Wednesday, 26 November 2014

Ron Paul Says: Watch the Petrodollar

By Nick Giambruno, Senior Editor, InternationalMan.com


The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.—Ron Paul

Dr. Paul is referring to the petrodollar system, one of the main pillars that’s been holding up the US dollar’s status as the world’s premier reserve currency since the breakdown of Bretton Woods.

Want to know when the fiat US dollar will collapse? Watch the petrodollar system and the factors affecting it. This is critically important, because once the dollar loses its coveted reserve status, the consequences will be dire for Americans.

At that moment, I believe Washington will become sufficiently desperate to enforce the radical measures that governments throughout world history have always implemented when their currencies were threatened—overt capital controls, wealth confiscation, people controls, price and wage controls, pension nationalizations, etc.

And there’s more. The destruction of the dollar will wipe out most people’s wealth, leading to political and social consequences that will likely be worse than the financial consequences.

From Bretton Woods to the Petrodollar


The dollar’s role as the world’s reserve currency was first established in 1944, with the Bretton Woods international monetary system. The US—victorious in WWII, and possessing the overwhelmingly largest gold reserves in the world (around 717 million ounces)—could reconstruct the global monetary system with the dollar at its center.

The Bretton Woods arrangement linked another country’s currency to the US dollar at a fixed exchange rate, and the US dollar was tied to gold, also at a fixed exchange rate. Countries accumulated dollars in their reserves to engage in international trade or to exchange them with the US government for gold at $35 an ounce.

By the late 1960s, exuberant spending from welfare and warfare—combined with the Federal Reserve monetizing the deficits—drastically increased the number of dollars in circulation in relation to the gold backing it.

This monetary inflation caused nervous countries to accelerate their exchange of dollars for gold at $35. The result was a serious drain on the US gold supply (from 20,000 tonnes to around 290 million ounces by 1971, an amount it supposedly still holds).

With gold reserves shrinking rapidly, President Nixon officially ended convertibility of the dollar to gold, thus ending the Bretton Woods system on August 15, 1971. It was a default, and it took with it the main reason countries primarily held their reserves in dollars. The buck’s preeminent value in international trade was gone. Demand for dollars by foreign nations was sure to fall, along with its purchasing power.

That hurt OPEC, whose members were the world’s leading suppliers of a commodity even more valuable than gold: oil. OPEC countries needed a way to retain the real value of their earnings in the face of a declining currency, without having to jack the price of oil sky high.

If the dollar was to remain strong, it had to reinvent its status as the world’s reserve currency, and that required a new world financial arrangement, one which would give foreign nations an ironclad reason to hold and use dollars. Nixon dispatched his National Security Advisor Henry Kissinger to Saudi Arabia.

The Petrodollar System


Between 1972 and 1974, the US and Saudi governments created the petrodollar system.

Saudi Arabia was chosen because of its vast petroleum reserves, its dominant influence in OPEC, and the (correct) perception that the Saudi royal family was corruptible.

Under the new petrodollar system, the US guaranteed the survival of the House of Saud by providing a total commitment to its political and military security. In return, Saudi Arabia agreed to:

  • Use its dominant influence in OPEC to ensure that all global oil transactions would be conducted only in US dollars.

  • Invest a large amount of its oil revenue in US Treasury securities and use the interest income from those securities to pay US companies to modernize the infrastructure of Saudi Arabia.

  • Guarantee the price of oil within limits acceptable to the US and act to prevent another oil embargo by other OPEC members.

No dollars, no access to the world’s most important commodity. It’s a very compelling reason to hold your reserves in dollars.

For example, if Italy wants to buy oil from Kuwait, it has to first purchase US dollars on the foreign exchange market to pay for the oil, thus creating an artificial demand for US dollars that wouldn’t exist if Italy could pay in euros.

The US is just a toll collector in a transaction that has nothing to do with a product or service. But that translates into increased purchasing power and a deeper, more liquid market for the dollar and Treasuries.

Additionally, the US has the unique privilege of using its own currency—which it can print at will—to purchase its imports, including oil.

The benefits of the petrodollar system to the US are impossible to overstate.

What to Watch For


Today, the geopolitical sands of the Middle East are rapidly shifting.

The faltering strategic regional position of Saudi Arabia, the rise of Iran (which is not part of the petrodollar system), failed US interventions, Russia’s increasing power as an energy giant, and the emergence of the BRICS nations (which offer the potential of future alternative economic/security arrangements) all affect the sustainability of the petrodollar system.

