Let's Legalize Competing Currencies

By Ron Paul

Before the US House of Representatives, February 13, 2008

I rise to speak on the concept of competing currencies. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Money makes the transaction process far easier. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes.

This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be portable, that is, easily carried; it should be divisible into units usable for everyday transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange.

Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses.

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IMF Gold Sales Don't Change Anything

Boris Sobolev writes the following:

"Many pundits have been calling for gold to correct since October. But the rally in gold has been strong, steady and without any sizable corrections. Much money is still sitting on the sidelines, waiting for a cheaper entry point. It is quite possible that this entry point is coming soon as the G7 has just agreed to allow the International Monetary Fund (IMF) to start selling a portion of its 3,200 tonne gold holdings to cover its running deficits. The details of the sale will not be known until April, but the most mentioned figure for the total tonnes up for sale is 400 or about one eighth of total IMF holdings.

It is difficult to guess gold’s reaction to the news, but it is clear that the metal’s fundamentals remain sound. Paper money is in oversupply, gold is in demand by investors and especially countries looking to diversify away from the US dollar. Undoubtedly, buyers for extra gold offered by the IMF will be easily found. IMF sales don’t change anything."

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Casey's Daily Resource Plus - 12/02/2008

Precious Metals

Gold seems to have found a new level around which to gather itself, as it meandered either side of $920 during the New York session on Monday, before settling at $922.55/oz., up $4.35. Overnight, gold has been flat.

Unstoppable platinum had another monster day, propelled to a record close above $1900 barely two weeks after first breaching $1700, as it ended at $1934/oz., up $52. Overnight, platinum has pushed higher.

Silver spiked sharply from mid-morning through until noon, after which it backed off about 15 cents, but still closed at $17.40, up 29 cents. Overnight, silver is trending higher.

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How to Stimulate Yourself

The Bush stimulus has been approved. Scratching your head? Don't know what to do with this "free" money? I offer three suggestions:

1. Donate it to the Ron Paul Revolution or
2. Pay of your debt or
3. Buy gold, i.e. a Kruger Rand
   

I would defenitely not spend it. But hey, that's me. It's your (or someone else's tax) money. ;-)

Other suggestions are welcomed.

Words from the (Investment) Wise

by Prieur du Plessis


The past week witnessed a turnaround in sentiment as renewed recession fears dominated investors' actions. Stock markets across the globe were subjected to selling pressure, while credit spreads scaled new highs. "What the market giveth [the previous week], it also taketh away [last week]," was Briefing.com's very apt description of events.

A particularly weak ISM Services report and the specter of bond insurer downgrades further reignited recession concerns, and reminded pundits of the words of Lily Tomlin, the American comedian: "Things are going to get a lot worse before they are going to get worse."

Randall Forsythe of Barron's offered the following commentary: "The Mardi Gras that's lasted four decades for the American consumer is drawing to an end, if it is not already over. After Fat Tuesday comes Ash Wednesday, which is observed today, and is the beginning of Lent, a 40-day period of fasting, self-examination and renewal for Christians, analogous to Ramadan for Muslims or Yom Kippur for Jews. Lower interest rates are a palliative, not a cure, for the economy's woes. Time is the only healer. Economists call that time a recession, and it can no longer be avoided."

Before highlighting some thought-provoking news items and quotes from market commentators, let's briefly review the financial markets' movements on the basis of economic statistics and a performance chart.

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The Fed and The Sorcerer's New Apprentice

Uncle Sam Crying "Uncle!"

by Antal E. Fekete

Tertium datur

People tend to think in terms of black-and-white. Many of my correspondents think that either hyperinflation or deflation is in store for the dollar; tertium non datur (no third possibility given). I would say tertium datur. The third possibility is a hybrid of hyperinflation and deflation. I described this scenario in my previous article "Opening the Mint to Gold and Silver". It is possible, even probable, that we shall witness collapsing world trade and collapsing world employment together with competitive currency devaluations, as the three superpowers compete in trying to corner gold. The lure of gold is very strong. "There is no fever like gold fever" and, contrary to conventional wisdom, governments are especially susceptible.

