Keith Fitz-Gerald (Money Morning):
Millions of investors who bought gold in the last 12 months are undoubtedly very happy at the moment – considering that the yellow metal has risen 60% since last November to a recent close of $1,138.60 an ounce on Monday.

But chances are good that many won’t be smiling when they discover just what the taxman has planned for their gains.

Unbeknownst to most investors, gold is considered a collectible not a capital asset. In plain English, this means that despite the fact that many people believe they are investing in gold, the Internal Revenue Service (IRS) believes that they are collecting it.

This is no small distinction and hurts investors because it means that gold does not qualify for the 15% maximum tax bite that most of us employ as a matter of routine when we mentally calculate profits earned on investments held for more than a year. That 15% cut for Uncle Sam is the long-term capital gains tax rate that applies to most stock or mutual fund investments.

Precious metals are a completely different story. Profits from these “investments” can be subject to a 28% maximum tax rate if held for more than 12 months. And if they are sold in less than a year, the profits count as ordinary income.

The long and the short of it “is that as a result of gold’s spectacular run-up, many investors may have a tax problem they haven’t counted on when they go to sell,” said Gary E. Ham Jr., of the Oregon-based accounting firm of Jones & Ham PC

This may be especially true for investors who have piled into such asset-backed, exchange-traded funds (ETFs) as the SPDR Gold Trust (NYSE: GLD), the iShares Silver Trust (NYSE: SLV) and the iShares COMEX Gold Trust (NYSE: IAU), for example, because precious-metals ETFs are set up as something called a “grantor trust.” According to Barron’s, ETF investors are treated as owning undivided interests in the actual metal that’s owned by the fund. Therefore, when an investor sells shares in the ETF, the tax code treats that investor as having sold a share of the metal backing the fund.

Click here to continue reading this article on Money Morning.

GOLD’S CURRENT price-tag of $1,000 an ounce suggests big doubts over the US Dollar, its domestic economy, and its status as the world’s No.1 reserve currency.

Or so we guess after 10 years of watching it quadruple from two-decade lows. But gold investors (old, new and everywhere) should note that this decade’s bull market in bullion is about much more than the greenback.

Here are three ways of judging what you might call the “real price of gold” instead.

#1. The Global Gold Index

Gold has risen against all world currencies since the start of 2001, very nearly tripling on average and hitting record highs against everything bar the Japanese Yen. (Tokyo gold buyers are still waiting for a near-double to the peak of Jan. 1980…)

Introduced in July 2008, Bullion Vault’s Global Gold Index is a stab at mapping this trend. It monitors “real gold” by plotting the daily price in terms of the world’s ten most important currencies, averaging their moves by size of the issuing economy.

Thus the Global Gold Index currently starts with the US Dollar gold price, and then takes in the gold price for Eurozone buyers, Japan, China, the UK, Russia, Brazil, Canada, Mexico and Australia – as per the latest World Bank and IMF data. (It’s rebased each year to accommodate changes in that league table of gross domestic product; India, the world’s hungriest physical gold market until the start of this year, flips in and out.)

Not quite the price of gold for everyone worldwide, this “real” value does at least cover 2.5 billion people who account for over two-thirds of world economic activity. It starts at 100 on New Year’s Day 2000, hitting a record peak for this decade in May 2006, and then all-time record peaks in March 2008 and then Feb. 2009.

Currently, the Global Gold Index is trading some 5% off that top, rising strongly into Sept. ‘09 so far.

#2. Gold vs. the Cost of Living

What about inflation; has the ultimate “inflation hedge” (as most commentators and analysts still mistake it) out-done the cost of living?

Given how suspect inflation data can be (wherever you live), let’s roll our third “real” gold price into this picture too, comparing gold against the cost of raw, productive materials as bought and paid for in the market-place…

This chart shows the Dollar gold-price adjusted for official inflation in US consumer prices (the gold line). Jan. 2000 marks the start of our indexation. You’re looking at gold priced in Y2K dollars, left-hand scale.

The chart also maps the “real” price of gold in terms of raw materials prices (dark red, right scale), indexing it against the CRB’s Continuous Commodity Index of the most-heavily traded 19 natural resources – crude oil, corn, soy beans and the rest. (Again, Jan. 2000 is our starting point for the maths, indexing the real price of gold in commodities at 100.)

But is gold cheap or dear right now? Three observations:

• Gold built a strong base against commodities during the 1980s and ’90s, holding onto far more of its 1970s’ gains than did natural resources;
• Gold has never been more expensive in terms of the raw materials it could buy than in Feb. ‘09, almost doubling in purchasing power from crude oil’s record peak of summer last year;
• Real gold prices stand at only 50% of their 1980 inflation-adjusted peak, but they’ve trebled so far this decade;
• Consumer-price inflation has thus been stronger since Y2K than you might guess…adding 27% to the cost of living and lopping a whole multiple off gold’s nominal gains since the start of this decade.

Still, the Noughties come fifth out of the last eleven decades both for “price stability” and “low inflation”. And gold’s performance in the face of rising consumer prices is varied to say the least…

Most significant perhaps for the fate of Dollars, gold and inflation, is the fact that real commodity prices have in fact halved over the last fifty years. Adjusted for US inflation, they were never cheaper than at the start of this decade.

The decline in real commodity prices between June 2008 and Feb. ‘09 was comparable only with their doubling in 1972-73. Dropping 40% inside eight months, real commodities fell faster than any time on the CRB’s five-decade record.

If this decade’s bull market in gold were only about inflation and commodity-price fears –whether priced in US Dollars or anything else – gold would not be trading four times higher above $1,000 today.

