes and inquisitive minds) and www.munKNEE.com (a site consisting of edited excerpts of the internet’s most informative articles on money matters).  He can be reached at editor@munknee.com

Original Source:  http://www.kitco.com/ind/Wilson/sep202010.html

By Brian Hunt
Saturday, May 8, 2010

On February 18, 2009 the Financial Times published one of the most important articles nobody read.

The article’s headline was Gold primed to become “mania asset.”

The gist of the article was something I’ve been telling people for a long time: Gold – more so than any asset right now – has the potential to experience a mania phase… one like we saw in Internet stocks from 1997 through 2000.

A mania phase is a period in an asset’s lifecycle marked by leaps of 10% or 20% in a month… 100% or 300% in a year… and 500% or more over the course of several years. Get in early with a big position on a mania phase, and you’ll make a fortune. Remember one Internet-mania darling, JDS Uniphase, climbed more than 30-fold in about two years… which would have turned a stake of $20,000 into $640,000.

As that little-read article mentioned, an asset must have one key ingredient to enter mania phase: It must have the “new era” factor… a set of conditions folks can point to and say, “This time is different… The old, conventional methods of valuing assets are useless in this case.”

Take Internet stocks. In the late ’90s, Wall Street analysts chucked classic valuation measures – like price-to-cash flow and price-to-book – out the window. The Internet was growing too fast for these old measures, they figured. Instead, they used crazy metrics like web traffic (and often pure fantasy) to justify valuations. Companies with little chance of turning a profit sported market caps of hundreds of millions of dollars simply because they had good stories… and because that time was “different.”

Now let’s get to gold. As we’ve noted many times in DailyWealth, you can make a good case that this time is different. Never before has the nation with the world’s reserve paper currency – which is backed by nothing but faith in a bankrupt government – promised so much to so many people (Social Security, Obamacare, unlimited military commitment).

We’re funding many of these promises with borrowed money… so crushing interest payments are on the way. The U.S. government could pay as much as 20% of its tax revenue to service the national debt in just three years. Imagine working your tail off just to pay the interest on your credit cards.

For a picture of what could happen, consider that Europe – which in aggregate has made the same crazy promises… and is under a similar debt load – is watching its paper currency union experience a slow-motion train wreck. The chart below shows what gold’s action looks like in the eyes of a European. It’s looking a lot like a mania phase.

How high can gold go? I can’t say. Nobody can.

Despite what many gurus will tell you, we simply cannot properly value gold. It’s not a stock, so you can’t say, “I’ll pay 10 times cash flow for this.” It’s not a rental property, so you can’t say, “I’ll buy this for eight times annual rent.” Gold’s chief use isn’t in the manufacturing process, like copper and iron ore.

Nope… gold is the odd man out in the asset family.

Gold represents real, intrinsic wealth. Greece can’t debase it. The U.S. government cannot debase it. There’s no way to know what people will pay for gold in a big crisis. This is precisely the reason it is a candidate for mania phase. People can tell themselves, “This time is different. It’s a new era of currency crisis, so gold can and should trade for $2,000… $3,000… or $6,000 an ounce.”

I’m no “the world is going to hell in a handcart” guy. I simply look around for assets with extraordinary potential to rise. I’m indifferent to whether it’s gold, stocks, homebuilders, uranium, or Malaysian palm oil.

I’m not saying a gold mania will happen next week… or even six months from now. I actually believe gold needs to pull back and “catch its breath.” I am saying gold is an asset folks can justify paying any price for.

The same sort of analysts who claimed the Nasdaq would go to 50,000 are the same sort of analysts who will claim gold will go to $25,000 an ounce. The sober among us will be shouted down… because “this time is different.”

This is the chief requirement of a mania. It is in place for gold.

Good investing,

Brian Hunt

by Tyler Durden

My journey into economics began in 1956 when I was a sophomore at Harvard. A classmate was arguing with me that the Federal Government did not have to balance the budget. He was sure of this because his professor had told him so. 

My thinking was different. “If the Harvard Department of economics did not believe that we had to balance the budget, then they must be a bunch of idiots. I have nothing to learn from such people. I will learn my economics when I’m out of here  Good bye John Harvard.” 

Fourteen years later, in 1970, I knew that the price of gold, then $35, had to go up. After all, pretty much every good in the economic universe had tripled in price between 1935 and 1970.  By that time, I had learned about Adam Smith and the law of supply and demand. The decision by the U.S. Government to suppress the price of gold and keep it at $35 (along with its allies in the London Gold Pool) was the height of foolishness. Prices are determined by supply and demand. An important factor in the demand for all goods is the supply of money. And the supply of money had been increasing dramatically over the past 35 years. To anyone who understood the political situation at that time (and knew that the printing of money was going to continue, the conclusion was simple. All prices, most especially the price of gold (which had lagged most other goods), had to go up. 

The conclusion was simple, but few others understood it. Henry Reuss, at that time the chairman of the House Banking Committee, announced that the price of gold would fall to something on the order of $6 or $8 per ounce. Actually, gold briefly dipped a few cents below $35 in 1970, and then it was off to the races. 

The puzzling thing was that, as gold climbed above $800/oz. (in early 1980), the entire official economic community refused to admit that it had happened. It was one thing to fail to predict the rise in gold in advance. That merely shows one to be an incompetent economist. But these people failed to comprehend (or admit) the rise in gold AFTER IT HAD HAPPENED. This was no longer just a matter of being stupid. It was a matter of being so incredibly stupid that there is no word in the English language (or any other language) to describe it. 

Gradually I realized what had happened. Everybody in economics who had some kind of a title was a blithering idiot. None of them had any knowledge at all. Harvard had defrauded me when it told me that its professors were economists, and this same fraud was being perpetrated over the entire world on a much larger scale.  

Gradually I was able to piece together what had happened. When FDR took office in 1933, he rammed a bill through Congress (in one day) taking the country off the gold standard and giving the commercial bankers the privilege to create money.  They still have that privilege today.

 FDR’s claim to be a traitor to his class was a lie. FDR had been a Wall Streeter during the 1920s (running a vulture fund). That is, he was a Gordon Gekko type. He was buddy-buddy with the commercial bankers and relied heavily on them for advice. No, the real traitor to his class was Sam Craig, the “regular guy” New Deal supporter in the 1942 movie, “Woman of the Year.”  Sam never thought about politics. He was too busy with the baseball game. He swallowed every lie that the New Deal told.  (It is interesting to note that in the period of the American Revolution there was very little interest in sports and great interest in politics. That is part of what is meant by the “spirit of 1776.”)

 FDR did not rob from the rich to give to the poor. FDR (as noted) gave the commercial bankers the privilege to create money and used this to rob from the poor (i.e., Sam Craig) and give to the rich. The banker’s creation of money was controlled by the Federal Reserve (America’s third central bank), a Government agency controlled by the bankers.  The bankers secured these positions by bribing (excuse me, donating to the campaigns of) politicians.  Notice that during the “crisis” of autumn 2008 both McCain and Obama came up with the same solution. “The bankers ought to print more money.”  That money is being printed as we speak (which is why the current theory that there is a danger of “deflation” is nuts). 

As the bankers created money, general prices in the U.S. began to rise (and have risen pretty much steadily ever since 1933). The bankers were able to make more loans with this newly created money and profited from the interest on these loans. The bankers’ big loan customers were able to profit from the lower interest rates (which accompanied the creation of money). And Sam Craig found that he could buy fewer goods when he went to the store. But he was confused by the whole thing and did not want to take the time to think about economics or politics. So he voted Democratic anyway. Prior to the New Deal the average American working man increased his real wages by 60% in a 30 year period. (See the wage series in Historical Statistics of the United States, published by the Commerce Dept.)  In the next generation that slowed, and starting in 1972 it has been in decline. 

Now exactly where do we stand today? Above is a chart of the S&P 500. A simple glance at it tells you one important truth. For the past decade, stocks have been going down. 

Is there a word of this in all of the garbage that passes for economics today?  Not a breath. I listen to a local radio show which bills itself as the best financial show on radio. It sneers at gold as only a collectable, but it has had its followers in stock funds for the past decade. If this is the best, then it’s a pretty bad lot.

 Here is the chart of gold over the same period. Can you see it? Stocks down. Gold up. S&P 25% lower.  Gold 4 times as high. This has been going on for the past 10 years. And 99.9% of the people who have titles in economics and claim to be experts in the field still don’t know it.

 The reason for this is that, once the bankers acquired the privilege to create money out of nothing, they needed intellectual cover. They needed a group of intellectuals who would  explain to the public that allowing them to print money was for the benefit of the whole society. They found a couple of sycophants, William Trufant Foster and Waddill Catchings, who argued that paper money was the “road to plenty” for a society. Foster and Catchings were considered crackpots by the economists of the day.  Then Keynes entered the scene and put a little twist on the Foster and Catchings theory. He called it progressive and liberal. A collection of hacks and frauds then jumped on the Keynesian ship and are known as the economists of the mid-20th century.