My colleague Marin Katusa’s mentioned in his book; The Colder War, you need to be aware of what Vladimir Putin is doing. Putin would like nothing more than to sabotage the petrodollar, and he’s forging alliances across the planet that he hopes will help him achieve his goal.

At the same time, you should watch the relationship between the US and Saudi Arabia, which has been deteriorating.

The Saudis are furious at what they perceive to be the US not holding up its end of the petrodollar deal. They believe that as part of the US commitment to keep the region safe for the monarchy, the US should have attacked its regional rivals Syria and Iran by now. And they may feel they are no longer obliged to uphold their part of the deal, namely selling their oil only in US dollars.

They’re already heavily involved with China and could also tilt toward Russia. Oil traded in rubles or yuan could be the future result—a death knell for the petrodollar.

Conclusion


It was evident long before Nixon closed the gold window and ended the Bretton Woods system in 1971 that a paradigm shift in the global monetary system was inevitable.

Now another shift also seems inevitable. Ron Paul’s words alert us as to when a dollar collapse is imminent.

“We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.”

Someday, perhaps soon, Americans will wake up to a new reality, like they did on August 15, 1971.

To learn more about the coming death of the petrodollar and how it will directly affect you, I recommend you read Marin’s new book, The Colder War.

Dr. Ron Paul has fully endorsed it and inside, you’ll discover the web alliances and deals Putin has forged to break the monopoly of the dollar in the global energy trade and what a flight from the dollar will look like.

Before Putin makes another move against America, get the full story by clicking here to get your copy of this eye-opening book.

The article Ron Paul Says: Watch the Petrodollar was originally published at caseyresearch.com.

Sunday, 23 November 2014

4 Steps for Avoiding a Capital “C” Catastrophe in the Next Downturn

By Dennis Miller


When the tech and real estate bubbles burst, many of my friends lost 40-50% of their retirement portfolios almost overnight. Is a similar downturn looming?

Take a look at the chart below showing the S&P’s performance since 2008.



Caution is in order. We may see a major correction, a huge downturn, or this bubble could continue to grow for quite some time. I’ll leave the timing predictions to others. Still, investor euphoria worries me. Even those playing with retirement money often ignore warning signs, thinking the parabolic rise in stock prices is never going to end. However, this time is NOT different.

Look at the Nasdaq’s performance just before the tech bubble crash:



From March of 1999 to March of 2000, the Nasdaq doubled, and investors were euphoric. Are you feeling that euphoria today?

Don’t Let the Next Downturn Make You Poor

The goal for a retirement portfolio is to create enough of an income stream that you can maintain your current lifestyle over the long haul while the balance grows ahead of inflation. This portfolio should also include enough safety measures to keep you whole regardless of what the market does.

Sounds simple, but it can feel like walking and chewing gum—to the power of 10. Treasuries are supposedly safe… but from what? Sure, you won’t lose your principal, but they won’t protect you from inflation. Certain stocks are solid; after all, many companies survived the Great Depression… but will they keep paying dividends when you need them? Investing in a turbulent market is a gyroscopic balancing act with endless variables.

4 Lifejackets


While outlining the entire Miller’s Money safety system is beyond our scope here, there are four must-do safety measures anyone can easily implement.

#1—Set strict position limits. No single investment should make up more than 5% of your overall portfolio. That means rebalancing at least once a year. I have a friend who brags about how well his portfolio has been doing. Turns out, 80% of his holdings are in Apple. While Apple is a fine company and has done well, he should consider locking up most of his gain and focusing on capital preservation.

#2—Use trailing stop losses. We recommend setting trailing stop losses at 20% or less on all market investments. Stop losses can prevent catastrophic damage to your portfolio. As our portfolio grows, a trailing stop can help lock in a gain. While you may still face setbacks from time to time, a trailing stop limits them. You’ll live to fight another day.

I’ve spoken to some retirement investors who limit each holding to 4% of their portfolio and set 25% trailing stops. Whatever makes sense! Just limit the size of each position—and in doing so the potential for catastrophe.

#3—Diversification is the name of the game. This means internationalizing, too. Holding 5-6 mutual funds all in the United States or in US dollars just won’t cut it. You must diversify into non-correlated assets all over the world; so, should one segment or market tank, it won’t bring down a major portion of your portfolio.

