Fading Faith in Fiat

Dave Gonigam – April 18, 2012

  • “Losing faith” in fiat money: Only now?
  • Frank Holmes with a bullish signal for gold… Rick Rule on why gold stocks are set to rebound
  • Chuck Butler with two signals from China threatening the dollar’s reserve currency status
  • “But what is a slave?” Doug Casey sounds off as Tax Day and “Tax Freedom Day” coincide
  • “What kind of freedom is this?” a reader asks: Why you have something to worry about even “if you’ve done nothing wrong”

   “I’m not one of those religious believers in gold,” says Matthew Bishop, “but I guess I’ve become a bit of an agnostic/atheist about my faith in government-backed money, so I really think governments are in a position where they’re going to debase in a big way.”

Mr. Bishop is New York bureau chief of The Economist… and he’s penned a book called In Gold We Trust?: The Future of Money in an Age of Uncertainty. He has put us in a difficult position as we aim to stake out “fat tail” ideas.

We likewise have no faith in government-backed money. And we’re agnostic about gold, for that matter. “Just because you understand monetary policy, the Fed and the dangers of fiat currency,” Addison said by IM between meetings this morning, “doesn’t mean you’re necessarily a gold bug.”

In any event, Mr. Bishop is onto something. “People have lost faith in the 20th-century religion of government-backed fiat money,” Mr. Bishop tells The Wall Street Journal’s video unit, “and they’re saying at the moment, ‘We don’t trust governments with our money.’”

   To wit: The blogosphere is buzzing this morning with word that the national debt under President Obama has grown by $5,027,761,476,484.56.

That’s now more than George W. Bush racked up in two terms.

Early in Bush’s second term, we were already concerned enough that Addison and Bill Bonner teamed up to write Empire of Debt. Then Addison devoted 2½ years to turn it into a film… before the current occupant of the White House was even part of the national conversation.

Then, few were alarmed that Bush racked up a debt total nearly equal to all his predecessors combined. Now, however, it appears the outrage threshold’s been reached.

   The price of gold measured in fiat dollars is down a bit this morning. At last check, the bid was $1,643. Silver, meanwhile, is retreating from $32, down to $31.50.

   “Gold bulls have plenty of room to graze in the stockyard these days,” says U.S. Global Investors chief Frank Holmes, “as the investing herd migrated to other assets during the market’s steep climb in 2012.”

“For the fourth time in the past year,” says Frank, “gold bears outnumbered the bulls in Bloomberg’s weekly Gold Bull/Bear Sentiment Survey. In fact, the bears had the bulls outnumbered by almost 2-to-1.”

Frank considers this a buy signal. “Research from the gold team at Canaccord Genuity found that gold rallied about 10% on average during the month following each of these sentiment ‘crossovers.’ This historical increase means that gold could potentially rally to the ‘high $1,700s per ounce.’”

Significantly, Canaccord believes that price level “would breathe some new life into the gold equities.”

   New life? Heck, owners of gold stocks would be happy if the patient merely flat-lined for a while. That’d be better than the 18% they’ve fallen in less than two months.

“It is important to remember,” says our friend Rick Rule, now with Sprott Asset Management, “that for much of the last decade gold equities outpaced gains in the metals… The expectations built into gold equities valuations, even relative to gold, were simply unsustainable.”

Don’t underestimate the impact of the bullion-linked ETFs, he says. They weren’t around during the 1970s gold bull market. “These developments at once spurred demand for bullion to back these equity-like instruments and constrained demand for gold equities as investors switched from traditional gold equities to bullion-like equities.”

Now that the stocks are relatively undervalued, look for equilibrium to reassert itself: “History has shown that markets cure periods of overvaluation; I suspect that they will also solve this period of undervaluation, relative to bullion.”

   The broader equities space is taking a breather this morning after yesterday’s monster run-up. Major indexes are down close to half a percent; the small caps as represented by the Russell 2000 are down about 1%.

   The greenback remains range-bound relative to the world’s other major fiat currencies. The dollar index sits at 79.6.

But one of the index’s main components has strengthened this week; the pound is up to $1.6025. If you’ve been following our “mock trades,” you know that’s bad news for Abe Cofnas’ recommendation this week.

All that matters, however, is how the pound ends the week. If it pulls back under $1.5975, it’s good for a 14.2% gain and Abe would be 8 for 8 on these demo trades. We shall see…

   “Add this to the list of things that China’s doing to remove the dollar as the reserve currency,” writes EverBank’s Chuck Butler this morning. He points us to a story at Global Times that informs us “China’s banks will be permitted to hold overnight positions in the renminbi/yuan, a move that also allows them to ‘short sell dollars.’”

“Previously,” Chuck explains, “banks were forbidden from short selling dollars, and that’s not good for the dollar, considering how the Chinese hold the dollar in such high praise. NOT!”

“The most-important thing, though, to me, is that this tells me that China as a country is getting comfortable with the markets moving the currency. You have to remember that in 2005, when the peg to the dollar was removed, the calls for a 40%, 50% and even higher revaluation in the renminbi were very strong. So the Chinese had to put the shackles on the renminbi.”

“And now, nearly seven years later, the Chinese are beginning to loosen the shackles. It’s all baby steps toward currency domination, folks.”

   Ditto, Chuck says, for the news we passed along yesterday about the London Metals Exchange dumping the pound for the renminbi.

“The markets see that story and think about more commissions. I see that story and know in my heart of hearts that should this happen, and I do believe it will happen, China will have stretched their tentacles for a wider distribution of the renminbi once more.”

