Trouble is, things are not going to “normalize.” Not for the Panhandle of Florida, and probably not for the rest of the state, either.

Projections suggest that Florida can expect oil all along its west coast, and possibly throughout the Keys and up the east coast as well. Yet even before BP’s well began spewing crude, pressures within the state’s economy were building. It was an explosive situation awaiting a match.

Oily beaches and dying wildlife are likely that match.

Take unemployment. Statewide, it ballooned from 3% in 2006 to a peak of 12.3% in February 2010. Though it’s backed off, it remains in double-digit territory at 11.2%. “Officially” – though official numbers understate the problem. Illegal immigrants, some 4.5% of Florida’s population, aren’t counted; the long-term unemployed and aging workers are regularly purged, even if they’re still looking for work.

This in a state already confronted with the worst of the coming healthcare/taxation crunch. It has the second oldest population in the nation, and as its citizens retire, their earnings fall off, causing tax revenues to drop. At the same time, healthcare bills rise, stressing social service budgets.

Florida is ground zero for Baby Boomer demographics. With 600 seniors for every 1,000 workers now, and the number trending inexorably higher, soon every employed person in the state will essentially have to adopt one senior to care for out of his or her paycheck.

Housing? Naturally, rising unemployment amplifies the difficulties of maintaining homeownership. With further negative effects from the oil, we can only expect the situation to worsen. A tsunami of defaults and foreclosures – and bank failures – would not be a surprise.

Florida is mortgaged to the hilt. It ranks second only to California in total securitized non-agency mortgage loans, 10% of the national total. Of those, half are 60 days or more delinquent, or 16% of all such mortgage delinquencies in the country, the highest ratio anywhere.

The state is full of retirees trying to live on modest incomes while hanging on to their homes. Unsurprisingly, this has led to a disproportionate amount of at-risk loans. 85% of the statewide pool is rated Alt-A or Subprime.

Nor has the crash in prices bypassed the Sunshine State. Nationally, fewer than 30% of houses sold for a loss in the past year, compared to nearly 50% in Miami and 65% in Orlando.

Many would-be sellers are clinging to the cliff edge by their fingernails. Overall, 81% of all Florida loans are under water, with the average mark-to-market loan-to-value ratio standing at 138%. Almost 40% of borrowers are crushed beneath debt of more than 150% of the value of their homes.

State government is no better off.

As the oil cuts into employment prospects, tax revenues will nosedive – and even before the blowout, the state was broke. The projected budget shortfall for fiscal year 2011 was $4.7 billion. What it will actually be is anyone’s guess – a bigger number is baked in the cake – but at $4.7 billion, it already represented more than 22% of the FY10 budget.

Both tax hikes and service cuts are political suicide. And desperately raising taxes in a depressed economy tends to decrease revenue, anyway. Yet a balanced budget is mandated by law. Where will the additional money and/or savings come from?

Then there’s Florida’s $113.8 billion public pension fund. It must generate earnings of 7.75% per year to meet its commitments to the nearly one million public employees and retirees who depend on it.

What investment safely yields 7.75% today? Nothing. So the fund’s administrators are asking for permission to try some “riskier” investments. Maybe they’ll succeed. Or maybe they’ll wind up staring down the barrel of a pensioners riot.

Florida’s coming problems are intractable, at best; the least bit of bad luck and they may become utterly irresolvable.

Expect bailouts. Washington will not be able to ignore what happens to this beleaguered state. The federal government will be forced to spend yet more vast sums of money that it doesn’t have, on a recovery that will take years, if it ever happens.

And that makes Florida’s plight a looming horror for us all.

Regards,
Doug Hornig
Whiskey & Gunpowder

August 18, 2010

Oil Spill Just the Beginning of Florida’s Troubles was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Virtually no one was calling for this kind of rally a year ago. But it happened. So investors are either seeing the “green shoots” supposedly sprouting from the moribund economy or believe that they’re about to break ground any day now. That sentiment is continually reinforced by government officials and media talking heads who almost universally proclaim that “the worst is past,” “we’re back from the brink,” or other words to that effect.

It’s often said that stock market action is a leading indicator, reflecting what investors think the economy will be like six or nine months down the road.

Are they right? Will good times soon be here again? Or is this just a big dead-cat bounce?

Jobs: Now here, we’ve clearly turned the corner. Everyone says so. For evidence, all we need do is look at the declining rate of job loss in the country. Uh-huh.

Perhaps it’s rude of us to point this out, but a declining rate of job loss is still a job loss. It is not the same as job creation.

The hard reality behind February’s “encouraging” numbers is that 14.9 million people remained out of work. 8.4 million jobs now have been lost since the start of the recession. In addition, there is a net need for 100,000 new jobs a month, just to keep up with first-time entrants to the workforce.

Even if the economy were suddenly to start churning out new jobs at the robust rate of a half-million a month — and the chances of that range from zero to none — it would still take nearly two years to return just to pre-recession employment levels.

