DBA versus GLD

The top chart shows the historical trend of the agricultural index exchange traded fund (ETF) Deutsche Bank Agricultural Index, DBA and the bottom chart shows GLD since late 2005.  The DBA chart had a double top two years ago just prior to the crash of '08. Double tops are a classic technical signal of an impending decline, and it worked in the case of DBA.  I googled the DBA and found a few technicians commenting on it to the effect that it has been/is a weak stock because of the double top two years ago.  Note the contrast with GLD, which has had a relatively steady upward trend, having taken a small double top and dip during the '08 roller coaster but recovering quickly and profoundly.

I have a problem with that combination of facts, though.  If gold is going up it is because of monetary demand, that is, people want to use gold to save instead of dollars, then people anticipate inflation and therefore DBA should go up.  If gold demand has a logical foundation, then inflation is impending.  If inflation is impending, then agricultural prices should be going up. This is especially true because the inflation has been caused by over-investment in real estate due to Federal Reserve and commercial banking's counterfeiting money and then investing the proceeds in politically favored industries, namely construction and real estate.  To expand investment real estate, the supply of agricultural land had to be reduced. Hence, there would seem to be upward pressure on food prices.  Last week DBA went up six percent in one day.  Since June, when DBA hit its low, it has gone up 28%, from $22.85 to $28.52.

The technicians may underestimate the effect of the underlying process of monetary inflation on long term food prices.  I bought DBA about two years ago and I'm up about 12%. The DBA has underperformed both gold and the stock market during that period. It may be subject to further downward fluctuations (the technicians have asserted this until recently) but given the recent trend it may be that the lean years are coming to an end for DBA.

Unstoppable Force Versus Immovable Object: Road To $6500 Gold Paved with Failing Economic News

Kitco has some excellent commentaries.  Darryl R. Schoon discusses the likelihood of a meltdown in the dollar.  He argues that the 1971 devaluation of the dollar and removal of the international dollar from the gold standard led to a fiat currency.  He claims that traditionally fiat currencies last about 40 years, and we are now 40 years into the paper dollar regime.  The result has been trade imbalances, exodus of manufacturing from the US, and inflation. The paper dollar will become worthless in his view and the reverse will occur for hard assets. The collapsing dollar will lead to volatility and the markets will find a stable replacement for the dollar, likely gold or silver.  He predicts $3,000 to $10,000 gold.  He also argues that gold is no more volatile than tech stocks. Schoon claims that there are five stages of a gold bubble and we are in the fourth stage, where there is increased volatility.

Although I don't put much faith in the Fed or Chairman Bernanke, his message suggests volatility indeed.  Before I summarize his speech as depicted in Bloomberg, notice that silver has lagged gold and that commodities like agriculture and the general commodity index have not increased to the same degree.  One claim may be that current demand for gold is caused by its monetary qualities, that some investors are now viewing gold as money.  However, it is also true that the dollar has gone through a period, in my opinion a temporary period, of strengthening. The dollar has gotten stronger because of risk aversion directed toward the global credit and banking collapse (especially including Greece, Portugal and Spain) and because of the collapse in bubble credit here in the US.

Bernanke's talk today as reported in Bloomberg led to nearly a one percent fall in the Dow and the S&P 500. Bernanke indicates that the Fed is planning to raise interest rates, which will have a depressing effect on the stock market.  Bloomberg quotes Dean Maki, chief US economist at Barclay's Capital:

"'The Fed is not close to implementing additional stimulus.'  Expectations for additional steps were based on 'more hope than fact.'"


There is little doubt that the Fed will keep interest rates close to zero.  But continued weakness in the economy creates a logical problem.  If the Fed stimulates inflation increases.  Stimulus also fuels the short-run gold price.  Bernanke aims to begin reducing the amount of stimulus to avoid these risks.  But he risks further increasing unemployment.  The unstoppable monetary collapse meets the unmovable decline in the US economy.

Mr. Schoon is right that in the long term the current monetary regime will fail.  However, international risk and a weak economy suggest a short term strengthening of the dollar.  This could mean fluctuations of gold of 50% or more.  Ultimately, though, the Fed's "printing press" will cause the dollar to crash.  This will result in increasing commodity prices.

If you are worried about long term monetary instability, commodities other than gold might be better holdings right now.  For example, the DBC, Dunn & Bradstreet Commodity Index and the DBA, Dun & Bradstreet Agricultural Index, have hardly risen since 2008.  Moreover, silver, which can be purchased through SLV, the I-Shares silver trust, can be purchased to take advantage of silver's monetary characteristics.  The claim that gold's price increase is due to its monetary characteristics rather than short term speculation is contradicted by the relative lag in silver's price increase.  If you are hedging for a monetary skid or collapse, SLV might be a better bet than gold for now.

