Chicago Gold and Silver Investing Fan Blog

Your Money in the Bank is NOT Secured by FDIC

Everyone has heard the claim that your money in the bank is FDIC insured up to $250,000.

Technically and legally it is, but in reality the FDIC cannot pay up even if they wanted to. See, they have $25 Billion in assets. Yet the amount of insured amount in US bank deposits is over $9 trillion dollars.

This is just one of the reasons why Casey Research recommends diversifying your assets internationally. For more, see article and free e-broadcast.

The Love Trade for Gold

Indians and Chinese buy gold because they love it, not because they are fearful of the economy. This article describes this type of demand as the love trade.

Anyone who is serious about what affects the price of gold, must seriously look more deeply into the live trade.

Here's a direct quote and chart from the article:

"You can visually see the strength of the Love Trade below in the year-over-year change in total consumer demand in tons for gold jewelry, bars and coins. Indian demand grew the most, increasing 27 percent compared to the previous year. Demand for jewelry, bars and coins in the greater China area increased 20 percent, as “seasonal strength in China, related to Chinese New Year purchasing, exceeded all previous peaks, marking a new record quarterly high,” says the WGC. Even U.S. residents had a love for gold, with demand growing 22 percent over the previous year."

Break Even Date

Anyone that has ever run a business understands that financials are a key part of the business. The financials have to make sense to anyone analyzing the financial numbers of the business. As soon as they do not, the whole competency of the business is taken seriously into question by anyone analyzing the business. Even worse, current management of the business may lose faith in your knowledge of the business.

One financial number of prime importance for any business is what is called the break even date. The break even date is the date is the date in which revenues equals costs.

Every business (and governments) have costs and revenues. Ideally, revenues are less than costs. If not, there has to be a plan to address that or else the solvency of the operation will be seriously in jeopardy.

In the case of governments at any level, most of their revenue generally comes from taxes. The costs of running the government and services and entitlements they provide are the costs. When costs are greater than supply, there are a couple of things governments can do. They can lower costs, increase revenues, borrow funds to pay for the costs, print money, steal money, or more. How a business and governments manage that will ultimately determine the solvency and fate of the organization.

If they manage it properly, the organization thrives. If not chaos or even complete breakdown can occur. Right now those running most governments around the world are not managing it properly. They have chosen to borrow more than they can handle, tax more than they can tax, print more than they could print, and steal more than they can steal.

If you do not manage it properly- and many governments are- the laws of nature will take over. Chaos, resistance, breakdown,defaults, wars, protests, and other malignant symptoms will appear. Like a cancer it will not take over the whole world at one time, you will see it surface in one part of the world at first, then if not quickly overcome it will spread to other areas fairly quickly.

But this is not a message of gloom. This is a message of optimisim. Governments neglecting their fiduciary duty is nothing new. Government have been doing this kind of neglect ever since there have been governments. Every time, humans have responded. The government may not have survived in the previous form, but has generally evolved to something stronger. It is a message of hope, because the governments that do not manage it well will eventually collapse or whither away. The ones that do make it, will be hopefully end out learning important lessons and come out stronger than before.

They Cyprus Effect Hits Australia

Zero Hedge reports that:

"the Australian government has just announced new rules which penalize citizens who have responsibly set aside savings for their own retirement.Any income over A$100,000 drawn from a superannuation fund (the equivalent of an IRA in the United States) will now be taxed at 15%. Previously, all such income was tax-free."

It seems like 100,000 seems to be becoming a magic number. In Cyprus, the talk was taht any deposits over 100,000 Euros would be assigned a levy and would be confiscated. In Australia, they are doing something similar in that if you draw any income over 100,000 Australian dollars, the government will tax it or another wasy of saying confiscate it.

This is a potentially dangerous trend. The government confiscation of depositor accounts made world wide news. This news in Australia to their tax code has barely made a ripple of news anywhere. Yet the effects are the same. That is if you are a saver, the government can legally take some of your money. The confiscation in not new. What is new is that government stealing your money through supposedly legal means could become common news and acceptable to the eyes of many.


State sponsored secret police or terror groups is not new. What I fear maybe new is public acceptance of state sponsored theft by the government.

