THE INFLATION SOLUTION!
TAKE BACK CONTROL OF YOUR FINANCIAL FUTURE NOW
Table of Contents
INTRODUCTION: AMERICA, BRACE FOR INFLATION
II. THE ORIGIN OF MODERN INFLATION
III. THE CHARACTER OF INFLATION
IV. INTEREST RATES AND INFLATION
V. WHY OWN PHYSICAL GOLD & SILVER
VI. RARE COIN ALERT!
VII. CONCLUSION: LIVING ABOVE INFLATION
INTRODUCTION: AMERICA, BRACE FOR INFLATION
By Craig R. Smith, CEO, Swiss America
In its attempt to bolster the U.S economy, the Federal Reserve has left no doubt in my mind that we are in a modern day depression – one that will be addressed by a massive expansion of the Fed balance sheet by trillions of dollars.
In 1929 the Fed contracted the money supply, and as a result we had deflation. The same was occurring in the initial stages of the current recession that began in December of 2007. If that recession had been allowed to run the normal course of a recession, we would be well on our way to recovery. But given the low tolerance for political pain in D.C., our leaders employed massive doses of spending that killed the pain but did not address the disease.
The economy is worse off now than it was before all the government "help."
Bernanke is making it clear he is going to expand the balance sheet of the Fed to whatever level is necessary to avoid a deeper and more prolonged recession/depression. Bernanke's master thesis for his doctorate was the Great Depression. It has long been known that Bernanke's assessment was that the Fed acted way too late in 1929 and should have never restricted the money supply. Bernanke is a firm believer in printing money and even throwing it out of helicopters to stimulate an ailing economy.
This attitude earned Bernanke the nickname, "Helicopter Ben." In March Ben loaded the chopper with $1.125 trillion of freshly printed U.S. dollars and threw it out onto awaiting recipients. He purchased an additional $750 billion of government-guaranteed, mortgage-backed securities on top of the $500 billion he has already purchased.
The Fed also agreed to buy up to $300 billion worth of longer-term Treasury securities over the next six months; a move virtually never seen from the Fed. What need has the Fed to buy the safest financial instrument available other than to lower rates, thus forcing Treasury holders to look for better returns in other markets. There is no other plausible explanation for such a Fed purchase.
He will also buy up to another $100 billion of agency debt for a total of $200 billion. In essence, the Fed has expanded its balance sheet to $1.8 trillion from just under $900 billion. The actions may well ultimately expand the balance sheet to $3 trillion or more over the next year.
How did the market receive this stroke of Keynesian genius? Stocks rallied from down 50 to up 80 points, gold rallied from down $30 to up $30 and the dollar suffered it single worst day since 1985 losing a full 3 percent against all major currencies. Gold went up an additional $18 on Thursday while stocks dropped 80 points and the dollar received a thorough pounding.
After reducing interest rates to virtually zero and employing quantitative easing with little to no positive effect on the economy, Bernanke is using one of the last tools in his box of fixes: printing money. He is now in competition with anyone who holds U.S. dollars.
It is reported there are trillions of dollars on the sidelines in bank deposits, money markets, treasuries etc. Now that Bernanke has printed another trillion dollars, it makes those deposits worth less as the quantity has increased. If you have 100 bushels of corn and the farmer next door grows 200 more, your corn becomes worth less as the quantity has increased without an increase in demand. Its Economics 101. If you increase the supply while demand remains unchanged, prices drop; increase demand while quantity remains the same, prices go up.
Bernanke is clearly willing to exponentially increase the supply of dollars by printing as his ability to borrow dollars at this time is at zero. Who in their right mind is willing to lend dollars knowing the Fed can and will print more making what they lent worth less, especially when the rate of return is less than the rate of devaluation?
Re-Inflating A Burst Bubble
The talk of re-inflating a balloon that has burst is a joke. That is unless the fabric of the balloon has been repaired. If not, the newly pumped air escapes. So the Fed will be forced to watch this air (printed dollars) disappear into this atmosphere.
In the past, the Fed has pumped billions through low-interest loans, thus creating the "dot-com" bubble, the stock market bubble, the housing bubble and now the Treasury bubble as people seek safety. Once Treasuries burst, which should be any day now given the Fed's willingness to devalue the dollar, the recipient of the pumping will be commodities. However this time the bubble will not burst for unlike paper markets there is an actual commodity. Gold, oil, wheat, steel, copper, corn etc. cannot be created out of thin air. They are real. And as such their price movement will be a reflection of supply and demand.
The old days of simple stock and bond portfolio strategy in planning for retirement and savings are no longer valid. Commodities and commodity-oriented companies will be a must for every investor if they wish to survive the ongoing market management of the Fed and the government. As Obama, with the assistance of Bernanke, continues to create trillions of new dollars to bring about the socialism he envisions, the long term value of the dollar will go substantially lower. Lower dollar value translates into higher costs of living, or a lower standard of living if an individual has no way to offset raising costs and possible unemployment.
Make no mistake about it, Obama, Bernanke and Geithner are doing exactly what they said they were going to do: print and spend their way back to prosperity. Their delusional minds actually believe that can be achieved by spending money we do not have with little to no prospect of ever being able to pay it back. For Obama to suggest he can balance a budget, no less reduce the national debt, with his corrupt math is ridiculous.
If some of the predictions are accurate, we may see a doubling of the national debt in the next decade if some fiscal sanity does not return to Washington and stop this very flawed and politically expedient process the Keynesians and socialists are pursuing.
