The Last Safe Haven

Addison Wiggin – September 6, 2011

  • The 5 bids farewell to one of the two remaining “safe havens” for capital… and hails the last one standing
  • New euro crisis reinforces the appeal of gold… and your chance to make the most of the trend
  • China issues white paper on “peaceful development”… The 5 examines how it’s already affecting food, currencies and gold
  • Tightfisted newlyweds forgoing gold for tungsten, titanium, cobalt
  • Reader takes us to task for “short-term outlook,” while another perseveres in serving the market… Others sound off on Gibson Guitars and exploding heads

   In the battle for capital, only one traditional “safe haven” remains standing today.

Since 1713, the year the Swiss passed their modern set of banking laws at the Council of Geneva, the Swiss have maintained relative neutrality in global politics, offered privacy for individual and corporate banking clients and independence with respect to the Swiss franc… and its “peg” to gold.

No longer.

   The neutrality of the Swiss politics came into question over a decade ago when a scandal erupted over loot stolen by the Nazis during World War II, hidden in plain sight in some Swiss banks. (The definitive U.S. “report” on that subject was released in 1998, the product of a commission formed under the Clinton administration, championed by Sen. Al D’Amato (NY, R) and headed by former Fed Chairman Paul Volcker.)

The first substantive blow to Swiss banking privacy came in 2008 when UBS, the largest Swiss multinational, caved to U.S. Internal Revenue Service seeking private banking information of U.S. citizens with accounts. (In our premium service Apogee, we traced the pedigree of the assault back to UBS’ desire to get in on the go-go finance of the late ’90s, buying Paine Webber — also in 1998 — to gain access to the U.S. market.)

Now, this morning, the Swiss National Bank (SNB) has effectively pegged the Swiss franc to the euro… with the immediate effect of weakening the franc against every major currency, including the dollar.

(In today’s issue of The 5, we can’t help but lament the slow-motion demise of a once stalwart and independent modern nation-state. Swiss independence has been legendary, if not in practice, at least in the myth, especially among young fobs who cut their teeth in the newsletter business.)

   To be precise about today’s malefactions, the SNB imposed a ceiling on the franc’s exchange rate “aiming for a substantial and sustained weakening of the franc,” in the words of its own statement.

“With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs.”

To accomplish that end, the SNB, again according to its own statement, “is prepared to buy foreign currency in unlimited quantities.”

If the Swiss have given up any pretense of a “hard currency,” at least they still know how to use plain and simple language. The Fed could stand to reacquaint itself with Strunk & White — assuming they ever met in the first place.

The SNB’s rationale is a lot like that of the People’s Bank of China. China relies on the United States to buy its goods, so it pegs the yuan to the dollar to keep its export prices affordable.

Likewise, Switzerland relies on the rest of Europe to buy its goods… so now it’s pegging the franc to the euro to keep its export prices affordable.

   “The currency wars are heating up,” says Kit Juckes, the forex chief at Societe Generale, the big French bank.

That’s a pointed reference to the Brazilian finance minister’s warning one year ago about a “currency war” — in which every country rushes to devalue relative to everyone else.

   For the moment, the greenback is a beneficiary. The dollar index has jumped to a two-month high of 75.8. Again, we search for interesting ways to play the trend in your own account.

   “The Swiss franc will weaken in the coming year,” said our currency trading specialist Abe Cofnas in this space on Friday. “In fact, it has the capability of decreasing in value more than 10% in one week”

Or as happened this morning, 8% in a few minutes.

Abe isn’t taking any chances: After recommending put options on a Swiss franc ETF last Wednesday, he says it’s time to book nearly 100% profits. To learn more about Abe’s currency plays, look here.

   Which brings us to the last contender when it comes to a “safe haven” status: the once and future money. Spot gold sits near a record as we write, at $1,905.

Bullion is also at or near record highs against most of the other major world currencies — proof that in a currency war, no currency emerges victorious.

“This is a historic watershed moment in gold’s bull market,” James Turk of explains, “because investors globally are finally coming to the realization that gold represents the ultimate safe haven.”

“A lot of people have been comparing today’s problems with those leading up to the Lehman Brothers collapse in September 2008,” Turk explains to King World News. “They have been fearful that when the next major stock market downdraft occurred that gold would be taken down along with it, just like what happened in the aftermath of Lehman.”

But 2008 was first and foremost a rush for liquidity: “Everything was sold; even the highest-quality assets, like gold, were sold because of the liquidity they offered.”

“The principal driver today is not a rush to liquidity, but rather, a rush to safety. Consequently, you are seeing gold climb higher, even while stocks in Europe are suffering a bloodbath.”

   Indeed, they are. Germany’s DAX index is down nearly 5% since Friday. You find similar carnage in France, Italy and across Europe.

   “These are unprecedented times for financial markets,” says our short strategist Dan Amoss, “since the scale of the government debt problem in Europe (and its impact on the banking system) is mind-boggling.

“With each passing day, it seems political support for the PIIGS bailout policy grows weaker. Last week’s trading activity in PIIGS debt, and today’s desperate policy announced by the Swiss National Bank, indicates that more stress in financial markets is likely.”

“Also, the public mood in Europe hints that we could see a shift in policy toward allowing Greek defaults, followed by ‘every country for itself.’ If so, stock markets have much further to fall, as German, French and Dutch banks get recapitalized by their own governments after a Greek default. Even if this recapitalization winds up stabilizing the banking system, markets are likely to decline sharply in the near term anyway.”

“Over the longer term, it’s still likely that we’ll see much more money printing and balance sheet expansion from all central banks. While this may prevent a downward spiral in economic activity, it comes at the cost of stagnation and high unemployment. Many stocks will be vulnerable to further weakness in this scenario.”

   Thus is fear crossing the Atlantic, knocking the Dow down 300 points as traders come back from their three-day weekend.

Even a somewhat perky report from ISM on the service sector — up from 52.7 in July to 53.3 in August — can’t relieve the gloom.

   “Investors selling stocks,” James Turk goes on, “are not just attempting to flee the stock market, they are also fleeing the euro and the incredibly fragile European banking system.”

“As money flees Europe, we are seeing a bit of a knee-jerk reaction with some of that hot money going into the dollar, but more importantly, we are seeing tremendous money flows into gold.”

   “When you buy gold,” says the inestimable Marc Faber, “it’s an insurance against systematic failure and problems in the financial markets.

“I don’t think that gold is in a bubble. I’d buy every month a little bit of gold.”

   As happened a month ago, gold stocks are acting more like gold and less like stocks.

Friday, the ETF of major gold stocks, GDX, reached a record high. So did the HUI, an index of major gold stocks.

Still, many gold stocks remain stunningly undervalued. Among the remarks our editors have shared in only the last month…

  • “Unless gold heads straight back down, which I think unlikely, gold stocks are really cheap,” said Chris Mayer on Aug. 26. “I think gold investors can work with $1,800 gold, in which case gold miners will make a lot of money”
  • “The price of what [gold miners] sell has gone up a lot, and a big part of the cost of what they do, which is energy, has gone down quite a bit,” said Byron King on Aug. 18. “So you’ve got higher income from your gold sales and you’ve got lower cost from cheaper oil and cheaper energy. That ought to go to the bottom line, and from a pure valuation standpoint, that ought to be good for the gold mining stocks”
  • “Gold mining stocks are long overdue for an extraordinary rally,” said Dan Amoss on Aug. 11. “Their cash flows are going to be spectacular in an environment of $1,700-plus gold prices.”

For three more days, we’re still offering access to a special report laying out the favorite gold stocks among all our editors.

It’s available only to members of the Equity Reserve — our “full buffet” package of stock-picking services. Along with that report, new members also receive…

  • A recording of our Aug. 17 teleconference gathering six of our editors, still packed with timely and actionable information
  • An invitation to our face-to-face Safety and Survival Summit here in Baltimore Oct. 13-14… We’ll even pick up a good chunk of your travel expenses
  • And, of course, access to our full array of stock-picking services — nine in all.

