by Ludwig von Mises

Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called "sound money."

The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.

The gold standard did not fail. Governments deliberately sabotaged it, and still go on sabotaging it. But no government is powerful enough to destroy the gold standard so long as the market economy is not entirely suppressed by the establishment of socialism in every part of the world.

Governments believe that it is the gold standard's fault alone that their inflationary schemes not only fail to produce the expected benefits, but unavoidably bring about conditions that (also in the eyes of the rulers themselves and most of the people) are considered as much worse than the alleged or real evils they were designed to eliminate. Except for the gold standard, governments are told by pseudo-economists that they could make everybody perfectly prosperous. Let us test the three doctrines advanced for the support of this fable of government omnipotence.

1. The Fiction of Government Omnipotence

"The state is God," said Ferdinand Lassalle, the founder of the German socialist movement. As such, the state has the power to "create" unlimited quantities of money and thus to make everybody happy. Intrepid and clear-headed people branded such a policy of "creating" money as inflation. The official terminology calls it nowadays "deficit spending."

But whatever the name used in dealing with this phenomenon may be, its meaning is obvious. The government increases the quantity of money in circulation. Then a greater quantity of money "chases" (as a rather silly but popular way of talking about these problems says) a quantity of goods and services that has not been increased. The government's action did not add anything to the available amount of useful things and services. It merely made the prices paid for them soar.

If the government wishes to raise the income of some people, for example, government employees, it has to confiscate by taxation a part of some other people's incomes, and then distribute the amount collected to its employees or favored groups. Then the taxpayers are forced to restrict their spending, while the recipients of the higher salaries or benefits are increasing their spending to the same amount. There does not result a conspicuous change in the purchasing power of the monetary unit.

But if the government provides the money it wants for the payment of higher salaries by printing it or the granting of additional credits, the new money in the hands of these beneficiaries constitutes on the market an additional demand for the not-increased quantity of goods and services offered for sale. The unavoidable result is a general tendency of prices to rise.

Any attempts the governments and their propaganda offices make to conceal this concatenation of events are in vain. Deficit spending means increasing the quantity of money in circulation. That the official terminology avoids calling it inflation is of no avail whatever.

The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others.

2. The "Cheap-Money" Fallacy

Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods. Interest cannot be "abolished" as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hundred years.

The height of the originary rate of interest,[1] which is the main component of the market rate of interest as determined on the loan market, reflects the difference in the people's valuation of present and future satisfaction of needs. The disappearance of interest, that is, an interest rate of zero, would mean that people do not care a whit about satisfying any of their present wants and are exclusively intent upon satisfying their future wants, their wants of the later years, decades, and centuries to come. People would only save and invest and would not be consuming.

On the other hand, if people were to stop saving, that is, making any provision for the future, be it even the future of the tomorrow, and would not save at all and consume all capital goods accumulated by previous generations, the rate of interest would rise beyond any limits.

It is thus obvious that the height of the market rate of interest ultimately does not depend on the whims, fancies, and the pecuniary interests of the personnel operating the government apparatus of coercion and compulsion, the much-referred-to "public sector" of the economy. But the government has the power to push the Federal Reserve System, and the banks subject to it, into a policy of cheap money. Then the banks are expanding credit. Underbidding the rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing. "The gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments."

Thus they are inescapably falsifying the businessmen's estimation of market conditions. Although the supply of capital goods (that can only be increased by additional saving) remained unchanged, the illusion of a richer supply of capital is conjured up. Business is induced to embark upon projects which a sober calculation, not misled by the cheap-money ventures, would have disclosed as mal-investments (over-investment in capital). The additional quantities of credit inundating the market make prices and wages soar. An artificial boom, a boom built entirely upon the illusions of ample and easy money, develops. But such a boom cannot last. Sooner or later it must become clear that, under the illusions created by the credit expansion, business has embarked upon projects for the execution of which the real savings are not rich enough. When this mal-investment becomes visible, the boom collapses.


The depression that follows is the process of liquidating the errors committed in the excesses of the artificial boom; it is the return to calm reasoning and a reasonable conduct of affairs within the limits of the available supply of capital goods. It is a painful process, but it is a process of restoration of business health.

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiency of their capital equipment. All they would have to do for the improvement of their conditions would be to expand money and credit more and more. No "foreign aid" schemes would have emerged. But in granting foreign aid to the backward nations, the American government implicitly acknowledges that credit expansion is no real substitute for genuine capital accumulation through saving.

3. The Failure of Minimum Wage Legislation and of Union Coercion

The height of wage rates is determined by the consumers' appraisal of the value the worker's labor adds to the value of the article available for sale. As the immense majority of the consumers are themselves earners of wages and salaries, this means that the determination of the compensation for work and services rendered is made by the same kind of people who are receiving these wages and salaries. The fat earnings of the movie star and the boxing champion are provided by the welders, street sweepers, and charwomen who attend the performances and matches.

An entrepreneur who would try to pay a hired man less than the amount this man's work adds to the value of the product would be priced out of the labor market by the competition of other entrepreneurs eager to earn money. On the other hand, no entrepreneur can pay more to his helpers than the amount the consumers are prepared to refund to him in buying the product. If he were to pay higher wages, he would suffer losses and would be ejected from the ranks of the businessmen.

Governments decreeing minimum wage laws above the level of the market rates restrict the number of hands that can find jobs. Such governments are producing unemployment of a part of the labor force. The same is true for what is euphemistically called "collective bargaining."

The only difference between the two methods concerns the apparatus enforcing the minimum wage. The government enforces its orders in resorting to policemen and prison guards. The unions "picket." They and their members and officials have acquired the power and the right to commit wrongs to person and property, to deprive individuals of the means of earning a livelihood, and to commit many other acts which no one can do with impunity.[2] Nobody is today in a position to disobey an order issued by a union. To the employers no other choice is left than either to surrender to the dictates of the unions or to go out of business.

But governments and unions are impotent against economic law. Violence can prevent the employers from hiring help at potential market rates, but it cannot force them to employ all those who are anxious to get jobs. The result of the governments' and the unions' meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed.

"The result of the governments' and the unions' meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed."

It is precisely to prevent this outcome that the government-manipulated banking systems of all Western nations are resorting to inflation. Increasing the quantity of money in circulation and thereby lowering the purchasing power of the monetary unit, they are cutting down the oversized payrolls to a height consonant with the state of the market. This is today called Keynesian full-employment policy. It is in fact a method to perpetuate by continued inflation the futile attempts of governments and labor unions to meddle with the conditions of the labor market. As soon as the progress of inflation has adjusted wage rates so far as to avoid a spread of unemployment, government and unions resume with renewed zeal their ventures to raise wage rates above the level at which every job-seeker can find a job.

The experience of this age of the New Deal, the Fair Deal, the New Frontier, and the Great Society confirms the fundamental thesis of the true British lovers of political liberty in the nineteenth century, namely, that there is but one means to improve the material conditions of all of the wage earners, viz., to increase the per-head quota of real capital invested. This result can only be brought about by additional saving and capital accumulation, never by government decrees, labor-union violence and intimidation, and inflation. The foes of the gold standard are wrong also in this regard.

4. The Inescapable Consequence, namely, the United States Government Gold Holdings Will Shrink

In many parts of the earth an increasing number of people realize that the United States and most of the other nations are firmly committed to a policy of progressing inflation. They have learned enough from the experience of the recent decades to conclude that on account of these inflationary policies an ounce of gold will one day become more expensive in terms both of the currency of the United States and of their own country. They are alarmed and would like to avoid being victimized by this outcome.

Americans were once forbidden to own gold coins and gold ingots (from 1933 to 1976). Their attempts to protect their financial assets consisted in the methods that the Germans in the most spectacular inflation that history knows called "Flucht in die Sachwerte" (flight into real values). They are investing in common stocks and real estate, and prefer to have debts payable in legal tender money rather than holding claims payable in it.

Even in the countries in which people are free to buy gold there are not yet (1965) conspicuous purchases of gold on the part of financially potent individuals and institutions. Up to the moment at which French agencies began to buy gold, the buyers of gold were mostly people with modest incomes anxious to keep a few gold coins as a reserve for rainy days. It was the purchases via the London gold market on the part of such people that reduced the gold holdings of the United States.

