Chicago Gold and Silver Investing Fan Blog

Reichsfluchtsteuer

In extreme (and not so extreme) economic times, countries impose capital controls. What is a capital control? It is basically government intervention in the marketplace.

One rather extreme example of this is the policy of Reichsfluchtsteuer or Reich Flight Tax implemented in 1931 by Weimer Germany. The law basically was a tax or a seizure of a certain percentage of your assets if you left Germany. At first it was 25%, then it steadily increased to up to 96% by September 1939- the month and year Germany invaded Poland and started World War 2.

Jews were leaving Germany due to persecution. And what better way to fill the Nazi coffers than to seize the assets of Jews.

While this is a rather extreme example of a government sponsored capital control. It just shows you the extent an unrestrained government can do to its people.

Governments today are spending like mad and getting itself into unsustainable level debts. To pay for its spendthrift ways, they must seize from its citizens. Governments cannot produce wealth on its own they have to take it from someone else.

As individual countries get in worse financial shape look for more capital controls and seizure of wealth and income from its citizens or anyone that it can. It could take many forms: default, devaluation, inflation, government intervention in the marketplace, nationalization of certain industries, even more money printing,even more debt, and a host of other tactics. All of which are designed to take from others to pay for promises that they cannot keep.

Fortunately there is a bright side to this madness. Eventually, it fails. Nazi Germany and the Soviet Union were both socialist countries. Both viewed the state as almighty. There was no such thing as individual rights. In both regimes if you hoarded gold and money, kept extra grain or vegetables, or even said or thought anything negative against the state you could be sent to a concentration camp, a Gulag, exciled, or outright shot.

Nazi Germany and Stalin's Soviet Union are examples of government given to much control and abusing their power to where everyone- including it's own citizens were expected to be servants of the state.

Both regimes failed. In the case of Nazo Germany, foreign entities had enough of their tyranical and murderous ways and defeated them. In the case of the Soviet Union, inefficiency and social unrest led to a break up of the Soviet Union.

Today, the United States, Europe, Japan have gotten themselves into too much debt, have created too many promises they cannot fulfill, and are now seizing wealth from its citizens. Eventually their citizens will rise against the tyranny, or their fiat bases Keynesian economc system they have developed will collapse under its own doomed policies.

When that happens, hopefully a more sane market driven, less government intervention, gold (or something valuable) backed based currency system will take its place. Or we could go back to restart and do this madness all over again.

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.

Combibar now for sale in the United States

The Combibar is now available for sale at Gainesville Coins. This 10x10 gram pure silver bar is not cheap, Gainsville is selling it for $162.54. It holds 3.125 ounces of silver. So if you do the math, Gainsville is selling it for over $50 an ounce. The spot price of silver is $32.10 so they are selling it at a whopping over $18 over spot.

Massive Shortfall

Various estimates are that there is a shortfall of 100-150 times the amount of physical gold to pay the claims of gold out there. What happens when even a small percentage of the people want their actual gold?

William Kay said it best:

“When the music stops, what the leverage in the system should tell you is there aren’t going to be enough chairs.  So Germany, as a credible country, is saying, ‘We’re reserving our chair.’  Now this is exactly the type of catalyst that, as investors, we look for as owners of fully allocated gold ourselves.

We share many of Germany’s concerns. We want our gold in a safe location, fully allocated, (where) no one else can have a claim on it.  We can go and touch it, and we know it’s there.  That’s exactly the process that Germany has going on currently, and it’s something that should be getting the attention of every investor.”

Kay, principal sharholder of Pacific Group feels that fund managers like himself are already quietly converting paper claims on gold to physical gold. They are doing what GErmany has done. Germany wants the physical gold instead of a paper claim to gold.

When you think about it most people in the United States are in a similar situation with their dollars. They have their dollars in a bank. But the bank does not have all the paper dollars to pay off if everyone (or even a fraction of people) wanted their claim of dollars they deposited.

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.

Chinese Backing Yuan With Gold?

I am hearing early reports from Kings World News that China plans on backing their currency, the Yuan, with gold. If that is the case and it is not 100% confirmed yet then that will spell trouble for the dollar. More countries will flock towards using the Yuan as a reserve currency as opposed to the dollar. This is absolutely a development to watch closely.

You could also see a massive short squeeze on gold. A short squeeze is when everyone rushes to take physical possession of gold but it is not all available so the price could jump up dramatically in a short squeeze situation.

China's strategy is to buy as much gold as they can as seceretly as they can without disturbing the price of gold. But insiders know what is going on. China is hoarding gold because they know gold, unlike the Euro, the US Dollar, and other fiat currencies, is real money.

Gold Will Not Go Up Until These Ladies Start Shopping for Gold

With the world going up in economic flames, fiat money being printed like crazy, countries going into massive debts they cannot repay, and countries such as Germany and Venezuela repatriating their gold, how come the price of gold has not gone up like crazy?

See, it works like this. 99.9% of the investors out there do not even consider gold as an investment. Institutional American Investors are taught to keep 40% of their investments in stocks, 40% in bonds, and about 1% in gold. Gold has not been taught to be an investment for over 40 years. Anyone who knows anything about gold is self taught.

Investors are not taught about gold as an investment. Central banks certainly know that gold is real money but they are not going to teach anyone that because they want their citizens to use their fiat currency as money.

China and India are two of the largest buyers of gold. Together they account for about 50% of the gold purchases in the world. The rest of the world combined accounts for the rest of the purchases. The media loves talking about America, Europe, and Japan. But in the grand scheme of things they are minor players compared to China and India as far as gold purchasers.

