Friday, April 29, 2011

The US Federal Reserve Speaks with "Forked Tongue"

Gold in New Zealand dollars: $1913.30 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $60.30 per oz
Previous all time high: $48.58
per oz

What are we to make of all the announcements coming out of the US Federal Reserve Bank yesterday?

From my reckoning, Mr Bernanke seems to be speaking with a "forked tongue" (I like this phrase, used many times in the old Westerns I used to watch)

There are comments about higher commodity prices and rising inflation, but then comments about inflation trends being 'subdued' and inflation expectations 'stable'.

Which is it to be? Inflation or no inflation. Subdued or stable?

Well, I ask you to stop, take a breath, and be still.

Think of the last time you went to the Supermarket and bought groceries. Did you come out with great glee and laughter, noticing weird side-glances from passers-by, happy in the thought that prices had now dropped and you could buy that new TV or pay off some more mortgage.

No, then what about when you last filled the car's gas tank? Didn't notice the litres or gallons ticking by slower than the dollars again?

Now look at the gold and silver markets as Mr Bernanke spoke. Seems both didn't believe the 'subdued' story either. Gold in US dollars is now at record highs.

No one believes the Fed's inflation story and no one, that I have read, can tell me where they will get the funds to keep the US Governments borrowing costs low, now that they have announced the end of QE2 (money printing 2).

The Fed will have bought $600 billion (USD) of US Treasury debt from July last year to June this year. Can you see interest rates staying where they are in order to entice bond buyers to buy Treasuries? Not likely. The costs of US Government debt will soar and the US dollar value will tank.

This will cause many problems worldwide. For example, our New Zealand dollar is rising, but that too is a mirage. It's actually the US dollar falling in relation to it. Where does a true store of value reside now?

The Federal Reserve seems now lost for policy and has thrown decisions back to Mr Market. His prompt reply.

Buy assets of lasting value that preserve wealth.

Articles of interest:

QE3 or not QE3? That is the Question

See article here
Phil's Stock World

Are You Smart Money?

See article here
Casey Research

Thursday, April 28, 2011

Precious Metals React to US Policy

Gold in New Zealand dollars: $1903.68 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $60.49 per oz
Previous all time high: $48.58
per oz

This is the first time I have quoted such a large blog post from someone else, but I think Dan Norcini's post today warrants a read.

FOMC gives Precious Metals Bulls reasons for cheer
The market has obviously interpreted the FOMC news and the comments from Fed Chairman Bernanke as a signal that they are unconcerned about the effect of their policy on the US Dollar, which is sinking further into the abyss. This has traders and investors moving strongly into the gold and silver markets, with gold soaring into a new all time high in nominal terms and silver shooting up a whopping 5%. 
Meanwhile, the Dollar has now convincingly broken down below critical chart support near 74 on the USDX and looks on target to sink as low as 72. I have said it several times here on this site and over at jsmineset - if the Dollar breaks down below 72 on that chart and cannot recover that level within a couple of sessions, we will be witnessing the historic demise of the currency and the probable end of its role as the global reserve currency. 
Thanks Ben and thanks to all the Fed governors whose foolish, inept, and short-sighted idiocy has set this nation on a path that will make the IMF prediction of its sliding into second place behind China, indeed come to pass. No nation ever kept its place of economic ascendancy by deliberately killing its own currency. An economically strong nation, with a solid manufacturing sector, the rule of law, an ethic of thrift, low taxes, reasonable regulation, etc, will by default have a strong currency.  
The plight of the Dollar is now a commentary on the decline of our beloved nation. It speaks with a more pure voice than any analyst could ever aspire to and what it is crying is disheartening to an extreme for those with ears to hear it. 
History has the advantage of being relatively objective in its analysis as it is removed from the passions of the era. It is with that in mind that I can confidently say it will render a harsh and severe criticism of those who led our nation and its monetary policy during this period as they presided over its decline.


Articles of interest:

Dollar sinks, gold hits new high after Bernanke speaks

See article here
LA Times Blog

Gold and Silver Coins are Money

See article here
Franklin Sanders blog

Wednesday, April 27, 2011

The Times they are a-Changing

Gold in New Zealand dollars: $1865.29 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $56.07 per oz
Previous all time high: $48.58
per oz

Being brought up in the 1960’s, I still remember quite a few of the old songs. The 60’s produced some of the greatest protest songs ever.

One of the more apt phrases was written by Bob Dylan in the song, “The Times They are a-Changing”

With governments, the times can change at any time. They make the rules.

Here’s an example from a New Zealand newspaper in 1919.

The Wanganui Chronicle, at the time, talks about a man saying that you could still legally demand gold for bank-notes from the Bank of England. The journalist soon puts this right.

He states, “You could do so before the war (The First World War), because the gold standard was based on a rule which provided that the Bank of England note issue must be backed by a certain amount of gold held by the Bank. The gold standard, however, could not be observed when the war broke out.

