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July 17, 2011
Issue 156  -  Let's Make This Clear,
Gold IS Money
 
In what may go down as the most asinine statement ever uttered by a Fed Chairman, Ben Bernanke answering a simple question from Ron Paul:
 
 
No.  No?  No!  Gold isn't money?  Really?  I wonder why the founders wrote this:
 
"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."
 
When you pay back debts, what do you use?  Money.  It couldn't be more clear.  A lot of people look at the constitution in the wrong way.  They say, "where in the constitution does it prohibit congress from doing x, y, or z?"
 
This is backwards.  The constitution doesn't list what the government can't do, but what it CAN do.  Everything not listed is prohibited by default.  If it's not in there, it falls to the state.  So we have the Founders telling the states, who have the majority of the power, that they better not make anything but gold and silver as money.   The problem for Ben is that if he called it like it is, he couldn't do this:
 
 
 
You can't do that with gold or silver.  First, the falling coins would probably maim or kill anyone they hit, but secondly, and more seriously, gold is LIMITED.  Central Banks don't like limitations.  They want to print at will and give bailouts to their friends.  The ONLY plan is a bailout of the vested interests here.  Don't believe me?  Take a look at this chart:
 
 
What you see here is the chart of the unemployment rate that the White House presented before passage of the "recovery plan."  This chart supposedly showed what would happen if we maintained the current course versus passing the plan. (and didn't spend a boat load of money) But a funny thing happened on the way to the recovery, it didn't happen.   Another line has been drawn on here to show what actually has happened.  To my highly trained engineering eye I would almost say that line is now going back up. 
 
And what about our public servants, toiling in congress, they're trying to help us out, right?  Not so much.....
 
 
How, during one of the worst periods for stocks in history, did this many congressmen get richer?  Is the game rigged?  Of course it is.  But you have a secret weapon that nobody can take away from you, gold and silver.
 
As I wrote last week, now is the time, delaying is no longer an option.  If the "smart" metal guys are right, they are ready to take off.  Here are a couple predictions:
 

$100 Silver in 6 Months, says $9B Sprott Asset Management

Posted by Dominique de Kevelioc de Bailleul on Jul 14, 2011 | View Comments

Here we go again.  Silver is on the move in chunks of up to 7% moves to the upside, yesterday, and as high as another 3.4% in European trading this morning.  Silver reached a peak of $39.36 before JP Morgan’s earnings report brought in some sellers at 8 a.m.

Sprott Asset Management’s John Embry told King World News he believes that when the investing public comes into the precious metals market, in earnest, the price of silver could go hyperbolic.  While the silver market is razor thin to begin with, adding the effect of the largest concentrated short positions in history will explode the price of silver, according to Embry.

“I totally agree with James Turk.  I think the thing (silver) has been abused on the downside and it’s just like a coiled spring ready to explode,” he said.  “I think silver will go back to those highs we saw before that May raid faster than most people can imagine.”

Unlike other beloved hard-money advocates Jim Rogers and Marc Faber, Embry is as fearless as James Turk and Jim Sinclair when he’s asked to put a price tag on the mercurial gray metal.

“We haven’t even really seen money start to significantly flow into hard assets, when that occurs and it will occur, it’s going to have an outsized impact on the price of these things,” explained Embry.  “The gold price should be $2,000 within the next six months and I believe the gold/silver ratio will decline tremendously in that environment.  I have no problem with $100 silver, none, and that might just be jacks for openers.”

The implications of Embry’s suggestion of a 20 to 1 ratio between the prices of gold and silver appear, on its face, extraordinary or apocalyptic.  A move of 25% in gold that sparks a 150% in silver may be hard to take in for newcomers to the bullion market.  But let’s consider the last gold and silver rally.

In August 2010, gold and silver traded at approximately $1,150 and $18, respectively.  Eight months later, in late April 2011, gold reached $1,575 and silver spiked to nearly $50—a 37% and 175% moonshot, respectively, in the price moves of gold and silver.

As gold knocks on the door at $1,600, and for silver, at $40, a move of 25% in gold to $2,000 and another blast of 150% to $100 for the price of silver isn’t that crazy—it’s an aggressive call, but not a crazy one at all!

Embry cites an important point of leverage as an explanation for his enthusiasm  for silver.  Several competent analysts have worked the numbers (including Bill Murphy and Chris Powell of GATA), and have come to the conclusion that for every ounce of silver in known inventories there are approximately 100 paper contracts trading (a fractional bullion system, if you will) on various exchanges across the globe.

To put the ratio between the paper and physical silver market in better prospective, a 1 percent silver “reserve” betters Lehman Brothers’ ridiculously low (criminally low, some say) reserve of 1.6% just prior to its implosion.  It just took one hint of a breakdown in confidence in Lehman that took it down so quickly—through its use of the over-the-counter derivatives market.  The same scenario could play out at the Comex, according to Embry.

“What’s been fascinating, and what was unappreciated by me in the early stages, was the enormous number of derivatives that have been created in the financial system,” said Embry.  “Because of the derivatives they’ve been able to keep this thing going for infinitely longer than any rational mind would have thought possible.

“Because the balloon was blown up so much, I just think the aftermath in its finale is going to be extraordinarily unpleasant.”



Even if this is half right, silver will be $70 an ounce.  I'm not sure about the timing but Embry isn't the only one with lofty predictions:
 

With gold closing in on $1,600 and silver attacking the $40 area, today King World News interviewed Ben Davies, CEO of Hinde Capital.  When asked about the breakout to new highs occurring in summer Davies stated, “This has the smell of 1998 when I was trading US government bonds and everyone was away on holiday and problems were beginning to brew.  Stock markets were beginning to get violent in reaction to Russia’s problems and it all kicked off in the summer months and people were being called back to their desks. 

I just have that same kind of feeling now.  This is not one I want to fight, the market is a little bit rich now in the short-term, but this could be the baby that takes us over the course of the next four months to that very tantalizing level above $2,000.  I really think this is the move.”

 
Davies continues:

“People are really beginning to realize that it (gold) is the currency of first resort.  As a prudent risk manager I’m always looking for the sucker punch, but I just don’t see it here.  I think that Ben Bernanke has come out again and tacitly said that QE3 or some change of policy along those lines is definitely in the cards.  I think deep down we’ve all known that would be the case.

The events in Europe have just been unfolding like a nightmare and policy-makers have realized that you cannot have a banking system or a financial system that is predicated on lending based off of a risk provision of zero for sovereign debt.  Clearly that sovereign debt, as we are finding out with the periphery debt, isn’t worth the paper it’s written on. 

This has completely undermined fractional reserve banking that’s been with us for nearly a hundred years, it’s been found completely wanting.  No wonder politicians are going to the edge before making serious policy decisions on resolutions.

I think we are going to see in Europe as I’ve maintained from the start, there will be a default.  We already have a default in process, what remains to be seen is, is it going to be disorderly?  This is all highly conducive for gold.”

When asked if he was signaling that the gold market was ready for an explosion Davies said, “I think there’s a really high chance, this is the year that you do not want to fight the gold market.  This is a trend that you just have to bite the bullet and be invested and go with it, I feel very strongly about that.

Various liquidity is going to be coming from all corners of the world.  At no time has gold pulled back throughout any of this credit tightening process, the market is going higher.  We are in my opinion going to see a $2,000 handle this year.”

In this interview Ben discusses a coming gold explosion and where silver is headed along with the mining shares. The KWN audio interview with Ben Davies will be available shortly and you can listen to it by CLICKING HERE. 

© 2011 by King World News

 
Ben Davies actually called the silver massacre within three days earlier this year.  He's a smart guy and has a good track record.  Nobody's perfect but I like his thinking.
 
Adding to this enticing story is the ever increasing chance of returning to the gold standard: 
 

Return of the Gold Standard as World Order Unravels

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, July 14, 2011

As the twin pillars of international monetary system threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability. The spot price surged to an all-time high of $1,594 an ounce in London, lifting silver to $39 in its train.

On one side of the Atlantic, the eurozone debt crisis has spread to the countries that may be too big to save -- Spain and Italy -- though RBS thinks a E3.5 trillion rescue fund would ensure survival of Europe's currency union.

