— Ecclesiastes 10:8

THE FRENCH PRESIDENT, NICOLAS SARKOZY, was in Washington earlier this month, speaking to Congress en Français and telling the United States to stop dumping dollars and risking a global financial crisis.

Ooh la la! Sounds just like old times…

“The dollar cannot remain solely the problem of others,” said Sarkozy before a joint session of Congress on Nov. 7, riffing on the (infamous) joke made by John Connally, treasury secretary to Richard Nixon in the early ’70s.

Connally said the dollar was America’s currency, “but your problem.” Au contraire, replied monsieur le president this week.

“If we’re not careful,” he went on — apparently using “we” to mean both himself and the U.S. Congress — “monetary disarray could morph into economic war. We would all be its victims.”

Ooh la la again! Did Sarkozy need to take liquid courage before speaking his mind?

“What the United States owes to foreign countries it pays — at least in part — with dollars that it can simply issue if it chooses to,” barked French president Charles de Gaulle in a landmark press conference in February 1965.

“This unilateral facility contributes to the gradual disappearance of the idea that the dollar is an impartial and international trade medium, whereas it is, in fact, a credit instrument reserved for one state only.”

De Gaulle did more than simply grumble and gripe, however. Unlike Nicolas Sarkozy, he still had the chance to exchange his dollars for a real, tangible asset — physical gold bullion.

Gold “does not change in nature,” de Gaulle announced in that 1965 speech, as if he were telling the world something it didn’t already know. “[Gold] can be made either into bars, ingots, or coins…has no nationality [and] is considered, in all places and at all times, the immutable and fiduciary value par excellence.”

How to collect this paragon of assets? Back in the 1950s and ’60s, world governments could simply tip up at the Fed, tap on the “gold window,” and swap their unwanted dollars for gold.

So that is what de Gaulle did.

Starting in 1958, he ordered the Banque de France to increase the rate at which it converted new dollar reserves into bullion; in 1965 alone, he sent the French navy across the Atlantic to pick up $150 million worth of gold. Come 1967, the proportion of French national reserves held in gold had risen from 71.4% to 91.9%. The European average stood at a mere 78.1% at the time.

“The international monetary system is functioning poorly,” said Georges Pompidou, the French prime minister, that year, “because it gives advantages to countries with a reserve currency.

“These countries can afford inflation without paying for it.”

By 1968, de Gaulle pulled out of the London “gold pool” — the government-run cartel that actively worked to suppress the gold price, capping it in line with the official $35 per ounce ordained by the U.S. government. Three years later, and with gold being air-lifted from Fort Knox to New York to meet foreign demands for payment in gold, Richard Nixon put a stop to de Gaulle’s game. He stopped paying gold altogether.

De Gaulle called the dollar “America’s exorbitant privilege,” repeating a phrase of his favorite economist, Jacques Rueff. This privilege gave the United States exclusive rights to print the dollar, the world’s “reserve currency” and force it on everyone else in payment of debt. Under the Bretton Woods agreement of 1944, the dollar could not be refused.

Indeed, alongside gold — with which the dollar was utterly interchangeable until 1971 — the U.S. currency was real money, ready cash, the very thing itself. Everything else paled next to the imperial dollar. Everything except gold.

And today?

“Printing a $100 bill is almost costless to the U.S. government,” as Thomas Palley, a Washington-based economist wrote last year, “but foreigners must give more than $100 of resources to get the bill.

“That’s a tidy profit for U.S. taxpayers.”

This profit — paid in oil from Arabia…children’s toys from China…and vacations in Europe’s crumbling capital cities — has surged since the Unites States closed that “gold window” at the Fed and ceased paying anything in return for its dollars.

Now the world must accept the dollar and nothing else. So far, so good, but the scam will work only up until the moment that it doesn’t.

“The U.S. trade deficit unexpectedly narrowed in September,” reported Bloomberg on Nov. 9, as “Customers abroad snapped up American products from cotton to semiconductors, offsetting the deepening housing recession that is eroding consumer confidence.

“Exports have reached a record for each of the past seven months, the longest surge since 2000,” the newswire goes on, which “may help explain why the Bush administration has suggested it’s comfortable with the dollar’s drop. It has declined in all but one of the past five years, even as officials say they support a ‘strong’ dollar.”