An extreme example of this is the Cheka in 1919 Russia or the Gestapo in Nazi Germany. Those were state sponsored and state approved police terror groups. The Cheka could legally arrest, torture, and even do summary executiions to enemies of the state at any time. The Gestapo could listen the priests sermon and if the priest publicly denounced the regime, they could arrest the priest and send him to a concentration with maybe at most a show trial.

Governments today are not doing summary executions. What they are doing are state sponsered theft. And the worse part about it is that unless there is any kind of public outcry, they will continue to steal with impunity.

China Looking for Another Bretton Woods Type Gold Standard

It is no secret that China has been amassing gold. Last year alone they may have accumulated an additional 1,500 tons of gold.

What do the Chinese plan on doing with all the gold? There's talk that they may be preparing for a another Bretton Woods type meeting. And why not. The Chinese Yuan is rapidly increasing in terms of international usage. Some reports say that the Chinese Yuan has increased it's global financial transactions by 170% last year. This means more and more countries are using the Yuan as a medium of exchange as opposed to other popular currencies such as the US Dollar and the Euro.

“We are headed for another Bretton Woods.  It is unsustainable for currencies to continue to lose their purchasing power while median incomes, especially in the US, continue to go down in the West.

At a certain point the Chinese will say, ‘It’s time to have another equivalent of Bretton Woods.’  That will challenge the BIS, and quite possibly lead to some sort of gold standard.  What Bretton Woods did was reestablish the gold standard as the Second World War was coming to an end."

- said Stephen Leeb in a Kings World News article

The Bretton Woods meeting established a globa gold standard and made the US Dollar dominant globally. The US dollar is still the main global reserve currency. However, with the US getting greater in debt and the dollar being regularly devalued, countries may look for alternatives. If the Chines accumulate enough gold and call for another Bretton Woods meeting, we could see a more rapid decline of the US Dollar and a bigger role of a gold backed Chinese yuan.

How soon could this happen? Well right now the United States has somewhere between 8,000-20,000 tons of gold. It is more likely closer to the lower number. In a few years (2-5) China could amass enough gold (10-12,000 tons) to surpass the US holdings.

 

Venezuela Davalues Currency 46% Overnight

The Venezuelan government decided to devalue it's currency the bolivar 32% against the dollar. This has the immediate impact of making it's exports cheaper and be able to pay off its debts in cheaper currency. On the flip side, it will cause massive inflation.

Welcome to a country run by a socialist government.

So overnight if you were a hard working Venezuelan middle class person, all of your hard earned bolivars has now suddenly lost 46% of its value. If instead you had held your savings in gold instead of bolivars you would have had at least preserve your wealth.

The same thing is happening here in teh United States, just not overnight. Someone could have $20,000 in the bank and be able to buy lets say $20,000 worth of wheat, or oil, or cotton, gold, or some other commodity. However, if there were a massive Venezuelan currency devaluation, then you would still have the $20,000 in your ban and you would still be able to buy $20,000 worth of commodities. However, if inlfation hits in the $20,000 you would not get as much of the commodity after the devaluation than before it.

Today socialist or socialist leaning governments are in charge of the United States, Europe, Japan, and may other parts of the world. As long as they remain in power, we will have more currency devaluation.

This is the time to buy not panic

"There have been seven or eight retrenchments in the current gold market, which of course began in the year 2000.  So if you think about the bull market that we’re in, a move in gold from $250 to over $1,500, (as I said) there have been seven or eight retrenchments, and in every case gold has come back and retraced the retrenchment in fairly short order and gone on to make higher highs."

 - - Rick Rule

Despite all the fiat money printing, for the last couple of years the price of gold has been stagnant. In fact, it  has been going down, even though we have a liberal run US government that is spending money like a mad man, Japan's new governement saying that they are creating inflation, and the Euro ZOne in shambles with all the debt they cannot pay. So why has gold not been going up.

Peter Schiff argues that the market does not know how to properly anticipate. There is a false sense of security in the population of the United States, Europe, and Japan. They feel the worse is over and they believe the propoganda spewed by its largely Keyneisian run politicians that money printing and inflation are a good thing. Yet, what Peter Schiff argues is that tehy are not good in anticipating the market. They were wrong right before the housing crash in 2008. They thought real estate prices were going to go up forever. Eventually reality hit and the market crashed. A lot of people lost a lot of money in that fake housing boom.

