Dear Liberty Lovers,

Liberty Coin & Precious Metals 

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The reactions to last week’s hammering of gold and silver further exhibits that we are still in the early stages of a long-term precious metals bull market.  With Tuesday’s huge declines in gold and silver, public sentiment turned bearish almost instantly, which is exactly what the sellers wanted.

In the early stages of a bull market, setbacks produce last week’s results: nearly instant negativity, in some cases panic.  In the latter stages of a bull market, price declines are viewed universally as buying opportunities, which are jumped on with confidence.  In the early stages, setbacks generate concern, cause investors to question the wisdom of their positions.  In the later stages, positions are increased.

Richard Russell, of Dow Theory Letters fame, used to say that if you aren’t sweating your buys you aren’t buying right.  To buy right, you have to separate yourself from the crowd.

Last week’s selling has been reported by experts in the industry to have been an absolute manipulative move.  Andrew Maguire, now known as the London whistleblower because of his email to the CFTC about a coming manipulative move last year, had this to say in a KingWorldNews.com interview: “. . . it couldn’t have been more blatant (intervention in the gold market) could it?  Talk about not worrying about hiding your footprints.  This was obviously sanctioned somewhere at a higher level because the amounts of contracts, paper contracts that hit the market, all at once, within seconds of each other, this was not normal trading.”

Maguire also said: “We were seeing massive order flows.  We were seeing every single bid being hit.  The offers were just massive.  I mean we were seeing 10’s and 20 thousand contracts at a time being unloaded by single individuals.”

James Turk, famed long-time gold trader said, also in a KWN.com interview: “We’ve seen this so many times over the past twelve years, Eric.  I’m taking last week’s smash in the metals in stride.  The fact that central banks chose to intervene when silver had broken out on massive volume and gold was on the verge of a breakout is not surprising.  The situation was getting desperate and they had to intervene at that point or things were going to get out of control on the upside.

“The reason, of course, is that the underlying fundamentals for gold and silver remain very bullish.  I know that corrections, like the one we are experiencing, can be disconcerting to investors who have made recent purchases, but as we have said so many times in the past, the hardest thing to do is to sit tight during these downdrafts.”

The sellers got the results they wanted: negative news on the metals, big declines, which send the message to investors thinking of joining the gold and silver march upward that the metals are dangerous investments.  Not discussed is that gold is up nearly seven times off its low a decade ago and that silver is up nearly nine times off its decade ago low.

Turk notes that “the fundamentals for gold and silver remain very bullish.”  Frankly, I haven’t looked at gold’s supply/demand fundamentals in a long time.  Silver’s fundamentals, of course, are widely discussed in precious metals circles and difficult to miss.  Besides, I’m a silver bull and know well silver fundamentals.  However, I’m not a gold and silver bull because of either gold’s or silver’s fundamentals.

I am a gold and silver bull because the metals are in long-term bull markets as a result of the US’s expansive monetary policy, and not just because of the massive creation of dollars since 2008.  The US went on a dollar binge immediately after Nixon closed the gold window, entering a great inflationary period.  Look at the graph below.

For now, ignore the action from 2008.  Admittedly, it’s hard to look at the graph without being drawn to the part that shows the massive money supply growth since 2008, but for now concentrate on the money supply increase from August 1971 to 2008.

In the decades before 1971, the money supply saw small growth.  In the following decades, the money supply ballooned.  Monetary inflation is followed by price inflation, and massive monetary inflation is followed by massive price inflation.  Gold and silver will remain in bull market regardless of their fundamentals.

A final note on last Tuesday’s (Feb. 28, 2012) bear raid.  Many analysts said it was because of the Fed’s statement that there was no need for another quantitative easing program at this time, which suggested that monetary policy would be “tight over the foreseeable future.”  The Fed could withhold printing another single dollar, and we will still face massive price inflation.  Now, concentrate on the graph for the years following 2008.  Enough money has already been printed to guarantee continued price inflation.  This dip should be bought although there’s no way of know how much further prices will fall before they stabilize and afterwards rebound.

