And they ain’t lyin’!

Writing for Forbes Louis Woodhill gets this seeming contradiction right. He views the price of gas not in terms of the depreciating monopoly money issued by the politically-empowered central bank…but in terms of the market’s favorite money: gold.

When viewed in relation to gold, gas prices are low…only 82% of their average over the past 41 years.

Gas prices aren’t high. The dollar is just falling, its value being undermined by politically-driven over-issue. So if you count the Fed-issued dollars as money — and are actually using it as a savings vehicles — then your world is being rocked by rising gas prices (and rising prices in everything else, too, except for computing power).

But it’s not just the rising prices of everything that threaten all of us. In his article Mr. Woodhill reminds us:

“Right now, the threat posed by rising gasoline prices is not just to family budgets. An even greater danger is that the government will use escalating oil prices as an excuse to do something stupid.

“After President Nixon abrogated the Bretton Woods monetary arrangement in stages starting in September 1971, both gold prices and oil prices started to rise. The government responded by imposing wage-price controls. This made a bad situation much worse.

“This time around, the stupid policies being considered to ‘deal with’ rising gasoline prices include additional cuts in payroll taxes and higher taxes on energy producers.

“During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another try. It is not likely that Americans will like it any more this time around than they did 40 years ago.”

Source

It amuses us that the “gold is for nutters” crowd loves to point out when a mere 250 of their beloved dollars could acquire the gold they hate so much. Yet they seem to forget that their dollars could buy more than ten times as much in the past — back before the Federal Reserve was established.

They also write off those times when gold reveals the inherent weakness of their treasured paper currency…like when the gold price surged to $850 in 1980…and now as the price of gold hovers near $2000 thirty years later.

If you look at it the right way — in terms of the eternal golden money — it’s the dollar’s periods of strength that are the aberration.

It’s not gold and silver prices that are volatile. Those have been incredibly consistent for thousands of years in terms of commodities they could buy. And because of the increasing standard of living being raised by free market economies, in a very real sense these eternal monies actually buy more. It’s the dollar that has been erratic in its overall declining trend ever since it’s been cut loose from gold (and silver).

Again, people looking at the cost of a gallon of gas, or of milk, or the cost of a nice suit, or rent from behind their piles of gold and silver are finding very little to worry about. In fact, to them, prices are lower than normal and declining.

Also the price of oil has tended to track the price of silver awfully closely for about as long as oil has been industrially useful. And so it’s no mistake that you can still get a gallon of gas for about about $0.20…as long as that $0.20 is composed of a pre-1964 90% silver dimes.

Or you could use a pre-1964 90% silver quarter for that gallon of gas and get back some change.

You see, the pre-1965 quarter is worth $6.38 as I type this. The pre-1965 dime is worth $2.55. These coins hail from a time when the dollar was still tied to gold (at the official price of $35 per ounce prior to Nixon nixing the gold standard). The dollar was still as good as gold — even though Americans themselves were forbidden to own gold bullion from 1933 till 1974 — and there was actual silver in the coinage until that content was reduced in 1964 and eliminated in 1965.

Those old silver coins shine the harsh light on the strength of the currency and the abuse that currency suffers from the feds and the Federal Reserve.

If you’d been saving in gold, then from your point of view gas prices have been coming down for the past few years. If you’d been saving in that old “junk” silver (pre-1965 quarters, dimes and half dollars), then gas prices are a downright bargain, too.

(In fact, we strongly believe that silver is still severely undervalued. While gold is more than twice its 1980 high in terms of dollars, silver still hasn’t quite hit its 1980 all-time high when less than an ounce of silver could buy a barrel of light sweet crude. Silver may be more expensive in dollar terms than it was ten years ago…but it’s still incredibly cheap in terms of both gold and in terms of oil…

…Back in 1980 at silver’s peak it took less than one ounce of silver to buy a barrel of oil. Oil is going higher…and silver is likely to try to play catch up and outpace both oil and gold. Silver is just as much a monetary metal as gold…and just as much a vital industrial commodity as oil. Yet again, silver is severely underpriced in relation to both gold and oil. And it stands to gain more than both as both climb higher. So physical silver has been and continues to be our favorite, simple way to hedge against the demise of the dollar.

We turn now to the Wall Street Journal where they find U.S. monetary policy more than a little at fault for the rising dollar cost of gas…

“Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama’s appointees who are now a majority on the Fed’s Board of Governors.

“Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of “quantitative easing” in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again. John Paulson says he’s betting on gold, the ultimate hedge against a falling dollar.

“Fed officials and Mr. Obama want to take credit for easy money if stock-market and housing prices rise, but then deny any responsibility if commodity prices rise too, causing food and energy prices to soar for consumers. They can’t have it both ways, as not-so-stupid Americans intuitively understand when they buy groceries or gas. This is the double-edged sword of an economic recovery ‘built to last’ on easy money rather than on sound fiscal and regulatory policies.”

Source

It seems so simple to us. The politicians want to prop up certain markets with inflation from the central bank…while keeping it easy for the government to borrow. But like any man-made abomination worth its salt, those newly created dollars don’t ever behave exactly how their creators want.

Stock and house prices are mostly flat or outright falling. The dollars meant to be puffing them up are instead spilling over into everything else.

The housing market is like a sad, burst balloon. Air just flows in and right back out. The stock market seems to be filled to capacity, its size delineated by annoying fundamentals like earnings. The price for these earnings is just too high right now and more new money in the economy just can’t drive those stock prices much higher.

That new money — the various QEs — is having an affect on other prices though. All the stuff you use to live. If you insist on believing in the dollar — and writing gold and silver off as barbaric nonsense — then you will be able to afford less and less of the life you want and to which you’ve become accustomed. Further if the history of paper monies is any kind, you could find yourself completely wiped out if you store your wealth in dollars or euros or pesos or whatever other paper lie is set to unravel next.

They will tell you that creating new money is necessary to keep the economy growing, to fight unemployment, to promote the general welfare, etc, etc.

But all it does is destroy your savings and make it easier for the feds to keep on borrowing to pay for welfare and wars. If you want to make sure the dollars you earn today can pay for the same amount of food and energy down the pike, trade those dollars for something of real value right now. We heartily recommend the type of money that actually fulfills that “reliable store of value” function.

Regards,

Gary Gibson

Why Gas Prices Are Actually Falling was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

No one I spoke to would venture a guess as to how high gold would rise before it hit its peak. But most stressed that people forgot that gold’s value was driven by sentiment.

“Gold doesn’t have any intrinsic value,” said Larry M. Elkin, president of the Palisades Hudson Financial Group in Scarsdale, N.Y. “It’s this era’s wampum. At one point you could buy Manhattan for beads.”

(Mr. Elkin said what bothered him the most about investing in gold was how irrational it was, unlike buying a blue-chip stock whose value rises and falls based on what the company produces.)

That said, having gold in a portfolio is still a good buffer against swings in other markets. Mr. Fisher calculated that over a 43-year period ending in June 2011, the average annual increase for gold, accounting for inflation, was 3.82 percent compared with 4.92 percent for the Standard & Poor’s 500-stock index. Gold, however, was 28 percent more volatile.

“The smoother the ride, the more likely the investor is going to stay in his strategy,” Mr. Fisher said. “That produces a better result.”

He said that from the perspectives of both return and volatility, a better strategy would have been to put 10 percent in gold and split the rest 60-40 between stocks and five-year Treasury bonds. Rebalancing the portfolio to maintain those ratios would have meant an average annual return of 4.66 percent, with more than half of the volatility of gold alone.