There is only one method available to prevent a further reduction of the American gold reserve, namely, radical abandonment of deficit spending as well as of any kind of "easy-money" policy.

A speech given by Ferdinand Lips
at the University of St. Gallen on 24 June 2004 as part of
the International Finance & Security lecture series


I would like to thank the organizers, Mr. Graf and Mr. Brunner, for inviting me here today. It says a lot that you have chosen such a contentious topic as gold. That shows courage. Indeed, until recently it was almost taboo to mention the word gold. Anyone who did so risked being labeled eccentric. But you were quite right in choosing this topic. You will soon see the extent to which gold has played a central and positive role in human history since the dawn of civilization.

I will provide evidence that without a gold-backed currency we are destined to face crises and military conflicts throughout the world. The best proof of this is provided by the events of the 20th century and the dawning 21st century.

I will also prove, or at least assert, that without a new gold standard the world will descend into a new dark age. I don’t know what the significance is, but the calendar of the ancient Mayan civilization ends in the year 2012. In my estimation, the current financial system, or non-system as I call it, will no longer exist by that time. As you know, it is based on deception and a mammoth debt burden that can barely be serviced anymore. In all likelihood, this mountain of debt will overwhelm the world someday.

I also want to give you hope, however, by describing to you how once upon a time there were better financial systems than the one we have today. My speech is also an appeal to you. I appeal to you young people to think of gold as money. Engage in monetary archeology. Try to devote some thought to the gold standard. It is up to you to save the world. No one will do it for you.

My speech will last 45 minutes. Afterwards, you will have to opportunity to ask questions. For those of you who would like to buy my latest book Die Gold-Verschwörung1) (Gold Wars), I will be happy to write a personal inscription.

Introduction:
today’s situation stems from abandonment of the gold standard
All of the bad things happening in the world today can be traced back to two specific events. They have given rise to the most troubling issues of the 20th century and now of the 21st century, including political dilemmas, wars, monetary crises, economic emergencies, widespread poverty, racism, the Holocaust, mass migration and terrorism. All of these things are overwhelmingly attributable to these two developments.

The first event is the abandonment of the gold standard at the beginning of World War One in 1914, and the second event is the establishment of the Federal Reserve System in the USA in 1913. World history demonstrates that there is a close relationship between monetary systems and war and peace.

And economic history shows that financial markets only function smoothly under a gold standard.

It is also evident that there is a close relationship between monetary systems and ethics and morality.

Unfortunately, it is not widely known that the 19th century was a period of prosperity and economic growth without inflation.

It seems like a fairytale when we discover that in those days the world’s major currencies remained stable over a long period. The French franc, for example, remained solid for 100 years. It was the age of the gold standard.

The lifespan of currencies
French franc 1814 – ... years
Dutch guilder 1816 – 1914 98 years
Pound sterling 1821 – 1914 93 years
Swiss franc 1850 – 1936 86 years
Belgian franc 1832 – 1914 82 years
Swedish krona 1873 – 1931 58 years
German mark 1875 – 1914 39 years
Italian lira 1883 – 1914 31 years

(Source: Pick’s Currency Yearbook 1977 – 1979)

How the gold standard worked
The basic rule of the gold standard was a fixed price for gold, i.e. each currency was convertible into gold at a specified rate. The currencies were backed by gold and redeemable in gold on demand. A nation’s monetary reserves consisted of only gold. On an international level, importing and exporting gold was unrestricted. All balance of payments deficits were settled in gold. (Balance of payments: the sum of all transactions between the domestic economy and the rest of the world.) Gold thus had a disciplining influence on a national economy.

It limited public spending. It provided citizens a currency that maintained its value and was internationally recognized. In such a system, if a balance of payments deficit develops because domestic prices go up, gold automatically flows out of the country. This leaves less gold available for internal money circulation, and prices will thus come under control or decline. Exports become competitive again, and the balance of payments reverses. If, on the other hand, a country has a balance of payments surplus, gold will flow in and allow the economy to expand. Upward revaluations or devaluations were unthinkable. The system maintained it stability automatically. This is one reason why politicians do not like gold. Gold forces them to balance their budget.

Stable currencies through the ages
History offers many examples of monarchs and kings who exercised great discipline in creating money. Ancient Greece, where the first gold coins were minted, provides one such example. Due to its gold content, the drachma in effect became the global currency of the civilized world at the time. During this period, the Greek cities thrived. And economic trade flourished.
The most impressive example of a nation with healthy money was Byzantium. In keeping with the ancient tradition of stable money in Greece, Emperor Constantine decreed the creation of a new coin named the solidus. For over 800 years, the solidus served as a global currency, circulating from China to the British Isles and from the Baltic Sea to Ethiopia.

Byzantine laws regarding monetary matters were very strict. Before someone was accepted into the bankers’ guild, the candidate needed sponsors. These people had to provide a character reference. The authorities wanted to be certain that the candidate would never counterfeit money. Anyone who violated these rules had their hand cut off.
It is an amazing historical fact that the Byzantine Empire flourished as the center of global trade for 800 years. During this period, there was not a single devaluation or any amassing of debts. Neither in antiquity nor in modern times has anyone else set such an example. Through its money, Byzantium controlled both the civilized and uncivilized world at the time. This outstanding phenomenon came to an end when Emperor Alexius Comnenus, who had high gambling debts, was forced to devalue. The Turks marched in 200 years later, and the splendor was over.

Another outstanding example of the success of standardized gold coins was the gold dinar of the Arabian Empire. At its peak, this empire extended from Bagdad to Barcelona.
The rise of the Italian city-states like Florence, Siena, Venice and Genoa was only made possible thanks to a new gold currency, the Florentine fiorino d’oro.
A stable, reliable gold currency spurred an upswing in trade and promoted prosperity in the Italian city-states and broad areas of Western Europe.
Gold as money formed the economic basis of the Renaissance. Cultures thrive only when prosperity prevails, not when people are poverty stricken. The power and the natural reliability of gold, in turn, brought mankind to a higher level of civilization.

In their great wisdom, the founding fathers of the USA stated in the American constitution that only gold and silver should be considered legal tender. The concept of paper money and a central bank were a horror for them. Today, all of this is ignored and viewed as anachronistic.

The 19th century gold standard, the highest monetary achievement of the civilized world
The gold standard was neither conceived at a monetary conference nor the brainchild of some genius. It was the result of centuries of experience. Great Britain was the architect. At the height of the gold standard at the beginning of the 20th century, there were about 50 countries, all of them leading industrialized nations, which participated in the gold standard. It was one big clearance community, and it worked.

In his book Währungen am Scheideweg(3) (Managed Money at the Crossroads – The European Experience), Professor Melchior Palyi wrote in 1960:
“For the first time since Rome’s prime did the civilized world succeed in creating a monetary unit. The commercial and financial integration of the world was achieved without the help of a military empire or a dreamy utopia. In theory and in reality, this monetary unit was accepted and recognized as the only rational currency system. Due to the automatic mechanism and the discipline to which the monetary institutions were tied, fluctuations in the exchange rates were very limited if not altogether impossible. This was the incalculable advantage of a gold currency.

Capital could be used for short-term as well as long-term transactions. Trade and industry were able to plan ahead. Especially the automatic mechanism and the rules of decent behavior in monetary affairs observed at the time liberated the value of money from the impact of governments’ whims. They substantially stabilized it on a worldwide basis. Despite all assurances by the monetary reformers, no reasonably equivalent replacement has been found in the meantime.”

Economist Ludwig von Mises wrote in his book Human Action4):

“The gold standard was the world standard of the age of capitalism, increasing welfare, liberty and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface… and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another...

The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard.”

Before Alan Greenspan5) 6) sold his soul, he described the gold standard as promoting prosperity and freedom.

According to him at the time, only this monetary system could prevent the chronic deficit spending of the welfare state and the recurrent speculative excesses of the financial world that result in depressions. He believed that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other. A true division of labor economy cannot exist without gold.

The era of the gold standard during the 19th century was the golden age of the white man, as well as Japan. During this period, after Napoleon, there were only seven wars of any consequence.