(Near-term employment figures may blip up, as the government hires one and a half million people — who knew we needed so many? — to help take the census. That could lead to a classic false dawn.)

Anyone looking to the housing market to lead the recovery, as it often does, had better find a magnifying glass. January marked the third consecutive monthly drop in new home sales, and it was a whopping 11.2% tumble. Mortgage applications fell to the lowest level in 13 years. There was even a decline of 6.1% from January of 2009, itself a very dark month. Congress’s extension of home buyers’ tax credits is proving to be of increasingly little consequence.

New home sales are very important, since they cause a cascade effect down through the entire supply chain, from architects to building contractors, to sawmills, to sheetrock manufacturers, to carpenters, plumbers, and electricians. But sales of existing homes are also relevant, and there, too, the figures are grim. After piggybacking on federal subsidies through the fall, sales absorbed the worst pummeling on record in December, down 16.2%. January was a little better, only off 7.2%.

One number that is unfortunately growing is this: distressed sales, such as foreclosures, accounted for 38% of sales in January, up from about 32% in December. People are losing their homes at an increasing rate, with few buyers stepping up to the plate.

But hey, maybe there is a huge pent-up housing demand out there. We doubt it, but if there is, it doesn’t matter. Because lenders are ignoring it. In 2009, U.S. banks posted their sharpest decline in lending since 1942. One reason is that many are too cash-strapped themselves to deal with borrowers. According to the FDIC, at year’s end its “problem” list of U.S. banks at risk of failing hit a 16-year high at 702 (or nearly one in eleven), rocketing up from 552 at the end of September and 416 at the end of June. And little wonder. More than 5% of all outstanding loans are now at least three months past due, the highest level recorded in the 26 years the data have been collected.

Then there are those that can’t lend because they’re no longer with us. 140 banks went belly-up in 2009, and 2010’s total will be worse than that if January’s 15 failures prove representative. The FDIC is bankrupt after reporting a $20.9 billion loss in the fourth quarter of 2009 in its Deposit Insurance Fund.

However, never let it be said that the government won’t try to squeeze some lemonade out of its bag of lemons. To wit, the FDIC’s own financial woes haven’t prevented it from opening a huge new satellite office in the Chicago area. The facility will be dedicated to managing receiverships and liquidating assets from failed Midwest banks, and will occupy seven floors of an 11-story building. The office space being leased is well over 100,000 square feet and will employ approximately 500 temporary employees and contractors.

Does the FDIC know something we don’t? We can’t say for sure, but the fact is that the agency has already opened similar offices in Irvine, California, and Jacksonville, Florida.  Each time, the number of bank failures in those states spiked dramatically after the FDIC set up shop.

Elsewhere, consumer confidence is flagging and, since the economy is 75% consumer-driven, that doesn’t bode well. The Conference Board’s index took a swan dive in February, to its lowest point since last April. The index plunged to 46 from January’s reading of 56.5, stifling the previous three months’ uptrend. As a measure of how bleak the public mood is, the economy is considered stable only when the consumer confidence reading exceeds 90. We’re barely halfway there.

And finally, we don’t want to lose sight of the 800-pound gorilla in the room, the federal debt. How bad is it? Well, the Bank for International Settlements recently released a very frightening figure. In order just to stabilize debt at pre-crisis levels, the BIS says the U.S. government must run a budget surplus of 4.3% of GDP. Every year. For ten years.

For an in-depth look, try Harvard economist Kenneth Rogoff’s new book, This Time is Different: Eight Centuries of Financial Folly (co-authored with Carmen Reinhart of the University of Maryland), the first comprehensive survey of past financial crises around the world.

Dr. Rogoff, who may be the country’s leading expert on the historical record, concludes that a banking crisis often leads a country into default, because government’s response is usually to try to prop up the financial system with yet more debt.

If that sounds familiar and disconcerting, it should. Even more so because Rogoff has identified a clear tipping point, beyond which there is little hope of recovery. When a government’s debt grows to equal annual GDP, the game is essentially over.

Where we are now: We have $12.5 trillion in gross debt, growing at $2 trillion per year, on a GDP of $14.3 trillion. Next year, it will be $12.5T + $2T = $14.5 trillion on a projected $14.5T of GDP. Or 100%. A level we cannot survive for long.

That means it’s likely, in the not-too-distant-future, that the government will be confronted with a very stark choice between defaulting on the debt or trying to inflate its way out. The former would kill off economic growth and likely launch a worldwide depression of epic proportions.

Disastrous as that would be, if the alternative is chosen and Washington’s printing presses beget hyperinflation, that would probably be worse. In a serious deflation, those who have saved for a rainy day can make it through okay. In hyperinflation, which unconstrained further spending could easily bring on, everyone loses.

The truly prudent prepare, as best they can, for either eventuality.

Regards,
Doug Hornig, Casey Research
for Whiskey & Gunpowder

March 17, 2010

The Big Dead Cat Bounce was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Whether he’s sincere or not remains to be seen, but the implication is that he’s unworried, because in his opinion the opposition party only knows how to criticize and doesn’t have anything constructive to say.

