A Better Idea Than the Trillion Dollar Coin

11 & 20 January 2013

Perhaps you have heard the recent discussion about printing a trillion dollar platinum coin to pay off debts incurred by the United States government. Paul Krugman and a cohort of others are promoting the idea, which has been well-covered by Business Insider: click here. The US Treasury Secretary may be permitted to do this by law, and it's a way to get around the anticipated and potentially rancorous debt ceiling debate.

(James Grant is the one who has perhaps best explained why the trillion dollar coin is not as great an idea as Paul Krugman thinks it is: click here.)

However, there was discussion on Bill Fleckenstein's subscriber website today about an arguably much better, though equally ludicrous idea.

As all major world governments are now essentially just printing money to cover their excessive expenditures, and the US central bank specifically is printing new dollars to purchase government treasuries, a reader pointed out that the same central bank which is purchasing essentially worthless government bonds could legally print inherently worthless money to purchase inherently valuable gold, so as to increase the store of real assets in that country's treasury.

As Mr. Fleckenstein pointed out, any central bank that wishes to could proceed to do this now, until the same currency markets which tolerate moneyprinting (which is usually done for the politically expedient purpose of purchasing government bonds) would (ultimately) be forced to reply, "Hey, you can't do this anymore!"

At this final point, presumably, the central bank which had purchased the most gold with newly printed unbacked currency would be the "winner."

On a related and timely note, James Buchanan, who, like Paul Krugman, won the Nobel Memorial Prize for Economics, died Wednesday at age 93. Mr. Buchanan helped to found the field of public-choice theory, which examines how bureaucracies and elected leaders make decisions.

In 1962, with co-author Gordon Tullock, Mr. Buchanan published "The Calculus of Consent," which challenged the idea of government as a force for good. Experience showed, Mr. Buchanan later said, that "government did not behave benevolently." Rather, "Bureaucracies expanded exponentially" and "the welfare state itself created more demands than it satisfied."

One could argue that Mr. Buchanan "got out just in time!" However, those of us who truly care about our economic wellbeing will miss his presence among us.

13 January 2013: On a related note, the US Treasury Department has ruled out minting the trillion dollar coin. My comments are attached to the linked article: click here. (The Federal Reserve has not announced a decision to print dollars to buy gold, by the way. More's the pity - for the US Treasury.)

My guess, before this decade is out, some country somewhere will in fact decide to print money for the express purpose of buying gold - and will continue brazenly to do so, so long as this practice is allowed by the international marketplace.

Note that a number of nations, with Russia perhaps the most notable among them, have been buying gold aggressively. Russian gold reserves have doubled in the past five years. Russia is also expanding its money supply by 14-22% per year, according to figures published by the Russian Central Bank. (I haven't crunched the numbers, but China is also both printing money and buying gold on a large scale.)

In Russia's case, therefore, the printing of money to buy gold is already occurring on a de facto basis. Is it time for other nations to start playing this game? I think so, though of course, long-term, it is a policy which illustrates more clearly than any other the bankruptcy of the world monetary system.

20 January 2013: I am sorry, I cannot top Mark Steyn on the trillion dollar coin, so I'm linking to his scintillating and timely opinion piece: click here. 

You've gotta read: 

Trillion-Dollar-Coin Fever

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Last Friday Might Have Been the Start of the Next Rise in the Gold Price

11 January 2013, 14 July 2013

I have mostly stopped commenting on the gold bull market, as the widespread adoption of inflationary monetary policy by every major government on the planet has all but guaranteed a continued rise in the gold price. However, last Friday (January 4, 2013) may possibly have been the day that the most recent gold price decline came to an end, due to the technically meaningful and usually decisive "bull hammer bottom" technical signal that day (this type of bottom usually confirms an exhaustion of selling pressure).

My current thoughts follow. The use of the capital letters "A" through "D" refers to the theoretical model of gold price advances and declines put forward by Mary Ann and Pamela Aden. That is, "A" is a modest gold price rice (the last one occurred between December 2011 and October 2012), "B" is a modest decline (we have been in a B decline since early October 2012), "C" is a massive and extended gold price rise running for a year or longer (the last one extended from May 2009 through September 2011 - over 2 years), and "D" is a sharp and decisive (though temporary) downturn in the gold price, with the last one having occurred between September and December 2011.

