From copper nickel to gold dollar?

A lovely, cheeky idea from Antal E. Fekete in SafeHaven: have the Indian reservations switch from running casinos to minting gold coins, to rescue the integrity of the currency. Maybe PC considerations would inhibit a Liberty-Dollar-type Federal raid.

Interesting also that he echoes my "twang money" idea:

Thanksgiving 2007 is special because we are just re-learning the ancient lesson that no banking system can safely operate without gold. You cannot measure the quality and quantity of debt in terms of another, just as you cannot measure the length of an elastic band in terms of another.

Veneroso: up to half the gold has gone

GoldSeek (November 1) relays Frank Veneroso's assessment that central banks may have disposed of up to 50% of their gold bullion:

... The manipulation of gold prices was first noticed in the 1990s by Frank AJ Veneroso, one of the world’s top investment strategists. As more gold bullion came onto the market depressing the price of gold, Veneroso believed the central banks were its source.

When queried, central banks denied Veneroso’s assertions. Central bank records, in fact, showed their gold reserves to be stable. But Veneroso was right and the central banks were lying. The gold moving onto the markets was indeed coming from central banks via their co-conspirators in capping gold, the investment banks.

Investment banks were borrowing central bank gold at 1 %, selling it thereby depressing gold’s price and investing the proceeds in higher yielding government debt; and, as long as the price of gold moved lower, the profits of investment banks increased (see The Manipulation of the Gold Market, http://www.gata.org/node/11).

The International Monetary Fund was complicit in this deceit as IMF regulations allowed central banks to count gold “swapped” or “loaned” as still being on deposit in their vaults. Veneroso now believes that up to 50 % of gold reserves claimed by central banks have already been sold—a fact that will be instrumental in our collective bet against central banks in their house of cards...

... Veneroso believes central banks sold 10,000–15,000 tons, equal to 320,000,000 to 500,000,000 ounces of gold over the last 20 years. Just imagine how high the price of gold would be if the central banks had not sold this staggering amount.

Today’s $800/oz. gold is a bargain—as is $2,000/oz. or $3,000 oz. gold—a bargain that exists only because central banks literally sold thousands of tons of our gold onto the market in their attempts to prove gold a poorer alternative to debt-based paper currencies.

Over a year ago, Veneroso estimated central banks had less than three years supply left to cap gold’s price. He also predicted the central banks would capitulate before then, keeping what little gold they had left. When this happens, the central bank subsidy of gold will end and the price of gold will skyrocket.

On the same site, Adrian Ash (November 2) looks at gold's disadvantages and decides that it is best defined not as a commodity, but as a currency:

Given that gold doesn't pay you anything in yield, interest or dividends – and that it does not have any real industrial value – the "investment motive" for gold can only be explained as desire to quit other assets. Or at least, to hold an asset entirely free from what drives other asset markets up and down.

... perhaps the gold market says investors are looking for protection against falling bond, real estate and equity values – as well as a falling US Dollar and slumping US economy.

So they are buying protection ahead of time. And to do that, they're buying gold – a wholly different asset from everything else.

One for the speculators. Meanwhile, perhaps the non-rich among us should take the precaution of paying off overdrafts, credit card debts and any other loans that can be called in at short notice.

Buffett goes South and East

MoneyNews.com (Friday) reports on Warren Buffett's investments in Brazil and South Korea. Apparently the great man has made a pile in Brazilian currency but is now looking to switch to their bonds.

Abroad elsewhere, he's looking for high-dividend companies - a combination of the standard value investing formula and hedging against the dollar.

And so say all of us...

Investment experts Jim Rogers and Marc Faber agree with Jim Puplava that (a) the US will try to reflate out of its troubles, and (b) cutting interest rates to achieve this, will lead to worse trouble.

According to Bloomberg today, "Rogers said he is buying agricultural commodities and recommended investors purchase Asian currencies including the Chinese renminbi and the Japanese yen.

Faber, publisher of the Gloom, Boom & Doom Report, said he is buying gold."

DOW 9,000 update

At the time of writing, the Dow stands at 13,493 and gold at $713.70/oz. Adjusted for the change in the price of gold, the Dow has fallen by just over 10% since July 6.

