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Is gold forming a bottom here?  We will watch this closely.  The “cup and handle” formations are powerful launch points for gold and silver.  We look to be in the early stages of one right now.  If gold can recapture $1,380 and then hold it for a while, we should expect fireworks shortly thereafter.

gold-apr-9-2014

Many of our readers are familiar with my banter for the last half a dozen years with “Dr. J” – aka “Cactus Jack” and most recently “Backwoods Jack.”

Backwoods is a friend of mine and he does own a substantial amount of gold and silver, but he is also under the influence of two of his sons.  He is very proud of them.  He sent them to an exclusive Eastern Boarding School and they graduated from pricey, prestigious Ivy League colleges.  They are both successful in their fields and they represent the typical Wall Street views on all things economic.

Backwoods loves to “stir the pot,” and he constantly pits my views against theirs, leaving me fuming in the middle.  I don’t mind a good debate, but his son, I’ll refer to him as Backwoods Jr, crossed the line on Friday.  I have tried to remain relatively calm throughout it all and after waiting for a day in order to temper my reply, I decided to rationally comment on what he had to say.  I believe many of you will benefit from the issues that were brought to the forefront here.

“We Are All Paranoid Conspiracy Idiots”

Last week I sent Backwoods Jack two articles, one by Paul Craig Roberts and the other, some recent comments from John Williams.  Backwoods sent them on to one of his sons.  His son sent an email back to Backwoods that he forwarded to me commenting that I shouldn’t get upset with the email or his son’s “piss and vinegar.”  “The acorn doesn’t fall far from the tree,” Backwoods said.  He’s right.

After carefully reading Backwoods Jr’s comments, it is obvious he has a total mis-understanding of the subject he is discussing.  He should stick to his area of expertise, which happens to be commercial real estate management.

I will address his comments, point-by-point knowing full well that it will not change his views in the slightest.

Backwoods Jr:  Who’s the paranoid conspiracy idiot talking about hyperinflation?

The “paranoid conspiracy idiot” he is talking about is John Williams and Paul Craig Roberts.  I need not defend these highly respected gentleman.  Google them and see for yourself what their credentials are.

Backwoods Jr:  Look, I’m a consumer, you’re a consumer, I don’t need some gold banger to tell me that hyperinflation is staring us in the face when I buy crap every day and prices are no higher and maybe lower than they have been in years.  Ask these morons to walk outside and look up and tell you if the sky is blue, I seriously wonder what world they live in! Maybe they’re on crack or something?  

No one said that hyperinflation is here now.  The articles Backwoods Jr is referring to explain that due to the massive money creation by the Federal Reserve (whose balance sheet recently topped $4.3 trillion dollars, up 400% in the last few years), and the growing real threat that oil and natural gas will be sold in currencies other than the US dollar, leading to the dollar’s loss of its Petro Dollar status.  That will cause the dollar to fall precipitously leading to hyper-inflation.

federal-reserve-balance-sheet-taper-vs-no-taper
Source: Zero Hedge
This is not far-fetched, as Russia and China recently agreed to trade oil and natural gas in Rubles and Yuan instead of the dollar.  This could be the beginning of the end of the dollar’s monopoly in energy trading and is something every American should be concerned with.  This is such a big issue, it is enough to lead America into a war with Russia in order to preserve the dollar’s monopoly as the only settlement currency for oil.

Here is an excerpt of the article from Paul Craig Roberts:

Is the US or the World Coming to an End?Paul Craig Roberts

April 9, 2014

2014 is shaping up as a year of reckoning for the United States

One of two things is likely: Either the US dollar will be abandoned and collapse in value, thus ending Washington’s superpower status and Washington’s threat to world peace, or Washington will lead its puppets into military conflict with Russia and China. The outcome of such a war would be far more devastating than the collapse of the US dollar.

Read the full article at PaulCraigRoberts.org

Over 80% of all US Treasuries are held by emerging country central banks (like China and the Brics).  They are our banker.  They call the shots.  Should they decide to increase their holdings in Euro, Yuan, Ruble and other currencies, and sell off dollars, the result will be highly inflationary for the US.  We have no control over this, which is frightening.

The second article contained several quotes from John Williams’ Hyperinflation Special Report.

Hyperinflation Special Report (2011) – John Williams

March 15th, 2011

It is in this environment of rapid fiscal deterioration and related massive funding needs that the U.S. dollar remains open to a rapid and massive decline, along with a dumping of domestic- and foreign-held U.S. Treasuries. The Federal Reserve would be forced to monetize further significant sums of Treasury debt, triggering the early phases of a monetary inflation. Under such circumstances, current multi- trillion dollar deficits would feed rapidly into a vicious, self-feeding cycle of currency debasement and hyperinflation.

With the economy already in or near depression, hyperinflation kicking in quickly would push the economy into a great depression, since disruptions from uncontained inflation are likely to bring normal commercial activity to a halt.

What happens next is anyone’s speculation. How long would a hyperinflation last before the government brought its fiscal house into order and established a sound currency? I would be surprised if the hyperinflation crisis lasted beyond a year or two, since the system is not positioned to handle the crisis well and pressures for rapid resolution would be extremely strong. All that depends, however, on what evolves out of what otherwise would be highly unstable political, economic, financial and social environments. Accordingly, the best individuals can do is to take actions to protect themselves and their families, through the worst of foreseeable circumstances, both in terms of personal safety and in terms of the purchasing power of pre-crisis assets.

***

Physical gold (sovereign coins priced near bullion prices) remains the primary hedge in terms of preserving the purchasing power of current dollars.  In like manner, silver is in this category.

***

A U.S. hyperinflationary great depression would be extremely disruptive to the lives, businesses and economic welfare of most individuals.  Such severe economic pain could lead to extreme political change and/or civil unrest…

What has been discussed here remains well shy of a comprehensive overview of all possible issues, but rather at least has raised some questions and touched upon some likely consequences.  No one can figure out better than you the peculiarities of this circumstance and how you, your family and/or your business might be affected.  Using common sense remains the best advice I can give.

Read the full article at ShadowStats.com 

Backwoods Jr:  The BS these people come up with to try and sell you gold and silver is incredible. That people actually pay these idiots for a newsletter to tell them to buy gold and silver is even better!!  The reality is these gold bangers have lost a ton of money in gold and silver over the years and if they didn’t have their loser newsletter subscribers paying them a few bucks a month they’d be eating ramen noodles 3x a day.

John Williams and Paul Craig Roberts are not involved in the precious metals industry.  They do not sell gold or silver.  They are providing honest, insightful information and they are warning Americans to be aware of the consequences we will face if (when) the dollar loses its Reserve Currency status.  Roberts is interviewed throughout North America and Europe and his information is available free of charge.  Williams newsletter, Shadowstats, sheds light on the unreliable data presented by the BLS and he shows what the “real” unemployment, inflation and GDP numbers are, sans the government’s “hedonic adjustments,” “seasonal adjustments” and the phantom new job creation added to every monthly report.  His newsletter is expensive and his subscribers include executives of Fortune 500 companies, hedge fund managers and many wealthy investors.  I have been a subscriber for the last eight years.

Backwoods Jr:  In 1980 gold traded at about $800 an ounce today it’s $1,300 that’s a growth rate of 1.44%.  The S&P over the same period went from 100 to 1,800 for a growth rate of 8.8%. The Dow went from 800 to 16,575 for a growth rate of 9.32%. And, the CPI went from 86 to 233 for an annual inflation rate of 2.97%.

So, the so-called “ultimate hedge” against hyperinflation has been outpaced by regular old inflation 2:1!!

I didn’t go to Harvard but I can figure out where your money should have been for the last 34 years!  I’m also pretty sure that 34 years from now the charts will look the same.  And the US dollar will still be the international reserve currency. 

Here is where Backwoods Jr shows his lack of understanding of gold.  He also uses the time-tested Wall Street argument that gold has under-performed stocks since 1980.  Note the time frame: 1980 – 2014.

