The Goldwatcher

 Troops massing on India Pakistan border:

The Ever Present Chaos of Being:

… every single event is the offspring not of one, but of all other events prior or contemporaneous, and will in its turn combine with all others to give birth to new: it is an ever-living, ever-working Chaos of Being, wherein shape after shape bodies itself forth from innumerable elements…Thomas Carlyle . 1795 to 1881 .  Essay on History

Carlyle’s often quoted essay addresses the ever present potential for chaos.But do any of us, other than Zimbabwians and others in similar unfortunate circumstances,  remember economic and geo-political times as near the threshold of chaos as we are now?  Yet we see almost everyday headlines on chaos in currency markets, insolvent banks and shadow banking establishments,  burst property and other financial bubbles,  fraudulent securities bankrupting organisations, soaring unemployment ravaging commuinities ,  unsustainable debt leverage,  the collapse of major industries, fragile energy stability,  reversion to pre cold war conflicts, nuclear proliferation and even a resurgance of piracy. 

A Bloomberg comment noted yesterday that typically  ’gold staged a strong rally (rising to $870)  following Palestinian militants launching their biggest rocket attack on southern Israel in at least six months after a truce expired Dec. 19,  at the same time as  Pakistani troops were being diverted from tribal areas near Afghanistan to the border with India.’

Roosevelt and Obama: 

With the Great Depression ravaging  the US and other economies President Franklin D Roosevelt faced a dire economic picture when he took office on 3rd March 1933 . In his inaugural address he spoke of dark realities- with ’the withered leaved of enterprise everywhere,’ industrial production slumping, banks failing, unemployed citizens facing the grim prospect of existence. ‘Only a foolish optimist,’ he declared ‘would ‘ deny the dark realities of the moment.’

Pages 62-66 of The Goldwatcher address Roosevelt’s key  2003/4 messages. These pages are, in my opinion, essential reading for everyone - except, of course, ‘foolish optimists!’ But it is debatable whether Roosevelt’s memorable assurance ‘we have nothing to fear but fear itself” is as true now as it was in 1933.

 The Goldwatcher’s Year end message:

The Goldwatcher shares the high hopes held for US President elect Obama’s success and anticipated the  formidable challenges he faces. They include global banking and shadow banking establishments in crisis, unprecedented debt leverage,  nuclear proliferation in unstable countries, failed military enterprises and unfunded social insurance obligations way beyond anything that menaced Roosevelt when he took office. 

GOOD LUCK FOR 2009 AND BEYOND - AND PLEASE RE-READ THE GOLDWATCHER PAGES 8 & 9

Gold is the UNIVERSAL aid to ‘having nothing to fear but fear itself’.' The one and only stateless money franchise that assures protection against chaos in currency and financial markets, social disorder and a range of the other financial and security risks we are exposed to.

Martin Wolf tracks the course to inflation:

Starting with a cartoon of Ben Bernanke piloting the money drop helicopter, similar to the cartoon you will see all over this blog, and commenting on the cut in the Fed’s target interest rate yesterday down to between 0% to 0.25%, the Financial Times’s authoritative Martin Wolf has this to say:

‘Central banks may soon resort to their most powerful weapons against deflation: the printing press and the “helicopter drop” of money. It is a time for which Ben Bernanke, chairman of the Federal Reserve, has long prepared. Will this weaponry work? Unquestionably, yes: used ruthlessly, it will eliminate deflation. But returning to normality thereafter will prove far more elusive….  .

A leaf out of Mr. Mugabe’s book: (see The Goldwatcher blog on The New Bretton Woodsand Dr. Marc Faber’s forward to The Goldwatcher.)

Martin Wolf’s comment continues: ‘As Robert Mugabe has shown, anybody can run a printing press successfully. Once the interest rate hits zero, the Fed can perform much further easing. Indeed, it can create money without limit…. Curing deflation is child’s play in a “fiat money” – a man-made money – system….Similar dangers now arise with the drastic measures that look ever more likely. This time, I suspect, the result will ultimately not be deflation but unexpectedly high inflation, though probably many years hence.

The Goldwatcher book and blog:

A reader interested in tracking the flight path of Helicopter Ben will find several references by searching for Bernanke on this blog. For a better understanding of the similarities between the conditions President elect Bernanke is facing and the conditions Franklin D. Roosevelt faced, and why the course embraces inflation, read The Goldwatcher:

Chapter 4 : The Rise and Fall of the Gold Standard : Did gold cause the Great Depression? 

Chapter 5: The Dollar Standard & the Deficit Without Tears : ‘Is the dollar again America’s currency and everyone else’s problem?’

Chapter 6: The Economic Consequences of 9/11 and George W. Bush : For how long will Asians go on lending for Americans to go on spending?

The Goldwatcher’s ideas on gold prices - and the dollar:

Chapter 9 : Gold Prices : Inflation, Deflation, Booms and Busts: Do Trees grow to Heaven?  And the Goldwatcher 15th December posting on Mattress Stuffers: The case for mattress stuffing never looked better -  particularly as the $ surge could be coming to an end.

Why gold will remain strong:

After the outcome of the proposed bail out of  Chrysler, General Motors and Ford - the CGF Group - the desperate automakers who CAN’T GET FINANCED - it will take a few days to draw the threads together for a year end Goldwatcher  conclusion. Indications are they may get some relief.  For now - back to Helicopter Ben’s epic flight:

Charles Ponzi

The New Mattress Stuffers:

An article in Friday’s Wall Street Journal comments that with the financial crisis sweeping across the nation ’one of the first micro-trend groups to emerge is the New Mattress Stuffers — people who have lost their trust in the financial world, and are preparing for the next meltdown.’ By Monday the stuffers with gold under the mattress looked smarter than many other investors. With the disclosure of Mr. Matoff’s $50 billion Ponzi Scheme another gaping breach in trust was revealed. And, with it, another good reason for investors to own gold as insurance against vulnerable financial assets.

Suckers, Geniuses and Comatose Regulators:

Suckers taken in by the 1920’s fraudster Charles Ponzi were greedy retail investors chasing unrealistically high returns.  But the investors taken in by Bernard Madoff  were greedy banks and institutions with managers,  disdainful of  basic due diligence.  chasing unealistically high retirns.  Making investments yielding over 10% at a time when blue chip  returns were negligible they must have been alert to high risk exposure.  How come  they committed  millions, tens of millions and in some cases billions to investments without abundant due diligence?

The answer appears to be that our genius million £/$ salary stars  were deficient in their performance. An article in today’s International Herald Tribune todayreveals investors failed  to ensure their  investments were safe. And they must have been blind. Madoff never accounted for investmnents with acceptable transparency.

What about the suckers? You,  me and everyone else supporting banks and other institutions.  And, of course, our comatose regulators asleep at the wheel again.

After the financial debacle experienced over the last few years what scope is there left for trust in a financial system still without adequate regulation?   This Bloomberg video includes commentary on the regulatory failure.

Why gold is so strong:

The case for mattress stuffing never looked better -  particualrly as the $ surge could be coming to an end.  Trust in financial institutions and regulators  is being breached without respite making the case for owning gold more and more compelling. It’s not surprising that,  priced in British pounds,  gold is now at or near an all time high.

#  Note added 16th December :

Descriptions of Madoff’s operation read like a cheat sheet out of Investment Fund Due Diligence for Dummies

# Note added 22nd December 2008: Barrons 2001 warning on Madoff

The New Bretton Woods Initiative:

The meeting of G20 heads of state hosted by President Bush last month to address the global financial crisis was, at least in the vision of French President Sarkozy and British Prime Minister Gordon Brown, intended as a first step to a new financial architecture for the 21st century. A new Bretton Woods.  When the Obama administration is settled in office the plans may be taken further. But for now the agreement reached at the meeting to relieve the  current crisis via monetary policy and fiscal relief on a national basis has already proved to be useful and  initiatives to improve financial regulation are in progress.

Readers interested in gaining a better understanding of current macro developments will find the web site The Baseline Scenario maintained by former IMF Chief Economist MIT Professor Simon Johnson a comprehensive and accessible source of information on both current issues and the background to the financial crisis.  The Financial Crisis for Beginners page is excellent.

The Goldwatcher Chapter 5 addresses  The Gold Standard and reviews the ‘Deficit Without Tears’ fault line  in the dollar standard. The so called ‘Bretton Woods 2′ arrangements,  where major emerging economies, particularly China, manage their currencies to keep them competitive and reinvest the proceeds in US securities following the ’America spends Asia lends’ formula are explained and discussed. Recent comment from Brad Setser suggests that ‘Bretton Woods 2′ is still alive and well.

Leadership and the US and Global Financial and Economic Crises:

These are the concluding comments on gold price prospects in The Goldwatcher page 191  ‘Without reassurance on future policy commitments the chances of a systemic solvency crisis, resembling in some ways the crisis experienced in the 1930s, can’t be ignored……………..(but) we know that in the past daunting challenges have been overcome in countries with strong economies, resolve and committed leadership……Gold bugs are now urging investors to bet the ranch on gold. On my analysis that would be foolhardy. Frank Holmes also advocates moderation in the following chapters (11-13).

With President elect Obama being advised by Larry Summers with Paul Volcker at his side, Tim Geithner as Treasury Secretary and Peter Orszag as Director of the Office of Management and Budget we have serious reassurance on leadership. But, as commented in previous Goldwatcher postings, they start with an unholy financial mess.

In this context owning some physical gold can be motivated as  essential insurance against the ’system’ being damaged beyond repair.

Quantitative easing and the Zimbabwe model:

The Guardian business glossary gives this crisp definition: ‘Quantitative easing is what non-economists call ‘turning on the printing press’ adding ‘In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital.  Ben Bernanke, the chairman of the Fed, won the nickname ‘helicopter Ben’ when he floated just such an idea earlier this decade.’

Yesterday in a speech on ‘Federal Reserve Policies in Financial Crisis’  Bernanke spelled out policy being implemented through conventional and unconventional means.Trillions of dollars of funds are being injected into the financial system. Bernanke, however, argues inflation will not necessarily follow as ‘  To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed’s balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.’

The dramatic fall in the gold price yesterday may or may not have been influenced by Bernanke’s assurance he is not turning on the printing press and steps will be taken to control inflation in future. But it’s more likely gold price falls followed another bout of selling by investors seeking  only cash or Treasury securities at the same time as  leveraged funds and other investors were forced to meet margin calls or redemptions.

In his gloomdoomreport yesterday Dr Marc Faber repeats his disdain for Bernanke’s ‘money printing’ and restates his preference in current volatile markets to seek protection from the safe haven credentials that come with owning gold, adding that gold miners and silver could outperform for a while.

This amazing quotation from Dr G. Gono, Chairman of the Zimbabwe Reserve Bank adds a touch of humour to Marc Faber’s report:

“As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests. …That is precisely the path that we began over 4 years ago in pursuit of our national interest . …Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander. …As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.”