Reading time: 16 – 26 minutes

TRACE MAYER: Welcome back to episode #55 the RunToGold.com Podcast, I’ve got with us today a special guest, Ian Gordon from the Long Wave Group. Welcome Ian.

IAN GORDON: Thank You very much for having me.

TRACE: Great. To start off with the latest news, why do you think that the gold price is taking this rapid jump of about of $60  per ounce over the last week.

IAN: I have never really that concerned about the “machinations” at work. I am extremely bullish on the gold price basically because I think the world is falling into the deflationary depression of the 1930’s and because of that I do not really worry about what is happening in the short or intermediate term. I think we are going to see much higher prices anyway. But I guess if I was to give you an answer I suspect it might be that India is buying the International Monetary Fund gold.

TRACE: 200 tons!. Usually that is trotted out by the gold cartel as “Oh, we are going to sell the IMF Gold and the price will go down. But in this case, India bought about half of what was available. I suppose that China is probably waiting in the wings to buy the remaining amount. Why do you think it is that India is willing to allocate this small percentage of their foreign reserves to purchase the IMF’s gold.

IAN: Well, I think that gold as money is going to shift to the wealthy countries and it is shifting out of the United States because the IMF is essentially run by the United States and is moving to the wealthy countries of the east. And that is where the wealth of the world is moving as well.  I think that for a country like India it has to put more of its reserves and it already has cause it only has a minuscule amount into gold because other reserves are in the dollar and you know what is been happening to that. Basically anyone invested in the dollar is being badly hurt.

TRACE: Exactly. I could not agree with you more on these points. Now with the Long Wave Group you focus on long-term waves and particularly on the Kondratieff Winter. And actually we met at a Cambridge House Investment Conference and I think we were both presenting there. And I think we have a pretty similar viewpoint on what is happening. “What is the Kondratieff Winter and the theory that under girds a lot of your work.

IAN: Okay my work is developed around Kondratieff Cycle that was promulgated by Nikolai Kondratieff, a Russian economist in the mid-1920’s.  It is a long economic cycle and he based his theory on prices, on the movement of trade, on money movements and inflation and so on. And he came up with this idea that capitalism really underwent this long cycle of expansion and contraction.  That the cycle lasted about 60 years, so first half of the cycle is really the expansion phase, and the second half is the contraction phase, and the last quarter of that contraction phase essentially is the depression- a deflationary depression stage in the cycle.

TRACE: Now, just an interesting tangent what ever happened to Mr. Kondratieff?

IAN: Well, Stalin sent him to gulag and he died in about 1938 in the Gulag. I mean some people had it that he was executed but what I read was that he actually just died in the gulag.

TRACE: It would be funny if it were not so sad that we had these political leaders, really just criminal gangs that strut around in their costumes, and yet when somebody comes along and does have a theory, like Galileo for example, and it explains how the world really works then the common response to that is to shove them in the gulag. And Mister Kondratieff was not any different than a lot of the very insightful thinkers that we have seen over the last century.

I noticed from your report that I read, “All That Glitters Is Gold” that you say:

The velocity of money will essentially come to a standstill … In deflation, as in the 1930s, those few people with money curtail their spending in the knowledge that prices will be lower tomorrow.

Could you please expound on that?

IAN: Most people today are basing their assumptions on the Federal Reserve printing and assuming that that monetary printing is going to lead to inflation. And most of the bullish gold analysts are bullish because they see inflation coming in to the economy. We are of the opposite view. We believe that we are going to have deflation and in fact massive deflation in the economy. And to have inflation you have to increase the money supply.  But to have an increase in the money supply the money has to transfer to the people who want to spend it. And to spend it as fast as you can because what they see ahead of them is just rising prices so they buy today rather than pay the high price tomorrow.

What happens in deflation is people do not spend but instead hoard money because they see lower prices tomorrow and they would rather wait for the lower prices.  A deflationary environment always sort of happens when the economy is really really bad. And we are going into the Kondratieff Winter or deflationary depression stage and people are scared.  Because they are scared they are not going to be spending money but the Federal Reserve and the central banks around the world want them to do. They are going to be hoarding the money which we see with the banks. The banks are not lending money out and they are hoarding it to improve their capital base.  So we do not get the fast movement of money in this kind of environment and therefore the velocity of money slows tremendously.

TRACE: And actually I think I have used the term “FROZEN”. But to take the other side of the argument, which I will do here, is not all of the these bank reserves just pent-up demand that will is like flood waiting to happen as soon as the dam bursts. Is not that not the argument of the inflationists. As soon as all these bank reserves finally burst through the dam and they begin lending again then we are going to have tremendous inflation and gold is sensing this future inflation and that is the reason it is rising. How do you respond to that type of argument?

IAN: Well, we have only just begun the real payback period. You know the whole purpose of the Kondratieff Winter or  deflationary depression part of the cycle is the washing out of the debt has been built up throughout the cycle. And our present cycle started in 1949 but the main build up of debt occurs in what I call the autumn of the cycle.

And the autumn started in 1982 and that is where the banks really started to make money available to consumers and corporations so there was a huge amount of borrowing that goes on starting in 1982 but it really reached its peak essentially in 2007. And that big borrowing was lent to people who will never have the ability to pay it back. And we can see it in the housing crisis that is now going on  in the United States and which we will see go through it in Canada even though most Canadians have believed that w ill not.

When that happens, all that debt starts to come out of the system. So that is money coming out of the system. And so the banks have been hit hard once on the sub-prime mortgage debacle. They are going to get hit hard again on other kinds of debt like commercial real estate. We are already seeing credit card debt starting to hurt some. So there is a massive amount of debt that is going to have to be taken out of the system.

You look at the United States and there is about $58 trillion of government debt.  W have abut $44 trillion of consumer, corporate and financial debt. And about half of that debt is going to be washed out in the winter. I thought of conservatively estimated that it will be about $22 trillion but I suspect it is going to be more.

But $22 trillion, the Federal Reserve does not have the power to print that kind of money so that even if they did print $22T then we would simply be at the same place we are now. We would not have really increased the money supply.  Well that is really what is going to happen is that were going to have a massive decrease in the money supply and the amount of deflation like we did in the 1930’s because the debt problems are the same. It was not as bad as then as it is today. And in fact, back in the early 1930’s we had a 30% deflation occurring in the United States. And I see a similar kind of situation happening this time.

TRACE: Now, this is an interesting issue that I address right off the bat in my book The Great Credit Contraction. And it is, what is money? And so I actually like to distinguish money from currency. Currency being the tool or instrument that we use on our ordinary daily transactions. And currency can either be money, money substitutes or an illusion.

Money has to be a tangible assets such as gold, silver, platinum, etc., and a money substitute would be, say a gold certificate like we had in 1933. And an illusion is just some made up little green paper tickets or digits in some database such as Federal Reserve Notes or Canadian Dollars or whatever these fiat currencies are.  Deflation under the Austrian school of economics definition is a decline in the money supply, or I would say the currency supply.

Could we have the illusions actually increase in supply to help support more of these gigantic inverse liquidity pyramid that is on top of it OR is your argument that even if the Federal Reserve tries to increase that the currency supply, which are illusions, that the capital will still go lower into something safer and more liquid, primarily gold, and that there is nothing they can do to stop this and therefore the evaporation of the liquidity pyramid because the earning capacity of the worldwide economy just is not substantive enough to support the service of all the debt.

IAN: We have all seen Exter’s inverse pyramid and I have a copy on my website. I know you have developed your own inverse liquidity pyramid and both have in common that at the bottom of the pyramid is gold. Gold is the ultimate currency that people have trusted. And that is really what we are already seeing with the move to gold. There is not any inflation. Yet, there has been a massive move to gold causing the gold price to close in on $1,100 per ounce. So people are buying gold and hoarding gold because they are fearful of what is transpiring.

