The Only True Standard of Value

Richard Russell snippet
Dow Theory Letters
Apr 21, 2011

April 20, 2011 — The dollar is doing just what the Fed wants it to do — it’s sinking, sinking and sinking more. Sadly, the great American public doesn’t understand what’s happening, and if they were told, they couldn’t care less. Of course, what the public does notice is the painful result of the dollar’s bear market. The result is seen every time Joe six-pack and his wife hit the neighborhood super-market. The rising prices are a shocker. And if the price of your favorite cold cereal has not been raised, there is less of the cereal in the box. Then when Joe has to fill up the buggy to get home, he groans as he sees the gasoline tab. “Sixty bucks to fill up this lemon. I’m going to get a motorized bike,” growls Joey. “This country is going to hell in a hand-basket.”

The US has been getting away with spending more than it takes in ever since World War II. It’s a process that isn’t sustainable, and if a process is unsustainable, it will end. The US’s habit of spending more than it’s paying for has finally hit a brick wall. The wall is the demise of the famous “Yankee dollar.” In order for the US to live over its head, it must borrow. Half of the US’s borrowing comes from foreign sources. And that’s a problem.

The fiat US dollar has no fixed value. It’s worth must be measured against other currencies. “The dollar is worth so much in relation to the Brit pound — or the dollar is worth so much in terms of the euro.” Our foreign creditors, many of whom are loaded with dollars, keep a sharp eye on the comparative value of the dollar, and they’re now frightened and mulling over the credit-worthiness of the US. The recent warning from the S&P rating agency heightened our creditors worries about both the US and the dollar. The disgraceful battle between Obama and the Democrats vs. Paul Ryan and the Republicans is further raising the fears of our creditors.

With commodity inflation now out in the open, Fed head Bernanke has a problem. His absurd defense is to refer to “core inflation” (without the cost of food and energy). Bernanke announces to the world that there’s “no inflation,” and besides if there is inflation, the Fed can end it any time they want.

What Bernanke and the Fed can not control is the tell-tale price of gold. As I write, the battle is on to keep June gold from closing above 1500. Yesterday June gold hit an intra-day high of 1500, but can it close there? “Ah,” Bernanke must be thinking, “If I could only control the price of that damn gold.”

Yesterday, as I looked at my computer, and I could see the fierce struggle that was going on as gold whipped up six dollars, then five minutes later it is up a dollar-fifty. There must be a powerful contingent (perhaps backed by the Fed) that is desperate to keep the price of gold DOWN and below 1500.

But alas for the Fed, gold is traded internationally across the face of the planet and 24 hours a day. Gold is out of the hands of the Fed and Goldman Sachs, and it trades everywhere and where it wants.

This year I’ve been telling my subscribers to think in terms of two concepts:

(1) Think in terms of avoiding losses (rather than thinking in terms of building fat profits).

(2) Think in terms of PURCHASING POWER. Are you gaining or losing purchasing power?

For ten years I’ve advised my subscribers to climb aboard the great bull market in gold. Early subscribers who have followed my advice now have huge paper profits, many have become millionaires, others have been able to retire on their gold positions.

Even new-comers have benefited from their belated investments in gold. Over the last 12 months, the dollar price of gold is up 31.32 percent.

Gold is the only true standard of value. The value of everything else must be measured in terms of gold. “How many ounces of gold does it take today to buy a new Ford?” “How many ounces of gold did it require to buy a new ford in 1932?” It costs a lot more (in dollars) to buy a new Ford today. But how many ounces of gold does it cost to buy a new Ford today compared with the ounces required in 1932 to buy a new Ford? What has changed, gold or the dollar? Gold hasn’t changed, what has changed is the dollar, which has lost purchasing power.

The US public is rapidly being educated about money and gold. Ads are appearing almost daily in the newspapers, telling readers how and why to buy gold. The ads are being confirmed by the rising price of gold. The public is finally “getting it”. I’ve been in this business since 1958, and I’ve seen a lot of advisory services come and go — a lot! What I notice is that there are a number of fairly new advisories that are climbing (entering) on the back of the gold bull market. These advisories are sending out mass mailings to the public — educating them on the fact of the dying dollar and the Fed’s plan to solve the debt problem by diminishing the purchasing power of the dollar. As Lincoln put it, “You can’t fool all of the people all of the time.” Clueless as the American populace is, they are finally learning about gold, something that their great grandparents took for granted.