 This is why VIRTUALLY EVERYTHING YOU HAVE BEEN TAUGHT IS A LIE. And all the authority figures to whom you look are charlatans or ignoramuses. Can you imagine a person who entered the field of economics after 1980? You had the gold bugs, who had been dramatically right. And you had the stock bugs, who had been dramatically wrong.  And who did these people choose to learn their economics from? They chose to learn their economics from the people who had been wrong.  So they graduate business school believing that we do not have to balance the Federal budget and that printing money does not lower its value. (Actually,  this happens in many areas of society.  If your marriage is in trouble and you go to a marriage counselor. Then you find that the counselor is divorced. He couldn’t save his own marriage.  Again, when Reggie Lewis collapsed on the basketball floor in 1993, the Boston Celtics hired a “dream team” of 12 cardiologists. One of the 12 cardiologists then died of the same disease for which he was treating Lewis.  He couldn’t even save his own life.) 

Who do you want giving you advice?  The divorced marriage counselor, the dead doctor or the establishment economist?  Who do you want?  The fellow with the title or the fellow who can do the job?

Well, here we are again. We went through this whole thing in the 1970s. The vast majority of the people listened to those with fancy titles. They lost 76% of their wealth in real terms. They gave up an opportunity to multiply their real wealth by a factor of 12 (by putting it into gold). That was the first upswing of the commodity pendulum. Now we are in the second upswing of the commodity pendulum.  And it appears that the vast majority are going to make the same mistake again. 

Fortunately, we live in a world which is inherently based on justice. Those who see reality as it is are rewarded. Those who deliberately close their eyes to reality are punished.  So it was in the ‘70s.  So it will be today. History does repeat. It is repeating as we speak. Fantastic moves occur in the financial markets.  If you are on the right side of them, you prosper.  If wrong, you lose.

This is my job in life, to help the good to prosper and make sure the evil lose. To this end, I publish a small economic letter called the One-handed Economist ($300 per year).  You can subscribe by sending $300 to the One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  Or you can visit my web site, www.thegoldspeculator.com. You can get a free sample of my writing by visiting my weekly blog at www.thegoldspeculator.blogspot.com  This past week I put out a special bulletin saying that the decline in gold (which started on Dec. 3) is now over, and the next move will be up.

Thank you for your interest.

 Howard S. Katz

 ****

 My name is Howard S. Katz, and I am looking for men who have that kind of courage.  I write the One-handed Economist, and I sell subscriptions for $300//year.  You can get one by visiting my website, www.thegoldspeculator.com, or sending $300 to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  You can also visit my blog (no charge) at www.thegoldspeculator.blogspot.com.  This week’s blog is “The Origins of Christianity.”

Gold’s Blood Relatives
Stewart Thomson
email: s2p3t4@sympatico.ca
Nov 10, 2009

1. “The banks are going to close! Street violence is coming!”

2. Remember those headlines going into Dow 6500? I do. I bought the Dow into those headlines. Of course, I kept up my insurance actions, removing money regularly from the financial system on a weekly basis. Nobody knew what would happen. Would the Dow make a bottom or go into an abyss with the thundering explosion of a thousand trillion dollars of OTC derivatives blowing to smithereens? The decision was made to use fraud accounting to bury it all and attempt to print money to technically re-price assets, while actually devaluing them. That is a key concept to understand going forward as this crisis accelerates. Raising the price of an item and raising the value of it are not necessarily the same thing at all times.

3. We are at a new Dow 6500 crossroads. An even bigger crossroads. This time, it is for the US Dollar. As the world’s largest market, major action there brings the greatest debate and the most powerful players. While the global fear level is nowhere near as big as it was at Dow 6500, the dollars on the line are vastly larger.

4. Will the mighty US dollar stage a rally? Or will it melt down, possibly triggering a global paper currency crisis? Look at the indicators like MACD rolling over. This looks like the chart of an item that is preparing to crash, not rally.

5. The analysts calling for a huge dollar rally and a stock market collapse are generally quite demoralized. The fundster technicians incorrectly identified the rising technical pattern in the Dow as an actual wedge, as opposed to the wedging action, that is all it was. I highlighted this repeatedly in my videos. Few listened. I kept seeing the same wedge drawn over and over. A costly error for those who bet large money on calling the Dow top with this “wedge”. I would venture that the banksters’ kids have a joke about the fundsters with a Dow “wedgie”. My bank trader friend told me his prime broker contacts told him a literal sea of fundsters were short the Dow on huge leverage at the recent Dow lows, sure they had the top. He pulled his own short positions. Dow top call number 10 zillion bites the dust.

6. The dollar could rally here. Jim Rogers says he’s bought the dollar. My question to those selling commodities here to buy the dollar is alongside Jim “Mighty Man” Rogers is: Do you really think Jim Rogers is net long the dollar? Do you think he’s bought more dollars than the commodities he holds as a core position? The man opened up his bag of peanuts and he’s chomping on a few US dollar peanuts. That is all that he is doing. Period. Many in the gold and fund community are already trying to eat the bag, shells and all, in a gorging on the dollar. Many of these players missed the move in gold from 905 or shorted it, and they are compounding one blown trade with another even worse set of tactics, to desperately “make back” their losses.

7. Play the dollar as an insurance trade or a simple counter trend play. Note the key word here is: Play. Not “sell all my gold at the market, it’s going down!”

8. The possibility of a strong US dollar rally is very high, yes, but the odds of a dollar collapse followed by a global paper currency crisis, are even higher.

9. Remember when gold moved towards the $1000 marker, towards the neckline of the massive head and shoulders continuation pattern on the gold weekly chart? I said, “There is a 51% chance we go higher. I am long with an ultimate target of $6000 and no amount of possible gold weakness will cause me to take any action on the sell side with my gold positions”.

10. When I look at the gold monthly chart, I see a stronger technical situation now than ever! Regardless of any minor trend rally (minor trends last 1-3 weeks in time), my view is the odds of a US dollar collapse are 55%. The odds of a major rally are 45%.

11. This is a time where put options on gold could be a good idea for those who are terrified of a dollar rally. You have solid profits in gold and related items, but the “will gold rise or tank” game being played out there is too much for you mentally. You could “insure” a portion of your gold portfolio for a small cost. If gold goes higher, your further gains should far outweigh the loss on the put options.

12. I personally will not be buying any put options. In fact, I’d rather buy call options here than put options if I was forced to choose one or the other. I will be buying more gold if it declines. All the way to zero in a pyramid formation. The buys growing larger as it declines.

13. There is no “gold top” and I don’t care about gold 1100.

It’s a round number marker and I sold into it with bits of my trading position. End of story. Here’s the chart. While the daily chart calls for booking modest profits, the monthly chart is on massive buy signals. Look at the TRIX configuration. That is an enormous buy signal. Gold’s major technical indicators are triggering buy signals, not sells.

While head and shoulders continuation pattern price targets are generally unreliable, this is one of the greatest examples of this pattern of all time. Targets of 1200-1400 are not unreasonable, just for the move from the head and shoulders. This pattern to me looks like price could soar far beyond that target. What happens now is not so important as insuring that you are in the gold rocket when it parks at moon $1400, on the way to mars $3000.

14. If a substantial decline of size were to commence in gold, well, I would suggest we are nowhere near that point yet. But if it did occur, you have to buy, not sell. We have the banksters, the fundsters, and now the Gold Topsters. My message to the topsters is this: Stop picking your gold nose. Or you will arrive at gold moon 1400 with bits of gold, if any.

15. My suggestion to those looking for real world tactics to manage your emotions and money on the gold rocket right now if you are feeling overwhelmed by both bull and bear pulls, is to focus on what I term “Gold’s Blood Relatives”.

16. I spoke about corn at length over the week-end. I don’t view corn as better than oil or wheat, but I like to talk about one thing at a time so investors understand it, rather than just blabbing, ‘oh yeah, corn is the big one, go go go!” But you tell me, what makes more sense, a madman play to load up on dollars when there is a 55% chance of a global paper currency crisis, or to buy items like corn, one of the world’s lowest risk investments, with a near-infinitely smaller chance of going off the board than the dollar? To repeat, I don’t favour corn over any other gold-related item. Notice the Bloomberg headline that came out yesterday, right after my write ups. That Bloomberg story shows a stunning picture of what is going on in the Chinese corn market.

17. About 55% of all farms in China are about 3 acres in size. Or less. The six dollar a bushel marker is the corn market line in the sand. If Chinese farmers get less than $6 a bushel, the revenues needed to survive on a farm that is less than 3 acres in size just don’t exist at less than 6 dollars a bushel. Chinese farming is not about profit margins. It’s about revenues. The Gman is subsidizing the farmers, because the farmers are pouring out of the farms and into the cities.

18. Jim Rogers himself has stated while he doesn’t think it will happen, he is clear that the risk is very real: water shortages could lay an unimaginable beating on the industrial revolution in China. No water equals: Starvation. The world bank notes the following about China:

With 20% of the world’s population but only 7% of global water resources, China meets with a severe challenge.

.  More than half of China’s 660 cities suffer from water shortages, affecting 160 million people.
.  The per capita water volume in China is one fourth of the world average.
.  90% of cities’ groundwater and 75% of rivers and lakes are polluted.
.  As a result of widespread water pollution, 700 million people drink contaminated water every day.