Regards,
Adrian Ash

Source: The Real Price of Gold

So speculative betting on gold going higher now equals a record-busting 752-tonne position in Comex futures and options, yet this is not a bubble according to Michael Pento of Deltaga.

Let’s say otherwise. Let’s say that gold prices, surging by almost $100-per-ounce in barely a month, are very much in a bubble…blown up by near-zero interest rates worldwide and a sharply negative cost of borrowing after inflation. Were that the case, the question before potential and existing investors would be simple:

Is this “irrational exuberance” or a “permanently high plateau”?

Alan Greenspan applied the former to US price/earnings in Dec. 1996; Irving Fisher said the latter of US equities in Oct. 1929. Both were looking at what history would decide were clearly bubbles in hindsight. But Greenspan was three years and 105% early.

Fisher spoke less than 72 hours before the Great Crash began…

Buying gold always looks “irrational” to most financial advisors and commentators, because it doesn’t pay an income or yield.

No matter that gold has beaten all other asset classes bar none since the start of the decade. People looking to buy gold (the blue line of Google searches above) have been underwhelmed with content and analysis online, despite outstripping the volume of “buy stocks” searches (in red) for nearly five years.

Gold buyers have also averaged 20% gains year-on-year since this point in 2004. That compares with -0.6% on average from shares, but so what? Check the spike in “buy stocks” stories highlighted by Google Trends’ lower chart during October last year. Just when gold turned sharply higher – and stocks still had another 40% to fall – the news-flow focused on bottom-fishing in equities.

Gold’s productive value is also judged to be nil next to foodstuffs, energy or base metals – materials that vanish in use and thus display a clear supply/demand dynamic. Whereas all the gold mined in history—being indestructible—is still with us today…some 165,000 or so tonnes. That makes a fundamental case for gold built on tight supply, rising demand absurd. Nor can TV or newspaper journalists get used to applying “exuberance” to gold, the ultimate in gloom-and-doom insurance outside your local gun-store.

But while permanent plateaus are harder to find in finance than geology, gold’s peg-legged clambering of the last nine years most certainly puts it higher than it started.

What’s powering the Stannah Stair-Lift today? In a word, leverage.

Liquidity (meaning “leverage”, as 2008 proved) has flooded back into the big investment houses, thanks to tax-funded injections, quantitative easing, and central-bank asset guarantees.

Near-zero interest rates sure help as well. And that, in turn, has enabled what we used to call investment banks to revive their prime broking services, offering to deal whatever leverage-hungry clients want most, and financing the trade with that ultra-cheap money.

The most leverage-hungry clients, outside of the banks’ own proprietary trading desks, remain hedge funds – hedge funds which doubled in number from 2003 to end-2007 (Hedge Fund Review), growing their assets under management from $600bn (Goldman Sachs’ estimate) to $2.9 trillion (HedgeFund.net) before hitting the credit crunch precisely as Bear Stearns blew up.

Just as the long-run bull market in gold threatened to keel over on this sudden withdrawal of derivatives leverage, however, the physical appeal of owning gold – or a near proxy, at least – came into its own.

Physical gold investment surged in the back-half of 2008 and early 2009, rising 150% from July-to-Dec. 2007 before adding two-thirds of that fresh record between Jan-and-March this year alone. (Data courtesy of the World Gold Council.) And now that deflation seems to be tipping ever-so-smartly into inflation – and the surge in ETF, coin and bar demand has eased off – leverage is back just in time for gold’s typical autumn move higher, a pattern seen 20 years in the last 40 and delivering some 15% gains on average this decade between Sept. and Feb. even for cautious investors buying on cash, rather than margin.

Inflation, deflation, who cares? Whether it’s exuberant hedgies or panicked private investors with something to lose, this “bubble” in gold – if that’s what you choose to call it after a decade of beating everything else, and four years after it broke sharply higher versus all currencies, not just the Dollar – just keeps expanding.

Sub-zero real rates of interest sure help. Media hype, to date, is missing. When those two factors reverse, buying gold may well become irrational – and whatever plateau it’s reached might well give way.

Regards,
Adrian Ash

Source: Gold: A Permanently Exuberant Plateau

The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars), in 1980, the price fell to the $1,000 level (in today’s money) in 1983.

We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years.

Some people draw the wrong lesson from this experience – that gold is always a bad place for your money.

Today’s Financial Times:

“In spite of low interest rates, that make owning gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns.”

But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic.

What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled.

Was it smart to buy stocks or bricks and mortar during the ‘70s? Not at all. Stocks bounced around, but they were no higher at the end of the decade than they were at its beginning. Meanwhile, high inflation rates took a big toll on real values. Stock market investors lost 75% of their money – maybe more. As for those who bought bricks and mortar, they lost too – but it’s hard to say how much.

And meanwhile, gold went from $41 an ounce to over $800.

Which would you prefer?

As you can see, dear reader, timing is everything. There are times to be long gold. And there are times not to be.

For thousands of years gold has been the money of last resort. It is the money you can trust. They can’t make more of it. They can’t counterfeit it. They can’t put extra zeros on it and pretend it is worth more.

But it is most useful when other money goes bad. Inflation rates in the US during the ‘70s went over 10%. Clearly, gold was a better thing to own to protect your wealth than dollars. You could have bought an ounce of it (outside the US…it was still illegal for private citizens to hold gold in America) for, say, $45 in the early ‘70s. By 1982, you could have used that single ounce of gold to buy up the entire list of Dow stocks. Gold and the Dow traded at a ratio of only one to one that year. Then, if you’d held onto those stocks you could have sold them in 2006 for $14,000.

