The Austin-based gold dealer US Money Reserve, Inc., has agreed to pay out $5 million to customers who consider themselves victims of wrong-doing by the gold dealers’ sales practices. However, the dealers claim that they, in fact, have done nothing wrong, but are working in compliance with the Texas Deceptive Trade Practices Act. Just protocol in their minds…and just a quick bit of research on this dealer could have told you to be cautious and have your gold buying guard up.
The owner of the company, Milton Verret, is an esteemed philanthropist according to his personal website, however if you ask the Better Business Bureau of Texas about his money-making business, they’ll show you a big “F”. Even other states flashed warnings about his company’s sales practices.
With fiscal time bombs ticking in both Europe and the United States, the pertinent question for now seems to be which will explode first. For much of the past few months, it looked as if Europe was set to blow. But Angela Merkel’s refusal to support a Federal Reserve-style bailout of European sovereigns, as well as her recent statement that she had no Hank Paulson-style fiscal bazooka in her handbag, has lowered the heat. In contrast, the utter failure of the Congressional Super Committee in the United States to come up with any shred of success in addressing America’s fiscal problems has sparked a renewed realization that America’s fuse is dangerously short.
Chancellor Merkel has been emphatic that European politicians not be given a monetary crutch similar to the one relied on by their American counterparts. Her laudable goal, much derided on the editorial pages of the New York Times, is to defuse Europe’s debt bomb with substantive budget reforms and, as a result, to make the euro “the strongest currency in the world.” Much has been made of the poorly received auction today of German government bonds, with some saying the lack of demand (which pushed yields on 10-year German bunds past 2% — hardly indicative of panic selling) is evidence of investor unease with Merkel’s economic policies. I would argue the opposite: that many investors still think that Merkel is bluffing and that eventually Germany will print and stimulate like everyone else. It is likely for this reason that yields on German debt have increased modestly.
In contrast, the US is crystal clear in its intention to ignore its debt problems. With the failure of the Super Committee this week, it actually became official. American politicians will not, under any circumstances, willingly confront our underlying debt crisis. While the outcome of the Super Committee shouldn’t have come as a great surprise, the sheer dysfunction displayed should serve as a wakeup call for those who still harbor any desperate illusions. Some members of Congress, such as John McCain, have even come out against the $1.2 trillion in automatic spending cuts that would go into effect in January 2013. Expect more politicians of both parties to cravenly follow suit.
Over the next decade, the US government expects to spend more than $40 trillion. Even if the $1.2 trillion in automatic cuts are allowed to go through, the amount totals just 3% of the expected outlays. In a masterstroke of hypocritical accounting, $216 billion of these proposed “cuts” merely represent the expected reductions in interest payments that would result from $984 billion of actual cuts. These cuts won’t make a noticeable dent in our projected deficits, which, if history can be any guide, will likely rise by much more as economic reality proves far gloomier than government statisticians predict. Finally, the cuts are not cuts in the ordinary sense of the word, where spending is actually reduced. They are cuts in the baseline, which means spending merely increases less than what was previously budgeted.
In the meantime, the prospect of sovereign default in Europe is driving “safe haven” demand for the dollar. So, contrary to the political blame game, Europe’s problems are actually providing a temporary boost to America’s bubble economy. However, a resolution to the crisis in Europe could reverse those flows. And given the discipline emanating from Berlin, a real solution is not out of the question. If confidence can be restored there, each episodic flight to safety may be less focused on the US dollar. Instead, risk-averse investors may prefer a basket of other, higher-yielding, more fiscally sustainable currencies.
The irony is that Europe is actually being criticized for its failure to follow America’s lead. This misplaced criticism is based on the mistaken belief that our approach worked. It did not. Sure, it may have delayed the explosion, but only by assuring a much larger one in the future. Once again, many have mistaken delay for success.
However, if Merkel’s hard line works, and real cuts follow, Europe will be praised for blazing a different trail. As a result, the euro could rally and the dollar sink. Commodity prices will rise, putting even more upward pressure on consumer prices and interest rates in the United States.
