Wednesday, March 9, 2011

Right Advice but Wrong Price

Peter Souleles B. Com. LLB.
6 March 2011
There are many of us who have periodically aimed our pens at Jon Nadler of Kitco for his prognostications and thoughts on the value and role of gold. He has perennially predicted a downward sliding gold price and has consistently ruled out the possibility of gold playing a serious role in anchoring the world's monetary system to something other than fiat fantasies.

To this end there has been an unending parade of bankers, economists and analysts whom he has quoted ad nauseam to support his position. To date his "experts" have been badly discredited by subsequent price movements, yet he refuses to change his mantra despite gold continuing its upward march.

Mr Nadler has however consistently put forth another proposition which is at odds with the usual content of his commentaries. Consider the following:

"We advocate 10%, regardless of price. That should be a core holding for anyone, of any orientation, whether they believe in inflation, deflation or an unforeseen crisis of any kind. It's an "all-eventuality" type of holding."

Jon Nadler - May 20, 2010

"A core 10% gold holding is very much advisable for most investors with assets worth protecting."

Jon Nadler - February 18, 2011

Now let's weave the following two pieces of information into his advice to hold 10% of assets in gold.

  • There are approximately 160,000 tonnes of above ground gold in the hands of central banks, individuals and institutions in various forms.
  • The total of the world's financial assets comes to around $140 trillion according to McKinsey & Co.

If gold holdings were to make up 10% of financial assets they would have to be worth somewhere in the vicinity of $14 trillion or $87.5 million per tonne which in turn equates to $2,721 per oz of gold.

This price of $2,721 is based on financial assets alone, so if one was to make a calculation based on incorporating land and buildings into the equation, the value of gold could reach $5,000 and beyond.

These are of course back of the envelope calculations which simply serve to make a point rather than to provide an exact figure. Furthermore, much of the above ground gold is held as jewellery which has been paid for at multiples of the spot price to reflect manufacturing expenses and overheads, profit and taxes. Should gold jewellery be removed from the above calculation, the price of gold would be further boosted.

In fact should jewellery buyers decide to spend their dollars on bullion rather than jewellery, the price of gold will literally explode. This is because, at least in western markets, a $1000 piece of gold jewellery contains at best $500 worth of gold.

In view of the above, Mr Nadler has to reconcile his numerous apocalyptic scenarios for the price of gold, to its actual performance. Let us consider pronouncements he made in May 2010:

"Of course, now we've heard that such a price should be anywhere between $8,000 and even $15,000 an ounce, but I still think that between $680 and $880, or in that range, gold would be much more in balance with its fundamentals."


"Further, what am I to make of Societe Generale, which also said in April of this year (2010) that $800 gold is in the cards before the end of 2010? And so on; I am not alone in computing such figures."

To achieve a 10% allocation to gold with a price of $880 per oz, one would have to source almost another 340,000 tonnes of gold. This is too much magic, even for Mr Bernanke.

The only other way this allocation could be achieved with an $880 per oz price would be for the value of other financial assets to plummet. Even if this were to happen the relative value of gold would still shoot up.

So the bottom line is that Jon Nadler has been demonstrably and catastrophically WRONG WRONG WRONG in his predictions about the price of gold, but would have made a lot of money for anyone who bothered to take his advice to hold 10% of their assets in the form of gold.

Either way, Mr Nadler is a winner. If price drops he will say, "I told you so" and if price goes into orbit, he will say, "you should have taken my advice." You are indeed a clever man Mr Nadler and I salute you. A real Dr Jekyll and Mr Hyde.

To the rest of my readers I say this:

The world's financial assets may well be $140 trillion but the unfunded liabilities of governments the world over for pensions and medical care are at least twice this figure. Were the net present values of such obligations incorporated into the balance sheets of governments it would be clear that the world both now and into the future is bankrupt and beyond repair. This shortfall is slowly making itself felt but should the general populace fully understand the speed and magnitude of the approaching tsunami, there will be a wild scramble to exchange fiat currencies for real money and productive assets.

Past history has shown paper money to be of questionable value and in this period of history, derivatives, sub-prime loans, MERS and the resistance of the Federal Reserve to open its books and its vaults have further damaged the credibility of all paper, all institutions and the systems whereby these pieces of paper are recorded, valued and regulated.