His first major error is considering gold to be an “investment.”  Gold is not an investment.  Gold is money.  Gold has filled that role for centuries.  Gold is a Tier 1 Asset Class for banks.  That puts gold in the same class as the US dollar.  Gold is money.  Gold is a reserve in virtually every central bank in the world and countries like Russia and China are adding as much gold to their monetary reserves as they can source from the marketplace.

Gold Becomes a Tier 1 Asset Class for Banks – TDV Golden Trader

WEDNESDAY, JUNE 20, 2012 AT 10:11AM

Misdirection by MSM as Gold Moves Towards The Banking System

Despite what the Main Stream Media (MSM) or “Financial Pundits” tell you, the gold bull market is far from over.  In fact, it is just starting, in our opinion.  While the misdirected financial world tell you that gold is in a bubble and it has burst, the central bankers and government organizations all know it is far from over.  In fact, gold is moving towards the banking system and not away from it.  We all know that many central banks are now net buyers of gold and their holdings are increasing as their need to diversify away from risky assets and foreign bonds only grows.

Continue reading on TDVGoldenTrader.com

Gold is “insurance” against inflation, civil disruption and war.

Gold’s value is different in times of peace, prosperity and low inflation than it is during times of rising inflation.

During the 1970s, gold rose from $35 to $850 when inflation rose to double-digits in the US.  When the Fed, under the guidance of Paul Volcker, jacked up interest rates to double-digits, the inflation fell (money was too expensive to borrow and business contracted) and the price of gold pulled back.  The remedy to stop the inflation was high interest rates.  That is not an option in the U.S. in 2014.  Not unless we are willing to collapse the stock market, the bond market and the real estate market.  Yet if foreigners stop buying our Treasuries or sell them, which is starting to happen now, interest rates will rise – or the Fed will have to purchase the bonds which will lead to hyper-inflation.

Gold was exactly the asset to own and the dollar the asset to avoid in the 1970s.  In the 1980s bonds were the place to be.  In the 1990s it was the stock market.  When Backwoods Jr uses 1980 as his starting point to compare the performance of gold (money) to the Dow (or S&P 500) which is an investment, he picks the PEAK price right before Volcker’s interest rate policy changed the landscape.

If we have the freedom to choose a starting point, why not use 2001, at the peak of the stock market before the crash and at the birth of gold’s second bull market?

Here are some numbers that reflect my “arbitrary” start date:

On January 14, 2001 the Dow was 11,722.98.  The average price of gold in 2000 was $271.

Since then, the Dow is up 137%! (11,723 to 16,026). Gold is up 463%.  (from $272 to $1,318).  And that is after a decade of Dow growth and 2.5 years of a gold correction.

But both starting points, 1980 and 2001 are arbitrary and support a different point of view.

I say the correct starting point for determining gold’s performance must be August 15, 1971, the day that President Nixon closed the gold window and eliminated a gold-backed dollar.  That is when gold was “set free” to float to whatever price the market dictated.  Gold was $35 an ounce when this occurred (actually Nixon had devalued the dollar and gold was $42.22 but for this discussion I will use the more commonly accepted number of $35).

Actually, it was never “set free” and the government and the Fed have been holding the price down to the best of their abilities ever since.  The Dow at the time was 889.

dow

It took 25.4 ounces of gold to buy the Dow in August, 1971.  Today it takes 12.15 ounces of gold ($1,318) to buy the Dow (16,026).  Gold has doubled the growth of the Dow since then (it takes half as many ounces to buy it).

But the Dow is a phony number because most of the stocks that were in the Dow in 1971 were removed because they represent failing or obsolete companies and they were continuously replaced with new and strong firms.  Even so, gold doubled the Dow performance!!

But this misses the point.  We are comparing apples and oranges.  Gold is money and its value is constant.  What changes is how many dollars someone will pay for an ounce – more or less.  Gold does not pay interest or dividends.  But it is a hedge against mis-management of the dollar and the resultant inflation.