Not bad, huh? Two transactions. Forty-five bucks to $14,000. Invest $100,000 and you would have ended up with $30 million.

But let’s get back to where we are now. Still in a bull market in gold…or at the end of one? Are we idiots for holding it now…or idiots for not buying more?

As you know, we’ve begun a new project: the Bonner & Partners Family Office. It’s our own family office that we’ve opened up to a few non-family members. But just as soon as the non-family members came in the door they started asking questions. Specifically, they wondered why…after all the preaching we’ve done about buying gold…we don’t have more of it in the family portfolio.

One our new partners wrote a very shrewd comment. We’ll pass along a little of what he had to say, but first, some context. The feds are desperate to restart the economy. The only way they can imagine is by increasing the money supply…and inducing people to spend money. They want inflation, no doubt about it. And they’ll get it; no doubt about that either.

The question is when. Our view is that they’ll get more than they expect, but later than they want it. We’re looking for another crack in stocks…followed by more fear and loathing in the economy. This will have two major effects. First, investors will turn to the familiar dollar for safety. Second, everyone will hoard money…speculation will cease…and prices will fall – including the price of gold. Our first writer disagrees:

“One mistake [your editor] might be making is his belief that we are already in another Great Depression.  We probably will be in a depression or some other form of economic calamity, but not yet.  Every Depression (or monetary contraction) in history has followed a similar pattern – expansionary monetary policy followed by a contraction of the money supply….  While we have experienced a huge monetary expansion/easy money in the 90’s, we have not yet experienced a real monetary contraction (which is a scary thought).  Instead, the central planners did the opposite and doubled the monetary base (keep the addict happy with more heroin).  These extra paper dollars have to go somewhere, and we are seeing the results in higher prices for stocks, oil, copper, sugar, gold, so far. ..

Well, yes…as long as the economy seems to be on the mend. Investors’ “appetite for risk” improves. They want to speculate on the recovery. But then, when the recovery proves an illusion…they’re going to run for cover.

Then, another new partner came to help us roll our stone.

“Bill is correct, not from money supply & credit data, but from ‘black swan’ type events such as: how deflationary forces will play out for lenders and holders of mortgaged backed bonds both commercial & residential, in a disruptive resetting of interest rates for Option ARM’s, ALT-A’s and various other prime borrowers in the next 6-12 months… Will we witness another series of major bank failures from this next round of resetting? And if so, how disruptive, in a deflationary sense, will this be?”

Either way, the result is the same. Market events – such as another big break in the banking sector – could bring a deflationary collapse. If not, the Fed itself may have to step in to protect the dollar. In either case, gold is not likely to reach its final, bubble phase until this contraction is over.

In the meantime, our advice remains unchanged: buy it on dips.

We continue to laugh at recovery sightings. Yesterday, for example, the Fed reported to the nation that a recovery was underway. But even the Fed couldn’t ignore the fact that consumers aren’t spending money the way they used to. The New York Times comments:

“The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed’s warning about it deflated some of the market’s optimism. About 70 percent of the economy depends on spending by consumers.”

The other sticky wicket in this game is unemployment. Jobless ranks are swelling like a floating corpse. But the jobless numbers don’t tell the whole story. There are 34 million Americans who live on food stamps. One out of every nine people depends on the government for his daily bread. The Financial Times fills in the details:

“Less attention has been paid to those still in the workforce, whose incomes are also being squeezed. The average working week is now about 33 hours, the lowest on record, while the number forced to work part-time because they cannot find full-time work has risen more than 50 per cent in the past year to a record 8.8m. Wages and benefits have decelerated. “The food stamp data suggest that “the labour market problems are more significant than you would expect, given just the unemployment rate”, said John Silvia, chief economist at Wells Fargo. “For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.” “Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP. Economists fear that people may be unwilling to resume that role. “Food stamps are distributed once a month on electronic cards that can be spent at many grocery stores. The $787bn stimulus bill added about $80 (€55, £50) to a family’s monthly allowance, which now stands at an average $290.

*** Nothing very original about keeping the masses fed with government food. The Romans figured it out 2,000 years ago. You have to distract the mob with pane et circenses (bread and circuses). Otherwise, they vote you out of office…or burn down the capitol.

“Everything, now restrains itself and anxiously hopes for just two things: bread and circuses,” wrote Juvenal.

Source: Are We “Idiots” for Buying Gold?

This is important because the Chinese are becoming increasingly affluent in large numbers. Total consumer spending was $1.7 trillion in 2007, compared to $12 trillion in the U.S. But that number is growing rapidly. The FT focused on the new rich. China now boasts more millionaires than the U.K. The rapid growth of this group has companies all over the world spending more money and time figuring out ways to get in their pockets.

So what do the affluent Chinese like? Outside of ordinary things like flashy cars and booze and quirky things like ivory and dried seahorses, one thing was mentioned in the FT piece that caught my eye: The Chinese love gold.

“China loves gold in all its forms,” the FT reports, “as a reserve currency, jewelry, an investment.” I’ve mentioned in the past about how the Chinese central bank doubled its holdings of gold this year, but it’s more widespread than that.

The rising middle class in China also buys a lot of gold. Since 2007, Chinese consumers have been the second largest purchasers of gold jewelry in the world, behind only India. The FT points out those gold sales were up 28% year over year in May. Total gold demand for the year was up 21%, to 400 million tonnes. There are not too many sales of any kind going up that much in this financial crisis, but there it is.

The financial crisis and weak stock market have helped gold as people look for a place to park some money. I think gold will remain a good place to be for some time yet. And gold stocks have the stars lined up for them. Many are reporting falling cash costs, yet the price of gold is staying up here in the $900s — and is likely headed much higher. That means gold stocks are reporting good increases in cash flow, among the few sectors to do so.

