Gold Is Rallying Because....

Gold is a superior store of value.

It resists the attempts by the monetary authorities to debase it, because except for concerted attempts to suppress its price through non-profitseeking selling at key market points by central banks, and naked short selling by the global commercial banks in the paper markets, gold cannot be created and controlled by financial engineers like Ben Bernanke.

It provides a refuge, a store of wealth for private citizens during a period of general currency risk.

A simple chart should suffice.



As part of the quantitative easing regime, the Fed has so debased the financial system that dollar debt is paying negative interest rates once again as it did in the 1970's.

In other words, it is costing money to hold dollar financial assets because of the mispricing of risk being engineering by the G7 central banks.

So, people and some central banks are seeking refuge in a stable store of wealth that is beyond the control of the financial engineers.

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." Fredrich August von Hayek

"The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments." Ludwig von Mises

Alan Greenspan himself states the case most eloquently in his famous essay from 1966 Gold and Economic Freedom.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

When the currencies of the US and Europe are debased by the financial engineers for the sake of the banks, when spendthrift governments run enormous deficits to fill the pockets of their special interests, informed wealth seeks a refuge in places where it cannot be so easily consumed for the exclusive benefit of the political elite.

This is sadly the case today, especially within the Anglo-American sphere of influence, from which the dollar had become the new opium trade, viciously addictive and debilitating. And so we have seen an historic flight to safety that began in the developing world, but is gaining momentum as the global dollar regime falters.

If you hold dollars, the Fed and the Treasury can confiscate your wealth, virtually at will. That is real power.

When the Fed lifts interest rates to again provide a positive return against inflation, then gold may stop rallying and reach a stable equilibrium price. This will be more difficult to do than it was to debase, as it is always easier to destroy than to create.

And it may be difficult to determine when that time comes, because the US bureaucrats have so thoroughly altered the Consumer Price Index over the past ten years that it is no longer a fair measure of inflation. Therefore it is a challenge to determine what is real and what is not, what is priced fairly and what is not. This is the hallmark of the modern western bankers and their accountants, and their demimonde in politics and the media.

Still, the message of the market is quite clear, to anyone who will listen.

A pleasant Thanksgiving holiday to my American friends, and a reminder to the rest of the world that you must muddle through without the direction of Wall Street for the next few days. How fitting that Thanksgiving was declared a national holiday by Lincoln in the depths of the Civil War, and made official by the Congress in 1941, at the end of the Great Depression, on the cusp of a terrible world war.

And Lloyd, I would not join the many and be happy at all if you took your own life as you have recently confessed that you feared they would. But there might be a cause for celebration if a master of the universe such as yourself would simply take this timeless message into you heart, and make it the light of the rest of your life. That is the right pricing of risk, the proper valuation of all that you are.

"Come, let us sing to the Lord; let us make a joyful noise to the rock of our salvation. Let us come before His presence with thanksgiving; let us make a joyful noise to Him with songs of praise. For the Lord is a great God, and a great King above all. In His hand are the deep places of the earth, the heights and strength of the hills. The sea is His, for He made it, and His hands formed the dry land. Come, let us worship respectfully, let us kneel before the Lord our Maker. For He is our God and we are the people of His pasture and the sheep of His hand. Now, if you will but hear His voice." Psalm 95

No time for despair, now is the time to be surprised by joy.

"I do not think of all the misery, but of the glory that remains. Go outside into the fields, nature and the sun, go out and seek happiness in yourself and in God. Think of the beauty that again and again discharges itself within and without you, and be happy." Anne Frank

What Is a Tobin Tax?

The purpose of a Tobin Tax is to place a financial penalty on short term transactions to curb speculation. It was originally proposed by James Tobin in the 1970's as a means of discouraging international currency speculation after Nixon closed the gold window and rendered the Bretton Woods agreement moot, at least until the ascendancy of the current dollar reserve currency system.

The tax is generally discussed as being 0.1% of the total transaction, or 1.00 per 1,000. It certainly would have a discouraging impact on the daytraders, and some could argue, as I would, that a percentage of the transaction at .1% might be considered regressive, and a huge penalty on institutional trading.

The tax might be better targeted at 'frequency' of trading, rather than nominal size of the transaction, in order to target speculation, under some reasonable transaction limit.

So for example, a flat tax of .50 per transaction would be negligible for the average investor, but would seriously impinge high frequency trading that is de rigeur amongst professional speculation these days.

What is also of concern is the discussion of a Tobin Tax as a international source of revenue, let's say for the IMF. A system of direct taxes on US citizens for the funding purposes of an international entity like the IMF must surely be unconstitutional.

And it goes without saying that there are sure to be 'exemptions' for certain types of trading in this tax, if the lobbyists have anything to say about it.

There will be another bailout of the banks. There will be discussion about punitive and ameliorative legislation to deal with them, in addition to the general lack of discussion about existing antitrust and bankruptcy laws, and the Glass-Steagall law which stood the test of time for sixty years.

