Gold, Silver and the US Dollar
 

..Noise and Nuance bested by Leadership and Action

September, 2009

It is hard to believe that only a few short months ago the word hyperinflation was not yet a constituent element of the overall financial narrative.  Today, every honest dialogue regarding the economy includes the potential threat of hyperinflation as part of the overall discussion.   

The key phrase, of course is 'every honest dialogue'.. 

What I find fascinating is how the narrative continues to evolve. The conversation now includes articulate and thought provoking perspectives on post-hyperinflation.   (Erste Bank, In Gold We Trust and Antal Fekete, Dress Rehearsal for the Last Contango).

I trust that you are not buying into a dangerous (and dishonest) counterview that is being foisted upon us by charismatic, nuance-enamored politicians and sweaty browed, nervous bankers. Soothing words that the economy, although remaining delicate is in recovery mode and inflation should not be a concern. So predictable, and in a typical good-cop, bad-cop routine, other 'experts' belly their way toward the spotlight and try to drag out the tired old deflation bogyman and how Washington should pump even more worthless script into the system.

The underlying implication is that things appear to be getting better, that it is okay to start spending and it's more than okay to view the US dollar as a haven of safety, and buying US debt remains a prudent investment strategy.  Really?


 

No, not really. The economy is not fine and we are on a collision course with hard inflation - it is only a matter of when.  Now do not get me wrong, I appreciate that Ben Bernanke is doing a wizard's job of drawing in old money and replacing it with new money and has (to this point) kept not only inflation at bay - but has massaged, tickled and lightly stroked the monetary velocity beast so it is once again moving.and moving in the right direction.  Unfortunately Bernanke may be fighting a losing battle.  Reason: His boss's team sucks and is clearly working to a different (and some say, sinister) agenda.

It is important to touch upon politics only because politics and political direction have intruded so much into the world of trade and commerce.  In years gone by, having to keep one eye on your politicians was just that - a glance now and again to see what the meddlers were up to.  Kind of like your brother-in-law's best friend's cousin showing up at last year's big barbecue. Grin and bear it while watching the slob gobble down three burgers and wash them back with a half a dozen beer, belch loudly, pinch your wife on the butt before he shuffled out your back gate. Only to find that this year, he shows up again and brought the rest of his out-of-work motley crew of cretins with him and he's demanding steak instead of burgers, bourbon instead of beer and while pawing your wife is casting covetous eyes on your daughter.  And by the way, have you changed the sheets in the guest room....and sunny side up with sausages, not bacon would be swell for breakfast.   

That being said, whether or not President Obama is a Marxist is open to debate. That debate, although a mention, will have to continue without me. Albeit a few of his recent political appointee's are raising eyebrows due in part, to their disturbing histories and past affiliations.  All of the newly appointed "Czars" are unelected officials accountable to no one except President Obama.   Disturbing traits include, a total ban on all hunting, forced abortions, euthanasia, sterilization through the water supply - and in the case of the second most infamous Czar, recently resigned Green Czar, Van Jones, an avowed radical communist who according to his own words, in print, on air and on video appears to have an agenda that relies heavily on forced wealth redistribution, and in his own words."taking control of and changing the entire system".  Although I will not enter the "is Obama a Marxist" debate, I do recall something Obama said during his brilliantly successful campaign to become president of the USA - "if you want to know who I am, look at the people I surround myself with".  Enough said.

Thus, the folks who are telling you the dollar is 'oversold' and should be bought are taking a myopic and simplistic view on the subject, as they studiously ignore the (political) elephants in the living room.  

Wonky American politics aside, the US dollar is not simply just another currency; it is the world's reserve currency.  As such, the value of that currency, both at home and abroad is based on trust, value and above all - a stable market environment.  The value of the dollar remains doubtful. Trust in the dollar continues to erode and the stable market is anything but, stable.  

What some fail to realize is the current global financial crisis is a worldwide historical event; an event where the underlying tenets of capitalism are being undermined. Our economy and our markets have taken an obvious hit, but rather than allowing the market to correct and right itself, it is being subjected to heavy-handed government meddling; based not on sound economic theory, but murky and na?ve ideology.  I'm sorry, but one only has to look back at the shabby and uneven treatment afforded the Chrysler bond holders to realize that rules and laws have become situational in America's postmodern market place. When expediency and ideology supersedes laws, uncertainty in the market place and a loss of national confidence is sure to follow. When that nation is the United States of America and is responsible for the world's reserve currency, a loss of confidence is not acceptable. Therefore claiming the greenback is 'a buy' is not something I can agree with.

When you combine a market system that is based more on whimsy rather than established law with a faith backed fiat currency system; where paper money can be created out of thin air, for any reason at all, it only stands to reason that the level of trust in both the underlying market system and the affected currency will erode to the point where neither retains much in the way of relevancy.  

For those who may have missed it, last month Pacific Investment Management Co., (PIMCO) the world's largest manager of bond funds said the US dollar will continue to weaken as Washington continues to pump massive amounts of (paper) money into the economy. More importantly PIMCO goes on to say, 'The greenback is losing its status as the world's reserve currency.'

What should be considered alarming (for those who hold US dollars) is that even though there is a glaring absence of an alternative currency, the US dollar continues to lose value; losing almost 15% over the last three months.  How can I say this any clearer - the US dollar is the last place you want to consider when thinking 'safe haven'.  A fool's paradise is more like it.

