I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
– Thomas Jefferson
Gold Will Soar as the U.S. Dollar Bubble Bursts
I haven’t taken the time to write about gold in length as of late because quite frankly there is so much quality stuff being written about it at this point. In addition, the understanding of the monetary system and the dangers of fiat money in general is so much better than it was even a year ago. Nevertheless, while the understanding is considerably better it remains poor. While it has become a bit cliché, the statement that “gold is not going up but the dollar is going down” is the most important concept for every investor and indeed citizen to understand at this point. Completely wrapping one’s head around this concept may very well be the difference between economic survival and complete destruction in the years ahead. For when you truly comprehend this notion you stop thinking about gold in terms of its price and you can then make a rational decision about where it is going. Gold is not up 23% this year to $1,345/oz, rather the U.S. dollar has depreciated by 23% versus the world’s neutral money supply, gold. As we all know by now, there is no limit to the amount of money Banana Ben Bernanke can or will print. Thus, gold’s theoretical upside is infinite in a purely paper money world. Once you understand this, you recognize that gold is not the bubble but rather the biggest bubble on planet earth today is the U.S. dollar itself.
The Dollar Bubble Grows as FX Reserves Surge Globally
French enlightenment giant Voltaire said back in the 18th century that “paper money eventually returns to its intrinsic value – zero.” Indeed, this is the basic economic history of the world and not really such a profound statement, yet most people in the United States today have no idea what sort of immovable force they are fighting against by storing a their “wealth” in increasingly worthless pieces of paper backed by nothing that we call U.S. dollars. One of the most bullish factors behind the current gold bull market and one that will drive the price multiples beyond where it stands today receives much too little attention. While a lot of attention is placed on the low percent of FX reserves that are held in gold by the BRIC nations and other fast growing emerging economies what is not discussed is that rate at which these FX reserves are growing in the first place. While the fact that China’s FX reserves soared to $2.65 trillion as of the end of September made plenty of headlines, not enough people pointed out the fact that this represents a 17% year-over-year growth rate. The implications of this are clear. Everyone knows that the BRIC nations and many others own a woefully inadequate amount of gold in tonnage terms, but especially with respect to a percentage of total FX reserves. While the latest Chinese gold data is only from April 2009 and the amounts are surely considerably higher, this is beside the point I am trying to make. The key point is that if it’s FX reserves are growing at 17% then China has to increase its gold reserves by that amount just to keep the % FLAT. Forget about increasing it. It’s not just China though. It is the whole world. Russia’s FX data recently came out and guess what? FX reserves soared 19% year-over-year to $503 billion. Russia provides more up to date data on its gold reserves and they are actually up 27% year-over-year. Nevertheless, Russia has previously stated that it wants it share of gold to reserves to get to10%. Despite the tremendous buying the percentage has only been moving up slowly and currently stands at 6%. This is a function of the dollar bubble and the impact it has had on Russia’s FX reserves.
What investors seem to overlook is the fact that when countries fight back in this highly destructive currency war they print their own currencies and then buy dollars to keep their currencies from appreciating too rapidly. Let’s take a look at Brazil. They have been in the news lately as the Finance Minister has made a stink about the U.S. policies with regard to the way the FED is defiling the dollar. They have been all over the market trying to prevent a more significant appreciation of the real. Well guess what? As of the latest FX data they now have $283 billion in reserves, which represents an incredible 21% increase year-over-year. Unfortunately for Brazil, they basically have no gold and don’t appear to be buying. Perhaps the leaders over there just don’t have a clue, or perhaps it’s because they don’t have nuclear weapons. If you take a look at the countries with massive and growing FX reserves the ones that are actively and aggressively buying gold have either nuclear weapons or some sort of significant military deterrent to the U.S. Look at Japan and South Korea on the flip side. Japan has about 3% of its FX reserves in gold and South Korea has 0.2%. More importantly, neither nation has been adding to their stockpiles. While South Korea made some comment about adding gold they probably will have to think twice considering the troops we have in their backyard.
Sadly enough, many of the fastest growing countries in the world simply do not have the geopolitical might to shift some of their increased dollars into gold. At least not officially or out in the open. This is probably partly why they are so angered by U.S. dollar policy. Essentially we are stuffing ticking time bomb assets into their FX reserves (dollars and dollar related assets) and they are forced to accept these soon to be confetti “assets” as payment. Jim Rickards wrote an excellent piece a while back where he likened U.S. treasuries to opium that the British forced the Chinese to accept as payment during the 19th Century. The article is excellent and can be read here http://www.dailypaul.com/node/144070.
Buy Physical Gold While You Can
Fortunately, we as American citizens do have the right to buy as much physical gold as we want at this stage and now is the time to do so. By saying this I do not mean that gold cannot go down from here. Of course, if the markets experience a huge spasm after the elections and the next Fed meeting, gold could certainly pullback violently. The people that I am trying to reach today are those that have not yet bought a reasonable amount of physical gold (not GLD!!!). This is because I think the window of opportunity to buy at anywhere near the current level is fast closing. Pretty soon, it is going to be clear to everyone exactly what is being done to the dollar and what this means. Think about it this way. There are roughly 230 million adult Americans around today. What if each one of them realizes that what Thomas Jefferson warned about in the quote at the top has already happened. Go back and read that quote and think about the Fed, the bank bailouts and the foreclosure scandal. This is the oldest trick in the book and we continue to fall for it while mindlessly watching Snookie prance around on the Jersey Shore. What if this awakening caused each adult to go out and buy just ONE ounce of physical gold. This amounts to over 7,000 tons!!! This is only slightly below what the U.S. government supposedly has stored in Fort Knox and elsewhere. It is 2.8 times the amount of gold that is mined each year. While I understand that this scenario is unlikely, we are only talking about one nation and we are only talking about one ounce each. Even if the richest 10% bought one ounce it would still be 720 tons, or 30% of annual supply. You see the math just doesn’t work at these prices. People are climbing the learning curve and doing it fast. If you wait until the tipping point there is a very good chance you will never be able to get your hands on the supply you desire. Good luck and use your head that’s what it is there for.
All the best,
Mike
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