Any significant reversal of the current upward dollar trend could provide a long awaited catalyst for nations holding large dollar reserves to diversify into other currencies. My guess is that Merkel understands the great advantage the US has enjoyed as the issuer of the world’s reserve currency. I believe she covets that prize for Europe, and based on her strategy, it is clearly within her reach.
There is an old saying that one often does not appreciate what one has until it’s lost. The nearly criminal foolishness now on display in Washington may finally force the rest of the world to cancel our reserve currency privileges. The loss may give Americans a profound appreciation of this concept.
When you first venture out to purchase your gold or silver the choices will be plentiful and so will the advice. You’ll face the options like: squares or circles, shiny or dull, and government issued or good ol’ minted bullion. It can become overwhelming and even confusing deciding whether junk or .999 rounds are the best choice for you. However, one of the best things you can do before making that kind of decision is consulting with experts…and/or someone you trust.
When I first decided that I should be investing in precious metals, the motivation came from my readings on the Federal Reserve Bank and the inflation that was taking place in the US and abroad. I had always thought it was silly to keep money in a bank account when the interest I was accruing wasn’t working fast enough to combat the decline of the dollar’s purchasing power. Thus, I turned to what seemed like a trustworthy investment: precious metals (namely silver, because I didn’t have $500K to throw around). It was then I realized, I need to start educating myself. I hope this was a thought that crossed your mind as well.
By Peter Schiff
I think I know some lab mice that have received less examination than the 2012 Republican primary candidates. It seems with each passing cycle, the campaigning starts earlier, there are more debates, and the media frenzy gets more intense. Yet, with all the pyrotechnics and pageantry, it becomes difficult to figure out what these tricksters actually think when they’re behind the curtain. Since the gold price is inextricably linked to the long-term fate of the US dollar, it’s rather important for gold investors to be able to forecast how each candidate, if elected, would conduct his/her monetary policy.
Monetary policy is not nearly discussed enough in debates or television appearances – partly because too few viewers care about it, and partly because most candidates simply don’t understand the subject. The most common monetary policy platform amounts to little more than, “I’m opposed to China’s currency manipulation, and America needs a strong dollar!” (Little do they know that these two goals are right now in opposition.)
As we examine three frontrunners, it’s important to remember that their future policies can be difficult to distil, but that their past records are likely to be a more effective indicator than their present rhetoric.
Herman Cain: The Fed Chairman
Cain’s lucky he’s known as “The Guy Who Makes Pizza” instead of “The Guy Who Prints Money.”
Herman Cain was Chairman of the Federal Reserve Bank of Kansas City from ’95 – ’96, and held the positions of Deputy Chairman and Board Member during the preceding six years. This was the heyday of Alan Greenspan’s bubble economy, and there is little record of Cain dissenting. While some have remarked that Cain knew little about economics when he joined the board, he has had ample time to learn. Yet, when challenged to name his favorite Fed Chairman at this year’s debates, Cain still chose Greenspan!
Cain’s flagship “9-9-9 Tax Plan” is drawing headlines, but it contains no in-depth discussion of monetary policy, other than brief allusions to a “strong dollar.” No mention of quantitative easing or the money supply. No condemnation of artificially-low interest rates.
Even if Cain were able to reduce taxes considerably, the spending would continue. Like many Republicans, Cain talks generally about spending cuts, but does not specifically target any budget items. We can assume any actual cuts he gets through Congress would be of the “slow the growth of future spending” variety.
With continued spending and record of inflation tolerance, Cain will most likely turn to the Fed to monetize the extra debt. This means a Cain presidency is likely to be very bullish for gold – with the mitigating factor that if given free reign, Cain might at least try to move the country back on a sustainable path.
- Bullish for gold
- Bearish for USD
Mitt Romney: The Closet Democrat
Consider the following quote: “My experience tells me that we were on the precipice, and we could have had a complete meltdown of our entire financial system, wiping out all the savings of the American people. So action had to be taken.”
It sounds like Tim Geithner, Ben Bernanke, or Paul Krugman. President Obama himself has said exactly the same thing countless times. Yet, this quote comes from Mitt Romney at a recent Republican debate.
