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Protection Against the Rising Riskof a Systemic Financial Meltdown
or...a
The forgotten role of gold
Louis Boulanger, CFA, Founder and Director, LB Now LimitedNew Zealand Society of Actuaries 2008 Conference, 19-22 November
“Gold is money and nothing else”J P Morgan, 1913, to the US Congress
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“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
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“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
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Agenda
About prudence now... The truth about money todayEconomic Freedom vs. Debt & DelusionThe role of gold as a standardThe need for monetary reform How to protect until thenSome 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
The paradox of prudencePrudence 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?
The word now seems synonymous with cautiousnessIn 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
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False beliefs
Today’s ‘USA’ is still based on US Constitution
Central bankers can and will save the world
Bretton Woods system is still operating
Your money is ‘safe’ with the banks
Inflation is rising consumer prices
This time… it’s different!
Gold is not money
Forgotten aspects of prudence
Caution is not the only or main aspect of prudenceThe following are the other integral parts of prudence according to Scholastic philosophy:
Memoria (accurate memory)Intelligentia (understanding of first principles) Docilitas – the most forgotten oneSolertia (sizing up a situation quickly)Ratio (discursive reasoning)Providentia (foresight)Circumspection (ability to take all relevant circumstances into account)
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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”
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“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
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
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Is this ‘good’ (sound) money?13
Forms of money14
Source: The Theory of Money and Credit, by Ludwig von Mises, Appendix B, page 526.
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“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)
Well, guess what?It’s already happened!I call it the ‘Monetary Tragedy of the 20th Century’
1910: the Fed is surreptitiously created 1913: the Federal Reserve Act is passed1934: gold possession became illegal in US1971: END of gold exchange standard set in
1944 in Bretton Woods (President Nixon unilaterally declares US dollars owned byforeign states are no longer redeemable in gold, as was intended by the BW system)
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‘Money’ (now) is… debt!
I know… your mind is repelled by this assertion
BUT IT’S THE TRUTH (which can set you free)
That’s why you need to rethink your ASSET MIX
This is the 1st time in history that NONE of theworld’s currencies is redeemable in gold (or silver)
Cause & effect in economics can be separated by decades, as was clearly the case with this crisis
The derivatives monster (>US$1Q!) is mostly credit!
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“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)
Aristotle was a wise man 20
Helicopter Ben is not21
Ben’s out of control!22
Musical chairs anyone?23
Back to the Fed’s BS24
Back to the Fed’s BS (cont’d)25
It gets worse…“There are additional important Fed actions not included in theirbalance sheet. For example, they invented a Money Market Investor Funding Facility (MMIFF) to guarantee up to 90% of $600billion 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
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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??????
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
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What you should know about goldGold is one of the world’s most misunderstood assets
Powerful forces govern its price (especially since ‘71)Despite ‘barbarous relic’, gold remains valued RTWWhy? Because it is useful as a monetary commodity
It’s the only asset that can compete with Govt bondsIt cannot be debased by creating it ‘out of thin air’ bygovernment fiat – like all currencies today are incl USD
Gold is nobody’s liability (unlike any other asset)Hoarding gold is a protest vote on Govt issued money
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Gold is special and uniqueThe only commodity produced for accumulation
The entire aboveground gold stock is only about 155,000 tonnes (less than 8,000 cubic meters)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 gramof gold mined by the Romans two-thousand years ago
So...gold price is principally a function of demand
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Demand IS rising; mostly ETFs31
Source: Casey Research LLC, Big Gold, Vol II, Issue 7, July 2008, p7
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 centralBanks, 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 itinto gold.
Anyone need a tutor to understand what US$1.5 trillion in new demand would do to the gold price? Didn’t think so.
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4. Gold as a standard“Ownership of gold is not about lust: it is about liberty of the individual. The gold standard is not a ‘game’: it is the embodiment of the timeless principle “pacta sunt servanda”(promises are made to be kept).”
-Professor Antal E. Fekete(1932 - )Renowned mathematician and monetary scientist (www.professorfekete.com)
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“In any discussion of the future of gold, or the price of gold, the first thing that must beacknowledged is that gold is a political metal for the simple reason that gold, in its historical role as a currency, is fundamentally incompatible with the modern financial system.”
Ferdinand Lips(1931 – 2005)Swiss banker, author of Gold Wars, Foundation for the Advancement of Monetary Education, 2001
Is gold a barbarous relic?
Some have claimed so with great effect:
“In truth, the gold standard
is already a barbarous relic.”John Maynard Keynes(1883 – 1946)British economist whose ideas had a major impact on modern economic and political theory.He was a key figure behind the 20th Century global monetary system post WWII (Bretton Woods). Above quote is taken from his Monetary Reform, 1924, p172
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I don’t think so...