Post-Napoleonic wars in the 19th century
1855 Crimean War
1861-65 American Civil War
1866 Austro-Prussian War, North German Confederation
1870-71 Franco-German War
1877-78 Russian-Turkish War, Congress of Berlin
1894-95 Sino-Japanese War
1900 Anglo-Boer War in South Africa
And furthermore: There was no terrorism of the scope we know today.

Assertion
I assert that if the gold standard had been maintained and if the warring nations had kept on observing the rules of the gold standard, World War One would not have lasted very long at all. Because of the automated mechanism and the prevailing rules of decent behavior at the time, financing the war on credit in a Keynesian fashion would not have been possible. (Parenthetically, Swiss historian Jacob Burckhardt describes Keynes as one of the great destructive forces in world history, along with Karl Marx.) Soon after the onset of World War One, the moment came when the world turned to monetary fraud. Political pressure to finance the war by issuing bonds made it impossible to pursue a sane monetary policy and drove the currencies to ruin. Without deficit financing, the war would have lasted for 6 months at the most. But without the discipline of a gold-backed currency, it went on for 4 1/2 years. The world lay in ruins, and millions of young people, indeed an entire generation, were lost on the battlefields.

The demise of the gold standard topples the old world order
The catastrophe of World War One also signified the passing of the old world order. Stefan Zweig’s book Die Welt von Gestern7) (The World of Yesterday) describes how comfortable the world was before the war. Financing the war had a particularly ruinous effect on Germany, the country with the most robust and thriving economy at the time. The Reichsbank financed a large part of the war expenditures on a short-term basis, i.e. not with long-term War Loans like the British. This fact, in addition to the Treaty of Versailles and unreasonable reparation payments, led to hyperinflation, to the destruction of the middle class and, finally, to Hitler. It thus set the stage for World War Two. Look at what the shortsighted socialists have made out of the economic miracle with their welfare state: a lamentable Germany.

The monetary tragedy of the 20th century
The return to the gold standard after World War One was a fait accompli. But it lacked wisdom and conviction on the part of those in charge. At the Conference of Genova in 1922, the gold exchange standard was introduced.

Please note that it was not the gold standard that was reestablished, but rather the watered-down gold exchange standard that was launched. This meant that, apart from gold, the central banks could also dollars and pounds (i.e. the currencies of the triumphant nations) as reserves. Suddenly, dollars and pounds were equivalent to gold. That was inflationary because dollars and pounds were now accounted for twice: first in the country where they were issued, and second in the country that held them in reserve.

Furthermore, it should have been obvious that these paper currencies were in no way immune to losses in purchasing power. Therefore, they could not be lasting and generally valid yardsticks. Gold always retains its value – paper currencies do not. One of the most catastrophic decisions in monetary history also occurred when despite the emergence of inflation in the meantime, Winston Churchill, as Britain’s Chancellor of the Exchequer, chose to maintain the gold parity at the same level as it had been in 1914 instead of devaluing the pound. The Fed, facing a mild economic downturn in the USA in 1927, began providing large amounts of liquidity to the banking system. Moreover, it wanted to help out the Bank of England, which was losing a lot of money at the time because fixed income investments in the USA were more attractive. In order to lower the interest rate level, the Fed thus pumped even further liquidity into the system. This money eventually made its way to the equity markets, and the situation got out of hand in 1929. When the authorities decided it was time to stop the boom, it was already too late. The USA’s economy collapsed and dragged the world into the Great Depression of the 1930s. To this very day, the proponents of planned economies blame the gold standard for this debacle. But there was no gold standard anymore. If there had been, it would have worked at the time.

Central banks, banks and wars
When the gold standard was abandoned, central banks were the last barrier to rampant money creation, as long as they were able to maintain their independence. In the meantime, however, we have learned from bitter experience just how ineffective these so-called keepers of stability have been. Central bank independence did not turn out how it was intended to be. Central banks became compliant pawns of the governments. Indeed, it is precisely the central banks and the banking system that, through their creation of credit, have made deficit spending and war expenditures possible, and even promoted them in many instances. In his book Debt and Delusion8), British economist Peter Warburton places most of the blame for the deterioration of economic and financial policy since the early 1980s on the central banks. There are no golden brakes anymore.

The Federal Reserve System
The most ominous and threatening event in central bank history was the establishment of the Federal Reserve System in the USA in 1913. The Bank of England and Germany’s Reichsbank served as a model. If you do not appreciate at the moment why I view the foundation of the Fed as ominous, I advise you to read the book The Creature from Jekyll Island – A Second Look at the Federal Reserve System by G. Edward Griffin9). Under the pretext of protecting the public against bank crashes and maintaining a stable value of money, the US Fed (which is not federal at all, but rather very private) is a cartel that is designed to protect its members against unwelcome competition and, in the event of losses, to pass these on to taxpayers. Its foundation flies in the face of the American Constitution envisioned by the founding fathers. Presidents like Thomas Jefferson and Andrew Jackson were always against the establishment of a central bank. It came into being in a very devious manner, as the Federal Reserve Act was pushed through Congress just prior to Christmas of 1913, when most delegates were already at home with their families. Its foundation violates the American Constitution, which states that only gold and silver should be considered legal tender.

Mr. Griffin recommends abolishing the Federal Reserve System for the following reasons:

The Fed is incapable of achieving the goals it has set for itself, namely maintaining a stable value of money. Since its foundation, the value of the dollar has fallen by more than 95%.
It is a cartel that violates the public interest.
It is an outstanding instrument for promoting exorbitant pricing by the banking system.
It creates highly unfair taxation.
It encourages and abets wars.
It destabilizes the economy.
It is an instrument of Totalitarianism.

The state, or more precisely, the welfare state
Economist Wilhelm Röpke, one of the men behind Germany's economic miracle10), once said: “One can venture the claim that governments very rarely had complete control over their currency without abusing it. In today’s age of the welfare state, the probability of such abuse is greater than ever before.”

Today the gold standard is needed more than ever, for we all know from bitter experience that politicians cannot be trusted. The current political establishment will therefore stubbornly resist any attempt to introduce a gold-backed currency because such a currency would make it impossible to maintain today’s welfare state. The welfare state’s existence is predicated on government deceit of the citizens since it bears the most responsibility for the eroding value of money.

The unfortunate decisions made at Bretton Woods in 1944
The world had not learned anything at all. At the end of World War Two, it was decided to introduce the gold-dollar standard. The USA was thus granted the appalling monopoly to settle its debts with paper money it printed itself, which Charles de Gaulle referred to as the exorbitant privilege. Nobody could have resisted such temptation. A direct result of this was the inflation of the 1970s.

I ask you to consider the fine points: After World War One, we went from the gold standard to the gold exchange standard with dollars and pounds. Then after World War Two, we then proceeded to the gold-dollar standard. The pound had lost its previous stature in the interim and was no longer suitable as a reserve currency. As a sign of the USA’s growing economic power, apart from gold the dollar remained the world’s only valid reserve currency.

When President Nixon unilaterally abandoned this arrangement on 15 August 1971, it was tantamount to the bankruptcy of the USA. The era of floating exchange rates began in 1973. That fully opened the floodgates for money creation, credit expansion, deficit spending and speculation. As far as the ominous foundings of the IMF and the World Bank are concerned, we don’t have time to discuss them in depth today. Suffice it to say that there is no doubt that both institutions encouraged and supported Socialism around the world.

Today’s international order as a consequence
In a speech on 7 August 2002, President George W. Bush said the following: “There is no telling how many wars it will take to secure freedom in the homeland.” With this comment, Mr. Bush announced that there might not only be a war against Iraq, but many wars around the globe. He did not define when a war would be considered won or lost. This means these wars may continue indefinitely. Once again, they will be financed by deficit spending and through the banking system. This would not be possible under a gold standard.

I will now take a closer look at how the USA will be able to pay for these wars. In principle, the USA is bankrupt. The trade balance deficit is approaching 600 billion dollars, the budget deficit exceeds 500 billion dollars, and its foreign debt is enormous.

