Alan's Finance Blog

Wall Street’s Best Bet for Crisis-Beating Returns

By: Adrian Ash, BullionVault

So how did the top US mutual funds stack up vs. the gold price since 2007…?

PAST PERFORMANCE is no guide to the future. But if you don’t study history, just what will you track instead?

December 2011 marked the fifth anniversary of the end of Ownit Mortgage Solutions – a small lender in the big scheme, but “maybe the canary in the coalmine,” according to one mortgage-backed security manager back at the end of 2006.

Let’s hope he found a new career in short order. Because come March 2007, tittle-tattle claimed that distress was spreading from the subprime collapse to US and Eurozone hedge funds. In July, news leaked and then broke of the collapse of two hedge funds at Bear Stearns, and the permanent emergency had begun.

What fun lay ahead! With the gold price at just $650 per ounce too! Silver was knocking around $13 the ounce. Together, that’s made for quite the track record since…

The Top US Fund Managers: Annualized Returns in Per Cent

1. US Dollar precious metals prices from the LBMA, periods ending 30/12/2011.

2. Fund count by BullionVault, using Lipper data via WSJ Online.

3. Single-best fund, best return & average return of all mutual funds taken from MorningStar.

USAA Precious Metals & Minerals you probably know. Co-manager Mark Johnson stepped down last month, leaving Dan Denbow to continue running the single-best performing US mutual of the last 10 years. Other big precious-metal miner funds pack the list of 11 mutuals to outperform silver and the gold price.

GVPIX you might expect to know too, what with it delivering 44% returns in calendar-year 2011. ProFunds US Government Plus led a bunch of long Treasury-bond portfolios. The old Lehman’s TLT tracker returned 34% – who needed active management, let alone risk, last year?

But the stand-out fund over both the last 3 and the last 5 years? The only mutual to beat gold for US investors since the eve of this crisis is Oceanstone. Don’t feel hard cheated if you’ve never heard of it. Apparently it’s got less than $15 million in assets, even though the minimum investment is $3,000. Its stellar 5- and 3-year records include a ridiculous 264% made in 2009, just from doing what it does – seeking value in common stocks on the NYSE.

Yes, it can be done. And yes, it could be done too. US investors really could beat gold since the alarm bells rang out at the turn of 2007. Because out of the 7,500 separate funds available – with 22,000 shares classes to choose from – one fund managed it. Just like 7 funds (go on, count ‘em) managed to beat silver since the turn of 2009, and fully 11 separate US mutual funds managed to beat silver since the start of 2002.

Adrian Ash

Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

What Happened in 2011 – What’s up for 2012?

By Euro Pacific Capital Research

2011 began as a year with much promise for investors. After losing nearly 40% in 2008, the S&P 500 gained nearly 20% in 2009 and 13% in 2010. These results convinced many that a long steady recovery from 2008 was ongoing. The first six weeks of 2011, which saw a healthy 6% gain in the S&P 500, seemed to confirm this expectation. Most attributed the stock gains to an overriding belief that the Great Recession was finally winding down. But then a new chapter set in. Click here to access full report >>

As the first quarter ended, major events such as the cascading Arab Spring and the magnitude 9.0 earthquake, tsunami, and nuclear disaster in Japan, initiated a round of major volatility. The Japanese stock market lost 19% in 5 business days. But these political and climactic events were not enough to shake confidence. Even the Japanese market recovered, rallying 13% by the end of March (Bloomberg, 2011). It took the lingering concern over unsustainable debt to turn the market on its ear.

In the first half of the year, investors still did not appreciate the magnitude of the sovereign debt problems in Europe and the United States. With fear taking a back seat, by May the S&P was up 8.4% on the year (Bloomberg, 2011), which turned out to be the high water mark of 2011. But the second half of the year saw both the slow motion train wreck of European sovereign debt negotiations and the comic charade in Washington over extension of the debt ceiling. The resulting uncertainty regarding the euro and a downgrade of US debt returned substantial amounts of fear into the marketplace. In September the Federal Reserve’s Open Market Committee sent markets lower still when it failed to explicitly extend quantitative easing. Since then, amid a general realization that the lackluster statistics were not a temporary blip, stock market performance has been sideways and highly volatile. Foreign markets finished down on the year, but it was the volatility that left investors shell shocked. Should we expect more of the same in 2012?

While the initial boost of the unprecedented monetary stimulus that was injected into markets in 2008, 2009, and 2010 had an unquestionably positive effect on stock prices, it did not engender sustainable real growth. In our view, the developed world simply can’t grow encumbered with such excess debt. Consumers and business are trying to lay the foundation for future growth by continuing to deleverage. Yet at the same time, governments are counteracting the deleveraging in the private sector with large fiscal deficits and printed money. Total leverage therefore is not decreasing and deflationary forces have not been allowed to take hold.

