Protection Against the Rising Risk of a Systemic Financial Meltdown or... a The forgotten role of gold

1
Protection Against the Rising Riskof a Systemic
Financial Meltdownor...aThe forgotten role of
gold
Louis Boulanger, CFA, Founder and Director, LB
Now Limited New Zealand Society of Actuaries 2008
Conference 11/12 Feb 2009
Gold is money and nothing else J P Morgan,
1913, to the US Congress
2
(No Transcript)
3
It is not because things are difficult that we
do not dare it is because we do not dare that
things are difficult. - Seneca (ca 4 BC - 65
AD) Roman stoic philosopher
4
(No Transcript)
5
All truth passes through three stages. First,
it is ridiculed. Second, it is violently
opposed.Third, it is accepted as being
self-evident...- Arthur Schopenhauer
(1788-1860) German philosopher influenced
Einstein
6
Agenda

• About prudence now...
• The truth about money today
• Economic Freedom vs. Debt Delusion
• The role of gold as a standard
• The need for monetary reform
• How to protect until then
• Some of my sources

7
1. About prudence
A prudent man foresees the difficulties ahead
and prepares for them the simpleton goes
blindly on and suffers the consequences.-
Proverbs 223
8
The paradox of prudence

• Prudence defined by man-made laws and court
• cases IS NOT the same as the virtue itself
• Who ever said that to be prudent is to imitate
  your peers?
• Is fiduciary irresponsibility not partly to blame
  for this crisis?
• The word now seems synonymous with cautiousness
• In this sense, prudence means a reluctance to
  take risks
• Such reluctance is prudent only for unnecessary
  risks
• But when unreasonably extended or applied based
  on
• false beliefs, then it becomes reckless and
  cowardly

9
False beliefs

• Todays USA is still based on US Constitution
• Government guarantees are as good as gold
• Central bankers can and will save the world
• US government cant default on its debt
• Inflation is dead or no longer a worry
• NZ is in better shape than ROW
• Monetary system is sound

10
Forgotten aspects of prudence

• Caution is not the only or main aspect of
  prudence
• The following are the other integral parts of
  prudence
• according to Scholastic philosophy
• Memoria (accurate memory)
• Intelligentia (understanding of first principles)
  
• Docilitas the most forgotten one
• Solertia (sizing up a situation quickly)
• Ratio (discursive reasoning)
• Providentia (foresight)
• Circumspection (ability to take all relevant
  circumstances into account)

11
Docilitas lets remind ourselves

• The kind of open-mindedness which recognizes
• the true variety of things and situations to be
• experienced and does not cage itself in any
• resumption of deceptive knowledge
• the ability to make use of the experience and
• authority of others to make prudent decisions

12
2. The truth about money
Truth, like gold, is to be obtained not by its
growth, but by washing away from it all that is
not gold. - Leo Tolstoy(1828 - 1910)Russian
author
13
What is money?

• Money is anything that is generally accepted
• as payment for goods and services and
• repayment of debts.
• The main uses of money are
• as a medium of exchange
• as a unit of account and
• as a store of value

14
Is this good (sound) money?
15
There sure is a lot of it around
16

• If the American people ever allow private banks
  to control the issuance of their currencies,
  first by inflation then by deflation, the banks
  and corporations that will grow up around them
  will deprive the people of all their prosperity
  until their children will wake up homeless on the
  continent their fathers conquered.
• Thomas Jefferson(1743 - 1826)One of Americas
  Founding Fathers
• 3rd President of its United States (1801-09)

17
Well, guess what?

• Its already happened!
• I call it the Monetary Tragedy of the 20th
  Century
• 1910 the Fed is surreptitiously created
• 1913 the Federal Reserve Act is passed
• 1934 gold possession became illegal in US
• 1971 END of gold exchange standard set in
• 1944 in Bretton Woods (President
  Nixon
• unilaterally declares US dollars
  owned by
• foreign states are no longer
  redeemable
• in gold, as was intended by the BW
  system)

18
Money (as we know it) is dying

• I know your mind is repelled by this assertion
• BUT ITS THE TRUTH (which can set you free)
• Thats why you need to rethink your ASSET MIX
• This is the 1st time in history that NONE of the
• worlds currencies is redeemable in gold (or
  silver)
• Cause effect in economics can be separated by
• decades, as was clearly the case with this
  crisis
• The derivatives monster (gtUS1Q!) is mostly
  credit!