The Obama administration made it very serious when Congress passed legislation to tax 90 percent of the bonuses at AIG with the blessing of the White House. While that may satisfy the populist outrage festering in America about bonuses, it will do little to fix the problems – not to mention the unconstitutional nature of such actions. Taxes are a means to generate revenue to facilitate the proper functioning of government, not to punish people. If the Treasury, the Justice Department and the Fed do not see the danger in such a move, they have ignored the Constitution.
The framers in their wisdom knew the potential threat of politicians being whipped into a frenzy by an angry electorate. Thus Article One and Nine state, "No bill of attainder or ex post facto shall be passed." This was designed to assure enforcement of the separations of power and as such protect individual rights. Disputes like the bonuses should be handled by the courts, not by legislative fiat. There are also specific assurances of "due process" and "sound legislation" to keep Congress from reacting irrationally. Obama should veto this bill to fulfill his oath to protect and defend the Constitution, regardless of how repugnant these bonuses may be.
If listening to Chucky Schumer and "Bawney Fwank" wax eloquent on how they will tax all of any citizen's money away doesn't send a chill up your spine, then you are a mindless follower of Obama mania. Where is the ACLU when Frank demands to have the identities of people under death threat be made public?
Am I the only American who is troubled with a Congress that takes only a few hours to increase taxes to 90 percent when it takes months to pass a normal spending bill? Every member of Congress should be impeached or fired over violating the oaths they swore to the Constitution. If they want the bonus money back, sue in the courts. That is what the judicial branch is for. Of course, they can't win because these contracts existed and were even reinforced in the TARP legislation passed to "save the world." Remember?
Redirecting Populist Outrage
If the American people want to hang someone, it should be Congress, the secretary of the Treasury and the president. Each of them knew full well that TARP money would be paying bonuses at AIG, just as the money would be paying Goldman Sachs the $20 billion AIG owed it. Or how about the many foreign entities that received TARP funds via payments from AIG? American taxpayer dollars used to bail out cronies at Goldman and foreign banks all with the full knowledge of Congress? That is outrageous, don't you think? But Congress has done a fine job focusing our anger on AIG employees instead of where the real responsibility should lie ... with it!
If Obama and Dodd are so set on AIG employees giving back their bonuses, maybe they should give back the $100,000 plus each received from those employees in campaign contributions. How about John Kerry, Hillary Clinton ... shall I go on? So while the "outrage" that Congress fakes incites a nation, Rome is still burning. And Obama is on Leno talking about his handicapped bowling abilities. How presidential.
So it is simple. It's simple to even a novice. The government, with full cooperation and participation of the Fed armed with printing presses, will print money to avoid a repeat of 1929 – regardless of what the long-term consequence is to the value of the dollar every American works for, saves and spends.
The government should have never gotten involved in trying to short circuit the normal business cycle we have seen over and over again in the economy. Our economy has expanded and contracted several times over the last 100 years. It is normal. But now that the government has made it its business to stop a recession, it will quickly learn it can no more legislate us out of a recession any more than it can legislate away the principles of mathematics.
It will fail, and I would argue it already has. That is why in prior writings I have pleaded with the government to stop any more wasteful deployment of taxpayer dollars. It is making things worse, not better.
If it really wanted to address the real problem, it would reduce the size of government, stop wasteful government spending and put more of America's money back in the hands of Americans. It would encourage savings, not consumption. It would lead by example in not spending money we do not have.
But obviously to do so would demand an immediate termination of the welfare state birthed under FDR and fulfilled under Nancy Pelosi and Obama. To have 300 million Americans all dependent upon government is not freedom. It is slavery. Abraham Lincoln helped end slavery, and now Obama wants it back – this time for all Americans. He's an equal opportunity master of our time. A good crisis is a terrible thing to waste, according to Rahm Emmanuel. That is especially true if you can expand the welfare state in the process.
Suggested Steps Of Action
These recent events demand immediate decisions by "We the People." If our government is going to pursue the "run the printing presses till they burn out" approach, we must take immediate steps to protect our financial future. The government stopped listening to the American people long ago. Therefore those steps include reducing personal debt and purchasing gold, other commodities and companies that produce commodities. Writing letters and making phone calls to the deaf and dumb is a waste of time.
Inflation is coming. Bernanke, short of taking a full-page ad in the Wall Street Journal, told you so. And while you may not see it just yet in the CPI, it will be there. It may well become hyper-inflation. I am convinced our leaders are such pansies that they will not make the tough decisions or demand sacrifice from the nation. Why? They are not willing to sacrifice themselves. They have become spoiled beyond belief, totally out of touch with reality and merely want to hold on to their power. It is all politics now.
I. THE CONFUSION OVER MONEY/INFLATION
"All the perplexities, confusion and distress in America arise not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation." -JOHN ADAMS, in a letter to Thomas Jefferson in l787. What was true then... is even truer today.
This Swiss America Special Report will focus on understanding the root cause of inflation and give readers some time-tested steps to help you protect and grow your own wealth -- Despite inflation, faltering corporate or government economic promises.
Confusion surrounds the very meaning of the words we use everyday like: money, dollar, wealth, inflation, and credit. Add to this, widespread public ignorance and confusion concerning tax laws, and you have a system designed to control and enslave the population -- rather than allowing the free market to flourish as our Founder’s designed.
Money is the builder or destroyer of society. An honest money system brings prosperity to all citizens - willing to work. A dishonest one enriches a few at the expense of everyone else - regardless of how hard they work.