In terms of gold: Assessing real estate values in terms of gold. At its peak, the housing market in March 2007, the median US home price was $262,600, which was equivalent to 340.6 ounces of gold. Today’s median income price is $186,100 or 109.2 ounces of gold. So in terms of real money, gold, the US median home price has lost 47% since 2007.

Applying the same measurements to the Dow, from the end of 2001 to the end of 2008 an investment in the Dow would have lost 81% of its purchasing power in terms of gold (statistic courtesy Larry Edelson of the outstanding “Uncommon Wisdom” advisory).

The great and harsh lesson of history now stares Americans in the face — no fiat currency in history has ever survived. This fact underscores the growing panic to get out of dollars and out of all fiat currencies.

This emphasizes the irony of those who are rushing into dollars or dollar-denominated bonds and blue-chip stocks on the thesis that these are “safe havens.” It’s a rush out of dollars to get into other forms of dollars.

What’s happening now is on a greater scale than has ever occurred before in the history of mankind. It’s going to hit the current generation of Americans like a whirlwind. It will be historic in its intensity and destructiveness.

The great gold rush of 1849 opened up the American West. This gold rush of the early 2000′s will open up the eyes of Americans to the danger of the Federal Reserve and fiat money.

Below in log scale — one of the greatest and most significant bull markets in US history.

Below, the Dow over the exact same period.

###

Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
Russell Archives
© Copyright 1958-2011 Dow Theory Letters, Inc.

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From Richard Russell in Dow Theory Letters:

This nation is so riddled with lies and corruption, sometimes I wonder how the U.S. has survived the many centuries since the Founding Fathers gave us our great Constitution.

No wonder Fed Chief Bernanke fought so hard to keep the Fed’s lending a secret. I just read in Rolling Stone magazine a story entitled “The Real Housewives of Wall Street.” It seems that the Fed loaned bailout money of $220 million to the wives of two Morgan Stanley bigwigs. After his wife got a big taxpayers bailout John Mack, CEO of Morgan Stanley, bought a $15 million home equipped with a 12-car garage. Outrageous!

When you think about it, it’s no wonder that Wall Street and the Fed hate gold. Gold exists outside the system. The Fed can’t manipulate or create gold the way they do Federal Reserve Notes. When gold rises, as it has been doing, it hoists a red flag over Wall Street, the Fed, and the economy. Surging gold tells the world that something is terribly wrong. All the lies, corruption, and secrets of the Fed and the politicians can’t erase the dire message of gold.

Gold is the protector and refuge of the common man. No wonder all the recent record highs in gold remain unreported by the media.

Source:  http://www.thedailycrux.com/content/7477/Richard_Russell

The precious metals markets moved into high gear last week with silver up 4.5% and new highs in gold and the HUI. Meanwhile the Wall Street Journal explained:

“Driving the recent spate of [currency] flows has been anticipation that the Federal Reserve will restart its efforts to stimulate growth through purchases of government debt that inject more money into the banking system – a practice known as quantitative easing or ‘QE.’”

“Easy Money Churns Emerging Markets,” by Alex Frangos,
WSJ, 10-8-10, p. A-10.

Sad, sad news in the daily paper this week.  We live in a world where the leaders of our country, and every country in the world, believe that there is nothing more to the production of wealth than to simply create, out of nothing, the money which symbolizes it.  The Journal again:

“Investors who had been betting on the dollar switched their wagers in the past few weeks as they grew convinced the Fed will pump still more money into financial markets to bolster the struggling U.S. economy – essentially diluting the value of the dollar.”

“Dollar’s Fall Roils World,” by Tom Lauricella, WSJ 10-8-10,
p. A-1.

For several years, we have watched as the precious metals markets have told us of a truly amazing advance.  Since their lows in the last century, both gold and silver have multiplied by a factor of more than 5.  Both metals have traced out powerful up trends with repeated bullish chart patterns. And now we know the answer why.  The Government of the United States, in the person of Ben Bernanke (and his fellow officials at the Federal Reserve), is trying to reduce the people of America to medieval serfs, to steal their wealth and to give it to the likes of Goldman Sachs (and a few other institutions which have obtained their great wealth not by producing it but by having the Government steal it for them).

