Bullionmark's comments

Jim Rogers is one of the most respected and successful investors in the world. Adding his voice to the hyperinflation argument adds significant weight to the case I have been building for sometime now.

By : Peter Schiff

Euro Pacific Capital

The current stock market crash has spurred a vital national debate about the causes and catalysts of the Great Depression. The dominant school of thought believes that the stubborn refusal of then president Hebert Hoover to intervene after the stock market crash of 1929, and his preference for free market solutions, led directly to the ensuing decade-long catastrophe. Through this lens, our leaders assure us that the most recent raft of government measures will prevent another episode of bread lines, Hoovervilles and pencil salesmen. As usual they have it completely wrong. In my view, the Depression was created precisely because Hoover followed the path that our government is now taking.

When the stock market bubble of the Roaring Twenties (which was created as a result of the loose monetary policy of the newly created Federal Reserve) finally popped, Hoover would not allow market forces to correct the imbalances. His policies were aimed at propping up unsound businesses, artificially supporting prices, particularly wages, and providing Federal funds for public works projects. These moves went well beyond the progressive reforms of Teddy Roosevelt, and established Hoover as the most interventionist president ever up to that point. In fact, much of what eventually became the New Deal had its roots in Hoover’s policies.

However, at the time, there were those who recommended a different course. Andrew Mellon, the long-serving Secretary of the Treasury whom Hoover had inherited from the prior two Republican Administrations, was labeled by Hoover as a “leave it alone isolationist” who wanted to “liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate.” Hoover would have none of it. In fact, during his nomination speech for his second term, Hoover bragged “We determined that we would not follow the advice of the bitter liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.”

Hoover chose to ignore the sound advice of his Treasury Secretary (in contrast to today where the current Treasury Secretary Henry Paulson is actually leading the charge over the cliff) and instead used every tool at his disposal to “fix” the problem. As a result, rather than allowing a recession to run its course, with healthy and rapid liquidations of the mal-investments built up during the boom, Hoover inadvertently created what became the Great Depression.

When Roosevelt took office he continued the same failed policies only on a grander scale. The magnitude and the idiocy of many New Deal programs, such as the wage and price setting National Recovery Administration (NRA), compounded the problems. So while Mellon’s advice would have caused a sharp but relatively brief economic downturn (which occurred after the Panic of 1907, for example), the Depression plodded on for nearly a decade until the country began gearing up for the Second World War.

In an amazing feat of revisionist history, somehow Hoover’s interventionist policies have been completely forgotten. It is taken as fundamental that his inaction led to the Depression and Roosevelt’s “heroics” got us out. Unfortunately, since we have learned nothing from history, we are about to repeat the very mistakes that lead to the most dire economic circumstance of the last century.

A major difference however, is that the structure of the U.S economy today is far weaker than it was in the fall of 1929. Years of reckless consumer borrowing and spending, and enormous trade and budget deficits have resulted in a hollowed out industrial base and an unmanageable mountain of debt owed to foreign creditors. Instead of the support of a strong currency backed by gold, the public now must deal with a modern Fed free to print as much money as politicians want. So rather than getting the benefits of falling consumer prices (as happened during the Depression), consumers today will contend with much higher consumer prices, even as the economy contracts.

With Barack Obama now waiting in the wings to conjure a newer New Deal, far larger than even FDR could have imagined, and at a time when we cannot even afford the old one, this will not be your grandfather’s Depression. It may be much worse.


Bullionmark's comment:

Agree with Peter Schiff that a hyperinflationary depression is the end state here. Where our views depart is impact zones. From his writings in his book "Crash Proof" and stated investment strategies Peter clearly sees the problems confined to the US. My view is that the US is the epicentre of the problem but the rest of the world will be struck by the tsunami waves of destruction. The enivitable US dollar dollar crash impacts all of us. It is the worlds reserve currency. All governments must match the excessive money creation of the US to maintain currency stability across the world. The US government exports all its dollars due to a massive current account deficit and ironically is one of the only governments not to hold Us dollars in their reserves, they hold gold (albeit a lot less than a few years ago). In effect the US is exporting its inflation. I also struggle with the economic decoupling theory as it is US consumption that drives Chinese production capacity which in turn drives natural resource demand from countries like Australia. Maybe thats why the Chinese stock markets and natural resource companies have seen much larger percentage losses this year than the Dow Jones.

Who is really paying for the bail outs? Like many gold investors I believe it will ultimately be the invisible tax of inflation through money printing, but in the short term another another funding mechanism is obvious.