With the monetary skids so generously greased, we think it unlikely markets will crash as they did in 2008, at least in the short run. On the other hand, we don’t see any catalyst for a runaway rally either. In our view maintaining a large cash position, however tempting, is unwise given that negative real interest rates will consistently erode purchasing power. But until a solution is found for the European debt crisis, heightened volatility is likely. Aggressive corrections will likely be met by equally aggressive market rallies as monetary stimulus remains extremely accomodative. As long as governments are willing to coordinate world-wide liquidity injections, they will likely have the ability to kick the can down the road for the immediate future. There is much evidence to conclude that this level of coordination is increasing.

Our expected inflation in asset prices runs counter to the prevailing negative sentiment. Short interest on the New York Stock Exchange is near record levels not seen since 2009 (Bloomberg, 2011). Economists have almost cut their 2012 real GDP growth estimates for the G10 in half over the course of 2011 (Bloomberg, 2011).

The next round of quantitative easing won’t necessarily be triggered by lower asset prices or sustained high unemployment. It could come simply as a way of financing the 2012 US deficit. In 2011 the Fed bought approximately $720 billion of US Treasury securities (Bloomberg, 2011), in essence financing 59% of the US deficit with printed money. We should expect the same with this year’s similarly ugly projected deficit. More easing from the Fed should be a positive for commodities, stocks and foreign currencies.

While most pundits view the most recent summit of European leaders a failure, the measures they did introduce seem likely to put a lid on solvency risk for some time. The fundamentals aren’t fixed, but in our opinion policy makers in Europe have bought themselves some time. Hopes are high that the US is immune from the troubles the world faces, yet in our opinion it is part of the cause. We expect that analysts will likely reduce their American growth estimates to an equal level with their international peers. As a result we expect US stocks to underperform international stocks in 2012.

This all lends itself to a volatile, but nearly flat trend for stocks and bonds in 2012. Fundamentals don’t yet support a run-up, but easy money may put a floor underneath assets over the short run. Unless the situation were to change, we believe aggressive dips in stock markets represent buying opportunities. We tend to think bonds will underperform equities in 2012, given their dramatic outperforming in 2011.

Euro Pacific remains underweight the Euro, Yen, Pound and Dollar. We seek to invest in securities that have minimal exposure to these regions both in our equity and bond portfolios. We continue to believe that by focusing on countries with the strongest fundamentals, we will outperform our peers over the long run.

Merk Commentary: Perils of Celebrity Central Banking

Axel Merk, Portfolio Manager, Merk Funds

January 6, 2012

Axel Merk January 6, 2012

Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).

The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising.

If the Swiss were asked whether they would like to adopt the euro, the popular vote would almost certainly be an overwhelming “NO”. Despite this, an unelected official seemingly single-handedly moves the currency at his whim. Arguments about deflation and competitiveness are given; with an unemployment rate of only 3.1%, the argument might have as many holes as Swiss cheese. Importantly, should the market doubt Hildebrand’s conviction, the peg-rate policy may turn out to be amazingly expensive – in 2010, the last time the SNB had aborted its intervention and all those euros purchased had fallen in value, the central bank reported tens of billions in losses. The Swiss public may sympathize with the buzzword “competitiveness”, but understands losses of that magnitude for tiny Switzerland is a lot of money.

In the U.S., we face similar challenges. Federal Reserve (Fed) policy appears all too dependent on Fed Chair Bernanke rather than what central banking should be about: the preservation of purchasing power. We hear the latest whim on what trick might work to boost the economy, disguised in the name of transparency.

What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.

We would not be surprised to see the Swiss franc rise against the euro as Hildebrand’s position may be weakened. Similarly, in the U.S., should credibility in Bernanke’s policy erode, it may have negative implications for the U.S. dollar.

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

European Union Agreement: Good or Bad for the Dow Industrials?

By Elliott Wave International

Did European Union leaders make the sovereign debt crisis “go away” last week?

Not even close. What they did agree on is tougher budget rules:

“…17 countries of the euro zone…agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly…”
Wall Street Journal, (12/9)

Will the EU agreement prove bullish or bearish for world stock markets, including the Dow Industrials?

Let’s put it this way: The evidence suggests that government intervention in the economy does not alter the dominant trend of financial markets.

For example: Look at the DJIA chart and try to identify when the U.S. government bailed out Fannie Mae, Freddie Mac, and other financial institutions.

“[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

“It is no good to claim that these actions had results eventually. By that reasoning, any future turn in the stock market would prove the contention.”
Elliott Wave Theorist, March 2010

If anything, the face value of this chart argues that economic government intervention makes stocks go down.