For those who fled to gold and Treasuries, the hardest part will be deciding when to get back into other securities. The best way in uncertain markets may be to go slowly in small chunks — a practice known as dollar-cost averaging.

They might have asked us. We have lots to say on the matter!

First, gold isn’t supposed to “do” anything. That’s why we like it and why it has been used for money for as long as there’s been the need for money. It is a store of value, not a value-creating business or a head of cattle or an acre of fertile land

And during times when the government and central bank have been doing plenty…running unpayble deficits, artificially inflating asset values by means of interest rate manipulation and by expanding debt and the currency supply…you want something that will “do” nothing.

Second, gold buying based on sentiment? And irrationality? Yet lending money to the government or buying overpriced stocks are both reasonable acts?

Lending money to the U.S. government to protect your savings is like running to an armed assailant for comfort. The government is doing everything in its power to make sure you are paid back in dollars that are worth less than the ones you lent…at an interest rate that doesn’t begin to make up for the rate at which your purchasing power is being destroyed.

Stocks meanwhile may represent ownership in productive businesses…but the costs of those earnings are currently too dear. They are not a good buy. Eventually those earnings will be on sale again. If you buy now, that means you are almost certain to lose money.

It’s about more than smoothing out volatility. It’s about recognizing what’s happening now. It’s about giving the Fed’s actions their due respect and a wide berth.

You have to understand that the very existence of a central bank is the problem. Minus a central bank and government propaganda, gold and silver are very naturally perceived as money, while economic growth is based on savings that aren’t discouraged in the first place by inflation.

With a central bank mucking around with the price and supply of both currency (we hesitate to call it money) and credit, you’re bound to get booms with the busts baked in and all the attendant distortions. You get bubbles moving through asset classes: through the currency, then stocks, then real estate, then commodities and precious metals.

This makes the advice about a having a “balanced portfolio” a bit of a joke. That’s like telling you to inject yourself with both steroids and Ebola and hoping the two will balance each other out. When you have a busybody central bank creating serial bubbles, you need to move from one investment class to the next.

You should have been trading your rising stocks for sleeping gold for the past decade. You should have been selling off your real estate and buying silver too.

We’re going to keep trumpeting the “do nothing” metal and its more industrious companion silver. Especially as the New York Times quotes experts who scratch their heads at this gold thing.

Gold has gone from under $300 to nearly $2000 in the last decade. What has the Dow done? It was around 10,000 ten years ago. It’s around 11,000 now. Yet these guys are still rolling their eyes at the people who were “all in” with gold, the price of which is now around sixfold more.

Sure there were a couple of dips in the Dow in the past ten years. You might have made a little money if you bought and sold at just the right time.

Gold took a lot less timing and a lot less effort. Those recommending gold were begging people to take advantage of gold’s years of dormancy. They begged them to keep accumulating while gold was cheap.

The price of gold is more than mere “sentiment”. That price is trying to communicate something. Gold’s price is declaring that fiscal policy stinks, that government deficits are no laughing matter, and that the stock market on the whole is a sucker’s game right now.

Regards,

Gary Gibson
Managing editor, Whiskey & Gunpowder

Gold Still A Better Idea Than Mainstream Asset Allocation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A gas station in Ashland, Oregon, May 2011

…If you pay with un-debased U.S. currency.

One gas station in Ashland, Oregon, is accepting payment for gas in the old, un-debased version of the currency.

The more prices change, the more they remain the same. At least when the currency is sound.

A gallon of gas was nearing $5 per gallon at the time the above picture was taken. Two old 90% silver dimes were worth about $5.00 of the newer 0% silver dimes and quarters. If you’d saved your money in plain ol’ currency back before the Treasury pulled another fast one, you’d be able to buy about a gallon and half of gas for $0.20.

We often tell people to start saving their nickels. This is why. This isn’t a get-rich-quick scheme. It’s not even a get-rich-slow scheme. It’s a don’t-get-hosed-by-central-bankers scheme.

Note that for all the years that dimes and quarters were 90% made of silver, the price of gas was around two of those (mostly) silver dimes.

Also note that there is a red line that shows the inflation adjusted gas prices. When the currency was sound and stable and the dollar price of gas was stable, people were better able to afford gas. This is because prices were stable as incomes were rising, a condition that Keynesians generally can’t stand.

(And heaven forbid prices actually fall slightly while incomes stay the same or even rise slightly. That sort of “deflation” is to be stopped at any cost.)

But see what happens when the silver is removed from the coinage in 1964? The price trends up a bit. And then after the U.S. dollar is entirely cut from gold in 1971, the price of gas really started to move in dollar terms. There was a spike leading up to 1980, a slight drop and leveling off for years (for various reasons we won’t go into now) and then it was back off to the races.

In 1918, a gallon of gas was about two 90% silver dimes. In 1928 about the same. And in 1948. Fast forward to 2011 and a gallon of gas is still about two 90% silver dimes, despite the rise in price in terms of the debased currency that really got going in 1974.

Even with all the Hunt Brothers drama and attendant price drops after 1980, silver’s price movements in dollars looks suspiciously like that of a gallon of gas…

Source: SilverPrice.org

You see, a gallon of gas isn’t getting expensive. Your currency is getting cheaper. Has been for a long time, since the official closing of the gold window. The speed at which it’s getting cheaper appears to be accelerating, too, as the central bank creates unprecedented amounts of new cash–unbacked by anything commodity or productive activity of course–to inject into the economy.

Meanwhile, the REAL currency is doing pretty well. Largely forgotten the silver version of the currency is keeping its value relative to things you buy. A gallon of gas is still less than $0.20. Twenty REAL cents. Not the forgeries that pass for money in the minds of the unwary.

If you think that’s something, realize that a gallon of gas is just five or six cents in terms of the old dollar bills that were also gold certificates. (One pre-1934 dollar was good for 1/20 ounce of gold, or about 80 of today’s dollars.) That’s an even more impressive holding of value than the silver coins. (Though silver still stands to surpass gold as the winning bet for beating currency debasement.)

Even the lowly penny has gotten in on the act. Say you missed out on (illegally) hoarding gold before 1934…and then again (legally) with silver coins before 1964…if you’d diligently saved your copper pennies before they were replaced in circulation with that shabby zinc substitute, you’d have protected your purchasing power quite well.  The metal in about $1.25 worth of pre-1983 pennies would buy you a gallon of gas today, priced at about $4.75 of today’s dollars.

Again, roughly a $5 gallon of gas in today’s money is five or six cents of the old dollar gold certificate, twenty cents of the silver dimes, a buck twenty-five of the copper pennies. There appears to be a strong correlation between length of debasement and multiplication of purchasing power.

The dollar was partially debased in 1934, the gold it represented made illegal for private American ownership, then completely cut free from gold in 1971. Dimes, quarters and half dollars started being debased in 1963 and were completely de-silverized by the end of the year (40% silver-clad half dollars were available for a few years after that). The penny got the same treatment and was completely de-copperized during 1983.

The old gold certificate dollars are worth 80 times their face value in the current currency…Well, technically they are collector’s items and museum pieces; the gold they represented is what has value today. The old dimes, quarters and half dollars more than 25 times. The old penny only three times.

The same thing that happened to gold certificates, quarters, dimes and pennies is happening to the cupronickel nickel. The value metal in the five-cent piece is staying steadily above the face value of the currency in which it’s minted. Put another way, a five-cent piece is worth quite a bit more than five cents. About 35% more, or 1.35 times face value as of this writing.

