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Got Gold?


$20 or $30 bucks downside risk is insignificant compared to what we were just told.



It's been a while since I put much down in writing because I have spent the best part of the last three months getting the new AgAu Global Producer Fund regulatory approvals and all that sorted out. All appears close to resolution for a March 1st launch, but lawyers are still running with the ball. Not too much has happened in gold and the range has been pretty tight at $30 bucks or so. We do look like breaking out of the Golden Triangle and I want to see a 655 print before I get too excited at present.

I watched the State of the Union address with typical Aussie bemusement, but it got me thinking too. Lisa, my little brother and I had a very robust, full and frank discussion about it, parts of which I thought worth sharing. Take it for what it is.

Notwithstanding the obvious theatrics, what really impressed me was that Mr. Bush reckons the budget was soon going to be balanced. At the same time, so much money was going to be thrown at this or that, tax breaks for this, medical insurance for that, blah blah blah. It all sounds so good and everyone is gonna be a winner.

Yet, and this is the part that I just don't get, there was no mention of spending cuts or tax increases or even hints of belt tightening.

I'm no accountant, believe me, but this just doesn't add up, especially when the starting point is negative $700 Billion. I am of the mistaken belief that if you spend more, then you've gotta earn more to keep a balanced budget and, if you're already in a big hole, you've gotta earn more again and spend less again. Maybe I shouldn't have slept through Economics 101. What did I miss?

Clearly this speech was no more than a carefully crafted PR exercise, aimed at instilling confidence and promoting to all that everything is just fine. This is just what is required from the leader of the country who issues the reserve currency of the world. It was mostly lip service to the bullet-point issues of concern. All of it was buzz words and motherhood statements and appeals to people's fears and dreams. It looks more like a political satire than actual politics. But it's just not funny. How could I suggest such heresy?

Rather than just dismiss the whole thing as extreme hypocrisy, maybe we should have a look at the Presidential scorecard over the past six years, before jumping to what appear to be some damning yet logical conclusions.

Initially one only has to look at the U.S. Dollar to get an idea of how things are traveling from an outsider's perspective. The currency of a country is the best indicator of the confidence in the government and its policies going forward. Take a look at Zimbabwe if you need a recent example. Under Mr. Bush, the dollar has fallen by close to 50% versus the Euro and just about any other government printed money. Gold, the real money, has more than doubled in U.S. Dollar terms and is just waking up, in this writer's humble opinion.

This is all a result of current and announced policy and action including the excessive monetary expansion by the Federal Reserve to fund all the domestic social programs and of course the military costs associated with the endless War on Terror. It is called Monetary Inflation and the results will only get worse for U.S. Dollar holders/earners. The market has spoken and will continue to speak loudly via dollar depreciation as things remain the same and previous mistakes and misjudgments are compounded. That the Fed won't publish M3 reports any more so we can monitor just what is happening with monetary inflation is devious at best. Monetary inflation has allowed people to incur massive debt via equity withdrawal in their properties, all because of a frightening property bubble. There are no savings but everyone feels wealthy. This must end in tears for many as this increased "wealth" is illusory at best. No one can print their way to prosperity.

The $50 Trillion dollars in unfunded future Government liabilities didn't get much mention nor did any proposed solution to what could be the straw that breaks the camel's back. One wouldn't want to draw attention to the problems that are of real concern. When Mr. Bush was talking about how good his economic management has been and will be going forward, I immediately remembered instances of financial chicanery - like "deficit management" via the placement of IOU's in the Social Security tin by the current administration (let's call them Government bonds that aren't counted as such, for debt reporting purposes. How Enron-esque!). These IOU's have been used previously when Government ran into the old "debt ceilings" but hey, that's down the track debt, not the current administration's problem.

The U.S. Government must increase taxes, reduce spending, rely on the benevolence of its creditors or continue printing more money. Surely, the USA does not intend to default on its debt twice in 40 years. And the silence is deafening.

I don't want to go near Medical Insurance and costs for Education because I don't experience that pain down under, but everyone I've talked to in the U.S. tells me how these costs have risen greatly in the past five years. These rising costs are hurting many and reducing consumption ability. Tax cuts and breaks for this is just a government handout to mask this pain, to be paid for by future generations. This is more monetary inflation at work. I've said many times that we are getting inflation of what we need at the same time as deflation of what we want. The big screen TV is now a third of what it cost a few years ago. Yippee. But who can afford to go to the hospital? Someone is gonna have to pay the bills, eventually.

The Current Account deficit under Mr. Bush has grown exponentially with no slowdown in sight, certainly there was nothing in this recent address that was gonna slow the bleeding. National debt has grown by over $4 Trillion dollars since Mr. Bush took office and the yearly running rate is getting closer to $1 Trillion a year without blinking. Something's gotta give.

