Charlie Munger, Warren Buffett’s partner in crime at Berkshire Hathaway, told CNBC recently, “I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold. They invest in productive businesses.”

In a way, Munger is correct. Gold is uncivilized in the sense that it functions best when civilization functions worst. The more uncivilized a society becomes, the more civilized gold becomes.

So the easiest way to dismiss this statement is to say that maybe it’s 1939 again and maybe this time “we’re all Jewish families in Vienna.” But let’s not let Charlie off the hook so easily. Instead, let’s “unpack it,” in the words of our tutors at St John’s College in Santa Fe, New Mexico. To ‘unpack it’ we need to focus on two key words in Charlie’s statement: “productive” and “civilized.”

Charlie might be right if the world were, indeed, civilized. But maybe the modern world isn’t as civilized as he thinks. Part of what made the world so uncivilized in 1939 was unsound money. The abandonment of the classical gold standard in 1914 made the expansion of the Warfare state possible. The equally unsound system that emerged from World War I — including the Treaty of Versailles — virtually guaranteed that monetary and fiscal instability would lead to political instability. Radical parties like the Nazis flourished.

Gold, on the other hand, is sound money. You are not buying it for a capital gain. You are buying it, by our reckoning, as a way of preserving purchasing power. You extract paper from the fiat money system and turn it into something (bullion) you can later exchange for whatever currency emerges when the financial system becomes more civilized.

Interestingly, for more than a decade Berkshire has underperformed gold — the investment asset Buffett recently called “forever unproductive.”

Since 1997, Berkshire’s shares have declined relative to this forever unproductive asset. The nearby chart depicts the trailing 10-year return of gold since 2007. Thus, the first data point on this chart shows the return an investor would have received from buying gold or Berkshire Hathaway in 1997. Moving across the chart to the right shows subsequent 10-year time frames. Bottom line: Based on a 10-year holding period, there has not been a single moment since late 1997 what an investor would have been better off buying Berkshire Hathaway instead of gold.

No wonder Charlie is so cranky!

This lengthy underperformance by Berkshire may explain Buffett’s and Munger’s very vocal and public hostility toward gold. Or maybe that’s just a function of both men living most of their adult lives in an era where the monetary system was not disintegrating. They are unable to imagine it.

But the chart above isn’t an indictment of the investment acumen of Buffett and Munger. It’s an indictment of the world’s fiat monetary system! A civilized society with civilized people has sound money. An economy with sound money has price stability. This stability allows for long-term planning and investment. This stability rewards investors for identifying which businesses are the most productive and efficient users of shareholder capital.

For these exact reasons, William McKinley campaigned for President in 1896 and again in 1900 as a champion of the gold standard. He won…twice. But just 12 years after his assassination in 1901, the Era of Incivility began: The Federal Reserve came into being. Just 20 years after that, FDR confiscated all privately held gold. And 38 years after that, Nixon cut the dollar’s last remaining ties to gold, thereby establishing today’s very uncivilized “fiat money” system.

In an uncivilized society, where the value of your labor is stolen through inflation (made possible by an unsound money system) long-term planning and investment become much more difficult, if not impossible.

If you accept that we live in civilized monetary times where productive labor is actually rewarded, your brain has been tranquilized by the Big Lie of our times. Munger wants you right where you are. The less you think about how uncivilized the current monetary system is, the less likely you are to question it or disrupt it (which would be inconvenient for Charlie).

But if you live an era that subverts accurate valuation of productive businesses — an era that subverts the productivity of the economy itself by encouraging debt and consumption, owning gold seems prudent, not wacky.

Uncivilized times call for uncivilized investments.

Regards,

Dan Denning
for The Daily Reckoning

Uncivilized Investing originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

There you have it. If you possess absolutely no gold, other than maybe a tooth filling, you are civilized. Congratulations!

If, however, you’ve stashed a few Krugerrands under your mattress, we’ve got some bad news for you. You are hopelessly uncivilized — a financial Neanderthal, deserving of pity from your civilized counterparts.

“I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939,” Munger remarked recently, “but I think civilized people don’t buy gold. They invest in productive businesses.”

Yes, that’s right, Charlie. Civilized people invest in productive businesses…until an uncivilized government decides to steal it, or merely tax and regulate it into oblivion. Some Jews in Vienna in 1939 operated extremely productive businesses. Unfortunately, they could not stitch any of those into their garments.

In other words, Charlie, civilized investment strategies function in civilized societies. In uncivilized societies, gold is usually a better bet. Or to put it another way, as civilizations lose their civility, share prices fall and gold soars…which is exactly what has been happening here in our beloved US of A.

During the last decade and a half, the investment return of Berkshire Hathaway, perhaps the most civilized of American stocks, has trailed far behind that of gold. Civilized folks like Charlie Munger and Warren Buffett consider that 15-year trend a fluke. Maybe so. Or maybe this trend is a warning that America is becoming a bit less civilized — a bit less friendly to productive businesses.

Notwithstanding this trend, civilized folks know better. They shun gold in order to invest in the shares of overhyped social media companies, highly leveraged banks, bonds of bankrupt governments and complex derivatives that are impossible to value precisely… until they go to zero… at which point their precise value is known.

That, Dear Reader, is civilized!

But there is one additional echelon: the über-civilized investor. Über-civilized investors shun gold to invest in über-complex derivatives. These are the folks like Warren Buffett who do not merely shun gold, but also belittle it very publicly while loading up on highly leveraged finance companies that are loaded up on complex financial derivatives.

Often, these banks are run by über-über-civilized investors — the kinds of guys who do not merely load up on complex derivatives, they load up on complex derivatives linked to the bonds of bankrupt governments. Then they utilize a “risk control” methodology that has a perfect record of failing to control risk.

You just can’t get any more civilized than that.

Eric Fry
for The Daily Reckoning

Investing in Gold as World Economies Falter originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The talk about a Grexit softened its tone a bit yesterday. The markets were basically saying that Greece could exit the euro (EUR) this weekend! The US is obviously on holiday this coming Monday, and that fact has factored into the calls for an exit this weekend.

Again, I don’t see this happening, as the cost to Greece — the pain and mess — will be far greater to the Greeks than their austerity measures, should they decide to leave. So I’m on the side of the fence that says Greece stays.

The EU summit was a nonevent. EU leaders left the summit without any meaningful plans. They all agreed that Greece needed to stay in the eurozone, but could not come up with any meaningful action that could be taken.

If you go back in time, when the Greek debt problems first called for a bailout, and the markets all thought that the contagion effect would take over all the southern eurozone countries, I told you then that the only way to deal with this — so that there would be no further contagion — is to issue a eurozone bond, and quit having each country hold their own auctions.

Yes, it takes another chink from each country’s sovereign armor, but when each eurozone country decided to give up their sovereignty of their currency, they opened the Pandora’s box of how to lose one’s sovereignty.

So now skip ahead to the EU summit, in which discussion of a eurozone bond would have nipped the daily flogging of the euro in the bud, the EU leaders decided to push that discussion off to the next summit. What? These guys are really beginning to give me a rash! What the heck are they thinking? Oh, I know, they are thinking that maybe with time, the problem goes away, and they don’t have to have that eurozone bond discussion.

My dad used to tell me all the time that most problems will take care of themselves with time. However, I think the EU leaders have chosen the wrong road to journey down. They needed to address this problem right away! So they decided to see if the problem would take care of itself, with time. I’m sure they will rue the day they decided to journey down this road.

OK, the euro this morning is down just a bit, as it shrugs off the nonevent EU summit, and the news this morning that German business climate, as measured by the think tank IFO, fell by the largest one-month margin (negative three points) since August 2011. The experts had thought it would be a negative number but a soft negative number, not a hard negative number.

German flash PMIs (manufacturing indexes) also are showing some weakening. So even the calm in the eye of the eurozone storm, Germany, is showing that the overall weakness in the eurozone is hurting them, too.