Nobody I know of can predict "when," but the directionality of the gold price has been clearly upwards since December 2011 (D bottom). The current (C) rise appears only to have started last Friday, January 4, 2013 (the probable conclusion of the "B decline"), so it is "young." 

Friday, January 4, 2013 looks like the "bull hammer" bottom, which appeared decisive. However, since this is (probably) the C rise now, it can run 1-1/2 to 2-1/2 years. What we're waiting for now is for the mainstream analysts to stop saying, "Oh, gold topped out in September 2011, it's done now." (Before that, it had supposedly topped out in 2006, 2008 and 2009, not to mention 2003 and 2004). 

The way you know that gold is nearing a top is when the people you meet on the street are buying (and talking about) gold investments - just as they did with tech stocks in the 90s, and with real estate investments this decade. That has not really started, though you do now have little stores selling gold as well as "taking it off your hands." There is also gold advertising on television now. 

Following this "last" very big pullback, the final blowout bubble top in gold would finally occur. By the Adens' charting system, 2019 would be the true top of the secular gold bull market - if it is typical, and it would be somewhere north of $5000 by then, probably $8000 or higher. This is all approximate. 

It is also possible that gold could go into an extended secular mega-bull market, as bonds have done for the past 30 years.That is, most bull markets seem to run 17-18 years (so 2001-2019 would be a "standard" 18-year gold bull market, as was the case from 1962-1980). 

But mega bulls are almost twice that duration. The duration of the gold bull market, of course, depends on fiscal policy. 

So long as governments print trillions per year in new and worthless currency, we know that gold will rise (nothing else is possible). When that stops, the gold bull market will be over. 

However, I'm not sure that moneyprinting and competitive currency devaluation by most major world governments will necessarily stop in 2019. Note that bonds have been in a 3-decade-plus uptrend since 1981-82 (the end of the last major inflationary period). If gold is in a mega bull market, it could rise through 2030 or longer, before massive global inflationary monetary policy would ultimately defeat itself.

So, hang on until 2019 at least (be careful in 2016), and keep your eyes on 2030 if governments are still printing away by the end of this (still young) decade. 

14 July 2013: But it wasn't....

Well, my last few predictions on the price of gold have been dramatically wrong. Despite arguably the strongest fundamentals in history, gold has managed to plummet while essentially all the factors that normally tend to lift the price of gold have been advancing steadily. I've been watching the gold market for a decade now. What have I learned? In brief, when the fundamentals are bullish, the following two rules have so far applied: (1) When the price of gold goes down more, it then goes up more. (2) When the price of gold goes down longer, it then goes up longer. Stay tuned for $5000 gold, and higher. When? Don't ask me. I don't know. But nothing has happened to alter my prediction. 

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The Deflation Trade Is Over

13 September & 15 December 2012

(This article was originally published on September 13, 2012.)

Ben Bernanke announced unlimited moneyprinting at 12:30 PM EDT today.

Joe Weisenthal has called it a "game changer." He is correct. Click here for the key text from the Fed statement and for Mr. Weisenthal's quick take.

What does it mean that the deflation trade is over?

There is no longer any cap on US moneyprinting. Further, the Eurozone has also committed itself to a moneyprinting-based strategy. Inflation will prevail. Long-term interest rates will rise (despite the massive demand-boost of Federal Reserve long-term securities purchases of $85 billion per month - a trillion dollars per year!).

Gold investors have rounded Cape Horn. For the past 6 years, deflation fears have created vicious headwinds for the precious metals sector, and destroyed the market value of gold and silver miners, explorers and mine developers. As of today, that has changed, for all practical purposes, permanently.

To switch analogies for a moment, this is the gold tsunami. It is now unstoppable. Gold will just rise and rise and rise as central banks and governments everywhere shred their currencies to make continued spending and debt repayment possible.

I could write pages and pages on this topic, but consider this the executive summary.

I may not have much more to say about the gold market after today. Clear sailing on smooth seas under a sunny sky with a steady tailwind isn't headline news. It is just a forecast for fair weather for years to come for gold, silver and precious metal mining investors.

We aren't there yet, but we are on a steady course, sailing under ideal conditions.