A large part of the problem is that the Central Bank is helpless in the face of bond speculation. The Fed is no Sorcerer. It is the Sorcerer's Apprentice. It can pump unlimited amounts of "liquidity" into the system, but cannot make it flow uphill. As we shall see, new dollars flow to the bond market causing a lot of mischief there, instead of flowing to the commodity market as hoped by the Fed.

Up to now leading commodities have outperformed gold. That could change. A select few commodities might continue in the bull-mode for a time, although gold could easily beat them. Most other commodities might go into a bear-mode similar to that of the commodity markets of the 1930's. If that's what was in store, then most investors would be totally lost. They would be navigating without a compass. There would be endless debates whether the country is experiencing deflation of hyperinflation. Your motto in this hybrid scenario should be: "expect the unexpected".

Of course, the Fed will keep printing dollars like crazy. Few of them, if any, will go into commodities. Indeed, most of the newly created dollars will go into bond speculation. Why? Because commodity bulls are running into headwind and face grave risks. By contrast, bond bulls enjoy a pleasant tailwind. Bond speculation is virtually risk-free. Under our irredeemable dollar bond bulls have a built-in advantage. The Fed has to make periodic trips to the bond market in order to make its regular open-market purchases of bonds to augment the money supply. In order to win, all the bond speculator has to do is to stalk the Fed and forestall its bond purchases. This is the Achillean heel of Keynesianism: it makes bond speculation inherently asymmetric favoring the bulls, and that will ultimately derail the economy on the deflation-side of the track.

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Ron Paul on the coming Economic Collapse

Click here to watch the full interview 38.35min

Taking a Dump

Ambrose Evans-Pritchard is reporting that Switzerland's central bank is to dump a further 250 tons of gold. The stink you smell is manipulation.

There are two ways in which you can look at this situation:

1. Gold has continued to rise over the last seven years, amid Central Banksters dumping their Gold reserves. Without this overt manipulation, who knows where the price of Gold would have been today? Central Bank Inflation will continue to play a major role over the next couple of years. Trying to hide it by pushing down the price of Gold , will have the opposite effect on the price of Gold in the long run. You can fool some of the people some of the time, but you can't fool all of the people all of the time.
2. Huge sell-offs like these might drive the price of Gold down, but inadvertantly, that creates an opportunity to buy more Gold at a lower price. Also, remember that the cost for mines to produce an ounce of Gold has gone up immensly. If the price of Gold is too low, there will be little incentive for mines to consider investing in future mining projects. On top of that, South-Africa's production levels are decreasing at an alarming rate. As of January 2008, China has overtaken SA as the world's number one gold producer.

Therefore, unlike the Central Banks, I don't have any intention of taking a Golden dump.

FMM comment: Please note that I'm not dishing out any investment advice. I'm just sharing my oppinion.

Who’s Been Goosing Goldilocks?

The Myth Of Free Markets

"The power of myth is extraordinary. Correctly applied, the ignorant will believe themselves enlightened and slaves will believe themselves free."

When credit markets began to unravel in the summer of 2007, central bankers and economists were surprised. In retrospect, they should not have been. Warnings of a speculative bubble were issued as soon as cheap credit began distorting housing prices in 2003. Denial, however, always trumps reason in the presence of profits—or ulterior motive in the case of Greenspan.

So it was in the 1920s in the US, in the 1980s in Japan, in the 1990s in the US and it will be so again in the 2000s in the US—all large speculative bubbles ending in collapse; but this time, like in the 1930s, the collapse will affect the entire world, for another global depression may be in the offing.

Credit, like steroids, is a potent tool and is now the prime mover of financial markets in New York, London, Tokyo, Hong Kong, etc. The interest rate of central banks measures the flow of liquidity in the form of credit that credit-addicted global markets depend on and crave; but credit like steroids, with continued usage will destroy the body it once helped—Parcus nex, sic economic death, is the next stage in our deadly dance with debt.

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Commodity Conundrum

by David Petch


The following article was presented on Saturday, December 15th, 2007 for the benefit of subscribers.