Source: What the Chinese Are Buying and How to Own it First

Of course, the world was a very different place in 1980. Deflation is now the bogeyman stalking the global economy (although here at Notes we believe a surging asset-price inflation is not far off). And back then, there were persistent rumors that Ronald Reagan was going to bring back the gold standard and send gold, in 1980 money, to $1,000 an ounce.

But as John Katz and Frank Holmes point out in their excellent book on the subject, The Goldwatcher (2008), the supply and demand picture is a lot more favorable towards higher gold prices now than it was at the beginning of the 1980s.

Another factor in favor of gold now is that in 1980 sentiment was negative to South Africa and Russia, the world’s two main suppliers of gold at the time. South Africa because of Apartheid and Russia because of the Cold War and the rise in the gold price would have benefited both countries as the main suppliers at the time of the world’s gold. There is no longer antipathy to either country and there are now also many other supplying countries.

But surely the two most pent demand drivers now are Exchange Traded Funds and surging economic growth in China, India, other developing economies and the gushing wealth in the Middle East and other oil exporting countries.

Gold prices are a complex puzzle made up of many moving parts, as the above extract shows. But that’s why we love the world of investing: it’s a great intellectual challenge. We wouldn’t have it any other way…

So, where are gold prices going? Well, it’s no secret that here at Notes we’re long-term bullish on gold. In our view, since the gold standard was abandoned in 1971, the price level of gold really only has one direction – up.

This is also the view of Morgan Stanley’s chief economist Stephen Jen. See, although the Fed and other central banks around the world are fretting over deflation right now, a persistent deflationary cycle is virtually ruled out by our fiat currency system.

Think about it. There are literally no limits on the amount of money central banks in fiat money-based economies can print. And because central bankers now believe the biggest threat to the global economy is deflation, they’re far more likely to overshoot to the inflation side than undershoot and allow deflation to take root.

But don’t just take our word for it. Jen has drawn two major conclusions about the future price of gold following a study of almost two centuries of consumer price data for the US, Britain and Germany:

1. Low inflation usually doesn’t last. Since 1820, periods of exceptionally low inflation have usually been followed by periods of high inflation. Episodes of high inflation occur typically, but not exclusively, around military conflicts.

2. Inflation has gone global. It has become more synchronised across countries over time, probably reflecting increasing globalization.

We don’t advocate, like some gold bugs, “betting the ranch” on gold. Remember, the most important weapons in an investor’s arsenal are asset allocation and risk management. If you haven’t fully mastered these, you shouldn’t a dime invested in the market… period. (Make sure you’ve read Dr Van K Tharp’s book on the subject, Trade Your Way to Financial Freedom. )

We recommend holding roughly 10% of your portfolio in gold. The question then is: what kind of gold? We personally favour owning physical gold – particularly British gold sovereigns, Krugerrands and gold bars.

This can be clumsy. But all you really need is a safe deposit box at a bank you trust – preferably outside of the US. (Underground investor and resource expert Rick Rule holds his physical gold in a bank safe deposit box located at his half-year residence of Canada in the bank of Nova Scotia.)

If you decide to buy physical gold, keep in mind these two rules from veteran coin dealer Lawrence Chard, managing director of Tax Free Gold:

1. Don’t follow the herd and buy only when the underlying gold price is rising.  Instead, buy on the dips and the downtrends. If you believe in the long-term future of gold, you shouldn’t be worried about temporary dips in price. If you don’t believe in the long-term future of gold, you shouldn’t buy in the first place!

2. Buy at the lowest premium (over the spot gold price) as possible. This often means buying in bulk. This is especially true of British gold sovereigns. According to Chard, you should buy these “only if you are buying say 50 or 100 coins at a time, when the premium is only slightly higher than Krugerrands. If you buy small quantities, you may be paying a ‘collectable’ or ‘retail’ premium.”

There are plenty of other ways to stock up on gold. Many of which may be less hassle then owning physical gold. This from our friends at Investment U:

1. Paper Gold: The SPDR Gold Trust ETF (NYSE: GLD) is a good option for investors who need liquidity with their gold assets. You can buy and sell this ETF like any stock on the market. Which also means you can sell it short, if you believe it will fall.

2. Gold Futures: Gold futures may be an excellent option for some. However, he stays out of gold futures because he believes it’s too volatile. Rick believes silver futures are even worse, like gold futures on steroids.

3. Gold Stocks: Gold producers trade between 1.7 and 2 times the net present value of their cash flows they could generate. It’s called the warrant on the gold price. Basically the market has assigned a large “growth” premium to a mining business – where the business gets smaller every day. There’s less and less gold to mine.

Silver might also be a good bet if your portfolio is already flush with gold.   Particularly because of the disparity between the price of silver and gold in today’s market.

Underground investor Addison Wiggin reckons silver will give you at least a 3 to 1 gain over the next 12 to 24 months. But you need to pick the right form of silver to invest in. He outlines how to make a 303% return here

Today’s “legacy assets” are toxic derivatives; a decade ago it was gold reserves. Both are proving hard to shrug off, but for very different reasons. Both legacies also come thanks to previous central-bank history; the fossils remain only too livid today.

And 10 years from now, if not sooner, just how welcome will the current central bank must-have become – freshly printed government debt, bought with money that doesn’t exist until the central bank wills it?

Seeking first to defend against inflation and war, the West’s central banks built up huge reserves of the ultimate hard money –gold bullion– during the early-to-mid 20th century. Long before the turn of the millennium, however, these hoards grew to look quaint and expensive. Unyielding and relatively useless to industry, gold simply sat there, down in the vaults, costing money to store but returning no interest.