19. Some cyclical forecasters believe an actual “dust bowl” type of event could occur in the 2011-2012 period. My suggestion is: If you are feeling like you can’t go on in the gold market at this point in time, rather than trying to be king of the dollar bugs, simply shave off a FEW gold profits, and grab a nice piece of corn on the price weakness cob. Take a bite out of that, not US dollars, to kill your thoughts of gold suicide.

20. If gold goes to $3000, where will the dollar be? Focus on Gold’s blood family, not gold’s enemies. I would suggest you also consider the “cost of farming floor” with agricultural items like corn. It’s not impenetrable by any means, but there is a price point below which the farmer throws in the towel. The odds of price going below there and staying there are small, never mind the odds of it going to a real price of zero. The deflationists haven’t factored starvation into their pipedream. There is much more Deflation of value coming to the world’s economy, but there will be Inflation of Price. Earth to price deflationists on Mars: There can’t be any deflation of price because we’ll all starve to death. The global farming industry will collapse and we’ll all die. The gold relatives advice applies to gold price chasers as well. Some have the thought, “I’m missing out, I just gotta buy, gold will be at 1200 and I’ll have too little!” If gold soars higher, do you think items like oil, food, and other hardcore commodities are going to tank? Not likely. But you can buy them without the adrenaline gusher that is present in the gold market right now. “I don’t buy anything that just went to an all-time high” -Jim Rogers. Maybe you are smarter than he is. I doubt it. There are many items, like food and energy that are trading at low prices.

21. My most important point today is this: Many gold stocks haven’t joined bullion yet. Those that have risen have done so modestly in most cases. Do not dump them to chase the bullion rocket. That borders on insanity. Gold stocks should be bought aggressively into any and all weakness. If you think you are missing out on bullion now, magnify that by 100, and you’ll have the picture of how twisted your emotions will be when the gold stocks join the party and you sold out to chase a $100 move in bullion.

22. The Dow is beginning to hyperinflate, as major institutional players sense a US dollar meltdown is very near at hand. Rising bullion prices coupled with a soaring Dow put you, the gold stock owner, in what I term “The Ultimate Driver’s Seat”. There is no better place to be invested right here, right now. My suggestion is you scan the gold stocks horizon and buy what you can that is weak. Don’t walk to those stocks. Run. Notice I said “hurry”. Not: “back up the truck”. You don’t need much fuel in a toy rocket to shoot it 500 feet in the air. That is the gold stocks market. But do not waste time. Time is of the essence. The gold juniors rocket is on the launchpad in a situation in time comparable to when gold bullion was at $960 as it moved towards the triangle breakout.

23. The pros are moving onto the gold stocks rocket and preparing for liftoff, while the gold topsters are jumping out of the rocket onto the US dollar cement below. The banksters are transporting their broken bodies to the US dollar oven and preparing for final roasting. Do I have a few longside US dollar peanuts in my bag like Jim Rogers does? Sure I do. I’ve bought the dollar into this weakness. With the peanut capital it deserves. So far, while I’ve banged about 10 or 15 USD pucks into the net on strength out of the hole from the recent low, overall it tastes like bits of USD shell mixed with USD peanuts. Those who sell gold stock in major size here and buy the dollar in size, are going to find they have a mouth full, not of shells, but of poison. It will be a mouthful far worse than the poisoning they got shorting the Dow into 6500. Gold’s blood relatives versus USD paper bills in the oven. Not such a tough choice. Is it?

Nov 10, 2009
Stewart Thomson
Graceland Updates
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Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an invetor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially.

The bottom line:

Are You Prepared?

Howard S. Katz
Nov 9, 2009

(Click on image to enlarge)

On November 4, gold pulled back to $1025, and that was the turn. It gained 75 points over the next 6 days, including a 30 day whopper when India bought 200 tonnes of gold from the IMF. On Friday, $1100 was breached (interday on the Comex, Dec. future).

Is it too late to become a gold bug? Are you one of those who did not listen to the one-handed economist? Worse, did you fly to “safety” in the U.S. dollar? Are you thinking, “Is it too late to buy?” The answer is in the chart above.

This is the gold bull market going back to its beginning in 1999. Even a novice can see one thing: it is going up. I am not a big fan of uptrend lines, although I have drawn the uptrend above. But you don’t even have to look at the uptrend line. All you have to notice is that each time gold goes up, it breaks to a new high, and each time gold goes down, it holds at a higher low. This is a concept that Charles Dow formalized in the Dow Theory a hundred years ago, and it is as valid today as it was then.

It is not difficult, but in this way of doing things is a very important idea. One must always keep in mind the big picture. The big money is made in the big move. The vast majority of traders are up too close to the market. They cannot see the forest for the trees. So they lose sight of the big picture. And it is the big picture which is going to bring you the big profit.

These are the technicals arguing for a big rise in gold. What are the fundamentals? The important fundamental is an event which happened on March 9, 1933. F.D.R. rammed a bill through the obedient Democratic Congress giving the privilege to counterfeit money to the commercial banks.

I know that you have been taught that F.D.R. and the Democrats were against the bankers. That is a lie, pure and simple. Through the 1920s F.D.R. had been a Wall Streeter working at 120 Broadway, the manager of a vulture fund (so called because it would swoop down on dying companies like a vulture and gobble them up.). His very first act allowed his Wall Street buddies to steal from the working people of America and use this privilege to get rich. A traitor to his class he was definitely not. The bill was rammed through Congress in one day, with no hearings, and the House of Representatives did not even have copies to read before they were required to vote. It was a travesty of the democratic process. Ever since that day, the Democrats have pretended to be the party of the working man while they robbed the working man to give to the bankers. Now how does this affect you?

With this in their pocket, the big Wall Street banks went to work. They found a group of “economists” who would advance the theory that letting the bankers print money makes the country rich. It is true that these “economists” were regarded as crackpots by the real economists of the day. No matter, the bankers’ money talked. They bribed a number of the top schools in the country to hire these crackpot economists. Crackpotism was defined as a new theory of economics. A good example is John Kenneth Galbraith, whose chair of economics at Harvard is named after a former head of the Manhattan Bank (today merged into J.P. Morgan). You probably know these crackpots by the name Keynesian. Perhaps you sent your son off to Harvard to earn a degree in crackpot economics.

I went to Harvard, but I was smarter than you or your son. I spotted the professors there as crackpots by my sophomore year. I skipped the Harvard economics courses and learned real economics by self study. This is why my record of economic prediction over the past half century is brilliant, and the record of the crackpot economists with the long titles is a joke.

But here we are in the 21st century, and you have to make a decision. Buy gold, as we gold bugs are telling you. Or buy stocks, bonds or T-bills, as the establishment is telling you. Well, here is the situation. Through the course of the 20th century the bankers were more and more successful. With the Kennedy tax cut of 1963, Nixon’s abandonment of gold in 1971 and Reaganomics in the 1980s, the issues of paper money got bigger and bigger. America had became the richest country in the world while she was on the gold standard (1788-1933). Now America is getting poorer and slipping backward toward the level of the other nations. The U.S. dollar is in full scale collapse, and there is speculation about the day that it will no longer be used as the world currency. (This happened to the British pound in 1947-48 and coincided with the collapse of the British Empire and with the fall of Britain as a world economic power.)

At the present time, both political parties follow the banker line of more paper money. Last year, the Fed created a trillion dollars out of nothing. To avoid alarming people, the Fed lied about this, reclassifying a portion of the money supply as time deposits (although the owners of these deposits were told that they were demand deposits).

The bottom line of all this is that the bankers are hungry for the Fed to create more paper money. (They are always hungry for the Fed to create more paper money.) So they have their crackpot economists writing articles in every “respectable” newspaper and magazine and locking down all the financial advisory positions in both parties. Obama is projecting trillion dollar deficits for the next 3 years. The Government does not intend to borrow these trillions of dollars from the American people. (thus putting the burden on our children). It intends to counterfeit the money (putting the burden on the people of today). (In America, paper money is illegal under the Constitution. That doesn’t seem to stop anybody, but it certainly does make their actions illegal.)

Since the crackpot theory that printing money is the road to plenty is not true, this will cause the collapse of the U.S. dollar. The vast majority of the American people will wind up poor, and the bankers will get rich. Think, we now have a Government which believes that destroying cars (Cash for Clunkers) will “stimulate the economy.” F.D.R. had a similar theory in the 1930s. Plow under crops, and kill pigs. This was considered to be the way to get us out of the “depression.”

The way to protect yourself is to get out of dollars. This means no savings accounts, T-bills, commercial paper or longer term notes and bonds. GET YOUR ASSETS INTO REAL GOODS. As the dollar goes down, the price of real goods in dollars has to go up. And anyone who tells you different is an ignoramus, a crackpot or a fraud.

