Gold and the Unemployment Rate

Friday, 10/04/2013 

 

The GOLD PRICE tells us just like any other indicator what is going on in our country, or economy.....

 

The most important part of an economy is simply employment. To ignore or sideline the importance of unemployment statistics is foolish. Including when you are considering the gold price.

 

The unemployment statistic is one of the most important numbers being studied by the Federal Reserve Bank. Their attempt to influence growth in the economy can only be proven out by growth in employment. This is because a growing economy means the need to produce more and in all cases increase hiring. But all the liquidity that is being added by the Federal Reserve Bank, even though it has plainly worked to boost the gold price over time, has had little effect on unemployment. Because most of the money is not reaching the economy, or the people in the private sector.

Gold Price: LBMA Gets Its Crystals Balls Out in Rome

Thursday, 9/26/2013 

 

LBMA conferences have a tradition of everyone guessing the gold price one year hence, and the average being offered back as some kind of guide to professional sentiment, writes Adrian Ash at BullionVault.

 

You know the idea. Anyone trying to guess how many sweeties there are in a jar – or inflated balloons squashed inside a car, say – will likely be wrong. But average out everyone's guesses, and your answer can prove weirdly right.

 

Forecasting the future then, this wisdom of crowds might help as well. Especially if the guesses are made by industry players, taking a punt at where they see – for instance – the gold or silver price sitting one year from now...updating

 

The Real Law of Wages

Wednesday, 9/12/2013 

 

ONE OF the oldest fallacies in economics is that the amount of work done should be reflected in the amount of pecuniary reward received for doing it, writes John Phelan at the Cobden Centre.

 

How can it be fair that someone who slaves away for hours slicing kebab meat in a kitchen on a sweltering day earns £6.19 per hour while someone who kicks a football around for a few hours a week gets £2,040 per hour?

 

In fact, the amount of work we do is not commensurate with how much we are paid. Nor should it be. In the late 18th century for every bit of effort the average Indian textile worker put in he or she was paid just one sixth of what a British textile worker was paid for the same amount of effort because the British worker, with their greater capital stock, produced six times as much with that given amount of effort. Whatever our gut reactions, what wages reflect is not the 'effort' of the worker but their output and the market's and the employers subjective valuation of that output.

 

When deciding whether or not to hire, and at what wage, an employer will only employ that person if they think doing so will add more to turnover than to costs and they will not pay that person more than he or she is expected to add to turnover. To pay more would mean that that the employer is paying to employ that worker. This is the real Iron Law of Wages.

India's Gold Currency Controls

Wednesday, 9/11/2013 

 

WHAT'S GOING on in India over gold imports is nothing new, writes Miguel Perez-Santalla at BullionVault.

 

We've seen it over and over again throughout struggling economies. Blocking inflows of gold, to try and stop outflows of capital, is called currency control. These attempts to control movement of currency are very common when a government is faced with problems like India's. They actually create a more crippling environment than the one they are put in place to improve. And make no mistake, controls on the movement of gold is a control on the movement of currency.

 

Gold has always been and will always be the safe haven of choice when people lack confidence in their government. Lacking confidence doesn't only mean that they're not certain they'll perform well, but it also may mean that they don't trust their government to operate in their best interest. Starting with allowing economic freedom, and defending the value of the currency.

 

What are these currency controls recently put on gold in India?

• They've prohibited and restricted loans to customers on gold bullion;
• They've raised the import tax on both gold and silver to 10%;
• The sale of gold may only be made to jewelers or bullion dealers to supply the jewelry industry;
• Gold importers must ensure that 20% of all gold imported is to be exported as product.

Oddly enough, the Reserve Bank of India and the government are so concerned with the balance of payments that they miss the most important responsibility they have. It is not to control the outflow of capital, but increasing the inflow of capital. Free trade, when enabled both ways, will find an equilibrium that will benefit all parties.

 

India's finance minister Palaniappan Chidambaram is attempting to do just that, but in the interim the laws that they put in place are hurting one of their key industries, the Indian gold jewelry trade. Estimates vary, but one puts the jobs at risk of being lost if the controls stay in place at half-a-million. This will force the people in that industry to search out other solutions.

 

Trying to interpret the government's regulatory actions has caused foreign investment in India to plunge over the past year, while capital expenditure at home may fall further in the future. Because as usual, when a country attempts to control business, then business goes elsewhere.

 

The chairman of Cipla (a large pharmaceutical company), Yusuf Hamied, in a recent interview with the Indian business newspaper The Business Standard, said that thanks to India's unpredictable tax regime, "All big Indian companies are going abroad. The time has now come for us to say goodbye to India."

 

Why not blame gold? From 2011 to 2012 India's gold imports increased nearly 50% to an estimated $57.5 billion. Of course, this does hurt their account deficit and it is something they should be concerned with. But their attempts to close the gap by controlling gold flows are again the wrong tack to take.

 

What happens when governments impose restrictions is that they also increase crime. With a 10% duty on gold, the profit to smuggle gold bullion into India has increased. Though some of the smuggling will be caught, much will make it into the country representing a loss of revenue to the government. Ten percent is just too high of a spread to be borne by the Indian public and market for which the gold is intended.

 

A recent article by Bloomberg details how gold-smuggling gangs from the Middle East are now entering this business. Some Indian jewelers are willing to buy from anyone that can bring them lower cost gold, because it enables them to keep their business running. Otherwise they can only live off the scrap metal they receive from the marketplace.

 

Banks and traders halted imports of gold bullion during August, after the central bank linked inbound shipments to re-exports. So gold supplies have become difficult to come by. But the recent collapse of the Rupee by 18% has increased the amount of gold being turned in for cash by Indian households, who are also faced with a "credit crunch" caused by the rising financial crisis. And so once again, gold – which their government informs them is not a proper investment – has saved the individual by providing liquid funds just when they're needed.

 

How does this affect the external gold market? The answer so far is very little. The market in China is constantly growing and China's gold demand may overtake Indiaas the largest consumer in the near future. Physical demand for gold coins has been strong globally. But India's traditionally strong period of festival and wedding demand now running to Diwali in November will likely see much lower gold imports through official channels.

 

Of course, gold will still flow where it is needed. The controls that the Indian government has established have done little to stay the hands of investors.

 

It's almost too simple to believe that the government cannot recognize where their focus should be. India's gross domestic product growth rate has been on decline since 2011 from a high of 9.3% to currently 4.4%. Capital outflows, distrust of government regulations, and the inability to get businesses active in India are the primary causes of this government's troubles. If the business environment were to be improved then the economy would grow as well. The people themselves would reinvest into their country.

Anarchy, Or Life Without the State

Tuesday, 9/04/2013 

How life without the state, aka anarchy, is the basis for a civilized society...

The POSITION that there need be a state is too often taken for granted, writes Chris Mayer in The Daily Reckoning in this, the second part of his interview with Crispin Sartwell.

The main body of Sartwell's book Against the State is dedicated to destroying the arguments for a state from the likes of Hobbes, Rousseau and Hegel. In fact, one thing that becomes crystal clear in reading Sartwell's book is how bad the classical theories of the state are.

"Amazingly bad," Sartwell said. "It's shocking, really. The way the book came about was that I taught a basic political philosophy course for three or four years. Every time I read Rousseau, Locke or Hobbes...I'm saying to myself, 'This is so bad. Don't people realize how bad this is?'

"I think what goes wrong is that these figures – Locke or Hobbes or Hume – are so secure in their position [that there must be a state] that all they have to do is wave in that direction and people will follow.

"One function of anarchism, it seems to me, is to put forward challenges to them. There have been some who have tried. Robert Nozick at least tried to articulate an alternative. There have been people who have tried to bring anarchism to the mainstream, but it's always been marginalised because it sounds so crazy to people."

I asked Sartwell what he thought was the stronger argument for anarchism: a moral argument against force and violence or a more utilitarian defence based on outcomes.

"I think the moral argument is the stronger," he said. "That's the center of my commitment, anyway. The problem with utilitarian arguments is how do you really judge? Look at what's happening now. How do you really know what the effects of what the US government is doing now are going to be, say, over a century? You can't really know. I like to turn those utilitarian arguments around on state. You start talking about the disasters of states. Holocausts. Genocides. World wars."

In his book, Sartwell cites the work of Matthew White on the mass killings of the 20th century. It's a blood-soaked indictment against states. Safe to say it's hard to imagine such large-scale slaughter happening in a world without states.

"It's not completely unimaginable,' Sartwell ventured, 'but you have to have a very organized body of people to come up with nuclear weapons or the Final Solution. It's going to have to be something that is, in effect, a state anyway. And in fact, the only bodies of people who have perpetuated death on such a scale are states."

I agreed that the moral arguments are stronger. I mentioned one of my favourites, Lysander Spooner (1808-1887), to whom Sartwell makes reference in his book.

Spooner is a good old-fashioned natural rights-based anarchist, relying on the language and concepts used by the Founding Fathers and Enlightenment figures that man has certain inalienable rights.

"Spooner is so amazing on that," Sartwell agreed. "You give him some minimal concept of natural rights, and everything else flows from that. It's almost Euclidean. As a philosophy professor, I worry about its conceptual underpinnings. I can't formulate a philosophy that makes natural rights obvious."

Sartwell puts forward a moral argument for anarchism in his book. I like one example he uses. He writes how he knows he doesn't want to be tortured, so he assumes others don't want to be tortured either.

"You don't have to have a concept of natural rights to say that," Sartwell points out. "But natural rights are a compelling way to formulate why that should be."

This brought us to one of Sartwell's favorites, Josiah Warren (1798-1874), a remarkable figure and a wonderful human being in the anti-authoritarian tradition. Josiah often gets credit for being the first secular American anarchist.

Sartwell has edited a great book of his writings with a lengthy and useful introduction as well as various notes. I highly recommend this book. (It's called The Practical Anarchist: Writings of Josiah Warren. A true labour of love, Sartwell edited all of Warren's writings and pared them down to a healthy sample of the most important ones. What remains are sparkles of clarity and one of the most extreme individualist philosophies you will find in American letters.)

Warren too builds his individualism on moral grounds. "He grounds it on the reality of human individuality and the reality of human differences," Sartwell explains.

I mentioned that Warren is the first secular anarchist in America, at least that we know about. But many people don't know the history of anti-authoritarian thought in America and how much of it sprang from the Protestant Reformation. Sartwell explains the fascinating link:

"I have a certain reading of this American libertarian or anti-authoritarian tradition that does trace from the Protest Reformation. Luther's teaching was that each person is his own priest and that there need be no hierarchy between a believer and the believer's god. It was a very radical idea. And very anti-Catholic, obviously. Although there are elements of that kind of dissent even from the very early days of Christianity.

"Luther himself allied with the state powers and princes in northern Europe to survive the onslaught of the Catholic Church, which is why the Reformation was more successful than other rebellions had been previously. But many radical figures in the Reformation extended that kind of anti-authoritarianism to political institutions. This would include groups that later came to the US, such as the Mennonites; Anabaptists; and, even later, the Quakers.

"These are radical groups that came here with an individualist kind of ethos. So there was an immensely complicated religious geography in early America. But it is primarily British Protestant of one sort or another. This is central to the whole American political tradition and central to the idea of natural rights. John Locke, for example, comes from a Puritan background. But this early American anti-authoritarianism is a more emotional, focused, and less educated version of individualism, and it is faith-based...

"It is a way of articulating individual rights in the early republic that focuses on religious practices and respect for different practices and different believers. This yields an entirely different conception of what a human being is on Earth and what a human being owes to any authority. Each of us is equally assigned the task of our own conscience and conducting our own moral life.

"For example, a Quaker believes, 'My conscience is not answerable to any outside authority.' This thought drove Lucretia Mott [a great 19th-century feminist and abolitionist], drove early feminism and early abolitionism, and is secularised in Thoreau's Civil Disobedience...

"This is the history I'm trying to uncover, not that I'm the first to try to do this. I want to draw out these connections in early 19th-century reform movements... And you can see this also as the growth of libertarianism. It is a very noble history, actually."