Interestingly, most investors are not positioned for the best of all possible worlds for precious metals. If you are not, you had better get there.

Gold has been the best-performing investment of the past decade. Looks like we've got another decade to go!

The chart below shows the ratio of the Canadian TSX Venture Exchange Index (CDNX) to Gold (priced in US dollars). The CDNX is dominated by precious metal explorers and early-stage mine developers. It was destroyed relative to the value of its underlying assets (gold and silver) by the deflation-scare and collapse of 2007-2009, and remains at its lowest-ever relative levels today (it fell to its all-time low of .7203 only on August 31, 2012 - that level will never be seen again). Note that if this ratio returns to its historic (pre-2007) range of 2.8-5.14, that would represent an appreciation of the market value of this index of 278% to 559%. With the deflation scare probably permanently over, that is perhaps not an unrealistic expectation. Think about it.

Enough said?

* 15 December 2012: OK. Just to wrap up the deal. Operation Twist (the sale of short-term US monetary instruments to purchase long-dated US bonds at a pace of $45 billion per month) expires at the end of 2012. Mr. Bernanke announced on December 12, 2012 that the Fed will now make outright US bond purchases without clearing its balance sheet. These are known as "unsterilized" transactions, yet another euphemism for outright moneyprinting. Again, no end date was announced. The program may be discontinued when inflation is measured above the 2.5% annual level (it is, of course, far above that level now, but if you value a $249 computer in the thousands and count ground beef as equivalent to steak, as well as discounting food and energy costs as "variable," it is possible to produce inflation numbers below 2.5%, as the Federal Reserve has done), or if unemployment falls below 6.5% (how do you want to measure that, as similar problems in calculation emerge here as well?). 

So, in brief, we are promised low (short-term) interest rates for years to come, to encourage borrowing and debt accumulation (why is this a good idea?), and the Fed has promised to print $85 billion in new US dollars monthly (even this won't cover the massive Federal deficit!), or $1.02 trillion annually. At these levels, the US dollar money supply will continue to grow at a pace roughly equivalent to the US dollar debt position. As I said in this article, there is nothing more to be said about gold investing. I published a couple of notes after September 13, 2012, but yes, I am done commenting here on the gold market. 

Gold can ONLY rise in this environment, though, since it is traded on the open market, its price will vary from day to day and month to month. But yes, the US dollar is being destroyed, the US Federal debt will never be repaid (except in grossly inflated dollars), and every major world economy is hell bent on inflation or "moneyprinting" (even those with stringent austerity programs). So yes, I am done commenting on this topic. 

Buy yourself some gold and hold on to it. It will preserve value, at minimum, and, due to being neglected for decades and also to being a minuscule market on a global scale, gold will probably outperform most other investments as demand continues to accumulate. I hope my articles have been helpful. Honestly, there is simply nothing more to say on the topic except, "Buy gold,  gold and silver miners, gold and silver royalty companies and emerging producers, hold on, and bide your time. Your patience will be amply rewarded."

OK. Let's update one factoid. The CDNX:GOLD ratio has fallen further than its prior August 31, 2012 all-time low of .7203 (cited above). It reached a new and recent low of .6864 on December 13, 2012. Is that newer, lower ratio the all-time low? Well, the small-cap sector is now under such deep pressure that the market presupposes many of these planned mining projects will never go forward. If this sentiment continues, the CDNX:GOLD ratio could drop further still. However, don't bank on it. Interest rates are still low, and banks are again swimming in liquidity. Somebody, somewhere will fund these operations at today's drastic discounts, as gold and silver prices continue to climb. The small caps are by far the cheapest way to buy gold and silver in the ground. At some point (not today and not tomorrow), these projects will be snapped up and taken out of the sights of mainstream investors. 

If you can tolerate the pain, a small to moderate percentage of your investment portfolio could continue to be maintained in promising small cap gold and silver explorers and mine developers. There are names in this sector which are likely to do well in almost any conceivable circumstances - ATAC Resources (ATC.V) being only one of many!

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Arizona I-40 Navajo County Traffic Scam

Just a warning to tourists travelling on Interstate 40 in Navajo County in Arizona.

You've heard of the rattlesnakes, scorpions and cactus in Arizona. In Navajo County, the poisonous creatures wear uniforms.



My impression is that police officers in this area are running a scam operation. Driving legally will be of no benefit to you. I was pulled over on an allegation of failing to signal a lane change, though in fact I did signal the change.

The officers then seek out opportunities to place more serious and sometimes bizarrely trumped up charges against their unwitting victims. Take caution.

Here is an overview from Griffen & Stevens Law Firm PLLC (click here):

"Police officers across northern Arizona, including Flagstaff and Holbrook, are initiating traffic stops on unsuspecting drivers, usually those traveling west from California (sic), for bogus reasons like: GPS device on windshield, unsafe following distance, illegal lane usage, speeding 1 or 2 mph over the limit, and endless other pretexts for pulling someone over. Then the officers can ask a driver to get out of their vehicle, wait by the police car while the officer issues a “warning” and begins interrogating that person about drugs and other illegal activity. The officer tries to look for indicia of criminal activity and drug trafficking, and will often utilize a drug detection dog. Ultimately, the officer wants to pressure you to consent to a search of your vehicle."

Again: Legal behaviour is no defense. These licensed predators are in my opinion running a scam operation. If you drive legally in Navajo County, you could be their next victim.

My advice. Don't drive Arizona Interstate 40 in Navajo County - period. Stay away. I for one will not be back (and I'll be spending much less time - and tourist dollars - in Arizona in future).
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A Look at One Chart Should Be Enough...

16 September 2012

I know that ratio charts are confusing to many.

Let me explain. The above chart depicts the ratio of the market value of the Toronto Gold Mining Stock Index (SPTGD) to the US dollar price of gold. That is, the value of the index is divided by the price of gold, on a daily basis, to create what is known as a "ratio chart."

What this chart is telling us is that the SPTGD index used to be valued at 0.723 times the price of gold (roughly 3/4 of the gold price) at its highest point, which was over 10 years ago, in May 2002. As you can see, physical gold has been a better investment than Canadian gold mining stocks for over ten years. And, despite their recent strong recovery, no real impression has yet been made on the long-term chart (as gold is rising rapidly too).

The funny thing is, gold mining is a much more profitable business now than it was back then, though arguably the 2002 ratio showed excessive early optimism. That is, as the price of gold rises, the margins of the gold miners increase, so their profits climb at a faster pace than the rise in the price of gold (though their costs are also escalating, to a lesser degree in most cases, for exactly the same reasons that the price of gold is rising).

However, if this ratio were simply to return to its longest-term stable value, which persisted from early-2003 to mid-2007, then we would be looking at a range of .40 - .55 in the ratio. Let's call its stable value ".50."

In other words, should the SPTGD:GOLD ratio recover its median value, it would appreciate 150% from where it is now (.195 as of September 14, 2012). That would be no small potatoes.

I think it will - because the deflation trade is now "over" (see previous posts).

Mark my words.

Though the trend has fallen from its stable value level for 5 years, I think we'll be back there within only about two years. What makes me say that? Look at the uptrend from 2000 to 2002 in the above chart (not the lower one). When this ratio climbs, that is the angle it tends to follow (you can see fractal slices of this same behaviour in the above ratio chart in later 2003, and in later 2008 to early 2009). For complex reasons, charts tend to repeat such patterns (the study of these patterns is known as fractal analysis).

So yes, in 2014, I expect to see a ratio in this chart of .50. Given that I am correct (only time will tell), where might the SPTGD index then be valued? (The chart of the SPTGD index itself is immediately below.)

I think it is conservative to suggest that gold, which is now on a "tear" due to announcements of global quantitative easing, is likely to be at the $2500 level in 2014. I believe a lower gold price than that in 2 years is unlikely, and that an even higher price is quite possible. But at $2500 gold and a 0.50 ratio in this chart. the SPTGD would be valued at more or less $1250. Where is it today? $346.60. That would represent an appreciation in the SPTGD of 261%.

Anything even close to this would also be no small potatoes.

What do bull markets do? They disappoint the impatient and amaze the persistent.

Think that's unlikely? Well, look at the SPTGD chart movement (second chart) between May 2005 and May 2006. In exactly one year, only 7 years ago, this index gained a full 122%. And earlier, between late 2000 and May 2002, the SPTGD index gained 180%, this time in 1-1/2 years. So what I'm saying is that a similar uptrend, persisting for 2 years, could very possibly lead to appreciation of more than 200%.