Dow 9,000 prediction revisited

September 8: since August 31, the Dow has slipped further to close at 13,113.38 on Friday; gold has risen to $701 (London PM gold fix). Adjusted for the rise in the price of gold, the Dow is now the equivalent of 12,117.25. So in terms of Robert McHugh's prediction, it has lost 10.98% since July 6. Time for another quiet release of gold by central banks?

The Dow 9,000 prediction

In SafeHaven on 9 July 2007, Robert McHugh predicted the Dow would drop to 9,000 "over the intermediate-term, although if the PPT responds by hyperinflating the money supply, it could be 9,000 in real dollars (gold adjusted), not nominal." This would mean a drop of 33.88% from its 6 July value. Others have also forecast a fall in the Dow and/or the dollar. I plan to test this assertion from time to time.

The situation is complicated by monetary inflation in the USA, and in other countries that are trying to maintain the exchange rate of their currencies against the dollar, in order to protect their trade with America. So we'll take the Dow as it was on 6 July (the chart McHugh was using) and adjust for relative currency movements and the price of gold.

Starting points for 6 July 2007: the Dow was 13,611.69; gold (London AM fix) $647.75/oz.; using the interbank rates as given by O&A, one US dollar bought 122.7160 Japanese yen, 0.49630 British pounds, 0.73450 Euros, 7.60760 Chinese yuan/renminbi.

Situation as at c. 7 a.m. GMT 31 August 2007: Dow 13,238.73; gold $666.30; dollar buys 115.73200 Japanese yen, 0.49660 British pounds, 0.73280 Euros, 7.55580 Chinese yuan/renminbi. Adjusting for movements in currencies and the price of gold, we reinterpret the Dow today as being worth:

12,870.16 against gold
12,485.29 against the Japanese yen
13,246.73 against the British pound
13,208.09 against the Euro
13,148.59 against the Chinese yuan/renminbi

At present and in purchasing terms, the Dow since 6 July 2007 has fallen most (8.275%) against Japan, next against gold (5.45%), then China (3.40%), Europe (2.97%) and the UK (2.68%). I see this last as a measure of Britain's own weakness.

So within two months, and against the yen, the Dow has already fallen by about one-quarter of McHugh's predicted overall drop.

September 8: since August 31, the Dow has slipped further to close at 13,113.38 on Friday; gold has risen to $701 (London PM gold fix). Adjusted for the rise in the price of gold, the Dow is now the equivalent of 12,117.25. So in terms of Robert McHugh's prediction, it has lost 10.98% since July 6. Time for another quiet release of gold by central banks?

September 18: At the time of writing (6 p.m. British Summer Time), the Dow stands at 13,493 and gold at $713.70/oz. Adjusted for the change in the price of gold, the Dow has fallen by just over 10% since July 6.

September 21: Dow currently 13,839.54, gold (10.03 a.m. NY time) $736.30. Adjusted for the change in the gold price, the Dow would be worth 12,175.15, or down 10.55% since July 6.

Putting it another way, gold has risen 13.67% against the dollar in 77 days; that's getting on for 90% annualised. Is this lift-off for Doug Casey's trip to the moon?

September 29: July 6 to present: Dow up from 13,611.69 to 13,895.63; gold up from $647.75/oz. to $743.10. So the "gold-priced Dow" is down 11.01% in 84 days.

Annualised equivalent: gold increasing by c. 82% p.a., "gold-priced Dow" falling 40% over a year. Will these trends continue?

October 27: The Dow is currently at 13,806.70, up slightly from its July 6 valuation of 13,611.69. But gold has risen from $647.75 to $783.50 in the same period - up 21% in 113 days, or around 85% annualised. This means the "gold-priced Dow" is worth 11,414.54. At this rate, Robert McHugh's prediction will be fulfilled by March 8 next year.

November 2: Dow at 13,595.10, gold $806 per ounce. Since July 6, Dow has appeared to hold its ground, but the "gold-priced Dow" has dropped to 10,925.83 - a fall of over 49% annualised. And at this rate, gold will have doubled in dollar terms by July 2008.