The entire package comes for an incredibly low one-time fee — less than you’d pay in only one year for each service individually.

Doors close to new members at midnight on Thursday. If you haven’t taken the opportunity to review the privileges and benefits of membership, we urge you to do so now.

   “China’s peaceful development has broken away from the traditional pattern where a rising power was bound to seek hegemony,” reads a 10,000-word white paper out this morning from the Chinese government.

“To read it,” says our acquaintance Chas Freeman, the veteran U.S. diplomat and Richard Nixon’s chief interpreter during the summit with Mao in 1972, “is to be reminded that a great deal of the criticism of China as lacking in transparency about its purposes and development programs derives from the failure to read or listen to Chinese sources or from bias against taking them seriously.”

“In the end, of course, China may not live up to its stated ideals any more than other countries do. Yet blueprints for Chinese development like this one have reliably forecast its course for decades.”

The white paper is short on details… but those are supplied by some other items we’ve run across today…

   China and Nigeria have struck a deal: Nigeria will transfer one-tenth of its foreign exchange holdings into yuan.

That will assure continued Chinese investment in Nigeria… and put another small dent in the dollar’s status as the world’s reserve currency.

   China is also talking with the World Bank about how to transfer some of its low-wage jobs to Africa.

China’s looking ahead to the day its labor force stops growing, and it wants the remaining workers to take on more high-value jobs, says World Bank chief Robert Zoellick, wrapping up a trip to Beijing.

He figures if only 5 million of China’s 85 million low-value jobs are transferred to Africa, that could expand job opportunities in Africa by 50%.

He’s also looking to back China’s push to develop African farmland. “This is one of the areas we are encouraging deeper cooperation between China and Africa,” he said cryptically.

   Meanwhile, it seems U.S. diplomats have taken a keen interest in what Chinese media report about the nation’s acquisition of gold. Or so we learn from a new stash of State Department cables obtained by WikiLeaks.

Upshot: China is clearly in the camp that believes Western powers manipulate the gold price.

“The U.S. and Europe have always suppressed the rising price of gold,” reads a commentary quoted from the Shijie Xinwenbao newspaper. “They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or euro.”

“Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries toward reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the renminbi.”

These cables are mere summaries of what’s in the Chinese press. There’s nothing to indicate what the diplomats actually think of such matters. If they even understand them, heh.

   Nothing says “I love you” like… tungsten? Cobalt?

The high price of precious metals and the weak economy are pushing newlyweds — well, men, anyway — to pursue cheaper metals.

“The response to our recent men’s tungsten collection was immediate,” says John Baird of Blue Nile. Enough that the online jewelry retailer brought out a titanium line, too. During July, “one in every 10 men’s wedding bands we sold that month was titanium.” Kay Jewelers, meanwhile, has a cobalt line.

A typical gold wedding band runs $700 these days. Cobalt and tungsten run $200-250, and titanium as little as $100.

“To men, there’s a coolness factor with tungsten, titanium and stainless steel,” says Peggy Donahue from the Manufacturing Jewelers & Suppliers of America.

That’s great. Except the “coolness factor” hasn’t quite extended to women. Bridal collections remain limited to gold and platinum… at least until the next down leg in the Great Correction, we suspect.

   “And so it goes,” writes the reader who inspired responses from the panoply of Agora Financial editors in the Thursday issue of The 5, each addressing why it’s still possible and desirable to make money even in “rigged” markets.

For reasons we can’t quite discern, the reader wrote to us under the subject line, “Belittle my comments?”

“I stand by what I have written,” he goes on. “Your answers show that, to quote George Ure, ‘Everything is a business model.’ You are interested only in selling your touts and demonstrate a very short-term outlook.”

“I have succeeded only because I have always had a long-term outlook. Your answers betray your shortsightedness and your lack of concern for your fellow man. You’re more interested in winning than how the game is played.”

“Your end will be the same as all the others that are only concerned for themselves.”

The 5: We apologize if you feel slighted. But it’s rare, if ever, that the writers agree on anything, let alone how to deal with the daunting prospect of rigged markets.

We suggest you reread what each have proposed in the way of solutions; they run the gamut from strategies dealing with resource scarcity to deep-value plays in frontier markets to understanding and investing in transformational technologies… hardly short-term impacts… hardly short-term strategies.

Indeed, there are also short-term strategies among our thinkers, too. But you’re free to use their ideas… or not. It’s your choice.

Unfortunately, for the very reasons you cite, managing your own money is as difficult as always today. We aim to provide solutions for you. In the effort, we answer to no advertisers… only to readers. If you feel we’re “touting” a system you distrust, then you’d be wise to ignore us completely.

   “We have manufactured a consumer electronics product for over 22 years right here in the U.S.,” writes a reader picking up on our theme that entrepreneurs will always try to tough it out — rigged markets and red tape be damned.

“A few years ago, I built radar detectors in Colorado for export to Taiwan at a cost cheaper than they could build them there… and we made a profit.”

“I believe that we in the U.S. can compete with anyone in the world in manufacturing with a couple of caveats: First, we have to design the products properly so they perform with excellent quality; second, I shy away from unions, as they tend to be power hungry and greedy… my employees have always been better paid and got more benefits than comparable companies; last, quality and performance have to be Job 1, just like it was in the ‘old days’ that people talk about.”

“Build it right and people will buy it; we have less than 3% returns, compared to our competitors’ average 17% returns, and we sell a better product for less money! By the way, we are also the only ones MADE IN THE USA.”

“I enjoy reading your sometimes cynical/satirical reviews of our economy, and I must admit, I mostly agree.”

   “Gibson Guitars,” a reader writes after Friday’s breach of the subject, “was raided for one simple reason: It’s the only major guitar company that is completely nonunion.”

“This is community organizing on a grand scale, just using the Justice Department, instead of individual thugs.”

“One of the reasons the Feds went after Gibson and not its competitors,” agrees another, “is that the Gibson factories happen to be in ‘right to work’ states and their competitors are not.”

   “Dude,” a reader writes, “the decision to use that picture of the guy whose head is exploding was a serious lapse in judgment. That coming from a guy who has never been offended by anything in The 5.

“I got the point, but that was disturbing. Throttle back on that sort of thing.”

   “Wow!” writes another. “My brain didn’t explode, but I laughed my guts out. Without a doubt, it was the most brilliant satire I’ve read in a long time. I’m still laughing.

“Keep it coming. Laughter helps one survive in a country now devoid of common sense, let alone sanity. Thank you!”

   “Just wanted to give you a pat on the back for staying in the reality-based world of information. The readers who say for you to stay out of politics can’t be sane. Politics is what is killing the golden goose of free enterprise. It always has!”

“The world of politics is powerful people doing a bunch of naughty things they shouldn’t be doing and hurting so many people in the wake of their actions. Keep up the reality-based economic insights and research. That is why I read you guys.”

   “Ron Paul is the only choice for 2012,” our last reader also adds.

The 5: We’re headed to the “Belly of the Beast” a week from today to interview Dr. Paul for another new documentary project. He’s graciously agreed to make room in a schedule dominated by congressional business and his presidential campaign.

More details to come…


Addison Wiggin
The 5 Min. Forecast

P.S. Gold took a minor pounding while we were writing the rest of today’s issue. Now it’s down to $1,877.

But even if it gets knocked back to $1,600, is there any doubt about the long-term trend? Or what that portends for gold stocks?

This is why it’s an ideal time to review the “pick of the litter” among all our editors who examine this sector. It’s one of an extraordinary array of benefits available to members of the Equity Reserve… but only through midnight on Thursday. That’s when the doors close… so it pays to move now.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More