Over time gold will go up.  But if you can buy it at $950 why buy at $1180?

Gold Hits Record High

The Street.com reports that gold hit a record high (in nominal dollars) at $1258.30 per ounce.  I view this as a speculative market driven by fear of global monetary collapse and short term investors.  I doubled my gold holding on the hunch that the bubble will continue for at least a few weeks although the market could collapse at any time.  Nevertheless, "expert" gold investors  on Kitco often quote an old saying "sell in May and go away" until the fall. But here it is mid-June and the gold market is breaking new highs.  This seems to be a very strong bull market.

As I noted a few days ago, other commodities are not bubbling like gold.  Silver has its advocates and it went up more than two percent today, but it is not moving as fast as gold.  Nor is there inflation.  According to the Bureau of Labor Statistics there was 0.2% deflation in May although prices increased 2.0 percent year over year.  These numbers are likely understated as the CPI statistics are biased against inflation to minimize social security increases.

There is reason to fear monetary collapse.  The debt that the US government is issuing will need to be repaid. If interest rates rise, then the repayments will become burdensome.  That will put pressure on the Fed to continue inflating.  If it does, foreign bond holders may sell, which would stimulate further inflation.

Modest commodity price increases in other areas suggest that other commodities may be better long term holdings than gold.   The DBA, DBC and SLV, agricultural, commodity and silver indexes, may be less speculative and require less buying and selling.  El Dorado Gold, which I sold at about 17 is now at 18 and going strong.

I don't invest more in gold than I can afford to lose half  in the short term.   In the long term gold will likely go up.  It does not seem that the centralized money supply is a system that will last.  Throughout history monetary collapse has been accompanied by inflation.  Another alternative would be the bankruptcy of the federal government. 

Americans should fear any impetus toward global centralization of the money supply.  Much as the Greek economy has dogged Germany do we really want to deal with Venezuela's economic problems, as bad as America's are?

Bill Gates and Depopulation

On a tangentially related front, there is a video circulating that has Bill Gates saying that he would like to depopulate the world. Gates holds that vaccines will cause lower population. "If you reduce childhood deaths population growth goes down."  However, the fixation on population control is like marijuana (so they say)--it leads to stronger stuff.  When the vaccines are distributed, then restrictions on human reproduction are sure to follow. The video below argues that vaccines are not enough to reduce infant mortality in the Third World.  Undrinkable water, for example, causes a large share of deaths.  So why use vaccines to reduce population? And if vaccines fail to reduce population, what do Bill Gates and the UN next have up their sleeve?

The depopulation issue seems to be related to the monetary issue. Just as government mismanagement leads the greedy government officials to call for more power, so the mismanagement of public health leads to ever greater calls for repression by health officials.  Both lead to increasing centralization. 

Is the Ride to $3,000 Gold Going to Hit Air Pockets?

The graphs above are of the Power Shares DB Commodity Index (DBC) which tracks sweet crude oil, heating oil, RBOB Gasoline, natural gas, brent crude, gold, silver, aluminum, zinc, copper grade A, corn, wheat, soybeans, and sugar; the Power Shares DB Agricultural Index, (DBA) which tracks corn, wheat, soy beans and sugar; and GLD, the SPDR gold trust, which tracks gold.  On May 28 Smart Trend.com reported that the agricultural index is in a bearish trend.  

As you can see in the charts above, the DBC and DBA peaked in 2008 and have stayed off their peaks, while GLD, the third graph, has risen consistently.

Personally, I have no more faith in the word of the US Congress than I do in the word of a three card Monty dealer on 42nd Street.  Given the massive increases in deficits under President Obama and the even more massive increase in the monetary base in 2008 (and consistent increases in the US money supply ) there is no reason to think that gold and commodities will do anything but increase over many years. Ultimately, speculation and replacement of the dollar with gold by frenzied Americans trying to escape the government's legal tender law will push up the gold price further. 


But gold has increased almost five-fold since 2001, while other commodities have not kept place and have significantly fallen since 2008.  A general rule is to buy low and sell high.  It is possible that the gold market is more rational than other commodities because industrial demand is greater for oil, food and other metals than for gold. But it is just as possible that it is less rational because gold is subject to romance and speculation. The other commodities tell a story different from gold.

Gold is going up because of speculation in anticipation of inflation, and if there is inflation then the other commodities will go up as well.  Also, hyper-inflation might mean a two-fold increase in prices, but gold has already gone up five-fold.