He needs to call Wisconsin Congressman Paul Ryan, ranking member of the Committee on the Budget, and have him over for tea.

Ryan is a representative who appears to take his job — overseeing the federal budget —  seriously. In 2008, he introduced legislation called “A Roadmap for America’s Future.” It died, so he’s reintroducing it this year. It won’t pass, unless the Democrats somehow manage to lose control of the House. It’s just too simple.

It’s also breathtakingly visionary. In one fell swoop, Ryan takes on taxes, health care, Social Security, and the federal deficit, and fixes them all. He puts the government back on the road to solvency, something no other plan comes close to achieving. Most important, he wants to shift our mindset, so we finally recognize that the cure for debt problems is not to pile up more debt.

Income and Other Taxes

Ryan has a nicely targeted sense of humor. For those who can’t bear to part with today’s elephantine tax code, he leaves it in place, and anyone who loves it can still use it. For the rest of us: Single filers would pay 10% on income up to $50,000 ($100,000 for joint filers) and 25% thereafter, with a generous standard deduction and personal exemption ($39,000 for a family of four). That’s it. No loopholes, deductions, credits or exclusions. Fill out the postcard and mail it in.

Additionally, the plan promotes saving by eliminating a whole bunch of other taxes — on interest, dividends and capital gains. It scraps the alternative minimum tax and abolishes the death tax. It replaces the corporate income tax — currently the second highest in the industrialized world — with a business consumption tax of 8.5%, about half the world average, putting American companies and workers in a stronger position to compete in the global economy. And it allows for immediate expensing of new business investment.

Health Care

A refundable tax credit — $2,300 for individuals and $5,700 for families — to purchase coverage (from another state if they so choose) and keep it with them if they move or change jobs. State-based high-risk pools. Supplemental payments to low-income recipients, who can choose their care rather than be consigned to Medicaid.

Medicare

Large-scale, common-sense reforms involving vouchers and medical savings accounts, along with a very gradual rise in eligibility age, designed to preserve the best parts of Medicare while securing its solvency for generations to come.

Social Security

Maintains benefits for current recipients, while making the program permanently solvent by combining a modest adjustment in the growth of initial Social Security benefits for higher income individuals with a gradual, modest increase in the retirement age. Includes a property right, so that your vested Social Security interest does not die with you. Those who own these accounts can pass on assets to their heirs.

Making all this work would require some adjustments, though. Nondefense discretionary spending, for example, would be frozen for ten years at 2009 levels in nominal terms and allowed to grow thereafter by an amount linked to CPI.

There has been immediate criticism from Democrats, mainly centered around cuts to Medicare. And some of the objections could be valid; maybe the plan could be tweaked a little to bring more of the opposition on board. Or maybe they’ll just continue to complain because reducing the size of government doesn’t sit well with them.

But the thing is, even the critics have been forced to admit that the plan would probably work. How do we know? Ryan had the confidence to submit it to the Congressional Budget Office for analysis. As you probably know, the CBO has stated frankly that continuing along the current path leads to unsustainable deficit levels and bankruptcy for the country.

According to CBO projections, debt will spike sharply upward in 2015, rising — relentlessly and unstoppably — to over 700% of GDP in 2080. Of course, the economy will be destroyed and government forced to default long before then.

If Ryan’s Roadmap were adopted, however, the CBO estimates that debt/GDP would peak at 100% in 2043 and “decline thereafter, reaching zero by 2080,” then move into surplus. (For the complete CBO report, go here.)

Yes, all predictions are bound to be flawed. Yes, we must remain skeptical of anything that comes from a politician. And yes, it’d be better for government to shrink more than this proposal envisions. But, especially concerning taxes, it’s a big step in the right direction.

The president is wrong. There is another idea out there, and according to the government’s own budgetary watchdogs, it’s a good one. It “just” necessitates adopting a 75-year time line.

Of course, the odds of Congress looking that far ahead are slim to none, and you know where Slim is. But who knows, if enough Americans beat the drum for Paul Ryan, this country may actually have a future.

Regards,
Doug Hornig, Casey Research
for Whiskey & Gunpowder

March 3, 2010

Paul Ryan Could Save America was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Well, the counterfeiters are out there, and have been for millennia, but how to counter them?

You probably remember movies about the Old West, wherein a shady-looking character would offer to exchange a gold coin for a horse, and the nag’s owner would bite down on the coin. That was about all you could do, if you lacked proper assaying equipment and had to make a snap judgment on the fly: depend on your teeth to tell you whether the metal in your hand was sufficiently soft to be genuine gold.

The bite test is actually a pretty good one since gold, despite being among the heaviest metals, is also very soft. If you chomp down and shatter a tooth, it ain’t gold. But does that mean you need to munch your way through your coin collection? In a word, no.

Not that faking coins would be that hard to do. This is the 21st century after all, and if there’s one thing we do well, it’s making copies of things. Given contemporary 3-D laser imaging, a die could be created that mimicked the real deal in perfect detail. It’s not as if you could hold your coin up to the light and see the kinds of safeguards built into paper currency these days.

