The Big Picture

Posted on July 24th, 2015

Financial Crisis Signpost Showing Recession Speculation Leverage And BubbleBy Peter Schiff, President and CEO Euro Pacific Capital

The past four years or so have been extremely frustrating for investors like me who have structured their portfolios around the belief that the current experiments in central bank stimulus, the anti-business drift in Washington, and America’s  mediocre economy and unresolved debt issues would push down the value of the dollar, push up commodity prices, and favor assets in economies with relatively low debt levels and higher GDP growth. But since the beginning of 2011, the Dow Jones Industrial Average has rallied 67% while the rest of the world has been largely stuck in the mud. This dominance is reminiscent of the four years from the end of 1996 to the end of 2000, when the Dow rallied 54% while overseas markets languished. Although past performance is no guarantee of future results, a casual look back at how the U.S. out-performance trend played out the last time it had occurred should give investors much to think about.

The late 1990s was the original “Goldilocks” era of U.S. economic history, one in which all the inputs seemed to offer investors the best of all possible worlds. The Clinton Administration and the first Republican-controlled Congress in a generation had implemented policies that lowered taxes, eased business conditions, and encouraged business investment. But, more importantly, the Federal Reserve was led by Alan Greenspan, whose efforts to orchestrate smooth sailing on Wall Street led many to dub Mr. Greenspan “The Maestro.”

Towards the end of the 1990’s, Greenspan worked hard to insulate the markets from some of the more negative developments in global finance. These included the Asian Debt Crisis of 1997 and the Russian debt default of 1998. But the most telling policy move of the Greenspan Fed in the late 1990’s was its response to the rapid demise of hedge fund Long term Capital Management (LTCM), whose strategy of heavily leveraged arbitrage backfired spectacularly in 1998. Greenspan engineered a $3.6 billion bailout and forced sale of LTCM to a consortium of Wall Street firms. The intervention was an enormous relief to LTCM shareholders but, more importantly, it provided a precedent that the Fed had Wall Street’s back. Read More..

Here’s What the Next Gold Bull Market Will Look Like

Posted on June 5th, 2015

UBS gold bars with mirrorsBy Jeff Clark, Senior Precious Metals Analyst

We measured every bull cycle of gold stocks and found there have been eight distinct upcycles since 1975.

We also discovered something exciting: Only one was less than a double. (A second was 99.9%.)

Even more enticing is that the biggest one—a 601.5% advance in the early 2000s—occurred just after a prolonged bear market.

And our current bear market is longer than that one. Read More..

Madness Coming To Gold Market: “There Are Thirty to Fifty Owners For Each Ounce of Gold That’s Out There”

Posted on April 6th, 2015

Gold Trap

By Max Slavo

Though the price of gold has seen a significant drop over the last two years from it’s all time highs of about $1900 per ounce, many experts and analysts believe that western central banks and their colleagues at major financial institutions have been manipulating the price. The rampant manipulation is believed to stem, in part, from the formerly Rothschild owned London Gold Fix, an organization made up of five large banks that make a daily determination of what the price of gold should be.

It is this unilateral control by western banks that recently prompted the Chinese to create their own Shanghai Gold Exchange. What separates the two is that the Chinese will be using their currency, the Yuan, as the reserve rather than the U.S. Dollar. Moreover, unlike their European counterparts, the Chinese will be trading in actual physical dollars. Read More..

Now Watch Denmark

Posted on February 11th, 2015

Obverse side of a 1000 Danish kroner banknote from the 2009 series

EDITOR’S COMMENT: Every time that I hear or read about the various countries having to devalue their fiat currencies, while other more stable countries are struggling to defend their own fiat currencies from soaring relative to others, I keep wondering what would happen, if one of these countries would introduce a gold-backed currency. There are many theories as to what would happen, but I believe the results for that particular country would be better than what they may be facing in the very near future.

By John Rubino

One of the reasons we’ve all heard of George Soros is that back in 1992 he pulled off an epic financial coup by “breaking” the Bank of England. At the time the UK was trying to maintain a loose peg with the German Deutsche Mark, despite the fact that the two countries had very different rates of inflation (UK’s high, Germany’s low).

To Soros’ practiced eye, this imbalance was clearly unsustainable and would eventually force the UK to devalue its currency to reflect the fact that it was living beyond its means and printing way too many pounds. Soros placed a big bet against the pound and sat back while the fundamentals won out. When Britain gave in and devalued, Soros made a billion dollars and became a household name.

Ever since, currency traders have dreamed of such conjunctions of government mismanagement and central bank cluelessness, hoping for their own Soros-level killings. But during the past couple of decades such sure things have been rare because currencies have floated more or less freely, which prevented huge imbalances from building up.

Now, however, thanks to the mess that is the eurozone and several other countries’ ill-advised dollar pegs, the world is once again a target-rich environment for speculators. The Swiss, for instance, have been going a little crazy trying to decide whether and/or how to peg the franc to the euro. And China, which runs a loose peg to the dollar, is looking like it might have to adjust its thinking in the not too distant future.

But right now the juiciest target is Denmark. A generally well-run country, it finds itself on the wrong side of the currency war, with the European Central Bank actively devaluing the euro against which the Danish krone is pegged. Capital has been flowing into Danish bonds seeking the relative safety of low inflation and stable state finances, which is pushing up the value of the krone. Maintaining the peg thus requires the Danes to create a lot of new kroner and use them to buy euros.

A soaring supply of national currency is inherently inflationary and destabilizing, which is the opposite of “well-run”. So just as the Swiss did last year, the Danes are both promising to maintain the peg and stressing out over the cost of doing so. Now the speculators smell blood:

Speculation Against Danish Euro Peg Proving Relentless

(Bloomberg) — Less than a week after Denmark resorted to its deepest rate cut ever amid historic currency interventions, forward rates suggest some traders and investors still aren’t convinced the central bank can save its euro peg.

SEB AB, the largest Nordic currency trader, says capital flows into AAA-rated Denmark forced the central bank to dump about $4.6 billion in kroner in the first three days of February alone, almost a third the record amount it sold in all of January. Nordea Bank AB, Scandinavia’s biggest lender, says Denmark will need to deliver another 25 basis-point cut to fight back demand for kroner, bringing the benchmark deposit rate to minus 1 percent.

“The pressure on the krone hasn’t eased yet,” Jens Naervig Pedersen, an economist at Danske Bank A/S in Copenhagen, said by phone. “We can see from the forward rates that the market views the current upward pressure on the krone as the greatest ever.”

Governor Lars Rohde addressed speculators last week in what he characterized as a verbal intervention to persuade them he won’t let the krone’s peg to the euro collapse. Such a scenario is “unthinkable” and the central bank will do “whatever it takes” to avoid it, he said after delivering a fourth rate cut in less than three weeks.

Denmark’s largest institutional investor, ATP, sent a clear message of trust in the peg the same day, revealing it hasn’t bothered to hedge its $110 billion in assets against the possibility that the nation’s currency regime might break.

Make no mistake, the Danes are the victims here. They’re behaving the way a country should behave, with an eye to long term stability. But the rest of the world — the eurozone in particular — is so indebted that its only choice is to inflate or die.

Which leaves solid countries like Denmark and Switzerland with a similar choice: inflate and throw decades of prudent management out the window, or watch their currencies soar against those of a profligate world, causing their export sectors to go extinct and their economies to slip into Depression.

The speculators, meanwhile, are not the villains in this story. They’re just pointing out the truth with their capital. And their honesty will be rewarded very soon.     (my emphasis)

By John Rubino for Dollar Collapse

By permission John Rubino

http://dollarcollapse.com

http://dollarcollapse.com/currency-war-2/now-watch-denmark/

The Reinvention of Alan Greenspan

Posted on November 6th, 2014

Alan GreenspanBy Michael J. Kosares

Former chairman calls Fed balance sheet a tinder box, endorses private gold ownership.

During the time Alan Greenspan and representative Ron Paul had their famous series of exchanges (some might have labeled them confrontations) during Congressional hearings from 1997 to 2005, the congressman made what turns out to have been a prescient observation. “My questions,” he said, “are always on the same subject. If I don’t bring up the issue of hard money versus fiat money, Greenspan himself does.” I say “prescient observation” because here we are a decade or more later and the “new” post-Fed Greenspan sounds very much like the “old” pre-Fed Greenspan-––the one who consistently advocated gold before he became Fed chairman.

Greenspan has always come across as a conflicted figure forced to reconcile his responsibilities as chairman of the Federal Reserve––the epicenter of the fiat money universe––with a “nostalgia,” as he put it, for the gold standard, its diametric opposite. As such, I always saw him as torn between the two––the devil on one shoulder and an angel on the other.

Outside those memorable proddings by Congressman Paul, Greenspan rarely spoke publicly about the virtues of gold while Fed chairman, and when he did his approach seemed guarded. Even in the years following his tenure, he rarely broached the subject. In recent months though, as you are about to read, the gloves have come-off not just with respect to gold but with the dangers inherent to the fiat monetary system as well.

The reinvention of Alan Greenspan

Part one – an article in Foreign Affairs magazine

Greenspan’s reinvention began with a surprising defense of gold in the October issue of Foreign Affairs magazine. In that article, titled “Golden Rule: Why Bejing Is Buying,” he reminds top level policy makers of gold’s role as a national asset of last resort. “If, in the words of the British economist John Maynard Keynes,” he says, “gold were a ‘barbarous relic,’ central banks around the world would not have so much of an asset whose rate of return, including storage costs, is negative. . .Gold has special properties that no other currency, with the possible exception of silver, can claim.”

So why is Bejing buying gold?

Chinese-Take Home CartoonIf China were to convert a relatively modest part of its $4 trillion foreign exchange reserves into gold,” he says, “the country’s currency could take on unexpected strength in today’s international financial system. It would be a gamble, of course, for China to use part of its reserves to buy enough gold bullion to displace the United States from its position as the world’s largest holder of monetary gold. But the penalty for being wrong, in terms of lost interest and the cost of storage, would be modest.”