What Bloomberg misses, however, is the surge in U.S. import prices right alongside. They rose 9.2% year on year in October, the Department of Labor said on Friday, up from the 5.2% rate of import inflation seen a month earlier.

Yes, the surge in oil price must account for a big chunk of that rise — and the surge in world oil prices may do more than reflect dollar weakness alone. The Peak Oil theory is starting to make headlines here in London. Not since the Club of Rome forecast a crisis in the global economy in 1972 have fears of an energy crunch become so widespread.

But if you — an oil-producing nation — were concerned that one day soon your wells might run dry, wouldn’t you want to get top dollar for the barrels you were selling today? Especially if the very dollar itself was increasingly losing its value?

“At the end of 2006, China’s foreign exchange reserves were $1,066 billion, or 40% of China’s GDP,” notes Edwin Truman in a new paper for the Peterson Institute. “In 1992, reserves were $19.4 billion, 4% of GDP. They crossed the $100 billion line in 1996, the $200 billion line in 2001, and the $500 billion line in 2004.”

What to do with all those dollars? “If all countries holding dollars came to request, sooner or later, conversion into gold,” warned Charles de Gaulle in 1965, “even though such a widespread move may never come to pass…[it] would probably shatter the whole world.

“We have every reason to wish that every step be taken in due time to avoid it,” the French president advised. But the step chosen by Washington — rescinding the right of all other nation-states to exchange their dollars for gold — only allowed the flood of dollars to push higher.

Nixon’s quick-fix brought such a crisis of confidence by the end of the ‘70s, gold prices shot above $800 per ounce — and it took double-digit interest rates to prop up the greenback and restore the world’s faith in America’s paper promises.

The real crisis, however, the crisis built into the very system that allows the U.S. to print money that no one else can refuse in payment — was it merely delayed and deferred? Are we now facing the final endgame in America’s postwar monetary dominance?

If these sovereign wealth funds — owned by national governments, remember — cannot tip up at the Fed and swap their greenbacks for gold, they can still exchange them for other assets. BCA Research in Montreal thinks that “sovereign wealth funds” owned by Asian and Arabian governments will control some $13 trillion by 2017 — “An amount equivalent to the current market value of the S&P 500 companies.”

And if China doesn’t want to buy the S&P 500 — and if Congress won’t allow Arab companies to buy up domestic U.S. assets, such as port facilities — then the sovereign wealth funds will simply swap their dollars for African copper mines, Latin American oil supplies, Australian wheat…anything with real intrinsic value.

They might just choose to buy gold as well. After all, it is “in all places and at all times…the immutable and fiduciary value par excellence,” as a French president once put it.

Charles de Gaulle also warned that the crisis brought about by a rush for the exits — out of the dollar — might just “shatter the world.” It came close in January 1980. Are we getting even closer today?

Regards,
Adrian Ash

November 20, 2007

A Crisis to Shatter the Whole World was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

WITH ALL EYES NOW SQUINTING at the fast-vanishing U.S. currency, it was only ever a question of “when” — not “if” — the bold and the beautiful would start rejecting the misshapen dollar.

The imperial greenback is just sooooo 20th century, darling!

“We don’t know what will happen to the dollar,” as Patricia Bundchen, sister and manager of Gisele, the statuesque and shapely Brazilian supermodel, puts it. “Contracts starting now are more attractive in euros.”

Not so fast, counters her agent at IMG Models in New York. “ Gisele does have contracts in dollars, [but] when she works in Europe, she gets paid in euros. When she works in the U.S., she gets paid in dollars…when she works in Brazil, she gets paid in reals.”

Whatever hair-pulling and hissing is going on among her people behind the catwalk, the former squeeze of Leonardo DiCaprio has now asked for euros, not dollars, in payment for promoting Dolce & Gabbana’s new perfume, The One.

Being based in Legnano, Italy, D&G no doubt had plenty of euros on hand. But Procter & Gamble? According to Veja — Brazil’s best-selling weekly magazine — Gisele has now demanded euros instead of dollars in her new contract to promote P&G’s Pantene shampoos and conditioners.

And who can blame her? In the year up to June, Gisele made an income worth $30 million to defend. If she kept that sum in dollars, then this Beauty would have already lost 8.3% of her money — in four short months — to the lumbering Beast…

Rejecting the dollar isn’t a new gambit for headline-hungry celebrities, of course.

The last time the U.S. dollar sank beneath the weight of low-yielding Treasury bonds, soaring oil prices and a looming recession, Bette Midler — the comedienne and singer — famously demanded that her $600,000 fee for a European tour in 1978 be paid in South African gold coins.

Smart move! Eighteen months later, that little mountain of Krugerrands would have been worth $2.1 million. But did Ms. Midler show more brains…if not beauty…than today’s ex-dollar superstar?

Gisele Bundchen actually seems keen to quit the U.S. altogether. (Maybe The Enquirer should tell her current beau, Tom Brady of the New England Patriots…) She cut the asking price of her New York penthouse just last weekend. Now her West Village apartment, with views of the Hudson thrown in for free, is on the market for $9.2 million — down from $10.9 million previously — according to the New York Post.

“In Tribeca,” the rag goes on, “Russian supermodel Natalia Vodianova has discounted her alluring 5,000-square-foot penthouse from $11 million to $9.9 million.”

Are the beautiful people turning bearish en masse on both the greenback and U.S. real estate? They might want to show the brains of Bette Midler…instead of the tanned midriff of Gisele…if so.

Since the dollar reached parity with the euro, for instance, exactly five years ago this week, gold priced in euros has risen by nearly 70%.

Yes, that pales next to the gold price in dollars…now more than 140% higher from this time in 2002.

And yes, “Gold is the most reliable performer as a hedge against dollar movements,” as Rhona O’Connell found in a research report for the World Gold Council last month. She compared the performance of various commodities — everything from zinc, cattle, heating oil and palladium to sugar — with the dollar’s changing fortunes on the currency market.

O’Connell’s yardstick for the U.S. dollar was an index of the world’s next five most important currencies. Gold bullion mirrored the changes in this dollar index more closely than any other physical commodity from January 2005-July 2007.

But gold is delivering much more than simply a dollar hedge. Given the political and economic barriers to raising interest rates anywhere in the world right now, you might wonder if it’s going to keep on giving, too.

Gold, so far in November, has also broken out against a whole series of other major currencies besides the U.S. dollar. Gold priced in euros just broke the top of May 2006, equal to 562 euros per ounce. The Japanese yen is trading at a 23-year low in terms of bullion. The Australian dollar — caught between being a “commodity currency” and a debt-fuelled Anglo-Saxon basket case — has just sunk to new record lows against gold.

And for British investors, gold has never been so valuable…

What to make of it? Here at BullionVault, we’ve been trying to figure out just what investors buying gold today can expect it to do for them.

Gold itself makes no promises, remember. Paying no yield or interest — and with little-to-no industrial usage, compared with silver or platinum — gold really doesn’t have very much to recommend it. Not besides the verdict of history.

The ultimate store of value and wealth for more than 3,000 years, gold is now drawing in a flood of investment cash from private individuals across the world. The proof? It’s moving fast against ALL of the world’s major currencies, not just the dollar.

We blame central bankers. And government wonks. And those investment banks that created a flood of “near money” assets at a record clip when they spied the mark of low-income homebuyers with no hope of ever repaying a mortgage.

“[Bank of England governor] Mervyn King’s effective guarantee of the liabilities of the British banking system is much more significant than declining South African gold production,” as John Hathaway of Tocqueville Asset Management puts it.

We’d add the Bernanke put, too…plus the Bank of Japan’s zero-rate madness…the Swiss National Bank’s sub-3% rates…and the eurozone’s basic political fault lines.

If you want to join Gisele, then buy euros. Thrown in for free, you’ll get the yawning gaps between Germany’s economy and the overspent, over-indebted economies of Italy, Greece, Spain, Ireland and Portugal.

If you don’t trust central bankers or government paper, on the other hand, then make like Bette Midler. Just don’t pay the extortionary dealing charges and insurance fees that buying a pile of Krugerrands will cost you.

Regards,
Adrian Ash

November 14, 2007

Beauty and the Beast? Gisele vs. Bette was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

From Coach Paterno’s perspective, the football program at Penn State had a black eye. The transgressions of the few had embarrassed the many. Coach Paterno determined that as punishment for some of the team members getting into a fight, the entire team would have to help clean up the Penn State football stadium after every game of the 2007 season. And Penn State’s football coliseum, Beaver Stadium, is no diminutive structure. It seats almost 110,000 oft-crazed fans of the Blue and White.