For as long as the urge to print, borrow, make promises, conduct wars and spend beyond income, continues unabated, the value of paper currencies and precious metals will diverge until the former disappears forever. Moreover, whether you choose M1, M2 or M3 it is clear that these measures have left the gravitational field of real money and cease to reflect or be attached to reality.

Got gold? Got silver? Or are you still reading Mr Nadler's commentaries?

Peter Souleles

Sydney Australia

Monetizing Silver: Instant Prosperity

Jeff Nielson
7 March 2011
For well over a year, we have been forced to listen to "economic experts", media talking-heads, and government "leaders" yammering on and on about "currency wars" or "trade wars" - and all because people who know nothing about economics are wailing about how the value of their money isn't falling fast enough.

In this insane world, serial inflationists like "Helicopter" Ben Bernanke are deemed to be the "winners", since they are destroying their national currency the fastest. For those who are sickened by continuing to listen to their own governments lament about not destroying our wealth fast enough, let me recommend "taking a vacation" - in the real world.

In the "real world", people don't want their money to be worth less and less and less (and eventually nothing), they want it to be worth more. In the real world, it is considered a tremendous advantage for one's currency to appreciate in value.

Over the past several months, Hugo Salinas Price has trumpeted the growing "political movement" in Mexico to partially "re-monetize" silver - as a parallel currency to the current banker-paper (i.e. the peso). Indeed, commentator Ben Davies speculated that this factor alone would send the price of silver soaring higher, as yet another incremental source of demand (in a world where silver stockpiles are gone).

While no one has been talking about fully re-monetizing silver in any particular economy, I thought it was time that someone presented this scenario (at least in hypothetical terms) - as a means of countering the wave of nonsensical propaganda that devaluing one's currency was "the path to prosperity".

Since hypothetical examples are always most illustrative when we plug-in extreme parameters, let's assume that Mexico had already re-monetized silver - and had done so at $3.60/oz, a 600-year low for the price of silver. With silver now at $36/oz (and soaring rapidly), the citizens of Mexico would have seen their money increase in value by a factor of ten, over the past 15 years.

In the eyes of all the "experts" (telling us all to "devalue" our currencies as fast as we can), this would be seen as an economic catastrophe. However, since we are "vacationing" in the real world, let's analyze what would really have happened to Mexico's economy had it re-monetized silver at less than $4/oz.

To begin with, while all other nations are gripped in an inflationary panic from exploding commodity prices (as expressed in worthless banker-paper), the citizens of Mexico would be laughing about commodity prices - such as paying (once converted to banker-paper) $11/barrel for oil (as of the up-to-the-minute price).

While holders of banker-paper have seen the price they must pay for gold soar by nearly a factor of six, Mexico's silver-holders would be buying-up gold at the equivalent of about $140/oz - slightly more than half the price of gold when it was at its multi-decade "bottom" in its own price. All other commodities (including vital food products) would be so cheap that Mexicans would be likely unaware that those prices had increased at all.

Naturally, the much cheaper prices for raw materials also equates to much cheaper prices for all finished goods. Thus from automobiles to refrigerators to entire houses, everything would be much, much cheaper for Mexicans. Much like the holders of once-valuable Western currencies could strut around the globe "living like kings" once they had converted their currencies into the cheap paper of poorer nations, it would be the citizens of Mexico who would instantly become the world's new "kings".

"Hold on there!" protest the 'experts'. "You're conveniently leaving out the mechanics of trade in your analysis," they accuse. So let's take a closer look at international trade.

At first glance, we might have pause for concern. With Mexican labour now the most expensive/best paid on the planet, who will buy their goods so they can "afford" to buy all of those dirt-cheap imports?

First the instant arithmetic: with all foreign imported goods costing 1/10th their previous price, Mexico could see it's own exports plummet by 90% - and still be able to "afford" all they were buying before. The difference is that they would only have to surrender 1/10th as many goods (priced in their own currency) to acquire those products.

Furthermore, the stunted intellects of the "experts" leave them incapable of understanding the dynamics of such economics. While everything that Mexican workers buy would only cost 1/10th their previous amount, the wages paid out by employers would have remained the same (momentarily).