Predictably enough, counterfeiting concerns eventually hit the Internet. About a year ago, the blogosphere bloomed with doomsday warnings after the publication of a series of articles in Coin World, dealing with the subject of coin counterfeiting in China, where it’s quasi-legal. The Web was abuzz with the worries of coin holders and eBay shoppers, as well as the pontifications of pundits about the coming flood of knockoffs from the Far East.

Now that didn’t seem right to us. We’ve been at this a goodly while, and we’ve never heard of anyone being slipped a fake Eagle or Maple Leaf. Just to be on the safe side, though, we checked with a dealer of 30 years’ experience and got the same answer. Nope. Only seen a couple over the past three decades.

The thing is, it’s really impractical. Any counterfeit bullion coin would have to be gold in order to pass. If it were pure, then what would be the point? And if the counterfeiter skimped on the gold content, the coin’s weight would be a dead giveaway. The only alternative would be to gold-plate a coin made out of some other metal. But again, getting the weight right while preserving the correct size would be a challenge. In the end, there’s just not enough of a profit margin to make it worthwhile.

The exception is rare coins. These can be made with the proper gold content, then artificially aged so that only an experienced numismatist could pick them out. Because of the premium they command, faux rare coins made with real gold could be highly profitable where a bullion coin would not.

This is one of the reasons (impartial grading is the other) why many collectors will only trade coins graded and slabbed by third-party specialists like Professional Coin Grading Service (PCGS) or Numismatic Guaranty Corp. (NGC).

Ominously, though, some counterfeit coins are turning up inside phony slabs, and the graders are taking the threat seriously. Both the major services have warned about this, with NGC providing guidelines about how to spot fakes of their slabs here. The counterfeits all seem to be originating in China, so one prudent response would be not to trust rare coins offered for sale from that country, especially on eBay.

Gold bars are a separate category. Fakes do show up in the market from time to time, and they’re hard to identify. Generally speaking, counterfeiters don’t bother with the smaller ones, which are stamped, numbered, and sealed. They concentrate on 1-kilogram or larger sizes. These are poured, rather than stamped, and can be easily adulterated or even hollowed out and filled with some other, cheaper metal.

And that’s exactly what has happened, on a massive scale … at least if you believe the rumor that exploded across the Net late last year, stating that “someone” in Hong Kong had blown the whistle on thousands of tungsten-filled 400-oz. “gold” bars that are now circulating throughout the world. Others picked up the story and ran with it, some going so far as to allege that Fort Knox is filled with 640,000 fakes. Either because we were duped many years ago, or because the government deliberately put them there to hide the fact that most of our gold is gone. Take your pick.

That tungsten was cited as the culprit is no surprise, because it’s the metal of choice if you want to imitate a big chunk of gold. Put some gold plating on tungsten and it will fool all the cheap, non-invasive tests, such as specific gravity, surface conductivity, scratch, and touch stone. For a conclusive result, you have to drill into the bar, take a core sample, and submit it to more sophisticated verification techniques — fire assay, optical emissions spectroscopy, or X-ray fluorescence — and that involves a lot of time, trouble, and expense.

The market, of course, long ago realized it would be a hassle to fully assay every large gold bar every time it changed hands. That would create bottlenecks all over the place. Thus, to facilitate liquidity and protect large traders, the London Bullion Market Association (LBMA) came up with the good-delivery bar system, otherwise known as the “good delivery circuit.”

The system begins with a group of accredited refiners, all of whom have been certified by equally accredited assayers. The refiners manufacture the 400-oz. bars, applying their stamps and serial number before sending them out. Requirements for making and remaining on the LBMA’s good-delivery list are stringent, and those on it zealously guard their status. It’s of great importance to them because most of the vaults to which they ship product — the next step in the circuit — won’t accept anything but good-delivery bars.

This thing isn’t foolproof, nothing is, but it ensures a pretty decent paper trail, a formal, recorded history of who held the bars, when, and in which approved facility — all the way from refiner to end user, whether that be an individual, a central bank, or an ETF. No buyer wants something from a non-accredited seller, and no one else in the chain wants to get fingered for supplying phony gold. That would get them kicked out of a very lucrative loop, and sued into the bargain.

What about gold bars that come from a non-accredited source or are otherwise circulating outside the good-delivery circuit? That could mean you. You’re not part of the circuit to begin with. And yes, if you bought something that wasn’t good-delivery certified, the possibility that you have acquired some fake gold exists.

If you’re concerned about the source, you might want to have your gold assayed in order to alleviate your worries. This will become an issue when you choose to sell. In that instance, a dealer will almost certainly require an assay as part of the bargain, even if you have the chain of custody paperwork and it all checks out. And you can’t blame him. There’s no way he can be certain of what you did to it while it was in your possession. The only exception might be if you have a long-standing, mutually trusting relationship with him, originally bought it from him, and are selling it back to him. But even that’s no guarantee. What you most emphatically want to avoid is the worst-case scenario: arranging a sale, then having your gold flunk an assay, laying you open to charges of fraud.