The mechanism of this historic theft is counterfeiting.  Indeed, the government has set up the counterfeiting department (the Federal Reserve System).  It prints money and gives this new money to its favorites (who respond via bribes disguised as campaign donations and job offers).

But as we gold bugs have been arguing, the printing of money causes the depreciation of the currency, and this must cause all prices (denominated in that currency) to rise. And this is taking the form of a general increase in commodity prices, itself led by the precious metals.

adly, America was once governed by wiser men.  In 1816, Thomas Jefferson commented:

“We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth. It is vain for common sense to urge that nothing can produce but nothing; that it is an idle dream to believe in a philosopher’s stone which is to turn everything into gold, and to redeem man from the original sentence of his Maker, ‘in the sweat of his brow shall he eat his bread.’” –Thomas Jefferson to Charles Yancey, 1816. ME 14:381

Jefferson was talking about the Second Bank of the United States. He and James Madison had abolished the First Bank of the United States in 1811, but Madison backed down and allowed a second bank in 1816. This bank was later destroyed by Andrew Jackson and Martin van Buren in 1836 (as a result of Jackson’s overwhelming victory in the 1832 election). It was this battle against the second bank which gave birth to the (real) Democratic Party.

If the Democratic Party was born to destroy the central bank and if the Democrats hold power today, then why is it we have a central bank which keeps on printing more and more money? Indeed, in the easing of 2008 we knew that we were being robbed for the benefit of Goldman Sachs and other Wall Street Houses which had accumulated toxic assets. But here in late 2010 we are not even allowed to know who will receive the wealth which is being taken from us.

Once Jackson had destroyed the Second Bank of the United States, the U.S. began a period of economic growth unprecedented in human history. A cornucopia of wealth flowed such as mankind had never seen. The human lifespan increased. A continent was tamed. One after the other, new machines and devices for the improvement of people’s lives poured out of the factories of the nation.

It should be noted that all this was accomplished without the hint of rising prices. From 1793 to 1933, the prices of basic wholesale goods came out the same. For most of this period, there was no word for unemployment for the simple reason that unemployment was so low that nobody noticed it, and nobody spoke of it.

As Bernanke made clear his intention to counterfeit yet another round of money (at this point no one knows how much), the dollar collapsed on the world markets. It collapsed against gold and silver.  It collapsed against the grains. And, as the above chart shows, it even collapsed against the other paper currencies.  (All of these paper currencies are going down, but the dollar is going down faster.)  Chartists will recognize the pattern which has been formed as a head and shoulders top, and the price objective point is 72.

What Jefferson was saying was that the issue of paper money could not create real wealth. Wealth is (scarce) goods which satisfy a human need. In simple language, wealth is stuff. President Obama’s and President Bush’s economic advisors do not know this. They keep saying that the printing of money will create stuff (“stimulate the economy”). One repeatedly hears the theory that the printing of money will so dramatically stimulate the economy that the extra goods thus created will cause a net decline in prices.

This theory (of a net decline in prices) is repeated throughout the financial world. Every time this forecast is made it proves false. But the people who hear the forecast have short memories. They forget that the last time they heard the same forecast it was also wrong. Ditto, ditto the time before that. They do not look at the facts. They look at the impressive credentials of the con artists who are deceiving them. And so they believe, again and again and again.

The important thing to understand about this confidence game is that it only devours its own.  To be protected against it, all you have to do is to see reality as it is.  The printing of paper money does not create wealth. Jefferson again.

“Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.” –Thomas Jefferson to John Wayles Eppes, 1813. ME 13:430

If you wish to be protected against the depreciation of our currency by Ben Bernanke, then specie (gold or silver) is the most perfect medium.  Any real good will provide protection. However, gold and silver have been chosen as money for certain reasons of convenience. They are the easiest to hold and to exchange with others.  They have been used as money for 2500 years, and they are the only legal monies under the United States Constitution.  As Ben Bernanke destroys the (Federal Reserve note) dollar, all real goods will rise in price, and gold and silver will lead (are leading) the way. The people who believe the establishment and plan for “deflation” will be destroyed. The people who believe Thomas Jefferson will be protected.

Thank you for your interest.