We also talked about various figures, such as William Lloyd Garrison (1805-1879).

"William Lloyd Garrison is a fascinating figure. He is one of the most important political figures in 19th-century America. He is an absolute pacifist, one of the first to articulate it, and a radical individualist of this very Protestant variety. He's over-the-top for Jesus. Lysander Spooner, by contrast, is a deist or an atheist, perhaps... He's got a completely different orientation, but still emerges out of the same tradition and has the same basic commitment to individualism."

We then talked how many of these anti-authoritarian figures tended to be on the right side of history.

"They tended to be," Sartwell said. "Absolutely. You can't be an individualist and be an advocate of slavery, not with any consistency, anyway."

In his excellent introduction to his book on Josiah Warren, Sartwell writes almost poetically about the beauty of individualism as against the abstractions of statists:

"Every abstraction from the world is...an abstraction from the world, a digression or diversion from it, and a devaluation of it. For millennia, we have been bundling things together to try to comprehend them; now the point is to appreciate their strangenesses, their excesses to categorization. Individualism is an attempt to remake the world by affirming it."

Although Sartwell is describing Warren's philosophy, I offered that this sounded a lot like Sartwell. As the old saying goes, there is no political philosophy, only autobiography.

"Yeah, that sounds like me. Josiah Warren goes far with individualism. It's not just a philosophy for him. It's a metaphysic. He appreciates things in their specificity. You see the same thing in Thoreau. His commitment to the specific observation of the real world is total.

"That's what he's interested in. It's a whole way of comporting yourself in the universe. It's about really understanding the position you are in and not covering it up with abstractions."

Such noble thoughts seem a long way from the Snowden-Manning-Abu Ghraib-drone fest we live in today. We finished our conversation where it began, marvelling at the backlash to Snowden and the encroachments of state power."

"What would Thomas Jefferson think of that?" I said. "What would Thomas Paine think? Is this our American tradition?"

"Not enough people are asking those questions anymore!" Sartwell said.

When I said we were perhaps fighting a rear-guard action as anarchists, Sartwell said, "Maybe not. Maybe we're the future."

Beat the Crowd, Buy Gold Now

Tuesday, 8/27/2013 

Big trends take a long time to turn round. Witness the long US bond vs. gold...

 

I'D LIKE to recap what I've long warned our subscribers is the most important trend in the world.

 

As longtime readers know, I frequently disclaim the ability to teach readers anything. To learn something, you have to be willing to think about what you're reading – especially when it challenges your preconceived notions or carefully maintained beliefs. Many people would rather die than think.

 

So before we begin, let me warn you... If you don't think carefully about these ideas, they will wipe you out financially over the next several years. If you learn nothing else from us during your subscription period, at the very least, learn this...

 

I'd like to start with a simple question. This is something anyone who knows anything about the stock market should be able to answer without even thinking about it: What was the better investment in the raging bull market of 1980-2010, stocks or bonds?

 

Most people know that the US stock market enjoyed a massive, 30-year bull market after 1980. Stocks went up nearly every year. So if I asked you, what made more money between January 1, 1980 and December 31, 2009? Stocks or bonds? You would almost surely answer "stocks."

 

Indeed, stocks did well over the 30-year period. If you simply bought the S&P 500 and reinvested your dividends, you made 11.3% per year over the period, for a total return of 2,676.8%.

 

But if you had invested in the US Treasury's long-dated, zero-coupon bonds, you would have done much, much better. According to financial writer Gary Shilling's research, buying 30-year zero-coupon US Treasury bonds each year and rolling them over annually would have made you more than 19% annually during the period, for a total return of 24,879%.

 

If you want to make a lot of easy money off your friends who consider themselves financially smart, just offer them a $100 bet on whether or not stocks or government bonds made more money for investors during the great bull market of 1980-2009. You'll likely win every time.

 

Buying long-term US government bonds (that had no risk of default) and simply reinvesting the profits annually would have earned you considerably more money than buying stocks in the 30 years following 1979.