I do not doubt that gold will continue to go up.  But if there were shortages in gold due to insufficient production in the 1990s, there ought to have been shortages in other commodities as well.  Hence, in the long run I wager that there will be continued speculation in gold and that when inflation takes off there will be a gold bubble. But I would think that other commodities where there is less speculation, romance and publicity are more reliable investments at this time.  When inflation starts, many will flock to gold, but the ride can be bumpy because there is speculation in the gold market. 

Let's say the Fed decides to increase interest rates.  There will likely be declines in the stock market, but gold could be even harder hit.  Over time the price will come back, but I find it hard to believe that without a concomitant increase in other commodities' prices the gold price will continue a secular increase. The reasoning for buying gold is that gold is a hedge against inflation, but so are the DBC and the DBA, and they haven't increased for two years. So if I were buying commodities now I would buy those and hold off on the gold.

According to Thoughts.com the dollar ought to be worth .7734 ounces of silver.  Today silver sells for $17.95 and gold sells for $1,207 per ounce.  Thus, the dollar is worth .0557 ounces of silver, 0.3% of the level at which the Coinage Act of 1792 defined it. If you think the decline in value was directed into the hands of the middle class, which William Greider claims in his book Secrets of the Temple, you're on drugs.  The money is created by banks who collect interest and they lend it to speculators, hedge funds, corporations and most of all, Wall Street. As well, it boosts stock prices because low interest rates increase the present value of future earnings.  Left wingers like Greider, who advocate Keynsianism, like to avoid discussing how their ideas support Wall Street and the banking lobby.

The additional money causes inflation, raising prices for everyone. Hence, it harms those who do not own stocks and real estate and are not bankers and helps those whose entire livelihood comes from stocks and real estate.  The middle class gets something back through increasing house prices, but those who save and work hard are penalized in favor of those who borrow.  Hence, it makes everyone poorer as the public learns that invention, innovation, hard work and creativity are for suckers, and borrowing to buy a condo is how to make a living.

The inflationary economy and the triumph of the left in terms of three card Monty government means that America's prospects are much worse than they've been.  A collapse of the financial and monetary system would seem to be a possibility. Hence, gold and silver are good bets. But I'm going to buy when they fall.

Plenty of Time to Invest in Gold

Ned W. Schmidt features the above graph on his Kitco commentary and on his newsletter's website (the newsletter costs $149, a reasonable price for an investment letter).

The price of gold for the past few years seems to have tracked the rate of monetary growth, but recently diverged sharply. The reason, as Schmidt shows, is contraction of industrial loans leading to less monetary growth. However, the monetary base expanded exponentially, far more rapidly than money itself, which would explain the divergence along with the contraction in loans.

The point that Schmidt is making is very good. First, note on the graph that at least until '08 the gold price has tended to anticipate monetary expansion but trail monetary contraction. Gold investors underestimate the possibility that the Fed will raise rates and contract the money supply. They are right in the long term but can be wrong in the short term. Second, the gold investors have diverged from monetary growth since '08. This may be a larger than usual short term error. Third, it is true that in the short run the contraction in loan activity in a fractional reserve banking system leads to reduced inflation or deflation. But longer term, over the next couple of years, there will be heavy pressure to inflate further, as Schmidt points out. Moreover, government borrowing will create pressure on the Fed to expand the money supply to purchase additional bonds. Until recently, foreign governments have been buying US debt to keep the dollar strong. There are signs that this policy will abate as China has been talking about tightening its money supply. On the other hand, there may be pressure to inflate in Europe as southern European countries suffer from socialist fiscal mismanagement.

Schmidt asks:

"Will that red line turn positive? Yes. Already the lack of economic growth inspired by weak U.S. money supply growth is evident in the economic statistics. Preliminary report on the U.S. economy for the fourth quarter of 2009 was dismal, despite the praise of journalists unschooled in economics. That weak economic growth will increase the pain felt by the Obama Regime and the U.S. Congress. With U.S. national election only nine months in the future, great pressure will be applied to the Federal Reserve. Bernanke may finally get to use that helicopter, either from which to hurl money or to seek asylum in some other land."

In fact, the helicopter left the heliport years ago. The tripling of the monetary base in '08 provides the banks with plenty of liquidity. Government will take advantage of it if consumers cannot. Government spending is inevitably inflationary. Inflation is the difference between the value that the investments facilitated by the new money create and the amount of new money. Government does not create value, it merely allocates consumption. So when most of the new money is borrowed by government, hyper-inflation is likely.

This provides a simple explanation for the recent weakness in gold. But longer term the liquidity-addicted financial-bureaucratic complex will take advantage of the liquidity to expand relentlessly.

Where Do Markets Bottom?

