Thursday, April 14, 2011

How the Hunt Brothers Capped Gold...Yes, GOLD!

By Mike Maloney:

It began with a shoot-out at the Circle K Ranch. The 12 best marksmen would ride shotgun as the world's largest, privately owned stockpile of silver was secretly transferred into secure vaults.

No, this wasn't a shipment from Nevada's Comstock Lode to San Francisco in the Wild West of the 1870s. This was the 1970s, and the precious metal was being moved from New York to Switzerland.

Shining silver under a moonlit sky, three unmarked 707s waited at LaGuardia Airport. The Circle K cowboys stood guard, shotguns in hand. 40 million ounces of bullion - amassed by Nelson Bunker and William Herbert Hunt - were loaded in, and the planes took off under cover of darkness to their secret destination...

“The Hunt brothers were more concerned about long-term survival and preservation of their family's wealth than they were with short-term speculative profits.”

Millions of people have heard the "official" story of how the larger-than-life Hunt brothers drove the price of silver from under $2 an ounce to over $50 in an attempt to corner the market. At one point, the two colorful Texas oilmen owned the rights to more than half the world's silver supply. But then it all came crashing down on Silver Thursday, March 27, 1980, when silver fell to under $11 an ounce. Instead of making billions, the richest men in America ended up losing the bulk of their family's fortune.

The Hunt Brothers - Sacrificial Lambs in Wolf's Clothing

I've been studying the Hunt Brothers, and I have a different take on what really happened. Because of the way they flaunted their wealth, because of ties they had to the Middle East, and because they did invest so heavily in silver, the Hunt brothers were the perfect scapegoats for the anger and frustration most Americans felt towards the lagging economy of the day.

I believe that Bunker and his brother were used by the Federal Reserve, in collusion with COMEX and the Chicago Board of Trade (CBOT), to cap the price of gold - YES, GOLD - and save the U.S. dollar.

Inflation Indignation

The period leading up to silver's spike was fraught with inflation, stagnant economic growth, and political upheaval. In 1965, President Johnson increased deficit spending to finance his Great Society programs, tax cuts, and an unpopular war in Vietnam.

In 1971, realizing that the U.S. Treasury didn't have enough gold to redeem all the dollars held by foreign governments and investors, President Nixon pulled the United States off the Bretton Woods monetary system - the last vestiges of a pseudo gold standard. This action effectively created a worldwide fiat currency system that continues to this day.

OPEC-generated oil shortages, along with real food shortages, fueled public fears that the U.S. economy was in crisis. By the late 1970s, inflation had become public enemy number one.

The Hunt for Silver

The Hunt brothers could see the writing on the wall. With their great wealth being steadily eroded by skyrocketing inflation, they needed an asset to which they could safely anchor their massive oil fortune. At first, they thought of gold - history's safe haven. But in 1973, U.S. citizens were not allowed to own gold, and Bunker Hunt thought the gold market was too easily manipulated for government purposes.1

So the Hunt Brothers turned to silver, and started buying it at about $2 an ounce. Total world silver production was dropping, while industrial silver consumption was exploding. And once government and private silver stocks ran out, the shortfall between supply and demand was certain to drive the price of silver skyward.

By early 1974, the Hunt brothers had purchased futures contracts (agreements to purchase commodities in the future at a pre-determined price) for another fifty-five million ounces of silver. This was on top of the massive hoard of physical silver they already owned.2 In April, Bunker Hunt stopped in New York to visit the COMEX trading floor for the first time. When he walked onto the floor, the normal frenzy of activity came to a screeching halt. Who was this fat Texan in thick plastic glasses and a cheap blue suit? Rumors began floating that the Hunt brothers were attempting to corner the market.

Those who believe that the Hunt brothers were out to corner the silver market point to Bunker and Herbert's huge appetite for silver futures as proof that they were trying to manipulate prices. I see it a different way.

The Hunt brothers used their positions in silver futures to acquire more of the physical metal. Aware that cash was continually losing value due to inflation, they settled their futures contracts with physical delivery of bullion, instead of cash, as a hedge against the government currency monopoly and global turmoil.

I believe that the Hunt brothers were more concerned about long-term survival and preservation of their family's wealth than they were with short-term speculative profits. That would merely have added a few more paper dollars to their vast sums of rapidly depreciating currency. Bunker Hunt was well versed in Germany's disastrous hyperinflation of the early 1920s, and he was genuinely concerned about going broke holding paper assets.

In an interview with Barron's financial magazine, Bunker kept quiet about his silver investments. But he made no secret of his distaste for the dollar: "Just about anything you buy, rather than paper, is better," he said. "...If you don't like gold, use silver, or diamonds or copper, but something. Any damn fool can run a printing press."3

If You're Losing, Change the Rules

By October 3, 1979, silver hit $17.88 an ounce.4 The two major U.S. exchanges, COMEX and CBOT, started to panic: They held a measly 120 million ounces of silver between them, an amount typically delivered in a busy month.5 With silver prices pushing to new heights as new buyers rushed in, the exchanges became fearful that a default (inability to deliver) was imminent.

The silver rush continued to accelerate, led by the Hunt brothers and their Saudi Arabian business partners. The Commodity Futures Trading Commission (CFTC), the government's futures watchdog, had become seriously alarmed at the prospects of a shortage on the exchanges, and tried persuading Bunker Hunt to sell some of his silver.

