Apologies to all but a little tinkering with the old site has morphed into a major overhaul. Wish I hadnt started, but cant stop now. Sounds a bit like the US money printing doesnt it? Anyway I am working to get a new site up a running in next few days. I hope it will enhance your bullionmark experience.

Despite the wonderful emotion from the US elections yesterday, the fundamentals for the US and the global financial system do not change. The US is bankrupt. Unfortunately no new President, not even Barack Obama, can change this.

Because the US dollar is the worlds reserve currency, the US, the most indebted nation in the history of the world, is the world’s lender of last resort. How ironic. The US great exporter of debt is itself bankrupt and the world economy is in danger of collapse. The IMF (controlled by the US) has now been asked to bail out Iceland, Pakistan, Hungary and Ukraine. The US may very well be the next IMF client.

What has happened over the last 12 weeks has eclipsed everything that has gone before. What will happen next year will eclipse what is happening now. The crisis is growing as the end-game of capitalism approaches its end irrespective of what central banks try to do.

This time the bankers overstepped themselves in such a way they have brought destruction not only on society but on themselves as well. It is only right that they should suffer too—as, after all, it is they who caused our problems.

It is unfortunate that society is being forced to lessen the burden on bankers even as bankers continue to indebt society. This privatise profits, socialise losses philosophy is immoral and criminal. But, then again, that’s what government is for—to act as the bankers’ agents in the continuing indebting of nations, businesses, producers and savers.

Markets will only be free when the virus of bankers’ debt-based paper money is permanently removed from commerce and the present tyranny of banker-controlled government is ended. Unfortuantely the very institutions and people that got us into this mess are mandated to save us. What a joke.

Remember the mountain of debt is so great it can never be repaid. We are left with only two options: default ala Russia 1999 or Argentina 2003 or hyperinflation Zimbabwe style. The problem with default is that the US is the reserve currency of the world so all fiat currency (& therefore countries) go with it. it also means banks lose their power base. Default is not an option. Hyperinflation on the other hand can delay the outcome and ultimately be blamed on other factors, eg Peak oil, commodity prices, war etc. The banks retain control. Central banks have already declared their hand with the federal reserve alone doubling its balance sheet in the last 8 weeks.




We will see continued stock and house price declines in 2009 as banks continue to deleverage. This is not deflation as many financial experts claim, its asset delveraging. Inflation/deflation relates to the money supply change. As can be seen in the chart above money supply growth is out of control. Prices of things you need to live are going much higher. Governments controlled by banks will continue to inject unfathomable amounts of paper confetti to save the global banking system. With a wonderful technology called a printing press (or in these days of digital dollars a simple mouse click) they may delay the inevitable systemic collapse, but at what cost? It may take 6-12 months to work its way through but there is no doubt.......Hyperinflation is coming!

Got gold and silver?

"Argentum et aurum comparenda sunt"

From Le Metropole Cafe


For several years now I have believed that the U.S. Dollar would fail and be replaced with a "new system". I went out to supper last night and asked for the bill, the waiter went to get it and I burst out laughing. For some reason I began thinking about how stupid it is to have a system where someone gives you a product or service and you give them a piece of paper. The local currency as are all paper currencies, is not backed by anything. Yes the government has a couple $ Billion held as currency reserves but of course financially the US is "the worst in show" and Dollar reserves should now be thought of as an anvil around ones neck.

The links posted above displays further posturing for the change coming to our financial system. Mr. Putin and other global leaders have come to the same conclusions, ie. why do they send goods to the US or other nations and accept "pieces of paper" in the form of Dollar credits? This reformation of Bretton Woods will also encompass the ideology of the Basel II agreement. In other words the world is going to demand more clarity of balance sheets, more banking reserves [which means less leverage], and in general a return to a more conservative financial stance similar to days past.

Recently we have been hearing of ".899" Gold turning up all over the world. Believe it or not, Gold has its own fingerprint or "DNA" so to speak. The speculation is that this .899 Gold is actually metal received from the confiscation back in 1933. Back then the government made it illegal to hold Gold personally, recalled Gold coins and melted them into bars that were stored in West Point, N.Y.. If it turns out that this .899 Gold is in fact from West Point there will be hell to pay. Already on a global basis, Gold is becoming scarce and difficult to obtain physically. If the world perceives that coin melt Gold is being dishoarded we could witness a global panic into the metal. For over 60 years the US has been thought of as having the largest Gold holdings on the planet, can you imagine the ramifications if the world began to believe that we were selling Gold from the bottom of the barrel?