Romney supported the TARP bailouts. Romney defends the Federal Reserve. Romney even implemented socialized medicine as Governor of Massachusetts. He says he would conduct monetary and fiscal policy “differently” than Obama, but when you’re car is headed over a cliff, it doesn’t much matter whether you drive on the right or left side of the road!
Just as with Cain, Romney still does not understand the terrible precedent set by the bailouts, and the devastating consequences loose monetary policy has on the US dollar and global economy. Worse yet, Romney hasn’t even offered a credible plan to reduce government involvement in the economy. Romney’s campaign slogan might as well be, “A New Face for the Status Quo.” And the status quo is a collapsing dollar and skyrocketing gold.
- Very bullish for gold
- Very bearish for USD
Ron Paul: The Gold Standard
If Ron Paul were elected President, he would immediately move to cut spending drastically. This is clear based on his 35-year record of acting on his promises, and his recent campaign pledge to cut $1 trillion from his first proposed budget. He would face stiff resistance from both parties, for sure, but such a move would change the entire direction of public discourse.
Now, it’s important to remember that $1 trillion is only two-thirds of the 2011 deficit. So, even if President Paul got his entire budget approved, we still would be facing a growing debt of around $16 trillion at that point. While President Paul could order the Treasury to begin selling its toxic assets that are impeding economic recovery, he wouldn’t have direct control over the Fed – which, under Bernanke, would likely announce even more money-printing to counteract the President’s tough medicine.
But President Paul’s real silver bullet would come two years into his term when he would get the opportunity to nominate a new Fed Chairman. As someone who entered public life in response to the end of the gold standard under Nixon, Paul is certain to appoint the most hawkish Fed Chairman the country has ever seen. This would immediately reverse the misfortunes of the US dollar and could impact gold’s rise.
But remember, even in this pie-in-the-sky scenario, it will still take years for Bernanke’s devaluation damage to fully circulate around the global economy. That means gold could still appreciate well into a Paul presidency.
Ultimately, a Paul presidency could also lead toward a gold standard monetary system. In such a case, gold is likely to carry an even higher value as the premium for serving as the international reserve asset.
- Bullish for gold
- Bullish for USD
Rick Perry: The Big Spender
Rick Perry is a career politician now in his 11th year as Governor of Texas. He claims to be a tax-fighter, but he has signed several tax increases as Governor. To the extent that he has held the line on taxes, he’s overseen a more than doubling of Texas state debt. And not all of this money was going to pay for schools and roads. For instance, he created the $435 million Texas Enterprise Fund to subsidize politically connected businesses.
As a candidate, Perry has adopted Ron Paul’s rhetoric being critical of the Fed’s quantitative easing programs. He’s even gone as far as accusing Bernanke of “treason.” But he doesn’t show a deep understanding of what makes the Fed’s policies so destructive, and his campaign website makes no mention of monetary policy at all.
Still, Perry at least knows which way the wind is blowing, and he does have a record of vetoing expensive legislation. Overall, it’s hard to tell what kind of President he would be – a lot like it was for the last Texas Governor that become President. In the latter case, President George W. Bush claimed to be for small government and a humble foreign policy, but went the exact opposite way once elected.
Perry might make an attempt to change Washington’s direction, but he has neither the depth nor the steadfastness to really make it happen. Thus, the current gold/dollar dynamic would be likely to continue.
- Bullish for gold
- Bearish for USD
Newt Gingrich: The Benedict Arnold
In the mid-’90s, Newt Gingrich gained a reputation as a radical reformer after he led the Republicans to their first House majority in 40 years. He wrote a Contract with America, and made a good faith attempt to pass all of its provisions. This movement could be credited with stopping Hillarycare, enacting welfare reform, and reducing certain key taxes.
But in the years since, he has vocally supported programs like the costly Medicare Part D, teamed up with Hillary Clinton on healthcare, and supported mainstream Republican candidates over Tea Party challengers.
What happened? Clearly, Gingrich has been building bridges in order to be seen as a moderate candidate for his Presidential run.
If only he had kept to his original firebrand style, he might have had a shot at getting something done in the White House. Unfortunately, trying to become part of the establishment is a game with no end, and therefore Gingrich is likely to continue “reaching across the aisle” to author costly legislation. If he announces a Contract with Austerity, maybe I’ll change my tune.