In short, China sees gold reserves as a means to building the credibility ofthe yuan as a global reserve currency that would compete with the dollar. As I mentioned in a recent issue of this newsletter, China could purchase the U.S. gold reserve in its entirety with only 8% of its $4 trillion in currency reserves and the entirety of global gold reserves with 32% of its foreign exchange holdings––some sobering numbers.

Part two – a speech before the Council on Foreign Relations (CFR)

Greenspan followed that article with a speech before the CFR in late October. In that speech, he raised questions about the effectiveness of the Fed’s quantitative easing program. He also registered concern that the Fed might not be able to adequately control either a future rise in interest rates or the volatility (read downside) it might create in the markets. He also cast doubt on the viability of the euro in the absence of a European political union. In a surprise, he offered what I consider to be some very sound financial advice: Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”

Part three – an appearance at the gold-friendly New Orleans Investment Conference

Greenspan also spoke at the New Orleans Investment Conference in October and here he offered some important insights into the role of the Federal Reserve in the present political economy. Henry Bonner (Sprott Global) who was in attendance offers this summation:

“[Greenspan] fell into his role as Fed Chairman purely by accident, he claimed, and what he did there, he did it because he had to. He explained that the capital needs of the Federal government were so massive that the only way to prevent disaster for the rest of the economy was to keep feeding the beast with cheap money. If the Fed hadn’t created and circulated new money, the Treasury’s insatiable demand for capital would certainly have ‘crowded out’ the rest of the economy, wrecking the entire private credit system. Political realities, he explained, in the form of entitlement spending and off-balance sheet obligations of the US government, trump the need for sound money every time.”

In this context, he explained, a gold standard is impossible. Greenspan added flatly that he “never said the Fed was independent and that its heavily monetized balanced sheet is “a pile of tinder but it hasn’t been lit. . . Inflation will eventually have to rise.”

Why Greenspan’s reinvention is important to the average investor

So why go to the trouble of cataloguing Alan Greenspan’s October, 2014 epiphany?

We need to keep in mind that this is an individual who actually sat at the controls of the most important central bank in the world. As such he saw first-hand how the monetary system operates––the good, the bad and the ugly. For him to graduate from that experience a proponent of gold reveals more about the efficacy of central banks than perhaps those institutions would like to be known. After all, the central bankers’ stock and trade is trust and belief. Wall Street trusts that the central bank knows what it is doing and it believes that it is powerful enough to make its will stick.

Greenspan in the course of thirty days has dispelled both notions. He tells us unambiguously that the Fed’s power is limited; that its policies by and large are dictated by forces outside its control (as mentioned earlier, he exclaimed at one point that he “never said the Fed was independent”); and that the Fed’s options are restricted by the overwhelming needs of a government fiscally out of control. What’s more he recommends gold to the citizenry as a financial defense. Tellingly, the man who was once called “maestro” for his apparent mastery of economic orchestration appears to have been humbled by his experience. His born again embrace of gold, and as one of the Fed’s most vocal critics, should be viewed as one of the more important curtain calls of the modern era. I am surprised that more has not been made of it.

Epilogue

As a young man Greenspan wrote what has become a famous tract––one widely referenced by gold advocates even now and one that still ranks among the most highly visited pages at USAGOLD. “Gold and Economic Freedom” is a strongly worded, no-holds-barred attack on fiat money and the welfare state written in the late 1960s. It also endorses the gold standard as a means to restraining those impulses.

Former Congressman Ron Paul once told the story of his owning an original copy of “Gold and Economic Freedom” and asking Greenspan to sign it. While doing so, Paul asked him if he still believed what he wrote in that essay some forty years earlier. Greenspan, then still Fed chairman, responded that he “wouldn’t change a single word.” True to his word, and after serving a 19-year stint as chairman of the Federal Reserve, he comes back to the place where he began. At nearly 89 years of age, he squares the books and adds a new and, in my view, useful chapter to his legacy. At the New Orleans conference Greenspan was asked where he thought gold would be in five years. He answered “higher.” When asked how much, he said “measurably.    (my emphasis)

Welcome back, Mr. Greenspan.

By Michael J. Kosares for USA Gold

By permission Michael J. Kosares

www.usagold.com

http://www.usagold.com/publications/Nov2014R&O.html

Links:

The Paul-Greenspan Congressional hearing transcripts.

Gold and Economic Freedom by Alan Greenspan (1967)

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 Review & Outlook, 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.

USAGOLD Review & Outlook is the contemporary, web-based version of our client letter, which traces its beginnings to the early 1990s under the News & Views banner. Its principle objectives have always been to keep our clients informed of important developments in the gold market; condense the available gold-based news and opinion into a brief, readable digest; and counter the traditional anti-gold bias in the mainstream media. That formula has won it a five-figure subscription base (and growing). In addition to our regular newsletters, we occasionally publish in-depth special reports that focus on events and developments of interest to gold owners.

Valued for its insight, accuracy and reliability, this publication is linked and reprinted regularly by a large number of websites both in the United States and around the globe. It also enjoys the goodwill of countless websites, individuals and organizations who contribute regularly to its content. To this group, we owe a deep debt of gratitude.