The real dilemma this is. The Dollar system has broken down and the world must move, but how? Foreigners have three choices, they can do nothing and watch the Dollar [and their own currencies] hyperinflate while trying to prevent credits, assets and markets from imploding. They can try to make a "currency basket" to replace the Dollar [which equates to a bunch of cripples leaning on a bunch of cripples]. Or they can figure out how big and how deep the "Dollar holes" are in their balance sheets and then they would compare the size of the holes to the amount of Gold they hold and simply mark the price up to to replace or fill the smoking Dollar holes.

I believe this third option is what will eventually happen. I think that global bankers will try to estimate how many Dollars have infested their systems, these will be more or less marked down and/or off. The Gold audits will begin and once they figure out at what level Gold must rise to offset these evaporated Dollar assets, credits and debts then.....walla! a new Gold price! We have fought against western efforts to suppress Gold and Silver for over 10 years now, I think it ironic that it will be governments that must remark their bullion to morph into the new financial system. This will not be a wind at our backs, it will be a category 5 hurricane that will effect a markup almost overnight.

Bullionmark's comment:

These comments are spot on. Interestingly back in 1990 or '91 about 1 month before the Soviet Union fell, gold with the Czar's stamp started turning up worldwide. The Soviets were dumping "unpure" Gold similar to the coin melt for use as hard currency. The same thing is now happening with the coin melt bars. The US is down to the bottom of the barrel! I expect a dramatic upward revaluation of gold and silver sooner rather than later. Could the G20 meeting on November 15th be the catalyst? Makes sense for an incoming President to get this big problem on the table before his inauguration on January 21st.

This article was first published in May of 1973 by the Foundation For Economic Education. It is as pertinent in today's world as it was then.

In 1944, as the world was recovering from the effects of World War II, the heads of state from over 100 countries met in Bretton Woods to create an international monetary system that would unite the western world, insure monetary stability, and facilitate international trade. Over the years since then the system has been plagued by dollar shortages and dollar "gluts"; chronic deficits and chronic surpluses; perpetual parity disequilibria, "hot money" capital flows, and currency depreciation. By 1968, a "two-tier" gold market was established in the midst of a gold crisis which, by 1971, culminated in the suspension of dollar convertibility together with a dollar devaluation against multilateral revaluations of most other major foreign currencies.

Bretton Woods is dead and an autopsy is called for to determine the cause of death. If meaningful international monetary reform is to follow, it is necessary to know what went wrong.

Fixed exchange rates, flexible rules.... Under the rules established by the Bretton Woods agreement, the gold values of a member nation's currency could be altered "as conditions warranted." This distinguishing feature of the Bretton Woods system exposed a drastic ideological departure from the gold standard.

Under the gold standard, no natural conditions would ever warrant a change in the gold value of a nation's currency. Under a pure gold standard, all the money in circulation would be either gold or claims to gold. Any paper money would be fully convertible into gold. There would be no difference between claims to gold and gold itself, since, if claims to gold circulated as money, the gold could not.

However, there are government-made conditions that could warrant a reduction in the gold value of a nation's currency. If governments have the power to artificially increase the claims to gold (e.g., dollars), they have the power to depreciate the value of the national monetary unit.

Bretton Woods was established with the intention of aiding governments in exercising their powers of inflationary finance. Government leaders knew that the gold standard prevented them from fully pursuing domestic goals that depended on deficit spending and prolonged, artificially induced "booms." They detested the gold standard for its fixed rules which brought adverse economic repercussions whenever they refused to adhere to them, and they detested flexible exchange rates that exposed the government's policy of currency depreciation.

The political temptations of artificially increasing the money supply in order to "stimulate the economy" prevailed against the gold standard and brought the beginning of a "new era": fixed exchange rates with flexible rules, the exact opposite of the gold standard.

No longer would politicians adhere to the discipline of the gold standard. No longer would they have to restrict their deficits or domestic money supplies. Government leaders would make their own rules and fix the nominal value of money by decree. And if "conditions warranted" a reduction in the nominal value of a nation's money, it was agreed that a nation could devalue up to 10 per cent after the formality of obtaining other nations' permission. This was called the "adjustable peg" system.

The great ideological distinction between the gold standard and the Bretton Woods system, then, is that the Bretton Woods system was ostensibly intended to stabilize exchange rates, but at the same time it anticipated that governments would not defend the value of their currencies. Worse, Bretton Woods institutionalized a method which allowed and condoned future currency depreciation.

Export or devalue: institutionalizing the devaluation bias....

Historically (and the Bretton Woods era was no exception) nations have seen fit to pursue a basically mercantilistic trade policy, i.e., a policy which maintains various regulations intended to produce more exports than imports.

The mercantilistic case is not a realistic one. For example, it would be impossible to develop a logical case advocating that all individuals should sell products and services at the same time. Obviously, some individuals must be consumers if there is to be a market for sellers.

