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The End of Paper Money

February 11, 2013


Eventually all paper money returns to its intrinsic value – worthless.         
- Voltaire

The history of government management of money has, except for a few very short happy periods, been one of incessant fraud and deception.          
- Friedrich Hayek

If the people will choose to defend themselves against their adversaries, it would be prudent to understand what and who their adversaries are. The challenge is not just pitting Democrat against Republican, but in the differences of economic philosophies regardless of how sweetly each are stated. But more importantly, in truth, freedom rests with the willingness of a sovereign people to take the time to learn knowledge that has been denied them for so long... and to understand it, and how it relates to the current situations of our times. I have tried to interject what I consider to be important lessons in how economics works; to try to explain what is going on in our economy and the world. Empirical evidence tells us that cutting taxes raises more (not less) revenue.

FREEDOM: DEFEND IT. From the stock bubble of the late 1990s to the even bigger and more devastating housing bubbles, culminating in the 2008 crash/Recession, to the recent policy of guaranteeing inflation and offering little or no reward to savers, the present government, by way of the FED, has eviscerated the middle class and made poor people poorer. The only beneficiaries have been the Big Banks, Wall Street and the friends of Obama. If all that weren’t enough, the crisis has spread throughout the world and is now threatening to turn into a worldwide depression beginning with the dismemberment of Europe. Even mighty China has fallen into recession and the problems that China is now facing can best be described as Chinese in proportion but exactly the same in nature as the rest of the world. After all, there is only one set of economic laws. We are about to discover that the root causes of their problems are exactly the same as ours and the rest of the worlds: Central Planning (Socialism) in the long run doesn’t work and that is not just my opinion. Empirical evidence over the centuries clearly demonstrates this truth.

Margret Thatcher (Prime Minister of England) said it best, “The trouble with Socialism, simply and concisely, is eventually you run out of other people’s money.”

SO WHAT DO WE DO NOW? Unlimited money-printing from the Federal Reserve, the European Central Bank as well as from Japan’s and China’s Central Banks will accomplish what? Oh let’s not leave out the Bank of England and a host of others, that are also on the same band wagon, announcing even more money-printing. And yet, the price of gold has not even bettered this year’s March high of $1,802, let alone last year’s November high of $1,923. We and the world just experienced the single most important election of our country’s history going back to our founding. Unfortunately the results have been disastrous. Our newly re-elected President continues to dictate his philosophy while Congress and the Republicans remain deadlocked in diametrically opposing policies. Unfortunately, Obama is much stronger willed than the spineless GOP and therefore his wrongheaded policies are destined to win out. Since we will not be able to rectify our situation and pull ourselves and the rest of the world out of this dilemma, we will fall into an inevitable worldwide depression which history teaches always leads to world war. (Since when has any government been able to learn from history?)

Is there a leader out there who can lead us back to prosperity and away from the brink?
Unfortunately I do not see one that has any ideas as to what must be done, let alone the courage to even attempt to do so.

INFLATION. Why with all this money printing has inflation not moved substantially higher along with the price of gold? And of even a greater mystery, why has all this money not created a tremendous amount of stimulus and inflation all over the world? Without getting into the details, the simple answer is that most of this Government stated inflation rate greatly understated what the true inflation is and is without any justification to reality; while most of the fiat money has been locked up in either the vaults of the Central Banks as they continue to monetize any and all new debt or the balance sheets of their member banks in order to strengthen those balance sheets and make up for all the tremendous losses they sustained during the real estate crisis. In a nutshell, whoever got all this money it was certainly NOT the public or small business or even the majority of large businesses.

The question is: Is gold going to go higher? Actually, the real question is not whether gold will go higher, but when and how high?

THE HEIGHT OF GOVERNMENT CORRUPTION. After almost a year of Jon Corzine (past Governor of NJ) stonewalling Congress about the crimes of MF Global, he is getting off without even a slap on the wrist and what is worse, not returning 1 cent of the $1.5 billion his firm stole from client accounts. The New York Times says “criminal investigators are concluding that chaos and porous risk controls at the firm (where was Dodd Frank?) rather than fraud, allowed the money to disappear.” Ok, so there was no criminal intent, but the public (the only innocent players) still take 100% of the loss. Gee, isn’t it great to be a Democrat politician?

ONLY IN AMERICA is a firm allowed to rob its customers of $1.2 billion in the midst of the worst financial crisis since the Great Depression, and our elected officials let him off with nothing but some finger-wagging. If you had any doubt that Washington and the banking industry are completely corrupt, you sure don’t anymore. And this isn’t the only case. A recent ruling against Sentinel Capital Management — a brokerage firm that defrauded its customers out of $500 million by using client funds as collateral in speculative plays — dismissed the charges and let the company walk away virtually scot-free. In fact, Fred Grede, a trustee of Sentinel, commented that the court’s ruling “suggests that brokerages can use customer funds to pay off other creditors.”

And then there’s the recent scandal regarding JP Morgan, Citigroup, Bank of America, the Royal Bank of Canada and Barclays, in which the banks manipulated the interbank borrowing rates and caused an estimated $3.5 TRILLION in client overpayment. What did the bankers get as their just rewards? Barclay’s was fined $400 billion and it is estimated that the American banks combined will only have to pay a paltry $35 billion fine, about 10% of the total over charges.