“For if you get the renminbi trading in London, that means at least a couple of large banks are going to have to provide liquidity, which means to make markets for everyone else. Once this process begins, renminbi will be everywhere! And when N.Y. banks get into the flow, it will be all over but the crying for the dollar as the reserve currency.”

   Lest we let the occasion go unremarked, this is the first full day of the year that you’re working for yourself.

In a rare confluence of events, “Tax Freedom Day” as calculated by the Tax Foundation coincided with yesterday’s deadline to file your 1040.

“Americans [worked] 107 days into the year, from Jan. 1 to April 17, to earn enough money to pay this year’s combined 29.2% federal, state and local tax bill,” says the foundation’s website. Your mileage, of course, may vary.”

“All the work the average guy does until April 17,” says Doug Casey, marking the occasion, “goes to pay for the government that failed to protect him on Sept. 11, 2001, failed to protect him from the crash of 2008 and continues failing him every day.”

“It’s rather perverse that Emancipation Day — the day the first slaves in the U.S. were freed in the District of Columbia in 1862 — is April 16. But what is a slave? He’s someone who is deprived by force of the fruits of his labor. Sound familiar? I disapprove of slavery, in any form — including its current form.”

   However, “I do not encourage anyone to break the law,” Doug cautions. “The IRS can impound your assets, take your computers, freeze your accounts and make life just about impossible for you while you struggle to defend yourself against their claims and keep the rest of your life going.”

That said, “People can and should do everything they can to pay as little in taxes as possible. This is an ethical imperative; we must starve the beast. It could even be seen as a patriotic duty — if one believes in such things — to deny revenue to the state any way possible, short of endangering yourself.”

We can always count on Doug to say something provocative when he pays a call each year at the Agora Financial Investment Symposium in Vancouver. We expect this year will be no different.

Chuck Butler is always on hand too, with ideas about how to play the currencies to your advantage… and which ones. Rick Rule holds court early each morning, fielding questions on nearly every junior resource that exists. The only way you can stump him is if you make up a name. And Frank Holmes is always one of our most popular speakers, even though two years ago he began his talk with thumping music and an impromptu aerobics session. You had to be there.

This year promises to be our best ever, based on some of the nonregulars and first-timers we’ve lined up. We’re not in a position to reveal their names yet… Give us another couple of days on that.

But consider this our cordial invitation. We’d love to have you join us July 24-27, whether it’s your first time or if you’re a veteran. [As always, Reserve members enjoy free admission as a perk of membership.] Early-bird registration is available now. To learn how to reserve your spot, give this a look.

   This will no doubt bring out the usual suspects who insist the economy’s getting better: Planned spending on high school proms is up 34% this year — all the way into four figures for the average family.

A survey conducted for Visa finds the typical family will blow $1,078 this year — up from last year’s $807.

“Prom season spending is spiraling out of control as teens continuously try to one-up each other,” says a senior director at Visa in a revoltingly hypocritical press release. “It’s important to remember that the prom is a high school dance, not a wedding, and parents need to set limits in order to demonstrate financial responsibility.”

Right, because Visa makes its money from young people being responsible with credit. That’s why not too long ago Visa cards were still handed out on college campuses like hard candy tossed off a parade float.

Even better: The lower the income bracket, the higher the parents plan to spend: Parents who make more than $75,000 plan to spend an average of $842, while those in the $20-30,000 bracket figure on blowing $2,635.

One word: Oy.

   “I found a tractor for sale online that I wanted to buy over the weekend,” a reader writes. “After filling out my forms for withdrawing over $10,000, I got scared. The seller and I had an appointment to meet on Sunday.”

“The shame of it is I was more worried about getting pulled over and having my money confiscated by a policeman than I was a thief or this seller whom I had never met face to face and knew I had $12,000 cash on me. What kind of freedom is this?”

The 5: You’re not paranoid, we can tell you that. “Asset forfeiture,” writes Radley Balko at Huffington Post, “is the process by which law enforcement agencies can take possession of property suspected of being tied to illegal activity.”

“Under these laws, the property itself is presumed to be guilty of criminal activity. Once the property has been seized, it’s up to the owner to prove he obtained the property legitimately. In about 80% of civil asset forfeiture cases, the property owner is never charged with a crime.”

And in many states, the law enforcement agency that seizes the money gets to keep the cash.

Perverse incentive? You bet. Last year, a Nashville TV station revealed how cops bother little to patrol eastbound Interstate 40 for drugs from Mexico, but they swarm the westbound lanes for drug money. And they caught one officer pulling someone over for “improper lane change” when the video showed no such thing.

It no longer holds — if it ever did — that “if you’ve done nothing wrong, you have nothing to worry about.”

Regards,

Dave Gonigam
The 5 Min. Forecast

P.S. You can rage alone at your computer and feel helpless in the face of such evil. Or you can join kindred spirits to fight back.

It starts with little things — even finding out how to “hack” your showerhead to get around the government’s limits on water flow.

“For several months,” writes Jeffrey Tucker, “a team at Laissez Faire Books has been quietly working in the lab to come up with something really new and wonderful, something to revolutionize the way libertarian ideas are generated and distributed.”

“We have it now. It is risky, radical, even reckless, but we are going ahead anyway.”

“Why?”

“Because there needs to be a new way to exchange ideas, engage our times, get government out of our lives and build a bright future for ourselves.”

That bright future starts tomorrow. Watch this space…

rspertzel

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