Pounding the table for gold and silver
The Federal Reserve tiptoed back, hoping I wouldn't
notice, into expanding credit, as evidenced by their $2 billion
infusion of make-believe money last week. Not too bad, actually.
But worse, they actually started down the path of the ultimate
fraud, and bought up $1.6 billion of government debt! Hahaha!
The government creates a bond, and the damned Federal Reserve
creates the money out of thin air to buy the bond! Hahaha! This
is fiat money at its finest! Hahahaha! And we wonder why we get
so little respect from the rest of the world!
Of course, this was probably necessitated by the Treasury holding
the pedal to the metal and driving us into an astounding level
of debt, and as of yesterday they had indebted us by another $57
billion in the first nineteen days of August alone! Three billion
bucks a damned day! A day! This takes us to, according to the
Treasury's website, a national debt of $7,926,779,954,124.77.
Almost eight trillion dollars. And this level of new borrowing
increases our debt at over a trillion dollars a year! A trillion!
As if that was not enough to push me off the deep
end, they also allowed the banks to decrease reserves again, down
to new historical lows, freeing up money that is supposed to be
a hedge against losses from all those loans they have been making
all these years to less-than-credit-worthy borrowers. Hahahaha!
The reserves that the banks were holding against potential losses
due to their profligate lending are now being used to create more
loans! So that they will have more losses! And less cushion! With
a tone of utter contempt in my voice, these are the depths to
which banking has sunk.
And why are they doing this? Well, as those clever
wags at WhiskeyAndGunpowder.com so pithily put it, "As soon
as the credit bubble stops expanding, kiss this economy goodbye."
But what to do with the money? How about borrowing
money to buy stocks? Well, Eric J. Fry, in his Rude Awakening
column at the Daily Reckoning.com site, reports that stocks are
grossly overpriced. "Last year, for example, the S&P
500's 'operating earnings,' the flattering, quasi-fictional results
imagined by Wall Street analysts, totaled $66.62. But after applying
GAAP standards to these quasi-fictional earnings, and adjusting
them for the cost of stock options, the S&P's actual earnings
dropped to only $55.25, according to James Montier, equity strategist
at Dresdner Kleinwort Wasserstein. That earnings number would
put the S&P 500 on a rich PE multiple of 22 times earnings."
And how do stock prices typically perform after
hitting these lofty levels? Very poorly.
Well, what about bonds then? How about borrowing
money to buy bonds? Well, it turns out that bonds are also overpriced,
as they are so expensive that they are yielding less than zero,
net of taxes and net of inflation! Less than zero real return!
So I don't see a whole lot of potential in bonds, either! Hahahaha!
And don't get me started on housing, because I am already losing
sleep over the housing bubble as it is. Stephanie Pomboy at MacroMavens
notes that almost a trillion dollar's worth of mortgages, of which
$543 billion is sub-prime, is going to have to be reset sometime
in the next eighteen months, a time when interest rates are supposed
to be higher than they are now. Already the amount of interest
money people owe on the floating-rate mortgages is up 14% year-over-year,
and so Pomboy figures that delinquencies are "sure to rise."
In case you are new to this economics thing, or
you are really drunk and you do not notice that my face is contorted
in horror at this revelation, economies are not prospering when
delinquencies are rising. Economies are only prospering when delinquencies
- As you are no doubt aware, I am constantly ready
to expound at length about the egregiously, criminally bad way
that the Federal Reserve is "managing" the economy,
which is, in a nutshell, the continuous, excessive creation of
money and credit to finance bubbles. With, I might add, the blessings
and encouragement of government, because of the bankrupting expense
of installing the wealth-transfer functions of socialism/communism
throughout the many levels of government.