Speaking of PMIs, in China, we always get two sets of PMIs. The government issues their report on the pulse of manufacturing, and HSBC (Hong Kong and Shanghai Banking Corp.) issues theirs, and never do the two match up. For instance, last month, the government issued a report that said that manufacturing as measured by the PMI was a number above 50, and HSBC issued a report that said it was below 50. (Remember, 50 is the line in the sand that denotes whether manufacturing is expanding or contracting.)

I always grow suspicious of government reports that don’t line up with those in the private sector. Take the U.S. economic reports versus ShadowStats. There are HUGE discrepancies between these two, but the sheeple here in the U.S. don’t pay attention to any of this. Whatever the government tells them, they swallow hook, line and sinker.

Anyway, getting back to China, the HSBC PMI report showed a seventh month of below 50 for April. The government report is usually printed on a weekend, so we’ll see what this has in store for us this weekend, as the pools open here in the U.S. (ours has been open for a month!) and the smell of charcoal drifts through each neighborhood and we sit back and reflect on the meaning of Memorial Day.

Did you know that Memorial Day was originally called Decoration Day? And that it originated after the Civil War to commemorate the fallen Union soldiers of the war? Notice, it was only the Union soldiers. Apparently, the South held their own Decoration Days in each region on different days. We joined this all together and called in Memorial Day, to honor the men and women that had died while serving in the U.S. armed forces, and later, we said it would be the last Monday of May.

There you go! A public service education announcement! You get it all here, folks! Why go to any other newsletter? Just kidding. Of course, absolute newsletter reads that I have include: The 5 Min. Forecast, anything David Galland writes, Doug Casey, Bill Bonner, David Rosenberg and I even carve out time for my friend John Mauldin once a week, and of course, the Mogambo Guru!

I wanted to write about this yesterday, but forgot all about it until I had hit “send”! UGH! But did you see the latest existing home sales data here in the U.S.? Very strong, and for the first time in a year of Sundays, the home price increased! WOW! Did we just hit the bottom for home prices? Somehow I can’t get my arms around that thought. I just think about the unemployment situation, and the foreclosures coming down the line, and have to think that this was just a one-month blip. But maybe I’m wrong, and it’s time for me to stop being such a negative Nellie.

I really wanted to send Chris a note on this last week, and then something happened that took my attention away from the story. Then I thought I would talk about it first thing this week, but then something happened to take my attention away from the story, so now on Wednesday afternoon, while I’m thinking about it, I will write it down for Thursday. And it’s Thursday!

Basically, I wanted to talk about sentiment, and focus. While everyone was having a cow over the Greek debt and whether they would form a new government and all that, the eighth-largest economy in the world announced that they had miscalculated their budget deficit and what had previously been forecast to be $9 billion turned into $16 billion in deficits. That eighth-largest economy in the world? Not Greece… not Spain… not Italy… but the great state of California.

The sentiment right now is that the eurozone’s center will not hold together, and the focus is on the eurozone’s problems, not those here in the U.S. with the same thing: debt. Trader sentiment and focus is all that’s needed to either make a currency’s day or send it up the creek without a paddle. And right now, the euro has been sent up the creek without a paddle.

Gold and silver saw another day of selling yesterday, and are down once again. (I have some words on this from Ted Butler later today). And the Australian dollar (AUD) has bounced higher this morning. I have given you two measures that are used to calculate if a currency is oversold in the past week and both showed that the A$ was oversold. But that doesn’t always mean that traders will jump to buying, in this case the A$ immediately. Not with the U.S. dollar strength so prevalent in the markets right now. But they will. Traders can’t break free of their urges to react to charts and index measures.

Hey! I just watched the price of gold go from a negative $5 to a positive $5 in less than five minutes! WOW! Maybe the shiny metal can catch some wind in its sails today.

The 7-year U.S. Treasury auction was interesting. The yield on the 7-year note fell to 1.13%. That’s a record low yield, folks. And just when I thought that yields couldn’t really get much lower! I’m sitting here with the thought of “Yes, Virginia, Treasury yields can go lower.” Hey! For the award of financing U.S. deficit spending, you can get 19 basis points of yield out one year. Of course, by the time the broker takes his pound of flesh for doing the trade, you probably end up with a negative yield. And I hate to break this to all you U.S. Treasury buyers, but unless you go out 30 years, you have negative real interest on your holding (real interest is the yield — inflation).

And then the two anti-dollar investments, oil and gold, which have been butchered lately with the dollar strength, at least didn’t lose any more ground overnight. I’ll have to go read the Mogambo Guru to see what he’s thinking these days about the price of oil and gold.

Then, from Ed Steer’s Daily: “This is Ted Butler speaking… ‘The price action this week has been horrid. It is horrid because the crooked commercials on the Comex have made it horrid. There is no legitimate economic justification for the price decline since Feb. 28 other than the price action was created to permit the commercials every opportunity to scare and induce others into selling Comex contracts so that the commercials could buy. Almost every day, the price of silver and gold seem to be put lower in thin overnight trading. Almost every day, we start out “in the hole,” where it is a struggle to get back to unchanged. This is not accidental; it is a deliberate plan to demoralize and keep silver investors confused. It is shameful that the CFTC has been captured by the crooks and is content to look away.

“‘The good news is that the commercials have succeeded in buying record amounts of silver (and gold) contracts. It’s impossible to pick the timing of the next rally, as we are in a sort of “no man’s land” currently, where technical-type buying won’t come in until the moving averages are penetrated to the upside. There still doesn’t appear to be much speculative selling remaining in silver and gold after the orchestrated takedown of the past couple of months, but neither is there any impetus for technical buying below the moving averages. In this environment, it’s not hard for the commercials and HFT practitioners to put prices sharply lower at will. About the only sane reaction to all this is to accumulate and hold physical silver for the long haul, as the short-term manipulative games won’t last forever.’”

Last week at the Las Vegas Money Show, the booth across from ours was Investment Rarities, which is Ted Butler. One of the guys in their booth came over to me and told me what a fan he was of the Pfennig. And I was like, “When you have Ted Butler? WOW!”

To recap: There was blood in the streets yesterday with the risk assets, as the asset prices dropped all day long. Today, we’re seeing some light — not much, but some, for the risk assets. German IFO and flash PMIs say that even Germany is weakening. The eighth-largest economy in the world announced that their budget deficit was $16 billion, not the $9 billion they originally told everyone it would be. And yes, Virginia, U.S. Treasury yields can go lower.

Chuck Butler
for The Daily Reckoning

Currencies Try to Rebound Today originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Grexit — that’s what is being talked about this morning. Grexit is a “Greek Exit,” See how I put the two together? Simply genius, eh? HA! Seriously, this talk of a Grexit has really put the euro against the ropes

This talk of a Grexit is really beginning to get loud, folks. But let me be perfectly clear here: Leaving the euro is NOT the answer to the Greek problems, and I truly believe that a few years from now, the Greeks will regret this Grexit.

Bloomberg had a great article this morning that listed what the Greeks would have to do in a 46-hour period should they decide to leave the euro:

“Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.”

I was on a call with a couple of other analysts a couple of months ago, and this topic of a Grexit came up, and I was alone in my thought that leaving would be very difficult and messy. I think this will be the case should the Greeks decide to leave the euro.

This Grexit talk has really gotten louder since the caretaker government of Greece made overtures about “renegotiating the terms of its bailout.” Hardliners in the eurozone will NOT go for that, and knowing that, the markets are preparing for a Grexit. That, my friends, is the main reason the euro is taking a ride on the slippery slope.

When I say the “rest of the currencies” are following the euro down the slippery slope, that doesn’t include Japanese yen (JPY), which is a currency on its own course. I’ve said all there is to say about the yen, so I won’t bore you with repeats.

I say don’t go against the trend that’s in place, and that trend is to flock to the so-called safe havens — dollars and yen. Swiss francs (CHF) used to be in that category, but with the “games” the Swiss National Bank (SNB) played with the franc last year, traders don’t want to touch francs with someone else’s 10-foot pole!

