By Mario Innecco

I remember when I lived in Brazil the local currency was like confetti and if you wanted to protect yourself against inflation and currency collapse you had to hold U.S. dollars. Holding dollars, if you could get a hold of it, was very worthwhile as every month that went by you could buy a great deal more of cruzeiros, new cruzeiros, cruzados or reais.

The other aspect of the currency market that I always found interesting was what was called the parallel or black market. In the parallel or black market one would always get a much better exchange rate for the U.S. dollar than one would get at a bank. Banks, of course, are under the control of the central bank and as a result the exchange rate was controlled or manipulated by central bank foreign exchange activity.

Travel agencies and other businesses related with foreign transactions dealt in this so called black market in dollars. In reality this was the free market in dollar for the Brazilian holder of dollars. It was called a black market as the banking establishment wanted to disparage this market and make their rapidly depreciating currency look a lot better than it actually was.

Recently in the developed or Western world we have started to see a great disconnect between the inter bank and comex price of gold and silver and the price of gold and silver coins and bars that one has to pay dealers, jewellers and ebayers. Gold sovereigns are being sold in London at anywhere from a 10% to 12% premium while I have heard that krugerrands have been bought, when you can find them, for as much as a 15% premium on the official inter bank price!

We, at forsoundmoney, believe that this disconnect between the official bank price of precious metals and the price for coins and bars or real physical gold and silver is simply a reflection of the manipulation by central banks of the inter bank and comex market. This official market is in reality a fictional paper market for the precious metals and does not reflect the free market price.

Have a look at this one troy ounce krugerrand on ebay! The bid was at £530 or $938 when I wrote this posting! That is a 12% premium over the closing bid of $834.80 on Kitco on Friday the 3rd of October, 2008.

Look at the price of this one ounce of silver bar on ebay ! At the time I wrote this article this silver bar had a bid of £10.99 or $19.45! That is a premium of 74% over the closing price quoted on Kitco for the 3rd of October, 2008!

There we have it! The Western central banks can try to embellish their currencies but the free market is not buying it!

Americans have reached a point in history where they will be deciding whether they would like to give away their freedoms to the bankers or remain a free people. This proposed Paulson Bailout plan for Wall Street is, in our opinion, the single most important issue since the colonists decided to sign the Declaration of Independence in 1776. Americans and their representatives in Congress will literally decide whether two hundred and thirty two years of freedom of the American individual will be abolished in the course of one week!

If the 110th Congress of these United States votes in favor of the Paulson plan the concept of individual liberty and freedom will be buried for generations to come! What hope does the rest of the world have if America gives up on liberty?

We should not forget what Sir Josiah Stamp (Director of the Bank of England in the 1920s) said about the system of Central Banking from which he personally benefited:

“Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits.”

We should also not forget what Thomas Jefferson said about banking institutions:

“I sincerely believe… that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”

Let us hope that the 110th Congress votes for liberty.

The United States Treasury announced today that it will supplement funding to the Federal Reserve in order to shore up the central bank’s balance sheet. The Treasury said that the Federal Reserve requested the additional funding as they have gone through all their balance sheet assets trying to save the U.S. financial system.

In plain English this announcement by the Treasury means the Federal Reserve has run out of financial ammunition and as a result will start printing Federal Reserve Notes in order to buy the Treasury bills in order to fund its balance sheet. This also means this financial crisis is far from over as the Fed feels it needs to shore up its balance sheet.

Is it any wonder gold is up over $80 on the day as Ben Bernake crosses over the Rubicon in his helicopter?

Sir Josiah Stamp was appointed a director of the Bank of England in 1928 so he was not a radical or a so called “conspiracy theorist”. One of our favorite quotes concerning the banking system was made by Sir Josiah Stamp and we think what he said back in the 1920s is very relevant to what is taking place in front of our very eyes.

He said the following: “Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits.”

For the last year we have been witness to the continuing implosion of the Western banking system. The problem, of course, has been that bankers lent money that they did not have to people that did not have the money to pay them back. Besides lending money they did not have they lent it many times over or in financial market speak they levered themselves to the hilt! Greed and bad money management has led to the bankers’ demise as house prices started turning south and the bankers’ loans started losing value.

One would think that in a supposedly free market capitalist system that we have in the Western world the banks would be allowed to fail and their depositors would have lost all their money. Unfortunately this isn’t happening and what Sir Josiah Stamp said way back in the 1920s is happening one more time now as the Federal Reserve and the Bank of England in conjunction with their respective Treasurys are creating hundreds of billions of dollars and pounds, on the back of the taxpayers, in order to shore up almost worthless securities and OTC derivatives that the banks hold. So the old process seems to be in motion again as the bankers’ assets have been taken away from them but with the flick of a pen, or by switching on a PC and typing a number one with many zeros behind it, the Fed and the Old Lady of Threadneedle Street are trying to buy back the whole world again!