And why am I always so ready to get right in your
face and scream about monetary policy until you are dizzy and
disgusted with the way I hold you by the neck, how little specks
of spittle keep hitting you in the face, and how the vein on my
forehead is throbbing throbbing throbbing? Because history is
nothing but one dreary lesson, over and over again. Namely, you
cannot allow these things. You cannot allow the money supply to
expand faster than the economy, because all that new money devalues
all the existing money, which causes prices to go up, which puts
people into a fund and it destroys the economy. Nor can you have
a fiat currency, because there are no natural limits to how much
money and credit a government can create, which devalues the money,
which causes prices to go up, which puts people into a funk and
it destroys the economy.
Nor can you allow excessive degrees of fractional
banking, as there are no natural limits as to how many times a
bank can multiply each dollar of deposits, which causes the value
of money to go down due to its excessive creation, which causes
prices to go up, which puts people into a real funk and it destroys
Of course, this brings to mind the French Revolution,
which was caused by the government of France creating so much
fiat currency that the currency was destroyed, and the people
got, as if you had to be told again when I just told you this
in the previous sentence, into a really, really, really, really
bad mood, (RRRRBM), a concept which is central to the famous Mogambo
Bizarro School Of Economics (MBSOE). And one of the principal
identities of this school of economic thought is that "RRRRBM
is equal to really, really, really, really bad news (RRRRBN)".
So in your notes please write this important equation down:
RRRRBM = RRRRBN
And to prove it, this morning on the Morning Edition
of PBS we learn that there have been 60 murders in Milwaukee so
far this year, already equaling the number of murders in all of
last year. A local official noted that (as I recall him saying)
that people there are "frustrated and angry." Well,
news flash to Milwaukee! Get used to it, dudes! This is what ALWAYS
happens when the horrific inflationary results of an irresponsible
inflationary monetary policy start hitting home. Misery and suffering
and anger and crime are what always happens after the boom dies!
People become poorer and poorer and angrier and angrier. Bummer.
And that is why I have been pounding the table for
gold and silver. The ongoing devaluation of the dollar means ongoing
appreciation in the price of gold, theoretically preserving the
buying power of my wealth by offsetting the decline in the value
of the dollar that is so bedeviling everyone else that they are
robbing each other and beating each other up and killing each
other. But all my table pounding was, of course, wasted on a non-receptive
audience, as you have no doubt surmised if you have ever talked
to anyone about buying gold, especially at dinner time, and your
mom ends up yelling at you to shut the hell up about gold and
eat your dinner before it gets cold, and your little brother pipes
up that you are a creepy little goldbug creep, and you instantly
shoot back that his creepy ignorance about monetary policy is
what really creeps me out, if you want to know who is the biggest
creep around here!
That is why I was astounded this morning when I
opened up my email and found, among the usual hate mails and helpful
suggestions (such as the popular "Go to hell, jerk!"),
that the father of my buddy, Bob S., has apologized for poking
fun of me all these years for being bullish on gold, and to let
me know that he is now buying precious metals! Wow! Okay, now
I'm walking around with my head in the clouds, as this is one
time that The Mogambo was right! I am, as has now been proved,
not always wrong about everything! Oh, my heart soars! Or, as
Lewis Carroll so deliciously phrased it, oh frabjous day!
Then, a few hours later when I was in the newsstand
buying a copy of Barron's, Mike tells me the same thing! I was
floored! What a coincidence!
Perhaps their change of heart is because they have
listened to Rhona O'Connell of Mineweb.com, who writes that "The
latest figures from the European Central Bank suggest that the
total tonnage (of gold) sold to date in this, the first year of
the second central bank Gold Agreement, has reached 506 tonnes,
against a limit of 500t."
So not only have the central banks disgorged themselves
of all the gold that they agreed to sell, but have actually exceeded
it! Hahaha! And early, too!
But she cautions us to not get too overwrought about
this, as "This of itself is of no great moment as the limits
have been breached before, but it does suggest that if the spirit
of the agreement is to be fully adhered to, then sales are going
to have to drop right off or cease over the remaining six weeks
of the current CBGA year, which is September 26th."
The actual statistics are that "Annual gold
fabrication plus bar hoarding demand in 2004 was 3,410 tonnes
against physical supplies from the mining sector (net of dehedging)
and scrap of 2,850 tonnes (GFMS Ltd. figures). This produced a
shortfall of 560 tonnes or 10.8 tonnes per week, much of which
was met by net official sector sales."