November 7: Dow at 13,660.94, gold $833.80/oz. "Gold-priced Dow" has therefore gone down since July 6, from 13,611.69 to (effectively) 10,612.71, a drop of 22% (or 52% p.a. annualised).

To put it another way, the Dow has stood still and gold has risen 29% (or 112% p.a. annualised) over the last 123 days.

January 13, 2008: Last year, Robert McHugh predicted that the Dow would drop to 9,000, if not in nominal terms then in relation to gold. The Dow was then 13,238.73 and gold $666.30/oz, which means that it took 19.87 ounces of gold to buy the Dow. McHugh's prediction implies the Dow dropping to 13.51 gold ounces (a fall of 6.36 ounces).

The Dow is now 12,606.30 and gold $894.90, so the Dow is now worth 14.09 gold ounces. It has fallen by 5.78 ounces out of the predicted 6.36, so the prediction is 90.9% fulfilled so far.

McHugh will be fully correct if, for example, the Dow remains unchanged and gold rises to $933/oz; or if gold stalls, the Dow will need to fall to 12,090.

January 18, 2008: Dow 12,082.31, gold $880.50/oz, so the Dow is now worth 13.72 ounces of gold as against Robert McHugh's prediction of 13.51.

Nearly there, and the new announcement of a $145 billion reflation may push gold that extra yard.

January 22, 2008: As at the time of writing, the Dow is 11,820.24 and gold $875.90/oz. The Dow/gold ratio is therefore below 13.51 and has (perhaps fleetingly) fulfilled Robert McHugh's prediction.

Whether the Dow falls below 9,000 nominal in the course of a severe recession is something we shall have to see.

Twang money

Richard Daughty (aka The Mogambo Guru) writes in The Daily Reckoning (21 August):

The big, big problem with the whole subprime/CDO/Armageddon market thing is that while the values on these assets can go down, the debts incurred to buy the assets don't.

Quite so. And since much of our money has been created ex nihilo by banks, then presumably it can also be reduced quickly by a credit crunch, so we have potential volatility in the money supply as in other things. Assessing things in money terms now seems to be like going to a tailor who makes all his measurements with an elastic band.

Sound counsel

Today's Daily Reckoning (I've just received it by email) offers some tips for managing your wealth in the current circumstances:

When trends turn negative, it is better to buck them...to head in a different direction. This is particularly so when the bad trends approach their inevitably catastrophic consequences.

That is what we think may be coming soon - with falling asset prices and falling standards of living in America, and probably in most of the other Anglo-Saxon countries. This is not a time to 'go with the flow,' in other words. The flow will not be going where you want to get.

As a practical matter, the course of action that is best in easy times is essential in hard times. Here, we spell it out for you:

First, you should focus on your own private business...or your own source of revenue. (Bonds, rents, retirement fund, dividend yields...whatever.) Make sure it is solid, protected, efficient and productive. Make sure it is something you understand...something you can see with your own eyes, run by people you trust. If you don't really understand it...or if it involves any form of "enhanced leveraged credit"...dump it.

Second, own the property you want to own, not the property you're hoping will go up in price. Begin, of course, with your own house. Is it the house you really want to live in for the next 5, 10, 20 years? Think long-term; the housing slump could easily last 10 years or more. Then, think about the other property you own. Would you still want to own it is if it went down 30% in price? If not, you might want to reconsider.

Third, make sure your savings and investments are diversified out of the dollar. Most experts now expect the buck to stabilise, but you can't be sure. Ten years from now, the dollar could easily be worth only 10% of its value today. Put some money into euro and yen deposits. Put some into gold too.

Fourth, once your finances are secure you can begin to think about speculating. But don't confuse speculating with investing. You speculate for entertainment, not as a serious way to finance your family. Are stock prices going up or down? You can't know. Nor can you know what prices land, commodities, currencies or anything else will sell for in the future. Don't speculate with money you're not prepared to lose.

This all seems pretty sensible to me, especially since the Dow's dropped 300 points.

UPDATE

Dow down 387 at close.

An alternative reserve currency?

