'It shone with the placid certainty of received tradition'
By Michael J. Kosares
"It is related of the illustrious Sandy McHoots that when, on the occasion of winning the British Open Championship, he was interviewed by reporters from the leading daily papers as to his views on Tariff Reform, Bimetallism, the Trial by Jury System, and the Modern Crave for Dancing, all they could extract from him was the word 'Mphm!" Having uttered which he shouldered his bag and went home to tea. A great man. I wish there were more like him." - P.G. Wodehouse
Regulars to this newsletter will recognize the quote from Mr. Wodehouse gracing this issue's masthead. It's been there before -- almost always at summer's start -- and almost always with a reflection that perhaps we can learn something from Mr. McHoots. After all how much of what any one of us has to say about the current state of affairs matters much in the scheme of things? Even the Open champion has limited sway on the course of world events. So McHoots had solid justification for turning up his nose at the prospect of answering the media's inquiries.
Then there's the issue of summertime and whether or not the world can be put on hold while thoughts turn to the configuration of one's gold swing, landing the fly in precisely the right location on the stream, or simply counting waves at the seaside. To a large degree we side with the McHoots school on the issue of summertime, but we also know that summertime can produce its unpleasant market surprises – dark thunderstorms that travel across the investment landscape wreaking havoc far and wide.
Bank of America Merrill Lynch was thinking just that when it warned its clients of a "grim summer" ahead and that they should consider moving money out of stocks and bonds and into gold and cash. A good many others have issued similar warnings. "Open your computer or smartphone these days," says MarketWatch's Mitch Tuchman, "and the stock market warnings fly by in giant type — 'Summer Crash Imminent' and 'Sharp Correction Ahead'" blink at the top of nearly every investing website.
Though the temptation might be great to retreat unphased into the comforts of summertime, this might not be the year to do it. Of course, the best course of action is to diversify one's holdings in such a way that summer's pursuits need not suffer fully the consequences of that late afternoon window rattler. Stock market practioners generally agree with that apporach, but almost universally fail to mention the one item that truly gets the job done for its owners – a tidy cache of gold and silver coins.
A telephone call from an old client and friend
Along these lines, I had the happy occasion recently of receiving a telephone call from an old client and friend – a physician safely retired near the sea and alongside one of the South's oldest golf clubs. It was good to hear from this student of the markets – one of life's steady and thoughtful practitioners. McHoots probably would have counted Doc, as I will call him, a friend, since he thinks much like the character so skillfully described by Mr. Wodehouse. Back at the turn of the century, Doc foresaw much of what would happen economically in the United States and purchased what he considered enough gold to see him through it.
Vanity Fair's Matthew Hart offers this masterfully written overview of those early years of the 21st century:
"An ounce of gold cost $271 in 2001. Ten years later it reached $1,896 – an increase of almost 700 percent. On the way, it passed through some of the stormiest periods of recent history, when banks collapsed and currencies shivered. The gold price fed on these calamities. In a way, it came to stand for them: it was the re-discovered idol at a time when other gods were falling in a heap of subprime mortgages and credit default swaps and derivative products too complicated to even understand. Against these, gold shone with the placid certainty of received tradition. Honored through the ages, the standard of wealth, the original money, the safe haven. The value of gold was axiomatic. This view depends on a concept of gold as unchanging and unchanged—nature's hard asset."
It was in that time frame, when gold was stuck in the $300 to $400 per ounce price range, that Doc transferred roughly $500,000 of his net worth into gold coins. His goal, like most of our clientele, was not to become wealthy through gold ownership, but to protect the hard-earned wealth he had already attained. After we had exchanged the usual pleasantries, the conversation turned once again to the subject of gold and the reason for his call.
"I still have all the gold I purchased from you," he said simply. "Every ounce of it. It's now worth well-over $2,000,000. I want to thank you again for your book and your advice. It made a great difference to me as you may have gathered."
(Ed note: At the interim top – the $1896 Matthew Hart mentions above – Doc's holdings reached a value well over $3,000,000!)
"That," I said, "is the kind of story we enjoy hearing around here, Doc. I'm happy for you. Happy gold could help you like it did."
"We had some very interesting conversations back in the day," he said with a chuckle, "and gold did for me what we thought it would, what you said it would."
I mentioned to him that the book to which he referred, "The ABCs of Gold Investing - How to Protect and Build Your Wealth with Gold," was now in its third edition and still introducing people to the advantages of owning the metal and advising readers how to go about it. The conversation then drifted to other of life's pursuits for both of us and ultimately to the purpose of his telephone call – a fresh gold transaction. We completed our business and I left the conversation with a strong sense of satisfaction. We get a steady stream of phone calls like Doc's, but it is always good to hear real-life tales about gold's role in preserving our clients' assets.