19
(No Transcript)
20
Unprecedented Fed action
21
Inflation time bomb
22
Whos going to buy _at_ 2?
23
In effect, there is nothing inherently wrong
with fiat money, provided we get perfect
authority and godlike intelligence for kings.
- Aristotle(384 BC - 322 BC)
24
3. Gold economic freedom
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. - Who said this??????
25
Alan Greenspan did!

• In an essay entitled Gold and Economic Freedom
• he wrote in 1966 and which published in Ayn
  Rands
• Objectivist newsletter and reprinted in her book
• Capitalism The Unknown Ideal, in 1967
• In his essay he wrote gold and economic freedom
  
• are inseparable.
• Greenspan has never publicly retracted a word of
  this
• essay, not even in The Age of Turbulence, in 2007

26
What you should know about gold

• Gold is one of the worlds most misunderstood
  assets
• Powerful forces govern its price (especially
  since 71)
• Despite barbarous relic, gold remains valued
  RTW
• Why? Because it is useful as a monetary commodity
• Its the only asset that can compete with Govt
  bonds
• It cannot be debased by creating it out of thin
  air by
• government fiat like all currencies today
  are incl USD
• Gold is nobodys liability (unlike any other
  asset)
• Hoarding gold is a protest vote on Govt issued
  money

27
Gold is special and unique

• The only commodity produced for accumulation
• The entire aboveground gold stock is only
• about 155,000 tonnes (less than 8,000 cubic
  meters)
• Golds supply is its aboveground stock
• This is crucial to understand how to analyze gold
  
• Annual supply is falling and is currently
  increasing
• aboveground stock year after year by only
  about 1 p.a.
• A gram of gold mined today is no different from a
  gram
• of gold mined by the Romans two-thousand
  years ago
• So...gold price is principally a function of
  demand

28
Demand IS rising mostly ETFs
Source Casey Research LLC, Big Gold, Vol II,
Issue 7, July 2008, p7
29
Consider this

• At the moment, the sum total of the worlds paper
  financial assets
• (including equities, bonds and bank deposits)
  comes to a grand
• total of about US100 trillion.
• Value of all physical gold held by private
  investors and central
• Banks, on the other hand, is only about US1
  trillion.
• Now, just suppose that some of the owners of all
  that paper
• got a wee bit spooked and decided to convert a
  mere 5 of it
• into gold.
• Anyone need a tutor to understand what US5
  trillion in
• new demand would do to the gold price? Didnt
  think so.

30
4. Gold as a standard

• Ownership of gold is not about lust it is about
  liberty of the individual. The gold standard is
  not a game it is the embodiment of the
  timeless principle pacta sunt servanda
  (promises are made to be kept).
• Professor Antal E. Fekete
• (1932 - )
• Renowned mathematician and monetary scientist
  (www.professorfekete.com)

31
In any discussion of the future of gold, or the
price of gold, the first thing that must
be acknowledged is that gold is a political metal
for the simple reason that gold, in its
historical role as a currency, is fundamentally
incompatible with the modern financial
system. Ferdinand Lips (1931 2005) Swiss
banker, author of Gold Wars, Foundation for the
Advancement of Monetary Education, 2001
32
Is gold a barbarous relic?

• Some have claimed so with great effect
• In truth, the gold standard
• is already a barbarous relic.
• John Maynard Keynes
• (1883 1946)
• British economist whose ideas had a major impact
  on modern
• economic and political theory.
• He was a key figure behind the 20th Century
  global monetary
• system post WWII (Bretton Woods).
• Above quote is taken from his Monetary Reform,
  1924, p172

33
I dont think so...
34
Need more evidence?
34
Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change Gold Price Annual Change
  USD AUD CAD CNY EUR INR JPY NZD CHF GBP
2000 -5.66 10.56 -2.19 -5.80 0.68 1.24 5.61 11.64 -4.68 2.06
2001 2.50 11.30 8.80 2.50 8.10 5.80 17.40 9.10 5.00 5.40
2002 24.70 13.50 23.70 24.80 5.90 24.00 13.00 -0.96 3.90 12.70
2003 19.60 -10.50 -2.20 19.50 -0.50 13.50 7.90 -4.50 7.00 7.90
2004 5.20 1.40 -2.00 5.20 -2.10 0.00 0.90 -4.07 -3.00 -2.00
2005 18.20 25.60 14.50 15.20 35.10 22.80 35.70 24.45 36.20 31.80
2006 22.80 14.40 22.80 18.80 10.20 20.50 24.00 19.39 13.90 7.80
2007 31.40 18.60 10.40 23.00 17.90 17.50 24.70 20.53 21.50 29.20
2008 5.80 32.50 32.40 -1.10 11.90 30.40 -14.90 39.27 0.20 44.30
Average 13.84 13.04 11.80 11.34 9.69 15.08 12.70 12.76 8.89 15.46
35
Familiar with the Dow/Gold ratio?
35
After the Fed
QUESTION Will the Dow/Gold ratio drop to 1
again?
Before the Fed
36
Still doubtful gold is money?
36
37
The true nature of this crisis