Howard S. Katz

****

To assist the good people with the technical details of speculating in gold or silver and in general dealing with the problems created by a paper currency, I publish a fortnightly (every two weeks) newsletter, the Gold Bug.  To subscribe, go to my web site, www.thegoldspeculator.com and press the Pay Pal button ($300).  Or you may send $290 to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055 ($10 cash discount).  Our most recent issue was dated Oct. 1, 2010.

By Dave Miller

Click Here To View Larger Chart

Original Source: http://solari.com/blog/?p=6416

Buy Gold Coins

By Mike Hewitt

“No legal tender law is ever needed to make men take good money; its only use is to make them take bad money.” (Stephen T. Byington)

The U.S. dollar has changed from being a paper certificate for a tangible asset to a fiat currency – a paper note declared legal tender. By looking at the history of American paper money one can clearly see the distinction.

The following image shows two one-dollar bills from different years (click to enlarge).

At a glance, the two bills appear similar, but look closely.

The wording on the first bill, a 1957 Silver Certificate, reads:

THIS CERTIFIES THAT THERE IS ON DEPOSIT IN THE TREASURY OF THE UNITED STATES OF AMERICA ONE DOLLAR IN SILVER PAYABLE TO THE BEARER ON DEMAND

This statement is completely missing on the second bill, a 2003 Federal Reserve Note.

The U.S. dollar is defined by the 1792 Coinage Act as being equivalent to 371.25 grains of pure silver. One troy ounce is equal to 480 troy grains. The market value for this amount of silver today is US$13.6125. So while they both read as being ONE DOLLAR, the second bill represents a devaluation of 93% in real terms from the 1957 bill!

These Silver Certificates began to disappear from circulation during the 1940s and 1950s because they were immediately shredded once redeemed for silver due to a diminishing store of silver bullion in the treasury vaults. Silver Certificates were officially abolished by Congress on June 4, 1963 and all redemption in silver ceased on June 24, 1968.

Up until the late-1920s, higher denominations of issued U.S. currency were gold certificates.

The bearer could redeem their dollars for “twenty-five and eight-tenths grains of gold nine-tenths fine,” as per the Gold Standard Act of 1900.

Constitutional Legality
There is some question as to the constitutional legality of the Federal Reserve Notes we use today.

“No state shall…make anything but gold and silver coin a tender in payment of debts.” (U.S. Constitution, Article I, Section 10)

The justification is done through a loophole whereby it is the Federal Reserve that produces the currency, not the individual States.1 The changing of the dollar from being a silver certificate to a Federal Reserve Note has enabled the production of additional money, that is, in the words of former Federal Reserve Chairman Alan Greenspan, without limit.2

Inflating the money supply causes a transfer of wealth from existing holders of money to the first recipients of the newly created money through the process of devaluation. It is, in essence, a form of theft.

“…the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” (Governor Ben S. Bernanke, Deflation: Making Sure “It” Doesn’t Happen Here)

What we today regard as U.S. legal tender notes are not legitimate dollar bills. There is no longer any paper currency or fixed concept of value known as a “dollar bill”. We carry and transact business with Federal Reserve Notes, and they merely represent the concept of a dollar bill.

Notes
1 The Federal Reserve was established through the Federal Reserve Act signed into law by President Woodrow Wilson a few hours after being passed by the Senate two days before Christmas on December 23, 1913.

2 “And in the case of a central bank of a fiat currency regime, such reserves can be created without limit.” Taken from a speech given by Alan Greenspan before the World Bank Conference on April 29, 1999.

About The Author

Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.

Original Article Source:  http://dollardaze.org/blog/?post_id=00748

by Fayyaz Alimohamed

I began writing the Acamar Journal in 2004, warning that debt levels in the US were at record levels and unsustainable. Much of what has happened was predicted in previous issues of the Journal.

I warned of a financial crisis and a coming recession in November 2006, well before the financial crisis first began in July 2007. In June 2008, I highlighted an RBS report which warned that a stock market crash would occur by September, which it duly did. You can view these issues at www.acamaronline.com.

Now that the crisis has happened, what next?

Since this recession has been compared to the Great Depression of the 1930s, let’s see what happened to the stock markets then. The Dow Jones peaked in Sept 1929 and then fell 48% by November.

It then rose 50% in a bear market rally off that November bottom. The rally lasted till April 1930.