Who needed crisis-proof gold when Western Europe (if not the Balkans or Mid-East) was enjoying its first generation of peace-time in history? And who needed fine gold when the Nasdaq index of tech stocks was priced for 20% annual earnings growth over the next decade and more?

In short, who needed gold when we’d got Alan Greenspan, as the New York Times asked in May 1999. “The argument against retaining gold is that its day is past,” wrote Floyd Norris with uncanny timing, just two days before Gordon Brown’s Treasury announced its ham-fisted sale of half the UK’s gold bullion hoard.

“Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.”

You could butter your toast with the irony. But it wouldn’t taste sweet or provide much nutrition. Whereas a further glance back at history might.

“With huge gold stocks available for sale, [governments] may discourage excessive price increases but naturally do nothing to prevent sharp decreases,” reported an investment piece for Medical Economics published in October 1977. (Our thanks to the author for finding and faxing it to BullionVault this week.)

“The government specter [over the gold market] can’t be expected to disappear quickly,” F.D.Williams continued, some 32 years ago. “Gold will continue to be part of many national reserves for a long time. The stocks are so large, they can’t all be dumped at once.”

Compare and contrast with today’s unwanted bequest – those toxic derivatives the US Treasury chooses to call “legacy assets” as if it played no role at all in producing them. Unlike state-hoarded gold, it only encouraged their creation; it didn’t want to look after the damn things. And quite unlike the market for state-hoarded gold, a ready stock of willing mortgage-bond buyers also looks unlikely to gather.

“The PPIP, which was beset by multiple delays as regulators tried to figure out the best means of removing many of the troubled assets from banks’ books,” as CNN reports, “is still not up and fully running yet.” It’s not been for lack of incentives. The $2 trillion Public-Private Investment Partnership, announced to much fanfare in March, offers huge leverage – entirely at tax-payer expense – plus some or other hold-to-maturity value to risk-cushioned investors, albeit as yet unknown. Private investment groups can use up to $1 of non-recourse loans, plus another dollar of Treasury finance, for every $1 they spend on taking toxic housing derivatives off the banks’ busted balance-sheets. Yet as a report published this week by the Congressional Oversight Panel put it:

“Whether the PPIP will jump start the market for troubled securities remains to be seen. It is also unclear whether the change in accounting rules that permit banks to carry assets at higher valuations will inhibit banks’ willingness to sell. Similarly, it is unclear whether wariness of political risks will inhibit the willingness of potential buyers to purchase these assets.”

Funnily enough, as the US authorities struggle to sell toxic debt, Western Europe’s Central Bank Gold Agreement has also stalled in 2009. This comes, however, despite prices and private-investor demand both holding near record levels. First signed ten years ago this September, back when no one at the New York Times, Economist, Financial Times or big central banks could see a use for the metal (simply owning this secure, liquid store of value is use enough, by the way), the CBGA capped annual gold sales and made them plain in advance for the coming five years. It aimed to avoid a repeat of May 1999, when the UK Treasury’s announcement drove prices down to what then proved their floor. In contrast to Washington’s PPIP, however, central-bank gold sales weren’t arranged in the hope of achieving maximum price, but merely curbing a rush for the exits instead. And as it is, they needn’t have bothered.

Gold prices have since risen three-fold and more against all major currencies, even while the 16 signatories to date sold almost one-fifth of their hoard in aggregate. Thus gold’s weighting in their reserves portfolio has doubled regardless, rising as gold outperformed all other assets from the start of this decade.

Hence the dramatic slowdown in central bank gold sales since the financial crisis began in August ‘07. Because it’s tough selling gold when its use becomes so clear, so present. Here in the fifth and last year of 2004’s renewed CBGA, “Net central banks sales likely to be in the order of 140 tonnes this year, down from 246 tonnes in 2008,” reckons London market-maker Scotia Mocatta. Yet the annual ceiling for CBGA sales currently stands at 500 tonnes!

The new agreement – just signed and due to commence on Sept. 27th – tips its hat to the facts, reducing that limit by one fifth. But who’s left to sell any way? Just as in the gold mining sector worldwide, the “easy metal” has already gone from West Europe’s vaults, pretty much emptying Spain, the UK and those excess Swiss holdings which maintained the Franc’s 100% gold-backing until the turn of this century. The two largest holders, Germany and Italy, continue to face down political calls for “mobilization”, refusing to yield one ounce so far despite signing all three agreements. France, the third largest owner, has pretty much sold the 600 tonnes from its hoard announced when it joined the central-bankers’ Cash4Gold party in 2005. That leaves only the International Monetary Fund’s 400-tonne sale, hardly enough by itself to meet the next half-decade’s 2,000-tonne limit.

Back at the Federal Reserve, meantime, tomorrow’s central-bank legacy – of freshly printed Treasury bonds bought with magic money from nowhere – continues to swell. Yes, the Fed’s stockpile of T-bonds may be smaller today than it was back in August ‘07 before the Great Inevitable broke, thanks to record Wall Street demand for the safety of Washington’s debt. And yes, the Fed isn’t quite collecting new bonds from the Treasury door directly, waiting instead a few days or so before picking them up (as Brian Benton, Chris Martenson and others have found) from those primary dealers who do bid at auction, rather than out-and-out monetizing the debt for all to see with its newly created cash.

And sure, private-sector demand for Treasuries continues to look so strong right now – what with overnight rates at 0%, plus the ongoing collapse of house prices, world trade and jobs creation – that the Fed says it will stop financing Uncle Sam’s spending in, umm, October rather than in September as previously stated.