So on the morning of Sunday, Sept. 2, 2007, the day after walloping Florida International University by the score of 59-0, the entire Penn State football team (110 well-muscled bodies, including the practice squad) could be found wearing work gloves and lugging trash bags, pulling garbage detail at Beaver Stadium. And this was no fluffy publicity stunt. According to news accounts, many of these student athletes were breaking a sweat. After a couple of hours of stooping in the hot sun, the team members began to drift toward the buses to take them back to their dormitory rooms. Coach Paterno thereupon inspected the effort and announced that they “didn’t do a good enough job.” Thus, did the gridiron squad, from first string to the water boy, have to head back into the stands of the massive stadium to finish the task. One could say that the Penn State football team cleaned up its home turf, after a fashion, on both Saturday and Sunday.

If you happen to be a fan of another school or football team, you can say what you will about Coach Paterno or Penn State. But you cannot say that Joe Paterno lacks a sense of moral compass or that he does not work to instill some of that sense of direction into the hearts of his players. Paterno follows the golden rule.

Monetary Policy Mess

It is a shame that more of the monetary policymakers in the U.S. have never played football for Joe Paterno. I’m inclined to think that they might have learned something from the guy, even if they never had to clean up Beaver Stadium.

I won’t bore you by rehashing the monetary policy mess that the U.S. Federal Reserve has made of the U.S. dollar over the past 94 years, let alone in the past decade or even the last year. If you read this newsletter — or most any other publication from Agora Financial — on a regular basis, you know what we tend to say on that subject. The central bank’s never-ending overexpansion of credit and liquidity has far exceeded the underlying needs of the U.S. economy. Thus, not only have we been living in credit bubbles of one sort or another for several decades, we have learned to live with a consistent and persistent realm of monetary inflation. The slow but sure erosion of the purchasing power of the dollar over time is simply one more fact of life. This monetary phenomenon is hard-wired into the economy in almost countless ways to where the phenomenon has a life of its own via the expectation of cost-of-living adjustments, or “COLAs.”

Thus, the first rule of making money in our economy is to structure your portfolio, not to lose it. Even if you are 100% in cash stuffed in a mattress, you have made a certain investment decision and condemned yourself to lose purchasing power over time as inflation robs you. Of course, if you play the stock markets, on any given day, stocks can go up or down, responding to one piece of news or another, to this trend or that. But at the end of the day, you have to ask yourself what you should do about the long-term erosion in value of the dollar.

As I do for my Outstanding Investments subscribers, I recommend investments in the energy and natural resource sectors, where the basic resource commodities support their own forms of long-term value.

Precious Metals

This spring, my colleague and friend, Kevin Kerr, and I went over all of the precious metals stocks in the Outstanding Investments portfolio. We thought then (and still think) that, long term, we think that gold and silver will keep on rising in price, just as they have been doing for the past five years or so. We believe that precious metals, as with oil and natural gas and most other commodities, are in a long-term bull cycle.

On occasion, readers send us e-mail asking why the precious metals have not broken out into new highs during the past couple of months. We think that the answer is that the dollar is declining in value slowly, and not simply falling off of a cliff. But the long-term answer is also to be patient. Do not be disheartened that there has not been some sort of massive upward spike in the price of gold or silver or in mining shares during the past few months. Yes, it always nice and reassuring to buy a stock and watch the share price move upward almost immediately afterward. It makes you feel smart, if not lucky.

But when it comes to the monetary future — and the fate of the U.S. dollar — we are in no hurry to see a precipitous decline of the world’s reserve currency. It is not that we don’t believe that the decline of the dollar is inevitable. (Our good friend Addison Wiggin wrote a bestselling book with almost exactly that title, The Demise of the Dollar.) The demise just may or may not be imminent. In the meanwhile, consider this “your” time to accumulate precious metals shares at relatively low prices, setting your portfolio up for the long-term rise.

What About Cash?

We have received numerous inquiries from readers along the lines of “What about cash?” That is, readers want to know what we think about selling off some part of the portfolio and just keeping cash in an account, if not under the mattress or in a coffee can buried in the backyard.

As far as coffee cans and mattresses go, we can think of quite a few more secure places to store your savings. Then again, as long as you remember where the coffee can is buried, it never hurts to have some hidden treasure out in the backyard.

And as for cash generally, let me quote my Agora colleague Eric Fry: “You can’t take advantage of a fire sale if you’re inside the warehouse when it burns down.” Well put, Eric. When things go up in smoke, you want to be outside the warehouse with your pockets full of cash. You also want to be holding a list of all the assets you want to own when the smoke clears.

