Notes

Bad Hair Days for Silver and gold OR Is the Most Powerful Man on the globe Likely to Plan B?
In September of the year 2011, Ben Bernanke, Chairman of the Federal Reserve Board of Governors, proved that he is the single most effective man on earth. In the periodic meeting of the Federal Reserve's Federal Open Market Committee on September 21-22, in which the country's all important monetary policy is defined, Ben moved his mouth, words arrived, and the financial markets of the planet blew up. Or nearly so. The ticker tapes of the world's stock and commodity and bond markets still flow, but a sea change has occurred. The annals book of this planet has already established a temporal marker inserted... a dividing line demarcating the world the way it had been before Ben's mouth moved, and way it really is after his words arrived. And in my own view, the fateful words were not the people the talking heads on the financial channels gave import to. It was a unitary sentence Ben uttered that basically achieved it. Before we replay that sentence, it might be beneficial to first offer some perspective by burning a bit.

Myself, I am a spectator, a day to day American, sitting in the bleachers, watching the overall game called The Troubled Global Economy unfold, and I'm listening to the referees make their calls. I hear the commentators analyze the game. They argue among themselves. They filter events through their own personal philosophy of the way the world works. I listen and try to discern the truth tellers in the group. The people free from rose colored glasses sufficient reason for no axes to grind. I seek the real umpires of observation (I just calls 'em likes I sees 'em). And in doing so... the reality revealed itself. It's simple. By sheer mathematics America, and many other countries, have borrowed more money than can ever be repaid. America has been spending more then she consumes for way too long now. To create up the difference the country has borrowed the amount of money. To help ease the pain of financing the growing debt, interest levels have already been kept artificially low and the US dollar has been significantly watered down by growing the amount of money supply faster than the economy. This type of game can't be played indefinitely however, and at this point it seems we are somewhere in the 4th quarter. The endgame approaches.

With that in mind, in 2004 I purchased a few coins to hedge against what seemed an uncertain future. Gold had roughly doubled to $400 an ounce at the time from its multi-year lows. In mid 2008, shortly after the collapse of investment bank Bear Stearns, with gold at $800 oz, and myself being truly a teacher and writer by partial trade, I wrote an essay entitled The Thin Red White and Blue Line to warn friends and relatives perhaps too busy living their lives to observe how dangerous the economic climate had become and that trouble was afoot. Greed, corruption, and the resultant overleveraging threatened the foundations of the economy, and I suggested a couple of things that one might do to mitigate what appeared to be an inevitable crash. more info is actually the list from that article.

Reduce on securities (stocks and bonds)

Buy silver and gold

Buy food

Become a farmer

Stock up on the fundamentals

Keep some cash on hand

Take some security precautions

Buy a super-high gas mileage vehicle (electric car, hybrid, motorized bicycle, etc.)

Conduct a "disaster preparedness test"

The philosophy that derived the aforementioned list was/is simple. The paper based financial world we was raised with is beginning tocrumble. Paper currencies, and all things based on currencies, such as for example stock markets, commodity markets, bond markets, et al. are only worth the trust we devote them. The system works so long as everyone trusts that the worthiness of the little bits of paper we exchange with one another for goods and services could have a somewhat predictable value. On a related note, we also trust that when we put our money into the paper based investment world, the information we are given concerning the vehicle of choice is accurate and truthful.

But in fact, rely upon most paper currencies of the world has eroded along with the purchasing power of said currencies. A dollar just doesn't buy what it used to. And on that aforementioned related note, trust in the economic climate was deeply eroded in 2008 when it had been found that supposed A-A-A rated mortgage based investment vehicles (derivatives) sold to investors around the world ended up being predicated on fraudulent loans. Therefore, investors, pension funds, money market and hedge funds, along with other unsuspecting financial institutions around the globe took a deep hit. The paper was proved nearly worthless and the taxpayer was asked forced to bail out a lot of institutions. Therefore and more rely upon all things paper has been greatly diminished.

In 2010 2010, with gold up to $1200 oz, a rapidly rising currency markets, and a seemingly recovering economy, I wrote a follow-up article entitled If The Future's So Bright How Come I Don't Need Shades, which argued that despite appearances, nothing had changed, and that we were actually still heading into an economic depression so serve it would ultimately be termed a depression. The article suggested that cash, short term US government bonds, gold/silver bullion, and other tangible items might be the safest store of wealth right now.

As it happens, a good part of the advice I have been distilling and passing on has proven helpful. As interest levels have dropped bonds have gained in value, and precious metals are significantly higher. Cash however is worth a bit less over the board. For the advice imparted I take no credit except perhaps to possess been in a posture to organize into readable format what appeared to be an obvious group of trends that were discovered upon parting the curtain to reveal the decrepit old man behind the facial skin of Oz. Meaning, the mainstream press is not your friend. You need to dig for the reality.

So here we have been now in the latter 1 / 2 of 2011, a significant Federal Reserve meeting under our belts, inflation up a bit, a fresh mini-crash in the stock markets of the planet, and money ducking desperately in to the shelter of the bond market in hopes of gaining cover from the increasing uncertainties of the financial world. In addition we've a planet dealing out an endless series of catastrophes as time moves through each month of the entire year(s). Surprisingly, gold and silver coins, which have skyrocketed in price this season, assumedly reflecting the continuing debasement of watered down currencies and an unprecedented world of uncertainties, have pulled a full reverse and headed along in cost. Gold, which topped $1900 oz. in August, dropped in price to the 1500s. Silver got slammed too. A large chunk of the fall in precious metal prices, as well as a significant downturn in nearly every other market came right after Fed chairman Ben Bernanke made some words emerge from his mouth on September 21st, 2011.

Just what exactly power does Ben have to make nearly every publicly traded market on earth drop like a stone? What did he tell rock the boat so severely? What words mixed in with the hot air emanating from his mouth shook the markets so deeply? And why could it be that the antidotes to market turmoil and uncertainty -namely gold and silver- dove in price as well? Many analysts seem to conclude associated with that Ben didn't supply the markets what they were expecting. The markets were expecting some additional type of Quantitative Easing (essentially printing money out of thin air). Yet Ben mostly promised only to move some existing money around to artificially suppress longterm interest rates (read lower mortgage rates), and to leave most everything else alone. And truthfully, I think those many analysts are right- to a degree. The markets had rallied to the decision of this Fed meeting and expectations were high. And even the Fed's actions did disappoint. But that may not be what really set the markets ablaze. It may just be that it had been not the Fed's actions that tipped the apple cart, but rather the Fed's words.

Ben said this:

...you can find significant downside risks to the economic outlook....

What?? He actually said that? Given his audience, and the magnitude of concentrate on that meeting, what Ben said was tantamount to the Fire Marshall shouting fire in a theatre. Unless you normally follow the statements created by the most powerful man in the world then you must know that folks of that ilk (politicians) don't normally talk that way. For example, rather than recently saying that the housing market continues to be in the dumpster because people can't get loans, Ben said; "Usage of mortgage credit is still constrained". That's the normal Fed-speak.

So what exactly happened? Was Ben's mouth broken or something? Maybe he didn't think anyone would notice. He snuck the sentence right among some standard Fed-speak that has been rather tempered. His statement reminded me of these prescription drug commercials on TV that tell you how great life will undoubtedly be if you swallow their pills.... and between your hopeful statements and the pretty pictures they happen to mention that, oh, by the way, you could die from swallowing their pills.

Ben slipped in a Mickey. Would the markets notice? They did. And they reacted far more than simply to the Fed's actions. Ben's words dashed the markets' hopes. This is where the real damage was done. The psychological result of the markets to Ben's words might best be explained in nursery rhyme form....

The markets

rocked easily to sleep

the outcomes of dessert dishes filled deep

by their rich uncle Ben

who had told them they want never weep

were expecting a delicious treat

But instead

ben said

the Fed

would provide them with water and bread

What hope of desserts next week? Not a shred!

that filled the markets with dread

tears were shed

and the markets were sent off to bed

their faces all turned red

I believe to the markets, it wasn't only a case of being sent to bed sans extra helpings of dessert (i.e. money printing). Rather, Ben appeared to intimate that things were so bad even dinner was up for grabs. Holy cow Batman. I mean, Ben's statement was akin to Iraq's Baghdad Bob (a.k.a. Iraqi Information Minister Mohammed Saeed al-Sahhaf during the Gulf War), breaking from his typical party line of denying that coalition forces were rolling into Baghdad, and that the forces were actually on the verge of defeat... to instead admitting that those tanks behind him in the camera shot did indeed belong to the coalition, and they were actually rolling unopposed into Baghdad at that very moment.

