Connecting the Dots

Today we find ourselves on two watches, one is a death watch and the other a birth watch.

The dollar is on life support and at the same time, the increasing frequency of contractions (see underlined time spans) signals the imminent birth of FreeGold.

Let's connect the dots:

August 4, 2007 - Jim Cramer pleads for a rate cut

Then, for the next seven (7) months, the Fed rate goes down, the dollar goes down, stocks go down and gold goes up. Finally, on March 16th, Bear Stearns collapses.

March 16, 2008 – Bear Stearns collapses and the Fed “surprises” the world with “only” a quarter point rate cut, showing its “hawkish” stance on inflation.

March 17, 2008 – Gold peaks at $1,033/ounce.

Then gold crashes, the dollar rises and stocks rise. But for the next four (4) months, things remain pretty much steady.

Then on July 15th, things change.

July 11, 2008 – INDYMAC bank is seized by the FDIC.

July 14, 2008 - This document is signed by the Comptroller of the Currency and the Director of the Office of Thrift Supervision.

July 15, 2008 - It is also signed by the Secretary of the Federal Reserve and the Executive Secretary of the FDIC.

July 16, 2008 – The above document is released which tells banks how much capital they must have. This is an international issue known as the Basel II Accord. It requires banks to be properly capitalized or else foreign (European) banks will be forbidden from doing business with them. These guidelines must be met by the end of the fiscal year, 2008, which is September 30, 2008.... TODAY!

July 15, 2008 – Gold again peaks, stocks hit new lows, and the PPT along with the world's Central Banks go into action. For the next two (2) months, stocks go up, the dollar goes up, and gold goes down. This is a massive intervention effort to give the remaining banks a chance to get in compliance with Basel II. To get recapitalized. Which didn't quite happen like they hoped.

September 15, 2008 – Lehman collapses. After this event, stocks go down, the dollar goes down, and gold goes up. Things get more intense, almost by the day, as the deadline draws near. For the next two (2) WEEKS breathless and frantic moves rule the day. The largest banks collapse and merge. Congress and Wall Street try desperately to get the taxpayer to pony up a nominal sum which, I assume, is supposed to help them make the deadline of TODAY. Doesn't happen.

Now we have Rosh Hashanah. This takes us into the new Fiscal Year. What does this mean?

We know the dollar is on it's deathbed. And the birthing contractions of FreeGold have gone from 7 months to 4 months, to 2 months, to 2 WEEKS. So what is the next one? If we assume acceleration it would be 2 days, putting us at Thursday or Friday. If we assume a straight progression, it puts us at October 7th, one week into the new Fiscal Year.

So help me fill in the blanks here. I'm starting from a big picture POV, but as they say, the devil is in the details. I will update this article if I think of something else. Please feel free to contribute in the comments.

Hat tip to Ender for his post on USAGold which got me thinking about this. Thanks!

FOFOA

Government to the Rescue!

Save America!

Karl's entire post

Open Forum

This is an open forum. Please feel free to share anything. Especially empirical evidence of a changing gold market or a changing dollar market.

FreeGold Archaeology

The American dollar (or any fiat currency) only has strength/value because it functions. This is called usage demand. Americans are forced by law to use the dollar. But the rest of the world is not. So ask yourself this. Is the dollar still functioning for the rest of the world? Does it still buy them what they need and want? Does it still function as a store of value for those that hold it? These questions are the key to whether or not the dollar retains its world reserve currency status.

Here is a good way to test a theory. Let's look back at some editorials and letters written by someone who was following Another and FOA back in 1999 and 2000. Let's ask ourselves if they have any relevance today. If the theory is logically self-consistent, then the answer should be yes.

SteveH on USAGold was kind enough to draw our attention to these archives:

June 7, 1999
http://www.gold-eagle.com/editorials_99/hickel060799.html

Aug. 9, 1999 - NEWLY ADDED
http://www.gold-eagle.com/editorials_99/hickel080999.html

Nov. 13, 1999
http://www.gold-eagle.com/editorials_99/hickel111399.html

Jan. 5, 2000 - NEWLY ADDED
http://www.gold-eagle.com/editorials_00/hickel010500.html

Feb. 3, 2000 - NEWLY ADDED
http://www.gold-eagle.com/editorials_00/hickel020300.html

Feb. 14, 2000 - NEWLY ADDED
http://www.gold-eagle.com/editorials_00/hickel021400.html

Sept. 25, 2000
http://www.gold-eagle.com/editorials_00/hickel092500.html

Oct. 18, 2000
http://www.gold-eagle.com/editorials_00/hickel101800.html

Nov. 13, 2000 - NEWLY ADDED
http://www.gold-eagle.com/editorials_00/hickel111300.html

Sept. 25, 2008
http://www.usagold.com/cpmforum/?p=165878

Steve's final thought:
"What if this move out of the US reserve currency is all a ploy to free-up US gold to move into stronger hands and deprive us all of our country’s gold? We hope those in charge are not playing into the hands of those who triggered this mess. Unfortunately I think they are…"

Then Ender asked the question that was also on my mind.

Ender: "...are you hinting that it the current events of today will simply blow over giving us another 8 years to follow this Great Scramble? Or, is it just the opposite that, even though it didn’t happen before, somehow today it’s different?"

SteveH: "I wrote those 8 + years ago. My take is that it took 8 years to come to pass. Much of what was spoken here by others and on the other site took eight years to come to pass... It also seems to point out that the trouble we see now was also seen then but staved out by TPTB as long as they could. Some earthy shaking event may have had something to do with that." -Posted on USAGold 9/27/08

A Small Prediction for Tomorrow

9:15PM 9/25/08

I'm going to go "out on a limb" here and make a small prediction. If it's right, I will take small consolation in that fact. If it's wrong.... why, I'll just delete it tomorrow. :)

Here it is:

I think the Democrats and Republicans have assessed the situation from a political point of view and they have both come to the decision that "no deal" will help them win the election, regardless of the outcome. If there is no deal and there is no crash, then the Republicans have stood firm on socialism and the Democrats have stood firm on no bailout for the rich. If there IS a crash, then the Democrats think the Republicans will be blamed, and the Republicans think that no one will trust the Democrats in a time of real crisis. So I think there will be no deal.

Both parties have judged this to be better than if there was a deal and it failed before the election. So that is 3:1 odds against a bailout tomorrow!

The other player is the PPT, Paulson, Bernanke and the big investment banks. Even if they have some ammunition left, I think they are at the point right now where they will say, "fuck it... let 'em see what a crash feels like." This will be their Hail Mary Pass for the bailout to go through next week. Dow futures are down right now, which says that the PPT is getting some much needed sleep.