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.

Will The Swiss Vote to Get Their Gold Back?

Posted on October 30th, 2014

Ron PaulBy Ron Paul

On November 30th, voters in Switzerland will head to the polls to vote in a referendum on gold. On the ballot is a measure to prohibit the Swiss National Bank (SNB) from further gold sales, to repatriate Swiss-owned gold to Switzerland, and to mandate that gold make up at least 20 percent of the SNB’s assets. Arising from popular sentiment similar to movements in the United States, Germany, and the Netherlands, this referendum is an attempt to bring more oversight and accountability to the SNB, Switzerland’s central bank.

The Swiss referendum is driven by an undercurrent of dissatisfaction with the conduct not only of Swiss monetary policy, but also of Swiss banking policy. Switzerland may be a small nation, but it is a nation proud of its independence and its history of standing up to tyranny. The famous legend of William Tell embodies the essence of the Swiss national character. But no tyrannical regime in history has bullied Switzerland as much as the United States government has in recent years.

The Swiss tradition of bank secrecy is legendary. The reality, however, is that Swiss bank secrecy is dead. Countries such as the United States have been unwilling to keep government spending in check, but they are running out of ways to fund that spending. Further taxation of their populations is politically difficult, massive issuance of government debt has saturated bond markets, and so the easy target is smaller countries such as Switzerland which have gained the reputation of being “tax havens.” Remember that tax haven is just a term for a country that allows people to keep more of their own money than the US or EU does, and doesn’t attempt to plunder either its citizens or its foreign account-holders. But the past several years have seen a concerted attempt by the US and EU to crack down on these smaller countries, using their enormous financial clout to compel them to hand over account details so that they can extract more tax revenue.

The US has used its court system to extort money from Switzerland, fining the US subsidiaries of Swiss banks for allegedly sheltering US taxpayers and allowing them to keep their accounts and earnings hidden from US tax authorities. EU countries such as Germany have even gone so far as to purchase account information stolen from Swiss banks by unscrupulous bank employees. And with the recent implementation of the Foreign Account Tax Compliance Act (FATCA), Swiss banks will now be forced to divulge to the IRS all the information they have about customers liable to pay US taxes.

On the monetary policy front, the SNB sold about 60 percent of Switzerland’s gold reserves during the 2000s. The SNB has also in recent years established a currency peg, with 1.2 Swiss francs equal to one euro. The peg’s effects have already manifested themselves in the form of a growing real estate bubble, as housing prices have risen dangerously. Given the action by the European Central Bank (ECB) to engage in further quantitative easing, the SNB’s continuance of this dangerous and foolhardy policy means that it will continue tying its monetary policy to that of the EU and be forced to import more inflation into Switzerland.

Just like the US and the EU, Switzerland at the federal level is ruled by a group of elites who are more concerned with their own status, well-being, and international reputation than with the good of the country. The gold referendum, if it is successful, will be a slap in the face to those elites. The Swiss people appreciate the work their forefathers put into building up large gold reserves, a respected currency, and a strong, independent banking system. They do not want to see centuries of struggle squandered by a central bank. The results of the November referendum may be a bellwether, indicating just how strong popular movements can be in establishing central bank accountability and returning gold to a monetary role.    (my emphasis)

By Ron Paul

By permission Cagle Inc.

© Copyright 2014 Ron Paul  Ron Paul is a former Congressman and Presidential candidate. He can be reached at RonPaulChannel.com.

This column has been edited by the author. Representations of fact and opinions are solely those of the author.

A Market Reset Due

Posted on October 13th, 2014

Investment In Gold As Gold Bullion_9526103By Alasdair Macleod

Recent evidence points increasingly towards global economic contraction.

Parts of the Eurozone are in great difficulty, and only last weekend S&P the rating agency warned that Greece will default on its debts “at some point in the next fifteen months“. Japan is collapsing under the wealth-destruction of Abenomics. China is juggling with a debt bubble that threatens to implode. The US tells us through government statistics that their outlook is promising, but the reality is very different with one-third of employable adults not working; furthermore the GDP deflator is significantly greater than officially admitted. And the UK is financially over-geared and over-dependent on a failing Eurozone.

This is hardly surprising, because the monetary inflation of recent years has transferred wealth from the majority of the saving and working population to a financial minority. A stealth tax through monetary inflation has been imposed on the majority of people trying to earn an honest living on a fixed salary. It has been under-recorded in consumer price statistics but has occurred nonetheless. Six years of this wealth transfer may have enriched Wall Street, but it has also impoverished Main Street.

The developed world is now in deep financial trouble. This is a situation which may be coming to a debt-laden conclusion. Those in charge of our money know that monetary expansion has failed to stimulate recovery. They also know that their management of financial markets, always with the objective of fostering confidence, has left them with market distortions that now threaten to derail bonds, equities and derivatives.

Today, central banking’s greatest worry is falling prices. The early signs are now upon us, reflected in dollar strength, as well as falling commodity and energy prices. In an economic contraction exposure to foreign currencies is the primary risk faced by international businesses and investors. The world’s financial system is based on the dollar as reserve currency for all the others: it is the back-to-base option for international exposure. The trouble is that leverage between foreign currencies and the US dollar has grown to highly dangerous levels, as shown below.

