The ‘gold bugs’ assert that at all times
and in all circumstances gold remains money. For some irrational reason
the ‘paper bugs’ cling to their increasingly worthless colored
coupons asserting their importance as currency.
The Great Credit Contraction
has begun and in the macro sense there is no practical solution to the end of
the current worldwide monetary system. But in the micro sense the
individuals and companies that will survive, thrive and prosper will be those
that are liquid. It will be those who can make payroll.
GOLD IS MONEY AND CURRENCY
On May 20, 1999, Alan Greenspan
testified before Congress, “Gold is always accepted
and is the ultimate
means of payment and is perceived to be an element of
stability in the currency and in the ultimate value of the currency and that
historically has always been the reason why governments hold gold.”
For these reasons gold, silver
and platinum belong in the cash portion of the balance sheet. The
precious metals are the ultimate form of currency. Unlike their
comptition, the colored coupons, the precious metals can never become
worthless, are always accepted and are the ultimate means of payment.
The ‘gold bugs’ will always be able to
purchase something while the ‘paper bugs’, if they have physical
notes and not mere digits in a database, are eventually left with an
instrument that only has a single use after defecation. What intrinsic
value!
GOLD ANTI-TRUST ACTION COMMITTEE
During the 1990’s Mr. Rubin had devised the
gold leasing scheme with the intent
being elucidated by Dr. Greenspan’s testimony in 1998,
“Nor can private counterparties restrict supplies of gold, another
commodity whose derivatives are often traded over-the-counter, where central
banks stand ready to lease
gold in
increasing quantities should
the price rise.”
GATA’s alleged central bank gold price suppression
scheme may include the COMEX’s participation. Mr. Robert Landis, a
graduate of Princeton University, Harvard Law School and member of the New
York Bar, has asserted that “Any rational person who continues to
dispute the existence of the rig after exposure to the evidence is either in
denial or is complicit.”
GATA alleges that the central banks have less than
half the physical gold claimed. The central banks carry gold in the
vault and gold out on loan as the same line item. In effect, they
report cash and accounts receivables as the same thing. Ever tried making payroll
with an accounts receivable?
INDIA’S PURCHASE
It seems some countries are getting a little nervous
and demanding their phsyical gold. For example, the IMF by-law F-1 states, “Gold depositories of
the Fund shall be established in the United States, the United Kingdom,
France, and India.”
With the lack of transparency it makes one wonder
whether India’s recent ‘purchase’ of 200 tons of gold
from the International Monetary Fund was a bona-fide purchase or the taking
of physical possession of ‘paper gold’ they had previously
purchase on the open market and whether this was done of the IMF’s
free-will or through coercion because of the ancient rule that possession is
9/10th’s of the law? Perhaps this is why India, not China, got to
purchase this large block of bullion.
But such is just speculation, like the tungsten rumors, based on
circumstantial research and there are no real credible and verifiable sources
that I have been able to find but it does highlight the issue: actual
physical gold is tremendously limited relative to the amount of colored
coupons.
ADVICE TO THE OIL MAJORS
Nearly a year ago on 16 December 2008 in Oil Majors Should Just Buy Real Gold I wrote:
Combined these five companies [Exxon (XOM), Chevron
(CVX), Total (TOT), British Petroleum (BP), Conoco Phillips (COP)] had
current assets exceeding $300B. … The entire eligible COMEX
stockpile represents an immaterial
0.36% of the current assets of the five oil majors. The
oil majors could drain the COMEX with a rounding error. It would be 14%
of what Exxon Mobil was spending per quarter buying back stock. Why buy
back stock when oil is so cheap compared to gold? Why not just buy
physical gold and truck it away?
What has happened since then?
At the end of Q3 2009 Exxon (XOM) had
$57.3B of current assets; Chevron
(CVX) had $35.5B in current assets with $7.6B cash on hand; Total (TOT) had
$48.4B in current assets and $13.8B cash on hand; British Petroleum
(BP) had $66.7B in current assets and the runt,ConocoPhillips
(COP), still possessed $22.3B in current assets. Combined these five
companies had current assets exceeding $250B and cash on hand exceeding $50B.
While the risk of a potential COMEX failure to deliver gold is a possibility
for brevity I will not explain the mechanics nor current state of the
warehouse.
The approximate two million ounces of registered
gold in the COMEX inventory represents about 62 metric tons or a mere $2.3B.
For compaision, Bloomberg reported on 17 November 2009
that The Bank of Mauritius bought 2 metric tons for about $71.7 million.
Mauritius had a 2008 GDP of $8.65B or about .5% of the 2008 total
revenue of the five oil majors.
On my article ‘How the Treasury Bubble Will
Burst and Why‘ at Seeking Alpha I received a comment from Alan
Brochstein, CFA and fellow Seeking Alpha Gold Standard Contributor who
provides analytical services for hire. He said, “Trace, sorry, but this
makes absolutely no sense…” This is not surprising considering
his 8 Dec 2008 article ‘Own Gold? Time to Fold‘
where he stated, “Gold remains a sucker’s bet…”
On 8 December 2008 gold closed at $772.25 and by 27
November 2009 gold closed at $1,177, a 52.4% gain. Not bad for a
different currency; it makes one consider whether the FRN$ is in hyperinflation.
PLATINUM AND SILVER
Platinum, a tangible asset, is incredibly safe and
has now, with GoldMoney, gotten more liquid. There is a miniscule
amount of platinum compared to the illusions in the liquidity pyramid.
For example, the entire
annual worldwide platinum production is valued at about $8B compared to
the five oil major’s $50B
of cash.
While no one really knows what the total above
ground silver stock is; Ted Butler, a noted silver analyst, suggests there are
about one billion ounces which is about $20B.
SHARE REPURCHASES
In 2008 the five oil majors repurchased about $54.2B of stock.
Exxon with $35.4B, Chevron with $6.8B, Total with $1.3B, British
Petroleum with $2.6 and Conoco Phillips with $8.1B. The average price
of gold in 2009 through October was about $941.
So let me get this right. Instead of holding increasingly worthless colored
coupons the oil majors could have diversified their currency holdings to
ensure they could make payroll and with about a third of what was spent on
the share repurchases could have bought the entire annual production of
platinum and the entire above ground stockpile of silver. Or assuming
the average price of gold they could have bought about 1,791 metric tons of
gold.
The 1,791 metric tons of gold would make the five
oil majors the fifth largest holder behind the United States, Germany, the
IMF and France, but who knows how much physical gold the Western central
banks really
have, and have about twice the 1,054 tons of the sixth place China.
At the current price of gold the $54.2B of stock
repurchases from five measly companies will only yield about 1,432
metric tons of gold or about 359 less tons than the hypothetical. For
comparison Venezuela is the 16th largest holder with 363.9 tons and the
United Kingdom is the 17th largest holder with 310.3 tons.
This is one reason the ‘new gold
monetarists’ should be taken seriously. Even on CNBC, a starving vampire squid ( Neilsen ratings are down 52%
year over year) which hates gold like werewolves hate silver, had a serious
discussion about the ‘new gold monetarists‘
which included the quote, “That is what the new gold monetarists are
saying. If you take all the world’s GDP and divide it by the
amount of gold that is above ground that is available then you get a price
that is somewhere between $11,000 per ounce and all the way up to
$50,000.”
CONCLUSION
Too many people have too much faith in worthless irredeemable
colored coupons and their companion digital counterparts. The Federal
Reserve and other central banks are failing with quantitative easing. And after all,
the worldwide monetary system is just a confidence game and when confidence
is lost it does not so much collapse as evaporate. For example, auction
rate securities, mortgage backed securities, Bear Stearns, Lehman Brothers,
AIG, the Kazakhstan tenge, the drooping Vietnam dong, the British Pound or the FRN$ (more than 50% loss in a year
is pretty bad!).
The current worldwide monetary system is failing.
Why will another fiat system not replace it? The market will not
permit such irrational behavior. The monetary authorities are on the
defensive. They have lost the confidence of the market and are unable to
regain it with more secrecy, more bailouts and more of the same. The
market is forcing them to do what everyone in the past has had to do.
They are being forced to show the market the money. Real money
and not some colored coupon currency. Money that is a real and tangible
asset that can be put in someone’s hand or trucked away to a different
vault.
Sure, what the new gold monetarists say seems
incredible and may lead some financial professionals to declare ‘this
makes absolutely no sense’. But this population of financial
professionals has been systematically miseducated to despise precious metals
and be ‘paper bugs’. But as confidence continues
evaporating those same professionals will demand that precious metals return
to the center of financial life. On the macro scene society will learn
some very real and very hard lessons. But on the micro scene there are
tremendous opportunities to benefiit from the largest transfer of wealth the
world has ever experienced.
The future is clear. Gold will return to its
historic role as the center of gravity for the Western and worldwide monetary
system. Sure, the Establishment, costumed officials and financial
professionals do not welcome the change. But it is not their choice
because the market will force their hand and the market is more powerful than
all of them combined.
After all, it will be the companies and governments
with the monetary metals in the cash portion of their balance sheet that will be able to make payroll
and those without will simply evaporate. The number one killer of
businesses is cash-flow. Remember the first rule of panic: do it
first!
DISCLOSURES: Long physical physical gold, silver, platinum and no
position the problematic SLV or GLD ETFs or XOM, CVX,
TOT, BP or COP.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies the
Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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