WAMU folded today. On a Thursday no less, when banks are supposed to go down on Fridays so as not to affect the markets. Yesterday, GM unexpectedly closed two dealerships here in Las Vegas as well as several others in other cities, hoping to get a piece of the taxpayer handout. So the FDIC (via WAMU) and GM (another big player) are positioning themselves in weakness while the taxpayer bailout is still "up in the air" so to speak.

I think this is all a play for taxpayer dollars. I think we will see a crash in the markets tomorrow. How big? I don't know. Without shortsellers to slow the decline, and without the PPT buying shitty stocks, it has the potential to be pretty dramatic. Gold should skyrocket tomorrow. Perhaps above $1,000 per ounce.

If this comes true, then it will likely continue on Monday. Beyond that I cannot predict. Only God knows what knee jerk pill our saviors in Congress will swallow at that point. But most likely, it will be exactly the wrong thing.

FreeGold as a Theory

In scientific usage, a theory does not mean an unsubstantiated guess or hunch, as it can in everyday speech. A theory is a logically self-consistent model or framework for describing the behavior of a related set of natural or social phenomena. It originates from or is supported by rigorous observations in the natural world.

In science, a theory is a testable model of the manner of interaction of a set of natural phenomena. A theory is capable of predicting future occurrences, and capable of being tested through experiment or otherwise verified through empirical observation.

In science, the word theory refers to a comprehensive explanation of an important feature of nature that is supported by many facts gathered over time. Theories also allow scientists to make predictions about as yet unobserved phenomena. (Paraphrased from Wikipedia)

Economics is a social science!

For the theory of FreeGold, the experiment is well underway. The future has arrived, so keep your eyes peeled for empirical evidence. Some of it is already out there.

One way you can tell that a theory might be correct is by viewing it from every possible angle. If it remains logically self-consistent from different angles there is a high probability that it is correct.

Here is a great article that speaks to me, as Another would say. It provides another angle from which to evaluate FreeGold. Don't focus on an official gold standard which may never happen again. But think instead about a natural gold standard. And think about whether or not a truly free floating gold price could affect the same controls on interest rates as an official gold standard. Perhaps it would act more like a fire alarm than an outright ban on playing with fire.

For more FreeGold theory, please read Ender's comments.

Additions:
"Oil" exchanging dollars for Euros
China fears dollar dumping
US Mint suspends gold Buffalos because of depleted inventory
Russian President tells gold mines, "Produce faster!"
The "Strong Dollar Policy" may have run out of ammunition.
So true it's almost not funny. I said almost.

FOFOA

FreeGold

Earlier on Randy's blog I said that I would post the only possible solution to this crisis here tonight. Some people might have thought that Karl Denninger's solution was that post. It was not. This is.

My solution is theoretical. It is a theory called FreeGold. It is not my theory and it is not new. It has been around for at least 11 years, probably many more than that. But I believe it is the inevitable end to our current situation. And it will either come by natural forces after America has been brought to her knees, or it will be "allowed" to happen and America will retain some of her former glory.

Please bear with me as it is hard to explain in one post what should take a whole book. I will be jumping from concept to concept with only a cursory explanation. Each of these concepts would take up one or more chapters in the book.

Right now the world has its hopes riding on the United States Treasury. The Fed has spent its balance sheet on bailouts that didn't work. And now the Treasury will supposedly come to the rescue. But the Treasury is misnamed. It should be called the gaping hole of nothingness. Or at least the gaping hole of debt. Where is the so-called Treasure? Oh yeah, we do have the gold.

According to the World Gold Council the United States has 8133.5 metric tonnes of gold, the largest stockpile in the world. (Forget that some of that might be IOU's. I'll explain later why that doesn't matter.)

As I type, the price of gold is going down in the Asian markets. It is probable that Hank Paulson and the Working Group on Financial Markets, also known informally as the PPT, the Plunge Protection Team, had a hand in the Asian markets taking gold down tonight. It is one of the many things they do. They believe that if gold goes down in price, the dollar gains strength. This may sound conspiratorial, but it's really not. It is simply a tactic that they use.

FreeGold is based on the theory that gold has a value much higher than what the markets say. The Central Banks of the world are aware of this value. They trade gold amongst themselves based on this higher value. The purpose of the lower gold price on the exchanges is to gain oil from oil producing nations at a low, dollar denominated price. So the low gold price has a real use, a function, that is maintained by the Central Banks.

If the price of gold in the markets was real, then why don't we see countries that are in trouble financially simply selling all their gold for some cash? It is because gold is really worth more than $50,000 per ounce in today's dollars. I propose to you right now that gold's true value on the world stage is probably $100,000 per ounce in US dollars. And that is based on the dollars in circulation right now. If they print more (which guess what, they are) then the value goes up proportionately.

So now let's jump ahead of ourselves and look at the state of the Treasury with and without FreeGold. Without FreeGold the Treasury is broke. It is insolvent. It is completely reliant on the future taxes to be paid by an economy in trouble. And its biggest asset, gold, is only worth $226 billion. That's hardly a drop in the bucket. But WITH FreeGold valued at $100K per ounce, that same stockpile is worth $26 trillion dollars. Now THAT is enough to be back in business on the world stage. Gold is, and has always been, the United States Treasury's "ace in the hole".

But is this possible? This $100,000 per ounce of gold? How can gold possibly rise that much if it's only at $865 right now? The answer is, it doesn't have to rise. That value is already there. It only has to be set free.

Think about it this way: All the gold in the world is maybe 5 billion ounces. Yet gold is the only "currency" other than the US dollar which is valued EVERYWHERE on this planet. Also, every powerful central bank in the world holds a stockpile of gold as a foreign currency reserve. Here's the list.

So if there's only five billion ounces, EVERYONE values it, ALL central banks consider it a currency, then how on earth is it only $865 per ounce? Well that can be explained.

If you follow this blog then you know about the deal that was supposedly made between the West and Saudi Arabia in either the late 70's or early 80's. The key to that deal was the ability of the West to basically PRINT paper gold and sell it without limit on the world exchanges. The public was taught that paper gold was as good as physical gold. And the ability to print made gold essentially another fiat currency. So that's where we stand today.

If you hold paper gold you are no safer than if you hold paper dollars. There is an imminent default coming on both.

Now I said earlier that the PPT believes that gold must drop in price for the dollar to be strong. This is not true. Even with FreeGold, the dollar can remain the world's most used currency. Not necessarily the RESERVE currency, but the most used. You see in a world of FreeGold, gold will not be traded. It will be held by those that have it, and desired by those that don't. But only a fool would take a printable piece of paper in exchange for something as valuable as gold.

Now you might give up a piece of your gold in exchange for a house, but probably not for a piece of paper.

Therefore, fiat currencies will still be needed for day to day transactions.