If you sell to another private owner, rather than a dealer, he will surely ask for an assay, and you shouldn’t be offended if he does. Nor should you hesitate for an instant to demand one if you buy from a private party. Although this is not a recommended way to acquire gold bars, it may be possible that something comes along that you can’t refuse. Just be very careful. If someone has a gold bar for sale but is in too much of a hurry to wait for an assay, walk away.

Your takeaway from all the hoo-hah about tungsten bars should be that whenever a sensational rumor like this hits the Internet, and it doesn’t immediately graduate to Bloomberg, you always have to ask why. Financial reporters read blogs, too. You can be sure they’ve seen the rumor and asked the obvious questions: What’s the source? Who are the people who reported the appearance of the tungsten bars named? For that matter, why aren’t they raising holy hell if they’ve been ripped off? Where are the lawsuits? No serious journalist who can’t turn up the answers is going to give the story credence.

If it were true, the appearance of several thousand tungsten bars, for each of which someone has been suckered into paying a hundred grand or more, this would be big, big news. It wouldn’t stay confined to a few websites for long.

This isn’t to say that someone good isn’t digging deeply into this story right now. Nor that they won’t be able to prove it out. It is to say that, more than likely, the rumor is false.

In summary, there’s no reason to believe that there is a real issue with counterfeit bullion coins at the moment. That doesn’t mean they don’t exist, nor does it mean that evolving technology might not make them more profitable in the future than they are now. If you’re at all worried, simply deal with someone you trust. Establish a relationship with a gold dealer who has built a strong reputation, preferably over a matter of decades. Buy from them even if you stumble across some mail order supplier who is charging less of a premium.

Some basic guidelines:

For coins, avoid “commemoratives.” Stick with universally recognized government bullion coins (American Eagle, Canadian Maple Leaf, Austrian Philharmonic, Australian Kangaroo, South African Krugerrand).

For small bars, purchase only those that carry the stamp of one of the known, trustworthy refiners, such as PAMP, Credit Suisse, or Johnson Matthey.

For bigger orders, 1 kilo and up, ask your dealer if he has an assay or is willing to have one done. If you want 100 ounces, insist on an assay or consider buying directly from the Comex, which means you’ll be assured of getting a good-delivery bar that has never left the circuit. And the Comex will also vault it for you if you like. Do not, under any circumstances, buy a larger gold bar on the Internet; we’d even balk at buying coins there unless it was from someone we already knew.

We don’t believe there is reason to be concerned about bullion coins, but if you are the supremely cautious type or perhaps already own some commemoratives, there are tests you can perform at home to check them out.

• First off, you can simply apply a magnet. Gold is non-magnetic, but if you’re unlucky enough to have gold-plated steel, it’ll stick.

• Size and weight are good measures. Get a scale calibrated to hundredths of a gram. If a bullion coin weighs light (or possibly heavy), it’s bogus. Here’s a handy list of the major gold coins with their weights, diameters and thicknesses.

• Since real gold has a higher specific gravity than other metals, you can test for that. Many Internet reference sites will tell you how.

• You could buy a commercial counterfeit detector. They aren’t cheap, but will quickly and easily perform the basic tests.

• If you have any suspect, non-governmental coins and happen to have some nitric acid handy, you can immerse your coin in the acid. Base metals will react, gold won’t. However, this is not something to try unless you are highly competent at handling dangerous chemicals; you do not want to test your skin along with the coin. In addition, of course, if you do have an alloy coin, the acid will ruin it.

• Rare coins are more of a challenge. If that’s where your interest lies, look for specimens that have been graded and slabbed. Buy from someone you trust. Never fall for a salesman’s pitch that a particular numismatic coin is a premier investment, sure to double your money. Don’t merely dabble in this area. What’s best is if you’re in it because coin collecting becomes a hobby you’re passionate about; worst is if you know and care nothing about what you’re buying. Read up on the subject, examine coins, get to know what the real thing looks and feels like, learn to spot the kinds of imperfections that characterize phonies. Become your own expert, or else risk being the dupe of the day. And if you do decide to pick up something on your own, send it to NCG or PCGS for grading. You’ll quickly learn whether you’ve been had.

Precious metals are going to be attractive to con artists, just like anything else of real value. No question about it. But there are some decent safeguards already built into the system. If you supplement them with your own knowledge and common sense, it shouldn’t be difficult to avoid becoming a victim. And for goodness sake, look after your own interests and don’t fret about what’s in Fort Knox. If it truly is full of tungsten, so much the better for your own holdings.

Regards,
Doug Hornig
Sr. Editor, Casey’s Gold & Resource Report

January 25, 2010

Is That Gold Bar Real? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It seems that everyone these days wants gold. Real, physical gold coins that they can hold in their hands, or bars that they’re assured are resting safely in a well-guarded vault. HSBC’s New York vault, for example, buried deep below its 5th Avenue tower, where it has stored people’s gold since it inherited the facility from Republic Bank a decade ago.