Leaving aside collectables, which can be tricky, you have 3 choices: stocks, real estate and commodities. Over the (very) long term, all three of these will go up (in dollar terms) as the dollar goes down. But one of my important discoveries is the commodity pendulum. This says that commodities and stocks take turns. Commodities move down and up in waves which used to take a decade and now take two (examples 1971-80 and 2001-?). As their rise feeds through into consumer prices, the Fed is forced to tighten, and this causes a collapse in both bonds and stocks. That is what you are going to see over the next several years. The Obama price explosion is already beginning in commodities and will later feed through to consumer prices. Then the Fed will tighten, and all the establishment types who are in the stock market will feel a great deal of pain. Have you heard the advice, “Stocks go up for the long pull. They always have?” I was told this when I started trading stocks in the 1960s. From 1966 to 1982, the real value of the DJI declined by 70% in real terms. From 1970 to 1980, gold multiplied by 25 times in nominal terms and 12 times in real terms. How stupid do you have to be to get taken by the same lie twice? (When the young Jim Dines first became a gold bug in 1963, he was fired by his establishment broker. They later went bankrupt, but they never apologized.)

# # #

Howard S. Katz
email: howardkatz@hotmail.com
website: www.thegoldspeculator.com

I publish an economic newsletter, the One-handed Economist ($300/year). I have been calling the gold and other markets since 1965. To subscribe, visit my web site at www.thegoldspeculator.com. If you don’t like computers, you can subscribe directly by sending $300 to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055. Or you can get a free sample of my writing by visiting my blog at www.thegoldspeculator.blogspot.com (no charge). This week’s blog is about the Middle East. Thank you for your interest.

Howard S. Katz holds a BA in mathematics from Harvard University. He became interested in Austrian economics and started a successful investment newsletter, The Speculator which focused on gold and gold stocks. He is a lifelong advocate of gold and gold stock investing. Later, he published The Gunslinger for investors interested in gold and gold stocks. In addition, Mr. Katz authored three books on gold, the gold standard and money in politics: “The Paper Aristocracy“, “The Warmongers” and the soon to be published “Wolf in Sheep’s Clothing”. He was involved in the Objectivist movement in New York in the 1960s and was an early member of New York’s Free Libertarian Party. Mr. Katz is a contributing author to The Ludwig von Mises Institute where his writings appear along with those of contemporaries Llewellyn H. Rockwell, Jr., Murry Rothbard and Robert Murphy, among others. He has been interviewed on numerous radio programs. He is currently Chief Investment Officer, editor and publisher of the gold and gold stock investment newsletter, The One-handed Economist.

Forward: If there are only a few articles you ever read on the gold standard, this should be one of them. The reason is that it is complete. It covers the moral case for the gold standard as well as its practicality. Although beginning with the basics it incorporates some of the more intricate aspects of it’s virtues.

There is no call in this article to re-establish the gold standard today. Whether the gold standard is ever re-established is not the point. The point, is that like freedom, it is the ideal. And like freedom, while achieving it may be a distant goal, moving toward it is always the direction we should be moving.

***********

At one time the case for the gold standard was practically self-evi­dent — undisputed by most econo­mists and appreciated by both lay­men and professionals. Today, however, the case for gold is bur­ied under decades of propaganda, misconceptions, and myths. It has been only recently that the case for the gold standard has begun to surface from under the Policy Makers’ anti-gold debris. Conse­quently, gold is once again gain­ing the attention and interest it so rightly deserves.

Today’s free-market advocates of the gold standard differ from past advocates. For example, free-market advocates do not exclude silver or other commodities from their concept of a gold standard. Indeed, they do not even insist that gold must be money. The case for the gold standard is actually the case for market-originated commodity money, and the case against government-regulated fiat money. It is simply an extension of the case for free markets which respect the rights of man, and the case against controlled markets which violate the rights of man.

To be concerned with the gold standard is to be concerned with a free economy, regulated by the values and choices of men, rather than a controlled economy in which the values and choices of men are regulated by government. This concern for man’s freedom to express values and exercise choices is derived from the deeper concern for justice and for man’s right to property. The man con­cerned with justice does not aim to force others to use gold as money. Rather, he insists that gov­ernment has no right to prevent him and other men from using gold as money if they choose. The man concerned with property rights does not urge government to legislate pro-gold policies in order to arbitrarily increase the value, popularity, or status of gold. Rather, he insists that gov­ernment stop inflating, since this arbitrarily decreases the value of his money claims to property.

Antagonists of the gold stand­ard claim that it is impractical. But the gold standard is, in fact, the most practical monetary sys­tem yet conceived by man. How­ever, the gold standard’s primary virtue does not lie in its practi­cality: it lies in its morality. Those concerned about such things as freedom, justice, the preserva­tion of property rights and pur­chasing power, would do well to consider the moral case for the gold standard, for, once under­stood, it is the individual’s best defense against government con­fiscation of property through in­flation.

The fact that prevents govern­ment from indulging in inflation­ary schemes under the gold stand­ard can be best summed up in a phrase: governments can’t print gold. But to understand the impli­cations of this statement, and the virtues of having gold as money, it is first necessary to understand what money is — and what money is not.

What Money Is . . .

A man on a desert island has no need for money. He produces the goods he needs to survive, and consumes all he produces. Simi­larly, a primitive society has no need for money. The kinds of goods produced are extremely lim­ited, and if individuals desire to exchange their goods with one another, they can do so through direct exchange, i.e., barter. But under a division of labor economy where men specialize in produc­tion and where there is a variety of goods produced, desired, and traded, there is a very definite need for money. For how else could Mr. Jones in Florida sell his oranges to men throughout the world and then buy Mr. Smith’s best-selling novel, unless there ex­isted some medium of exchange acceptable to all parties.

Money originates from men’s desire for indirect exchange. And more, since indirect exchange usu­ally occurs between strangers like Smith and Jones, money must be an object which is mutually val­ued. Thus, money is that commod­ity which serves as a medium of exchange by virtue of its high degree of marketability.

The task of discovering which commodity will be most valued by and most acceptable to men as a medium of exchange can only be accomplished through a market process; for it is only through the market that men’s values and choices are properly reflected. The verdict of the market has re­flected three general requirements for any lasting medium of ex­change: that money should be gen­erally acceptable to most men; that it should be practical to use; and that it should be relatively stable in value. If these require­ments are satisfied, the result is a money of trust.

Trust is the lifeblood of money, and money is the lifeblood of any economy based on the indirect ex­change of goods and services. A money of trust serves to facili­tate exchange among men, and in doing so, breeds a healthy and growing economy. But if men should ever begin to mistrust money, the market will immedi­ately reflect this loss of confidence. Then money will begin to lose stability, lose its acceptability, and will soon become impractical to use in exchange.

Mistrusted money is the anti­thesis of the lifeblood of an econ­omy. It’s a kind of “bad blood” circulating between men through­out the economy, breeding con­fusion and suspicion. The fact that men’s mistrust of money will result in monetary crises and col­lapse, underscores the need for a money that never contradicts men’s values, a money that at all times properly reflects men’s val­ues, i.e., a money based on, and constantly exposed to, individual choices — which means a free­-market-originated commodity money.

When one considers the com­plex process that must take place before men can discover which commodity money constantly re­flects their changing values and choices, one can understand why it is only through a free market process that money can properly evolve as a medium of trust. And one may also understand why no man, group of men, or govern­ment, has the right to dictate what money or its value should be. This decision must be a market decision if it is to be a lasting decision.

Throughout history, almost every conceivable commodity has been used as a medium of ex­change. Through the years of eco­nomic development and through trial and error, those commodi­ties least suited to serve as money were eliminated, while those com­modities best suited survived as forms of money. After centuries of exchange between men, the commodity that emerged as the most valued, the most practical, the most trusted money among men, was gold.

What gives rise to men’s trust in gold? First, men value gold as money because men value gold as a commodity. Gold at any time can be converted to its commodity role if its monetary role should ever be questioned. Second, since gold is relatively scarce and precious to men, it has stability of value. Therefore, it can be trusted to serve as a relatively stable medium of exchange. And since most in­dividuals desire to save part of what they produce in some mon­etary form, gold’s stability of value provides them with a relia­ble monetary method of accumu­lating and storing wealth.

What else gives rise to men’s trust in gold? Gold is easily mar­ketable, which means it is accept­able to men in exchanges of all kinds. Gold is also trusted because it is practical: it’s durable, so it won’t perish or rot; it’s small in bulk, so it is easily transportable. It’s a metal, which means it can be used in different forms, such as bars or coins; and, since gold does not evaporate, it will lose neither quantity nor quality if or when men should decide to melt their coins into bullion or melt their bullion for use in production.

There is one more thing that gives rise to men’s trust in gold: the knowledge that gold cannot be counterfeited; the conviction that the money supply cannot be arti­ficially and arbitrarily increased by those who would aim to con­fiscate wealth rather than produce it; the knowledge that money (the claim to production and effort) will itself represent production and effort. In short, men’s trust in gold carries the conviction that the monetary system freely adopted by men is based, not on whim and decree, but on integrity and productivity.

These are some of the reasons why men have trusted gold as a medium of exchange through his­tory — and why today’s Policy Makers damn its existence.

… And What Money Is Not

Money is not paper. Paper notes evolve from the desire for a con­venient substitute for commodity money. The paper notes that cir­culate as money today were once money substitutes (receipts for gold), defined by and convertible into a specific amount of gold. Paper notes did not and cannot become a money of trust without first representing a commodity of trust.