TRACE: So we see for example the evaporation of auction rate securities, commerical mortgage backed securities or money marketsand those like cash instruments we are seeing people move into are either Treasury Bills or going a step further like the Indians and saying just give me two hundred tons of physical gold bars in my hand.

IAN: Exactly.

TRACE: Fear is definitely a powerful motivator. Now, I would like to tease out another one the quotes from that report you sent me:

Once the debt bubble is unwound, it is deflation in nature because it is painful and results in bankruptcies on both side of the ledger.  Actually, it takes money out of the system and during our Kondratieff Winter, trillions of dollars of debt will be expunged.

Now we talked a little bit about the latter part but how about the former.  When you talk about it resulting in bankruptcies on both sides of the ledger, what exactly do you mean?

IAN: I mean both the creditors and the debtors are going to be bankrupt. And we have already seen that. We have seen the creditors like the major banks both in the United Kingdom and in the United States being severely impeded by the credit bubble bursting. And we have seen the debtors being severely hurt as well. We have seen General Motors go bankrupt, Chrysler go bankrupt, and that is just the beginning because as they say, the next shoe has to drop. What we have seen really in this recovery phase in the markets and so on is very similar to the recovery phase that we saw 1929 to April 1930.

When the Federal Reserve of that time was really frightened by the crashing stock market and they pushed money into the banking system at a horrendous rate.  According to Murray Rothbard in his book, America’s Great Depression, in one week the money supply was increased by 10%. And they brought down interests rates in 6 weeks from 6% to 3.5%.

That got the things going again and it got particularly the stock market going again so we got a recovering stock market from November 1929 to April 1930. And essentially 50% of the losses that occurred before that were recovered.

But the whole thing is that the debt that was underpinning the economy had not been paid back.  So the real fragile state in the economy was the debt bubble. That had occurred throughout the 1920’s and it is in the same position today. So we have had a recovery in the stock market and I believe that recovery is over. And we are now going to the next level down in stocks much as as we did after April 1930.

TRACE: A few months ago I wrote about the coming market crash.  We have actually already seen the Dow break down below 9 ounces of gold for the Dow, just recently. Now, back to this part about bankruptcies on both sides of the ledgers.  I have written about bankrupting for profit and fair value lying standards with the mark-to-market FASB 157 affecting or being applied in keeping some of these zombie institutions alive.

IAN: Well, I think we are seeing it through sleight of hand. Basically, the values of the derivatives that they have on the books have been sort of pushed under the rug and hidden from view so that we are not really going to be a apprised on what the real situation is in the banks.

TRACE: And that perhaps is one of the reasons that we are seeing the bank reserves so high is that all the banks have an incentive to understate their liabilities under FASB 157 and yet at the same time overstate the assets but really the liabilities that one bank holds are an asset of another bank and therefore all the banks know that everybody is lying. And because of that therefore everybody is sitting on a lot of their capital in the form of bank reserves. Would you say that is a fair assessment?

IAN: I think so. Yes. Absolutely right on.

TRACE: OK. I got another quote I found very interesting in that report you sent out:

When that occurs as in 1873 and 1929, and now there is fear and panic. In all panics, there exists an instinctive will in all of us to survive and succor loved ones. Like always, the the paper money system collapsed and gold replaced it.

And so, in my book The Great Credit Contraction, I addressed the issue of Peak Oil. And so I was wondering exactly how bearish of the general worldwide economy are you?  Obviously you are bullish about the precious metals but how bearish are you on the worldwide economy and perhaps the standard of living for example?

IAN: Well, I am very bearish.  Again we go back to the 1930’s to use that as the measuring stick for what we might expect this time around. And in the 1930’s, the U.S. economy contracted by about 45%, or GDP drop by 45%. Now, I think its going be bigger this time because the debt level is significantly larger now than it was in 1929. But assume that 45% drop from $14T to $8T. So that is a huge, huge drop.

And it means that people are far poorer than they have ever been and an awfully lot of them are not going to be working. In the US in 1933 about 25% of the work force was unemployed and a much larger percentage of the workforce was employed in agriculture.

TRACE: It seems like you are not as bearish as some of people out there. For example, we have extremely complex systems. And when the Federal Reserve intervenes in determining both the money supply and the cost of money through interest rates it amounts to central economic planning. And that central economic planning may have worked when the economy was so simple with for example some thug coming in and saying well you can only sell your cow for a certain amount.

But now we have these hugely complex systems were we drill 5 miles into the ocean to extract oil. And then spray that oil onto our fields as herbicides, pesticides, and fertilizers to grow our food, and then we put the oil in trucks and to get the food into the supermarket.  We have these hugely complex systems with central economic planning and that central economic planning is now failing. And there is a branch within the peak oil group that talks about die-off.  What Obama is doing now is really trying to duplicate what President Roosevelt did.

President Obama and the Federal Reserve think that they can centrally plan the entire economy.  Under Austrian Economics theory interest rates regulate production over time. And so, when we have the interest rates suppressed for the last 60 years we have produced a lot of things. Particularly the population of the world has increased tremendously.

Especially with peak oil and this complex systems that can fail do you see that we could perhaps have even a worse case scenario like some of those who talk about a die-off situation?

IAN: Well I do subscribe to the theory of peak oil. But again, I think the demand for oil is going to drop precipitously. Simply because non one’s gonna be working. Again if we use the idea that 45% of the U.S economy is going to be halted. That means essentially that the same kind of oil demand is the percentage dropping oil demand is also going to occur in the United States. And we are only picking on the United States because she has the largest economy in the world but we are all going be in be in the same boat.

So the whole world economy is going to drop by that kind of percentage.

TRACE: But not necessarily a precipitous enough drop that we could see 90% of the earth’s population washed away in this winter because of unsustainability?

IAN: Well, you are not going to see that because, as you know, there is a significant part of the world’s population who basically do not have anything anyway. If we go into Africa, or huge parts of China, India, etc. even though they are emerging nations they still have a large percentage of the population that are extremely poor.

So it is the wealthy nations that are really going to be hurt by this downturn and I think in particular, it is going to be WASP nations- United States, Canada, Australia and Great Britain, because that is probably where we saw biggest debt burden incurred.

TRACE: I agree.  I doubt we will see a die-of situation.  Thank you very much.  If people want to learn more about your work and your theory, how can they do that?

IAN: They can visit my website Long Wave Group.  Thank you very much Trace.

Reading time: 8 – 13 minutes

Edgar Allen Poe’s most widely circulated story was ‘The Gold Bug‘ where William Legrand appears to go insane after being bitten by a bug he thinks is pure gold and embarks on a search for mythical treasure.  Paul T. Jones II of Tudor Investment Corporation has approximately $11.57B under management and has earned $1.22B year-to-date in 2009.

Mr. Jones is a serious money manager who makes serious money.  In the 2009 Q3 report he wrote, ‘I have never been a gold bug.  It is just an asset that, like everything else in life, has its time and place.  And now is that time.’

20% UNDERVALUED

On page 17 he writes,

Our proprietary econometric model, which evaluates the impacts of inflation, M2 growth, and real rates on the price of gold, suggests – under our baseline macro scenario – that gold is 20% undervalued over the next 24 months.  Our modeling work highlights the importance of real rates and inflation to the price of gold.

Mr. Jones is not alone with the Ancient Metal of Kings and is flanked by John Paulson with over $4B in gold investments and David Einhorn of Greenlight Capital who understands the risks of GLD and reported to shareholders that  ’We made modest changes to our macro hedges.  First, after extensive investigation we switched our entire GLD exchanged traded fund position into physical gold’.  Interestingly Mr. Jones devotes 9 of 23 pages discussing gold like it is some forgotten mystery of finance.  In some sense it is because if you want to learn the truth out money you have to learn it on your own.