Before gold is set free, we will watch as the exchanges that trade gold as a commodity freeze up. They will remain frozen for a period of time and then all the contracts on those exchanges will be settled in Federal Reserve Notes (also known as dollars). That is all the law requires. No contract can require payment in anything but dollars. That is contract law and that is legal tender law.

Then, after that is done, no gold will trade. Period. At least for a while. Then we will hear about gold being shipped to the Middle East as payment for oil shipments to the West. And we will read about countries exchanging piles of gold to settle trade imbalances. And finally, after a year or so, the true value of gold will be known by all.

So if you have some gold right now, bury it deep. If you don't have any, get whatever you can get your hands on while it's still traded as a commodity. Because believe me... gold is no commodity. It is the only store of value in this world that cannot be easily inflated... and the whole world knows it.

The freezing of the exchanges could happen this week. It could happen next month. Or it could happen next year. I do not know. I only know that this is inevitable. And as ANOTHER says, "It need only be [re]-priced once during the experience of life, that will be much more than enough!"

Oh, and I said I would explain why IOU's in Fort Knox don't matter. Well, those IOU's will be called in when this happens. And they WON'T be settled in dollars. Most of those IOU's are held by Bullion Banks who then hold IOU's from gold mines. If those gold mines cannot produce the physical gold at that time then the mine itself will become the property of the US Treasury. If they CAN somehow provide the gold, that will only give them a temporary reprieve. Soon they will be either "taken" or taxed like you won't believe. In a world of FreeGold you can't have private gold mines out there. That would be like giving a private company the printing press for the dollar.

For further information read my posts ANOTHER (QUOTES!), The Picture ANOTHER Paints, The King and his Gold, and of course read ANOTHER and FOA. They are also linked on the right side of this blog.

I'm sure I have not given this topic a fair treatment here. So please post your comments and questions and I will respond to each and every one.

FOFOA

The Mother of all Frauds

This is a repost of Karl Denninger's Market Ticker blog:



I'm speechless.

Let's disassemble this monster piece by piece.

First, this is a de-facto nationalization of the entire banking, insurance, and related financial system. Specifically:

"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;"

That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.

This might include things like demanding that a bank or other financial institution sell him its paper, even if it forces that firm to collapse and be assumed by the FDIC!

You didn't buy any bank stocks last week did you?

"(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States."

This, at first blush, would seem to indicate that only American firms would be covered. Nothing is further from the truth. If the Chinese wish to unload some of their purchased toxic sludge they merely sell it to, oh, Goldman Sachs for 40 cents on the dollar and then Goldman sells it to the Treasury for 50. This, under the black letter of the law here, is perfectly legal, which means that one must assume that Paulson will in fact foist off all the bad paper on world markets that was originally based on a mortgage in the United States, while allowing his banker buddies here to loot the taxpayer by acting as an intermediary in the transaction!

"(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;"

Contracts can (and presumably will) be "no bid, no solicitation" and given to whomever Secretary Paulson favors, without regard to the public interest or normal competitive bidding processes. Must be nice to be a "Friend of Hank."

"In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer."

Notice which comes first.

"(c) Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

Having bought these securities for any price Mr. Paulson would like (and he can compel institutions to sell at his demanded price as noted above!) he can then sell those assets at any price he wishes, to anyone he wishes. It certainly is nice to be a "Friend of Hank", and it most certainly sucks if you're not.

"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"

This is clever and nobody in the mainstream media has figured it out.

If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.

Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.

Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.

In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it. Oh yeah, this bill does that right up front too. No need to bother with it the first time around.

Folks, $700 billion isn't even close to the total cost of this monster.

If Paulson and his successor decide to, they could literally cycle all $5.3 trillion of Fannie and Freddie's debt through this scheme, potentially sticking the taxpayer for 20% or more of the total, plus as much private debt on various bank balance sheets as they can manage to nationalize until (and possibly beyond) the point where the bond market tells him to go to hell.

Bottom line: This bill gives Paulson the ability to nationalize an UNLIMITED amount of private debt and force YOU AND YOUR CHILDREN to pay for it.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

If you are a bank, investor, or other entity who is forcibly gang-raped by Secretary Paulson due to his actions as "King" (crowned by Congress) under this law, you are unable to seek redress in the courts or by administrative action.

The claim is that this is intended to "promote confidence and stability" in the financial markets.

It will do no such thing.

It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

If they have an IQ larger than their shoe size it will commence at 9:30:01 AM Monday morning, although given history and the lack of intelligence displayed by the crooning media market euphoria may continue until the first couple of firms are dismantled by Paulson's newly-crowned Kingly powers with the scraps handed out to his favored few.

The best part of this outrageous fraud is that those who get bent over the table can't even sue - their only recourse will be the (literal) deployment of pitchforks and torches.

That Paulson and Bernanke circulated this document, irrespective of what actually gets reported out onto the floor of the House and Senate (if anything) tells you everything you need to know about his intentions and the safety of your financial assets in the United States markets.

That this "proposal" hasn't resulted in Congress calling for both Bernanke and Paulson to resign for their blatant attempt to crown Paulson King tells you everything you need to know about Congressional integrity as well.

My advice: Don't be caught with any stock or debt instruments linked to a United States financial firm in your portfolio past 9:30 AM Monday morning.

Oh, and if you want an alternative that will actually work?

Here it is.

Paulson's Fundamental Flaws

The purpose of my Epiphany post was not to whine about the taxpayer being stuck with the bill. It was to point out a fundamental flaw in Paulson's frantic and breathtaking plan which is now before Congress.

That flaw is the inflation of the price of bad assets, out of the reach of the rest of the market. Whatever free market mechanism was left in the system for clearing out these bad assets is now gone. Only the taxpayer will buy them at these prices. And don't believe the part about a "reverse auction seeking the lowest price". Since when has anyone shopping with someone else's money haggled down to the lowest possible price? Especially when the purchase must be done in a hurry.

Well, I think I have identified a second fundamental flaw with potentially catastrophic consequences.

It lies in the banning of short selling. The SEC and Hank Paulson have placed the bet that the short sellers were driving down the financials, and that it was not just the shareholders liquidating out of fear. If they are wrong about the public's confidence in shares of the 799 financial institutions then the result could be catastrophic. Here's why:

A short seller is selling a stock he borrowed, but doesn't actually own, at current prices only to buy it back at a lower price. He causes two buys in the market. First is the person that buys the borrowed stock he sold, and the second buy is him buying it back at a lower price and then returning the borrowed stock to it's owner. In essence, he is betting on the price of the stock dropping and when it does he makes money. On the other hand, a long seller is an owner of the stock who just wants out. He is selling a stock he actually owns. He only causes one buy in the market because once he sells he is out. And as he sells, the stock is caught at the lower price by the short seller. So the short seller actually acts as a backstop against the panic selling of shareholders.

If you remove the short seller from the equation, then there will be no backstop if the actual shareholders get spooked by the market and decide to exit their positions.

Most short sellers place their bets because they actually believe a stock will go down based on fundamentals. In fact, most short sellers don't have the billions of dollars it would take to affect the market in a downward trajectory, so they must place their bets carefully. Some short sellers are doing it as a hedge against a long position they may have in the same company, perhaps in Preferred Shares with a fixed dividend. By shorting the common stock they can hedge their risk in the price of the preferreds.

The point is that legal short sellers provide a legitimate function in our current market setup. And by removing them wholesale from the marketplace creates a situation where the prices of stocks could theoretically freefall all the way to zero. That is where we are today.

This warning was issued by the editors at iTulip.com:

"Politicians forget that a short seller is a buyer albeit at a lower price. Take him away and in a market panic there are no buyers at all. A market can in theory then fall to zero. You've been warned."

Also, there were many short sellers that were completely wiped out on Friday. They will not be coming back to the trading floors because they are now bankrupt. I think the appropriate analogy is that all insects play an important role in nature. And if you completely eradicate one of them you will be overrun by the consequences. If you kill all the spiders, you will be overrun by the insects they once ate for lunch.

I'm going to post the entire message from the editors at iTulip because I think it contains a couple important messages:

Editor's addendum: On the short selling rules imposed today, two notes.
One, we extend our sympathy to Mike Morgan who we tried to warn against shorting financial stocks. This regime – we think it is fair to, at this point in time, to stop calling it an administration – knows no limits in the business of market controls.
Two, politicians forget that a short seller is a buyer albeit at a lower price. Take him away and in a market panic there are no buyers at all. A market can in theory then fall to zero. You've been warned.

FOFOA

A Small Epiphany

I just had a "lightbulb moment". That's when you can almost see the lightbulb turning on!

I will rightfully credit Ender at USA Gold for helping me throw the switch.

You see, this bailout has troubled me from a free market perspective. I know there's something wrong with it, but I just couldn't put my finger on it. I just realized, it is the overpaying of the American taxpayer for a bunch of toxic shit that the market has been frantically trying to clear!

I couldn't say it better than Ender when he says, "Every ‘money manager’ in the world knows that the structured contracts have a Marked to Model price and a Marked to Market reality. These numbers are not the same and, in most cases, not even close. In an effort to prevent collapse, there is a Marked to Model bailout in the works. This will be discounted by the world."

You see, all these firms have been clearing out their toxic SHIT by selling it at market prices. Sometimes that was as low as 5 cents on the dollar.

But now.... NOW.... Joe Sixpack comes in and offers to buy this SHIT at "marked to model" prices. That's right. You, me and every other taxpayer is now overpaying for worthless SHIT.

What does that do to a market? Well, that raises the price. Why would, let's say Morgan Stanley, now sell a MBS (mortgage backed security) to, let's say Barclay's for 20 cents on the dollar when it knows it will probably get at least 65 cents on the dollar from you and me? They won't! So the price has just TRIPLED.

Now, if you are Barclay's, and you have a hundred million US dollars to spend, do you spend them on an MBS at 325% of it's true market value? Or do you spend it on GOLD, which is only $870 an ounce right now? Which is a better value?

As Ender puts it:
"Oil will be overwhelmed.
Gold will be overwhelmed.
All commodities will be overwhelmed.
The dollar will be shunned.

The dollar will be found wanting.

There is NOTHING more valuable than a full pantry and the ability to honor your contracts right now."

This is hyperinflationary, dollar negative and gold positive all at the same time! So where do you go with your money? Why, into the financials obviously. Morons.

Here's the link to the above referenced post on USA Gold.

Relativity and Painted Reality

Today at the closing bell I saw that Kitco and CNBC both agreed on the price of gold... almost. CNBC had it at $876 and Kitco had it at $871.60. But the bigger difference was that CNBC had the red arrow next to gold saying it was down $20 while Kitco shows that it is UP $19.60. So which is it? Is gold up or down?

I suppose the answer is that "it depends". It depends on what you compare it to. Everything is relative.

Perhaps the red arrow on CNBC was a simple mistake. But it was up on the screen the whole time I was watching.

How about the Dow Jones Industrial Average? Well, next week they are going to remove the ailing insurance company AIG which has been dragging down the DJIA and in it's place they are putting the more buoyant KFT (Kraft Foods Inc.).

How about inflation? The CPI is the CONSUMER Price Index. That is the barometer for what you and I pay. And when the price of gas or milk was running the CPI up, they simply stopped counting those prices. Instead they count flat screen TV's which are going down in price. If the price of steaks are going up, they make the "assumption" that people will just eat cheaper ground beef and they show the price of "meat" is falling.

How about the money supply? The M3 was the broadest calculation of money. M0 is all the physical currency in circulation. M1 is M0 plus the money in demand deposits like checking accounts. M2 is M1 plus time deposits like CD's. And M3 is M2 plus everything else that is "liquid" including large liquid assets, institutional money market funds, short term repurchase agreements and so on.

M3 was the broadest measure of money in the system commonly used by economists and published by the Federal Reserve. And when liquidity is pumped, it generally lands in the system somewhere in the form of an M3 category and takes a while to filter down to M2 and M1.

But in March, 2006, the Fed stopped publishing M3 data. Wikipedia says, "They explained that M3 did not convey any additional information about economic activity compared to M2, and thus, had not been used in determining monetary policy for years. Therefore, the costs to collect M3 data outweighed the benefits the data provided."

How about our nation's gold? No one is allowed to go in and count it. When Congressmen visited Fort Knox they were only allowed to look at the pile that had been placed in front of them (behind the security bars). When one of them asked to look behind the pile to see how much more was back there they were told they could not.

When our national gold is lent out for various purposes it is replaced with an IOU. That IOU says that the gold will be returned some day. On the books, that IOU is counted the same as a bar of gold. There are not two separate columns. So we have no way of knowing how much of our nation's gold is real and how much is "paper". And the problem with paper gold is that when there is a shortage of real gold, those paper IOU's get settled in Federal Reserve Notes, or dollars.

So what is reality? Where is truth?

It is out there. It is right behind the facade. And the facade is wearing thinner by the day. You see, in reality there are real consequences for actions. There are inevitabilities. You can fool all of the sheeple some of the time and some of the sheeple all of the time, but you cannot fool all of the sheeple all of the time.

Our markets may be manipulated, but they are manipulated within the structure of a free market, where the world is allowed to participate. So while they can fool the world for a while into thinking that it is safe to jump back into financial securities, they can't do that forever. Sooner or later the consequences of the past will blast into the present and reality will be overwhelming. That almost happened this week.

This week we went into full meltdown. But Wall Street was so hungry for some good news that even the mention of Uncle Sam coming to the rescue made the Dow soar.