The USA has indeed already been bankrupt since 15 August 1971. That was the day America escalated its war on gold. Not unlike a banana republic, the USA defaulted on its obligation to redeem dollars for gold. If you are bankrupt, you theoretically should not be able to wage any wars. Under the discipline of the gold standard, it certainly would not be possible. Despite this, however, the USA can wage war and simply pay for it with its unbacked paper money, with fake money so to speak.

Who, then, actually pays for these wars? The answer is simple: We all do! It was the same in the case of Kennedy’s and Johnson’s Vietnam War. The world helps to finance the deficits, and the Americans wage the wars. That is ultimately the disgraceful result of abandoning the gold standard. But nobody notices, or is willing to admit it. That’s how it is: We are all partly to blame.

The 20th century and the onset of the 21st century
Contrary to the 19th century – with its solid and inflation-free growth, notable currency stability and relatively small number of wars – the 20th century was marked by inflation, hyperinflation, currency and trade wars, waves of speculation and military conflicts. The 20th century also brought two world wars, hundreds if not thousands of local wars, hundreds of millions of casualties, wholesale genocide, mass migration, worldwide monetary erosion, economic ruin, gigantic slums, the Aids epidemic and, ultimately, the decline of civilization.

Why are there wars?
Among the various motivations for international disputes that have ultimately led to war, economic reasons have undoubtedly been the most significant – from the primeval struggles for hunting territories, pastures, salt mines and fertile valleys, to the predatory attacks and conquests of the seafaring and trading nations, all the way to modern battles for living space, sales territories and, the most important motivation of all, access to natural resources. However, domestic political problems have also played a large role. Wars have frequently been started to divert attention from problems on the home front.
In the Middle East, both aspects have been important to the Americans, namely:

Control over the oil resources of the Middle East

Distraction from the disastrous condition of the US financial system

Saddam Hussein was only a pretext. Let’s not forget that the USA had previously built him up and supported him as a buffer against Iran.

There is one more reason, however, and that is the unbelievable arrogance of the US government. But now the arrogant leaders in the USA are feeling the backlash. First this is a war that can’t be won, and second it is doing even more damage to the dollar. Wars have always undermined the purchasing power of currencies. Whereas a gold coin from the time of Alexander the Great still shines as it did then, paper currencies are destined to revert eventually to their intrinsic value, and that is nil.

The Germans know a thing or two about that. They suffered a total loss after World War One, another total loss after World War Two, and were ultimately admitted to the European Monetary Union, thus accepting the euro as their currency. And this all happened in less than a century.

Gold is freedom
Not only is there a correlation between gold-backed currencies and war, but also between gold-backed currencies and freedom. In a famous essay entitled Gold and Economic Freedom5) that current US Fed Chairman Alan Greenspan wrote in 1966, he said the gold standard promotes prosperity and freedom. When we recall that one of the first official acts of Lenin, Mussolini and Hitler (and, by the way, Franklin D. Roosevelt) was to forbid the private ownership of gold, this relationship becomes clear. Even now, the price of gold is still manipulated each day and kept artificially low. Those in power want to maintain the fictitious status of the dollar, at least for as long as possible. In my book Gold Wars11), I described this manipulation.

Why is gold being manipulated?
Gold is indeed being manipulated each day by a clique of reckless financial wrongdoers. The following chart shows the gold price movements and manipulation over a one-day period. You can clearly see what is happening here.

Normally, the price of gold rises in Europe, but as soon as the COMEX opens in New York it is driven downward – more on some days, less on others. And this takes place without regard to the harm, and by that I mean the economic damage, that it causes throughout the world.

Why are these financial wrongdoers interested in manipulating gold?
In each and every discussion about the future of gold and its price, one thing needs to be clearly understood:

GOLD IS A POLITICAL METAL.
And this is so for the simple reason that given its historical role as money, gold just isn’t compatible with the modern financial system. Up to 15 August 1971, there was never a period in history during which no currency was linked to gold.

The world’s history of currencies is full of examples of devaluations, coin clipping and bankruptcies. Yet it was always possible to switch to other currencies that were backed by gold. But if you disregard the Swiss franc, this has no longer been possible since 1971.

All of the economic, monetary and financial catastrophes of the past 30 years can be traced back to this event.

Today’s system of unbacked paper money is still very young. It relies solely on faith – faith that the debts upon which it is based will be repaid someday.

A single, one-off event that could shake this faith, and thus the foundation of the financial system, is a robust upsurge in the dollar price of gold.

That is the entire reason why gold is manipulated each day.

But we know from the history of the Gold Pool in the 1960s that gold cannot be manipulated endlessly. At the time, the central banks tried to fix the price of gold at 35 dollars an ounce. The Gold Pool fell apart on 17 March 1968, and the entire pitiful experiment became the object of ridicule.

Gold is very cheap today because the governments of the world tamper with its price on a daily basis.

Where do we stand today? In a world at war and in crisis!
We are in the midst of a global currency and devaluation war.
The world’s reserve currency, the dollar, is weak because of the USA’s alarming financial situation – more than 34 trillion dollars of debt, 200 trillion dollars of derivatives and some 10 trillion dollars of obligations outside of the official government accounting. (And just think, in 1997 there were fears that the global financial structure would collapse due to a single hedge fund, Long Term Capital Management, with total assets of 3 billion dollars.)
The money supply is increasing dramatically in the USA and worldwide.
The stock markets currently resemble casinos; they are overvalued and dangerous. The Dow Jones Index is manipulated each day by the Working Group on Financial Markets (established in 1987 by President Ronald Reagan). There are no free markets anymore.

The insiders are getting out.
We face negative interest rates (i.e. inflation exceeds interest income), which are bad for investment and the economy.
There is a deficit between gold production and demand – central banks have loaned out 1/3 to 1/2 of their gold. The gold is gone. Panic could ensue if people realize that gold is the only safeguard of monetary value and that a large portion of the central banks’ gold has been sold.
The mountainous debt has reached historically high levels worldwide. This will place an onerous interest burden on the young generation and may be impossible to finance. It could result in panic or might be dealt with through inflation.
The current erosion of money is catastrophic for wage earners and retirees. The Middle Class is being squeezed. A billion people around the world live in poverty stricken areas. Soon, one out of every three city dwellers will live in slums. Such conditions will promote the spread of radicalism. Hate is growing.
The global economy will be in a Kondratieff winter over the next 10 years. Humanity has managed to overcome every crisis up to now, but given the current means of monetary degradation, it will not get through this crisis without serious consequences.

Political confusion is on the rise.
The geopolitical situation has never been so bad. A coup in the Kingdom of Saudi Arabia could, by itself, have a disastrous impact on the flow of oil and the global economy.
At this point, allow me to provide a quote from a speech given in Washington D.C. in 1948 by Congressman Howard Buffett, father of the most successful investor of all times, Warren Buffett:

“Because of our economic strength, the paper money disease here may take many years to run its course. But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife. That was the way out for the paper-money economy of Hitler and others... For if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue – the restoration of your freedom to secure gold in exchange for the fruits of your labors.”

Ladies and Gentlemen, these are the subtle relationships between freedom, money, intellect, war, peace and gold.

Ladies and Gentlemen, I believe I have now provided sufficient reasons for the necessity of a healthy, stable currency based on gold. It is the only solution! We must go back to honest money, back to the gold standard.

Or as Otto von Habsburg once said: “Ethics and morality are still the safest approach to take in all fields

In conclusion, I will therefore allow two other gentlemen with a renowned grasp of world affairs to speak out on the topic of a gold-backed currency. The internationally recognized investment consultant Harry Schultz has given us one of the best definitions of the gold standard: Standards: (gold and other)

I have written several times in the last 36 years and I want to restate this principle with force: I am pro-gold regardless of the price! I don’t fight for gold in order to make a profit on gold shares, bars or coins! Gold is important for far more important reasons and I would be embarrassed to promote gold only for monetary gain. Gold is the essential linchpin for our individual (not group or nation) freedom. Gold belongs to the monetary system as a governing factor. We belong back on the gold standard. I used to compromise and say a quasi-gold standard will probably do, a modified Bretton Woods version. And that may be what will evolve, but in my view we should fight for a pure gold standard, the old-fashioned form, because it worked! And not just for fiscal reasons! It forced nations to limit their debt, spending and socialist schemes, which meant sound behavioral habits were formed around those limitations, and those habits rubbed off on everyone. People were more honest, moral, decent, kind, because the system was honest and moral. Cause and effect. Today we have cause and effect of the opposite standard: no limits on what governments can do, control, dictate; no limit on government debt, welfare or socialist schemes. There is no governor on the government.