American Banking News
Is a Tobin Tax in Store for Large Banks?
By Christopher
November 24th, 2009

The phrase “too big to fail” may get retired in 2010, but for banks such as Goldman Sachs, Citigroup Inc., and Bank of America, they may face a new round of punitive legislation to deal with the political fallout.

According to a special report in Money Morning, heavy government intervention in the banking sector combined with low interest rates and ongoing stimulus has made 2009 a profitable year for many banks.

In fact, according to a special report in Money Morning, so-called “bad” banks including Goldman Sachs, Citigroup Inc., and Bank of America have turned out to be a better investment than good banks.

But as they look to 2010, these same factors may signal trouble.

To begin with, if the Federal Reserve raises interest rates as is widely expected, it would reduce trading profits, reduce the profitability of borrowing short-term and lending long-term, and reduce the prices of assets such as houses and commercial real estate – putting even more strain on loan portfolios.

But an increase in interest rates is only the first of three areas of concerns for investors.

The length and the level of U.S. unemployment have economists wading through unchartered waters. If unemployment rises above its current 10.5% level and tests a postwar period high of 10.8% set back in 1982, it could signal huge losses as the U.S. consumer-credit system is not “stress-tested” for such high unemployment rates over a prolonged period of time.

And if the losses start piling up, the Fed might very well intercede again with a second bailout. This would be yet another strike against bank stocks since politicians would try to penalize investors for needing taxpayer money twice in two years.

All of this, plus the recent news of record bonuses at Goldman Sachs is creating momentum for punitive legislation against the banks that goes beyond the premiums banks pay to the Federal Deposit Insurance Corp. (FDIC).

One idea being considered is a “Tobin tax”. Originally proposed by economist James Tobin after the Nixon administration effectively ended the Bretton-Woods system of tying the U.S. dollar to the gold standard.

The idea behind such legislation, which would fall most heavily on very big conventional banks and trading-oriented investment banks, would be to tax transactions in bonds, stock commodity and foreign exchange markets.

Opinions are divided between those who discern a Tobin tax could protect countries from spillovers of financial crises, and those who claim the tax would constrain the effectiveness of the global economic system and dry up world liquidity.

Massive Deflation Sighting in the US As Noted in the Asia Times

David Goldman says in the Asia Times that "It’s Still the Worst Deflation in US History." He shows a chart (below) of US commercial lending to prove his point.

Asia Times
It’s Still the Worst Deflation in US History
November 18th, 2009
By David Goldman

This morning’s news that housing starts “unexpectedly” dropped by 11 percent month on month is consistent with my grim view of the American economy. The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t.

The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in.

Here’s year on year growth in commercial and industrial loans from weekly reporting banks in the US:



A 20% decline year on year does not look like a recovery. In fact, it looks like nothing we have seen since the Great Depression. C&I loan growth lags the end of recessions, to be sure, but this extreme level of credit reduction suggests profound trouble....

Yes commercial lending is slack and gone negative. And yes, it does signal severe economic distress in the productive economy. But is that deflation?

No, it is a sign of a very slow GDP growth and deleveraging in the aftermath of a credit bubble, with a GDP that I think is still negative in real terms. The US economy is still very bad, and David is probably less gloomy about that than Le Proprietaire.

One could assume that by 'deflation' David means 'a recession/depression' or 'a lousy economy.' But that is not deflation, as the economists learned in the economic stagflation of the 1970's. Words count, and this is an important distinction, because one reacts to situations as diverse as inflation or deflation, hyperinflation or stagflation, differently.

Is this a deflation which we see now in the US, even if it is not the 'worst in history?' Is there a steadily strengthening US dollar ,and low money supply growth relative to demand, or GDP relative to money suppy as indicated by an abnormally high velocity of money?

Only in the mind and imagination of someone who already believes in a deflationary outcome with all their mind and heart.

Can deflation happen? Yes. That is inherent in a fiat currency.

If the Fed raised the overnight interest rates to 20% tomorrow, we would have a deflation 'lickity split' because that would be an extreme policy action which relative to the underlying demand for money and economic conditions, is purposeful and dramatic towards a specific end. And this is the Fed's 'hole card,' the means by which they think they can control inflation in the future once the US economy has recovered (if it does sustainably I would add, and not just another asset bubble).

Inherent in David's conclusion is that money supply can only grow through bank lending. This is economic illiteracy. The Weimar inflation, for example, was not caused by excessive lending by German commercial banks in a vibrant economy. It was caused by the monetization of existing debts, the war reparations debt, without a corresponding growth in productive GDP.



So, absent a conscious policy decision by the Fed to strangle the US economy premature to recovery, deflation becomes a likely outcome if the Federal Reserve runs out of debt obligations, both public and private, which it is willing and able to monetize. That is the only 'hard stop' in the game on that side of the equation, and good luck with that.



Deflation would hurt those who owe debts in dollars, and be a boon to those who are the creditors. The American people are the debtors, and they control the growth of their money supply, at least for now.