Ben told the reality! Fed-speak for significant downside risks to the economic outlook means; we are in very deep doo doo. It might be the first time the reality had sputtered out at one of these brilliant monetary policy meetings in some time. It's almost just like the Fed is quitting, and it took folks by surprise. To be fair, Ben has been hinting at the reality for some time now in other forums just like the Fed's Jackson Hole summit in August, where he admitted that the Federal Reserve couldn't fix the economy. None-the-less, the markets weren't ready for what uttered at this particular the-whole-world-is-watching-with-baited-breath meeting. The markets concluded, "Gee If BEN is saying it's bad, it must be REALLY bad. And gee, he's not passing out any candy to take the sting away," and therefore the markets were instantly repriced for a slowing, not just a growing, economy.

How come Ben breaking from the original oratory the Federal Reserve has been putting forth all these years? It can be more years before we really know, but a best guess is he is losing his consensus of support from another Fed governors. We are seeing more and more of the breaking with the party line stuff going on everywhere (like Europe). The Powers-That-Be are not longer speaking with one voice. One might think that it's approaching every man (slash woman slash country) for himself time.

But why did gold and silver get stomped along with most the rest? Simple. The market is currently expecting deflation. Deflation with a capital D. The existing [US / world] economy can be likened to a punctured balloon. So long as the balloon is tethered to a tank of heat (Ben's mouth and/or the wind from the high-speed printing press), it'll stay afloat. But slice the tether and the balloon WILL deflate. Meaning, without further stimulus, or talk of stimulus, the economy will contract, or more precisely, continue steadily to contract. Right now the declining price of the benchmark metal copper along with a selection of other indicators is telling us the economy is slowing again. A slowing economy is people buying less stuff, leading to companies making less stuff, resulting in the hiring of fewer employees to make the less stuff, and subsequently causing even less demand for stuff, and thus the price of stuff boils down. That's price deflation, and gold/silver are not always immune.

Of course that is clearly a simplified explanation, and several factors combined together to create the price of silver and gold down so hard and fast. Cyclical factors, forced liquidation to improve cash to cover other bets gone wrong, possible market manipulation, as well as the fear that everyone else will sell their gold before you -to name a few- all may have contributed to the shocking drop in gold and silver coins prices. The question now is; what does the road ahead look like for silver and gold?

The solution is; nothing has changed. Nothing has changed. The paper based financial world we was raised with continues to be crumbling. Confidence in the system continues to be eroding. Governments are intervening to forestall a day of reckoning that is certain ahead. Money has been lent that may never be repaid completely. There's only best japanese streetwear brands can end, and both ways portend well for precious metals; either governments will continue steadily to print money to service old loans and take out new ones, or, governments will default and the loans will never be paid back. It is that simple, and you won't need to be an economist to understand that any more than you need to be a meteorologist to know when you are being rained on.

Greece is in the headlights at the moment to see if they will default. Either Greece gets more loans (that may never be paid back) -that's plan A- or the country will default -that's plan B-. You will observe that both plan A and plan B have exactly the same ultimate result. IN THE US, it's hard to trust we will willingly choose plan B though. Politicians are controlling that option, and politicians know they'll be in serious trouble with the voters if they pull the plug on loan repayments. The most effective quotes I've ever heard was stated by Luxembourg's Prime Minister Jean-Claude Juncker: "Everybody knows what to do, but we have no idea the way to get re-elected once we have done it."

So plan A, continuing to borrow-print-spend (and more quantitative easing), will probably continue to boost prices for gold/silver just as it did for days gone by decade, as water-downed currencies get re-priced when it comes to gold and silver coins. Plan B could possibly be triggered by various countries though, and if so we'd likely start to see the most massive unwinding of debt in the history of the world catch fire (that would be monetary deflation, which leads to price deflation). A residence of cards would fall, leaving a huge number of people with much less money almost overnight because the derivates market collapsed, overleveraged financial institutions went broke, money market and pension funds committed to those institutions took a bloodbath, and the multi-trillion dollar derivatives market imploded. The music would stop and everyone would scramble for a chair. With the resulting drastically reduced money supply, most stock and commodity prices would be priced far lower. However, historically, even though precious metals tend to fall in deflationary periods, they drop in cost less relative to the expense of other things. Hmmm. Perhaps this is why gold/silver have historically been a means of preserving wealth.