This habit rubbed off on the public, causing them to go into debt, lose respect for the system and morality. The effect brings us more divorce, fraud, crime, illegitimate births, broken homes. When the money of any country loses its base/backing there is no standard for any behavior. Money sets a standard that spreads into every area of human activity. No paper money backing, no morality. That is why gold coin money worked so well and why the US moved into paper money very slowly, carefully, keeping the paper dollars backed 100% by gold. But slowly, like slicing a sausage, that backing was removed in stages, ‘til now there is none. The effect of this cause is all around us. Violent films reflect violent society reflect no respect throughout society. Layer by layer, we are corrupted when money loses certainty. Today’s stock market bubble is part of the scene as will be tomorrow’s mega-crash and mega-recession. Big Brother was made possible through the absence of automatic controls and loss of individual freedom via non-convertible currency. So, pass the word. Fight for gold. Not for profits, though they are helpful and help us fight for individual freedom, but for a future that returns to sanity in various standards. If we have a gold standard we get a golden human standard! The two are intertwined. They are the ultimate cause and effect. Gold blesses.”

Charles de Gaulle, President of France, gave his country the greatest gift he could offer: He restored France’s confidence.

On 4 February 1965, he said::

“The time has come to establish the international monetary system on an unquestionable basis that does not bear the stamp of any country in particular. On what basis? Truly, it is hard to imagine that it could be any other standard than gold. Yes, gold whose nature does not alter, which may be formed equally into lingots, bars or coins; which has no nationality and which has, eternally and universally, been regarded as the unalterable currency par excellence.”

I thank you!

Ferdinand Lips

Speech given by Ferdinand Lips
at the University of St. Gallen on 24 June 2004 as part of
the International Finance & Security lecture series

by Paul B. Farrell, MarketWatch

30 'leading edge' indicators of the coming Great Depression 2
Every day there is more breaking news, proof Wall Street's greed is already back to "business as usual" and in denial, grabbing more and more from the new "Bailouts-R-Us" bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas -- anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 "leading indicators." Each problem has one or more possible solutions, but lacks unified political support. Time's running out. We're already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

1. America's credit rating may soon be downgraded below AAA
2. Fed refusal to disclose $2 trillion loans, now the new "shadow banking system"
3. Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse
4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this yea
6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
19. Corporate bond market, both junk and top-rated, slumps more than 25%
20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
21. Unemployment heading toward 8% plus; more 1930's photos of soup lines
22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
23. China's sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
24. Despite global recession, U.S. trade deficit continues, now at $650 billion
25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
26. Now 46 million uninsured as medical, drug costs explode
27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
28. Outgoing leaders handicapping new administration with huge liabilities
29. The "antitaxes" message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises
No. 30:
At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.

He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government."

Reuters concludes: "Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. 'I just want to get people thinking about this, and to realize this is a road to disaster,' said Whitehead. 'I've always been a positive person and optimistic, but I don't see a solution here.'"

We see the Great Depression 2. Why? Wall Street's self-interested greed. They are their own worst enemy ... and America's too

Bullionmark's comments:
.....and the world too!

As forecast the bullish bias on both gold and silver materialised last week. The levels of $1168AUD for gold and $9.60USD for silver now become important levels of support. Some retest of these levels may be seen early next week but the path of least resistance is up from here.

Gold weekly (in $AUD) click on chart for larger view
Our short term targets forecast last week were achieved. Should gold break above $1300AUD we will see a quick move to $1415. An impulsive move could see $1450AUD a point of very strong resistance. Good support is now in place at $1150AUD.




Silver daily (in USD)click on chart for larger view
Silver tested and held our $8.93 resistance levels this week. The predicted bounce to $9.60USD was achieved with Fridays strong rally. Strong closes on a Fridays are a bullish signal. With the $9.63USD target achieved it should now provide solid support. We expect a run to $10.50USD this week with a breakout target of $13.50USD soon. Big moves may be coming for silver.

Gold. People either love it or hate it. There aren't many who feel ambivalent toward it. Unfortunately, gold is deeply misunderstood by investors, and that misunderstanding is hurting their portfolio returns. Many in the investment community trot out the old myths about gold: that it is a bad investment; that it is very risky; that it is not a good inflation hedge. But is there anything behind these assertions? If investors take the time to examine the facts, these commonly held beliefs simply do not stand up to scrutiny. It is precisely because these myths have become so prevalent that gold is still undervalued. Once the general public realizes these beliefs are not valid, the price of gold will be much higher.

MYTH 1:
GOLD IS A BAD INVESTMENT
A frequently cited argument is that since it peaked at $850 per ounce (all amounts in U.S. dollars unless otherwise noted) in 1980, gold's return has been poor compared to the major stock indices. However, that peak price was a short-lived, single-day aberration. Investors who avoided the mania phase and purchased gold one year earlier in 1979 at its average price of $306 per ounce also avoided any significant losses during the subsequent bear market. The performance of different asset classes varies from cycle to cycle. The previous cycle from 1968 to 1980 saw the Dow Jones Industrial Average remain flat with significant volatility, while gold increased by 2,300 percent. In the current cycle, which began in 2002, gold has posted a compounded return of 14 percent, while 15 of the 30 Dow components are negative.

Many studies compare gold to equities over peri-ods as far back as the 1700s. But these studies ignore the fact that gold's price was fixed until 1971. Prior to that time, gold was money and not an investment. Interestingly, virtually none of the stocks listed in the 1700s still exist today. Instead, the returns of major indices such as the Dow are boosted by the removal of bankrupt companies and poor performers, which are replaced by high performers. Three of the 30 companies that made up the Dow in 2000 have since been replaced.

From a strategic portfolio allocation viewpoint it is easy to see why Ibbotson Associates, one of the world's most highly regarded asset allocation specialists, determined that holding between 7.1 percent and 15.7 percent in precious metals bullion reduces portfolio volatility and improves returns.

MYTH 2:
GOLD IS NOT A GOOD INFLATION HEDGE
The arguments against gold as an inflation hedge are usually based on calculations arising from the intra-day price spike in 1980. While gold did not keep up to inflation using daily prices from 1980 to 2002, the annual average gold price has kept up extremely well since 1971, when the price was no longer fixed, Figure 1. During the same timeframe, the U.S. dollar lost about 80 percent of its purchasing power. In fact, all the world's major currencies have depreciated by significant amounts due to continuous excessive increases in the money supply. The impact of this devaluation on real returns is significant.

Conversely, gold has not only maintained its purchasing power but increased it against all major currencies. It will continue to do so as long as the world's central banks keep increasing the money supply by a greater percentage than their country's GDP growth.



More importantly, gold maintains its purchasing power not only during inflationary periods, but also during deflationary periods. An extensive study, published by Roy Jastram, analyzed the purchasing power of gold in England and the U.S. from 1560 to 1976. Jastram concluded that gold held its value remarkably well over time. The purchasing power of gold and precious metals actually increases during deflationary periods because other assets decline in price by a much greater amount than precious metals do.

As central banks continue to accelerate the pace at which money is printed, inflation will increase, and the purchasing power of paper currencies will decline. This will result in more and more astute investors fleeing to the safety of gold. As a con-sequence, gold's price should rise far in excess of the Consumer Price Index and the true inflation rate. In order to protect portfolios from rising inflation, Wainwright Economics concluded that an all-bond portfolio would need an 18 percent allocation to gold, silver and platinum, while an all-equity portfolio would need 40 percent just to stay ahead of inflation.

MYTH 3:
GOLD IS A RISKY INVESTMENT
Risk means different things to different investors. A pension fund may perceive risk as a failure to meet its liabilities, whereas an asset manager may view risk as a failure to meet its benchmark. Most investors, however, associate risk with a loss of their capital or underperformance of their invest-ments in comparison to their expectations. "Risk comes from not knowing what you are doing," according to Warren Buffett.