Obviously, Mexican employers would immediately start demanding wage-cuts from the workers. Note that if they cut the pay of their workers by even 80%, those workers would still be twice as affluent as they were before silver was re-monetized. Thus while there would be some grumbling, the overall arithmetic would still be extremely favorable for the Mexican worker - and even more so as his "falling wages" (in nominal terms) pushed him down into a much lower tax-bracket.

In other words, we have been brainwashed (by bankers) into believing that the only "mechanism" for ensuring some sort of (mythical) "economic equilibrium" is a world of permanent inflation structured into our economies (i.e. excessive money-printing of banker-paper). This is a total lie. In fact, deflationary dynamics work much, much, much, much better than inflationary dynamics at creating economic equilibrium, since they produce sustainable economic parameters - rather than simply an endless succession of banker Ponzi-schemes, followed by horrific "crashes" as each one bursts.

Lastly, the need/benefits of "foreign trade" have been grossly distorted by the economic charlatans. Understand the concept (the only one) which validates international trade: Comparative Advantage. This refers to the fact that some nations (whether due to efficiency or natural advantage) can produce certain goods more cheaply than other nations.

The way that international trade is supposed to work is that (naturally) nations only seek to export goods which they can produce "more efficiently". In reality the incompetent clowns who run our economies have flooded global trade with ridiculously subsidized goods. There are too many negative implications of such folly to even list them all - let alone properly explain them. But here's a start.

First, much of what is exported today is sold at a net loss - this is known as "dumping". That is, when we factor in direct subsidies, indirect subsidies, and tax-breaks, there is less-than-zero economic benefit for every unit exported. Heavily-subsidized U.S. agricultural products are a perfect example of this phenomenon.

The U.S. government has showered the agricultural sector with lavish hand-outs, including squandering most of the U.S.'s "water reserves", (as usual) leaving little-to-nothing for the people. Meanwhile, Ben Bernanke and Tim Geithner scheme to destroy the U.S. dollar even faster - so that the U.S. agricultural sector can sell yet more goods at a loss.

Because prices for goods are see-sawing back and forth erratically (due to the global markets being flooded with new banker-paper), there will be brief intervals where such trade can seem "profitable". However, converting the U.S. economy from a manufacturing power-house to a "banana republic" has been a pure money-loser - as evidenced by the overall collapse of the U.S. economy.

Thus, rather than strengthening our economies and raising our standards of living, much/most international trade is weakening our economies, and lowering our standard of living. Now let's return to the concept of "comparative advantage".

I submit that a nation which is able to buy oil, gold, base metals, food products and everything else at 1/10th the cost of other nations will have a pretty large "comparative advantage" in making and selling all sorts of finished products.

Even if that didn't occur internationally, such dynamics would certainly occur within the Mexican economy. While exports to other nations would certainly suffer, the trade-off is that Mexican manufacturers would be selling their goods to the world's most-affluent consumers and paying for their production inputs at 1/10th what non-Mexican manufacturers would pay.

Obviously the "comparative advantages" of trade within such an economy are enormous. Of course we don't have to view this scenario as totally "hypothetical". As I've written before, we have a previous precedent for a "high-wage" economy, with a "high-value" currency - and which also still managed to be a manufacturing power-house: the United States. Indeed, the U.S. economy reached its all-time peak in prosperity at the time when the U.S. dollar was at its peak in value versus other currencies and when the wages paid to U.S. workers were at the highest level in global economic history.

Everything we have been told about a "low dollar" and "low wages" leading to economic prosperity for the U.S. (or any other nation) has been all lies. In fact, each time the U.S. dollar takes another dip versus other currencies, the U.S. trade balance gets worse not better - as the soaring cost for imported oil grossly overshadows the increased revenues which this banana republic brings in from soy beans or cotton.

Worse still for this banana-republic, the corporate agriculture model created by the U.S. government is an oil-intensive industry, gobbling-up vast amounts of limited global production. This means that we could never see an extended period of time where "profits" from agriculture exports actually paid for more oil imports. The U.S. has entrenched itself in an economic "vicious circle" which must lead to its own annihilation.

We have now reached the pinnacle of global, economic insanity. Intellectually-bankrupt governments race against each other to see which can destroy its own currency the fastest - in order to prop-up an international trade paradigm which is losing money (on a net basis).