The fact of the matter, though rarely discussed, is that gold ownership has as much to do with personal philosophy as it does finance and economics -- though by that I do not mean to diminish the importance of financial markets, or politics for that matter, in our everyday lives. Things, though, do need to be kept in perspective and gold helps toward that goal -- once one understands its true nature. In many ways, gold ownership, as Doc would likely attest, is a rational portfolio decision that suits the times, but it is also a life-style decision. As Richard Russell, the venerable purveyor of the Dow Theory Letters puts it, "I still sleep better at night knowing that I hold some gold. If or when everything else falls apart, gold will still be unquestioned wealth." And one that helps you spend a quiet summer enjoying family and friends no matter what happens on Wall Street or Washington D.C.
Review & Outlook
Top gold researchers say gold is going to $2300 over next three years
Annually Incrementum, the Lichtenstein investment house, publishes the most comprehensive gold study available.In Gold We Trust 2015 comprises 140-pages of top-drawer analysis for those wondering whether or not gold should continue (or begin) to play a significant role in their financial plans. That study is published in the clear at the link below. We highly recommend at least paging through this important work, if not fully digesting it. The following is an excerpt from the study's conclusions.
"We are strongly convinced that we are now close to a fork in the road. Over the coming three years, a paradigm change is likely to become evident in the markets, quite possibly including rising inflationary trends. We believe the following scenarios to have the highest probability:
Scenario I: The current economic cycle nears its end and the fairy tale of a self-sustaining recovery is increasingly questioned by market participants. This leads to a significant devaluation of the US dollar relative to commodities, since the Fed – as it has stressed time and again – will once again employ quantitative easing or similar interventions if occasion demands it. In this case gold would benefit significantly from wide-ranging repricing in financial markets. A stagflation-type environment would become a realistic alternative in this scenario, something that is currently on almost no-one's radar screen.
Scenario II: Rising yields lead to an increase in credit creation and an increase in money velocity (= decline in the demand for money). Economic activity picks up, is however accompanied by accelerating price inflation. In this scenario, both financial assets (with the exception of bonds) and real assets (such as gold) would benefit in nominal terms.
Scenario III: The system hasn't become any healthier since 2008, but has in fact become more fragile in many respects. Due to further concentration in the banking sector, the balance sheets of the largest banks have grown enormously. The volume of outstanding derivatives has continued to grow, with many off-balance sheet positions. In addition, the geopolitical situation hasn't been this tense since the end of the cold war. The probability of a "black swan" event striking is therefore in our opinion higher than it has been in a long time. In this type of scenario, gold would likely emerge as a beneficiary as well.
Conclusion:All in all we are convinced that gold remains in a secular bull market, which is likely close to a renaissance. Should this assessment be correct, we would expect to see a trend acceleration in the coming phase. As discussed above, a variety of scenarios is possible which would mostly have positive effects on the gold price. We believe that this is a good time to provide a concrete time horizon for our long ago formulated price target. In light of the perspective discussed above, we have decided to set a time horizon of three years for our long term gold price target of USD 2,300.
Why Ben Bernanke should replace Alexander Hamilton on the ten dollar bill
The mainstream media tends to stay away from cumbersome discourse on money – its uses and value and why one form of money might be better than another. So it was with interest that we took the amount of press time and space generated by a U.S. government proposal to take Alexander Hamilton's portrait off the $10 bill and replace it with that of a worthy female historical figure. Even retired Fed chairman Ben Bernanke weighed in on the subject stating that he rather liked Alexander Hamilton's contribution to the history of American finance and business and would just as soon see him remain on the currency. His protest elicited the following response from the New York Sun:
"The irony of this is that while chairing the Federal Reserve, Mr. Bernanke traduced every principle Hamilton held dear, particularly the idea of sound money defined by Congress. It was Hamilton who wrote the first law Congress passed under the authority the Constitution grants it to coin money and regulate the value there of, and of foreign coin, and to fix the standard of weights and measures. That piece of legislation, the Coinage Act of 1792, is the final fruit of what Hamilton envisaged in respect of money and the purest record of how he thought about the dollar.
That is the law that established the United States Mint, enacted that the money of account of America would be expressed in dollars, and defined the dollar as having the value of "a Spanish milled dollar" as it was then current and "contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver." The law recognized gold as specie in coins at a value of about 15 times that of silver, and for debasing coins of either specie established the penalty of death. . .