- Bullish for gold
- Very bearish for USD
How Important Is the President?
Despite what the media would have you believe, the President is not all-powerful. In fact, a President only has limited powers compared to Congress. Without the support of Congress and the American People, a President can be rendered a lame duck early on – like Jimmy Carter was.
The direction of gold under most candidates is fairly easy to predict – it will continue appreciating against the falling US dollar. This is simply because these candidates will not even attempt to address the disastrous fiscal and monetary policies that have brought us to this point.
The price direction under Ron Paul (and also Gary Johnson), however, would be less predictable. I believe both men would try their best to reverse the US decline that my strategy is insulating against.
In any case, even an authentic campaigner who understood the calamities of money-printing would be hard-pressed to actually save the dollar at this point. The history of fiat currencies has few – if any – examples of monetary debasement being reversed before the currency falls apart – and many cases of gold proving the superior asset.
Barack Obama: The Worst-Case Scenario
There is one candidate in 2012 that we can be sure won’t even try to save the dollar, and that is President Obama. From his doubling down on the bailouts to his faithful support of Chairman Bernanke, Obama has done almost everything in a President’s power to hasten the dollar’s demise.
If he is re-elected, which still seems like a possibility, then you better put on your mining hats because the gold rush is on!
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Casey Research’s Gold Commentary
The following conversation took place between a friend’s son and me. He’s a bright but relatively young investor. He had purchased some gold based on some things I’d told his father. Shortly afterward, the price dropped hard. As you’ll see, he was not very happy with my advice and said so in an email to me. So I called him…
I: Sounds like you’re upset.
Friend: Yeah, that’s putting it mildly. What the hell am I supposed to do now?
I: Because the gold price has dropped?
Friend: Yes! It’s down 15% in a month! I thought you said this was going to be a good investment.
I: It is. And it will be. You might even consider buying more here if you have the funds.
Friend: I have some other money, but why would I put it in gold? It’s losing money.
I: Because it’s on sale. Because it’s cheaper now than when you bought it. And especially because none of the reasons for buying it have gone away.
Friend: That doesn’t mean it’s going to go back up.
I: As I told your dad, there are no guarantees, but I think it will have to go higher. Either way, it will hold its purchasing power over time. We’re holding it as an alternate currency, a more sound form of money that can’t be debased.
Friend: Yeah, well, my money just got debased, big time. It needs to go up 20% for me just to get back to even.
I: Five years from now your dollars will have lost at least 10% of their value, based just on current trends. There’s a good chance it will lose more than that. And gold will probably rise more than 10% a year.
I: Look, I know you’re upset, but I’d hate to see you bail. This is one of the best investments we can make this decade.
Friend [relenting a little bit]: You really believe that.
I: I can’t promise you anything, but yes, I do.
Friend: And that’s because you think inflation is coming.
I: It’s for a lot of reasons, and that’s one of them. Inflation is virtually baked in the cake; the dollar’s long-term problems will be impractical to resolve; and the global economy is on high alert. These are exactly the kind of circumstances gold is meant for.
Friend: Then why is it falling?
I: Institutions need cash and liquidity, and gold offers a bid. Besides, nothing goes up in a straight line, and gold had just run up 35%. It was time for a break.
Friend: So this big drop really doesn’t worry you.
I: It doesn’t. I’m buying. In fact, I’ll prove it to you – send me your gold and I’ll buy it from you.
I: I know it doesn’t feel good right now, and it may take some time for it to make another new high, but gold is too important not to own here. It’s a long-term trade, so plan on holding it for a while. In fact, if it helps, just forget about the fact that you own it – go do something fun and have a beer at the pub.
Friend: [a little chuckle].
I: I don’t think you made a mistake buying at the price you did, in spite of it being lower now. Odds are high you’ll be happy in a few years.
Friend: [pause] All right…
I’m glad my son’s friend decided to hold on, because that conversation took place in June, 2006! He’d bought gold at around $700 and watched a month later as the price fell to as low as $567.
Gold ended up declining a total of 21% in just five weeks before bottoming, after a run-up of 35% (sound familiar?). And yes, it took over a year before it hit a new high.