Again, why is this possible? Because the deflation trade is over. It changes everything for gold and gold mining investors.

Don't get shaken off by volatility, which isn't going to go away....

My advice: Persist, and prepare to be amazed.

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Economics 00000002

15 September 2012

I've been arguing lately that economics is easy. Here is the advanced level....

Just caught this nugget from Warren Buffett:

"Value investors are not concerned with getting rich tomorrow. People who want to get rich quickly, will not get rich at all. There is nothing wrong with getting rich slowly."

Also see: Economics 00000001.

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Economics 00000001

15 September 2012

I commented on September 13, 2012 that I didn't have much more to say about gold investing. However, people do sometimes approach me and tell me that they don't understand economics.

Actually, there is nothing easier than economics.

Here is is.

1. If you save money, you will do well.

2. If you borrow money, you will do poorly.

3. High interest rates encourage people to save money.

4. Low interest rates encourage people to borrow money.

The Federal Reserve has just "promised" that (short-term) interest rates will remain very low (near zero) until at least mid-2015. They are also printing $40 billion new dollars every month to make it easier for people to borrow money.

How do you think we will do?

Here ends the lesson.

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Mr. Draghi Is Sterilizing His Purchases, What Could Possibly Go Wrong?

6 September 2012

This post is being entered quickly, so it is for "those in the know." If You don't understand what Mr. Draghi just did (explanation here), then this post will not be much help to you.

My thoughts on Mr. Draghi's plans to buy the debt of troubled Euro nations and "sterilize" it by selling the central bank's best-quality assets follow (originally posted here):

Obviously Mr. Draghi will do unsterilized sovereign bond buying at some point. Even with supervision, the PIIGS will be badly behaved. But I don't think he can just print right away.

On the upside (for him), he doesn't have to raise German cash or sell German debt IF he prints new Euros and buys the sovereign debt of the PIIGS without obtaining "real" money from the better-off EMU members. It seems to be a process. The original rules under which the Euro was constructed are going out the window, one by one. It seems only the Germans have a long memory. However, the EMU had, until recently, been a win-win game for all the players. Greece got to pretend there is no tomorrow. Germany boosted exports. France got to play both sides.

Now, the only course of action that will keep the win-win equation going a little while longer will be unsterilized purchases of "junk" government debt. If the junk is bought with printed money, then it is nobody's (and everybody's) obligation. What could be the downside? Apart from the certainty of ultimate currency collapse, it's looking pretty cheery out there.... Currency destruction is obviously a problem for another day.

With new Euros, China benefits, etc., etc. It's all a big, globally connected, spinning wheel (until the wheel comes off the cart). But let's deal with that chapter when we get there. Certainly the precious metal market is having no trouble figuring it out. The gold buyers are voting with their feet. So why don't the Germans just buy gold? Everybody's happy, and Germany still wins.

8 September 2012: OK. More information is in. The plan is to encourage deposits at ultra-low interest rates, and thus take money out of circulation in exchange for the purchases of "junk" sovereign bonds of no more than 3 years' duration (the shorter term chosen presumably to reduce risk).

Hmmm. Exactly why would this work? The take-away is that the junk is going to get bought to keep the Euro currency wheel spinning a while longer, perhaps much longer. But, exactly how is this ever going to play out over the medium to long-term? Why would I, or any entity, wish to give the ECB my hard-earned cash on deposit, knowing that the central bank is decimating its asset base with the worthless government bonds of profligate Eurozone nations? This does not add up on so many levels!

Here is the current situation and its implications, according to the WSJ. Interestingly, business confidence is so low at this time, it's easy right now to get partners to park cash with the ECB for vanishingly low interest:

In principle, “sterilization” is a process that ensures that individual actions by the central bank don’t result in an overall increase in the money supply. Monetarist theory dictates, after all, that it is excessive monetary growth that leads to inflation, which is what the ECB is exclusively mandated to guard against.

Every week since it started buying bonds under its old Securities Markets Program, the ECB has withdrawn from circulation an amount of money equivalent to what it had spent so far in buying them. For the last six months, this figure has hovered around €210 billion. The amount falls as the bonds it holds mature.