There is no difference when it comes to nations trading in a world market. This is simply to say that not all nations can run trade surpluses at the same time.

An equally difficult case would be to try to convince some individuals that most of the money they receive from the sale of goods and services should be saved rather than spent on the consumption of goods. Yet this is the intent underlying all government policies that aim at increasing exports (sales) and restricting imports (consumption).

There is no logical reason why individuals should not be allowed to reduce their cash balances by buying goods from other nations if they believe it is to their benefit; that is what their cash balances are for. To penalize men or discourage them from importing by imposing licensing restrictions, capital controls, tariffs, or "import surcharges," only serves to limit the variety of their economic choices. This in turn only serves to reduce their standard of living. A nation's drive for export surpluses, together with its "protectionist" policies of restricting imports, leads to an increase in the domestic money supply. This influx of money, together with the money that governments feel they must artificially create in order to "stimulate the economy," leads to higher domestic wages and prices as more money chases fewer goods. These higher wages and prices create an illusion of prosperity, which explains the popularity of mercantilist-inflationist policies.

But higher domestic wages and prices lead to a dwindling trade surplus as a nation's goods become less competitive in world markets, and a dwindling trade surplus, unless corrected, eventually deteriorates into a trade deficit. This is the dilemma facing all governments that pursue the contradictory and self-defeating policies of mercantilism and inflationary finance.

Under a gold standard there is only one way to resolve this dilemma: stop artificially creating money, stop preventing money from leaving the country. The result would be a normal, self-correcting deflation — i.e., a contraction of the domestic money supply — which would lead to a fall in domestic prices and to equilibrium in that nation's balance of trade position.

But because governments hold an unwarranted fear of lower prices and favor higher prices that give the illusion of prosperity, the framers of Bretton Woods adopted a mechanism that would allow governments to inflate their currencies yet escape the process of a normal self-correcting deflation. By devaluing their currencies, governments could continue to inflate their domestic wages and prices while making their exports less expensive to the world.

The device of devaluation was established to allow nations to regain their competitive edge once their surplus deteriorated into deficit. Devaluation immediately lowers the price of a nation's exports, and in this way nations can more actively strive for export surpluses. Thus the framers of Bretton Woods found a way in which nations could continue both their drive for export surpluses and their domestic policies of inflation.

A nation would simply export its goods until its domestic inflation reduced or eliminated its trade surplus, then devalue. In this way the Bretton Woods system established an implicit code of conduct: export or devalue. It institutionalized a devaluation bias within the new international monetary system, which led to serious imbalances, ultimately resulting in hundreds of devaluations during the Bretton Woods era.

"Hot Money Blues."...

Because devaluations are completely arbitrary (at best mere guesswork), new problems arose in place of old ones. The problems centered around the pre-devaluation exchange rate: nations were committed to supporting the rate even when it was unrealistic.

Bright investors soon began to realize when a particular currency was overvalued and to shift their money from the weak currency to stronger ones. This caused further pressure on exchange rates and resulted in speculation — i.e., selling short on X currency, buying gold, or buying long on Y currency. Governments intervened in foreign exchange markets in order to preserve their unrealistic exchange rates, by accumulating massive amounts of unwanted weak currencies. But this could not continue for long.

Finally, when a government was forced to devalue, the action had repercussions on other currencies (particularly if a major currency were involved): it brought all other weak currencies under suspicion. This resulted in further devaluations as investors transferred their money into only the strongest currencies in anticipation of competitive devaluations and major currency realignments. This was called "hot money" and was attributed to speculators — not to currency-depreciating policies of governments.

Finally, under the Bretton Woods agreement, national currencies were not allowed to "float" and seek their own levels. The new "par value" of a currency was arbitrarily set by the IMF — and these were consistently either too high or too low. Like all forms of government price-fixing, the fixed exchange rate system was in perpetual disintegration. This resulted in further "hot money" flurries, further realignments of currencies, and an inherently unstable exchange rate system — the exact opposite of the goal intended by the framers of monetary reform at Bretton Woods.

The role of the dollar under Bretton Woods....

The role of the dollar under the Bretton Woods system was vastly different from that of other currencies. Because of the

United States' economic strength and Europe's economic weakness after World War II, the dollar was used by other governments as a reserve for their currencies. This meant the dollar was pegged to gold and supposedly committed to stability and convertibility. Thus the dollar was supposed to be "as good as gold," and therefore to be treated as a reserve asset just like gold.

There are several implications tied to the concept of a paper reserve currency. (1) Gold, the main reserve asset, was considered too limited in quantity to restore world liquidity or to provide sufficient wealth for rebuilding war-torn nations. (2) While gold could not be increased, a paper asset (U.S. dollars) could — consequently the reserves of the western world could be expanded. (3) Inflation could be implemented in a "more equitable" manner by an ever-increasing paper reserve. (4) A paper reserve currency "should not be devalued" yet it should be increased "as needed" to meet demand. This last blatant contradiction was the major factor in the disintegration of the IMF in later years.