The U.S. money system operates in a way that would astound most Americans if they only understood how it really worked. Our dishonest money system, which perpetually creates inflation, is at the very heart of America's economic and social problems. The degree to which the money system is corrupt is the degree to which all other areas of society are corrupted. Defining Inflation: In Whose Numbers Do We Trust?
“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” -Henry Ford
Inflation is officially defined as a “sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.” So as inflation rises, every dollar you own buys a smaller percentage of a good or service.
But is that the whole story? Is inflation just caused by greedy businessmen wanting more profit? Or, could it be the Federal Reserve, in concert with the U.S. government, actually promotes the real engine of inflation by printing too much paper money? How can we be sure our money is not eroding faster than reported? – a critical factor in planning for the future and our retirement.
At the heart of successful financial planning is understanding how to overcome the growing inflationary threat -- very often played down by the mass media, Federal Reserve and the U.S. government.
Modern culture is based upon our trust in numbers. They are commonly accepted as the means to achieving objectivity in analysis, certainty in conclusions, and truth. Numbers tell us about the health of our society and they provide a demarcation between what is accepted as safe and what is believed to be dangerous.
But in reality, numbers are nowhere near as objective as we often take them to be. They do not exist in the air, but instead always come from someone's computations. Someone put them there and they often hide his or her intentions or assumptions.
It is easy to use numbers to lie, but it's very hard to discover that lie because our culture tells us numbers are objective and true. For the same reasons, it is easy to see how our entire economic system may also be reported falsely when using only government numbers to describe it. (See Alternative Inflation Index from www.shadowstats.com)
For example, CNBC "Squawkbox" recently discussed the Consumer Price Index, the top U.S. inflation indicator. After reviewing all the facts, CNBC concluded that the CPI is rigged, and not representative of the true rising cost of living numbers that are widely reported.
WSJ confirms this, reporting … “Inflation debate brews over intangibles”
It's critically important for consumers, business, the government and the economy as a whole for the CPI to be as accurate as possible. The CPI is used to benchmark how much is paid to Social Security recipients, who last year received outlays of $487 billion. It also plays a role in adjusting lease payments, wages in union contracts, food-stamp benefits, alimony and tax brackets.
Getting the CPI right is immensely complex and can seem counterintuitive. Consumers sometimes have the impression that the government must be missing something -- considering inflation has remained remarkably low in recent years, even as housing prices, medical bills and other daily costs have soared.
The issue is likely to gain more attention now as signs of inflationary pressures grow. On an annual basis, consumer prices rose at 4.3 percent in the first three months of this year, compared with 3.3 percent for all of last year.
“Bill Gross, head of the world's largest bond fund, Pimco, caused a stir last fall by proclaiming that the way the CPI is calculated amounts to a ‘con job’ by the government aimed at concealing the true rate of inflation. A key culprit, he said, was the CPI's growing reliance on hedonics. Mr. Gross, who has other complaints about how inflation is tracked, estimates the CPI really is higher than official figures suggest.” -Inflation debate brews over intangibles -Timothy Aeppel, WSJ, May 9, 2005
II. THE ORIGIN OF MODERN INFLATION
"Original sin was that Eve told Adam about central banking, about the notion that you can create value with a stroke of the pen." -FED. New Challenges for Monetary Policy, Symposium 1999, Federal Reserve Bank Kansas City
On November 22, 1910, the nation's leading bankers left by train at night from Hoboken, New Jersey on a secret mission to Jekyll Island, Georgia. Their mission -- to create what was to become the "Federal Reserve System."
Use of the word "Federal" in the name "Federal Reserve" leads the public to believe the Federal Reserve is a government institution. Contrary to this misleading use of language, the FED is a private corporation owned by foreign and domestic banks and operated for profit - no more Federal than Federal Express.
The FED controls the nation's money supply and interest rates, and thereby manipulates the entire economy. This is in violation of Article 1, Section 8 of the United States Constitution that expressly charges Congress with, "Power to coin money and regulate the value thereof." Article 1, Section 10 of the Constitution says, "No State shall make any Thing but gold and silver Coin a Tender in Payment of debts."
The folding, spindling and mutilating of America's monetary system became legitimized in 1913, when the Federal Reserve was formed. Long ago bankers discovered a nasty little secret referred to as "fractional-reserve banking" which is fueled by credit and debt creation out of thin air. [See rediscoveringgold.com - Chapter One]
Under the FED's direction, gold and silver coins were taken out of circulation between 1933 and 1965, removed as the backing for our currency and replaced with monetized debt -- in other words -- credit. The process of inflation has accelerated ever since.
“Inflation is the form of taxation that the public finds hardest to evade, and even the weakest government can enforce it when it can enforce no other. By a continuous process of inflation, government can confiscate secretly and unobserved an important part of the wealth of their citizens. By this method, they not only confiscate, they confiscate arbitrarily, and while the confiscation impoverishes many, it enriches some. Lenin was certainly right, 'there is no surer way of overturning a society, than to debauch the currency.' The process engages all the hidden forces of economic law on the side of destruction, and does so in such a manner than only one man in a million is able to diagnose it.’” -John Maynard Keynes, The Economic Consequences of Peace (credited for the birth of modern economics).
* Conditions for inflation:
Too much money in circulation, and not enough in-demand products and services available
* How inflation hurts:
Purchasing power falls, consumers pay more, and it becomes more difficult for business and consumers to make plans about future purchases.
* Attempts to control:
The Federal Reserve tries to keep the inflation rate stable by buying and selling Treasury bonds.
The Fed can:
-Lower interest rates. If the Fed wants to lower interest rates to stimulate the economy, it adds money into circulation by buying bonds, thus giving the bondholder money to spend in the marketplace. -Raise interest rates. If the Fed wants to raise rates in response to inflation concerns, it will reduce the money supply by selling bonds, thus taking money out of circulation.
So, monetary inflation begins as the FED creates more and more paper “dollars” to stimulate the economy, yet they’re simultaneously reducing the value of every dollar that every American has saved or invested. Monetary inflation begets asset inflation, which could be seen clearly in real estate prices until the bubble popped. “Real world” inflation has averaged more than 6% over the last 40 years. No wonder so few American wage earners are able to keep up.
DailyReckoning.com’s Mogambo Guru reports, - "In 1960, the minimum wage was $1.00 per hour, and at various times it was raised. In 1997, it was increased to where it is now, $5.15 an hour. The rate of inflation in minimum wage works out to, compounded, 4.53% per year! And it is still not enough to keep up with the rise in prices as it is!
“I am here to tell you that every time a new higher minimum wage goes into effect, there are at least a dozen American guys who retire on a defined-benefit pension. And each of these guys watches in growing despair as their standard of living declines, month after month, year after year, as prices climb but their incomes remain constant.
“And it just gets worse and worse and worse, until the day they die in utter poverty. And if you could bring these guys back from the dead, they would say, in a ghostly unison, ‘Listen to the Mogambo! Inflation will kill you! And since inflation is a monetary phenomenon, and since a monetary phenomenon is a central bank phenomenon, the Federal Reserve will, ipso facto, kill you!’ Which is, you gotta admit, pretty astute for a bunch of dead guys.” -THE WAGES OF SIN, Daily Reckoning, August 16, 2004
Monetary inflation begets asset inflation, which could be seen clearly in real estate prices between 2003-2007.
III. THE CHARACTER OF INFLATION
"Inflation is like sin; every government denounces it and every government practices it." -Frederick Leith-Ross, The Observer
"Character," in the Greek means "engraving" or "image." Our character is a mark of our ownership, a sign of our citizenship. As with the character of individuals and nations, so too with the character of economies.
Our deceptively low "official" CPI numbers hurt everyone, but especially those who rely on SSI and fixed retirement incomes. Cost-of-living income adjustments based on an artificially low CPI will never be able to keep pace with higher "real world" prices.
Stamp Price Index reveals "real world" inflation
Another way to judge the true rate of inflation is by using the U.S. Postal Service stamp price statistics. According to the government, the cost of a postage stamp should reflect only true cost-of-living increases, since the USPS is not-for-profit, right?
If we use the price of a postage stamp index as a "real world" inflation gauge, we've had substantially rising inflation during a time the government has reported that inflation is almost nil. Since 2006, the U.S. Postal Service has increased the price of a first-class stamp from 39 cents to 44 cents in 2009 – a 13 percent rate increase!
USAToday reports, "The price for a first-class stamp jumped by 517 percent between 1970 to 2004, compared to the official CPI inflation gauge which has only registered a 293 percent increase."
That means in 1970 a $10,000 car now costs $51,700, instead of $29,300. That's a whopping 76 percent discrepancy!
Even former Fed Chairman Alan Greenspan has said that official CPI numbers have no basis in reality. It's nonsense to say we live in a world of 2 to 3 percent inflation today, because the government has systematically stripped out of their CPI virtually all of the "real world" indicators, such as rising home costs.
It was a British economist who first said, "I never trust anything the government says until they officially deny it!" A sad statement, but apparently true regarding many government statistics. Remember: Numbers don't lie, but governments do.
IV. INTEREST RATES AND INFLATION
"Inflation is the one form of taxation that can be imposed without legislation." -Milton Friedman, Nobel Prize winning economist
Whenever you hear the latest inflation update on the news, chances are interest rates are mentioned in the same breath. Interest rates are decided by the Federal Reserve. The FED meets eight times a year to set short-term interest rate targets. During these meetings, the CPI and PPI are significant factors in the Fed's decision.
Interest rates basically rise for two reasons:
The first is that the demand for funds exceeds their supply. For example, the Federal Reserve may decide to restrict the money supply or foreigners may cease investing in dollar-denominated assets because of a falling dollar. The second reason why interest rates rise is because of expected inflation. Today we have both going on together!
According to NYU professors Nouriel Roubini and David Backus, “The real rate of interest is the difference between expected inflation and the nominal rate of interest that we see quoted in the paper.” Their theory is that the real interest rate is determined by investment and saving without regard for money and inflation. What happens to the interest rates if inflation rises? Rates rises by the same amount. Thus an increase in inflation leads to higher interest rates.
V. WHY OWN PHYSICAL GOLD & SILVER
By Adrian Douglas ~ marketforceanalysis.com
I have spoken to many ordinary people about investing in gold and I have noticed how people’s eyes glaze over and they clearly have difficulty understanding why gold is the investment opportunity of a life time. For those who understand the market well, and live it and breathe it as I do, we make the mistake of blaming the listener as being “clueless”, “brain-dead”, “stupid” and a long list of other insults.
If the message of what an extraordinary investment opportunity gold represents is not understood by the listener then it is the fault of the messenger. There is no other excuse! If the listener understands the message but refuses to accept it or understands it, accepts it, but doesn’t take action then perhaps some of those epithets are justifiable!
I speak to many precious metals investors who complain that they have tried constantly to persuade friends and family members to invest in gold but to no avail…if we can not convince those who know us well what chance do we have with total strangers?!
When you tell the average person that gold is “real money” he looks at you with a quizzical grin, wondering how he can swipe a gold eagle through the card reader at his local Safeway supermarket. And when you talk to him about avoiding “counter-party risk” he thinks you are talking about protected sex and can’t think what this has to do with gold! When you get deep into how the gold market is rigged with derivatives and Central Bank gold leasing he is starting to wonder which maximum-security facility you escaped from and is looking for a break in the conversation to go get another hot-dog from the BBQ!
I am going to attempt to explain gold (and also silver) in very simple terms of one syllable that most people will be able to understand. So hold off on going to get that Hot Dog from the BBQ and listen up:
We can class what people buy into two main categories: Consumables And Collectables
Consumables are, as the name implies, all the things we need in life and that we consume. This includes things like milk, bread, butter, gasoline, electricity, water etc. It also includes, under my definition, things like TV’s, computers, furniture, appliances, cell phones etc. These are not normally thought of as consumable but they essentially are because they are used for a certain amount of time (might be many years) and eventually they are discarded as junk.
If we do not earn much money all our wages go on “consumables’. If we earn in excess of our basic living needs we have the capability of buying “collectables”. The most obvious “collectable” to accumulate if we have excess earnings over basic needs is “cash”. But there are many “collectables” we can acquire such as fine art, rare cars, vintage postage stamps, first edition books, fine wines, diamonds, real estate, shares, bonds, silver, gold etc.
How is the cost of a “consumable” determined? In simplistic terms it is the cost of manufacture plus the profit the market will “allow” the manufacturer to make.
Determination of Price
How is the cost of a “collectable” determined? In simplistic terms it is the cost of production plus a scarcity premium.
For a consumable there can be no long term “scarcity premium” because the market would not tolerate it. If consumers went to buy their bread and found the bakeries were sold out and the bakers offered to bake some more bread for 100% markup on the usual price there would be riots in the streets! There can be short term scarcity premiums if there are disruptions to supply such as strikes or natural disasters etc. Because there are nearly always a large number of suppliers to supply consumable items, and the goal of all suppliers is to fully satisfy all demand, the profit is squeezed by abundant supply and competition to somewhere between 1-10%.
Collectables are items that people like to “hoard” or “collect”. Typically because many people like to collect them the demand is higher than supply so the price includes a large “scarcity premium” over and above the cost of manufacture of the item. The scarcity means that, under normal circumstances, it is not possible to oversupply the market and furthermore suppliers have no motivation to satisfy all demand. Rolls Royce has no ambition to have everyone in the world driving a Rolls Royce. The low supply and high demand maintains high scarcity premiums. A Rolls Royce might sell for $600,000 even though it only cost $200,000 to make it. That means there is a $400,000 scarcity premium that buyers are willing to pay to get such a limited edition car and perhaps wait 3 years to get one. This would not be tolerated if the car was a “consumable” everyday car. No one would wait 3 years for a Honda Accord nor pay 200% scarcity premium for it!
Taking another example, a Picasso painting may have cost Picasso $100 to produce but it may now sell for $50 million because so many art lovers appreciate Picasso’s work and as the artist is dead the supply is limited to what he produced in his life.
It is interesting to note that consumables can become collectables. For example the Model “T” was Henry Ford’s first mass-produced car that sold for less than $1000. It is no longer manufactured and most have long ago been scrapped. A model “T” Ford would now sell for hundreds of thousands of dollars!
Occasionally collectables can become consumables. In the 1800’s Aluminum was a precious metal, more expensive than silver and selling for several dollars per ounce. There was no commercial process at the time that could mass produce it. It was highly sought after as a collectable. There was a large scarcity premium in the price. When an industrial process was invented that made it available in millions of tons per year it became a consumable selling for a few cents per ounce, which was barely above the cost of production.
Stocks are collectables. The cost element in figure 1 can be equated to the true value of the company stock (based on assets, liabilities and profit generation potential etc) while the scarcity premium will rise and fall depending on how much investors want the stock. When a mania develops, as in the dot.com era, so many people chase so few available stocks that the scarcity premium can go to ridiculous levels. If the company truly has great fundamentals then the price can be maintained because the value of the company increases as the scarcity premium decreases thereby maintaining the price. If the company has no fundamentals, then when investors start to run for the exits the flood of available stock makes the scarcity premium go to zero or even negative…in other words stocks can sell at a discount to their true value because there is a huge surplus of supply over demand.
What makes things collectables?
This is pure democracy at work. The people decide. There is no point in wasting energy wondering why people like to collect postage stamps or fine wines or Elvis Presley recordings. If they like them and want them that is all that matters.
But not all collectables are created equal.
Most collectables are man made such as postage stamps, first edition books, fine wines, fine art, fine jewelry, muscle cars, vintage cars, custom houses etc. Most of these collectables need an “expert” to assess the authenticity, quality and value. A few “collectables” are made by nature such as precious metals, diamonds, rubies, pearls, gemstones etc. Precious metals are unique in that they do not need an expert to assess them. One ounce of gold is one ounce of gold. On the other hand the quality of one carat diamonds vary enormously and may even be zirconium fakes.
Many collectables are not appreciated by a wide community of buyers. Many people would not appreciate the value of a bottle of Chateau Latour or a Ming Vase if they found one in their basement. Some people might even refuse to buy a rare painting by a lesser known artist if you were offering it for $50 while almost everyone on the planet would accept to buy 1 oz of gold for $50.