There is simply no “cause and effect” relationship between government actions and stock market trends.

The stock market’s price pattern is governed by the Wave Principle:

“Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.

“….The market’s progression unfolds in waves. Waves are patterns of directional movement.”
Elliott Wave Principle, (p. 21)

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Permanent Crisis: The First 5 Years

Cheer up! This permanent state of emergency is doing a wonderful nothing to unwind the bubble…

SO 2012 will mark the fifth anniversary of the global financial crisis. There’s little reason to think it’s reached its end yet. Merry Christmas.

Banking and household leverage in the rich West has barely ticked lower from the credit bubble’s historic peak of 2007. Financial leverage has only been reduced by a fraction, while governments have been stuffed like a French goose with that new debt spurned by the private sector since 2008.

So why this slow, seemingly permanent pain? Because interest rates are still set at zero, with no uptick in sight – an emergency measure that’s now etched in stone. “There is a lot of financial stress out there,” the UK insolvency specialist Begbies Traynor moaned last week. “[But] if it wasn’t for low interest rates the number of insolvencies would have been twice what they are.” Twice as many debtors would have enjoyed a write-down, in short. But do you really think their creditors sleep any better knowing what’s keeping debtors in debt?

The gambit of low rates – first played in mid-2007 and now stuck – comes from studying the Great Depression of 80 years ago. If only the US Federal Reserve had slashed rates to zero, then today’s central bankers could have avoided the deflation of their grandparents. Low teaser rates under Alan Greenspan have thus become permanently low revolving rates under Ben Bernanke. Which is where the mechanics of this depression stands apart from the downturn of, say, 30 years ago.

Back then, central bankers imposed deflation by hiking short-term interest rates towards 20% per year. Today the credit crunch is priced into the weakest balance-sheets only, and in the interbank lending market, where liquidity has vanished again in 2011. Contrast with the early 1980s’ depression, when bond yields badly lagged policy in forcing through the deflation. Ten-year US Treasury yields, for instance, broke into double digits 10 months after the Federal Reserve’s overnight target rate breached that level. It wasn’t until 1983 that the curve reverted to normal, with 10-year bonds offering a higher rate of return than overnight credit held at the Fed.

The impact of this policy-driven deflation? A rise in the Dollar so strong – both in real purchasing and forex conversion terms – that it unwound all of gold’s plunge for non-Dollar investors.

That we’re living through deflation again today is plain, no matter how far the Fed and other central banks string it out. A deflation in credit, asset prices and economic activity. A deflation that doesn’t need shop prices to fall; it’s still “a deterioration of the monetary standard“, this one characterized by volatility as much as deleveraging, but also squeezing debtors every time the Dollar rises.

That in turn is squeezing creditors, of course, now terrified of default and writedowns but so far spared the actual pain. The worst of all possible worlds results. No new investment, because lenders won’t lend and debtors won’t borrow. No write-down or write-off of existing debt, lugging a permanent drag onto economic activity. And meantime the Dollar remains money the world over, proving last decade’s Cassandras early, wrong or just stupid.

Call me all three if you like; the last thing the world wanted pre-2007 or today is a rising Dollar. Not the US, China, Europe or anyone else. So just to screw the most people the most, that’s what we keep getting. But only in fits and starts. Which like the wonderful nothing achieved by zero interest rates, might just be the very worst we could ask.

Plenty of chart analysts and media hacks will tell you today that the price of gold just broke below its 200-day moving average. The smarter ones will add that it fell through the uptrend starting with the great deflation of Lehman’s collapse, too. But only in US Dollar terms, we note here at BullionVault.

Look at gold ex-the Dollar – as our bright orange line does above. The Dollar devaluation, forced through by Ben Bernanke cutting in line and slashing rates faster than anyone else in 2007-2008, worked such magic that non-Dollar investors are now – to date – wearing a much shallower top-and-drop pattern in gold so far.

This might matter. Because gold has outperformed all other assets (and very nearly all mutual and hedge funds too) since the eve of this crisis. Most people thank the inflationary response of central banks everywhere. A handful think gold’s rise might instead be due to bullion offering the perfect deflation escape – a route to extricating yourself from the debtor/creditor relationship underpinning the vast bulk of alternative homes for your savings.

Either way, a Dollar rally is rarely good for the gold price. And no one, least of all the Bernanke Fed, wants to allow a persistent Dollar rally on their watch either.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

He Chose Well

By: Paul Tustain

David Cameron was today forced in Brussels to choose between the free market and the vanities of overreaching politicians…

TODAY is a very sad day. We believe that the markets are telling us that there is a horrible abscess in Europe, and that the Euro is the pus. We believe that fuelled by injustice, the infection of nationalism will now tear Europe apart – making outright enemies of Germany and Greece, France and Italy, the Netherlands and Spain.

