Dave Gonigam – June 4, 2012
- A new type of airport interrogation, courtesy of the IRS: The country where it’s already happening… and the reason it could happen here sooner than you think
- Why central banks might have been the source of gold’s big rise on Friday
- Two ways China is out to undermine the dollar’s reserve currency status… and a two-week window in which you can take protective steps
- Early opportunity: Famed dissident now pleads for foreign investment in the country that held her captive
- The reality of a “transfer plan”… a reader who expects to “spark much righteous fury”… a “classic contrarian signal” from the eurozone… and more!
Imagine a day when you plan a trip abroad… and you exchange some dollars for the currency of your destination country before you depart.
At the airport, uniformed agents ask whether you have any foreign currency. You are then asked to prove you obtained the currency legally… and inform the IRS about where you’re going, how long you’ll be away and the reason for your trip.
As of seven days ago, this is the new reality in Argentina. And as of 11 days ago, an event in Washington should give pause to anyone who says, “it can’t happen here.”
The new rules in Argentina came into effect a week ago today. They are aimed squarely at holders of U.S. dollars.
The government wants to keep those dollars within the country, the better to shore up the central bank’s reserves and pay down its debts.
“Many Argentines,” reports The Associated Press, “only declare part of their wealth and income to evade taxes, and use black-market currency exchanges to convert their inflationary pesos into dollars. Travel agencies are the latest target since they manage multiple currencies and offer customers black-market rates for their money.”
A curious letter addressed to Treasury Secretary Timothy Geithner raises the specter of similar rules coming down the pike in this country.
Dated May 24, it comes from Rep. Barney Frank, the top Democrat on the House Financial Services Committee… and Rep. Sander Levin, the top Democrat on the Ways and Means Committee.
“Frank and Levin,” says a joint press release, “have long been concerned that the language in U.S. trade and investment treaties was too restrictive and did not leave adequate flexibility for governments to use controls to stem the massive flows of speculative capital that can exacerbate economic crises.”
So they’re asking Geithner to make it clear, in writing, that the United States retains “the ability to deploy capital controls on the inflow or outflow of capital without being challenged by private investors.”
“You no longer have to read between the lines when it comes to currency and capital controls,” says an email from Addison this morning. Indeed, you can just read the lines directly.
Once Geithner obliges the Congress members with a written statement — do you really expect him to do otherwise? — a new brick will be erected in the “virtual Berlin Wall” that Addison has described to readers of Apogee Advisory for nearly a year now.
“Even if you’re a person of modest means,” he wrote last July, “and you merely want to ‘spread the risk around’ by putting a portion of your wealth outside U.S. banks and the U.S. dollar… it’s becoming harder and harder to do so.”
As we’ve chronicled here in The 5, one of the biggest bricks was cemented into place more than two years ago. The Foreign Account Tax Compliance Act, or FATCA, imposes onerous reporting requirements on foreign banks that do business with U.S. customers.
If those banks refuse to cough up your information to the IRS, they must impose a 30% withholding tax on the income and gross proceeds from any U.S. assets in your foreign account.
Result: Many foreign banks have ceased doing business with U.S. citizens. “I don’t open U.S. accounts, period,” the head of private banking at Singapore-based DBS tells Businessweek.
Several legal avenues remain if you want to protect your wealth from an ever-depreciating U.S. dollar. But time’s running out. We’re not at the Argentina stage yet… but at the rate things are moving, we might soon be forced to cross a few of those legal avenues off this comprehensive list.
Major U.S. stock indexes are adding mild losses onto Friday’s massive ones. The Dow has surrendered to 12,100… the S&P, to 1,275.
At 27 and change, volatility as measured by the VIX is its highest in six months.
Gold is consolidating its big gains from Friday. At last check, the spot price was down about $11, to $1,615.
Silver, as usual, is proving more volatile, down to $28.17.
It’s possible that central banks lit a fire under gold on Friday.
“Every time we’ve gone down below $1,550 and dipped into this support level, we’ve had very strong, quality buying emerge,” writes Dan Norcini, the trading veteran affiliated with legendary gold bull Jim Sinclair.
“Most of the time, this type of buying is associated with central bank purchases, particularly central bank buying coming out of the East. The bottom line is there was some very powerful buying that came into the gold market from some extremely strong hands. They were strong enough that they could absorb hedge fund algorithm-related selling, which is significant right now across the commodity sector.”
Even during April, when gold was priced higher than it is now, central banks were loading up.
Turkey was the leader — adding 29.7 metric tons to its reserve, according to figures from the International Monetary Fund. Mexico bought 2.9 tons, while Kazakhstan picked up 2 tons, and Ukraine, 1.4.
So much central bank buying is taking place that the World Gold Council has shifted these “official sector purchases” from the supply side of its table of fundamentals… to the demand side.
This change “documents an important shift in gold market dynamics,” says bullion dealer Michael Kosares. “In 2002, central banks contributed 545 tonnes of gold to the supply. Ten years later, in 2011, they purchased 440 tonnes — a significant nearly 1,000-tonne swing on the fundamentals table.”
“Emerging markets,” Addison writes in The Little Book of the Shrinking Dollar, “really want to catch up and hold at least 2-8% of their reserves in gold.”
As usual, China is proving the wild card. “China might invest more than $1 trillion into bullion,” Addison writes in the book, citing strategist and CNBC regular Michael Pento.
“China wants to be an international player,” Mr. Pento adds, “and they need to own more gold than they currently have.”
But they’re keeping their purchases close to the vest. In 2003, the central bank disclosed it held 600 metric tons. The next disclosure did not come until April 2009, when the figure shot up to 1,054 metric tons. There’s been no announcement since.
China’s gold accumulation is powerful evidence that it seeks to supplant the dollar as the world’s reserve currency. Coupled with the sort of currency deals it’s cutting with one nation after another, the dollar’s days are increasingly numbered.
Recall that China and Japan started trading in yuan and yen on Friday, bypassing the dollar. “The move…marks another step to raise the yuan’s international role,” according to a refreshingly upfront report from the state-owned Xinhua News Agency.
“The direct trading will boost bilateral investment, as well as imports and exports,” it added. “It will bring convenience in business and lead to considerable reduction of risks caused by fluctuation of the dollar’s exchange rates on the world market.”
As we pointed out in a brief note over the weekend, the move amounts to China waging war on the dollar. Although in light of everything the White House, Congress and the Federal Reserve are doing to undermine the dollar, we daresay it’s a war of self-defense.
Regardless, you might wish to prepare for the fallout by watching the presentation below.
[Ed. Note: There may be less time to prepare than you think. A meeting of G-20 leaders starts two weeks from today. In the event of a major rift between the United States and China, you might not have time to react.]
“I’m concerned when people say Burma is a battle ground for the United States and China,” says Nobel laureate Aung San Suu Kyi, eyeing another source of conflict. “It should not be so.”
We’ve been eyeing Burma for a couple of months now. The place is opening up to the outside world, and Suu Kyi made her first foreign trip this weekend after spending 15 years under house arrest under Burma’s military junta. She pleaded for foreign investment during a speech at the World Economic Forum in Bangkok.
Our friends from Leopard Capital, a firm that specializes in “frontier markets,” are way ahead of the crowd. “It was an amazing trip,” writes Lawrence Mackhoul after a visit last week, attaching a picture of downtown Yangon.
“You should all really try to get over here sometime soon before the place changes too much,” he added. “Change has already started and is happening at an alarming rate.”
Chris Mayer will have to add Burma to his list of destinations. But in the meantime, he’s off to Mongolia this week in his ongoing quest to ferret out opportunity in far-flung places. Watch for his dispatches here; consider them a supplement to his recent book, World Right Side Up.
“Great title,” writes a reader of Friday’s episode. “‘PrintRallyCrashPrintRally’ reminds me of the Stooges’ famous line ‘Moe, Larry, Cheese’… when Curly was insane doing circles on the ground for more cheese.”
“Kind of like us constituents wanting more, don’t cut back on my government cheese!”
“Those who equate Social Security to a retirement savings plan start with an incorrect working assumption about the program,” writes a reader winding down a thread from last week.
“As has been pointed out in past comments, Social Security was not set up as a savings plan, but as a transfer plan. Just think about it. The first and earliest retirees paid nothing into the system, yet collected from those who were gainfully employed at the time. Money was transferred from workers to retirees. Nothing more, nothing less.”
“The program worked well when life expectancies were no greater than the age at which one could collect from the system and there were eight-plus workers contributing for every retiree. Now with the baby boomers retiring, the math just doesn’t work out the same. The large contingent of baby boomers, who were paying for their parents’ retirement (plus extra for the government to waste), are now ready to collect from the next generation.”
“Those who argue that the government ‘owes’ them Social Security payments need to consider that the government owes you according to what the government says it owes you. Those who confuse governments with some sort of altruistic and benevolent entity there to serve its people need to study history.”
“Government is power. If people are not consistent in demanding individual and personal liberty, little by little those liberties will be taken away, and you will be left with no argument about the government owing you anything. Sorry about the rant, but I am truly amazed at how far our great country has fallen in the last 40-50 years.”
“I have seen where we are headed for the last 12 years,” writes a reader, pivoting to the broader subject of retirement, “and as I approached retirement, I used the guidance of The 5 and other sane advisers to set myself up for the world that is really there.”
“I converted all my paying assets into nonvisible assets, gold and silver coins and the like (easy to sell privately), determined my state pension and all the benefits I could get by lowering my nonstate income to zero, cleared all my debts, made all my major long-term purchases (cars and appliances), retired to a small community and now coast along quite nicely thanks to the government largess.”
“This should spark much righteous fury from the readers, but what else is there to do? I am only following the example set by our leaders: Line your pockets at the expense of others.”
“The era of the striver and the entrepreneur is over for a while. This is the age of the state parasite. I did well in the past era, and I am doing well in this one.”
“Thanks again for your guidance, and ignore the guy in the bushes with the parabolic microphone. He is only there for your protection.”
The 5: Just curious… Did you work for the same agency as the guy in the bushes?
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. According to the Commodity Futures Trading Commission, short positions on the euro relative to the U.S. dollar are at an all-time high. “This is a classic contrarian signal,” says Fear & Greed Trader’s Abe Cofnas.
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It’s these short-term swings in sentiment that make Fear & Greed Trader a one-of-a-kind trading advisory. Readers have had the chance to collect gains of 87%… 104%… and 335%… all in four days or less.
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