And who knows? The SNB could be selling francs into this dollar strength, to further weaken the franc. I wouldn’t put it past them.

One of the anti-dollar investments — oil — has really seen its price plunge, and that’s not surprising to me, given the dollar’s strength right now. You see, it’s all about the petrol-dollar.

But what’s going to happen to the petrol-dollar next month, when Iran opens its Oil Bourse, in which oil can be purchased with any currency, not just dollars? Maybe not right away, but should the Oil Bourse gain traction, it should be a real pain in the side of the dollar and the U.S.

I can tell you right now, folks, that all the saber rattling with Iran is not truly about their nuclear capabilities. The reports I read say Iran is 10 years away from a weapon of mass destruction, but you won’t hear the U.S. leaders say that, because they have to keep the focus on Iran’s nuclear capabilities. The real reason that all this saber rattling is going on is that Iran is going to open this Oil Bourse.

Now, that’s probably something you hadn’t heard or read about. But that’s me — always digging for the stories that fly under the radar. Like the story I saw go across the screens briefly yesterday — The U.S. Commerce Department has imposed tariffs of 31-250% on Chinese solar panels. Back in 2001, when I wrote the white paper called The Decline of the Dollar, I began to write that white paper because President Bush had just affixed tariffs on Japanese steel.

And while being protective of American Industries sounds good, the unintended consequences is that protectionism is one of those things that cause chinks in a country’s currency. So like in 2001, the hit to the dollar didn’t come immediately. I think this hit to the dollar will follow suit, and it will be some time before we see it cause harm to the dollar.

The European Union (EU) summit is going on as my fat fingers type away here this morning. This summit is going to be a real dogfight, and that won’t help the euro any. In the blue corner, we have French President Hollande, who wants to pull off the austerity measures and promote growth with spending (same old dookie, right?), and in the Red corner, we have Germany’s Chancellor Merkel, who will dig her heels in on the austerity measures.

But things can’t be that bad. A German auction of bonds/debt this morning saw great demand, and the issue was oversubscribed, and the yield for 10-year bunds fell to the lowest level in some time. And France also saw good demand at their bond auction this morning. And yes, just here in the U.S., where the Fed buys 61% of Treasury auctions, the European Central Bank (ECB) could very well be doing the same. I don’t think so. But I could be wrong!

One of my trading partners (thanks, Shauna) sent me some research her firm had done on India the other day — and folks, it doesn’t look good. This morning there is an article in The Times of India talking about an Indian default! “Market players are starting to worry that India’s deepening economic crisis and political paralysis could drive Asia’s third-biggest economy into default, according to the International Financing Review.”

Gold is down another $15 this morning. There just doesn’t seem to be anything to stop this slide as another anti-dollar gets whacked by the dollar strength. And we’re coming into the “traditional slow months” for gold and silver… the summer months. Last year was an exception, as gold hit its high during the summer, but you have to go back to last summer. And remember that the debt ceiling debacle was taking place, along with a downgrade for the U.S. Gold should have been going higher with stuff like that going on! And lookie, lookie… what do we have here?

Another round with the debt ceiling, which should come about by late summer. Are you with me that this could get really ugly with this being an election year? That’s why I think — and is my opinion, which could be wrong — that this current dollar strength will last until late summer.

Then from Forbes:

“Add it to the growing list of people going after JPMorgan Chase. Employees are suing the bank over the $2 billion trading loss that they say hurt their retirement plans.

“A lawsuit filed on behalf of JPMorgan employees says their retirement accounts fell in value after news broke about the trading loss, Reuters reports. That’s because the plan holds JPMorgan shares, which have dropped 18% since the loss was announced on May 10.

“The complaint, filed in U.S. District Court, Southern District of New York, names the bank, its CEO and chairman Jamie Dimon as well as former CIO Ina Drew, who resigned soon after the loss was revealed, as defendants. According to the suit, the defendants violated the federal Employee Retirement Income Security Act which gives plan participants the right to sue for breaches of fiduciary duty.”

OMG, what’s next?

To recap: The two-day calm in the currencies ended overnight as fears of a Greek exit from the euro are really strong after an EU official said that there would be no renegotiating of the bailout terms for Greece. The EU summit begins today and should become a real dogfight between the southern countries that want to spend and promote growth and the northern countries that want to continue the austerity measures. Gold and oil — the “anti-dollars” — are getting sold because of the dollar strength.

Chuck Butler
for The Daily Reckoning

Talk of a Greek Exit Gets Louder originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Maybe the currency traders can also find their way back on to the right course, but I doubt it. I told quite a few people last week that I truly believe that this dollar strength that we’re seeing could last for most of the summer. But you know what happens at the end of summer, don’t you?

Ahhh, grasshopper, with the way we’re spending money that we don’t have, the U.S. government will be bumping up against the debt ceiling by the end of summer. And with this being an election year, don’t you think that the raising the debt ceiling negotiations are going to get even uglier than last year? I do, and if you recall last year, the dollar was teetering on the cliff during those negotiations.

For now, the dollar still holds the mighty hammer. Of course, I also told quite a few people last year that while the Australian dollar (AUD) has fallen from the lofty levels above $1, it’s still strong. Yes, that’s right, the A$ is still strong compared with where it was 10 years ago! Fifty-five cents — do you recall that?

Anyway, last week, I sent Chris a note to include in the Pfennig that talked about the A$ falling through oversold levels on the RSI charts, and how it had done that four times since 2010, and each time previously, the A$ bounced higher. Now there’s some more data that lead us to that same conclusion.

The IMM positioning last week showed A$ longs at their lowest level since the crisis. The last two times that the A$ saw positioning like this (oversold) was in July 2010, and in September 2011, the A$ experienced pretty significant moves higher in a relatively short period of time.

Now, after I’ve said all that, the A$ is down about half a cent this morning!

When I came in this morning, the currencies were holding their own, but they have slipped while I was preparing to write the letter. And gold is off $16 this morning. So I’ve got to find out what happened while I was preparing to write — inquiring minds want to know!

Well, the ratings agencies don’t seem to mind being late to the party, and Fitch is the latest to be late to the party in Japan. Fitch downgraded Japan’s credit rating and placed the country on negative outlook. Really? So what you’re saying is that you believe Japan has a problem? HAHAHAHAHAHAHA! I can’t stop laughing!

Japan has had a problem for over two decades! But here’s my serious thought on this: The yen (JPY) might have weakened by 0.5% on the announcement, but I don’t think the selling of the yen has any legs, and it will stop soon enough. There’s just too much going on in the world right now, and as perverse as it might seem, Japanese yen is a safe haven.

Yesterday, I told you about how Chinese Premier Wen Jiabao, announced that China’s economy would receive stimulus. This news helped the emerging markets get their heads above water yesterday, along with the fact that oil gained back a buck on the day, which really helped the Russian ruble (RUB) gain back some lost ground.

The Chinese announcement also helped the Aussie and New Zealand dollars (NZD). I think, though, that today is going to be a tough row to hoe for the currencies, as the European Union summit begins tomorrow, and everyone believes that there is going to be a showdown between Germany and France, and this has got the markets scared right now, which is leading to the selling I’m seeing this morning.

France’s new Socialist leader wants to promote growth with spending. Germany had just about gotten every EU member to sign on to the “austerity is the best program” until France threw a spanner in the works by electing Francois Hollande. And now we’re going to have to be witness to all this drama.

But as I’ve said before, history tells us that, eventually, the German leaders can persuade the French leaders to see things the German way. But Hollande has to grandstand now, as he was just elected, although, in my opinion, it’s better to let your constituents down early in your term, so they have time to forget that you dumped on them! HA!

Yesterday, I told you about how I felt regarding Norway and Sweden getting tarred with the same brush as the euro (EUR), and that one day, traders would get it through their thick skulls that Norway and Sweden are not Greece! Norway tried to pound that thought in traders’ heads this morning by printing a stronger-than-expected GDP for the first quarter — 1.1% first-quarter growth is very good for Norway, given how the rest of the world has slowed. Oh, by the way, the consensus forecast was 0.9%.

I guess the Brazilian government and central bank win. They set out two years ago to weaken the real (BRL), and after multiple rate cuts, taxes and interventions, they have finally gotten what they wanted: a weak real. I told you about a month ago that it appeared to me that the traders had left town, and didn’t want to play this game with the Brazilian central bank any longer. That took away the support for the real, and the free fall has been quick. This is exactly why I always talked about buying the real only with the speculative money that you allocate in your investment portfolio. Crazy wild swings, and now this.

The unintended consequences… they are everywhere and in everything we do. Brazil’s leaders are going to soon find that the unintended consequences of their bashing the real into a weakling that gets sand kicked in its face is soaring inflation. And when the tourists begin to arrive for the World Cup and then the Olympics… oh, my!

Speaking of the Olympics, going back to the ’90s. We have always seen the host country get a bump in the currency as the Olympics draw near and during them. Spain was the first we tracked, and so on. So keeping that in mind, could there be a bump in store for the British pound sterling? That’s going to be a tough row to hoe, given all this dollar strength. But it will at least be interesting to watch, eh?

Yesterday, I made fun of the G-8 meeting and their silly attempts to make people think they actually accomplished something. I saw that Russian leader Putin said that the meeting wasn’t worth coming to. Did you know that there was only one truly trained economist among the G-8 leaders? Mario Monti of Italy. Now, that alone should tell you something about the meeting. The leaders were all throwing in uneducated ideas of what would work. Oh, boy, sign me up for the next meeting, eh?

I was asked by quite a few people last week about the Swiss franc (CHF). The franc is still hovering just above the 1.20 floor that the Swiss National Bank (SNB) put on the currency’s cross to the euro last September. It’s currently at 1.2011. The overtures from the SNB continue to ring out a song about how they want that cross’s level to go to 1.35 or 1.40. That would knock the stuffing out of the franc, folks. And with the euro getting weaker by the day, the SNB’s resolve will be tested soon enough.

I had a chance to talk briefly with James Rickards, author of Currency Wars, while in south Florida a couple of weeks ago. Mr. Rickards is convinced that all countries are in a war to reduce the value of their currency below their neighbor’s or trading partner’s currency.

I told him I hoped that wasn’t true, but at this point, how can you argue with him? But here’s what I took from the conversation and the book. That the U.S. dollar is going to lead the currencies down, which means the dollar will always be weaker than the other currencies. Maybe that’s taking a simplistic view of the whole situation.

Then I had a couple of readers send me this story, so it obviously is worthy! Did you know that the U.S. allows China to bid directly in U.S. debt auctions without going through Wall Street banks? Yes, it’s true! And China has the only central bank that’s allowed to do this. Reuters broke the story on this. I say good for both parties! And I would ask why are the other central banks of the world not allowed to do this? Why should Wall Street primary dealers get to make truckloads of markups on debt auctions to central banks? We should be rolling out the red carpet and meeting them with an adult beverage with an umbrella in the glass, when these central banks show up to buy our debt.

To recap: The currencies held their own yesterday and overnight, but the announcement by Fitch that they were downgrading Japan’s credit rating put the currencies on the selling block again early this morning. Gold is off by $16 this morning. The A$ has reached oversold levels on two different measures now. Chuck is looking for a bump here, along with one in pound sterling, should the “Olympic host country bump” for the currency hold true.

Chuck Butler
for The Daily Reckoning

Fitch Downgrades Japan originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

We continue to remind callers that diversification is the key to long-term investing success, and the best strategy is to make an investment plan and stick with it. But before I get in trouble with the lawyers, I better get back to the purpose of this letter, which is to give readers a recap of what is going on in the currency markets.

The Greek crisis jumped back onto all of the trading screens last night after the Greeks finally admitted they couldn’t form a coalition government, and planned another election in June. The problem with these new elections is that there is a high risk that leftists opposed to the terms of an EU bailout will sweep to victory in this next election and send the eurozone into a deeper crisis.

Both of the parties who won the largest percentage of the last vote want to remain in the euro (EUR), but promised to “renegotiate” the terms of the bailout agreement. The second round of elections could shift the results further left, making the withdrawal of Greece from the euro a higher probability.

In addition to the Greek crisis, yields on both Spanish and Italian bonds rose yesterday as investors sold and sought safer havens. Moody’s Investors Service downgraded 26 Italian bank ratings, citing Italy’s recession and increasing bad debt. It also warned that Spanish banks face additional challenges.

And there is probably more bad news to come from the rating agency, as a Moody’s official said the rating agency is postponing possible downgrades on more than 100 banks worldwide as it assesses the fallout from JPMorgan Chase’s trading losses.

None of this was good for the euro, and the single currency unit approached the 12-month low of 1.2624, which it reached on Jan. 13. Bad news for the euro corresponded to an up day for the U.S. dollar, which is seen as the only “safe haven” in the most-recent crisis. The U.K. economy fell into a second recession, while Europe has avoided the double dip, according to official numbers released yesterday.

The pound sterling (GBP) was seen as a safe haven from the euro crisis, but the pound weakened the most in a month versus the U.S. dollar after the BOE said the U.K. economic growth was likely to remain “subdued” in the near term.

Central bank Governor Mervyn King admitted the U.K. faced threats from the euro crisis as he released the quarterly report on inflation. “Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank-funding costs and confidence,” the BOE said in the report. “The MPC [Monetary Policy Committee] judges it likely that the possibility of such extreme outcomes crystallizing will continue to weigh on U.K. activity for some time, even if these outcomes do not actually occur.”

Shifting to the U.S., markets will be eagerly awaiting the release of the minutes from the last FOMC meeting, scheduled to be released early this afternoon. Chairman Bernanke said after the most-recent meeting that he is prepared to “do more” to boost economic recovery, which the markets took to mean another round of quantitative easing.

Investors will be analyzing the minutes of the last meeting to try and get a sense of whether or not QE3 is in our future. If there is any indication that another round of easing is in the offering, the equity markets will run higher and the dollar will get sold.

But before we get the minutes this afternoon, we will also get a boatload of other data releases here in the U.S. Housing starts are expected at 685,000, a slight increase from last month’s 654,000, and the month-over-month increase is expected to be a much-better 4.7% increase, compared with last month’s dismal 5.8% fall.

We will also get a report on building permits, which is a more “forward looking” report. Permits are expected to have fallen in April, down 4.5% from March levels. We will also see industrial production and capacity utilization, both of which are expected to show a slight increase during April.

Yesterday was chock-full of data with the release of the CPI and retail sales data. The inflation data showed consumer prices here in the U.S. rose at an annual rate of 2.3% in April, just as a majority of economists had predicted. Readers know neither Chuck nor I put much faith in this “official measure” of prices, and would rather look at John William’s ShadowStats, which pegs the price increases to a more-realistic 10%.

The retail sales numbers weren’t as encouraging, as sales slowed to a 0.1% increase during April, down from a 0.8% gain in March. Other data showed the New York state manufacturing activity improved, mostly due to falling energy prices, and business inventories were up a bit, at a 0.3% increase.

One of the most-important pieces of data released yesterday didn’t get any press in the mainstream media (no surprise there). Data showed the total net TIC flows dropped $49.9 billion in March, but the newsies chose to focus on China’s increase in its holdings of U.S. Treasuries in March. Our friends over at The 5 Min. Forecast had some interesting things to say about the increase:

“Yes, China beefed up its holdings of U.S. Treasuries in March, according to figures out this morning from the Treasury Department. But if you widen the scope and go back six years, a couple of interesting things happen. First, the increase in March was so small as to barely show up on the chart…

“And second… China’s holdings peaked last July. Coincidentally, that was the last month before Uncle Sam lost its AAA rating. The numbers declined markedly through the end of 2011, and stabilized in the first three months of 2012. This is especially interesting when you consider how Chinese imports of gold grew at the same time Chinese purchases of Treasuries were shrinking.”