But no more.

HSBC has served notice to its retail customers — many of whom are simply middle-men and custodial services which store gold with HSBC on behalf of hundreds of their own account holders — that all their gold must be out of its facility by July 2010. Otherwise, folks, prepare for an unwelcome knock at your door. HSBC’s letter says that, in the absence of directions to the contrary, clients’ metal “will be returned to the address of record… at your expense.”

Picture, if you will, what the Wall Street Journal reported: “fleets of armoured cars laden with gold, ferrying the precious metal out of New York.”

Where to? That’s a good question. One destination is a pair of warehouses operated by FideliTrade, the parent company of Delaware Depository Service Co. Its vaults in Wilmington have been filling up quickly, leading Jonathan Potts, the managing director, to comment that, “I have never seen any relocation like this.” Other depositories have seen a similar run.

The logic behind HSBC’s decision, according to the Journal, is simple. The vaults are being cleared of smaller clients in order to make more room for institutional holdings, because “retail customers tend to be more expensive [to service] in part because of their diverse holdings. They usually buy American Eagle or Canadian Maple Leaf coins, and bars of various weights and sizes, all of which need to be categorized and stored separately. In contrast, institutions typically buy standardized bars of 100 or 400 ounces, making them easier to store. Institutions also tend to hold the metal for long periods.”

HSBC itself didn’t say why it’s doing this (in fact, its letter wasn’t intended for public release). So, predictably, the Internet exploded with rumors that its action had more sinister motives.

Chief among them has been the tungsten story. That one, in case you haven’t already heard it, maintains that a foreign gold buyer — some say Indian, some say Chinese — found to its dismay that bars it recently purchased were merely gold-plated tungsten. (Tungsten would be the metal of choice for a counterfeiter because it’s the closest metal to gold in specific gravity, and can fool the most basic test for purity.) Some go as far as to claim that Fort Knox is full of fakes, deliberately placed there to make our official stash appear bigger than it is. A suspicion that’s easily stoked since no outside auditor has inspected U.S. gold holdings in over 50 years.

Be that as it may, the latest rumor claims that the appearance of tungsten bars at this time is going to cause widespread chemical testing of gold bars, and HSBC doesn’t want to be caught with anything bogus. Thus they’re preemptively moving their gold out, protecting themselves and at the same time laying off the need to do any testing onto someone else.

This is a great tale, but it ignores the fact that it’s largely coins and small bars that are being moved, and those are not cost effective to counterfeit in tungsten. In addition, that the story is presently confined to the Net means it’s fiction until proven otherwise. As Ed Steer — GATA activist and author of Casey Research’s Gold and Silver Daily — points out, “If it were true, Bloomberg would be all over it in a heartbeat.”

Or someone would. And even if the mainstream media failed to do their job, there’s still the absence of a smoking gun. Who’s seen the tungsten bars? What are the names of officials who can confirm the fraud? Why aren’t the Indians who’ve been ripped off waving the phonies in front of a TV camera? These questions don’t yet have satisfactory answers. Thus the rumor will have to remain just that.

Rumor #2: HSBC has less gold on deposit than it promises, and it’s doling out what it does have to its best friends. This one might make some sense if HSBC were getting out of the gold business entirely. But it isn’t. And if it does have any physical shortages, it can cover them indefinitely with paper “equivalents.”

Rumor #3: HSBC is going under. Those storing large amounts of gold know it, and they’re protecting their assets from future claims by creditors. HSBC is hiding the mass exodus of gold by claiming to have ordered it. No way to confirm this, of course, but the volume of gold that’s leaving means an awful lot of people know what’s happening. Word of the bank’s fragility would surely have leaked out by now. That it hasn’t makes this one highly doubtful — not to mention that HSBC likely falls into the “too big to fail” category and would be propped up if it faced collapse.

Rumor #4: The most outlandish of all. Under this scenario, Washington suspects an attack in conjunction with the terrorist trials, and it’s ordered gold moved out of New York so it isn’t contaminated in the event of a dirty bomb. (Those with the deepest, darkest level of cynicism claim that this would also provide the government with a handy excuse to default on foreign claims to physical metal — as in, sorry, it’s gone, but here’s what you’re owed in dollars.)

All of these make for spicy Web chatter, but after checking with our own sources, we believe that the truth is far more mundane, yet quite exciting in its own right. In essence, we think the WSJ’s analysis is pretty close, with a twist.

It all has to do with the COMEX. That exchange, which handles futures activity in gold, has to maintain a cache of metal with which to settle trades. As a courtesy, it will also arrange to store gold for buyers who don’t want to take physical delivery. But it has no vaults of its own. It contracts with four banks to do the actual storage, though only two maintain significant amounts: of the 9.73 million ounces of COMEX gold, Scotia Mocatta has the most, nearly 5.1 million; HSBC USA is next, with over 4.1 million.

The amount of gold warehoused by the COMEX has exploded since the metal’s bull run began in 2001, as you can see from the following chart (where “registered stocks” are sitting there with someone’s name already on them, and “eligible stocks” are awaiting either registration or delivery):

The trend is obvious, and what it means is that HSBC needs an ever-increasing amount of space for its COMEX gold. Provided, of course, that the trend remains in place. Or accelerates.

HSBC has cast its vote. It clearly believes that it’s going to be getting more gold from the COMEX, maybe a lot more, and it’s making room by giving the boot to other depositors. Perhaps the bank knows something we don’t know, or perhaps it’s just acting out of reasonable expectation.

Either way, it’s telling us that the demand for gold is going to continue rising. And coming from a major bullion bank, that’s about as bullish a signal as anyone could want. If you don’t own any physical gold, it’s time.

Regards,
Doug Hornig
Casey’s Gold & Resource Report

January 13, 2010

Why Is HSBC Clearing Out So Much Physical Gold? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

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.

Regards,
Doug Hornig

October 5, 2009

Why All the Fuss Over Rare Earths? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Now as then, China keeps its own counsel. We know what they want us to know, plus what we can surmise from rumor and reading between the lines. But lately, we’ve been able to add presumption to news and come up with something that looks very significant.

Specifically, there’s been a flood of tantalizing stories out of the East that, taken together, strongly suggest a growing preoccupation with a form of money that was ancient even in Signor Polo’s time. And it ain’t silk. It’s gold.

We already learned, back in April, that China has been salting away bullion for the previous six years, out of sight of international gold watchers. To the tune of 14.6 million ounces. Now the evidence suggests that that was merely the prologue.

Let’s take these tidbits one at a time:

Sovereign Wealth Fund Dumping $$ for Gold?

This one is still at the rumor stage, but highly-respected website Mineweb.com is supporting it. What we know for sure is that the country founded its primary sovereign wealth fund, China Investment Corporation (CIC), two years ago, with the stated aim of rapidly deploying some of its $1.5 trillion forex surpluses – $200 billion initially, with another $100 billion recently added to the kitty – into investment in non-Chinese enterprises. This it has been doing in spades, acquiring businesses around the globe. Extractive industries are among them, including Teck Corp., the diversified Canadian mining giant.

Might it also be buying up gold? We don’t know that for sure, but it seems likely. And, in addition, rumors sneaking off the mainland indicate that within the CIC, a lot of effort is being poured into prospective investment deals in the oil and precious metals sectors. The more it produces, the more it can keep.

The Chinese have made no secret of their disdain for current American economic policy and what they see as the inevitable destruction of the dollar. That they would be moving to diversify out of the greenback shocks precisely no one, and gold is one logical landing place for all those bucks. We suspect that’s exactly what is happening, behind the scenes as well as center stage.

Gold and Silver Pushed to the People

As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it’s actively pushing folks to buy some personal metal, with China’s Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.

It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity.

There are persistent rumors that the export of silver has already been banned. Gold could be next.

Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.

All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…

China Repatriates its Bullion

Meanwhile, in early September numerous sources reported an announcement that Hong Kong is pulling all its physical gold holdings from depositories in London and transferring them to a newly built, high-security depository at the city’s airport.

That means the government is backing the promotion of Hong Kong to a more formidable status as a Swiss-style, regional trading hub for bullion, at the same time as it reduces London’s role as a key settlement and storage center.
Press reports cited government officials as saying that marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility. Outreach will also be made to commodity exchanges, banks, precious metals refiners and ETF providers.

There can be little doubt this signals that the Chinese government fully recognizes the importance of gold in a time of crisis, and that the most prudent plan involves keeping its stores close at hand.

China Threatens to “Just Walk Away”

In one of the year’s most intriguing developments, commodity and derivative markets were thrown into a tizzy on Monday, August 31, by the worldwide circulation of a story published two days earlier in Caijing magazine (and reported by Reuters here).

According to the Caijing article, a spokesperson for China’s state-owned Assets Supervision and Administration Commission – the regulator and nominal shareholder for state-owned enterprises (SOEs) – told six foreign banks that SOEs reserve the right to default on contracts.

Say what?

Maybe the commission has been paying attention to the “just walk away” forfeiture movement that blossomed among American homeowners whose overall debt on their properties far exceeded the assessed value.

Small wonder there was panic in trading houses that hold a lot of Chinese paper. They hope any problems will be worked out short of a default. In fact, “It’s [only] a handful of companies who are being encouraged by regulators to ‘re-negotiate’,” says one banking source. “It’s outrageous, but it’s China, so everyone is treading very carefully.” Very carefully.

Nevertheless, in addition to tangible losses, those potentially affected fear the establishment of a dangerous precedent, one that could lead to utter chaos in the enormous, tangled world of derivatives.

And there is one other, albeit highly speculative, possibility. Some major entities – we don’t know who, due to the opaque nature of international gold trading – have huge, perhaps quite concentrated short positions in the metal, both on the COMEX and OTC market. Is one of them China, acting through American intermediary banks?

A short position in precious metals means that the initiator of that position is obligated to deliver physical gold or silver if the buyer (who holds the long end) wants it. Suppose China is one of the big shorts. Suppose it’s been playing the market in order to buy at what it sees as bargain prices. Now suppose a gold rally induces it to just walk away from all those obligations to deliver. Who’s going to force it to make good? Guess what, no one has a gun large enough.

Granted, it’s an outlandish scenario. But impossible? No. Beijing has shown nothing but indifference to what others think of it. And if the dollar does crap out as the world’s reserve currency, there’s nothing to say that China won’t see its self-interest as lying in a completely new direction.

Conclusion. Gold, and the companies that produce it, have enjoyed a brisk runup of late, as the metal mounts yet another assault on the beckoning, symbolic $1,000 level. How much of this can be traced to what China has done, is doing, or may yet do?

We don’t know, but we suspect it’s not entirely coincidental. All rumor and speculation aside, as China clearly turns more and more bullish on gold, so will everyone else.

Regards,
Doug Hornig

September 14, 2009

What the Heck Is Going on in China? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

August 31, 2009

Washington Capitulates: Peak Oil Is Real was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

What are the chances?

Well, it’s always good to bear in mind that there is no telling what the government might do. It’s already doing things that were unthinkable just a few years ago. If President Obama believes there is political hay to be made from seizing your gold – or even if he sincerely thinks such a move would be “good for the country” – we’re sure he won’t hesitate to make the grab. After all, his favorite predecessor, Franklin Roosevelt, set the precedent.

Many Americans don’t even realize that private gold ownership was forbidden for forty years, but it was. The relevant edict is Presidential Executive Order 6102 of April 5, 1933, which begins:

Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates By virtue of the authority vested in me by Section 5(b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 1933, entitled

An Act to provide relief in the existing national emergency in banking, and for other purposes,in which amendatory Act Congress declared that a serious emergency exists,

I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section to do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations…

There was, of course, no constitutional peg on which to hang such an outrageous crime against the people, so FDR decided to fall back on the 1917 Trading with the Enemy Act, which he claimed gave him the authority to do this in order to prevent gold from falling into the “wrong” hands. If that seems a flimsy argument, it is.

But it echoes eerily today. How much of our personal freedom have we already been asked to sacrifice to the Forever War on Terrorism? And note also the reference to an “existing national emergency in banking” that requires extreme measures. Sound familiar?

So, no question that Obama could follow in the footsteps of his mentor, if he wanted to. That said, though, the likelihood of a new gold confiscation is remote, for a number of reasons.

2009 is not 1933. Back then, the money supply was constrained by the gold standard. As Roosevelt concocted the New Deal, he ran smack up against that wall. He needed more money than he had, couldn’t raise taxes in a depression, and couldn’t print dollars that weren’t gold-backed.

His solution may have been reprehensible, but it was elegant. First, make the private possession of gold illegal, paying those who surrender their metal the official price, $20.67 per ounce. Then revalue gold to $35 per ounce. Voilà: Instant inflation, lots of new money, problem solved. And the New Deal was off and running.

But we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation.  However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash.

Given this kind of clout, what does he need gold for?

An argument can be made that the yellow metal is still useful. It runs like this: Creating money out of thin air is inflationary, and a large stash of gold, even if it doesn’t officially back anything, serves as a sort of counterweight. People around the world will have greater confidence in your currency knowing that, as a last resort, you can pay your bills in gold. And the more gold you have, the better.

Furthermore, confiscating gold and assigning it a fixed dollar value would also prevent the kind of runaway gold price that the coming massive inflation is bound to trigger. As those who argue that the gold price is already suppressed correctly point out, the government has decided to sacrifice the dollar in order to avert deflation. Thus a lower-than-free-market gold price helps obscure the damage that’s been done to the currency. People feel richer with more, albeit inflated, dollars in their pockets; a rapidly escalating gold price shows them that they’re not.

These two arguments aren’t empty, but they’re not convincing. Most folks in government subscribe to the “barbarous relic” school of thought about gold. Precious metals probably cross the minds of Obama’s economists only when they’re out buying jewelry.

And most American citizens have never even seen a physical gold coin, much less own one. Reeling in all the bullion out there will, in reality, do the government little if any good.

One final point. In the 1930s, when people were asked to turn in their gold, compliance was quite high. Americans believed their government when told that it was for the greater good. Imagine.

Today, that attitude seems laughably naïve. Those who have gold know that it is an unequaled storehouse of value. That they would meekly part with it at the government’s behest requires a belief that naïveté still rules the land.

Far more likely is that gold owners would resist. And since they also tend to be gun owners, there could be serious confrontations. The government doesn’t want mass resistance to one of its orders, nor an escalation of the domestic violence it will probably get anyway, when unemployment rises to Depression-era levels. It’s simply not worth it.

Never say never where government stupidity is involved. But all things considered, a modern-day gold confiscation is not high on our list of financial worries.

Regards,
Doug Hornig
Casey’s Gold & Resource Report

Are We Being Conned About Gold Consfication? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.