Total World Money 2013 Graph

Plainly, there is great potential for currency instability, compounded by over-priced bond markets. Greece, facing another default, borrows ten-year money in euros at about 6.5%, while Spain and Italy at 2.1% and 2.3% respectively. Investors accepting these low returns should be asking themselves what will be the marginal cost of financing a large increase in government deficits brought on by an economic slump.

A slump will obviously escalate risk for owners of government bonds. The principal holders are banks whose asset-to-equity ratios can be as much as 40-50 times excluding goodwill, particularly when derivative exposure is taken into account. The stark reality is that banks risk failure not because of Irving Fisher’s debt-deflation theory, but because they are exposed to a government debt bubble that will inevitably burst: only a two per cent rise in Eurozone bond yields may be sufficient to trigger a global banking crisis. Fisher’s nightmare of bad debts from failing businesses and falling loan collateral values will merely be an additional burden.

Prices

Macro-economists refer to a slump as deflation, but we face something far more complex worth taking the trouble to understand.

The weakness of modern macro-economics is it is not based on a credible theory of prices. Instead of a mechanical relationship between changes in the quantity of money and prices, the purchasing power of a fiat currency is mainly dependent on the confidence its users have in it. This is expressed in preferences for money compared with goods, and these preferences can change for any number of reasons.

When an indebted individual is unable to access further credit, he may be forced to raise cash by selling marketable assets and by reducing consumption. In a normal economy, there are always some people doing this, but when they are outnumbered by others in a happier position, overall the economy progresses. A slump occurs when those that need or want to reduce their financial commitments outnumber those that don’t. There arises an overall shift in preferences in favour of cash, so all other things being equal prices fall.

Shifts in these preferences are almost always the result of past and anticipated state intervention, which replaces the randomness of a free market with a behavioural bias. But this is just one factor that sets price relationships: confidence in the purchasing power of government-issued currency must also be considered and will be uppermost in the minds of those not facing financial difficulties. This is reflected by markets reacting, among other things, to the changing outlook for the issuing government’s finances. If it appears to enough people that the issuing government’s finances are likely to deteriorate significantly, there will be a run against the currency, usually in favour of the dollar upon which all currencies are based. And those holding dollars and aware of the increasing risk to the dollar’s own future purchasing power can only turn to gold and subsequently those goods that represent the necessities of life. And when that happens we have a crack-up boom and the final destruction of the dollar as money.

So the idea that the outlook is for either deflation or inflation is incorrect, and betrays a superficial analysis founded on the misconceptions of macro-economics. Nor does one lead to the other: what really happens is the overall preference between money and goods shifts, influenced not only by current events but by anticipated ones as well.

Gold

Recently a rising dollar has led to a falling gold price. This raises the question as to whether further dollar strength against other currencies will continue to undermine the gold price.

Let us assume that the central banks will at some time in the future try to prevent a financial crisis triggered by an economic slump. Their natural response is to expand money and credit. However, this policy-route will be closed off for non-dollar currencies already weakened by a flight into the dollar, leaving us with the bulk of the world’s monetary reflation the responsibility of the Fed.

With this background to the gold price, Asians in their domestic markets are likely to continue to accumulate physical gold, perhaps accelerating their purchases to reflect a renewed bout of scepticism over the local currency. Wealthy investors in Europe will also buy gold, partly through bullion banks, but on the margin demand for delivered physical seems likely to increase. Investment managers and hedge funds in North America will likely close their paper-gold shorts and go long when their computers (which do most of the trading) detect a change in trend.

It seems likely that a change in trend for the gold price in western capital markets will be a component part of a wider reset for all financial markets, because it will signal a change in perceptions of risk for bonds and currencies. With a growing realisation that the great welfare economies are all sliding into a slump, the moment for this reset has moved an important step closer.     (my emphasis)

By Alasdair Macleod for Gold Money

By permission Alasdair Macleod and Gold Money

www.goldmoney.com and www.financeandeconomics.org

The World Order Becomes Disorder

Posted on September 17th, 2014

Global Economy by Bill Day, Cagle Cartoons

By Donald G. M. Coxe, Chairman, Coxe Advisors LLC.

Is the post-Cold War global boom over?

Since the fall of Bolshevism, the world has seen remarkably sustained growth in international cooperation, brought about by freer trade and new technologies. Financial assets have generally performed well, increasing prosperity across most of the world. There were just two major interruptions—the tech crash in 2000, and the financial crash in 2008.

The world warmed up fast after the Cold War. Prices of most commodities rose, despite major corrections:

  • Oil climbed from $15 per barrel to as high as $140. It collapsed with the crash, but climbed back swiftly to near $100.
  • Corn climbed from $2 to as high as $8 before sliding to $3.60.
  • Copper climbed from 80 cents to $4.30 before sliding to $3.
  • Gold shot up from $350 to $1,900 before pulling back toward $1,200.

So what’s happening with commodity prices now? Is this just another correction, or has the game really changed?