They point out that China is slowly accumulating gold, but you wouldn’t know that by the recent price movements. The shiny metal dropped again yesterday, to a new low for 2012, at $1,526.97. It has bounced back up from its lows, but is still trading in the $1,540 range.

I pointed out my thoughts that gold is an excellent place for investors seeking a safe haven, but the recent trading patterns show that most investors feel it is more of a “risk” asset. The correlation between gold and the dollar has been moving closer to –1, which would indicate a perfectly negative correlation (a negative correlation indicates gold moves down as the dollar moves higher). The 30-week correlation coefficient between the greenback and bullion is now at -0.66, compared with -0.24 in September.

But some of the biggest investors feel gold will rebound from its current levels. Bloomberg reports that the median estimate of 11 analysts who track gold indicates the price will average $1,740 in 2012. Goldman Sachs’ commodity research team believes the Fed will start a third round of QE in June, which will push the value of gold higher.

Billionaire George Soros raised his stake in gold, according to a filing yesterday reflecting first-quarter holdings. Central banks are buying bullion at the fastest pace in five decades, adding 439.7 tons in 2011, and they will probably purchase a similar amount this year, according to the World Gold Council. Sounds like a good opportunity to increase metals holdings at good prices!

Chuck is working out in Las Vegas this week, giving a couple of talks to packed rooms as usual. I miss attending these shows with Chuck, who is treated a lot like a rock star at them. Fans constantly drop by the booth to shake his hand and pick his brain on the markets. He sent me the following reflections from the floor of the Las Vegas MoneyShow:

“Most people here at the Las Vegas MoneyShow believe, as I do, that the back side of the storm is about to hit the U.S. But then again, 250 of them were Pfennig readers in this humongous room I was in yesterday!

“I said something to the people there when talking about the Pfennig, and it hit me like a brick! I’ve been writing the Pfennig in one shape or form for 20 years now! WOW! Who would have thought that those handwritten notes to salesmen each morning would turn into this 20 years later!

“Even when I was ‘retired,’ after Mercantile performed ethnic cleansing on Mark Twain employees, I wrote the Pfennig from home. Back then, Alex was only 3, and used to sit on my lap and pound away on the keyboard so that portions of the Pfennig looked like this: : )*%PLKE#&^)*!

“Alex is almost 17 now — amazing how time flies, eh? But the point here is that longtime readers that go back to Mark Twain Bank days have been with me through a lot. I’m thankful for your loyalty.”

Chris again. Yes, I remember back 20 years ago, when I would find a handwritten note from Chuck on my desk when I arrived each morning. Back then, we didn’t have the Internet, so he would jot down his thoughts and leave copies on everyone’s desk. We started passing these notes along to the investors we were talking to via fax, and eventually Chuck switched to passing it out electronically.

Then there was this. I haven’t commented on JPMorgan Chase’s $2 billion trading loss, which really put egg on the face of Jamie Dimon, the outspoken CEO of the company. Dimon was one of the loudest voices protesting the additional banking regulations working their way through Washington.

Yesterday, I read a story that I immediately thought would be a great story for this morning’s “Then there was this.” The story, which appeared on Bloomberg and was also picked up by our local paper, was titled “Fed Conflict Raised for JPMorgan.” The article points out that Dimon is one of three bankers sitting on the board of the New York Fed, as required by law.

That’s right, the Federal Reserve Act of 1913 actually mandated that three of the nine seats on the regional reserve bank board be occupied by bankers. The article quotes Sen. Bernard Sanders, who sees an obvious conflict in Dimon’s two roles. “It is an obvious conflict of interest for Jamie Dimon, the CEO of the largest bank in America, to serve on the New York Fed’s board of directors,” Sanders said in an emailed statement. “This is a clear example of the fox guarding the henhouse.”

To recap. Greeks will be returning to the polls in June, and the currency markets are worried about the outcome. The euro dropped again, both on the new Greek elections and a cut to Italian bank ratings by Moody’s. The pound sterling dropped, and may not be the “safe haven” that some investors thought. We got a boatload of data released yesterday, and will get even more out this morning. Most of the data showed the U.S. economy continues to “muddle through.” China is continuing to increase its gold holdings, along with some very influential investors. And I ended today’s Pfennig with a note from Chuck, who is speaking to the masses out in Las Vegas.

Chris Gaffney
for The Daily Reckoning

British Pound Sterling Losses “Safe-Haven” Status originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The euro (EUR) continued to drop on Monday, falling to its lowest level in almost four months as more and more people begin to imagine a euro without Greece. The dollar has been the biggest benefactor of the latest eurozone crisis, as investors moved money back into the US Treasury markets. The rush back to safety pushed the yield on the US long bond back below 3%, and the shorter maturities are also lower.

The Greeks are still without a unified government after the biggest anti-bailout party decided against joining the government. It is looking more and more as if the Greeks will be forced back to the polls for another round of voting.

And the Greeks aren’t the only ones heading to the polls. The Irish will vote on a referendum May 31, which asks the public to approve the “EU Stability Treaty.” While a sharp turn to the left in Greece and the return of the Socialist party to the French presidency has sent the euro lower, an Irish rejection of the EU treaty could be the last straw for German-led austerity measures.

On the flip side, the stability pact requires only 12 nations to ratify it, and German Chancellor Angela Merkel seems to be warming to adjustments to the treaty’s stringent fiscal rules. While a Greek exit is still a possibility, Germany could still allow them to stay after loosening the rules on maximum deficits. Many of the countries that use the euro are in better shape than Greece, but still need the ability to stimulate their economies.

All of this will be debated and discussed at the next EU summit meeting on May 23. Francois Hollande will be representing France, but it will be interesting to see if the Greek government gets organized enough to send a representative to the bargaining table.

The euro has settled into a tighter trading pattern overnight, and is actually starting to move higher as I write this morning. A better-than-expected GDP reading showed the German economy avoided “double dipping” into a second recession.

Gross domestic product in the 17-nation euro region came in flat for the first quarter, compared with an expected 0.2% decline. Germany’s economy grew 0.5% during the first quarter, a surprisingly strong number, which offset some of the weaker GDP numbers in the peripheral economies.

The dollar index snapped 11 days of gains overnight, as it weakened slightly ahead of a full morning of data here in the US. We start the morning off with the inflation numbers for April, with CPI predicted to have risen 2.3% versus a year ago, down from a 2.7% rise in March. We will also see the Empire Manufacturing number, advance retail sales, total net TIC flows and business inventories. There will be plenty of data for currency traders to move the markets.

If the data show the US economy is continuing to slide, we could see renewed calls for another round of quantitative easing here in the US. The impact of QE3 (or is it 4?) on the currency markets is tough to predict. More stimulus would probably cause the equity markets here in the US to rally, and would give the dollar a short-term boost.

But ultimately, QE is negative for the dollar, as it pumps more money into the markets, driving interest rates lower and causing inflation risks to rise. With this being an election year, the administration is geared now more than ever on the short term, so if the data show any weakness in the economy, we could see another push for stimulus.

An article appearing in yesterday’s Wall Street Journal online was appropriately titled “Rare Speed Bump in Commodities’ Long Run.” The title caught my eye, as it reflects exactly what I think we are seeing, a short-term pause in what I believe will be a continuation of the long commodity bull market. But in the short term, both oil and gold are being sold off.

Worries about the slowdown in China, combined with questions surrounding the eurozone credit crisis have decreased future demand for commodities. Oil dropped below $94 for a short period yesterday before rallying back later in the day. Gold has also dropped, erasing its gains for the year. I just don’t understand why gold is selling off in the face of such uncertainty. After all, gold is the only “real” currency, so why wouldn’t people be moving into gold as they sell positions in “risk” assets? I guess one answer would be that investors are no longer worried about inflation, and some of these investors had accumulated gold positions as an inflation hedge. Others will point toward central bank selling into the markets, getting value from one of the only assets that has maintained value. Still others will undoubtedly point toward “market manipulation,” but I will stay away from that in today’s Pfennig.

