Pure Economic Salvation

The Daily Reckoning PRESENTS: Good news – everyone’s favorite masked economist has found a way to make a “whole gigantic humongous ton of money with gold.” Read on…

PURE ECONOMIC SALVATION

Several readers have challenged me to explain how the gold lease rates can manipulate the price of gold up and down. I smile, as nothing could be easier, my precious Mogambo grasshoppers! And, there is nothing I like better than something that is “easy,” unless it is something that is tasty. And so, pizza delivery gets very, very high marks for being both easy and tasty.

So, I smile beatifically and rub my fat little tummy in satisfaction, which is, even as we speak, growling for more pizza or fewer donuts.

Nevertheless, I say, “Hear me now, my quizzical ones! First, tell me all the ways – all the sleazy, slimy, slippery ways that you can manipulate markets when you control everything and have the Federal Reserve, a supplier of seemingly endless amounts of gold at very cheap rates, as a willing co-conspirator. There must be a zillion ways right there! Hahaha!”

My laughter ringing hollowly in their ears, I ruthlessly went on, “And on top of that, tell me more ways to make a profit by insiders manipulating the gold market if they are also free to use any combination of leased gold bullion, market-provided gold bullion, custodial gold, certificate gold, gold mining shares, mutual fund’s gold shares, warrants, futures, options, private contracts, promissory notes, poker chips and side bets! Hahaha! That ought to be good for a few gazillion ways to profit right there!

“And then, tell me all the more ways you can profit from manipulating the gold market if you can also take a short position in any or all of those things, too! Hahaha! And then, as if that is not enough, tell me all the additional ways to make a profit manipulating a market when the money to finance all of this insanity is provided by Japan and their zero-interest-rate policy!”

I dramatically pause to let my words sink in – ruined by an inadvertent big, burping belch (“Burrrrrp!). Hurriedly, I exclaim a little too loudly, “Tell me these things, my Young Mogambo Larvae (YML), and I will tell you exactly how it is done!”

I look over the crowd assembled at my feet and glare purposefully at the ones nearest my feet who are harshing my buzz by loudly complaining about the smell. Then, I smile and say, “All you really need to know, my Greedy Little Ones (GLOs), to make a whole gigantic humongous ton of money with gold, is to buy it when you see that the price is held down by these manipulations! Huge multiples of the total existing global supply of gold is now mere paper, traded as if it were gold, which it ain’t, and probably never was. By now, the only thing that flimsy promissory note has in connection to gold is some words on paper or a computer disk somewhere. It will end badly for them. And, it won’t be long in coming.”

Amid cries of “Prove it, mighty Mogambo,” and “Show us the proof, idiot Mogambo,” I grab the microphone and speak in my most Profound Mogambo Voice (PMV): “To prove it, my Precious Mogambo Grasshoppers (PMG), you would have to prove that all the millions of Wall Street hotshots, Nynex hotshots, Comex hotshots, bullion-bank hotshots, foreign-central-bank hotshots, trader hotshots – and all their secretaries and underlings and friends and insiders – are all just Too Darn Stupid (TDS) to come up with some way to make money out of a sure thing!”

Then, I chortle, “And, it can work until the scam gets overwhelmed by sheer physical demand by millions of people, perhaps billions of people, who are all coming to their economic senses and are scrambling to buy silver and gold against the coming economic hard times, driving prices relentlessly up and up and up, as gold will be, just like it always has been, Pure Economic Salvation (PES) for people, as protection from the unstoppable depreciation in the purchasing power of the money caused by a huge government, which is massively deficit-spending a massively inflating stock of fiat currency based on debt, multiplied by an insanely low fractional-reserve ratio in the banks! Just like it has in all of history, and just like now! Hahaha! Now you know why I laugh!”

Then, dismissively, I point to the door and exclaim, “Go thee now! Go! Hie thee to thy places of gold and silver exchange, and buy, buy, buy!”

Soon, the place is deserted, and everybody has gone home, mostly muttering how they feel stupid even listening to an idiot like me. They whisper hateful things back and forth, like, “Did you get a whiff of those feet? Pee-yew!” Everybody laughs.

Whether or not you believe a raving lunatic like The Mogambo (and you would be an idiot if you did), the gold lease rates had again fallen (over the last 10 days) to a singularity (a strange situation where leasing gold short-term costs the same as leasing long-term!) in the last two days. Sure enough, right on schedule, the price of gold soon had a huge downdraft! You want more proof than flimsy, sheer coincidence? I shake my head in wonder, as you are not nearly as paranoid as you need to be, nor nearly as paranoid and angry as you are soon going to be.

