Category Archives: Gold

Schooling Ben Bernanke on the merits of gold

Yesterday, Federal Reserve Chairman Ben Bernanke got all confused when asked whether gold is money and why central banks hold gold instead of diamonds. Watch the last 32 seconds of this youtube clip:

I know I am not the Chairman of the Federal Reserve, but at least I’ve heard about fungibility. Heck, even wikipedia mentions:

Diamonds are not fungible because diamonds’ varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size.

In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid.

If the Fed Chairman needs more information about why gold is money, he should google “why gold is money.” Now, I just need a good answer as to why pieces of paper with pictures of Presidents on them are considered money.

“Ireland on the brink” with no way out

Marketwatch reports:

Ireland on the brink as budget crunch looms

Austerity threatens growth, but markets leave Dublin little choice

After promising a 15 billion euro ($20.7 billion) austerity package of spending cuts and tax hikes, Ireland’s government may be facing its last chance to avoid a bailout by persuading markets that the country can repay its debts.

Yields on government bonds have soared in recent days as investors increasingly fear that the only long-term option for Ireland will be a bailout from Europe. But sympathy for Brian Cowen’s Fianna Fail–led coalition is almost nonexistent among Dubliners, who see the government as the biggest villain in the collapse of the Irish economy…

Please read the whole article, but I’ll summarize it in just a few words: Ireland is damned if they do and damned if they don’t. If Ireland does nothing, it will be unable to repay its debts. In other words, it will default if it is not given a bailout. But the EU will not bail out Ireland if it does not reduce its deficit.

If Ireland chooses to reduce its deficit, which it is trying to do, it will require massive tax increases and/or huge cuts in spending. Either will result in massive protests and economic harm.

Western governments have been spending more than it could afford for nearly a century now. In the US, it started in 1913 with the emergence of the Federal Reserve and ratification of the income tax amendment. It got worse with the two world wars, Great Depression, and breaking from the gold standard. Now, countries like Ireland, Greece, Portugal, and Spain have only years, if not months, to get their houses in order. After 100 years of failure, we are now paying the price.

The end of fiat currencies and return of the gold standard?

For years, gold bugs and other “crazies” have called for returning to the gold standard. “Smarter” people argued against using the “barbarous” metal as a standard, foretelling a return to the Dark Ages. Well, the “crazies” no longer look so crazy and the “smart” people no longer look so smart. Marketwatch reports:

The president of the World Bank said in a newspaper editorial Monday that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of structural reforms to the world’s foreign-exchange regime.

“Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today,” said Zoellick.

He said such a reform would reflect economic realities and should be considered as a successor to the existing global currency paradigm known as “Bretton Woods II.”

Zoellick said a return to some sort of currency link to gold would be “practical and feasible, not radical.”

To adjust Churchill’s famous quote for this situation: The gold standard is the worst system of currency, except for all those other systems that have been tried.

Irish bonds fall, CDS and insurance rates hit new highs. Spain’s economy suffering. Sovereign debt crisis continues.

A couple of news stories in the ongoing sovereign debt crisis.

Bad news for Ireland:

The cost of insuring Irish debt against default hit a fresh record Friday with investors fearing that Ireland’s draconian budget cuts will slow economic growth and further weaken public finances.

Spreads on Irish five-year sovereign credit default swaps topped 6.10 percentage points Friday, according to data provider Markit, after having briefly touched 600 basis points Thursday.

This means that investors will have to pay EUR610,000 annually to ensure EUR10 million Irish debt against default. Some market watchers note that CDS trading starts to dry up at these levels as investors worry about being caught on the wrong side of the trade.

CDS are tradable, over-the-counter derivatives that function like an insurance contract for defaulting on debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller.

The Irish 10-year yield spread over German bunds, which show how large a premium investors demand to hold Irish bonds versus more-stable German debt, also hit a record of 5.31 percentage points Friday.

