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Protection Against the Rising Risk of a Systemic Financial Meltdown Or... a the Forgotten Role of Gold

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Protection Against the Rising Risk of a Systemic Financial Meltdown Or... a the Forgotten Role of Gold Protection Against the Rising Risk of a Systemic Financial Meltdown or... a The forgotten role of gold Louis Boulanger, CFA, Founder and Director, LB Now Limited New Zealand Society of Actuaries 2008 Conference, 19-22 November “Gold is money and nothing else” J P Morgan, 1913, to the US Congress 2 “It is not because things are difficult that we do not dare; it is because we do not dare that things are difficult.” - Seneca (ca 4 BC - 65 AD) Roman stoic philosopher 3 “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self- evident...” - Arthur Schopenhauer (1788-1860) German philosopher; influenced Einstein 4 Agenda h About prudence now... h The truth about money today h Economic Freedom vs. Debt & Delusion h The role of gold as a standard h The need for monetary reform h How to protect until then h Some of my sources 1. About prudence “A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences.” - Proverbs 22:3 6 The paradox of prudence h Prudence defined by man-made laws and court cases IS NOT the same as the virtue itself Who ever said that to be prudent is to imitate your peers? Is fiduciary irresponsibility not partly to blame for this crisis? h The word now seems synonymous with cautiousness In this sense, prudence means a reluctance to take risks Such reluctance is prudent only for unnecessary risks But when unreasonably extended or applied based on false beliefs, then it becomes reckless and cowardly False beliefs h Today’s ‘USA’ is still based on US Constitution h Central bankers can and will save the world h Bretton Woods system is still operating h Your money is ‘safe’ with the banks h Inflation is rising consumer prices h This time… it’s different! h Gold is not money 8 Forgotten aspects of prudence h Caution is not the only or main aspect of prudence h The following are the other integral parts of prudence according to Scholastic philosophy: Memoria (accurate memory) Intelligentia (understanding of first principles) Docilitas – the most forgotten one Solertia (sizing up a situation quickly) Ratio (discursive reasoning) Providentia (foresight) Circumspection (ability to take all relevant circumstances into account) 9 Docilitas – let’s remind ourselves “The kind of open-mindedness which recognizes the true variety of things and situations to be experienced and does not cage itself in any resumption of deceptive knowledge; the ability to make use of the experience and authority of others to make prudent decisions” 10 “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 (1863-1947) Founder of the Ford Motor Company and father of the modern assembly line 2. The truth about money “Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold.” - Leo Tolstoy (1828 - 1910) Russian author 12 What is money? Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are: 1. as a medium of exchange; 2. as a unit of account; and 3. as a store of value 13 Is this ‘good’ (sound) money? 14 Forms of money Source: The Theory of Money and Credit, by Ludwig von Mises, Appendix B, page 526. 15 “If the American people ever allow private banks to control the issuance of their currencies, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered.” -Thomas Jefferson (1743 - 1826) One of America’s Founding Fathers; 3rd President of its United States (1801-09) 16 Well, guess what? It’s already happened! I call it the ‘Monetary Tragedy of the 20th Century’ h 1910: the Fed is surreptitiously created h 1913: the Federal Reserve Act is passed h 1934: gold possession became illegal in US h 1971: END of gold exchange standard set in 1944 in Bretton Woods (President Nixon unilaterally declares US dollars owned by foreign states are no longer redeemable in gold, as was intended by the BW system) 17 18 ‘Money’ (now) is… debt! h I know… your mind is repelled by this assertion h BUT IT’S THE TRUTH (which can set you free) h That’s why you need to rethink your ASSET MIX h This is the 1st time in history that NONE of the world’s currencies is redeemable in gold (or silver) h Cause & effect in economics can be separated by decades, as was clearly the case with this crisis h The derivatives monster (>US$1Q!) is mostly credit! 19 “In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and godlike intelligence for kings.” -Aristotle (384 BC - 322 BC) 20 Aristotle was a wise man 21 Helicopter Ben is not 22 Ben’s out of control! 23 Musical chairs anyone? 24 Back to the Fed’s BS 25 Back to the Fed’s BS (cont’d) 26 It gets worse… “There are additional important Fed actions not included in their balance sheet. For example, they invented a Money Market Investor Funding Facility (MMIFF) to guarantee up to 90% of $600 billion of loans to that sector. They do this through special-purpose vehicles established by the private sector (PSPVs). The latest Commercial Paper Funding Facility (CPFF) started October 27 and has issued $143 billion so far. These are both in addition to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility initiated September 19. The programs are beyond keeping up with. Nothing like this has ever been done before by the Fed. In time, the consequences in terms of confidence in the dollar will be bad.” Bud Conrad, Chief Economist, Casey Research LLC, 12 Nov 08 3. Gold & economic freedom “This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.” - Who said this?????? 28 Alan Greenspan did! In an essay entitled ‘Gold and Economic Freedom’ he wrote in 1966 and which published in Ayn Rand’s Objectivist newsletter and reprinted in her book Capitalism: The Unknown Ideal, in 1967 In his essay he wrote: “gold and economic freedom are inseparable”. Greenspan has never publicly retracted a word of this essay, not even in The Age of Turbulence, in 2007 29 What you should know about gold h Gold is one of the world’s most misunderstood assets Powerful forces govern its price (especially since ‘71) Despite ‘barbarous relic’, gold remains valued RTW Why? Because it is useful as a monetary commodity h It’s the only asset that can compete with Govt bonds It cannot be debased by creating it ‘out of thin air’ by government fiat – like all currencies today are incl USD h Gold is nobody’s liability (unlike any other asset) Hoarding gold is a protest vote on Govt issued money 30 Gold is special and unique h The only commodity produced for accumulation h The entire aboveground gold stock is only about 155,000 tonnes (less than 8,000 cubic meters) h Gold’s supply is its aboveground stock This is crucial to understand how to analyze gold Annual supply is falling and is currently increasing aboveground stock year after year by only about 1% p.a. A gram of gold mined today is no different from a gram of gold mined by the Romans two-thousand years ago h So...gold price is principally a function of demand 31 Demand IS rising; mostly ETFs Source: Casey Research LLC, Big Gold, Vol II, Issue 7, July 2008, p7 32 Consider this: At the moment, the sum total of the world’s paper financial assets (including equities, bonds and bank deposits) comes to a grand total of about US$75 trillion. Value of all physical gold held by private investors and central Banks, on the other hand, is only about US$1 trillion. Now, just suppose that some of the owners of all that paper got a wee bit spooked and decided to convert a mere 2% of it into gold. Anyone need a tutor to understand what US$1.5 trillion in new demand would do to the gold price? Didn’t think so. 4. Gold as a standard “Ownership of gold is not about lust: it is about liberty of the individual. The gold standard is not a ‘game’: it is the embodiment of the timeless principle “pacta sunt servanda” (promises are made to be kept).” -Professor Antal E. Fekete (1932 - ) Renowned mathematician and monetary scientist (www.professorfekete.com) 34 “In any discussion of the future of gold, or the price of gold, the first thing that must be acknowledged is that gold is a political metal for the simple reason that gold, in its historical role as a currency, is fundamentally incompatible with the modern financial system.” Ferdinand Lips (1931 – 2005) Swiss banker, author of Gold Wars, Foundation for the Advancement of Monetary Education, 2001 35 Is gold a barbarous relic? Some have claimed so with great effect: “In truth, the gold standard is already a barbarous relic.” John Maynard Keynes (1883 – 1946) British economist whose ideas had a major impact on modern economic and political theory.
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