Britannia Radio

The Daily Crux

Dear Daily Crux reader, In the past two weeks, we've seen extraordinary reader interest in two posts. Both concern the same topic. The first post was about a secret White House plan for the U.S. dollar. In this post, legendary market advisor Richard Russell suggests our government is actively devaluing the dollar in order to inflate away its huge debt load... while shamelessly lying to the public about supporting a strong dollar. The second post features my friend Porter Stansberry pointing out how large Wall Street money managers are publicly talking about the importance of gold... while criticizing the government's stewardship of our economy. I don't blame folks for being interested in the subject of gold and the U.S. dollar. Our elected leaders are behaving absolutely stupidly right now... and they will eventually cause another crisis. To help make sense of it all – and to help you profit – we sat down with one of the world's top experts on government stupidity... and how to protect yourself and prosper from it. This week, by popular request, we got some answers from the one and only Porter Stansberry. Good investing, Brian Hunt Editor in Chief, The Daily Crux --------------------------------- The Daily Crux: Sunday Interview Porter Stansberry:  The White House is lying to you about the dollar The Daily Crux: Porter… our posts regarding the "secret dollar plan" and the recent talk from large money managers about gold received major reader interest. Do you believe the White House really wants a strong dollar? They say one thing and then go out and do the complete opposite. As Richard Russell put it, could we consider the devaluation of the dollar part of their secret plan? Porter Stansberry: Well, let's just look at the facts. Who controls the price of money? The price of money is set completely by the federal government. It's in the hands of the Federal Reserve's Open Market Committee. They can move the value of the dollar in any direction they choose, literally overnight. So for them to pretend that the catastrophic fall in the exchange value of the dollar since 2002 – that's about when the bear market in the dollar started – is out of their hands or in some way not their responsibility is ludicrous. Only the fact that the American people have no real understanding of money allows this charade to continue.-  It would be like being obese and pretending it wasn't your fault that you're overweight. That all of the eating you've been doing for the last seven years had nothing to do with it. So let's just be clear about this. The exchange value of the dollar, which largely controls the price of gold, is completely under the control of the Federal Reserve. So if the current administration actually desired to have a strong dollar, they could have a strong dollar overnight. If the Fed were to come out and lift the Fed funds rate to 3.5%, the dollar would go to beyond parity with the euro overnight. But they can't do that for a couple of reasons. First of all, they can't do it because they can't afford an increase to their own borrowing costs. They're borrowing record amounts of money in every monthly Treasury funding. They also can't do it because it would have a catastrophic effect on the ability of the U.S. banks to repair their balance sheets. The banks have to be able to borrow money from the federal government at a very low rate of interest so they can make a wide profit margin by lending out money for mortgages and credit cards and those things. So the death of the dollar is being orchestrated directly to allow for the repair of the banks' balance sheets. Another way of looking at this is to realize that all of the losses the banks have taken – all of the losses in mortgages and credit cards and car loans – all of that money is going to be printed at the expense of every single American whose paper dollars are devalued. So what is really happening is that, thanks to the FDIC and thanks to the government support of the banks, all of the risks of making loans have been socialized. It's basically impossible for the banks to really go under. When a bank gets closed, its deposits end up with another bank. The system never really shrinks. The debts and the obligations are just passed around and eventually they're socialized by the issuance of more paper money. What we have in our system today is not really capitalism. What we really have is a crony form of socialism where all of the risks are socialized and all of the profits are privatized. So if you're wondering what the hell has happened to your standard of living, you really have two enemies. Number 1 – the federal government, who is robbing you blind by destroying the value of your savings. And Number 2 – big corporate America, namely the banks and the investment firms, whose livelihoods depend on the socialization of their risks. The thing to remember is that one can't survive without the other. The federal government needs the investment community to go along with the huge deficits it's running and to help finance its debts. The investment community in turn requires the federal government to socialize their risks. It's really a mutual understanding that the way to plunder the public is by working together. So that's why you see so many people from, say, Goldman Sachs ending up at the highest levels of government and vice versa. Crux: They have to stay in touch. Stansberry: It's silly to pretend they're on opposite sides of the table. They're not. They're at the same side of the table... at a feast of the American people. Crux: Sounds like a secret plan if there ever was one. Now let's move on to the strange development of large, high-profile investment managers openly criticizing U.S. fiscal policy… and openly endorsing gold ownership. It's not just fringe alternative media or bloggers out there who are pointing these things out. You've now got the world's richest speculator, John Paulson, and hedge-fund manager David Einhorn openly bringing this stuff up... Stansberry: In all of my years in financial research, I have never seen the topic of gold – or the role of gold as the antithesis of government money – spoken about openly on Wall Street before. Never, ever. Now behind closed doors, private meetings, whispers in the back room... absolutely, they speak about it. I can tell you, all of the world's great investors own lots of gold and they always have. And by the way, the U.S. Treasury keeps 80% of its foreign currency reserves in gold. The government itself understands the role of gold. They just don't want anybody talking about it. So there had always been an unofficial understanding on Wall Street that you just don't talk about gold. Like I said earlier, the upper levels of Wall Street are in partnership with the government. They don't want to be seen as promoting gold, which is the antithesis of government money. That's why it was so unusual in the last several months that so many high-profile, major investors – Paulson you mentioned, Einhorn you mentioned – have come out so publicly in favor of gold. This is very unusual. But I will tell you that it's a reflection not only of the current state of monetary affairs but also of a new schism on Wall Street. There are now large, powerful firms on Wall Street whose risks are not socialized. All of the banks have the backing of the regulators but none of the hedge funds do. You'll notice that when a hedge fund has losses or when a hedge fund's manager is arrested for insider trading, which happened last week , the hedge fund actually goes out of business. And its investors suffer the consequences. Whereas for the major firms, the risks are all socialized. They never actually disappear. The sign on the front might change names, and maybe even the equity investors take a haircut… but the real backers, the bond holders, etc., always get bailed out. You've got Bear Stearns for example. Even Lehman Brothers, which everyone says was not bailed out. That's not true at all. If you look at who ended up with all of Lehman's assets, it's Barclays... It's the other major firms. So the pie really never disintegrates when you're talking about the regulated bankers. But on the other side, for the hedge-fund managers, there is no socialized safety net and so those are the guys you see actually talking openly about gold. It's going to be interesting to see if there is an offer made by the government... to see if there is an olive branch extended to hedge funds. Does the government say, "You know what? We want to regulate hedge funds. And in return for regulation we're going to offer you guys more of the socialization of the risks like we offer the banks." And if that happens – I wouldn't be surprised at all to see that happen – is that when the hedge funds stop buying gold? Or at least stop talking about it? Crux: That's an interesting question. As far as gold, is there some price that would tell you all of this jerry rigging they've done has finally caused the wheels to come off the wagon? Would it be $1,500? $2,000? Stansberry: Well, there are two things I think are important when you're talking about the price of gold. The first point is, there is no reliable way to figure out what the intrinsic value of gold is. Gold is the oldest form of money. There's no price-to-earnings ratio associated with it. You can look at the value of gold in lots of different currencies. You can come up with a range of value that makes sense. But the truth is that no one really knows what the price of gold in dollars ought to be. That's the first thing you have to recognize as an investor in gold. You have to be confident in your desire to own ounces of gold, because the value in dollars of those ounces is going to vary widely. Even in the last year, when the economic troubles of America have been plain and open and for everyone to see, you still had a very wide range in the price of gold. Gold has been as low as $700 or thereabouts and it's been as high as $1,070. That's a large price range, which is pretty incredible considering gold isn't an operating business. The real utility of the metal hasn't changed at all – it hasn't changed in all of recorded human history. What would explain the volatility? There's no rational explanation for it, so you can't think of it in a rational way. What should the price of gold be? What's the meaningful price of gold? The answer to the question is I don't know and neither does anybody else. That's the first thing you have to know about gold. The second thing you have to know about gold is the price of gold in dollars is completely at the whim of the chairman of the Federal Reserve. So if you think you're going to see a steady, consistent rise in the price of gold, you're fooling yourself. It's not going to happen. The chairman of the Federal Reserve is going to make speculators in gold pay as much as he possibly can. The government can't allow the price of gold to move too far, too fast. It just can't afford for that to happen. It can't afford for there to be a real lack of confidence in the dollar. They need the value of the dollar to fall and they're happy to see the price of gold go higher, but they don't want it to happen too fast. Now, if you go back and look over the last decade, how many times has there been a 10% or more correction in the price of gold? I don't know off the top of my head, but it happens several times a year. What I advise you to do is, any time there is that kind of a correction, add a little bit more to your gold stash. Or you can do what I do, which is completely ignore the price of gold and just buy more every year. I happen to buy at the end of the year because that's kind of when I settle my accounts. And whatever money I have left over I just put it into gold. I have bought gold at less than $400 an ounce and I have bought gold at more than $900 an ounce. I figure since I can't really know what the price ought to be, the best thing I can do is just average in my cost over a lifetime of buying gold, and that's what I would recommend everyone ought to do. Now, you asked what gold price would signal there's an eminent collapse of the dollar. I would not look to the price of gold to make that assumption. What I would look to is the silver-to-gold ratio. The silver-to-gold ratio has always been an indicator of a monetary crisis. The last time there was a real monetary crisis in the United States was in the late 1970s, and the silver-to-gold ratio peaked at about 16, meaning it would only take 16 ounces of silver to buy one ounce of gold. Right now, the silver-to-gold ratio is around 60, which tells you we're not at any real crisis level yet. As that ratio falls, people are going to get more and more scared about the ability of the dollar to serve as the world's reserve currency. Of course, you know my belief that over the next decade or so the U.S. dollar will lose that special standing. Instead, the world will return to a precious metal standard and it'll be a mix of gold and silver. And at that point, you should see silver basically trading at a price that's 1/16th the price of gold. If you do the math right now, you'll find that silver is very undervalued relative to this historic 16:1 ratio. And so I would say along with buying some gold this year, you should also buy some silver. I don't have any strong opinion about what your personal ratio should be. You should just be aware that silver is going to be a lot more volatile than gold, and as a result I recommend owning a lot more gold than you own silver. Crux: That sounds like a great plan… and it sounds like a good place to end it. Thanks for your time. Stansberry: You're welcome. Editor's note: If you're interested in protecting your family's finances against the dangerous government behavior taking place right now, Porter Stansberry's Investment Advisory is a must-read publication. In just the past few years, Porter has shown readers how to make 75% gains in gold stocks in less than a year… how profit from the demise of Freddie Mac, Fannie Mae, and General Motors… and how to best protect themselves from the coming inflation. At less than $100 per year, "PSIA" is one of the best values going in the advisory industry. You can learn more about a subscription here.