The billionaire resisted, believing that silver was a long-term play with an integral role in the future global economy. The CBOT, backed by the CFTC, finally decided to put a stop to the Hunt brothers' buying - by changing its rules.

Margin requirements were suddenly raised, and traders could hold no more than 3 million ounces of silver futures; those holding more were placed in forced liquidation. Bunker Hunt cried foul, accusing exchange board members of having a financial interest in the markets - an accusation that would later be proven true.

Then, the U.S. Federal Reserve and its chairman, Paul Volcker, added to the Hunt brothers' troubles by strongly encouraging banks to stop making loans for speculative activity.

When Silver Sneezed, Gold Caught the Cold

On January 7, 1980, the other major U.S. exchange, COMEX, changed its rules also. Investors were limited to 10 million ounces in futures contracts, and any amount above that had to be liquidated by Friday, February 18.6 On the very next trading day, Monday, January 21, as silver reached a record high of $50 an ounce, the Hunt silver hoard peaked at a mind-boggling $4.5 billion, (that's $43.5 billion in Shadowstats CPI-adjusted 2011 dolars!)5

On the same day that silver hit $50 and silver futures topped out at $52.50, gold's price set a new record of $850 and gold futures peaked at $892. COMEX, terrified that it would be forced into default, announced - with the backing of the CFTC - that trading in silver would be limited to liquidation orders only, eliminating any buyers.

With no new buyers, the price of silver could not go up. So this rule was basically the same as saying, "Until this rule is lifted, the price of silver will only go down." Of course, silver began to plummet, and on that same day so did gold.

Was it just a coincidence that gold and silver peaked at the same time?

Could it be that many large silver traders also held gold?

Wouldn't the gold traders on the exchanges have known what happened to the silver traders and said to themselves, "Oh my God...if they can do that to silver, then gold is probably next"?

From Billions to Bust

On Silver Thursday, silver dropped from $15.80 to $10.80 an ounce. The stock market also crashed, fueled by rumors that the Hunt brothers would liquidate stocks in order to cover their silver losses. Because most of their silver bullion had been purchased at under $10 an ounce, the Hunts were still ahead of the game on their physical silver. But in the futures market, where their average purchase price was near $35 an ounce, it was a different story.

It became easy for the government to label the Hunt brothers as market manipulators - both in the court of law and in the easily swayed court of public opinion. Bunker Hunt filed for personal bankruptcy and was charged with trying to corner the silver market. He settled with the IRS for $90 million and was fined an additional $10 million by the CFTC.7

Why were the Hunt brothers torn down? Gold and silver are the canaries in the coal mine: Their spiking prices reflected the public's loss of confidence in fiat currencies - like the U.S. dollar. So, the government and banking establishment had a vested interest in keeping gold and silver prices from exploding.

Do you think it's possible that the Federal Reserve may have realized they could suppress the price of gold and save the dollar - while making it look like they were really protecting everyone by going after the Hunt brothers?

After scrutinizing the evidence, my conclusion is that the Hunt brothers were sacrificial lambs. The Hunt brothers broke no laws. The CFTC, COMEX and CBOT simply changed the rules in the middle of the game. And the U.S. government, eager to stop the rush to gold and silver that threatened the credibility of its own fiat currency, had no problem looking the other way.

Even Jeffrey M. Christian, Managing Director and founder of CPM Group and one of the world's foremost authorities on the markets for precious metals, told me in an interview that he believed the Hunt brothers only added between 75¢ and $1.00 to the price of silver.

Silver Linings: What the Hunt Brothers Can Teach Us Today

The Hunt brothers got into trouble because they exposed themselves to a huge amount of risk through their leveraged investments. Leverage makes a bigger impact when you're losing than it does when you're winning: It can be as blunt as a bowling ball on the way up, but as sharp as a surgical laser on the way down.

In my view, there's simply no substitute for physical ownership of your own gold and silver. This is especially important today, as we see the fiat currency system showing severe signs of instability.

Whether the Hunt brothers were victims of their own greed, the greed of board members on the exchanges, a desperate attempt by the Fed to save the dollar, or some combination of these things, it's clear to me that the fall of silver in 1980 brought gold down with it and bought the dollar some extra time.

We have no way of knowing how high gold and silver would have gone if the government and banking establishment hadn't gone after the Hunt brothers. We'll never know if the dollar would have survived. We do know that gold peaked when silver peaked, and we know that gold fell when silver fell.

In the near future, both of these metals may again start taking off into the stratosphere. And this time, the Fed won't have the Hunt brothers around to stop them.

- Michael Maloney

This is a free summary of the 2-part in-depth Hunt Brothers articles available to subscribers. Sign up for a free trial (no credit card or personal information required) to check out all the articles and analysis by Michael Maloney and the team.


1. Tuccille, J. (1984). Kingdom: The Story of the Hunt Family of Texas. Washington D.C.: Beard Books. P. 312.

2. Seagraves, J.D., Bunker Hunt's Attraction to Silver: A History of Cornering the Silver Market,

3. Hurt III, H. (1980, September). SilverFinger: How billionaire Bunker Hunt tried to corner the silver market - but cornered himself instead. Playboy Magazine.

