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The author is running the precious metals portal GoldSilverWorlds.com. He holds a university degree in Applied Economics. He is dedicated to help people understand the real benefits of owning gold and silver, by explaining their monetary and economic value in applying it to today's market... More
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  • How Our Monetary System Works And Fails

    Where does money come from? Is its value constant or does it change? Are there risks associated with money? These are all important questions, because today's monetary system combined with fractional reserve banking has a lot of risks. It is vulnerable to bank runs, inflation, and economic bubbles, to name just a few. Yet, those risks remain invisible to the majority of people. Global Gold Switzerland released a research note "Real vs false money" and a short educational video. They explain how our current monetary system works, where it fails and how you can protect yourself against it. The video is available on Youtube.

    In this article we extract twelve insights from the extended report.

    1. Governments have a track record of diluting the value of their currency. History is full of examples where governments started mixing worthless metals into gold coins as soon as they ran into financial trouble.
    2. The first documented case of fraud by a banker dates back to the year 393 BC. A banker called Passio used bribes and falsified documents to misappropriate the gold which was entrusted to his bank. It became a widely used practice of goldsmiths and other depositories to lend out the gold which was handed to them for safekeeping; earning interest on lending out gold in the form of receipts; which was not legally theirs.
    3. The ancient Greeks were the first to use gold coins: The Drachma. Different civilizations in history, like the Greeks, Romans and the history of city states in Italy, have proven that the blossoming of these Civilizations took place when they adopted Gold or Silver based currencies.
    4. The economic and social collapse of the Roman Empire was caused by the inflationary policies of the state; which reduced the purchasing power of the currency. On the other hand, price caps were set for basic goods. This led to the demise of many businesses and brought trade in the Empire to a halt. This development brought banking to an abrupt end. It took nearly 800 years until the banking system was rediscovered during the Middle Ages in the Italian cities.
    5. The gold coin "Solidus" was the world currency for over 800 years. It was used from China to Britain during the Byzantine Empire. At the end of the empire the currency was issued only in silver and minor copper coins with no gold issue.
    6. Banks and governments have been acting as an "alliance" till this day because the fractional system benefits both. Why? Because governments give the banks the right to "print money". In exchange, they expect the banks to buy their bonds (which is nothing more than debt) so they can continue to spend money which they simply don't have.
    7. If the gold standard had not been abandoned, World War I would not have lasted longer than a few months. Without the Gold Standard, however, the war went on for more than four years, ruined leading economies and claimed millions of lives.
    8. Before becoming the chairman of the Fed, Alan Greenspan wrote: "This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the Gold standard".
    9. Since 1971 the world is on a paper based reserve currency. There is no gold backed currency anywhere on the planet. This has never happened in the last 3,000 years.
    10. Gold was "demonetized" on August 15th 1971. US President Nixon said he would "temporarily" close the gold window. He also said that US citizens would be better off, as the dollar would hold its value. Since then, the value of the dollar has lost some 90% of its value since then.
    11. History has shown that governments are too often undisciplined. When they go too far the market loses trust in their currency, which results in hyperinflation. In the 20th century alone, we have seen 50 hyperinflationary periods across the world.
    12. Debt levels are not sustainable anymore. The situation is essentially dramatic. But there is one concerning fact: Somebody has to pay for it.

    Physical gold (NYSEARCA:GLD) and silver as an alternative currency protect purchasing power on a long term basis. They should not be seen as trading vehicles.

    Download the report "Real vs false money"

    (original source)

     

    Disclosure: I am long GLD.

    Business relationship disclosure: GoldSilverWorlds released this video for Global Gold but is not receiving any compensation related to this article.

    Jul 23 9:52 AM | Link | Comment!
  • Diversify Some Of Your Fiat Money Into Gold Before It Is Too Late

    Since the middle of October the price of gold has been building some solid support above the $1700 an ounce level. However, it continually came into selling resistance at the $1720 an ounce and then again at the $1740 an ounce. All of this selling pressure can be attributed to the action of traders and especially those on Comex, meaning none of the selling was for hedging purposes and none of it had anything to do with an increase in the supply. Nevertheless, traders were able to influence prices using massive sell orders in this paper market.