Inflationary cycles are always manifested towards the end with rises in commodity prices that become equivalent to a black hole where money gravitates. Increasing the supply of money is the very definition of inflation, with rising prices being a symptom. Interest rate cycles tend to last 20-30 years starting from a decline to a base, followed by peak. Central banks use interest rates as the brakes of an economy and is the primary tool used under fiat currencies. Central Banks could stop printing money, but that would lead to a deflationary collapse, which is not a desirable outcome...so inflation it is. After interest rates rise to cool things on a Cycle Degree, periods of declining interest rates occur which will often see a decline in prices. Money is still being printed in the background, so the general overall theme is inflation, albeit maybe 1-2% instead of 15-20% near the end of the cycle. As economies begin growing with lower interest rates a credit economy emerges where companies and people essentially leverage their ability to purchase goods and pay it back later (a totally different concept than "Pay if Forward").

Towards the end of the credit cycle, inflation begins to grow due to expansion of the money supply and credit (due in part to the fractional reserve system used by banks). Rising interest rates eventually makes borrowing expensive, thereby quashing demand for things and causes scaling back in consumption sectors of the economy. During this phase, there is an increase in the amount of money circling the globe to try and find somewhere to park into something "tangible". Gold and silver and are often viewed as "tangible" items once the economy shifts from a credit economy to a "necessity economy" (paying only for the essentials such as heat, food, fuel for transportation etc.).

Supply and demand dynamics generally see commodity prices rise during the terminal portions of inflation cycles and decline during subsequent periods of disinflation. Once disinflation kicks in, commodity prices historically decline to near or below operational costs, which cause many companies to collapse. Once demand begins to outstrip supply, commodity prices begin to turn around.


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Gold, the Euro and the US Dollar

By FX Insights Moderator,

If you’ve spent even just a brief amount of time at FX Insights, surely you’ve noticed how close we watch and track the EUR/USD’s market correlated variables… and just to give the term a proper definition, my definition of what a market correlated variable is:

"A non-Forex factor that has direct connection to the EUR/USD and to the EUR/USD’s price fluctuations."

To put it another way, market correlated variables are factors happening outside of the Forex world, yet have major direct impact on whether the EUR/USD goes up, goes down, and to what degree these moves may occur.

Trading: Primarily, gold is traded on the NYMEX. For gold, there is a spot market, a futures market, and an options market. Gold is traded by everyone from the small potatoes retail investor all the way up the ladder to large banks, hedge funds, institutions, and further on up to the central banks of the world.

Major reasons why gold is purchased: Gold is purchased as a hedge against inflation. Gold is also purchased in “response” to a weakening currency, which in the case of the EUR/USD, gold is and would be purchased as the value of the dollar falls against the euro. Gold can be bought and gold can be shorted, just like a currency can in the spot FX market.

Gold and central banks: Although both the dollar and the euro are fiat currencies, the Fed and ECB have vast gold holdings within their reserves. One way the Fed and ECB control and manipulate the value of their respective currencies is by trading their vast gold reserves. The ECB is especially notorious for dumping many tonnes of their gold on the market at certain times of the year to “cool down” the value of the euro against the dollar. Gold is a powerful market manipulation tool at the hands of the central banks, and the market usually only learns of a central bank’s gold operations after the fact…

Key gold facts: The main reason why the commodity of gold is highly correlated to the EUR/USD is because gold is denominated in U.S. dollars. Gold and the USD share an inverse correlation… think of it this way, when gold is purchased, the USD is sold… the selling of any currency will naturally devalue that currency, so as gold is purchased and the price of gold rises, the value and “price” of the USD must fall because of the inverse correlation that exists between gold and dollar.

It’s my understanding that in 2001 gold began making a very strong resurgence which has ultimately led to this commodity making all-time highs in the $940’s…

This past week the USD/CHF went to post-World War II lows while gold was making all-time highs. Going back to 2001, look at the EUR’s climb to dominance over the USD… looking at the big picture, the EUR/USD has moved up in tandem with gold, while the USD Index has moved against gold and the EUR/USD…

Other key facts about gold and the USD: As we mentioned earlier, gold is denominated in U.S. dollars. So lets think about it… if the dollar is strong, you could buy more gold, literally getting more bang for your buck… a weak dollar buys less gold… here we have yet another reason why the weak dollar will only keep upward momentum going for gold – as long as the USD stays weak, the market stays bearish on the USD, gold naturally has to stay strong and has to rise, which then naturally correlates into the EUR staying bullish against the USD.