The Bank is now under no obligation to redeem its notes in gold as was formerly the case, and Treasury have issued Treasury Notes to the value of legal tender for the payment of debts. Neither can the holders of these demand that they be redeemed in gold.”
The Wanganui Chronicle; 2 September 1919, Page 5

So at one stage before the War, the bank Notes in New Zealand, were backed by physical gold. You could just take them to The Bank and get the equivalent gold…nice.

However, by whim of Government decree, this changed overnight. Notes were not redeemable in gold. Credit was created by fiat (latin for ‘let it be done’); value was created out of thin air. Money had value only because the Government of the day deemed it.

When do our governments today get desperate and change the rules once again? This is the game that is played with your wealth. One minute your labour is measured in gold and then debt based notes. But wait, even then it can be revalued (by stealth with inflation) and you lose the buying power and wealth stored in that previous note. What is rightfully yours, by the sweat of your brow, is stolen.

It may be a long stretch to re-instate the gold standard as it once was, but something needs to be agreed upon when the world monetary system resets. Some say a form of gold standard is applicable. Whatever is decided must be just and fair and not manipulated by Governments. Good luck with that I hear you say.

The times they could be But we can preserve the wealth we have now by purchasing gold. This has been so for the last 5000 years of monetary history and it's not about to change.

In the words of another Bob Dylan song, “A Hard Rains a-Gonna Fall”. Will we be ready?


Articles of interest:

Axel Merk: Why Is Anyone Still Waiting to Sell the Dollar?

See article here

Monetary Reform: The Key to Spending Restraint

A call for a return to the gold standard
See article here
The Wall Street Journal

Tuesday, April 26, 2011

Our Little Bubble, Our Big Problem

Gold in New Zealand dollars: $1885.43 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $58.76 per oz
Previous all time high: $48.58
per oz

The volatile run-up in silver last night came to an end when the New York exchange opened. However, it has since bounced back to around $47.00.

Let’s look at some of the sovereign debt worldwide, especially ours here in New Zealand.

Last week, Greece had to sell 2-year bonds at 19.3%. This is more than their GDP growth. This is simply unsustainable and Greece will default, soon.

So default you say? Well no, not unless you try restructuring first.
You see, with debt, someone has to pay. So if a country doesn't default (and default can be the best option), they restructure so that that someone else isn't a Banker or large powerful Investor.

Guess what, that someone else is you, me and Joe Sixpack next door.

With sovereign debt we are the suckers (and your children and grandchildren) that will pay. In New Zealand, we all now owe $42,500 per person. When are you going to pay yours? No, well who is? With incomes steady and interest rates negative (inflation rate to deposit rate) it looks like default is the only option.

But there is still time before that happens. The IRD (tax man) will go after every last cent they can squeeze from you. Maybe even to the point of asking your nice Swiss friends to cough up your account records.

The NZDMO (NZ Debt Management Office), successfully sold a record $1 billion of debt last Thursday. It could have sold 3 times that amount. People still like us.

That's another $250 that we all now owe someone else. We just keep adding to our own debt pile, because as long as we can sell bonds and raise debt, and raise more debt to pay for the repayments and interest on previous debt, the merry-go-round will continue.

Until the music stops and we can’t pay or raise any more money.

Greece is close, Portugal, Ireland, Spain, the UK, USA etc are close. The S& P downgrade on US debt that was threatened last week, is a shot across the bow for them.

The price of gold in relation to the falling US dollar is the canary in the gold-mine. It's not likely to hold at $1500 per oz for long.

Prepare for the next economic mess. It may be sooner than you think.

Our little debt bubble will pop. Our big problem will begin.

Articles of interest:

Jim Sinclair on Gold and the World Financial System

See article here

Debunking Anti-Gold Propaganda

By Doug Casey here
Casey Research

Monday, April 25, 2011

Silver Rocket

Gold in New Zealand dollars: $1895.26 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $61.05 per oz
Previous all time high: $48.58
per oz

Silver has made unusually high gains today (so far) of $2.00 per oz to be around $48.80 (USD) per oz.

We don't quite know what is happening but will fill you in as we hear. It is the strange volatility that is weird. At one stage a few hours ago it nearly hit $50.00.

Gold is also showing gains in Asian trading.

Thursday, April 21, 2011

Investing in Gold for Beginners

Gold in New Zealand dollars: $1885.28 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $56.77 per oz
Previous all time high: $48.58
per oz

You want to put some of your savings into gold? How much should you invest in gold? Should you buy gold and take delivery?

Here are 5 tips for the new Gold Investor.

1. How much should I invest in Gold?

This is a personal decision, but most commentators would recommend anything from 5 – 25% of your wealth should be in gold. It depends on how ‘bullish’ (or brave, or trusting in paper) you are.

Gold is an insurance for the bad times. Primarily an insurance against bad government. In the second world war, and other conflicts, many displaced people had much of their wealth in gold and actually carried their gold out with them when they had to leave countries. Will society ever break down like this again?