Congressman Ron Paul from Texas hits the nail on the head in his recently published thoughts on gold and monetary inflation:

"A sharply rising gold price is a vote of "no confidence" in Congress' ability to control the budget, the Fed's ability to control the money supply, and the administration's ability to bring stability to the Middle East.

Ultimately, the gold price is a measurement of trust in the currency and the politicians who run the country. It's been that way for a long time, and is not about to change.

If we care about the financial system, the tax system, and the monumental debt we're accumulating, we must start talking about the benefits and discipline that come only with a commodity standard of money -- money the government and central banks absolutely cannot create out of thin air.

Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.
" (All of this discussion paper can be found here.)

But, having watched the State of the Union address, I reckon Congressman Paul is peeing into the wind. There is no one challenging anything that is said. Has the U.S. become so caught up in the "respect for the Office of President" that it has forgotten how to participate in Democracy? Maybe it takes an outsider to point this out. In Australia our elected representatives cheer/jeer/curse our prime minister and treasurer while they speak in parliament, even during the televised reading of the budget or other "national" televised political events. Dissent makes democracy work. There have been punches thrown in Parliament, such is the vigor of our democracy. Our House is nicknamed the Bear Pit for good reason.

There's a passage in my brother's Architecture thesis of which I am currently reading, describing the way that Julius Caesar moved the speaker's podium inside the Forum so that he was no longer surrounded by the people he was talking to, where he could be challenged. He spoke from one end of the space so that most people were too far away to hear him properly, and he couldn't hear their protests or dissent. "The orator was meant to appear, to point a finger, to clutch his breast, to spread out his arms: he was to look like a statesman to the vast throng who could not hear him, and who had lost the power to act on his words in any event (Aaron Betsky, 1995)." It was a deliberate move to dis-empower people. Times haven't changed much, have they? When was the last time "reporters" asked some seriously hard questions (or got the chance to) and got a reasonable answer? Why are protestors and objectors kept out of the way and out of earshot, all the time? Hmmm.

Mr. Bush went to War against Iraq ostensibly misinformed, under prepared and massively under funded. Currently the cost of the war is over $360 Billion dollars yet a few years ago he axed all the people (dissenters) who said it would cost much more than he told us all, and these dissenters were all very wrong on the low side! Military planners and Generals who said that it would take many more soldiers and time than he had planned, were silenced, and retired. Mr. Bush now demands more men and more money to fight something he declared victory over in 2004. Now he argues "Trust me this time, it might just be winnable if we have a bigger go at them. All we need is more money, more soldiers and more time." Fair dinkum, is this for real?

Regarding Mr. Bush's assertions pertaining to the whole energy mess and the U.S. reliance on imported Oil, Lisa pointed out to me that she'd been hearing the same old same old since the '70's, with bugger all to show for it. Back then VW Bugs and Diesel Rabbits were the fix-it. Nowadays with everyone driving gas guzzling SUV'S and Hummers and the like, the way back is so much harder. Why should it be different this time? Talk is very cheap. It was encouraging to see acknowledgement that the U.S. economy could be held to ransom by the oil producers of the world and that is a risk that is hard to address over any timeframe. No mention was made regarding the threat that Foreign U.S. debt holders hold over the U.S. Government and the economy, via potential bond and currency sales forcing higher interest rates on a country that cannot afford it. The interest bill alone on the U.S. Government debt is in the hundreds of billions even with such low interest rates as we currently enjoy. Furthermore, discussing Greenhouse emissions and associated concerns sounds pretty hollow when the U.S. and Australia are the only non signatories to the Kyoto Agreement. Actions, not words, are required to alter perception and reality.

Once upon a time a political audience would only applaud a speaker if it agreed with what is said, and 'boo!' or speak out if it disagreed or had concerns. That is what a senate is supposed to be. To keep spending more than is earned, hand out more tax cuts and pretend everything is alright and on track defies logic. Deficits do matter, Mr. Cheney. Economic history says so. Making unsubstantiated claims about energy conservation and oil use reduction, when the exact opposite has been done for the first three quarters of his tenure is somewhat perplexing to say the least.

Confidence is built on a base of honesty, transparency, credibility and past performance. How can anyone have confidence in the administration, and therefore the dollar, based on those individual components or in the whole? Confidence in fiat money is no different. Was anything spoken to instill confidence to any informed observer? Not a chance, in my opinion.

I spoke to numerous people around the globe after the speech, most working in the financial markets. Many responses are unprintable. There was unanimity on one point - that show last night was not a good advertisement for the U.S. Dollar, no matter how you cut, slice or dice it. And the whole world was watching. I saw and heard nothing that could foster any confidence in the U.S. Dollar going forward. More of the same means more of the same. Got Gold?

I went out and bought some more gold for the kids. $20 or $30 bucks downside risk is insignificant compared to what we were just told.

Just the way I see it from across the river.

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