Saturday, November 24, 2007

Gold; the Ultimate Currency & a Short Video Course on the Subprime Mortgage Crisis

Since The Bull Market in Things and Portfolio Check-up were posted to this site earlier this year, I thought perhaps it was time to take another look at the growing elephant in the living room; gold. There is a tiny minority of Americans who recognize what it going on and who have been quietly investing in this asset class or currency. Yes, it is still a currency, after thousands of years and it certainly has been trading like one (copper, the base metal bellwether has been plunging of late while gold stubbornly appreciates in price). Since most investors invest in what's popular, higher prices will have to be realized before they take the plunge. Once they see gold breaking through $1,000 US (and silver in the $20s), things will begin to change.

Keep in mind that currency indices measure paper currencies against each other. The Euro has appreciated in dollar terms, yes, but has been falling in terms of gold. As an analogy, all the ships are taking on water, some just slower than the others due to the tremendous creation of money and credit worldwide, at double digit rates. Even the venerable "Swissy" (Swiss Franc), perhaps the top performing paper currency in the world, is beginning to spring some leaks in the face of gold (see charts below).

Despite the unrelenting appreciation of the metal since 2001, only the populations in the Middle-East and Asia have widely taken notice. As far as the West goes, those populations simply refuse to give up thinking in terms of pieces of paper posing as stores of value. As an example of this myopia, this month we saw media reports of top model Gisele insisting upon payment in Euros and "rapster" Jay-Z in a music video flashing a wad of 500 Euro bills. Central bankers are international. They care not which of their pieces of paper you prefer. What about gold? As far as we know, they have not yet succeeded in turning lead into gold, but what they have done is better as they pass off notes which pose as money. As the scheme began to grow cracks in the late 1990's with the LTCM and Russian debt default etc., astute market observers discovered admissions by the FED, as revealed in their FOMC minutes, of selling (or leasing) gold to suppress its price. In addition, despite gold's appreciation and recent run-up, you won't hear CNBC, the 24-hour Wall Street infomercial, talking much about gold, much less the coming gold investment wave which will dwarf that of the mania.

Financial professionals and money managers have been ignoring the clear signs of a secular bull trend in gold which has been in play for over the past five years. Now that price action is screaming a long term buy (and maybe a few clients are beginning to ask some questions), they will soon no longer be able to stubbornly adhere to their professional indoctrination. A Keynesian economic indoctrination which has also been enforced by the extremely short timeframe that is a few decades of observation of an economy in motion (gold's slumber lasted for almost half a lifetime). So now the usual recommendations are being touted. Five to ten-percent allocation into precious metals. Now we can all sleep at night as we allocate 90 to 95% of our wealth in currencies which are being multiplied by governments and their central bank paymasters struggle to keep the system from imploding.

Funny money, limited corporate liabilty, the off-loading of risk into the financial system by way of non-transparent exotic financial instuments and the myriad bailouts of the past half-century have increased the moral hazard to the degree of threatening the entire world financial system. In times past, no financial entity lent real money (gold), without carefully considering the capabilities of the borrower. But back then, investment capital was derived from savings and interest rates were determined by the quantity of savings available.

I tend to believe that the behind the scenes planners know very well what they are doing as we stare at more consolidation into currency blocks and an eventual world central bank. It is a replay of the orchestrated bank panics of the early twentieth-century on a worldwide scale. This time, they used hedge fund managers and mortgage bankers, whom I must assume have very short memories or perhaps shave once a week. Did the gray hairs really believe that real estate appreciation (ignited by the FED lowering rates in 2001) was sustainable? That a couple earning $70,000 could afford a $450,000 McMansion making payments dependent upon temporary teaser or adjustable mortgage rates? Why did former Federal Reserve Chairman Sir Alan Greenspan encourage borrowers to buy homes using ARMs (adjustable rate mortgages) in the face of rising interest rates?

The last orchestrated bank panics of the late 19th and early 20th centuries led to the creation of the Federal Reserve (which was devised in secret, since back then, people were extremely suspicious of the "money trust"). Sixteen years later the United States was hit with a major economic disaster, the Great Depression. The Great Depression consolidated even more power for the banking cartel, as state chartered banking was destroyed (as intended) and gold was officially demonetized, domestically. Forty-two years later, gold was demonetized on a worldwide scale and currencies have floated ever since without the discipline which gold created for balanced trade (this was the real reason for the energy crisis of the early 70s). Did the private banking cartel that is the Federal Reserve create the economic stability it promised? Even if you hold on to your wallet, the big boys are going to bail themselves out at your expense without having to pull out a single note from it. They'll just have the value of each adjusted so that you pay your fair share, once again, for their reckless profilgacy.

Below are three month charts of Euros, Canadian Dollars, Swiss Francs and the US dollar in terms of gold.

Confused about the mortgage lending problems and the growing financial panic? This is bigger than you can imagine and it involves more than just mortgage lending. See the video below for a quick explanation of a topic which could use a little humor: