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In 1933, U.S. President Franklin D. Roosevelt outlawed the private ownership of gold by American citizens, forcing them to sell any gold bullion in excess of $100 to the Federal Reserve at $20.67 per troy ounce. To store the huge stockpile of confiscated gold, the US Treasury built the United States Bullion Depository at Fort Knox, Kentucky, in 1936. This vault has a 25″ thick casing with a 21″ vault door made of the latest torch and drill resistant material weighing 20 tons.
There must be something very valuable in there to justify this level of security. Official records say there’s 4,577 metric tons (147.2 million oz. troy) of gold bullion worth over $200 billion at current prices. Of late however, there’s an increasing number of respectable people questioning the notion that the stated amount of gold is actually still there, and if so, that it remains unencumbered.
In this History Channel documentary Decoded, Brad Meltzer attempts to answer the question “Is there any gold in Fort Knox?”. Featuring interviews with notable figures like Chris Powell of GATA, Law Professor Kevin Goldberg, Senator Dee Huddleston, former US Senator of Kentucky and many more, it’s an eye opener. -
Part 1 “What if I told you that Fort Knox is empty.The last time anyone was allowed inside was in 1974. Many experts today believe the soilders stationed here are protecting absolutely nothing.They point to numerous theories to explain their believes.., but if you tell me that no one’s been allowed to see this gold since 1974, I want to know if it’s there and I want to know what else is inside. It is time to decode Fort Knox.”
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Part 2 Craig Hulet, a returning veteran charged with issuing weapons to guards at Fort Knox was told by his Officer In Charge not to issue any ammunition because there was no gold inside. As for potential armed intruders - there’s a policy of “Let them in and zip them up”.A Financial Engineer from Princeton who spoke on condition of anonymity discusses the implications of an empty Fort Knox. He compares his work on financial derivatives at Wall Street to the Manhattan Project.
It’s a given. The debt ceiling will be raised - again. It has been raised 68 times since 1960. Why should this time be different? Maybe what’s different is the intensity of the theatrics.
US Debt Ceiling: Wikipedia
As Chris Duane puts it, ”All that is going on right now is political posturing for the election. Nothing of any real importance is being fought for. It is a carefully choreographed fight not unlike professional wrestling. The balanced budget amendment will never happen.”
So, while all this “white stuff” is being passed down from the very top to the bottom, we the people at the bottom of the financial food chain should take note of several key points raised by the Paul2 team in their recent interview with Neil Cavuto - and prepare ourselves.
Image courtesy of Casey Research
Cutting the Rate of Increase in Spending is not the same as cutting spending
It’s not a budgetary problem per se, it’s a government philosophy problem.
What they don’t realise and don’t admit is that the country is bankrupt.. there will be a default. The default is occurring. The people are getting less for their money and that’s how big governments and big countries default.
All this debt has to be liquidated for us to get growth again. They don’t want to liquidate debt by declaring bankruptcy… You liquidate debt by paying it off by junk money. You just print the money. And you have run away inflation. That’s an indirect tax on the people. By next summer there’ll be big talk on price inflation.
Monetary reform has to come for the resolution of this crisis we’re facing.
and cryptically “He wouldn’t pay his rent in silver”
[I don't live in the US. You may not too. So why bother? This will be a non-issue for many of us if not for the fact that the US$ is the world's reserve currency, the US is the largest debtor in humanity's history, the largest US banks are holding hundreds of trillions in derivatives and when the US$ goes down, it pulls the rest of us down, like it or not]
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In the very short term, especially immediately after announcement of any debt ceiling deal, and bearing in mind that there are no markets anymore - just interventions, it’ll be prudent to exercise some caution. In his latest Got Gold Report, Gene Arensberg finds market signals turning against gold.
In the mid to long term, if the Bullish Gold Case #2 plays out, consider converting your savings into hard currencies like gold & silver as part of the preparations for what’s to come.