Gold and inflation: Back in the late 1970’s and early 1980’s U.S. inflation was absolutely out of control, and this runaway inflation issue took gold up to almost the $900 level, which must have been a staggering price back in those days… the Fed had to raise interest rates several hundred basis points very rapidly to slow inflation and this eventual mega rise in interest rates caused gold to loose half of it’s value and by 1983 gold was in the $400’s.

So as you can see, inflation is another key factor in the value of gold… when inflation rises, gold rises, but when a central bank steps in with interest-rate-raising tactics to slow inflation, gold will fall in value accordingly… and following this natural progression… higher rates = less inflation = weaker gold. Higher rates = a stronger dollar and a stronger dollar = weaker gold…

In many ways inflation is reflected in the price of gold which is then reflected in the price of the EUR/USD as more times than not gold leads the EUR/USD…

Practical exercise: I’d like to pause and take you through a practical exercise… this is how I think things through and how I attempt to forecast the market and formulate a predictive view of the EUR/USD… this is the kind of stuff that goes on in my head, so I’m going to do my best to communicate it as simply and clearly as possible…

First, I always start with interest rates… interest rates, as you’ve heard me say a katrillion times are paramount in the spot FX market…

For now I see the Fed in a rate cut cycle and the ECB in a rate hold cycle, at least through the spring of this year… I think the Fed can cut rates another 50bps or more before it’s all said and done. So going forward starting with interest rate cuts, here’s how I think it through:

1. Fed rates stay at 3.00% and possibly get cut further

2. Low rates and rate cuts weaken and devalue the USD

3. The weak USD correlates into higher gold prices

4. Higher gold prices correlate into the EUR/USD continuing to make bullish gains

5. Rate cuts and weak USD lead to rising U.S. inflation

6. Rising inflation leads to buying of gold, driving gold prices higher, driving EUR/USD higher

7. Rising inflation causes the consumer to slow spending, which further weakens the USD

So, that’s my logical way of thinking through what’s happening within the market under current conditions. The Fed seems reluctant to combat inflation and hell-bent on trying to stimulate growth and appease global markets with heavy rate cuts, so I believe this will naturally lead to more gold gains which should keep the euro supported against the dollar, at least until the Eurozone fundamentals really start turning south and the ECB begins following the Fed with rate cuts of their own, at which time we should see some rapid declines in the value of the EUR vs. the USD.

Gold and recessions: Currently, the hot debate is whether or not the U.S. is in a full-blown recession, the start of a recession, or a few negative GDP reports away from a recession… I’m not a college-degreed economist, so I can’t give you the textbook answer… personally, I look at two key things to help me determine a U.S. recession situation, and those two factors are gold and the employment situation (which then trickles down to the death of the consumer).

The rapid rise in gold prices and the rapid decline in new job creations, the loss of construction and manufacturing jobs, the rise in new and continuing jobless claims and the almost 100bps rise in the unemployment rate signal a real recession… and I think these signals were obvious many months ago when gold really started taking off…

But here’s where it gets a little weird with gold and recessions – believe it or not, history has shown us that when the U.S. is in a full-blown, established, and recognized recession, the price of gold has stabilized and or declined! So this means if all the world’s economists put their heads together and officially declare that the U.S. is in a recession, we could see the price of gold level off or drop, which could push the value of the USD up against the EUR…doesn’t make much sense that the USD could strengthen during a recession, but it’s certainly possible…

Gold and trading the EUR/USD: Here’s where we get practical when it comes to using gold as an indicator to trade the EUR/USD…

Quite simply, I am watching the spot gold market just as much as I’m watching the EUR/USD price action… moves in the price of gold more often than not will lead moves in the EUR/USD… gold is a tremendous leading indicator… if I’m trading the market intraday, I’m watching every little uptick and downtick with gold… I watch the NY spot gold market like a hawk…

If you’re one of our many tech traders trying to wean off the techs and learn how the EUR/USD really moves and why it really moves, you’d be well served watching the spot gold market as a key indicator… do yourself a favor and compare a 1-week gold chart to a 1-week EUR/USD chart, pick any week really, and you’ll see what I’m talking about…

There’s really no way I can glamorize the gold-EUR/USD correlation… it’s fairly simple and fairly cut and dry… it’s not a magic bullet indicator, and as I always say, there’s no such thing as “always” in the FX market, but gold is a highly probable and fairly consistent market correlated variable.

If you don’t track it or use it as a trading indicator, I encourage you to begin doing so… it’s only going to enhance your trading and give you more wins vs. losses as it will paint a clearer picture of market direction.

When the spot gold market is volatile you can expect the EUR/USD to be volatile… when gold decides to find its next top and correct, you can likely expect the EUR/USD to correct with it… the overall euro fundamentals do not warrant the value of the EUR/USD to be north of 1.4200, however, because of market correlated variables like gold being on such a bullish run, the euro naturally has to come up with it…

Again, of all the market correlated variables like oil, bonds, and equities, I believe the tightest overall correlation exists between gold and the EUR/USD.

Lastly, based on past experiences, I know there’s somebody or several somebodies out there who’ve read this and are thinking, “So if gold goes up, what does the EUR/USD do?” If you’re not sure, find me in the chat and ask, I can always use the amusement…

-FX Insights

What Will You Do With Your Gold?

by Gary North

This assumes you have bought some gold.

A lot of my readers have read my recommendation – "Buy some gold" – for six years. They still haven't bought any. They apparently think it's good enough to have read a few reports on the importance of buying gold. "Now I don't actually have to buy any." It's like an overweight person reading a diet book while munching on Fritos and bean dip.

There is an astounding amount of misinformation on gold available on the Web. This shows the tremendous impact of the Web. Back in 1995, this misinformation was far more limited in its scope.

Here is the main piece of information: "Gold! Gold! I'll be rich – rich, I tell you! Hahahahaha."

No, you won't. Here's why.

Gold Investments Market Update

Prior to the Federal Reserve’s 50 basis point interest cut to 3%, gold was down $3.60 to $921.20 per ounce in trading in New York yesterday and silver was down 4 cents to $16.74 per ounce. Gold surged (from $920 to $934.25) to new record highs after the interest rate decision at 2:30 p.m (1930 GMT) in after-hours trading on the Comex division of the New York Mercantile Exchange (NYMEX). Silver surged to new highs at $16.87.

Both have seen profit taking and have since sold off in Asian and European trading. A monthly close above $900 tomorrow, the first ever, would obviously be very bullish from a technical point of view.

Negative real interest rates (with the key discount rate less than the rate of inflation) in the world’s largest economy is very inflationary and could lead to gold reaching $1,000 in the coming weeks, as the dollar comes under further pressure. The moniker ‘Helicopter Bernanke’ is looking more and more apposite as the Federal Reserve chairman again drops copious amounts of liquidity onto the increasingly troubled financial and economic waters. The risk is that by attempting to prevent deflation in asset classes, the Federal Reserve ends up creating stagflation and a mild form of hyperinflation. Or even worse by endeavoring to protect the banks, stock and property markets they end up putting the dollar’s position as the global reserve currency at risk.

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Eskom Withdraws Authorisation for Mining Industry

JOHANNESBURG, January 31 /PRNewswire-FirstCall/ -- Gold Fields Limited ("Gold Fields") (NYSE, JSE, DIFX: GFI) is disappointed to confirm that Eskom has informed the Company that authorisation to increase electricity load from 80% to 90% by this evening, has been temporarily withdrawn in order to "protect further frequency decay and system instability."

To comply with this instruction, and in the interest of safety, production at Gold Fields' operations is being pulled back to the 80% power level.

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Four signs that gold has further to rise

It's been a great start to the year for gold - and its fellow precious metals - so far.

In fact, I’m beginning to wonder if my target of a high in gold of $1150 an ounce this year was a little conservative. Perhaps I’m feeling too exuberant and that’s a warning signal, but there are certain signs that suggest an intermediate-term top is coming - I'll tell you what they are in a moment - and I don’t see many of them.

In fact, if the Federal Reserve cuts interest rates later today by half a point, we might even see my target before the end of February...

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