The obvious pivot point, one key vector, in all this is one simple question: "Can the US economy become self-sustaining again, productive in its own right without having to export inflation by printing currency and living on credit?"

A second, but important question is can China and the rest of the mercantilist world adjust gracefully to a rebalancing in the distribution of demand, while maintaining sustainable growth of their own, despite their fears of a rising middle class?

We say yes, but only with a serious effort at fiscal and economic rebalancing. Cutting spending alone is not enough. That is the route to self-destruction, economic anorexia, if nothing else changes. Liquidationism alone is inherent in the neo-Calvinist roots in the US that emphasize the justice of non-redemptive suffering. They have sinned, so they must suffer, and the more the better.

There are three things the US must do: reform, reform, reform. Everything else is a palliative, to buy time at best while you seek to make the necessary systemic changes.

What does it matter, the details of the outcome, as long as the economy is in a slump?

If you want to suffer, go into a serious and protracted stagflation in the US holding dollars as the bulk of your wealth, and that will give you a taste of hell.

What is the most likely outcome? Would you care to buy a vowel? I would suggest that you buy an "I" and then see if there is an "S."

Deflation and straight inflation are relatively easy to hedge. Stagflation is the most difficult outcome to manage from an investment perspective. We'll talk more about this later if that appears to be the case.

Stagflation will be the unintended consequence that will catch the most people unprepared. This is the outcome most feared by the Fed, because it renders their monetary policies ineffective. The Fed can create money until the dollar goes to zero, but it cannot manage fiscal and industrial policy, and confer productive vitality which is essential to a sustainable recovery.

You cannot say that Bernanke did not warn you about what he will do. Deflation: Making Sure "It" Doesn't Happen Here

But we cannot stress enough that the outcomes are not predetermined, except in the minds of true believers. Therefore flexibility and clear-headed watchfulness are important now, more than ever.

The Last Bubble

The purpose of monetary and fiscal stimulus in economics is similar to the use of anesthesia and antiseptics during an important surgical procedure to correct some systemic difficulty, some disease, some serious problem in a patient. They enable the procedure, help the patient get through it without excessive pain and death from infection or systemic shock.

To apply stimulus and the other monetization programs which the Treasury and the Fed and the Congress and the system of global trade settlements are now doing without enacting sigificant and serious systemic reform to correct the underlying problems, the disease itself, is like taking a patient with a life threatening condition, applying large amounts of anesthetic and antibiotics and antiseptics to keep them stable and quiet, but then refusing to perform the operation to correct the life threatening condition.

Because in this case the disease that is infecting the patient and consuming their life has bribed the physicians and hospital administrators and nurses to leave it alone. It wants to maintain the status quo as long as is possible.

The pulse of patient, their blood flow, is the dollar. And the dollar is laboring under serious difficulties. The disease is consuming it, and the Fed is adding clear plasma to replace it, but is unable to add vitality, the white and red blood cells. They cannot create life, only sustain its appearance.

The liquidationists, by the way, would simply take the patient off all medications, and see how well he can fight the disease while running on a treadmill, hoping his body can cure and correct itself on its own. If the patient is not too sick, this has worked in the past. But if the problem is systemic, if the disease is advanced, then the patient is likely to go critical and sustain a stroke, and a major loss of functionality, even death. Benign neglect might work, it might not. Sometimes the cure is worse than the disease when applied without a perceptive diagnosis.

The Obama Administration (the doctors) and the Congress of both parties (the hospital administrators) and banks (the hospital owners) and the mercantilist trade system most notably China and Japan (the medical suppliers) are failing to deal with the problems of the US economy at hand, merely applying the anesthetic and antiseptics, for which they are being paid handsomely as the hospital bills run higher and higher.

This may be the last bubble, the one that takes the patient to a hospice for long term care in a zombie like condition, or worse, to the morgue. It is the last bubble, malpractice of the highest order, the mother of all policy errors. Nothing is inevitable here except selective default most likely through inflation.

The banks must be restrained, and the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

Associated Press
Third-Quarter U.S. Growth Revised Lower
November 24, 2009

WASHINGTON (AP) — The economy grew at a 2.8 percent pace last quarter, as the recovery got off to a slower start than first thought.

The government’s new reading on gross domestic product was not as energetic as the 3.5 percent growth rate for the July-September period estimated just a month ago.

The main factors behind the downgrade: consumers did not spend as much, commercial construction was weaker and the nation’s trade deficit was more of a drag on growth. Businesses also trimmed more of their stockpiles, another restraining factor.

The new reading on G.D.P., which measures the value of all goods and services produced in the United States — from machinery to manicures — was slightly weaker than the 2.9 percent growth rate economists surveyed by Thomson Reuters had expected.

Still, the good news is that the economy finally started to grow again, after a record four losing quarters. The bad news is that the rebound, now and in the months ahead, probably will be lethargic.

The worst recession since the 1930s is very likely over, but the economy’s return to good health will take time, Fed officials and economists say...