Gold stands out as a very special collectable.
In 6,000 years of recorded human history gold has been desirable as a “collectable” and it still is today. This is truly amazing. There were no postage stamps, muscle cars, first edition books, fine wines, fine arts 6000 years ago. But there was gold. And 6000 years later man still lusts after this “collectable”. It is the most durable collectable ever. It is the collectable of all collectables because it has universal appeal to almost everyone on the planet and has been for all of history. It doesn’t need an expert to assess it. It is so dense at 19.3 times the density of water, and it is so malleable that even an amateur can recognize its distinctive feel in the hand. It is extremely difficult to make convincing imitations…lead is only half the density and is the wrong color.
Gold is very scarce. There are only 140,000 tons above ground which is all the gold ever mined. It is not consumed so all the gold ever mined is still in existence somewhere. That is equal to ¾ ounce per person on earth, or as is popular these days, just enough to fill two Olympic size swimming pools.
So gold is the most desirable collectable on earth and it is very scarce. You would then expect it to be selling at a price equal to its cost of manufacture plus a large scarcity premium. Surprisingly gold has been selling at or below its cost of production for almost 15 years! How do we know this? We know because the major mining companies of the world hardly make any profit. This means they sell gold for the cost of production. This means gold is being priced as if it were a loaf of bread! It is as if you told Da Vinci “I will give you $900 for your labor and materials if you could please paint the Mona Lisa for me”! Who would refuse such a deal (other than Da Vinci!)? So why would anyone refuse to buy gold?
How could the scarcity premium in gold have been annihilated such that it sells for cost?
The demand for gold is approximately 4000 tonnes per year. However, the supply from mines and recycling is only 2500 tonnes. What’s more because gold has been selling for approximately the cost of production, mine supply is declining at 10% or so per year. With such a large gap between supply and demand the scarcity premium should be very high instead of being zero. The only logical conclusion is that there is no scarcity. How is this possible? Western Central banks have been surreptitiously supplying their gold hoards to the market, without reporting it, to fill the gap between supply and demand.
They have also encouraged the supply of paper substitutes for gold (such as Exchange Traded Funds, pool accounts, futures contracts etc) that many people have been prepared to accept as proof they own gold without actually verifying themselves. This has suppressed the price of gold with the result of boosting the apparent value of the dollar and keeping interest rates low which has allowed the US to live beyond its means for 15 years, importing far more than it exports. This has distorted almost every market in the world and this is now starting to come unraveled with disastrous consequences.
The fraudulent interference in the markets has a certain shelf-life just like the Madoff Ponzi scheme. The Western central banks have just about exhausted the stock of gold they are prepared to part with. The general public is increasing dramatically its demand for physical gold because of the financial turmoil as can be witnessed by the mints around the world now rationing gold and many retail outlets being sold out. Many people are now so scared of the risks in the financial world that they are less and less accepting paper substitutes for gold and they are demanding the real thing. All this is creating massive demand for gold at a time when Western Central Banks have depleted reserves and the mines are experiencing rapidly declining output. The World Gold Council reports that investment gold demand rose 64% in 2008. What do you think is going to happen to the scarcity premium? Yes! It will sky rocket. No collectable sells below its cost of production for extended periods so the downside is almost non-existent yet the upside is huge.
There is another competing collectable…the US dollar. The US dollar has a very low cost of production. It is a fraction of a penny per thousand dollars. It has a large scarcity premium because the US Dollar has enjoyed the privilege of being the reserve currency of the world and so there has been high demand for its use in international trade during the economic expansion of the last 15 years. Furthermore, the Federal Reserve has manipulated the dollar’s apparent scarcity with respect to gold by over-supplying the gold market with Central bank gold. Just recently the gloves came off.
The financial crisis is so dire that the Federal Reserve announced on March 18 that they will implement “quantitative easing”. This is a euphemism for printing money. The FED has in the last year committed almost 10 T$ of extra money supply into a system that had 15T$. The availability of dollars is accelerating at a frighteningly exponential rate just at a time when world economic activity is slowing and the role of the dollar as the reserve currency is being called into question. Clearly we are entering a new era where the dollar supply will be much larger than demand. With trillions of new dollars being created and demand diminishing, the dollar will be anything but scarce! It doesn’t take a rocket scientist to work out that the US dollar is going to transform from a collectable to a consumable. It will lose its ENTIRE scarcity premium and its buying power will be related to its cost of production i.e. a fraction of a penny per thousand dollars.
When a currency loses its entire scarcity premium, it becomes a consumable. Images remind us of the famous Weimar Republic hyperinflation of 1923 showing bank notes being burned as a cheaper alternative to firewood! The paper had a higher caloric value as a purchasing power as a currency!
The old expression “cash is King” is only applicable under a gold standard. Bank notes under a gold standard don’t have any value per se, they are proof of ownership of gold, but they can be used as currency as they will be accepted by other people as payment. The dollars can be exchanged at the bank at any time for gold. So “cash” is King only when the banknotes represent a holding of gold. If you own a house the “title deed” document doesn’t have any value per se, it only proves you own the house which is the asset of value. The fiat currency system we have had since 1971, when the last link to gold convertibility of dollars was severed, is like using Property Title Deeds as money but where the corresponding houses to these titles have not yet been built! Eventually the market will value the Title Deeds at their cost of production, close to zero, not at the value of a house. It will be no different for the dollar.