Consider the reaction of free men — men who, understanding and respecting the meaning of property rights, are suddenly and for the first time offered in place of gold, non-convertible paper notes. These notes would be mean­ingless to such men. No man who had just come from harvesting a field of wheat would even consider trading his wheat for scrap paper.

There are only two ways in which men will accept paper notes without commodity convertibility : if they are forced to do so, or if they are conned into doing so. Americans are now legally forced to accept government’s non-con­vertible paper notes — but only because they have been conned into believing that commodity money is “old-fashioned” and “im­practical” and that paper notes are indicative of a “modern and sophisticated economy.”

Nothing could be further from the truth. Non-convertible paper “money” is fiat money that derives its value, not from its value as a commodity, not from its value as a useful medium of exchange ac­cording to the requirements of a medium of exchange, but from the decree of government. Fiat money is a throwback to the days of kings and the mentality of dic­tators. It is not a money evolved from the values and choices of free men in free markets, but a money created through the coer­cion of government.

Is commodity money old-fash­ioned and impractical, as today’s Policy Makers contend it is? Con­sider the following facts: Over the last several decades, the ex­change ratios (the prices) of vari­ous commodities have not varied much in value relative to each other. For example, the value of eggs to milk or milk to bread would be at approximately the same ratios today as they were years ago.

Why Prices Rise

But if it is true that the ex­change ratios of commodities are relatively the same today as they were in the past, why then have prices (the exchange ratios of dollars to goods) soared over the years? The reason is that the val­ue of the paper money, with which government forces everyone to deal, has fallen yearly relative to all commodities. Clearly, if a com­modity (theoretically, almost any commodity) had been used as a medium of exchange over the past decades instead of government’s fiat money, prices would have re­mained relatively stable. It is im­portant to realize that it is not commodities that are rising in value, but fiat money that is fall­ing in value.

Since 1933, when the U.S. sev­ered the dollar-commodity rela­tionship by abandoning what was left of the gold standard, the value of the dollar has depreciated by over ninety per cent in relation to other commodities. This could nev­er occur under a commodity stand­ard — only under a government imposed fiat standard. Had the U.S. returned to a dollar based on and convertible into gold instead of severing the dollar-gold rela­tionship, the supply of dollars over the years would have been limited to, or checked by, the sup­ply of gold. Therefore, the value of the dollar today would have been equal to the value of gold in relation to other commodities. Instead, the U.S. decided to print dollars whenever “needed” and to pretend that the dollar was “as good as gold” by legally fixing its value. The pretense couldn’t last, and today the dollar is worth a mere fraction of its val­ue in terms of gold in 1933.

Paper notes that are not repre­sentative of and convertible into a commodity are not money and have never satisfied the require­ments of money for long. They are notes of circulating debt which men are forced to accept, so that governments can continuously pur­sue their policies of inflation.

The Nature of Inflation

Inflation is the fraudulent in­crease in the supply of money sub­stitutes and credit. It is a policy which allows government to arti­ficially create and spend more money than it is able to collect in taxes or borrow from its citizens. Government is the cause of infla­tion — the effect is higher prices.

Consider each dollar as a claim to some tangible good. If the claims are increased, the value of each claim goes down because there are more dollars seeking goods. This bids prices up.

But inflation is not simply ris­ing prices. In fact, inflation may exist even when prices remain the same or decrease. How is this pos­sible? If the production of goods and services increases more than the artificial increase in paper claims, prices will drop — but not by as much as they would have, had there been no artificial in­crease in paper claims. Thus, in real terms, the value of paper claims is effectively reduced even though in relative terms the value of these claims may increase.

Historically, and in relatively free market economies, there are only two ways in which a general across-the-board increase in prices can occur: through a dramatic in­crease in commodity money (such as new gold discoveries) or through a fraudulent increase of money substitutes by banks and governments. The former type of general price increase rarely oc­curs and is perfectly natural. The latter is both unnatural and im­moral.

In the case of new gold produc­tion, those who have produced the new commodity money will have earned the right to exchange their product for the products of others. All other non-money producers may have to pay higher prices for goods, as the supply of gold in­creases, but the higher prices are compensated for by having more money to spend. Who receives the “new” money will depend on indi­vidual productivity — and this is as it should be, for it is the jus­tice of the market that the acqui­sition and distribution of wealth is based upon productivity rather than decree.

But, given a fiat standard where government sanctions and spon­sors an artificial increase in paper money or credit, the increase in purchasing power for some men can only be obtained at the ex­pense of other men. Given a fiat standard, income distribution is the result of chance, caprice, or government favors and loans. When government doles out its fiat money, these notes dilute the value of all other outstanding money claims. Those who receive the fiat money first, benefit from spending their money before prices rise. But as the fiat money is spent, prices are higher for all other consumers. Thus, the difference between a real increase in the money supply (i.e., commodity money) and an artificial increase (i.e., in paper claims) is the dif­ference between production and theft.

Clearly, inflation is a moral is­sue. However prices respond, it is immoral that some man, agency, or government is legally permit­ted to obtain wealth at the invol­untary expense of other men. The major challenge in the sphere of monetary relations today is how to abolish the coercive power of government to control the supply and regulate the value of money, and how to return this function to the market where it properly belongs.

The Fiat Standard at Work

Under a fiat standard, govern­ment gains control of the banking system and thus, indirectly, of the nation’s money supply. It can arti­ficially and arbitrarily create mon­ey and furnish credit. Government paper notes are not based on or convertible into gold, or any other tangible commodity; man’s pro­duction and labor are not the sole claim to other men’s production and labor : the supply and value of money are determined by govern­ment.

Under the American version of the fiat standard, the banking sys­tem and the nation’s money sup­ply are controlled and regulated for the most part by a twelve-man Board of Governors which is em­powered to make policy decisions for the majority of the nation’s banks. Thus, America’s banking system is not a free and private banking system — it is a quasi-governmental banking system, known as the Federal Reserve System.

It should be clear that the Fed­eral Reserve System’s power to create claims against individuals’ property is immoral. But neither the Federal Reserve System nor the fiat standard is ever defended on moral grounds; they are de­fended on practical grounds. Once inspected, however, these grounds turn out to be about as solid as quicksand. The primary justifica­tion given for a fiat standard is that credit can be extended far more rapidly and extensively. This, it is claimed, is the fiat standard’s major virtue. It is, in fact, a major vice.

The greatest economic threat under a fiat standard is that the Federal Reserve System will sup­ply heavy doses of money and credit to the loan market in an attempt to reduce interest rates and “stimulate” the economy. This attempt, while temporarily stimu­lating economic activity, leads to malinvestment, as businessmen falsely anticipate greater profits. A “boom” results, but since the “boom” is artificially created, the prosperity is temporary and, for the most part, illusory. Govern­ment has not furnished more goods; it has not increased the nation’s prosperity; it has simply increased the money supply —which leads men to believe they are richer. The fact is, however, they only have more paper claims to goods. This cannot enrich any­one; it can only lead to future in­flation, i.e., a reduction of the value of real claims to wealth.

The Illusion of Prosperity

Thus, increases of money and credit provide only an illusion of prosperity, for with increased money and credit come increased costs for producer goods and in­creased wage costs. Higher wages then lead to over-consumption, as consumers, too, are enticed by the illusion of prosperity. But over­consumption results in higher prices which reduce the consum­er’s standard of living. Since the “boom” was inflation-inspired, producers and consumers are not better off — they are worse off. Mal-investment and over-consump­tion are mistakes — errors in judg­ment — caused by government’s at­tempt to con its citizens into be­lieving that profit opportunities are better than they really are.

When the credit expansion that stimulated the “boom” ends, the mistakes that were made cannot be perpetuated. These mistakes must be liquidated: consumers buy less and begin paying off their un­realistic accumulation of debts. Producers liquidate inventories. Interest rates rise, and unemploy­ment increases as the economy struggles to readjust. The severity of the readjustment depends on the degree and length of govern­ment’s prior credit expansion and the policies implemented to cope with the adverse effects. Given continual injections of money and credit in the inane attempt to con­tinue the “boom” and prevent a necessary recession, hyperinfla­tion will result. Hyperinflation must lead to monetary chaos as well as economic disaster, i.e., to depression. A major depression is not a necessary result of the fiat standard, but inflation and the “boom-bust cycle” are.

The whole purpose of fiat mon­ey is to allow government to spend more money than it can raise in direct taxes from its citizens. As a result, the American fiat stand­ard has worked more often as a means of redistributing wealth than a means of stimulating the economy. Government, instead of furnishing money to the loan mar­ket in the attempt to continuously reduce interest rates, has created money to finance the “welfare” state. When government’s fiat money enters the economy in the form of checks for expenditures, rather than through the loan mar­ket, the sequence of events and the effects are a little different.

Men usually hold their money as savings, but as prices continue to rise over the years of govern­ment deficit spending, men realize that the pieces of paper they hold are continuously and progressively depreciating in value — that in­flation is becoming a way of life. Once men begin to lose confidence in government’s fiat money, it’s only a matter of time before the years of simple inflation burst in­to hyperinflation and monetary collapse.

