Frog Soup, Gold & Diamonds

Richard Russell snippet
Dow Theory Letters
posted Jul 13, 2010

July 12, 2010 -- "The Golden Rule": "Who has the gold, makes the rules." And China is on a headlong path to accumulate as much gold as it can. China is now the world's largest producer (miner) of gold, and all the gold mined in China must be sold to the government. What in the world could the Chinese be planning? Here's what I'm thinking. The yuan will become the world's most wanted currency, heavily backed by gold and a stable government plus the planet's biggest military. In due time, China will be the new owner of the world's reserve currency.

On my July 7 site, I explained why I am convinced that the Bernanke Fed is on its way to devaluing (cheapening) their Federal Reserve Notes (we mistakenly call them "dollars"). Why am I convinced of Bernanke's plans? Because it is the only painless and politically acceptable way. It's the Fed way. In effect, it's the old "frog in a pot of slowly heating water on the stove". The frog never notices the rising heat. By the time he does, he's frog soup.

Back in 1945 I bought a $10,000 GI Life Insurance Policy. Paying off that policy was a real pain in the ass. I had to send Uncle Sam $20 every month, and that was a lot of money (remember, prior to the Air Force I was lucky to have a job loading trucks for $18.75 a week. That was a union job, and it included half a day on Saturdays). So that $20 a month to carry my insurance policy was hard. As a matter of fact, most GIs who took out this insurance dropped out of it. They couldn't afford it. After a number of years, I paid off that damn GI Insurance policy (deep breath).

Now let's return to the present. After 65 years of systematic inflation, I could pay off my old insurance policy in a day, and I wouldn't miss the money. And that's the way it works for government created inflation. Let the government gradually inflate, and give them enough years, and even the trillions of dollars of debt we owe will seem "manageable."

As I write, inflation in the US is "dangerously thin." Home prices are weak, autos sales are slowing, consumers are cutting back and corporations are hoarding money. Could the next step be actual deflation? This is Bernanke's worst nightmare. Prior to his election as Fed chief, Bernanke stated that under a fiat money system deflation could not happen.

You remember Benny's famous words, "The US government has a technology called a printing press (or today its electronic equivalent) that allows it to produce as many US dollars as it wishes at essentially no cost." Thus Bernanke reasoned that the Fed could create so much money that the dollar would lose its value, and a devaluating dollars is in itself inflationary. With the "cheap" dollar everything would cost MORE in dollar terms. So that's Bernanke's thinking, flood the system with enough Fed Notes and the price of everything rises -- and presto, deflation backs off, and inflation is back again.

As for America's $50 trillion [?] national debt, inflation might go a long way towards solving that problem too.

What's the downside of the Bernanke's "perpetual inflation" strategy? The downside is that his plan of perpetual inflation will gradually undercut all faith in the US dollar. At some point, even though the US can print endless Fed Notes, the rest of the world will refuse to accept these Notes. At that point, the US dollar will be in a collapsing mode. You know the drill -- produce too much of anything and people don't want it (this does not include drugs).

Right now I see the US dollar as the world's biggest bubble. It's a supposed "safe haven" but it's an over-loved and doomed currency. It's held for trading purposes and safe-keeping by almost every nation. Amazing because the US's debt will be 90% of GDP in the coming fiscal year -- a "banana republic" type balance sheet.

Back in the 1960s former Fed Chief Alan Greenspan was an honest man and a firm believer in the gold standard. The following is from a paper Greenspan wrote in 1967. He later forgot what he wrote and became an advocate of fiat currency. I never trusted him after that, and I believe it led to this ego-driven, ambitious twerp's downfall.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

by Alan Greenspan [more here]

Confession -- A successful and sophisticate investor of mine bought more bullion coins yesterday, bought 'em during the correction. He told me, "I'll never sell them, I consider them part of my estate. I don't give a damn what the price of gold is tomorrow, next week or next year. I count my gold holdings not in dollar-value but in the number of ounces I hold."

He continued,"Let me own 10,000 ounces of bullion gold, and I don't care what the stock or bond markets are doing, and I don't give a damn what the dollar price or the euro price of gold is. If I own 10,000 ounces of gold (and I intend to), I'll always be wealthy. And I don't have to worry about inflation, devaluation or the solvency of any counter-parties."

Warming up to the subject, he added, "Because only gold is not subject to a counter-party. Gold is pure wealth on its own. The only way gold's value can be destroyed is if a new monster hoard of gold is discovered and distributed. In other words, "too much gold in the world" would drive down the value of gold. But you know something -- there'll never be "too much gold in the world," this despite the desperate attempts of the ancient alchemists to turn lead into gold. Gold is retrieved by high risk, large investments of capital, know-how, daring, danger, and the sweat of thousands of men. No central bank has ever produced so much as a single ounce of gold. Talk to any central banker and he'll tell you," "We don't need no stinkin' gold. We create our own money, as much of it as we want and when we want it. And we don't have to sweat or lift a finger to produce it."

Question -- OK, Russell, then if one never sells his gold, what in the world do you do with it?

Answer -- You leave it to your wife or your kids or your sweetie. And you tell them never to sell it. It's as simple as that.

Some people (collectors) who bought Matisses and Picassos and Modiglianos for a song during the great Depression still have those paintings. They've never sold them, and they've never made millions, but these are wealthy people. Fortunes are made in the buying. You buy 'em when nobody wants them.

Example -- When I first suggested (many years ago) that my subscriber buy top-quality diamonds, it was a time when nobody wanted diamonds. I was told repeatedly that you "buy diamonds at retail and sell them at wholesale." Besides, I was told that "new diamond mines are opening all over the world." Further, it was said that the price of diamonds had done nothing for the last decade, and what could change?

Well a lot has changed. Diamonds are now sizzling in price. Chinese and Indian women adore them. And the Russians covet them. Currently, there's a scarcity of large, good quality stones. Most American jewelers have never seen anything like it. Nobody wants to sell their inventory of diamonds.

Today any good quality stone over 8 carats will bring a price of over a million dollars. I understand that dealers are calling retailers and asking them if they have any stones that they don't want or can't sell. The Hong Kong market is now the hot market for diamonds. Today the only way a diamond dealer can make a real profit is if he is lucky enough to find an uninformed private party who is ready to sell "mom's old wedding ring." Why do you think you are seeing all those big ads for "We want to buy your diamonds and we'll pay top prices for your jewelry"?

Enough about gold and diamonds.

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Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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