Gold will never go to zero value. Many other investments have that possibility.

2. How much gold bullion should be in my possession and how much in a vault?

It is sensible to have some physical gold bullion in your possession. The ratio is yours to decide. Small gold bars and gold coins are the best option. But remember that small gold pieces hold a large premium over spot price, so don't get too much. Buying large amounts form bullion companies and having it stored is the cheapest option.

For bullion storage I recommend The Anglo Far East Company. This company matches your gold investment with the actual physical gold. It is custodial, allocated gold and silver. You own it, they don't. It is a highly personalized, white glove service and has a minimum purchase amount.

3. Where do I store my physical gold bullion?

Most people buy a safe and install it in a secure place in their home. Some put it in paint tins in their shed (but don't let anyone else clean out your shed!!) Others put gold into Bank Deposit boxes. Or you can split between the two. Remember it may be difficult to get YOUR gold out of a bank deposit box.

4. When do I sell my gold bullion?

Gold is very liquid and can be quickly sold in times of monetary stress. If you are looking at gold as an investment, then look at some of the better commentators on the internet for advice of when to sell. There are experts that will give this sort of advice for a fee. A well known gold company will tell their paid subscribers 24 hours after they have personally sold their precious metals.

5. Who will accept my small gold pieces when I need to trade them or sell them?

Most bullion dealers will be happy to buy pure gold. Also, in times of financial collapse gold will be acceptable as money to most people in exchange for goods or services.

In New Zealand we have little understanding of the world of gold. Those from Asia and the Middle-East and Eastern Europe have such a history. I suggest they would readily exchange goods and services for gold and silver.

Articles of interest:

Tell me that Political Leaders don't put pressure on Ratings Agencies

See article here
Trader Dan Norcini

Interview: Jim Sinclair on Gold and the World Financial System

See article here

Wednesday, April 20, 2011

Debt Bomb; Murderer of the Middle Class

Gold in New Zealand dollars: $1891.93 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $55.64 per oz
Previous all time high: $48.58
per oz

Interesting title you say. Bit far fetched?

Are the events going on the US now, in regard to the debt ceiling increase and the budget, going to cause the the world economy to implode?

The gold and silver prices are going to new record levels (gold) each day. Why?

The issue is the deficit of the US Government. Precious metals are looking to head much higher. The high price is unknown, just as the size of the debt bubble is unknown.

And this is going on as the European economies struggle with their own debt bomb. Perhaps this is a bigger issue than the US debt. It's closer to popping.

One troy ounce of gold and one troy ounce of silver (both 32.15gm) will always be the same. The price is the only thing that changes.  The price is changing because the amount of debt that we are accumulating is increasing.

Central Banks are pumping more credit into the system daily. Call it Quantitative Easing, call it monetizing the debt, or purchasing government bonds. The Debt bubble is inflating and it will burst. That's just a law of physics.

There is more money (credit) chasing the same hard assets, so price goes up. Gold and silver are our tea leafs or our Prophet on his soap-box. Telling us there is something acutely sick about the world economy.

As the US dollar devalues, more and more people are rushing to protect themselves in commodities and hard assets. Unfortunately, the middle-class have nowhere to go. The flood of money doesn't help them, they just get sideswiped by the increasing money supply (inflation) and find their grocery and fuel bill skyrocketing. They are getting 'murdered'.

The debt bomb will explode. Is it now?

I don't know, but what I do know is what goes up, must come down. This will affect the price of precious metals and that even in a deflation, they protect wealth.


Articles of interest:

World Bank president: 'One shock away from crisis'

See article here
BBC News

Britain will not help to bail out the Euro

See article here
The Telegraph

Tuesday, April 19, 2011

All Shook Up

Gold in New Zealand dollars: $1897.48 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $54.87 per oz
Previous all time high: $48.58
per oz

Gold up, oil down, share markets down, bonds down, S&P threaten a credit rating down-grade of the US dollar, US dollar down, NZ dollar down, inflation up, euro down, debt mountains continue to rise...

It is all rather confusing and weird.

One commentator recently said that this isn't a market that you would want to trade in, or let anyone else trade in.

That's one reason why it may be worthwhile to restrict the amount of money you give to others to invest.

Investment managers often put funds in a diverse range of areas; property, shares, cash deposits. Someone once said that the reason they do this is they are hedging their bets against their own ignorance.

In these days of unrest and market manipualtion at the highest levels, how can even seasoned managers know what will happen next?

But if we take more personal responsibility for our hard earned, what would be the result? Would we be better off? Perhaps? Likely?

This is one reason to not sign up for the New Zealand Kiwi Saver scheme. Do those managers really have your best interests at heart? Remember, they make a commission, win or lose. And when you want those funds in 20 or 30 years, will they even be there?

If you take responsibility for your own investments, then you are more likely to have better control and more likely to do better due diligence on those investments. You earned it, you worked hard, why not trust yourself to invest wisely. You may actually win more than you lose.