Thus, whether government tries to stimulate the economy or to finance programs that it cannot afford, the fiat standard is self-de­feating and counter-productive. The consequences of America’s fiat standard have been mild by historical standards: the Great Depression of the ’30’s, an end­less series of booms and busts since then, and a depreciation of the dollar by about 92 percent. So much for the “practicality” of the fiat standard!

The Meaning of the Gold Standard

In a free society, no man, group of men, or government has the “right” to infringe upon the rights of others. This means that within a free society, the initia­tion of force is banned. All goals must be attained through persua­sion and voluntary cooperation, and no goal may be achieved at the expense of any man — not for the “good” of another man, not for the “good” of the state, and not for the “good” of society. A system of voluntary exchange is a system of laissez-faire capitalism. Under capitalism, man’s rights are supreme. They are defended by government — not violated by government.

A gold standard is an integral part of a free society; a fiat stand­ard is an integral part of a con­trolled society. A gold standard cannot exist without the consent of individuals; a fiat standard cannot exist without the initiated force of government. A gold stand­ard is based on voluntary exchange, the recognition of men’s values, and respect for private property; a fiat standard is based on compulsory “exchange,” the de­nial of men’s values, and the insidi­ous confiscation of private prop­erty.

Wealth is production, and gold is the equivalent of wealth pro­duced. Because neither wealth nor gold can be created out of nothing, neither wealth nor gold are pos­sible without men of intelligence, men of ability, and men of produc­tivity. Fiat is force and is the equivalent of wealth confiscated. Both fiat and force are the tools of the envious and the cowardly.

Where a gold standard is welcomed by the best of men, the fiat stand­ard is welcomed by the worst of men. Where the gold standard de­mands the earned, the fiat stand­ard grants the unearned. Where a gold standard evolves from indi­vidual choice, a fiat standard evolves from government edict. Where a gold standard necessi­tates only that men be left free to act, to choose, and to trade, a fiat standard invites government to control, to regulate, and to dic­tate men’s choices, actions, and the terms of trade.

Gold limits the government’s power to spend more money than it receives in taxes, and in doing so, gold limits the government’s arbitrary power over the economy; gold checks artificial money and credit expansion; it prevents arti­ficial “booms” which lead to very real “busts”; gold protects individuals from economically un­sound government programs; and it protects citizens from the in­flationary confiscation of private property. Not only is the gold standard the most practical mone­tary system yet discovered, it is a standard consistent with freedom — yet it is the gold standard that today’s Policy Makers either ig­nore or denounce.

Paul Nathan
October, 2009

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Paul Nathan has written in the field of economics since 1968. In the seventies he wrote several articles on gold for a national, international magazine. Since then he has become a full time investor and has resumed his witting, focusing on gold and current events.

By Nick Barisheff
Sep 29 2009 2:40PM

http://www.bmginc.ca

“I’m not so much interested in the return on my money
as I am the return of my capital.” – Will Rogers

In this extraordinary environment, preserving your personal wealth becomes priority one. Before you make another major financial decision, it is imperative to understand the big picture by recognizing and understanding three critical issues. First, we are in a secular bear market for financial assets (stocks and bonds). Second, the consequences of the global bailouts will likely be highly inflationary. Third, we are at a pivotal point in the long-term investment cycle. Let’s examine each of these three keys in more detail.

KEY 1: WE HAVE ENTERED A SECULAR BEAR MARKET

In a secular (long-term) bear market, stocks plunge in value, single digit price/earnings ratios become the norm, and they can stay that way for decades. The secular bear we are experiencing now actually began when the stock markets crashed in 2000-2001, but few investors noticed because in 2003 the markets were artificially propped up by massive amounts of easy money from the US Federal Reserve under Chairman Alan Greenspan. This was not a new monetary policy. Greenspan’s response to every financial “crisis” he faced starting with the stock market crash of 1987 all the way through to and past 9/11 was to pour money into the system. The system was never allowed to self- correct, allowing a variety of asset bubbles to form.

During a secular bear market such as this one, stocks habitually move down or sideways. But there are occasional and sometimes violent bear market rallies to the upside that suck in naïve investors hopeful of a quick market turnaround. The most recent example is the spring/ summer 2009 rally in which the S&P TSX, the Dow and the S&P 500 has risen between 48 and 56 percent from their March lows. Since we are just in the early to middle stages of this secular bear market for stocks, investors still have time to rebalance their portfolios into negatively correlated assets. That means selling stocks and bonds (which will decline when interest rates rise) and buying an asset class that will thrive in this uncertain market: precious metals

Cash may seem to be a safe haven but it won’t protect against rising inflation. Bonds did well in 2008 because interest rates were slashed to zero. But rates have nowhere to go but up, which means adding or keeping bonds in your portfolio is likely to produce a negative return. It is important to note that bonds no longer provide true diversification protection because stocks and bonds have become positively correlated, meaning they generally move in the same direction.

Buy and Hold Doesn’t Work In A Secular Bear Market

Following traditional bull market mantras such as ‘Buy-and-Hold’ and ‘Stay the Course’ is a recipe for disaster in a secular bear market. Because secular trends last for years, they also take years to break. The most recent examples are the1966-1982 bear market in equities which, on an inflation-adjusted basis, investors lost nearly two thirds of their value during this period. As Warren Buffett points out “During these 17 years, the stock market went exactly nowhere.”

During this current bear market, the DOW has been negative over the past ten years, the MSCI World Index is only marginally positive, yet precious metals have soared over 200 percent (Figure 1). If inflation is taken into account the stock indices would be in significant negative territory, while volatility has been extreme: many of the stocks that formed the DOW in 1999 are no longer even in existence. One more fact: if you are counting on stock dividends to help you get through this downturn, consider this: at the time of writing, companies are cutting dividends at the fastest and deepest pace in at least 50 years.

KEY 2: MASSIVE BAILOUTS WILL TRIGGER MASSIVE INFLATION

As Merrill Lynch economist David Rosenberg wryly points out, “the new growth engine for the economy is government spending.” We are in the early stages of a global government spending spree of unprecedented proportions which, coupled with zero percent interest and extraordinary money supply growth, will be hugely inflationary. Financial assets will continue to lose purchasing power in this kind of environment, but gold and precious metals will hold theirs because they are a proven hedge against an investor’s two worst enemies — inflation and economic turmoil.

In recent years, the US money supply has been growing at an alarming rate. In 2008, despite a slowdown in lending and credit, money supply still grew dramatically with M3 (the broadest measure of money supply) increasing at about 11 percent, as Figure 2 shows. In 2009 the money supply is still growing at approximately 9 percent on an annualized basis. Over the long term, M3 increases have been the best leading indicators of future increases in the price of goods and services.

Most people think of inflation as a rise in the price of goods and services but in actuality price rises are the effect, not the cause, of inflation. As famed economist Milton Friedman pointed out many years ago, “inflation is always and everywhere the result of an increase in the money supply”.

Precious metals are the only currency to own when central bank printing presses are debasing global currencies at unprecedented rates. Because they are a proven store of value, precious metals are likely to be the only asset class that will preserve the purchasing power of your savings as we enter into a prolonged period of ‘–flation’: deflation, stagflation or inflation (one of the latter two being much more likely).

KEY 3: RIDE THE INVESTMENT CYCLE

A buy and hold strategy might work if it weren’t for the existence of cycles that drive bull and bear markets. A good way to understand the investment cycle is to look at what is called the Dow:Gold ratio. The Dow:Gold ratio (Figure 3) calculates the number of ounces of physical gold bullion it would take to ‘purchase’ one share of the Dow Jones during any given time period. When the ratio rises, as it did in the 1920s, 1960s and 1990s, it tells us that portfolios should be overweight stocks. When the ratio slumps, as it did in the 1970s and today, it tells us that portfolios should be overweight precious metals bullion.

The last three major stock market bubbles ended with the Dow:Gold ratio above 18:1, while the last two major bear markets (1932 and 1980) ended with the ratio near 1:1 At the height of the equities bull market in 1999, the Dow:Gold ratio peaked at over 40:1. But now the current ratio is below 10:1 and falling. It is certainly not too late to increase your allocation to gold and precious metals.

Precious metals preserve wealth

Precious metals have successfully preserved wealth for thousands of years because, unlike stocks and bonds and paper currencies, they are not someone else’s promise of performance and they are not someone else’s liability. Massive credit expansion has put US debt at over $11 trillion, but if the $60 trillion in unfunded pension liabilities and Medicare obligations that the US owes its citizens, actual debt is approaching a staggering 500 percent of GDP.

America’s spiralling debt crisis is leading many experts to consider the previously unthinkable: that the US might become the next Argentina, which famously defaulted on its debt ten years ago. To learn more about the debt crisis, visit www.ChrisMartenson.com. Dr. Martenson has created a superbly researched video called the “Crash Course” which explains in layman’s terms how massive debt is destroying investors’ wealth.