Limited gold — unlimited dollars: a formula for disaster....

Since gold was limited, the vast majority of the assets on which foreign currencies were based to finance Europe's recovery was not gold but U.S. dollars — the second primary reserve asset. The demand for dollars came in two forms: (1) demand for foreign exchange to be used for importing goods, and (2) demand for reserve liquidity and replenishment.

The U.S. satisfied the demand for foreign exchange by inflating its currency and extending loans and gifts to Europe. These gifts and loans were used almost entirely to import goods from the U.S. Therefore, many of these dollars returned to the U.S. However, the demand for reserve liquidity and replenishment was met by continuing U.S. deficits that led to European "stockpiling" of dollars in the form of interest-bearing notes and demand deposit accounts. Demand for dollars between 1950 and 1957 continued and an excess of dollars began to build up in foreign central banks.

After 1957, and to this day, the foreign banks have been obliged to continue to take in dollars that were neither intended for imports nor needed for liquidity. This era has become known as the era of the dollar "glut."

Confidence versus liquidity — a two-tier tale....

During the 1960's the progressive supply and accumulation of dollars mounted and world central bankers found themselves confronted with a government-made monetary dilemma: the more dollar reserves they acquired, the more likely was the chance that their dollar surplus would depreciate in value. To state the problem another way, the more liquidity central bankers enjoyed, the less confidence they had in their most liquid asset — the dollar.

Gresham's Law prevailed and in 1968 central bankers and private speculators began to convert their dollars into gold. A gold crisis developed: the U.S. could not hope to convert the amount of dollars outstanding against its gold stock. A "two tier" gold market was set up to avert a dollar devaluation and the break-up of the International Monetary Fund (IMF), i.e., one free market for speculators and industrial users who would buy gold at the free market price, and an official market where governments would transact dealings at the pegged price of $35 per ounce. Finally in 1971, in a wave of "hot money" speculation, the U.S. was forced to devalue the dollar against gold and to suspend its convertibility.

Gold's limitations: a blessing in disguise....

The demise of Bretton Woods can be traced directly to an excessive supply of dollars. The anti-gold principles of inflationary finance practiced diligently under the Bretton Woods era, turned into a give-and-take fiasco: the U.S. became a faucet of wealth, supplying dollars on request to every corner of the world, while over a hundred countries drained the U.S. in the name of world liquidity and "reparations."

The result was a flood of dollars that swept over the world producing world inflation, numerous recessions, hundreds of currency realignments, disruptive trade, a gold crisis, and the final international monetary crisis that has left the world precariously groping for stop-gap measures to resume monetary and trade transactions.

Clearly the Bretton Woods vision of a stable and ever-expanding reserve currency was doomed from the onset. Had the governments limited their reserves to gold, the kind of monetary and credit expansion under Bretton Woods — and all of its disastrous consequences — could never have occurred. Gold places objective limits on monetary and credit expansion, and this in itself was enough for the framers of Bretton Woods to condemn it.

It is no accident that the kinds of limitations gold imposes on the extension of money, credit, and reserves is just what the world is crying for today in light of the "dollar glut." As a reserve currency, the dollar was supposed to be as good as gold. But monetary authorities never stopped to ask "what makes gold so good?" The answer is that gold is limited — the very point for which it was condemned.

The refusal of government leaders to adhere to the rules of the gold standard and their desire to create a monetary system based on their own arbitrary rules of whim and decree, failed as it has always failed. Once again, history has proved that a mixture of government whim with the laws of economics is not a prescription to cure world problems: it has always been and will always be a formula for world chaos.

U.S. balance of payments problems....

U.S. balance of payments deficits began in the early 1950's and have not ceased to this day. The cause of these incessant deficits can be traced to monetary and trade decisions made at the inception of Bretton Woods and reinforced throughout its existence.

The first straw....

When it was decided that the U.S. was to act as world banker and benefactor to those countries in need of help after World War II, it is doubtful that anyone really believed the U.S. would profit as world banker. On the contrary, the consensus was that war-torn nations needed more money than they could afford to pay back. It was argued that the

U.S. could afford to (and therefore should) extend foreign aid (gifts), loans at below market rates of interest (gifts), and military protection (gifts), to those countries in need.

What must be remembered is the precedent for this decision: the U.S. was committed to protect and finance the western world by virtue of its great strength and an ever-expanding stream of dollars.

It was assumed that this money would return to the U.S. via import demand, and in fact, during the years 1946 to 1949 most of it did, resulting in fantastic U.S. surpluses.

