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Beware of Fake Gold Standards

Counterfeit Gold Standards

by Gary North

Recently by Gary North: Good News on Taxes

 
  

There is abundant evidence that a well designed, well managed, gold standard is better adapted than a monetary standard managed at the discretion of elite civil servants to maintain price stability and strong economic growth. ~ Ralph Benko

Mr. Benko supports the creation of a government-designed, government-run, and government-enforced gold standard. I do not. This is because there is abundant evidence that such a gold standard always turns into the central-bank fiat money standard that Keynesian economists and monetarist economists insist is the only possible way to maintain long-term economic growth. Fiat money is dishonest money.

Economists want dishonest money. So do politicians. So do central bankers. So do commercial bankers. If you want to know what honest money is, I have written a book on this. You can download it for free.

While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon's fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation's currency at a fixed rate for gold coins of a fixed weight and fineness.

The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today's fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. "Yes, we guarantee that we will exchange our currency for gold. You can trust us." It was not a 100% gold standard. It was a 100% trust your national government standard.

In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

The gold exchange standard of 1922 was Europe's attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers' gold standard among themselves. It was never intended to be a gold standard for the masses.

That was the problem. It was a gold standard for the elite of elites: the central bankers. It blocked out the secondary elite, namely, government civil servants.

DON'T TRUST, DO VERIFY

Ronald Reagan was famous for his slogan governing nuclear disarmament: "Trust, but verify." When dealing with central bankers, it should be, "Don't trust, do verify." Central bankers are far less trustworthy than Soviet bureaucrats were at their most duplicitous. They have outlasted the Soviet bureaucrats. They got a free ride until Ron Paul's 32 years of warnings finally gained traction during the central bank-created financial crisis of 2008.

Any time that you see someone in an Establishment media outlet suggest that we need a return to a gold standard, look carefully at the details of his proposition. Does it involve the reintroduction of gold coins by the national mint? If there is legally guaranteed rate of exchange between the national currency and these gold coins, meaning full redeemability? Can anyone go to his local bank and exchange money in his bank account for gold coins? That would get us back to 1914.

Yet even that gold standard would be fake. Why? Because no one is being charged for a service: storing the gold coins. Any time you find a valuable service being offered for free by any bank, you can be sure that there is a ringer somewhere in the arrangement. The bank is luring you into a deal by means of a promise that cannot be met under all circumstances. In this case, it is free gold coin storage. Somewhere in the bank's operations there is a liability against the gold coins – a liability superior to any depositor's claim.

In 1914 in Europe, this liability was to the central banks. The central banks in turn were under the authority of the governments. So, there were two sets of superior claims. A mere citizen, let alone a resident alien, did not have priority. The courts did not enforce his legal claim to full redeemability of the national currency.

The average citizen today has no understanding of either the logic or the operations of a gold coin standard. Neither does the average Ph.D. in economics. Certain topics are not explored in detail by economics departments. One is central banking. Another is the gold coin standard. Central banking is never discussed in terms of the economic logic of cartels, which are government-licensed operations against the public interest. The only textbook-level analysis of fractional reserve banking that does this is Murray Rothbard's The Mystery of Banking (1983), which was not aimed at a college market, and which has not been adopted by colleges.

MUNDELL'S PSEUDO-GOLD STANDARD

Benko is a disciple of Nobel Prize-winning economist Robert Mundell. Mundell is an advocate of a pseudo-gold standard: central banks only. The peons – the likes of you and me – are not supposed to become a part of this Old Boy Network.

I have been reading Mundell since the early 1970s. I recall speaking at a conference sponsored by the Committee for Monetary Research and Education in 1973 or 1974, where Mundell had spoken before I did, i.e., had read an academic paper to non-economists. In my speech, I described what I was being paid to deliver my lecture: "All the beer I can drink, plus an English-language translation of Dr. Mundell's lecture." This got a laugh.

Benko cited Mundell verbatim . . . or so it seemed. This is one of Dr. Mundell's more coherent statements. This was from an interview on Bloomberg television on May 25.

Pimm Fox: You've written about the role of gold in the world economy, Professor Mundell. Do you think that we're going to see any kind of return to the gold standard?

Mundell: [T]here could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade central banks.

The great advantage of that was that gold is nobody's liability and it can't be printed. So it has a strength and confidence that people trust. So if you had not just the United States but the United States and the euro tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.

Benko skipped over Mundell's crucial sentence, which preceded what Benko cited: "Nothing like the gold standard that existed before 1914. But there could be a kind of Bretton Wood type of. . . ." This was deliberate on Benko's part. In academia, when you drop someone's words, you are expected to add three periods, called ellipses. They look like this: ". . ." This lets the reader know that you have dropped something.

Benko did not deem it important that his readers see the crucial admission that Mundell made. Mundell has made this admission for 40 years: "Nothing like the gold standard that existed before 1914." He got his Nobel Prize because of this admission. Nobody who has advocated or has even suggested the possibility of a return to the pre-1914 gold coin standard has ever won a Nobel Prize.

Benko waxed eloquent about Mundell.

Mundell is the world's most distinguished living economist. He is a Nobel Economics Laureate. He was the primary source of the original supply-side manifesto, "The Mundell-Laffer Hypothesis," which led to the low-tax-rate, strong-dollar policy at the heart of Reaganomics. He has acted as a privy counselor to the Chinese government (which in appreciation has named a university for him). Mundell's guidance, of course, is one of the reasons why mainland China has had 30+ years of uninterrupted double-digit economic growth. Mundell's work also laid the foundation for the common European currency, the euro.

First, James Buchanan is the most distinguished living Nobel laureate, if we are talking about free market economists.

Second, Mundell had nothing to do with the strong-dollar policy of the Reagan years. Paul Volcker did, beginning in the fall of 1979, when he took over as Federal Reserve Board Chairman, replacing the incomparably incompetent G. William Miller, who had lasted only 18 months, the shortest term on record. Volcker's policy of tighter money caused the 1980 recession, which let Reagan win in November. He maintained that policy until Friday, August 13, 1982, when the Mexican government threatened to nationalize foreign banks. On Monday, August 16, the Federal Reserve started to inflate. Mundell had nothing to do with any of this.

Third, the Chinese central bank has had the most inflationary monetary policy of any major nation, inflating M2 at close to 20% per annum for at least a decade. The currency is in no way tied to gold.

Fourth, the euro is a disaster.

Benko is a well-meaning advocate of a fake gold standard. No one in the financial world pays any attention to him, any more than the world's economists have ever paid any attention to Mundell's call for a pseudo-gold standard.

The point of a gold standard is to limit central banks. It restricts their ability to inflate. It limits their authority over monetary policy. Central bankers do not want limitations on their authority. They are forced to accept some degree of government authority for brief periods during financial crises – crises that central bank policies have created – but they will never voluntarily surrender to the masses their authority over monetary manipulation, meaning central planning.

The entire economics profession, except for the Austrian School, believes in central banking and fractional reserve commercial banking. This means that economists favor a cartel. In universities, they assign a textbook with a chapter on cartels which argues that cartels are profit-seeking, government-licensed, oligopolies that act against the public interest. But textbooks never extend this analysis to central banks and commercial banks. I have said this before, but it bears repeating. Fractional reserve banking and central banking get a free ride from academic economists. They also get a free ride from financial journalists.

Economists call for their favorite pseudo-market, government-administered limitation on this or that aspect of banking. But they do not call for 100% reserve banking, as Rothbard did. They do not call for free banking, as Ludwig von Mises did.

Why not? Because they do not trust the free market to maintain a money supply limited only by mining expenses and voluntary contracts. They give lip service to free market competition, but not at the center of every economy, the money supply. Here, they want final government authority and central bank administrative authority. They believe in people with badges and guns as reliable central planners.

The gold coin standard removes final economic authority from people with badges and guns and turns it over to the masses.

GOLD IS THE HAMMER

In this life, there are nails and hammers. The battle over final economic authority is the battle over the monetary system, for money is the central institution in a division-of-labor economy. Thus, the battle is over who holds the hammer.

Bankers and politicians refuse to turn final authority over to the masses. The elite wishes to retain power over scarce resources. This can be accomplished only through their power over the money supply.

Gold is the ultimate hammer, because it has long been the favored money commodity. It cannot be easily counterfeited. It is expensive to mine. It is easily divisible. It has high value in relation to weight and volume. It is widely recognized. So, it has historic value – not intrinsic value, which no asset has, but historic value. It has easily predictable value.

Gold coins allow little people to hold the hammer. Through the market process, individuals exercise their choices. They determine market value through a system of auctions. The free market is a gigantic auction.

Gold coins keep the auction honest. No one can legally print money to gain influence in the auction. No one can easily counterfeit his way into great wealth, outbidding others.

Central bankers want to direct the auction. So do politicians. So do commercial bankers. All three elite groups have an incentive to keep gold coins out of the auction process. Gold coins keep the auction honest, and elites maintain their power through dishonesty – above all, dishonest money. They fear honest money.

Gold is described by ignorant journalists as the money of plutocrats. Fiat money Greenbackers like Ellen Brown agree. (On Ellen Brown's fiat money utopianism, click here.) This reverses the truth. Fiat money is the money of the elites, the plutocrats of all ages. The gold coin standard is the economy of the masses.

Gold coins are mini-hammers. These coins, along with legal IOUs to coins, transfer enormous authority to the masses. The little guy with gold coins or IOUs to gold coins has a veto over the easy money, big-spending, power-centralizing schemes of the government's central planners and their profit-seeking allies, the counterfeiters: fractional reserve banks.

CONCLUSION

There is chatter on the fringes of the Establishment about the reintroduction of a gold standard. The gold standard they promote is not the pre-World War I gold coin standard. That standard drastically reduced government power over money, but it was always a compromise with government power. The governments of Europe revoked that standard when the war began. They played around with a government-run, central bank-run version in 1922: the gold exchange standard. The final revocations of the gold coin standard took place in 1931, when England went off the gold coin standard, and 1933, when the United States did.

There are gold coins and counterfeit gold coins. Similarly, there are gold standards and counterfeit gold standards. When dealing with gold coins or theories of a gold standard, I suggest that you adopt a slogan from 1950s advertising: "Accept no substitutes!"

Here is the real thing: a free market standard without any government involvement – no mint, no central bank, no legal tender laws, no printing presses, no warehouse receipts, no "free" storage. Just this: laws against fraud and laws enforcing contracts. That system will produce a gold coin standard for large transactions and a silver coin standard for smaller ones. The users can decide what they want to use as money. The ruling elites will no longer be allowed to counterfeit, confiscate, or manipulate money.

When an economist who defends this system wins the Nobel Prize on the basis of his defense, we will know that our deliverance draweth nigh. If the prize is awarded in gold coins, we have entered the Golden Age.

July 23, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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TIP OF THE WEEK - Create a Stock Market Watchlist

Create a Stock Market Watchlist Using Morningstar.com
July 22, 2011
Jason Brizic
 
You can use Morningstar.com to create a watchlist for your stocks to buy near the next stock market panic.
 
After you've researched your first batch of companies (read my articles, the public filings, and visited company Web sites), it's time to set up a watch list. How do you do this? Fortunately, Morningstar offers these services for free:

1. Go to the Morningstar.com and click on the tab labeled "Portfolio."
2. In the Portfolio Manager window, under "Create a Portfolio," click "New Portfolio."
3. You'll see a box labeled "Step 1." It's automatically set up to build a watch list, so click "Continue."
4. Pick a name for your portfolio, or just call it "watch list." Then, plug in the ticker symbols of the companies you want to watch. Click "Done."
5. In the following window, you'll see a list of updates, alerts, and tips that Morningstar will send you daily for the companies in your watch list. Click "Done" again.
6. Now you have a watch list that you can visit anytime by clicking the Portfolio tab on Morningstar.com.

By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell decisions, stay organized, and keep informed.
 

Safe Bulkers (SB) reports 2nd quarter 2011 financial results

Safe Bulkers (SB) announced its 2nd quarter 2011 financial results earlier today.  The earnings miss will probably drop the stock price a bit, but that is good news for those of us who want to buy below $7.00 per share.  The dividend is still safe.  I haven't examined the balance sheet yet for changes.
 
Here are the highlights from the beginning of the press release:

press release

July 21, 2011, 4:05 p.m. EDT

Safe Bulkers, Inc. Reports Second Quarter and First Half 2011 Results and Declares Quarterly Dividend

ATHENS, GREECE, Jul 21, 2011 (MARKETWIRE via COMTEX) -- Safe Bulkers, Inc. (the "Company") /quotes/zigman/512899/quotes/nls/sb SB -1.18% , an international provider of marine drybulk transportation services, announced today its unaudited financial results for the three and six months periods ended June 30, 2011. The Company's Board of Directors also declared a quarterly dividend of $0.15 per share for the second quarter of 2011.

Summary of Second Quarter 2011 Results

 
-- Net revenue for the second quarter of 2011 increased by 1% to $41.2 million from $40.6 million during the same period in 2010.
-- Net income for the second quarter of 2011 decreased by 22% to $19.1million from $24.4 million during the same period in 2010. Adjusted net income(1) for the second quarter of 2011 decreased by 7% to $25.5 million from $27.4 million during the same period in 2010.
-- EBITDA(2) for the second quarter of 2011 decreased by 14% to $25.5 million from $29.8 million during the same period in 2010. Adjusted EBITDA(1) for the second quarter of 2011 decreased by 3% to $31.9 million from $32.9 million during the same period in 2010.
-- Earnings per share ("EPS") for the second quarter of 2011 of $0.27, calculated based on a weighted average number of shares of 70,116,022, compared to $0.37 in the second quarter of 2010, calculated based on a weighted average number of shares of 65,870,573. Adjusted EPS(1) for the second quarter of 2011 of $0.36, calculated based on a weighted average number of shares of 70,116,022, compared to $0.42 in the second quarter of 2010, calculated based on a weighted average number of shares of 65,870,573.
-- The Company's Board of Directors declared a dividend of $0.15 per share for the second quarter of 2011.

You can read the full press release here: http://bit.ly/SB2Q2011report 

I will perform some analysis on these results soon, but nothing shocking is in the highlights.

 
Disclosure: I don't own Safe Bulkers, but I would like to purchase it below $7.00 per share.

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Should you buy, sell, or hold Terra Nitrogen (TNH) at today's 52 week high?

Terra Nitrogen (TNH) hit a new 52 week high today of $157.00 per share.  This fertilizer company has skyrocketed since April 2011.  I'll bet you're wondering if you should you buy, sell, or hold TNH shares at $157.00?  You should hold them if you own them because TNH is only trading at 15.7 times the company's five year average adjusted earnings of $9.97 per share.  Sit back and collect the dividend until the shares climb to 20 times average earnings which would be $199.40 per share.
 
 
Terra Nitrogen is not a high dividend stock right now due to the huge stock price advance since July 2010.  The company is paying a $1.36 quarterly dividend per share.  There was a special dividend last quarter that is confusing all the online dividend yield calculations.  The dividend yield is closer to 3.4% when the special dividend is removed.  That is still a good dividend compared to the pathetic S&P 500 average of around 2%.
 
If you don't own Terra Nitrogen, then consider buying it when it drops back to the $90 - $119 range.  The stock would be trading at 12 times its five year average earnings when the price is at $119.  At $90 TNH would sport a dividend yield of 6% if it keeps its $1.36 quarterly dividend in place.  The dividend is fairly safe.  In the 1st quarter of 2011 TNH earned $3.60 per share and paid out $1.36 in dividends.  That is a low 37.7% dividend payout ratio.  Let's look at this even more cautiously: assume for a moment that the company only earns its five year average in earnings - $9.97 per share.  The dividend payout ratio at the end of 2011 would only climb to 54.5% ($5.44 annual dividend / $9.97 average annual earnings).
 
Terra Nitrogen has a strong balance sheet.  It has $252.1 million in current assets (most of that is cash and cash equivalents) and only $55.5 million in current liabilities.
 

CONSOLIDATED BALANCE SHEETS

March 31, December 31,
2011 2010
(in millions, except for units)
ASSETS
Current assets:
Cash and cash equivalents $ 221.7 $ 124.8
Demand deposits with affiliate 10.7 6.1
Accounts receivable, net 1.2

33.4
Inventories, net 16.7 27.6
Prepaid expenses and other current assets 1.8 1.2
Total current assets 252.1 193.1
Property, plant and equipment, net 82.6 83.2
Plant turnaround, net 11.9 13.4
Other assets 6.8 7.0
Total assets $ 353.4 $ 296.7
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities $ 22.0 $ 24.3
Customer advances 33.1 61.2
Other current liabilities 0.4 0.8
Total current liabilities 55.5 86.3
Noncurrent liabilities 0.7 0.4
Partners' capital:
Limited partners' interests, 18,501,576 Common Units
authorized, issued and outstanding 250.0 208.5
Limited partners' interests, 184,072 Class B Common Units
authorized, issued and outstanding 1.4 0.6
General partners' interest 45.8 0.9
Total partners' capital 297.2 210.0
Total liabilities and partners' capital $ 353.4 $ 296.7
 
To read the other articles I've written on Terra Nitrogen click here: http://www.myhighdividendstocks.com/category/high-dividend-stocks/terra-nitrogen
 
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Safe Bulkers (SB) edges closer to a value buy opportunity

The Baltic Dry Index tracks the spot market dry bulk shipping rental rates.  The BDI has barely recovered from its January 2011 bottom.

http://bloom.bg/BDI_moves_lower

Traders/investors use the BDI as a barometer of global trade.  A lower BDI equates to a double dip recession in their minds.  Further erosion of the spot market will cause investors to sell dry bulk shipping stocks.  This will provide an opportunity to buy high dividend stocks like Safe Bulkers (SB) at a lower price.

Image003

http://bit.ly/BDI2yearChart

Consider buying Safe Bulkers at or below $7.00.  Most of Safe Bulkers 16 ships are not contracted in the spot market.  They are in long term contracts between $20,000 and $30,000 per day.

Image005

http://bit.ly/SB2yearChart

Please follow this link if you want to read my analysis in support of Safe Bulkers as a best dividend stock: http://bit.ly/SafeBulkers  Those articles cover its dividend record, earnings power, and its balance sheet.

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Are there high dividend stocks worth buying in the LNG shipping sector?

One of the Motley Fool writers wrote on July 7th, 2011 that there are huge dividends to be received from two liquid natural gas (LNG) shipping companies.  The article is a lead up to the recommendation of Teekay LNG Partners L.P. (TGP) and Golar LNG Ltd. (GLNG).  I had heard of Teekay before during my research of dry bulk shipper Safe Bulkers (SB), but I had never heard of Golar.  I didn’t have any awareness of these company’s dividend records, earning power, or strength of balance sheets.

http://www.fool.com/investing/general/2011/07/07/huge-dividends-from-americas-energy-game-changer.aspx

Teekay LNG has a dividend yield above 6% and Golar only yields about 2.6%.  Let’s take a closer look at each of these stocks to determine at what price to buy them low.  The bottom line is that they are both speculatively price right now, but at the right price they can be high dividend stocks.  It will take a few more years of increasing earnings to overcome their spotty records.  Don’t buy these stocks at today’s prices.

Teekay LNG Partners L.P. (TGP)

Market price: $37.10

Shares: 58.81 million

Market capitalization: $2.18 billion

Dividend record: strong and growing, but the earnings aren’t covering the dividend payments!!

Image002

Dividend: $0.63/quarter

Dividend yield: 6.78%

Recent EPS: $1.45

Dividend payout ratio: 173% ($2.52 annual dividend / $1.45 recent EPS)  This is not good.  Expect a dividend cut in the not too distant future.

Earning power: $0.53 average earnings @ 58.81 million shares

(earnings adjusted for changes in capitalization; TGP has issued some shares over the years)

            EPS                   Net inc.             Adj. EPS

2006     ($0.28)             ($9.591 M)        ($0.16)

2007     $0.45                $25.662 M         $0.44

2008     $0.36                $19.486 M         $0.33

2009     $0.85                $42.145 M         $0.72

2010     $1.48                $78.728 M         $1.34

Five year average EPS $0.53

Consider buying below $6.36 (12 times average earnings)

Consider selling above $10.60 (20 times average earnings)

TGP is trading for 70 times average earnings.  This is highly speculative.

Balance sheet: Stagnant and unexciting; weak current financial strength

Image008

Book value per share: $15.23  TGP traded below its book value as recently as late 2008.

Price to book value ratio: 2.43 (not too bad)

Current ratio: 0.27 (over 2.0 is good)

Quick ratio: 0.14 (over 1.0 is good)

Golar LNG Ltd. (GLNG)

Market price: $37.65

Shares: 68.12 M

Market capitalization: $2.56 billion

Dividend record: spotty, usually $0.25/quarter, no earnings to pay the dividend!!

Image009

Dividend: $0.25 quarterly

Dividend yield: 2.6% ($1.00 annual dividend / $37.65 share price)

EPS: none

Dividend payout ratio: can’t be computed without earnings

Earning power: $0.65 per share @ 68.12 million shares

(earnings adjusted for changes in capitalization; GLNG has kept its number of shares very constant)

            EPS       Net inc.             Adj. EPS

2006     $1.05    $71.673 M         $1.05

2007     $2.07    $136.204 M       $2.00

2008     ($0.15) ($9.989 M)        ($0.15)

2009     $0.34    $23.082 M         $0.34

2010     $0.01    $0.384 M           $0.01

Five year average earnings $0.65

Consider buying at $7.80 (12 times average earnings)

Consider selling at $13.00 (20 times average earnings)

GLNG is trading at 57.92 times average earnings.  This is highly speculative.

Balance sheet: horrible trending downward

Image012

Book value: $6.09

Price to book value ratio: 6.18 (bad because the stock is priced six times more than the capital invested in the company)

Current ratio: 0.78 (over 2.0 is good)

Quick ratio: 0.57 (over 1.0 is good)

Disclosure – I don’t own positions in either of these stocks.

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It Ain't Money If I Can't Print It!

It Ain't Money If I Can't Print It!
by Peter Schiff

Recently by Peter Schiff: Don't be Fooled by Political Posturing
   
I have been forecasting with near certainty that QE2 would not be the end of the Fed's money-printing program. My suspicions were confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke's semi-annual testimony to Congress yesterday. The former laid out the conditions upon which a new round of inflation would be launched, and the latter re-emphasized – in case anyone still doubted – that Mr. Bernanke has no regard for the principles of a sound currency.


Tuesday's release of the Fed minutes contained the first indication that a third round of quantitative easing (QE3) is being considered. The notes described unanimous agreement that QE2 should be completed, along with the following comment: "depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run." Since the unemployment situation is deteriorating, and by all accounts will continue to do so, the Fed is essentially pledging to keep the spigot turned on. The committee also decided to look only at current "overall inflation" in making their judgments, as opposed to "inflation trends." Since new dollars take awhile to circulate around the economy and raise prices, this means the Fed is sure to be too late in tightening once inflation starts to run away, causing more dislocations in the American economy.

If anyone had lingering faith that Mr. Bernanke actually has a plan to end the US government's addiction to cheap money, the Chairman's semi-annual testimony to Congress should have washed it away. In addition to claiming that his money-printing has helped the US economy, Bernanke told Congress that gold is not money, people buying gold are not concerned about inflation, and the external value of the dollar has no influence on its domestic purchasing power. He even took a moment to stump for President Obama's plan to raise the debt ceiling.

 
By claiming that gold is not money, the Chairman demonstrates his ignorance of much of monetary history. He told Congressman Ron Paul that he had no idea why central banks hold gold, before speculating that it might have something to do with tradition. Yes, traditionally gold is money, which is precisely why central banks hold it. And gold is money because central bankers like Mr. Bernanke cannot be trusted with a paper substitute.

Bernanke further disputes the facts by claiming that the only reason people are buying gold is to hedge against uncertainty, or "tail risks" as he calls them. My advice to the Chairman is to ask the people who are actually buying it. As someone who has been buying gold myself for a decade, I can assure him that my gold buying has nothing to do with "uncertainty." In fact, it's just the opposite. I am buying gold because of what is certain, not what is uncertain. I am certain that Mr. Bernanke's incompetence will destroy the value of the dollar and unleash runaway inflation.

If it were true that people bought gold to protect themselves from market uncertainty, as the Chairman claims, then the metal should have spiked in the midst of the '08 credit crunch. Instead, it fell along with most other assets. People instinctively fled into US dollars and Treasuries because of their long record of stability. What Bernanke doesn't understand is that his irresponsible monetary policy is undermining that faith in US assets, built up over generations. That is what's driving gold: easy money, negative interest rates, and quantitative easing.

 
Finally, by claiming that the dollar's exchange rate has no effect on domestic prices, Mr. Bernanke demonstrates that he probably lacks the competence to be a bank teller, let alone Chairman of the Federal Reserve. A weaker dollar means Americans have to pay more for imported goods. But it also means domestic producers have to pay more for raw materials and imported components, which raises domestic production costs as well. It also means that more domestically produced goods are exported, reducing the supply and raising the price of what is left for Americans to consume. This is Econ 101.

Given the Chairman's confusion on the basics of economics, perhaps it's no surprise that he's put quantitative easing right back on the table, where, despite prior rhetoric, it has been all along. The Fed has always known that QE3 is coming; it's just looking for an excuse to launch it.

 
The problem is that fighting a recession with QE is like fighting a fire with gasoline. As the flames of recession reignite, more QE, while dousing it momentarily, will only produce an even larger economic inferno.

At one point, Bernanke said, "The right analogy for not raising the debt ceiling is going out and having a spending spree on your credit card and then refusing to pay the bill." He's got the analogy right, but his conclusions are completely wrong. Yes, Congress has gone on a spending spree and it's time to pay up. But raising the debt ceiling is like taking out a Mastercard to pay the Visa... it just makes the problem worse. If you or I go out one night, get drunk, and run up a huge credit card bill, we know that the way to fix it is to buckle down and pay it back. We might postpone vacation plans or put off buying a new car, we might cancel our cable TV subscription or gym membership. The point is that we would have to reduce current consumption to make up for the overspending in the past.

Obama claims that raising the debt ceiling is about getting a hold of the federal debt. Have you ever heard of anyone getting out of debt by taking on more debt? Has anyone ever reduced their debt without reducing current consumption? How can the Fed Chairman endorse such a preposterous idea?

Bernanke actually went a step further and warned against reducing current federal spending too sharply, claiming that such a move might impede the "recovery." He apparently believes that it is the role of the Congress to go on spending sprees, and his role to pay the mounting bills with freshly printed dollars. The fact that this formula has produced larger and larger economic crises does not seem to bother him. I guess ignorance is bliss.


July 15, 2011

Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is How an Economy Grows and Why It Crashes.

TIP OF THE WEEK - Using the CCI to help time buy and sell decisions

An indicator that shows if a stock, commodity, or ETF is overbought or oversold

Jason Brizic

July 15, 2011

Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels.

To learn more about how the CCI is calculated and excellent examples read the rest of the StockChart.com chart school entry on the CCI.  It is available here: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in

I perform fundamental analysis first to determine if a stock, ETF, or commodity is worth buying.  Then I use technical analysis to help time my buy or sell.  The CCI can help you make buy and sell decisions.  This also works with shorting stocks.

You can use the CCI to help spot price bottoms.  The best opportunities to buy often occur when the CCI is in the “red”.  That means a value of -100 or greater.  You can also use the CCI to help spot price tops.  The most opportune times to sell often occur when the CCI is in the “green”.  That means a value of +100 or greater.

I use the Commidity Channel Index when I create free charts on www.stockcharts.com.

Here are the steps I take to setup my charts in less than 10 seconds:

  1. Leave the Type of chart: set to SharpChart.
  2. Type in the ticker symbol and click Go.
  3. Change the Period to Weekly.
  4. Scroll down to Chart Attributes; change Size to Landscape.
  5. Check the following checkboxes: Full Quote, Price Labels,
  6. Uncheck the Log Scale checkbox.
  7. Scroll down to the Overlays area.  Change the one that says –None- to Bollinger Bands
  8. Scroll down to the Indicators area.  Change the one that says RSI to CCI

I used the CCI along with Bollinger Bands and the MACD indicator to time my purchase of gold in November of 2008.  Notice that the price of gold was deep in the “red” on the CCI indicator in late 2008.  I has risen steadily since 2008.  Look at all those “green” peaks.  The green peaks will continue until the Federal Reserve tightens monetary policy.  There will be a day to sell gold, but that day is likely years away because the Federal Reserve is not facing inflationary pressures yet.  But I disgress.  Let’s get back to the CCI.

Image001

3 year gold price chart: http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p21431362973

I recently wrote about AstraZeneca (AZN) as a potential high dividend stock worth buying.  AZN’s 3 year chart is very instructive on how the CCI could be used to help time stock purchases.

Image002

When was the best time to buy AstraZeneca stock in the past three years?  The answer is in March of 2009 when the US stock market was bottoming after the Panic of 2008.  The CCI was deep in the “red” at a value of over -200!  The MACD and Bollinger Bands confirm the bottom of AZN in April of 2009.  Just take a look at how often the price bottoms coincide with the CCI in the red.  Likewise, so many price tops are near the green CCI peaks.

This method is not foolproof.  The United States Natural Gas Fund ETF traded as UNG shows us how ignorance of the prerequisite fundamental analysis that Benjamin Graham advocated many years ago can lead you into investment peril if you only rely on technical indicators.

Image003

I’m going to analyze the fundamentals of UNG in the not too distant future.  This might not be the bottom.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Safe Bulkers (SB) will report 2nd quarter results on July 21st.

Safe Bulkers (SB) will report 2nd quarter results on July 21st.

http://finance.yahoo.com/news/Safe-Bulkers-Inc-Sets-Date-iw-3230380523.html?x...

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Safe Bulkers (SB) is smart to buy ships at deep discounts. Now that's capitalism.

Safe Bulkers (SB) is one of my favorite high dividend stocks because it has a good dividend record, stable earning power in the worst dry bulk shipping market since they have been keeping records, and their balance sheet is strong.  Safe Bulkers (SB) might buy up to 10 ships next year.  This is smart because there will be bargains to buy.  Successful businesses buy assets cheap and put them to work profitably.  If they make smart purchases, then they won’t damage their balance sheet in the process.

This is from Reuters India:

BANGALORE | Fri Jul 15, 2011 1:19am IST

BANGALORE (Reuters) - Safe Bulkers Inc(SB.N), the fourth-largest U.S.-listed dry bulk carrier by market value, may buy up to 10 vessels next year as the weak market promises cheap bargains, its top executive said.

The company expects the new vessels to start operating by 2013, helping it cash in on the improving market where demand will outpace deliveries leading to better freight markets.

"By this time next year, we will have opportunities to order more ships as prices next year will be lower which will enable us to buy more reasonably prices ships," Chief Executive Polys Hajioannou said in a telephone interview from Athens.

The Greece-based company has a fleet of 16 vessels -- mostly from Japanese shipyards -- which mainly carry thermal and coking coal and it has 11 vessels scheduled to be delivered at various times through 2014.

Hajioannou expects to have a "fire power" of about $320 million to buy vessels, with $160 million of that being raised as debt by offering ships as collateral.

"We hope that the shipyards, mostly Japanese, should deliver competitive prices next year. At the moment they are not delivering competitive prices because the yen is strong now," Hajioannou said.

Since the downturn, the price of a panamax vessel has fallen almost 30 percent to about $33.5 million currently and is expected to drop further to $30 million by the end of the year.

Ship owners went on an ordering spree before the economic turmoil, resulting in an oversupply condition that hit the market hard. This has also forced companies like DryShips Inc (DRYS.O) to diversify into drilling and tanker businesses.

Safe Bulkers, valued at $545.8 million, however, has no such plans.

"We will remain dedicated to bulk shipping," Hajioannou said. "We don't believe that companies should be active on too many fronts, as it becomes difficult to monitor all markets."

The CEO expects a better dry bulk market next year as Japan, a big commodity consumer, will import more iron-ore and coal to help the reconstruction of the quake-hit country.

Commenting on the issue of piracy, Hajioannou, who is also a founding member of the Union of Cyprus Shipowner, said the shipping sector will have to live with the reality of piracy off the Somalia coast.

Piracy attacks have risen by a third in the first half of the year, and become more violent, with pirates using grenade launchers, machine guns and other weapons.

"I don't think there's a political will from the governments to intervene," the football fan said.

(Reporting by Vaishnavi Bala in Bangalore; Editing by Saumyadeb Chakrabarty)

Link to original article: http://in.reuters.com/article/2011/07/14/idINIndia-58265820110714

Disclosure: I don’t own Safe Bulkers, but I’d like to.

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