The rally generated expectations that the worst was over. President Herbert Hoover told a group that had come to ask for a stimulative public works program in June 1930, “Gentlemen you have come sixty days too late. The Depression is over.”

He was wrong. By June 1932, the Dow Jones had lost 89% of its value from the 1929 peak and the Depression lasted until 1939 when World War II began.

I cite this example to show how the current rally is generating similar expectations. There is talk of “green shoots” suggesting that the economy will resume growth in the last quarter of 2009 or early 2010. The banks have passed the stress tests conducted by the government, though I think the results are not credible.

The US has now committed to over $ 13 trillion in bailout packages, consumer stimulus, AIG, Freddie Mac and Fannie Mae guarantees, TARP and other programs. These are funds that the US Government will have to borrow to try to solve the crisis.

Here’s my problem with this. The crisis was caused by excessive debt and leverage. The solution cannot be far more debt. That’s like giving a drug addict more drugs to cure him. It won’t work, and it will make the eventual problem worse.

The current US deficit is estimated at $ 1.75 trillion, which is almost four times larger than the record $ 485 billion from last year.

My question is: who will fund this?

China has spent the last 20 years accumulating massive foreign exchange reserves due to its massive trade surpluses. But it has only accumulated $ 1.9 trillion over three decades.

Even with oil around $ 60, there are not enough Petro-Dollars available to write this kind of a cheque.

And here’s the real shocker:

The head of the Federal Reserve Bank Of Dallas, Robert Fisher, gave a speech in May 2008 (Storms on the Horizon) in which he said that the US government’s unfunded liabilities are now $ 99.2 trillion (for future Social Security and Medicare obligations). This is in addition to the Federal debt of over $ 11 trillion.

With 111.6 million households in 2006, each household’s share of this future debt is $ 888,750. For each family!

Total credit market debt (combined government, corporate and personal debt) is now an all-time record of over 350% of GDP, as of Q4 2008. This does not account for growing federal and state government debt this year nor does it take the unfunded liabilities into account.

The reality is that the US is essentially insolvent.

This brings us to Bernie Madoff. The former chairman of Nasdaq ran a $ 50 billion Ponzi scheme. For years he pretended to earn impressive returns for his investors; the reality was he didn’t invest anything, he just took money from new investors to pay old investors and lived very well off the difference.

The US government is running a similar investment plan through its issue of new US Treasuries.

The US will never, ever repay its debt. It can’t, the numbers are too large. Each year, it rolls over the principal and interest by issuing new bonds, with the debt growing ever larger.

The Fed announced last month that it will begin to “monetise” US debt, which means it will buy US Treasuries and Agency debt, ostensibly to keep interest rates down.

Here’s one of the major reasons why:

The Chinese have virtually stopped buying US Debt, have warned the US to ensure that it protects the value of the approximately $ 800 billion it already holds in US debt and have proposed that the US dollar be replaced as the world’s reserve currency.

This monetisation strategy, formally known as Quantitative Easing, has engendered sharp criticism from China’s People’s Central Bank. In a quarterly report, it says “A policy mistake made by some major central bank may bring inflation risks to the whole world. As more and more economies are adopting unconventional monetary policies, such as quantitative easing (QE), major currencies’ devaluation risks may rise.” It warns of its concerns of a bond crisis due to this policy approach.

Japan is a major holder of US bonds. And Japan’s opposition party has announced that if it comes to power it will not buy US bonds if they are denominated in US$, only in Yen!

My concern is that the Fed’s actions seems to indicate the last stages of a Ponzi scheme going bad, when there are no longer enough new buyers and the desperate con man has to improvise to keep the scheme going.

And another bubble appears to be OTC derivatives. These unregulated contracts were recently valued at $ 684 trillion, which is an unfathomably high number compared to global assets. Derivatives are what Warren Buffett once called “weapons of mass destruction” but he indulged in derivative contracts anyway, leading to Berkshire Hathaway’s recent 96% profit drop.

And if this US Treasury or derivatives markets blow up, then the global economy will be decimated as these are the mother of all bubbles.

Fayyaz Alimohamed

****

Fayyaz Alimohamed has been the Chief Financial Officer of an insurance company in Vancouver and the Director of Investments for a large investment and operating group in Dubai.

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