On selling one's cake and wanting it too....

But during the years 1950 to 1957, a turn of events took place. Europe by design curtailed its already abundant imports and concentrated on replenishing its national reserves. With conscious intent, the U.S. continued to supply the world with dollars through deliberate balance of payments deficits to accommodate Europe's demand for reserve replenishment. The refusal of the foreign governments to allow their citizens to use their constantly rising dollar surpluses for U.S. goods (by imposing trade restrictions) led to the dollar glut of the 1960's.

The blame for the chronic surpluses of foreign governments and chronic deficits of the U.S. must be shared. While the U.S. can be blamed for financial irresponsibility, the surplus countries must be blamed for economic irresponsibility. The U.S. could have stopped its deficits, but surplus-ridden countries could have stopped penalizing their citizens and discouraging them from importing. Instead, they decided to increase dollar reserves (dollars that for the most part were given or loaned to them) and to either exchange them for gold or hold them in the form of interest-bearing notes and accounts.

By accumulating excessive amounts of dollars that they refused to use, surplus countries helped foster U.S. deficits: some nations' chronic surpluses must mean that other nations are running deficits. The irony of the decision to run an intentional chronic surplus is that the purpose of selling goods is to gain satisfaction as an eventual consumer. The drive for both surplus reserves and surplus exports, and the refusal to consume goods with the money received, implies that a nation expects to sell a good and somehow derive satisfaction from it after it's gone.

The illusion of the last straw....

The increasing demand for dollars led the U.S. government and the Federal Reserve System to increase the amount of dollars and thus to depreciate the purchasing power of the dollar. As confidence disappeared in the dollar's ability to continue its role as a reserve currency, "hot money" flurries soon appeared. Thus, by the late 60's and early 70's, an enormous amount of dollars accumulated against a dwindling supply of U.S. gold. This caused both "runs" on the U.S. gold stock and "flights" from the dollar into stronger or undervalued currencies.

This speculative capital outflow caused the U.S. balance of payments deficit to increase in a pyramiding fashion. Finally, the conspicuously low amount of U.S. gold reserves, the disparity between currencies and interest rates, and a dwindling U.S. trade surplus, aroused a well-founded suspicion that the dollar might be devalued — and that other, stronger currencies might appreciate in value.

This justifiable suspicion then caused even greater U.S. capital outflows which led to even greater U.S. deficits. This was the "straw that broke the camel's back." But it was the haystack of straws before it, beginning with the first straw — i.e., the first U.S. inflation-financed gift abroad — that inexorably led to the progression of U.S. balance of payments deficits, international monetary chaos, and the disintegration of the Bretton Woods system.

The high price of gifts....

When the U.S. embarked on a policy of inflation-financed world loans and gifts, it surrendered all hopes of attaining a balance of payments equilibrium for itself or for the world. Between the years 1946 and 1969, the U.S. as world banker extended some $83 billion in grants and loans. Since 1958 some $95 billion has left the country. Most of these dollars were non-market transactions motivated by political and military considerations.

While many economists believe it is necessary for the U.S. to run trade surpluses to correct its balance of payments deficits, to expect normal exports to rise to the level of these abnormal capital outflows only makes sense if one stands on one's head — it is not a logical position to take.

These grants should never have been given to foreign nations. It was an economically unsound move and the grants were extended at the expense of the American taxpayers. Further, any additional loans and gifts made by the U.S. to satisfy nations who demand "free" military protection, such as Europe and Japan have been demanding for years, or "reparations" such as those now being demanded by North and South Vietnam, will only lead to further capital outflows... and this at a time when the world is plagued by depreciating dollar reserves and continuing U.S. deficits — the very cause of the international monetary crises which led to the demise of Bretton Woods.

Those who argue that the U.S. balance of payments deficits were caused by insufficient trade surpluses blind themselves to the fact that the U.S. has been running continuous trade surpluses for almost a century. They refuse to place the blame for U.S. balance of payments deficits where it belongs: on the U.S. government's inflationary policies of give-away finance.

On domestic dreams and international nightmares....

The notion that governments can divorce domestic inflation from international economics is fallacious. There is no domestic-international dichotomy in economic theory. There is a causal relationship between all economic activity, thus there can be no international immunity from unsound domestic policies and no domestic immunity from unsound international policies.

To the degree that nations practice sound domestic economic and monetary policies, the result will be stable economic progress in both the domestic and international economies. To the degree that domestic policies are unsound, distortions will occur that will be destabilizing and inhibit economic progress both domestically and internationally — the results being counter-productive in both areas. Bretton Woods was set up to accommodate various nations' domestic dreams. The dreams of post-war prosperity were financed by inflationary schemes that were incompatible with any sound international monetary standard. The Bretton Woods agreement established the contradictory system of fixed exchange rates with a built-in devaluation mechanism, in order to avert the monetary repercussions of not adhering to the exchange rates they fixed. The framers of Bretton Woods knew that governments had no intention of preserving the value of their currencies, that, in fact, they planned to deficit spend and inflate in order to pay for their domestic economic programs.