By the way, if you check your Mogambo Handy Handbook (MHH), you will notice that I advocate that you take physical possession of gold and silver bullion. One reason is that once you have it paid for and in hand, your annual costs go to zero, whereas brokerage accounts and mutual funds are always hitting you with fees and commissions, expenses, taxes and levies until one day you cry out: “They’re stealing me blind!”

If you want another reason for taking possession of actual gold, then you might be interested to learn how a mutual fund could lose value even as gold and shares rise. If so, then check this out from a prospectus sent to me by a mutual fund I own: Under the section of risks in owning shares of the mutual fund, the last one is “Securities Lending Risk. Any loss in the market price of securities loaned by the fund that occurs during the term of the loan will be borne by the fund and would adversely affect the fund’s performance.”

And who are these guys borrowing my stocks and are causing me to suffer a loss in my mutual fund? The answer is: Guys who went short gold! Hahaha! In other words, guys who aren’t very smart! I mean, and pardon me for laughing, but who is stupid enough to be short gold in a roaring bull market in gold?

Switching on the Mogambo Risk Analyzer (MRA), I quickly discover that, unfortunately, the chances of getting the money back, thanks to the mutual fund loaning it to dimwit dirtbags, are, officially, Pretty Darn Slim (PDS). And this coincides exactly with how people who loaned money to a dimwit dirtbag named The Mogambo, never got it back, either. So, you see how this all fits a little too neatly together to suit me!

If those are not enough reasons to own bullion gold, from some of the gold mining stocks I own, I, as a shareholder, am getting always asked to vote for all kinds of weird proposals buried deep in the prospectus, like allowing them to issue a lot of free options so that the company can give them to “select” people. This lets them, at some time in the future, opt to buy shares of the company, but at today’s price! Hahaha! Oddly enough, I think that this shameless scam signifies that they think gold is going to rise in price, if they are greedy enough to try and it off now! How bullish!

Of course, there are the gigantic salaries of the officers and boards and whatnot, and the constant share dilution from them giving themselves baskets of shares. I am sure they are all just a bunch of thieving, lying scumbags like you find in every publicly owned company.

Until next we meet,

The Mogambo Guru
for The Daily Reckoning
May 1, 2006

Mogambo sez: As price equilibrates supply and demand, the constantly rising price of gold all these past few years means that demand is higher than supply. That’s all you need to know to buy anything, but especially gold at an economic time like this.

And, Doubly Mogambo Especially So (DMES), maybe even Triply Mogambo Especially So (TMES) about silver, which will rise in price, like gold, not only because of the looming decline in the dollar, but also by the most glaring and startling fundamental imbalances in all of history!

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The world of money – oh, what a wicked world it is!

We will return to our report from our Easter vacation below, but first let us check in on the Financial Times from whence comes a report on the sorry state of U.S. federal finances. The “President’s Budget” shows a deficit of $319 billion for this fiscal year. But the president’s financial intelligence is subject to the same persuasion as his strategic intelligence; his budget shows not what is, but what he wished were.

The U.S. Treasury Department also produces its own budget, called the “Financial Report of the US.” It shows a budget deficit of twice as much: $760 billion. The difference between the two is that the U.S. Treasury Department prepares the budget more or less as every company must – on an accrual basis. It takes into account not only cash outlays, but contracts and commitments. The President’s Budget is merely a statement of cash in, cash out. Were GM and Ford to account for their businesses that way, they’d be gushing profits, too!

The U.S. Treasury Department also comes up with a number for how much Americans actually owe, thanks to federal deficits. Are you sitting down? It’s a chunky number: $750,000 per household. That’s what you get when you take the total commitments of the feds – $49 trillion -and divide them by the number of families.

The Financial Times goes on to note that it took 204 years for the U.S. government to accumulate its first $1 trillion in debt. Now, it adds that much every 18 months. George W. Bush has added more debt than any president who ever lived. In fact, he’s added more debt than all the presidents who ever lived…combined.

But as we keep saying, nature abhors a vacuum and it loathes a monopoly. When the Soviet Union collapsed, the United States stepped into a vacuum. It became the world’s only superpower, with practically a monopoly on the use of state-sponsored violence. Nature must have found the United States too big for her britches, and decided to find a way to take her down a peg. She came up with George W. Bush.