It will be interesting to observe over the next few years if the American and the British taxpayer wake up and realise that they are being taken for a ride and demand real reforms that bring about a monetary system that is based on sound money and a banking system that is not controlled by a cartel of banks headed by a Central Bank.

Will we go for slavery or liberty?

This is President Nixon’s announcement of the end of gold convertibility for the American dollar. It is interesting to note that all the great things Mr Nixon predicted would happen like a stronger dollar, low inflation and a rebalancing of the trade deficit didn’t! In fact with the abandonment of gold as a monetary anchor the dollar has gone from just over 4 Swiss francs to almost parity today against the franc. Inflation was rampant in the 1970’s also as Mr Nixon closed the “gold window” and has remained rampant ever since and as a result created multiple bubbles of which the latest is the housing bubble. As for the trade deficit it has only gotten worse! America nowadays exports roughly $700 billion less than it imports from abroad! One also only needed $35 back in 1971 to buy one troy ounce of gold! The Austrian School of Economics was right that if the dollar was allowed to float versus gold the value of the dollar would plummet against the yellow metal! Milton Friedman and other mainstream economist were completely incorrect as they pointed out that the value of gold would drop precipitously once the gold standard was abandoned.

By Mario Innecco

We think the way inflation is presently defined goes a long way to helping central banks and governments perpetuate the debasement of currencies via the over issuance thereof. Prior to the 1980’s The Merriam-Webster Dictionary defined inflation as: “an abnormal increase in the volume of money and credit resulting in a substantial and continuing rise in the general price level”. Nowadays The Merriam-Webster Dictionary defines inflation as: “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. The new definition does not seem that different but notice how inflation is now “a continuing rise in the price level…” instead of “an abnormal increase in the volume of money…”.

This change in definition has allowed central bankers and politicians to control people’s expectations of inflation . Defining inflation as rising prices and measuring rising prices through government measures like the C.P.I. (consumer price index) has allowed central banks and governments to fool people into believing that inflation is under control because the basket of goods and services in the C.P.I. keeps getting adjusted over and over again in order to keep the index from showing the real effects of inflation. We recommend people to take a look at John Williams’ website shadowstats.com to learn more about how statistics like the C.P.I. have been adjusted over the years.

Only through the over issuance of fiat currency can inflation take place and only through central banks can fiat money be issued. When there are no central banks the banking system is limited to the amount of currency it can issue because the supply of gold is finite. Currency issued by banks is limited to the amount of gold on deposit and if a bank over issues, the value of its currency or note will drop below its par value. If a bank wants to stay solvent under a free market system, where there is no central bank to bail it out, it better have enough gold specie to cover its demand deposits. It is the discipline of the gold-backed free market system that keeps inflation naturally in check.

As one can see monetary inflation is only possible when governments give monopoly powers to a bank of issue or central bank and forces people to accept the fiat currency through the legislation of legal tender laws. Felix Somary, one of the most influential bankers in Europe in the early 1900’s once said: “the state alone is responsible for inflation: inflation without government, or indeed against government, is impossible.” (1)

(1) “The Raven of Zuerich – The Memoirs of Felix Somary.” C. Hurst & Company, London, 1986, pg 98

Yesterday (Friday, September 21st, 2007) the gold price for physical purchase was fixed at $737.00 per troy ounce in the London P.M. session. The gold price is fixed twice a day in London. The A.M. fixing is done from 10:30 onwards and the P.M. fixing is done from 15:00 onwards. The reason why we are looking at the P.M. fixing is that during this period the major financial markets of Europe and the United States are open so this fixing price is very representative of physical demand for gold bullion.

Prior to yesterday the second highest weekly P.M. fixing ever had been last year on May 12th when gold was fixed at $725.00. One needs to go back to January 18th, 1980 to find the highest weekly P.M. fixing ever at $835.00. It is not surprising that the second highest ever weekly fixing for gold came on the week that the Federal Reserve Board decided to slash the the Fed Funds and Discount rates by 1/2 of a percent. The Fed’s aggressive rate cut came despite the fact that the Dow Industrial average is near its all time peak of 14′000, the unemployment rate is at a relatively low 4.6% and when U.S. G.D.P. growth is growing at a 4% rate according to the preliminary second quarter data reported by the U.S. government.

We think the gold price is telling us the international money market does not trust Ben Bernanke, the Federal Reserve Board chairman, to maintain the integrity of the United States’ currency.