No international monetary system — not the gold standard nor any form of standard less fiat system, nor any combination thereof — can insure stability given unsound domestic policies. The fundamental economic issue today is not the kind of international monetary system that will replace the Bretton Woods system, but whether the domestic policies of the nations involved will permit any international monetary system to last. The pre-condition of any lasting monetary system is that it has integrity.

A monetary system that has integrity means a monetary system that is protected from government-created inflation, i.e., arbitrary and artificial increases in the supply of money and credit.

It is a moral indictment against today's political leaders and the public at large that the chances for a monetary system that has integrity are almost non-existent. For before a nation can have a monetary system of integrity, it must end all policies of inflationary finance. And this means that all those dreams a nation cannot afford must end.

The public has bought the politician's claim that they can get something for nothing; that all a government need do is print up money to pay for programs that satisfy national dreams. But there is no such thing as a free lunch — someone must inevitably pay the price of that lunch.

And so it is with domestic dreams.

The price for indulging in domestic dreams through government "something for nothing" programs is domestic inflation and international monetary crises with all their tragic and disruptive consequences.

If domestic dreams of nations today are pursued by resorting to the insidious schemes of inflationary finance, they will inevitably become the international nightmares of tomorrow.

This was the lesson learned from the Bretton Woods system. May it rest in peace!

While some investors view precious metals as a short-term cyclical speculation, there are actually three important reasons for including precious metals in every investment portfolio. These are: strategic asset allocation, hedging and tactical asset allocation.

Strategic Asset Allocation
Strategic asset allocation is a method used to fully diversify investment portfolios by properly balancing asset classes of different correlations in order to maximize returns and minimize risk. While many investors believe their portfolios are diversified, they typically contain only four asset classes – Real estate, stocks, bonds and cash. Commodities, precious metals and collectibles rarely form part of most investors’ portfolios. With only four asset classes out of a total of seven, such portfolios are clearly not adequately diversified.

A recent study carried out by Ibbotson Associates, Portfolio Diversification with Gold, Silver and Platinum, noted that, since 1969, stock and bond correlations have increased and, contrary to popular belief, a mix of these will not result in a diversified portfolio. Today, most portfolios lack the negatively correlated asset classes – real estate, commodities and precious metals – necessary to achieve full diversification, and as a result are exposed to risk and volatility.

Ibbotson researchers constructed a composite index that held equal dollar amounts of gold, silver and platinum, and examined the correlations of that index to the other asset classes typically held in investment portfolios. The study, which examined the years 1972 to 2004, showed precious metals are the most negatively correlated asset to all other asset classes. As a result, it takes the least amount of precious metals in a portfolio to achieve maximum negative correlation and the appropriate level of diversification.

The overall performance of precious metals during the 32-year period was close to fixed income investments. Even through the long bear market of 1980 to 2002, precious metals outperformed both cash and inflation during the entire period.

From 1973 to 1984, a high inflation period, precious metals were the top-performing asset class, and the study concluded that precious metals provide an effective hedge against inflation. Precious metals were the only asset class with a negative average correlation to the other asset classes, the basis for diversification.

The Ibbotson study concluded that, by allocating from 10 to 25 percent of a portfolio to precious metals, returns would increase while risk decreased. These conclusions were not based on assumptions of a bull market in precious metals or a bear market in financial assets; they were simply based on a continuation of the returns and levels of inflation that have been prevalent recently.

Hedging
Hedging is a strategy used to offset investment risk; the perfect hedge eliminates the possibility of future losses. The old Wall Street saying, “Put 10% of your money in gold and hope it doesn’t work”, succinctly summarizes the hedging attributes of precious metals. And in today’s economic climate, there are plenty of risks to hedge against: currency exchange declines, loss of purchasing power and “Fat Tail” events.

Currency Exchange Risk
Currency crises have been occurring on a regular basis since 1971 when US President Nixon “closed the gold window”, and, globally, currencies were no longer backed by gold. When confidence in a currency wanes, people tend flee to the safe haven of precious metals. Perhaps most famously, the gold price exploded from 75 marks per ounce to 23 trillion marks per ounce in the 1920s Weimar Republic of Germany. Mexico experienced a currency crisis in 1995, and the peso declined by about 50% against gold in approximately three months. During Indonesia’s currency crisis of 1997, the rupee lost 82 % over a one-year period. In Russia’s 1998 currency crisis, the ruble declined by 60% in just one month. In Argentina’s 2002 currency crisis, the peso devalued to 22 % of its previous level.