Source: James Turk, Presentation at a Casey Research Crisis & OpportunityInvestment Summit in Scottsdale, Arizona, USA, on 26 March 2008
Need more evidence?37
Source: www.sharelynx.com, Dow Jones Industrial Index in US$ chart
And now the Dow in Gold (not $) 38
Source: James Turk, Presentation at a Casey Research Crisis & Opportunity Investment Summit in Scottsdale, Arizona, USA, on 26 March 2008
Again… but for last 200+ years39
Source: www.sharelynx.com, Dow/Gold ratio chart
Still doubtful gold is money?40
The true nature of this crisis
It’s not a credit crisis
It’s not a housing crisis
It’s not a banking crisis
It’s not a financial crisis
The above are all symptoms/manifestations of…
The Great Global Monetary Crisis
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The true nature of the problem
You can’t solve a problem with more of the samethe problem can’t also be the solution!
The true cause is the fiat money system itselfit’s a financial bubble machine!
The nature of the problem is one of MEASUREMoney should once again be defined asa unit of weight of gold
after all, that’s how it used to be (but we forgot!)
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About the gold standardThe gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold.
The gold standard is not currently used by anygovernment, having been replaced completely by fiat currency, and private currencies backed by gold are rare.
This has never happened before in human history...
There is no measure for what our ‘money’ is worth!!!
Greenspan (again)
“Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.”
Source: ‘Gold and Economic Freedom’, 1966
“The gold standard strikes back”
That’s how Professor Antal E. Fekete sees it
“The chickens of ‘71 are coming home to roost”
All fiat currencies are in a race to the bottom
Price volatility is highest in living memory
WHAT’S GOING ON?
Capital is being destroyed
Global monetary system is collapsing
4. Need for monetary reform
“We cannot solve our problems with the same thinking we used when we created them.”
-Albert Einstein(1879 – 1955)A man who should know…
My newfound purpose
First, look after myself and my familythen look after OP’sM as you do your own
Educate, awake as many as I can that’s why I write the e-letter Prosper!
Advocate actively for monetary reformboth here in NZ and overseasSound Money = Economic Freedom
Bretton Woods ‘III’
What do I mean ‘III’?
BW ‘I’ died in 1971 (and was buried in 1976)
BW ‘II’ has been in place ever since (37 yrs)
What’s BW ‘II’?
The Great Delusion of Money as Debt
What will BW ‘III’ be?
That depends on who wins the war…
5. How to protect?
“The ultimate result of shielding men from the effects of folly is to fill the world with fools”
Herbert Spencer (1820 – 1903)English philosopher; best known for coining the phrase “survival of the fittest”
Own some bullion!
ETFs are NOT the same (that’s paper gold)
Gold mining shares are NOT the same thing
Bullion is the only asset that has ever beenable to successfully protect one’s wealth from the devastating effects of systemic risk
Bullion IS NOT an investment… IT’S MONEY
Think of it as INSURANCE (or a protest vote)
Want to know more?
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“"Unlike an animal, man is not told by drives and instincts what he must do. And in contrast to man in former times, he is no longer told by traditions and values what he should do. Now, knowing neither what he must do nor what he should do, he sometimes does not even know what he basically wishes to do. Instead, he wishes to do what other people do -- which is conformism -- or he does what other people wish him to do -- which is totalitarianism.”
Viktor Frankl(1905 – 1997)Austrian psychiatrist; founder of logotherapy; author of Man’s Search for Meaning, 1946
Some of my sourceswww.gata.orgwww.bmginc.cawww.mises.orgwww.chaostan.comwww.shadowstats.comwww.the-privateer.comwww.globalresearch.cawww.caseyresearch.comwww.lemetropolecafe.comwww.professorfekete.com
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Suggested books to readGold Wars, by Ferdinand Lips, 2001
Debt & Delusion, by Peter Warburton, 2005
Petrodollar Warfare, by William R. Clark, 2005
The New Paradigm for Financial Markets, by George Soros, 2008
The Case Against the Fed, by Murray N. Rothbard, Ludwig von Mises Institute, 1994
The Theory of Money and Credit, by Ludwig von Mises, Liberty Fund, 1981 (translation of 1924-34)
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Thank You.
Louis Boulanger, CFAFounder & Director, Louis Boulanger Now LimitedP O Box 25 676 St Heliers, Auckland 1740, New Zealandtel: +64 9 528 3586; mob: +64 275 665 095; email: [email protected]
Any Questions?
