Chicago Gold and Silver Investing Club Blog

Re-hypothecation

Re-hypothecation means "someone else says they are the true owner of what you believed was yours, because the entity in control of the asset sold it to you, then sold it again to another buyer, and again."

from Wealth Cycles

This is part of the crazy world of derivatives and the financial services world.

The best way to describe Re-hypothecation is that you deposit dollars into a bank. The bank then uses those dollars and sell it to another buyer and they go ahead and sell it to another buyers. This is what led to the Mortgage Backed Security debacle in the United States. In the gold industry, Re-hypothecation is the norm. And that is why it will eventually collapse. Like the housing market collapse in the United States, the gold market will collapse because it is built on this house of cards foundation. All it takes is someone (probably a large institution) to call for their gold. Then other will follow. At some point, someone will not be able to get their gold and that is when the whole fraudulent system will collapse.

And don't think, it will be only relegated to the United States. Chinese trading exchanges have seen an increase in derivatives. The US and Europe it seems have exported derivatives and the eventual collapse.

There may be some good news. According to Wealth Cylces: Singapore has tripled it's gold imports and

"Beginning October 1^st 2012, Singapore will exempt investment-grade gold, silver and platinum from a 7% goods and services tax (GST). This is massively good news not only for the local citizens but, perhaps more importantly, for global precious metals investors.

Taxing a particular type of money discourages its use. Lifting that tax opens the door for citizens and businesses alike to save in, trade and utilize an alternative, a huge boon for demand.

According to finance minister Tharman Shanmugaratnam, the intent is to develop a refining and trading industry within the nation. "

 

What this looks like is that SIngapore is setting up the foundation for a gold-backed exchange. One where paper is traded and proven to be able to be turned in for real physical precious metals. An exchange free from Re-hypoethecation and all the dangers that come with it. If Singapore or another country from likely the East successfully makes this gold backed exchange, investors world wide will flee their current risky Re-hypothecated gold paper exchange and go to one perceived as less risky. If this happens the demand for this new exchange will skyrocket compared to the supply of gold and the price of gold will go up with it.

This is a major major development, worthy of keeping track of closely.

Gold is Money

When most people think of money they think of the dollars in their wallet. Money is supposed to represent something of value. For example, money could represent oil, cotton, wheat, a maufactured good, a house, a lap top, a cell phone, or anything else that is worth something and has value. However, try carrying around a barrel of oil or a bale of wheat. Money represents that barrell of oil so you don't have to carry that barrell of oil around to use for barter. It is much easier to give a person a stack of dollars rather than a barrell of oil.

However, money is more than just a representation of money. Or to put it better, real money. Real good money must ideally have low storage costs, is uniform in size and shape, be easily recognizaeable, easy to move, and last a long time.

That is why for centuries people have used gold as money. Because of it's size, composition and rarity it has low storage costs, can be molded into uniform size and shape, has a distinct color, is easy to transport, and lasts a long time.

Compare gold to paper currency. Paper currency has many of the advantages of gold as money. However, the one major weakness is that it does not hold it's value over time. Why? because people abuse it. The paper is supposed to represent something of value, but because paper is so common, it is commonly overprinted or counterfeited. When there is too much paper currency out there, it dilutes it's value. That is one of the major reasons why, paper currency representing money does not last for a long time. Paper as money has always proven to eventually collapse.

Inflation vs Deflation Argument by Peter Schiff

Video -James Rickards Interview on Why Central Banks are Obsessed with Gold & Why QE3 is Imminent Part 1

The following is a good video that explains Gold and Central Banks. James Rickards, author of the book Currency Wars is interviewed.

Summary:

• There is no amount of growth or taxes that is able to pay all the debt out there. Corporate debt, federal debt, student loan debt, etc.
• The solution to this debt crisis is either default or inflation. Default will not happen. US will print out money. Consumers and corporations will default. 
• Government not necessarily suppreses the price of gold, but they manage the price of gold. They want proce of gold to go up due to inflation, but they want increase orderly not disorderly. They do not want a super spike. Government wants to manage process.
• There will be volatility in gold, however he expects $5,000-$7,000 price range in a few years. Government wants to get part of the rise in price of gold. They will find a way to tax it or confiscate it like FDR did in 1933. There will be a fight between control of governement and market.
• Bank for International Settlements - www.bis.org -

"The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks."

Central bankers meet at the BIS in Switzerland. It is no secret that they meet. The BIS was created after WWI to manage the gold holdings of its participants. However, they do not publish the meetings of the minutes. That is kept secret. However, don't think of it as some deep conspiracy they are hiding. Central Bankers all think the same way and act in concert together because they think the same way.

