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By Michael J. Kosares
"Lenin was certainly right, there is no more positive, or
subtler, no surer means of overturning the existing basis of society than to
debauch the currency...The process engages all of the hidden forces of
economic law on the side of destruction, and does it in a manner that not one
man in a million is able to diagnose." -- John Maynard Keynes
Neither Keynes nor Lenin would have envisioned currency debasement on
a global basis yet that is exactly where we find ourselves today. As
mentioned in last month's The
Gold Owners Guide to 2013, it is as if John Law had been
reincarnated simultaneously in every major nation state in the world. At this
stage, it is difficult to gauge the potential effects though, as you are
about to read, there is plenty of speculation. Though the price of gold
remained range bound this past January, global demand for coins and bullion
has been anything but restrained. The U.S. Mint reports the highest monthly
sales ever for the Silver Eagle in January and the highest monthly total for the
Gold Eagle in over two years. Similarly ETF gold holdings are up about 12%
since last August reflecting strong interest among financial institutions and
funds. Though Keynes was right about currency debasement, he missed the mark
on the public's ability to identify the problem. Apparently, a good many
understand the problem all too well.
Short & Sweet
Reuters reports that "the Russian central bank will continue to
buy gold as it seeks to diversify its foreign reserves away from paper assets
it views as risky".......Russia increased its gold holdings in 2012 to
958 tonnes, a significant 8.5% increase...........................Currency Wars author, James
Rickards says that "late this year or early 2014, the Chinese will
announce 'we've got 3000 tonnes or maybe 4000 tonnes." According to the
last report issued by the World Gold Council China's gold reserves are now
1054 tonnes. Chinese authorities have targeted a future national reserve of
4000 to 6000 tonnes.......................Along these lines Stephen Leeb
(Leeb Capital Management) says "China could (already) have the second
largest gold reserve in the world, even ahead of Germany...They are importing
as much as they can without trying to disturb the price of gold. You won't
believe what's going to happen. I'm telling you in 3 years people  will not
believe the price of gold."...........................In the "Gold
Owner's Guide to 2013" released last month, I mentioned the global
predisposition to print money as one of the disturbing trends to monitor for
the new year. That warning was unexpectedly echoed by Bundesbank chief, Jens
Weidman, who went public in late January about the dangers of "a politicization of exchange
rates."....................My old friend, cartoonist Ed Stein, weighs in
on the issue to the left. His cartoon reminds me of Richard Russel's
oft-cited dictum (with reference to the Federal Reserve): "Inflate or die!"..............Overall,says
Deutsche Bank, we believe that the microeconomic environment for
gold is turning more positive and forecast prices to exceed $2000 per ounce
in the first half of 2013.....We believe the low-interest rate environment is
likely to continue to enhance gold's attractiveness given the negligible
opportunity cost and longer term fears regarding adequate stores of value and
value/wealth preservations."............George Soros once again upped
his position in the SPDR Gold Trust in the third quarter (2012) to $215
million, a 49% increase in his holdings...........................William
Kaye who once managed the arbitrage position for Paine Webber and now runs
Hong Kong's Pacific Group says, "Gold, the way we look at it, is
anywhere from being undervalued to being seriously
undervalued. We're in the early stages, in our judgment, of what would likely
be the world's largest short squeeze in any
instrument.".....................Reports of very strong physical gold
and silver demand keep cropping from a number of sources in various location
around the world......................MoneyNews
reports that a handful of billionaires are selling heavily into the latest
stock market rally. Warren Buffett, it reports, is selling U.S. stocks at an
"alarming rate.".....................Speaking of stocks, Gloom, Doom and Boom's Marc
Faber believes we may be approaching a 1987-style bubble-top and crash in the
stock market. As a result he says he is "selling shares. . .because
euphoria is building.".......................In the "this is bad as
it gets" category, Zimbabwe, the country most famous these days for the
hyperinflationary destruction of its economy, now has a grand total of $217
left in the government's treasury. In a classic example of understatement,
authorities said, "The government finances are in paralysis state at the
present moment. We are failing to meet our targets."
(Gulp)................PIMCO's Bill Gross: "The US balance sheet, its
deficit, and its 'fiscal gap' is in flames and that its fire department is
apparently asleep at the station house." And the transfusion doesn't to be reaching the
patient...................
The top five riskiest countries in the world are in order Greece,
Argentina, Cyprus, Pakistan and Venezuela. The United States, it will
surprise many American fiscal conservatives, ranks 65th and is situated among
the least risky nations. The Nordic countries are the least risky - Denmark
(66th), Finland 67th) Norway (68th) and Sweden
(69th).......................Jim Rogers: "If gold goes down I
hope I'm smart enough to buy more. If it goes down a lot, I hope I'm smart
enough to buy a lot more." ........................Investment banking
giant JP Morgan says that gold will trade at $1800 by mid-2013 the result of
mining crisis in South Africa, monetary stimulus in U.S., Japan and Europe
and the risk of war in the Middle East......................By the way, with
all the talk in the gold industry about the temporary shelving of Basel
Accord adjustments to accommodate use of gold as collateral, we forget that
J.P. Morgan implemented a "gold as collateral arrangement" with its
counterparties in 2011 and is actively marketing the program globally. It is
also taking gold as collateral in private loans with wealthy
individuals...............In early January, JPM sold $35 million in notes
tied to the gold price. The promised yield is three times the gain in the
price of gold up to 15.6% with no protection in capital losses due to a
decline in the price. By tying the notes to the price of gold, JPM offers an
extra layer of protection to bond holders concerned about being repaid in
depreciated dollars -- a sign of the times................Anyone remember
James Dines? Here's his latest from an interview at King World News:
"The function of gold is that of a circuit breaker, protecting against
excess printing of paper money that causes an inflation, which steals
proportionately more from the poor than it does the rich. The Fed is actually
in charge of the blood bank here. In effect, the Fed is Dracula in charge of
the blood bank."....................................Also from Dines:
"The US gold at Fort Knox, Kentucky, is priced at priced by America at
$42.22, which is more 'Alice in Wonderland' fantasies. You can just see how
they lie and play tricks, and it's your warning to do something to protect
yourself. Adding a little inflation to the economy is wrong. Deflation cannot
be healed by applying its cause. So we are headed for a much more serious
result of deflation which could be a
hyperinflation."........................Michael Belkin, who counsels
some of the biggest hedge funds and once worked at top government security
dealer, Salomon Brothers, describes the mechanics of money printing:
"How this works is the Treasury issues debt, the government securities
dealers buy the debt at auction, and then the Fed comes in and buys the debt
from the government securities dealers. That's
what debt monetization is. So when Salomon Brothers bought $5 billion of the
2-Year Notes at the auction, and then the Fed came in and did a coupon pass
and bought $2 billion of that, they credited Salomon's account with $2
billion. That's counterfeited money. That's brand new, high-powered money. I
had some mentors that were former Fed officials so I have a pretty cynical
view on this whole process.".............From George Milling Stanley formerly
the World Gold Council's managing director of government affairs and now an
independent consultant: "There is still among most European central
banks, even in those that are facing major economic problems, a sense that
selling gold would undermine the faith in the government and the country.
People feel better about buying the bonds of a country if there is gold that
might potentially be unlocked to back them in the event of a crisis
happening."................MK
The Yellow Brick
Road
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Quote of the month
"You see,
Maria, I want to tell you I buy gold because I am fearful. I am sorry to
say, Maria, you do not own any gold and
you are in grave danger because you dont own any gold."
-- Gloom, Doom and
Boom's Marc Faber
in response to CNBC's Maria Bartiromo's asking him why he will never stop
buying gold.