Bad news for Spain:

The Bank of Spain on Friday said it estimates third-quarter gross domestic product in the country was unchanged from the prior quarter. That follows a gain of 0.2% in the second and 0.1% in the first quarter. In a monthly economic bulletin, the Bank of Spain said the economy likely grew 0.2% on an annual basis in the third quarter. Official third-quarter GDP data will be released by the National Statistics Institute on Nov. 11. The Bank of Spain said growth was likely stymied by government austerity measures and the effects of consumers tightening spending as value-added taxes went up from July 1.

Today, the Dollar is up as traders sell Euros. Even with the Dollar up (which usually hurts commodity prices), gold and the other precious metals are rallying to record highs. Traders are looking for safety as the chances of an Irish default increase. Furthermore, we are seeing in Spain that “austerity” is a bitter but necessary medicine.

After years of liberal government spending and big deficits, Ireland and Spain (along with Greece and Portugal) are damned if they do and damned if they don’t. Unfortunately, the United States is not that far behind them.

TARP was a waste of money, despite what the Treasury Department tells you.

The Treasury announced that the total cost of TARP would be just $50 billion. In their perverse logic, the Administration and media played this up as a government success story. But we really should look at TARP as an investment. Congress approved spending $700 billion for TARP, of which only $296 billion was spent. Looking at TARP as an investment, the government lost 16.9% over a two year period. And they call that a success!

What else could the government have done with the $296 billion? Since TARP was signed into law on October 3, 2008, the following instruments have produced these returns:

TARP Troubled Asset Relief Program -16.9%
SPY S&P 500 9.1%
TLT iShares Barclays 20+ Year Treas Bond 15.7%
IEF iShares Barclays 7-10 Year Treasury 19.3%
SHV iShares Barclays Short Treasury Bond 0.7%
GLD SPDR Gold Shares 57.8%
XLF Financial Select Sector SPDR -18.8%

All major markets (stocks, long-term bonds, intermediate-term bonds, short-term bonds, and gold) posted positive returns. In some cases, very good returns. As you can see, I added the Financial sector into that table, which declined slightly more than TARP. Most of TARP’s investment were in the financial sector. The small difference is largely a rounding error because I am looking at XLF’s return up to today whereas the Treasury is using expected returns as of some future date. And that is assuming you trust their accounting…

But this raises the question of why they invested in the worst performing market sector? Those of us who argued that they were throwing good money after bad were correct. Maybe Treasury lost less money than we expected, but we were still correct in predicting negative returns on this investment.

Of course, the government claims that TARP saved the financial system from utter destruction. Oh, to live in a world where you can make outrageous claims without any proof. Next thing you know, the government will claim that the American Recovery and Reinvestment Act of 2009, also known as the stimulus bill, “created or saved” millions of jobs, even though the unemployment rate has remained steady near the 10% level.

Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues.

The debt crisis finally forced Ireland into making a decision. Ireland had to choose whether to let its banks fail or bail them out. Neither choice was pleasant and both would have had severe repercussions. Not surprising, Ireland took the easier way out. Marketwatch reports:

The cost of bailing out nationalized lender Anglo Irish Bank could soar to as much as 34.3 billion euros ($46.6 billion), the country’s central bank said Thursday, as it also unexpectedly told Allied Irish Banks to raise a further €3 billion.

The new figures, along with the money already injected into other banks and a possible further capital increase for Irish Nationwide Building Society, could see the total cost of the industry bailout hit as much as €50 billion.

In a highly-anticipated assessment of the cost of the financial crisis, the Central Bank of Ireland said it expects Anglo Irish to need €29.3 billion in total, but added the figure could rise by another €5 billion under a “stress scenario.”

The bank has already received €22.9 billion of that total after suffering massive losses as the country’s housing market and construction industry collapsed, dragging the whole economy down with it.

Here’s the key section for those watching the debt crisis and the increasing socialism and economic fascism occurring around the world:

The extra cash for the banking system means the deficit in 2010 will soar to around 32% of gross domestic product, compared to a previous estimate of 12%. The government will announce a new four-year budget plan in November to ensure it can meet this commitment.

