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Another Call for a Gold Peg from QB Partners…/adults-wanted/

Creative Commons License photo credit: Martin Deutsch

As somewhat of a goldbug, I can’t help but enjoy reading the following updated article (See the original gold peg call from QB Partners posted in December 2008) from Paul Brodsky and Lee Quaintance, who run investment fund QB Partners. The article is posted on Barry Ritholtz’s Big Picture.

Gold at $3K/oz would be pretty incredible for current precious metal holders. Gold at $9,000? That is hard to imagine.

Yet if history is any guide, when we start seeing gold make a serious run up and everybody starts diving into the asset class, we could easily see some unbelievable prices reached.

The rebuttal is that all of this deleveraging will result in deflation, which will take down commodities and gold. With the Fed pulling all the stops, I don’t see that happening. They’ll overshoot on monetary policy (as always) and the resultant rice in prices will mean hell to pay (to buy anything!).

In our papers last year we established that an equilibrium price of gold (our “Shadow Gold Price”) would be something north of $9000/oz today. We used simple, Bretton Woods-model math (Federal Reserve Bank liabilities divided by US official gold holdings). To save the US and European banking systems and stabilize western economies we believe the US dollar peg to gold should be implemented at a much lower conversion price than its equilibrium price. The following actions should be taken:

1)The Fed announces a public tender for any/all outstanding private gold holdings at $3,000/oz.

2)The Fed prints Federal Reserve Notes (aka US dollars) to fund these purchases

3)As once privately-held gold flows into the Fed, the Fed’s balance sheet de-levers in gold terms

4)The Fed would soon own enough gold to credibly support the newly-designated peg

5)The Fed would also purchase the “people’s gold” currently held by the Treasury Department at the $3,000/oz clearing auction price (Treasury is carrying gold on its books at $42.22/oz.)

Bang – the soundness of the dollar suddenly becomes unquestioned because it has scarcity value. Its hegemony is protected and its status as global reserve currency is solidified.

A three-fold increase in the gold price should be enough to guarantee that the “free market” would drive asset prices up to the point that all toxic and opaquely-marked paper is once more reserved by banks at ratios greater than one. The loss that JP Morgan et al would suffer in their gold/silver short positions (yes we know about those) should be more than offset by the move to Par in all their respective paper assets. In fact, given the current interest rate structure of sovereign yield curves, we would argue that most dubiously-priced paper held by banks would be valued well in excess of Par, as credit spreads would collapse to reflect sharply higher asset collateral coverage ratios.

On an ongoing basis, the Fed would hold public auctions (as a buyer/seller) to maintain the $3,000/oz. peg. The gold market would become the new outlet for the Fed’s open market operations. Other economies would have to follow suit and devalue their currencies to preserve trade relationships (particularly net exporters to the US). This would be a huge transfer of wealth to the US, particularly from China and Japan. No doubt the US would have to negotiate terms with these exporters.

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The Money quote on Gold from Chris Wyke


Tim at TheMess has a fantastic quote from Christopher Wyke which, in only a few sentences, pretty much sums up the strength of gold as an asset class (I am unabashedly long gold, and this is not to be considered investment advice!).

Here’s Wyke:

Wyke: I think people have been investing in gold as a safe haven, as an alternative to stocks. But what’s really impressive is that the gold price is up by about 25 percent in the last four months at a time when the dollar’s been strong and no one’s been worried about inflation. I think, when that turns around, when the inflation concerns arise again, and if the dollar is to fall again, then gold could move very sharply ahead.

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“Making money is that easy . . . You make it yourself, with your friends, as you create value for another.”…on/2009-spring/

An interesting, brief article in H+ magazine titled Hacking the Economy by Douglas Rushkoff speaks to times long gone — centuries ago when barter was the common means to transact locally and centralized currency was scarcely used at all. The author explains that the aristocracy effectively compromised this system by pushing centralized currency, which was “a way to extract value from the periphery and bring it back to the center.”

Whether things occurred as simply as Rushkoff describes is up for debate. Governments (via banks or perhaps its vice versa!) have long been incentivized to centralize the management of currency. Currencies throughout history have been based on gold and silver (as they are scarce, divisible, and uniform). However, via centralization’s corrupting influence (i.e. no checks and balances), the central monetary authority has always slowly but steadily debased the currency spurring inflation and leading to all sorts of unfortunate consequences — the most noteworthy of which is robbing the common man of his wealth.