You should also review the correlation of the asset you’re considering. What events in the market will cause the price to rise and fall? And pay particular attention to the near term. For example, until recently, utility stocks were considered the gold standard for retirees. Now there is so much capital in this sector, the stocks are correlating much closer to changes in interest rates.

Look for assets that are either uncorrelated to the market or those which may move in the opposite direction (the market goes down, this goes up, and vice versa).

Again, the game is: hold on to as much capital as possible and live to fight another day.

#4—Look for low duration on income investments. Bond sellers tout the safety of US government and investment-grade bonds. They are correct as far as default is concerned; however, a sudden rise in interest rates would mean a large loss for an investor holding these bonds who resells them in the aftermarket.

Retirement investors normally hold bonds for interest income, and they hold them until maturity. While some say bonds are still a good investment, most of these folks are traders. They buy high duration bonds (their market price moves significantly with changes in interest rates), betting on interest rates continuing to decline, and plan to sell for a profit down the road. We are not traders or market timers. Unless you are comfortable holding a bond until maturity, stay away from it.

When you invest money earmarked for retirement, using models that were in vogue as recently as 10 years ago will leave you vulnerable. Whether you’re considering bonds, utilities or any other investment vehicle, having the most up-to-date information is imperative. You can learn more about where bonds fit—or don’t fit—in your retirement plan by downloading our timely and free special report, Bond Basics, today. Access your complimentary copy here.

Thursday, 20 November 2014

Why Janet Yellen Needs Her Own Magic Show

By Dennis Miller


What do Siegfried and Roy have in common with Federal Reserve Chairman Janet Yellen?
Shortly after the Bureau of Labor Statistics released unemployment data last month showing that joblessness had dropped below 6% for the first time since the 2008 crash, the Federal Reserve announced it would stop government bond purchases; Quantitative Easing is history.

The Federal Open Market Committee’s (FOMC) October 29 announcement states:

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. ...

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. ... Accordingly, the Committee decided to conclude its asset purchase program this month.

To better understand what all that means in English, we need to back up a bit.

In 2012, Principal Global Investors Economist Robin Anderson noted of Yellen:

Janet Yellen is the latest in a string of Fed bigwigs to get behind an idea of using explicit inflation and unemployment targets to inform the market about the Fed’s future plans—forward guidance, in Fed-speak. ...

Essentially, the idea is to set up explicit thresholds for inflation and unemployment measures (the two mandates for the Fed) to help set expectations about the future of monetary policy if there should be a disconnect between the two.

In other words, the Fed leans on concrete inflation and unemployment data to form policy. That sounds intelligent, straightforward, and simple; however, it’s the kind textbook talk we should expect from someone living in a world of theory. Most of the time, the person making these statements has never been responsible for or had her job performance measured by a sales budget, expense budget, or achieving profit goals.

As I’ve mentioned before, in the words of Yogi Berra, “In theory there is no difference between theory and practice. In practice there is.”

Ms. Yellen quickly discovered that Yogi was right. In May 2014, during testimony before a joint congressional committee, she said the 6.5% unemployment goal was being taken off the table, and she refused to give Congress any goals or timelines. She simply repeated that rates would remain near zero for a considerable time and would rise only when stronger economic conditions allowed.

Can you imagine the president of any major corporation standing up at a stockholder meeting and refusing to answer shareholders’ questions? “I’m not sure how much we will sell next year, nor do I know how much money we will earn. But when we get there I will tell you. You can trust me.”

Well, the day arrived, and Ms. Yellen says it’s time for bond buying to stop. And a few months down the road, the Federal Reserve is likely to begin slowly raising interest rates, even though she said she plans to keep interest rates low for a considerable period of time. Why? The unemployment rate, as reported by the BLS and shown in the graph below, is now below 6%.



Ms. Yellen has jumped and is now saying “that was our secret target.” This is her justification for stopping bond purchases. Hmm… sure looks like the Fed knows what it’s doing. Surely announcing that happy days are here again just before the midterm elections was a mere coincidence.

Take a look at the chart below showing the Labor Force Participation Rate as reported by the BLS on November 1.



I might be a 74-year-old with aging eyes, but even I can see that the line is going down. If true unemployment were going down, wouldn’t labor force participation be going up?

When it comes to raising interest rates Ms. Yellen has a big problem. Greenspan let that cat out of the bag at a recent New Orleans investment conference attended by members of the Casey Research team, noting that it was naïve to believe the Federal Reserve is independent of the government.