For gold to go up in price in the face of all of
this adding to world supplies tells me that there is one hell
of a lot of interest in buying gold. And without any more of these
central bank expansions of supply, the current level of demand
should, in theory, cause the price of gold to rise. And it is
a rising price means that something that you bought has gone up
in price! And it is this delicious rise in price that produces
profits! So, Mogambo Investment Tip O' The Day For The Zillionth
Day In A Row (MITOTDFTZDIAR): Buy gold.
But the Gold Anti-Trust Action group, popularly
known as GATA, have re-circulated a series of letters with the
government, wherein we learn that while there are no actual plans
for the government to again confiscate gold from us proletariat
trash, like that filthy, commie bastard FDR did, they reserve
the right to do it anytime they want. Several people have written
and asked what in the hell they can invest in that the government
can't, or won't, confiscate. How can they keep their money safe?
The room is suddenly hushed except for the sharp
intake of breath, as each atom in each molecule of each person
in the room was instantly galvanized to rapt attention, attending
to my every move and gesture. The air crackles with electric tension,
as at any moment I am going to answer one of Life's Big Mysteries
(LBM). I look out over the crowd, and I see their innocent, trusting
faces uplifted to meet my benevolent gaze, and I see the light
of hope flicker in their eyes. That is why it breaks my heart
to tell you that the sorry answer is that there is nothing that
you can do with your money that the damned government cannot come
and take, any time they want to.
A lesson about the grubby confiscatory attitude
of governments can, perhaps, best be illustrated by the lesson
from modern-day Zimbabwe, as we learn from Peter Spina's newsletter,
the Global Watch Gold Forecaster. Once upon a time, some Zimbabwean
people and companies had investments in shares in foreign companies,
mostly American. The government had nothing. Here is where Mr.
Spina takes up the story. "Foreign shares were appropriated
in 1984, when the government raided the banks to seize nominee
held shares and paid with 4% government bonds for these shares."
And then, suddenly, the government owned the shares of foreign
companies, denominated in dollars, and they were soon rich. The
people now had Zimbabwe government bonds, denominated in Zimbabwe
money, both of which went to virtual worthlessness, and they were
And if you think that there is a big difference
between the kleptocracy in Zimbabwe and the kleptocracy in the
USA, then I know that you are young and I am charmed by your guileless,
childlike innocence. I smile in serene indulgence. The Mogambo
reaches out his hand as if to gently stroke your head. But instead
I rap your thick skull with my bony Mogambo knuckles (BMK), and
you shout "Hey! That hurt! Why did you do that, you horrible
old man?" My face is a study in kind benevolence as I reply,
"As you must grow older and wiser, you are now both older
and wiser than you were a few minutes ago, my darling young grasshopper!"
And I think to myself "One day you will gain
sufficient insight, and you will sit up with a start and declare
'The Mogambo was right! We're freaking doomed!' "
But getting back to the original question, which
was how you can protect yourself from the government coming and
taking all your stuff, I add that you can't even escape to another
country, as the United States is the only country in the world
that reserves the right to own you, which gives them the right
to track you down anywhere you go in the whole world, and take
anything they want, at any time. Welcome to the "land of
the free and the home of the brave."
All of this means that this is another valuable
Mogambo lesson (AVML), where we learn that it is important for
you to pay attention to how you vote, as each of these grubby
government thefts was created by horrible elected officials that
we voted for, and all the grubby government thefts in the future
will be created by horrible people we will have voted for, too.
Makes you think. I hope.
- If you want to know when was a good time to retire,
Puru Saxena writes that "During the entire 19th century,
there was zero inflation! Zip! Nada! In fact, we witnessed mild
deflation (contraction of money supply) during that entire century.
To put it simply, cash saved in 1800 bought roughly the same amount
of goods one hundred years later!"