Today, the chairman of the Senate banking committee, Democrat Chris Dodd, said the United States could be "days away from a complete meltdown of our financial system" and Congress is working quickly to prevent that.

Today Jim Sinclair listed out the implications of the current action under consideration by our elected officials:

Dear Friends,

1. Today's reported potential infinite bailout of all and any portends, if adopted, is the largest increase in dollars outstanding since the Jurassic Age.
2. It closely models actions undertaken regarding the production of currency liquidity seen in the "Weimar Republic."
3. It is reported now that more than 1000 hedge funds are on the rocks. This has the potential for a significant financial impact.
4. The only way to hide the numbers from the statistics produced by the suspected actions of the Fed is to value the indebtedness purchased at 100%, claiming a wash transaction.
5. The only conclusion is that when the smoke clears and the advertised actions have been adopted, nothing more dollar negative than this has ever occurred due to the potential expansion of T bills and therefore dollar supply explosion.
6. Gold is the only currency with no liability attached to it which, as you have seen recently, will be selected as the currency of the people.

Respectfully yours,
Jim Sinclair

I think I agree.
FOFOA

The Picture ANOTHER Paints

This is a repost of a comment I made in a previous article:

Everything but physical gold has counterparty risk. It is everywhere. The counter party to the dollars in your wallet is the US Treasury, ultimately the whole of the taxpaying American public. That can and is being defaulted on by printing new money and deflating the value of what is in your wallet. Everything the investment banks hold on their balance sheets has even bigger counterparty risk. For one bank to live up to it's counterparty obligations requires another bank living up to it's obligations, and on and on ad infinitum.

The mob enforcer is these banks short selling their peers into bankruptcy. When they don't live up to their counterparty obligations, their peer bankers take them out. Bye bye Bear Stearns, bye bye Lehman. And there's always a next on the list until they are all gone. Buh bye.

You ask appropriately "Is the dollar that desired around the world, or can Europe, Asia, and the Middle East do without them?"

ANOTHER would answer this question with, "The world currency system has, for years been little more than digital credits backed by "usage demand"."

So as long as the majority of "things" (oil being the biggest) is priced in dollars, the usage demand will be there. That may end soon.

Also, these foreign countries find economic strength (falsely) in keeping their currencies weaker than the dollar. They see this as helping their economy by making their products cheaper on the world market. But all it really does is make their citizens holding their money poorer on the world market. Yet still they buy dollars to keep their currencies lower. This still goes on today.

Then, ANOTHER would say, "In the long run it was oil backing the US$ that kept it all together! It truly is strange, that in the end it was gold that backed oil! In a even more strange twist, [the Central Banks refusing to part with their physical gold just to support the failing COMEX gold futures market] will bring the system down!"

I think this too is coming. If the dramatic rise in gold continues in the face of physical shortages, look for a major default within the next 90 days.

You say, "Oil is traded in dollars. Oil producing nations get our dollars, and have nothing else they can do with them but buy our limited manufactured goods, and our financial, real estate/ insurance goods and services."

This brings up one of ANOTHER's biggest points. He claims to have inside knowledge about some deals that were made, presumably with Saudi Arabia, and presumably in the early 80's. My post titled The King and his Gold was my attempt to present briefly what ANOTHER said over 3 years. It's probably not totally accurate. That's why I made it into a story. But I think it captures the message he was trying to get across.

The point he makes is that they aren't interested in the dollars or the goods, etc... only in the gold that they can get for those dollars. Because they have a different view of gold than we do in the West. We view it as a commodity and they view it as wealth. But to trade gold for oil on the open market would explode the price of gold, so instead they keep the price of gold low and let the Saudis buy it from the mines which are forced to produce it and deliver it at the price on the COMEX.

If gold were to trade freely, the Saudis would get much less gold for each barrel of oil, but they would be just as happy. And the longer it takes before that happens, the more wealthy and powerful the Saudis will be once it does happen. And it will happen. It is one of those inevitable consequences of a manipulated system.

You say, "Now, those nations have the Yuan because China bought their currencies". This is not totally true. A lot of the dollars bought by the Chinese Central Bank come into the country through the trade of goods. The Chinese people sell goods to us for dollars. Then the banks buy those dollars from their citizens. So instead of holding the Yuan, we hold the goods it makes instead. By buying these dollars from the citizens, the Chinese banks keep the dollar valuable, and keep the Yuan down.

Of course the Chinese could do us great harm by spending all the dollars they hold in reserve. But so far, they do not think that is in their best interest. They don't yet fully realize that they would be fine without the American consumer.

Dollars ARE debt. Remember, the counterparty to the dollar is the American taxpayer. So as long as the dollar is the world reserve currency, our debt is their currency. And their government is STILL trying to keep our debt valuable. Why? Because it will be painful to make the transition, and pain is politically difficult to sell.

I agree that everyone could uncouple from us. But so far they are too timid to do that.

The incentive for, lets say China, to see the price of oil rise, is that they can get all that they need. If the law of supply and demand is alive and well, then a correct price puts the product where it is most needed. If the price is lower than supply and demand says it should be, there will be shortages where it is most needed. What good is a loaf of bread for 99 cents if the store is sold out? Wouldn't you rather pay more and always be able to get some?

You are right about the FDIC. I think that will become the most hyperinflationary problem in the next year.

The problem is that there are more "digital credit units" (dollars) out there locked up in banks and investments than there should be. If everyone ran to the bank to get theirs out and spend them, there wouldn't be enough. And this goes for investors cashing out their holdings as well. There are just too many. There's should only be about $60 Trillion worth of dollars out there in the whole world (including all currencies). Yet there are between $600 Trillion and $1 Quadrillion worth of "digital units" of derivatives and other stuff out there.

So as we bail out banks, and ultimately the FDIC bails out individual accounts, we will be converting those "ghost credits" into real, spendable dollars. That is hyperinflationary.

Your final paragraph is this, "I have no idea about gold and silver. With a somewhat operating Europe and Asia, the price might not really move to its former highs. But if there is a war with Iran, it will likely jump up out of panic. Most Americans don't really have much available cash to buy gold or silver, only bread and milk and college tuition and car payments and mortgages. They are hoping once their bank fails they can get their cash out."

This brings up another one of ANOTHER's main points. That we of "Western thought" see gold as a commodity. You use the word "price" with regard to gold. Would you say "the price of the Yuan"? More likely you would say the exchange rate of the Yuan. Would you say you don't have much cash to buy Yuans because you are buying bread and milk? No, because there is a difference between what you hold for wealth and what you spend to live. "Western thought" has programmed us to think of gold as a commodity. But in reality it is an artificially suppressed currency. This is proven by the fact that foreign Central Banks hold gold as part of their "foreign currency reserves". In the Euro countries, the members are required to have 15% of their foreign reserves held in gold.