Mr. Jones’ valuation of gold is eerily similar to my call of $1,300 earlier on Business News Network of Canada.  $1,300 times 80 percent is $1,040.  While Mr. Jones does not assume the title of a ‘gold bug’ having such company is encouraging.

GOLD SUPPLY

On page 18 he recites,

Despite a three-fold increase in worldwide metal exploration expenditures, new mine production has remained stagnant at 80 million troy ounces over the last decade.  In addition, new mine production is marginal in terms of available supplies.  As a result, any incremental demand for gold must be met through sales from current owners.  They just aren’t making that much of it anymore. … The recent advent of physically-backed gold ETFs has increased investment demand from a new investor class. … The trailing 12-month ETF accumulation has “bought” the equivalent of 25% of new mine production consistently since the beginning of the year. … This represents a remarkable change of direction for a market that has been accustomed  to absorbing substantial volumes of gold sold by central banks over the last decade. … More importantly, there is huge potential for more buy-side interest to emerge from central banks.  Total international reserve assets have quadrupled over the last decade, primarily from the accumulation of global money.  However, the percent of total reserve assets held in gold has declined markedly [emphasis added].

For reasons stated earlier I appreciate his use of the word ‘equivalent’ and also the ” around the word bought.

GOLD MARKET DISEQUILIBRIUM

Mr. Jones is, like most of us, merely on the prowl for a good investment.  But there is no market more out of balance in the history of the world than the gold market.  The closing act of this centuries old play began with the fat old lady singing (Bank of England dumping the crown’s reserves).  There is even massive fraud alleged.  But you do not spend a lot of time swimming with the vampire squids of Wall Street or in private equity without encountering rigged markets.  Indeed, a nimble outsider can book some good profits by breaking or riding cartels.

But the more I investigated the gold market the more I learned it is easily distinguished from potash, pork bellies or even oil with OPEC.  In this case, the price is being suppressed and not supported and this was being done not by users but by owners.

Dr. Greenspan even testified in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”  Thus, we had a market that was undeniably rigged and that rig was officially sponsored and denied.

But if you own tremendous amounts of an asset then why run a cartel to keep its price down? Like a shark that smelled blood in the water I honed in on GATA’s beacon of gold bleeding central banks.

With books like Dr. Vieira’s masterful and meticulously footnoted 1,700+ page Pieces Of Eight and GATA’s dispatches and conferences I learned the macro picture.  Gold is real money, poses a mortal threat to the fiat FRN$ based monetary system, and the bank’s legal monopoly to issue legal tender currency is inifinately more valuable than the price of a portfolio asset.

This legal counterfeit monopoly allows for confiscation through inflation which is a form of taxation without representation and without due process of law and in violation of the United States Constitution.  Because this is done only under color of law consequently Federal law has no intelligible answer to What is a Dollar?

As Ludwig von Mises wrote,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.

Indeed, fiat currency and fractional reserve banking are the heart of the State and its health is war, carnage and death.  Therefore, these centuries old tools of fiat currency and fractional reserve banking are both barbarous and relics that allow special private interests to profit from nefarious activities.

GOLD PRICE SUPPRESSION SCHEME

With meticulous documention by the Gold-Anti Trust Action Committee the environment was clear.  The gold market is rigged.  The rig is used to prop up a monetary system that is immoral and in conflict with the Supreme law of the United States.  The rig is merely a means to that end but it is integral and indispensable.  Also, the deeper you dig the more integral it appears to be.  The Achilles heel appears to be physical delivery.

Consequently, the worldwide monetary system is a confidence game built on an illusion and if the people lose confidence in the illusion then the system does not collapse but evaporate.  The easiest way to undermine the fraudulent illusion is by telling the truth and letting real money run free.  As truth will cleave its own way and because of the complex systems we rely on for ordinary life this inevitable event of currency collapse could be very disruptive.  It became time to prepare for survivalism in the suburbs.  This would likely result in tremendous social, political, geo-politicial and geo-strategic changes.

GOLD BUG FEEDING FRENZY

And so the process that many of us have undergone is happening now to many others.  With advances in telecommunications and the Internet the idea of sound money is spreading faster than fabricated H1N1 growth rates.  Major money managers like John Paulson, David Einhorn and now Paul Jones are being bitten by the gold bug.  As I wrote about over a year ago in The Derivative Illusion,

My strategy is to acquire gold on a consistent regular basis with a constant percentage of proceeds from cash-flowing assets.  When you own an unencumbered ounce of gold your wealth is sovereign.  Hoard it.  Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral. Those who own gold know of what I speak.  The yellow metal seems to call out to the inner conscience and resonate with our DNA.  The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.

What is happening is a sea-change.  Fiat currency and fractional reserve banking are going to be replaced by commodity currency with 100% reserves through services like GoldMoney.  It is like an iceberg flipping.

While no one knows exactly how this will play out and hopefully the machine does not stop but the transition happens in a rather orderly fashion and without too much chaos, disruption of ordinary life, destruction of property or loss of life.  The issue is not that there is not enough gold but that there is too much worthless paper and the first rule of panic is to do it first.  While Mr. Jones is late to the feeding frenzy on the central banks’ physical gold he has still arrived before almost everyone else.

DISCLOSURES:  Long physical gold and silver and no position in the problematic SLV or GLD ETFs.

Reading time: 10 – 16 minutes

The first message to ever travel between two computers connected via the ARPANET, the computer network that would become the Internet, happened on 29 October 1969.  The Internet just turned 40.  And 40 is the new 20.  It is incredible that Al Gore, born 31 March 1948, was able to invent such an amazing series of tubes at the age of 21.  Technology is rapidly changing humans, life and relationships.  In fact, the homo sapien is about to become obsolete.  Perhaps 300 will become the new 20.

Forewarned is forearmed and this article is both objective and persuasive.  But while the baton, taser, assault rifle or stealth bomber may be used in lieu of conversation words will always retain their power.

As Ludwig von Mises wrote in Socialism on page 460, ‘Only ideas can overcome ideas.’ and in Omnipotent Government on page 210, ‘Both force and money are impotent against ideas.’

Words proffer the instruments to meaning.  Equity, freedom, justice, peace and prosperity.  These are not mere words; they are vantage points.

OPEN SOURCE SOFTWARE

One major trend with the Internet is the open source environment.  Open source software is where the original source code is made freely available and may be redistributed with or without modification.  There are many examples such as Linux, SourceForge or Wordpress.  The speed and adaptability of the open source environment cannot be ignored.

For example, in a memo from deputy CIO David Wennergren to top military officials he wrote,

To effectively achieve its missions, the Department of Defense must develop and update its software-based capabilities faster than ever, to anticipate new threats and respond to continuously changing requirements … The use of open source software can provide advantages in this regard.

The open source environment is the opposite of a classified environment.  The source code may be viewed by all.  Every single revision may be viewed by all.  Transparency is fundamental to the process much to the consternation of some parties.

For example, a researcher built at monitoring tool called Wikipedia Scanner for the online open source encyclopedia Wikipedia.

The BBC reports two examples:

An online tool that claims to reveal the identity of organisations that edit Wikipedia pages has revealed that the CIA was involved in editing entries.

Wikipedia Scanner allegedly shows that workers on the agency’s computers made edits to the page of Iran’s president. …

“The changes brand Mr Limbaugh as “idiotic,” a “racist”, and a “bigot”. An entry about his audience now reads: “Most of them are legally retarded.”  The IP address is registered in the name of the Democratic National Headquarters.

Once the taste of such freedom has been experienced it is difficult to extinguish the desire for more.  Additionally, the fundamental thinking process spreads over into other aspects of life.

OPEN SOURCE VOTING

The Wall Street Journal reported 9 September 2009 that Diebold (DBD) Election Services which provides proprietary non-publicly viewable voting software is selling their unit to Election Systems and Software.  Senator Schumer is concerned about the sale because it gives about 75% of the market share to a single company.