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Overleveraged
governments cause inflationary crisis, flight to gold
"If you look back
through time at inflationary crisesfrom
ancient Rome, to Ming China, to revolutionary France and America or to Weimar
Germanyyou'll find that
uncontrolled inflations are caused by overleveraged governments which
resorted to printing as the easiest way to avoid explicit default (whereas
inflation is merely an implicit default). Some argue that equities hedge
against inflation because they are a claim on real assets, but most of the
great bear market troughs of the 20th century occurred during inflationary
periods. A more obvious inflation hedge is inflation linked bonds, but
governments can default on these too. More exotic insurance products like
sovereign CDSs, inflation caps, long-dated swaptions or upside yield curve
volatility all have their intuitive merits. But they all come with
counterparty risk. Physical gold doesn't. Indeed, during the '6000 year gold
bubble' no one has defaulted on gold. It is the one insurance policy which
will pay out when you really need it to." -- Dylan Grice, Societe
General (now with Eidelweiss)
Not to worry
"[Gold is in] a secular bull market. That as long as the central banks,
do not take steps, which I do not think they will, to stop printing money,
and as long as real interest rates are not positive, the conditions continue
to be very good for gold. At some point, either the price (of gold) goes
through the roof and the movement becomes parabolic, and that would indicate
the end is near, or the central banks change their tune. But they don't seem
inclined to do so. So as long as that (money printing) continues I think it's
positive for the price of gold. Every now and then it will be weak for
whatever reason, but as long as conditions are good one should not worry. I'm
not selling any of the gold I own." -- Jean Marie Eveillard, First Eagle
Fund
Best analysis of
Germany's gold repatriation
"We noted that it
is going to take 7 years or 10 shipments a year to move it to Germany. This
is odd because it can be done much faster. Are they allowing the banks from
which it is being drawn to pull it back from those to whom it has been
leased? If this is the case and they have to go out and buy the gold to
supply Germany with, will we see the three central banks [the Fed, the Bank
of England and the Banque de France] enter the open gold market as buyers of
the gold they cant
access in that time or has seven years been decided on because this matches
the maturation of the leases? " Julian Phillips, The Gold Forecaster
Editor's note: Of all the commentary I have read on
the repatriation of German gold, the one above by Julian Phillips comes
closest to my view on the subject. In terms of impact on the market, I rank
the decision to repatriate right up there with China's decision several years
ago to purchase gold on the open market and keep its gold production within
its borders. The two actions together will put a floor under the price as
bullion banks responsible for returning gold deposits will likely enter the
market on price dips. Phillips takes the discussion a step further:
"As we said above, the
move of this gold to Frankfurt will allow time to ensure the central banks
where the gold is held, to get hold of the gold if they do not have it at the
moment. The prospect of developed world central banks now competing with
those of the emerging world in the gold market may well start the next leg of
the gold bull market because this new, persistent, price-insensitive buying
has the power to take gold to a whole new level! We watch to see. If this
does happen, then the whole nature of gold in the money system will change
even before the changes are officially accepted. Gold will be in a de facto pivotal position in the monetary
system again. It will be a short time from that point before it is officially accepted then. The way will have been
paved for China to arrive on the scene and gold to have a vital function in
the monetary system between two very different and unconnected, politically
and economically, power blocs, the developed world and the emerging world with
China as its hub. The last time the world was divided on this basis was at
the start of both world wars. The consequences to the monetary world then
were so devastating and saw the destruction of national currencies on both
sides, in Europe."
Gold follows monetary
base over the long run
The Federal Reserve has increased its balance sheet to $3 trillion, and
announced that it would continue to add $85 billion per month in various
forms of government paper. Federal Reserve assets are important because they
add to the monetary base. When people talk about printing money, it shows up
in the monetary base. There is a direct correlation over the longer term
between increases in the monetary base and the gold price as shown in the
chart below.
Gold - a currency
without a printing press
"For more than a
millennium, gold has served as a store of value and a medium of exchange. It
has broadly managed to maintain its real value, even as various currency
regimes have come and gone. The reason is that the supply of gold is not at
the whim of any governmental power; it is fundamentally supply constrained.
Total outstanding above-ground gold stocks the amount that has been extracted
over the past few millennia
are roughly 155,000 metric tons. Each year mines supply roughly 2,600
additional metric tons, or 1.7% of the outstanding total. This is why gold
can be thought of as the currency without a printing press.
The downside of gold is that
it generates no interest. One ounce of gold today will still be only one
ounce next year and the year after that. Because of this, gold is sometimes
referred to as a non-productive financial asset, but we feel this
characterization is misleading. Rather, we believe gold should not be thought
of as a substitute for equities or corporate bonds. These have equity or
default risk and therefore convey risk premiums.
Instead, gold should be
thought of as a currency, one which pays no interest. Dollars, euro, yen and
other currencies can be deposited to receive interest, and this rate of
interest is meant to compensate for the decline in the value of paper
currencies via inflation. Gold, in contrast, maintains its real value over
time so no interest is necessary." -- Nicholas J. Johnson & Mihir P.