But hoarding gold looked rather more sensible amidst the violence and misery of the mid-20th century, and no one at the Fed or Treasury guessed two years ago that they’d be offering leverage incentives to try and revive the market in mortgage-backed derivatives. When the global economy gets off the floor…or risk assets become more attractive to private investment…or China and Japan find they really don’t have any space left for US debt in their central-bank vaults, the market into which the Fed will want to sell its Treasury hoard will look very different to the market from which it’s currently buying.

Whether a decade from now, in 2010, or perhaps this fall – when the $300 billion of quantitative easing ear-marked for Treasuries is spent – trying to quit the Fed’s newest “legacy asset” could prove tougher even than finding ready buyers for today’s toxic junk. And given the soaring interest rates and potential US bankruptcy that in turn might trigger, spurred by whatever’s added to the Treasury’s $11.7 trillion of debt between now and then, perhaps buying gold will look a smart move to the Western world’s central bankers once more.

Regards,
Adrian Ash

Source: Gold Will No Longer Be a Toxic Derivative to Central Banks

He reminds us that “in 1933 the US government banned the ownership of gold by US citizens and purchased all but rare gold coins from the US public. They did this, at $20 an ounce. Two years later they revalued gold to $35 an ounce, a 75% revaluation” which instantly gave the government a lot of new, but still 100% gold-backed money to spend!

What a blatant, brazen theft! And nobody says anything! But let me take a few bucks out of the employee pension fund, petty cash drawer or the coffee jar, then it is some kind of “big deal” around here and everyone wants me to get fired! What kind of crap is that, huh?

Anyway, so how much gold are we talking about? Well, the total amount of gold above ground that you can put your hands on is estimated to be about 140,000 tonnes, which is approximately 90% of all of the gold that has ever been mined, which is estimated to be 160,000 tonnes.

Added to that, there is an annual mine production of roughly 2,500 tonnes of gold, but which is becoming harder and more costly to find and mine.

Perhaps it is all this talk of confiscation of gold that has Doug Hornig of Casey Research’s Gold & Resource Report commenting that when FDR made private ownership of gold illegal in 1933, the dollar was on the gold standard and thus 100% backed by gold.

The difference between then and now is that “we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation” which is (insert sound of trumpet fanfare) the winner of the coveted Mogambo Award For The Understatement Of The Week (MAFTUOTW).

It wins for two reasons, the first being that is so terrifyingly true! There are no constraints on the government getting the Federal Reserve to create as many dollars as it, or anyone, needs or wants, and thus it is beyond ludicrous to even compare the 1933 gold-backed dollar against the pathetic piece of almost-worthless fiat money that the dollar has become, to which Mr. Hornig alludes when he says that Obama has it easy, as “However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash.”

And he is, alas, absolutely right. Unlimited amounts of money can be created just by asking for it. In fact, no one has ever disputed that fact, as it is the whole reason behind having a fiat currency! Hahaha!

In relation to the prospects for a confiscation of gold, he asks, “Given this kind of clout, what does he need gold for?” which is exactly right! If you can print money to spend, why do you need gold to sell to get money to spend? Hahaha!

Unfortunately for Mr. Hornig, he does not go on to the Mogambo Bonus Round (MBR) because I must deduct points from his score since he is grammatically incorrect to end a sentence with “for”, as in his “need gold for?”

Instead the sentence should have properly read, “Given this kind of clout, for what does he need gold?” which IS grammatically correct, so you can see the crucial difference!

And perhaps it is this “correct grammar” thing that makes the colossal incompetence of the Federal Reserve even more terrifying when adding that undertone of grammatical precision to the nightmare that the Fed created so much money and credit that it allowed the dollar to lose so much purchasing power since 1933 that gold is now almost $1,000 per ounce, up from the $20-to-$35 per ounce rip-off that financed the whole New Deal for a decade! Grrrr!

Of course, I would love to go on and on from there, waxing evermore contemptuously lyrical and angrily ever-louder about why I despise the un-Constitutional, un-holy Federal Reserve and everything it stands for, which is summed up in the Mogambo Big Book Of Economic Stuff (MBBOES) as “Purposeful inflation in money and credit by a central bank to create unprecedented amounts of debt for unbelievable of amounts of consumption that inevitably leads to ruinous inflation in consumer prices and ruinous deflation in asset prices such that it destroys the entire economy, which will soon lead to many, many poignant stories of ordinary men and women who, along with their doomed children, are wandering around, dazed and lost, living under bridges and overpasses, calling themselves Lost Children Of The Mogambo (LCOTM), forever bleating for pity that they did not listen when he told them to buy gold because their government was acting so insanely with fiscal and monetary policy, and now they are being cruelly punished by persistent price increases against which these people can only offer falling or stagnant nominal wages and collapsing real, inflation-adjusted wages, devalued assets, vanished wealth and disappearing jobs, which means a drastically falling standard of living until they are finally reduced to eating lawn clippings and miscellaneous bugs while screaming for revenge, whereupon the world then devolves into a dreary, post-Apocalyptic, dog-eat-dog world where, once again, for the umpteenth time in history, we learn that the dogs that eat well are going to be the ones who switched to gold when their governments started wallowing in such fiscal and monetary lunacy, which is why you ought to be out buying some more gold right now.”

I would probably end the Predictable Mogambo Tirade (PMT) with something in the vein of drawing an eerie parallel between the Fed creating too much money and credit, which leads to disastrous, ruinous, murderous inflation in prices, and the fact that the American government once gave smallpox-infected blankets to the Indians, which seems so, so apropos, which deliciously rhymes so you know it must be true.

Or maybe I would angrily relate how I, a normal, tax-paying citizen, call the CIA and demand to know under the Freedom Of Information Act if they are spying on me, or if any other jackbooted, government-Gestapo thugs are spying on me or tampering with my stuff, such as messing with my dishwasher which, after about 12 years of perfect performance, is now making this strange intermittent groaning noise, like a belt slipping or something that goes rrrrRRRrrrrrRRRrrrrrr, and then they put me on hold, and then they come back on the line and tell me that nobody is spying on me, but you can tell from their voices that they are lying.

Mr. Hornig is not sure that the CIA is out to get more or that a confiscation of gold is in the cards, although “An argument can be made that the yellow metal is still useful. It runs like this: Creating money out of thin air is inflationary, and a large stash of gold, even if it doesn’t officially back anything, serves as a sort of counterweight. People around the world will have greater confidence in your currency knowing that, as a last resort, you can pay your bills in gold. And the more gold you have, the better.”

Nevertheless, Mr. Hornig speaks for both of us when he says, “all things considered, a modern-day gold confiscation is not high on our list of financial worries”, although he adds the caveat that “Never say never where government stupidity is involved”, which sums it up perfectly, making it almost unnecessary that I jump up and yell, “Buy gold, silver and oil to save your worthless butt whenever your own government is acting with fiscal and monetary stupidity, which they are doing right now, which means” (insert musical soundtrack with heavy backbeat) “you should be buying these things RIGHT NOW because investing is easy when you KNOW HOW!”

Source: Why the Government Doesn’t Need Your Gold

An interesting new wrinkle in the new agreement that it will “allow the International Monetary Fund to join as a signatory if it wishes”, which it already desperately wishes so that the IMF can aggrandize more power by being a “player” with all the fiat currencies it will collect and then be able to wield like a bludgeon.

And this 400 tons of gold per year certainly sounds like a lot, but in reality, how much gold is there?

Well, the article notes that the “gold holdings of the 10 largest signatories total more than 11,000 tons, valued at $350 billion”, and I remember writing down somewhere that the US has about 8,000 tons of gold and the IMF has 3,217 tonnes.

In case you were wondering, I casually mix up “ton” and “tonne” all the time, probably because they are almost the same, so I never bother to try to keep them straight because I am lazy and I don’t care anymore.

For the record, though, one metric tonne contains 32,150.72 Troy ounces, so 11,000 tonnes is 353.661 million ounces of central bank signatory holdings which, at almost $1,000 per ounce, is where I assume they get the valuation of $350 billion.

This, in case you were wondering why I said the words “Central Bank Gold Agreement” with such a sneering tone of scorn and loathing disrespect, is because this is another slimy, five-year, corrupt deal whereby the gold that governments accumulated over the centuries, by committing a continuous series of outrageous, murderous atrocities to acquire, are now selling the gold to get a little “spending money”, to save a little money by not having to pay the expenses of storing the gold, and to happily drive down the market price of gold.

I know what you are thinking! You are thinking to yourself, “Why in the world would the central banks be selling their gold, which drives down the price of gold, which plays right into the hands of The Mogambo, who is happy to buy gold at these bargain prices because he knows that the price of gold will rise meteorically as inflation in the prices of consumer goods rise meteorically in response to the money supply rising meteorically thanks to the Federal Reserve creating it and the federal government borrowing it and then immediately spending it in meteorically-rising amounts for years and years and years, which makes buying gold such a no-brainer that he is known to squeal with girlish delight, ‘Whee! This investing stuff is easy!’”

Well, obviously, since I know that governments send their secret agents to spy on me all the time and sabotage my life, we can be sure that they are not keeping the price of gold down for my benefit! Hahahaha!

No, what they want to do is drive the price of gold down so that the price of gold does not rise against their currencies, which is what you would normally expect from the inflation in prices that would result from these selfsame repellent, dishonorable, corrupt, thieving governments creating additional excessive amounts of paper, fiat money to try to buy their way out of the national inflationary bankruptcy they caused with their prior years of creating and spending excessive amounts of paper, fiat money! Hahaha!

Puru Saxena of Saxena Wealth Management notes, “It is interesting to note that only 160,000 tons of gold has ever been mined from the face of this planet and at US$950 per ounce, it is worth US$4.9 trillion. Now, consider that the total amount of paper money in circulation (currencies, savings, deposits, money-markets and CDs) is worth US$60 trillion, or approximately twelve times the value of the gold in existence.” Wow! Twelve times!

The way I am screaming hysterically that everyone should buy gold reminds me that gold rises in price because its value remains relatively constant, because of all of its valuable inherent properties, while the purchasing power of the paper money used to bid for gold goes down and down, each unit of money buying less and less gold and each unit of gold buying more and more money, which tips everyone off that “That Screaming Mogambo Weirdo (SMW) was right! We’re freaking doomed by inflation! We gotta buy gold, silver and oil right away!” which, naturally, makes their prices rise even further! Whee!

But by flooding the market with government gold, this short-circuits this “canary in a coal mine” (or more properly “Mogambo in a raging snit”) inflation alarm so that us proletariat chumps don’t panic at the horror of huge inflations in prices that are usually reflected in the price of gold which, unfortunately, always follow a huge inflation in the money supply.

This time, because it involves a commodity, I figure that it has the added benefit that slimy insiders/bullion banks can now do all kinds of slimy arbitrage tricks by buying government gold at a (theoretically) falling market price as 400 tons a year come barreling into the market to swamp demand with a deluge of supply, as well as leasing government gold at almost zero percent rates, maybe somehow running it through some Exchange Traded Funds that are shorted for some reason that I don’t understand, maybe hedging risk in the futures and options markets, perhaps bundling together a few derivatives to “lay off risk”, and making money, money, money with which to pay taxes, taxes, taxes, which I figure is the whole point, from the government’s perspective.