If you subscribe to the notion that all markets are now manipulated (which I do), then it is likely that the US government is profiting from this in conjunction with the banking cartel of JP Morgan, Goldman Sachs, Bank of America, HSBC etc


Oil $145 -$70
Silver $21-$9
Gold$1030-$750
Soybeans$1500-$800
Commodity Stocks -50-70%
PM stocks -60-80%
US dollar +20%

If the government had advanced knowledge of price direction, simply taking a leveraged bet across these markets could raise hundreds of billions dollars, all at the expense of hedge funds, sovereign wealth funds and anyone short US dollar and long any type of commodity position. JP Morgan’s timely entry as a major short in the Silver market in July is a good example.

Suddenly some things start to make more sense ie uptick rule, naked short selling, CFTC/SEC blindness, futures margin rate changes etc etc

The US government has done a great job. Supported US dollar, wounded the Russians economically, hammered inflation, bailed out its banking masters and made a substantial profit all at the expense of commodity investors.

However this is only one battle within a much bigger war. Manipulation can only ever work on a short term basis, markets always win in the end. The last few months have been brutal but gold and other commodites must go higher. View price takedowns as a gift. Accumulating great commodity assets on substantial discount is a wonderful way to create long term wealth.

By : Ron Paul
www.house.gov/paul

One of the burning questions regarding the recently passed bailout, and the one that almost no one has bothered to answer, is how the government intends to pay for it. Governments have three main methods by which they can raise funds: taxation, printing new money, and debt. As our $10 trillion national debt shows, the federal government has always enjoyed raising money by issuing new debt. Money is gained upfront, while the cost of repaying that debt is pushed onto future generations.

This method is especially favored today, since imposing $700 billion worth of taxes would lead to widespread public dissatisfaction. When the cost of all the recent bailouts plus the cost of all the new lending facilities the Federal Reserve has initiated are added together, we quickly reach a figure in the trillions of dollars. Even with the debt ceiling being raised to $11.3 trillion, the issuance of debt alone cannot begin to cover the cost of all the bailouts in which the government is engaged. Every indication is that the government will use both debt and inflation in its attempt to keep the economy running at full speed.

Debt financing has begun in earnest, as the national debt has increased $600 billion over the past three weeks, and most of that increase came even before the $700 billion bailout bill was passed. I fully expect that trend to continue in the near future and would not be surprised if we see another debt-limit increase slipped into another economic stimulus package that might be passed before the new year. Now that our foreign creditors are less willing to purchase our debt, what debt we cannot sell to foreigners will be monetized through the Federal Reserve, resulting in increased inflation.

In fact, money supply data for the narrowest measure, the adjusted monetary base, show an unprecedented increase, far higher than when Chairman Alan Greenspan attempted to reflate us out of trouble after the dot-com stock bubble burst. That intervention on Greenspan's part, pumping in liquidity and driving interest rates down, led to the real estate bubble, and Chairman Ben Bernanke unfortunately seems to be following the same script as his predecessor in resorting to credit creation and low interest rates. Even were this effort to succeed, it would only delay the inevitable. In order for the economy to return to normal, the Federal Reserve must cease the creation of new credit, overvalued assets must be allowed to fall in price, and malinvested resources must be allowed to liquidate and be put to use in more productive sectors.


Ron Paul

www.house.gov/paul


Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. For more information click on the Project Freedom website.

I have written many times on the 700 year price history of silver.


As can be seen from the chart above throughout history silver has sold for about 16 ounces for each ounce of gold. However in the last 200 years since the British tried to demonetise silver in the 1800's (because they had none) the ratio has increased dramatically. From (1808 – 2008), the ratio between gold and silver has been 33 ounces of silver equals one ounce of gold. More recently, say 1978 – 2008, the ratio has widened to on average, 60 ounces of silver buys one ounce of gold. At the extremes the ratio fell to 17:1 in 1980 as both metals peaked; and rose to 100:1 in 1991 during the depth of the recession.

During the 1976 – 1980 bull market in precious metals, the ratio fell from 40:1 to 17:1

During the 1990 – 1991 recession the ratio rose from 71:1 to 100:1

The latest bull market in silver began in 2003, and from then until mid 2008, the ratio dropped from 80:1 to 45:1.

A few months ago, as more and more people began to suspect that the world was heading for a recession, the ratio rose again, from 50:1 to the current 80:1

A LESSON FROM HISTORY.

The clear lesson from history is that we can expect silver to drop faster than gold during a recession, and silver will rise faster than gold during a bull market in the metals.

A simple application of this observation is to trade silver for gold in the middle of a recession, when a bull market in gold and silver is about to start, and to trade gold for silver at the top of a bull market in precious metals.

It behooves us to remember that the actual peaks only last for a few seconds. Though the action will show up as a line on a chart henceforth forever, the actual amount of any stock or commodity traded at the precise peak is minimal. Most of the action takes place when traders are convinced that a top (or bottom), is in place.

It is said that technical analysis works best when it is based upon fundamental analysis. The fundamentals for gold are very bullish. Supply is coming from three sources, gold mines, recycling and central banks. The gold mines are supplying less gold every year, as mines become depleted and new mines are not coming on stream fast enough.
Mining experts do not expect any large new gold mines, until the gold price rises above $1,200.00

South Africa’s gold mines, the world’s #2 suppliers, are still suffering from power shortages, and mines there are delivering about 10% less gold compared to a year ago.
The world’s #1 supplier, China, is reported to be keeping all the gold mined in China within its borders, to balance its reserves, which at last report were less than 3% of its huge ‘paper reserves.’

Supply of scrap gold has been rising, along with the higher price, but that supply is finite.
It will no doubt rise each time there is a sharp rise in the gold price, but eventually it drops off, as people run out of rings, bracelets and gold teeth.
The supply of gold from central banks was predictable at 500 tonnes per year, until the 2007-08 fiscal year, when sales dropped off noticeably.
The suspected reason for this drop is very likely the credit crisis, as central bankers realize they need to hold onto gold to create the illusion that the paper and digital money they have issued is safe, since they have gold with which to back up all that paper. Never mind that gold is no longer used for that purpose.

Demand for gold is very strong, especially at the investment level. Reports of shortages of coins and small bars have come in from all over the globe. Several Mints have stopped taking orders, and other mints are working overtime to fill orders. Dealers are paying a premium over bullion value in order to replace stock they sold earlier.

THE OUTLOOK FOR SILVER.

The picture for silver is even more bullish! Silver has been in deficit for the last 18 years. The dramatic rise in the price of silver that ended in 1980 enticed people all over the world to cash in, by selling old coins, silverware, cutlery as well as silver jewelry purchased over the years from manufacturers in Mexico, Peru and Italy. (As an aside, a large portion of silver jewelry, even though it will be marked .925, is actually silver plated. It pays to buy silver jewelry only after checking it over with a magnet! That goes for chains and bracelets that are for sale in ‘reputable stores’ as well! Caveat emptor).

It took the world’s economies about 10 years to convert this 1980’s excess silver back into useful format, and either use it up, or see it disappear into an investment portfolio, and today it is estimated that the world ‘consumes’ 1.5 ounces of silver for every 1 ounce the mines are producing.
The majority of silver that is used in industry, is applied in very small amounts such as cell phones, computers, TV’s, refrigerators, medical applications, satellites, weapons systems, electrical wiring applications etc. In the majority of cases this silver is never recovered.

THE MAIN DRIVER.

The main driver for the rise in the silver price between 1976 and 1980, and the concurrent dropping in the ratio, was investment demand. People were concerned about the dramatic rise in price inflation they were experiencing.

Ironically history is repeating again! Not only are we seeing dramatic increases in the price of the foods we eat and the products we use, but this time we have problems in the banking sector as well. Since we know that governments fight problems by throwing money at the problem, we can be sure that inflation is going to be with us for quite a while.

AN ADDED FACTOR.

When we compare the supply vs demand factor for silver, we need to be aware of the fact that since 1980 we have almost 2 billion consumers who were not in the marketplace in 1980. Most of them live in India and China, and large numbers among them are moving up into middle class status. Middle class people all over the world love ‘gadgets’. Gadgets require silver. It just happens that people in those two countries also have an affinity for precious metals.

Thus we have confluence of factors on the demand side of both silver and gold: Investment demand, industrial demand, along with the fear factor, due to the current credit crisis (which will be with us for years to come).

THE BLACK SWAN.

Hiding behind some tall weeds is a black swan. As outlined above, the time to switch from silver to gold is when a bull market in precious metals is about to start (or to resume after a correction). Precious metals have corrected since March of 2008, and may well be ready to resume rising. The black swan is the almost certain fact that a number of bullion banks, aided by central banks have taken on very large ‘naked short positions’ in gold, and especially in silver. The fact that we are now witnessing a dual pricing system in gold and especially in silver, (‘paper silver a-la-Comex’ versus ‘real silver’ which applies to anyone attempting to buy physical silver), is a direct result of this blatant manipulation in the precious metals markets. When this manipulation ends, it will add extra energy to the bull market.



Just ask yourself this simple question: If a billionaire (and there are lots of them out there), wanted to buy 1 billion dollars in gold could he do it?
If the same billionaire wanted to buy 1 billion dollars in physical silver, could he do it?
The answer to both questions is ‘yes’, but while buying the silver, he would drive the price up by multiples of the current price. Silver is scarce!

Since 1984 a trading range has developed in the ratio. With the ratio near 45 it makes sense to trade silver for gold, until the ratio breaks sharply below 45 and thereby indicates that it is starting a new trend. With the ratio near 80, and even if it rises back up to 100 it makes sense to trade gold for silver.

IN CONCLUSION.

The bull market in precious metals very likely has not even reached the half-way point in either price or time. (Gold started in 2001 and silver in 2003). “Real interest rates” are currently negative (T-bill minus CPI), and gold always thrives in that kind of environment.
The credit crisis will be with us for a number of years and governments will continue to ‘print’ money to ‘solve’ the problem. The US Federal Reserve is currently expanding the Monetary Base in excess of 20%! Money supply is growing on a global basis. The US budget deficit this year will be another record.
Investment in the metals is just beginning to move from ‘stealth’ into main stream. This process takes years, as people are slow to change investing habits.
The recent rise in the US dollar was caused by at least two factors: First: hedge funds were unwinding positions that were short the dollar and long oil. Oil appears to have bottomed at 80, thus that factor is now ‘in the market’. Second, it was thought that the Euro (which makes up 57.6% of the US dollar index), was going to be even more negatively affected by the credit crisis than the dollar. That condition is now also ‘in the market’, and leaves the dollar vulnerable to a sell-off. In the past, weakness in the dollar has translated into strength in metals.
Silver is now scarcer than gold! This factor alone makes me steer my investment dollars into silver, rather than in gold for the time being. My long-term target for the ratio is 10:1, and I base that on the growing demand for silver as an industrial metal in combination with silver as an investment, while the supply of silver continues to dwindle. In the 1960’s, the US government had a stockpile of 2.5 billion ounces. That silver is gone, used up! Before the ratio drops again, it could rise above 80, and could even reach 100 again as it did in 1991. If that happens, I will become even more convinced that it is time to trade gold for silver.

By Peter Schiff
More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has all but defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.

Despite the myriad of proposals that are coming from Washington and other world capitals, we must understand that this crisis cannot be cured by governments. In the United States, credit is gone because savings are gone. Our shallow pool of savings has been depleted through bad loans, and we can no longer entice foreigners into lending us their available savings. Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?

As a result, the free market is trying to put an end to our spending spree. Without savings or home equity to fall back on, Americans struggling with rising prices are finally being forced to curtail their spending. This has terrified our leaders and is causing them to dismantle the remaining structure of our free enterprise-based economic system.

The intention of all these daily federal interventions is to keep the credit spigots open so Americans can go even deeper into debt to buy more stuff they can’t actually afford. This should be clear enough to anyone who listens to what our leaders are actually saying. When speaking about the need for an even larger fiscal stimulus package, Barney Frank, chairman of the House Financial Services Committee, said, “We have to prop up consumption.” He has it backwards. The government has been propping up consumption for far too long, and the best thing they can do now is remove the props so spending can be replaced by savings.

The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it. Legitimate credit can only be supplied if there are genuine savings to finance it. Savings can’t be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn. Efforts to fool the market will not work and will ultimately lead to a monetary disaster and runaway inflation.

Were the government to allow market forces to work, Americans would now have to pay cash for their consumption. That would mean no instant credit for new cars, plasma TVs, appliances, consumer electronics, clothing, furniture, etc. Unless buyers actually had the cash in their checking accounts these purchases would have to be deferred. From an economic perspective this is precisely what the doctor ordered. But for an economy based 72 percent on consumer spending, the medicine will go down hard.

Ultimately, a serious reduction in consumer and mortgage credit, combined with an increase in personal savings, would again provide a pool of needed capital for businesses to produce products and provide employment opportunities. However, the danger is that this potential credit could be completely crowded out by massive borrowing by the Federal Government. In addition, prices for such things as houses and college tuition will fall sharply, as the credit artificially propping them up disappears. People would still be able to buy houses and send their kids to college only they would pay much lower prices when they do.

However, if the government keeps creating inflation to artificially sustain consumer borrowing and spending, there will be no savings left to fund anything and prices will be so high that despite massive consumer spending there will be few goods that Americans could actually afford to buy.