Worah, PIMCO
Gold and silver
bullion coin sales surge end of January
"A massive 7.4
million Silver Eagles were purchased from the U.S. Mint in January,
considerably higher than the previous record from early 2011. After halting
Silver coin production/sales for over a week, the Mint re-opened yesterday
and demand once again surged. Having almost doubled from the first week in
January, there remains two more days before the book is closed on January's
sales. At 140,000 ounces, the Mint has also sold the most ounces of gold in
January in almost three years, suggesting the rising 'currency wars' are
stoking people's ongoing rotation from paper-to-physical assets as their
'wealth' slowing loses its value." -- Tyler Durden, ZeroHedge
Bundesbank president
talks gold
Concrete objects
have served as money for most of human history; we may therefore speak of
commodity money. A great deal of trust was placed in particular in precious
and rare metals gold first and
foremost due to their
assumed intrinsic value. In its function as a medium of exchange, medium of
payment and store of value, gold
is thus, in a sense, a timeless classic. Dr. Jens Weidmann, President,
Bundesbank
Twelve years into the
millennium - 612.46% return
The year 2012 was the
12th year in a row in which gold rose compared to the US dollar. During this
millennium, gold has risen 612.46%, at an average annual rise of 16.72%. This
was also the third year in a row in which the world's central banks added to
their gold reserves, after decades of being large net sellers of the yellow
metal. This cannot be viewed as a normal commodity bull market, but rather as
gold slowly returning to its historical role as the universal medium of
exchange, store of value, unit of account and ultimate extinguisher of debt.
In other words: money. - Dr. Saifedean Ammous, Lebanese American University
$1800, $1900, $2200
per ounce price predictions
With the Bank of Japan now jumping into the money printing pool with the U.S.
Federal Reserve and the European Central Bank (ECB), conditions remain ripe
for continued purchases by emerging market central banks and individual
investors as they all endeavor to retain the purchasing power of their money.
Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS,
said "Policies of ultra-low interest rates across the Western economies
will persist in 2013. This will continue to support investor interest in
gold." Klapwijk anticipates gold prices to move back into the $1,800 an
ounce range. The London Bullion Metals Association recently said that gold
could hit $1,900 an ounce this year. Money Morning's Global Resources
Specialist, Peter Krauth, believes it is quite likely gold will see $2,200 an
ounce in 2013. The reasons he cites includes the aforementioned money
printing and central bank buying of gold along with the supply/demand
fundamentals. -- ETF Daily News
The History of Gold
Charles DeGaulle's
famous "Criterion" speech
Editor's note: I post this excerpt from Charles
DeGaulle's famous "Criterion" speech nearly 48 years to the day
from when these words were first uttered at the Palais de l'Élysée. There is
an old saying that the more things change, the more they stay the same, and
to the modern ear DeGaulle's speech on gold carries the ring of familiarity.
When the Bundesbank, Germany's
central bank, announced its repatriation of gold reserves held overseas last
month, a number of commentators likened the situation to the assault on the
U.S. gold reserve in the 1960s. That "repatriation" of European
gold, led by France, laid the foundations for gold's eventual bull market in
the 1970s. Six years later, Richard Nixon announced the first formal
devaluation of the dollar. It was not long until that devaluation fed through
to virulent price inflation.
Today, as this issue
emphasizes, most of the world currencies are in the process of being
similarly debased. Though the policy is aimed at providing an export
advantage, the net result is likely to be a universal reduction of purchasing
power for the citizens of each state. In other words, inflation and gold
demand could rise simultaneously in most of the richest nations on Earth.
James Sinclair, the
widely-read gold commentator, called Germany's repatriation "the most
important gold development since Charles De Gaulle called the US hand that it
would stand by convertibility." Even the staid Financial Times voiced
its approval of the repatriation as a blow for transparency in the gold
market. FT ended its report by calling for other central banks to follow suit.
At the very least, such copy-cat behavior would strain the gold lending
system and add another major locus of physical demand to go along with
China's consistent, but still secretive, reserve acquisitions.
What is striking with respect
to the Bundesbank's gold repatriation are its stated reasons for doing so,
i.e. "to build trust and confidence domestically." Forbes reported
one Bundesbank official stating that the "relocation is in case of a
currency crisis." One half of Germany's gold henceforth will be stored
in Frankfurt; the other half will be split between New York (37%) and London
(13%). As DeGaulle points out below, in times of currency turmoil the one
criterion a nation state can rely upon is gold. The same standard of
reliability, it should be said, applies to the private investor as well.
(Please see "Best
Analysis of Germany's Gold Repatriation" above.)