So the people who retired in 1800 had the same,
or greater, standard of living for the next hundred years, because
their savings were not eroded by inflation. Yes! If you really
want to help the senior citizens of this country, then THIS is
the way that you do it! And if you want to help the poor, then
this is how you do it! They never get poorer as long as they have
a steady income of money!
And why is there no other time to retire that was
as good? Because of the inflation in prices that followed from
the inflation in the money supply, caused by the Federal Reserve
massively creating money and credit, with gusto bordering on mental
illness, from its inception in 1913. Hell, just going back to
1960 he finds that "The money supply grew from $300 billion
in 1960 to roughly $10 trillion today! That is an astounding growth
rate of 3,300% or a 33-fold increase! This huge rise in the supply
of money has caused money to lose its value (purchasing power)."
Now, this is nothing new for the disciples of The Mogambo (DOTM),
who sit at my feet to learn economic wisdom, but who persist in
spending their time bickering and arguing about which smells worse,
my feet or my breath?
Relative olfactory discussions aside, with such
a consistent track-record in mismanaging the money, Mr. Saxena
goes on to say, "It would be safe to say that going forwards
we can expect this trend to continue. Therefore, as more money
is introduced into the system by the Fed, the value of paper money
will continue to evaporate in real-terms."
The lesson is that if you are retired on a fixed
annuity, or if you are retired and count Social Security as a
significant part of your income, then you are indeed screwed,
and you need to go back in time to the 19th century. Failing that,
you should contact AARP immediately, and have them lobby Congress
to pass The Mogambo Zero-Inflation Imperative (TMZII). This would
require that the Federal Reserve target zero as the upper bound
on consumer prices. And if they miss the target, I get to travel
up there, first class, and slap the living hell out of the chairman
of the Federal Reserve until I am sure that he has gotten the
message. The legislation, of course, has no chance of passing.
But when inflation is causing suffering, and crimes are being
committed by scared and desperate people, one day a bullet will
zing by your ear, and with a jolt you will suddenly realize, "The
Mogambo was right! We're freaking doomed!"
Mr. Saxena scoffs at my megalomaniacal and fear-mongering
stupidities, and with wit born of brevity, says simply "Make
no mistake; inflation (increase in money supply) is robbery pure
and simple. Inflation is the confiscation of your hard earned
And if you have ever been robbed, you know how violated
and angry you felt, and why you had this sudden, consuming interest
in the Death Wish movies, where Charles Bronson demonstrates how
revenge and handguns just naturally go together, like peanut butter
Okay, so to tell you the truth, now I'm getting a little irritated
with this Saxena guy, who is not only stealing my thunder, but
doing it better than I ever could, which, I admit, wasn't all
that great to start with. So I figure that I could launch into
my patented "Buy gold now, you moron" (BGNYM)"
spiel, which isn't all that popular and sales of the CD and the
video were disappointing, since it turns out that very few people
like being called morons. Who knew? But anyway, before I can even
chug the last of that cold, frosty beer and stagger to my feet
to speak, this Saxena guy jumps in and says "In my opinion,
gold is one of the cheapest assets paper 'money' can buy these
days. No, let me correct this - in fact, around $435/ounce, gold
is literally being 'given' away!"
At this, everybody is suddenly standing and applauding
and cheering. Applause and cheers that would have been MINE if
he hadn't stolen them from me! So I sat down in a bitter sulk
and crossed my arms in defiance, and I glared at him as he was
ceremoniously carried off stage, borne aloft on the shoulders
of an adoring crowd.
Then here comes Roland Watson, of the New Era Newsletter,
who says that he figures that gold could hit $10,000 an ounce,
and silver could go to over $700 an ounce "in our lifetimes."
And the crowd goes bananas again! Now they are carrying them both
around the auditorium, like they were heroes or something!
