Forty Years to $1,737

Addison Wiggin – August 15, 2011

  • The Great Dollar Standard 40 years on… heh, everyone from central banks to eBay members is buying gold!
  • Stocks rally, ignoring an ominous sign the economy isn’t in ”recovery“… surprise…
  • Foreigners flee Treasuries; Dan Amoss on what’s “an even more attractive opportunity” after last week’s Fed announcement
  • A classic American car, yours for payment in gold… a leveraged gold stock ETF under the microscope… and more precious metals other than gold or silver!

   In the history of money in the world… 40 years really isn’t that much time.

In today’s 5, we celebrate the 40th birthday of the Great Dollar Standard era, initially by quoting (liberally) from our own Empire of Debt:

On Aug. 15, 1971, the administration of Richard Milhous Nixon did something extraordinary. It slammed the “gold window” shut. Henceforth, foreign governments would not be able redeem their surplus U.S. dollars for gold.

Mention the late president’s name and the average person recalls the crime with which he is most associated: B&E (breaking and entering) at the Watergate. But while the public’s attention was distracted by Nixon’s fumbling sidekicks, another team of Nixon’s goons was pulling off the biggest heist of all time.

What was their crime? Breach of contract? Theft? Fraud? Counterfeiting? It was all of those things. The breached the solemn promise of five generations of U.S. Treasury officials and set in motion the worldwide credit bubble of the pax dollarum age.

   In 1971, the decision to abandon the gold standard was not exactly an improvisation.

The decision was part of a series of moves made by the Nixon administration to hold down wages and prices and to check inflation. Consumer prices rose at 4.9% in 1970 and inflation looked as though it was going to get worse. Nixon came to believe that he could control the economy, even though this shift in policy contradicted his own political and economic philosophy as stated in the past.

In the cut of I.O.U.S.A. we screened at the Sundance Film Festival in January of 2008, we had audiotape of Nixon conspiring with his advisers to blame the decision to close the “gold window” on “speculators. ” After we sold the film to the Peterson Foundation, that story beat was edited out. The final cut of the film released in Aug. 22, 2008 blames rampant inflation in the 1970s on Arthur Burns, then chair of the Federal Reserve.

Alas, the Federal Reserve system was set up [in 1913] to provide the nation’s empire builders with a convenient, expandable and compliant money. Whenever they felt they needed more of it, the dollar was right there, ready for duty.

   Since 1971, the United States has added trillions to the world’s supply of dollars and credit. During this same time only about 58,000 metric tons of gold have been brought from the ground. Sooner or later, those extra dollars must be marked to an unforgiving market.

“Of course,” we wrote back in 2005, “it hasn’t happened yet. Investors are tempted to look out their windows, see the sun shining and think the dollar will last forever. They have no interest in the financial crimes of the Disco Age.”

On this 40th anniversary, with gold in the ballpark of $1,800 and potentially rising, we suspect the interest level in Nixon’s fateful decision is rising.

   On Aug. 15, 1971, gold was pegged at $35 an ounce… as it had been since 1933.

As of this morning, it’s $1,737 — off from last week’s highs, but higher than it’s been at any time up until 10 days ago.

   After shunning gold, the “barbarous relic” lo these many decades, the world’s central banks are adding to their gold stashes at an unprecedented pace.

New figures from the World Gold Council reveal central banks adding 208 metric tons in the first half of 2011. Should this pace keep up, the annual total will smash the previous record of 276 tons in 1981.

Thailand, South Korea and Mexico are among the major buyers in recent months.

   Ordinary people, that is “we, the public” can’t seem to get enough of the stuff. Sales on eBay of 1-ounce U.S. Gold Eagles and 1-ounce Pamp Suisse bars rose steadily most of last week… and so did the premiums buyers were willing to pay over the spot price.

Spot gold jumped 6% between Friday Aug. 5 — just before Standard and Poor’s downgraded Uncle Sam — and last Wednesday. But Gold Eagle prices on eBay rose nearly 8.5% over the same period.

“When people are coming down to the question, ‘Do they want to have cash in the bank or gold in their hands?’ the answer is they’d rather have gold or silver,” says Jacob Chandler of Great Southern Coins, eBay’s largest seller. “Business,” he says, “has nearly quadrupled in the last six weeks.”

In come the speculators…

   “Gold is becoming extended and overbought,” warns Richard Russell, the octogenarian dean of cantankerous gold bugs everywhere. “I expect gold to be erratic and unstable like the rest of the market, and it will take guts to sit with gold over coming weeks.”

Looking further out, though, Russell expects gold to hit $2,000.

(As a side note, we recall suggesting could hit $2,000-2,500 on a Bloomberg interview last year and getting snickered at by the anchor of the program. We doubt they’re snickering any longer… and, in fact, may now be forecasting similar targets of their own.)

   Stocks are moving up to start the new week, the major indexes gaining as much this morning as they did on Friday. The S&P is within a few points of reclaiming 1,200.

Nothing like a little merger-and-acquisition news to spur a little rally: Google is buying Motorola’s mobile phone division, and Time Warner is snapping up the cable operator Insight.

Less-worse-than-expected GDP numbers Japan didn’t hurt, either.

   But there’s also an elephant in the room: Traders got a glimpse at manufacturing for the month of August… and chose to avert their eyes.

The Fed’s Empire State Manufacturing Survey shows factory activity in New York State contracting for the third straight month… and the rate of contraction is speeding up.

Worse is the six-month outlook among manufacturers surveyed: It’s as grim as it was in February 2009.

   With the safety trade off today, hot money is fleeing the greenback. In trading overnight, the dollar index slipped below 74 for the first time since the Dow shed more than 500 points on Aug. 4.

Still, look for some dollar strength this week against the Swiss franc. Switzerland’s monetary mandarins are going all out to keep the franc from appreciating. Last week, they bought a basket of alternate currencies. This week, there’s already talk of a short-term peg to the euro.

“The price momentum is gapping up further,” our currency trading specialist Abe Cofnas says of the dollar valued in francs. He sees the dollar moving up from 0.7838 francs this morning to over 0.8025 by week’s end… and recommended a trade accordingly.

Last week worked out very nicely for one of Abe’s recommendations — a 139% gain between Monday and Friday. In the unique market that Abe tracks, everything plays out in four days or less. If you’ve been burned by forex before, it’s because you’ve never tried it like this. Check it out.

   Foreigners are fleeing from U.S. Treasuries at a record pace.

Private foreign net purchases of long-term Treasury bonds and notes fell by $18.3 billion in June, according to figures out from the Treasury Department this morning. Among our two largest foreign creditors, China’s holdings rose slightly, while Japan’s fell.

The debt ceiling debate was getting under way in earnest back in June, so there’s probably more where this came from. And don’t forget the poor auction of 30-year bonds last week. After the Fed announced it’s keeping the fed funds rate near zero for at least another two years, China decided to sit on its hands.

   “There is a huge cost to the Fed’s decision on Tuesday,” says Strategic Short Report’s Dan Amoss: “It has given away its ability to hike short-term rates in the event of a U.S. dollar crisis.

“If foreign creditors accelerate the pace at which they’re already diversifying out of the dollar, inflation may pick up to uncomfortable levels. While the ‘money velocity’ of domestically held dollars may remain low in a sluggish economy, the velocity of dollars held outside the U.S. is likely to increase.

“Foreign creditors will continue to lose confidence in the U.S. dollar as a store of value. The dollars that exist outside of the U.S. as a result of past trade deficits — along with the future dollar ‘exports’ — will not remain as sequestered as they have in the past. Their owners will look to exchange them for something with a better chance of preserving their purchasing power.

“The Fed is gambling that these creditors will prefer stocks as a store of value. But given the past two weeks of trading, I’m not so sure about that. And how did QE2 ultimately work out as a market-propping manipulation?

“One thing is for sure: Hoarding gold, oil and other industrial commodities is now an even more attractive proposition than it was prior to Tuesday’s announcement from the Fed. Savers now know there is little chance of earning a positive real return until 2013.”

So… the Fed will continue to flog savers in hopes they’ll flee into stocks. But stocks have delivered nothing but heartache for the last three weeks. Commodities have climbed down; currencies are all over the place. If there isn’t a crisis in the United States, there’s one in Europe. And if there’s not one in Europe, then China’s showing signs of slowing down.

We’re still at a critical juncture, and no doubt you’re wondering what to do with your money now. This is why we’re adopting a 3-Part “Market Volatility” Strategy.

The first part is a “Reserve Members-only” teleconference we’re hosting for you this week — convening all our editors to ask them one simple question at this critical juncture: What to do now?

You’ll also be getting an exclusive report detailing the top precious metals plays across all the sectors our editors scour.