• Its not a credit crisis
• Its not a housing crisis
• Its not a banking crisis
• Its not a financial crisis
• The above are all symptoms/manifestations of
• The Great Global Monetary Crisis

38
The true nature of the problem
38

• You cant solve a problem with more of the same
• the problem cant also be the solution!
• The true cause is the fiat money system itself
• its a financial bubble machine!
• The nature of the problem is one of MEASURE
• Money should once again be defined as
• a unit of weight of gold
• after all, thats how it used to be (but we
  forgot!)

39
About the gold standard

• The gold standard is a monetary system in which
• a region's common media of exchange are paper
• notes that are normally freely convertible into
• pre-set, fixed quantities of gold.
• The gold standard is not currently used by any
• government, having been replaced completely
• by fiat currency, and private currencies backed
• by gold are rare.
• This has never happened before in human
  history...
• There is no measure for what our money is
  worth!!!

40
Greenspan (again)

• Under the gold standard, a free banking system
• stands as the protector of an economy's stability
  
• and balanced growth The abandonment of the
• gold standard made it possible for the welfare
• statists to use the banking system as a means to
• an unlimited expansion of credit In the absence
• of the gold standard, there is no way to protect
• savings from confiscation through inflation.
• Source Gold and Economic Freedom, 1966

41
The gold standard strikes back

• Thats how Professor Antal E. Fekete sees it
• The chickens of 71 are coming home to roost
• All fiat currencies are in a race to the bottom
• Asset price volatility is highest in living
  memory
• WHATS GOING ON?
• Capital is being destroyed
• Global monetary system is collapsing

42
4. Need for monetary reform

• We cannot solve our problems with the same
  thinking we used when we created them.
• Albert Einstein
• (1879 1955)
• A man who should know

43
My newfound purpose

• First, look after myself and my family
• then look after OPsM as I do my own
• Educate, awake as many as I can
• thats why I write the e-letter Prosper!
• Advocate actively for monetary reform
• both here in NZ and overseas
• Sound Money Economic Freedom

44
Bretton Woods III

• What do I mean III?
• BW I died in 1971 (and was buried in 1976)
• BW II has been in place ever since (37 yrs)
• Whats BW II?
• The Great Delusion of Money as Debt
• What will BW III be?
• That depends on who wins the war

45
5. How to protect?

• It's not whether you're right or wrong that's
  important, but how much money you make when
  you're right and how much you lose when you're
  wrong.
• Warren Buffett
• (1930 - )
• American investor

46
Own some bullion!

• ETFs are NOT the same (thats paper gold)
• Gold mining shares are NOT the same thing
• Bullion is the only asset that has ever been
• able to successfully protect ones wealth
• from the devastating effects of systemic
  risk
• Bullion IS NOT an investment ITS MONEY
• Think of it as INSURANCE (or a protest vote)

47
Want to know more?
48
Some of my sources

• www.gata.org
• www.bmginc.ca
• www.mises.org
• www.leap2020.eu
• www.chaostan.com
• www.richebacher.com
• www.globalresearch.ca
• www.caseyresearch.com
• www.lemetropolecafe.com
• www.professorfekete.com

49
Suggested books to read

• Gold Wars, by Ferdinand Lips, 2001
• Debt Delusion, by Peter Warburton, 2005
• Petrodollar Warfare, by William R. Clark, 2005
• The New Paradigm for Financial Markets, by
• George Soros, 2008
• The Case Against the Fed, by Murray N. Rothbard,
• Ludwig von Mises Institute, 1994
• The Theory of Money and Credit, by Ludwig von
• Mises, Liberty Fund, 1981 (translation of
  1924-34)

50
Thank You.
Any Questions?
Louis Boulanger, CFA Founder Director, Louis
Boulanger Now Limited P O Box 25 676 St Heliers,
Auckland 1740, New Zealand tel [phone]
mob 64 275 665 095 email louis_at_lbnow.co.nz