We expect all these factors above in bold to increase over time.

A market for pre-1963 90% silver coins is well established. These coins trade for the aforementioned 25x-plus their metallic content. A market for trade has only just begun to develop for pennies like it has for old silver coins. It hasn’t yet for nickels. It will.

The government figuratively took the gold out of the paper dollar. They literallly took the silver out of the dime, quarter and half dollar, and the copper out of the penny. The nickel is the only thing the U.S. has left to debase. It will probably be getting around to doing just that very soon. So now would be a good time to stock up.

This is your last chance to protect yourself from dollar weakening (and perhaps dollar destruction) by merely saving your money in the right form. No premiums attached! Just go to the bank and exchange whatever dollars and cents you have for nickels. They will give you 100% of your money back in nickel form without taking a cut.

Go to any bank right now and hand them $100 and ask for nickels. The teller will gleefully give you back about $135 in metal (as of this writing). We suggest you do this as regularly as you can.

No, you can’t take advantage of that now by turning around and selling these cupronickel pieces (“nickels” are actually only 25% nickel and 75% copper) for an immediate 35% gain. Not yet. But that time is coming. It could take years, but we doubt it will be that long this time around. The pace of debasement is accelerating over time. It’s taking on the classic “hockey stick” form on the charts.

You should still be buying gold and silver because there is plenty of dollar debasing left to go. But you should also be gathering nickels because they are so damned easy to acquire (go to the bank and see) and because they insure against both dollar strengthening (which could still happen) and declining.

In the unlikely event that the dollar gets stronger over the course of the rest of your life, you have merely saved money that you can still use at face value. In the much more likely event that the central bank keeps printing up new money, the metal content of the nickels will continue to climb far above their face value.

When the metal value gets way above the face value, the Treasury will surely do what they always do: issue a new, debased version of the currency with a much cheaper metal (probably zinc). This could happen as early as next year. This opportunity will not last forever. We strongly urge you get on a program of regular nickel-gathering now.

Perhaps best of all, any substantial wealth is virtually theft-proof in nickel form. As I recently noted on the Whiskey Bar Panel: if you have $10,000 in nickels in your house, no one who breaks in is going to get more than about forty bucks of that. At least not without lots of time, help and planning.

Nickels have very low value per unit. So even a fairly tiny amount of purchasing power in nickel form is very heavy. Forty dollars worth is heavy and awkward enough to make the effort and risk to reward ratio low enough to deter most thieves.

Now if a devoted thief plans a competent heist…if he gathers accomplices and makes sure he has a reliable getaway car and plenty of loading time, then you’re probably out of luck. But I suspect that thieves with that level of skill and dedication would be targeting all the gold bugs, not the nickel-hoarders.

You should absolutely be buying gold, silver or both. Silver especially still looks like the best way to multiply purchasing power instead of just protecting it. But you should also hold some cash, just in case, and much of that cash really ought to be in a form that will do just fine whether the dollar goes up or down. It ought to be in nickels.

Regards,

Gary Gibson
Managing editor, Whiskey & Gunpowder

Gas Prices Don’t Move Much In Good Currencies was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The strange thing about gold & silver, however, is that while they are the last vestige of a money that is not in and of itself able to be manipulated by the political criminal class many people still trade instruments in gold and silver which are easily manipulated by the aforementioned.

We can’t speak for the marketplace but we buy gold and silver as a way to protect ourselves from the easily foreseeable collapse of the current non-free market monetary system. To us, to try to protect ourselves from the collapse of the monetary system by buying instruments (futures) which are a part & parcel with the current monetary system makes as much sense as buying shares of Enron in late 2001 because you had inside knowledge it was a fraud.

We suppose at this point there are probably two types of precious metals investors. Those that are blissfully unaware of the reasons to own the metals and are just bandwagon jumping the bull market and those that understand what is going on and who are buying gold and silver as protection and a way of preserving their assets through TEOMSAWKI (The End Of The Monetary System As We Know It) to come.

We live in a literal financial house of cards. It is all paper. That house of cards has been in the process of collapsing since 2008. Astute market participants realize this and are buying bullion, one of the only financial assets with no counterparty risk, as a way to protect themselves from the coming storm.

Those who think this is just a bull market to trade likely buy highly leveraged futures that have little or no direct connection to actual gold or silver bullion.

So, what happened with silver? It more than doubled since Ben Bernanke began his high level terrorist attacks against the US dollar with “Quantitative Easing II” announced in August of last year, rising from $18 to just below $50.

The rise in gold and silver was likely making Bernanke feel a bit uncomfortable about his “there is no inflation” story and a phone call was likely put into the COMEX. Five margin increases in rapid succession later and the COMEX had increased initial margin requirements by a substantial 84%.

Anyone who had bought silver futures using leverage and without a substantial cash holding was forced to immediately sell their silver futures. The result was a drop in silver futures prices from near $49 to below $34 in a matter of hours.

So, what’s the first moral of the story? If you are buying gold and silver to distance yourself from the highly manipulated and rapidly failing monetary system then don’t buy gold and silver in forms that are under the control of the central planners.

Silver Bubble?

The action in silver has most of the world saying that silver was in a bubble and now that bubble has popped. Those who say this don’t know what a bubble is and have been blinded by the inflated dollar nominal prices.

If you look at the silver price in US dollar terms it does look like quite a parabolic, bubble-like rise. However, when you just discount the silver price by the US Government’s own CPI Index — which they say is a proxy for inflation — the silver price looks like it has not done much at all. And when you take Shadowstats.com‘s CPI — which just calculates the Government’s CPI the way they used to calculate it in the 1980s before they learned how to hedonistically remove the inflation — silver has been in a long bear market since 1979.

This jives with the following chart as well where we see the price of a number of disparate items in 1980 and in 2010. Can you spot which one of these items is in a bubble?

What’s the second moral of the story? You take your investment life into your own hands if you pay attention to the price of your investments in US dollar terms. In nominal dollar terms silver looks like it has been on a ludicrous rocket ride. When looked at discounted to ‘inflation’ as defined by the US Government’s CPI or when compared to other assets over the last thirty years, silver has been a long bear market and has done relatively nothing compared to any other assets.

And compared to the growth in US Federal Government debt, silver has underperformed by a factor of five. One bubble is about to pop… and it isn’t silver.

Regards,
Jeff Berwick
The Dollar Vigilante
Whiskey & Gunpowder

May 20, 2011

Silver Price Collapse Reminds of Risks in Paper Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

To begin with, the U.S. Government now employs cash-sniffing dogs at most international airports. If you are carrying more than $10,000 in cash and don’t declare it to the Government when coming in or out of the U.S., your cash will be seized.

According to a blatant propaganda “newscast,” $3.2 million has been seized at Logan Airport in Boston in the last year.

Some government apologists might say, “If you aren’t doing anything wrong, why wouldn’t you mind being x-rayed, sniffed, patted down, detained and questioned?”

Besides the obvious absurdity of that question, the main reason this is of concern is because in every case in history when a government has inflated its currency into worthlessness they always institute capital controls. Just ask anyone from Argentina or Italy. And it won’t take much to change the rules from having to “declare” $10,000 to “not being allowed” to take $10,000 out of the country.

Not to mention that if you do declare you are taking $10,000 out of the country, who knows what kind of database you will end up on. You are obviously highly suspicious if you have more than a few hundred bucks! Only Wall Street bankers and others associated with the Government are supposed to have more than a couple dollars! The most ludicrous example of the War on Money came across the newswire today, “Feds Seek $7 million in Privately Made Liberty Dollars.”