Our European friends are today irritated by Britain’s refusal to come to their drunken party. Not for the first time we are the odd man out, and being pointed at by the shallowest politician in Europe. It’s OK. We can live with a little name-calling for the moment, and we look forward to quietly rebuilding our friendships with every one of you in the future. We hope it will be soon.

You are right. Our financial system contributed – in part – to the mess we are in. But you are wrong as to the reason and the solution. What happened is that over a period of years the political classes in London, New York and the smaller financial centres of Europe worked together to hold down the cost of credit. Ever since 2001 they suppressed the will of the market for higher interest rates. They did this to foster the ‘feel-good factor’ and to get themselves re-elected. It was the irresponsible and self-serving policy of elected representatives all over the western world, and it is without any doubt the root cause of the explosion of credit which we now have to pay for.

The result of the explosion of credit was an enormous pile of cash accumulated at the banks of the world. It represented the savings of an older generation, and there was far too much of it. It was lent very unwisely. That happens. It’s life. And usually it means the creditors lose their money and gain some wisdom.

Only this time some of the creditors – particularly Germany and France – don’t want to lose their money. They want to force two or three generations of Greeks, Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany and France lent to your father, yet you become the indentured slave.

That should never be how bad money-lending is resolved. The lender should take the hit when the borrower cannot repay; it helps to focus his mind before he lends. In Britain we got rid of inter-generational debt servitude 200 years ago, and it is not progress to return to it.

As it happens in Britain we have the same deep insolvency problem to resolve, but it is going to be resolved in a different way. Our government is going to have to print to eliminate the debt – just watch. There is going to be a storm and Sterling will be murdered. Interest rates are going to climb sharply as world markets demand the return of their rightful position as the setters of the cost of money. Those rate hikes and concomitant inflation are going to eliminate twenty five years of savings, and twenty five years of a silly, credit-fuelled house price bubble. By the time it ends the creditors will have paid in full. Houses will be again affordable by anyone with a half decent job. Retirement at 55 will have been consigned to the dustbin. Student loans will have inflated to irrelevance, and Britain will again be a great deal fairer than it currently is.

In Europe you will doubtless laugh quietly as this storm hits us. But you will have no reason to make war on us, and you won’t want to, because your strength will be all used up making war on each other. We do not believe that 1,000 years of carefully constructed and often hard fought mutual independence should be sacrificed on the altar of a bad monetary union. We do not believe the people of Europe will want it when nationalist tensions materialise. We think that Europe’s political class is making a monumental error in order to hold on to something which carries their political credibility. We think they will fail and that Europe will suffer dreadfully for it.

It is a black day, because contrary to your belief we love Europe. We also love our free market and the way it exposes the vanities of overreaching politicians. Today you forced David Cameron to choose between the two, and he chose well.

Paul Tustain

Director

Settlement-systems specialist Paul Tustain launched BullionVault in 2005 to make the security and cost-efficiencies of the professional wholesale gold market available to private investors. Designed specifically to meet his own gold ownership needs as a risk-averse investor, BullionVault now cares for some $1.5 billion of client gold property, all of it privately owned in the client’s choice of low-cost, market-accredited facilities in London, New York or Zurich.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Catfish, Your Savings & Japan’s Gold Coin Giveaway

Don’t be greedy, or a giant catfish might force you to spew out your savings…

UNLIKE us – who are so smart today – ancient folk in ancient times used to believe the oddest things about how the world worked.

The Japanese, for instance, long thought that earthquakes were caused by a giant catfish, shuffling and shifting whenever the great god of Kashima forgot to keep his foot on a heavy stone which held the beast down, deep beneath the coast of Honshu. Honoring the Kashima shrine, some 80 miles north-east of what was then Edo (modern-day Tokyo) was therefore a good idea. Because tectonic upheaval, causing death and destruction, was a sign that the god was neglecting his duty.

November 1855 saw Kashima skip town, or so legend soon had it, leaving the god of fishing in charge of the stone and the catfish. What a mistake! The Great Ansei Earthquake killed 7,000 people at a stroke, and many more in the days and weeks after.

But it wasn’t all bad…

“Don’t be greedy!” one of the laborers urges his mates in this popular print, Mr.Moneybags launches forth his ship of treasure. “You’ll regret it if you save this money and an earthquake comes.

“Better go and spend it at the brothels and keep it circulating.”