4. Seagraves, J.D., Bunker Hunt's Attraction to Silver: A History of Cornering the Silver Market,

5. Matonis, Jon. (2009, January). Hunt Brothers Demanded Physical Delivery Too. The Monetary Future,

6. Matonis, Jon. (2009, January). Hunt Brothers Demanded Physical Delivery Too. The Monetary Future,

7. Seagraves, J.D., Bunker Hunt's Attraction to Silver: A History of Cornering the Silver Market,

8. Tuccille, J. (1984). Kingdom: The Story of the Hunt Family of Texas. Washington D.C.: Beard Books.

9. Williams, J. (1995). Manipulation on Trial. Cambridge: Cambridge University Press.Hurt III, H. (1982). Texas Rich: The Hunt Dynasty from the Early Oil Days through the Silver Crash. New York, NY: W.W. Norton & Company.

Gold Mania: Are We There Yet?

Louis James, Senior Editor, Casey’s International Speculator
It's understandable that people want to know where the precious metals market is headed next. And not just because big fluctuations can be nerve-wracking, but because it makes a big difference how you'd invest today if, for instance, you think there's a big correction ahead (save cash to buy cheaper) or not (load up and ride the wave).

But the reality is that I don't know. Nobody knows what will happen next.

That's why it's called speculation.

Further, you can be right about the trend and still get wiped out if your timing is wrong. That's why it's easier to say what is likely to happen than what is likely to happen next.

And that, in turn, is why we at Casey Research still have quite a bit of concern and uncertainty about a possible correction in the near term, even though the Casey Consensus is unanimous in projecting rising prices for precious metals for years to come.

Some investors are tiring of our cautioning of a "possible correction," "waiting until you see the whites of their eyes," and so forth. Some wish the market would stop dithering and just head north into mania territory. Or wish Casey Research to stop dithering and just start issuing lots of Buy recommendations. But other, more nervous readers seem to wish we'd just admit that the market has topped and issue a Sell on everything - time to cash in our chips and go home!

I am sympathetic, but Mr. Market doesn't know our desires and wouldn't care if he did. We would be doing our subscribers a grave disservice if we pretended to know which way he'll move next, when we don't. And anyone who claims they do know is likely a former New York bridge salesman.

This is why we've been steering a middle course for some time. We're not out of the market; many of our recent picks have done spectacularly well on gold's new nominal high. But we're also not all in.

Let's look at a simple snapshot of our most fundamental trend, the price of gold. Compare this chart of spot gold over the last year with the one below it, showing the same thing during the months before and after the 1980 spike. Does it appear to you that we've hit the same sort of peak? Me neither.

Of course, history seldom repeats, although it does rhyme. Here's a 10-year chart of gold during the current bull market.

This chart looks a lot more like, if not a spike, at least a price peak that could now be set to slide downwards for the next 10 years.

But don't forget gold's biggest picture, the inflation-adjusted price since it was set free by Nixon in 1971.

In nominal terms, gold certainly seems to have scaled its prior peak; in real terms, it's still got a long way to go to beat the 1980 spike.

All of the economic and financial factors that have contributed to this precious metals bull market remain in force, and many of them have worsened. And if a big and broad market correction hits us again, the precious metals and related stocks will get squeezed, if only temporarily. The 2008 crash proved that such a squeeze can be very sharp and painful - even for groups like ours that did see it coming.

Assuming you agree with me and the Casey Consensus that this metals bull market is going to produce a gargantuan Mania Phase that lies yet ahead, I'd like you to try a mental exercise:

Ask yourself what would happen if the current sharp rise is actually rhyming with the sharp rise in the early 1970s, not the big run-up to the 1980 peak. If so, and if history continued rhyming, that'd put us before the biggest gold correction ahead of the mania.

History may not rhyme that much at all, of course, but just think about it:

  • If you had bought during the 1974 peak, would you have been able to hang on through the ensuing 50% retreat to profit from the eventual mania? Would you be able to shrug off missing the lower prices available the following years and be content with your future profits based on 1974 buying?

If you answered yes, and you are certain you won't need the cash invested for a year or two (no margin buying), then life becomes simpler for you. Buy the best of the best companies and forget about them until the Mania Phase arrives. If you are this confident - or disagree with us that another steep correction is likely in the next major economic shock - you might just work on building the best portfolio you can, for profit during the coming mania.

  • Or, if you bought the 1974 top, would you kick yourself - hard - for overpaying and not having the cash to buy during the pullback?

If so, then you should take first tranches of only the best plays and keep plenty of powder dry for the time when the economy exits the eye of this most massive economic storm in modern history. Given the number of agonized vs. serene emails I got during the crash of 2008, I suspect that most investors fall into this group, so this is the context for most of our recommendations. If this rough grouping is yours, admit it, embrace it, and hedge your bets on Mr. Market's erratic behavior accordingly.

Either way, it's crucial for speculators to be honest with themselves about their own strengths and weaknesses. Happily, either way you still want to focus on the best of the best. The difference is in what you're willing to pay for them, and when.

Incidentally, if we get another crash-induced bottom, I believe it will be the last before the Mania Phase kicks in - the next and last best chance to really back up the truck and position yourself for truly spectacular gains.