As America's balance of trade continues to weaken it, and the dollar's value erodes, the question arises, what could replace the greenback as the world's trading currency?

Assuming that gold reserves are relevant to trust in the currency, it's interesting to note that Germany has almost half as much as the US, and its balance of trade is not so unhealthy. Interesting also that the German mark, although currently in a fixed exchange rate with the Euro, still has a nominally separate existence.

Julian Phillips (GoldForecaster.com) says in his 29 June article, "Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it."

Here are the four greatest world holdings of gold (June '07 World Gold Council figures):

United States 8,133.5 tonnes
Germany 3,422.5 tonnes
IMF 3,217.3 tonnes
France 2,680.6 tonnes

France has a negative balance of trade, and has reduced its gold hoard by around 11% since 2000, but nevertheless, between them the last three on the list above have gold reserves totalling 14.5% more than the US. Politically, France and Germany are the Western core of the EU. If things change radically, who knows what the new world order may look like?

The gold question

Here's a couple of articles by Julian D. W. Phillips at GoldForecaster.com. They're extracts and the entire text is only available if you subscribe to the site.

But because they are freebies, and have much interesting and relevant information, I reproduce the extracts here. The first is a response to the recent sale of some gold reserves by Switzerland. It appeared in BullionVault on June 29:

WITH THE Swiss central bank selling 250 tonnes of its gold reserves, the classic question has to be asked again, what is the price of gold? If we answer that it's worth a certain number of Dollars, then we have to ask the next question:

Just what is the price of a Dollar?

Is the US Dollar such a reliable a store of value that it can be used as a measure of gold's value? To ask would be to question the very foundation of the paper currency system. Can one trust the Dollar or even the international monetary system? It’s all a question of degree.

The US government itself holds mainly gold in its reserves, because it is the issuer of the world’s reserve currency. This does imply that it is completely dependent on its own currency, the Dollar, in the global economy. As the foundation of the world’s monetary system, should this currency lose the confidence of its own or other nation’s citizens, the international money system – and trade relations across the world – will be damaged severely. It is thought that this process is well under way.

The Eurozone community’s Central Bank drew off 15% of its reserves in gold from its members. This does not mean it intends to only hold 15% of its reserves in gold, nor does it imply that there is a rigid exchange rate between gold & the Euro. But the question of how to measure 15% of reserves is raised.

From the beginning of the Central Bank Gold Agreement, the European Central Bank decided to sell a fixed tonnage of 235 tonnes of the reserves it inherited from its member banks in return for paper currencies. Ostensibly, this was to keep gold's proportion in the ECB's reserves roughly fixed. The ECB is fully aware of the dangers of measuring gold in the Dollar – and in the Euro for that matter – but for the sound functioning of our paper-currency world, it is crucial that gold be subject to measurements in paper currency terms, and not the other way around.

With gold now higher from seven years ago, bullion is now around 25% of the ECB's reserves. Perhaps that's a level the Frankfurt policymakers prefer?

Germany, who gained the right to sell up to 500 tonnes of its gold under the CBGA, has not taken this option yet, citing that “gold is a useful counter to the swings in the Dollar.” Of course, a doubling in the price of gold since making this decision is paying off handsomely. We commend the pragmatism of the German Bundesbank; its reserves are there for a rainy day. They are not a pension fund scheme requiring profitable investment.

Certainly, growing a nation's reserves through investment and trading can be a secondary objective, but it should never take over first place. The reserves have to be credible in times of distress, and they have to acceptable to all trading partners.

Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it.

Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian Lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest. After all, adding noughts to a currency doesn’t make it more valuable. It’s only the buying power that counts.

So will the Dollar today, with interest added over the next decade or two, be worth more than today’s equivalent in gold in a decade or two?

The Swiss Franc has always been one of the most stable of the globe’s currencies, based upon one of the most stable and constant of economies. In times of global war or uncertainty, this peaceful anti-war country becomes itself a ‘safe haven’ for foreigner’s savings. So it is almost a source of safe money and financial security in itself.