It’s like a license to print money while driving down the market price of gold to help disguise the inflationary horrors of, for example, a federal government deficit of 13% of GDP!

The federal budget deficit is almost 1 out of every 8 dollars of national economic activity, and the total amount of government spending will sure be, when including the inevitable future Supplemental Appropriations, over $5 trillion this year, which means that federal government spending – by itself! – is 35.7% of America’s $14 trillion GDP!

Now if you can get me to shut up my screaming, screaming, screaming in horror at such fiscal insanity for one lousy minute, I will add in another $1.5 trillion for the spending by the states and another half trillion by local governments and school boards, and suddenly we are looking at (ignoring double counting the federal aid to the states which is included in the state’s budgets) a potential of $7 trillion in total governmental spending, which is HALF OF GDP!!

I am sure that you noticed the two exclamation points, the way my voice is now screeching at full volume and revolting specks of spittle are flying through the air as I stomp around the room, cursing loudly and incoherently, that I am upset that governments now spend half of the entire economic output of the Entire Freaking Country (EFC)!

If you are a true Junior Mogambo Ranger (JMR), your blood suddenly turned cold and a sense of doom fell upon you.

Now, imagine the horror of those who are NOT, alas, Junior Mogambo Rangers (JMRs), and thus who probably do not buy gold, silver and oil because they do not know that they should be doing that when their government is acting fiscally and monetarily insane!

When you do know, however, investing is easy! Whee!

Source: Canary in a Gold Mine

Well, it’s always good to bear in mind that there is no telling what the government might do. It’s already doing things that were unthinkable just a few years ago. If President Obama believes there is political hay to be made from seizing your gold – or even if he sincerely thinks such a move would be “good for the country” – we’re sure he won’t hesitate to make the grab. After all, his favorite predecessor, Franklin Roosevelt, set the precedent.

Many Americans don’t even realize that private gold ownership was forbidden for forty years, but it was. The relevant edict is Presidential Executive Order 6102 of April 5, 1933, which begins:

Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates By virtue of the authority vested in me by Section 5(b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 1933, entitled

An Act to provide relief in the existing national emergency in banking, and for other purposes,in which amendatory Act Congress declared that a serious emergency exists,

I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section to do hereby prohibit the hoarding of gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations…

There was, of course, no constitutional peg on which to hang such an outrageous crime against the people, so FDR decided to fall back on the 1917 Trading with the Enemy Act, which he claimed gave him the authority to do this in order to prevent gold from falling into the “wrong” hands. If that seems a flimsy argument, it is.

But it echoes eerily today. How much of our personal freedom have we already been asked to sacrifice to the Forever War on Terrorism? And note also the reference to an “existing national emergency in banking” that requires extreme measures. Sound familiar?

So, no question that Obama could follow in the footsteps of his mentor, if he wanted to. That said, though, the likelihood of a new gold confiscation is remote, for a number of reasons.

2009 is not 1933. Back then, the money supply was constrained by the gold standard. As Roosevelt concocted the New Deal, he ran smack up against that wall. He needed more money than he had, couldn’t raise taxes in a depression, and couldn’t print dollars that weren’t gold-backed.

His solution may have been reprehensible, but it was elegant. First, make the private possession of gold illegal, paying those who surrender their metal the official price, $20.67 per ounce. Then revalue gold to $35 per ounce. Voilà: Instant inflation, lots of new money, problem solved. And the New Deal was off and running.

But we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation.  However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash.

Given this kind of clout, what does he need gold for?

An argument can be made that the yellow metal is still useful. It runs like this: Creating money out of thin air is inflationary, and a large stash of gold, even if it doesn’t officially back anything, serves as a sort of counterweight. People around the world will have greater confidence in your currency knowing that, as a last resort, you can pay your bills in gold. And the more gold you have, the better.

Furthermore, confiscating gold and assigning it a fixed dollar value would also prevent the kind of runaway gold price that the coming massive inflation is bound to trigger. As those who argue that the gold price is already suppressed correctly point out, the government has decided to sacrifice the dollar in order to avert deflation. Thus a lower-than-free-market gold price helps obscure the damage that’s been done to the currency. People feel richer with more, albeit inflated, dollars in their pockets; a rapidly escalating gold price shows them that they’re not.

These two arguments aren’t empty, but they’re not convincing. Most folks in government subscribe to the “barbarous relic” school of thought about gold. Precious metals probably cross the minds of Obama’s economists only when they’re out buying jewelry.

And most American citizens have never even seen a physical gold coin, much less own one. Reeling in all the bullion out there will, in reality, do the government little if any good.

One final point. In the 1930s, when people were asked to turn in their gold, compliance was quite high. Americans believed their government when told that it was for the greater good. Imagine.

Today, that attitude seems laughably naïve. Those who have gold know that it is an unequaled storehouse of value. That they would meekly part with it at the government’s behest requires a belief that naïveté still rules the land.

Far more likely is that gold owners would resist. And since they also tend to be gun owners, there could be serious confrontations. The government doesn’t want mass resistance to one of its orders, nor an escalation of the domestic violence it will probably get anyway, when unemployment rises to Depression-era levels. It’s simply not worth it.

Never say never where government stupidity is involved. But all things considered, a modern-day gold confiscation is not high on our list of financial worries.

Regards,
Doug Hornig

Source: Are We Being Conned About Gold Consfication?