But Diebold Election Services, which has since changed their name to Premier Election Services, has been caught tinkering around with Wikipedia.  John Borland at Wired reports,

On November 17th, 2005, an anonymous Wikipedia user deleted 15 paragraphs from an article on e-voting machine-vendor Diebold, excising an entire section critical of the company’s machines. While anonymous, such changes typically leave behind digital fingerprints offering hints about the contributor, such as the location of the computer used to make the edits.

In this case, the changes came from an IP address reserved for the corporate offices of Diebold itself.

What could possibly be at issue?  Well, in 2003, Walden O’Dell, CEO and chairman of Diebold, was a top fundraiser for George W. Bush’s Presidential campaign. As Hacking Democracy’s documentary revealed a letter sent by O’Dell to Ohio Republicans stating that he is “committed to helping Ohio deliver its electoral votes to the president next year.“

Of course, this situation would be too funny,  if not so sad, for The Onion to leave it alone.

With the available technology and open source software why is voting not completely transparent and accountable?  Why is proprietary software, owned by private companies and not available for public review, used?

GOLD AND FIAT CURRENCIES

Fiat currencies are like the common stock of nations.  All fiat currencies are in long-term bear markets when compared against gold.  This portends civil unrest which has already broken out in Iceland, Greece, China, Iran, the United States and others.

Governments may have had a role and been able to function earlier.  When the economy was not very complex a thug could tell someone how much they could charge for a cow.  But in our current extremely complex society that is riddled with chaotic fingers of instability the distortions that come from government are extremely disrupted to a civil society.  At all times and in all circumstances gold remains money.  Thus, during this age of turbulence you will know that unlike Bear Stears, Fannie Mae or Washington Mutual stock or Zimbabwe Dollars; gold can never become worthless.

Remember, governments only consume wealth.  They are parasitic and produce nothing.  The only way they gain and maintain market share is through the threat or use of violence against innocent individuals.  For matters of morality is a robber’s costume material?  But governments, particularly the large Welfare States, are archaic and barbarous institutions that are no longer needed with our more advanced and civil society.  Statism is an ineffectual excuse for immoral behavior.  Statism is merely a human livestock management practice.

GOVERNMENTS LOSING THEIR WHUFFIE

Whuffie is the ephemeral reputation-based currency of Cory Doctorow’s science fiction novel Down and Out in the Magic Kingdom and current application to the Internet is explained in the fascinating The Whuffie Factor.

The primary goods and services that governments sell are theft, corruption, famine, pestilence and war.  Sure, the costumed criminal gangs strut around lying about how they are protecting markets through regulation but who can seriously believe them?  The smart kids in school go off and start business while the dumb kids become the regulators because it is the path of least resistance for the immoral.  Seriously, the dumb kids are going to regulate the smart kids?  After all, the dumb kids think they know how the series of tubes works.

As a result, the smart kids often just purchase the dumb kids through bribes, extortion, etc.  Is this deep capture any more plain than with Goldman Sachs (GS) and JP Morgan (JPM)?  There is a plethora of whistle-blowing that shows up on the open source Wikileaks.

Citizens, human livestock, are more productive for their farmers, the elite Wall Street bankers, when they believe the illusion that they are free.  Thus statecraft has evolved to be ‘of, by and for the people’.  But now the human livestock is realizing their true relationship to the State; they are good only for milk on April 15th and meat in Iraq, Afghanistan or H1N1.  They realize that if voting made any difference it would be illegal.  They begin to see governments more like an acne infection on the earth’s face that needs to be cleansed.

LIVESTOCK RUMBLINGS

And so the livestock, awaking to the reality of their being owned, are grumbling and mumbling.  Millions have marched on Washington DC.  The ideavirus is spreading from hive to hive.  What ideavirus?

That governments are costumed criminal gangs hired by bankers that are engaged in purely immoral and unethical behavior to lie, steal, cheat, defraud and murder.  That their little paper tickets issued by the unaccountable and close-source Federal Reserve are the primary way they fund these nefarious activities.  That the psychopathic bankers are able to privatize the gains and socialize the losses.  The best possible way to deal with these parastic vampire squids was enacted by the Founding Fathers in Section 19 of the 1792 Coinage Act that provided for ‘any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, * * * every such officer or person who shall be guilty of any * * * of the said offenses, shall be deemed guilty of felony, and shall suffer death.’

As Bloomberg reported on 15 September 2009,

James McDonald, chief executive officer of New York investment firm Rockefeller & Co., died Sunday from a single gunshot wound that was probably self- inflicted, officials in Massachusetts said.

CONCLUSION

Technology is rapidly moving forward.  It has enabled ideas to spread at rapid speeds.  The spread of these ideas is undermining the current power structures and revealing things are they really are.  The FRN$ and all other fiat currencies are evaporating before the heat of gold and the rise of digital commodity currency.

But all of the current machinations are nearly insignificant compared to the larger picture that soon a whole new level of species is likely to develop called the Homo Evolutis.  Governments have been a constant retardation for evolution and advancements as life struggles from the swamps to the stars.  Try to escape from being collateral damage as life will be what it was born to be:  FREE AND INDEPENDENT.

DISCLOSURES:  Long physical gold and silver and no position in DBD, JPM, GS or the problematic SLV or GLD ETFs.

Reading time: 9 – 15 minutes

The recent gold bull upleg is in the midst of a predictable slight correction and consolidation.  When that finishes it is highly probable, based on seasonality and technicals, that the next part of the upleg will commence.  The Federal Reserve and Washington are only making matters worse through their extremely damaging policies.

GOLD PARTY BARELY STARTED

Back on 9 September 2009 I wrote:

200 day relative price of gold is at 1.08x … Based on seasonal trends gold and silver will be strengthening, with the strongest months in September and November

This upleg in gold and silver will have significant strength because of the long period of consolidation just like in 2004 and 2006 which provided the foundation for the uplegs in 2005 and 2007 that took gold from $400 to $700 and $650 to $1,000, respectively.  If the current upleg is similar to the previous two then the 200 day relative prices for gold and silver at the top of this upleg would be about 1.5x and 1.7x, respectively.

This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms

Back then the price of gold was $996 and the 200dma was about $920.  Today gold’s price is about $1,030 with a 200dma of about $950.  While the probability for a profitable trade is not nearly as high as it would be should the price relative to the 200dma be significantly below the 200dma there is still room for the price to run as we enter winter.  The October intermission is likely coming to a close.

OCTOBER INTERMISSION

Dr. Greenspan testified in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

One of the key reasons to keep the price of gold suppressed through central bank gold leasing is to keep interest rates low.  This will be particularly helpful for the $182,000,000,000 of certificates of confiscation that will be sold during the week of 26-29 October 2009.  Another reason is that NYMEX November options expired 27 October 2009.

PHYSICAL PREMIUMS RAISED

The physical coin dealers are fairly wise to the machinations of Wall Street.  When the paper price of bullion falls precipitously then the dealers often raise the premiums.

For example, a reader asked me a few weeks ago when would be a good time to buy gold American Eagles.  I suggested after the next drop and if lucky then he may be able to acquire them around $1,025 spot but the premium would likely increase.  He reported his shopping to me a couple days ago after the recent drop in price and informed me the premium had been raised from $37.95 to $41.95 per coin.

SILVER BACKWARDATION

On 12 September 2009 I observed that “the London SIFO, the Silver Forward Mid Rates, have been trending towards backwardation.”  It is interesting to observe the continuing trend and brief entry of silver in backwardation in the LBMA on 9 October 2009.  It seems like the physical silver market is getting a little tight.

QUANTITATIVE EASING

The big issue is whether the Federal Reserve will be able to, as Ben Bernanke said on 8 October 2009 in The Federal Reserve’s Balance Sheet:  An Update, ‘tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration?’  Back in March 2009 when Bernanke started this lunacy I asserted that The Federal Reserve Will Fail With Quantitative Easing.