The news story is only about 10 paragraphs long yet it has dozens of logical absurdities. Even in the Headline is one.

According to the headline, part of the reason they want to seize these dollars is because they are “privately made”? Yes, we wouldn’t want to compete with the private Federal Reserve banking cartel!

And I know the Constitution is passé in the US, nowadays, but how in the world can this man be in trouble for making silver coins? The constitution states:

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts.

He is in trouble because he is making currency out of gold or silver yet, the Federal Reserve, another private organization, is not doing anything wrong by making paper currency NOT backed by gold and silver coin?

Apparently, the thing they “got him on” was the following:

Federal prosecutors successfully argued that von NotHaus was, in fact, trying to pass off the silver coins as U.S. currency. Coming in denominations of 5, 10, 20, and 50, the Liberty Dollars also featured a dollar sign, the word “dollar” and the motto “Trust in God,” similar to the “In God We Trust” that appears on U.S. coins.

Ignoring the fact that the dollar sign was originally used for Spanish and Mexican pesos and was stolen by the U.S. to use for its dollars and the fact that the word dollar actually comes from the word thaler which was a silver coin minted in Bohemia, according to the Feds, he was trying to pass off coins, made of silver, worth more than $35/ounce, as quarters, which are now made from 92% copper and 8% nickel, and worth $0.06 in metal value.

Boy, that’s quite the racket! Passing off highly valuable silver to people who were expecting to receive near-worthless copper and nickel tokens! It’s a good thing they stopped him before it was too late!

Anne Tompkins, the U.S. Attorney who was put on this important case, stated:

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism.”

Anne, if attempting to undermine the currency of the US is a form of terrorism, why has Ben Bernanke not been tracked down and sent off to the Guantanamo concentration camp?

This “news” story finished by quoting an unbiased source: a group named the Southern Poverty Law Center, a group that tracks political extremism which has apparently been tracking Bernard Von NotHaus, the proprietor of the silver coin making terror enterprise. According to the story, long before the government began its investigation into von NotHaus, the group was raising concerns about the popularity of Liberty Dollars among fringe groups on the far right.

“He’s playing on a core idea of the radical right, that evil bankers in the Federal Reserve are ripping you off by controlling the money supply,” said Mark Potok, spokesman for the group. “He very much exists in the world of the anti-government patriot movement, whatever he may say. That’s who his customers are.”

The U.S. has started another war. The war on money. Anyone with any amount of cash more than will buy them a couple NFL tickets, beers and enough to pay for parking is suspect. And if you are one of those deluded people who think the Federal Reserve is evil and is ripping you off and you buy gold or silver to protect yourself, you are a domestic terrorist.

It’s going to be a fun few years ahead in the U.S. If you live there and haven’t defected yet, time is running out. If you choose to stay or are unable to leave, I wish you luck!

Regards,
Jeff Berwick
The Dollar Vigilante
Whiskey & Gunpowder

April 11, 2011

Currency Controls and the War on Money was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In 1933 President Franklin Delano Roosevelt signed Executive Order 6102, which made it illegal for U.S. citizens to hold gold bullion.

Prior to that, the $20 bill was essentially a warehouse receipt for a one-ounce gold coin. Prior to the Federal Reserve Act of 1914, the $20 bill actually told you this.

After Executive Order 6102, $20 notes weren’t allowed to be exchanged for gold anymore. Americans couldn’t legally own or trade gold as money and savings, only as jewelry or collectible coins.

A year after making monetary gold ownership illegal, FDR revalued gold from $20.67 per ounce to $35 an ounce with the Gold Reserve Act. The Act also required all gold and gold certificates to be turned over to the Treasury.

The dollar was debased. A chunk of the gold it used to be good for was legally removed. Instead of  “containing” 1/20 an ounce of gold, each dollar now only contained (or represented) 1/35 an ounce. And of course you couldn’t actually own the gold itself.

In 1971 Nixon severed the last official ties between gold and the dollar. The dollar quickly sunk to its real value, which had been debased by years of money supply inflation.

By 1975 Americans were allowed to own bullion gold again, but during the roughly 40 years bullion gold ownership had been illegal, the dollar had been drastically debased. At its former lowest point in the summer of 1980, the dollar was worth only 1/850 an ounce of gold. It regained some value for a while, but for the past couple of years a dollar would only get you less than 1/1000 an ounce of gold (right now it gets you less than 1/1300 an ounce).

That was the story with a piece of paper that was merely standing in for a monetary metal. But what happens in the case of circulating coins actually composed of monetary metals?

Let’s look at quarters, dimes, nickels and pennies…

• Prior to 1964, U.S. quarters and dimes were 90% silver. From 1965 to 1970 half dollars were 40% silver “clad” over a copper-nickel or “cupronickel” mix. Now quarters and dimes and half dollars have no silver in them at all. They are now entirely copper and nickel, but only enough to get a little more than 1/4 their face value.

• Prior to 1983, U.S. pennies were 95% copper and 5% zinc. In 1982 we started getting pennies made of 97.5% zinc with only 2.5% copper plating. Since 1983 every new penny has had this composition.

• The U.S. nickel has been cupronickel since 1946: 75% copper and 25% nickel with trace amounts of manganese. But that’s probably about to change…

Why are quarters and dimes no longer silver? Why is the penny no longer mostly copper? And why will the nickel likely follow suit fairly soon?

Because the amount of silver and copper and nickel in each case came to exceed the face value of the coin. The debasement of the U.S. currency over time has required the metal in the coins to be replaced with a cheaper substitute.

The average American has no idea what inflation really is or why currency debasement is a problem at all. He figures one metal is as good as another in minting of the currency…that when the face value of a coin falls below the value of the metal in the coin, it’s nothing more than a curiosity. Substitute a cheaper metal, they think. Problem solved.

And indeed the problem is solved for the government, which mints the coins made of real money at a loss after the effects of bouts of the inflation started by monetization of government debt. Savers and the overall economy on the other hand…their problems are just beginning…

But that is a story for another time. For now let’s look at the opportunities to be had when the government makes metals available for a fraction of their market price via coins…And let’s see if there are any opportunities left (Hint: there are!).

If you had seen the writing on the wall in the early 1960’s and started hoarding quarters and dimes while they still were almost wholly silver, you would have found that your dimes were worth a high of $3.57 each. Your quarters would have been worth $8.93 each.

In fact, these 90% coins still trade just like regular silver bullion bars and rounds. They were taken out of circulation — “hoarded” — by those savvy to debasement (Gresham’s Law tells us that good money will be hoarded when bad money floods the market). These coins were collected without any transaction costs. They were bagged up with different face value totals: $1,000 bags, $500 bags, $250 bags, $100 bags and $50 bags. These bags now sell with a transaction cost.

Each of these bags traded for over 35 times their face value because of the silver in the coins. At least they did at silver’s peak in 1980. Even after the peak and during the ensuing 20-year slump they were selling for more than three times face value.

Now thanks to waves of money and credit expansion from the Federal Reserve, silver (and gold) is pushing back toward its old highs. These bags of so-called “junk” silver are trading at more than 20 times their face value. They may hit 30 times face value again…and beyond…

Between 2000 and 2006 I was a big believer in silver as an investment (I still am). I begged all my loved ones to sell their (overpriced because of credit expansion) homes, pay off their credit cards and shove the rest of the money into silver.

No one listened. Here are a couple of graphs that makes them wish they had.

The red vertical lines in both graphs represent the start of 2006.