How long can the world fail to notice? The United States has been running up debt as if it were a banana republic – only without the bananas, even though for the last 18 months or so, the dollar has actually gone up. But, how long could that trend last? Not long, was our guess. Looking at a chart today, it looks as though it came to an end in December. Since then, the dollar has trended down.

And last week, Ben Bernanke came out with a warning: maybe the Fed wouldn’t keep raising rates after all. The currency markets shuttered. The dollar dropped, but what were speculators going to do? They looked around and found the anti-dollar. The one thing that has been rising relentlessly ever year of the Bush administration: gold. The yellow metal surged; June contracts rose above $638.

What can we say? There’s a bull market in gold, and a bear market in paper. So far, only the dollar has been noticeably affected, but it is just a matter of time before other paper is, too – bonds, stocks, mortgages, and derivatives.

Watch this space.

Now, more news from our currency counselor…

————–

Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis:

“The United States released a report that showed the U.S. economy grew at an annual pace of 4.8 percent in the first quarter, the fastest in more than two years.”

For the rest of this story, and for more insights into the currency markets, see today’s issue of The Daily Pfennig

————–

Bill Bonner with more on what happened in Argentina…but first, a couple notes from Addison in Baltimore…

*** You may recall, dear reader, back in November we sent 537 copies of our book to Washington.

Calling the letters we got back in return “replies” would be gratuitous; you’d find more sincerity in a Department of Motor Vehicles license application.

But that was the point of the exercise. We published a handful here in The Daily Reckoning. We wanted to show that even if members of Congress are privately concerned about profligacy in the capital city, the political climate not only condones such largesse…it cries out for it.

Now we’re trying something new. We bought billboard space on the back of a bus that circles the Capitol Building. And 10 back-lit kiosk space in metro stations in the vicinity.

At this point, we may just be amusing ourselves. But we’re told they go live today. Stay tuned…

*** You may also find us high in the air, too. In an attempt to reach businessmen flying from New York to Los Angeles we did an interview with SkyRadio. For the next month you can listen in on the Forbes In-Flight Radio on American Airlines. In May and June you can find us on the Newsweek channel on USAir.

Then…we go international. In May and June we’ll also be featured on Northwestern flights to Asian ports of call.

Listen in, if you can…we guarantee a fitful rest on your flight.

*** In the interest of full disclosure, we are making two big financial bets. One is on gold and the other is on Argentina. In the weeks ahead, your editor will try to explain why. For now, more about the trip:

The unhappiest people in the world…

It was already starting to get dark when we made it back to our camp. We had been riding for most of the day and were ready for a little rest. Not only that, Jorge and Francisco had promised to prepare a nice meal and we were beginning to know what that meant. They’d cook pieces of beef over a campfire and serve them with Maria’s bread, and wine from nearby Colome.

We were barely off our horses before the small fire was started, next to an irrigation canal. The mountains behind us were already purple and mauve, but Elizabeth decided to explore a little on foot, along the riverbank, in the last of the daylight. We followed along like an old hound.

The camp had been pitched in a green oasis, where the farmers grew alfalfa and brought the cattle down from the high range when the grass gave out.

“These are reserved pastures,” Jorge told us, which explained the tree branches and dried-out thorn bushes piled up in a long thread to fence out the cattle.

Once inside the fence, we discovered an abandoned orchard, where the grass had been closely cropped as if by sheep. Most of the trees looked like plums, but there was no fruit on them so we couldn’t be sure. There were also a few walnuts.

“I love walnuts,” Elizabeth declared. She tried one and pronounced it much better than the walnuts in Europe. We bent down to help her collect more until our pockets were bulging. Then, we set off again, continuing along the riverbank until we ran across the ruins of a stone house.

Only two walls were still standing, but we could make out the piles of stone where the rest of it had collapsed. It stood between the orchard and a large field of alfalfa, looking out over the river and the mountains on the other side. We saw that the horses we had been riding had been hobbled and turned loose in the pasture where they were greedily tearing up the green grass after a day of hard work.

“What a beautiful spot,” we thought. At the edge of the river, the gauchos had piled up hay into the shape and size of a Mongolian’s yurt and had surrounded it with more branches and thorns as an extra protection against intruding cattle. The only noise we could hear was made by the rushing water – it sounded a bit like a broken pipe.

We looked around. North, south, east and west – there was no view that was not extraordinarily pretty. And yet, the only people who lived here were a couple of aging locals, Felipe and Carmella, both in their ’70s and both notably cheerful.