Another piece of advice from by Richard Russell: a bull market will bailout your timing mistakes.  Don’t worry about buying a little too soon.  Only one investor buys at the absolute bottom.

I highly encourage you to read the latest interview with Hugo Salinas Price.  Mr Price is a retired billionaire who made his fortune via a chain of appliance stores in Mexico.  He is also a tireless advocate of sound money.  His plan to reintroduce silver as a competing currency in Mexico would make it the most sought after money in the world bar none. It is well worth your time to understand the details of how he proposes to do this.

But what I really want to draw attention to is a point that Mr. Price frequently makes that you very rarely hear anywhere else – the fact that the limitless trade imbalances of the US and its subsequent de-industrialization and loss of quality jobs can be laid at the doorstep of the fiat dollar.  Consider his point: />

“I see no fundamental reason why silver cannot support international trade; it did at one time, and can do it again: it is a question of a natural rise in the price of silver to reflect the tremendous depreciation of paper currencies that has taken place through the years. But we must remember that international trade has to be self-liquidating: exports are collected in the form of imports, and imports are paid for with exports.

No amount of silver (or gold) would be sufficient to allow chronically UNBALANCED trade. So this brings with it, the revival of JOBS. Jobs growth has become so scarce in the West because all that the East exports can be paid with dollars or euros, whose supply is inexhaustible. Eastern exports have removed millions upon millions of Western jobs and hundreds of industries, because those incoming goods can be paid with unlimited amounts of fiat paper money. I cannot see how any Western industrial economy can survive in the long-term, under the paper money system. Europe is gravely affected by the loss of industries and jobs, and only a return to gold can bring them back.

Jobs will NOT return until TRADE IS BALANCED and trade will not be balanced until silver and/or gold is made the international means of payment – paper unacceptable.”

This is perhaps difficult to intuitively understand without some explanation.  First consider a global trade system that works entirely on a barter system.  Imports must equal exports.  No country will give away its valuable goods without an equal value of goods in return – nor would any individual in a barter economy.  This is easy to understand.  Now let’s introduce money in the form of gold.  Gold has value all over the world as a recognized store of value and as such a country would be willing to trade its goods all or in part for gold.

Since gold is sound money, meaning that new gold cannot be summoned into existence by a central banker, a trade imbalance offset by gold can only be a temporary condition.  If a particular good, say an automobile, is cheaper to buy as an import than domestically produced, then many consumers will pursue this option resulting in a net outflow of gold from the country.

A decrease in a country’s gold supply is deflation by definition.  The result is an increase in its value, most commonly observed as a general drop in prices.  At some point this drop in prices will make the domestically produced automobiles more attractive to those in other countries, and they will begin to import more of them, thus reversing the trade imbalance along with the net flow of gold.

Gold as money in the settlement of international trade has a natural balancing effect.  A fiat dollar produced by the Federal Reserve has no such property.  Since dollars can be produced in unlimited quantities, trade imbalances can be maintained for as long as these dollars are accepted.  Unfortunately, the net flow of manufacturing and good jobs from the West to the East can also be maintained for just as long.  The Federal Government likes this arrangement as many of these dollars flooding the world have no where else to go but to come back the US to fund additional government debt.

In 1971, when the US government defaulted on its obligation to redeem dollars for gold with its trading partners, it set our fate into stone:  A near endless de-industrialization, a loss of quality jobs, a massive rise in the size and power of government, bankruptcy, and ultimately the destruction of the dollar as the world’s reserve currency.

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It’s little wonder that so few people in the United States and Europe can think straight about basic economics with the constant flow of misinformation coming from the media and universities.  Here’s an interesting piece out of Scotland from an Oxford and Harvard trained editor titled “When inflation could be good for you.”

This one is interesting because it contains a bit of a head fake to start off.  When I first saw the title, I expected an immediate launch into an economic fallacy, but its author actually states the opposite:

“So could an inflationary inoculation work in economics, providing strong medicine for a serious economic ailment?

“With our economics strongly influenced by the experiences of the 1970s, the answer tends to be ‘no’. Inflation feeds on itself, workers chase higher wages to keep up with prices, costs spiral, companies lose the confidence to invest, and anyone on a fixed income – notably, pensioners – are the ones who suffer most.”

I guess by leading off with a little bit of truth, readers are expected to let their guards down in order to accept the information that follows.  When he states that “the the answer tends to be no,” we are immediately back on alert that fallacies are soon to follow.

But first he gives another nugget of truth:

“While interest rates remain at a historic low, with the base rate still at 0.5% and expected to stay there for a while yet, that means a negative real interest rate.

“To put it simply, the interest you get on holding money in a savings account is not enough to stop the value of your savings eroding.”

But he then uses this to conclude that a real negative interest rate policy is good because it encourages people to consume and not save their money.

“If inflation is officially encouraged to go a bit higher, real interest rates would fall, and people’s expectations of falling value of their savings could encourage them not to save but to get consuming again.”

So here we are again with the classic fallacy that consumption is the basis for economic growth. The idea that the only thing standing between us and a rip roaring economy is that we just need to stop saving and buy stuff. And if we really want to be prosperous, then we go into debt to buy stuff that we don’t really need.

This is, of course, complete nonsense.  Savings and production are the basis for economic growth. Standards of living are raised via increased productivity.  The more efficiently goods can be produced, the lower their cost. Wealth and financial independence are achieved by being productive and consuming less than you produce, not the opposite.

If this concept is not intuitively obvious, I highly recommend reading the first part of Irwin Schiff’s cartoon book “How an economy grows and why it doesn’t (Download PDF)“.  Schiff derives from first principles – or actually three men on an island – how an economy actually grows. Once you “get it,” the hazy concept of economic growth comes into sharp focus.

Ultimately the cry for more consumption is another attempt to kick the can down the road and extend the Ponzi central banking/fiat money scheme.  Particularly if we can extend it long enough to bail out the Too Big to Fails:

“Then, why-oh-why would we want to penalise thrift and savings, to encourage consumer demand, when excessive consumerism is precisely what got us into this mess?

“The answer is that – to misuse a political slogan from 2010 – we’re all in this together. Responsible behavior may have to be penalised so that savers, alongside everyone else, can get out of the current economic predicament.”

And there you have it.  If we allow our failed banking system to actually go bankrupt, it would result in a major recession.  So in order to muddle through this, the banks must be made whole again at the expense of the prudent folks who lived within their means.

And just in case those folks start getting any ideas about opting out of this arrangement, he states that:

“There’s not a savings product on the mainstream market that matches the current rate of inflation.”

But the last time I checked, gold has been doing exactly that and more for the last eleven years.

The 99% and the 1%. We see it all over the news. There are protest movements in almost every major city focused on it. We all know that something is wrong, but almost no one can put their finger on the root cause. The reason is that the vast majority of people have no idea how banking works or where money comes from.

Did you know that only about 3% of money exists in physical form as coins or bills? The remaining 97% of money exists as numbers in bank computers representing various account balances. /> /> Most people believe that the balance on their bank statement is just a symbol representing how many physical dollars, contained in the bank’s vault, that belong to them. It isn’t. The fact is, the number on the statement is the money. Think about it – there is more than 30 times as much money on bank account statements as there exists physical currency. The number on your statement is the money.

Most people have a quaint notion that banking works something like this: Joe Customer goes down to the bank to deposit his hard earned money into a savings account, which pays him a return based on an interest rate. The bank then loans that money out at a higher interest rate and profits from the difference.

If that were the case, then how can the money be both loaned out by the bank and available for use by the customer at the same time?

The answer is it can’t. Somewhere along the line, the bank obtained more money than was originally deposited.

So where did the extra money come from? Well, remember that the number on the account statement is the money. So if you’re a bank, it’s pretty simple: Create an account and key in a number. Done. Instant new money.

Of course they can’t do this completely willy nilly. There are certain rules and procedures that must be followed. Namely that the new money in accounts must be loaned out and that there are limits as to how much money can be created versus how much was actually deposited.