The Gold Weekly P.M. fixing chart courtesy of Bloomberg.

I took my daughter out this afternoon, Saturday, September 15th 2007, for a snack in downtown Bromley, England and we actually witnessed history in the making. It was the 2007 bank run in its early stages. People are suddenly realising that a great deal of financial institutions have acted recklessly with their money and they want their money back! Poiticians, bankers and regulators have tried to convince people there is no reason to panic but understandably many people do not trust our so called “policy makers” anymore.

It will be interesting when people also realise that our present day money or fiat money is only backed by the promises of the very politicians and policy makers they don’t trust anymore! Maybe they will then demand a sound monetary system based on gold and silver.

Depositors queueing outside Northern Rock to withdraw their savings this afternoon in Bromley, Kent which is situated in the southern outskirts of London

Today we saw the O.N.S. (Office of National Statistics) release the C.P.I. and the R.P.I. for the month of June. The C.P.I. or the consumer price index came out at a 2.4% year on year rate and actually dropped from 2.5% in May but the financial markets were expecting a drop to 2.3%, while the R.P.I. or the retail price index came out at 4.4% year on year which was on the back of an expected decrease from 4.3% to 4.2%. Short sterling futures, which reflect expectations of three month deposits, dropped across the board. A one basis point decrease in the futures price represents a one basis point increase in expectation of three month sterling deposits. The September 2008 futures dropped from 93.68 to 93.61 and is therefore discounting a rate of 6.39% for September of next year.

Tonight’s Evening Standard’s front page story says: “Soaring prices in shops mean rates are certain to hit 6% soon” and it goes on to say that economists now think another rate hike by the Bank of England is almost certain and that it could come in August. We have noticed that most economist have been underestimating how far the Bank of England will need to raise rates. In an article in March this year Victoria Marklew, an economist at The Northern Trust Co., said the following: ” So, where does all this lead interest rates? The prospect of one more rate hike in April or May has dimmed a little but not disappeared. In its February Inflation Report the BoE concluded that inflation would be slightly above the 2.0% target in two years time if the repo rate stayed at 5.25%. And while the MPC seems to be feeling more sanguine – even the two most hawkish members voted to stay on hold this month – they are not yet ready to rule out the need for additional tightening.” Another article in the FT on the 4th of June carried the following quote from Robert Lynch at HSBC: “UK interest rates are seen staying at 5.5 per cent, even though inflation concerns remain prominent following recent data pointing to the increased pricing power of British companies. Interest rate futures suggest another quarter-point increase to 5.75 per cent is likely by August.” We are now in July and the BoE has already raised rates (June) to 5.75% and 6% is expected in August!

We at ForSoundMoney think it is very important to follow money supply growth as inflation is the growth of the money supply which leads to rising prices of goods and services. In the U.K. the broadest measure of inflation or the money supply is the M4. We have warned our readers in the past that it is imperative that the Bank of England do whatever is necessary to keep money supply growth under control. We think the Bank of England has lost control of inflation and that the only way it can bring it back under control is through much higher interest rates than we have got at present (5.75% BoE rate). Check out the chart below and notice how the last time the M4 growth rate was hovering around 14%, like it is now, how the 10 year Gilt yield was around 10% and the R.P.I. was also at 10%.

The share price of Newmont Mining, the second biggest gold minig company in the world, recently touched an almost two year low of $38.08 on the 27th of June. This was the lowest level for NEM (ticker symbol) since August 2nd, 2005! It also marked a very significant drop from the high of $62.72 reached on January 31st, 2006. It would seem that Newmont Mining’s share price has no future and that the gold mining sector is not the place to be at the moment but if one looks at the bigger picture it is possible that what we have witnessed in the last sixteen months is nothing more than a gut wrenching correction in a long term bull market. It happened in the mid 1970’s when the price of gold dropped from around $200 in 1975 all the way down to around $100 in 1976 before it started its ascent to $887.50 in January of 1980!

The first chart below shows the fibonacci retracement in the Newmont share price since the beginning of its bull market in October 2000. Newmont bottomed at $12.75 in October 2000 and traded all the way to $62.72 in January of last year. As can be seen NEM failed to hold the 38.2% retracement of the above-mentioned move. We think, nevertheless, that the recent low at $38.08 is near enough the 50% retracement of $37.735 to probably point to a probable low.

The second chart shows a falling wedge formation which is usually a counter trend corrective move in a bull market. If NEM holds the $37.75/$38.00 area and goes on to trade above ( above the $43/$45 level) the white trend line of the falling wedge in the next couple of months or so it could be pointing to a new leg up in the gold mining sector bull market.

1stChart

2ndChart

Charts from Bloomberg.