The Swiss concept of a rainy day contains far less moisture than most other countries fear. Switzerland is therefore financially more secure and less dependent on its reserves than other countries, whilst also being small enough to adjust its reserve holdings within the foreign exchange markets capacities at present. With the mix of gold and currencies in the Swiss National Bank's portfolio, you can be sure they have covered their backs on the risk front and stand to gain either way the cookie crumbles.

It is of little account whether the Swiss sell some more gold or not. We see their latest move – announcing the sale of 250 tonnes by 2009 – as a gesture of support for the paper currency system. The SNB no doubt sees it as a gesture to protect its overall reserves portfolio.

Again a key question: Why sell gold at all – or more pertinently, why sell a little gold and retain sufficient for rainy days ahead? It is to ensure the retention of value in the overall portfolio. The SNB is not the getting rid of the gold content therein.

Clearly Switzerland – with its constantly sound position as banker to the wealthy of Europe, alongside its dependence on the banking industry – has a vested interest in a mix of global paper currencies. It retains a greater vested interest than those nations with an unsound Balance of Payments, smaller reserves, and facing greater economic risks in the global economy. Besides the United States, nations now suffering a poor balance of payments include Australia, New Zealand, Britain, France, Italy, Greece, Spain, Czech Republic, Poland, India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa and many others.

The big question: will gold have a greater real value in times of distress than yield earning national currencies? In the last world war, what value did the Deutschmark – or indeed the US Dollar –have internationally? Remember, forgery is one of the acceptable weapons of war. And what value did gold have? No contest.

With economic power shifting Eastwards, and the Asian nations growing away from their dependence on the US economy, it is inevitable that reserve currency dependence such as we are used to with the Dollar is now changing. It is fragmenting, with other currencies coming onto the scene and with national interests clashing and exerting pressure on the different leading world currencies.

Should these pressures grow beyond a certain almost indefinable point, then paper currencies will not garner the same level of confidence as they do now, and the unquestionable international reliability of gold as a measure of value will ascend further still.

Prime Minister Brown of the UK went the same way that Switzerland is, once again, going to go. Looking for a more profitable content to the UK’s gold and foreign exchange reserves in 1999, the UK paid a heavy price that continues to grow as the gold price rises. Did Brown act for political reasons in support of the Euro and the more controllable paper currency system? We believe Switzerland may be following the same line of reasoning as Brown did then.

After all, if we measured the proceeds achieved from the last sale – and the total value plus the interest thereon – what would the shortfall be against today’s value of gold?

The mix of foreign exchange and gold reserves is essentially a gamble on the future.

The second is issued today on GoldSeek:

As the move to keeping what nations have already Protectionism is in full swing. This will inevitably disturb the currency world, who quite rightly will look to something that will protect them from the rising volatility in the currency markets alongside seeping confidence from the U.S $. This ‘something’ will include gold and gold investments. Both Protectionism and Capital Controls will enter the scene as this happens as testified to by history.

Will the States do such a thing? Of course it would. The games played to prevent China acquiring U.S. oil companies with reserves in Central Asia demonstrated this aptly, last year. U.S. patriotism will ensure this happens wherever it is obvious. The necessary legislation is in position already, albeit in a seemingly unrelated form. It is always hard for Politicians to pass unpopular or freedom-inhibiting measures, so they are best attached to causes that persuade individuals and Congress to accept such limitations, such as the recent powers over troublesome individuals in Iraq. This paves the way for full control over financial markets of all types. Here is an example of how a popular cause can be used in this way from the White House itself.

“Pursuant to the International Emergency Economic Powers Act, as amended (50 U.S.C. 1701 et seq.)(IEEPA), I hereby report that I have issued an Executive Order blocking property of persons determined to have committed, or to pose a significant risk of committing, an act or acts of violence that have the purpose or effect of threatening the peace or stability of Iraq or the Government of Iraq or undermining efforts to promote economic reconstruction and political reform in Iraq or to provide humanitarian assistance to the Iraqi people……….. In these previous Executive Orders, I ordered various measures to address the unusual and extraordinary threat to the national security and foreign policy of the United States posed by obstacles to the orderly reconstruction of Iraq, the restoration and maintenance of peace and security in that country, and the development of political, administrative, and economic institutions in Iraq.