The Kashima shrine itself was damaged in March 2011′s catastrophe. But the poor idiots of old-time Japan would still find a silver lining. Although some of the hundreds of namazu-e (catfish pictures) from 19th-century Japan show the beast captured and beaten – or even committing hare-kiri to say sorry – he also became a folk hero to laborers and shopkeepers, because he forced the wealthy to spend money on repairs and rebuilding.

Think of it as a divine take on Bastiat’s “broken windows” parable. Knocking things down is good for society (or so society says), since the glazier is paid and then spends that money in turn. Earthquakes are great for production, because they force cash out of locked chests into the pockets of carpenters, plasterers, bricklayers and masons – just the right type to keep it circulating again.

“For Edo residents,” one scholar explains, “the earthquake of 1855 was an act of yonaoshi, or ‘world rectification’.” In print after print, catfish shake or squeeze wealthy old hoarders who vomit or shit out gold coins, quickly scooped up by dancing laborers eager to spend it on booze, noodles and trips to what’s now known as Soap Land.

“Like typhoon-season floods and dry-season fires,” notes another 2011 look back, “earthquakes and tsunamis were understood as corrections of temporary imbalances in the vital force perpetually flowing through the world (known in Japanese as ki and in Chinese as qi). Periodic eruptions of natural violence released pent-up force and kept both nature and human society healthy by renewing them…Confucian philosophers as well as ordinary people believed that the economy followed the same principles. Just as ki flowed continuously in nature, money should be kept moving in the economy too, not allowed to stagnate and foster greed. For this reason, many people viewed capital accumulation distrustfully. Nature, they believed, censured it.”

Could anyone hold such a medieval view of economics today? Not outside a central bank or university, you might think. But greed is central to our depression’s mythology. From there, the attack on capital accumulation can’t be far off. And it’s ironic that to help keep money moving after the terrible earthquake and tsunami which hit Honshu this spring, Tokyo is now offering gold coins to investors buying its reconstruction financing bonds. On the minimum ¥10 million investment ($150,000) needed to qualify, however, Japan’s reconstruction bonds pay 0.05% per year without the coin, and a barely less miserly 0.3% with it if gold stays at today’s prices by the end of 2014. So the net effect is still to shake down Mr.Moneybags – otherwise known as Japan’s diligent household savers today.

Anyone calling this special half-ounce commemorative gold coin an “incentive” might sound like they need to raise money themselves to buy a calculator. But it’s not the first promotional effort tied to Japanese government bonds. Word reaches us here at BullionVault that special flyers – posted by door-drop in Tokyo – have recently been advertising government debt straight through the mailbox. As for coupons and premia, the Nomura brokerage is already offering its retail clients free shopping vouchers if they buy JGBs and lend to the government, too.

“The wealth of the realm belongs to the realm,” wrote Confucian scholar and advisor Yamaga Soko – who also developed the Samurai code of chivalry, bushido – in the mid-17th century. “It is not the wealth of a single person. Well should it circulate.”

Now compare and contrast French politician and essayist Claude Frédéric Bastiat writing 200 years later. “What would become of the glaziers, if nobody ever broke windows?” he asked in his famous parable of 1850, paraphrasing the “vulgar” mob who applaud the shards of glass on the street. Yet it is the shopkeeper needing to get his window fixed, “the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause…who is always kept in the shade…who shows us how absurd it is to think we see a profit in an act of destruction.” It is also the tradesman who stands for the capitalist, the diligent drudge minding his business. Shaken down like old Tokyo’s Moneybags, he can only watch in horror as his money – his treasure – is launched forth to common approval.

Here in the early 21st century, Occupy Wall Street think they know just who to choke with a catfish. “Hey, Paulson, you can’t hide, we can see your greedy side!” chanted the self-declared 99% at the hedge-fund manager in October, little caring that his fund has halved in value in 2011-to-date. The echo-chamber of TV news and financial blogs reckons the entire system is run by greedy bastards anyway. No doubt they’re right, but even before the crisis blew up, Fed chairman Ben Bernanke long ago blamed Asia’s savings glut for building imbalances in the global economy.

So how to shake cash from the hoarders? A Tobin tax on financial transactions looks a good start, even though retirement savers will end up paying, of course, as their pension-fund managers pass on the cost. Capping bank dividends only hurts savers again, because their income depends on such yields. Setting interest rates at zero aims to scare (or at least hurt) them for not spending money today. So too does printing more money, as Japan’s modern-day Moneybags know only too well.

“Your key financial asset, your medium of exchange – money – is also a savings vehicle (a store of value) and a safe asset (a unit of account),” explains Berkeley professor Brad DeLong. So “if an excess demand for financial assets is seen to cause a collapse in production and employment” – especially money hoarded in money, rather than being spent on new windows and brothels – “then it would seem immediate and obvious that generating an excess supply of financial assets would cause a revival.”