 

And in 1979, just as the big bull market in US Treasury bonds was about to begin, what did investors think of the bond market?

 

One of the world's greatest investors, Warren Buffett, wrote in his 1979 letter to shareholders that long-term bonds were "obsolete." Buffett didn't believe the market for long-term bonds would even exist by the time the government's newly issued 30-year obligations reached maturity...

 

We have severe doubts as to whether a very long-term fixed-interest bond, denominated in dollars, remains an appropriate business contract in a world where the value of dollars seems almost certain to shrink by the day. Those dollars, as well as paper creations of other governments, simply may have too many structural weaknesses to appropriately serve as a unit of long-term commercial reference. If so, really long bonds may turn out to be obsolete instruments and insurers who have bought those maturities of 2010 or 2020 could have major and continuing problems...

 

In fairness to Buffett, Paul Volcker wasn't appointed to the Federal Reserve until August 6, 1979. His opinion on long-term bonds probably changed as Volcker's policies began to rein in growth in the money supply, causing inflation to subside and sparking the massive bull market in bonds. But the point I'm making is important: The big moves in markets – the giant, long-term "secular" changes – occur when there is a nearly universal agreement regarding a financial asset's appeal.

 

Back in 1979, long-dated US government bonds could not have been more loathed. People called them "certificates of confiscation." And no one – not even the "Oracle of Omaha" – recognized the greatest investment opportunity of our lifetimes in front of them.

 

Last year, the yield on the US Treasury benchmark bond – the 10-year note – hit a modern, all-time low of 1.55%. That is, if you believed the market's price, investors were willing to lend the government $1,000 for the next decade and only receive $15.50 per year in interest.

 

Yes, you have good reason to doubt that this is a real interest rate, because the Federal Reserve has been purchasing all of the government's newly issued debt – $85 billion worth a month. As a result, we don't know what the free market interest rate would be for our government's obligations. But it's a safe bet that "higher" is the correct answer.

 

Back in January 2009, I warned that the trend toward lower interest rates (and higher bond prices) couldn't possibly continue. I said we were sitting on the verge of a massive shift higher in interest rates. Here's what I wrote:

 

The US budget deficit for 2009 is now projected to be $1.1 trillion – more than 8% of GDP. Only during World War I and World War II did the government ever have bigger annual deficits. None of these figures include any of the new stimulus package OBAMA! has promised, which means the actual deficit next year might grow to $2 trillion – around 15% of GDP.

 

Given our total debt already exceeds $10 trillion, it seems improbable this level of deficit spending can continue without sparking a run on the dollar via foreign governments selling US Treasury bonds. No one believes our creditors will ever sell the dollar. But they're wrong. Our creditors will not allow us to print money forever.We are squandering and destroying the greatest advantage of our country – control over the world's reserve currency.

 

Since then, our federal government's spending habits and debt accumulation have become significantly worse. The government's total debts have increased 70% in only four years – a truly stunning and nearly unbelievable increase. And despite any major war or financial crisis, we continue to run annual deficits of around $1 trillion.

 

Last May, I saw something in the market I literally couldn't believe: Junk bonds were trading at prices that reduced their benchmark yields to less than 5%. I wrote at the time that this had to be the top in bonds because default rates alone would wipe out all the gains that were possible by buying a portfolio of junk bonds at those inflated prices.

 

And so... just as the investment community was overwhelmingly bearish on bonds in 1979, just prior to their greatest bull market in history... the market became more bullish on bonds in May than it had ever been during my lifetime – just as we hit a low point in their yields.

 

When I began warning in 2009 about the inevitable collapse of the US bond market, I couldn't have foreseen the Federal Reserve's massive intervention. The central bank has bought about $3 trillion worth of bonds over the last four years.

 

But as it began to do so, I recommended a simple way to protect yourself from this incredible folly... and also a way to judge our progress toward a financial apocalypse.

 

All you had to do was compare the price of the long-term US Treasury bonds with the price of gold. A simple way to do this was to watch the prices of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the SPDR Gold Shares Trust (GLD).

The Ruins of Detroit

Tuesday, 8/27/2013 

Home to the future once more...