As the scarcity premium of dollars start to sink, along with the closely related financial instruments, US Treasury Notes, people will want to exchange these “collectables” before they reach the buying power of a “consumable”. The most likely collectable they will turn to is the collectable of all collectables, gold, and its closely related cousin, silver.
The scarcity value of gold will soar as supply fails to meet demand.
Because gold is a collectable that is desirable by almost everyone on the planet it is what can be described as “real money”. You would find it difficult to pay for things you want to buy with postage stamps or fine wine but gold is so desirable that people will accept gold as payment instead of currency. Eventually as the scarcity premium of the currency gets destroyed they will only accept gold or preferentially accept it, despite how difficult that is to believe right now!
Finally let's look at silver
Silver used to be a pure collectable just as gold is. However, in the last 50 years many industrial processes have been developed that need silver. Just like Aluminum, silver passed from being a collectable to being a consumable. Well not quite. No one collects Aluminum as a precious metal anymore while 10% of demand for silver is for investment. The problem has been the 90% that has been demanded as a consumable. This brought the price of silver down to the cost of production plus a small or zero profit. The entire scarcity premium disappeared. As we discussed earlier the goal of suppliers of consumables is to ensure there is no shortage.
However, there is a dirty little secret. Silver is scarce and getting scarcer! The demand for silver has exceeded mine supply by almost 250 million ozs per year for many years such that an above ground global stock pile has been reduced from 10 billion ozs in the 1940’s to less than 1 billion ozs today. Of the 1 billion oz only 300-400 million ozs are “available” for sale. This means that there is only about one more year left where the gap between demand and supply can be met with above ground stocks. Mine supply is declining especially as 60% of silver comes as a base metal mining by-product and base metal mining has contracted with the economic contraction.
The bottom line is that silver is close to transforming from a consumable to becoming once more a collectable with a very high scarcity premium within the next 12 months or so. This is comparable to what has happened to the Model “T “Fords! Considering there is no substitute for silver in its industrial applications the scarcity premiums could go to unimaginable levels and not only be sustainable but go higher! Of course silver will still be used in industry but the industrial users will have to get accustomed to the price of their essential metal being governed by the scarcity premium. They will have to treat it as a collectable and recycle almost 100% of the silver they use instead of it being lost in land fills around the world and thereby being “consumed”. 100% recycling will become economical because of the huge scarcity premium silver will command.
Gold and silver are highly prized collectables that are selling like ordinary consumables at just above their cost of production. Through market manipulation and interference their scarcity premiums have been annihilated through surreptitious supply that can not be maintained. Just like consumables their prices can not go meaningfully lower because no one produces real things at below cost for long. There is a near certainty that they will regain their collectable status soon and acquire massive scarcity premiums in line with their true supply and demand fundamentals as demand increases and central banks stop selling gold, and even start buying it instead.
Meanwhile, the US dollar will lose its “collectable” status and lose its vast and undeserved “scarcity premium” to eventually have a buying power equal to its cost of production. Does it take a rocket scientist to work out that the best trade of a life time is to exchange US dollars or other fiat currencies for gold and silver NOW? You will divest of something that will rapidly lose its scarcity premium and buy something that will rapidly gain a huge scarcity premium.
Some investors may be concerned that perhaps they have missed the bull market in precious metals because gold has risen from $255/oz to $1000/oz while silver has risen from $4/oz to a high of 21/oz. This rise in the metals only reflects the increased costs of extraction. There is no scarcity premium included. No bull market will ever finish before very large scarcity premiums have developed. Investors have missed almost nothing. The major gains are still ahead.
VI. RARE COIN ALERT!
By James M. Carrillo ~ Sr. Portfolio Adviser, Swiss America
This is a Red Alert to all gold buyers to start looking into and buying rarity now. Why? Because of the Fed's decision to print, print, print trillions of dollars. This action will create INFLATION like we've never seen before!
As many of you know Swiss America has been recommending lower grade to mid grade common date gold Liberties and St. Gaudens and we still do, because they have outperformed almost every investment over the past 36 months. If anything has done better we don’t know what it is.
The reason we're recommending rare dated coins now is simple; the Fed is tripling the money in circulation! The only reason rarer coins have not performed as well during this time frame was the liquidity crisis. Most investors were looking for the "pure" gold play. Things just changed.
Charts illustrate the sheer magnitude of this money creation starting in 2008. Once the money supply has tripled, the average price level in the U.S. will triple as well. This is a basic application of the law of supply and demand, which was proven by Adam Smith at the very beginning of the science of economics.
We have targeted several areas of the market that could literally explode in value over the next few years.
This alert is not for everyone. This should only be considered by people who have the liquidity to hold these coins for a minimum of three years, and preferably a decade, to maximize the return. Remember, all this freshly printed cash will gradually make its way into circulation. These rare U.S. gold and silver coins could explode in value overnight, but it may take some time.
The growth in this area of the market may take time, however the growth can be simply staggering. The graph below is an actual example of the money made between 1970 and 2005 with a $1,000 investment. Note that just $10,000 invested in the *12-Piece gold coin type set would have had a maximum return of over $1,200,000! I firmly believe we are re-entering this same type of cycle today.