Immediate and obvious like a giant catfish making the rich puke gold coins, perhaps. Forcing a revival of spending by flooding the market with cash still hasn’t worked in Japan, but it has led to door-drops and vouchers to try and find new loans for the State. And further to DeLong’s proposal, our key financial asset and means of exchange is now something else, too: money is first and foremost a credit, held on deposit rather than hoarded in sock drawers at home. And being a credit, rather than tangible property, the vast bulk of money today is already out of the savers’ control.

Today’s Mr.Moneybags is by definition a lender. Indeed, his money’s already been lent out with gusto. The old miser has no choice; cash on deposit is owed to him, he does not own anything inside the bank’s vaults. On the bank’s balance-sheet, his savings are deemed “liabilities”, while on the other side of the ledger sit the banks’ “assets” – the loans it has made, using Moneybags’ cash. If the old miser (aka retiree or saver) withdraws all his cash, some debtor somewhere must repay their loan. And debt forgiveness is already being talked up – whether for governments in Europe or over-spent US consumers.

So blame greedy hoarders if you like. Just watch for the mob gathered round your broken windows, ready to choke you with a metaphorical catfish.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Great Western Crackup

By Peter Schiff, CEO of Euro Pacific Precious Metals

From World War II until very recently, the West – specifically Europe and the United States – was on a course for greater centralization, greater integration, and greater economic intervention. But this consensus is breaking down. In Europe, the euro has gone from steadily adding new members to now facing the prospect of having its weaker members quit. In America, the US Congressional Supercommittee has now officially failed in its mandate to bring even meager cuts to the bleeding US deficit.

This is the beginning of the end. Both the EU and US are politically paralyzed, seeming only to be able to make compromises that involve more spending, more debt, and more central planning. The results are all too predictable to free-market thinkers: bailouts leading to moral hazard, low interest rates leading to ballooning debt, and eventually a cascade of systemic failures – leading to more bailouts.

This was confirmed yet again last Wednesday when central bankers on both sides of the Atlantic announced a coordinated tidal wave of new money to bailout the Western banking system yet again. Now, the only money you can trust is the gold and silver in your pocket.

LIKE LEMMINGS OFF A CLIFF

The poison of Keynesianism has left the politicians unable to even listen to free-market solutions. Personally, I have found it nearly impossible to find a Keynesian professor or official to debate me – even though (or perhaps because) I have a track record of accurate economic predictions. You would think at least one of them would want to tell me why I’m wrong… to offer some excuses for their failure to predict the dot-com bubble, the housing bubble, or anything that has come after that.

This is just an illustration of what we, as investors and citizens, are facing. The halls of power, the media, and academia are completely closed off from reality. They’re clutching their theories and hoping that they don’t end up having to work for a living like the rest of us.

EUROPE

I have repeatedly stated that the fact that Germany has been resistant to printing more euros is the main argument in favor of the euro. Of course, the mainstream consensus is the opposite. The same people who pushed for entitlement programs that Western nations couldn’t afford are now arguing that the EU must use the power of the printing press to “help” bankrupt Greece, Italy, Spain, and others. Really, this is just a secret tax on those who chose to save for a rainy day, and it will lead the euro on the road to ruin just like the US dollar.

If Greece, Italy, et al, can’t stomach the austerity that comes with staying in the euro, they should withdraw and see how the bond markets treat them without the implicit backing of Northern Europe. Either way, they must be made to face the market consequences of their previous spending.

Unfortunately, with this past Tuesday’s announcement that the EU would provide another $10.7 billion bailout to Greece and Wednesday’s bank bailout announcement, there is no sign that Europe’s politicians are going to allow market forces to play out. Instead, repeated bailouts will ensure that other ailing economies, like Italy or Portugal, do not make the necessary cuts in time to avoid needing their own bailouts. And no one, save perhaps China, can afford to bail out the likes of Italy.

Thus, like pulling off a bandaid, the politicians have made the euro crisis more painful by drawing it out. This means more risk and more volatility for investors, causing them to abandon the supranational currency in droves.

AMERICA

Abandoning the euro looks like a wise course of action, but it becomes extremely unwise when you buy dollars instead. Remember, my concern with Europe is that they have started down a path that may lead them to the sorry state of the US. If you’re worried that your refrigerator doesn’t get as cold as it used to, you don’t move your perishables to another fridge that won’t even turn on!

In other words, the current status of the dollar is the nightmare scenario for the euro: no significant member-states are thriving, bailouts are assumed and given without significant debate, and the money supply is growing rapidly to cover the debts. At worst, the EU could be facing a rump euro comprised of the healthier Northern economies or years of debt monetization to try to “save” the PIIGS. But the US has already spent decades monetizing its debt and is now facing a ‘game over’ scenario. Remember, the EU might be going along with the latest bank bailout scheme, but the US Fed spearheaded it and the swaps are denominated in dollars.

The failure of the Congressional Supercommittee shows how laughable Washington – and, by extension, the dollar – has become. The Federal Reserve is frantically buying Treasuries at auction to make up for wilting demand from foreign creditors, such that it may soon hold 20% of all outstanding Treasury debt. Meanwhile, the Supercommittee failed in its meager mandate to slow the growth of new spending by $100 billion a year, barely a dent in an annual deficit that runs over $1 trillion a year – not to mention the $15 trillion in debt already accumulated. The failure caused ratings agency Fitch to downgrade its outlook on US credit, potentially joining S&P soon in stripping the US of its AAA. Perhaps the analysts at Fitch realize that if the Fed were to stop buying Treasuries, say because consumer prices started rising too quickly to ignore, then rising interest rates would add additional trillions to the debt problem, making default inevitable. Or maybe they’re starting to realize that getting paid back the whole coupon in worthless dollars is just another form of default.

In short, the US is going to be mired in economic depression for the foreseeable future, with no reform efforts likely, and so the Fed will continue printing as much as it can to paper over the problem. This is tremendously bearish for the dollar, even moreso than a euro facing the loss of a few weak member-states.

THE BUCK STOPS HERE

The knee-jerk buying of US dollars, which has sent metals prices on a roller coaster this fall, represents pure market manipulation by the Fed. Private buyers and foreign governments were selling dollars and Treasuries before this recent market action sent confusing signals. We saw a short rally, but on last Wednesday’s bank bailout news, dollar selling resumed in earnest. Overall, the trend remains: the Fed will continue to buy a greater and greater share of US debt until all the new money it’s printing sends inflation into the double digits.

So, in a world where the two major reserve currencies are both faltering, which asset is going to become the new foundation for international trade and personal savings?

A look at history sees periods of monetary debasement and market mania followed by a return to more fundamental values. Every successful civilization in history has relied on sound money to grow, always in the form of precious metals. With globalization, we live in a world where investors don’t have to live with their governments’ bad choices. Allocating a portion of your portfolio to precious metals means being able to sit on the sidelines and laugh at the comedy of the sovereign debt crisis. It means that when new dollars or euros are printed, your metals simply go up in price.

That is the ultimate resolution to this crisis. More banks, institutions, and individual investors will simply withdraw from the fiat money system and rely on precious metals as their reserve asset. As they do so, the fiat system will be all the weaker for the those left behind. After this period of uncertainty, a new consensus is sure to form, and the 24% run up this year alone indicates that gold may play a central role.

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.

Prechter: “The Trend Is Exhausted”

Robert Prechter explains what’s the real problem with today’s market

By Elliott Wave International

What is the real problem with today’s market? Watch this excerpt from Robert Prechter’s special, video issue of the August 2011 Elliott Wave Theorist. Prechter shows you how the buildup of dollar-denominated debt has brought us to what he calls a critical market juncture.

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Gift Wrapped Liquidity

Is the ECB about to give Europe’s governments and banks the biggest Christmas present of their lives…?

WITH CHRISTMAS a little over three weeks away, the European Central Bank may be about to hand indebted European governments – not to mention its banking sector – the biggest gift they ever received: an unlimited credit backstop.

It is now being widely reported that there ‘only ten days left to save the Euro’. Even Metro – the free newspaper found discarded by commuters on British trains and buses each morning – made it their front page splash today.

The FT’s Wolfgang Munchau was pushing this meme earlier in the week – but it was European commissioner for economic and monetary affairs Olli Rehn that really got it going with these comments yesterday:

“We are now entering the critical period of ten days to complete and conclude the crisis response of the European Union…There is no one single silver bullet that will get us out of this crisis.”

The ten day dead deadline refers to the European leaders’ summit at the end of next week. Is such a deadline justifiable? Will the Eurozone begin to disintegrate if no convincing solution comes out of that summit?

Quite possibly. Predictions of Eurozone demise within the fortnight could turn out to be self-fulfilling. An ultimatum has been laid down – if politicians appear to have ignored it, it could be fatal for what little confidence investors have left in Europe.

All of which could go some way towards explaining yesterday’s coordinated central bank action. The headline move was the lowering by 50 basis points (half a percentage point) of the cost of borrowing US Dollars. This makes sense given the speed at which international capital is fleeing Europe, as investors head for the perceived safety of the world’s sole reserve currency.

