Notes

Bad Hair Days for Gold and Silver OR Is the MOST EFFECTIVE Man on the globe Going 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, where the country's all important monetary policy is defined, Ben moved his mouth, words came out, and the financial markets of the world 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 history book of this planet has had a temporal marker inserted... a dividing line demarcating the world the way it was before Ben's mouth moved, and way it really is after his words came out. And in my view, the fateful words were not the ones the talking heads on the financial channels gave import to. It had been one single sentence Ben uttered that really achieved it. Before we replay that sentence, it can be helpful to first offer some perspective by backing up a bit.

Myself, I am a spectator, a day to day American, sitting in the bleachers, watching the game called The Troubled Global Economy unfold, and I'm hearing the referees make their calls. best japanese streetwear brands hear the commentators analyze the overall game. They argue among themselves. They filter events through their own personal philosophy of how the world works. I listen and try to discern the reality tellers in the group. The people free from rose colored glasses and with no axes to grind. I seek the true 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 takes in for way too long now. To make up the difference the united states has borrowed the amount of money. To help ease the pain of financing the growing debt, interest levels have been kept artificially low and the US dollar has been significantly watered down by growing the amount of money supply faster than the economy. Such a game cannot be played indefinitely however, and at this time it seems we have been somewhere in the 4th quarter. The endgame approaches.

Knowing that, in 2004 I purchased a few coins to hedge against what seemed an uncertain future. Gold had roughly doubled to $400 an ounce at that 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 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 were an inevitable crash. Here is the list from that article.

Reduce on securities (stocks and bonds)

Buy silver and gold

Buy food

Become a farmer

Stock up on the basics

Keep some cash on hand

Take some security precautions

Buy a super-high fuel consumption 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 everything based on currencies, such as for example stock markets, commodity markets, bond markets, et al. are only worth the trust we devote them. The machine works so long as everyone trusts that the value of the little pieces 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 info we are given concerning the vehicle of preference is accurate and truthful.

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

This year 2010, with gold up to $1200 oz, a rapidly rising stock market, 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, along with other tangible items may be the safest store of wealth right now.

As it happens, an excellent part of the advice I had been distilling and passing on has proven helpful. As interest levels have dropped bonds have gained in value, and gold and silver coins 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 arrange into readable format what seemed to be an obvious group of trends that were discovered upon parting the curtain to reveal the decrepit old man behind the face of Oz. Meaning, the mainstream press is not your friend. You must dig for the reality.

So here we have been now in the latter half of 2011, a substantial Federal Reserve meeting under our belts, inflation up a little, a brand new 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 group of catastrophes as time moves through every month of the year(s). Surprisingly, precious metals, which have skyrocketed in price this year, assumedly reflecting the continuing debasement of watered down currencies and an unprecedented world of uncertainties, have pulled a complete reverse and headed along in price. Gold, which topped $1900 oz. in August, dropped in cost to the 1500s. Silver got slammed too. A large chunk of the fall in platinum prices, in addition to a significant downturn in just about any other market came immediately after Fed chairman Ben Bernanke made some words come out of his mouth on September 21st, 2011.

Just what exactly power does Ben have to make nearly every publicly traded market in the world drop like a stone? What did he say to rock the boat so severely? What words mixed in with the hot air emanating from his mouth shook the markets so deeply? And just why is it that the antidotes to market turmoil and uncertainty -namely gold and silver- dove in cost aswell? Many analysts appear to conclude the reason is that Ben didn't supply the markets what these were expecting. The markets were expecting some additional type of Quantitative Easing (essentially printing money out of nothing). Yet Ben mostly promised only to move some existing money around to artificially suppress long term interest levels (read lower mortgage rates), also to leave most the rest alone. And truthfully, I believe those many analysts are right- to a degree. The markets had rallied to the call of the Fed meeting and expectations were high. And indeed the Fed's actions did disappoint. But that may not be what really set the markets ablaze. It could just be that it was not the Fed's actions that tipped the apple cart, but rather the Fed's words.

Ben said this:

...there are 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 probably the most powerful man on the planet then you got to know that folks of this ilk (politicians) don't normally talk this 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; "Access to mortgage credit continues to be 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 in between some standard Fed-speak that was rather tempered. His statement reminded me of those prescription drug commercials on TV that let you know how great life will undoubtedly be in the event that you swallow their pills.... and between your hopeful statements and the pretty pictures they eventually mention that, oh, by the way, you can die from swallowing their pills.

Ben slipped in a Mickey. Would the markets notice? They did. Plus they reacted far more than simply to the Fed's actions. Ben's words dashed the markets' hopes. That's where the true damage was done. The psychological reaction 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 think to the markets, it wasn't only a case of being delivered to bed sans extra helpings of dessert (i.e. money printing). Rather, Ben appeared to intimate that things were so bad even dinner was shared. Holy cow Batman. After all, 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 type 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 in fact rolling unopposed into Baghdad at that very moment.