    The gold market then went on hold as it waited for an outcome of the US election. Then, there was constant talk about an imminent attack on Iran by Israel, and then it was the strikes at the gold mines in South Africa. But, none of these issues are the real driving force behind the gold price at the moment.

    Suddenly, the turmoil in the Gaza area was supposed to send the prices of gold higher, but in actuality, they had little to no impact on the price of the yellow metal. In fact, two days after the cease fire, prices rallied sharply. The threat of escalating violence in Gaza has dissipated for the time being as a ceasefire went into effect in and around the Gaza Strip, after Israel and Hamas agreed to cease hostilities. The Egyptian foreign minister announced the ceasefire agreement hours before it took hold at 19:00 GMT on Wednesday.

    Last Friday gold prices rallied sharply sending the price through a key resistance level of $1740 an ounce before piercing its 50 day Moving Average. The price of the yellow metal spiked due mainly to a weaker dollar and money moving into a broad range of risk assets. The upside move in gold was also aided when it broke through a key technical resistance level and triggered a wave of buying. However, it is still much too early to say that this is a decisive break above the $1750 an ounce level.

    As I have already mentioned the situation in Gaza had little impact on gold prices, and the price has been driven by other factors, in particular the deteriorating situation in the Eurozone and the uncertainty over the U.S. "fiscal cliff."

    At their latest summit in Brussels, European policy makers failed to agree on a seven-year budget for the bloc. European Parliament President, Martin Schulz, told the 27 European Union heads of state and government gathered in Brussels, that they were acting "extremely irresponsible," when they failed to agree on the necessary funding for the €1.091 trillion budget proposed by the European Commission.

    Every seven years, European Union leaders must come together to agree on a new spending plan, and this year's Commission proposal has been particularly controversial. At a time when many EU countries have tightened their belts significantly, an increase to the EU budget, slight though it may be, has not proven popular among net contributors. The UK would like to see the budget cut to between €890 billion and €960 billion and Germany proposed the budget should be around €960 billion) However the remaining countries have supported the higher figure proposed by the Commission.

    European policy makers have now turned their focus to providing funds to keep Greece solvent. The Eurozone finance ministers held a conference call on Saturday to prepare for their third meeting this month, today about Greece's rescue.

    "There's no time to waste" in finding a solution for Greece, German Chancellor, Angela Merkel, told reporters on Saturday in Brussels. A plan "is being intensively worked on," she said.

    European commissioner, Rehn, said that he saw "no reason why we should not be able to conclude the package". Meanwhile, German Chancellor Merkel also said that there were "chances to get a solution on Monday". So, we'll just have to wait and see.

    After a marathon meeting on Monday night, European finance ministers finally agreed on a deal for Greece, opening the way for the latest installment of bailout money to be released - a crucial measure if the country is to avoid a catastrophic default on its debts and an exit from the single currency.

    The first disbursement is set to take place Dec. 13, said, Jean-Claude Juncker, head of the Euro group of finance ministers. According to, Juncker, the deal includes a plan reduce Greece's debt level to 124% of its gross domestic product by 2020 and below 110% by 2022. The IMF had originally insisted on a debt-to-GDP ratio of 120% by 2020.

    It will also include a cut of 100 basis points on the interest rate charged to Greece by other Eurozone member states - excluding those that are also receiving bailouts.

    "This is not just about money," Juncker said. "It is the promise of a better future for the Greek people and for the euro area as a whole."

    The head of the IMF, Christine Lagarde, also said the agreement was significant.

    "We wanted to make sure that Greece was back on track," Lagarde said. "If you put it all together it is a significant amount."

    Greece will get €34.4 billion ($40.84 billion) straight away and the rest in separate installments in January, February and March.

    The money is going to prevent Greece from defaulting on its debt obligations and to also pay thousands of government workers. But, will it do anything to revitalise the Greek economy, I doubt it.

    Despite the rhetoric of most of the European leaders, things in the Eurozone are not improving at all, and instead they are simply getting worse daily. As these leaders continue with their hopeless attempts to cover up the real situation, prudent investors are losing faith with the global fiat currency system and are looking to diversify into hard assets especially gold and silver.