A currency crisis is typically triggered by excessive growth in the money supply or unsustainable government debt. Is the world’s reserve currency, the US dollar, vulnerable? Total US money supply in 1971, when President Nixon ceased dollars-to-gold convertibility, was approximately $800 billion. Last year, the annual increase in M3 was more than $800 billion, bringing the total US money supply to $10.2 trillion. In other words, the US now has annual increases in the money supply equal to the entire money supply of 34 years ago. Adding in the current money printing for bail out after bail out money supply is out of control. If this continues, the result will be hyperinflation and, eventually, a currency collapse. Meanwhile, the rising price of gold is acting as a leading indicator for troubled times ahead, signaling a growing non-confidence vote in a government’s monetary policy.

Loss of Purchasing Power
An increasing money supply leads to the steady erosion of purchasing power. Based on published CPI figures, both the Australian and the US dollar have lost about 83% of their purchasing power since 1970.

To appreciate how precious metals preserve purchasing power against inflation, consider that in 1971 a compact car cost about $2,300; today, the price is $20,000. A starter home was $24,000; today, it is $350,000. The Dow Jones stood at 890, vs about 10,000 today. As for gold, it was $35 per ounce, compared to $750 as at October 2008.

If you convert these dollar prices to ounces of gold, you see that they have actually declined. For instance, the car that used to cost 66 ounces of gold in 1971 now costs only 30 ounces. The house that cost 703 ounces of gold now costs 466. In fact, you can buy almost twice as many cars or houses with your gold. Even investing in equities costs less today in gold terms. In 1971 the Dow Jones was 25 ounces of gold, while today it is 13.

Fat Tail Events
The third hedging benefit provided by precious metals is protection against a sudden, unexpected financial crisis – a fat tail event. Examples of fat tail events are war, terrorism, natural disasters, health pandemics and systemic financial risks such as a derivatives accident, bankruptcy of a major bank or a major corporation, defaults on bonds, derivatives contracts, insurance contracts and disruption of oil supply. When any of these occur, traditional financial assets often suffer while the price of precious metals tends to rise dramatically. While most investors regard insuring their homes an absolute necessity, their investment portfolios are often completely exposed and “uninsured” – lacking any precious metals allocation.

Tactical Asset Allocation
Although using strategic allocation or a hedging strategy is enough to justify a 7 to 15 percent allocation to bullion, tactical strategy justifies much higher allocations. Broadly speaking, tactical asset allocation means actively seeking out strategies that will enhance portfolio performance by shifting the asset mix in a portfolio in response to the changing patterns of return and risk. With rising oil prices and increasing inflation, precious metals are likely to outperform traditional financial assets in the years ahead. Here are some of the reasons why precious metals are a good tactical asset strategy today.

Precious Metals Bull Market
The bull market in precious metals began in 2002, and despite recent declines vs the US dollar it has reached new all time highs vs most currencies, including Australian dollars, euros, Swiss francs and British pounds. From a tactical point of view, portfolios should now be rebalanced so they are overweight precious metals in order to take advantage of the current market trends.

The main indicator confirming this trend is the Dow:Gold ratio, a factor that indicates when to be overweight precious metals and hard assets, and when to be overweight financial assets. In 1999 the Dow:Gold ratio peaked at over 40, before declining to its current level of about 13. When the ratio is rising, as it did from 1945 to 1960 and again from 1980 to 1999, it is prudent to be more heavily allocated to financial assets with lower allocations to precious metals and hard assets. When the ratio is declining, as it is today, the opposite investment strategy applies. In our current economic climate allocations to financial assets should be reduced, while allocations to precious metals and hard assets should be increased in order to maximize returns.

Some investors think the precious metals bull market is well advanced, and they have missed the boat. However, when we compare the current market to the bull market of the 1970s, it becomes apparent that we are still in the early stages of what could be a 20-year bull market.

Determining whether the trend will continue is as simple as looking at the key drivers for precious metals price increases. While commodity-based supply/demand fundamentals are certainly a factor, there are more: increasing concerns about the weakening US dollar, burgeoning US debt and rising oil prices. Since the US dollar acts as the world’s reserve currency, its decline will ultimately have a global effect.

US Economic Vulnerabilities
As the world’s reserve currency, the health of the US dollar impacts all economies, currencies and investments. The US economy is currently propped up by a mountain of debt. In 2008, the federal debt increased by over $1 trillion, to over $10.5 trillion. If you add the 5-10 trillion bailouts of banks and Insurance companies plus present value of unfunded Social Security and Medicare obligations is taken into account, it now stands at over $50 trillion.