• Gold is money. However, Central Bankers will never admit that because they want you to use their currency, often called Central Bank money. They control central bank money. They do not want people to use gold or other forms of money because that would mean they lose control.
• Ben Bernake has stated numerous times that gold is not money and he down plays gold, yet we have not sold any of gold since 1980. If it is so bad, why do they not sell it. Becuase gold is money.
• We are what he calls a shadow gold standard. Take the market capitalization of gold (spot price * ounces) and divide that by M1 and that is about 17%. We are still on a godl standard but it is never admitted by central banks because to do so would undermine their own monopoly on central bank money.
• He feels that Obama does not have an intuitive feel for economics so he feels Obama would nto dig deep enough in this.
• The smaller your investment portfolio the easier it is to hold physical gold. If you ahve $100,000, all it takes is to buy 75 gold eagles and there you have your $100,000.
• If you are a small investor and you put it in a safe deposit box, watch that box like a hawkm because if you see signs that the bank may close or the government takes it over, then you may have risk of losing it.
• Right now ETF's are fine, but be prepared to get out if you have to. Don't be holding ETF's on the day they close the stock exchange.
• Rickards has contact with government officials, millionaires, and billionaires. He says they are all concerned about the dollar crashing. He does not know a billionaire who does not have some holding in gold.

• He believes Obamacare is not as much about health care as it is a revenue raiser. There are a lot of hidden taxes, fees, mandates, increases of medicare charges form your pay check, etc. It sounds crazy but he feels that if the Supreme Court rules Obamacare as unconstitutional it will blow a big hole in the defict, because the CBO finds that Obamacer is more of a revenue raiser. Interesting point.
• He feels that the FEd will do QE3 - or the equivalent by May, June, July, or August 2012 at the latest. September and October will be too close to the elections and January, February will be too late.

 

You Know Illinois is in Serious Financial Trouble When Their Democratic Governor Has To Talk Pension Reform

Governor Quinn of Illinois is starting to talk like a Republican. He is actually proposing some sweeping pension reform for public sector unions in Illinois. In a stunning Chicago Tribune article states that Quinn proposes:

To help shore up the vastly underfunded system, Quinn called for a 3 percent increase in employee contributions and reducing the rate of cost-of-living increases. The governor also wants to raise the retirement age to 67.

This just shows you home much financial trouble the state of Illinois is in. If something is not done soon, the state will be unable to pay its bills. The democrat party has basically been the most union friendly party you can get. Now when Democrats begin admitting there is a pension problem and then start doing something about it, that is a major admission of public sector unions have really bled the system dry.

At the same time, I approach this news with caution. Quinn is still a democrat, and democrats always look to tax and spend. Quinn will find a way to screw this up. He could call for more borrowing, more taxing, and more spending. Like any Democrat, it is in their blood to tax money from someone else, borrow more than you can handle, and spend like there is no tomorrow.

 

Complex and High Taxes Lead to Record Number of People Runciating US Citizenship

The United States tax laws are so burdensome that CNBC reports a record number of Americans are reunciating their American citizenship. In other words people are willingly deciding to give up their American citizenship to become a citizen of another country. Many of which are doing so to escape the burdensome and in many cases too high US taxes.

Pensions Broke All Over the Place

Chicago is broke. At the city level, county level, and at the state level. According to a Chicago Tribune article: the city of Chicago has a pension gap of more than 25 billion, Cook County has a pension gap of 5.2 billion, and the state of Illinois has a pension gap of over 80 billion.

Everyone know we are all broke. The problem is that the mostly liberal leadership keeps getting the solution. Illinois has been run by Democrats for decades. Their solution always seems to be to blame the rich, raise taxes, raiding pension funds, and keep increasing public sector union compensation. This formula got us to this point and in Illinois they keep trying the same old formula that keeps getting us even deeper in the hole.

The county is in such a hole, even if they ask for a 1% increase in how much county employees (currently at 8.5%), they will only generate an additional 15 million dollars. That is minisully short of the 5.2 billion needed for the county pension gap.

I just cannot see any way for Illinois to get itself out of this mess without creating some massive chaos. When that happens, the unprepared will pay the most dearly.

Video: Gold Manipulation- View This To See How Central Banks Manipulate the Gold and Silver Market

Video- Peter Schiff on Why Ben Bernake and the Fed are Wrong

Demand for Gold Looking to Increase as India Grows

India makes up 17% of the world's population. India is also the world's 6th largest economy. India's GDP is expected to grow by about 8% until 2020. India is also the world's largest consumer of gold jewelry and purchases about 32% of all the gold worldwide according to this Wealth Cycles article.

Then add the fact that India exports a lot of its gold and most of the gold purchased in India stays in India and never goes to the world market. These factors clearly indicate that the demand for gold in India, a country with a growing economy and a huge purchaser of gold could only lead to greater demand for gold.

What will happen to gold prices if demand is greater than supply. Gold prices will rise.