    For years the scoundrels who have run the global central banks tried all sorts of tricks to have gold deleted from their list of monetary reserves. They swapped, leased, and sold as much gold as they could as they ploughed into paper assets in particular the US dollar and US Treasuries. But, like everything in life, this cycle is now coming to an end, and things are changing around the world. And, as the US dollar looks set to lose its pre-imminent position as the reserve currency of the world, central banks are becoming more concerned about the value of their paper assets and some of these banks are accumulating as much gold as possible.

    Even though global gold demand in the third quarter was down 11% from a record high in the third quarter of 2011, and demand from China fell by 8% according to the November 2012 World Gold Council Gold Demand Trends Report. The decline in Chinese demand reflects a 6% drop in jewellery demand and negative sentiment sparked by the slowdown in China's economy. At the end of September, China's economy had slowed to its slowest pace in three years. Despite the global slowdown, demand for gold remains resilient.

    According the World Gold Council (WGC) demand for gold bullion bars and bullion coins fell in the third quarter. The WGC stated that the demand from this category of investment was 30% weaker year-on-year at 293.9 tons, translating to a 32% decline in value to US$15.6 billion. The WGC also stated that since the demand last year was exceptional, the comparison is a somewhat distorted. "It is important to note the extent to which the year-on-year comparison for bar and coin demand is affected by the extraordinary levels of demand witnessed during Q3 2011.That quarter saw a record 422.1 tons of bar and coin demand which was almost double the prevailing 5-year quarterly average". Investors reacted to the conditions of the time: a worsening of the European debt crisis, a weaker US dollar, a US debt downgrade, poorly performing equity and credit markets and rising inflationary pressures all strong drivers of demand for gold.

    Investors in Europe particularly in German speaking markets accounted for over 50% of the 128.1 ton decline in bar and coin demand as investors were less aggressive in their purchases relative to Q3 2011.

    The drop in demand for gold and coins was largely offset by an increase in demand for ETF's, and medals/imitation coin segments. Investors who are concerned about the consequences of additional monetary stimulus seemed to add to the ETF positions. On a year-on-year basis, ETF demand was the strongest performing sector generating a 48.6 tons increase in demand. At 136 tons, Q3 was the strongest quarter since Q2 2010.

    The report also indicated that the demand for gold from India is beginning to recover. Demand was up 9% to 223.1 tons from 204.8 tons in Q3 2011 following increases in both jewellery and investment demand. In comparison with Q3 2011 jewellery demand was up 7% to 136.1 tons and investment demand rose by 12% to 87.0 tons.

    Central banks bought 97.6 tons in Q3. Marcus Grubb, Managing Director, Investment at the World Gold Council said:

    "Gold is beginning to re-establish itself as part of the fabric of the financial system. In the medium term, the quantitative easing initiatives in the West and the continuing growth story in the East, particularly in India and China, coupled with the seasonally strong quarter coming up in Asia, are excellent indicators for further growth in the gold market.

    "Against a backdrop of continued global economic uncertainty and elections in China and the US, it is clear from five year rising demand trends that gold's fundamental property as a vehicle for capital preservation continues to endure, as evidenced by this quarter's increase in global ETF investment, up 56% and continued purchasing by central banks, the ultimate long term investors."

    Another development taking place amid all this economic turmoil is that more central banks are being forced to reveal the exact situation regarding their gold reserves. This implies that global central banks are taking their gold holdings a lot more seriously than they have in many years. In many instances most of the gold is still being held outside of the respective countries in the major bullion centres such as London. The concern of these banks is whether their physical gold can be accounted for or not.

    The price of gold has held above the $1700 an ounce level and with continued accommodative central bank monetary policies, the demand for gold and silver as a hedge against inflation and exposure to the debasing of industrialised nations' currencies will remain very strong.

    It is clear that gold is been recognized as alternative to the global fiat currencies. And, as it gains in importance in the global financial system, you had better be sure you own some physical gold. And, for those investors who own euros, my advice is to swap them for gold.