[Month after month, Louis James provides the market's best investment advice in the junior mining sector… and his amazing track record has proven him right. The hand-selected, small-cap exploration stocks he recommended in 2010 outpaced the S&P 500 by 8.4 times. Find out more here

US Currency in Circulation & Barron's Gold Mining Index

Mark J Lundeen
9 April 2011
Exactly what is money? Looking at Wikipedia's definition of what money is, it's obvious that money is more a dynamic economic catalyst than just an asset to be spent.
  • Medium of exchange (frees society from barter exchanges)
  • Unit of account (standardizes the terms of commerce)
  • Store of value (allows for secure saving over time)
  • Standard of deferred payment (allows the creation of a bond market for long-term capital formation)

And economic catalyst is the precise concept to understand how money functions in an economy. Like all catalysts, money facilitates a process without being consumed.

In our ancient pre-history, peaceful trading had to be done without the benefit of money. Archeological finds of copper knives from Spain and France, at England's Stone Hedge provide an intriguing hint of commercial activity in the British Isles, trading across the English Channel over 5000 years ago. The American Indians never developed an iron and steel industry. Yet, trade with Europeans on the east coast of North America routed steel blades all the way to the Pacific Ocean, by way of trade between the tribes. But these are examples of trade by barter, not exchanges of goods and services facilitated with money.

Gold and silver have always been highly valued, as they were by the Incas and Aztecs, but coins for monetary purposes possibly go back as far as Mohenho-daro, in Pakistan (2600-1750 BC). King Sennacherib of Assyria (705-681 BC) minted shekel coins, but he saw war as a better means to gain wealth than commerce. Coins for commerce didn't really take off until King Croesus, of Lydia (560-546 BC) minted coins of gold and silver, whose weight and purity was guaranteed by the state.

Why did King Croesus begin minting coins? No one exactly knows. Maybe he began minting gold and silver coins because he found them beautiful. It's doubtful he fully understood the economic dynamics his coins were to unleash. No matter, the citizens of Lydia who formerly had to barter sheep for pottery (a difficult transaction if no artisan of clay had need for sheep on market day), could now base their trading on a common term of value: King Croesus's gold and silver coins. Now, bringing sheep to market guaranteed its owner that they would walk away with coins, and bringing coins to market allowed their owners to buy anything offered for sale.

Lydia became fabulously rich, thanks to gold and silver coins circulating in the markets, functioning as an economic catalyst. Sheep got eaten, pots of clay got broken, but the coins of gold and silver used in trade were unaltered in the transaction. With no interference from a political class, Lydian coins continued circulating from hand to hand in an endless stream of economic activity. So, coins became a powerful stimulant for economic activity, and political power. The world was never the same again.

Credit is not money, but the belief that lent funds will be repaid. Credit can also function as money. In fact, credit is the major component in most monetary metrics, such as the monetary aggregates M1 & M2. Viewers of CNBC are frequently informed that corporate America is "flush with cash", suggesting some figure greater than a trillion dollars. The same is true for cash held by mutual funds. From the good folks at ICI, who compile weekly data on money market funds, we see that money market funds currently hold a total of $2.73 trillion dollars in "cash." But with CinC (actual paper dollars and base metal coins in circulation) currently just over $1 trillion dollars, we know that most "cash" today is not cash at all, but credit - debt awaiting repayment.

Credit can be used for many purposes, some vital, some not. Wimpy's "I will gladly pay you Tuesday for a hamburger today" is the economic basis for most consumer credit and government debt. After Wimpy, the City of Detroit or the State of California spends their lent funds, there is seldom any collateral a creditor can foreclose on, in the unexpected situation that come Tuesday, Wimpy, or Sacramento, California is a bit short of cash. Are some of Wimpy's IOUs, credit created for past hamburger consumption, now sitting in your pension fund, or life insurance company reserves? Don't doubt that for a second!

With Doctor Bernanke's "policy" since December 2008 of low interest rates and regular, massive injections of funds into the banking system, allowing deeply indebted consumers to continue running up credit card debt, and allowing all levels of government to continue runaway spending, we can be sure that Wimpy got his fill of hamburgers.

Here's a YouTube video explaining the technical aspects of consumer credit. Okay, it's a Popeye cartoon, but it better illustrates how consumer credit works than anything you'll see on CNBC. At 4 minutes and 36 seconds, stop the video and note how much Popeye was charging for a bowl of soup or a hotdog in 1957, one year before the run on the US Treasury gold reserves began: fifteen cents.

Don't get me wrong, credit creation artfully done is a wonderful thing! During the gold standard, credit creation funded the industrial revolution, and credit once provided a more equitable distribution of wealth than state socialism ever achieved in its sorry 100 year history of inflationary monetary policies. Wimpy, and the Keynesian academics would surely disagree with this, as the gold standard forces economic participants to bring something of value to the market, if they are to share in the wealth others create.

At the root of this disagreement lies the question of exactly who is entitled to the money and credit circulating in the economy. Proponents of the gold standard believe that money and credit belong exclusively to those who create wealth, by offering labor, goods or services that other producing members of society are willing to exchange their money for. The gold standard also directs credit into productive uses that provide a return of lent money, plus interest. The gold standard punishes those who use debt to fund current consumption, both governments and individuals. But ultimately, so does paper money.

This wise policy can prevent today's youth from becoming tomorrow's aging poor, and inhibits governments from becoming a hobgoblin, consuming their citizen's wealth as it corrupts everything it touches with legislation & regulations. So, in a world where the economy is financed by sound money, banks provide a safe place for people to deposit their excess savings. Loans, by necessity, are for funding commercially viable activities. With no Central Bank injecting phantom-funds into the banking system, at rates artificially determined by ivory tower academics, banks, long ago, had to pay meaningful rates to attract deposits from the public, to fund commercial activity.

With the gold standard's insistence that money can only come to those who bring something of value to the market, Wimpy, Keynesian economists & social utopians have never approved of gold as money. Their preference will always be for a form of money that can be lent-into-existence. "Liquidity injected" into the banking system becomes money lent-into-existence when banks make personal loans for consumption (credit cards, auto loans, and no money down, 30 year mortgages). To the extent that Washington spends more than it taxes, it spends money into existence.

The long term consequences of this policy (creating credit from nothing for the purpose of funding current consumption), are best illustrated by a chart of the US National Debt. The US Treasury is forced to continually roll over past debts, as the proceeds from past debts were used by the US Government in ways that provided no economic return. When one rolls over their debts, it's because the funds spent haven't earned enough to pay off their past debt, and nothing Washington, or government in general spends our money on is profitable.

The big push for "Urban Renewal" by academic "Social Engineers" of the 1940-60s has long since been forgotten by most, but was well covered by Barron's at the time. The return on these "investments" in America's inner-cities, as predicted by Barron's, has been dismal. And the debts created to fund these socialist-urban catastrophes are STILL rolling over in the US National Debt after six decades. Incredibly, US Treasury bonds were much sought after in every global financial scare during the Greenspan era as "safe haven" assets. When purchasing US Treasury debt, do people really know what they are buying? I don't think so!

So as we see above, Washington's past debts, which funded one Soviet style economic disaster after another, are not only being rolled over, but new debts are increasing the US national debt exponentially. The expansion of debt to the scale seen above is only possible because gold was replaced with debt backed money, which could be "injected" without limit into the economy like gasoline is to an engine. With such confused notions about the proper function of money in a healthy economy, the US Congress proceeded to legislate greater and greater quantities of debt backed money into existence, increasing the rate of growth of the national debt. And as the dollar is backed by US Treasury Debt, so has the supply of dollars.

Generations from now, economic researchers will wonder how such a harebrained scheme could have been allowed to go on for decades, a scheme that obviously lined the pockets of politicians and bankers, at great expense to private citizens and global commerce. The answer to that question is that the politicians and bankers found willing accomplices in academia, economists who were more than willing to compromise their professional integrity to support the debt-as-money scam in return for a generous piece of the action. Via the student loan program, educational grants, and government sponsored research that funds junk science, colleges and universities have grown fat on the debt based dollar, and "higher education" has shared its enthusiasm for debt, and antipathy for sound money with generations of their students.

This link to an August 2006 CNBC, eight minute debate (at the very top of the mortgage bull market), between Arthur Laffer (a famous "supply-side economist) and Peter Schiff (a notable defender of sound money) is a real eye opener in 2011.

Five years later, "mainstream" economists like Dr. Laffer, et al, have lost all credibility. Keynesian and Monetarist theory has now been thoroughly discredited by their complete inability to forecast the gaping chasm lying less than a year away in 2007, unlike Peter Schiff and the Austrian School Economists, who saw it coming. True, the panic of October 2008 was still 2 years away, but default rates on subprime mortgages were already increasing by late 2006/early 2007, and Bear Stearns announced liquidity problems on their portfolio of mortgage backed securities in the summer of 2007. Still the mainstream economists refused to face reality.

I don't mind tooting my own horn every now and then, but I predicted the coming debacle in the mortgage market when I penned a piece for Bill Murphy's Le Metropole Café: Mortgages - What the Bank Won't Tell You in February 2004, where I concluded:

"FDR's "policy" for American mortgages blew up some 40 years after it was implemented. The mortgage "policy" of Carter, Reagan and Bush the first, won't last that long. --- long term American mortgages will perform in the future for the current holders as they had in the past for the Savings and Loans."

Doctor Laffer may be clueless on the economy, but I'm sure his income is still generous. Who would pay for such horrible advice? Washington, via government-grant money to academia, and Wall Street with their consultation fees. And where do they get their money from to pay for Doctor Laffer's work? This is straight from the horse's mouth:

"We make money the old fashioned way. We print it." - Art Rolnick, Chief Economist for the Minneapolis Federal Reserve Bank

And what is Art's favorite hobby when he's not "printing money?" Economic Education; who could have guessed!

Like most money spent on such research, Washington and Wall Street really don't care if someone like Doctor Laffer is right or wrong, as long as his research supports the current debt-based money system, and continues to carry considerable influence with the college "educated" public.

BEV Chart for the Barron's Gold Mining Index

It's time to move on to the Barron's Gold Mining Index (BGMI). My data goes back to 1920, however Barron's only began publishing the BGMI in 1938. But as the BGMI was comprised of only two companies in 1938:

I was able to backdate the data when a friend of mine, Goeff, obtained price data for Homestake Mining from 1920 to 1938 from the New York Times. Thanks Goeff!

Looking at the Barron's Gold Mining Index with the Bear's Eye View (BEV), we see that there have been four bull markets in the BGMI since 1920, which I've placed in boxes:

  • May 1925 - March 1936 -------------: (Gain of 1254%)
  • November 1948 - March 1968 ----: (Gain of 911%)
  • December 1969 - October 1980 --: (Gain of 1331%)
  • October 2000 - To Present ---------: (Gain of 598%)

As the Bear's Eye View is a technique of examining bear markets, and corrections within a bull market, it cannot display gains above a previous bull market's high. Also, for the BGMI bull market of the 1950s & 60s, I chose the 1948 bottom as a start date, not 1942's. Nothing wrong with 1942, but the 1948 bottom was after Bretton Woods was ratified. By the way, the 1925-36 bull market saw its TZ in 1936, not 1939, although it may appear so in the chart below. In March 1939, the BGMI came within 0.91% of making a new Terminal Zero. Close, but no cigar.

May 1925 - March 1936 -------------: (Gain of 1254%)

An interesting historical fact, documented in Allan H. Meltzer's, "A History of the Federal Reserve Vol. 1", & Ron Chernow's, "The House of Morgan," is that after WW1, The United Kingdom wanted to return to the gold standard, as it should have. However, during the war, the Bank of England printed more paper pounds than they had gold to back them. Not wanting to devalue the postwar pound, the British "policy makers" foolishly priced the pound to prewar levels, eventually leading to a run on British gold.

An interesting date in this charade was 28 April 1925, when the Chancellor of the Exchequer, Winston Churchill announced to the House of Commons that the UK was returning to the Gold Standard; however this was after the House of Morgan, and the US Federal Reserve, provided funds and credits to the Bank of England (BoE). I won't go into further detail, other than to say that the BoE continued receiving support from the US "monetary policy makers," in the form of artificially low US interest rates to help prevent the run on British gold. This resulted in a bubble in the US real estate and stock markets, which ultimately deflated causing the crash of 1929, followed by the Great Depression in the 1930s. Meltzer tells us that this affair led the "policy makers" to conclude they needed to take a more "activist" approach in the future. As I recall, Doctor Bernanke said something similar to Congress in October 2008.

Anyone who has studied the Great Depression's bear market knows that Homestake Mining, and Alaska Juneau Gold had a fabulous bull market, while the rest of the economy was in ruin. My source is Wigmore's "The Crash and its Aftermath." But what's made clear in the BEV chart above, is that the 1930s bull market in Homestake Mining actually started in 1925; just 5 weeks after Winston Churchill's April announcement of the UK's return to the gold standard! It's amazing how markets respond to political influences.

Next is the WW2 era, which in the BGMI's BEV Plot we could say started at its March 1936's Terminal Zero.

From a BGMI perspective, the depression ended and the World War 2 era began with its 1936 BEV's Terminal Zero (its last all-time high of the 1925-36 bull market). This TZ marks a logical point in time where the world turned its attentions from domestic, to international concerns. If war and global chaos were actual reasons for gold mining stocks to rise, we should have seen a historic bull market in the BGMI during World War 2.

* But we didn't *

What actually happened was the BGMI (now using the published data from Barron's) crashed 67%, and bottomed just a few months before the Battle of Midway.

November 1948 - March 1968 ----: (Gain of 911%)

I took 1948 for the start of my BGMI bull market, but if you chose 1942 you would not be wrong. The war years were abnormal, so I decided not to use the 1942 date in my analysis. Look at the red circle I placed over the November 1945 peak in the BGMI: The guns of WW2 were silent, Bretton Woods, with its $35 to one ounce of US Gold link was in place * and * holding (as we saw in Part 2 of this series on Currency in Circulation), and the BGMI began a 3 year decline on this happy news for the US dollar.

But this happy situation was changed in 1948, when the US monetary printing presses started a 20 year bull market in the BGMI, whose Terminal Zero ultimately occurred just days before Buckingham Palace announced to the world that the London Gold Pool was being shut down, and a two tiered gold market was created. One market for central banks, who promised to continue trading their monetary gold at the set official price of $35 an ounce, and a new public market for gold, where buyers and sellers would set the price.

Buckingham Palace's 1968 public announcement, and the creation of a two tiered gold market, had a radical effect on the gold mining shares. Before the closing of the London Gold Pool, bull markets in the BGMI were normal affairs, whose chart patterns looked very similar to bull markets for the Dow Jones. But afterward, BGMI bulls became wild beasts. Look at the BGMI before and after the dashed line marking the Buckingham Palace announcement. We entered a new world, where "monetary policy" was capable of anything but prudence.

December 1969 - October 1980 --: (Gain of 1331%)

Look at the extremes in volatility the BGMI displayed from 1969-80. Washington took the world off the gold standard, and the mining shares went wild, with bull market corrections of over 65% becoming common! Three decades ago, in June of 1982, with the BGMI down 73%, did anyone even realize that the bull market was over? As documented in Barron's: many didn't! This was the craziest bull market ever! Lots of the old-timers talk about all the money they made in gold, silver and mining shares during this time. Really? Ask them how much money they actually took, and kept home; after 1980.

I purchased a few 1 oz silver medallions from the Franklin Mint before I enlisted in the Navy. I left San Diego for Hawaii on the USS Mobile. We were going on a six month deployment to Asia. When we arrived in Hawaii, I went to the library to check out Barron's January 1980 issues. When I saw silver at $50, I went back to the ship to write my sister to sell my medallions. I still chuckle about that, writing a letter to a family member to sell silver in January 1980.

October 2000 - To Present ---------: (Gain of 598% - so far)

The 1980-2000, 82% bear market was the longest & deepest bear market for gold mining shares in the past 90 years. The 2000 bottom was a HARD BOTTOM; a bottom so extreme that speaking kindly of gold, silver or mining shares actually invited ridicule and hostility! But, it's from such bottoms that historic bull markets are born. In 2000, when shares in gold, and silver mining companies were dirt cheap, no one wanted any, now people don't want them because they cost too much. But mark my words: before the current bull market in the BGMI is over, investors will be willing to pay any price to jump onboard!