Five Year Gold Price courtesy Kitco.com

The above is a chart of the gold price over the last five years. The steep falls of the past week are tiny blips. But while one experiences them they are significant. The question is: where does gold bottom? The current decline like the one in fall 2008 is due to concern about financial problems, this time one in Greece and Spain that threatens the Euro; and the possibility of future Fed tightening. It is paradoxical that despite long term ill prospects for the dollar, in the short term it is viewed as a safe haven from risk assets, including gold. In fact, gold is much safer, but the short term psychology of Wall Street Keynesians leads to that thinking.

Gold has further to fall, according to my coin flip test, but not so far as in 2008. Maybe to $950, which came up heads.

GOD BLESS KITCO: KITCO RECANTS HETEROSEXUAL BAN

Howard S. Katz showed me a confidential e-mail from Bart Kitner, president of Kitco, who has invited Katz back to the site as a contributor. Kitco's Daniela Carbone, likely a product of politically correct educational systems, banned Katz from writing for Kitco's gold commentaries for saying on his personal blog that he opposes gay marriage. Katz is a longtime gold investor (dating back to the '60s--I first met him in 1978) and he has a lot to offer in the way of advice about gold and commodity investing. He has beaten the S&P indexes since '99 when he started keeping track. Kitco is a fine gold site and has corrected its inadvertent misstep.

The public outcry in response to my blog and Katz's articles on some of the other gold sites was gratifying. Several of my friends, associates and readers called Kitco, as did several of Katz's readers.

This illustrates the growing power of the Net to confront the gay-dominated easy money community. Homosexual investment bankers will no longer silence gold investors.

As well, this illustrates the potential public power that can be awakened by the "tea parties" that have recently sprung up. I believe that true Americans have lain dormant for too long, seeing their country stolen by rapacious government, special interest looters, big business crooks and homosexual investment bankers who have manipulated the state so that hard working Americans have to pay 50% of their incomes to incompetent government tyrannies.

Kitco Bans Gay Marriage Opponents

What does gold investment advisor Howard S. Katz have to do with Miss California? Recently, Perez Hilton, a gay judge in the Miss USA contest, asked Miss California, Carrie Prejean, whether she believes in gay marriage. Prejean suggested that marriage ought to be between a man and a woman. There has been speculation that Prejean lost Miss USA as a result. Suppressive intolerance against all who disagree with extremist dogma is reminiscent of the the Fascist trial of Antonio Gramsci. The left has whined about McCarthyism for more than fifty years, yet it does not hestitate to apply McCarthyite tactics, ruining careers with ideological litmus tests, when an individual's views do not conform to left wing or homosexual dogma.

Howard S. Katz has been working on gold investing since the 1960s. He has successfully navigated gold, lumber and other commodities markets for 40 years, and frequently publishes on Gold Eagle, Goldseek, and other gold websites. Recently, on his personal blog that he had linked to a Kitco article, Katz mentioned that he opposes gay marriage. He did not write this in the Kitco article. He simply voiced the view that he opposed gay marriage in his blog, which was linked to the article.

Because Katz failed the Code of Gay Fascism, Ms. Cambone wrote Katz the e-mail below. It saddens me that the gay community and Kitco have taken to witch-hunting and McCarthyite tactics, such as attacking people's livelihoods because they merely store and do not lubricate their gold bars.

Does this mean that all current writers on Kitco support gay marriage? I will inquire. Please stay tuned.

--------------------------------------------------------------------------------
Subject: commentary
Date: Thu, 16 Apr 2009 12:35:50 -0400
From: dcambone@kitco.com
To: howardkatz@hotmail.com

Dear Mr. Katz,

We have run into quite a few complaints with your latest article. It seems that when our readers clicked the link to your website, they found a blog against homosexual marriages. This has insulted many people. We at Kitco realize that your commentary did not make reference to this fact but we cannot be associated with individuals who share these viewpoints.

You are a longtime contributor to Kitco and we appreciate your commentaries. Unfortunately, we cannot publish commentator’s who have points-of-views that are offensive to readers.

If you would like to discuss this matter in further detail, please feel free to call me.

Sincerely,

Daniela Cambone
Content Specialist
Marketing Department

Kitco Metals Inc.
Direct Line: (514) 670-1317
Cell: (514) 928-5820
Fax: (514) 875-2579
dcambone@Kitco.com
www.kitco.com

Howard S. Katz's Poem for March 8

Howard S. Katz has preceded his current newsletter with this poem:

A sadder man you’ll never see
Than Don Quixote Bernanke.
The only thing that he does know
Is how to print a lot of dough.

He’s striding all about the town
Not knowing whether up is down.
He fights “Depression” it is said.
“Depression” is all in his head.

Dear Bernanke, may I be bold?
Suggest you view the price of gold.
The thing to know, before you sup,
The price of gold is going up.

And that’s a signal, if you’re wise,
That all the prices – gonna rise.
And then the country will be poor,
No goods to buy at local store.