The coordinated central bank statements, though, seem to be preparing the ground for something else too. The following paragraph was common to all six of the central banks involved in the action (The Federal Reserve, the ECB, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank):

‘As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the US Dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. The swap lines are available until 1 February 2013.’

In other words, central banks are preparing to step up their provision of currencies other than the Dollar. This could be a sign that the ECB is about to take a more active role in the Eurozone crisis.

Indeed, each central bank’s statement had a version of the following, taken from the ECB, dealing with its own particular currency:

‘The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This action will enable the Eurosystem to provide Euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese Yen, Sterling, Swiss Francs and Canadian Dollars (in addition to the existing operations in US Dollars).’

Here’s a rough outline of where we stand in this crisis:

• Investors are wary of Eurozone government bonds. This reluctance to lend to governments has pushed borrowing costs to unsustainable levels in Italy and Spain. France may be next.

• It is hoped that the Eurozone’s rescue fund, the European Financial Stability Facility, will be able to solve this problem by ensuring there is sufficient demand at government bond auctions to bring yields back to sustainable levels – for example by offering partial guarantees on losses. However, the EFSF lacks the necessary funds to do this for larger countries, and is having trouble raising cash itself.

• French finance minister Francois Baroin has called repeatedly for the EFSF to be given a banking license so it can borrow from the ECB (Germany is dead against this). And here’s what Bank of France governor and ECB Governing Council member Christian Noyer said yesterday: “In a period of intense market disruption, it is essential to ensure that the monetary policy transmission mechanism actually works. This may involve temporary and exceptional interventions on those market segments where dysfunctions are most apparent.”

• European leaders now have a de facto ultimatum: sort this out by the end of next week, or else.

There is an ongoing push, led by Germany, for a ‘fiscal union’ – involving greater oversight of national budgets and the like. But fiscal integration is preventative measure – not a solution to a crisis that has already erupted.

Markets are looking for a solution this side of Christmas. The only agent in a position to act that quickly is the ECB.

ECB president Mario Draghi spoke to the European Parliament this morning. While he gave his support to what he called “a new fiscal compact”, he did make some comments that may hint at further ECB action over and above its ongoing bond purchase program (which clearly isn’t working, as Italian and Spanish bond yields attest).

“As you know, the ECB’s monetary policy is constantly guided by the goal of maintaining price stability in the Euro area over the medium term,” said Draghi.

“And when I say this, I mean price stability in either direction. This applies to both the setting of official interest rates and the implementation of non-standard measures.” (emphasis ours).

There was also this potential hint:

“I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.” (emphasis again ours)

Might that “credible signal” be an offer to provide whatever liquidity is needed to assuage fears in key markets?

There are several mechanisms, for example, by which the ECB might seek to prop up government bond prices (and thus keep yields down). It could find a way, as touched on above, to get more Euros into the hands of the EFSF. It could buy the bonds directly at auction (unlikely, and currently forbidden by several European treaties, but at this stage of the crisis little can be ruled out…). Or perhaps some other method would be found.

The net aim is the same whatever the mechanism: to get Euros to governments who need to roll over their Euro-denominated debt. If there are insufficient investors willing to hand over their Euros, logic suggests that one solution is to turn to the ECB, from whence Euros originate. The ECB, after all, has access to an unlimited number of Euros.

There are also fears over the banking sector, which yesterday suffered a swathe of downgrades from Standard & Poor’s (which in turn may have precipitated the central banks’ announcement). Lower ratings could seriously impair some banks’ ability to borrow in the money markets – which is also a reason we see the world’s lenders of last resort priming their pumps.

In short, get ready for a world of uncapped credit availability, as the authorities step up their fight against deleveraging – like the cavalry in a Western, riding over the hill when all hope seems lost. Saddle up, Draghi!

Long term, a liquidity boost would tend towards a higher gold price, other things equal. However, there could be significant downside risk for gold, with or without a solution being announced at next week’s summit.  If markets are unconvinced, we could see the sort of mass liquidation that has been common in recent weeks – and that has hit gold and silver along with stock markets.

If, on the other hand, the markets buy whatever the Euro leaders are cooking, then we could see some weakening of safe haven demand for gold, at least in the immediate term.

Either way, though, Europe will still be in a mess. Growth is sluggish (today’s Eurozone purchasing manager’s index shows a manufacturing sector shrinking at an accelerating rate).

Outstanding debts, therefore, will either be dealt with via default, or they will have their real value diminished – which means reducing the value of money itself. Default or devalue remain the watchwords for creditors.

So while the ECB may be convinced that it has ‘ten days to save the Euro’, if it ramps up its liquidity provision it could end up doing the exact opposite.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.