Yet, my son’s friend – now older and wiser – wishes he could go back in time and make the same mistake again and buy gold at $700. His investment is sitting on more than a double, in spite of buying at a temporary peak.
I think that a few years from now we’ll all wish we could go “back in time” and buy gold at $1,700. And I believe you’ll still feel that way if gold falls to $1,500, as some writers are projecting.
I think this because circumstances now are worse – and hence more bullish for gold – than they were in 2006. Look at how much money we’ve printed (the monetary base now exceeds $2.6 trillion, a mind-boggling 200% increase since 2006). Look at the state of the global economy: highly vulnerable and propped up by governments. Consider the lingering and inescapable predicament of many European nations – how, exactly, will this be resolved in a healthy way? Ask yourself if the outlook for the US dollar is out of the woods (roughly 10% of federal revenue now goes solely to debt payments – a figure that is projected to triple). Explain how the reckless path of deficit spending will shift without causing some kind of major impact on the economy (history shows abject deficit spending leads to economic downfall, virtually without exception). Tell me how we avoid massive inflation, an outcome that seems so certain at this point that about the only way to avoid it would be a massive global meltdown – and even then, the Fed would surely print to oblivion.
Like I told my son’s friend, nothing is guaranteed. But until real interest rates are positive again, government leaders instigate honest solutions to our debts and deficits, the global economy becomes an engine of growth, the sovereign debt issues in Europe are genuinely resolved, and global currencies – especially the US dollar – are strong again, I’m buying gold.
Yes, there will be volatility. And yes, a short-term “solution” to what seems like certain default in Greece, for example, would cause some investors to sell gold. But like in the spring of 2006, these are temporary, short-term fixes only. For the tumult that is most likely ahead, there simply isn’t any better currency protection than gold and silver.
Join me in calling your favorite bullion dealer and making the mistake of buying gold at $1,700.
China Buys Gold to Challenge US Dollar
Al Jazeera – America’s diplomats know the world will one day pull the plug on the US dollar’s life support system. A recently published, unredacted Wikileaks cable from the US Embassy in Beijing shows that the concern has, in fact, been at the front of their minds. The cable quotes an editorial in a Chinese government-sponsored newspaper claiming Beijing is increasingly buying gold to encourage the rise of monetary alternatives; in effect, as the cable quips, to “kill two birds with one stone” by simultaneously undermining the US dollar’s and euro’s status as reserve currencies.
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Hedge Fund Heavyweight Sees Gold at $2,200
Bloomberg – Tony Hall, the moonlight boxer and hedge-fund heavyweight who returned a whopping 33 percent for his clients last year, prefers to fight from the gold corner. Golden-glove Hall believes that the yellow metal could work its way up to $2,200 an ounce by the end of 2011. Hall notes that in today’s turbulent economic environment, gold is attractive due both to its safe-haven and inflation-hedge qualities. For Hall, the latest correction in gold to the $1,700 level is a good opportunity to jump back into the ring.
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Gold-Backed Dollar Puts ‘Fair Value’ at $10,000 an Ounce
Bloomberg – If every US dollar in circulation were actually backed by the full faith and credit of incorruptible gold and not by politicians’ hollow promises, you would need approximately 10,000 greenbacks to buy one ounce of the yellow metal, a recent report maintains. Dylan Grice, a London-based global strategist at French bank SociÃ©tÃ© GÃ©nÃ©rale, crunched the numbers and says that the $10,000 figure is the actual “fair value” of gold. Significantly, the calculation suggests that in playing catch-up, gold has the potential to quintuple its current spot price.
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Industry Eyes Gold at $2,000+
The Globe and Mail – According to the average prediction of participants at the London Bullion Market Association’s conference, the gold industry’s biggest annual gathering, gold is primed to crack the $2,000 an ounce threshold over the coming year. Participants expressed Ã¼ber-bullish sentiments based on their direct experience with buyers and sellers. For instance, Steven Nathan, marketing director at the Rand Refinery in South Africa, had this to say about the popular Krugerrand coin: “Demand is insatiable. It’s the strongest period ever right now.” Incidentally, in years past, the conferences’ average predictions have often turned out to be excessively cautious.
