Trashing Gold Owners’ Property Rights

Dave Gonigam – December 19, 2011

  • Kim Jong Il’s signal accomplishment… Digging Uncle Sam deeper into bankruptcy
  • The plot sickens at MF Global: Owners of allocated bullion bars set to take the same 28% haircut as everyone else…
  • Introducing a precious metals solution tailored to your own level of “counterparty risk tolerance”…
  • Elmerraji on the next levels to watch in the S&P… An intriguing question about whoever’s putting Krugerrands in Salvation Army kettles… a host of peeved readers… and more!

   We pause this morning to marvel at an accomplishment of Kim Jong Il — one that’s gone unheralded; you won’t read about it in the papers.

He made no contributions to U.S. political campaigns. He had no army of lobbyists wandering Capitol Hill. But with little more than a scary speech now and then, he convinced a succession of congresses and three presidents to pour — depending on how you calculate the figure — $15-20 billion every year into the defense of South Korea.

True, when it comes to bleeding Washington dry, Kim didn’t hold a candle to bin Laden. But he made a significant contribution, nonetheless.

   Fifty-eight years after the cease-fire that ended the Korean War, the United States still maintains a force of 28,500 troops in South Korea.

That’s roughly one out of every 100 active-duty and reserve members of the armed forces — even though “the entire raison d’etre of the alliance has disappeared,” in the estimation of the Cato Institute’s Doug Bandow.

“By the 1980s,” he says, “the South was pulling away economically from the misnamed Democratic People’s Republic of Korea. The latter was a militarized wreck unable to feed its people; in the late 1990s a half million or perhaps more North Koreans starved to death…”

“South Korea has upward of 40 times the GDP of the North. The ROK also has a vast technological edge, twice the population and a clearly superior international position.” At a time Uncle Sam is borrowing 42 cents for every dollar it spends, South Korea seems rather capable of defending itself.

In the North, the torch will supposedly be passed to Kim’s son Kim Jong Un. But he’s still in his 20s. The talk is that among the cronies the old man left behind, the long knives might be coming out.

It’s not hard to anticipate what kind of response this uncertainty will get from Washington: “$15-20 billion a year? That’s not nearly enough!”

   Gold is starting a new week struggling to reclaim $1,600. The spot price came within a few pennies of that number by the close on Friday afternoon, but now it’s back to about $1,592.

   Asian buyers of physical gold are stepping into the market — as they often do when gold looks like a relative bargain.

“Combined turnover on the [Shanghai Gold Exchange] this week has been consistently strong,” says a report UBS issued on Friday, “and is about 53% higher than the previous week’s, while demand from India is shaping up to be the strongest weekly offtake since early October.”

Meanwhile at Dubai-based Emirates NBD, “We saw excellent buying from customers which reminded us very strongly of the heydays in August/September,” says the firm’s precious metals chief Gerhard Schubert.

People in Asia and the Middle East have long had a fondness for physical gold. Meanwhile in the United States, trust in “paper gold” is quickly evaporating.

   A new wrinkle is emerging in the sordid tale of MF Global: People who held actual gold and silver bullion through MF Global — not just futures buyers who planned to take delivery — stand to take the same 28% haircut as everyone else.

“The trustee overseeing the liquidation of the failed brokerage,” according to Erin Arvedlund at Barron’s, “has proposed dumping all remaining customer assets — gold, silver, cash, options, futures and commodities — into a single pool that would pay customers only 72% of the value of their holdings.”

“In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver — and hold ‘warehouse receipts’ to prove it — they’ll have to forfeit 28% of the value.”

Worse, “attorney and liquidation trustee James Giddens has frozen all asset classes, meaning that traders have sat helplessly as silver prices have dropped 31% since late August and gold has fallen 16%.”

Giddens’ law firm, you’ll recall, has done considerable business with J.P. Morgan Chase — one of MF Global’s biggest creditors.

In the meantime, the people who now stand to collect only 72% of their gold and silver bars are still paying storage fees on 100% of their holdings.

   “The U.S. financial system as it now stands cannot be trusted to observe even the most basic property rights as it continues to unravel from a long-standing culture of fraud,” concludes the blogger “Jesse” at Jesse’s Cafe Americain, an experienced observer of the precious metals market.

“What is now painfully clear is that the… regulated futures system is defaulting on its obligations,” he goes on, slamming the Commodity Futures Trading Commission and CME Group, owner of the Comex.

“This did not even happen in the big failures like Lehman and Bear Stearns, in which the customer accounts were kept whole and transferred before the liquidation process.”

   This is a critical observation: It’s one thing to get hosed if you hold metals in an “unallocated” account, where your holdings are mixed up with everyone else’s. It’s another thing entirely when there’s a gold or silver bar with a serial number that’s assigned to you… but you still don’t “own” it.

That’s what MF Global clients are now discovering.

It comes back to a question we’re posing more and more: Whom can you trust?

That’s what makes a new package of special reports from Byron King especially timely. If you’re suspicious of the system, but you’re also leery of a home safe, Byron lays out 10 alternatives for holding precious metals… allowing you to take only as much risk as you’re comfortable taking.

This package of special reports also identifies Byron’s three favorite large-cap gold stocks, his favorite silver stock, and three natural resource plays that can deliver you income. It’s an exceptional value we made available only last weekend… so it’s as timely as possible. If you missed the initial announcement, here’s where to go.

   U.S. stocks began the day up, flattened and are now down. The major indexes have shed about half a percent. The S&P sits at 1,211.

   Despite a 2.8% drop in the S&P, “From a technical perspective, nothing game-changing took place last week,” according to our resident technician Jonas Elmerraji, “and stocks remain in between their most recent swing high (at around 1,260) and low (at around 1,160).”

“While we had been watching an important support level at 1,225 for much of November, it’s no longer a place where we’re seeing a glut of demand for stocks. Those more recent extremes (1,160 and 1,260) are more important levels to watch from this point on.”

“As we approach the holidays, expect to see traders taking a break from their monitors and hitting the eggnog hard to forget about a rough 2011. The most direct result of that is going to be exceptionally low trading volume for stocks in the next two weeks. That could make things more volatile as we approach year-end, but a material move in stocks is still not that likely.”

   Volatility as measured by the VIX is up this morning… but still below 25. Mild by recent standards.

“There are no headlines announcing the usual doom-and-gloom for the coming week,” says Abe Cofnas, who keeps a finger on the market’s emotional pulse to spot profit opportunities.

We’ve noted before how the VIX has moved into a “new normal” range since the downgrade of U.S. debt in early August… but Abe wants to draw your attention to a steady downward trend of late. “The traditional CBOE Volatility Index (VIX) is showing declining fear and therefore lower volatility conditions.”

“I believe that the sentiment conditions are not ripe for our usual volatility/fear breakout trades nor the anticipation greed trade,” he advised Strategic Currency Trader readers this morning… so he’s suggesting an alternative strategy that can make money from range-bound conditions.

As with most of his recommendations, the outcome will be known by Friday. That’s what makes “binary options” so lucrative. To learn more about Abe’s strategies, give this a look.

   It’s the time of year when Salvation Army kettles pop up everywhere… and a few of them end up containing one of these.

One landed in a kettle outside a Wal-Mart last Wednesday near Gettysburg, Pa. “The valuable currency has appeared in Gettysburg-area kettles for several years,” reports The Associated Press.

If it’s the same donor every year, it makes you wonder: Is he digging deeper into his pocket each year to acquire the Krugerrand? Or did he buy a bunch of them years ago and his generosity looks more valuable in dollar terms each year?

   “OK, we are officially confused,” writes a confused reader, “by your issue last Thursday about gold and gold stocks.” The passage that threw them was this one from Dan Amoss…

“Profit margins are much higher. More importantly, these margins are likely to stay higher, since the cost of mining — diesel, steel, equipment, chemicals, labor, electricity, etc. — is not likely to rise nearly as much as the price of gold. So gold stocks are cheap. They are not yet anticipating a continued rally in gold. Instead, these stocks are anticipating a steady drop in gold prices over the next decade.”

“Really? And every other statement in The 5 indicates continued increases in gold prices next year and throughout the next few years! Byron King disagrees with this statement in the same edition of The 5! Is someone reading the whole 5 or just putting pieces together and shipping it off?”

The 5: Um… There’s no contradiction we see. At the moment, gold stocks are priced at a level that anticipates falling gold prices. If gold prices rise, and especially if they rise at a faster clip than the costs of mining, it’s all good for the gold stocks. Much more here.

   “I am also an American citizen living in Canada,” a reader writes after seeing Friday’s issue, “and from day one, every American, no matter where he lives in the world, is supposed to file a U.S. tax return on his income.”

“This is not new…check it out.”

The 5: We didn’t say it was new; it’s the IRS’ level of enforcement that’s new — even going after people who never knew they held U.S. citizenship.

   “Why do you guys keep lying about the lighting efficiency bill passed in 2007?” writes another peeved reader.

“This bill would never force anyone into buying a CFL to replace an incandescent. Just yesterday, I was in my local hardware store and saw examples of the new, more-efficient halogen lamps; they put out the same amount of light as the 100-watt incandescent, yet use only 72 watts. GE, Philips, Osram and others have been bringing these to market. They save money over the life of the lamp because they are more efficient and last longer.”

“Please stop lying about this!”

The 5: Yes, halogens are available as an alternative to CFLs. And yes, they save money over time. But the economy’s in terrible shape right now and some people can’t shell out $4 upfront and might still prefer the incandescent for under $1.

The 2007 law was the work of world-improvers, born of the same mind-set that gave us “cash for clunkers,” taking hundreds of thousands of older used cars off the road and making used cars far less affordable.

   “In your discussion of the Bureau of ‘Labored’ Statistics, you are not playing by the rules,” writes yet another reader with a bone to pick.

“You have obviously forgotten to take into consideration the hedonics involved. At this point, many people are just happy to be able to be able to buy food or fuel or have a place to live, so the appreciation of these things is greater, and any increase in the price is therefore offset.”

“A little sarcasm here, of course!!!”

The 5: Whew, we were starting to wonder what we’d done to torque off so many people…

   “Love your style!” writes one more reader. “Right up front, tell it like it is and be damned!!!!!!!!”

“Keep it up! You’re a breath of fresh air!”

The 5: Well, it’s nice to see someone appreciate what we set out to do…


Dave Gonigam
The 5 Min. Forecast

P.S. “Speaker John Boehner says he expects the House to reject the Senate’s two-month extension of the payroll tax cut,” reads an alert from CNN.

“Sen. Majority Leader Harry Reid says he won’t reopen payroll tax cut talks until House passes extension OK’d by Senate,” reads a subsequent alert.

Oy… It’s all theater.

Something will get ironed out… eventually. Politicians don’t want to be seen increasing taxes going into an election year.

Left unsaid is what another year of the tax cut will do to Social Security’s finances… and future Social Security benefits.

This is why it’s more important than ever to give you consideration to alternative forms of retirement income. One of the most popular with our readers recently comes from Lifetime Income Report editor Jim Nelson. You can review it right here.


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