You’re bailing out the ultra-rich
And leaving country in the ditch.
I’ve said to you, you are a cad.
Cause printing money’s very bad.

No, this is point you do not know.
One can’t get rich by printing dough.
So turn your policy around
And give us money that is sound.

$3,500 Gold

I already live in these hills, so please do not head for them.

Currently gold is selling in the low $900s per oz., up from $250 or so earlier in the decade. A recent tidbit of news suggest that the price of the precious metal will skyrocket. As part of the Bush administration's tragic, socialist tap dance, which the New York Times reports may include partial nationalization of banking, the Federal Reserve Bank announces yet another sharp increase in the monetary base. Howard S. Katz just e-mailed me that there has been a 68% increase in the monetary base over the past few weeks.

The inflation of this cycle may turn out to be much worse than that of the late 1970s. The inefficiencies in the economy are greater and there has been a much longer period of withdrawal of commodity production in response to low prices in the 1980s and 1990s. Howard calls this the "commodity pendulum".

Gold has already demonstrated an ability to anticipate inflation. The problem is exacerbated by the Fed's decision to encourage foreign central banks to monetize American debt. The global liquidity excesses of a few years ago are transforming into an inflation stoked by the banking system's addiction to easy money. The shortages will get worse as the old, new and future liquidity slosh through the system over the next few years, bidding up prices.

I'd say head for the hills, but I already live there and I want to keep the traffic down.

Correction in Gold and Oil Prices?

Is there going to be a correction in gold, oil and other commodity prices in the coming weeks? It seems like a distinct possibility.

Fed and Financial Community Cause Global Food Shortage

Gaius of Blue Crab Boulevard has posted a blog about a New York Sun article concerning food riots. The current global food shortages are a symptom of Alan Greenspan's and Ben Bernanke's excessive liquidity policies. As Howard S. Katz has pointed out in his blog, the banking system in the United States and globally has lent counterfeit Fed money (or excess liquidity) about which the financial community has been ecstatic for the past three decades (calling it stabilization of the credit markets, priming the pump, reducing unemployment, ending recession, stopping depression) to build homes that no one could pay for. At the same time, too little investment was made in commodities. Thus, the sub-prime crisis and the current global shortage of food are direct products of the banking system's lending practices and the Fed's expansion of the money supply since 1981. Ludwig von Mises, the Austrian economist, called this process malinvestment. For the past 25 years the Fed printed money and stimulated home building. Too many homes were built and sold to people who could not pay for them. Too little investment went into expansion of food and commodity production. The sub-prime crisis of today results from the mistakes that the banking community made in response to the hot Fed money that Greenspan and Bernanke have been creating under four presidents, Reagan, Bush, Clinton and Bush II.

The Bush administration's solution to the malinvestment of the past three decades has been...more malinvestment. The Bear Stearns bailout, the current loose monetary policies of the Bernanake Fed and further government transfers to banks to prevent defaults from incompetently made loans keep real estate prices high and continue the massive malinvestment that has occurred in the housing sector.

From an investment standpoint, it is clear that commodities will be hot for the next few years as rising interest rates freeze out new investment in commodities (see Howard S. Katz's blog for more on what he calls the "commodity pendulum"). From a moral standpoint, the American public should be ashamed of itself for allowing this orgy of self indulgence among the various players in the financial community; for allowing transfer of wealth from people who need to eat to wealthy stock investors and hedge fund managers; and for allowing the incompetence and mismanagement that the economics establishment and the Fed have demonstrated.

To quote Gaius:

"The New York Sun reports on a trend that is not at all pretty. In some areas of the country, rice, flour and cooking oil are in such short supply that retailers are limiting the amount people can purchase. This is happening right here in the United States.
The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come. "

Howard S. Katz and Market Psychology

I had the opportunity to observe market psychology first hand during the past couple of weeks. My friend, Howard S. Katz, had called a market top in gold this past Monday when gold was about $950. He also called a bottom in stocks and shifted from gold stocks into construction stocks. The first few days after Howard's call, gold continued to go up. It hit $1002 toward the end of the week. The stock market had become very volatile as bulls and bears battled in response to Fed easing. Subscribers to Howard's newsletter contacted Howard to argue that he had called the top too early. I mentioned Howard's call to a few MBA students and they too argued that he had been too early.

It is very difficult to call a turn precisely, but to make it more so, social pressure opposes a correct call. The gold market indeed topped at about $1000 and the construction stocks are up about 50% since Howard's call. I'm not sure how he does it (he uses technical analysis which is Greek to me), and I don't believe that contra-opinion is necessarily right. Delusional markets can continue for several years or more. Look at politics.