So as you can see, the GIANTS of this world see gold differently than we the people do. Perception rules our world right now, just as in The Matrix. But after the collapse, the Matrix will be destroyed and reality will once again rule. At that point, those that hold physical gold, including countries, central banks and individuals, will have infinitely more wealth than anyone left holding worthless paper.

ANOTHER says that upon the crash gold will stop trading everywhere. And for a long while it will not trade. It's value will not be readily known. During that time, holding a bar of gold will be like possessing an original Van Gogh. It is not the most liquid of currencies. In fact, you probably have to auction it off if you want to spend that wealth. That is because it is so rare and yet it is valued by many people.

So imagine a world where the US dollar is carted to the market in wheelbarrows as it is in Zimbabwe. There is no Kitco gold price website anymore, because gold is not traded. It is simply a valuable store of wealth. And it's value must be calculated by it's rarity with respect to the amount of people and things in the whole world when they are compared to the amount of gold in the whole world.

Also, gold mines will not be producing much gold at this time because they will either be nationalized or they will be so heavily taxed that there will not be much profit in it for them.

This is the picture ANOTHER paints. It is both rare AND valuable.

Hyper Drive Engaged - Destination Zimbabwe

ANOTHER (QUOTES!)

aka Things that make you go hmmm....

The best way to rework the publics mind about gold money was by changing the way it was viewed.

"It's money of course but let's also call it a "commodity! Then we can place a "paper" value on it and denominate it in all forms of future contracts. It will lose it's true value as money in peoples minds and be priced in an unrealistic paper format." And here we are today!

The banks must sell all the gold they have to keep the system togeather. And once it is all sold and the financial markets implode the nations will use "whatever force is necessary" to pull the gold back in! That action in and of itself would show the true value of gold money!

You see, gold is not a commodity. The CBs have used every weapon to keep it's price low . Understand me, Gold is now, today, a devalued currency being used in world trade!

Do you think the CBs are selling gold to keep the dollar strong? They don't have to sell to accomplish that feat! CB gold ( one billion ozs.? ) valued at it's current commodity price is only worth 300 billion, it's nothing in that price range! They know what it's US$ price is worth in terms of oil! They are not stupid as they show.

You should not think they are dumb! Invest in gold mines, will you? Notice how quick the Australian CB hinted at taking "gold in the ground" if needed. This was said after their sale! The nature of the coming crisis will make the taking of investor property a piece of cake. You see, because gold is a commodity, you will be compensated at the commodity price of return + a fair profit, of course.

How much further can they take this? The world private stockpiles that could be sold have been. The CBs are heavy into their own stuff now and are over their heads if they had to make good on all the private deals ( read my other posts ) . The economic game is ending! Watch closely as the world currencies and markets fall one by one. Watch in absolute wonder as the demand for oil plunges and it's price goes thru the roof. Yes, oil stocks will crash with the markets. And gold? You will never know it's price. It will stop all trading as it slices thru $10,000+.

Who am I? As I will not be around for long so I am noone. But, follow with me as all of this takes place in your time

Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!" Worldwide the oil business is still conducted in dollars. But, an interesting side show is now taking place that will change the way we think about gold and oil! If you wanted to devalue the US$ against other currencies what would be the best way to do it without LOWERING interest rates in the USA? Perhaps you want to cool off an over active stock market without raising rates ? Could a smart CB Chairman kill two birds with one stone ?

The falling markets worldwide are an early warning that the gold for oil deals are coming undone! As the big players are now heading for the exits in anticipation of exploding oil prices, the selling pressure from the CBs will quickly come off gold. The end of a parallel gold market pricing structure will leave many, many players holding nothing at all! The third world markets are the first to go as their currencies are crushed time and time again. Europe will be next, closely followed by the USA!

As for the US$ and T- bills held overseas, "they don't really exist"!

Current News Item

China Daily
Updated: 2008-09-12 07:32

China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars...

Now let's take a peek at America's gold:


This 2008 chart from the WGC lists America's stockpile at 8133.5 Tonnes, or 261.5 million troy ounces.

But just yesterday, the Associated Press came out with this story:

How much gold is stored at Fort Knox? And is it all the property of the American public?

Jeff Kimball

Salt Lake City

___

The vaults hold 147.3 million ounces of gold, all of which is owned by the United States. The gold, which is worth more than $100 billion, is stored at the United States Bullion Depository in Fort Knox, Ky. That's part of the U.S. Mint, which makes the nation's coins. The Fort Knox depository is a classified facility; no visitors are permitted.

Interestingly, Fort Knox isn't the largest depository of gold in the country — a full 216 million ounces of gold, worth $160 billion, is stored at the New York office of the Federal Reserve. Tours of the Fed's gold vaults are available to the public.

The gold at the New York Fed belongs to foreign governments, central banks and international monetary organizations, with only a small portion belonging to U.S. government.

Jeannine Aversa

AP Economics Writer

Washington

Okay. So the AP says that we have 147.3 million ounces at Fort Knox, and that we have, and I quote, "only a small portion" of the 216 million ounces at the NY Fed. (That's the place from Die Hard 3)

So subtract 147.3 million at Fort Knox from the WGC's 261.5 million and you get 114.2 million ounces we should have that's not at Fort Knox.

114.2 million out of the 216 million at the NY Fed is exactly 52.9%. So 52.9% of the gold at the Fed should be America's. Since when is more than half "only a small portion"?

Something doesn't add up.

Hmmmm.

The Collapse!

So how close are we? There has been a lot of talk about "the collapse". In fact, "the collapse" is poorly defined. It could come as either hyperinflation or depression. There's also the combination of hyperinflationary depression, but that's really just hyperinflation. It is hard to become Zimbabwe and still have a booming economy.

So how close are we? I think we are very close. The following concept comes from Richard Maybury of the Early Warning Report (EWR). Don't bother looking for it on the Internet because it's not there. It will cost you $300 a year for 10 issues, $15 each for past issues, or $99 for a year's worth of past issues. I'm not trying to spread it for free, just this one concept, in my own words, and giving Richard full credit. He takes Visa and Mastercard at Chaostan.com. [/advertisement]

So how close are we? The Federal Reserve's conventional monetary policy is to constantly inflate the money supply at a controlled rate that will keep us in a "safe zone" between double-digit inflation and recession. As we head toward recession we print more money and inflate. Then inflation gets too high and we pull back increasing interest rates and slowing things down. Think of this in a graphic sense. Two parallel lines, the top one is hyperinflation and the bottom one is depression. In between these two lines we see the fluctuations of the Fed's printing press. Here is the graphic Richard used:


That seems all well and good. But there is a problem with this "standard model"; in a word, malinvestment. Every time the printing presses go to work money flows into the system. That money distorts prices. Businessmen who rely on prices to make good decisions end up making bad decisions based on distorted prices. This causes malinvestment. We can see this right now in the housing sector.