Here’s a great summary of some recent positive outlook on gold by Jeff Clark
SICA Wealth Management’s Jeffrey Sica: “Right now, I think gold looks better than ever.” He sees a “painfully high probability” of troubling events occurring in the months ahead. “There has been a general loss of confidence in the ability of central banks and governments to manage the economy. That will continue to give gold and other precious metals a boost.”
Empire Economics chief economist Clifford Bennett expects gold to come close to $2,000 an ounce this year and $2,200 an ounce within 18 months. “There is risk in the second half of the year of a bit of a ‘panic spike,’ if you like, as everyone thinks there isn’t enough to go around and starts to hoard. That’s when you’ll really see gold take off towards $2,000 an ounce.”
Franco-Nevada Chairman Pierre Lassonde said the coming mania in gold will make the 1970s run look like child’s play. “In 1980, the only players, or the dominant players, were the Americans. Today the dominant players are China and India; 58% of all the gold sold this year will be sold in these two countries. When we reach that mania phase… watch out, because it will truly make your head spin.”
Antaike analyst Shi Heqing had this to say about Chinese investors: “Record high prices won’t scare away investors… they are likely to chase the rally and continue to buy gold because paper money feels increasingly worthless and they are worried about inflation.” Shi expects China’s gold demand to rise about 20%, due in no small part to the country’s 6.4% inflation rate.
Reuters: ”The case for gold in the longer term is still very strong,” said a Singapore-based trader. “Gold may appeal to new classes of investors who previously avoided the market in favor of more mainstream investments like bank deposits, bonds, and equities. Potentially there’s a whole new market for small-sized gold bars if these investors lose faith in paper.”
Newedge USA predicted gold will hit $1,800 and silver $70 by year-end due to investors seeking a haven asset and physical demand from Asia. “Gold is an excellent hedge in troubled times” said Mike Frawley. “Demand will be very strong long-term from Asia, and the economic trend in the West is improving.”
FX Concepts founder John Taylor: “Gold will climb to $1,900 by October.”
SMC Global: “Evidence of sluggish U.S. growth has shaken investor confidence. Concerns about rising inflation here have also boosted appetite for gold ETFs. Demand is high from small players.”
Minerals and Metals Trading Corp’s Ved Kumar Prakash reported “skyrocketing” demand for gold in India. He predicted that given the company’s brisk sales, gold imports would jump by more than 40% this fiscal year.
The Swiss Parliament is expected later this year to discuss the creation of a gold franc. “I want Swiss people to have the freedom to choose a completely different currency,” said Thomas Jacob, the man behind the gold franc concept. “Today’s monetary system is all backed by debt - all backed by nothing - and I want people to realize this.”
The Utah Legal Tender Act was signed into law by Governor Herbert last month. “Good monetary policy is an important part of a healthy and prosperous economy,” said Senator Mike Lee. He and other Republicans also introduced legislation to eliminate federal capital gains taxes on gold and silver coins. “Since the Federal Reserve Act of 1913, the dollar has lost approximately 98% of its value. This bill is an important step towards a stable and sound currency whose value is protected from the Fed’s printing press.”An “Iranian gold rush” is under way, according to an article by Reuters. “Usually as the price of an item increases, demand will decrease - but in the case of gold, it seems that higher prices are creating more demand,” said an unnamed Tehran gold retailer. “The reasons that people are drawn to these safe assets - gold coins and hard currency - are firstly a limited choice of investment opportunities, and secondly a fear from the weakness of the national currency,” said an economist who asked not to be named.
CIBC World Markets’ Peter Buchanan remains bullish even if the debt ceiling talks resolve. “Even in the likely event Congress agrees to a debt ceiling rise, recent uncertainties are likely to reinforce central banks’ ongoing efforts to diversify from the dollar into gold and other assets.”
Citigroup Global Markets reported that silver may more than double to $100 an ounce if the current bull market follows similar patterns seen between 1971 and 1980. “If the final rally in the last bull market repeated, then we can expect $100 over the long term… While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet.”
Gold Forecaster analyst Julian Phillips: “This is not typical of a ‘bull’ market that will eventually fall back from whence it came. We believe gold is not in a ‘bull’ market, because it is changing its shape and nature permanently. Our reasoning is not academic posturing, but a reflection of the realities that have taken place over time and those that confront us now. Because it is perceived to be an alternative wealth-preserving asset, a counter to a failing monetary system, it is not a simple commodity moving up and down with the flows and ebbs of economic cycles; it is a valid measure of monetary values.”
American Precious Metals Advisors Managing Director Jeffrey Nichols: “A recent survey of 80 central bank reserve managers predicted that the most significant change in their official reserve holdings in the next 10 years will be their intentional build up in gold reserves. They also predicted that gold will be their best performing asset class over the next year, and sovereign debt defaults will be their principal risk.”
Gloom Boom and Doom editor Marc Faber: “I just calculated that if we take an average gold price of say around $350 in the 1980s and compare that to the average monetary base and the average U.S. government debt in the 1980s…and then if I compare this to the price of gold to today’s government debts and monetary base, gold hasn’t gone up at all. It’s actually gone against these monetary aggregates, and against debt it’s actually gone down. So I could make the case that gold is today probably very inexpensive.”
GoldMoney founder James Turk: “In reality there are very few participants currently in the gold market… when I look at the price action, it suggests to me that a lot of this big money on the sidelines wants to be in. Therefore we are seeing some aggressive bidding on any pullbacks.”
Reuters Money reports that eBay’s “gold and silver outpost” has seen gold bullion sales jump more than 60% from 2007 through 2010. More significantly, “almost half of the silver and gold buyers in the first quarter of 2011 never purchased these items on eBay before.”
Sprott Asset Management chief investment strategist John Embry: “I think it will be really exciting when silver clears $50, because then it will be in absolutely new ground. There is, without question, major physical shortages of physical silver, and demand is robust. Once silver gets rolling, it’s going to levels people cannot imagine.”
It’s hard to go one day without seeing comments like these. The chorus is growing, and as these bullish views spread further and further into the mainstream, the number of investors attracted to precious metals will swell and continue to drive prices higher.
Is this growing consensus the sign of a top? As I said about gold stocks, taking the contrarian view in response to this information would be the wrong move. Fiscal and monetary issues are getting worse, not better, and I think we’re simply seeing more investors recognize the inevitable. We’ll worry about exiting this sector when real interest rates are positive and the dollar is once again a revered currency. Until then, it’s hard to imagine a scenario that isn’t bullish for gold. Any pullback should thus be viewed as a sale price.
Is the impetus for a mania building? I don’t know if we’re on the doorstep of that phase or not, but the fundamental reasons to hold gold are as strong as they’ve ever been. Indeed, it’s getting more critical to have meaningful exposure to precious metals. Keep in mind that when the debt ceiling talks reach a resolution - whatever it may be - the fundamental problems of excessive debt and further deficits will still be unresolved.
Will gold correct if agreements are reached on the debt talks? Probably, but I think the more appropriate question to ask is this: If these analysts are correct, do I own enough ounces?
Just before I hit the “Publish” button, gold takes a hit.
There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it.
Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law.
Contrary to a statement of Dr. Bernanke, made before he became the Chairman of the Board of Governors of the Fed, he could not drop freshly printed dollars from a helicopter, no matter how many reasons for such an action he may be able to cite. Another thing the Fed is not allowed to do legally is to purchase Treasury paper from the U.S. Treasury directly. It must be purchased indirectly through open market operations. If you don’t put the Treasury paper through the test of the open market before the Fed is allowed to buy it, the presumption is that the market would reject it as worthless, or would take it only at a deep discount. The law does not allow the F.R. banks to purchase Treasury paper directly from the Treasury because that would make money creation through the F.R. banks a charade, reserve requirements a farce, and the dollar a sham.