Precious metals are a safe haven

In 2008, stocks lost 30-70 percent of their value, while gold increased about 5 percent in US dollars. But equally significant, in a year of record-setting volatility, gold’s volatility was reassuringly low. At its lowest point, gold was only down 14 percent and at its highest it was up 21 percent. Both Goldman Sachs and UBS see the price of gold rising, and UBS expects investment demand for gold to pull the price of silver and platinum up along with it. Citigroup is calling for gold to rise above $2,000.

Precious metals protect against depreciating dollars

Since gold and precious metals are priced and traded in US dollars, they surge in value when the US dollar declines. As trillions in new money is printed, the dollar and other currencies will fall precipitously relative to gold. In an environment where the dollar is already weak and other currencies are weaker, investors seeking to preserve and grow their wealth must understand the impact of declining currencies on their portfolios.

Figure 4 shows the Canadian and US dollars have lost approximately 84 percent of their purchasing power since 1970. The world’s other currencies have fared no better. Not coincidentally, 1971 was the year the link to the gold standard was cut. Only gold, along with its two precious metals brethren – silver and platinum – will hold their value in periods of severe deflation and inflation.

Physical bullion versus proxies

Few investors are aware of all the precious metals investment options available to them. Some precious metals investments such as futures contracts and options are better suited for speculation and a higher tolerance for risk. But certificates, pooled accounts, ETFs and mining stocks also have higher risk. Only physical, bullion stored on a fully allocated, insured basis can guarantee peace of mind because it gives the investor exclusive title to the safest and lowest risk precious metals investment of all.

For absolute security, physical bullion should always be stored in allocated and insured form. If not, investors take the risk that their bullion may be lent out without their knowledge or consent or may not be there at all. Today, buying and storing physical, allocated bullion has never been simpler. You can privately and securely purchase bars of gold, silver and platinum in large bar sizes and have them insured and stored for you at a registered LBMA vault without ever breaking the Chain of Integrity. Visit www.bmgbullionbars.com to learn more or read our BMG Special Reports on how to invest in precious metals at: www.investinpreciousmetals.ca and www.goldmyths.com

It’s time to preserve your portfolio’s purchasing power

A minimum 10 percent allocation in precious metals is considered adequate in a bull market, but a much larger allocation of 20 percent or more is suggested for protection in a secular bear market. If you have not already done so, now is the time to rethink your investment strategy and preserve your hard-earned wealth. Physical bullion will keep its value regardless of whether the economy is headed for inflation, deflation or hyperinflation.

For the first time in history, the central banks have an unlimited ability to print as much money as they need. Precious metals are the only currency that will survive intact in this environment, because while governments can print infinite amounts of money, they cannot “print” more precious metals. More and more investors and institutions are turning to precious metals, because this secular bear market is expected to last for many years, eating away at investors’ hopes and dreams and portfolios along the way. Don’t let your portfolio be one of them. Now is the time to make an investment in your future, because the future is precious metals bullion

Nick Barisheff
President, Bullion Management Group Inc.
September, 2009

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Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends. For more information on Bullion Management Group Inc., BMG BullionFund and BMG BullionBars visit: www.bmginc.ca.

	By Howard Katz
	www.thegoldspeculator.com

Well, here we are with the price of gold above $1,000. Since this is the day so many thought would never come, it is time for reflection. I have lived my life in a society in which most of the “experts” have been wrong over and over.

I was a gold bug in 1970, when gold was $35/oz. I turned bearish on gold Jan. 21, 1980, the day it hit its high of $875/oz. I became a stock bug in 1982 with the DJI at 780.  Then I predicted Black Monday 1987. I turned bullish on gold again at the end of 2002 with the metal at $325. And I predicted a long term top in the stock market at the beginning of 2007.

In all of these predictions, I was ridiculed by the self-proclaimed experts of the day. Always they were wrong. They were bearish on gold in 1970. They were bearish on stocks in 1982. Black Monday caught them by total surprise. So they turned bearish the day after. They thought that stocks were showing irrational exuberance in 1995 but did not have a clue that anything irrational was going on early in 2000.  So when they started telling people that gold could not break $1000, it was par for the course.  Fools, incompetents, losers.

But I know why you are here. You are here because you want to make the big score. And I encourage this. The big money is made in the big move. The key to success in the markets is to spot a big move before it occurs. Get in early, and don’t let go.

This is not easy to do. The entire weight of our society is against you. At the bottom in gold in 1970, any establishment type could pull out a long sheet of data showing that gold had been the worst performing economic good in history. Everything else had gone up, but gold had been flat for 35 years. Projecting the trend, they could tell you that gold was going to be the worst performing good in the decade from 1970-1980.

Idiots!  In 1970, gold was undervalued. This is what caused it to multiply by a factor of 25 times and turn into the best performing good of the decade. They were able to dig out the data. They just interpreted it upside down. They couldn’t tell the difference between overvalued and undervalued. In commodities, one does not project a trend.

Again, in 1999 gold was $254/oz. Sentiment was so bearish that the gold mines themselves were shorting their own stock. Yet this was the time to buy.

Students of the market have discovered an important principle called contrary opinion. This says that to make money in the markets one must go contrary to the opinion of the vast majority of the people. The majority are usually wrong.

What is the reason for this? Our economic system is basically dishonest and has been dishonest since the nation left the gold standard on March 9, 1933. At that time, the privilege to create money out of nothing was given to the commercial bankers. This is a very valuable privilege for them and their associated vested interests, whom I call the paper aristocracy. In the 1930s and ‘40s, the paper aristocracy moved to influence the Government to do their bidding and the educational system to teach their convoluted economic theories to the next generation. This is why the country is full of economic authority figures who are repeatedly wrong.

For example, in 2008 the paper aristocracy wanted to employ their money creation privilege. Their friends in Government (Henry Paulson) and the media (The New York Times), therefore, began a propaganda campaign (a year ago almost to the day) that the nation was in terrible danger of prices going down.  “Financial crisis,” was the headline. What was the crisis?  It was expressed in different ways: “The Second Great Depression,” “The Great Recession.”  Without being too specific, the point was made that prices were going down, and it was bad.

In any society, there is a phenomenon call the self confirming hypothesis. If everyone in the society thinks that a certain idea is true, it makes them act in a way which makes it appear true. Thus, when the media told everyone that prices were going down, it led speculators to sell, and this, to a certain degree, caused prices to go down. The fact that people believed it was true led them to act in a way which made it appear (at least for a short term) to be true.

I would like to point out that the very ideas of recession and depression are horribly confused. They are closer to the ideas of witches and dragons than to anything real.  Think about it. What is a depression? A depression is a period when the whole society gets poor. A recession is a little depression. Now what are the facts?

Well, in the period of the early nineteen thirties the overwhelming majority of Americans were not getting poorer. The overwhelming majority of Americans were getting richer. If you check the fundamental book on statistics for the United States, Historical Statistics of the United States, published by the Commerce Department, it will tell you that the people of the U.S. in the early thirties were switching from margarine to butter; they were eating more meat (from 129 lbs of meat per person in 1930 to 144 lbs. per person in 1934); and they were giving more to charity. The people who were getting poorer in the early thirties were the bankers and their loan customers, the big corporations. But these, of course, are not the whole country. They are a small fraction of it. In short, there was no depression in the early 1930s. It was/is a giant lie.

Now if we fast forward a decade to the early 1940s, then we do find a depression.  In the early 1940s, one could not buy a new house. They were not being built. One could not buy a new car. They also were not being built. And if you wanted to go somewhere in your old car, gasoline was rationed to 3 gallons a week. Further, many food items were also rationed. This was, of course, due to the war. One would think that the economists of the country would have no trouble saying that the war made the country poorer. After all, what is war but the destruction of human lives and wealth? Would it hurt an economist to admit that?

And yet you can’t get an economist to admit that 1942-1945 was a depression in this country even if you put him on a torture wrack and turn the screw. You see, the early ‘40s were a period where massive amounts of money were created, and the paper aristocracy made a bundle of money (war profiteers). Because of this all of the conventional economists call the early 1940s a boom.  “The war brought us out of the Depression” they teach. This is because the profession of economist consists of people being bribed by the paper aristocracy. When the government creates money, they call it a boom. When the government destroys money, they call it a depression.  Practically everything you have been taught about this subject is a lie.

You see, during WWI both the money supply and the price level had doubled.  Most Americans in that day had saved for retirement. Their retirement savings fell in half in 5 years (1914-1919).  So the Republicans, in 1920, promised to bring prices back down to their 1914 level. Since cigars had gone from 5¢ to 10¢ between 1914 and 1919, this was expressed by the slogan, “What this country needs is a good 5¢ cigar.”

And this is what happened.  In 1933, prices were brought down to their 1914 level. Everyone’s retirement savings doubled in value. The banks and the big corporations were hurt, but the common person was better off.

Of course, you have heard a lot of propaganda about unemployment in the 1930s.  Here are the facts. As prices came down, wages came down also, but they did not drop as fast. Thus the buying power of wages rose. In other words, you got less pay in money terms but more wealth (food, clothing, shelter) in real terms. Indeed, there is a song from the period made famous by Eddie Cantor. The lyrics went:

“Potatoes are cheaper.
Tomatoes are cheaper.
Now’s the time to fall in love.”