*
* * * * * *
 The currencies of the countries of
Western Europe have today been restored, to such an extent that the total
gold reserves of the Six is today equivalent to that of the Americans. They
decided to convert all the dollars that they had in their account into
precious metals. In other words, the convention that gives the dollar an
over-riding value as an international currency no longer has its initial
basis, namely the possession by America of the great majority of the gold in
the world. But in addition, the fact that a large number of countries accept,
out of principle, dollars in the same way as gold to compensate, when
appropriate, any deficits that arise to their advantage from the American
balance of payments, leads the United States to become voluntarily indebted
to foreign countries. Indeed, what they owe them, they pay them at least in
part, with dollars that they hold just for these payments, instead of paying
them totally in gold, the value of which is real, that you can only possess
if you have earned it and that you cannot transfer to others without risk and
without sacrifice. This unilateral facility which America has been given
contributes to the idea that the dollar is an impartial and international
symbol of foreign exchanges being blurred, while it is an appropriate means
of credit for a country.
Obviously, there are other
consequences to this situation. There is, in particular, the fact that the
United States, for want of having necessarily to pay in gold, at least
totally, for their negative balances of payment in accordance with the old
rules, that required countries to take the required steps, sometimes
rigorously, to remedy their imbalance, is suffering year after year from a
deficit balance. No less because the total of their commercial exchanges is
to their disadvantage. Quite the opposite! Their material exports always
exceed their imports. But that is also the case for dollars, exports of which
are always in excess of imports. In other words, capital sums are being built
up in America, by means of what should really be called inflation, which, in
the form of dollar loans granted to countries or to private individuals, are
being exported. As, in the United States itself, the increase in currency
circulation that results from this makes investments within the country less
remunerative, there is an increasing trend there to invest abroad. This
leads, for certain countries, to a sort of expropriation of some of their
companies. Certainly, such a practice has greatly facilitated, and still
encourages to a certain extent, the multiple and considerable aid that the
United States is providing to a large number of countries, to be used for
their development, and from which we, on other occasions, have ourselves
widely benefited. But circumstances are such today that we can even wonder
how far the problem would go if the countries that hold dollars wanted,
sooner or later, to change them into gold? Although such a general movement
would never take place, it is still the fact that there is an imbalance that
is, to a certain extent, fundamental.
 For all these reasons, France is in
favor of the system being changed. We know that France said this, in
particular, at the Tokyo Monetary Conference. Given the universal jolt that a
crisis in this field would probably cause, we have every reason to hope that
the steps to avoid it are taken in time. We therefore believe it to be necessary
for international exchanges to be established, as was the case before the
world's great misfortunes, on an unquestionable monetary basis, that does not
carry the mark of any particular country.
What basis? Indeed, we
cannot see that, in this respect, there can be any other criterion, any other
standard, than gold. Oh, yes! Gold, which never changes its nature, which can
be shaped into bars, ingots or coins, which has no nationality and which is eternally
and universally-accepted as the unalterable fiduciary value par excellence.
Moreover, despite everything that could be imagined, said, written, done, as
huge events happened, it is a fact that there is still today no currency that
can compare, either by a direct or an indirect relationship, real or
imagined, with gold. Without doubt, we could think of imposing on each
country the way it should behave within its borders. But the supreme law, the
golden rule
we can truly say
that should be reapplied, with honor, to international economic
relationships, is an obligation to make up, between one monetary zone and the
next, by effective deliveries and withdrawals of precious metals, the balance
of payments resulting from their foreign exchanges.
_________________
Source: The World Gold Council; Charles De Gaulle, 1971, 4, pp. 325-342, esp.
330-334. The English translation of this excerpt is drawn from Lacoutre,
1991, p. 381; Excerpt from a press conference of French President Charles de
Gaulle at the Palais de l'Élysée calling for the return of a 'gold exchange
standard'; February 4, 1965
http://www.usagold.com/forms/newsletter_backissue.php
Michael J. Kosares is the founder
of USAGOLD and the author of "The ABCs of Gold Investing - How To
Protect and Build Your Wealth With Gold" now in its Third Edition. If you are looking for
the full picture on incorporating gold into your savings plan, this
newly-released edition of the book might be what just what the portfolio
doctor ordered.
This newsletter is distributed
with the understanding that it has been prepared for informational purposes
only and the Publisher or Author is not engaged in rendering legal,
accounting, financial or other professional services. The information in this
newsletter is not intended to create, and receipt of it does not constitute a
lawyer-client relationship, accountant-client relationship, or any other type
of relation-ship. If legal or financial advice or other expert assistance is
required, the services of a competent professional person should be sought.
The Author disclaims all warranties and any personal liability, loss, or risk
incurred as a consequence of the use and application, either directly or
indirectly, of any information presented herein.
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