A 32 percent deficit!!! That has to be some kind of record.

But what choice did Ireland have? It could have let the banks fail, which would have sent the country to economic turmoil. Instead, it chose to socialize the banks’ debts and is risking the creation of a huge moral hazard. Ireland chose to trade short-term chaos for long-term chaos.

In reality, Ireland is hoping for an economic recovery that will lift its economy and help it reduce its deficit and pay off some of the debt. But will that recovery come soon enough? Will it be strong enough? Will the Irish government and Irish banks suddenly develop the fiscal discipline that it has lacked so far?

I don’t blame Ireland for the choice it made. The problem was not the choice it had to make last week, it was the choices it and other governments, including the United States, have made over the previous decades of loose money, free spending, and debt accumulation.

But we must remember, this story is far from over. It has simply shifted from one of a gushing flesh wound to a slow and festering wound that has not yet been repaired. I repeat: The sovereign debt crisis is far from over. In fact, it is just beginning.

The sovereign debt crisis is far from over. In fact, it is just beginning.

Anybody who thought the sovereign debt crisis was over, it is now time to wake up. Irish credit default swaps hit a new record today!

Irish government bond yields rose and the cost of insuring sovereign debt against default jumped Friday due to ongoing jitters over the cost of bailing out Ireland’s troubled banking sector.

Analysts tied the weakness in part to a research note published Thursday by Barclays Capital warning that the Irish government could eventually be forced to seek outside help from the International Monetary Fund and European Union if the fiscal situation proves worse than expected.

The spread on five-year Irish sovereign credit default swaps hit 433 basis points, up from 387 basis points on Thursday — soaring to the widest level on record, according to data provider Markit. That means it would now cost $433,000 a year to insure $10 million of government debt against default, up $36,000 from Thursday.

For months, the various world governments and mainstream media told us that the debt crisis was over. Why? Because countries such as Greece, Spain, Portugal, and Ireland would reduce their budget deficits. Not eliminate them, just reduce them.

For example, Portugal:

Portugal posted a deficit of 9.3 percent of gross domestic product in 2009, the fourth-highest in the 16-country euro region. The government aims to narrow the deficit to 7.3 percent this year and intends to meet the EU’s 3 percent limit in 2012.

Yes, a 3 percent deficit is preferable to a 9.3 percent deficit, but with debt of 75 percent of GDP as of 2009 (much higher now), they are only switching from a quick death to a slow one. Besides, their deficit target is based on assumptions of a growing economy. What if the economy does not grow? The deficit will be wider than expected and their debt problem will get even worse.

Or Spain:

Zapatero has imposed tough austerity programmes, aiming to slash the budget deficit to 3 percent of gross domestic product by 2013 from 11.2 percent last year.

Again, 3 percent is better than 11.2 percent, but the slow bleed continues. They are simply putting a band-aid on a broken arm.

And in Greece:

The government plans to cut the budget deficit to 8.1 percent of gross domestic product this year from 13.6 percent last year.

Again, I’m unimpressed. Greece’s debt is already 113 percent of GDP. Is there any way to recover from that besides running budget surpluses, which would require sharp cutback in government services?

And what is the situation like in Ireland, Europe’s new bogeyman?

Analysts say this year’s budget deficit could reach around 25 percent of gross domestic product (GDP) including the one-off costs associated with bank bailouts.

Even without the one-off bank bill, the shortfall is still expected to be around 10 percent next year on an underlying basis, over three times an EU limit of 3 percent, according to the latest Reuters poll.

Are you serious? A 25 percent deficit is possible this year? And an “improvement” to 10 percent next year?

By the way, the situation in the United States is not much better. This year’s deficit is expected to be 10.6 percent of GDP. Next year’s: 8.3 percent. Eventually, if all things go according to plan, which they never do, the deficit will fall to 3.9 percent of GDP. Not much better than those failing European countries.

And the government/mainstream media is trying to convince us that there is nothing to worry about. Gold is looking more and more attractive every day.