Commodity prices have risen against a backdrop of falling interest rates:

Ten Year US Treasury Yield Graph

The US ten-year Treasury yielded 8% as recently as 1994, and as low as 2.1% during the crash. Recently the consensus target was 4%—before fears of outright deflation drove it to 2.4%. Bond yields have fallen below 1%. Even the bonds of the southern members of the Eurozone yield Treasury-esque returns.

Remarkably, those low yields persist even as major geopolitical outbursts have ended the mostly benign post-Cold War era. The foundations of global economic progress are being shaken by geopolitical earthquakes from Russia and Ukraine to Syria and Iraq, where a new caliphate has been proclaimed.

It seems bizarre, but the world is heading toward a revival of both the Cold War and the Ottoman Empire.

Unfortunately, these concurrent crises are occurring at a time when the great democracies’ leaders bear scant resemblance to those leaders responsible for the end of the Cold War and the launch of global cooperation and free trade: Reagan, Thatcher, and George HW Bush. Mr. Obama won his nomination by voting against the invasion of Iraq. He ran on the promise of ending wars, not starting them. Now, faced with sinking popularity in an election year that could give Republicans complete control of Congress, he naturally fears dragging America into the ISIS chaos—or Ukraine.

Obama is also haunted by the collapse of his most daring and creative foreign policy achievement—the reset with Russia. Last week, Mr. Putin doubled down on his Ukrainian attacks by warning that Russia should be taken seriously, because it is a major nuclear power and is strengthening its nuclear arsenal. Those with long memories recall Khrushchev banging his shoe at the United Nations and shouting, “We will bury you!”

Meanwhile, Western Europe’s leaders show few signs of being prepared for either crisis. Angela Merkel, raised in East Germany, is cautious to a fault. British Premier David Cameron is struggling to prevent Scottish secession and to deal with the likely return of hundreds of ISIS-trained British citizens. (Military analysts generally agree that well-funded returnees with ISIS training are much greater threats than Al Qaeda ever was… yet Cameron has failed to convince his coalition partner to support restraining their re-entry into British Muslim communities.)

The backdrop for long-term investing has, in less than a year, swung from promising to promises broken by wars and threats of more-terrifying wars.

Another unlikely threat is deflation.

DEflation?

When central bankers have been running the printing presses 24/7?

Most economists, strategists, and investors would have deemed deflation a near-impossibility with government debts at all-time highs, funded by money printed at banana-republic rates. Who thought that the Fed would quadruple its balance sheet? And who dreamt that such drastic policies would be sustained for six years and would be accompanied by outright deflation in much of Europe and minimal inflation in the USA?

So why have Brent oil prices fallen from $125 in two years despite production outages in Syria and Libya and repeated cutbacks in Nigeria? Are Teslas taking over the world?

The answer is that the US is once again #1 in oil production, thanks to fracking (in states that allow it). Mr. Obama likes to boast about the new US oil boom, but he has been a bystander to this petro-revolution. According to an oil company executive interviewed in the New York Times last week, without fracking, global oil prices might be at $200 a barrel, and the world would be in a deep recession. He’s a Texan and thus inclined toward hyperbole, but his point is directionally valid.

US frackers—deploying advances in science and technology with guts and skill—have averted fuel inflation. And farmers, using the tools of modern agriculture—GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers—have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.

Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.

So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to: (1) buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big; and (2) prop up the overall market because investors have learned that buying on margin when the costs are minimal—and below dividend yields—just keeps paying off. Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.

Gold loses its luster when: (1) inflation seems to be as remote as a pot of gold at the end of the rainbow; and (2) even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.

We had predicted in February that 2014 would be the year of increasing geopolitical risks that would challenge conventional asset allocations. We see geopolitical risks expanding from here—not contracting—and stick to our investment advice that the broad stock market is precariously valued. A range of options is available for those who wish to hedge themselves against even worse news.

Gold is part of any such risk mitigation. So are long government bonds.

Most importantly, we have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.

—–

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Wall Street Admits That A Cyberattack Could Crash Our Banking System At Any Time

Posted on September 5th, 2014

CyberattackBy Michael Snyder

Wall Street banks are getting hit by cyber attacks every single minute of every single day.  It is a massive onslaught that is not highly publicized because the bankers do not want to alarm the public.  But as you will see below, one big Wall Street bank is spending 250 million dollars a year just by themselves to combat this growing problem.  The truth is that our financial system is not nearly as stable as most Americans think that it is.  We have become more dependent on technology than ever before, and that comes with a potentially huge downsideAn electromagnetic pulse weapon or an incredibly massive cyberattack could conceivably take down part or all of our banking system at any time.

This week, the mainstream news is reporting on an attack on our major banks that was so massive that the FBI and the Secret Service have decided to get involved.  The following is how Forbes described what is going on…

The FBI and the Secret Service are investigating a huge wave of cyber attacks on Wall Street banks, reportedly including JP Morgan Chase, that took place in recent weeks.

The attacks may have involved the theft of multiple gigabytes of sensitive data, according to reports. Joshua Campbell, supervisory special agent at the FBI, tells Forbes: “We are working with the United States Secret Service to determine the scope of recently reported cyber attacks against several American financial institutions.”