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By Peter Schiff
Last week, I spent the afternoon visiting the Occupy Wall Street demonstrations in lower Manhattan. I brought a film crew and a sign that said “I Am The 1%, Let’s Talk.” The purpose was to understand what was motivating these protesters and try to educate them about what caused the financial crisis. I went down there with the feeling that much of their anger was justified, but broadly misdirected.
By Peter Schiff
President Obama today announced a plan that will ensure students are able to commit to higher levels of federally backed student loans. By limiting student obligations to repay, and by passing more of the repayment burden onto taxpayers, colleges and universities will be able to continue to raise tuitions at a rate that outpaces nearly every other cost center in the American economy. The move will come as a great relief to an education establishment increasingly concerned that students might no longer be able to afford skyrocketing tuition rates.
By Peter Schiff
Herman Cain has been gaining much traction with his 9-9-9 Plan, a bold proposal to replace our dysfunctional tax code with what could be a simpler, less invasive, and more economically stimulative alternative. While I don’t agree with the full spectrum of Mr. Cain’s policy choices, I applaud his courage on the tax front. Judging by his rising poll numbers, this appreciation is widely shared. However, the plan has deep flaws, the most glaring of which is its creation of a hidden payroll tax which represents a fourth “nine.” This serious pitfall has been unmentioned by Mr. Cain and overlooked by those who have analyzed his plan.
Jeff Nielson’s Gold Commentary
It has been a rough month to be a precious metals investor. However, irrespective of whether we are talking about markets or life in general, whenever we encounter any short-term turbulence, we need to step back and look at the big picture.
The main reason to do this is that, being human, these short-term events provoke our emotions: exuberance if our investments are suddenly rising, and fear or despair should they suddenly decline.
When this happens, many lose sight of the fact that short-term movements may have no relevance to a longer term trend, and certainly that short-term events are rarely the cause of those longer (and more stable) trends. Look at a one-week chart of the price of gold recently and one might be tempted to do their best impersonation of Chicken Little. However, look at a ten-year chart and the recent pull-back brings but two words to mind: “buying opportunity.”
Nielson Chart 3 – GOLD 10YR
Conversely, for those investors who prefer the perilous world of US equities, the Dow Jones Index has spent the last ten years “breaking 10,000” – having done so more than 25 times, most recently in 2009. One look at a ten-year chart of the Dow and I’m thinking that’s one heck of a merry-go-round.
Source: Google Finance
And 10,000 on the Dow today is not what it was ten years ago. Rather, Washington’s Plunge Protection Team has used the printing press to keep the stock market afloat.
Take a look at the following chart of the Dow in terms of gold. Since gold doesn’t rise in value as much as keep its value versus falling fiat currencies, this chart gives a clear picture of how much purchasing power an investor would have lost buying the Dow in 2001.
Nielson Chart 2 – DOW GOLD 10YR MOD
Source: Fred’s Intelligent Bear Site
Obviously, gold has been the place to be for the last ten years, while Dow stocks have seen about as much appreciation as that car in your driveway.
Trends do change, however. So, the question becomes is there any reason for US investors to believe that the future will be significantly different for either gold or the Dow? In short, no.
While entire books could be written about all the bullish fundamentals currently favoring precious metals, two words will do: “competitive devaluation”. Prior to the “Crash of ’08”, the price of gold had nearly quadrupled versus our depreciating fiat currencies – while the price of silver quintupled! With most of the world’s governments now racing to drive down the value of their currencies, gold’s long-term performance should continue to improve going forward.
For US equity markets, the future is not nearly as bright. The “record earnings” that many large US corporations now boast about have come at the expense of stripping millions of American workers (and consumers) of their jobs. High profits overseas will continue to be offset by weak demand and shrinking profit margins domestically. Since US tax law discourages these firms from “repatriating” these overseas profits, I wouldn’t expect them to appear in the form of dividend checks to the American stockholder.
It is said in markets that “the trend is your friend.” This is abundantly true for gold investors, especially given the current price reduction.Meanwhile, US equity investors should be asking themselves,”With friends like these, who needs enemies?”