My new order takes additional steps…………by blocking the property and interests in property of persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to have committed, or to pose a significant risk of committing……… The order further authorizes the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to designate for blocking those persons determined to have materially assisted, sponsored, or provided financial, material, logistical, or technical support for.

I delegated to the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, the authority to take such actions, including the promulgation of rules and regulations, and to employ all powers granted to the President by IEEPA as may be necessary to carry out the purposes of my order. - “ GEORGE W. BUSH “

Such moves seem reasonable in this case. Our reason for the inclusion of this quote is to clarify just how quick and easy it is to impose restrictions on the spending of the U.S. $ in the hands of any person, institution or nation, not acceptable to the U.S. Administration, [whether he be a foreign national or a U.S. citizen, just as it is in any other nation’s hands [Whether it be Germany, or China itself or any other nation – this is the power a politician has always].

Capital Controls

In all the historic instances of either Protectionism or Capital Controls, but in particular Capital Controls, such measures were and can be imposed overnight and became an instant unchangeable reality. Protectionism appeared to be the most reasonable and less dramatic but produces softer but similar consequences in each case. Applied globally [and nations hit, usually respond by imposing their own protectionist measures] they rupture the smooth flowing of trade and finance.

Capital Controls are more draconian than Protectionism however broadly spread, causing huge swings in currency values, so are halted as quickly as possible so as not to damage what is left of a nation’s economy. However, in the case of Britain, where a dual currency system was instituted it stayed for a couple of years. In South Africa where Exchange Controls have been present for more than 30 years now, the Capital Control component lasted for around 20 of these years. In both cases a main component of these controls covered investments of all kinds, loans and any transaction of a Capital nature. In both cases the “discount” on the value of the sales of shares for the repatriation of Capital reached 30%.

Bear in mind that as far as we can see ahead Asian and other nations’ surpluses will continue to burgeon. As they become so bloated that they pose a threat to the $ by the sheer risk of their movement from the U.S. Consequently the possibility of even a partial exit of foreign nation’s surpluses from the $ becomes almost inevitable. So, the nation will, at some point, just have to impose Capital Controls, if only over the removal of foreign nation’s surpluses from the Treasury market.

If such Capital Controls were imposed in the U.S., which would be an almost certainty at some point in the future as money floods from the country, the entire global money system would be irreparably damaged and a flight to hard assets [lead by gold, silver and other precious metals] certain. The break in confidence in currencies themselves would be savage.

Much to chew on here.

Poll update

Early responders seem to prefer gold and silver to foreign currencies, as stores of value. As Shylock correctly pointed out, "thrift is blessing, if men steal it not", and the fear of inflation's theft appears to be greater than the promise of interest on foreign bank accounts. The "breed of barren metal" is winning at the moment.

Please vote in the polls opposite.

Poll: how would you hedge against a dollar fall?

...and for extra marks (especially if you're putting your money on it!), let's see what currency or precious metal looks like the best store of the value of your dollars.

Warren Buffett recently revealed he's hedged against the greenback, and gold and silver bugs are contesting the merits of their respective hoards. If your preference is for currency but you wonder about the backing, remember that Germany has the world's second-largest stock of gold, whereas Switzerland and the UK have been persuaded to get rid of about half their gold holdings since 2000.

Meanwhile, Japan and China are both struggling to hold their currencies down, to protect their export markets. Russia seems keen on claiming half the Polar region and is already able to use its energy supplies as an economic weapon. India is developing fast, and may turn out to be an interesting rival for China.

Here's our starting point today, using the figures from the Currency Converter widget on the sidebar. $1,000 will currently buy:

729.74 Euros
1,427.25 German Marks (there's a glitch in the currency converter, so I've done this in two stages)
119,080 Japanese Yen
7,581.23 Chinese Yuan or Renminbi
492.40 British Pounds
40,383 Indian Rupees
25,548.20 Russian Roubles
1,203.70 Swiss Francs

An ounce of gold costs $665.03
An ounce of silver costs $12.92

Where would you hold your savings until the New Year?