Don't think so? Look at what happened after the December 2008's, 70% correction - just two years later the BGMI was making new BEV Zeros (new all-time highs). What other sector see * frequent * bull market corrections of over 60%, and then powers back to new highs in less than two years? Since the closing of the London Gold Pool in 1968, such corrections and powered rebounds are standard occurrences with the shares of precious metals miners during bull markets.

In the next few years, the gold & silver mining shares are going to give us all the ride of a lifetime, if the past is any guide to the future, (and it usually is). This is straight from the "1MC": "all hands standby for heavy rolls to port and starboard" when the Barron's Gold Mining Index starts moving up again in earnest! A tsunami of deflating credit instruments is coming our way.

We'll finish up part 3 next week with charts showing the Dow Jones, the BGMI and CinC. It'll be worth the wait.

Mark J. Lundeen
9 April 2011

A Financial Crisis in 2012 is Inevitable! Here's Why

Arnold Bock
2012 is shaping up to be the blockbuster main event of the ongoing financial crisis. Massive amounts of new debt, vast quantities of additional digital dollars and the spark of higher interest rates will set off version 2.0 of the credit-driven financial implosion.

Why Was Financial Crisis 1.0 Only a First World Crisis?

The original 1.0 version had its origins in the collapse of the US subprime mortgage derivative deck of cards in 2007 before morphing into a broad-based financial crisis in the fall of 2008. It gradually spread to most other first-world advanced economies, but did not wreck havoc on emerging markets and second and third world nations. Most such economies were insulated from the folly of first-world finance - credit, borrowing, overwhelming debt and onerous interest payments - simply because they did not qualify for the intoxicating elixir of credit.

Can the US Government Prevent Another Financial Crisis?

A plethora of fact and opinion has been offered to explain what went wrong - Wall Street greed, crony capitalism, deficient and inadequately administered regulations, a credit and debt engorged consumer-driven economy, imprudent lending standards, negative real interest rates and nonexistent savings. Invariably, all reasons rest on the overwhelming availability and excessive abundance of cheap and easy credit and cash.

The meagre measures that have been designed and implemented since the onset of the Great Recession to mitigate financial risk, such as the Dodd Frank Financial Reform legislation, have merely institutionalized the shortcomings of the regulatory framework. Moreover, the 'too big to fail' private financial institutions which qualify for unlimited taxpayer bailouts are even fewer and larger today. Indeed, the supposed solutions to the problem exemplify what the problem really is - government!

Deficits are exploding rapidly leading inexorably to massive debt at all levels of government from federal, to state and into local governments. US sovereign/federal debt is now over $14 Trillion and is expanding in the current fiscal year at over $1.65 Trillion - over three times greater than just three years ago. Currently 37 percent of all federal spending comes from borrowing, which means much more debt...and a veritable fairyland of more magic money created by the FED to service the ballooning beast.

To this cauldron of crud one must add all the unfunded and underfunded obligations of the social safety net represented by Social Security, Medicare and Medicaid, all conveniently excluded from the federal government's annual operating budget. Depending on what assumptions are made for such factors as future inflation, eligibility criteria, program utilization and related issues, further unfunded liabilities of between $60 Trillion and $110 Trillion must be added to the US federal government's debt tab.

State and local governments contribute a further $3.87 Trillion in unfunded liabilities attributable to their employee pensions and health insurance benefits. Recent state and municipal employee demonstrations militating for retention of the unsustainable status quo have profiled what clearly are bloated pension and health benefits.

Respected economists Carmen Reinhart and Kenneth Rogoff, in their recent book entitled "This Time is Different" outlined how a debt to GDP ratio of 90 percent is a nation's tipping point. Their conclusions are based on an analysis several hundred years of economic history. The USA, United Kingdom, Japan and others are lined up to join Greece, Ireland, Portugal among others staring at the looming financial abyss.

Fundamentals are therefore in place for another financial collapse. This time governments will join private financial institutions heading toward the financial debt wall. Government won't be able to perform its previous role of bailing out ailing financial giants since government itself is now in need of rescuing.

Indeed, the most challenging questions today are how and who will bail out our failing governments? European nations in the EU and those who share the Euro currency can't help since many of them occupy an equally perilous perch on the financial precipice. It seems all advanced nations not supported by a strong natural resources sector (Canada, Australia) or high productivity manufacturing (Germany) are facing financial catastrophe.

What Will Trigger Financial Crisis 2.0?

Rising interest rates are all that is necessary to trigger the round two collapse of the ongoing financial crisis. It doesn't take Mensa level intelligence to notice that current interest rates are lower than they have been since the early 1950's. Real interest rates are also perilously close to being negative, if not already. With rapidly growing price inflation, interest rates will be forced northward.

Until this year foreign purchasers have been the largest buyers of US Treasury debt, with China and Japan in the lead. Japan now has other priorities following its recent highly destructive tsunami. China has already substantially reduced its purchases citing lack of confidence in the declining value of the United States dollar. They have also found that spending their inventory of surplus US dollars by ensuring future supplies of minerals and energy to be much more beneficial to the Chinese economy. Moreover, bond purchasers find sixty year low interest rates on US Treasury bonds, less than the rate of inflation, a very risky and unattractive investment.