    Technical picture

    (click to enlarge)

    Now that the price of gold has broken above another level of resistance set at $1740 an ounce, and has pierced the 50 day Moving Average, the price action will be closely watched over the next few sessions to see if it can hold these levels.

    The author of this article is David Levenstein from LakeShoreTrading. He is a leading expert on investing in precious metals.

    This commentary appeared on GoldSilverWorlds.com.

    Tags: GLD
    Nov 27 3:18 PM | Link | Comment!
  • Peter Schiff About Gold, Fiscal Cliff And Real Economic Growth

    Earlier this year, Peter Schiff published his book "The Real Crash", which explains how an economy grows and how it crashes, in simple language. Yesterday's Black Friday appeared to be an ideal event to explain again the basic principles he presents in his book. The author commented on the picture of Black Friday that the media has created: people stepping out of warehouses with their shopping carts full of goods. He points to the key problem that the all those goods are produced in other countries (in this case, seen from the perspective of the US).

    Peter Schiff explained in his book and he repeats again that "it's not the buying" but "it's the making" that is growing the economy. Buying goods is the result of production, but you cannot consume what you haven't produced. A strong economy is one that produces a lot. The author repeats over and over again that what we really need is more production and less consumption. If we wouldn't have had all these bailouts of several financial institutions, the system would have been able to restore on itself.

    Gold has been much stronger than the stock market recently, especially with the down day of the Dow Jones on Friday and the intraday rally of gold (with the Dow Jones to Gold Price ratio reaching almost a decade low). The dollar index was also down. Peter Schiff believes that those market actions are related to the economic expectations and the fiscal cliff, as it becomes more obvious that the President and the Congress will work out a solution to avoid to go over the fiscal cliff. Now here it gets interesting. Peter thinks that going over the fiscal cliff will be the first step in reducing deficits, based on tax increases. He believes it would be much better to cut down government spending, as it would result in freeing up resources from the public to private sector where they can be used more efficiently and productively. That's how Peter believes an economy grows, led by a decrease in debts.

    Five key insights about the US federal budget and fiscal cliff (source: video from the Wall Street Journal):

    1. In 2011 - 63% of all spending was on autopilot to pay for promises made in the past. Those expenses included social security, Medicaid, Medicare, subsidies and debt interests. It means that all debates and discussions in Congress affect only the remaining 37% of the expenses.
    2. One out of 4 dollars goes to healthcare. In 1960 it totaled less than 10% of spending, today it makes up for 25%. The next decade it is expected to rise to 33% unless a fundamental change takes place.
    3. The governments employs 4 million people. Most of us think that it would be helpful to decrease that number, but the truth is different. Suppose all 4 million people were fired, it would save 435 billion dollar, which is even not one third of all expenses.
    4. The defense expenses amounted 700 billion in 2011. The defense budget of the US alone is bigger than the next 17 countries combined (China, UK, Russia, France, Japan, Saudi Arabia, Germany, India, Italy, Australia, Turkey, UAE, Israel, Spain, Brazil, Australia, Canada).
    5. The share of income that families pay has been falling for more than 30 years. In 1981 a middle class paid 19.2% to federal and related taxes. In 2007 the amount has decreased to 14.3%. It means that the rich pay more and that the governments borrows much more (i.e. 36 cents per dollar for every dollar spent, coming mostly from abroad).

    Back to Peter Schiff. He makes a very interesting point. The "Keynesian way of thinking" says that a decrease in government spending hurts the economy, so their attempt is to avoid spending cuts and opt for tax hikes. Peter argues that the key objective should be to avoid deficits, because that's the real issue. If a choice need to be made between continuing deficits or taxes hikes, then higher tax hikes are the best solution. However Peter points out that Congress has a history of not using tax hikes to reduce deficits, they mostly spend the extra revenue as well, which is the worst of all options.

    In closing, Peter believes that the markets are slowly but surely coming to the same insights. Going forward, his expectations are that first the currency will be impacted, followed by an appreciation of gold. Eventually the stock and bond markets will start suffering.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: GLD, DIA
    Nov 25 1:29 PM | Link | Comment!
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