As is true in most facets of our economy, the optimal economic policies are to do the exact opposite of everything recommended by "experts". They say "destroy our currencies", I say "make our money better-than-ever". They say "trade or die", I say we must refuse to "die by trade".

To this point, I have only made my case by looking at a positive example of what happens when we increase the value of our currency (and then allow the natural economic advantages produced by that dynamic to flow through our economies). Some time in the near future I intend to present readers with the opposite dynamic: how destroying the silver-based monetary systems of the world's two most-populous economies was the real cause of "the Great Depression".

Jeff Nielson

Sprott says silver will keep outshining gold

By Euan Rocha and Pav Jordan

TORONTO, March 8 (Reuters) - Silver is likely to keep outperforming gold thanks to strong dollar flows, though both are still good investments compared with copper and other base metals, according to Eric Sprott, the hedge-fund manager and Canadian investment guru.

"I watch where the money goes and the money's going into silver. There's as much money going into silver as into gold in dollar terms," said Sprott in an interview with Reuters.

Sprott, who heads Toronto-based hedge-fund Sprott Asset Management, said it is important to note that silver available to buy is relatively scarce in terms of value, and that bodes well for further gains.

"There is 75 times more dollars worth of gold to buy than silver, but the money's going in one to one," says Sprott, while speaking on the sidelines of an investor event held in conjunction with the annual PDAC mining convention in Toronto.

Silver stocks in COMEX warehouses are near their lowest since April 2006, when the metal traded at $5 an ounce. Demand for silver coins has also picked up, especially in the United States, where it was at record levels early this year.

"My biggest thing is silver -- I think silver is going to go up a lot here. Gold's right in there, but not as good as silver," said Sprott, following a presentation to hundreds of investors in a resplendent ballroom at Toronto's Royal York Hotel.

Gold and silver -- traditionally viewed as a safe store of value in turbulent times -- have soared on inflation concerns, political turmoil in the Middle East and North Africa, an uneven U.S. economic recovery and the European sovereign debt crisis.

Gold touched an all-time high of $1,444.40 on Monday, while silver hit a 31-year high of $36.70 an ounce, after rating agency Moody's downgraded Greece's debt and violence flared anew in on

Oil markets brace for Saudi 'rage' as global spare capacity wears thin

click on the map to get the hi-res version

From the UK Telegraph
By Ambrose Evans-Pritchard

Goldman Sachs suspects that OPEC has been pumping far above its agreed quota since November and therefore cannot easily raise output much without cutting deep into global spare capacity.

Jeff Currie, the bank's oil guru, said Saudi output had quietly crept up by 700,000 barrels a day (bpd) even before the Libyan supply shock.

Assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields.

"We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries," he said.

If this picture is broadly correct, spare capacity is already close to the wafer-thin levels that led to wild price moves in mid-2008.

he flow of Libyan oil has so far fallen by 1m bpd. This may not sound much against global supply of 88m, but oil prices are determined by levels of spare capacity once supply tightens.

Beyond a certain point, the price spiral can kick in with explosive force until the economic damage crushes demand.

Libya's conflict has already cut spare capacity by a third. Hopes for a quick solution are fading as the country succumbs to civil war along ancient lines of tribal cleavage. A raft of new projects planned for the Sirte Basin by mid-decade will be mothballed.

Chris Skrebowski, editor of Petroleum Review, said the long-denied oil crunch is starting to bite. "We cling to the comfort blanket that spare capacity exists, but it is mostly fictional, or inoperable. If you take 2m bpd off the figure, the whole dynamic of global oil supply changes," he said.

A Wikileaks cable cited a Saudi geologist claiming that the kingdom's reserves had been overstated by 40pc. A second cable questioned whether the Saudis "any longer have the power to drive prices down for a prolonged period" on

A Simple Question - A review of the Arab uprisings

Keiser Report from Cairo: US Gaddafies

on Mar 8, 2011

This week Max Keiser and co-host, Stacy Herbert, report from Cairo on war profiteers blaming foreign 'financial terrorists' for the economic collapse that they helped cause. They also talk about Gaddafi's billions and China's gold. In the second half of the show, Max talks to investigative journalist and blogger, Hisham Allam, about Egypt's revolution and what his investigations into corruption are finding in terms of the Mubarak family's loot.