To justify the Fed’s easy-money policies, he said the government’s insatiable need for capital would have “crowded out” the rest of the economy. In straight talk that means if he hadn’t juiced the system with easy money, interest rates would have risen so high that capital would have been too expensive for the private sector. There is a universal truth: government-spending obligations preempt the need for sound money policies every time.

Ms. Yellen can trumpet all she wants about the Fed promoting employment and keeping inflation under control. Mr. Greenspan has made it clear that the real mission of the Fed is that of dealer to government spendaholics.

Over time, addicts want more frequent injections and bigger doses, and Ms. Yellen has inherited an addict in advanced stages. To solve the real problem (the addiction) requires an effective intervention (hopefully before it’s too late) and real behavioral change or the addict dies an ugly death.

Dr. Lacy Hunt estimates that every 1% increase in the interest rate would add $130 billion annually to the budget deficit. Projected deficit increases will run his estimate to $260 billion. Currently, if interest rates increased 4% it would add $520 billion to the deficit, accelerating the need for even more juice.

The government has reported that the annual deficit is going down. The Fed is keeping a lid on interest rates. When government debts are sold in a free market, though, interest rates will rise. Yellen knows this and she is doing everything she can to hide it. Ask her to set a target? Forget about it!

So, what do Siegfried and Roy have in common with Yellen? Both lean heavily on smoke and mirrors. Maybe it’s time for her to take their place in Las Vegas. For updates on her show times—along with timely investment news and economic analysis—sign up for our free weekly missive, Miller’s Money Weekly here.

The article Why Janet Yellen Needs Her Own Magic Show was originally published at millersmoney.com.

Wednesday, 12 November 2014

The End of the US Dollar Imperium


Jeff Deist and Patrick Barron continue their discussion on monetary imperialism. They delve deeper into US dollar supremacy, and how it might end with a whimper instead of a bang; how the Bundesbank is a potential savior for the world monetary order, while the IMF is a paper tiger; how elites will have an increasingly hard time denying gold a role in the global monetary system, and how America’s fiat dollar corrupts cultures as well as economies.

- Source Mises Institute

Sunday, 9 November 2014

Why Gold Is Coming Back To Life


Edmund Moy, Chief Strategist at Fortress Gold, says factors like renewed demand for physical gold and supply constraints will drive prices higher soon.

Friday, 7 November 2014

Ted Butler - The Silver Nightmare Will Be Over Soon


Halloween couldn't have been more terrifying for silver investors. The gray metal cracked under $16/oz on Friday, a price not seen for nearly half a decade.

For years now, it's seemed like silver was beaten up so badly its price couldn't go lower. But then it would.

Why has silver been beaten down so badly? (now down 2/3 compared to it's high in late 2011). And will it ever see brighter days again?

This weekend, Chris has a long discussion with silver expert Ted Butler on the real culprit behind the wild price slams that have plagued silver: unfairly concentrated positions within the derivatives market.

- Source, Peak Prosperity

Tuesday, 4 November 2014

Jim Grant - The Outcome Of Hyperinflation Brought About By Massive Helicopter Money


How to think about central bank policy and the economic impact, with Jim Grant, founder and editor of Grant's Interest Rate Observer.

Wednesday, 29 October 2014

Swiss Demand Global Gold Recall Despite Central Bankers


In a word association game, If I said Switzerland, you might say cheese or chocolate or maybe the alps. But another common item everyone associates with the Swiss is their money. Their banks. Their currency.

Soon, that currency could change in a big way. This November, a Swiss Gold Referendum is going to a vote, and the repercussions, one way or the other, could cast a shadow of uncertainty on the US dollar. Nearly one-third of the Swiss Franc used to be guaranteed by gold reserves, not it’s less than 8 percent. If THIS VOTE goes through, the Swiss will be forced to raise the gold reserve back up to 20 percent.

Joining us today is radio host Charles Goyette. He and Congressman Ron Paul have talked about central banks at great length on his radio show. Today, we’d like to get HIS input on the Swiss Gold Referendum.

Sunday, 26 October 2014

Jim Rickards: Obama Ending Alliance with Saudi Arabia and Killing the Petrodollar


At the San Antonio Casey Research Summit, Jim Rickards sat down with Alex Daley to talk about the pain ahead for the US Dollar, why we'll soon see SDRs, and other harbingers of the Death of Money.

Buy Canadian Maple Leafs Official Dealer of Gold/Silver Coin Fast S&H - Easy Pay for Bullion, Silver Gold Bull.

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