Seeing that I have a few minutes to spare until
the boisterous crowd settle down, I idly pick up some papers and
read that his method of determining these prices for silver and
gold is to use the "Kondratyev wave, based on an average
length of 54 years between peaks." Where are we now? He says
that they cycle is precisely determined if "We add 54 to
the last peak in 1980." This plots out "to arrive at
a suggested blow off about 2034 if not sooner." So I try
to mentally subtract 2005 from 2034, and I get this monster headache
from the effort. So I ask my wife, and she says that it is 29
years from now. So things are going to continue to get worse and
worse for 29 years? Boooo! But I will continue to make money on
silver and gold for the same 29 years, at which time gold will
have appreciate in value from $440 an ounce to over $10,000? Yayyyy!
In a slightly different vein, he notes that this
whole inflation thing holds true for gold, and that "the
1932 low of $20 equates to $258 in 2001 dollars, only $3 off the
actual 2001 low" which almost perfectly adjusts for the loss
of buying power of the dollar since 1932. And remember that these
are the LOWS. And things have gotten much worse since 2001, and
will continue to get worse for the rest of your life.
For example, the Labor Department said that first-time
claims for unemployment benefits rose to 316,000 in the week ending
Aug. 13. This is up from a revised 310,000 the prior week. Perhaps
this has something to so with the Chicago Fed's index of national
activity having slipped to +0.16 in July, which was down from
+0.40 in June.
The Chicago Fed, in a rare bit of candor, also said
that the index also points to rising inflationary pressures. Hahahaha!
No kidding? Hahahaha!
As if to validate this, the Conference Board's Composite
Index of Leading Economic Indicators was 138.3, up from a revised
138.1 in June. So, net gain in the LEI was 0.2. The Coincident
Indicator, which reflects current economic activity, advanced
0.1 percent in July to 120.8. But it is the Lagging Indicator
that I watch, as it is a measure of cost pressures. Anyway, this
inflation indicator climbed 0.3 percent to 120.0 in July. So inflation
is increasing faster than present and future economic activity!
Note the exclamation point, which is your infallible Mogambo Indicator
Of Emphasis (MIOE), which means that you should pay particular
attention to it, as it WILL appear on the mid-term exam. And maybe
a pop quiz or two, because that is just the kind of sadistic bastard
that I am.
- Oil expert Craig Smith, who has been described
as a "self-proclaimed geopolitical know-it-all" who
has authored a book called Black Gold Stranglehold, predicts that
gas prices will jump to five bucks a gallon pretty damned soon.
Before you write him off as just another kook who
takes the extreme position (and if he wasn't a kook then why in
the hell is the idiot Mogambo reading his stuff?), this is the
same guy who, last year, predicted $3-a-gallon gas and $65-a-barrel
crude oil this year. "So," I can hear you thinking to
yourself, "if this guy is so smart, what does it think about
the price of oil in 2006? Huh? What does he think about THAT?"
Turning my famous Mogambo Mind Reading Power (MMRP) to Mr. Smith,
I close my eyes and peer into his brain. I can see dimly through
a mist that he figures $80 a barrel by the end of the year. So
I say "Eighty dollars a barrel!" and he says "Hey!
That's right! How did you do that?" and I haughtily remind
him that I am (blare of trumpets) The Mogambo, and he says, with
a real snotty tone that I didn't like one bit because I hear it
so much, "Oh. That explains the smell."
So keep buying energy stocks, as they are both a
good relative value and fundamental value, too. As Bob Wood of
Kaizen Managed Assets wrote in his latest newsletter, "With
energy stocks selling at about 12x earnings in a market where
the S&P is quoted in Barron's as selling at over 19x earnings
that can rightly be called suspicious in many cases, why would
anyone think of selling those holdings?"
- The rate on bank 6-month Certificates of Deposit
hit 4% last week. This is roughly the same yield as 5-year Treasury
Bills! And only 0.22% less than 10-year T-notes! With CD's there
is zero risk of loss of principal, as it is guaranteed by the
banks that issue them. But with debt issues there is no guarantee,
except that if interest rates climb, then any chumps holding bonds
are guaranteed to get killed! Hahahaha!