 

The 2,500 SEAT Eastown Theatre hosted The Who and The Kinks, 

 

The Cass Tech High School taught Diana Ross and John DeLorean. Michigan Central Station, almost 100 feet long, 230 feet wide, and graced with 14 grand marble pillars, once had Franklin Roosevelt, Charlie Chaplin, and Thomas Edison pass along its platforms.

 

Nowadays these buildings are just three of the 78,000 abandoned and blighted structures in Detroit. Reminders of a bygone golden age, the authorities can't afford to demolish them.

 

The decline and fall of Detroit, which recently filed for bankruptcy, is a staggering tale. In 1950 Detroit was home to 1,849,568 people, hundreds of thousands of them working in the booming motor industry. In 1955 80% of the planet's cars were made in America, 40% by Detroit-based General Motors alone. GM's German subsidiary, Opel, was only a little smaller than the largest non-American car maker, Volkswagen. And Toyota only built 23,000 cars that year compared to GM's 4 million. In the 1950s the Detroit area had the highest median income and highest rate of home ownership of any major American city.

 

But as they grew together, so they died together. Between 1955 and 2000 global car production increased by 273% but the US motor industry saw little of that action, increasing its output by just 39%. Even at home, despite a hastily erected wall of tariffs and quotas, US car companies lost market share; between 1970 and 2000 Japanese car companies' share of sales in the US rose from less than 5% to 30%. In the same period the share of US car manufacturers fell from 86% to a little over 50%.

 

The reason was productivity. In 2005 the average Toyota worker produced 16% more cars than the average GM worker and a staggering 128% more than the average worker at Daimler/Chrysler. Toyota made a profit of $12.5 billion, GM a loss of $10.9 billion.

 

In part as a result of the demise of the motor industry, less than half of Detroit's over 16s are now employed. And as the jobs disappeared so did the workforce. In 2010 the population was down to 713,777, a fall of 61% in 60 years.

 

But the city's government was left with the spending commitments and liabilities it had incurred in the not-so-bad times. One half of Detroit's $18 billion debt is made up of pension and healthcare spending commitments to city employees. The share of city revenues being spent on debt servicing, pensions, and retiree healthcare has risen from 30% in 2010 to 40% today. It is forecast to rise to 65% by 2017.

 

The city tried to fund these commitments with higher taxes. Detroit imposes a per capita tax burden on its residents 80% higher than neighbouring Dearborn even though its residents have a per capita income 33% lower. Detroit residents face the highest property tax rates of any similarly sized city in Michigan, but with 3 bed, all brick, colonial houses on the market for under $10,000 many don't bother paying. Nearly a third of property tax owed in Detroit went uncollected in 2011.

 

So Detroit slashed spending, even on 'core' functions of government. 40% of streetlights don't work and aren't being repaired. Last winter just 10 to 14 of the city's 36 ambulances were in service at any time, some with enough miles on the clock to have circled the planet 10 times. In February, Detroit fire fighters were told not to use hydraulic ladders unless there is an "immediate threat to life" because they hadn't been inspected in years.

 

But even with this, spending commitments without the tax base necessary to fund them have caused Detroit to add $700 million to its debt in the last seven years and brought it to bankruptcy. This is a real American horror story.

 

Is the death of Detroit "just one of those things" as Paul Krugman wrote on Monday? Or are there lessons to be drawn for the rest of us?

 

The essential problem of Detroit, that for decades its leaders have been writing cheques their tax base can't cash, is true now to varying degrees of all western governments facing ageing populations. As I wrote elsewhere late last year

 

America's unfunded liabilities (including Medicare, Medicaid and Social Security), rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans...the $1.7 trillion you would get wouldn't make a dent.

 

In Britain the Office of Budget Responsibility reported last week that with zero migration the costs of an ageing population would push government debt up to 174% of GDP by 2062. To hold it where it is Britain would need, the OBR estimates, immigration of 260,000 people a year.

 

Like the ruins described by Shelley's "traveller from an antique land" the ruins of Detroit are a warning of hubris and complacency, of the belief that it'll never happen to us. We should heed the warning.