“Are you the new patron?” Felipe had asked us earlier in the day, smiling broadly and taking off his hat to reveal a thick head of dark hair, grey only at the edges. When we assented, Felipe not only took our hand, but he put his arm around us.

“Welcome, patron,” he said.

Felipe’s wife is a very thin and spry woman, with a smile missing two front teeth, but she smiles almost perpetually, in a way that reminds us, vaguely, of Lauren Bacall. She must have been cute 30 or 40 years ago, we thought. Now she has a friendly, helpful demeanor. Henry had forgotten his hat when he left the ranch house. Noticing this, Carmella had asked if he would like to borrow one, then turned and sprinted back to the farmhouse to return with a black hat, similar to the one worn by the Cisco Kid, for him.

Seven hours later, here we were, looking up from the riverbank, across the field of alfalfa, and the only human habitation we could see was hers. It is the only one in that little oasis, and we saw only a small piece of it through the trees – an eroded adobe wall topped with a mud roof.

The sun is so hot and the weather so dry in this part of the world that you can build a roof out of wet clay. You just lay some beams or even cactus boards across the walls. Then, you cover the roof with bamboo or other smallish sticks, put some straw or pampas grass on top, and finally, cover the whole thing with mud.

The sun will bake the mud into a hard tile. You just have to face it up with new mud every year or so. Not a whole lot of money needs to be involved in the process, we imagine.

“Really, all this emphasis on showing off by spending money, ” Maria began. “I mean, what we see in London…people who drive down the street in those big Hummers. In central London! Can you imagine anything so ridiculous? They just do it to show how rich they are. But what’s the point? It seems to me that these people live better, in many ways, than we do.”

Any wonder, dear reader, that we are becoming more and more suspicious of the green stuff? Everywhere we look we see it attached to frauds, mountebanks, swindles, and humbugs. We might as well be in a joint session of Congress.

Dollars themselves are no less of a scam, pretending to be more valuable than they actually are. But that doesn’t stop people from wanting them. They schlep and tote, sweat and strain – eight, 10, 12 hours a day – just to get more of them. And then what happens? The dollars go back whence they came. They are spent, lost, squandered – one way or another. Sooner or later, every dollar that ever existed must go back into the ether. What is there to show for them? Gadgets, health care, education – how much of it is really worthwhile? Our guess: not much.

Felipe and Marcella are penniless. They live in a house with no running water, no electricity, and no telephone. It cost them nothing to build. They have no utility bills. They have no automobile. They have no way to buy things.

Yet, as near as we can tell, they are both happy and healthy, and enjoying life in one of the most attractive places on Earth.

By comparison, your editor is a rich man. He works for his money – if you can call writing The Daily Reckoning work – but what does he get for it? Only more choices: He can go where he wants and do what he pleases. If he wants a new pair of shoes, he can buy them.

But what does he choose to do with his money? He takes an expensive vacation in South America. Why does he do that? Because, it makes him happy. What does he do on his vacation? He goes to places were people have no money. If he likes these places so much, why doesn’t he just stay there? Because, he could not make any money there. And if he could not earn money, he would be unable to afford to take a vacation. Think how unhappy he would be if he couldn’t take a vacation!

Besides, his status depends on money. No, your editor is not fool enough to want to give up his privileged life of 12-hour workdays. His cup runneth over with frequent flyer miles. He gets invited to the Jockey Club in Buenos Aires. And, Felipe calls him ‘patron.’

But Felipe and Marcella live in a kind of paradise. They have fruit from their trees, meat and milk from their animals, and vegetables from their garden. They have sun 335 days a year. They have no trouble with neighbors.

Felipe and Marcella have no taxes to pay, no parking places to look for, no club memberships, no fancy cars, no McMansions, no mortgages and no credit cards.

Statistically, Felipe and Marcella are about as rich as the average American couple. They have no assets, it is true, but they have no debts either. They entered the world with nothing. They will take nothing out with them, nor leave behind them any bills for their children and grandchildren to reckon with.

“Patron,” said Felipe as we were mounting our horses for the ride back to the house, “we hope you will come back soon.”

We’d like to, but we can only come when we can take a vacation. So, we probably won’t be back until next year, we explained.

Felipe looked puzzled. Maybe it was our bad Spanish. Or, maybe it was the idea of ‘vacation.’ You could not tell it from looking at them, but Felipe and Marcella must be among the unhappiest people in the world; they never get a vacation. It might be that they don’t even know what a vacation is.