It's not a pretty picture either way, but interestingly, for the average person the precautions to safeguard oneself from the resulting chaos of either plan A or plan B are similar. Let's look at that aforementioned recommended set of precautions again:

Reduce on securities (stocks and bonds)

Buy silver and gold (as well as perhaps gold mining stocks)

Buy food

Become a farmer

Stock up on the basics

Keep some money on hand

Take some security precautions

Buy a super-high fuel consumption vehicle (electric car, hybrid, motorized bicycle, etc.)

Conduct a "disaster preparedness test"

Ok. Now you could say something like; "Gee, why be worried about my fuel consumption if plan B takes hold? Because in a deflation some things fall in price but others don't. Even though demand for most things dries up (people either don't possess money or they wait for a further drop in price before buying), the way to obtain other things tends to dry out as production drops. If less gas is being produced as a result of economic depression then gasoline may escalate in price. Or, if food crops fail due to bad weather (like, say, ummm, THIS year), then food will get very expensive. Plus, we must eat. We must drive to work. But we don't have to buy a completely new car or iPhone.

So are we likely to plan B? The truth is we have been already getting alternating doses of both plan A and plan B. We have been on a rollercoaster of costs of raw materials going up and going down. By the end of the day perhaps all we are able to do as citizens is make plans for ever larger doses of both plans A and B. Meaning, we shall likely continue to see both inflation and deflation because the rollercoaster ride continues and governments and investors battle to heard in the proper direction. Volatility and government intervention are the only certainties. By the end of the day, plan B (massive debt default and resulting deflation) seems inevitable. But it doesn't mean we won't see hyperinflation first. It's just a matter of how much inflationary money printing we get before we give up and accept the reality that the world as a whole got too far into debt, and that more debt is not the perfect solution is. The longer we wait the more painful it'll be, which is why the Too-Big-To-Fail argument ultimately will not hold water. Perhaps it is in recognizing our powerlessness over this situation that we become empowered. In pragmatic terms we must cope with this global issue on an area level. The above set of precautions should help ride out any storm.

Which brings me to some other point to end this essay. I believe this can be a mistake to think about this financial and overall economy as an isolated event. It may be best to have a holistic approach in viewing the issues of the world. Could it be coincidence that our world is so deluged with every kind of crisis these days? We see changes in the planet, the climate, the economy... and, in people. Is human nature evolving? We have been realizing increasingly more that our old systems of governing ourselves need to be updated. Many people feel that a big change of ages is upon us, and that amidst all our woes and concerns we are giving birth to an increased level of human consciousness. Most folks I talk to feel a shift in the wind to one degree or another. This is a time to be awake and aware. Perhaps more so than at any time in our lives. It is not business as usual.

That's where our real power as a race of humans may lie. If we believe that the future isn't set in concrete, but is similar to wet cement, we may manage to shape it. Our thoughts, words, and actions may have more affect than we realize. Definitely not in the daily unfolding of world events, but at an increased, more archetypal level. This can be a time therefore to remain, for insufficient better words, positive. We might be living in one of the most interesting and evolutionary times of all civilization. So no matter what the months and years bring us, let's not panic and present in to fear. That never works. Instead show love and compassion for our neighbors. Consider this time on the planet as a test. If we have been being tested, let's conduct ourselves -each and all of us- in a way we can look back on and be happy with our behavior.

Americans may take a cue from Europe in regards to what one possible future looks like. Many Europeans are increasingly being required to adjust to a very different lifestyle. But I say if things go sour for all of us too, let's take whatever lemons we are dealt and make lemonade. For the time being, it seems prudent to migrate out of paper based assets (stocks, bonds, etc.) and toward real assets like farm land, food, tangibles, etc. And yes, despite the fact that gold and silver could drop further for a while, precious metals certainly are a store of value, and really should be part of a 'complete breakfast' of securing ones future in uncertain times.
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