So when will the price of gold really escalate? One, if the economy of China and/or India really get better then you will see them acquiring even more gold than they already do and then you'll see the price rise. As for the rest of the world. Something really dramatic will have to wake them up. Maybe one morning a country will have it's currency blown up in one day, no one will be able to get their currency in the banks, or hyperinflation will hit them suddenly. Only then, will the rest of the world realize that their government's have been feeding them a lie. They will find out that their currency is not as good as they thought, they will look at an alternative. Some will use another countries currency as an alternative. Others, will flock to gold and silver. When that happens, the price of gold will really rise.

Or if there is some kind of paradigm shift. Right now Gold purchasing is not fashionable. One day, something could happen where that thinking changes. Gold purchasing is already culturally ingrained in India and China. It is not fashionable in most of the rest of the world. However, with the economic chaos seemingly getting worse every day, the conditions seem ripe for a change in gold's perception. When that happens, you better hope you have already bought the gold because when gold becaomes fashionable, the price will be way too high and the opportunit to make the really big profits will have passed.

Kyle Bass on Upcoming Social Unrest

"You’re going to see more social unrest. You saw huge riots in Greece, and you’re seeing huge riots in other parts of the world over food (and lack of food) and those are actually derivatives of the financial problems that we’re seeing. We’re exporting inflation to some other nations. Going forward it’s going to be a problem." - Kyle Bass

Kyle Bass on Japan Debt Bomb

Kyle Bass made a lot of money in the economic meltdown of 2008. He feels the next economy to go will be Japan. For more on his take watch his CNBC video above.

Bass says that Japan's debt is 24 times central governement tax revenue. It would be like someone earning $50,000 a year with a debt of 1.2 million. Think about that if a person earned $50,000 a year in annual income, the interest on the debt alone assuming a very low interest rate of 2% would be $24,000 a year or almost half of his annual income. That is just interest payments alone on debt. How will he pay his other obligations?

Bass feel when you get into that type of insolvency, there is nothing you can do to help especially printing more money.

When you think of a crisis 99% of the people get it wrong.

When questioned why Japan's economy has not blown up yet despite him being able to predict it, he said that no one can predict with precision exaclty when the meltdown will occur. All the component are in place for all of sudden this will break. Interest rates will be lowest as soon as it breaks. The clock has started when the belief in this untenable situation.

Japan spends 25% of revenue on interest, 50% of revenue on debt service. Any 1% increase of rates cost them an additional 25% of revenue. He feels the Japanese government (and I feel the US government) has been dishonest with its constituents.

The situation is so bad in Japan in the Yen, that he recommends anyone that holds the Yen to spend it and buy a productive Western asset. As a side note, this is something to watch. When the Japanese flee their own Yen and start buying US dollars, US companies, Western real estate, or other non-Japanese assets then you know the meltdown has begun in Japan. This could also include precious metals like gold and silver. When the Japanese start buying in droves gold and silver, you will see the price rise up dramatically.

The likely scenario in Japan is that the elites, wealthy individuals, and others holding a lot of Yen will realize this is an untenable situation. When that happens, they will flee the Yen and the Yen will collapse.

The problem is that before the bomb detonates, things will seem alright. Interest rates will probably be the lowest, the Yen will be the strongest, and more. Then, one day it will just collapse and the run away from the Yen will appear.

Another issue is the relationship between China and Japan. There is a rise of nationalism in those countries and they really do not like each other. Yet, 20% of Japanese exports go to China. That's 340 Billion dollars. If Chinese and Japanese relationships worsen, that will be terrible economically for Japan.

As for the US, he still invests some of his money in the US. He says he is long on anythingwi th real estate. He feels that this is about the time for housing to turn flat and then turn.

In China, he has no positions and he does not know what to believe. He is concerned about non performing loans and other issues. He feels China has set iteself up for a problem down the road. We are spending 10-11% of central government revenue on interest.

Another Kyle Bass interview

He who controls the printing press cannot go broke

“A government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the one we have today, can produce claims without limit”. Alan Greenspan, 1997

Since 2007, assets on the Fed balance sheet has over tripled.

The Fed continues to create new dollars, yet the economy is not growing. The fed has tried Operation Twist, QE1,QE2, QE3, QE4, Zero Interest Rate Policy(ZIRP) - all of it has failed to stimulate the economy. Our debt obligations and interest rate obligations are growing every year.

To pay for our increasing obligations, we print more money and get into more debt.

To add to the woes, our political leaders have no clue as to properly solve this issue and are accelerating the problem. The Deomcratic party has had power in the White House and Senate since 2008, their efforts and legislation they have passed have met fierce opposition - and rightfully so because their policies have made it worse. Another entitlement in Obamcare passed the Supreme Court by one vote. We will find out in 7-10 years when Obmacare is fully implemeted that we have created another burden in our country that we may be able to pay for but just weakens our financial situation. A small majority of Americans don't seem to have an understanding as they voted Obama back in. They want the goodies that he supposedly provides, but they have not asked how it will be paid for. Raising taxes on a sliver of the population won't do it. Printing moremoney won't do it. Asking foreign countries to buy more of our debt won't do it. Asking the Fed, to buy more of our debt won't do it.

The only reason why America is still on its feet is because the Fed controls the printing press. So what if we spend far more than we collect in revenues, the Fed can always print more money to meet it's obligations.

The quick fixes (Obamacare, fiscal cliff deal, ...) only increases America's debt. To pay for this debt, the Fed has to sell government bonds(Treasuries). In the past,foreign countries bought a lot of the debt. However, they realize the poor financial situation that the US is in, and as a percentage of US Treasuries are purchasingng less every year.