In our modern days, we’ve gone completely to a credit-based society whereby all money is based on the assumed credit of the centralized authority. Dollars don’t represent gold or silver (though they once did). I won’t go into further detail on this here, but you should check out Rothbard’s What has Government Done to our Money? (Buy it off amazon or grab it free in pdf or audio off

What I like about Rushkoff’s concise piece is how it makes two fundamental conclusions, both of which I happen to agree with:

  1. Centralization tends to result in perverse systems — i.e. our productive hours don’t lead to our own wealth. Money is made simply by moving electronic balances around. Finance replaces production in society (I.e. the United States’ FIRE economy).
  2. Money is easy to make. Money is merely efficient barter. No matter what happens to the general economy, the dollar, the yuan or yen or gold or silver, trade will continue on. You just better hope you have some assets to barter around, and if you don’t, you can always get creative and find things that you can trade.

Here’s a summary snippet of Rushkoff’s article found on page 37 / 38 of the online magazine. The rest of the magazine looks fascinating and I only wish I had the time to skim all its pages!

The economy we live in is a rigged game, established around the time of the Renaissance in order to promote the welfare of earlychartered corporations and the monarchs who gave them license to monopolize world business. Until that time, there were many kinds of money in use simultaneously. People used centralized currency to conduct long-distance transactions, and local currency to transact on a more day-to-day basis. . . .

Like most innovations of the Colonial era, centralized currency is a way to extract value from the periphery and bring it back to the center. . . .

A majority of the money earned under our current currency system is earned by people who don’t actually do anything. As such, all this speculation is a drag on the system. Speculators just bet on various companies’ ability to pay back what they have borrowed. . . .

The way out — as I see it — is to begin making our own money again. I’m not talking barter, but local currency. Money is just an agreement. And the more a community trusts one another, the more effi ciently the moneys they develop can function. We can create units of currency based on anything . . .

Thanks to the current economic meltdown, a restaurant in my town called Comfort has been unable to secure a loan from the bank to expand. Instead, John the owner has turned to us. We are buying “Comfort Dollars” at a rate of 1 US dollar for every $1.20 worth of restaurant food. So if I invest $1000, I get $1200 to spend at the restaurant. I get a 20% return on my investment, and — since he’s paying in food — he gets money a lot cheaper than he can borrow it through the bank.

Plus, I have a reason to promote his restaurant, invest in my town, and extend the good will. everybody wins.

Making money is that easy. You don’t get it from a corporation or a bank. You make it yourself, with your friends, as you create value for one another. This is the ultimate hack in a society addicted to the market: pretend it doesn’t even exist, and go about your business.

(H/T boingboing via Ritholtz)

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Jim Rogers: We are buying land in Brazil and Canada and starting to farm it

Quotes from Jim Rogers’ interview (video at bottom):

  • “We’re still going to eat probably. We’re still going to wear clothes probably. You know nobody — Farmers cannot get loans for fertilizer right now. So the supply of everything is going to continue under pressure. Uh the inventories of food are the lowest they’ve been in 50 years. We have serious supply problems developing for many mining goods, oil, agriculture. So even if demand goes flat or down as it did in the 30s as it did in the 70s you can still have a nice market.”
  • “What we’re doing is buying land in Brazil and the other is buying land in Canada. … If I’m right agriculture is going to be one of the great industries of the next 20 years or so … 30 years … maybe we can change this to CNBC agriculture.”
  • “We are buying some land … and turning raw land into farm land. . . . we are hiring farmers.”
  • “You know the IMF is trying to sell their gold and if they do then they may drive the price of gold down a lot and if they do Martin you better buy all you can because that will be the last opportunity to buy gold in a long, long time.”
  • “Throughout history when governments have printed huge amounts of money it’s always – it’s always led to higher prices.”
  • “I still own the yen and hope to buy some more yen if it continues to consolidate for awhile.”
  • “I expect to own commodities for years.”

(H/T to Tim)

Rogers has been busy lately (Or in high demand). Here’s more from him:



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Jim Rogers on The Oracle with Max Keiser


I’ve not seen Max Keiser’s program The Oracle before, but since my current favorite billionaire Jim Rogers was on the show, I had to watch.

It’s about a ten minute clip and I can’t say there’s anything particularly new that comes out of it from Rogers (You can get almost all the same soundbytes from reading Jim Roger’s most recent interview with Maria Bartiromo). The new tidbits I did enjoy are paraphrased as follows:

  • Rogers doesn’t have much respect for the IMF and believes they will likely end up selling all of their gold before going the way of the dinosaur.
  • He points out how the Swiss banks are bigger than the Swiss government; the takeaway being that if the Swiss government tries to bail out the Swiss banks, they are likely to go bust themselves — the Swiss government being like a lifeguard trying to save a panicking man from drowning when the man can’t swim and is twice the lifeguard’s size.
  • When asked in a jocular manner if he had any gold coins on him at that moment, wouldn’t you know it he did (he pulled out a coin from his pocket)
  • Rogers is currently in Singapore. He’s moved to Asia (and sold off his NYC house), so this isn’t surprising though I think he’s officially calling China home these days.

(H/T to Ritholtz)