Gold Less Bulky Than Paper Money

One of the arguments against the use of gold as money is that it is supposedly more bulky than paper money. I have recently purchased some one-tenth-ounce Canadian Maple Leaf gold coins, and I was surprised to see that they are much smaller and lighter than a stack of $20 bills.  A one-tenth-ounce gold piece is worth about $128 at current prices; it is tiny--much smaller than a $20 bill.  There was a time when $100 or $500 bills were widely used, but today because of money laundering concerns bills larger than $50 are rare.  A stack of six $20 bills weighs more and is bulkier than a $128 gold coin.

The claim that paper money is necessary because carrying gold is inconvenient is a fake rationale.

When Will the Currency Collapse Come?

As of the first quarter of this year, federal indebtedness was $21.1 trillion, while GDP was roughly $19.8 trillion, so the ratio of GDP to debt is 107%.   Nobody knows how the constellation of relationships in the current world economy will play out.  For instance, the dollar is the global reserve currency.  Other countries absorb and make use of the dollar.  However, as with all psychological delusions--whether faith in a tribal rain dance or faith in the integrity of the Federal Reserve Bank-- sooner or later reality intervenes.  The economy of Greece collapsed at a debt-GDP ratio of 170% or so.   The US has additional cushions, so there is not likely an impending crisis, but it is unlikely that indebtedness will do anything but grow.

There are three ticking debt clocks:  First the Social Security unfunded liability of $13.2 trillion over 75 years may require a benefit cut of 17%. Second, the unfunded liabilities of Medicare, which are unknown, may be as great. John D. Shatto and M Kent Clemens, actuaries for the Department of Health and Human Services, write that there is “substantial uncertainty regarding the adequacy of future Medicare payment rates under current law.” Third, student loan indebtedness is currently about $1.5 trillion.

If you add the hard indebtedness of $21.1 trillion to the unfunded liabilities and the student loan debt, the sum is in excess of twice GDP.

In part because the unfunded liabilities are not salient, international investors continue to accept the dollar as the global reserve curreny. As with any bubble, this will continue until it doesn't. The amount of US currency in circulation overseas is at least equal to the amount at home. 

There will be political pressure to devalue the dollar, both from Millennials who spent $100,000 each on college and never found a job and from senior citizens who do not want their Social Security benefits cut because the government claimed for 85 years that Social Security is an insurance plan rather than an at-Congressional-will welfare plan.  As well, depending on the course of technology and health care costs, Medicare can easily become the biggest problem of all.

There will thus be significant pressure to devalue the dollar in order to dupe Social Security recipients and to devalue the Millennial's unproductive student loans.  In response, there may be a global run on the dollar; alternatively, an internationalist authority like the IMF might step in and offer to substitute a global currency like special drawing rights as a substitute for the dollar.  As a result, bank dollar holdings and cash may be reduced in value.

Knowing this, I hypothesize that a portfolio allocation of 10 to 20 percent to gold and silver is wise. At the same time, gold could go back down to 2001 levels before it rebounds. As Keynes put it and my financial adviser reminds me,  "The market can stay irrational longer than you can stay solvent."  As well, trusting in the wisdom of the federal government and the American people is foolhardy.

King Kong versus Godzilla: US and Chinese Central Banks Go to War over Trade

Tariffs are a mistaken policy---unless you find a trading partner who's even dumber than you are and is willing to foot the bill for you. President Trump may have done that. The strengthening dollar suggests a deflationary effect of the tariffs arising from Chinese dollar purchases. The dollar gets stronger, Americans can buy more; the yuan renminbi gets weaker, the Chinese can buy less but sell more. American goods will be harder to sell, but Americans will be richer and have more money to spend. If this pattern continues, some of the effects of Fed monetary policy--reduced interest rates--will be counteracted. The stock market may be in for a roller coaster as Chinese and Fed manipulation--King Kong versus Godzilla--battle it out. Americans may at least temporarily benefit. In the long term, we would have been much better off without the manipulation, without the Fed, and with a market-based system free of central bankers and Wall Street subsidization.

I have temporarily reduced my gold holdings on the chance that dollar strengthening continues and gold continues to fall. A few days ago $1240 was a technical resistance point. Gold is now down to $1217, and it looks like the drop will continue.  I suspect that the collapse in the commodity sector will continue down to the point where the Chinese stop subsidizing the dollar, probably when the dollar rises another five to ten percent. 

Jim Rickards Describes Increased Global Interest in Blockchain and Gold instead of the Dollar

Alex Stanczyk interviews Jim Rickards in the June 2018 edition of Gold Chronicles.  Rickards’s thesis is that the dollar is going to collapse.  I agree, but while it is easy to know that this will happen, it is hard to know when—whether in three years or 35 years. 

I am accumulating gold gradually and plan to have about 20% of my portfolio in gold and silver, although I’m at about eight percent now.  I’m not totally convinced that the downturn in the gold price from the 2011 peak--due to monetary expansion and the Trump stock market bubble--is over.

Rickards says that gold production has flatlined.  We all know that the “peak” thesis was wrong for oil, and I have little reason to believe that it will be right for gold.  However, production is not a determinative factor in the long run. 

Rickards claims that there is a new axis of gold formed by secondary and tertiary powers who are looking a way out of the dollar system, and they will hasten the invention of an alternative monetary system that will include both blockchain technology [but not Bitcoin] and gold.  Incidentally, I have purchased a small amount of Overstock.com, which has become a blockchain incubator.

Stanczyk says that gold is migrating from the West to the East, especially from London to Switzerland and then to China and India.  Gold reserves held in emerging market central banks increased 91% from 2006 to 2017.  The Russian central bank has purchased over 600 tons of gold over the past four years.  The Keynesian claims that gold is a “barbaric metal,” defunct, and meaningless with respect to monetary policy, seems to have escaped central bankers around the world.

          “The dollar is still boss,” Rickards says, but “Russia buys [gold] like clockwork.” Still,  remember that the price of oil collapsed a couple of years ago [and gold can still do the same].  The oil collapse hurt Russia’s economy. In the 2014-2016 period,  Russian dollar reserves declined by 40% due to the fall in the price of oil, but Rickards points out that the Russians did not stop buying gold even during this difficult period.  It’s like you buy $100 a month in gold, but then you lose your job. Even then, you still buy the gold. That’s conviction.

China is less transparent than Russia, according to Rickards. China has purchased 600 to two thousand tons; Turkey has acquired gold; Iran has acquired gold; Kazakhstan has been acquiring gold. From 1999 to 2010 central banks sold gold. [They apparently sold into the gold bull market.] Since then, the central banks have been buying gold.  The last time the US sold gold was 1980, despite the scoffing of foundation-funded academics.

The big sellers after 1980 were the UK, Switzerland, and the IMF. Germany, France, and Italy never sold.  The central banks that were selling have stopped. Now, on net, banks are buying.  Miners are having difficulty finding new gold. “What’s going on is strategic,” says Rickards.

The US dollar is currently more than 60% of global reserves, 80% of global payments, and 90% of oil payments.  The Establishment (Ben Bernanke, Tim Geithner, John Lipsky) sees continued dominance of the dollar.  Currently the US is in financial wars with Iran, Russia, North Korea, and possibly China. 

          The ubiquitous dollar enables the US to be effective at enforcing economic sanctions. The problem is that these countries, at the short end of US foreign policy and trade policy, are trying to get around the dollar system.  Russia, China, Iran, Turkey, Venezuela, and Brazil are looking for an alternative to the US dollar system.

The Superbubble and the Wisdom in Owning Gold

Gold Prices Since '08--An 18-Month Stagnation Mirrors the 1983-2001 Era

Money Supply M1:  Obama Meant Change

Monetary Base--Can Be Expanded Tenfold  from Here

I have been subscribing to Przemyslaw Radomski's Sunshine Profits newsletter for four or five months. One of his Kitco articles is here.  He is a capable technical analyst who is predicting a gold-price turnaround. His short-term predictions may be correct, although there’s reason  not to be surprised if there are a few years of a hiatus in gold’s movement upward (the current hiatus has lasted 1.5 years, as the top chart indicates). Even if Radomski is right and gold rallies this year, there could be a several year stale period before another epic-scale rally occurs. That's not to say to sell gold because the Federal Reserve Bank and the federal government have led America to an unstable, casino economy.  Because the US monetary system is unstable, gold is a hedge.

If fundamental political and monetary patterns don’t change, then gold can see a much larger long-term upswing than the six-fold-or-so increase that has occurred over the past 10 years.   From 1981 to 2001 there were fundamental bullish reasons to buy gold, but the Reagan, Bush I, and early Clinton years' monetary expansion caused lower commodity prices. Gold’s price fell to a low of about $250. This occurred because Federal Reserve money printing increased competition among miners as well as manufacturers.  Mining competition increased supply just as the supply of consumer goods increased, resulting in intermediate-term price depression. Also, the Chinese absorbed American inflation by demanding dollars to buy treasury bonds.   

The Chinese policy continues, and now we see a new monetary expansion under Obama that dwarfs the Reagan-Clinton-Bush expansion (see the second and third charts above).  If the Chinese policy changes, or the initial depressing effect on commodity prices from the Obama monetary expansion ends quickly, a larger bull market can occur in gold in the intermediate term than occurred from 2001 to 2011.  

The 1980s and 1990s economy was something like the 1920s, with monetary expansion funneled into stock-and-real-estate bubbles rather than price inflation.  Because the prior, 30-year monetary expansion mutes the effects of the three QEs, and the Fed added the QEs to the 30-year expansion with no reallocation or liquidation of the (distorted) real economy, in the coming years we can expect larger bubbles or larger inflation than we’ve seen in the past.  Either may augur well for gold once a shakeout in the mining sector occurs.

Let’s say natural gas fracking and shale oil cause energy price declines. The result can be a more expansive economy.  Let’s say the Fed is reluctant to withdraw the bank credit and monetary base that it has created. (The money supply –M1—has gone from $800 billion in ’08 to over 2.4 trillion now, while the monetary base has gone from a little over $800 billion in ’08 to over $2.8 trillion now, as per the two above charts.)  In that case, the monetary base can be expanded so that the money supply is up to 10 times the monetary base. That will occur in an inflationary period. In other words, the $2.8 trillion in monetary base can become $28 trillion in money supply, leading to a more than tenfold increase in the supply of money.  

That’s not all because, first, the US federal debt is currently $16 trillion, $5 trillion of which is held by foreign holders. Let's say the US economy continues to stagnate. At some point there may be a panic in US debt.  If so, there will be sales of dollars in exchange for other currencies and assets, resulting in a large inflow of dollars into the US.  Also, according to this Fedral Reserve Bank report:  “Estimates by the Federal Reserve suggest that as much as 60 percent of the $760 billion in U.S. currency outstanding at the end of 2005, or roughly $450 billion, was held outside the United States.” In the event of a run on the dollar, large dollar holdings can be repatriated through demand for exchange at banks and purchases of US assets. The result will be a dollar collapse. 

Hence, holding gold along with  other non-dollar assets such as stock has a diversification rationale.  The Fed's hyper-expansion is having the same effect on the stock market that the 1983-2000 expansion had, but the economy is much worse off in terms of misallocation of resources.  In the past, monetary bubbles and their concomitant asset bubbles and inflation were followed by contractions, but that has not occurred;  Obama and Bernanke have invented the superbubble.

Investors are no better off than they were in 2003 and 2007, and the stock market is at similar levels.  Interest rates are near zero.  Although the Fed has caused valuations of future earnings to increase to nearly infinite levels, causing the stock market to escalate, stock market prices are constrained by the availability of money to invest.  Will banks continue to pump up the stock market in a kind of Ponzi scheme whereby the Fed prints money, uses it to buy treasury bonds, and the banks then use the printed money to pump up the stock  market?  Alternatively, can foreign investors carry the US stock market to ever higher levels?   It is not at all clear that the current stock market valuation is more than one more peak in a secular bear market that began in 2000.

Another problem with the stock market is that during periods of uncertainty, there can be sharp falls in valuations.  If, for example, there is a currency collapse, the stock market might fall because of the risk.  Hence, we see the wisdom in owning gold.

Turkey's Banking System Begins to Use Gold as Money

Kitco interviews Jeff Christian, who reports that the Turkish central bank now allows its commercial banks to use gold as reserves for deposits, and about 7% of deposits in Turkish banks are backed by gold. Christian believes that other countries will imitate Turkey's move, which he describes as pure genius. Christian is a modest gold bear, predicting a $1540 bottom over the next two years. It seems to me that if banking systems begin to imitate Turkey, monetary demand for gold will be a bullish factor. Christian also predicts a move away from the dollar as banking systems embark on a multicurrency regime.  Over the long run the dollar will slide.  This is going to devastate Social Security and pension payments, leading to a meager old age for the baby boom generation.

QE 3: Gold Bugs, Stockholders Celebrate While American Workers Starve

Joe, a retired, Kingston, NY commodities trader and Brooklyn College alum, is a drinking buddy. He predicted $1750 gold on Labor Day while he, Mike and Mark Marnell, a left wing attorney, and I were imbibing a 1.75 liter bottle of four-year-old single malt scotch called McClelland's.  I picked it up at JK's Wine and Liquor in the Kingston Plaza mall. For only $43 for a jumbo bottle, McClelland's is a good buy.

On that fateful Labor Day Joe predicted $1750 gold this month.  It just about hit $1750 the other day, but today it soared to a bid of $1769 (at 2:26 P.M.).  The reason is the Fed's announcement of quantitative easing.  My brokerage accounts, because of the recent moves in the general stock market coupled with the recovery in metals prices and real estate,  are at or near all-time highs.  According to Kitco: " Spot gold was last quoted up $37.50 an ounce at $1,769.50.  December Comex silver last traded up $1.298 at $34.60 an ounce."  The stock market is also buoyant: The Dow is up 224 points, or 1.68 percent, and the S&P 500 is up 1.76% at 1461.

Quantitative easing or QE3 is one more round of money printing. Monetary expansion boosts the stock market because increasing the quantity of money reduces the price of money, the interest rate. A lower interest rate increases the discounted future value of profits. That increases the stock market because stock prices discount future earnings. It is a mechanical relationship.  As a result, the Fed has played the Nixon card with Obama: in 1972 Nixon encouraged then-Fed Chairman Arthur Burns to ease so that the stock market would go up; now, Ben Bernanke's Fed is easing and Obama will win the election. Likewise, the Europeans are accommodating Obama.  A recent German court decision held that Germany can participate in a bailout of profligate Greece and other southern rim nations. Hardworking Germans can now sacrifice their savings to fund pensions of Greek public sector retirees who have produced little and demand much.

Joe does not have much faith in the stock market.  He is right in a fundamental sense: there is no reason to have faith in the structural reality of the underlying economy. The excesses of the Clinton and Bush years are still around, and Obama has done nothing to correct them.  Americans, for an unfathomable reason, tend to reelect presidents when the stock market is high. The monetary expansion that increases the stock market harms most of them; in other words, most Americans vote for politicians who directly harm them.

The reason is that the monetary expansion that boosts the stock market devalues wages.  As the money supply has expanded since the Reagan and Clinton years, the link between real wages and productivity has been eliminated for the first 40-year period in American history.  American workers are no better off today than they were in the early 1970s, but stockholders are much better off. In other words, the income inequality that liberals grieve over is directly due to the policies of Paul Krugman, Woodrow Wilson, Franklin Roosevelt, Richard Nixon, Ronald Reagan, Bill Clinton, George Bush, and Barack Obama. Obama has done nothing to clean up this mess.  Historically, he has contributed more to it than anyone else.

The stock market may continue up through the fall and possibly into 2013.  Eventually monetary bubbles implode as bondholders realize that their bonds are going to become worthless.  As real interest rates start to rise, Fed policy becomes irrelevant.  If the Fed continues to print money thereafter, there will be a monetary collapse.  Otherwise, there will be rising interest rates and stagflation as the expansion of the monetary base is transformed into cash money.

If real interest rates start to rise, the stock market will not do well, but commodities will because of the inflation.  If the dollar remains stable, the increasing money supply will continue to boost the stock market. 

I am easing out of the stock market.  I had sold the stocks in my pension fund (I still have real estate), which were about five percent of my total stock holdings.  I have low-beta (low-risk, high dividend) stocks like Philip Morris, Kimberly Clark, and Heniz in one brokerage account, and higher risk stocks in the other. I will sell the higher-risk stocks over the coming months, except for the gold mine stocks.  I hold both the gold index and the Van Eck juniors index.  I would like to be able to pick gold mining stocks, but I lack the expertise.

The stock market is likely to continue up into the coming year; thereafter, all bets are off.  If you look at a picture of the S&P 500 since 1950 there are two massive peaks in 2000 and 2007; we are approaching the height of those two peaks now.  Because of the massive monetary stimulus, the peak could get higher in nominal terms.  As the monetary expansion translates into a depreciating dollar the reverse can and will occur.

   

Is It Time to Buy More Gold?

Lucianne.com carries a Bloomberg piece (h/t Kitco) saying that professional investors are boosting their gold positions.  Maybe it's time to add to my position.  It's difficult after a period of loss to bravely attempt to time markets, but why not buy during a sale?  Of course, the same argument could be made with respect to the housing market.  A friend told me that a house that had been listed for $400,000 in the Town of Olive, where I live, was recently sold at auction for $130,000.  Will there be further declines, or is this the bottom?  When I bought my house in 1997 Olive was called "low-tax-Olive."  Because of incompetent Town negotiations with the City of New York, which pays much of the Town's taxes via its largest reservoir, the Ashokan, our taxes have signficantly escalated. So buying property on speculation is risky, which will contribute to plunging real estate prices.

Stock Market Spells Boomer Trouble

A double top is a bearish signal. The above is the 23-year S&P 500 chart.

 

I am not a technical analyst. In fact, I do not know the first thing about it. But I do know that a double top spells trouble.  The above chart looks suspiciously like a double top. There is a struggle for a triple top, but if you've been following the stock market over the past six weeks, the Democratic stock market of '08-'11 seems to have followed the same pattern of the Democratic stock market of 1932-40: Keynesian policies and more government regulation have done nothing.  Like many stripes of ideologue, Keynesian economists say that their ideas are right, but reality is wrong. They say that nearly a trillion dollars in borrowed money is insufficient.  If Keynesian economists were physicians they would be in jail.

Keynesian economists do not mind their failure because they have tenured jobs in universities and so do not suffer from their own incompetent economic advice, which is helpful to big bankers and the Ochs Sulzbergers, the owners of The New York Times, but harmful to the average American.


I was just reading Murray N. Rothbard's Case Against the Fed.  The book was written in 1994, and Rothbard mentions (p. 23) Milton Friedman's use of the "helicopter" metaphor for printing money. Thus, "Helicopter Ben" simply talks as a good Friedmanite monetarist. Rothbard writes:

Milton Friedman's more modern though equally magical version is that of his 'helicopter effect,' in which he postulates that the annual increase of money created by the Federal Reserve is showered on each person proportionately to his current money stock by magical governmental helicopters.

The helicopter analogy is superstition. There is no uniform distribution of printed money.  The printed money is handed to hedge fund managers and Wall Street stock jobbers. The distribution of wealth, according to policies of both the Democrats (Paul Krugman) and Republicans (Milton Friedman, Ben Bernanke) is to print money, give it to banks, who give it to Wall Street and the Ochs Sulzbergers, and to Princeton's endowment.

That said, until now I have been optimistic about the stock market because new money boosts it. That is the only reason for long run secular stock market increases (and flattening real hourly wages) that we have seen since 1932 (in the case of wages, 1970). But eventually the inflation from the money printing awakens the public to their having been made poorer by the money printing's not having been distributed by a helicopter but by money center banks who have given it to wealthy Wall Street, real estate and corporate interests and stockholders.

A double top might be signaling that the market expects an inflation. That would force the Fed into tightening, with a resulting stock market collapse. The stagflation of the 1970s required a massive downturn, somewhat larger than the '08-'09 one in terms of unemployment and with much higher inflation. This time, though, after eight decades of economic mismanagement by Washington, by the followers of Keynes and Friedman, the downturn may be worse than the 1970s. 

The downturn will be enhanced by the medical system's failure. This will occur on two fronts. First, medical innovation has faltered because of misallocation of investment. Large pharmaceutical firms invest in drugs that have short run return, such as anti-erectile dysfunction drugs. New antibiotics are more difficult. Innovative scientists have much more trouble obtaining capital under Progressivism than under a free market system. Thus, innovation in new directions is squashed by the current monetary system and by Keynesian and monetarist monetary polices and by taxes and regulation.  The result is that the past 80 years' vacation from the worst results of infection is coming to an end. Thanks to Democrats and Republicans, thanks to Progressivism and big government, no innovation with respect to anti-infection drugs is on the near term horizon.  I hope you enjoyed voting for Democrats and Republicans because having done so will help cause you to die.  The baby boomers are the first American generation not to be wealthier than their parents. They will also be the first generation to die younger than their parents.

Second, the medical system has become mismanaged due to government intervention, which has accelerated since 1965.  The result is a system that rewards waste.  Additional federal intervention in the micro-management of hospitals and physicians' practices will add to the waste. 

The situation is as bad with respect to retirement. The boomers have not saved because of the federal income tax, high state property taxes, inflation, especially in areas like education and health care, and low wages.  Wages have been artificially low for the past 40 years because of the money printing in which both parties have engaged. The claim that deficit spending stimulates the economy has turned out to be pap. There has been deficit spending for the past 80 years, and the economy is crap.  The economics profession, a pack of frauds, and both parties are to blame.

Prior to the abolition of the gold standard real hourly wages went up two percent per year. Since 1970 they have not gone up.  But Wall Street has grown exponentially.  New York was a manufacturing center until the 1960s. After the abolition of the gold standard in 1970 it became, over 20 years or so, a playground for the super-rich.

So the stock market now shows a double top and the massive monetary expansion which monetarist Bernanke and his Keynesian colleagues believe will provide new antibiotics and an innovative economy has failed. The gold market has reacted predictably.  Gold has gone up six-fold in the past 11 years. Silver has gone up more than 10-fold.  They are not cheap and seem to be at a rational price given what has been done so far. There is a risk of a commodity market collapse, but there is also a risk of a dollar collapse. Take your pick.  Not that I am an advocate of increasing the stock market. The stock market is a measure of profitability, not of human welfare. Firms can be profitable for good reasons, such as innovation, but such reasons are fleeting in a free economy.  In general, the stock market goes up because of monetary inflation, that is, money printing.

How can boomers think about retirement when the Democratic and Republican Parties have screwed them financially? Putting your money into risky gold and silver or risky dollar equivalents is hardly an encouraging prospect. The stock market may not do much and may collapse altogether. Thanks to monetarists and Keynesians, the dollar is crap.   I hope you've enjoyed the Department of Education and the sub-prime mortgages, because they are ruining your life financially.

Gold Surges Toward $1500 Per Ounce

Gold is casting a vote against the American financial system. I'm about 15% in commodities and my portfolio is at an all time high. The question is whether gold will vanquish the $1500 barrier. Just ten years ago the yellow metal sold at $250 per ounce. How high will it go? I am buying a little extra silver for the short term. Expect corrections further down the line. One rule is "sell in May and go away." Gold stocks have been lagging. Maybe they are a better bet now. Silver has been having a great ride. But parabolic rises (something like 20% in the past couple of weeks) cannot last forever. On the other hand, the trend is your friend. I may go with some shares of Barrick Mining and leveraged silver. But this is short term. I don't expect this kind of parabolic increase to continue for more than a few weeks.

Howard S. Katz, RIP

My old friend and former business associate, Howard S. Katz, has died according to Kitco.com and Zionist Gold Report (h/t Glenda McGee).  Zionist Gold Report cites an obituary in the Nashua Telegraph.

>According to an obituary in New Hampshire’s daily newspaper, Nashua Telegraph, Howard S. Katz, a long-time commentator on Kitco.com passed away on Dec. 23, 2010 at the age of 72. Howard was a financial analyst and editor-in-chief of The One-Handed Economist and the former Gold Bug Newsletters. He was born in Providence, and had lived in New Hampshire for 10 years.

>His biography on Kitco.com states that he was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. He 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.). Howard was also the head of the Committee to Establish the Gold Standard and worked with Congressman Ron Paul for the passage of the American eagle gold coin bill of 1986.

>He published several newsletters; The Speculator (1964- 1972), The Gold Bug (1973-1986) and The One- handed Economist (1996-present). He is also the author of three published books on money: The Paper Aristocracy (1976), The Warmongers (1979) and Honest Money – Now! (1979).

 

In the late 1970s, before I moved to California to attend the UCLA Graduate School of Management, I was the treasurer of Katz's Committee to Establish the Gold Standard.  At the time Howard lived in a small apartment on Fourth Avenue in lower Manhattan.  I worked with him on his congressional campaign bid in Manhattan (I may have been  his only staff member).  I was learning to drive at the time, and Howard gave me a few tips.  Although he came in near last in the race he spread the pro-gold message.  Ronald Reagan was elected a year or two later.  The end of the late 1970s' high inflation, as Howard liked  to emphasize, was the product of the Carter administration, not the Reagan administration. President Carter had appointed Paul Volcker, who adopted monetarist Fed policies.  Volcker's policies popped the Keynesian stagflation of the 1970s that followed upon Richard M. NIxon's pronouncement that “we are all Keynesians now”; the out-of-control public sector unionism in New York and elsewhere; and the monetary policy-induced inflation of the late 1960s and 1970s. But, as Howard also frequently emphasized, Reagan renewed the inflationary pattern through the Keynesian supply sider argument.

Howard had been a member of the Free Libertarian Party in Manhattan prior to my joining it in 1977.   A few years ago Howard gave me his unpublished manuscript Wolf in Sheep's Clothing that I have yet to review. I had reviewed a draft of his revised "Paper Aristocracy" which I do not believe was re-published.  Paper Aristocracy is out of print but sometimes used copies are available at Amazon.com.

I recall clearly his visiting Congressman Ron Paul in the late 1970s  to discuss gold issues with him.  Hence,  Katz has influenced Paul's pro-hard money ideas today.  Katz unquestionably has influenced national debate on monetary policy and renewed public concern about the Federal Reserve Bank. 

Before any one else in post World War II America, Katz emphasized the Jacksonian insight that the central bank is a redistribution mechanism from poor to rich.  Hence, the Keynesian claim that the Fed helps labor and small business is pap.  He claimed that economists and advocates of progressivism fall into two categories: the smart dissemblers who are manipulating the system to their and Wall Street's advantage, such as Alan Greenspan, and the vast majority of useful idiots, economists who actually believe the Keynesian theory.

Howard made similar points about the Fabian socialism of people like Sidney and Beatrice Webb, namely, that their socialist ideologies were a "wolf in sheep's clothing."  He argued that there are two categories of advocates of destructive socialist policies: those who actually believe them, the majority of useful idiots, and those who understand their vicious implications and use them to gain power.

I lost contact with Howard when I attended UCLA in 1979.  In 2004 or so in the face of impending gold price increases I spent several weeks attempting to renew contact and tracked him down in Nashua.  At the time, he published his newsletter, the One Handed Economist, via Xeroxing.  I suggested that he start a small website, which we did after a year or two of deliberation.  He asked a different friend to run his website about two years ago. Also, he changed the name to "the Gold Speculator."

Howard had a tremendous effect on many libertarians' and gold advocates’ thinking.  He will be sorely missed.

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.

Anthony Weiner Is a Shady No Goodnik

I'm ticked that  a shady congressman, Anthony Weiner, has been making noises about proposing legal action against Glenn Beck because Beck advocates holding gold.  I don't know about the particular firm that  Beck advertises, but however dishonest it is, its dishonesty pales next to the corruption of Anthony Weiner, his fellow crooks in Congress and their brainchild, the Federal Reserve Bank.  I wrote Anthony this brief letter:

Dear Tony:

Your attack on Glenn Beck is misguided. The biggest racketeers in the United States today are the Federal Reserve Bank and the US Congress. By creating three times the 2008 level of reserves the Fed has monetized every corrupt, incompetent practice of Wall Stret and the US Congress, including you.

I would add to it that the New York Times and the rest of the Democratic Party's PR organization, NPR, CNN and the rest, lied to the American public on behalf of their owners on Wall Street and told them to buy and hold stocks at inflated prices for years.

You might consider that the Democratic Party media has been engaged in fraud for the past three decades, and since the abolition of the gold standard the US economy has largely become a casino steeped in corruption.

But instead of advocating a gold standard and an end to Wall Street's corrupt domination of the American economy via the Fed, you choose to kick at Glenn Beck.

Tony, you are a low breed of human being. Count me out. I don't want to live in a country that calls scum like you "honorable."

Sincerely,

Mitchell Langbert

Blood in the Streets

Kitco reports that gold prices have fallen 4 percent today to 1066, nearing the 1030 mark that Jon Nadler mentioned as a near term support several days ago. Morgan Stanley Smith Barney's ticker says that the Dow is down nearly 200 points and the S&P 500 is about 1074, a 23 point drop. These declines are related to a strengthening dollar.

How far will the Fed allow markets to fall before it prints more money? Like an obsese food addict, the Fed reaches into its candy bag at the slightest impulse. Bernanke and his associates like to see gold fall. But the effects of a stronger dollar and weaker gold include bankruptcies and unemployment. More importantly to the Fed, hedge funds' carry trade and the hundreds of billions loaned to Wall Street each week will be threatened by higher interest rates.

Based on my coin flip test, I am betting $950 gold. Unless the Fed decides to change its philosophy, I doubt the S&P will go below 850. But when inflation kicks in, then the Fed will need to tighten. At that point we could see more dramatic stock market declines. Gold would continue to be fueled by speculation for a while, until raising interest rates mutes the price increase trend. Then gold will fall again.

Hamlet is Us

When the market is down in January, don't expect a good year. In 2008, I noticed that the market was down in January and I went ahead and invested in gold stocks anyway. I was hammered that fall. Marketwatch quotes S&P's Sam Stovall as saying that this "barometer's track record is dicey, as it often fails to identify the start of new bull markets, such as the market-turnaround years of 1982 and 2003."

At 11:01 The Street noted that gold broke 1100 (I like that kind of symmetry, 11:00, 1101, it goes with my coin flipping method of investing). I'm not convinced that gold will remain firm in the short term just yet, although I've been wrong plenty of times before. Kitco today indicates that the 30 day change in the gold price has been slightly positive.

Jon Nadler of Kitco concludes his report today with this remark:

"If you are in the short-term end of the spectrum of players, excitement will not be lacking, on an hourly basis, even. The bigger picture remains unconvincing on several levels for medium-term speculators."

Also on Kitco, Roger Wiegand has a summary of the derivatives blow up over the past ten years.

Here are some of Wiegand's points:

"USA and other nations’ central bankers pumped currencies and bonds to the moon...TARP money was stolen from taxpayers and funneled through conduit AIG to crooked, failed bankers to reliquify their balance sheets with free money. They are supposed to lend some out for growth but are holding it tight earning free interest from the government; taking no risks...Crooked bankers discovered they are “Too Big To Fail” and are doing it all over again with a tacit “no penalty” understanding. Estimated derivative balances today are $204 Trillion Dollars. No one will stop them until everything collapses in one final crashing swoon."

I have a Hamlet problem. I fear the further fall of gold and rise of dollars in light of the likelihood of dollar demand in case of a global issue such as defaults by Greece or Spain (logically that should not happen but the big investors insist on the safety of the dollar). But I also fear the long term prospects for the dollar given the fragility of the banking system and the likelihood of further inflationary movement.

$980 or $1200 Gold?

Jon Nadler of Kitco argues the bear case:

"On the technical side of things, as was expected, the break below the $1,015 (he means $1,115) price marker elicited a fairly heavy subsequent decline in values. At this time, near-term support has held up at the $1,073-1,075 levels, despite such support being fairly moderate in terms of bargain hunting. Thus, a deeper decline towards the $1,055 and ultimately the $980 level now appears more plausible, even if we can expect a bounce from current levels in upcoming sessions. Overhead resistance appears to be in the $1,095-1,097 area, and the metal needs to rise to above the $1,117 mark to get the bulls excited again."

Also of Kitco, Frank Holmes argues:

We believe that the secular bull market for commodities and natural resources stocks that began in 2000 is far from over. The International Monetary Fund believes that commodity prices will rise further in 2010 as a result of global economic recovery and escalating demand from fast-growing emerging markets.

"The expanding middle class in China, Brazil and the other biggest emerging economies want more of the material goods taken for granted in the developed world. They are laying claim to a bigger share of the world’s commodities, many of which could face future supply constraints.

"History shows that commodity supercycles typically last 20 to 25 years, though not without periods of volatility. If the current cycle follows the historic pattern, we could be just starting the second half of a prolonged upward trend."

"To favor the bear case long term you need to believe in the competence of the Fed and the US Congress. Also, you need to overlook the long term trend of dollar depreciation over the past century. To favor the bull case short term you need to overlook the power of the central banks and Wall Street and the dollar mythology.

Dollar Gains, Gold Falls--Can a Chimera Last Forever?