But at the end of the day, for every new dollar deposited into a bank, almost 99 new dollars can be created out of thin air by the banking system. But here’s the best part: The bank earns interest on all of those dollars it just created! You and I must work for our dollars before they can earn us interest. No such requirement for a bank.

And it gets better. Let’s say there was some sort of collateral promised against a loan and the loan goes bad. The bank then gets ownership of real stuff (a house, a car, a boat, etc) even though the money it “loaned” was nothing more than a number keyed into an account.

That’s quite the business model. No need to actually produce anything when the government grants you the legal right to create new money. Bankers figured out long ago that working for a living was for the middle class.

And speaking of the middle class – and the rest of the 99% – I’m afraid the bad news doesn’t end there.

There’s a larger price to pay for all of this banker privilege beyond just having to work for a living. You’ve heard the expression “there is no free lunch”, well it’s true. When a bank creates new money, it reduces the purchasing power of all other money, including the money in your savings account and your paycheck.

The average person – who doesn’t know how banking works – observes this as the price of things going up. “Gee honey, the price of milk just went up again. It must be getting more expensive to produce milk.” Wrong. It’s actually getting cheaper to produce most things due to increases in productivity. It’s just that your money and your savings and your income are losing their value faster.

Computers and electronics are an interesting case. They get cheaper every year because the gains in manufacturing productivity are so great, that even bankers can’t devalue the money that fast. But this is the normal action of prices in a sound money system. Sound money retains its purchasing power, and almost all manufactured goods cost less to produce every year. If our monetary and banking systems weren’t based on fraud, a person would never need to get a single raise or increase in pay to see their standard of living rise every single year. Please take a minute and contrast that with your experience in our current system.

That 3-10% price inflation we see is how much purchasing power our incomes lose every year. To say it another way, our standard of living falls 3-10% every year after year after year. It wasn’t that long ago that a middle class family in America could comfortably get by on a single income. It is now often necessary for a household to have two full time incomes just so it can struggle by..

So how did the 99% become the 99%? It’s because that is exactly what our monetary and banking systems are designed to do. It is an institutionalized system of wealth transfer that acts slowly over time. Like the boiling frog, most don’t realize what has happened until they’ve been cooked.

Perhaps at some point you’ve stumbled across the famous quote by Henry Ford:

“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Now you know what he was referring to.

Various reports coming out of last week’s G20 meeting in Cannes are suggesting that some member countries had proposed Germany use its gold reserves as collateral for a Eurozone bailout fund.  This brought a series of quick and unequivocal responses:

“German gold reserves must remain untouchable” said the German Economy Minister Philipp Rosler.

“Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” said Steffen Seibert, a German government spokesman.
An MP from Angela Merkel’s Christian Democratic Party stated that it is out of the question that Germany’s gold be used to fund Rome.  However, Italy could use its gold instead.

Well isn’t that interesting.  Central banks and their governments (I believe that is the correct hierarchy) don’t bat an eyelash at creating billions of dollars worth of their currencies to intervene in a market, or peg their currency to a sinking ship, but suggest that they might put some gold at risk and suddenly everyone has their hackles up.

If gold really is just a barbarous relic, or tradition, then why would anyone care?  Warren Buffet says it’s a useless metal that we spend money to dig out of the ground, then spend more money to guard in a vault.

Don’t believe a word of it.

Central bankers know that the only real asset they have on their books, apart from their fancy buildings, is gold.  It’s tough to get excited about accumulating a bunch of currency units created by another bank, at will, in exchange for a bunch of currency units, that you just created, at will.  It all seems rather valueless doesn’t it?

The Federal Reserve is the ultimate example of how little central banks value the currencies they produce.  Over the last several years they have created trillions of dollars to be handed out willy nilly to seemingly anyone who knows the proper person to ask.  After the crisis of 2008. two Wall Street wives created a legal entity called Waterfall TALF Opportunity (get it?) to grab $220 million from the Fed in near 0% rate non-recourse loans.  These ladies invest the money and pocket the profits.  If they lose money they just send a bunch of sub par paper back to the Fed and call it even. Getting rich is easy when you are an insider to the criminal currency creation monopoly.

Privately, central bankers are the ultimate gold bugs.  They, more than anyone else, understand the fleeting value of the digital currency units they produce at the stroke of a key.  They understand that the current money paradigm won’t last forever, because at the finish line for the race to devalue, waits the number zero.  And when the ultimate restructuring comes, it will largely be the amount of physical gold each possesses, that will determine their pecking order in whatever monetary system replaces the current one.

Various reports coming out of last week’s G20 meeting in Cannes are suggesting that some member countries had proposed Germany use its gold reserves as collateral for a Eurozone bailout fund.  This brought a series of quick and unequivocal responses:

“German gold reserves must remain untouchable” said the German Economy Minister Philipp Rosler.

“Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” said Steffen Seibert, a German government spokesman.
An MP from Angela Merkel’s Christian Democratic Party stated that it is out of the question that Germany’s gold be used to fund Rome.  However, Italy could use its gold instead.

Well isn’t that interesting.  Central banks and their governments (I believe that is the correct hierarchy) don’t bat an eyelash at creating billions of dollars worth of their currencies to intervene in a market, or peg their currency to a sinking ship, but suggest that they might put some gold at risk and suddenly everyone has their hackles up.

If gold really is just a barbarous relic, or tradition, then why would anyone care?  Warren Buffet says it’s a useless metal that we spend money to dig out of the ground, then spend more money to guard in a vault.

Don’t believe a word of it.

Central bankers know that the only real asset they have on their books, apart from their fancy buildings, is gold.  It’s tough to get excited about accumulating a bunch of currency units created by another bank, at will, in exchange for a bunch of currency units, that you just created, at will.  It all seems rather valueless doesn’t it?

The Federal Reserve is the ultimate example of how little central banks value the currencies they produce.  Over the last several years they have created trillions of dollars to be handed out willy nilly to seemingly anyone who knows the proper person to ask.  After the crisis of 2008. two Wall Street wives created a legal entity called Waterfall TALF Opportunity (get it?) to grab $220 million from the Fed in near 0% rate non-recourse loans.  These ladies invest the money and pocket the profits.  If they lose money they just send a bunch of sub par paper back to the Fed and call it even. Getting rich is easy when you are an insider to the criminal currency creation monopoly.

Privately, central bankers are the ultimate gold bugs.  They, more than anyone else, understand the fleeting value of the digital currency units they produce at the stroke of a key.  They understand that the current money paradigm won’t last forever, because at the finish line for the race to devalue, waits the number zero.  And when the ultimate restructuring comes, it will largely be the amount of physical gold each possesses, that will determine their pecking order in whatever monetary system replaces the current one.

It seems everyone is looking for a place to put their hard earned money as uncertainty around the globe continues to rise. Oil, Gold, and Silver which have been the hot investments for the past few years took it on the chin over the past month with oil falling 13%, gold dropping 15%, and silver with a whopping 30% decline. We did actually see sharply lower prices, but last week these oversold commodities had a bounce and recouped some of their losses.

It has been a month since I covered the dollar index in detail and back on August 31^st I pointed to a potentially large shift in the US dollar. The charts were pointing to a sizable rally which would likely send stocks and all commodities crashing lower. Since then we have seen just that and the so called safe havens (Gold, Silver, Oil) have dropped taking most investment and retirement accounts down with them. I did talk about these so called safe havens a couple weeks back stating my point of view on them. 

My Cole’s Note Summary: “I do not consider any investment vehicle a safe haven if it can drop 15% in value within 1-2 days. And I would never put a large position of my account especially a retirement account into these investments if I were over 50 yrs of age.”

So where are the big, smart, and conservative traders putting their money to work?

Let’s dig down and take a quick look at the charts…

The 20 Year Bond – Daily Chart:

US Dollar – Daily Chart:

Utility Sector (Dividend Paying Stocks) – Daily Chart:

Weekend Trading Conclusion:

In short, I feel both stocks and commodities are oversold but need more time to bottom and we may see a few more days of lower prices in the near future. I see the dollar starting to get toppy on the daily chart and once that rolls over then stocks should bottom along with gold, silver, and oil.

Once equity prices start to bounce I anticipate money to flow out of the safe haven (Bonds) and into stocks where there are much larger potential gains to be had. All this could play out in a couple days so I am keeping a very close eye on everything.

Last week we bought the inverse SP500 etf (SDS) anticipating another surge higher in the dollar which would send stocks down in value. So far we are sitting with a gain of 8.2% and the potential for another 4 – 10% if things play out as I expect. If you would like to receive my daily pre-market trading videos so you know exactly what to expect each session along with my ETF trades be sure to join my free newsletter and get my free book here: http://www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

Perhaps you’ve noticed that gold was under attack before the $165 price drop 9/22, 9/23.  So what, isn’t gold always under attack by the Establishemnt?

What’s particularly interesting is that the most recent attack occurred precisely as the the Swiss National Bank announced the peg of the franc to the euro. What should normally be immensely bullish news for gold, is being held in check. Even the illustrious Paul Krugman has joined the fray with his latest blog piece for The New York Times: Treasuries, TIPS, and Gold (Wonkish).

In an inadvertent moment of truth, Mr Krugman let it slip that

“I have no idea what drives the price of gold,” but then it’s quickly back to the business at hand.

“Why not think about what actually should be driving gold prices? And I mean think about it, rather than going for slogans about inflation, debased currencies, and all that.”

Slogans about debased currencies? Could it not be the debased currencies themselves? Now that the Swiss National Bank has committed the franc to the wrecking yard of paper monies, isn’t it just a question of simple math and counter party risk? If every central bank in the world states that their policy is to continually reduce the purchasing power of their currencies, then why wouldn’t a rational person choose to store their wealth in gold?

The real problem here for Mr. Krugman is that the situation is becoming increasingly clear to too many people. Gold is a way for the average person to opt out of the global ponzi scheme of fiat money and unsustainable debt.

Time for a little obfuscation from the master:

“OK, how do we think about gold prices? Well, my starting point is the old but very fine analysis by Henderson and Salant (pdf), which was actually the inspiration for my first good paper on currency crises. H-S suggested that we start by modeling gold as an exhaustible resource subject to Hotelling pricing.

“Here’s how it works. Imagine that there’s a fixed stock of gold available right now, and that over time this stock gradually disappears into real-world uses like dentistry. (Yes, gold gets mined, and there’s a more or less perpetual demand for gold that just sits there; never mind for now). The rate at which gold disappears into teeth — the flow demand for gold, in tons per year — depends on its real price: graph.

“Crucially, at least for tractability, there is a ‘choke price’ — a price at which flow demand goes to zero. As we’ll see next, this price helps tie down the price path.

“So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resources because they are rewarded with a rising price. Abstracting from storage costs, this says that the real price must rise at a rate equal to the real rate of interest, so you get a price path that looks like this: graph.

“Obviously there are many such paths. Which one is correct? Given rational expectations (I know, I know) the answer is, the path under which cumulative flow demand on that path, up to the point at which you hit the choke price, is just equal to the initial stock of gold.”

Now that’s more like it! This is how a Nobel Prize winning economist goes about attacking the truth. He employs a highly sophisticated form of econo-babble designed to leave any potential dissenters in a catatonic state. A single PhD trained economist can easily defeat an entire population through this powerful form of mind control. Throw out a few choice phrases like flow demand and choke price and within seconds eyes begin to glaze over and minds start to wander. Soon enough, the great unwashed masses are just begging for the “experts” to decide their economic fates for them.

And, so Mr. Krugman dutifully earns yet another paycheck. His work as chief propagandist for the central banking system is done here.

If you’ve made it this far, be sure to check out one of the most important articles you’ve never read: Priceless: How the Federal Reserve Bought the Economics Profession.