Moneyization: The 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 1s.
C. Sign in restaurant says, "Checks only!"
D. When scrap dealers are melting down the
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 form?
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
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
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 the data.
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
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.