There are many kinds of risk: currency risk, default risk, market risk, inflation risk, systemic risk, political risk, interest rate risk and liquidity risk. While all of these apply to financial assets, many do not apply to gold bullion. Physical bullion is not subject to default risk, liquidity risk, political risk, inflation risk or interest rate risk. In the rare circumstance of strong currencies, gold may be subject to short-term currency risk and, at times, to market risk. Unlike financial assets, however, gold bullion cannot decline to zero. Gold is the only asset that can protect wealth from non-diversifiable systemic risk.

Volatility or standard deviation are often used as measures of risk, and gold is considered to be quite volatile. However, when annual compounded returns are plotted against standard deviation, the individual Dow stocks are all more volatile than gold, and all but two of the Dow stocks had poorer performance than gold, silver, and platinum over the past eight years. Figure 2.



Returns are important, but even more important is to compare risk-adjusted returns. Clearly, an investment that has higher volatility may still be attractive if the returns are appropriately higher. Nobel prize-winning economist William Sharpe devised the most commonly used measure of risk-adjusted performance: the Sharpe Ratio. This ratio measures the amount of excess return per unit of volatility. The interpretation of the Sharpe Ratio is straightforward: the higher the ratio the better.

Bullion is unlikely to suffer underperformance risk in the near future. Demand for gold, silver and platinum is increasing for both commodity and monetary attributes, while annual mine production is declining. As the price of oil continues to rise due to production declines and increased demand, inflation will accelerate. As central banks increase money supply at accelerating rates, the purchasing power of currencies will continue to decline. As these two major trends interact with each other, the price of gold will continue to rise.

MYTH 4:
GOLD DOES NOT PAY DIVIDENDS OR INTEREST
The Bank of England used this argument to justify selling half the country's gold holdings at the bottom of the market in 1998. It wanted a "safe" investment, one that would generate interest, and it chose U.S. treasury bills. The gold was sold for under $300 per ounce. In the months following that sale, the price of gold tripled, and the value of the U.S. dollar lost 30 percent against the British pound. The currency exchange losses plus the opportunity cost resulted in billions of pounds in losses, significantly offsetting any interest income the Bank might have received.

The same is true for bond investors. In an infla-tionary environment, the "real" or inflation-ad-justed interest rate they receive is often negative. Gold, like any other asset that sits in a vault, will not earn interest or dividends, but neither is it at risk. No asset class generates income unless you give up possession and take the risk of not getting it back. However, gold's capital appreciation is many times greater than the prevailing interest yields, while not being subject to any of the risks that interest-bearing investments are subject to.

MYTH 5:
GOLD IS AN ARCHAIC RELIC
Gold is often referred to as an archaic relic with no monetary role in today's modern digital society. Several facts contradict this view. The world's central banks still hold 29,000 tonnes of gold in their reserves. Gold, silver and platinum trade on the currency desks - not the commodity desks - of the banks and brokerage houses. The turnover rate of physical gold bullion, between the nine members of the London Bullion Marketing Association, currently averages $24 billion per day. Trading volume is estimated at seven to ten times that amount. Clearly, gold is still trading in its traditional role as an alternative currency.

MYTH 6:
MINING STOCKS ARE BETTER INVESTMENTS THAN BULLION
While mining stocks can generate impressive returns during an uptrend in precious metals prices, they do not always outperform bullion. It is unfair to compare junior mining companies to bullion because of the huge disparity in risk. While successful junior miners can generate impressive returns, over 90 percent of precious metals discoveries never become productive mines. A better comparison would be the larger producers. While mining stocks have outperformed bullion during the early stages of this bull market, gold bullion has outperformed the major mining indexes since March 2007. Figure 3.

Mining stocks tend to be significantly more volatile and risky than bullion, and during sharp market declines they tend to follow the broad equity markets downwards -even if the price of the metal is rising. During the late stages of the bull market of the 1970's, mining stocks underperformed bullion. In order to adequately compensate investors for the higher risk, mining stocks would have to outperform bullion.



CONCLUSION
Investors who take the time to carefully evaluate the benefits of bullion will realize that these com-monly held myths do not hold up to scrutiny. Those investors stand to reap significant rewards. Investors who believe these myths are missing out on the opportunity to add an asset class that diversifies portfolios, protects against inflation, and may provide better returns than traditional assets, such as stocks and bonds.

Under a worst-case scenario of systemic risk, bullion may be the only asset that holds its value. As these myths are dispelled and the price of bullion rises, as many mainstream analysts predict, informed investors will benefit from purchasing bullion at today's undervalued prices.

When the public at large becomes fully educated with respect to precious metals, it will bid up the price. Considering that global financial assets are estimated at over $180 trillion, while total global above-ground gold is only $4 trillion (and above-ground bullion is less than $1.5 trillion), a massive wealth transfer event is likely to occur. It is inter-esting to note that even a 10 percent switch from financial assets to gold would result in a 450 percent to 1,200 percent increase in the gold price.

Amazingly, while gold and other commodity related stocks continued to be sold off to levels that are at deep discounts to their intrinsic value in October, gold continued to break to new all time highs in most major currencies. On October 9th and 10th gold recorded new all time highs in many currencies including the Euro, the Australian Dollar, British Sterling, the Indian Rupee, the Russian Ruble, the South African Rand and many others. The Dow Jones Industrial Average Stock also recorded a multi decade low in terms of gold. Investors are getting a very much skewed view of gold’s performance if they are viewing it in terms of the US Dollar or Yen. These are the two main currencies that have been used as cheap funding sources allowing speculators to take on incredible degrees of leverage to invest in higher yielding assets with much better fundamentals. The excessive debt is being unwound causing a very unnatural rise in the dollar as overleveraged investors raise dollars to pay down their excessive debt. This has caused an unlikely gift from heaven for foreigners holding dollars to sell their dollars which are being printed like at no other time in history while at the same time they are rising in value due to the even bigger buying by debtors selling other assets to pay down debt. The same is happening to the yen which is why in these two currencies gold has not yet recorded another new high like it has in the majority of other currencies.

The manipulative attacks on gold and silver are getting more and more desperate and obvious to the masses. You could say the action on October 10th went just a little too far to the point where even the mainstream press and media are commenting on the price discrepancies between paper silver and gold trading on the Comex and physical silver and gold which is ever more difficult to find available at any price. While the stock market was melting down on that day, gold went from up $40 to down $75 in a matter of hours. Silver went from a high of $12.32 to a low of $9.42 as well. Meanwhile in the physical markets for silver the best price I could find for silver was $16.50 per ounce, a whopping $7+ over the “market” price on the Comex. That is an incredible 75% premium! One ounce silver coins go for more than double the spot price on eBay. The manipulation has become so obvious we are seeing a steady decline in the weekly Commitment of Trader’s Report open interest figures for gold and silver. Could it be that investors are finally realizing that market is a total scam? The manipulators have been so outrageous, they are precipitating their own downfall as Comex longs are increasingly demanding delivery rather than rolling forward. After all, you can take delivery and now sell it for as much as a 75% premium in the physical markets on eBay, for instance. At this rate they are in huge danger of having their scam market revealed since there isn’t more than a fraction of the silver available for all of the demand which has been growing rapidly in recent times. This should soon result in a reemergence of demand for gold and silver equities as the convenience of the futures market and very probably the gold and silver ETFs are called into question. When the fraud is removed, be prepared for the biggest gold and silver stock rally of all-time. Right now the stocks are being sold with no attention to the underlying attributes of individual shares. While many gold and silver stock investors have had enough and want out at any price, those buying in this selloff are picking up stocks of companies trading at less than ONE! times earnings or cash flow and as little as 30% of the cash companies have in the bank. I don’t know if there has ever been a time in history where a group of stocks has traded so cheaply while their operations have performed so strongly and that is despite tremendous manipulation and suppression in their underlying products which are priced way below what they will be in a free market.

How could this have happened? This is what we have heard from insiders that witnessed some of the actions which engineered the selloff in the commodities sector.