If that were the only problem with Quantitative Easing, it would be bad enough. But there is something else that is even more ominous. The fact is that the Federal Reserve banks can purchase Treasury paper only if they pay with F.R. credit that has been legally created.
F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued in accordance with the law. The law says that F.R. credit must be backed by collateral security at the time of issuance, usually in the form of an equivalent amount of U.S. Treasury paper. The procedure is as follows.
The F.R. bank seeking to expand credit takes its Treasury paper, owned outright and free from encumbrances, and posts it as collateral with the Federal Reserve agent who will then authorize the issuing of credit. In other words, if the F.R. banks do not have the unencumbered Treasury paper in their possession, then they cannot create additional credit legally.
There is some evidence that the F.R. banks do not have F.R. credit available to make the kind of purchases Dr. Bernanke is talking about as part of his Quantitative Easing. Nor do they have unencumbered Treasury paper in sufficient quantity that they could post with the F.R. agent for authorizing the issue of additional F.R. credit.
The point is that the process of posting collateral first, and augmenting F.R. credit afterwards must under no circumstances be reversed. What the F.R. banks cannot legally do is to buy the Treasury paper first with unauthorized F.R. credit, post the paper as collateral, and justify the illegal issuance of credit retroactively. Nor can they borrow the bond from the Treasury, post it as collateral, and pay for the bond retroactively.
This is an important limitation separating the regime of market-based irredeemable currency from the regime of fiat money involving outright monetization of government debt — the graveyard where the Continental dollar, the assignat, the mandat, the Reichsmark, and the Zimbabwe dollar (among countless others) rest.
At any rate, retroactive authorization of F.R. credit, if that’s what the Fed is up to, would be a violation of both the letter and spirit of the F.R. Act. It would mean converting the dollar into outright fiat money through the back door, bypassing Congress. It would show absolute bad faith on the part of the Chairman of the Federal Reserve Board of Governors, Dr. Ben Bernanke, who certainly knows what the law is. Such a blatant violation of the law would make him totally unfit for the powerful office he occupies. It would call for his immediate and dishonorable discharge by the President, pending Congressional investigation of the matter.
The various violations of the law of which the Fed is accused point to a concerted effort to remove the shackles the law has put on the money spigots lest crooks help themselves to the public purse. These violations are not isolated incidents. They are aiming at the corruption of the monetary order of the nation and the world. Moreover, they would ultimately figure prominently among the causes of the financial instability the world has been suffering from since 1971 and, more recently, since 2008.
Without understanding this fundamental truth, all talk about stabilizing the monetary system and reining in the runaway budget deficit is an exercise in futility.
Yours very sincerely,
Antal E. Fekete
Professor (retired)
Memorial University of Newfoundland
Tel./Fax: +36-1-325-7996
Note: an identical letter has been sent to Congressman Mike Pence of Indiana.
In 1974 Professor Fekete delivered a talk on gold in Paul Volker’s seminar at Princeton University. Later, Professor Fekete was Visiting Fellow at the American Institute for Economic Research and Senior Editor for The American Economic Foundation. In 1996 his essay, Whither Gold?, was awarded first prize in the international currency essay contest sponsored by Bank Lips, the Swiss bank.
For many years an expert on central bank bullion sales and hedging, and their effects on the gold price and the gold mining industry itself, he now devotes his time to writing and lecturing on fiscal and monetary reform with special regard to the role of gold and silver in the monetary system.
At this moment, when the world’s monetary system appears increasingly shaky, Prof Fekete details why the current paradigm is flawed and how the problems must be dealt with. This is almost taboo in the main stream financial media. Prof Fekete explains it as a gold crisis, not a dollar crisis. Those who doubt it would do well to recall that every fiat money system ever tried – and history is littered with examples – failed.
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