Fair Money and Social Justice

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–In today’s obligatory gold note, we’d like to point out that the yellow metal has made new highs when measured in British pounds and Euros. American markets were closed for Labor Day. European markets were not, but probably wish they were.

–Before we tuck into today’s financial feast, an announcement: your editor and Money Morning editor Kris Sayce are both pleased to be a part of this year’s Gold Symposium in Sydney. It’s being held at Luna Park on November 14th and 15th. You can check out the program here and register to attend for just $199.

–In the interests of full disclosure, we don’t get paid anything if you sign up for a ticket. But we fully support the idea of talking about gold and money and investments for a couple of days with other investors and thinkers. The event’s founder, Marcus Matthews, invited us up to Canberra a few years ago to attend the first of what he hoped would be an annual discussion on gold, money, and the world. It was small, cosy, thought provoking, and gold was selling for just $1044 an ounce at the time.

–The event moved to Sydney last year. There were more people, more speakers, and even a few curious media types. Gold was near $1400. On the first day of the show, an article by World Bank president, Robert Zoellick argued that gold should be used as “an international reference point” for market expectations of inflation and deflation future currency values.

–No one quite knew what that meant. Your editor was asked about it during an interview on Sky News business. We argued that gold was being remonetised by central banks. As we pointed out yesterday, the rising gold price communicates valuable information about how stupid politicians and central bankers actually are.

–This year the show is even bigger and the gold price is even higher. Money Morning editor Kris Sayce will chair the Symposium on Day 2. Your editor will speak on day one. The title of our speech is: “Fair Money: How a return to the gold standard will lead to social justice and fairness in Australia.” Again, if you want to check out the speaking program or register to attend, go here.

–The charts below confirm something we said in our seven-minute interview last year. Namely, that the market would eventually have to reckon with the global debt problem. When it did, it would send sound money higher. It has.

–This includes silver, by the way. Speaking of which, yesterday we mentioned that it’s not unusual to see people melting coins when the value of the metal in the coin exceeds the nominal value of the currency unit. Alex Cowie took us back to 17th century England and told us how Isaac Newton handled the issue. A reader replies:

Hi Dan

You do not have to go back to the 17th century to find this type of arbitrage. Friends of mine at Sydney University used to pay their way through university by buying selected silver coins (older 3p and 6p denominations), take them back to India and sell them for around double their face value.

Cheers
John

–So there you go. Silver arbitrage is a thoroughly modern phenomenon as well. In fact, Alex is far more bullish on silver for 2011 than he is on gold. He makes his case here.

–European banks were rattled yesterday when the US Federal Housing Finance Agency (FHFA) filed suit against units of 17 different banks in Europe and America. The FHFA accuses the banks of misrepresenting risks on $196 billion worth of home-mortgage securities sold to Fannie Mae and Freddie Mac.

–As if the European banks weren’t under enough pressure at the moment. The superficial explanation for a suit like this is that the government is finally chasing up alleged fraud in the mortgage securitisation market. The less obvious explanation is that Fannie and Freddie have been run precisely to allow this kind of fraud, so the public is left holding all the risk via the US Treasury Department’s implied guarantee of Fannie and Freddie debt. Nothing is as it seems.

–You can see below that gold has had breakout years in British Pounds, Euros, and Aussie dollars. Gold is up 41% in pounds, 34% in Euros, and 27.5% in Aussie dollars. This is confirmation that the biggest underlying trend in the metals markets is the bear market in government-backed money. Some governments are less bad at managing their money than others. But gold is quite clearly telling you that serious fiscal and monetary problems need to be reckoned with before we can get back to talking about economic growth.

1 Year Gold Price in GBP/oz

1 Year Gold Price in EUR/oz

1 Year Gold Price in AUD/oz

–We’d like nothing better than to spend each day writing to you briefly about our best investment ideas and the entrepreneurs creating wealth. But there is a massive overhang of debt that’s weighing down the whole global economy .This must be dealt with before you see a real recovery.

–It’s true here in Australia as well. “Australian companies are facing an uphill battle to refinance more than $100 billion of debt over the next 18 months as jitters in global credit markets force banks to cut funding lines to industries such as retailing and manufacturing,” reports Paulina Duran in today’s Australian Financial Review.

–If the credit crisis comes back with a vengeance because of events in Europe, what should you do as an investor? Well, last time around, in 2008, companies with short-term debt on the books that required refinancing got absolutely hammered. Cashed up outfits with low debt fared a lot better. More tomorrow.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. My decision to go and work for a silver mining company is looking better each day :)

    Reply
  2. As a manager and future owner of a retail coin and jewelry store, I am asked everyday by customers about my thoughts about the future of gold and silver. The answer is plain and simple: as long as the fed keeps the market flooded with lots of greenbacks, the future of elevated gold and silver prices are going to continue to persist.

    The most curious phenomenon in the recent price history we have experienced is the divergence of cash flow in the money markets versus the physical markets. The last five or six times in the last year or so when the paper assets market fell with the gold and silver ETF’s, I had a hoard of customers banging at my doors wanted to buy buy buy. Every time the markets step back in value, the demand for physical material goes through the roof.

    Reply
  3. It is said that industry uses about 2/3rds of the yearly production of silver thereby causing a greater demand. If (there’s that word again) there is a renewed downturn in the economy, to which i agree, then presumably ditto for manufacturing, which should mean less silver being used. Will this not have an impact on the price of silver?. Just a thought!.

    shortchanged
    September 6, 2011
    Reply
  4. Thanks Ross, missed that one.So its all coming together then, fasten your seat belts and hold on. Methinks we are in for a bumpy ride, (financial speaking of course) and unless you can afford to lose money, cash and gold will be king.Unless you are Warren Buffett and can get a guaranteed 6% on buying BOA stock, when all others get .25%, i said something was fishy.
    On another tack, i have some strange feelings about gold, can’t put my finger on it but there’s something.

    shortchanged
    September 8, 2011
    Reply

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