So when the money stops flowing, these malinvestments go bust, companies go broke, and people complain. That is called a recession. So the printing presses go back to work pushing out more new money. But the Fed can't control where this new money goes. People are complex animals and usually this money doesn't go back into the bankrupt industry of a few years ago, it goes into something new.

Thus we have a boom bust cycle that seems to pass from one place to another. Have a look at the DotCom boom, then bust, followed by the housing boom and bust if you are confused.

So what's the problem? Maybe our next bubble will be renewable energy, right? Wrong. The problem is a flaw in the chart above. What if those lines aren't parallel? What if they converge? There IS evidence of this. Here is Richard's second chart:


What this means is that in each cycle of boom and bust, the maneuvering room the Fed has becomes smaller and smaller. Each time it takes more money to reinflate a bubble, yet more money causes ever higher inflation. And if the lines are converging, then they must eventually intersect. I think we may be at that point.

The lines have been converging since WWII. Here are some examples: In 1949 a recession was halted with "only" $10 billion. In 1982 a recession required $100 billion to reverse. The mild 1990 recession took $350 billion. And in 2001 it required $250 billion, but that one was so mild there is a debate about whether it was even a true recession.

The government stopped reporting the M3 in 2006, so it is hard to compare apples to apples, but the MZM is a fair measure of what is going on now. And so far the MZM says we have "printed" $2 trillion for this current crisis. And it isn't even close to being over.

So in 1949 it took $10 billion to keep all the malinvestment afloat. Well you might say that $10 billion in 1949 would be worth a lot more today. True. But if you factor inflation (which of course is the main problem to begin with) into this, we have already printed 22.3 times as much money, in 1949 terms, to get to where we are today. And from where I'm sitting, we are still deep in it.

So where does that leave us? Basically any printing big enough to avoid a depression leaves us with hyperinflation. And anything short of hyperinflating the money supply will not be enough to dig us out of this hole. The Fed is backed into a corner. So what will Ben Benanke do? Will he lower the rate? Will he raise it? Will he keep it the same? Does it even matter? I don't think there is a way out at this point.

So what happens to gold? Obviously it goes up. But there is already a shortage. And the hole that the interventions have dug requires that "official gold" must be released to keep the credibility of the COMEX alive. No one else is selling real gold. The mines can hardly afford to take it out of the ground at these prices. Only the stock of the US Treasury and other Central Banks can keep the paper market alive at this point. But they are getting low. And soon they will not want to part with their gold.

ANOTHER said this in 1997:

In any event, LBMA has traded so much paper/oil/gold that any rise in the currency price of gold will implode them. The CBs must become the full primary suppliers of gold or the system as we know it is done.

One last note: No form of paper wealth will survive the financial crush once the CBs stop selling!

NOTHING!

I'll end with some of Richard's own words. I hope he doesn't mind. Maybe someone will sign up for his newsletter because of this post. Here they are:

And by that measure,I think virtually the whole
economy is malinvestment. During its 94 years of
existence, the Fed has injected so many dollars that
hardly anything is where it should be, doing what it
ought to, at the correct prices.

If these estimates are anywhere at all in the ballpark,
they mean we may be close to the end point of
the channel. If the Fed does not do additional massive
injections, we will fall into a depression, but if
they do make these injections, we'll go into a runaway
inflation.

Any injection big enough to avert a depression
triggers runaway inflation.

Please read that last sentence again, I
think it describes our present situation.

More (THOUGHTS!) on the Hunt Brothers

I am reading ANOTHER (THOUGHTS!) and FOA's Gold Trail series for the second time right now. It is like a book as I printed it all out. Here is what "the book" looks like on my nightstand:


As I read it all for the second time I am picking up lots of things that I missed on the first reading. As you can probably tell from what I've written about Another, his writings are somewhat cryptic. But there is also a ring of truth in what he says, which is why I value it so highly.

It has also aged more (like fine wine) than what is being written today. The definition of wisdom is knowledge, insight or truth that stands the test of time. In his writings I sense such wisdom, and I am looking for current signs that show that what he said 10 years ago is standing the test of time.

I am not alone in keeping ANOTHER (THOUGHTS!) alive in my thoughts as I watch today's gold market. Here is a post from today which references him in regards to current Central Bank and government actions, like the nationalization of Freddie and Fannie.

I am still going to post my thoughts regarding the lessons we should take from the Hunt Brother's story. But I am still forming my thoughts on those lessons as I reread ANOTHER and as I read other current writings.

For example, here is a link to Ted Butler's latest article on the current manipulation. In it he says,

Let me state that clearly - one (maybe two) U.S. bank holds a net 36% share of the entire COMEX silver market. The same one or two U.S. banks hold 82% of the total commercial net short position. This is a concentration that is unprecedented; maybe double or triple or more what the Hunt Brothers held on the
long side in 1980. Without these, one or two traders, there would hardly be any commercial silver short position at all. This makes the big concentrated short a danger to everyone, including the market itself. That’s why the regulators must act now.

This is important. If you remember from the story of the Hunt Brothers, the big Wall Street banks held the short side of the Hunt's long on silver. And just when they were about to lose their shirts, the exchanges helped them out and changed the rules which killed the Hunt's position. The Hunt's weakness was that they had bought on margin. And if you notice right now, it is the "margin investors" that are getting killed, forced out of their positions at huge losses.

But as I said, that is the most obvious lesson. I still think there are deeper lessons. For one thing, if the Hunt's had had the advantage of reading ANOTHER (THOUGHTS!), they would have probably switched from silver to gold in 1974. They would have focused on taking possession of physical gold only. And you can't very easily do that on margin.

Anyway, I will get back to this subject soon. But for now, please watch this video interview with Bill Murphy the founder of GATA. I think the video is about a year old, but it is still very good. Bill started GATA along with Chris Powell back around the time that ANOTHER was writing. And as I mentioned before, Bill and ANOTHER had different approaches to what they both saw happening. But that doesn't really matter as my goal is to uncover the elusive truth of what is really happening, and what is coming our way. The media and the government are trying to paint and spin the truth and the future. So digging out the truth in this day and age can be a difficult task.

Here's the video:

FOFOA

Priceless

The Story of The Hunt Brothers

The story of the Hunt Brothers is a fascinating tale. At one point in the story, around 1974, they rounded up the best marksman cowboys in a contest held at the Circle K Ranch in Texas. Then they hired these “Circle K Cowboys” as security to move a large amount of silver out of the country. The Hunts were worried about a 1930's style government confiscation of silver. So they chartered three Boeing 707's and the cowboys flew to Chicago and New York where they were met by convoy of armored trucks in the middle of the night. In all, 4 million ounces of silver was loaded onto the three planes and the cowboys accompanied the shipment to Zurich, Switzerland where they were met by another convoy of armored trucks. This secretive operation cost the Hunt Brothers $200,000.