A prudent approach based on sound money and cash may well be the answer today. But don't take my word for it.

It's your money, your wealth.

Monday, April 18, 2011

Tipping Point

Gold in New Zealand dollars: $1862.73 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $54.08 per oz
Previous all time high: $48.58
per oz
When anything gets too wound up, it is in danger of snapping. When too many forces push something to the edge, it will take just a little poke and it will fall.

The straw that breaks the camel's back.

North Africa and parts of the Middle-East are now in turmoil. Libya, Algeria, Tunisia, Syria, Saudi Arabia, Bahrain and Egypt have all experienced the tipping points for their countries. Some say this all started with a man setting himself alight in Algeria. From there, well, the rest is history.

What of the markets in general though. Since the crash in September 2008, those in charge of the economies around the world have attempted to allay the effects of the huge debt bubble created ,arguably, since President Nixon floated the US dollar in 1971.

But the problem hasn't gone away. The can has been kicked down the road. The ostrich has put his head in the sand. The debt still exists; and it's larger; much larger.

Under President Obama's reign, the US debt has increased by more than under all the other President's before him. First it was private debt, now it's public and government debt that is going parabolic. When this happens, we generally print money. Printing may be happening here in New Zealand too (I think this is arguable from figures I recently obtained from the NZDMO and the RBNZ; but that is for another day). Here's our debt clock. It is not good reading.

What will be the tipping point. I don't know, but what I do know is that it could be something we haven't thought of. Note this story out of The University of Texas. This fund isn't buying gold for investment purposes, it is buying gold because they can see the US dollar losing value fast. They are protecting their staff retirement savings from devaluing.

Could this small act be a tipping point ? Confidence suddenly about the wane?
Inflation in New Zealand is reported, just today, to be around 5%. Will this be a tipping point for us? I doubt it. But where might it come from? Another disaster? Heaven forbid. Anger at food prices? Perhaps.

When the tipping point happens, then people lose confidence in the dollar. They rush to exchange this paper with things that hold value. It's happening around the world in small pockets, but it's gathering steam. Here's what the people of Belarus are doing. Exchanging their roubles for gold as fast as possible.

Is the tipping point closer? I believe so.


Articles of interest:

Belarus Central Bank halts gold sales

See article here
West India

Who will save America from drowning in debt?

See article here
The Telegraph

Friday, April 15, 2011

Gold is Just Another Commodity

Staying on the commodity theme from yesterday. 

Is there an argument for gold being more than 'just another commodity?

Some analysts consider gold to be just a commodity and is traded as such; that gold has no monetary value (see Wednesday's post for a rebuttal). But the price of gold can be shown to correlate to the value of currencies and the trust that people have in their governments and bankers. If they lose faith in these two areas, then wealth will flow into hard assets. And the base line hard asset that is the best preserver of wealth is gold.

Moreover, gold could be acting more like the world reserve currency of late. Central Banks are now net buyers of gold, and countries like China encourage their citizens to buy and save in gold. This is done to preserve value and to exchange for goods and services later. No simple commodity acts like this. No one buys more wheat to store to use as money.

This article reflects what is happening with gold market at the moment. Read between the lines and you may see the benefit of gold right now. Jim Rickards on King World News:
“You have to put gold in a separate place and say it’s not an industrial input, it only responds to monetary vectors.  So those forces are still very much aligned in the direction of gold going up simply because the dollar is going down because the Fed wants it to go down.  That’s exactly what QE is all about which is creating inflation around the world causing other currencies to revalue their currencies upward which pushes the dollar down, trashing the dollar means that gold goes up in dollar terms.

And if it tips the other way and if the inflation doesn’t continue, if we get deflation which is also possible, we all know that gold does very well in a deflationary environment...Gold has had a great run, it has had a 10 year run and it’s hitting some new all-time highs recently and so people naturally worry about whether it’s going to turn around and collapse, is it a bubble?  It is absolutely not a bubble and the reason I say that is that when you talk to institutions, I’m talking in the $100 billion and up category, they either have no gold or they are allocated like 1%, 1.5%...If anything they are under allocated and they are catching up.

What’s interesting about the Chinese is that they need gold and they know it but they are also very savvy, they are very sophisticated.  They understand the potential market impact of this and so what they are trying to do is acquire gold through mining.  They are mining their own mines inside of China as fast as they can.  They are reaching out to places like Myanmar, a lot of people know this formerly as Burma.  They are building railway connections into Northern Myanmar so they can move infrastructure in there and take the gold out by land route or using the railroad.  So they are doing everything they can on the mining side. 

But when you take gold from mines, you bypass the market.  I mean you get the gold, but if you control the mines you are getting it at cost...instead of $1,400 an ounce and that gold never hits the market.  Can you imagine if the Chinese came into the London market with an order for 1,000 tons of gold?  Gold would double overnight, so they are smarter than that.  

