global financial phenomenon of individuals and businesses
moving their funds to monies in which they have the
highest confidence, or money in which they have a higher
store of faith.
Or, We Have Meltdown
Around the world, investors are
shedding their national monies and moving to Gold. Quite
simply, they have higher faith in Gold than that money
produced by their governments. Gold, neither managed
by a central bank nor a liability of a government, has
been and continues to be the money in which investors
have higher faith. Little wonder with the record of
governments and their debt money that Gold is moving
toward a new long-term high dollar price as it moves
in a greater bull market to more than US$1,300.
So, how do you know when your country's
money is not worth much?
A. Moneychanger at airport in small country
laughs at you.
B. Restrooms have money changers to convert 20s into
C. Sign in restaurant says, "Checks only!"
D. When scrap dealers are melting down the coins.
For some time Gold bugs and writers on
the merits of Gold have been critical of Federal Reserve
policies and the spendthrift ways of the U.S. government.
We have written till our fingers hurt that the value
of the money would be destroyed. Even US$650 Gold is
ignored by the inbred group of economists running Washington.
The latest run in Gold to a high was brought about by
the testimony of Chairman Bernanke. Global money markets
are voting, thumbs down on Federal Reserve policy and
thumbs up on Gold
The answer to the big question above
is D. The scrap dealers are about to have a new line
of business, melting down U.S. pennies, US$0.01 coins.
The U.S. government, and most others, debased their
national monies many decades ago. The ultimate debasement
was when paper money was forced on the citizens. We
still have, though, some metal coins to at least preserve
some semblance of national dignity. What respectable
nation would have all denominations of money in paper
Many of us can remember back to when
the copper penney became a historical relic. Diligent
workers at the U.S. mints conjured up a new mix of copper
and zinc for the lowly penney. The purpose of that action
was to destroy any remaining intrinsic value of the
coin. Such a move would prevent the melting down of
the copper pennies for the copper in them. Presumably
once done with that deed, they went on to reformulate
the consumer price indices. However, global demand for
commodities in a world with surplus dollars has caused
price relationships to adjust once again.
As Graph One shows, the meltdown value
for U.S. pennies is fast approaching. Yes, for simplicity
we are ignoring smelting and other costs. More importantly
though, we are looking at the intrinsic value of the
U.S. one cent piece. Will it be worth more as scrap
metal or as money? And is this development an omen of
the future value of other denominations of U.S. money?
The U.S. penney is composed of copper
and zinc. Exact specifications can be found for all
U.S. coins at the Mint's page through the U.S. Treasury
website. Prices for these metals are rising around the
world in dollars, as most people around the world have
more dollars than needed. Those dollars are being spent
on oil, on copper, on zinc, on Gold, on just about anything
real. The dollar prices of such real assets have been
rising because the real value of the U.S. dollar is
both imaginary, illusionary, and destined for decimation.
Above was asked if the coming meltdown
of the U.S. penney was an omen for the other denominations.
The answer to that question is yes. For as the scrap
value of the penney rises above US$0.01 converting any
denomination of U.S. dollars will be profitable. Just
turn them in at the bank for pennies. How the U.S. government
will respond to that development is the next issue.
The Mint could continue to mint pennies at a loss, or
negative seigniorage. Or the U.S. could reformulate
again, and validate the view that the dollar's value
is doubtful at best.
As a consequence of Moneyization,
the move to monies of higher faith, the meltdown value
of the U.S. penney is moving higher. The termites start
with the foundation of the house, working themselves
higher over time. The same is true of the "monetary
termites" which are slowly consuming the value,
the wood, of the fiat monetary system. You have a choice,
be food for the "monetary termites," or move
on to Gold, the money of higher faith.
The world is slowly sorting out the hierarchy
of money. At the top, Gold has returned to the millenniums
old role as the first tier money. In second tier is
a narrow group composed of the Euro and the renminbi,
which are ascending to new global roles. The third tier
is the U.S. dollar which is beginning its era of decline.
Fourth tier is composed of Canadian, Australian, Swiss,
and similar national monies which either due to history
or economic circumstances are destined be become obsolete
monetary relics of a former era. Lastly is all the rest,
which are to be monetary toast and should not be owned
Gold's return to its historical role
as the premier global money is readily observed in the
higher price for Gold in nearly every national money.
Too many investors have not made the move to Gold, and
remain to be convinced. Some are still hoping that paper
assets will return to the great days of 1929 and 2000.
However, hope has never fed anyone. Others remain overexposed
to debt backed by their homes, believing the silly notion
that one can never lose money in real estate. Time will
crush that view. However, what many do not realize is
that over the past 34 years Gold has been a better investment
than housing. Home prices are simply a money illusion.
See second graph.
In the second graph are plotted the indexed
values for quarterly $Gold prices and home price in
the U.S. $Gold prices are the triangles and home prices
are the solid line. For U.S. home prices the Freddie
Mac Conventional Mortgage Home Price Index is used.
This measure is published quarterly by Freddie Mac.
This index is superior to other measures due to the
large data base of the company. They are able to capture
repeat trades, or repeat sales of the same property.
In measuring stock prices, we use the change in the
price of IBM stock, for example, over time. The widely
followed median price measures compare, for example,
trades in IBM with trades in MSFT, which tends to distort
Astute observers will realize that during
these 34 years periods existed when home prices did
better than Gold. Yes, that is true. However, selling
your house and putting all the money in Gold is not
the recommendation. Putting all your eggs in one basket,
Gold or a house, would be an error. Gold is a wise addition
to the total portfolio of an astute investor. Having
all your exposure to real assets represented by speculation
in a house is not wise. The third graph presents returns
on various periods, and all it proves is that Gold should
be included in your total portfolio. Well, maybe it
proves also that the real estate bugs don't know what
they are talking about.
The first and most important argument
being presented here is that Gold should be included
in the portfolio of each and every investor. This recommendation
is especially true for those with most of their wealth
concentrated in paper assets and/or a home. Gold can
help you diversify your assets. A second concern is
that housing debt and housing prices are a serious threat
to the viability of the U.S. economy. That situation
creates a derived threat to Canadian investors. This
risk is one many continue to ignore as they are lulled
into complacency by the Canadian dollar's appreciation
against the U.S. dollar.
The widely accepted thesis is that the
Mortgage/Housing Bubble in the U.S. is unwinding. Damage
to the economy will be considerable as the default level
rises on mortgage debt. Spillover impact on Canadian
economy will be great due to the exposure to the U.S.
economy. Both national monies are at tremendous risk.
For that reason we need to monitor the imploding U.S.
housing bubble. Hopefully, such an effort will encourage
more investors in both countries to reduce their exposure
to both dollars.
U.S. HOUSING BUBBLE BURST TRACKER
in Nominal U.S. dollars.
|March 2006 Data
|Price Decline - Annualized
|Inventory For Sale
Data: Median Prices from NAR
Two aspects of the unwinding of the housing
bubble are relevant. First, what has happened thus far?
This view is through the rear view mirror of the car.
That information is readily available from the regular
reports. Recently for example, the National Association
of Realtors reported on existing home sales. Relevant
information derived from that report is summarized in
the above table. However, a note of caution is important.
NAR made revisions to the methodology and the data.
That combined with somewhat less than desirable reporting
of the data does give the appearance of skewing the
report to a positive note. Clearly
though prices have peaked, and, secondly, prices are
going to get weaker. That latter view is supported by
the rising level of unsold inventory.
The information we have considered thus
far, as suggested, is looking in the rearview mirror.
What is the outlook through the front windshield? Graph
four give a fairly clear indication of the future trend.
In that graph is plotted the weekly index of applications
for mortgages to buy homes released weekly by the Mortgage
Bankers Association. The trend
has only one interpretation, and the latest data point
is a new low. The mortgage broker is slowly becoming
the "Maytag repairman" of this decade.
As always, we follow the money. Fewer
applications for mortgages mean fewer dollars available
to make purchases of homes. The only way transactions
can occur in such an environment is through lower prices.
Lower prices mean that less equity will be extracted
on sale, and in some cases inadequate equity will remain
to fully repay any indebtedness. Naturally, some potential
sellers will not strike a deal. In these cases all that
is being done is the compounding of losses, making the
ultimate resolution of the debt more painful.
Chairman Bernanke confirmed again this
past week in testimony before a Congressional committee
the lack of any plan at the Federal Reserve. In short,
he said that at some meetings of the FOMC rates might
rise and at some meetings rates might not rise. The
duck outside the window could have provided the same
insight. Such a response in many ways is what to be
expected from a lackluster leader. The monetary policy
of the U.S. economy, the survival of the dollar, and
integrity of the global economy now rest with a mediocre,
politically motivated academic. Think back to all the
college professors you might have had. Would you turn
over to any of them responsibility for the global financial
The U.S. dollar quickly plunged on Bernanke's
testimony. Gold moved ahead, seeking out a new cyclical
high. With the crumbling U.S. Housing/Mortgage Pyramid
scheme as background, we now have a less than inspiring
academic running the Federal Reserve. Global holders
of dollars knew what to do: Sell! Foreign exchange markets
are sending a signal that should not be ignored, and
needs to be correctly interpreted. The signal this week
was that the U.S. dollar's value is tenuous, and the
dollar went down. Do not fall into the trap of interpreting
the market signal as that your national money, Canadian
dollar for example, will get stronger. Gold's price
Gold investors clearly are on the right
train. The disastrous economic fundamentals created
by the former leader of the Federal Reserve are clearly
evident in the housing problem. The selling of dollars
in response to Bernanke's testimony is simply confirmation
that the path of least resistance for the dollars is
down. Investors in the U.S. and Canada that remain complacent
in such a situation will clearly be available for yard
work in future years.
That Gold's Super Cycle is unfolding
is no longer at doubt. The only remaining questions
are how much Gold an investor should own and when should
it be bought. You must answer the first question. Methods
exist to help with the latter, as presented in the last
two graphs. Graph for Euro Gold is available.
The closing note is on an amazing financial,
or business, characteristic of the past year or so.
The Federal Reserve has raised interest rates fifteen
times, from 1% to 4.75%. Thus far no serious nor notable
failure event has occurred because of this change. That
lack of event would seem to be a historical oddity.
Somewhere out there is a ticking financial time bomb.
Somewhere someone had misjudged their true risk exposure.
In June we know the hurricanes will come, just not where
and when. A "monetary hurricane" is brewing
in this financial environment, only when and where is
not known. The time for insurance, Gold, is before the
storm hits. April 2006
Ned W. Schmidt,CFA,CEBS is publisher of
THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS,
to help investors identify timely points for buying
Gold and Silver. You can join him for the Gold Super
Cycle at http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html
His monumental report, "$1,265 GOLD",
which has now been read in 12 countries, has 255 pages
and 98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.