I do not know what it is going to take to grab EVERYONE'S attention. Perhaps, if one of the large central banks loses the battle to remain solvent? Oh! You were not aware that many of the central banks are already on a 'war footing' and are scrapping like dogs in an alley for their own survival?  Here's a clue - the central banks are NOT selling gold. The central banks are BUYING gold.  In times of trouble, even these flat faced fiat hucksters know that holding physical gold is real and true wealth.  I suppose one could say that actions really do speak louder than (dishonest) words.  It used to be 'follow the money'..now it is, follow the gold.

It is all about owning gold and not fiat currency and coping with inflation.

Not to worry, I am not going to try and make my point by trotting out the same depressing, grainy black and white pictures of grim-faced German women burning stacks of worthless money during Germany's ill fated Weimar Republic.  I think I will also pass on filling up my report pages with a slew of brightly colored modern charts showing just how many near-worthless dollars there are in existence; how many Americans are really out of work; how much money Americans do not have in their savings accounts; how broke the FDIC is; how many banks are failing, or how the real estate crash is poised for Round Two.  Why bother, when a recent and very important and under-reported piece of news can shine a much brighter light on the fact that gold = good and dollar = bad.  The news showcases what appears to be an honest effort to offer sound advice to a nation's citizenry and offers true leadership, courage and direction.  My only disappointment is the direction does not come out of the USA, the former bastion of capitalism.  It comes out of Communist China.

Guaranteeing true "economic recovery and prosperity..buy gold, buy silver."

When it comes to forward thinking, and stellar leadership, China gets full marks.  Using the full power of their state media, the Chinese government is aggressively encouraging the folks to own physical gold and silver.   What will this do to the price of gold?  The answer is obvious. What is not obvious is how a protracted run on gold (and silver) will affect the monetary velocity of the US dollar?  I do not know. What I do know is the price of gold and silver, and how we view gold and silver will change, forever.

Now never mind that there are 1.3 billion people in China and that even if 1% of them start the ball rolling, there will soon be a serious price issue for gold and silver. Worth thinking about is that the folks in China are recognized as born savers. Or, perhaps because their economic boom is in its infancy - forced savers might be more like it.  For decades the old communist system in China was dour, and depressing. Legions of little people wearing little grey uniforms, riding around on little grey bicycles past large and featureless grey buildings. Consumer goods were almost nonexistent. But that was then, and now is now.  As well know China is a force to be both appreciated and reckoned with. Some might argue that China is the new global engine of industry and they will not be denied, as their underlying philosophy has always been capitalism.  

What is important to realize is that the citizens of China have money. Many a worker bee that has moved from the rural areas to the booming, product-producing cities has earned more money than ever thought possible. That money is able to be spent, squandered..or invested. I am betting on 'invested'. And seeing as the central government is viewed as a good government - one that has been instrumental in bringing prosperity to the nation, it goes without saying that the vast majority of China's citizens will heed government advice and buy gold and silver.  

Important to remember is that the situation in China is one worth watching. Most nations in the clutches of an oppressor government do NOT want their citizens running around with gold and silver in their pockets. For the Chinese government, it is a mark of maturity and a sense of security that they are on the right track when they not only allow their citizens to invest in gold and silver - but encourages them to do so.

One of the fundamental differences between Washington and Beijing is that the communist government of China is fully cognizant that China has historically been the center of Asian trade, and the focal point of economic and financial direction.  Capitalism in one form or another has lurked under or near the surface for over two thousand years. In Beijing, encouraging both industry and the individual to make money and prosper is part of the national solution. The concept is embraced.  

In Washington, making money is an anathema to many of Obama's closest advisors, while a person or corporation having money is now a focus of suspicion.  


Will the future of leaders in China devolve to the point where they loot that nation's wealth and hobble industrial output? Only time will tell.


In Washington, the looting of wealth is no longer conjecture. It is called 'the redistribution of wealth'.  When it comes to 'wealth', remember:  wealth is grown through freedom and hard work. Producing wealth is to be celebrated, not maligned.  China has it right, Washington does not.


Also worth considering..by China encouraging its people to go out and buy gold and silver, they show trust in the people. Trust begets trust. When a nation trusts their government, they invariably trust the currency of their government. I wonder if the lack of trust for the US dollar signifies a greater lack of trust in the leadership coming out of Washington.

When you add it all up: China's citizens lining up to buy hard gold; central banks turning from sellers of gold to buyers of gold; suspect leadership in Washington; US dollar in deep trouble, it goes without saying that our survival/prosperity plan we initiated in November is more meaningful with every passing day.

Remember our plan:  Stay in the business of gold. Buy (physical) gold and silver and tuck it away. Invest in publicly traded companies that are all about gold and silver. Every time you take a profit, reinvest part of your gains into gold and silver. Repeat again and again.  I thought we had a couple of years left to weather-proof our house and fully stock our pantry. I'm no longer sure if that is the case.  Time may not be our friend.

Last year's narrative regarding Atac Resources TSX.V: ATC and Nova Gold TSX.V: NG worked out very well for us. Both turned into gains by the power of ten (10). Seven cents to over seventy cents and sixty cents to six dollars. To tell you I planned a pair of ten-baggers, I'd be lying.  It just worked out that way.

I am hopeful that I can bring home the bacon once again with Golden Reign Resources (TSX.V: GRR).  Nothing on their site yet, but the NI 43-101 has been filed and the Company site will be populated (strictly) from approved information. Worth noting..we are talking about reopening a gold mine that has not been worked since 1927. A few cruel twists of fate, but nevertheless.when the mine was blown up by bandits it was producing a half to an ounce of gold per tonne.  Currently trading at seven cents.

 
Larry Myles
Larry Myles Reports
604-408-7600

"Capitalism is the only system that can make freedom, individuality, and the pursuit of values possible in practice."