Back in July, days before Fannie Mae and Freddie Mac were to be rescued, Bernanke and Paulsen were faced with a horrendous Consumer Price Index release of +5.4% which had already been deceptively massaged lower through various methods such as substitution, hedonic pricing, and geometric averaging, generating a number so low it bears no relationship to reality. Even with all the massaging lower of the CPI it was felt it had reached a level that would be most worrisome to the masses, particularly since gold and silver were working their way toward new highs recorded in March right around the time Bear Stearns blew up. Incidentally, it has recently been discovered that Bear was likely attacked by other financial firms since it was long $12 billion in gold derivatives and was not doing its part in the gold suppression scheme. Bear was no more bankrupt than all the other major banks and brokers, however, with the incredible leverage these organizations have taken, (most all are leveraged over 30 to one), a rumor about such a firm’s liquidity will soon become a self-fulfilling prophecy since there is constant refinancing going on.

Paulsen knew that top performing hedge funds had been making a killing riding up the long term wave of higher commodities and shorting financials. He was already validated in 2006 by his successful efforts to drop energy prices by getting his ex-employees at Goldman to change the weighting in the widely followed Goldman Commodity index over night. This caused a cascade of selling by indexers when the surprise change hit the press. The scrambling resulted in the failure of Amaranth, a large hedge fund specializing in energy which caused more selling.

This time it has been reported that in July, Paulsen went to big institutional investors such as CALPERS which had big exposure to the well positioned commodity sector and after relaying the seriousness of the condition of the financial system, persuaded them to sell their commodity related investments “for the good of the nation”. He wanted to turn the inflation scare suddenly to a deflation scare. With a few big institutional investors leading the way combined with rampant naked short selling of gold and silver equities by the likes of Goldman reported by Canadian brokers, a wave of selling in this area was put in motion that snowballed. The illogical selling resulted in broken technical patterns of stocks resulting in more selling. This has resulted in a high level of redemptions in gold funds that forces managers to sell even when the stocks trade lower than the cash the company has in the bank. A way to check if this is what happened is to analyze individual companies and see how they have performed. For the most part there is nothing that should result in a selloff, as these businesses are among the strongest in the world today despite suppressed prices for gold and silver that would be much higher at this time.

It is truly a disgrace that the modus operandi of our financial leaders is to send false signals to the marketplace and cause cascading selling and buying after having those in the know positioned to take advantage of the effect. That could have another name – robbery. The bifurcation between the price of the physical gold and silver market and the “market price” as represented by the Comex is an indication that a vast number of participants in these markets have come to the realization, finally, that the market price on the Comex is a total sham. It is most unfortunate that those that have invested in gold and silver to protect precisely against the financial dislocations that have accelerated since Bear Stearns was driven to insolvency, are putting in for redemptions or selling personally because “something is wrong”. Physical gold and silver in your own possession can not be ruined although its perception can be tainted by those that believe the fraudulent pricing from the Comex actually means something. Gold and silver are the mortal enemies of fiat money since fiat is always eventually abused to the point of worthlessness. Since the very banks which have an interest in seeing gold and silver discredited have access to unlimited borrowings from the Fed and have no restrictions whatsoever from driving the price of the metals and the stocks down, you can not rely on any message that lower prices of these invaluable assets is bringing. There are huge numbers of investors that are currently paying 70-100% over Comex prices for silver and 15-20% over for gold. These people are clearly not paying attention to what the Comex “market” reflects. Gold and silver serve a very special function in the protection of one’s assets and in a fiat money system gone totally out of control that is even more true. Investors need an appropriate weighting in precious metals that should not be sold because a line has been broken on a technical analysis chart. Even though it does not seem to be working while it is apparent that it should, it is the type of asset that will probably work all at once, when the constant manipulation is suddenly overcome by natural forces. Central bankers and the money powers are masters of all things paper. They very cleverly found a vulnerable area to exploit when they noticed hedge funds were very long in this area and that they were using excessive leverage. With a little cooperation from a handful of very large institutional investors they were able to initiate a domino effect of selling making this traditional safe haven look totally ineffective while in reality the selling is a result of holders using leverage and self defeating stop losses that takes them out of the sector when it is most needed. Those that were overexposed or leveraged in this area should bring their weightings down to an appropriate level but to abandon the sector completely at this time is very foolish. Gold and silver should protect assets from either inflation or deflation; however, a very rocky period before that protection becomes apparent should not be totally unexpected and reflects no understanding of what the recent manic money creation will bring about. The huge losses being experienced now are more due to not understanding this than anything else. Stocks can protect somewhat in a period of inflation but bonds would be lethal and unrecoverable. Deflation would make highest quality bonds acceptable but stocks would suffer. Cash would only protect in the case of deflation or in the initial stage of inflation coinciding with the period before that inflation rolls into the real economy. That is probably what is occurring now and you should be protected in t-bills until it is apparent that inflation is going to be so high that your purchasing power will be wiped out rapidly. In an era when most all major banks are recklessly leveraged at 30-40 times their equity it is clearly not safe to have much cash vulnerable to likely bank failures. To do a check on these statements look at the evidence from the Bank of International Settlements. Despite the belief that banks and financial companies are deleveraging there is almost triple the amount of derivatives as there was over a year ago at $1.4 quadrillion! The money powers are less in control every day and that is why the attack on gold and silver has been so vicious. They have been unsuccessful from stopping other countries and investors from pulling all the available gold and silver off the market and these are the holders that will have the economic power down the road. You can bet when all the leverage unwinding ends, the financial companies that were successful in engineering the selloff will be the new big owners of the stocks and metals that are being thrown away for less money than the companies have in the bank. Firms such as Goldman have vital information since they are among the largest prime brokers. They know how leveraged specific investors are and can use that info against them. One major prime broker raised their in-house margin requirements on mining stocks from 50% to 100% “because they are so volatile”. Obviously this resulted in more forced selling. They always pull out every trick in their bag to make sellers for what they want to buy. With the information they have in hand is it any wonder that the market can go up 900 points one day and then down 800 the next? They are gaming positions that should be privileged information. Ex-Goldman employees entrenched in key Government positions in many countries help the money powers influence policies such as continually attacking the gold and silver markets. In July, two US banks sold paper silver in a very short period of time equal to 1/4th of an entire year’s production driving the silver price from over $19 to around $12 in a few weeks time.

The Government and their agents have spent the last decade propping up zombie companies such as GM and the banks, and suppressing free market movements in gold and silver. They continue to add to the problem with the massive bailouts and money creation that is the key factor driving gold and silver up which is what they so foolishly are trying to stop. As derivatives positions blow up, the dollar gets a boost as failing counterparties try to raise dollars to pay off their failed bets. A very huge portion of the $1.4 quadrillion in derivatives is positioned directly against what the natural pull of a free market that would cause asset prices to move to. More specifically, interest rates on bonds would be very much higher, gold and silver would be very much higher, debt of most major corporations would be unsalable except at dramatically higher interest rates, etc. etc.

The key problem of the financial system is too much debt and leverage. All solutions so far to the key problem involve more debt and leverage. That is why derivatives have almost tripled since this crisis began over a year ago and we are no closer to a solution. Gold and silver are even better values now than ever. The $700 billion bailout which we were vehemently opposed to went to the banks and to furthering the goals of the financial powers which is not in your interest. Not a nickel of it has gone toward extending more credit to consumers, nor will be, you have been lied to. Guaranteed, some of it has gone to holding back the gold and silver price and from exposing the reality of the situation. Write your Congressman and complain, let them know you see what is going on. We do.

There are many money managers that clearly see what is going on and they have taken the appropriate steps to address the current scene. Managers such as Jim Puplava, Eric Sprott, John Embry, John Hathaway and many others have taken the correct steps. Their performance has not reflected that they are the correct steps but that will come in time unless we let the financial powers take from our very hands the investments that will protect us from their actions. No leverage whatsoever should be used in this environment. The only way you can have these stocks taken from you is if you are using borrowed money. Gold stocks, silver stocks, and uranium stocks have fundamentals so strong that they can not be hidden despite the unprecedented attempts to make them look bad. This is why silver trades as much as 100% above the phony paper markets. You should be increasing your exposure to these assets not withdrawing from them. The upside is absolutely unprecedented. Gold and silver stocks have never been cheaper relative to gold and silver than they are right now. If you are overexposed, cut back, do not withdraw completely. Do you own physical gold and silver? It is absolutely essential and can still be sold at close to all time highs despite the bogus paper markets. In this investment climate gold and silver should not only be a permanent part of your portfolio no matter how the investments respond in the turmoil, it should be an increasing portion. Physical metal is very difficult to acquire if you have waited to this point so do not give up on your gold and silver stocks. They have direct possession even if it is still safely below the ground.