Bernanke asserts:

Although the Federal Reserve’s approach also entails substantial increases in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed. For lack of a better term, I have called this approach “credit easing.

What Bernanke is trying to do is get capital to take on additional risk by moving up the liquidity pyramid.  But The Great Credit Contraction has begun.  While there may be differences in the velocity at which capital moves down the liquidity pyramid the overall direction has not changed.  Washington and the Federal Reserve are tiny actors compared to the total size of the market.

Their policies are aimed and designed to grant special privilege to banks like JP Morgan and Goldman Sachs.  Through government assistance the banks are able to move their capital down the liquidity pyramid.  In effect, they have privatized the gains and socialized the losses.  While there may be a case for a rise in the FRN$ in the short term the ultimate destiny is known:  the fiat currency graveyard.

EXACERBATING THE GREATER DEPRESSION

As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression:

It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market.  But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.

Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”

In the present case, mark-to-market rules, like FAS 157, are not implemented, delayed, ignored or willfully violated.  The financial markets are now undergirded by fair-value lying standards.  For example, Section 132 of the Emergency Economic Stabilization Act of 2008 is titled “Authority to Suspend Mark-To-Market Accounting” and restates the SEC’s authority to suspend the application of FAS 157.

The Austrian definition of inflation is an increase in the money supply.  The Adjusted Monetary Base, the very lowest layer of power money, shows a tremendous increase over the past year.  The effects are most likely masked by the tremendous slowing in the velocity of money.

In an effort to stimulate consumption and discourage savings that will result in keeping prices and wages high the Obama administration has unveiled a $1 trillion stimulus package.  The Geithner toxic asset plan will only serve to hasten the destruction of wealth from the economy as the system evaporates.

The Federal minimum wage rose in July 2009.  Unemployment will be subsidized by extending benefits for 13 weeks and delaying the income tax payments.  Legacy industries, like the auto industry, are receiving bailout money to keep wage rates up and people employed doing nothing all day long because of the huge over capacity of automobiles.  With Cash-For-Clunkers automobiles which have value are destroyed to reduce supply of alternative goods to new cars made by Government Motors.  This is a prime example of what Washington DC is:  A giant wealth destruction machine.

Therefore, like heroin to cure a hangover the quantitative easing from the Federal Reserve and the lunatic policies from Washington are not improving the situation for average people but instead exacerbating the greater depression.  Now is the time to Raze The Fed and while doing the spring cleaning who needs Washington?

CONCLUSION

The current correction and consolidation of gold appears to be within trend and expected based on the seasonality.  November is the strongest month and this recent correction on low volume is laying a strong foundation for a large move upwards.

The Federal Reserve’s quantitative easing programs have not been helping the situation but instead exacerbating the greater depression.  All in an effort to save the inefficient, barbarous and archaic relics of a fiat currency and fractional reserve banking system that is destined for extinction and replacement.  The Crash of 2008 was just the start of The Great Credit Contraction and it will last for decades.

DISCLOSURES:  Long physical gold and silver and no position the problematic SLV or GLD ETFs.

Reading time: 6 – 10 minutes

On 22 October 2009 Reuters reported that Korea National Energy Corporation will purchase Harvest for C$1.8B or C$10 per unit.  On 12 December 2008 I wrote, “For these reasons Harvest appears to be fairly cheap and a good opportunity.”  This article will examine the anatomy of the trade and opportunities for redeployment of capital.

PEAK OIL

One of the underlying themes for my investment philosophy is Peak Oil.  Many major oil producing countries have already passed their peak oil production; Germany in 1966, the United States in 1970 and shortly before the Nixon shock when he unilaterally defaulted on international gold obligations, Iran in 1974, France in 1988, in 1999 Argentina and the United Kingdom around the time Gordon brown sold massive amounts of England’s gold,  Mexico in 2004 and Kuwait is expected to peak in 2013, Saudi Arabia in 2014 and Iraq in 2018.

The prescient oil specialist and investment banker Matt Simmons, author or Twilight In The Desert, thinks OPEC has almost no spare capacity.  The role of the monetary metals, particularly gold, is to perform mental calculations of value; pricing.  The sooner you begin to calculate value in terms of real things the sooner you will be able to understand the relationship between gold, oil and your stomach.  Provident living principles include having excess energy; a monkey that gets margin called starves to death.

The United States, consuming 400% more than it produces, needs a reliable source to feed its addiction and Canada is the perfect candidate.

CANADIAN ENERGY TRUSTS

The Canadian energy trusts are generally high-yield going concerns that pay out distributions based on cash flow.  Generally, under Canadian tax law they receive preferential treatment so long as the pay out ratio is above 50%.  This special treatment will change in 2012 but many trusts have significant tax pools to shield income like Harvest with $3B.

When I recommended Harvest its price was FRN$8.68 per unit or about 0.33 grams of gold.  The unit price of the Canadian energy trusts were decimated with the fall in oil and Harvest was no exception.  For example, it fell to a low of $3, or about 0.10 grams of gold, on 9 March 2009.

HEDGE STRATEGY

The role Harvest played in my portfolio had to do with passive income according to provident living principles.  Accordingly I followed my own suggestions I wrote in my article.

Worst case scenario oil prices continue to fall and the Federal Reserve Note Dollar continues to strengthen which will weaken Harvest’s extremely attractive yield from the current approximately 30% (depends on your tax situation).  Long term put options can easily be purchased to preserve capital investment.

Despite the volatility in price I maintained significant monthly cash flow, a 30% cash-on-cash yield will do that, and actually significantly increased my position by purchasing additional units with the proceeds from the put options.  Consequently, the new problem is to figure out where to deploy this capital so that the portfolio balance and lifestyle are not disrupted.

PENN WEST ENERGY

A comparable company to Harvest is Penn West Energy (PWE) although they produce over three times as much oil and gas, do not have a refinery and are not burdened with as much debt.  At $17.67 per unit with a C$.15 per month distribution it currently yields cash-on-cash about .78% or 9.3% annually.

Like Harvest it implements a prudent hedging strategy that minimizes the impact of volatile commodity prices.  Even with weak commodity prices in Q2 2009 they achieved $25.64 netback per barrel of equivalent which included a realized hedging gain of $5.46.

But Penn West has risen about 35% in the past two months.  The goal is to buy low and sell high.  While I think Penn West will make a good dairy cow for my herd it does seem a little expensive at the current price.  Consequently, the open strategy will need to be a little more complex than a market order.

SELL STAGGERED PUTS

For a time horizon of a few years, which includes the tax pool advantages, Penn West appears a decent purchase around $16 per unit.  It may even be worth paying a little extra in order to reduce US$ exposure with the cash balance.

A naked put, also called an uncovered put, is a put option whose writer (the seller) does not have a position in the underlying stock or other instrument.  This strategy is best used by investors who want to accumulate a position in the underlying stock but only if the price is low enough.  If the buyer fails to sell the shares then the seller keeps the option premium for bearing the risk.

Selling naked put options does entail significant risk.  The maximum value at risk would be the strike price minus the premium received and would materialize in a bankruptcy that I would consider a black swan.  A more likely risk would be a significant decline in the unit price like what happened with Harvest in March 2009.  This risk has a higher probability because of the recent run up in price and coming seasonal weakness for energy commodities.

But I need a new dairy cow for my herd and am not very fond of my unemployed cash in this zero interest rate environment where the Federal Reserve will fail with quantitative easing.  Consequently, I think opening some uncovered put positions on Penn West around the $15 and $12.50 strike prices for December 2009 and March 2010 will be a good use of the excess liquidity that has resulted from KNOC’s tender offer.