If you had sold your house at the very peak of the housing bubble in 2006…just before silver took off…you could now sell your silver and buy back your house…plus five more houses like it.

And there’s a lot more potential for that trade to get even better.

Silver shot up about fourfold, while real estate plummeted by a quarter or a third. That’s “so far.” Silver’s price could multiply again — even if does dip in the interim — while housing could drop even more.

Even if you didn’t catch the peak, but just saw the writing on the wall in 2000-2005, you’d still have done pretty well by selling your home and buying silver. You wouldn’t have gotten quite as much for your house, but you would have gotten silver at around $4 instead of $9.

Silver probably has another trick or two up its sleeve. It probably has a lot more upside than gold. It will probably play catch up till the silver/gold price ratio gets larger. Who knows?

Look at the other coin that was debased: the lowly penny…

Prior to 1984, the penny was almost all copper. Now those old pennies have been driven out of circulation and hoarded (Gresham’s Law strikes again). And they’re worth just under three times their face value: Almost three cents for the old one-cent piece.

Copper hasn’t had quite the success that silver has. Non-debased silver coinage has been worth 35 times face value and is currently worth 20 times face value and climbing. Copper coins’ triple-bagger over nearly thirty years doesn’t seem nearly as impressive. That’s because it’s not. But it is telling.

The thing is, silver now has transaction costs. Whether you buy bars, rounds or pre-debasement coins, you have to pay a middleman. You have to pay shipping if you get it online.

Meanwhile, copper pennies are still floating around, but hard to find. It’s really not worth the effort to gather underpriced copper this way.

But nickels? That’s a different story. Every single circulating nickel still has 3.75 grams worth of copper each…along with 1.25 grams of nickel. The silver dimes and quarters and the copper pennies are gone, but the copper-nickel or cupronickel nickel is still the only kind of nickel there is. For now…

What if you could have simply been there to start collecting silver quarters and dimes when they were actually circulating? You’d just have had to walk up to your bank and withdraw your money as quarters and dimes. This would have worked up to 1963. After that you’d have to sort through your quarters and dimes to make sure you didn’t have one of the new, non-silver ones.

The best opportunity with silver coins has long passed. But there is still a similar opportunity with silver’s humble cousin, the cupronickel five-cent coin.

Buy Two, Get One Free

Copper is currently about $4.60/lb. Nickel is currently about $13.00/lb

120 five-cent pieces is $6.00. Those 120 coins contain a pound of copper and 1/3 pound of nickel. That’s about $8.93.

If you deposit $6 in any bank in the nation, then withdraw your money as nickels, you get almost $9 worth of metal. That’s an immediate 50% return. That’s like paying for two thing and getting three.

You can’t legally cash in on it now (anti-smelting laws for pennies and nickels were introduced in late 2006). But the bullion market for cupronickel coins will develop, just as it did for silver U.S. coins. This will happen once the government starts minting five-cent pieces made out of cheaper metals.

To those who doubt this will happen, I refer you to the bags of silver coins trading as bullion for over 20 times their face value. You can easily order such a bag right now by going to any of a number of online bullion dealers. These bags of coins sell right alongside silver bars and rounds.

Right now, the government is subsidizing your copper and nickel purchases…and cutting out the middleman. As much as we complain about government, we ought to stop and offer them a little thanks for this.

The debasement of the U.S. nickel is looking very likely. Right now you have another opportunity to do what the silver coin hoarders did back in the early 1960’s.

Hoarding nickels right now gives you an immediate benefit. You get between $0.07 and $0.08 of copper and nickel for a mere $0.05. Thanks to Uncle Sam. But your good uncle won’t subsidize this forever. He can’t afford it.

What’s even more is that there is a hedge against deflation risk that you just don’t get with bullion. You see this discounted metal is minted. It will always have a nominal value of what’s stamped on it by its issuer.

So if the dollar strengthens and copper, silver, and gold all get cheaper in dollar terms, you can still spend your nickels just like any other money. Your purchasing power stays the same, maybe even increases.

But if the dollar declines, then the value of the cupronickel in the currency will rise against the face value. Eventually — at two or three times face value — these five-cent pieces will trade as bullion just as 90% silver quarters and dimes did and still do.

Again, there is currently no transaction cost to saving in nickels and no risk from plummeting metal prices. There is literally nothing (in case of deflation) to lose and everything (in case of inflation) to gain.

Your only real problem is storage; a few thousand dollars of nickels takes up a lot of space…and it’s heavy. But people had the same problem with silver when it was cheap. I doubt they’re complaining now.

Having “too much” cupronickel won’t seem like much of a problem if inflation continues to drive the cupronickel in five-cent pieces far in excess of face value.

At worse the dollar strengthens and you’ve just saved money whose purchasing power has increased. That is not a bad worse case scenario at all.

The cupronickel is the last bit of honest U.S. currency there is. Right now it’s dying slow, like the others did. But things could speed up quick.

The cupronickel could surprise us all. Gold and silver are having their day. Maybe eventually cupronickel will, too. What cannot be dismissed is the current discount on the stuff (thanks, Uncle Sam) and the extremely limited downside.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder

February 16, 2011

Gold, Silver, Copper, Nickel and the Slow Death of Money was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It was just good, clean, Texas fun, and word has it that the boys actually hoped to profit not so much by squeezing jewelers and film manufacturers but primarily from a new, very rich, silver mine they were keeping under wraps. One that has never been opened. This makes sense; big money and old money tend to think generationally and those families which don’t, end up back in whatever cow byre or hick town they came from. Miss a chance this generation, that’s fine, because the opportunity will return in time and descendants will have been taught how to profit from it.

Long-running examples of success include the Rothschilds, Barons von Reuters, Rockefellers, and Krupps. A splendid example of doing it wrong is the Kennedy family, where too many relatives have been living off what Papa Joe made running rum and getting his boys into politics, with occasional useful marriages. The hubris and complacency are still there, as witness Caroline Kennedy thinking she could become the Senator from New York simply by telling the Governor she wanted the custom-made chair. Never mind that she doesn’t even vote! She’s a Kennedy, after all, and lived in the White House half a century ago, surely qualification enough. Not in this century, dear.

In the fullness of time the Hunts will no doubt go into production if the tale is true, and my surmise is that they are watching the manipulations of J. P. Morgan Chase with avid, probably amused, eyes. If it is apocryphal, it still isn’t safe to be short 20% of the world’s annual silver production in times of rising demand and falling output.

Back in the days of Andrew Jackson the ratio of silver to gold was set at 16:1, although throughout previous history 10:1 was more common, demonstrating that Old Hickory could keep his eye on acquiring extra Pine Tree shillings as well as FDR and RMN did. My read is that the highly anomalous ratios of sixty and even seventy-plus to one are the result of “judicious” short-selling by JPMC and a couple of confederates. It takes a while to become short 20% of a year’s output, and the others account for at least 10% more. There is a big backlog of inexorable demand.

It doesn’t matter much what the manipulators hope to gain by this reckless course of action for this discussion because the parts that interest us are the difficulty anyone short will have in delivering physical silver and what happens when the yo-yo springs back into our hand. Any change in the ratio will redound to our benefit, and a full snap back to 16:1 would literally quadruple the value of our holdings. Silver closed at a neat $18.00 last Friday, and the ratio does not have to return to traditional standards to make me smile. Even 30:1 will more than double the value of our stockpiles and that rise will make our silvery beauty even more desirable to investors, and concomitantly more dangerous to anyone short my favorite metal.