Having said that, they are opportunistic and if gold pulls back there is a bid there.  So I think the Chinese bid is part of what is keeping a floor under gold.”
We can argue all we like as to whether gold is just a commodity; that it is used as one and that it's price reflects that. As we see in the above article, large investors are seeing the difference and learning fast.

Will Joe Sixpack learn before it's too late and before his wealth is stolen.

Articles of interest:

Gold and silver market trends for 2010-GFMS
See article here

Global banking system 'living dangerously'

see hereNZ Herald

Thursday, April 14, 2011

Commodities and My Budget

Reality often stumps the official figures. The statistics that are relayed to us about such matters as inflation and house prices don't seem to portray what is really happening. The people on Main Street with the middle-class incomes and the middle-class expenses are not fooled.

Since August, 2010, commodity prices have been on a tear. The increases have been notably parabolic since the US Federal Reserve decided to print more money with their Quantitative Easing 2 (money printing) scheme. Prices that increase in the spot markets usually take about 3 - 6 months before they translate to the Supermarket shelves.

This is now beginning to happen in New Zealand.

In New Zealand, the official inflation rate is touted as being around 4%. But what are we actually looking at? Inflation is measured on a basket of goods and services and is adjusted for the likes of hedonistic qualities of some goods. For example, if the iPad 2 is the same price as the iPad 1 (which it is) then their must be some deflationary aspect going on, therefore this creates downward pressure on the inflation rate. But technology is always finding new efficiencies in production. It skews what is actually happening.

In the USA, if the old way of calculating inflation is used (in 1980s) then inflation is more than 10% as opposed to the 3% currently quoted. The method has changed in NZ to.

Change the method, fool us even more? I wonder. Without doing the sums, maybe our inflation rate is much higher than reported.

But as I said above, are we fooled. We are the ones buying the food each week and noticing the shopping basket getting smaller, but the prices getting larger.

One of the reasons given for the latest riots in the middle-east (and noticeably France and Britain) are because people are finding it more difficult to pay their food bills. Food availability has a most terrifying affect on the psyche of people. It's called the survival mentality, and politicians better watch out if it gets too wound up.

Naturally, governments do not want reported inflation to be too high. This causes a demand for higher wages and causes higher interest rates on their (our) debt. Not good for the bottom line.

If you can fool the punters long enough, then the government can continue to spend to oblivion. It can afford to borrow for programmes in cannot afford (and maybe to gain the votes it needs)

But for how long will we be fooled? How long will we remain silent? We don't want people to suddenly snap in desperation. We have all played a part in the spending spree of the 'naughties' (2000 - 2008) and must all play a part in the solution.

That means spreading the pain evenly and looking out for each other. Times are going to get tough and we don't want to see what desperation can do.

Articles of interest:

'Inflation? Well... iPad 2 costs the same'
See article here
The Straits Times

New Zealand Inflation Calculator

see here

Wednesday, April 13, 2011

The History of Money - Gold, the Raw Material

(courtesy of the British Museum, London)

This slide alludes to a couple of the important facets of gold that make it the most suitable metal to be used as money.

The Mining of Gold.

I don't pretend to be anywhere near an expert on gold mining. But gold is scarce. There is less than one ounce of gold per person on the planet.

It is more difficult to find sources of gold now. One hundred years ago, in the Yukon, for example, you used to find nuggets lying around on the ground. Now we need to dig deeper into the earth to find it, and that is more expensive. Peak gold is being mentioned more in gold mining circles.

In the world now there are around 130,000 tonnes of gold that has been mined. Most of this is still intact, although some has been lost through industrial usage.

It can take about 5 years and a large investment to get a new gold mine to production. It is estimated that there is around 60,000 tonnes underground in the known deposits.

For want of labouring the point, this is critical to understand what money is.

With gold being so scarce it means it cannot be easily mined to increase supply. Like paper money it cannot be created with the push of a computer's 'enter' button. This is why it will maintain your wealth.

Here again is the excerpt that I placed in this blog last Thursday describing why gold is used as money.

Why Gold

• Gold requires no government to prove it’s valuable. It has been the “Money of Kings” for thousands of years of human history.
• Gold retains buying power. Unlike fiat currency, Gold retains its ability to purchase goods over time.
• Gold can never go to zero. While “paper” relies on a government or financial institution to give it value, Gold has intrinsic value, and Gold has no counter-party risk. Regardless of what happens as financial institutions, financial systems, and even governments fail, Gold retains its value internationally.
• Gold is liquid and easily traded.
• Gold makes large amounts of wealth easily transportable, because it has a high value for its
• Gold has served as money because it is divisible; you can divide it into coins or re-melt it
into bars without destroying it or reducing its value.
• Gold is nearly impossible to counterfeit, as genuine Gold is easily recognizable.
• When measured by weight, Gold is easily countable and verifiable.
• Gold is not subject to decay, rot or rust.
• Gold is no one’s liability.
• Gold depends on no one’s promise to pay.
• Gold cannot be inflated (you can’t print more of it).
• Gold is scarce. There is less than one ounce of Gold per person on the planet.

(excerpt taken from “The Global Insider’ Newsletter. See here)

Articles of interest:

Buy Pullbacks in Gold
See article here
King World News

Brother, can you spare a trillion?
See video here

Tuesday, April 12, 2011

The History of Money - The Spread of Standards

(courtesy of the British Museum, London)

The critical phrase in this narrative is, “When users were confident that coins had been made strictly according to a recognised weight standard, payments could be made without reweighing them”

Here the word ‘confident’ is the most important. If everyone under a monetary system is confident that the standard is recognised as unchangeable, then they will  undertake economic activity with some certainty.

However, when confidence starts to fray around the edges and begins to disintegrate, then what we get is a fast movement of money around the system that can eventually lead to high inflation or hyper-inflation. This is sometimes called the increase in the velocity of money.

A wheelbarrow of fiat money used to buy a loaf of bread in Weimar Germany

Hyperinflation is primarily a psychological event. It's when faith in the confidence of money disappears and purchases are made at a quickening pace out of fear that your money is losing value faster and faster.

This is not a happy place to be. Weimar Germany went through this phase in the 1920s. It was said that those who held precious metals, especially gold, were able to take advantage of this and purchase assets at rock-bottom value.

Hyperinflation is a possibility when fiat currencies (currencies backed by nothing but faith) are used. Throughout history all fiat currencies have gone to their intrinsic value - zero. 
Will hyperinflation happen again? How soon?

Articles of interest:

See article here

Monday, April 11, 2011

The History of Money - Setting the Standard

Here's the picture I took of the first important aspect of how to understand what money is.
(courtesy of The British Museum, London)
Standards are the most import aspect of what money is. If there isn't an accurate measure, on an ongoing basis, of what a good or a service is worth, then markets will function in an environment of confusion.

Throughout history, it could be argued, when markets used gold or silver standards (as the basis of measurement) then those markets functioned well. People knew that the value of what they were buying and selling would be the same yesterday, today and in the future. They also knew that if they added value to those items, then they could make more money.

So stability of the weight or measure is key to functioning markets. It may also be a justice issue if those weights and measures are arbitrarily changed. Inflation can be unjust when standards change and it eats away your hard earned cash.

This has occurred in history for as many times as there has been attempts at setting a metal standard. The latest being the dropping of the Bretton Woods gold standard by President Nixon in 1971. Governments cannot keep there noses out from controlling economies for their own gain.

From 1971, all currencies have been floating against each other and value has been fluid (to say the least). This is why we see a huge correction coming in regards to debt.

Will we ever get back to just weights and measures? Will this include gold or silver as standards? What do you think?

Friday, April 8, 2011

Thinking the Unthinkable

I am suspending the series on the History of Money for today as I felt compelled to respond to an article in our main daily here in New Zealand about our debt situation.

Here's the paragraph that got me all-a-flutter:

Thinking the unthinkable

Now for something a little more controversial.

- One solution for getting rid of debts you can't afford to pay is printing money.

This a last resort, but it is not unprecedented and it's something that the leader of the western world (America) is doing right now.

The Reserve Bank could buy these bonds currently being issued by the government and essentially inflate the debt away. That punishes both local savers and foreign creditors (who hold our debt in New Zealand dollars) but it does fix the problem of indebtedness. It would also immediately cause a slump in our currency.

This would have been unthinkable a few years ago.

But when it's good enough for America, maybe it could be good enough for us too.

I realize that Bernard Hickey is posing ideas to prompt discussion, but the QE, or money printing, approach is the worst of a bad bunch.

For one thing it simply 'kicks the can down the road'. It puts the debt problem off for another day and another generation. The debt isn't dealt with, just paid off with phoney money of no worth. Interest rates and costs will rise.

And don't get me started on the possibility of high inflation perhaps bordering on hyperinflation.

New Zealand can devalue our currency by allowing the Reserve Bank to buy our own debt, but the consequences of this could be enormous. Debasing a currency kills the middle-class and retirees.

Those who have saved will be punished. Our older folk who need funds to survive in their dotage will find they have nothing. Their hard-earned savings stolen through inflation. Just research what happened to savings in pre-world war two Germany in their hyperinflation.

And when has printing money ever worked? Just ask Japan over the last 20 years, or the US since 2008. No great changes to the positive in those economies.

And we are hardly the US who can print money at will and then threaten to park an aircraft carrier off the coast of any country that complains about their loans to them being devalued.

Debt isn't all bad, especially when it gets invested into creating greater productivity. But most of our new debt has gone into the housing boom. Not much productivity there. A much smaller percentage since 2008 has gone into business lending where wealth production occurs.

New Zealand needs to decide how to restructure the debt. There are a few choices:
  • Default on the debt
  • Restructure the debt
  • Use Quantitative easing (print or inflate the money supply)
  • Reduce the debt by paying it down through austerity measures.