So there are times to be, as the saying goes, “fully invested.” And there are times to hold more cash in anticipation of buying opportunities. Now just may be one of those times to have some cash in an account, ready to pounce on buying opportunities. For example, in the past month and a half, the oil service sector went through some significant declines, along with much of the rest of the stock market. And for a few brief moments — and I do mean “brief” — you could have snapped up many other great companies at real discounts. But you had to have some cash, and you had to be ready to make the move. If you delayed because you did not have the cash, let alone because you were on vacation at the shore, you missed the chance. Great deals do not hang around down at the beach.

But just because this particular buying opportunity occurred in August and now the opportunity has passed, does it mean that nothing like it will ever happen again? No way, not at all. The summer sell-off was triggered by crises in the subprime lending sectors, when the value of risk was re-priced dramatically downward. This fundamental problem spilled over like a bursting dam into the rest of the financial world. People sold what they had to sell to cover positions and meet margins. They did not necessarily sell what they wanted to sell. So a lot of great companies went on short-term fire sales.

Looking forward, have the subprime lending problems gone away? No, not at all. In fact, the next year may well reveal even more rot within the financial sector, as millions more mortgages have the potential to go bad. It is quite possible that hundreds more large banks, financial institutions, hedge funds and other overleveraged groups will have to bail out of their untenable positions. So the point is it will be quite beneficial to hold some amount of cash going forward. How much? That depends on how well you sleep at night. You should amass enough cash that you can wake up refreshed each day. Then watch the news for the next market meltdown. Sooner or later, it will occur. And when it does, buy gold miners and oil service companies.

Six Years Later

And now, dear readers, there are some things that transcend money. So we cannot let the moment pass without recalling the events of Sept. 11, six years past. Do you remember where you were? (It was like the Kennedy assassination, if you are old enough to recall that event.) Do you remember what you were doing, how you felt? Do you remember turning on the television, wondering what in the hell was going on and watching the flames and smoke spill out of the Twin Towers? I still remember the sick feeling in my stomach, watching close-up shots of people hanging out of broken windows and gasping for air. I remember just shaking my head, because deep down I knew what was going to happen. And then some of them jumped. And I will never forget the sound of the secretaries in my office, shrieking in horror and pain, as we watched the first of the towers collapse.

A lot of people lost somebody that day. Later on, I learned that a couple of my old Navy acquaintances died. One of the deceased was Charles “Chic” Burlingame, aged 51 (his 52nd birthday would have been Sept. 12, the next day), a retired Navy captain, Gulf War veteran and the pilot of American Airlines Flight 77 that hit the Pentagon. A number of conspiracy theorists have used Chic’s connection with the U.S. Navy to say that he was part of some grand hoax, that there were no hijackers aboard his aircraft and that no airplane ever hit the Pentagon. Yet I actually walked amidst the Pentagon wreckage and picked up pieces of a broken airliner with my own hands. And Capt. Burlingame is buried at Arlington National Cemetery, his body having been recovered from the wreckage of a certain Boeing 757-223, registration number N644AA, located within the burnt walls of the Pentagon.

The other of my acquaintances was Wilson “Bud” Flagg, aged 62 and a retired admiral who was also aboard American Airlines Flight 77, along with his wife Darlene, when it crashed into the Pentagon. Adm. Flagg was an expert in aerial reconnaissance. Earlier in his career, Bud had logged more flight time in the F-8 Crusader aircraft than any other pilot in Navy or Marine Corps history. Again, over the course of time, some people have actually tried to convince me that no airplane ever hit the Pentagon on Sept. 11. They say that the Pentagon attack was a big conspiracy put together by an evil cabal, and that any damage to the building was caused by a remote-control cruise missile. Of course, this does not explain why the bodies of Adm. and Mrs. Flagg were also found within the impact area of the American Airlines Boeing on the grounds of the Pentagon.

To everyone else who lost somebody that sad day, you have our sympathy. The least we here at Whiskey & Gunpowder can do on certain occasions is to remember our friends. Life goes on, we know, and life is for the living. But still, while time takes us further away, it does not truly ease the pain. So we have our moments when we remember our old friends and feel the true meaning of “Auld Lang Syne.”

Until we meet again…
Byron W. King

September 26, 2007

“Don’t Get Joe Mad” was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.