April 2011


The Only True Standard of Value
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from  Richard Russell’s Dow Theory Letters
April 20, 2011 — The dollar is doing just what the Fed wants it to do — it’s sinking, sinking and sinking more. Sadly, the great American public doesn’t understand what’s happening, and if they were told they couldn’t care less. Of course, what the public does notice is the painful result of the dollar’s bear market. The result is seen every time Joe six-pack and his wife hit the neighborhood super-market. The rising prices are a shocker.
And if the price of your favorite cold cereal has not been raised, there is less of the cereal in the box. Then when Joe has to fill up the buggy to get home, he groans as he sees the gasoline tab. “Sixty bucks to fill up this lemon. I’m going to get a motorized bike,” growls Joey. “This country is going to hell in a hand-basket.”
The US has been getting away with spending more than it takes in, ever since World War II. It’s a process that isn’t sustainable, and if a process is unsustainable it will end. The US’s habit of spending more than it’s paying for has finally hit a brick wall. The wall is the demise of the famous “Yankee dollar.” In order for the US to live over its head, it must borrow.
Half of the US’s borrowing comes from foreign sources. And that’s a problem. The fiat US dollar has no fixed value. It’s worth must be measured against other currencies. “The dollar is worth so much in relation to the Brit pound — or the dollar is worth so much in terms of the euro.” Our foreign creditors, many of whom are loaded with dollars, keep a sharp eye on the comparative value of the dollar, and they’re now frightened and mulling over the credit-worthiness of the US. The recent warning from the S&P rating agency heightened our creditors worries about both the US and the dollar.
The disgraceful battle between Obama and the Democrats vs. Paul Ryan and the Republicans is further raising the fears of our creditors. With commodity inflation now out in the open, Fed head Bernanke has a problem. His absurd defense is to refer to “core inflation” (without the cost of food and energy). Bernanke announces to the world that there’s “no inflation,” and besides if there is inflation the Fed can end it any time they want.
What Bernanke and the Fed can not control is the tell-tale price of gold.
As I write the battle is on to keep June gold from closing above 1500. Yesterday June gold hit an intra-day high of 1500, but can it close there? “Ah,” Bernanke must be thinking, “If I could only control the price of that damn gold.”
Yesterday, as I looked at my computer, and I could see the fierce struggle that was going on as gold whipped up six dollars, then five minutes later it is up a dollar-fifty. There must be a powerful contingent (perhaps backed by the Fed) that is desperate to keep the price of gold DOWN and below 1500. But alas for the Fed, gold is traded internationally across the face of the
planet and 24 hours a day. Gold is out of the hands of the Fed and Goldman Sachs, and it trades everywhere and where it wants.
This year I’ve been telling my subscribers to think in terms of two concepts:
(1) Think in terms of avoiding losses (rather than thinking in terms of building fat profits).
(2) Think in terms of PURCHASING POWER. Are you gaining or losing purchasing power?
For ten years I’ve advised my subscribers to climb aboard the great bull market in gold. Early subscribers who have followed my advice now have huge paper profits, many have become millionaires, others have been able to retire on their gold positions. Even new-comers have benefited from their belated investments in gold.
Over the last 12 months, the dollar price of gold is up 31.32 percent. Gold is the only true standard of value. The value of everything else must be measured in terms of gold. “How many ounces of gold does it take today to buy a new Ford?” “How many ounces of gold did it require to buy a new ford in 1932?” It costs a lot more (in dollars) to buy a new Ford today. But how many ounces of gold does it cost to buy a new Ford today compared with the ounces required in 1932 to buy a new Ford? What has changed, gold or the dollar? Gold hasn’t changed, what has changed is the dollar, which has lost purchasing power.
The US public is rapidly being educated about money and gold. Ads are appearing almost daily in the newspapers, telling readers how and why to buy gold. The ads are being confirmed by the rising price of gold. The public is finally “getting it”. I’ve been in this business since 1958, and I’ve seen a lot of advisory services come and go — a lot! What I notice is that there are a number of fairly new advisories that are climbing (entering) on the back of the gold bull market. These advisories are sending out mass mailings to the public — educating them on the fact of the dying dollar and the Fed’s plan to solve the debt problem by diminishing the purchasing power of the dollar. As Lincoln put it, “You can’t fool all of the people all of the time.” Clueless as the American populace is, they are finally learning about gold, something that their great grandparents took for granted.
In terms of gold: Assessing real estate values in terms of gold. At its peak, the housing market in March 2007, the median US home price was $262,600, which was equivalent to 340.6 ounces of gold. Today’s median income price is $186,100 or 109.2 ounces of gold. So in terms of real money, gold, the US median home price has lost 47% since 2007.
Applying the same measurements to the Dow, from the end of 2001 to the end of 2008 an investment in the Dow would have lost 81% of its purchasing power in terms of gold (statistic courtesy Larry Edelson of the outstanding “Uncommon Wisdom” advisory).
The great and harsh lesson of history now stares Americans in the face — no fiat currency in history has ever survived. This fact underscores the growing panic to get out of dollars and out of all fiat currencies.
This emphasizes the irony of those who are rushing into dollars or dollar denominated bonds and blue-chip stocks on the thesis that these are “safe havens.” It’s a rush out of dollars to get into other forms of dollars. What’s happening now is on a greater scale than has ever occurred before in the history of mankind. It’s going to hit the current generation of Americans like a whirlwind. It will be historic in its intensity and destructiveness.
The great gold rush of 1849 opened up the American West. This gold rush of the early 2000’s will open up the eyes of Americans to the danger of the Federal Reserve and fiat money.
Below in log scale — one of the greatest and most significant bull markets in US history.
Below, the Dow over the exact same period.
Richard Russell