The ballooning trade deficit has increased annually since 1975. Today it is approximately $1 trillion, meaning the US must borrow over $3 billion each day to fund its consumption of imported goods and commodities. The US now absorbs over 80% of the entire world’s savings in order to maintain its consumption. Since the US has outsourced much of its manufacturing and imports the majority of its oil, even a major decline in the value of the dollar will not reverse this growing trend. The US trade deficit has become systemic.

The US current account deficit is now approaching 7% of GDP. Economists believe that 5% is the critical number because, historically speaking, a current account deficit in excess of 5% has resulted in a currency crisis. During a currency crisis, demand for alternative currencies, including gold, silver and platinum, increase dramatically.

Total US debt as a ratio of GDP has surpassed the previous high set in 1933, when it stood at approximately 255% of GDP. Today, the number is well over 300% of GDP. The fact that foreigners hold a growing percentage of this makes matters worse; almost 50% of US government Treasury bills and bonds are held by foreign entities. If foreign investors, tired of funding US budget and trade deficits, lose confidence in the dollar, a massive exodus from both it and from US financial assets will ensue. The result would be a US financial disaster. Since the US dollar is widely viewed as the last stable currency, much of the money fleeing out of it will have nowhere to go but precious metals. A number of central banks have already announced they intend to diversify out of US dollars. Since aboveground global supplies of precious metals are currently valued at less than $2 trillion, and global financial assets exceed $70 trillion, the prices of gold, silver and platinum will increase dramatically if there is a shift in sentiment and demand explodes. Considering that precious metals are already rising against all currencies, this trend may have already started.

Gold/Oil Relationship

We are at a juncture where oil production is about to decline just as demand, particularly from China and India, is about to explode. Numerous studies suggest, and many experts agree, that the world is close to reaching peak oil production. The result of increasing demand coupled with dwindling supply will be an upward-spiraling oil price that drives precious metals price higher while negatively impacting financial assets and global economies.

Throughout history there has been a positive correlation between the prices of precious metals and oil. As the price of oil increases, so does that of gold. As gold rises, silver and platinum follow. Traditionally, oil trades at about 15 barrels per ounce of gold. Today, oil trades at about 8 barrels per ounce. Either gold is undervalued, or oil must decrease in price to about $50 per barrel, an unlikely event. At the normal 15-to-1 ratio, gold today should be priced at over $1200 per ounce.

Bullion vs. Mining Stocks

Hedging and tactical allocation to precious metals can only be achieved through investment in bullion itself, and not from mining company stocks. While stocks can be good trading opportunities during bull markets, they have a completely different risk/reward relationship than bullion. During the stock market crash of 1987, for example, mining stocks declined by a greater amount than equities in general, while the price of gold increased. Mining companies are exposed to many operational risks and can decline to zero; bullion cannot. During a currency crisis, bullion outperforms mining stocks because global investors as a whole will seek to hold bullion rather than invest in paper. While mining stocks are popular in North America, people in South-East Asia, South America, Europe and other parts of the world that have already experienced a currency crisis would rather have gold, silver and platinum bullion than anything else.

Bullion Investments

One of the most important things to consider when investing in bullion is whether you are investing in paper promises for bullion or the real thing. As we have seen in the current credit crisis counterparty risk is major concern. Owning bullion in your own right has no counterparty risk. Physical gold and silver are no one elses liability in your possession. A futures contract, option, certificate or fund cannot make this claim, someone owes you bllion that in a major melt down may never be repaid. Many precious metals investments are nothing more than promises to deliver bullion at some future date. Bullion investments must precisely track the price of bullion, and not be influenced by the equity markets. If the form of investment is dependent on a counter-party and the counter-party defaults, all the benefits of holding precious metals could be lost at precisely the time when they are needed the most.

In summary, a portfolio allocation of 10 to 25 percent in precious metals is justified simply from the strategic and hedging points of view. If you take into account current vulnerabilities in the global financial system and the implications of peak oil, a much higher allocation is appropriate. The Dow:Gold ratio is an accurate indicator of the trend toward precious metals, and clearly confirms the need to be overweight in that sector at this time.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKr.oY2YKc2g

NEW YORK -- Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.

"The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry," said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made.

The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn't include an additional $700 billion approved by Congress in a bailout package.

... Fed's Position

Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

The Fed staff planned to recommend that Bloomberg's request be denied under an exemption protecting "confidential commercial information," according to Alison Thro, the Fed's FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn't subject to the freedom of information law.

"This type of information is considered highly sensitive, and it would remain so for some time in the future," Thro said.

The Fed didn't give Bloomberg a formal response because "it got caught in the vortex of the things going on here," said Michael O'Rourke, another member of the Fed's FOIA staff.

Thro declined to comment on the lawsuit.