Should there be new readers who do not understand what “selling short” means, it refers to having your broker sell something which you do not own, on the vague promise to replace the stock or commodity “bambaya,” “By and by, yes?” as we say in Hawaii. If the value of what you sold rises, instead of falling, you will be required either to replace what you sold without owning it or to deposit enough in your account to cover the current cost. Those were the dreaded “margin calls” which led to leaps from windows, back when those opened in office buildings.

It makes one wonder, does it not, what could be so important about keeping the price of silver depressed for firms to take such risks, even if they will probably be deemed “too big to fail?” This is far worse than selling a piece of paper representing a share in Google or ADM. Those things are for sale any time, although one might not like the price. Physical silver must both exist and be for sale.

What Morgan has done is sell something it might not be able to purchase at anything like the prices they have managed to keep submerged. Sure, all last year they held prices in a beautiful little rising channel that offered constant upside movement followed by predictable downside potential, and even now if you are certain you understand the game, you might want a piece of the action. I’m not certain any more, and an expert technical analysis friend says he won’t be interested unless it breaks below seventeen. I wrote recently that if one did not own physical silver to grab some the next time it touched 16 1/2. I don’t expect it to see sixteen again any time soon, and I would pounce at $16.31 if I wanted some. My views on buying silver permeate my archives, here and elsewhere.

Let me repeat: some actions simply are not safe. I could attempt to sell the Star of India short, but I would have no way of covering; it is part of the crown jewels of England, and if I were the Queen my royal ladies in waiting would pry it out of my hand every night after I fell asleep. Phoo on the tourists; let ‘em look at a replica. Chances are they can’t tell the difference between diamonds and CZ anyway. Laughter…chances are that what is on view in the Tower of London IS a phony, at the insistence of Lloyd’s of London. They haven’t stayed in business all of these centuries by taking foolish chances.

There is a limited, discreet, quantifiable amount of silver produced every year (more and more as a byproduct of mining for gold and Japanese sewers, Byron King tells us) and surely Morgan is betting that when the time is right it can pick up the physical metal necessary for less than it made selling short. We aren’t certain what else they’re gambling on. One of the year’s delightful scandals was the empty vaults that were pledged to contain gold and silver in specific accounts while the clients were being charged large storage fees. For that matter, Ft. Knox hasn’t been audited since before I was born, and I don’t place a great deal of credence in the theory that it safeguards some four hundred billion at current prices. Most of what is traded on ‘change these days is promises or shares in mines. Which don’t pay dividends in product.

I’m a “Contrarian,” of course, and my call is that investors (egged on by the government with its fudged, fraudulent data), may doodle around for a brief while attempting to convince themselves that the jobless, consumerless, productionless “recovery” is real, but that sanity will reassert itself and metal will resume its rise. I wouldn’t even give that proposition until Election day to manifest itself–although there should be some nice buying opportunities then if the Statists are rejected as thoroughly as seems probable at the ballot box. By early next year I predict soaring metal prices as a result of the realities of new and higher taxes and energy costs. That’s an easy call: up because times are grim, down because Congress changed hands (maybe), then up as all that hope and change hits paychecks still going out and a new round of pink slips arrives. There should be a whing-doozy of a sell-off in December to avoid Cap Gains going from 15% to 20% and the socialistic medicine bite 3.84% tacked on top of that come 1 January 2011.

Gold is beautiful and symbolic and has some industrial uses, but silver is the most superior conductor of heat and electricity and has long been a strategic commodity. Signature chuckle…considering how many products, military and commercial, are made in China, my first impulse was a laughing, “Where to get enough silver is China’s problem now!” but that isn’t the real situation. The Chinese will have no difficulty raising prices to adjust for problems obtaining supplies.

I’m as big a Silver Bug as ever was and my silver is all physical and none of it is for sale, period, until a prospective buyer offers me what I want for it, which is land. I’m also on the Doom & Gloom bench permanently and expect the day to come when the land I want is available at a price I am glad to pay–in silver. I remain as convinced of the increasing “value” of precious metals as I have always been, for more reasons than our mantra: “Fiat currency doesn’t tell you the price of metal; metal tells you the value of fiat currency.”

Regards,
Linda Brady Traynham
Whiskey & Gunpowder

August 2, 2010

Cornering the Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Elmer Sutton’s eyebrows shot up when he saw the ad proclaiming gold stocks might make you wealthy.

It sounded like the perfect solution for his stock portfolio, loaded with investments going nowhere. He vaguely recalled hearing a little about gold, but if what the ad said was true, he thought he could make a killing.

So he called the broker and made an appointment for the next day. The broker seemed very knowledgeable and took the time to explain why he felt gold stocks were one of the best investments right now. He said this was not a get-rich-quick scheme, but that if you stuck with it, you could see potentially enormous profits. It sounded good. Elmer wrote a check for $2,500, and the broker bought three gold stocks for him.

The very next day, gold took a big drop and his spankin’ new gold stocks sold off hard. Not only that, there were riots in South Africa, where one of the companies was located. Elmer was instantly disgusted. He was losing money yet again. This time, however, he’d play it smart and get out before he lost it all – something his wife made sure he understood – so he hastily called the broker and told him he wanted his money back.

“Elmer, you can’t do that,” the broker told him. “This isn’t Woolworth’s.”

“I’m not buying them!” he yelled to the broker and slammed the phone down. Elmer wanted out, and that was that. He wasn’t about to lose any more money in the stock market.

Three years later, long after he’d forgotten about that broker, newspaper headlines were screaming about gold. Everyone at the party Elmer attended the night before was talking about how well their gold stocks were doing. His co-workers bragged about the good deals they were getting buying gold and silver coins. Everyone was talking about precious metals.

Elmer panicked; he didn’t want to be left behind. He scrounged around the house until he found the original confirmations of the trade he’d broken with “that broker”: 1,500 shares of Grootvlei at 35¢, 500 Anglo American at $2.50, and 1,000 Leslie at 50¢. He grabbed his newspaper and saw that Anglo was up 500% since then, and the others were paying dividends – this year alone – totaling more than he would have paid for his shares in 1976.

As the newspaper went limp in his hands, he had a vague recollection of the broker he met with and quickly tracked down the phone number. “I want to buy some gold stocks,” he breathlessly panted to the secretary answering the phone. She said the broker wasn’t in, and that while they would be happy to buy a stock for him, they were actually recommending investors sell their gold stocks.

Elmer couldn’t believe it. How ludicrous! Everyone he knew was buying, and he was personally acquainted with many people who were getting rich. He pushed on. “Look, everyone’s into gold right now. It’s on the front page of the paper, for crying out loud. So I want to buy some gold stocks right away.”

“That’s fine, sir, but I think you should talk to the broker first,” the secretary replied. “We really don’t recommend you do that.”

“I don’t care!” Elmer screamed, which he didn’t mean to do, but panic was setting in. “What’s this clown’s name anyway?”

“Doug Casey,” she replied.

Please Don’t Crowd the Emergency Exit

This true story explains how Doug Casey bought gold stocks at the very bottom of the market, as he took on those abandoned shares from Elmer. But today’s lesson underscores what Doug Casey saw back in the late 1970s: there’s certain to be a rush into gold and silver, and buying before Main Street catches gold fever is the only way to play this trend.

Because when Midas fever hits, prices will explode to the upside, for both the metals and the stocks. How do we know that?