The position of the Sun is that were Hamilton to learn what has been done to the dollar since he defined it, he would have sent Aaron Burr a note of thanks for sparing him the humiliation. So forgive us if we take with a grain of salt Mr. Bernanke's protestations in favor of Hamilton. His own record suggests that he has no more regard for the principles Hamilton believed in than he does for the man in the moon. In respect of the dollar, he opposes the very definition that Hamilton hewed. The fact is that the ten dollar Federal Reserve note is worth today but a percent or two of what it was worth when the Fed was created. Maybe the face to put on it is neither Alexander Hamilton nor Harriet Tubman but Ben Bernanke himself."
Quietly Puerto Rico poses substantial threat on this side of big pond
With the world's attention on Greece, what is going on in little Puerto Rico has gone unnoticed. That is until Puerto Rico's recent announcement it will declare a "moratorium" on its debt payments. Two bond insurers, Assured Guarantee and MBIA, had their stock prices hammered due to their exposure in Puerto Rico. Assured Guarantee shares were down 13% and MBIA shares were down 23% in a single day.
"It's a substantial threat," bond expert Larry McDonald said Monday on CNBC's Power Lunch. "The problem we're seeing around the world is that political officials that are borrowing money in the capital markets have not been completely forthcoming about their financials."
We recall the AIG collapse in 2008 – a centerpiece of the financial crisis. AIG was a major seller of credit-default swaps, a form of insurance against default on assets tied to corporate debt and mortgage securities. In the end, the federal government bailed out AIG to the tune of $85 billion. Yesterday's reports had exposure at Assured Guarantee and MBIA at a mere $10.3 billion, but we are talking about their exposure in Puerto Rico only. If McDonald is right, this "quiet" and developing problem could go much deeper. Puerto Rico's total sovereign debt is $72 billion and, as declared by its governor, "unpayable."
One China bank joins London fix, another slated in coming weeks
Under the new London gold fix regime, there are now eleven participants. "Volumes," says the ICE Benchmark Administration, "have also increased significantly, with average daily volumes for the morning and afternoon gold auctions more than doubling, compared with the five months prior to IBA's administration."
As I have noted in the past, including China in the fix, brings a new element to the table in that China is out front about its market position as a major buyer of the physical metal. In this past March's News & Views, I cover how China's participation in the global gold pricing system is likely to impact the market in the months and years to come. Bank of China is already a participant and China Construction Bank is slated to join soon.
From the March newsletter:
"I expect this synergy to carry over when later this year China inaugurates its own version of a gold fix in Shanghai and three Chinese state banks join the London Bullion Market Association's new London fix later this month. I am not among the group that foresees a hot gold war between the Shanghai and London fixes, between China and the West. More I believe we will see a balancing of interests – a cold war of sorts between the physical metal-based Shanghai business and the paper-based London business. China would not be seeking admission to the international gold club in London if it did not intend to adhere to some common ground rules – if in fact a quid pro quo of some sort had not been agreed.
That is not to say though that the new gold market mechanisms will fall short of being transformative. To the contrary, I would counsel to expect major changes in 2015. At the top of the list I would put the likelihood of Shanghai forcing London to honor its pricing by delivering real metal into the China market. The three state banks China has stationed in the new London eleven-member fix regime will act as a conduit for those deliveries – a mission for the time being likely to keep the flow through the London-Zurich-Hong Kong-Shanghai pipeline moving at a steady pace. In the process, China might force a level of honest settlement too often avoided in the previous gold fix regime. More on that further on . . ."
[Note: The original announcements listed three China banks as participants, not two.]
The doubling of volumes is a surprising development and it has come quickly under the new regime. It is difficult to know at this juncture how much of that volume is going to China in the form of physical metal, but those numbers will likely come out over time. At some point, the pressure from China is likely to accrue as a positive in the pricing mechanism, as the sellers realize over time that real, not paper, metal is China's final objective. We will be watching these developments with a great deal of interest as we move out of the usual summer doldrums in the gold market and into the Fall rush season.
Today's crop of inflationist central bankers drives safe-haven money to gold
"If history teaches anything, it is that government cannot be trusted to manage money." So begins Scientific Market Analysis "The Nightmare German Inflation", one of the most-referenced online short works on the mid-1920s Weimar Republic monetary disaster. In those days, if you did not like what your government or central bank were doing, you could move your money into another currency and ride out any potential storms. Today that option, for the most part, is no longer available. The United States leads the pack in money printing followed closely by Europe and Japan and a whole host of smaller countries too numerous to mention. As a matter of fact, the three big economies openly acknowledge running the money printing presses at full speed as if it were as acceptable as taking the kids for a Sunday afternoon ice cream. As a result, unless you feel safe in the Brazilian real, the Russian rouble or some other emerging country currency, the only remaining option is precious metals – not ETF gold and silver but the kind that comes in coins and bullion form that you can store in your bank safe deposit box.
Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.
Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.
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