And you get a chance to join us at our “Emergency Summit” — and assembly of Agora Financial’s senior editors in person with a select group of readers joining in. We’ll be sending out the invitations this afternoon. If you want to receive it, all you need to do is drop us your email address. Here’s where to go. Please indicate if you’re a Reserve member when you write in.

   With precious metals top of mind today, a reader points us to an unusual eBay listing. It’s noteworthy not for what’s being sold, but the potential medium of exchange.

“Would you be interested in gold coins for payment?” inquires a potential buyer in the Q&A section for a 1970 Plymouth Barracuda with 76,663 miles.

“Maybe,” comes the reply. “The down payment would have to be through PayPal, as stated. I’m interested enough, but I want more info. Got any gold bars so I could add more of them to my collection?”

Heh, the seller’s no fool. The reserve on this listing still hasn’t been met, so it’s still available.

   “I am currently going through several IRS audits that defy description,” a reader writes. “On one audit, the agent is trying to reclassify income from long-term capital gains to ordinary income. On another audit, the same agent is trying to reclassify the ordinary income reporting to long-term capital gains.

“These audits are on separate LLCs that are in the same business. The agent’s methods are truly bizarre, as there is a complete lack of rationality involved. The private attorneys and CPAs involved from our side would laugh at the IRS if it wasn’t so serious.

“To me, it’s clear the IRS is on a ‘jihad’ against the U.S. taxpayers to extract every last dime they can. If the IRS asserts a position, no matter how ridiculous, the burden to disprove the IRS falls squarely on the shoulders of the taxpayer. And there is no recourse other then appeals courts, which will cost thousands. And if the IRS prevails, they will also charge a 25% penalty for underreporting, plus interest.

“In essence, we are all screwed under this regime.”

   “Your team covers gold and silver frequently, but how about platinum and palladium? For a brief while last week, gold traded above platinum, which, to me, made platinum a screaming buy.

“Yes, I know, the argument is that it’s more of an industrial than a precious metal. But different sources I read suggest that demand for platinum jewelry is soaring in Asia, and my own view is that a metal that is 13-15 times rarer than gold is grotesquely undervalued when it trades at a price even close to it. What does your team think of platinum’s prospects?

“Thanks for the great job you do each day of reporting the financial news that matters, free of a leftward or rightward bias. It really helps in an economy where our so-called leaders are more interested in scoring sound-bite points than in providing sound leadership.”

The 5: “The global supply of platinum is tightening,” Byron King said in this space last month. During a visit to South Africa earlier this summer, one mining executive after another told him how hard it was to expand production.

“There’s no way we can avoid shortfalls over the next two years and more,” one of them said. “There’s not going to be enough platinum from any source to meet demand. I expect prices to shoot up in 2012 and beyond.” Byron makes a recommendation for playing the platinum trend in his latest issue of Outstanding Investments.

   “Direxion has now a 2X gold miners ETF called NUGT,” writes another reader with precious metals on the brain. “If you expect gold stocks to rise, would this be a good way to invest/speculate?”

The 5: If you think you’re an expert at timing the market, go for it. The problem with most “leveraged” ETFs is what’s called “time decay.” The returns are keyed to the daily performance of the underlying index.

That works great for short periods when the index is going up day after day… like last week, when NUGT jumped 12%. GDX, the most popular gold stock ETF, based on the same index, rose 6%.

But most of the time, markets don’t move straight up. The volatility can quickly wipe out whatever “extra” gains you get from the leveraged ETF. So over the last six months, NUGT rose 1.6%… while GDX rose 3%.

You stand a much better chance at “leveraging” the rise of gold and gold stocks by buying a basket of quality junior miners or options on gold futures dated four-six months out.

That’s why we’re assembling a report with the very best gold plays across all of our services, with contributions from Byron King, Chris Mayer, Dan Amoss and Alan Knuckman.

It comes with access to our exclusive teleconference with all of our editors, which you’ll have a chance to listen in on later this week. If you’re interested, there’s still time to sign up. When you do, please let us know whether you’re a Reserve member.


Addison Wiggin
The 5 Min. Forecast

P.S.“I sure would like to know what you recommend for the crisis you see coming,” writes a final reader, “but every time I click on the link to one of your presentations, I find the presentation so long and drawn out that I never have the time or patience to get to your recommendations. Can you please be more succinct in what you have to say?”

The 5: There’s a lot of ground to cover. If reading is more your speed, we’re happy to accommodate. Or send us your email address here to be notified of the “Reserve Members-only” teleconference we’re convening this week; part one of Agora Financial’s 3-part “Market Volatility” strategy.


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