First, let’s look at gold. If we added up all the gold ever mined on the planet, its total value would equal no more than $5 trillion at today’s prices. Yet, look at how this compares to the debt and bailouts and other monetary mischief of current governments…

Let’s make this chart very clear. Of the $5 trillion in gold ever mined…

• The U.S. government has thrown over twice as much at the economy in the past 12 months.

• The U.S. debt is more than double this amount so far this year.

• Total global government bailouts are almost four times larger (and this is a conservative figure; one estimate puts it at $24 trillion).

I intended to include annual gold production as one of the comparisons, but the chart isn’t big enough and neither is your monitor: 2008’s global gold production equaled about $73 billion, and to make that figure discernable on the chart would require the Global Bailouts bar to hit the ceiling above your head. That’s how small the gold market is.

The implications are undeniable: when the greater public rushes into gold – whether in response to inflation, dollar woes, war, whatever – the price will be forced up by an order of magnitude.

A Picture Is Worth a Thousand Dollars

While physical gold will protect our wealth, it’s the gold stocks that can potentially make us wealthy.

Once again, to get a sense of the Lilliputian size of the gold industry, I compared it to several other leading industries and stocks.

The value, as measured by market capitalization, of all gold producers around the world is less than Walmart’s. Every gold stock would need to nearly double just for the industry to match ExxonMobil. The oil and gas industry is about 12 times bigger.

When your neighbors and relatives and co-workers and friends all start clamoring to buy gold stocks, the pressure on prices will be enormous, rocketing our positions upwards.

Meanwhile – and admitting we’re first and foremost gold bugs – the picture for silver is even more dramatic. The potential for silver stocks is jaw-dropping.

If the gold industry is tiny, then silver’s $9 billion market cap makes it a nano industry. The entire silver industry is over 21 times smaller than gold’s! If gold explodes, silver will go supernova.

Consider these macro-facts about a micro-market and what they reveal about silver’s enormous potential:

• There are over 200 companies in the S&P 500 with a market cap larger than the entire market of silver producers

• There are five times more gold stocks than silver.

• Total silver production in 2008 was valued around $10.3 billion (at today’s prices). That represents just 1.5% of the $700 billion bailout last year, and 0.006% of the current U.S. monetary base.

• Of the 20 largest silver producers, only five actually call themselves a “silver” company, due to the fact that about 73% of all silver mined is a byproduct of other metals mining.

Any flood into the silver market would overwhelm it. In other words, the rise will be stunning. While it’s not going to happen tomorrow, I strongly suggest you get on board before that rocket ship takes off.

Just putting these charts together stirred my feelings of restlessness, making me anxious for the mania in precious metals to arrive. But the timing is not up to us. Be patient, because if you’re invested in gold and silver and the respective, high-quality stocks, you’re on the right side of this trend.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

November 20, 2009

Gold Mania Means a Niagra Falls of Dollars Through a Precious Metals Market Garden Hose was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Lately, the politicians and monetary bubbas have all been focused on big-picture stuff, like saving the world financial system. Dressed in their superhero suits, they’ve lost sight of issues like the fundamental soundness of the dollar. They’re just too busy admiring themselves in the mirror and patting their own backs about how smart they are.

Meanwhile, a single headline set the metals markets on fire. It was about how a group of Arab nations plus Russia, China, Japan and France are plotting to replace the dollar for trading oil. Sound plausible. Will that happen? Eventually, I’ll bet, but not overnight.

$1,000 Is the New $900

The point is the dollar replacement story is a monetary rumor, and we’ve heard it a zillion times before. This week, for some reason, the rumor gained traction. Why? Well, sometimes the rubber meets the right spot on the road. It’s just “time” for something to happen. And this week, it was time for $1,000 gold to become the new $900.

It’s not hard to understand why. For many years, American politicians have overspent the resources of the nation. It was one of the few bipartisan things that national leadership could agree on. Spend, spend, spend. No issue was too small for federal intervention and funding.

The U.S. dodged the monetary bullet because a) the U.S. economy was big and resilient and it appeared like the economy could deal with the hit, b) the rest of the world didn’t have an alternative to the dollar and c) most of the world wasn’t really on to the monetary con job of the U.S. writing checks that never got cashed.

The politicians spent money like it didn’t matter. Except… it did. We’ve been approaching some sort of monetary tipping point. Now it seems like we’re there. Information flows around the world in microseconds. So there’s no big con job anymore. People across the world are tired of getting jerked around by the U.S. dollar.

Thus, now we’re watching the dollar melt down before our eyes, like the Wicked Witch at the end of The Wizard of Oz.

Off to See the Wizard

Let me digress for a moment. Author Lyman Frank Baum wrote the original book, The Wonderful Wizard of Oz. The book, published in 1900, was whimsical. But among other things, it poked fun and caricatured the gold and silver debate in the U.S. in the 1890s. More broadly, Wizard was an allegory about life and political populism in the U.S. in the 1890s.

Author Baum had a keen eye for the gold-silver debate because he knew something about the subject. Baum was wealthy, and heir to serious family money that came from the 19th-century oil fields of Pennsylvania. So he took the idea of debased currency and ran with it.

Just look at just the title, The Wonderful Wizard of… Oz, where “Oz” stands for “ounces.” I’ve heard that in the real story, the “Emerald City” of Oz was a city of gold. (It became emerald when MGM Studios made the famous Depression-era movie in 1939.) The yellow brick road was a metaphor for gold. Dorothy’s slippers were silver in the book, and changed to ruby in the movie.

The Tin Woodman stood for the urban workers of America, who were left out in the cold and rain by the forces of banker capitalism. The Scarecrow stood for the farmers — and recall that he had no brain, because many East Coast snobs thought farmers were dumb hicks, ripe for the picking. The Cowardly Lion was a dead ringer for William Jennings Bryan, who made good speeches, but could not stand up to the entrenched big guys.

The Wizard was all smoke and mirrors, reflecting the political classes as a bunch of charlatans who promised much and delivered little.

Hey, Wizard is a children’s story. It’s not a cookbook for what ails us today. If there are any real answers in the Wizard book, it’s along the lines that things aren’t what they may at first appear. And the common people — workers and farmers — are smarter and nobler than the elites think.

The only thing that’ll begin to save us is if the elites realize that they’re not as smart as they think. Of course, then they have to admit it and pursue other policies that work — like not spending so much money at the federal level. That, and create conditions to rebuild the basic economy and maintain a stable dollar.

But these are politicians we speak of so I wouldn’t count on that anytime soon. Instead of hitching your cart to political salvation, you should be counting on gold, silver and oil to pull you and your portfolio through.

Until we meet again,
Byron King

October 16, 2009

Gold, Silver and the Wonderful Wizard of Oz was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Some bubbles have a significant amount of yield to them, depending upon how fully they were inflated and how sharp the object poking them is.

Some bubbles have thick, yielding coverings and are never inflated to rigidity beyond the point at which little kids sit on them and bounce along happily.

No bubbles can be reinflated after bursting, not even the ones which are blown through a little straw from smelly goo and harden almost instantly, a favorite toy of my youth.  Those wonderful bubbles could be pinched close to survive quite a while after the first rent appeared, and stuck to each other in the most delightful fashion.

Some bubbles can be reblown almost instantly and infinitely, particularly from gum formulated for that purpose.

You now know all there is to know about bubbles except what the title of this article means.

Bill Bonner made another excellent point recently:  why hasn’t the bond bubble burst messily all over the scenery?  I’ll play Cindy Lou Who:  is it because, Mr. Bonner, the wind blowing out of Washington gives the appearance of increasing activity and many people haven’t caught on that the wind is circular (as are those in hurricanes and tornadoes) blowing the money around and around through the Fed and the Treasury and the Banks?  Sound and fury, signifying nothing?  Far more apt than the Bard, the sound and fury which some of us have seen rising for many moons indicate that when this whale finally blows there’s going to be a spout to end all spouts and Moby Dick (if we even have a Moby Dick in this scenario; it sure isn’t Ben Bernanke.)  is going to go back to port and sit in the local sailors’ bar telling sea stories.

Our own beloved Gary Gibson pointed out recently that sometimes we’re a little off in our timing, but that it is better (and far more comfortable in the long run) to see problems and react early.   Y’all know my inner Cassandra:  sometimes she’s early in her warnings but sooner or later she is almost always right, and it is a whole let better to begin our preparations as soon as we can rather than to wait for further cracks to appear in the walls.  Sometimes, true, our fears are OBE, “overtaken by events.”  My detractors (who are blessedly few that I know about) point out gleefully that I was wrong about the Democratic National Convention slightly over a year ago.  I reply sweetly that Hillary Rodham Clinton may not have stolen the Convention from Barrack Hussein Obama–I’m still astounded that she didn’t–but that if she had done so there would have been riots in the streets.  It cost none of us anything to keep our heads down quietly in the country that week just in case.  Slight ridicule is a very small price to pay for having taken out an insurance policy that lapsed unused.  Most insurance never pays off, but when sixty years’ growth crashes across the roof (as happened to us two weeks ago) in the course of a storm that didn’t last five minutes paying the premiums makes excellent sense.

The Bond Market is going to go “Kablooie!” with ricocheting remnants that will have us whimpering for the good old days of upside down mortgages.  Which won’t have gone away either.  Which will probably have been augmented by the commercial real estate bubble which is covered by an integument stretched so thin that we can see through the shiny spots.  Go drive by any strip mall at random. Look at the Big Front stores.  They have “for lease” signs in the windows.

How could this not be so?  The bonds are of even less value than the currency which, by definition, is worth less every time a new cargo ship full of fiat money blows out the doors of the Treasury.  “Safety” is locking your current value into government paper at an interest rate that is lower than anything since the day before someone thought the concept up?!  Said value to be replaced at a later time in valuta that cannot fail to be worth less at a time when inflation has risen steeply?!  Anyone who thinks so should just go blow the money now in Vegas.

Which takes us over to “Why is there no inflation?”  At present in selected areas there is deflation, which in this case means you can buy a horse and buggy for a quarter of what they cost three years ago because almost no one has money to put in horses and buggies and even fewer see any need for them.  The carriage trade is still a small elite, as it has always been, as it will always be.

Inflation is defined casually as “more dollars chasing fewer goods.”  There are still plenty of goods, another situation that must, of necessity, by definition, change in the foreseeable future.  The more dollars aren’t chasing them because those who have more dollars are at government levels or in unions or in Hollywood, but they aren’t down here at the grocery store level.  They aren’t walking into car dealerships, where one out of four Cash for Clunkers suckers is feeling buyer’s remorse.  The dealers haven’t been repaid the $4500/car they fronted for the government and every car that goes back to the bank or dealer has lost the 20% or whatever it is now that it lost the moment it was driven off the dealer’s lot.  That’s one reason we passed a dealership yesterday offering to finance a major car brand for nothing for five years.

We have several situations which are going to collapse or explode and the only questions are “When?” and “Which comes first, the ARM mess or the Bond debacle or the Commercial Real Estate plummet or the next round of the Dow dive-bombing or devaluation of the currency either through butterflies being loosed in the Far East or deliberate governmental action?”  I don’t know.  It doen’t matter.  What matters is to be sure you don’t have funds tied up in any of those but have stored all of your value elsewhere.

I’m watching silver nervously.  Watching.  As ancient wisdom and Gary noted Friday, if you don’t know who the mug in the game is, you’ve already been tagged to be “It.”  Those of us with low, cunning, suspicious minds remain convinced that there are mice in the clockwork and those account for the strange things the clock has been doing.  We don’t perk right up, preen ourselves, and carol, “SEE!  We told you so!  We told you to buy silver.”  At least I am hunkered down in our little Whiskey Bunker. I don’t jump on invisible magic carpets because a genie invites me for a ride.  I don’t pounce on unseen coattails that may be whisked away before I have even located them, leaving me to fall on my face.  If some fellow tries to pick me up in a drugstore I don’t suppose I’m Lana Turner, an example so old it may be meaningless to anyone under seventy.

Yeah, long term silver is going up, and up, and up because it is real “money.”  Between now and at least the end of the year silver is almost certainly someone else’s game and he/she/it isn’t telling me the rules.  I understand Quidditch perfectly.  I can tell Offsides from Encroachment.  (No, gentlemen, the little lady isn’t trying to show off and revealing her ignorance.  She’s telling you that she has been in the game long enough to know that Offsides is Offsides no matter what you call it.)  I don’t know who or what is pulling the strings in metal but I’m content with the cheese I stole off the trap for now.  When–if, admittedly–silver gets below $13 again I’ll start buying again.  In the meantime, I’m going to store value in Galvalume.  Snap-ring barrels.  Whatever I see that is a traditional trade good, item that is always useful, or luxury at a great price.

I just bought two septic tanks!  Wow, is that a sexy investment, or what?  Well…if you want to circle the “guest quarters” (aka motor homes and travel trailers), and it will cost $20,000 plus tax to “have the man come do it,” and your gravedigger’s back hoe will dig out holes to bury the concrete vaults in a couple of hours…so far as I’m concerned we just turned eight hundred dollars into a twenty-five-fold profit AND the septic tanks will not be subject to costly annual inspections by the government.  And that’s without figuring the 8.25% tax in my head while typing although it should be obvious that it will be on the close order of another two-point-five increase.  If this is not intuitively obvious you’re probably buying into a PE of 130.  And you don’t read W&G.  Or you weren’t taught arithmetic in the Forties.

I got a diffident note from an old friend who sent me–pleased chuckle!–today’s Daily Reckoning.  Said friend doesn’t know investments from vestments from verticulitus.  This may well be the modern version of the urge to stuff gold coins into the straw, when people who have never had any interest at all are trying to find out what is going on.  And where better than right here?!

I’ve run out of space to tackle the unemployment and the jobless, venture capital-less, expansionless, profitless in most sectors, meaningless “recovery,” so I’ll close with where I intended to start which is saying that the giant sucking sound isn’t jobs going to Mexico, it is the millions who are living on the bubble.  That doesn’t mean those who profited from the real estate market collapsing or playing ring-around-the-banks.

I’ll put this first in the form of an old joke:  if you and I are walking through the woods and a bear rears up out of the berries and starts chasing us, I don’t have to run faster than the bear, I only have to run faster than you do.  Or climb a tree before you think of it.  Whisk myself to safety, and the Bear take the hindmost.

“Living on the bubble” is a racing term.  Let us suppose that 40 people will qualify to enter the Indianapolis 500 or whatever.  There are still trials going on, and you’re in 40th place.  Never mind the 39 ahead of you; you had your chance and you didn’t best them.  What you must worry about are the ten left who could still knock you out of competition.

That’s living on the bubble.  That is what almost all of us who don’t own thousands of hectares in Argentina are facing.

Don’t look forward other than to avoid snares, pitfalls, swamps, and alligators.  Keep your eye on the bears and those thundering up on your six.

Regards,
Linda Brady Traynham

September 10, 2009

Living on the Bubble was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.