When most people think of “cyber attacks”, they think of a handful of hackers working out of lonely apartments or the basements of their parents.  But that is not primarily what we are dealing with anymore.  Today, big banks are dealing with cyberattackers that are extremely organized and that are incredibly sophisticated.

The threat grows with each passing day, and that is why JPMorgan Chase says that “not every battle will be won” even though it is spending 250 million dollars a year in a relentless fight against cyberattacks…

JPMorgan Chase this year will spend $250 million and dedicate 1,000 people to protecting itself from cybercrime — and it still might not be completely successful, CEO Jamie Dimon warned in April.

Cyberattacks are growing every day in strength and velocity across the globe. It is going to be continual and likely never-ending battle to stay ahead of it — and, unfortunately, not every battle will be won,” Dimon said in his annual letter to shareholders.

Other big Wall Street banks have a similar perspective.  Just consider the following two quotes from a recent USA Today article

Bank of America: “Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future.”

Citigroup: “Citi has been subject to intentional cyber incidents from external sources, including (i) denial of service attacks, which attempted to interrupt service to clients and customers; (ii) data breaches, which aimed to obtain unauthorized access to customer account data; and (iii) malicious software attacks on client systems, which attempted to allow unauthorized entrance to Citi’s systems under the guise of a client and the extraction of client data. For example, in 2013 Citi and other U.S. financial institutions experienced distributed denial of service attacks which were intended to disrupt consumer online banking services. …

“… because the methods used to cause cyber attacks change frequently or, in some cases, are not recognized until launched, Citi may be unable to implement effective preventive measures or proactively address these methods.”

I don’t know about you, but those quotes do not exactly fill me with confidence.

Another potential threat that banking executives lose sleep over is the threat of electromagnetic pulse weapons.  The technology of these weapons has advanced so much that they can fit inside a briefcase now.  Just consider the following excerpt from an article that was posted on an engineering website entitled “Electromagnetic Warfare Is Here“…

The problem is growing because the technology available to attackers has improved even as the technology being attacked has become more vulnerable. Our infrastructure increasingly depends on closely integrated, high-speed electronic systems operating at low internal voltages. That means they can be laid low by short, sharp pulses high in voltage but low in energy—output that can now be generated by a machine the size of a suitcase, batteries included.

Electromagnetic (EM) attacks are not only possible—they are happening. One may be under way as you read this. Even so, you would probably never hear of it: These stories are typically hushed up, for the sake of security or the victims’ reputation.

That same article described how an attack might possibly happen…

An attack might be staged as follows. A larger electromagnetic weapon could be hidden in a small van with side panels made of fiberglass, which is transparent to EM radiation. If the van is parked about 5 to 10 meters away from the target, the EM fields propagating to the wall of the building can be very high. If, as is usually the case, the walls are mere masonry, without metal shielding, the fields will attenuate only slightly. You can tell just how well shielded a building is by a simple test: If your cellphone works well when you’re inside, then you are probably wide open to attack.

And with electromagnetic pulse weapons, terrorists or cyberattackers can try again and again until they finally get it right

And, unlike other means of attack, EM weapons can be used without much risk. A terrorist gang can be caught at the gates, and a hacker may raise alarms while attempting to slip through the firewalls, but an EM attacker can try and try again, and no one will notice until computer systems begin to fail (and even then the victims may still not know why).

Never before have our financial institutions faced potential threats on this scale.

According to the Telegraph, our banks are under assault from cyberattacks “every minute of every day”, and these attacks are continually growing in size and scope…

Every minute, of every hour, of every day, a major financial institution is under attack.

Threats range from teenagers in their bedrooms engaging in adolescent “hacktivism”, to sophisticated criminal gangs and state-sponsored terrorists attempting everything from extortion to industrial espionage. Though the details of these crimes remain scant, cyber security experts are clear that behind-the-scenes online attacks have already had far reaching consequences for banks and the financial markets.

In the end, it is probably only a matter of time until we experience a technological 9/11.

When that day arrives, will your money be safe?    (my emphasis)

By Michael Snyder for Economic Collapse

By permission Economic Collapse Blog

http://theeconomiccollapseblog.com

http://theeconomiccollapseblog.com/archives/wall-street-admits-that-a-cyberattack-could-crash-our-banking-system-at-any-time

Inflation, Interest Rates, and Why You Should Own Gold

Posted on August 26th, 2014

The Words Interest Rates__21406499By Jeff D. Opdyke

The answer: Gold.

The question: What is the best investment to own today as the Federal Reserve begins raising interest rates?

How we get to the answer — an answer that would seem to fly in the face of conventional wisdom — is why I come to you today. And this answer will reveal to you why you should own gold.

It’s not the destination; it’s the journey. I’m sure you’ve heard that old saw many times. Well, in this case, that’s all wrong. As Yellen & Co. nears the start of the first rate-hike cycle we’ve seen since the summer of 2004 to the summer of 2006, the Fed’s ultimate destination with interest rates is the only subject that really matters.

Though the stock, bond and currency markets at the moment are preoccupied with the question of when the first interest-rate increase will happen, the real story lies in where interest rates are ultimately headed … because that answer defines where stock, bond and currency prices are ultimately headed.

And the reality, dear Reader, is that the Fed simply cannot — and will not — allow interest rates to crawl very high. They know that with every tick up, higher and higher interest rates will increasingly crimp Washington’s style — that “style,” of course, being D.C.’s penchant for wanting to splurge big on buying votes by spending stupid amounts of money on stupid programs.

See, D.C. has itself in a bit of a bind, as you likely already know. For more than half a century, the goobers we’ve elected to Congress have been spending our tax dollars as though they won’t live to see tomorrow and, so, what the hell: Let’s live for today! Now we have that $17 trillion in public debt that you always read about — and the $120 trillion in unfunded debt on and off America’s balance sheet that you don’t always read about but that is, nevertheless, all too real.

Because of that, rising interest rates pose a significant challenge for the Fed and for Congress.

Consider some numbers and you will quickly understand the problem we face as a first-world nation rapidly moving toward Banana Republic status:

  • In 2013, America’s interest payments cost U.S. taxpayers $415.7 billion. Some commentators I’ve read have used that as proof that we’re finally getting our debt under control because in 2007, interest payments were higher, at $430 billion.
  • But in 2007, total debt was just $9 trillion vs. $16.7 trillion at the end of 2013.
  • Also in 2007, the average annual interest rate across all maturities of Treasury debt was 4.94% vs. just 2.02% in 2013. So in 2013 we had a much larger sum of debt, but benefited from exceedingly low interest rates.
  • The Congressional Budget Office calculates that if interest rates move back toward norms by 2020 — meaning 10-year notes at 5% (they’re 2.4% today) and 3-month T-bills at 3.7% (they are 0.03% today) — our annual debt payments will explode to more than $840 billion, double what we’re paying now.

The Long, Long Road to 2%

Think about America today — a country already gasping under the weight of too much debt. And then think about an America where debt-service payments have doubled.

That world implies a vicious debt-cycle, in which the country must issue more debt to make debt payments, which then leads to more debt as the debt payments rise because of all the new debt needed to repay the existing debt. It also means a dramatic change to America’s tax-rate structure. The wealthy class now responsible for 39% of all federal taxes, will be forced to dig even deeper into their wallets. The middle-class now responsible for just 3% of all Federal taxes paid will see their lifestyle shrink as more taxes come out of their paychecks. And the lower-middle-class that now earns money from the federal tax system, will suddenly feel the sting of Uncle Sam’s pick-pocketing ways as their tax benefits become tax obligations.

In short, America’s consumer-dependent economy would face unmanageable headwinds as consumers lose a meaningful portion of their spending power to government taxation.

Worse, the taxes we pay would not turn around and flow back into the economy but would, instead, flow to holders of U.S. debt, many of whom live overseas. We would, in essence, be working our butts off so that a debt-drunk Uncle Sam could send ever-larger sums of our tax dollars to the Chinese, the Japanese, the Russians, the Brits, the Taiwanese and others.

Ultimately, that would be a political, social and financial disaster for Washington, D.C. And the Fed is smart enough to realize these ramifications exist … which brings us back to the main point: the Fed’s ultimate destination with interest rates.

Though rates will soon begin moving up for the first time in nearly a decade, the Fed will — and must — continue strong-arming the market to keep rates unnaturally low. My guess: the Fed-funds rate, the Federal Reserve’s key interest-rate lever, will not go higher than 2% and, more important, getting there will take years, not months. The Fed will not raise rates in rote 0.25% step-ups over a few meetings. It might move in 0.1% increments, and it could go several months or maybe even a year between rate hikes.

In short, we’ve been stuck at near-0% interest rates for more than five years … and it very well could take the Fed another five years or more to get us back toward 2%, simply because it knows that Congress has worked itself into an impossible financial situation.

Thus, the Answer: Gold

The knock on gold is that it pays no rate of return and is, therefore, not a smart asset to own when money in the bank or in Treasury paper offers a decent yield.

But while rates will begin to rise, money in the bank or in Treasury paper will still offer no real yield in the future, given that inflation has begun to move up as wages now rise (a little jab to the gut from all those efforts to push minimum wages higher). That means inflation will equal or outpace the interest rates you’ll be able to earn in savings accounts, CDs and government bonds.

And that is the environment that is brightest for gold.

When you’re losing purchasing power just by letting your money sit in savings, CDs and bonds, gold is a godsend. Its price tends to rise in such an environment.

So, do yourself a favor. Do not look at the coming Fed rate-hike cycle as an opportunity, finally, to move some cash back into CDs and savings account. Look at it for what it really is: An opportunity to grab gold now, at a fair price, knowing that the Fed has no other option but to keep interest rates exceedingly low for a long, long — long — time.    (my emphasis)

Until next time, stay Sovereign …

By Jeff D. Opdyke for The Sovereign Investor

By permission The Sovereign Investor

http://thesovereigninvestor.com

http://thesovereigninvestor.com/gold/inflation-interest-rates-why-you-should-own-gold/

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