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The Daily Reckoning | Wednesday, September 12, 2012 History’s favorite money finally becomes money once again... Basel III: What it is and why it’s important for gold... Plus, Dan Amoss on why quantitative easing will only serve to increase the value of gold, and plenty more... ------------------------------------------------------- External Advertisement What Romney and Ryan Never Wanted You to Know Mitt Romney won’t release his 2011 tax returns. Meanwhile, Romney’s running mate, Paul Ryan... Well, his net worth exploded by up to 130% over the last 10 years. “It’s absolutely stunning,” says political intelligence expert, Robert Williams, who just released the shocking results of his bipartisan investigation into the secret affairs of Congress. “I now know things that very few Americans know. Shocking things. It’s scary, actually,” says Williams. To view how Romney and Ryan got so rich, and to learn the incredible details around a bill called “Unicorn,” just click here.   Quote of the Day... “The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.” — Ludwig von Mises, from Economic Policy Eric Fry, reporting from Laguna Beach, California...   Eric Fry Extra! Extra! Gold is money again! Read all about it! Yes, Dear Reader, it’s true; gold has become money once again. And not because it was never not money in the first place; that would be too obvious. Gold has become money again because the Federal Reserve said so, as Doug Honig explains in today’s edition of The Daily Reckoning. Interestingly, according to Dan Amoss, gold is likely to remain money for a very, very long time. And not because the Federal Reserve says so; that would be moronic. Gold will remain money because it was never not money in the first place. But we Americans tend to forget that fact from time to time. A large dollop of inflation helps us to remember...and that’s exactly what’s coming our way, says Dan. Read on...   Why “gold $2,000” is a joke... On April 24, 2007... one gold expert said “gold is on its way to $2,000 per ounce.” At the time, gold was trading around $688 and the mainstream figured he’d lost his mind. But anybody who listened had the chance to make up to 175% on the metal alone... and up to three times more on related metal plays, as I write you today.  So what’s this gold expert’s latest prediction? Click here to find out. The Daily Reckoning Presents Gold Just Became Money Again   Doug Hornig On June 18, the Federal Reserve and FDIC circulated a letter to banks that proposes to harmonize US regulatory capital rules with Basel III. BASEL III is an accord that tells a bank how much capital it must hold to safeguard its solvency and overall economic stability. It’s a global standard on bank capital adequacy, stress testing, and market liquidity risk. Here’s the important bit: At the top of the proposed changes is the new list of “zero-percent risk weighted items,” which now includes “gold bullion,” right after “cash.” That’s the part to take notice of. If the proposals are approved by regulators — and that seems likely since adoption of Basel III will be — then this is a momentous change for the gold market. Now banks will be allowed to hold bullion in their vaults and count it among their Tier 1 assets — in other words, the least risky assets. That by itself would be bullish for the gold price, as banks that recognize gold’s unique characteristics seek to stockpile more of it. But that’s not the whole story... Gold Regains Money Status For one thing, Basel III also stipulates that a bank’s Tier 1 holdings must rise from 4% of assets to 6%. That means that banks may not only replace a portion of their existing paper with bullion, but may use it to meet some of the extra 2% as well. In addition, this vote of confidence from the highest monetary authorities gives further impetus to the remonetization of gold. In essence, what’s happening is that from now on gold will be considered “money” in virtually the same way as cash or bonds. And banks will be given the choice between holding more of their core assets in history’s most reliable store of value vs. paper backed by nothing more than the promises of increasingly wasteful governments. Finally, there is the impact on individual and institutional investors. Jeff Clark, in Casey Research’s BIG GOLD newsletter, has been guiding gold investors for years. In his view, this news looks set to really shake up the gold market, because as regulators and banks increasingly view gold as having safety on a par with the various paper alternatives, it is logical that they will also see the need to beef up their own holdings. There are a number of positives for gold going forward. Though it remains speculation on our part, we believe that the net result of Basel III and associated adjustments to US regulations will be an increased recognition of gold’s safe-haven status across all markets. And that translates into higher global demand for the metal next year, and a concomitant increase in its price. If you haven’t done so already, it’s time to get informed on gold and begin adding it to your portfolio. Regards, Doug Hornig for The Daily Reckoning   The “Lost” Gold Bible Congress Never Wanted Anyone To See “Locked away” for almost 3 decades. Kept virtually secret...until now. You’ll soon discover why all the secrecy surrounds this book...and why it would be to your great benefit to read this book now. You’ll also see why I’m doing everything in my power to get this book into your hands for FREE by following one simple step Click here to read more.   And Here’s Why Gold Will Remain Money   Dan Amoss One of the longest-running myths in financial markets is going to damage a lot of portfolios: the myth that central bank money printing — in the context of a modern banking system — hikes the value of stocks. Many academics still think printing lots of money — which is thought topermanently increase stock prices — will lead to some sort of trickle-down economy phenomenon. Ben Bernanke said as much in his famous November 2010 Op-Ed in The Washington Post: “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” Since then, the S&P 500 has rallied from 1,200 to 1,430, mostly on the belief that stocks are a good substitute for bonds. Printing from the Fed and other central banks has front-loaded returns. Front-loading returns means the potential market gains will be depressed. In other words, the Fed’s actions have temporarily pushed stock prices above intrinsic value, and when the Fed stops money printing, stocks could quickly fall back to intrinsic value. Yale professor Robert Shiller created the “Shiller P/E ratio,” which is the most-robust measure of the intrinsic value of the broad stock market. The Shiller P/E ratio is calculated as follows: Divide today’s S&P 500 index by the average inflation-adjusted earnings from the previous 10 years. I look at 10 years of earnings and cash flow data in researching stocks to get a feel for how earning might look in the future. Most investors remain too focused on the quarter-to-quarter minutiae, which often leads to surprises at turning points in the earnings cycle.  The Shiller P/E of the S&P 500 is currently 23 — 50% higher than its long-term average. The average Shiller P/E ratio since 1880 is about 15. A move back to the average would take the S&P 500 back to 930. A move to bear market low valuations would take the S&P 500 back to roughly 400. Right now, it’s 1,432.  The Fed can’t grow the intrinsic value of stocks. Companies can do that only by earning returns above their cost of capital.  In the coming quarters, many companies that had been earning returns above their cost of capital will be earning lower returns. Free cash flow will follow returns lower. Look at Intel’s latest revenue warning; look at FedEx’s earnings warning. Profit margins have peaked in many industries. Manufacturing companies exporting to Europe and China will continue to suffer. Apple can hold neither the stock market nor the economy up.  Meanwhile, household budgets out in the real world are straining to the breaking point. This morning’s data showed the US labor force participation rate at a terrible 63.5% — the lowest in 31 years. So Ben Bernanke is responding to this silent crisis the only way he knows how...by pushing repeatedly on the “print money” button at the Federal Reserve. He calls is “quantitative easing,” or QE. And it’s my bet that QE3 is coming soon to a nation near you. With each successive round of quantitative easing, demand for gold and other stores of value will rise and demand for stocks will weaken. As I observed in this column last Friday, “Fed officials have been all over the media for weeks, laying the groundwork for a third round of quantitative easing. By preparing markets for QE3, the Fed refuses to let real-world evidence get in the way of its beloved theories...Perhaps once the global paper money system is restructured, involving some sort of gold standard, sanity will return to the Fed and other central banks. Until we see more signs of sanity, hold a core position in gold, silver, and precious metal mining stocks. These asset classes will be the prime beneficiaries of future printing.” Regards, Dan Amoss for The Daily Reckoning