DOES ANYONE STILL BELIEVE THAT GOVERNMENT IS LOOKING OUT FOR THE LITTLE GUY? Trusting our elected officials and the banking system to guard our wealth and our freedoms is a joke. It’s time to throw them all out. If you’re like me, you understand the easiest solution to protecting our savings is to buy up gold and keep it outside the banking and brokerage system.

Over the last decade, gold has proven itself to be the greatest store of value for protecting your money. That is why countries like Russia, China, and India are buying up massive amounts of gold as well as encouraging their citizens to do the same. They are doing this to cushion their economies against the eventual collapse of the dollar.

WHY ARE STOCK PRICES RISING? The S&P 500 is just off its 52-week high, yet nearly every bit of recent economic data shows we’re in the middle of a global economic slowdown. In China, new export orders fell at the fastest pace in 42 months. The unemployment rate in the euro zone hit a record high this month. And in the US, second-quarter GDP was revised down from an already anemic 1.7% growth rate to a pathetic1.3%.

Still, investors ignore the bad economic news and bid up stocks. Why? The simple reason is they are not. It is the massive injections by the world’s central bankers in their all out attempt to juice up the stock markets in their desperate hope that rising stock markets will generate demand and thus rally the economy. In short market - manipulation. (Manipulation cannot be a long term solution.)

GOLD. The most frequent question I get is, "How will Gold do during the coming stock market plunge?" I can tell you that during the stock market crash of July through August,  2011, gold rose 15% while stocks fell 17%. This and the price pattern for gold suggest that it will be an excellent hedge against a stock market crash.

Back in 1970, China didn't even register as one of the top gold producers. The top five producers at the time were South Africa (67%), the former Soviet Union (13.7%), Canada (5.75%), the United States (3.7%) and Australia (1.3%). Then, in 1995, China made its debut on the Top 10 list at No. 6, with 6.2%. South Africa was still No. 1, but produced only 16.6% of the world's gold -- a sharp decline from 1970. The US jumped to 13.7%, followed by Australia and Canada. Fast-forward to 2012, and the numbers are quite eye-opening. China is now the No. 1 producer at 13.1%, followed by Australia at 10%, the United States at 8.8%, Russia at 7.4%, and South Africa at only 7%. (If you add the former USSR nations together, they would top the list.)

China's buying and hoarding of gold only bodes well for the price of the metal going forward. And since China has shown consistently that it's a patient investor that buys into selloffs, with an eye for the future, we're looking at decades of support for gold prices.

DANGER. But what is in the future? China, apart from trying to get rid of their currency reserves of ever depreciating US dollars, intends to challenge the US dollar’s sole Reserve Currency status by backing their own currency with gold. And they are not alone. They have enlisted the aid of Russia, Brazil and Saudi Arabia with their Gold Dinar. They are also soliciting the rest of the world’s emerging nations that have large surpluses in their balance of trade (which have been accumulating depreciating US dollars), telling them that they are losing money on every day. Even our so-called ally, France, has jumped on the new Reserves Basket of currencies band wagon.

The bottom line: The FED, Bullion Banks and their allies have been manipulating the price of gold and silver DOWN ever since 1971 in their attempt to maintain the value of the US dollar. There is no better proof of manipulation than examining gold trading. In just one day recently $35 million of gold was dumped at the market opening, driving the price of gold down $30. Is that the way for a seller to maximize his returns? Or is it the best way to drive down the price of gold and perhaps scare away new buyers? They have gotten away with it thus far only because the exchanges under government pressure have not enforced their own position limits or enforced their own Mark to Market Collateral Rules. And the Governments of both England and the US have continued to supply their country’s gold to the point that I do not believe that either country has any Gold Reserves left. It is my belief that they will not be able to continue this charade much longer.

At some point in the not too distant future, both gold and silver will benefit from all of this. They will also benefit greatly once the “Manipulation Cabal” is forced to capitulate.

GOLD AND SILVER FUNDAMENTALS. Meanwhile, the fundamentals for gold and silver continue to push relentlessly higher. South Africa’s gold mine strikes have halted nearly 90% of all production. In addition to the mining strikes, there is also a transport strike.

Certainly this disruption in production will cause a contraction in supply, while consumer and central bank demand in the yellow and white metals are on the rise, combined with the central banks printing money as fast as they can to bolster their respective economies - all signal a very bullish environment for gold and silver.

GOLD SET TO BECOME A TIER 1 ASSET. The Basel Committee for Bank Supervision (BCBS), which is responsible for forging global capital requirements, just made gold as of January 1st a Tier 1 capital asset. This means it will serve as a key indicator of a bank's fiscal health for regulatory purposes, and thus plays a crucial role in determining how much banks are permitted to lend to borrowers. Gold has traditionally been categorized as a Tier 3 asset. The inclusion of gold as a Tier 1 Capital asset by BCBS would enable banks to double their lending ability based on their holdings of gold and it will become "the new backstop for debt, currencies and bank equity capital."

This will serve as a strong and immediate spur for banks around the world to raise their holdings of gold bullion as against all other forms of Risk Free Assets, further adding to the upward momentum of gold prices to counteract the mass printing of fiat currency by monetary authorities and rampant stimulus spending by governments. What would you rather own - Gold or Treasuries?

Copyright ©2013 Aubie Baltin

Aubie Baltin has spent his career identifying major trends in the markets and helping others to profit from them. 

 


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