It has done this by offering one-week deposits to the banking system. Banks bid competitively for the deposits, and the rate bid has tracked the ECB’s own overnight deposit rate very closely. It has been only fractionally above zero since the ECB last cut its deposit rate in July.

Fears that it would prove difficult for the ECB to sterilize such a large amount of money regularly have so far been unfounded. On the few occasions when it has failed to auction the full amount of deposits, it has been due to exceptional, technical factors in the money market which have never lasted beyond a day or two.

This situation might change if the ECB and the euro zone succeed in restoring so much confidence to the region’s financial markets and economy that banks start again to lend to each other, and to businesses and households. Before the crisis, the private sector routinely created a multiple of the money created by the central bank.

But the link between central bank money and privately created money has changed beyond recognition since 2007. Growth in broad money aggregates has collapsed despite the ECB more than doubling the size of the monetary base, which typically consists of cash in circulation plus banks’ reserves at the central bank.

As of today, the precautionary hoarding of reserves by euro-zone banks is so great that banks are holding over €770 billion in excess reserves in accounts at the ECB, voluntarily “sterilizing” money the ECB created without forcing it to lift a finger.

The ECB is sterilizing another €209 billion by paying only 0.01% on the deposits it auctions. In the current environment, it does not seem like the ECB would struggle to withdraw from the market any amount of liquidity it wanted to. Even so, the numbers implicit in the ECB’s new bond-buying scheme are daunting. Excluding treasury bills, there are some €390 billion in Italian bonds that fall due in the next three years.

For Spain, the number is €203 billion, for Portugal and Ireland combined, another €50 billion, according to national debt agency data. In all, a total of over €640 billion. Of this, it seems likely that the ECB already holds — and sterilizes — a large part of its €209 billion SMP portfolio. There are no precise data yet on the ECB’s holdings, but only around 40 billion euros is accounted for by Greece.

Thus the amount that the ECB needs to sterilize could easily double or treble from its current level. This may incline it to sterilize more over a longer time-frame of a month or three months or even more, so as to reduce the potential for volatility in the money market. The ECB has already examined such options internally two years ago, but chose not to proceed.

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Art Cashin Correctly Identifies August 1971 As the Date of Our Downfall

1 September 2012

Art Cashin recently identified August 1971 as "the most disastrous moment in US history." I concur.

His article is here:

The Most Disastrous Moment In US Economic History Occured In August 1971

My comments to other readers (whom I thought missed the point of the discussion) are here:

Uh. I think we are forgetting the real question here. Do we want our currency to be stable in value, or to be a plaything of the central banks and politicians? I for one opt for the former. Fixing the currency to something real of course achieves that purpose more effectively than any other known strategy.

Humans are still emotional, so the gold standard doesn't "fix" problems, rather, it prevents their development, and that is what is at issue here. When the currency is unstable, the citizenry are literally forced into speculative assets as a means of preserving wealth. You don't have to agree on all points with Mises to see that easy money promotes capital misallocation, as we've had boatloads of that since at least the Vietnam war, and in spades since the advent of the Greenspan/Bernanke era.

Would preserving the gold standard have created a "perfect" financial world? Of course not. But we would have averted the worst of the excesses of the past 4 decades, and savers/investors, rather than speculators and manipulators, would have been rewarded.

The current US economy is hugely allocated to the practice of financial management (and law). Doug Casey identifies financial management alone as accounting for roughly 22% of the US economy (it should be more on the order of 1%). This is because value is being destroyed everywhere, and savers are desperate.

The world economy is imbalanced towards the holders of real assets - oil in the Middle East and Asia and cheap labour in southeast Asia. Islamic extremism has been funded by inflationary monetary policy, which has run up the price of Middle Eastern oil. The present regime is a disaster, and none of our political leaders has a plan to deal with it (apart from Mr. Paul, with whom I certainly do not agree on all points).

Was the abandonment of the gold standard the worst event of the second half of the twentieth century? Yes, certainly. Mr. Cashin is absolutely correct here.

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The US Dollar Is Well on its Way to Equivalency with Monopoly Money

3 August 2012

This wonderful graphic comes from Jim Sinclair.

Take your pick.

There is now little difference remaining between the two.

And... think before you act!

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