Ben told the truth! Fed-speak for significant downside risks to the economic outlook translates to; we are in very deep doo doo. It may be the first time the truth had sputtered out at one of these brilliant monetary policy meetings in a few time. It's almost just like the Fed is giving up, also it took folks by surprise. To be fair, Ben has been hinting at the truth 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 as of this particular the-whole-world-is-watching-with-baited-breath meeting. The markets concluded, "Gee If BEN says it's bad, it must be REALLY bad. And gee, he's not fainting any candy to take the sting away," and therefore the markets were instantly repriced for a slowing, not a growing, economy.

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

But why did gold and silver get stomped along with most everything else? Simple. The market is now expecting deflation. Deflation with a capital D. The current [US / world] economy could 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 cut the tether and the balloon WILL deflate. Meaning, without further stimulus, or talk of stimulus, the economy will contract, or more precisely, continue to contract. At this time the declining price of the benchmark metal copper along with a variety of other indicators is telling us the economy is slowing again. A slowing economy is people buying less stuff, resulting in 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 therefore the cost of stuff boils down. That's price deflation, and gold/silver aren't always immune.

Of course that is a simplified explanation, and several factors combined together to bring the price of gold and silver down so hard and fast. Cyclical factors, forced liquidation to raise cash to cover other bets gone wrong, possible market manipulation, along with 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 appear to be for silver and gold?

The solution is; nothing has changed. Nothing has changed. The paper based financial world we grew up with continues to be crumbling. Confidence in the machine continues to be eroding. Governments are intervening to forestall each day of reckoning that is certain to come. Money has been lent that may never be repaid in full. There's only two ways this can end, and both ways portend well for gold and silver coins; either governments will continue steadily to print money to service old loans and remove new ones, or, governments will default and the loans will never be paid back. It is that simple, and you also won't need to be an economist to comprehend that any more than you should be a meteorologist to know while 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 can never be paid back) -that's plan A- or the country will default -that's plan B-. You will notice that both plan A and plan B have the same ultimate result. IN THE US, it's hard to trust we will willingly opt for plan B though. Politicians are controlling that option, and politicians know they will be in serious trouble with the voters should they pull the plug on loan repayments. One of the best quotes I've ever heard was stated by Luxembourg's Prime Minister Jean-Claude Juncker: "We all know 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 much more quantitative easing), will likely continue to boost charges for gold/silver in the same way it did for days gone by decade, as water-downed currencies get re-priced regarding gold and silver coins. Plan B could possibly be triggered by a number of countries though, and if so we'd likely start to see the most massive unwinding of debt in the annals of the planet catch fire (that might 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 as 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 will be priced less. However, historically, even though precious metals tend to fall in deflationary periods, they drop in price less relative to the cost of other things. Hmmm. Perhaps that is why gold/silver have historically been a way of preserving wealth.

It's not a fairly picture in any event, but interestingly, for the average indivdual the precautions to protect 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 cash 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 can say something like; "Gee, why worry about my fuel consumption if plan B takes hold? Because in a deflation some things fall in cost but others don't. Even though demand for most things dries up (people either don't have money or they wait for a further drop in price before buying), the way to obtain other things tends to dry up 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 because of inclement weather (like, say, ummm, This season), then food can get very expensive. Plus, we need to eat. We have to 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 are already getting alternating doses of both plan A and plan B. We are on a rollercoaster of costs of recycleables going up and then going down. By the end of your day perhaps all we can do as citizens is make plans permanently larger doses of both plans A and B. Meaning, we shall likely continue to see both inflation and deflation as the rollercoaster ride continues and governments and investors battle to heard in the proper direction. Volatility and government intervention will be the only certainties. By the end of your 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 all together got too far into debt, and that more debt isn't the solution. The longer we wait the more painful it'll be, which explains why the Too-Big-To-Fail argument ultimately will not hold water. Perhaps it really is in recognizing our powerlessness over this example that we become empowered. In pragmatic terms we need to cope with this global issue on a local level. The above set of precautions should help ride out any storm.

Which brings me to another point to end this essay. I really believe this is a mistake to think of this financial and economic crisis as an isolated event. It might be best to take a holistic approach in viewing the issues of the world. Can it be coincidence that our world is so deluged with every sort of crisis these days? We see changes in the planet, the climate, the economy... and, in people. Is human nature evolving? We are realizing progressively more that our old systems of governing ourselves should be updated. Many people feel that a 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 speak to feel a shift in the wind to one degree or another. This can be a time and energy to be awake and aware. Perhaps way more 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 is not set in concrete, but is more like wet cement, we may be able to shape it. Our thoughts, words, and actions may have more affect than we realize. Not necessarily in the daily unfolding of world events, but at an increased, more archetypal level. This is usually a time therefore to remain, for lack of better words, positive. We may be living in many of the most interesting and evolutionary times of most 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. Think of this time on earth as a test. If we are being tested, let's conduct ourselves -each and every one 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 adapt to a very different lifestyle. But I say if things go sour for us too, let's take whatever lemons we have been dealt and make lemonade. In the meantime, 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 silver and gold could drop further in the short term, precious metals certainly are a store of value, and should be part of a 'complete breakfast' of securing ones future in uncertain times.
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