So why is inflation so low?  Let’s look at what John Williams (that “paranoid conspiracy idiot”) has to saw about inflation.


Source: ShadowStats.com

Source: ShadowStats.com
If inflation is calculated the same way it was in 1980, Backwoods Jr’s starting point in determining gold’s performance, it is now running at nearly 10%!  Williams explains how to read his graphs:

The CPI chart on the home page reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living. 

Continue reading on ShadowStats.com

Backwoods Jr:  In 1980 gold traded at about $800 an ounce today it’s $1,300 that’s a growth rate of 1.44%.  The S&P over the same period went from 100 to 1,800 for a growth rate of 8.8%. The Dow went from 800 to 16,575 for a growth rate of 9.32%. And, the CPI went from 86 to 233 for an annual inflation rate of 2.97%.

So, the so-called “ultimate hedge” against hyperinflation has been outpaced by regular old inflation 2:1!

I would argue that Backwoods Jr’s inflation numbers are wrong, very wrong; though they are the “official” numbers.  They are the numbers that Wall Street loves to use.

Likewise, Wall Street uses the ridiculous BLS unemployment numbers too.  I prefer to use John Williams’ numbers.  Here is an explanation of how he derives his numbers and his graph.

Alternate Unemployment Charts – ShadowStats.com

The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.

The point Miles Franklin likes to make is that gold is financial “insurance.” Insurance against a major drop in the value of the dollar.  We own gold “just in case,” though we also believe that the time is at the doorstep now that it will be a necessary asset.

Backwoods Jr expects gold to show a return in good times and bad.  That’s not how insurance works.  Gold performed as would be expected in the 1970s when inflation was raging and the stock market was sinking.  Gold performed as expected in the 2000s when the stock market was sinking and the money supply was exploding, courtesy of Alan Greenspan, Ben Bernanke, TARP and Quantitative Easing.  I offer gold’s ascent from $272 to $1900 during this period as all the proof one needs.

But gold has fallen for the last two and a half years as the stock market has risen.  Without addressing why this happened, suffice it to say that the reason to own gold is to protect your wealth when the shoe drops again. Backwoods Jr doesn’t cancel his fire insurance, his health insurance and his car insurance just because he hasn’t made a claim recently.  Nor should any rational person cancel their “financial insurance” either.

I have no issue with Backwoods Jr or anyone choosing the stock market as the best place to keep their money.  It’s their money, not mine.  I have no problem with Backwoods Jr believing that the dollar will never lose its Reserve Status or refusing to accept a stock market crash or hyperinflation.  I don’t agree with him in any of these areas, but that’s o.k.  We all have freedom to chose what we want to.

But I do take issue with his demeaning email.  In fact I am furious that he has the audacity to state that gold and silver dealers and newsletter writers deliberately use scare tactics to sell their products and are only motivated by profit.  That is an insult to most of the people in our industry!  All of us at Miles Franklin – Andy Schectman, Andy Hoffman, Bill Holter and myself have the majority of our net worth in gold and silver.  We are putting our own money where our mouth is.  We may be right, or not, but we do not promote gold and silver to an unsuspecting public just to make money.  Many in our industry honestly believe we are, as John Paulson would say, “doing God’s work” to help all of you avoid a financial maelstrom.  We have taken the necessary precautions and have stepped aside of the consequences of  the loss of Petro Dollar status and/or Reserve Currency status.  I hate to be so bold, but I am certain that we are correct.

The truth is most people think like Backwoods Jr.  His views are embraced by the majority.  We are in the minority.  But that does not mean that we are wrong.  After 30 years in this industry, I assure you, we are NOT wrong.

Try and find the time to listen to the Max Keiser report.  Coincidentally, the Petro Yuan is the topic of discussion.  40 central banks are already starting to stock up on the Petro Yuan as they anticipate oil and natural gas being traded in Yuan.  Yes Backwoods and Backwoods Jr, we are all crazy and the dollar will never lose its Petro or Reserve status.
 
 Keiser Report: Petrodollar vs Petroyuan (E587)