Gold bugs will be vindicated.

by Alasdair Macleod

In recent weeks, while the eurozone has suffered escalating levels of systemic stress in government bond markets and its banking system, the gold price has fallen under $1,600. One would have thought that – but for the occasional fat-finger trade – gold would rise in all this instability, not fall. Putting aside short-term considerations, the simple reason has to be that the investment establishment, which has bought into the bond market bubble, does not believe that gold is any longer an alternative to paper money.

We can understand why they think this. Though the Keynesian vs Austrian economic debate is attracting increasing attention, financial services companies recruit economists who have been trained in the traditions of Keynes and Friedman. They are thus immersed in economic disciplines that assume gold is old-fashioned and has no meaningful place in a modern economy. While they might accept that gold has an historical attraction for some investors, they see it as a “risk-on” investment. This is jargon for something you buy when you want to take risks, the opposite of gold’s traditional role.

For further proof, you need look no further than the average level of portfolio exposure, which across the global investment management industry is said to average less than one per cent. This is certainly not compatible with the level of risk in today’s markets, with many nations on the edge of bankruptcy. The result is that flaky gold bulls are experiencing the discomfort of rising panic.

Let us go back to fundamentals. The Keynesians and Friedmanites are oblivious to the debt trap faced by all major currencies. Central banks are printing money to fund government deficits at the lowest possible interest cost. The inevitable consequence of printing money is price inflation, and price inflation always leads to higher interest rates. Higher interest rates exacerbate budget deficits.

You cannot put it more simply than that. The alternative is to stop printing the money and jack up interest rates, but in that event at the head of the insolvency queue is government itself, so this can be ruled out as a deliberate policy. That is what a debt trap is all about: whichever way you turn, there is only one outcome: bankruptcy.

When a government goes bust, its paper is valueless: not just its bonds, but its fiat currency as well. On the surface it is different in euroland, because the nation states do not issue their own currency. On this basis the demise of the euro is an event one step removed from the bankruptcy of individual nation states. The relationship with the other major fiat currencies is direct.

The destruction of fiat currencies themselves is becoming more likely by the day. Meanwhile, the weakness of “risk-on” gold has led to a serious mispricing in the market. This has happened because the financial community, sucked into the bond market bubble, has not even begun to discount the debt threat to government paper from sovereign bankruptcies.

When this mispricing is inevitably resolved, it is unlikely to be gradual. It will be so swift that those old-fashioned enough to own gold for insurance purposes will have the protection they sought. Those that fall for modern neo-classical economics will learn a very sudden lesson about what gold is actually for.

Mr Mcleod's website

David Stockman's Investing Model is ABCD or Anything Bernanke Can't Destroy!

David Stockman was the director of the Office of Management and Budget under President Ronald Reagan back in the 1980s. In a recent interview with the Gold Report he says at the end of his interview that his present investing model is to own anything that Fed chairman Ben Bernanke can't destroy. 

The interview:

The Emperor is Naked: David Stockman

Gold has changed overnight, and likely will again

by Chris Powell

Dear Friend of GATA and Gold:

GATA isn't an investment adviser but rather, as a matter of law, a non-profit educational and civil rights organization incorporated in Delaware and recognized as federally tax-exempt by the U.S. Internal Revenue Service. As a more practical matter we aspire to be a sort of liberation movement, since, as was written in ancient times, the truth makes you free. We don't know exactly when this will happen.

Insofar as the price of gold is an international political decision as much as a market decision, we particularly do not know when crucial political decisions affecting the gold price will be made. But they have been made before, they will be made again, and we are seeing now so many developments that correspond to the developments immediately preceding the last great revaluations of gold, in 1968 and 1971.

Back then, when gold price suppression was openly a big part of U.S. economic and foreign policy, gold moved from West to East -- particularly from the United States to Europe. Then came the collapse of the London Gold Pool and the Bretton Woods Agreement, when the U.S. government decided that the drain on its gold reserves caused by its policy of price suppression had become too great:

http://en.wikipedia.org/wiki/London_Gold_Pool

While gold price suppression is now a largely (but not entirely) surreptitious policy, once again we see gold flowing from West to East -- only now the East includes the rapidly developing countries of Asia. This flow has been tempered by the supply of imaginary gold conjured by derivatives, but it is a strong flow nevertheless.

At what point will the government or governments still supplying metal to the market for price suppression change policy to relieve the threat to what remains of their gold reserves? Will the U.S. government, as geopolitical analyst Jim Rickards has suggested, end the price suppression scheme by confiscating the gold reserves it holds in custody for other nations?

Maybe there are answers to those questions in the documents the Federal Reserve was able to withhold from GATA as a result of the decision last year in our somewhat successful freedom-of-information lawsuit against the Fed:

http://www.gata.org/node/9917

We don't know. But we do know from history that the biggest circumstances with gold, and thus gold's valuation, tend to change overnight, when all is revealed suddenly. The central bankers won't be calling us or you about this a day or two ahead of time. They'll be calling their agents at JPMorganChase and HSBC. All we can do is strive to hasten the day of change. And such days do happen, and have happened in times much like the ones we are experiencing now.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Howard Buffet explains how human freedom rests on gold redeemable money.

by Mario Innecco

Recently on CNBC we have heard from Charlie Munger who is the vice chairman of Berkshire Hathaway and consequently Warren Buffet's deputy. Mr Munger points out that civilized people do not own gold and that investment in productive businesses is what counts. We at forsoundmoney partly agree with him that produvtive enterprise is necessary in civilized society but where we disagree with him on is that gold is not necessary in civilized society.

We think Mr Munger has lost sight of the fact that in a civilized society the diversity of products and services produced by private enterprises are indirectly exchanged for other goods and services and a sound money system that facilitates the indirect exchange of these goods and services is an essential component of the system. Mr Munger does not realize that our monetary system has been severely damaged since the closing of the gold window back in August of 1971 and that under the current fiat money system the weight of debt necessary to keep the system functioning will eventually destroy the monetary system and thereby disrupt the functioning of a modern civilized society in which indirect exchange is paramount.

It is a shame that Messrs Buffet and Munger do not see the importance of gold as money in a free and civilized society. Howard Buffet, the late congressman from Nebraska and Warren's father, saw it otherwise and he let the world know what he thought of gold as money in this article he wrote in 1948 for the Commercial and Financial Chronicle.

Howard Buffet ends his article with the following warning:

But, unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.

There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors. But, unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors.

Marc Faber says gold is not in a bubble.

Investment guru Marc Faber says gold ownership is still very low and that more people own Apple Corp. stock. He compares Apple to Japanese stocks in the late 1980s in that almost everyone owned it and dot.com stocks in the late 1990s.

An interesting article in Moneyweek Magazine.