MAGAZINE This is how the Dollar will Die
September 2014
In GOLD WE TRUST
QE4 is already here... we're just calling it something new now. Fed “tapering” won't change a thing. The quantitative easing con game is far from over... Larry Summers has even proposed an infuriating new policy to launch the end of QE — one that harshly punishes responsible savers. An attack on your savings is underway, and you might be blindsided if you aren't aware of what's about to happen... Even the man who helped launch quantitative easing in the first place has since quit the Fed and exposed the dirty little QE scheme for what it really is: “the greatest back-door Wall Street bailout in history.” It's hard to have any faith in America's institutions anymore. Whether the issue is torturing innocent people at Guantanamo Bay, spying on our allies (courtesy of the NSA), or raiding your retirement account, the American government certainly isn't as esteemed as it once was. Meanwhile, the middle class is quickly disappearing, and the dollar is on its way out... A shocking 76% of Americans are living paycheck to paycheck. And it feels like each paycheck is worth less and less as the value of the dollar plummets to its death. Yes, we've certainly got some shaping up to do. Prophetic or Impossibility? Back in 1973, Willard Cantelon wrote a book called The Day the Dollar Dies. Cantelon's careful research was received quite controversially back then because many Americans couldn't swallow the idea that our beloved dollar was quickly swirling down into a black hole of extinction.
Today, however, readers can appreciate Cantelon's prophetic message, as we are now living through the various stages of this “future economy” referenced so spot-on in the book. In what other authors are coining the Financial Armageddon the death of the dollar is no longer some wacky speculation. Surely we've all felt the pangs of Wall Street Meltdown, big bank failures, the subprime lending crisis, a recession nearly on par with the Great Depression, and three failed "stimulus-boosting" rounds of quantitative easing. And China's been on full alert and ready to take the limelight the whole time... QE Cued the Currency War Last spring, Xinhua News Agency reported that central bank Deputy Governor Yi Gang said China is “fully prepared” for a currency war. The agency was very succinct on the matter, simply stating, “In terms of both monetary policies and other mechanism, China will take into full account the quantitative easing policies implemented by central banks of foreign countries.” It's not exactly a secret that we're not paying off our massive debt in a timely fashion. No, we're too busy inflating it and injecting a false sense of security into our own economy in an attempt to keep consumer spending up (it does constitute 70% of our GPD, after all). And if China can capitalize on our mismanagement... it won't hesitate to do so.
CONTINUED ON NEXT PAGE
CONTINUED FROM PREVIOUS PAGE As we told you last month, China is more than ready to give the renminbi the dollar's star role. As China remains poised to become the world's #1 economic power, it's also more than eager to flaunt that status by internationalizing its currency. But let's not get ahead of ourselves because that hasn't happened yet... What has happened is far more interesting. Indeed, the market has seen the flaws I've just outlined and responded with something very unique... The Dollar Replacement is Here in a Most Unlikely Place... We're in the midst of a major societal paradigm shift in this digital age we're living in. Everything is online these days. Even the dollar's replacement... You've probably noticed that we've been talking about this e-cash for a while now. And our excitement hasn't waned. We’re still optimistic about Bitcoin. Yes, the value of Bitcoin has been fluctuating, but we don't see it falling below $800. And we could see it feasibly climbing all the way to $10,000 as the cryptocurrency craze heats up in response to the government's mismanagement of fiat currency.
John Stossel with Fox News recently reported: Given how my government spends money, and the way the Fed enables this by buying trillions in government bonds, I fear my dollars may someday be worth pennies. So I bought Bitcoins. Bitcoins are digitally created -- or "mined" -- at a slow, fairly predictable rate. An incomprehensible (incomprehensible to me, anyway) computer algorithm limits their number. "Bitcoins are not controlled by anybody," explained Mercatus Center senior research fellow Jerry Brito on my TV show. "It's a new Internet protocol, like email or the Web ... a digital, decentralized currency that allows you to exchange money with anybody in the world fast and cheaply without the use of a third party like PayPal or Visa or MasterCard." In Bitcoin We Trust Amidst the growing distrust of the government, investors have been writing to us inquiring about a sort of government-proof investment option in light of the current currency crisis. That’s why we’ve been talking so much about how “cryptocurrencies" — immune from sovereign debt crises — are revolutionizing the modern era as we know it. It's not science fiction; it's the dollar’s replacement. With no banks, no fees, and no inflation threats, this new digital currency — according to Ron Paul and other libertarians — could be a “destroyer of the dollar.”
Gold & Commodities Gold Miners Add Kick To Stock Portfolios Without Undue Risk: Gold stocks have historically ranked among some of the most volatile asset classes. Over any given one-year period, it is a non-event for gold stocks to move plus or minus 38 percent. This DNA of volatility is about three times that of gold bullion, which carries an annual volatility around 13 percent. Despite this volatility, our research shows that investors can use gold stocks to enhance returns without adding risk to the portfolio. In 1989, Wharton School finance professor Jeffrey Jaffe completed an academic study that illustrated the effects of portfolio diversification into gold stocks. Jaffe’s original study covered the period from September 1971, just after President Nixon ended convertibility between gold and the dollar, to June 1987. During Jaffe’s study period, the average monthly return for the S&P 500 was 0.89 percent. Gold stocks, as measured by the Toronto Stock Exchange Gold and Precious Minerals Total Return Index, converted to U.S. dollars, performed considerably better, returning an average monthly return of 1.42 percent. On the risk side, gold stocks had greater volatility (measured by standard deviation) than the S&P 500. But Jaffe found that, because of their low correlation to U.S. stocks, adding a small percentage of gold related assets to a diversified portfolio slightly reduced overall risk. To find an optimal portfolio allocation between gold stocks and the S&P 500, the efficient frontier plots different portfolios, ranging from a 100 percent allocation to U.S. stocks (the S&P 500) and no allocation to gold stocks, and gradually increases the share of gold stocks while decreasing the allocation to U.S. equities. Assuming an investor rebalanced annually, our research found that a portfolio holdings, 85 percent allocation to the S&P 500 and a 15 percent allocation to gold equities had essentially the same volatility as the S&P 500 (horizontal axis) but delivered a higher return (vertical axis). In other words, the addition of a small allocation to gold stocks increased portfolio returns with no increase in the portfolio’s volatility. Between September 1971 and November 2011, the S&P 500 averaged a 9.69 percent annual return. A 15 percent allocation to gold equities and an 85 percent allocation to U.S. stocks, with annual rebalancing to maintain the allocations, would have a high yield, on average, an additional 0.82 percent per year. How much is 0.82 percent per year? Let’s use a hypothetical $100 investment as an illustration. A $100 investment in gold stocks in 1971 would have grown to nearly $5,100 at the end of November 2011, while
the same amount in the S&P 500 Index would be worth about $4,800. But look what happens when you combine the two. Assuming the same average annual returns since 1971 and annual rebalancing over 40 years, a hypothetical $100 investment in a portfolio with 15 percent gold stocks would be worth about $6,600. That is 37 percent greater than the $4,800 for the portfolio solely invested in the S&P 500, while adding virtually zero risk. U.S. Global Investors consistently suggests allocating up to 10 percent gold in a portfolio, so we also looked at returns for investors at that level. In dollar terms, a hypothetical $100 investment in the 90-10 portfolio would grow to $6,022 over the ensuing 40 years (assuming annual rebalancing), compared to $4,820 for the portfolio solely invested in the S&P 500. And when you look at the efficient frontier in the chart, a portfolio with a 10 percent weighting of gold stocks and a 90 percent allocation to the S&P 500 has also historically increased return with no additional volatility. More than two decades and many ups and downs have passed since Jaffe published his study, but our follow-up research shows that the relationship among gold, outsized returns and volatility has remained consistent through the past four decades. Most gold stocks haven’t kept pace with the SPDR S&P 500 Index (SPY) this year. The Market Vectors Gold Miners Index is down 14.3% year-to-date, while the SPY is down 1.5%. Barrick and Anglogold are both down 15%, but Newmont and Goldcorp are up 2.5% and 1.2% respectively. If you haven’t already completed your annual portfolio rebalancing, this may be an opportune time recalibrate your portfolio with gold stocks.
w w w. y o u t r a d e g o l d . c o m
nick Barisheff: The Case For Much Higher Gold Prices This interview was recorded three weeks ago. We've been unsure of how well-received an interview about "$10,000 gold" would be received while the yellow metal experiences its worst quarter, price-wise, in history. But rather than sit on it any longer, we're releasing it now and will trust our readers to look past the current price of gold and focus on the long-term macro arguments Nick presents. ~ Adam Nick Barisheff, CEO of Bullion Management Group recently published the provocatively-titled book: $10,000 Gold: Why Gold's Inevitable Rise Is the Investor Safe Haven. In this week's podcast, Chris sits down with Nick to learn the math behind this forecast. I was reluctant to put up a number and a timeframe. And when I say $10,000 gold I do not mean this year, or even next year. It is probably a plus or minus five years scenario. What changed my mind was in 2011, when in the U.S. there was the raging debate over the debt ceiling. You could see that there was no political will or ability to ever change the United States debt crisis, because it is impossible to either increase taxes or cut expenditures enough to really make a difference. You are not going to grow your way out of it. Nobody is predicting that that is going to happen. So the only choice left is essentially, in simplified terms, to call it printing money. When you look at that, then what you get is that the printing is going to continue, the global deficits are going to continue, and, in fact, they are going to increase. And the interesting point is that if you plot U.S. debt versus the gold price, you almost get perfect correlation. So this is just a straight progression. Like, if you keep printing money at the rate you are printing, you are going to get to $10,000. $10,000 is by no means the peak, and people have trouble coming to grips with $10,000. But if you hit $10,000, then we are into hyperinflation, and the numbers after that will sound absurd. In making his price prediction, Nick also takes a historical view of the perfect record – of economic failure – of paper-based currencies: Throughout all of history, there has never been a single instance where a fiat currency did not end in hyperinflation and monetary collapse. There is not one example of a successful fiat currency. Because the simple thing is that if you give a printing press, in simplified terms, to a politician, a king, an emperor, a president, a prime minister, you name it, they will overuse it every single time. That is just human nature. And that is what happens. It is particularly a deficiency in democracy, because democracy will also always have people vote themselves a bunch of benefits that the politicians promise to get elected. And that is how you get this spiral effect that keeps going. So the end result is the same. This time around, though, we are in unchartered territory, because you have got global fiat currencies and you have got a global reserve currency. So unlike hyperinflations in the past – like, everybody knows about Germany, it was restricted to a country – this time it is going to be global. In terms of the short term, there is probably no other choice but to print more money, because if the Fed pull back in its quantitative easing, we would have a massive depression. So for the moment, you print more. But the problem is what happens down the road?
China Moves To Hide Massive Gold Purchases In a move to expand import capacity, Chinese officials have announced that gold imports will be allowed to flow directly through the capital of Beijing. This is in addition to imports through Shenzhen, Shanghai and Hong Kong. However, the new move could threaten business in the latter. While information on imports through Shenzen and Shanghai is scarce and unreported by the Chinese government, Hong Kong discloses how much it buys and sells. $53 billion in gold is known to have shifted to the mainland in 2013 as a result of Hong Kong's reporting rules. With new imports through Beijing, China will be better able to obscure the massive flow of gold bullion from western central banks and mines into the nation. The drop in gold prices last year greatly increased Chinese gold demand. China imported nearly 1,160 tonnes of gold from Hong Kong last year. Analysts from Global Trade Information Services suggest that China imported at least another 194 tonnes last year from other sources. All of this is on top of about 428 tonnes of local production. The World Gold Council has said Chinese demand in 2013 was 1,066 tonnes, raising the question of where the other 716 tonnes went. Many, if not most, in the industry believe that it went into the coffers of the People's Bank of China (PBOC). With growing concern over the long-term effects of quantitative easing and mounting U.S. debt, China has shifted almost entirely away from buying U.S. treasury bonds to adding massive amounts of gold reserves. The PBOC last released information in 2009 on gold reserves, when it announced that bullion holdings had risen to 1,054 tonnes from 600 tonnes in 2003. Unverified rumors amongst analysts in the industry suggest PBOC gold reserves actually range from 3,000 to 5,000 tonnes. Even a 1,000 tonne increase from last announced levels could prompt a jump in gold prices, which would make the PBOC very cautious about the timing of any announcement. Given the advantages of keeping prices low and stealthily building up central bank gold reserves outside of debt-burdened fiat currencies, there is little chance of any increase in the official reserve figures any time soon.
w w w. y o u t r a d e g o l d . c o m
The drop in gold prices last year greatly increased Chinese gold demand
Market Crash Imminent It's all fun and games until someone gets hurt. Well, a lot of people are about to get hurt, so if you're smart you'll start taking precautions now (if you haven't already). Everything we've warned you about is coming to fruition. The housing market is crashing (again). Unemployment and stagnant wages have crimped spending. The Fed is fumbling as it tries to rein in its stimulus. And we're already slipping into another recession. Riding this merry-go-round has been fun (and profitable) for many of us, but it's time to get off while we still can. Because the cracks are beginning to show. You don't have to take my word for it, either. Just look for yourself... Another Housing Collapse We'll start with the housing market. After all, that's where the last financial crisis started seven years ago. And speaking of 2007, there are some eerie parallels. Here's a look at existing home sales over the past year...
Does that look familiar? It should. Here's what the same one-year graph looked like in May 2007...
This isn't some new development; we've been talking about it for months now. The fact is, the housing “recovery” so many economists touted last year has not only stalled, but reversed course. It's a drag on the economy, a liability.
Applications for mortgages to buy homes are down 21% from this time last year. Residential fixed investment (which includes construction, home repairs, and broker commissions) fell 5.7% in the first three months of the year. That's the second straight quarter of declines, after a 7.9% drop in the fourth quarter of 2013. To put that in perspective, residential investment accounted for 3.1% of GDP in the fourth quarter, less than half the peak contribution of 6.6% percent in 2006. That's just housing, though, what about the rest of the economy? I'm glad you asked... Not Buying It Retail is the second major pillar of our economy. How are we faring there? Well, retail sales — which account for a third of all consumer spending — edged up just 0.1% last month. And if you take out cars and gasoline, they actually fell 0.1%. Worse, major retailers missed earnings estimates by the biggest margin in 13 years in the first quarter. I'm not talking high-end retailers, either. I mean the 'Average Joe' stores... • Wal-Mart's profit plunged $220 million as store traffic fell by 1.4%. • Target's profit declined by $80 million, or 16%, as store traffic fell 2.3%. • Costco's income shrank by $84 million. • Best Buy's sales are down $300 million. • McDonalds' earnings fell by $66 Million. • Income at The Gap fell 22%. • The Dollar General's profit fell 40%. • And American Eagle's profits tumbled 86%. Bulls blame these results on the weather, but that's just nonsense. They're in denial. It's because unemployment is still ridiculously high, and wages are being suppressed. The real unemployment rate (the U-6), which includes the number of people who have given up their job search, was 12.3% in April, roughly double the 6.3% headline rate. Meanwhile, wages have failed to match the pace of inflation and personal income is on the decline. Indeed, five-year growth in personal income — or how much you make now versus how much you made five years ago — is at its lowest level since records started being kept in 1959. The growth is so low it's negative for the first time ever at -5%. As a result, household debt — which includes mortgages, credit cards, car loans, and student loans — rose $129 billion in the fist quarter, to $11.65 trillion. That was the third consecutive quarterly increase. So, no, the American consumer isn't faring very well. In fact, between the crumbling housing market, unemployment, and declining sales, we've already slipped into another recession. Data released yesterday shows the U.S. economy contracted 1% in the first quarter. How's the stock market taking this news? In stride. And that's disturbing.
w w w. y o u t r a d e g o l d . c o m
Take Advantage of Global Uncertainty Discover INVESTMENT STRATEGIES that can potentially DOUBLE, TRIPLE or even QUADRUPLE your account in 60 to 90 days! GET-FREE
INSTANT ACCESS IN: www.YouTradeGold.com Why invest in Gold? l A solid hedge against inflation and a
declining U.S. dollar
l A proven safe-haven in times of war, geopolitical
and economic uncertainty
FREE
â‚Ź50,000
virtual dollars No risk or obligation FREE 30-Day trial offer
l Outstanding price appreciation
and profit potential
Gold trading advantages: l Youtradegold.com offers this safe haven
metal with a generous 100 to 1 leverage to maximize profit potential. l Pre-determined risk with unlimited
upside potential.
l Liquidity: Regulations allows you to open
a position for a pre-determined period of time in the market, and at your discretion, exit the position any time.
Follow us: