Political Metals

By Jeff Clark | BIG GOLD

While we’re convinced that our gold and silver investments will pay off, they don’t come without risk. What do you suppose is the biggest risk we face? Another 2008-style selloff? Gold stocks never breaking out of their funk? Maybe a depression that slams our standard of living?

Though those things are possible, we at Casey Research don’t see that as your greatest threat:

“Your biggest risk is not that gold or silver may fall in price. Nor is it that gold stocks could take longer to catch fire than we think. Not even the prospect of the Greater Depression. No, your biggest risk is political. As bankrupt governments get increasingly desperate for revenue, any monetary asset held domestically could be a target. It is absolutely essential that every investor diversify themselves politically. In fact, at this point, it is the one action that should be taken before anything else.” - Doug Casey, September 2011

I know many reading this are prudent investors. You own gold and silver as solid protection against currency debasement, inflation, and faltering economies. You set aside cash for emergencies. You have strong exposure to gold stocks, both producers and juniors, positioned ahead of what is likely the next-favored asset class. You feel protected and poised to profit.

Yet, despite all this preparation, you remain exposed to one of the biggest risks.

Similar to holding a diversified portfolio at a bank without checking the institution‘s solvency, many investors keep their entire stash of precious metals inside one political system without considering the potential trap they‘ve set for themselves. While storing some of your gold outside your home country is not a panacea, it does offer one important thing: another layer of protection.

Consider the exposure of the typical US investor:

1. systemic risk, because both the bank and broker are US domiciled
2. currency risk, as virtually every transaction is made in US dollars
3. political risk, because they are left totally exposed to the whims of a single government
4. economic risk, by being vulnerable to the breakdown of a single economy

Viewed in this context, the average US investor has minimal diversification.

The remedy is to internationalize the storage of some of your precious metals. This act reduces four primary risks:

Confiscation: We don‘t know the likelihood of another gold confiscation. But we do know that things are working against us - particularly for US citizens. With $14.7 trillion of debt and $115 trillion of unfunded liabilities, the US government will likely pursue heavy-handed solutions. Under the 1933 FDR “gold confiscation” in the US (the executive order was actually a forced delivery of citizens‘gold in exchange for cash), foreign-held gold was exempted.

Capital Controls: Many Casey editors think some form of capital controls lie ahead, limiting or eliminating a citizen‘s ability to carry or send money abroad. If enacted, all your capital would be trapped inside the US and at the mercy of whatever taxing and regulating schemes the government might concoct. Although you might be able to leave the country, your assets could not travel with you.

Administrative Action: There are plenty of horror stories of asset seizure by a government agency without any notice or due process, possibly leaving the victim without the means to mount a legal defense. Having some gold or silver stored elsewhere provides what could be your only available source of funds in such a scenario.

Lack of Personal Control: Having gold and silver stored elsewhere adds to your options. You will have a source of funds available for business, entrepreneurial pursuits, investment, or pleasure.

Foreign-held assets also require greater awareness and planning:Notice above we said these risks can be reduced, not eliminated. There is no perfect solution; US persons could, for example, be compelled to pay a “wealth tax” on assets held worldwide, or even repatriate them in a worst-case scenario. Absent a crystal ball, the political diversity of asset location is an essential strategy against an uncertain future.

1. Access to your metal or sale proceeds may not be quick. Therefore, this option is for those with some gold and silver stored at or near home. We do not recommend storing all your precious metals overseas; that defeats one of its purposes, to have it handy for an emergency.
2. While we think the US poses the greatest threat, a foreign government could move to control certain assets as well. The risk varies by country and is generally greater within the banking system than with private vaulting facilities.
3. Understanding and complying with reporting requirements is essential.

The bottom line, though, is that foreign-held precious metals can mitigate risk and give you more options. And as your metal holdings grows, diversification becomes more crucial.

Given our current rapacious climate, it‘s likely that simply buying gold won‘t be enough. We strongly suggest every investor diversify one‘s bullion storage outside their current political regime. The option may not be available someday, leaving you vulnerable without a secondary source of bullion.

We advise taking advantage of the opportunity before it is gone.

[One way to internationalize your bullion is to use a safe deposit box in a second country; however, this requires traveling to the institution to handle the paperwork and organizing the transport of your bullion... and the contents of a safe deposit box aren't insured. Other programs will store gold; but the metal is often held in the form of fractional ownership in a 400-oz. bar and not specific coins and bars held in your name. A better solution is to store your bullion in a non-bank depository, outside your home country, without shared ownership, and do it for a reasonable fee. We found a program that provides all those things; and it offers BIG GOLD readers six months' free gold and silver storage in a Canadian vault. A risk-free, three-month trial subscription to BIG GOLD will qualify you for that deal... plus all the expert analysis and actionable investment advice packed into each issue.]

Related Articles:

• Buying & Storage Options
• Storing gold & silver at GoldMoney, BullionVault, AFE

By Alex Stanczyk | AFE Global Insider

Once an investor comes to the conclusion that gold is currently behaving as money and not as a commodity in this global economic environment, it is then clear how gold might fit into a portfolio. Instead of comparing gold to bonds, commodities, or equities, gold should probably be compared directly against other currencies. In this regard, one could point to the fact that it costs money to store, protect, and insure gold, but I would suggest that the typical 1% per annum cost of doing this is far below the opportunity cost of holding bonds in a negative interest rate environment. If the CCI index is averaging 14% gains per year, what that is really telling us is that the market considers the loss of buying power in the USD to be approaching this number versus the government-reported statistics.

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All portfolios hold a cash component; why not hold some of this in gold? It is as liquid as any other currency with a 24- hour global market. When you compare gold’s performance versus nine of the top currencies globally over the last decade and then average it, you will see that gold has performed on average 17.1% better than all currencies in real purchasing power for the last ten years running.

There may be a time when it is deemed wise to lower exposure to equities and bonds and sit tight in cash. At this point we must ask the question, which form of money is going to hold value the best? Another question that a prudent money manager might consider is, “Do you have a strategic plan in place to deal with currency devaluation and systemic risk?” If not, perhaps it’s time you should.

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Alex Stanczyk is an Executive Vice President of Anglo Far-East Bullion Company and a Market Strategist for the Luxembourg regulated Precious Metals Fund - LFP Prime SICAV SIF

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For those who don’t agree with Alex, you have company! Listen to what this reporter has to say about why some investors are not buying gold.

Apparently, some investors don’t buy gold because it is backed by nothing! At least the USD is backed by the American government, and the Federal Reserve will still be around a year from now .. And that makes it a more comfortable investment for them!

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Our generation grew up with the USD as the global reserve currency, and until recently, few would have questioned its status. Since the global financial crisis of 2008, and more so in the last few months, increasingly large segments of the global community have been questioning the status quo to the extend of actually preparing themselves for the inevitable day when the USD loses its reserve currency status.

While the average lifespan of global reserve currencies is around 100 years, the average lifespan of fiat currencies is only 27 years.  Most if not all of the above global reserves currencies had some form of gold or silver backing in one form or another, that is they were not fiat currencies. The USD has been serving as a global reserve currency for over 90 years, 40 of which as a fiat global reserve currency.

If history is any guide, the USD is fast approaching its “use by date”. It is little wonder that many are preparing not just for the inevitable loss of its reserve status but also the demise of the currency itself.

Mr. Trump said he sees the deal as a repudiation of the Obama administration’s economic policies, of which he has been a vocal critic.

“It’s a sad day when a large property owner starts accepting gold instead of the dollar,” Mr. Trump said in an interview. “The economy is bad, and Obama’s not protecting the dollar at all. … If I do this, other people are going to start doing it, and maybe we’ll see some changes.”

Mr. Trump said he has some gold in his personal portfolio, but declined to say how much.

Thursday’s transaction was something Apmex suggested, Mr. Trump said.

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Top 10 currency gainers as at Aug 2011

Two weeks ago, the Swiss Franc was one of the most sought after currencies. Yesterday, a short statement from the Swiss National Bank (SNB) turned the tide.

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures

That’s how fragile the so called safe haven currencies are. Their value and potential devaluation is just a few keystrokes away. This was not the first time the SNB intervened to devalue its currency. It quadrupled its foreign currency holdings in the first half of 2010 in a similar effort to manage the CHF resulting in a record $21 billion loss. Going further back, it pegged the Franc to the German Mark at 0.80 in 1978 resulting in soaring inflation.

Yesterday’s intervention resulted in this dramatic move in the price of gold priced in CHF. That’s not surprising considering the fact that it pledged to ” buy foreign currency in unlimited quantities”. Unlike Greece and other Eurozone countries in crisis, the SNB can print unlimited quantities of CHF to honour that pledge.

Gold priced in CHF gained 8% following the SNB statement

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Putting a floor below 1.2 EUR/CHF appears to be worse than the much criticized move by Malaysia to peg the Ringgit at 3.8 to the USD in 1998. Unlike a peg, a floor allows the CHF to weaken but not strengthen against the EUR. One has to wonder, what will happen to this “former safe haven” currency if the Euro collapsed.

Of late, currency devaluation, capital controls and aggressive central bank interventions have become acceptable, if not respectable, as seen in Brazil, Japan, Switzerland, Iceland, Vietnam & the once almighty US, just to name a few.

When will the paper currency you’re holding be the next victim of this global currency war?

Related Articles:

• Gold is the only safe-haven asset that will not do QE, put in capital controls, or complain
• As Swiss devalue their franc, gold may be last currency standing
• 20 Quotes From European Leaders That Prove That They Know That The Financial System In Europe Is Doomed

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It scares me!

Gold punched through $1,900 today. If the current financial system can withstand the stress and remained intact till the day gold trades at $20,000 an ounce, what will life be like then?

If we’re holding gold at that time, we may be doing fine but we are not likely to be 10 times richer. That’s because nothing much has happened to our gold. Rather, paper currencies would have lost so much purchasing power that it would take 10 times more of the same to buy what we could buy today. A Big Mac will most likely cost around $43 in the US. In Malaysia, NZ and Britain, it’ll like be  around RM76, NZ$54 and £25 respectively (estimates based on Big Mac Index). When a basic meal costs that much, life can be very tough for savers who continued holding on to their paper currencies or other paper assets.

Many of my friends and relatives, from retired professionals to missionaries have been ill advised to rely on supposedly safe or high yielding investments like mutual funds, government managed pension schemes, term deposits or hot stocks to generate passive income or preserve the value of their retirement funds. Despite being presented with information from this website and elsewhere, there’s little affinity shown towards gold or silver. This scares me and for their sake, I hope gold does not get anywhere close to $20,000 before they get on board.

What’s even scarier is the fact that an enormously huge segment of society do not have the means to get on board, even if they wanted to. We’re looking at the 1.4 billion people living on less than NZ$2.25 a day. That’s less than 0.05 ounces of silver! They worry not about the Fed nor the Cartel but about how to provide food, clothing, housing and healthcare with that amount each day. It’s about survival, not savings. Pause for a moment to imagine their plight when gold hits $20,000.  Spare them a thought today, and check out their appeal for assistance.

Why $20,000 gold?

In this recently released documentary, Mike Maloney presents the case for $20,000 gold by stepping back and looking at the big picture. He takes us back, very far back, and paints us a very big picture. This excellent educational video is a must watch, especially if you’re new to the Political Metals space. It’ll be your 90 minutes well spent.

But if you can’t spare the time, I’ve highlighted some of his key points with some new charts below for a quick read.

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Dow/Gold Ratio Chart: Where are we in the Wealth Cycle? 