Eddie Cantor was pointing out what every ordinary American knew.  Even though nominal wages were lower, real wages were higher. Now these higher wages caused unemployment.  Business couldn’t afford to pay them. BUT ALL THIS HAD HAPPENED BEFORE. There was another credit contraction very much like the 1930s. It happened in 1873-79. There was a lot of unemployment, and prices declined.  That, in fact, was the time that the word “unemployment” entered the American language, and this is why the British word for the phenomenon (“redundant”) is different from the American. The Republicans of 1920 knew that their policy of reducing prices would cause unemployment. They had lived through it in the 1870s. But they also knew that the unemployment would be temporary. And they knew that far and away the most important thing was to restore the value of the retirement savings of the ordinary person.

When prices came down (approximately 30% from 1930-33), the paper aristocracy took it on the chin. Their stocks declined. Their profits declined. For them it was a depression, not for the rest of the country. 75% of the people retained their jobs. They got higher real wages, and their retirement savings gained in value. The 25% who were unemployed were probably living on their gain in real savings and hanging tough for higher nominal wages. Indeed, there was one employer who figured it out. He needed workers and could afford to pay $40 per week ($680 per week in 2009 dollars).  So he offered $50 per week with a $10 kickback. That is, when the employee received his $50 at the end of the week, he had to kick back $10.  There were these stupid employees receiving $40 per week (not a bad wage in real terms) but thinking they were $50 men. They could hold up their heads in their community.

And what did the President of the time do to fight this depression (which was in his imagination)? He adopted a policy to kill pigs and plow under crops. That is, he thought that the country was suffering from a lack of wealth, and the way he chose to fight this shortage of wealth was to destroy wealth. If you think that this insanity goes beyond the bounds of human stupidity, then reflect. Today’s President is doing the same thing. Surely you have heard of the cash for clunkers program. Perhaps you are not aware that in order to qualify a “clunker” must have its engine destroyed. Only minor parts are salvaged. That is, the way that Barack Obama is fighting what he calls the current financial crisis is to destroy wealth.

I should mention that they had some trouble in the ‘30s. The jackasses who pulled the plows had been taught to walk between the rows. But with the new plowing under program the jackasses were made to trample on the crop. This didn’t make sense to the jackasses, and they rebelled. The jackasses knew more economics than the economists.

In words of one syllable. the economists of today are nuts. In words of two syllables, they are stupid, crazy and insane. In words of three syllables, they are lunatics. And four syllables is beyond their vocabulary.

Now why are the economists of that day and this so incredibly stupid? Well, it is easy to be stupid when the paper aristocracy is paying you off. Money talks. Truth gets booted out the back door. From almost every newspaper, TV show or magazine all you hear are lies.

This is why it is so hard to make money in the financial markets. As noted, I turned bullish on gold at the end of 2002. My subscribers are making the big score. But every step of the way up there has been a tidal wave of anti-gold propaganda. The paper aristocracy can’t win unless you lose.  For the government to follow its (the paper aristocracy’s) policies, the majority of the people must be deceived.

I am a bad boy. I want to bring people the truth. To this end, I publish an economic letter called, The One-handed Economist ($300/year).  You may subscribe via my web site, www.thegoldspeculator.com.  Or you may simply send a check (for $300) to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  (Include e-mail address.)  You are also invited to read my blog at www.thegoldspeculator.blogspot.com (no charge). This week’s blog is on the subject of medical care.

Howard S. Katz

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Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31). Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.). Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002. His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures. This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.(Include both electronic and mailing address.)

Buy Gold Coins

A report suggests that the Chinese government is pushing the general public into buying gold and silver bullion, which could have a dramatic effect on the markets.

Author: Lawrence Williams

We are indebted again to Paul Mylchreest’s  Thunder Road Report  for news that will bring big smiles to gold and silver investors everywhere.  Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder.  If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!

The report notes that China’s Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment.  On silver investment the announcer is quoted as saying ” China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”

What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity.  This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled.  Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.

Around a year ago, Leyshon Resources managing director, Paul Atherley, in an investor presentation in London – and no doubt delivered elsewhere in the world too – commented that some employees at the company’s gold mining project in northern China would, on pay day, go to the local bank and buy a small gold bar as an investment and wealth protector.  To an extent we put this down at the time to mining company hype – but this seems to be exactly the same phenomenon noted by Thunder Road.  The Chinese are being converted from being the lowest per capita gold consumers in the world to a nation of small precious metals investors.  Now, by next year, Chinese consumption of gold is likely to exceed that of India, which has been for years the world’s biggest gold market.  And one suspects that the potential for gold purchasing by individuals is only in its earliest stages.  As more and more Chinese move into the cities and individual wealth grows, this trend is only likely to accelerate.

Paul ends the piece on Chinese gold and silver potential with the following comment: “Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working. The Chinese public now has gold trading platforms on steroids…. …Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a ‘Lucky Gold’ card. I can’t even get Bank of America to open a foreign currency account.”

This may be an overstatement of the case from a precious metals bull – or it may not!  Certainly if China is indeed pushing the public to buy gold then there may well be a hidden agenda here.  It’s unlikely they are doing it and will suddenly pull the rug out from under millions of investors.  A cynic (or a raging gold bull) would suggest that this will precede a move to switch a good proportion of the country’s reserves into gold which would have a huge effect on the global gold price and could prove disastrous for the dollar.  Maybe it’s not in China’s interests to drive the dollar down too much until it has managed to divest itself of the huge dollar overhang (see the article on Chinese Sovereign Wealth Funds we published yesterday – Chinese sovereign wealth fund dumping dollars for strategic investments like gold ).  The country may well already be, of course, surreptitiously building its gold reserves without reporting the build-up.

If the Chinese are indeed beginning to buy gold and silver as the quoted report suggests then this has to be a strong signal that prices are going to rise, and perhaps rise dramatically, in the relatively near future.  We await comment from other China watchers for confirmation of the gold and silver buying spree, but with global gold production at best flat and probably in decline, even a small increase in Chinese buying could have a substantial impact on gold and silver prices.

Silver Dollar Coin Values

Gold is respected throughout the world for its value and rich history, which has been interwoven into cultures for thousands of years. Coins containing gold appeared around 800 B.C., and the first pure gold coins were struck during the rein of King Croesus of Lydia about 300 years later. Throughout the centuries, people have continued to hold gold for various reasons. Below are eight reasons to own gold today.

1. A History of Holding its Value
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. (Read more in Understanding Supply-Side Economics.)

2. Weakness of the U.S. Dollar
Although the U.S. dollar is one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008. The decline in the U.S. dollar occurred for a number of reasons, including the country’s large budget and trade deficits and a large increase in the money supply.

3. Inflation
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Since World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979 and 1980 (as of 2008). During those five years, the average real return on the Dow Jones Industrial Average was -12.33%, compared to 130.4% for gold. (As Coping With Inflation Risk explains, inflation is less dramatic than a crash, but it can be more devastating to your portfolio.)

4. Deflation
Deflation, a period in which prices contract, business activity slows and the economy is burdened by excessive debt, has not been seen globally since the Great Depression of the 1930s. During that time, the relative purchasing power of gold soared while other prices dropped sharply. (Read more in What Caused The Great Depression?)

5. Geopolitical Uncertainty
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity”, because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some of their largest recent movements during periods of tension with Iran and Iraq in 2007 and 2008. Its price often rises the most when confidence in governments is low. (Read how to cut through the confusion and invest successfully in Investing During Uncertainty.)

6. Supply Constraints
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. (Read more about the different options for investing in gold, from bullion to ETFs, in Getting Into The Gold Market.)

At the same time, production of new gold from mines has been on the decline since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices. (For more insight, read Economics Basics.)

7. Increasing Demand
Increased wealth of emerging market economies has boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world, and gold has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold. In China, where gold bars are a traditional form of saving, the demand for gold has also shown rapid growth. (Read about another way that China and India are impacting world markets in What Determines Gas Prices?)

Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, the largest gold ETF, StreetTracks Gold Trust (PSE:GLD), became one of the largest ETFs in the U.S. and one of the world’s largest holders of gold bullion in 2008, only four years after its inception. (Read more about gold ETFs in The Gold Showdown: ETFs Versus Futures.)

8. Portfolio Diversification
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:

• The 1970s was great for gold, but terrible for stocks.
• The 1980s and 1990s were wonderful for stocks, but horrible for gold.
• As of 2008, this decade has been a good one for gold, and an unfavorable one for stocks.

Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk. (Read Introduction To Diversification to find out how diversifying a portfolio can enhance returns and reduce risk.)

Conclusion
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, gold has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.

by Tony Daltorio, (Contact Author | Biography)

Tony Daltorio worked for more than 20 years in the investment business. Most of those years were spent with Charles Schwab & Co., both as a broker and a trading supervisor. As a supervisor, he oversaw, at times, dozens of employees. Daltorio was trading supervisor during the 1987 crash and was responsible for millions of dollars of customers’ orders.

Source: http://www.investopedia.com/articles/basics/08/reasons-to-own-gold.asp

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