Put the vast majority of your portfolio in cash generating gold and silver companies, there are many which trade below three times cash flow and even one times cash flow. Many, if not most, have more money in the bank than their entire market capitalization. Panic selling initiated by the Paulsen and Bernanke white wash did little to calm the nerves of the market place. It did shut off the escape hatch of gold and silver that will benefit like no other area when the money printing accelerates and escapes into the real economy. At that point, and we believe it is very soon, those that have sheltered themselves in cash and bonds will be annihilated and will be too afraid to move to the safety of gold and silver after what was just perpetrated. This is truly criminal activity, be aware of it and stay sheltered with an appropriate percentage of your assets.

The capital that has been cut off from mining will most definitely create an upward explosion in the price of gold and silver like nothing we have ever witnessed. Demand for gold and silver continues to mount, particularly on the investment side while supply is in the early stages of absolutely plummeting. Gold production was down 6% in the first half of the year and will be much worse in the second half. Some companies we spoke to are moving to slow their production because they feel the Comex prices are just ridiculous. We agree and are glad to hear they hesitate to throw away scarce product for an inadequate price. Silver production will likely skid sharply if the situation continues. The zinc price has dropped all the way back to .48 while industry breakeven is closer to the $1 mark. 32% of silver production comes to market as a byproduct of zinc and another huge portion over 25% comes as a byproduct of copper. The stage has been set for the most remarkable and likely rapid rebound of all time. The bull market in gold and silver and all commodities was catalyzed by a very long period of underinvestment and lack of capital. That situation is clearly being exacerbated by the events of the past five months which will cause an even more explosive upside than before. The supply side will be affected much quicker and deeper than any falloff in demand due to weak world economies. One can not just decide they all of a sudden would like to go find a new gold or silver mine or uranium field. Physical commodities must be priced above their production cost or the supply will simply dry up which is exactly what we are seeing in the gold and silver markets. Intervention can last for quite awhile but eventually the artificial prices result in ever bigger shortages and upward pressure on prices. People know that gold and silver should really be doing better now with all we have seen transpire this year so some people are using that as a justification not to buy it. As John Embry has said, “that is exactly the mindset the guys driving the price down are trying to create.” You can be sure when they can no longer drive it down they will be the big owners when it all bottoms.

Stocks in these sectors are trading at ridiculously low valuations based on earnings, cash flow, reserve values, and even just cash alone in the bank. This is clearly not a time to sell these companies yet investors have continued to do so forcing fund managers to sell stocks trading at a fraction of their real value to raise cash. As overleveraged hedge funds and investors sell investments and buy back dollars to pay off debt, the artificial strength of the dollar will persist until the debt is retired. Yes, believe it or not, there is global demand for the US dollar at a time when the country is fundamentally bankrupt which few yet understand in the US. This has all been set in motion by Paulsen and Bernanke with their scheme in July to twist the arms of big institutional investors to sell their commodity investments. The companies continue to report good earnings results even with the unnaturally low gold and silver prices. It is impossible to know exactly when the selling will stop since investors want out of the strongest performing industries remaining in the US. If they would only take a hard look at what they are selling the selling will stop but all things must run their course. The sad part is just as investors run to cash we are ever closer to seeing just how unsafe cash is. We have been wary of banks all year to the point of not allowing much cash to sit in them. Our worst fears regarding how unsound banks are has proven out. So far damage to depositors has been minimal as bigger banks that are in even worse shape have rescued bankrupt banks like Washington Mutual and Wachovia. Gold and silver continue to improve fundamentally with: wars on two fronts; huge, unprecedented and growing budget and trade deficits; ongoing financial crises with many more banks to go under; a recession that will uncover more financial problems; a flawed national energy policy; and improving supply and demand fundamentals. In addition, the monetary base is up over 50% over the past few months while other money printing to fund bailouts has even exceeded that. The Fed has kept its word that it is ready, willing, and able to print money in any quantity necessary to back these bailouts of the financial powers.

The uranium price moved down in October as hedge funds and financial players that were hoarding uranium metal were forced to sell in the deleveraging process. I was never a big fan of hoarding metal that already is experiencing shortages for its basic applications. Good for the electric utilities that got some material at a bargain price that they will find ever harder to acquire in the years ahead. The price has started to move back up over the past few weeks.

When you look at the actions of our Treasury Secretary and the Fed you have to question either their sanity or honesty, it is one or the other. The Government’s borrowing needs for next year are already expected to double to over $2 trillion. Contrast the recent bailout plan initiated by China with ours. The China plan is focused on infrastructure with such things as railways and public housing that will require ongoing demand for commodities with a real, lasting product that can be used many years into the future. The US plan is focused on funneling $100’s of billions of dollars and eventually trillions to failed financial firms as well as uncompetitive industries the most glaring of which is the US auto industry. These are the companies that caused the problems we have now. The Administrators running the bailout were complicit in this entire mess. AIG was just handed another $40 billion now raising that bailout for one firm to over $150 billion. AIG has been rumored to be the biggest short seller of gold and silver. Does that seem like a worthy bailout to you? Contact your Congressman! There should be no more bailout money funneled to the bankrupt Wall Street banks and brokers. American Express was just converted to a bank so it could too get on the gravy train. Enough! Let the chips fall where they may so we can start over. The current plan is just taking more from you and me in favor of the financial elites in power. The sooner it stops the better. Make no mistake, the market and the media can be moved at will with all of the financial weapons we have handed over. Congressmen were threatened with Martial Law if they did not cede all the requested powers along with the $700 billion. Protect yourself with t-bills and gold to the greatest extent possible. Be very wary of cash held by banks or any counterparty.

If you were a businessman and you bought a company that was generating cash equal to what you paid for the whole company or even 1/3 of what you paid for the whole company would you be upset and want to sell it? That is, in effect, what you are doing if you sell these companies that are trading at these very low valuations. It makes no sense but it is happening.

by Richard J. Greene

by Nick Barisheff Bullion Management Group

Gold is respected throughout the world for its value and rich history, which has been interwoven into cultures for thousands of years. Coins containing gold appeared around 800 B.C., and the first pure gold coins were struck during the rein of King Croesus of Lydia about 300 years later. Throughout the centuries, people have continued to hold gold for various reasons. Below are eight reasons to own gold today.

A history of holding its value
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next.

Weakness of the US dollar
Although the US dollar is one of the world's most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices.

The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008. The decline in the US dollar occurred for a number of reasons, including the country's large budget and trade deficits and a large increase in the money supply.

Inflation
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Since World War II, the five years in which US inflation was at its highest were 1946, 1974, 1975, 1979 and 1980 (as of 2008).

During those five years, the average real return on the Dow Jones Industrial Average was -12.33%, compared to 130.4% for gold.

Deflation
Deflation, a period in which prices contract, business activity slows and the economy is burdened by excessive debt, has not been seen globally since the Great Depression of the 1930s. During that time, the relative purchasing power of gold soared while other prices dropped sharply.

Geopolitical uncertainty
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the "crisis commodity", because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments.

World's greatest investors
For example, gold prices experienced some of their largest recent movements during periods of tension with Iran and Iraq in 2007 and 2008. Its price often rises the most when confidence in governments is low.

Supply constraints
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008.

At the same time, production of new gold from mines has been on the decline since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.

Increasing demand
Increased wealth of emerging market economies has boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world, and gold has many uses there, including jewelry.

As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold. In China, where gold bars are a traditional form of saving, the demand for gold has also shown rapid growth.

Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, the largest gold ETF, StreetTracks Gold Trust, became one of the largest ETFs in the U.S. and one of the world's largest holders of gold bullion in 2008, only four years after its inception.

Portfolio diversification
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:

The 1970s was great for gold, but terrible for stocks.
The 1980s and 1990s were wonderful for stocks, but horrible for gold.
As of 2008, this decade has been a good one for gold, and an unfavorable one for stocks.
Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.

Conclusion
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, gold has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.