The same thing is going to happen here. People do not realize the danger the governements are creating. Thier house of cards will fall and some point and that is when realitystrikes again and gold will go up.

Rule also added: “In a situation where the US federal deficit is 50% of the total budget, and where half of the deficit isn’t even borrowed, it’s simply counterfeited, what you do is you tighten the spring with regards to the gold market tighter and tighter and tighter.  And at some point in time that spring breaks (to the upside).

What I can tell you is they make more and more valueless paper every day, and they do not make more and more precious metals.  To paraphrase your friend John Mauldin, ‘Own things they can’t print.’”

Jim Rickards - Currency War 3 Has Begun

 

Jim Rickards, the expert on currency wars has stated that Currency Wars 3 has begun. To get an insighton what is a currency war see this Ricakrds video taped last year.

Here is a quick summary of parts of the above video:

• A currency war starts with insufficient growth. When there is slow growth there is a temptation to steal growth from your competitors by devaluing your currency.
• The way it starts is look at a company like Boeiing. Indonesia needs airplanes but it doesn't produce airplanes. So it goes shopping. It looks at the world market. Given the same quality of product, it will buy from the place or country that has a cheaper product. Currency devaluation in America makes the Boeing product cheaper to buy by the Indonesians. If Indonesia buys products from the USA it creates jobs, lowers unemployement, and can pay more taxes for the governement to collect. That is how politicians and governement officials look at currency devaluation.
• The problem is that the US imports more than it exports. The imports will go up because other countries have more dollars and thus make export prices rise. Also, there is retaliation. Other countries will retaliate- almost instantaneoulsy by cheapening their currnency (import inflation), do capital controls, and trade wars (excise taxes, etc). This will reduce world trade.
• Other countries cannot beat the US Militarily. So an alternative is financial warfare.
• If the US messes with the dollar, it could push people out of the dollar and use alternative currencies (such as gold).

Currency War Now in Session

Below is a summary, direct quotes, and misc thoughts of this great article by Grant Williams called War Games.

• This is a crazy world. Investors are buying government bonds at super low interest rates and basically taking a loss.Governments are reducing the rate of spending and calling it austerity and spending cuts.
• Central banks throughout the world are devaluing their currency. Do those fools really feel that if they devalue their currency, that other countries will just sit there and do nothing. Other central banks will devalue their currency and this will lead to massive inflation. Don't central bankers realize that?
• Guido Mantega, Brazil's finance minister,announced in 2010 that the world is in a currency war. 'We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,' were Mantega's exact words. Mantega publicly stated what many central banks are saying privately, that the way to lift their economy is through currency devaluation.

Gold Price Dependent on Supply and Demand

The price of Gold like almost anything else follows the basic law of supply and demand. If the supply stays the same and the demand rises, the price will rise. Conversely, if demand stays the same and supply declines the price will rise.

Let's look at both cases. Let's say the supply of gold remains relatively constant. That means, the amount they mine and the amount of gold every year is about the same. In a free market, the price will stay the same as long as the demand stays the same. However, if demand increases the price will increase.

There are many factors that could boost the demand for gold. Historically, the demand for gold has increased the most during times of economic stress. It could be either real or perceived. When hyperinflation hit Weimer Germany and Zimbabwe, people flocked away from their countries currency and currencies of other countries and to precious metals such as silver and gold.

Also, the supply of fiat currencies throughout the world is increasing. Europe, Japan, and the United States are just some places where they are printing boat loads of fiat money. However, fiat money also follows the laws of supply and demand. You print too much of it and each one becomes worth less and less.

Gold could also rise in price if supply is reduced and the price stays the same. One way of supply being reduced is the various gold leasing schemes being perpetuated by central banks. See, central banks hold gold and they lease it to other countries. The supply of gold could be affected when the party who owns the gold wants it back and there is no gold there.

Think this is not a realistic scenario? Germany recently told the United States that it wants its gold back that is stored in its shores. The US agreed but they will give it back to them in stages over a 7 year period. Some are saying that the US is trying this tactic because some of the German gold is not actually in its vaults. They feel the fed has leased it out to another party.