If Penn West floats around its current price then the options will not exercise and I keep the premiums.  For the March 2010 $15 puts that amounts to $65 per contract and depending on the margin requirements will take about $500-1,200 of excess liquidity for a very flexible stress test.  Of course, raising the bid to $.85 or higher, in a measured and staggered fashion, will help increase the return.  Remember, you make money when you open the position not when you close it.

Thus, this strategy will be able to replace the lost passive income from Harvest.  Excess capital can be used to reduce risk and expand one’s wealth foundation by  moving a significant portion of the unused capital into cash positions holding physical gold, silver or platinum bullion via GoldMoney.

CONCLUSION

The world has a very serious problem with its energy sources and consumption habits.  While nations may do incredibly stupid things, like the Nixon shock or Brown’s blunder, individuals can take calculated risk to protect, preserve and grow their capital according to provident living principles.

But even after acquiring good assets the markets can turn and therefore it is important to implement a good hedging strategy to preserve capital.  Sometimes against your wishes the market will take your dairy cow to market and turn it into hamburger in which case it will be time to find a new dairy cow.

But there is a wide variety of investments available and sufficient tools to take measured risk.  In this case, Penn West appears to be a slightly expensive replacement for Harvest and with an uncovered put strategy the acquisition of units will be at a better value than the current market price.

DISCLOSURES:  Long HTE, physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs and short put options on Penn West.

Reading time: 4 – 6 minutes

A lawsuit over billions of dollars of unclaimed savings bonds is brewing over whether the Treasury Department or the States should be able to confiscate the minimal remaining value of these certificates of confiscation.  This article will be written from the first person perspective of the victim who has been robbed after investing in these ‘risk-free’ assets issued by the United States Treasury.

DILIGENT SAVER

In 1965, being a diligent young man my parents rewarded me for graduating from High School by buying me a $75 United States Savings Bond. Following this pattern of savings while I was in the United States Army in 1969 I saved $6.25 per month so that I could buy a $25 dollar savings bond each quarter. Upon hearing the news of unclaimed bonds being confiscated by either the States or the Treasury Department therefore today, October 19, 2009, I cashed in these United States savings bonds. The original face value of these 3 bonds was $125 Dollars. I paid $93.75 for these in the 1960’s.

If I had used gold and silver to buy these same bonds then it would have cost me 2 ounces of gold and 24 ounces of silver.  When I cashed these in today I received $825.11 which consisted of $93.75 in principal and $731.36 of interest.  The value of gold today is a $1,063.90 per ounce and silver is $17.81 per ounce.  Thus the $825.11 dollars represents 47 ounces of silver and no gold.  But that is not all.

TAXES

From the $825.11 dollars there is $731.36 of interest.  At approximately 30% tax rate that amounts to about $219.41 of tax liability.  Therefore, the net amount received is $605.70 and will purchase a mere 34 onces of silver.

OPPORTUNITY COST

If I had kept the gold and silver that I could have bought these United States savings bonds with back in 1965 and 1969 then I would have two ounces of gold and about 24 ounces of silver.  I could sell that bullion for about $2,850. What is wrong with this picture?

LYING GOVERNMENT

Newsmax reports, “The Treasury Department counters that it indeed tries to find owners of the unclaimed bonds, and says it has a Web site where people can simply type in their Social Security number to see if they have one.”

Diligent Saver responded, ‘Despite paying significant amounts of taxes for decades and using both a Social Security number and valid address while filing I never received a single communication from the Treasury Department about these outstanding savings bonds.  Nevertheless, they were extremely diligent notifying me when they thought I owed more taxes.’

CONCLUSION

There are significant assets available that may be confiscated by the government as unclaimed property.  The Treasury Department does have a tool to locate these certificates of confiscation.  While many argue that these types of assets are ‘risk-free’ this example plainly illustrates that these assets are subject to payment, counter-party and political risks.

On the other hand, gold and silver are immune to all of those risks except political.  For example, during some of the time period at issue the Ancient Metal of Kings was considered so dangerous by the United States government that it was illegal for residents in the Land of the Free to own.

But this is typical of fiat currency and the governments which issue it.  Neither the paper tickets nor costumed officials should be trusted.  In every case throughout history their paper coupons have over time proven to be merely certificates of confiscation.  And to think the Chinese own $2T of these silly little coupons!

DISCLOSURES:  Long physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs.

Reading time: 6 – 10 minutes

On 9 October 2009 I was interviewed (MP3) by Business News Network, Canada’s premier financial channel, live from the NASDAQ in Times Square New York about the rise of gold.

BNN HOST:  A note that caught our eye from RunToGold.com saying “Gold price rise pretends another round of the Credit Crisis. … Gold in Q2 2010 $1,300.”. Joining us to talk about that prediction, Trace Mayer, financial blogger and author of The Great Credit Contraction. He is in the city so nice the name that twice New York, New York. Very happy to be with us, Trace.

TRACE: Oh Thank You.

BNN HOST: You said the credit crisis has not been calmed but intensified. Why?

TRACE: Yes, one of the reasons is that the FASB mark-to-market has just obfuscated the toxic assets. So it is preventing the credit liquidation. So we still have the same bad assets that have not been liquidated in the market on the balance sheets. But people do not necessarily know where they are lurking.

BNN HOST: So the idea that the stimulus package and government back stops, things of that nature, have really delayed the inevitable more than anything else?

TRACE: Yes. They have delayed it and they have just pushed it off. And because people continue to make misallocations of capital because of that government intervention.  It will only lead to bigger crisis later.

BNN HOST: Ok. When is later though?

TRACE: Well, we have been pushing this off for decades now.  It seems to have really picked up in 2007 and the next round appears to be coming pretty soon. Mostly because of the move into gold. We see it closing at $1,050 this week and it now has a 3 week moving average above $1,000 and so there is a lot of strength. And a reason is because gold functions as a currency.

BNN HOST:  Really the only currency that does not have obligations.

TRACE:  Yes, it is a currency that at all times and in all places remains money. And there is a difference between money and currency. Gold is money because it can never become worthless.  As you say it is no one’s liability.

BNN HOST: What is really moving gold on a day to day basis though, more speculation than actual demand. Is that accurate?

TRACE: Yes, there is a lot of speculation along with the central bank gold price suppression scheme. Because gold is a competitor to their fiat paper franchises they have a heavy vested interest in interfering with the gold market. So in the short term we do see a lot of central bank interference.  But now it appears that Greenspan’s Call which is leasing gold should the price rise has been counteracted by the Beijing Put which appears to be putting quite a floor in the gold market.

BNN HOST: You have an interesting graphic in the report of the Day, an inverted pyramid, explain this to us.

TRACE: Yes. This inverted pyramid is the liquidity pyramid and shows the different assets in the world economy. And what has happened over hundreds of years is capital moved up the pyramid into less safe and less liquid assets. And that was the great credit expansion. And now we have reached the top and economic law shows that capital moves down the liquidity pyramid. And that is the great credit contraction; capital moving into safer and more liquid assets.

For example, capital is moving out of auction rates securities or commercial mortgage backed securities and into Treasury Bills. And eventually it will move from Treasury Bills into the monetary metals. And the reason for that is that fit currency and central banking are barbarous relics that are not really needed in the Information Age. We could have gold and silver and platinum circulating as currency in ordinary daily transaction (Goldmoney). We do not need these archaic devices anymore. And it may take some creative destruction for that to happen. But I think that the market will pull through because there are more efficient ways of handling our currency in our ordinary day to day transactions.

BNN HOST: So as we get more and more concerned with the top of that pyramid, the derivatives play, you are talking about $1,300 bullion. How do you get to that figure?

TRACE: $1,300 bullion comes from looking at the 200 hundred day moving averages and where gold has consolidated and where it goes based on the usual uplegs.  It looks like we are following the same thing that happened in 2004 with the rise in 2005, the consolidation in 2006, which went to the rise in 2007, and the consolidation in 2008, and it looks that it will lead to a similar rise in 2009 and 2010 which will take gold to $1,300 which should be a little bit above its 200 day moving average. But in the same trading ranges as we saw in 2005 and 2007.

BNN HOST: We have a 10 year chart on the screen but you look back even five or seven years ago; more so I suppose take it back 10 – 20 years. Looking at gold on an inflation adjusted basis and gold is dirt cheap by comparison.

TRACE: Yes. The reason for that, we hit on it earlier, was Alan Greenspans testified twice before Congress “that central banks stand ready to lease gold should the price rise.” And the reason that central banks leased gold since early 1995 and onward, and actually before that they were in the market, is to keep the interest rates suppressed.  So we have had this inflation in the system and the consequences have been masked by the central bank gold leasing. But it seems that the central banks are now losing control over their physical bullion, the market is asserting itself and we are seeing this rise in price as a result. Because when you own gold in effect you are fighting every central bank in the world.

BNN HOST: Are we also not fighting the U.S Dollar. What is your expectations Trace for the green back?

TRACE: That is a very excellent question. The dollar is the world reserve currency but as Alan Greenspan and said, “This rise in the gold price is the first real step towards a move away from fiat currency.  And so we do not know how long it will take but the dollar has tremendous problems. And now it has appeared to become the carry-trade currency.  So we are seeing a lot of people sell the dollar to fund purchases and buy other assets and that puts further selling weakness on the dollar.

BNN HOST: Trace, we appreciate…

TRACE: And will probably persist for a long time just like the Japanese Yen.

BNN HOST: Well, we are going leave it there. Thank you so much for your insights and all the best to the Columbus Day Long Weekend.

TRACE: Oh. Thank you.

BNN HOST: Trace Mayer, Financial Blogger and Author of The Great Credit Contraction.

DISCLOSURES:  Long physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs.

Reading time: 8 – 14 minutes

United States legal tender nickels present an almost completely risk-free investment.  Getting a large 5 gallon bucket and tossing in the nickels from your daily change is an excellent way to preserve your purchasing power, protect your wealth and reduce both counter-party and payment risk.  But due to increasingly despotic threats and actions by the United States government this avenue for wealth preservation is being threatened.

PURCHASING POWER

The current melt value of 1946-2009 nickels is about $0.0465604 or 93.12% of the face value.  A great resource to track the current melt rates of United States legal tender money relative to Federal Reserve Note legal tender currency is Coinflation.com.

Each nickel is 5.00 grams and consists of 75% copper and 25% nickel.  Thus, a $10 box of nickels, or 200 nickels, weighs 1,000 grams or about 2.2 pounds.  This would be about the size of two bricks.  With some gold spray paint and the unverified shortage of LBMA quality bullion you may even be able to get the problematic GLD ETF to buy a few bars.

COUNTER-PARTY RISK

Nickels are usually available for withdrawal from your local bank.  Since so many banks are failing and so many others are in worsening financial shape it makes since to keep minimal cash balances in your account(s) unless you know of their financial soundness.  The FDIC’s reserve fund is in horrible shape but the $500B line of credit with the Treasury should keep formal bank runs with lines, like Disney Land used to have, at a minimum.

But a physical nickel in your hand has intrinsic value and can never become worthless which makes it immune to payment risk.  By taking possession instead of keeping the electronic digits in your bank account you completely eliminate that degree of counter-party risk.  Additionally, you pay no fabrication fees unlike purchasing gold, silver or platinum.

MISH’S MISSTATEMENTS OF FACT

Mike Shedlock of Global Economic Analysis in an article titled Analysis:  Ridiculous Hype Over Secret Oil Meetings wrote:

Ten Simple Facts

5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.

6) The above logic applies to any currency and any commodity.

7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.

8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.

While I will not address the substantive analysis of his article I would like to address several misstatements of fact and offer analysis on potential likely changes to the landscape.

CURRENCY CONTROLS

First, as stated in #5 the ability to ’sell any currency they want and buy any other currency’.  Foreign exchange controls are various overt forms of controls imposed by a government on the purchase or sale of foreign currencies.  These controls can take many forms including, (1) banning the use of foreign currency within a country, (2) banning locals from possessing foreign currency, (3) restricting currency exchange to government-approved exchangers, (4) fixed exchange rates or (5) restrictions on the amount of currency that may be imported or exported.  Section 14 of the International Monetary Fund agreement provides for currency controls for transitional economies.

While Mish may attempt to narrow the discussion from ‘any currency and any commodity’ to any major currency or the currencies of major economies I think doing so fails on both counts as China imposes overt foreign exchange controls, had a 2007 GDP of $3.5T, began to sell sovereign bonds to foreigners in September 2009 and is a formidable force in the global economy.  Therefore, to categorically state that anyone can sell or buy any currency or commodity through the extremely liquid FOREX markets is a blatant misstatement of fact.  But this surface analysis is even more potent if one keeps digging.

Second, I am unsure what Mish means by ‘Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.’  Drawing upon Dr. Vieira’s previous work I address the issue of  what is a dollar as applied to the recent Kahre case.  An excellent book on the subject is Murray Rothbard’s What Has Government Done To Our Money.  The actionable conclusion for IRS purposes is to distinguish between FRN dollars and U.S. Dollars as found under 31 U.S.C. 5112.  This difference leads to a capital gains tax on gold or silver, which are both commodities and currencies.

Interestingly, Section 408(m), applicable to retirement accounts, provides exceptions for legal tender gold and silver coins along with ‘a coin issued under the laws of any State’.  The IRS also issued a private letter ruling that ‘The acquisition by an IRA of shares in trusts which hold gold and silver bullion as their only asset will not constitute the acquisition of a collectible under Code Sec. 408(m).’

If a capital gain tax rate greater than 25% is not a draconian currency control in practice then I am not sure what is.  Because both FRN$, gold, silver, copper and nickel are legal tender thus in practice this capital gains tax is perhaps the single largest protection of the FRN$’s fiat currency monopoly which leads to its market dominance and world reserve status.  Yes, all Dollars are dollars but some Dollars are more equal than others.

Third, as I analyzed in June 2009 the United States Treasury issued additional overt currency controls on United States legal tender in 2006.  The announcement provided:

The United States Mint has implemented regulations to limit the exportation, melting, or treatment of one-cent (penny) and 5-cent (nickel) United States coins, to safeguard against a potential shortage of these coins in circulation. … Prevailing prices of copper, nickel and zinc have caused the production costs of pennies and nickels to significantly exceed their respective face values.

“We are taking this action because the Nation needs its coinage for commerce,” said Director Ed Moy. “We don’t want to seeour pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers.”

Specifically, the new regulations prohibit, with certain exceptions, the melting or treatment of all one-cent and 5-cent coins. The regulations also prohibit the unlicensed exportation of these coins, except that travelers may take up to $5 in these coins out of the country, and individuals may ship up to $100 in these coins out of the country in any one shipment for legitimate coinage and numismatic purposes. In all essential respects, these regulations are patterned after the Department of the Treasury’s regulations prohibiting the exportation, melting, or treatment of silver coins between 1967 and 1969, and the regulations prohibiting the exportation, melting, or treatment of one-cent coins between 1974 and 1978.

The new regulations authorize a fine of not more than $10,000, or imprisonment of not more than five years, or both, against a person who knowingly violates the regulations. In addition, by law, any coins exported, melted, or treated in violation of the regulation shall be forfeited to the United States Government.

In conclusion, the assertions in Mish’s “Ten Simple Facts” of substantive statements of fact are actually complete misstatements.