And yet people are buying bonds with such zeal that
they have driven the yield to (after inflation and after tax)
less than zero! And corporate bonds are yielding squat, too! Like
a woman marrying me and expecting me to change, it makes no sense!
Unless they know, because they are evil gutter-dwelling
rats using their little rat-senses to detect an impending crisis,
that there is a hell of a recession coming down the pike. If so,
then they know that the Federal Reserve will slash interest rates
with their usual maniacal zeal, and (theoretically) bond prices
will go up, giving them a gain on their bond holdings. Hmmmm.
This may have something to do with what Larry Edelson,
of the Money and Markets newsletter, is talking about when he
writes, "Oil is actually killing Wal-Mart on two fronts.
Its bread-and-butter customers are spending so much on gas that
they have very little left over to spend at Wal-Mart and the cost
of operating its trucking fleet and air conditioning its stores
is going through the roof. According to the company's CEO yesterday,
'this impacted our operating profit by $30 million and our total
utility expense rose by $100 million in the quarter.' "
But it is not only that! He goes on to say "Rising interest
rates are also taking a toll. Approximately 50% of Wal-Mart's
$33 billion of debt is adjustable or floating rate debt, which
means that its borrowing costs will rise and fall with interest
rates. How much? Wal-Mart saw its overall borrowing costs rise
by 5 basis points in Q2. And before you pooh-pooh 5 basis points,
just remember that it translates into $165 million dollars on
$33 billion of debt."
He goes on to say that the lesson is "If you
place any credence whatsoever (and you should) on the notion that
Wal-Mart is a barometer of the economy, you should be very worried
that our consumer-driven economy may run into some big trouble
in the not-too-distant future." And it is this "trouble"
that the bond buyers are apparently counting on.
But he sees that this is affecting me seriously,
and I am nervously licking my lips and inserting a clip of ammo
in and out of an M-16 rifle, click-click, click-click, click-click.
To change the subject, he nervously notes that the government
is a lying bunch of scumbags, although I am not sure that it makes
me feel any better. To prove it he points to the latest CPI report,
which dares to report that housing prices, "which account
for 40% of the CPI, increased by only 2.9% over the last 12 months."
If you have spent a lot of time lost in a cave on Mars, perhaps
you are not familiar with what has been happening to housing prices
for the last few years. For everybody else on THIS planet, however,
we say "Hahahaha!"
And a bunch of guys who HAVE spent most of their
time on this planet is the National Association of Realtors (NAR),
who report that "the price of an average home in the last
12 months rose by an average of 13.6% - the fastest increase in
The government says house prices rose 2.9%. The
NAR says 13.9%. Who are you going to believe? But beyond that
ugly point, even at 2.9%, housing prices are rising faster than
after-tax incomes! I run screaming from the room.
The measures of inflation are surging. Let me quote
from Barron's in their Review and Preview section, with some judicious
Mogambo editing of individual words. "Wholesales and retail
prices SHOT up in July, reflecting SOARING energy costs. Producer
prices SURGED a BIGGER-THAN-EXPECTED 1%, the LARGEST increase
since October. The core index ROSE 0.4%. Consumer prices ROSE
And it is not just here, either. On Bloomberg.com
we read that "The inflation rate in the dozen nations sharing
the euro rose to a seven-month high in July, exceeding the European
Central Bank's limit as oil prices jumped to record levels. Consumer
prices rose 2.2 percent from a year ago".
And it is going to get worse and worse, as we are
all expanding our money supplies at huge multiples to GDP growth.
This is the path of madness and misery. Ugh.
*****The Mogambo Sez: It seems to me that when the
Gold Lease Rates (found at the Kitco.com site) trend down, then
the price of gold trends down, too. And when the Lease Rates trend
up, the price of gold trends up, too. Nothing scientific, but
it looks very interesting to me!
Right now, gold lease rates have bottomed and are
trending up. Looks like a good time to buy precious metals. But
then again, anytime is a good time to buy precious metals these
Richard Daughty, the angriest guy in economics
9241 54th Street North
Pinellas Park, FL 33782
727 546 5568