One thing is certain. If you are right about a change in market patterns there is going to be alot of argument against your position and not too much social support. It takes confidence in addition to the rare insight. The insight alone is rare enough. The combination of courage wtih insight is difficult to sustain.

The same is likely true of ideas. It takes guts to tell the truth.

Howard Katz's Goldseek Article

Howard S. Katz has an interesting article in Goldseek. He writes:

>"Over the past few weeks, there have been dozens of forecasts in the newspapers about the possibility of a coming recession. In most of these, the forecasters have not been identified as anything more than “economic experts,” etc. What is going on is just a public relation campaign to convince the public that something bad will happen if we do not print money at a faster and faster rate. Usually no evidence is cited, just “experts say.” Sometimes there is an incredibly ignorant use of statistics whereby data which will be revised away in a few months is cited as authoritative. For example, the preliminary employment report for August ’07 showed a drop of 4,000. This was widely cited as evidence that the economy was heading for recession. Then the number was revised and is currently listed as an increase of 93,000 (very close to average for the year). No apology from the recession mongers. These people pretend to be scientists attempting to predict a recession, but in fact they are public relation shills, trying to convince the media to support a central bank policy of easy money and credit.

>"According to (Keynesian) economics, as it evolved over the 20th century, recession and inflation were opposite things. A recession was caused by not enough demand. Inflation was caused by too much demand. As noted, we currently have $900 gold and $100 crude oil. The CPI is advancing at the fastest rate in 17 years. The PPI is advancing at the fastest rate in 27 years. How, even in their own terms, can these people believe that there is both too much demand (“inflation”) and not enough demand (“recession”) at the same time?

>"Currently the stock market is being hammered down by propaganda about the coming recession. Of course, when the propaganda is successful and Bernanke completes his easing, this will make stocks go up. Those who listen to the recession propaganda and sell will sell near the bottom. It was precisely to deal with situations like this that the old timers made the rule, buy when there is blood in the streets. However, the rule should have been, buy when there is blood in the media because what is happening is not happening in reality, only in people’s minds. Again, in deciding on a massive easing at a time when the dollar was very weak anyway, Bernanke essentially threw the dollar out the window. The U.S. central bank has made the decision to trash its own currency. I don’t have to tell you that this means BUY GOLD. Unfortunately, most of our sources of information in this society are full of lies. Their purpose is to make the banks and their other vested interests rich, and to do this they have to make you poor. Believe the lies, and you are a loser.

>"In a very real sense, a recession is like an infestation of witches. It is an imaginary event. It can be listed with the belief of the Aztec Indians that, if they did not offer the Sun God a human sacrifice every single day, then the sun would not rise the following morning. The difference is that the Aztecs never knew what science was. A century ago our society did understand scientific method, and there is no excuse for letting that knowledge slip away.

>"So, dear reader, if you want to be a gold bug, then you must aspire to see reality as it is and not believe the lies reported in the media. This is my job at One-handed Economist (see my web site www.thegoldbug.net). Visit us, and see if I can make you a gold bug and put some extra money in your portfolio."

Howard S. Katz's "Bad News"

Howard S. Katz has posted a fascinating blog entitled "Bad News" which I reproduce below:

>"I have bad news for all young Americans.

"You were born into what used to be the greatest country in the world. The Founding Fathers of this country fought for our liberty in the 18th century. They won, and they set up a government whose purpose was the protection of everyone’s rights. The first President of this country was known for being unable to tell a lie.

"In 1933, however, the country fell into the hands of a collection of scoundrels. They said, “Rob from the rich and give to the poor.” Then they set up a system which robs from the poor and gives to the rich. In order to win support for this system, they told a bunch of lies.

"Then when these lies had become accepted as commonplace, they made up more lies. Then more lies still. The whole structure resembles an onion. If you are smart enough to discover an important truth and peel off one layer of the onion, you think that you are seeing reality. But then there is another lie to be peeled off and yet another lie beneath that. Let us take the current issue facing America, the “interest rate cut” of Sept. 18, 2007. The phrase is in quotes because, while not literally a lie, it was a half truth, and a half truth with the intent to deceive. (See blog 9-24-07.)

"The argument in favor of the “rate cut” was that the country was on the verge of a recession. Please to define recession? Well, John Maynard Keynes argued that it was not having a lot of goods that made a country rich. Just the opposite, what made a country rich was having a lot of demand. It was necessary to have an intense desire for economic goods, and having this desire would in some way create the goods.

"Let us test this theory against the empirical facts. In North Korea, for example, they have unbelievable poverty. Ditto, ditto, Tibet, Albania and most of black Africa. Is the United States rich and North Korea poor for the simple reason that we have more demand? And anyway, how would you measure demand to prove whether this was true or false?