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Here’s an excellent guide for those looking for up-to-date gold and silver coin (US and foreign) face or melt (pure metal spot price) values: Coinflation.com

April 6, 2011, 
Dear Dr. Paul:
There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it.
Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law.

Contrary to a statement of Dr. Bernanke, made before he became the Chairman of the Board of Governors of the Fed, he could not drop freshly printed dollars from a helicopter, no matter how many reasons for such an action he may be able to cite. Another thing the Fed is not allowed to do legally is to purchase Treasury paper from the U.S. Treasury directly. It must be purchasedindirectly through open market operations. If you don’t put the Treasury paper through the test of the open market before the Fed is allowed to buy it, the presumption is that the market would reject it as worthless, or would take it only at a deep discount. The law does not allow the F.R. banks to purchase Treasury paper directly from the Treasury because that would make money creation through the F.R. banks a charade, reserve requirements a farce, and the dollar a sham.

If that were the only problem with Quantitative Easing, it would be bad enough. But there is something else that is even more ominous. The fact is that the Federal Reserve banks can purchase Treasury paper only if they pay with F.R. credit that has been legally created.

F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued in accordance with the law. The law says that F.R. credit must be backed by collateral security at the time of issuance, usually in the form of an equivalent amount of U.S. Treasury paper. The procedure is as follows.
The F.R. bank seeking to expand credit takes its Treasury paper, owned outright and free from encumbrances, and posts it as collateral with the Federal Reserve agent who will then authorize the issuing of credit. In other words, if the F.R. banks do not have the unencumbered Treasury paper in their possession, then they cannot create additional credit legally.

There is some evidence that the F.R. banks do not have F.R. credit available to make the kind of purchases Dr. Bernanke is talking about as part of his Quantitative Easing. Nor do they have unencumbered Treasury paper in sufficient quantity that they could post with the F.R. agent for authorizing the issue of additional F.R. credit.

The point is that the process of posting collateral first, and augmenting F.R. credit afterwards must under no circumstances be reversed. What the F.R. banks cannot legally do is to buy the Treasury paper first with unauthorized F.R. credit, post the paper as collateral, and justify the illegal issuance of credit retroactively. Nor can they borrow the bond from the Treasury, post it as collateral, and pay for the bond retroactively.

This is an important limitation separating the regime of market-based irredeemable currency from the regime of fiat money involving outright monetization of government debt — the graveyard where the Continental dollar, the assignat, the mandat, the Reichsmark, and the Zimbabwe dollar (among countless others) rest.
At any rate, retroactive authorization of F.R. credit, if that’s what the Fed is up to, would be a violation of both the letter and spirit of the F.R. Act. It would mean converting the dollar into outright fiat money through the back door, bypassing Congress. It would show absolute bad faith on the part of the Chairman of the Federal Reserve Board of Governors, Dr. Ben Bernanke, who certainly knows what the law is. Such a blatant violation of the law would make him totally unfit for the powerful office he occupies. It would call for his immediate and dishonorable discharge by the President, pending Congressional investigation of the matter.

The various violations of the law of which the Fed is accused point to a concerted effort to remove the shackles the law has put on the money spigots lest crooks help themselves to the public purse. These violations are not isolated incidents. They are aiming at the corruption of the monetary order of the nation and the world. Moreover, they would ultimately figure prominently among the causes of the financial instability the world has been suffering from since 1971 and, more recently, since 2008.

Without understanding this fundamental truth, all talk about stabilizing the monetary system and reining in the runaway budget deficit is an exercise in futility.
Yours very sincerely,
Antal E. Fekete
Note: an identical letter has been sent to Congressman Mike Pence of Indiana.