None of these choices are easy.

I don't believe we can continue to borrow money to pay for welfare programmes. But how will we support our needy and vulnerable people? Any ideas? Do we go back to a more caring society based around small communities?

There comes a day when we will not be able to pay the interest on our debt. Much of the developed world is getting to this limit. New Zealand is now borrowing about $400 million a week. Perhaps our limit is here.

There is no easy way out for a high debt nation. We have borrowed today to pay for stuff that we couldn't afford. We bought forward our spending and now we have to pay for it.

The Great Correction continues...
Articles of interest:

How the foreign profit and interest drain has made us poorer
See article here
NZ Herald

Gold: 40 years of turmoil
A helpful review of the history of gold here
The Telegraph
Silver hits $40...


Thursday, April 7, 2011

The History of Money - Part One

Over the next few days, I will comment on a display I saw at the British Museum in London.

It’s a display about the history of money, and it explains what money is, why we need it, and why we need it to be a reliable weight and measure of our labour.

But I’m going to start by using an excerpt from a newsletter describing why gold is money; especially with reference to the paper money (or fiat currency) system that we have now.

This may seem a bit back-to-front, but if you keep the reasons below in mind, while money is explained over the next few days, the reason why gold (and then silver) is money may become clear.

Gold is the opposite of paper money.

• Gold requires no government to prove it’s valuable. It has been the “Money of Kings” for thousands of years of human history.
• When people start to realize that paper money is devaluing (usually by noticing price increases in such things as food in the grocery store), history shows that people always trend back to Gold and Silver.
• Gold retains buying power. Unlike fiat currency, Gold retains its ability to purchase goods over time.
• Gold can never go to zero. While “paper” relies on a government or financial institution to give it value, Gold has intrinsic value, and Gold has no counter-party risk. Regardless of what happens as financial institutions, financial systems, and even governments fail, Gold retains its value internationally.
• Gold is liquid and easily traded.
• Gold makes large amounts of wealth easily transportable, because it has a high value for its weight.
• Gold has served as money because it is divisible; you can divide it into coins or re-melt it into bars without destroying it or reducing its value.
• Gold is nearly impossible to counterfeit, as genuine Gold is easily recognizable.
• When measured by weight, Gold is easily countable and verifiable.
• Gold is not subject to decay, rot or rust.
• Gold is no one’s liability.
• Gold depends on no one’s promise to pay.
• Gold cannot be inflated (you can’t print more of it).
• Gold is scarce. There is less than one ounce of Gold per person on the planet.

(excerpt taken from “The Global Insider’ Newsletter. See here

Wednesday, April 6, 2011

Preparation is key

Ants are good at this. In times of plenty they squirrel away food aplenty for a time they know will be fraught with hardship...winter.

In a recent trip to Panama, my daughter and I watched and marveled as leaf-cutter ants crossed our path in a line of focused industry. Ants carrying huge weights of leafs on their backs, concentrated on the goal of reaching their nests to store up food.

What is our attitude to preparation? How would we cope in a crisis, whether that be man-made or natural.

As you may be aware. Christchurch, in New Zealand, suffered an horrendous earthquake in February. Interestingly, a poll was conducted last week as to whether people in that city are now prepared with basic survival needs in case of another catastrophe. Only 50% responded that they were. That's quite high, even taking into account that people are still getting over the trauma of this.

If there is a major financial meltdown in the near future, how prepared are we and what can we do? Here's a few ideas These are not at all exhaustive. If you can contribute some comments, then feel free.

1. Have some cash on hand. At least a weeks worth, more if possible.

If the banking system fails and the banks close for a period of time, cash will be king. Even having some small tradable pieces of gold and silver on hand for bartering will be useful. Who would accept these? My thinking is, in a crisis, the true meaning of what money is will grow quickly and gold and silver will be accepted very easily by many traders, especially those from Asian backgrounds.

2. Have at least 4 weeks food available

3. Have something to cook on.

We have just purchased an 'Ozpig'. This is a portable fire oven that is light and easy to carry and can heat and cook food. If you have a BBQ, then make sure you have gas.

4. Get a survival kit together.

This would include some water and ways to filter water. Tools, batteries etc. There are many sites on the internet to help you get these items together (see below)

You may feel this is all a bit alarmist. But being ready is to feel more secure, especially if you have dependent children to look after.

For a very good summary of what you may need to do to prepare, go to

Happy leaf-cutting!

Tuesday, April 5, 2011

What is the Plan?

New Zealand finds itself in a precarious position with its finances.

We are spending too much for the income we are producing. We are heavily in debt.

Privately, we all borrowed from the future to pay for things now, like houses and cars. The house was our ATM. Just go to the bank and get more cash ‘on the house’.

Publicly the government joined in the good times and increased the size of the public sector and embarked on paying for large infrastructure schemes.

It may be that ordinary NZers, living with their ordinary pay packets, are beginning to wise up to their own large debt issues. Their discretionary spending is drying up and even their core spending on basics like food and petrol is taking a hit. All to pay down debt and to survive week by week. Most NZers wouldn’t have more than a week of savings to live on if they lost their jobs. And that’s probably being optimistic.

But what about our government? There is talk of austerity supreme in the budget in May. This is good is in some senses, but with the way the system works now, it may have serious repercussions.

If the government cut spending on social welfare, then lookout for growing social unrest. If they cut too many jobs in the public sector, then these people will find it difficult to get jobs and the effects will be seen on the government’s bottom line.

There are no easy answers for NZ. We can’t print money (QE), like the Europeans or the Federal Reserve Bank can, to cover our new government debt and to re-finance the old debt rolling over. We have to sell our bonds to people who love us! The Chinese, the Europeans, and large private funds.

But the world is changing fast. Japan won’t be buying. To the contrary, they will be selling their US Bonds, and other assets, to pay for rebuilding. The Chinese may come to the rescue with their US dollar cash, but do we want more Chinese ownership? Who’s going to buy our debt? Is the last resort to default? This would be calamitous. Watch the NZ dollar tank in that scenario.

Maybe there is time for us to grow our way out of this. To repay debt and cover interest payments. We are a country rich in agricultural resources and brain-power and also mineral resources. The time to harvest fossil fuels is not yet over. We have good educational standards and great intellectual capital. But time is short.

With $350 million  per week borrowing and growing., there are no easy quick-fix plans.

But what is the plan? Do you have any ideas?

Monday, April 4, 2011

Are you still into Gold?

This is a question that I get reasonably often. And it’s a bit puzzling.

Along with the ‘Why do you buy gold, after all,  you can’t eat it’. But an answer for that question another day. Or perhaps another universe.

The first question is puzzling because I was usually not aware that these people even knew I had purchased any gold. Where did they hear this? But the most perplexing part of this is why they haven’t talked to me about it before?

I think there may be a number of reasons. We Kiwis are a shy type of bird and don’t often march up to someone, even if we know them well, and ask them about how much money have you have made or lost lately. Kinda not polite.

But I think there may be a more ‘disturbing’ reason behind the question. People are waiting for the right time to jump into buying gold and silver. Waiting for that perfect moment when they know definitely that they will make money.

The right time.  Now there’s the investor conundrum in three words.

Tell me the exact right time to invest in anything and I would probably own all the resources that exist. But don’t worry, I’d be a great World Dictator and be graciously benevolent and give you a ‘little’ bit. Maybe.

So with precious metals, when do I consider the right time to invest or buy. The advice I have taken, and that has worked for us, is to use the ‘dollar cost average’ approach. That is you buy regularly and often when you can afford to.

But the typical new investor will think this way:

I will wait for the price to drop and then I will buy.
The price drops
Oh, I will now wait a little longer as the price has dropped and I don’t want to jump in now as it might dip further.
The price goes up
Oh, I think I’ll wait till the price dips again like last time and then buy some.
The cycle continues
The Investor never buys gold and silver

You see in precious metals you need to look at the fundamentals behind the market. Prices will fluctuate considerably at times. Your fear may get to you an you may never actually start to save in gold and silver. Look to the long-term and remain strong. If you do your homework and listen to the right people, you will feel less fear about what you are doing.

The bottom line for me is this. Government can 'create' money with computer bits and bytes. Gold and silver have been money for 5000 years and cannot be created by anyone.

Friday, April 1, 2011

Houses and Understanding

At the end of a bull cycle in any asset, there is usually a huge run-up in the price of that asset.

I talked a few days ago of the reasons why gold and silver are not yet in a bubble and are not even near the huge (parabolic and manic) run-up in prices near the end of a bull run (mania phase).

But houses are a different story.

As you can see by the above graph, house prices in New Zealand may very well be at the ‘Return to Normal’ phase. If so prices may be ready for a large fall.

In the mid naughties (2004-2007), many Mum and Dad investors believed the hype in the ‘media attention’ stage and threw their hard earned (and future earnings through borrowings) into property. The media and property analysts said prices will always go up. This was a sure bet for your retirement security.

An article in “The Economist” magazine stated the New Zealand house prices are still 20% overvalued. That’s around $90,000 on the median house. They are also becoming unaffordable to the extreme. With inflation rising, incomes stagnant and jobs disappearing, prices are set for a fall.

In New Zealand the housing market is stuck. Sellers and investors, who do not want to lose badly, are holding on to their quoted selling prices. However, fewer people are buying. They are hoping that prices will drop. Stale mate.

The term ‘never invest in something you don’t understand’ comes to mind. Just jumping onto an investment to make money without looking at fundamentals is highly risky. Look at the long term trends and what is happening around that asset class. The internet can provide a huge source of ‘contrary’ information that can help you.

Understanding what you are investing in is key. Don’t be drawn in by spruikers and their captivating talk. Do your homework and never rush in.

See you on Monday!