In another interesting part of the story Bunker Hunt, one of the bothers, went to Tehran, Iran to try to talk the family of the Shah of Iran into investing in silver with them. But the Shah didn't know anything about the Hunt brothers and the meeting didn't go too well so the deal fell apart. Right after that, Bunker set up a meeting with King Faisal of Saudi Arabia to get him to be a partner in their silver buying company. But Faisal was assassinated just weeks before the meeting.

If you only read the American press accounts of the Hunt Brothers, they are made out to be criminals or evil rich men. True, they were billionaires. At one time in history, their father may have been the richest man in America. They were also evil oil men. And everyone knows that if you are obscenely rich, from Texas, and in oil, then of course you are a bad guy. Right?

Well I see the story a little differently. And I think there are some important lessons in this story that may shed some light on what could happen in our futures markets today.

First of all, the Hunt brothers started buying silver in the early 70's because they believed in hard money and they also believed that high rates of inflation were eating away at their considerable wealth. Why silver? Well at the time that they started buying and for the first three years of their buying, it was illegal for Americans to own gold. So silver was the next best thing. And for those of you who are fortunate enough to have a substantial amount of savings, you probably know the difficulties and costs of converting large amounts of paper money into hard money. So imagine if you were a billionaire trying to protect your wealth. You couldn't just go to your local coin shop with $10K per day. That would take 200,000 days or 547 years to convert the kind of cash they wanted to convert.

Secondly, you must understand the history of the Hunt family. You can read about it here. Their late father, HL Hunt was a poker player. He gambled both in cards and in business, and he was known for going “All In”. In fact, he even funded his early oil well ventures with money won at the tables. So the Hunt brothers inherited this “All In” mentality from their father which might explain why they tried to buy so much silver over the next decade.

So what happened to the Hunts?

Snippets from H.L. Hunt's Boys and the Circle K Cowboys by Larry LaBorde:

By the spring of 1974 silver rose to over $6/oz and rumors were flying that the Hunts were trying to corner the silver market. At the time annual production was 245 million oz and annual demand was 450 million oz. The Hunt brothers had just taken delivery of 55 million oz. The big question was how much silver was out in private hands?

only about 200 million ounces was available for delivery against futures contracts.

That same Spring Bunker appeared on the floor of COMEX in New York for the first time and declared that "almost anything is better than paper money" and "any fool can run a printing press".

The brothers quickly devised a swap where Great Western would trade 20 million oz of silver to the Philippines for sugar for their refineries; the Philippines would then trade the silver to the Saudis for oil.

the IMF killed the deal. The IMF would not recognize the silver as an asset of the Philippine government and would refuse other loans as a result. The deal fell through and the brothers sold the 20 million oz of silver the next year. Once again Bunker felt thwarted by the Eastern establishment.

The brothers then turned to another commodities play and invested in soybeans. They were a little short on cash again so they used their silver as collateral. As usual the brothers went into the market in a big way. The legal limit for a single investor is 3 million bushels. The brothers brought in family members and had a total stake of 22 million bushels. The CFTC cried foul and filed suit against the Hunts.

They were fast gaining a reputation of playing fast and loose with the rules concerning commodities trading.By the late 1970's the Hunt first family's fortune was estimated to be in the range of 6 to 8 billion dollars.

In 1978 John Connally introduced Bunker to a Saudi sheik at the Mayflower hotel in Washington.

A year later International Metal Investment was incorporated in Bermuda between Bunker, Herbert and two Saudi sheiks. It was speculated that the two sheiks were fronting for members of the Saudi royal family.

In the summer of 1979 the Hunt brothers started buying silver through the International Metal Investment group along with their Saudi partners. Over 43 million oz of silver contracts were purchased through the COMEX and the CBOT with delivery to be taken that fall. In the fall of 1979 the silver price doubled from $8 to $16/oz in only two months.

The COMEX and the CBOT started to panic. In late 1979 the warehouses of the two exchanges only held 120 million oz of silver and that amount was traded in October alone.

Late in 1979 the CBOT changed the rules and stated that no investor could hold over 3 million oz of silver contracts and the margin requirement were raised. All contracts over 3 million oz per trader must be liquidated by February of 1980.

Bunker accused the COMEX and CBOT board members of having a financial interest in the silver market themselves. Investigations later found that many had substantial silver short positions. Bunker knew that a shortage now existed or they would not be screaming so loudly. He bought even more. The price on the last day of 1979 was $34.45/oz.

Finally on January 7th of 1980 the COMEX changed their rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th. . The CFTC promptly backed up the ruling. On January 17th silver hit $50/oz, Bunker had continued to buy.

On January 21st the COMEX announced that it was suspending trading in silver.

By March 14th silver was down to $21/oz.

Finally on March 25th of 1980 the Hunt brothers ran out of cash. Bunker called Herbert and simply said, "Shut it down". Herbert promptly told his broker the following morning that they could not meet their $135 million dollar margin call that day.The Hunt's brokers promptly sold $100 million dollars worth of silver that day

When it was all over they owed $1.5 billion dollars.

After the smoke cleared it appeared that the drama was not just a one sided manipulation by the Hunts. The shorts and the Eastern establishment had just as much at stake as the Hunts. By the mid 1980's silver was bumping $17/oz again.

In 1988 Bunker filed for personal bankruptcy. In 1989 he left bankruptcy with a net worth of $5 to 10 million dollars and a debt to the IRS of $90 million dollars to be repaid in 15 years. Bunker's trusts, set up by his father H.L. Hunt, are currently valued at $200 million dollars. Last year the payments to the IRS finally stopped.

So what are the lessons we can learn from the Hunt Brothers (other than the obvious, don't buy on margin)? I will attempt to address this question in my next post. And I will look at those lessons in light of the writings of Another. One question I will ask myself is what would the Hunt Brothers have done differently if they had had the advantage of reading Another? And how would things have turned out then?

I encourage you to read the full story from the above link. And also read this article that appeared in Time Magazine right after the Hunt's appeared before Congress in 1980.

Bunker's Busted Silver Bubble – Time

From the article:

As the brothers told the tale, they were just worrying, like most Americans, about the worsening economy. As Bunker Hunt has reportedly said, "A billion dollars is not what it used to be." Inflation had destroyed their faith in the dollar, so early in 1979 they began putting even more of their wealth into a "harder" currency: silver.

"At no time," said Herbert solemnly, "did I attempt to corner, squeeze or manipulate the silver market."

In some ways this is simply the sad tale of a misguided hard money advocate who just happened to be a billionaire.

FOFOA