On the other side, the recovery has sputtered out and the printing presses are being oiled again. Brinkmanship between the Congress and the White House over the U.S. debt ceiling has compelled Moody's to warn of a "very small but rising risk" that the world's paramount power may default within two weeks. "The unthinkable is now thinkable," said Ross Norman, director of thebulliondesk.comFed chair Ben Bernanke confessed to Congress that growth has failed to gain traction. "Deflationary risks might re-emerge, implying a need for additional policy support," he said.

The bar to QE3 -- yet more bond purchases -- is even lower than markets had thought. The new intake of hard-money men on the voting committee has not shifted Fed thinking, despite global anger at dollar debasement under QE2.

Fuelling the blaze, the emerging powers of Asia are almost all running uber-loose monetary policies. Most have negative real interest rates that push citizens out of bank accounts and into gold or property. China is an arch-inflater. Prices are rising at 6.4 percent, yet the one-year deposit rate is just 3.5 percent. India's central bank is far behind the curve.

"It is very scary. The flight to gold is accelerating," said Peter Hambro, chairman of Britain's biggest pure gold listing, Petropavlovsk. "One of the big U.S. banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money."

China, Russia, Brazil, India, and the Mideast petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small.

"There is no depth of market in these other currencies, so gold is the obvious play," said Neil Mellor from BNY Mellon. Western central banks (though not the U.S., Germany, or Italy) sold much of their gold at the depths of the bear market a decade ago. The Bank of England wins the booby prize for selling into the bottom at E254 an ounce on Gordon Brown's orders in 1999. But Russia, China, India, the Gulf states, the Philippines, and Kazakhstan have been buying.

China is coy, revealing purchases with a long delay. It has admitted to doubling its gold reserves to 1,054 tonnes or $54 billion. This is just a tiny sliver of its $3.2 trillion reserves. China's Chamber of Commerce said this should be raised eightfold to 8,000 tonnes.

Xia Bin, an adviser to China's central bank, said in June that the country's reserve strategy needs an "urgent" overhaul. Instead of buying paper IOUs from a prostrate West, China should invest in strategic assets and accumulate gold by "buying the dips."

Step by step, the world is edging toward a revived gold standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point." The Swiss parliament is to hold hearings on a parallel "gold franc." Utah has recognised gold as legal tender for tax payments.

A new Gold Standard would probably be based on a variant of the "Bancor" proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China's central bank chief Zhou Xiaochuan two years ago as a way of curbing the "credit-based" excess.

Mr Bernanke himself was grilled by Congress this week on the role of gold. Why do people buy gold? "As protection against of what we call tail risks: really, really bad outcomes," he replied.

Indeed.
These other emerging countries make it clearer and clearer that the dollar standard is doomed.  This change could be announced at any time if the crisis was great enough.  Having gold and silver at that time will be a very good thing.  I happen to like silver the best, but I do recommend that you have some of both.  As far as silver, check out this chart:  (thanks to Hugh)

 
 
 
That is an absolutely incredible chart showing the silver leaving the largest known stockpile of tradable silver in the world.  If this chart were to continue, you wouldn't have to guess where the price of silver might head.  Stock up now.  Buy physical gold and silver and stocks that could benefit from this coming rise in price.  I am a big buyer of silver at this point.  If you need help, let me know. 
 
Positions
 
GORO  (closed $25.10, up  $2.12, average price paid $6)
 
GORO was discussed on the Financial Sense Newshour this weekend and it was a good discussion.  The guest actually mentioned a triple digit price for the stock.  The interview can be found here and is called "How to Survive NINQE"  The discussion about GORO starts at about 14:10 and lasts about 5 minutes.  GORO will also be presenting at an investor conference tomorrow in San Francisco.  I believe as more people find out about GORO they will be buyers.
 
Mexus Gold  (closed $.195, flat, average price paid, $.22) 
 
Mexus had news this week:
 

CARSON CITY, Nev., July 11, 2011 (GLOBE NEWSWIRE) -- Mexus Gold US (OTCQB:MXSG) is a company engaged in the evaluation, acquisitions, exploration and development of mining properties and conducts salvage operations for the recovery of precious metals. Mexus Gold is pleased to provide the following updates on the following projects to our shareholders.

Submarine Cable

Mexus is pleased to announce today that the Company's tug, "Caleb", and its 220 foot barge will be leaving for Alaska along with the recently equipped survey boat in order to begin salvage operations. The present schedule contemplates the return of the tug, barge and other equipment in late fall to Washington where operations will be conducted throughout the winter months.

8 Brothers, Sonora Mexico

The permits necessary to commence mining activities are finalized and construction of the bypass channel around the 8 Brothers mine has been completed; therefore, the Company is planning to begin mining operations on July 11, 2011. Construction of the final pieces of milling equipment has been completed and awaiting importation into Mexico.

State of Sonora, Mexico

Mexus Gold US is pleased to announce the acquisition of five additional mining claims, approximately 1,000 acres, adjacent to Mexus' already large holdings in Caborca, State of Sonora, Mexico.

About Mexus Gold US (OTCQB:MXSG) is a company engaged in the mining industry for the purpose of producing precious metals, including gold, silver and copper, from its projects located in the state of Sonora, Mexico and in the states of Nevada and Alaska. Mexus Gold US is dedicated to protecting the environment, providing employment and education opportunities for the communities where they operate. For further information or to see the full report, visit www.mexusgoldus.com.

 
There was also a filing with the SEC.  It can be seen in total here.  The key section on cable pulling is follows:
 
Cable Salvage Operation

 Our examination of the information provided to us and our accumulation of data has identified the most prospective area to begin our salvage operations is the near coast areas of Alaska. The initial recovery operations will be comprised of acquiring two and one-half inch diameter cable with a weight of eight and one-half pounds. We are satisfied that we will be able to comply with all permits and notifications to the appropriate governmental authorities regarding the salvage operations.

On July 8, 2010, the Company entered into a Project Management Agreement with Powercom Services, Inc., a Georgia corporation, to provide the necessary capital so Mexus can proceed with the first phase of our Cable Recovery in Alaskan waters.

Mexus President/CEO Paul Thompson along with Ken Setter, the person in charge of the Alaska sub-marine cable project for Mexus, just returned from a two week trip to Alaska to verify the cable locations in Alaska waters culminating in the execution of the contract which will fund Mexus through its first barge load sale of cable.

Mr. Ken Setter directed Mr. Thompson to several sites along the Pacific Coast of Alaska where we were able to identify the sub-marine cable. We were able to retrieve several sections for sampling purposes, and to test the Company’s new innovative way of retrieving cable from the bottom of the ocean. We believe the new cable pulling equipment will have the capability of pulling up to 10 miles per day or 475,200 pounds of cable per day.

The cable is composed of copper, lead, and steel all salvageable for scrap sales or processing for end user. Mexus is now ready to start equipping its 260’ barge located in Seattle, Washington with pulling equipment for the trip to Alaska where it will be able to start pulling cable at a point identified & marked by Messrs. Setters and Thompson on their recent trip.

On October 29, 2010, our tugboat, the "Caleb", and our 230 foot barge arrived in Ketchikan, Alaska. The boats are equipped with automated cable pulling equipment and underwater electrical equipment, magtonetor, underwater cable identifier, remote cameras and a high definition scanning sensor, and a cable left buoy marking system.  As of the date of this report, we have begun cable pulling operations, weather permitting.

In addition, we have now located additional submarine cable in Washington State waters with our special survey equipment and we are awaiting cooperation from Washington State to pull the cable.
 
Cable pulling should commence later this week which is what I've been waiting to hear.  The tug is scheduled to leave on Tuesday for Alaska.  If they can start making some cash the stock should react positively. 
 
Alexco Resource Corporation -  AXU  (closed $8.44, up 0.38, recommended at $7.90)  AXU will definitely benefit greatly if silver rises.  Love this stock under $10.
 
Stocks    (Current status, out, sold on March 18)
 
Possibly pulling the trigger this week into the S&P500.  Dividend paying companies should start to pay off as inflation kicks in.  Will be looking to add 25% of portfolio on any pull back.
 
Physical Gold  (Closed $1,594,  up $50,  average price paid $395)
 
Physical Silver  (Closed $39.27,  up $2.56,  average price paid $5.31)
This week's video has a guy doing one crazy thing before he does another crazy thing.  Crazy.  Have a great week!