Most of the commodity-based currencies have sold off in tandem with the drop in oil and precious metals. The Australian dollar (AUD) continues to slide lower along with the kiwi (NZD) and South African rand (ZAR). Brazil’s real tumbled and traded above two per dollar for the first time in almost three years after finance minister Guido Mantega said the exchange rate doesn’t worry the government. This only led to further selling of the currency, as traders took Mantega’s words as encouragement to sell the real versus the US dollar. Brazil’s government is using a weaker real and lower interest rates to help stimulate their economy. Investors are expecting another cut to the benchmark interest rate by the end of 2012.

Then, Chuck usually uses this section to share something he has read recently that struck a chord with him. Yesterday, I mentioned Chuck’s predictions regarding the euro volatility during 2012, and a couple of readers asked me where they could read his projections. That got me looking through some of the past editions of Chuck’s Review and Focus, and I came across the following in the Jan. 1, 2012, edition:

“As we turn the calendar to 2012, most of us know all too well that this is the year the Mayans predicted apocalypse. But maybe they just failed to finish the calendar! OK, that was my attempt at humor, which I’m sure will get shot down in a heartbeat by many. 2012 will also be an election year, so maybe the Mayans were onto something. Nevertheless, this is the event, or the run-up to the event, that will put the dollar back to its underlying weak trend. I’ll explain in a minute, but first…

“I do believe that in the first half of 2012, nondollar investors using foreign currencies and precious metals will have to have some thick skin and batten down the hatches. This shouldn’t come as a surprise to you, dear reader, for in October 2011, I wrote that we were approaching a perfect storm for dollar strength, and that we should expect to see a period of dollar strength that could last several months. While that perfect storm hovered over the euro and other currencies, not really taking its wrath out on the nondollar investments, the storm became stronger until it finally unleashed itself on the markets late in 2011.

“So here we are starting 2012, just like we’ve started the past few years, dealing with dollar strength. This happens almost every year, due to renewed forecasts for economic vigor in the US, only to see those forecasts fade away by the time summer comes around. And I do believe this is where we are this year, too.”

Chuck wrote those last few paragraphs over five months ago, but he was pretty right on with his call for dollar strength during the first half of the year. Now we will see what happens from here. Will we see that event which puts the dollar back to its underlying weak trend?

To recap: The euro continued to slide yesterday as a Greek exit from the euro was on the minds of most currency traders. Euro leaders will discuss a possible “growth pact” at their summit on May 23, and Ireland will vote on the “stability pact” at the end of May. Looks like volatility in the euro will continue! We will get a ton of data in the US today. Could it point to QEIII? Commodities sold off, forcing commodity-based currencies lower. And we ended with a look back at Chuck’s thoughts for the first half of 2012.

Chris Gaffney
for The Daily Reckoning

Euro Continues to Drop originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Americans, by and large, run all their affairs within the confines of the US. The US economy is so large and so varied that it’s easy to assume that everything you want to do with your wealth can be done without crossing any borders. And people in the US, like people anywhere, live with the habits and attitudes developed over generations. They’re only human. In the case of Americans, those habits grew out of long experience with a government that was small and that generally practiced the rare virtue of following its own laws. In a happy exception to mankind’s experience with rulers, there was little to fear from it.

Stay at home is still the norm for Americans, but it’s a norm that is slowly fading. Every billion-dollar tick of the government debt clock, every expansion of the government’s regulatory apparatus, every overreaching judicial decision made in the name of a compelling public need, every inversion of protection for citizens into license for the state and every intellectually tortured discovery of a new meaning in the Constitution’s 4,400 old words leaves a few thousand more people wondering how prudent it is to consign all their eggs to a single national basket. Encounters with high-handed IRS agents and eager TSA gropers do nothing to ease that concern. And for those who listen thoughtfully, the messages from our designated leaders and their would-be replacements only hurry the dawning sense of unease.

Specific worries include exposure to predatory lawsuits; fear of where income tax rates might climb; the prospect of losing a family business in a regulatory battle or simply through estate tax; the fragility of financial institutions that have operated for forty years with the assurance that the Federal Reserve would rescue them from any folly; the possibility that a government desperate to protect the dollar from collapse might impose foreign exchange controls or capital controls; the memory and precedent of the forced gold sales of 1933; and the thought that a government floundering in deficits might start pilfering from IRAs and other pension plans.

But beyond those particular worries, and perhaps more important than any of them, is the sense that from here on, anything goes. The politicians will do whatever they find expedient, because there is no longer anything to stop them — not an electorate that is jealous of its freedoms and certainly not the Constitution, which is now just a playhouse for judicial imagineering. No one can know what’s coming next from the government and the financial system it has fostered, but for many of us there is an awful suspicion that we are not going to like it.

Most Americans still have yet to stick a single financial toe across the border, but more and more are considering it. Many, perhaps millions of toes are now twitching at the thought. Their owners want to end their absolute dependence on what happens in the US. They want to prepare for whatever is coming down the road, even though they don’t know what it will be. They want to be as ready as possible, even though their worries can only guess at what’s ahead.

Because internationalizing your financial life means dealing with the unfamiliar, the project can seem more complex than it really is, so it’s best to start with the simplest measures, even if by themselves they don’t give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will make the next step easier to plan. Start with the first rung on the ladder of internationalization. Then climb, at your own speed, to reach the right level of protection.

Rung 1: Coins in Your Pocket

Gold coins that you’ve stored personally give you something whose value doesn’t depend on the health of the US economy, doesn’t depend on any financial institution in the US and doesn’t depend on any US government policy. Gold coins are portable and hold their value no matter where in the world you might take them. They’re internationalization in a wafer. Safety cookies.

It’s best to buy the coins for cash, for maximum privacy. And there is a good reason to favor one-tenth-ounce gold Eagles. Gold coins mean readiness for troubled times; if you ever need to dispose of the gold in an informal market, it will be easier to do so with small-denomination coins that are widely recognizable and whose value matches the scale on which large numbers of people normally trade.

The premium on one-tenth-ounce coins (the price compared with the value of the gold content) is higher than on the larger coins — usually about 15% for the small coins vs. 5% for one-ounce Eagles. But the premium isn’t a dead cost, like a commission or bid-ask spread. The premium is a second investment; it’s what you pay for the packaging, and you can expect to recover it when you sell or trade. And in the circumstances when you would have the strongest reasons for thanking yourself for having bought some gold, the premium you paid will look like a bargain.

Rung 2: A Foreign Bank Account

On its own initiative, the IRS can freeze any bank account in the US without warning. The action might arise from mistaken identity, from an erroneous filing by some other taxpayer, from your failure to respond to an IRS notice in time or even from a postal error. And that’s what can happen without malice. Other government agencies have similar powers to act on their own, without giving you an opportunity to object in court. And any one of them might act against you for any of their specialized reasons — perhaps because someone resents your inattention to the needs of the migratory birds that visit your property or perhaps because someone thinks it would be fun to point to you as a terrorist, drug smuggler, arms dealer or child-porn merchant.

In principle, there are legal avenues for undoing a freeze or a seizure. But you’d need a lawyer, and being suddenly penniless could get in the way of hiring one.

A foreign bank account protects you from being trapped in such a nightmare. The US government can get to your foreign bank account eventually, because it can get to you. But a lightning seizure is very unlikely, because it would require a foreign government to override its own legal processes, which it generally wouldn’t be willing to do except in a grave emergency. So if your liquid assets at home were frozen, you would have cash outside the US to fund the legal cost of untangling the problem.

A foreign bank account is also a way to step back from the uncertainties of the US dollar, since the account could be denominated in another currency.

The US government has seen to it that Americans are no longer welcome customers at foreign banks. So forget about opening a Swiss bank account in your own name. However, if you apply in person (not by mail), you still can open a bank account in Canada. Be prepared to show your passport and to give the bank an original utility bill that confirms your place of residence.

Rung 3: Gold Abroad

The forced gold sales of 1933 were the work of an executive order signed by President Roosevelt. The purported legal basis for the order was the Trading With The Enemy Act, a legislative artifact of World War I. I have yet to find an explanation of how the authority for an order requiring Americans to sell their gold to the government at the government’s official price of $20 per ounce could be found in the Trading With The Enemy Act, but the fact that the enemy in question had gone out of business 15 years earlier didn’t seem to interfere with the legal logic.

The forced sale was a prelude to an increase in the official gold price to $35. The government’s reason for wanting that price rise was to gain leeway for a substantial, though limited, inflation of the dollar while keeping the dollar on the international gold standard. The forced sale was a way for the government, which operated in a political environment that still disfavored deficit spending, to capture the profit from the price rise. That profit would be a kitty for more spending without more borrowing.

Today there is no gold standard for the government to stay on. And deficit spending isn’t something politicians especially want to avoid; they’ve promoted it as a civic duty, to stimulate the economy. So the depression-era motives for a gold grab don’t seem to apply. Yet you can’t listen to a conversation between two gold investors without hearing the seizure topic coming up.

Are they just scaring each other? I don’t believe so. There are two potential motives for the government to again treat gold differently from everything else.

If the dollar’s slide in foreign exchange markets threatens to turn into a panic, the government might want to use gold sales to foreigners to mop up foreign-held dollars — in which case it might see a need to mop up the gold owned by its own citizens. That’s bad enough, but a second motive is a good bit nastier. At a visceral level, people who have centered their lives on government just don’t like gold. It’s an affront to the government’s authority to command and control and an insult to government’s supposed aptitude for solving economic problems. So disrespectful. From their point of view, every ounce purchased by an American is another tomato hurled at the political class. And the purchasers still constitute a tiny minority of the voting population. What could be more satisfying and convenient for the politicians than to kick sand in the face of gold investors for being such lousy citizens?

A new attack on gold ownership probably wouldn’t be a point-for-point reenactment of 1933. There are many weapons for mugging gold investors. It could be a prohibition on gold ownership coupled with a prohibition on sales of gold to foreigners. The only one left to buy would be the government, and being the only bidder, it would be a very low bidder. It could be a commandeering of privately owned gold, with token compensation like the $15 per day paid for jury duty. It could be a super tax, say 90%, on gold profits, which would get the job done slowly… or quickly if it were accompanied by a mark-to-market rule. Or it could be something none of us has thought of yet.

Not only can’t we know the shape of a future gold grab, we can’t know whether or how the rules would touch foreign-held gold. Owners of gold stored outside the US would be a minority of a minority. Their gold wouldn’t be the low-hanging fruit — it would be higher up in the tree and more trouble to get to. That’s why, in a casino sense, gold overseas is a different bet and a better bet than gold at home.

Maybe it will turn out that storing gold overseas won’t matter at all, in which case a little effort will have been wasted. And maybe it will turn out to matter a great deal.

To be continued tomorrow…

Regards,

Terry Coxon
for The Daily Reckoning

Protecting Your Assets from an Out-of-Control Government, Part I originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I don’t know what the markets mean when they flock to dollars and yen (JPY), the two big dogs when it comes to debt creation. But it is what it is, so we carry on, and look for other things that make sense!

Like the Chinese buying eurozone government debt. I explained this all previously, but for those of you new to class, the eurozone is China’s largest export destination. Did that surprise you? I bet you thought it was the U.S. But no, it’s the eurozone.

China is making progress with its attempt to switch from being a country that depends wholly on exports to drive its economic growth, to one that shares the load of driving the economy with domestic demand, but they aren’t there just yet, and therefore, exports remain very, very important to the Chinese. Therefore, they cannot afford to lose their biggest customer.

And this is part of the plan, folks (China’s plan to replace the dollar standard). The Chinese have become the world’s financier, taking that away from the U.S., and they have also made big inroads to removing the dollar as the settlement mechanism — in terms of trade — by signing currency swap agreements with a boatload of countries.

These currency swap agreements allow China and the country with whom they are trading to exchange each other’s currencies and not use dollars, as the way it was done since the end of World War II.

Last year, I told you that the New York branch of the Bank of China had begun allowing deposit accounts in CNH, the new, deliverable Chinese currency. The account size is limited, but the idea of deposits was what stirred the drink, folks.

Now there’s word that the U.S. Fed had approved an application by ICBC (Industrial and Commercial Bank of China) to acquire retail bank branches in the U.S.  ICBC will pay $140 million to buy an 80% piece in Bank of East Asia USA.

People that should know better are not making a big deal of this, and saying things like, “This is too small to be concerned with,” and so on. But it’s a foot in the door, folks.

And just another baby step for China to remove the dollar as the reserve currency of the world.

OK, after going through all that, I see a news story go across the screen that says “China’s Sovereign Wealth Fund (SWF) Stops Purchasing European Sovereign Debt.” Let me try to break this down (and let this be a warning to the U.S.).

Obviously, China has bought enough European sovereign debt (ESD) to fill their desires. If The Chinese SWF can back away from its biggest customer, then it should have no problem backing away from its second-biggest customer (the U.S.).   I think that China will attempt to invest in Europe to help keep the ship afloat — they just won’t make a big deal of it.

OK, I didn’t mean for this Thursday Pfennig to carry on about China for the whole letter. So I’ll stop there, and return to our regularly scheduled programs.

The dollar’s mighty hammer stopped swinging so wildly yesterday, and in the overnight markets, we’re actually seeing a handful of currencies that are attempting to gain back some lost ground to the dollar in the trading days since last Friday’s jobs jamboree disaster.

The Norges Bank, Norway’s central bank, is meeting as my fat fingers fly across the keyboard. I don’t think the Norges Bank is going to cut rates today, so it will be interesting to hear what the Norges Bank has to say.

You see, right now, I’m not a fan of the Norges Bank, when normally I am a fan. What has soured my taste right now is the fact that the Norwegian economy and fundamentals are calling for higher interest rates.

But the Norges Bank has been struggling with a strong krone (NOK) (to the euro (EUR)) for some time now, and a rate hike would only make their struggle more difficult. But in Chuck’s world of “when I’m the head of a central bank,” I wouldn’t let those kinds of things bother me — especially if I were head of Norway’s central bank. They have oil revenue coming out of their ears, they have to offset the inflationary problems that oil revenues bring and they can do that with a combination of a strong currency and appropriate interest rate levels.

I see where global investors have given Fed Chairman Big Ben Bernanke a 75% approval rating. Of course they did! Big Ben has been responsible for keeping the stock market ship out to sea with his quantitative easing, and ZIRP (zero interest rate policy). Of course, with this highest rating for the Fed chairman comes the EXPECTATION that he take further action this year to accelerate a revival in U.S. financial markets.

I wonder what these people will say in a few years when we see the unintended consequences of Big Ben’s policies. I doubt they give him a 75% approval rating then, but on the other hand, maybe they will, for we could be talking about QE4 or QE5 or QE10!

The price of oil seems to have found a bid at $96, as it has held that figure for three consecutive days now. The petrol currencies of Norway, Canada, Russia, Brazil, the U.K. and even Mexico will breathe a sigh of relief if $96 is the bottom for this sell-off.

While I like seeing the price of oil lower, I know in my heart of hearts that this sell-off was overdone. You see, it all started with the Jobs Jamboree disaster last week, and has continued until reaching $96. That’s a fall of $8 in a week. Talk about overdone!

Gold had a very interesting day, as the price dropped, recovered, dropped, recovered and finally gained a bit. When I see this happening, I think that the “price manipulators” are being matched by the Chinese and Indians taking advantage of the cheaper price. And talk about a sell-off being overdone! But when the “price manipulators” smell blood, they attack, and attack they did this past week. I would love to give these “price manipulators” my version of Jackie Gleason on The Honeymooners. One of these days, price manipulators, to the moon!

The eurozone has approved the next scheduled payment to Greece. There was some thought going around yesterday that eurozone leaders would hold up the payment, as penalty to the Greeks for attempting to elect an “anti-euro” government. Of course, that government didn’t have enough seats and couldn’t put together a coalition that worked, so it dissolved, and the Greeks will have to vote again.

There are renewed calls for Greece to leave the euro. I still don’t think that will happen, as the problems for Greece would multiply, not be reduced, by leaving the euro and going back to the drachma. But hey, that’s never stopped leaders of a country from doing stupid things before!

I would think the euro would be better off without the baggage in the long run.

The Swiss franc (CHF) continues to be strong. Not as strong as a year ago, but strong, nevertheless. And that’s killing the Swiss National Bank (SNB). The cross to the euro remains stuck at around 1.2015 — spittin’ distance to the floor set by the SNB last September. I’m surprised that the markets haven’t tested the SNB’s resolve here. But they haven’t, so life goes on in Switzerland.

The Bank of England (BOE) just ended their meeting today and left rates unchanged. No surprise there — what can they do? They’ve cut rate to the bone, they’ve increased their version of QE/ bond buying… yet the economy does a double dip in the recession pool..

I told a small group of people yesterday that just like the euro and dollar are an ugly contest, so too is the British pound sterling (GBP) and the euro. And here, the euro loses. But really? Investors think that things in the U.K. look better than in the eurozone? Really? Maybe they are, but I sure would be looking elsewhere in Europe. (Remember, Norway, Sweden, Switzerland, Poland, Hungary and the Czech Republic don’t use the euro!)

Then one of my fave reads on Bloomberg is the author and columnist Caroline Baum. She always makes sense to me, and you don’t find many writers on economics that do that! Her latest column on Bloomberg is about the labor picture here in the U.S., titled “Government’s Snake Oil Won’t Cure Jobs Ailment.”

In the column, Ms. Baum talks about how the jobs problem could be structural. “What if the Fed, through all its efforts, can’t buy more employment? What if unemployment is structural, with an inadequately trained workforce or labor immobility preventing employers and job seekers from hooking up? Signs are pointing in that direction.”

She goes on to say: “Structural unemployment, like the nation’s other fundamental deficits, is a tough challenge for policymakers all around. Jobs are a big issue in the presidential election. No elected official wants to see the public suffer, financially or emotionally, from being unemployed. There a strong desire to do something even if nothing is the lesser of two evils.

“On the fiscal front, attempts to correct long-term structural imbalances with short-term tax-and spending are doomed. Cyclical medicine leaves the patient with more debt and the same old ailments.

“What happens if the monetary authority misdiagnoses the cause of high unemployment and uses its usual tool, the printing press, as a cure? For the same money, the Fed will buy itself more inflation and less growth. That’s the sort of jolt the economy can do without.”

As I’ve said since the financial meltdown and the jobs problem began, that a lot of those jobs were not going to return. It appears that I hit that one bang on.

To recap: A few of the currencies are showing some life this morning, while the majority are still under the spell of the dollar and the flight to safety that began after the Jobs Jamboree disaster last week. China gets approval to buy a U.S. bank. Another baby step, folks. The Norges Bank meets today and will probably follow the lead of the Bank of England and leave rates unchanged. And we have a special treat with a snippet of a column by Caroline Baum!

Chuck Butler
for The Daily Reckoning

China Stops Buying Eurozone Debt originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The seller in this case is very large and very sloppy, perhaps intentionally so. The buyer is also very large, but very patient and methodical. Trapped between these two powerful opposing market participants we find a “range-bound” gold market. Let’s take a closer peek at the curious goings-on…

Last Monday, a large early-morning sell order in the gold market whacked the price of the precious metal by about $15 in a matter of seconds.

“The CME Group Inc.’s Comex division recorded an unusually large transaction of 7,500 gold futures during one minute of trading at 8:31 a.m.,” The Wall Street Journal reported. “The sale took out blocks of bids as large as 84 contracts in one fell swoop and cut prices down to $1,648.80 a troy ounce [from $1,663.00]. The overall transaction was worth more than $1.24 billion.

“Gold traders buzzed with speculation that the transaction was an input error — a so-called ‘fat finger’ trade,” the Journal continued. “‘Or a Gold Finger as it might be known in the bullion market,’ traders at Citi joked in a note to clients.

“Still, not everyone agreed Monday’s slip in gold was caused by a keystroke error,” said the Journal. “Chuck Retzky, director of futures sales for Mizuho Securities USA, said that silver prices suffered a similar leg down at the same time as gold, tumbling 35 cents to $30.805 a troy ounce, but other markets like Treasurys, currencies and stocks were unperturbed. ‘To do it both in gold and silver tells me that it wasn’t a trade done in error,’ Retzky said.”

A second trader chimed in, “No one who has the account size and the money to trade thousands of gold contracts would do it in one transaction, that’s just stupid.”

Or maybe this “stupidity” was intentional, as the folks at ZeroHedge suspect. Again yesterday, a large 3,000-plus lot gold sell order hit the Comex overnight trading system around 1:30 AM, Chicago time — causing the gold price to quickly fall more than $5. “Volume that size is unusual for that time of the day on the COMEX,” ZeroHedge remarks.

A few hours later, shortly after the Comex opened the gold pits for the regular daytime trading, a couple of very large sell orders knocked $10 off the gold price in a matter of minutes.

These large, sloppy sell orders are no accident, ZeroHedge insists. They are simply some of the most flagrant examples of what could be market manipulation by Western central banks. ZeroHedge does not point fingers at any particular “fat finger,” but it does wonder aloud if the Bank for International Settlements (BIS) may be involved.

“[A few weeks ago],” says ZeroHedge, “somewhat tongue-in-cheekly, we presented the ‘people bringing you currency manipulation on a daily basis,’ or in other words, the BIS execution team for Europe’s central banks, which is most directly engaged in FX and precious metals ‘interventions’ when needed.

“The execution chain we presented was headed by one Richard Austin Jones, head of central bank services at BIS, Basel, yet more importantly the actual trader at the bottom of the totem pole was a Mikaël Charozé, whose various tasks included the ‘management of the liquidity for big amounts’ primarily interventions and portfolio diversification, as well as ‘holding and managing proprietary positions on all currencies including gold.’

“We posted this observation on April 5,” reports ZeroHedge. “Funny then that just 10 days later, one would never know that Mikaël no longer counts ‘holding and managing proprietary positions on all currencies including gold’ among his duties as well as task of ‘management of liquidity for big amounts including interventions.’ [I.e. the BIS Website removed all of this language from Mikaël’s job description]. In fact his entire profile, since our little humorous exposés, appears to have been rather completely altered. Inquiring minds would love to know: why?”

Why, indeed?

Many gold-market participants have long-suspected that Western central banks (and other agencies of currency debasement) conspire to suppress the gold price. According to this conspiracy theory, the central banks periodically pound on the gold price in order to prop up the value of the paper currencies they print.

But despite the anecdotal evidence supporting the conspiracy theory, no one has ever caught one of the conspirators in the act. Like Sasquatch, the conspirators leave lots of great, big footprints, but no one ever manages to trap them in their caves.

So maybe there are no conspirators, just lots of really stupid and sloppy gold sellers.

Meanwhile, the buy side of the gold market is much less mysterious.

“Earlier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year.” Sprott Asset Management observes in its April letter. “China has now imported 436 tonnes of gold through Hong Kong over the past 8 months, compared with only 57 tonnes over the same 8 month-period a year earlier (July 2010-February 2011).”

In other words, on the other side of every sloppy gold sale by a BIS trader (or whomever) you are likely to find an eager Chinese buyer. The recent surge in Chinese buying represents a whopping 25% increase in total global investment demand for gold.

“There isn’t a physical market on earth that can withstand that type of demand increase without higher prices over the long run,” Sprott declares, “and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last 10 years…Where is the gold going to come from? We ask because we don’t actually know.”

So there you have it…The invisible “fat fingers” are selling gold. The very visible Chinese are buying it. Place your bets!

Eric Fry
for The Daily Reckoning

China Buys Gold…No Matter Who’s Selling originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".