For example, if an individual wants to withdraw a mere $10 of legal tender nickels, or 2.2 pounds, from their bank account and melt the coins down to create a doorstop then they face a fine of $10,000 and imprisonment of not more than five years.  If they sufficiently resist then the costumed criminal gang will escalate the unjustified aggressive violence and inflict death.  It would be nice to live in the fantasy world Mish describes where ‘Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.’ but that is simply not the case.

Additionally, I have not addressed other enacted or pending legislation in both the America and the Eurozone that lays a strong foundation for additional currency controls to be implemented.

CONCLUSION

Nickels are made copper and nickel which are tangible assets that have intrinsic value.  They are an excellent vehicle for protecting and preserving one’s purchasing power.  Nickels are approaching the point where, like gold, silver and copper coins, their face value will be less than their melt value.  But in anticipation of and to impede the free flow of capital the United States has imposed overt foreign exchange controls on nickels and pennies with draconian penalties.

Disclosures: Long physical gold, silver, platinum and some nickels with no position in the problematic GLD or SLV ETFs.

Reading time: 8 – 14 minutes

The world economy is incredibly intertwined.  For example, a butterfly flapped its wings in the Amazon resulting in typhoon after typhoon hitting the Philippines.  This has interrupted the work flow for RunToGold because one of my wonderful assistants located there has had his village decimated, been flooded out of his house and therefore been unable to complete several projects.  As a result, thousands of people are not able to consume information that may affect the decisions they make.  Often when we are in the moment we do not fully comprehend the gravity of the situation until it is fully upon us.

CHAOS THEORY

Chaos theory is a branch of mathematics which studies the behavior of certain dynamical systems that may be highly sensitive to initial conditions. This sensitivity is popularly referred to as the butterfly effect. As a result of this sensitivity, which manifests itself as an exponential growth of error, the behavior of chaotic systems appears to be random. That is, tiny differences in the starting state of the system can lead to enormous differences in the final state of the system even over fairly small timescales. This gives the impression that the system is behaving randomly. This happens even though these systems are deterministic, meaning that their future dynamics are fully determined by their initial conditions with no random elements involved. This behavior is known as deterministic chaos, or simply chaos.

Chaotic behavior is also observed in natural systems, such as weather with typhoons pummeling the Phillipines. This may be explained by analysis of a chaotic mathematical model which represents such a system.  Quantum chaos investigates the relationship between chaos and quantum mechanics.

HUMAN ACTION

While we like to think that human action is largely individual and unique, and it is, the branch of statistics allows us to make incredibly accurate predictions regarding populations.  In economics this is perhaps the chief competing premise between the Austrian school of economics and others:  starting with the individual and deriving the macro or vice versa.

The problem with starting somewhere besides the individual is that there is always a previous history to that choice; every individual has their own story.  To discount the individual is to discount their humanity; their ability to choose.  And it is that humanity which will often lead to choices which do not always conform with game theory or ‘rational behavior’.

That is not to say an individual cannot build mighty towers with and through other people.  The issue is whether he will view them as bricks or stones (Genesis 11:3).  The problem with individuals as bricks, or in other words human livestock, is that it is immoral and the immoral policy will always fail.  While the behavior of the chaotic system may appear random it is deterministic.  Mankind will be what he was born to be:  free and independent.

FINGERS OF INSTABILITY

John Mauldin wrote a great piece Another Finger Of Instability:

Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it builds on itself and it seems like one whole side of the pile slides down to the bottom.

Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found that there is no typical number. “Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur.”

The piles were indeed completely chaotic in their unpredictability. Now, let’s read this next paragraph from Buchanan slowly. It is important, as it creates a mental image that helps me understand the organization of the financial markets and the world economy.

“To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, ‘ready to go,’ color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever.”

AVALANCHE

Often I get questions such as when is the dollar is going to collapse, when is the DOW going to crash, etc.  Now I like to profit from trading just as much as the next guy and have made a few recommendations that have made tidy returns for diligent readers.  But I try to look at all possible events, assess the probability of an outcome occurring and then acting in accordance with that assessment.

Is it possible that a CIA employee will be charged or indited for detainee abuse charges before December 31, 2010?  Yes.  Is it probable?  Well, Intrade puts the probability at 25%.  I think it is even lower; criminal gangs costumed in government regalia do not like to prosecute those in their fraternal brotherhood.

Many people seem to think that the evaporation of the world’s reserve currency is something that can be played for profit.  When we are in the moment and bursting with confidence of greenshoots we seem to ignore out better judgment and ski down the slope.  But to the 3rd party observer it looks all too predictable and probable.  This likely will not be a period of history easily played for profit; at least not for those lacking a costume or cohorts with one.

I recommend being more concerned with principles of provident living and prepare for survivalism in the suburbs.  Will they be necessary?  We hope not but The Black Swan now the norm it is wise to be prepared.

THE SAFEST HAVEN OF GOLD

While the world is in commotion the bull market for gold is in forward motion like never before.  The 24 day moving average is above $1,000 per ounce with the 50 day moving average above $970.

The Gold Wars have been waged for centuries.  The latest incarnation is the US government and central banks engaging in a gold price suppression scheme.  The US government has gone ‘all in‘ and they are losing.  And that is primarily driving the demand for the ancient metal of kings.  But this is deterministic of the chaotic system’s future dynamics.  Empires rise; empires fall and always for economic reasons.

Sure, many think that gold has effectively been demonetized.  But Information Age technologies like GoldMoney allow for gold, silver and platinum to easily circulate as currency in ordinary daily transactions.  The King is dead!  The King is dead!  Long live the King!  Gold has only begun to stir from its long slumber.  The prime form of money’s price will only continue to rise as its value does from increased daily use among individuals as currency.

CONCLUSION

When you own an unencumbered ounce of gold your wealth is sovereign.  Hoard it.  Whether buried under an avalanche or on the bottom of the ocean in one of the most corrosive environments on earth; gold will have value one, ten or hundreds of years later.  Every empire that has fought gold has lost.  Those who own the bullion are riding in the helicopter safely away from the ruinous effects of the Kondratieff Winter’s avalanche.

Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral. Those who own gold know of what I speak.  The yellow metal seems to call out to the inner conscience and resonate with our DNA.  And that is perhaps the most bullish aspect of this bull market.  Gold has been the only safe haven and how much of the general public has actually touched a gold coin let alone owns one?  The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.  These chaotic fingers of instability will shake these giant welfare states until they implode.

Disclosures:  Long physical gold, silver and platinum with no positions in the problematic GLD or SLV ETFs, S&P 500 or DOW.

Reading time: 6 – 10 minutes

[Editor's Note: The rare earth metals are extremely important to the developed Western economies. The two part interview with Jim Dines along with Casey's overview will provide a great foundation about these vital elements. On a side note, soon the site will be moving to a faster host, thank you to everyone who contributed, and hopefully there will not be any problems during the transition.]

Part One – Jim Dines – Paper For Wealth In The Ground – 30 minutes

Part Two – Jim Dines – Paper For Wealth In The Ground – 33 minutes

WHY ALL THE FUSS OVER RARE EARTHS?

By Doug Hornig, Senior Editor, Casey’s International Speculator

Rare earth elements (REEs) have been the mystery metals of the mining world for years. Now, suddenly, everyone’s heard about them.

Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to know, point 1: Rarity.

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to know, point 2: Applications.

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to know, point 3: Supply.

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

THE MARKET

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals has gained 120%, Arafura Resources is up 75%, Rare Element Resources has added 72%, and Lynas Corp. is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

The team at Casey’s International Speculator are experts in all things natural resources. In this month’s issue, Senior Editor Louis James writes about rare earth opportunities in Canada’s Northwest Territories. After some hands-on research, he’s putting a new company on his watch list that could become a real breakout winner in this sector. That hands-on and boots-on-the-ground research, by the way, is what Casey editors do on a regular basis – to ensure that the companies we recommend are really who they say they are. You can get this issue of Casey’s International Speculator and much more with your 3-month, risk-free trial subscription.