* 12-Piece Gold Set: The 12-Piece Gold Set is an industry index that is used frequently within the world of rare coins for financial evaluations. It consists of the 12 U.S. Gold coins that have been most commonly traded over the last 50 years. It is an index like the DJIA is an index, meaning it is designed to represent the composite performance of a given market. It's important to note that being commonly traded does not mean that they are the best performing coins in terms of appreciation in value. Several pieces in the 12-Piece Gold Set have not performed well over the time period presented and we may not recommend buying specific pieces at certain times. Unlike the DJIA, however, these 12 pieces are a constant over the entire time period analyzed.
* Dow Jones Industrial Average: The Dow Jones Industrial Average consists of 30 companies. The 30 companies in today's DJIA are not the same as the 30 companies in 1970, though. Some companies have been dropped and others added for a variety of reasons, including poor financial performance. For example, Johns-Manville was dropped when it entered bankruptcy and Chrysler was dropped when it approached bankruptcy. As a result, the DJIA actually presents the performance of stocks in a better light because poor performing companies have been dropped from the index. Of course, the DJIA does not include stock dividends, which might be re-invested and increase the overall performance of the equities.
Even with the advantage of dropping poor performing stocks from the DJIA index, rare U.S. Gold coins still have a far superior track record for capital appreciation and could be considered a bargain at today’s levels.
Well-established third party grading companies provide data on quality and quantity of coins. It is easy to track value and prices for virtually any type of coin. Rare coins are also a very liquid investment several NASDAQ like trading networks exist as well as regularly scheduled auctions for Ultra Rarities.
Certified Rare coins offer you tremendous profit potential, a proven track record of appreciation, and an infrastructure for buying and selling that rivals the equities market. Many financial advisers agree that rare coins should be a part of a diversified portfolio.
Introducing CAC Coins
Third party independent grading services like PCGS and NGC revolutionized the U.S. rare coin industry by evaluating and certifying the condition and the grade of coins. Evaluations, however, can be subjective and over time, coins of varying quality have received the same grade.
Swiss America is proud to provide the finest protection for rare coin investors by offering "Certified Acceptance Corporation" (CAC) certified coins. Only U.S. rare coins meeting the highest of standards qualify for the unparalleled security offerd by CAC.
CAC certified coins guarantee top notch excellence. Now, Swiss America clients can rest assured that we are providing the very best quality product every time they look at their CAC seal.
All graded coins are not created equal, why? As in all areas, there is what is deemed the best of the best. Certified PCGS and NGC coins are no exception. Now there’s an easy way to identify elite coins within any grade. Just look for the CAC verification sticker.
"CAC’s objectives are to give consumers an easy way to identify higher-end coins and provide a formal basis for independent trading of those coins," says CAC founder John Albanese. "We want the market to reflect what they’re really worth."
In conclusion, the opportunity that exists today looks to be far greater than that of the 1970's, using basics economic principles. There have been many such cases of significant increase in the money supply in American history but none as great as today. As you can clearly see in Chart 2 (left) there is a potentially staggering amount of money to be made. We are now targeting key areas that we feel have the greatest potential for our investors.
SEIZE THIS GOLDEN OPPORTUNITY!
VII. CONCLUSION: LIVING ABOVE INFLATION
"Inflation, like sin, begins with a desire to gain some undue advantage." - Steven Samson, THE CHARACTER OF INFLATION
We stand at the dawn of a "new era of personal responsibility" which must include you taking back control of your financial future and retirement plans. Financial security does not come with a money-back guarantee from your employer or from your government. How will your retirement plan withstand the inflationary storm of next 5, 10 or 20 years?
The American dream has been built on credit, debt, dollars, and inflation bubbles -- all of which are getting ready to burst. Something must give. Unsustainable debt, deficits, trade imbalances, consumer debt, record bankruptcies and foreclosure rates are turning dreams into nightmares.
Monetary theft is not limited to governments; the stealing of money can be seen in such ancient practices as the clipping of coins and the abasing of metals. These early types of inflation have been succeeded by “fiat” (false) money inflation as we have learned.
In 2009 political and economic leaders worldwide are so fearful of a global deflation that they’ve decided to create global inflation as a "solution" to the burst economic bubbles of the last decade. (Pure folly). As a result living above inflation is about to get much more difficult as the Fed and Treasury print trillions upon trillions of new dollars and other nations do the same with their paper currencies. (read: competitive currency devaluation).
Yet today most people still value their “wealth” in terms of paper dollars, euros or yen. Thankfully, a paradigm shift is currently underway in how the world understands the value of paper money in relation to gold. A dollar used to be an “IOU gold”, but today is nothing more than an “IOU debt”. The dollar is now being isolated and shunned as the world searches for a new international “reserve” currency.
Investors are slowly grasping the historic fact that gold is the only real “inflation-proof” money in the world. This can be seen in rising demand worldwide for gold and silver coins, bars and ETFs. This is just the leading edge of a wave of investors, most of whom have never owned gold before, now coming to realize they need financial security beyond what any paper money offers.
Discovering “real world" statistics involves stripping out the political-financial spin and cross-checking the numbers with multiple sources. Finding financial numbers you can really trust today is almost as hard as finding a financial adviser you can trust. For over a quarter century we have helped our clients convert a portion of their paper money into real money -- before the consuming fires of inflation cause further destruction.
Swiss America’s goal is to help Americans understand the vital role tangible investments like gold and silver coins play in keeping your portfolio safe from rising inflation amid a recession. We believe owning U.S gold and silver coins is essential to survive the ravages of the coming 21st century inflation.
Call Swiss America today to discuss how to prepare for the coming inflation at 1-800-289-2646.
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. Past performance of any investment is no guarantee of future performance. All investments have risk.