"In reality, a human being starts to demand economic goods almost from his first breath. He cries for food. Then he cries for a rattle, then a bicycle. Then he asks for a car. Then he gets a job so that he can get a better car. All of his life is spent demanding. The problem in an economy is not to create the demand. There is plenty of demand. What America (and Britain) did starting about 1790 was to figure out a way to increase the quantity of goods to satisfy that demand. That took a number of brilliant men. At that time, all of the world was demanding (and had been demanding since the creation of the human species), but only the Anglo-Saxon countries (and later a number of other countries which imitated them to a degree) figured out how to satisfy much of that demand.

"Now, what about recessions? According to the Keynesian theory it is bad to not have enough demand. But it is equally bad to have too much demand. And since there is no way to measure demand, we must depend on the economic authority figures to tell us whether demand is too high or too low. An economy with demand too low is said to be in recession or depression. An economy with demand too high is said to be overheating and suffering from inflation. And what the Keynesian economists are always searching for is a Goldilocks economy – one where the demand is just right.

"One thing is impossible under this theory,: to have demand too low and too high at the same time. Or to put it in their lingo, it is impossible to have a recession and an overheating (inflationary) economy at the same time.

"But two months ago, Ben Bernanke, the chairman of the Federal Reserve, said that the economy was in danger of inflation. Indeed, for the first 8 months of 2007 the official consumer price index has risen by 3%. If this continues for the remainder of the year, then 2007 will come in at a 4.5% rate. And this would be the highest rate since 1990. But just last week, in the twinkling of an economic eye, Bernanke said that the economy was in danger of a recession. (I should mention that most pieces of economic data are very erratic, and it is necessary to watch a given index for at least 6 or 12 months to even know whether it is going up or down. Indeed, all of the data issued over the most recent two months are labeled preliminary. They are often revised, and sometimes revised sharply. A piece of data which was reported two months ago might be revised away next month and discovered never to have happened.)

"If you want to understand what is really going on, then the U.S. economy did not suddenly go from too much to too little demand. There has been too much demand for every one of the past 52 years because prices have risen every year since 1955. And during this period there have been nine officially declared recessions. In every one of these, there has been too much demand and too little demand. Nobody cares that this is impossible. To be a Keynesian economist, one must, like the Queen of Hearts, “believe 6 impossible things before breakfast.” (To believe the impossible, it is helpful to give different meanings to the same concept. For example, sometimes demand means a willful desire, as when a baby cries; sometimes it means effective demand, i.e., demand backed up by the money to buy.)

"But the sad thing, dear young American, can be seen if we consider a line from Hamlet. “Though this be madness, yet there be method in’t.” Indeed, modern establishment economics is madness. Yet there is a method in it. The method is to rob from the poor and give to the rich. From 1972, real wages in America have been going down. From 1974, the stock market has been going up. (During the age known as the period of the robber barons the real wages of the working man went up, and the stock market went sideways.)

"The Federal Reserve does not have the ability to manage the economy. From 1836 to 1914 there was no central bank in America, and our economy was the greatest in the world. During this time prices remained stable. Today the bankers (government and private) have the privilege to create money, and the classrooms are filled with “economists” teaching that the creation of money out of nothing is the “road to plenty.”

"One of the rich people who made big bucks from the Greenspan issues of money in the 1990s was hurting this year because the creation of money slowed down. This gentleman, Jim Cramer, went on YouTube on August 6 and threw a public tantrum. (You can find it via a Google search on his name and then click YouTube – Market Meltdown.) The reason that the Federal Reserve “lowered interest rates” (meaning agreed to print money) on Sept. 18 was that it was trying to balance the rich people like Jim Cramer with the poor people who do not make any noise. The squeaky wheel got the grease. And all the pseudo-economics is a rationalization.

"This is the world into which you were born. The Government steals from the poor and gives to the rich. How much is to be stolen is decided by the method of the 3-year old who throws a tantrum in the supermarket. Paper money is the money of the bankers. Gold money is honest money. Gold is the money of the people."

How to Re-Monetize Gold

Lenny Rann responds to my earlier blog as follows:

Rann writes:
>"We have exceeded the ability to regulate our currency along the gold standard, we have produced too much to cover with such a scarce resource. Much that we produce are not commodities that exist in the natural world, i.e. the richest man in the world made it on intellectual property. Today, copper and steel seem to define the relationship between liquidity and commodity prices (inflation?) Please see the five year chart for the following copper producer (PCU) and steel manufacturer (SID) http://finance.yahoo.com/q/bc?t=5y&s=PCU&l=on&z=m&q=l&c=sid. Whether we are in a metal commodity bubble, I don't know. Almost all of my holdings are in metals and mining, but I am reducing my positions and moving back to petroleum."

It doesn't matter what resource is used as a standard. But the problem isn't that gold fluctuates too much; that there is too much productivity; or that the economy is too complicated for the dollar to be backed by gold. The problem is that we have increased productivity too little to merit the increases in the number of dollars.

You could use platinum, iron or silver, as a monetary standard, but historically gold has been used and people feel comfortable with it. You could use other things as well, say oil, it's arbitrary in the sense that people expect coins to be shiny. The government still makes them shiny because people feel comfortable with shiny coins. Coins could be orange, but people would be uncomfortable.

Gold is a good choice because people feel comfortable with it.The issue is whether to have a standard or not. It doesn't matter if commodities fluctuate in price. They don't fluctuate in only one direction, so over the long run there is more stability with a commodity standard than without one. The arguments against a standard are just an excuse because some people want inflation. The people who favor inflation are: commercial bankers, investment bankers, hedge fund managers, corporate executives, left wing academics, Keynesian economists, the American Enterprise Institute and debtors. The people who shouldn't want inflation are wage earners and savers.

There are many people who both benefit and lose from inflation. People who are bad stock market investors lose, because inflation causes unpredictable shifts in the stock market which make many people do irrational things like withdrawing their money when the market bottoms. Also, people are often both real estate owners who hold a fixed-rate mortgage and also are wage earners. Inflation will help them via the fixed rate mortgage but it will hurt them because it reduces the real value of their wages.

The last three decades have seen flat wages (which began in the 1970s, right after the gold standard was abolished) coupled with widespread home ownership. So the effects of inflation are complicated. The poor who can't borrow are hurt the most. The very wealthy are helped the most. Risk-averse savers are hurt. Risk-taking investors with good market timing and people who take large mortgages at fixed rates relative to their incomes are helped. Wage earners are hurt. Stock holders are helped.

The chief thing that changes when you don't have a gold or other standard is that the central bank has the flexibility to increase the money supply faster than the rate of increase in productivity. M3, the now-discontinued measure of global supply of US dollars, has been increasing at 8% per year, three times the rate of US productivity increases. If the Fed could match increases in the money supply to productivity increases in the US economy it would be ideal. But they cannot because of political pressure from the financial community, the business community and Keynesian and left-wing academics. Also, the Fed makes many mistakes.

The effects of money supply increases are felt in the long run and can potentially become catastrophic for the United States and its citizens.The shift from the gold standard to pure paper money was completed in 1972, under President Nixon, and workers' real wages started stagnating almost immediately thereafter.

According to David Wozney, a poster on Howard Katz's Gold Bug blog , "A 'Federal Reserve Note' is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."

I read on the web that there are 368,250 bars of gold in Ft. Knox, with each bar weighing 400 oz. 400 x 368,250 x $750 (approximate price) = $110.5 billion. The government stopped publishing M3, which included foreign deposits, but it is likely in the area of $11.3 trillion. That means that while the government has defined a dollar to be 1/42.2 oz. of gold, according to one observer it has gone ahead and printed 185,000 dollars for every ounce of gold that exists anywhere in the world.

Eventually, dollar holders may realize that the dollar has no validity. It has not been backed up "by the US economy"; it has not been backed up by the good faith of the US government (which has been increasing global money supply at 8 percent per year while US productivity has been increasing at 2.5 percent per year); and it has not been backed up by gold.

I would assume that to re monetize gold you need to redefine the dollar as 1/750th oz. of gold, or the current market value, and use the amount in Ft. Knox as fractional reserves.

Money and Stability

Gold bug Howard Katz, author of the Paper Aristocracy and The Warmongers, has started a new blog called thegoldbug---the one-handed economist at http://www.thegoldbug.net/blog.

Howard Katz's first blog concerns how the foundation of the Federal Reserve Bank in 1913 has resulted in inflation, so that today prices are 16 times higher than they were in 1933. The source of this effect is the Fed's creation of credit. In his blog, Katz points points out that

If the Government tried to borrow from the people, its borrowing would crowd out most other projects, and a great deal of business would come to a standstill. For this reason, the government “borrows” from itself. That is, the Federal Reserve (a part of the government) creates money (using the power given it in the Banking Bill of 1933) and “lends” this money to the Government proper. In effect...it simply counterfeits enough money to balance its budget. This is why prices have risen in this country for every year since 1935.

Howard Katz points out that due to inflation, social security is a terrible investment. If you invested 15 percent of your pay each year into stocks, bonds and hard assets like commodities, you would have many times what social security has to offer. Part of the reason is the very inflation that Katz attributes to Fed policy. Sadly, the same "something for nothing" mentality that drives public support for social security also drives banking support for the Fed.