A couple of weeks ago I blogged that my coin flip test confirmed that the dollar was in a strengthening trend and gold in a weakening trend, and it seems that the coin (it was a 1982 penny) was right. Kitco's Jon Nadler notes (gold closed at $1,080 per ounce today):

"The final session of the final January trading day in New York opened with a $1.50 loss in the yellow metal, which was quoted at $1083.90 per ounce. Gold traded in a band of from $1078 to $1088 overnight, as few additional physical buyers (other than pre-Chinese New Year buyers) emerged to take advantage of yesterday’s further significant dip. Today’s GDP numbers may yet aim gold back towards yesterday’s lows."


Nadler adduces a chart that shows that gold supply exceeds demand this year by the largest amount in three years. He quotes bearish sentiment on gold at Goldessential.com and adds:

"George Soros said yesterday that despite the current headline-making woes that Greece is experiencing, he expects the country to get its act together and not collapse in terms of debt. He referenced a six-month turnaround by Hungary some time ago as an example of how a comeback can be achieved. That said, Mr. Soros also mentioned the fact that Germany is in no mood to pump money into the direction of what it sees as ‘profligate spenders in the southern parts of Europe.”

He also notes that Soros has said that he believes that there is a risk of a gold bubble because of low interest rates. But of course, monetary expansion causes both low interest rates and gold speculation. No great insight there. Nadler mentions $1,030 as a possible low-end targeting. As well, he quotes Bloomberg:

"Commodities headed for the biggest monthly drop in 13 months on concern that demand may wane as governments seek to control economic growth."

In the short run, traders like Soros and, more generally, Wall Street hedge funds, are likely to support the dollar. This will also be true if there is any kind of bad economic news.

But what are we seeing in Washington? Ever increasing deficits and insanity. If someone tells you they're a Democrat, send them to a psychiatrist.

This is hard to take. Short term, the dollar looks buoyant. Long term, there could be a breakdown in the dollar that could happen quickly. Prices of gold and stocks go up with monetary expansion. The world's monetary system is unstable unless everyone inflates along with the US, which has already expanded its potential money supply three-fold. So no currency seems safe, including the dollar.

So far, the international financial system has supported the dollar. But how long can a chimera last?

Whither Gold?

Gold went up today just four days after I blogged that I was mostly in cash. I just wrote a column for a popular local newspaper called the Lincoln Eagle that should come out in a few days and I suggested that there are four scenarios that might evolve: (1) bank failures/inflation; (2) deflation/inflation; (3) inflation/stagflation and (4) steady course. Jon Nadler of Kitco had suggested that we were in for a higher interest rate regime like we saw in the late 1970s and early 1980s, but I do not believe that it will be possible for the Fed to successfully execute a deflation or regime of high interest rates followed by a moderate (by 2010 standards, not by 1950 standards) re-inflation as was done under the Carter and Reagan administrations. It is likely that interest rate hikes will lead to stress on banks and additional unemployment. I do not believe that Obama is naive as was Carter to appoint a Fed chairman with the discipline to raise rates. Paul Volcker was exceptional and has not been equaled in the Fed's history. Even there, he reversed his monetarist policy by the early 1980s.

This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.

So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.

The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.

Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.

2007 Video on Dollar Collapse

This is a video about the potential, long run crash of the dollar. It was made in 2007 and the makers could not have foretold the banking crisis of 2008. In the short run, the Wall Street dollar bulls have won the battle, and even in the past few days the dollar has been rising and gold has been falling. If gold falls to the $900 range there will be a significant buying opportunity. Given the management of the dollar by central banks around the world, the status quo has not changed and may not change for some time. On the other hand, a dollar collapse could come at any time. At the same time, banking collapses could mean a rising dollar in the short term.

London Times on America's Feeble Dollar

The London Times has an excellent article on Obama's weak dollar strategy. The article notes:

"All of this means that investors do not believe that President Barack Obama will respond to the enormous pressure put on him during his visit to Beijing and take steps to strengthen the dollar. The president and Treasury secretary Timothy Geithner might talk the talk of a strong dollar but they walk the walk of a declining one. A weak dollar should lift exports and cut imports, which in White House terms means jobs for American workers. And it is jobs that the president asks his aides about first thing every morning. With reason."

The article notes that there are risks associated with gold investing, in particular the chance that the Fed will attack inflation. The article inaccurately attributes the Volcker Fed policy to Reagan. Carter appointed Volcker and he instituted his monetarist strategy during the Carter administration. Reagan allowed him to continue. But Volcker reinstated inflation in the early 1980s and the Reagan administration was for it. They called it "supply side economics".

A likely scenario is that Obama and Bernanke will resist limiting monetary expansion until a strong inflation is underway. There will be plenty of time to exit gold when they do exit. Even if they do exit, the credibility of the dollar has been permanently reduced. I'm not sure that even if the Fed strengthens the world will take the dollar seriously in the future.