Using the Dow Jones Industrial Average (Dow) as a measure of performance of the equities market in general, the ratio of the Dow to the price of gold indicates the performance of equities market relative to gold. Currently each point of the Dow is worth about 6oz of gold. During the process of correction after the biggest stock market bubble in history, the ratio is expected to head towards the historical mean (4oz) and overshoot it before finding its fair value again.

The bigger the bubble (deviation from mean), the larger the overshoot. During the present cycle, Mike expects the overshoot to touch 0.5:1 (1 oz of gold worth 2 points of Dow). In its extreme, the Dow would have to collapse from 11,000 to 950 if the price of gold remains at current level of $1,900. Conversely, gold will increase to $22,000 if the Dow remains at current levels.

Relative performance of Dow Vs Gold & Silver since Jan 2000
(Worst reference point, at peak of stock market bubble)

Relative performance of Dow Vs Gold & Silver since March 2009
(Best reference point, at the start of QE1)

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Currency Supply Chart: Where are we in the Inflation/Deflation Cycle?

For simplicity, “money” & “currency” are used interchangeably here. Watch the video to see the difference.

Monetary inflation is the increase in money supply resulting in price inflation (rising prices of goods & services), with a time lag between the former and the latter. The reverse applies to monetary deflation and price deflation. Studying the trend in money supply or the total amount of currency in circulation (CinC) over a period of time gives us an idea of where we are and where we’re heading in terms of inflation and deflation.

Money is created in two stages. The initial Base Money is created by the Fed (or other central banks). More new money is then created (up to 9 times the initial Base Money) within the private banking system through credit. It is loaned into existence. Watch the video to learn more about the money creation process.

The chart above  represents the amount of CinC that’s exclusively created by the private banking system. The highlighted area indicates that this component of the overall money supply has dropped by $1.7T since the 2008 crisis. This is the Debt Collapse or Credit Contraction. Less lending by banks results in less money chasing goods and services, leading to price & asset deflation. It is evident from the chart that a contraction of this magnitude has never happened since 1960. The last time it happened was just before the Great Depression of the 1930s.

In response to this credit contraction, and in an attempt to prevent another Great Depression, the Fed has been rapidly increasing the Base Money supply by creating new money. The recent rate of increase is unprecedented. The first trillion dollars was created over a period of about 90 years. The next $1.4T came into existence over the last 2 years!

This rapid increase in Base Money (red chart) was an attempt to offset the decrease in the credit money (blue chart). When we add these two components of money supply together, we obtain the total CinC (Base Money plus Credit Money) as shown in the chart below.

Notice the contraction at the top of the chart, albeit a smaller one. It is evident that despite the frantic pace of money printing by the Fed, it has not succeeded in offsetting the reduction in money supply due to credit contraction.

The Fed has little choice but to continue creating money.  With such a large perturbation in total currency supply and due to the complexity and size of the monetary system, it is not possible for the Fed or anyone else to create just sufficient money at just the right rate such that the total CinC won’t overshoot its long term trend. The principle that the larger the deviation from the mean, the larger will be the overshoot during the correction applies here as in the stock market above. The fact that there’s an undetermined time lag, between monetary inflation and price inflation further adds to the likelihood that the next round of money printing will result in a massive overshoot. Coupled with other factors, hyperinflation could be just round the corner.

In his book, Rich Dad’s Advisors: Guide to Investing In Gold and Silver: Protect Your Financial Future, and again in his presentation, Mike predicted the following sequence of events:-

1. Threat of deflation - At the onset of the 2008 crisis (Past)
2. Money printing - TARP, QE1, QE2 (Past & more to come)
3. Big inflation - Here and now (anyone disagree?)
4. Real deflation - Asset deflation in real estate & stock market (The severe but short deflation  is ahead)
5. Hyperinflation - Just round the corner?

How does gold perform under inflation and deflation environment? Check out the study by Oxford Economics: “Impact of inflation and deflation on the case for gold”.

Related Resources:

• Fractional Reserve Banking - Two short video clips on money creation
• Crash Course on Banking, Finance & Economy. By Chris Martenson
• Central Banking and the Federal Reserve System (Fed)