In the absence of enough foreign or private sector purchasers, the US central bank, the Federal Reserve Board, has been 'monetizing' federal government debt through its purchases of Treasury bonds. The process dubbed Quantitative Easing, by which the FED creates money out of thin air, allows the FED to become the purchaser of last resort of government debt. At the present rate it is expected that the FED will purchase a full 50 percent of all new and maturing Treasury bonds in the current fiscal year. This is necessary simply because there are not enough foreign or domestic, private sector or government buyers to be found at current rates of interest and levels of risk.

The most telling and perhaps scary portent occurred recently when PIMCO, the largest private bond fund, sold its entire US Treasury bond holdings, thereby demonstrating its concern about federal government debt. Reasons cited for the sale by PIMCO head Bill Gross are risks associated with near negative interest rates and the declining value of the US dollar stemming from excessive money creation.

Knowing that institutional money managers representing pension funds and insurance company investment pools frequently follow industry leaders, we can confidently predict that many more Billions and Trillions of Treasury bonds will soon be dumped into the sickly bond market. When this process plays out, FED money creation and debt monetization will go into overdrive, since price inflation will take off as the dollar devalues.

Why America's Political Process Virtually Guarantees Financial Crisis 2.0?

How can we be so certain that another and more serious financial crisis is on the horizon? Salient factors include:

  • the magnitude and momentum of expanding government deficits, debt and unfunded liabilities,
  • the monetization of Treasury debt by the Federal Reserve Board using manufactured money acquired through the somewhat mystical process labelled 'Quantitative Easing',
  • the strong prospect of higher interest rates necessitated by an inflating and devaluing currency followed inevitably by increasing price inflation.

The political process virtually guarantees that no tough, but essential, measures of consequence will be undertaken by political decision makers to stabilize the financial system. Witness the recent embarrassing public tussle between the two parties in Congress over a mere $33 Billion of pocket change in budget reductions when the total shortfall is $1.65 Trillion.

To suggest that strong leadership at this time of looming financial crisis is needed is to state the obvious. However, politicians are like most other people in that they are ambitious careerists who worked hard to secure the jobs they so treasure. Ditto for government bureaucrats who want to preserve their careers and the associated benefits, including the cushiness of defined benefit and inflation protected pensions as well as gilded health insurance. Preservation of the status quo is understandably their top priority.

Voters expect their elected representatives to be active and to 'do something' when a crisis strikes them between their eyes. However, there is absolutely no incentive to scan the horizon and to implement tough measures designed to head off a mounting crisis.

Politicians of across the partisan spectrum and range of ideologies have learned, indeed they have thoroughly inculcated, the reality that the voting public does not want to hear about emerging or imminent problems. They want reassurance, not anxiety, but when a crisis blindsides them, they want immediate action from their government.

Until the crisis arrives, politicians who assume leadership roles as educators and disseminators of serious policy options are frequently branded as bad news bears and messengers of mayhem for calling for belt tightening and sacrifice. Instead, voters reflexively point to government waste and to the 'rich people' for austerity and additional revenue.

Politicians of vision are invariably chastised by losing their jobs at the next election. Candidates who ignore the storm clouds and who promise good times ahead are most frequently rewarded with the endorsement of a vote. Political will wilts in this kind of hostile electoral environment. Is it any wonder the voting public hears what it wants and gets what it deserves?

Presidential election years are traditionally awash with positive investment environments. Politicians in power know that the public can be bribed with their own money...actually borrowed money. Voters enjoy their apparent prosperity and the general feeling of financial wellbeing. Incumbent Presidents, legislators all, do well in such circumstances.

We will see this scenario play out again in 2012...but only if the persons in power can engineer it yet again. But can they? Will record low interest rates continue? Will the large institutional Treasury bond purchasers such as pension funds and insurance companies follow PIMCO'S Bill Gross out of the Treasuries market? Will the dollar plummet with the excess of FED money printing? Will emerging price inflation in food and energy make for a grouchy voter? Can the government keep the lid on or will the financial pressure cooker explode?

Conclusion: 2012 Will Be the Year of the Perfect Financial Storm...

Buying time by creating ever more magic money, which inevitably results in price inflation, overheated stock and commodities markets and which devalues the currency - will work until it doesn't.

This analyst sees the perfect storm of converging criteria almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction.

If starting tomorrow morning our politicians were to act like adults, willing to lead in a pragmatic and focused fashion, free from the concerns of partisan advantage, rancour and rigid ideology, financial collapse could be delayed...perhaps avoided. Unfortunately the challenge seems insurmountable and the political will too feeble.

Get ready for Financial Crisis 2.0 in 2012 - It's inevitable!


Arnold Bock is a frequent contributor to, "A site/sight for sore eyes and inquisitive minds", and, "It's all about MONEY" of which Lorimer Wilson is editor. Sign up for the FREE weekly "Top 100 Stock Market, Asset Ratio & Economic Indicators in Review."

Why Pimco holds 31% cash and -3% bonds

From Arabian Money:

The world’s biggest US ‘bond’ fund is no longer in bonds and has a net short position, and holds an amazing $73 billion in cash. What is former Las Vegas poker player and one-time ‘bond king’ Bill Gross up to? This is what Mr Gross says he would tell a Congressional hearing:

‘I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.’ on