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Turning paper into Gold Bullion at the emerging-world’s central banks…

CENTRAL BANKS are becoming modern-day alchemists, says Christopher K. Potter, principal of Canadian-focused hedge fund Northern Border Capital Management Inc., which he founded in 2002.

India’s big gold purchase late last year was a game-changer, Potter here tells the Gold Report, and more and more central banks will follow suit – he believes – successfully managing to turn the paper money their countries accumulate into Gold Bullion…

The Gold Report: Just after the Reserve Bank of India (RBI) bought 200 tonnes of gold last November, you wrote an article entitled Game Changer, highlighting previous transactions such as China’s Central Bank 99-tonne purchase gold in ‘02 and Argentina’s 55 tonnes in ‘09. Since no other central bank has stepped forward in the months since India’s announcement, was that really a game changer?

Chris Potter: I think so. For as long as I can remember, gold bears have warned that central bank gold is a massive source of supply that is capable of overwhelming any conceivable demand scenario. They said that this would make it very difficult for the Gold Price to rise significantly. It’s been an easy argument to make because one fifth of all the gold ever mined is sitting in central banks’ vaults.

But what we’ve seen over the last nine years is that argument being steadily dismantled, piece by piece. Year after year, signatories to the Washington Agreement have sold less than their quota of gold. We’ve also seen various central banks add and talk about adding to their gold reserves. Then when the world became aware that the International Monetary Fund – which I think is the third largest holder of gold – was a potential seller of 400 tons, there was all kinds of speculation that this would have a very detrimental effect on the Gold Price.

Well guess what, the opposite happened when the Reserve Bank of India announced that it not only bought 50% of what was for sale but bought it at market prices! All of a sudden people realized that central banks might be net buyers rather than net sellers of gold. This was a big development. We still haven’t heard about who is going to buy the other 200 tonnes but the market no longer seems concerned that a buyer will be found. You mentioned that no other central bank has bought gold since the Reserve Bank of India announcement – well, we don’t know that that is the case. If you were a central bank interested in increasing your gold reserves, you would not likely telegraph to the market that you were doing that until you were finished buying.

TGR: Is the IMF actively trying to sell the other 200 tons?

Chris Potter: They reported that they planned to sell 400 tonnes so I see no reason to believe that they have changed their minds about the remaining 200 tons. It had been rumored that the central bank of China was going to buy the whole piece and that is why the Indian announcement was such a surprise. Perhaps China buys what’s left.

We’ve heard that the Chinese Central Bank has been a consistent buyer of gold over the last several years, but we haven’t heard anything officially. I suspect that they do not want to signal that they have a lot of gold to buy, because that would just drive the price up. If they are negotiating with the IMF for the remaining 200 tonnes, we won’t hear about it until the deal is done.

TGR: Could China just be buying it in such small increments that it might take them a year to buy it but they wouldn’t have to report it?

Chris Potter: I’m pretty sure that the US Federal Reserve is required to report purchases and sales of gold and other assets. I’m not familiar with the reporting requirements in other countries, but I would take any lack of disclosure about Chinese purchases of gold with a large grain of salt. In other words, just because they have not announced that they have been Buying Gold does not mean that they have not been.

TGR: Jon Nadler, Kitco’s senior investment products analyst, suggests that central banks’ acquiring gold is no more than re-balancing their portfolios. It’s part of a natural course of events since their portfolios are growing, and in that case, it shouldn’t affect the price of gold one way or another. What do you think of that view?

Chris Potter: By purchasing 200 tonnes of gold, the Reserve Bank of India increased its gold holdings by 50% – I would hardly call that rebalancing. But what is even more important than the amount of gold that central banks are buying is the realization that they are buying and not selling. This is a brand new idea and completely alters market perception about supply and demand. This kind of change in perception can have a very meaningful impact on price. So no, I do not agree with Jon Nadler’s suggestion.

TGR: So how do you look at it?

Chris Potter: If I were running a central bank and I had the ability to create money at virtually no cost and I could then exchange that costless money for one of the earth’s scarcest resources, why wouldn’t I do that all day long? Why not exchange something that costs me nothing for something that is incredibly rare and incredibly valuable?

TGR: It’s not a central bank’s role to print money for the purpose of Buying Gold, though. Creating more money creates other negative trends in the economy.

Chris Potter: Sure, it’s inflationary. But take the example of India buying 200 tonnes of gold. That’s a very large amount of gold, but relative to the amount of money that they are creating for other purposes, it has a very minor inflationary effect.

TGR: I’ve always had the impression that central banks were held to a higher standard to do what’s best for the economy.

Chris Potter: Well, maybe what they’re doing is best for their economies. If you’re a central bank and you’re observing that around the world vast amounts, unprecedented amounts, of new money is being created, you have to realize that somewhere down the road every one of those currencies is going to take a big hit. So, how do you distinguish you currency and your economy from your neighbors’?

Well, one thing you can do is Buy Gold. So maybe the Reserve Bank of India is being proactive about their economy. They are saying, "Look, we can Buy Gold now for $1000 an ounce and five years from now, when we are all swimming in newly printed money, gold might be $5000 an ounce. We can increase our wealth without inflating our currency to the same extent as other nations." Essentially they are hedging against a decline in their currency and that is good for their economy.

TGR: A lot of financial advisors tell investors they should have assets that include 10% to 15% precious metals as "insurance." Are the central banks looking at this as an insurance policy, too, or in some other way?

Chris Potter: I suppose you could call it an insurance policy and that is the way a lot of people think about gold. But that is not the way I think about it. I view gold simply as a currency whose supply and demand characteristics are vastly superior to other currencies. Perhaps that is a more accurate explanation for why central banks are exchanging their paper for gold.

TGR: Gold’s been trading around $1100 for the past few weeks. There seems to be some resistance at that level. Some gold bugs say gold will be at $2000 before the end of the year. Where do you project as a trend for the physical Gold Price through 2010?

Chris Potter: I have a much stronger view of where the Gold Price will be in two or three years than I do over the next few months. It’s had a good run so I am not surprised that it is taking a breather here. If I had to guess I’d say we’ll see new highs before the end of the year. I just think that the path of least resistance is up because the amount of debt that continues to mount around the world is staggering – a lot of that has to be monetized.

Everyone talks about deleveraging but the US ran a budget deficit of $1.4 trillion or $1.5 trillion last year, and it looks like we’re going to do something similar this year. I think I just read we’re trying to increase the debt ceiling here by $1.5 trillion Dollars to $14 trillion. These numbers would have been unheard of a couple of years ago. I think back to a speech that Bernanke gave in January of 2007, in which he worried that the US budget deficit would approach 9% of GDP by the year 2030.

TGR: Oh, we’re way beyond that already, and 2030 is still 20 years away!

Chris Potter: Absolutely. Last year at $1.5 trillion, our budget deficit was more than 10% of GDP. Bernanke’s great fear about what the budget deficit might do occurred 20 years early and it happened not because of our unfunded Social Security and Medicare liabilities that he worried about but because of the global financial meltdown. When we layer on the unfunded liability issues we have a really gigantic problem that will be extremely difficult to grow our way out of, despite what Washington tells us. That is why I say that the path of least resistance – the solution to this – is to inflate these liabilities away.

That requires printing money. It requires a lot of new Dollars, a lot of new Renminbi, a lot of new Yen, a lot of new Euros, a lot of new Roubles. I think you’re going to see all of those currencies depreciate against other assets, and probably most against gold. I imagine that will continue this year, but anyone who has been involved in the gold market over the last seven to nine years knows to expect some scary rides up and down.

TGR: You’ve laid out a compelling argument about all governments increasing their money supplies and we’ll have inflation worldwide. How much higher do you think gold can go?

Chris Potter: It’s always difficult to put a number on it, but the inflation-adjusted Gold Price, depending on your assumptions and in which year you start, is somewhere between $2200 and $3100 per ounce. I’ve run a number of different models to see where the Gold Price could go and have come up with anything from $1500 to $3500 an ounce. In the end it’s anyone’s guess as to what the ultimate high will be, but as I said, the path of least resistance seems to be up.

TGR: If you follow the gold patterns, the summer months have historically been relatively low, with prices picking up again for the holiday seasons, particularly in India. Given that more gold is being bought as an investment or as insurance now, do you see that seasonality coming into play over the next two to three years?

Chris Potter: As you point out, more often than not we’ve seen a rise in the Gold Price in October and November, which coincides with the Indian wedding season. I have no particular expertise here, but I’ll guess that that seasonal pattern will continue. Ultimately though it is not a primary driver of the Gold Price If you look at a nine-year price chart, those seasonal moves are just blips.

TGR: Should investors be looking at physical gold, the majors, the juniors? How should they play what you see as upward trends in Gold Prices over the next several years?

Chris Potter: My strategy is to own both physical gold and mining stocks. I focus on the smaller capitalization gold companies, the exploration companies, the early-stage producers just because if you get those right, they have a lot more leverage to a rising price for the metal.

The problem with owning only Gold Mining equities, and no bullion, is that in a market sell-off, they can go down with everything else. I know people who were managing gold funds who had a very difficult time in 2008 despite the fact that the Gold Price was up. As we saw, gold mining companies were decimated. Many of those equities were down by 50% to 90% in 2008, and the Gold Price was actually up.

TGR: So is the combination of physical and equities a kind of a hedge against each other?

Chris Potter: I wouldn’t characterize it as a hedge. I would just say that it gives you a greater chance of participating in a rising gold market under various market scenarios.

TGR: As I understand it, you consider the Canadian market somewhat less efficient than the US market, thus making it easier to uncover attractively valued companies. What do you think accounts for the discrepancy, and is it specific to small caps or also true of large caps?

Chris Potter: It’s really true of both large caps and small but it’s not a permanent discrepancy. It’s more of a lag. What I mean is that US investors take a lot longer to recognize and buy high quality Canadian companies than US listed ones. I used to be concerned that this lag would somehow be arbitraged away, but I’ve been doing this now for 12 or 13 years, and it has not.

There are a lot of reasons behind that. For one thing, there seems to be an apathy or ignorance on the part of US investors about almost everything Canadian. There’s also a perception that the Canadian securities laws are lax, that its investment community is run by mining promoters, and that US investors won’t get a fair shake up there. While there are certainly landmines to look out for when investing in Canada, they are no more dangerous than those in the US

To characterize the entire Canadian investment scene as corrupt because of the Vancouver mining community and the Bre-X Scandal in the late ’90s ignores the fact that the US has had plenty of its own investment scandals such as Enron and a banking system that perpetrated the greatest financial fraud in history this past decade.

But I can’t tell you all of the reasons for the valuation lag that I continue to see between US and Canadian companies.

TGR: Thanks so much for your time, Chris. This has been great.

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Source:21st Century Alchemy

Breast is best, robots can’t kiss, and paper money fails – in the long run – to become Gold…

SCIENCE & TECHNOLOGY have produced many wondrous breakthroughs, writes Bill Bonner in his Daily Reckoning, but there are some things science cannot improve.

A kiss from natural lips is still the lover’s choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction.

The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary…

A Scottish rogue, John Law, was the protagonist of the story. He killed Beau Wilson in a duel in London’s Bloomsbury Square. Then, he went on the lam…first to Scotland…then to Amsterdam…and finally to Paris. Like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places – in this case the Duke d’Orleans, who needed money. Law had a way to get it:

"I have discovered the secret of the philosophers’ stone," he is said to have remarked, "it is to make gold out of paper."

We need to look no further. Law may have been good with figures; it was at philosophy that he failed.

Because a thing cannot be both one thing and a different thing at the same time. It is either Gold, or it is paper. It cannot be both.

Rarity and durability give gold value as money. Paper’s most conspicuous properties are just the opposite – it is common, and it has a tendency to curl up and blow away. Law’s new, easy money helped France to an economic recovery – or so it seemed. But in the end, the philosophical error caught up with him.

Gold has real value. So if you can create it at will, why not create more of it? It was just a matter of time before he had created too much. Soon, there was an angry mob outside Law’s office on the Rue Quincampoix. People who held his paper gold had come to see it in a different light. Where once they cherished it as paper gold…now they despised it as nothing but paper.

Law’s scheme increased France’s money supply – including banknotes and shares in his Mississippi company – by 300%. Prices in Paris doubled between 1718 and 1720. Then, when the new money system began to give way, the Duke d’Orleans cranked up the printing press. By 1721, Law’s money was worthless. "Banque" became a dirty word in France, and stayed dirty for the next 200 years.

Today’s current experiment with paper money began on the Sunday, 15 August 1971. Henceforth, said Richard Nixon, foreign countries that wished to exercise their right to trade US Dollars for Gold could drop dead. From then on, the Dollar was worth only what someone would give you for it.

Philosophers held their breath. But nothing happened. Many have died since, waiting for the Dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch.

The new paper money standard allowed for a worldwide credit boom – just as in Paris following the establishment of Law’s scheme. The US created Dollars. Its citizens spent them. The Dollars accumulated as reserves all over the world…and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere.

The Japanese economy was the first to blow up, back in 1989. The tech sector on Wall Street was next to go – in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law’s example.

All nations issue paper gold – in the form of bills, notes, and bonds – as if they were the Banque Royale. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, maybe $2 trillion.

How long can this go on? Where will it lead?

"There are no means of avoiding the final collapse of a boom brought about by credit expansion," wrote Ludwig von Mises. "The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Last Tuesday, the S&P rating agency issued a warning. If Japan continues in the direction it is going, it will have Hell to pay.

Japan leads the way into the future. And into a monetary minefield. Her current deficit – a record – is more than her tax revenue. And her public debt is nearly 7 times as great. Her feet grow larger.

No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying.

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Source:The Descent of Money

Money Morning (blog)

The Obama Proposal for Bank Reform Money Morning (blog) When you're using gold coins as the medium of exchange you know exactly what you have. However, when you're using paper money you're relying on the faith of … and more »

Source:The Obama Proposal for Bank Reform – Money Morning (blog)

Is the Gold Price really managed or suppressed…?

HERE AT GOLDFORECASTER, we have absolutely no doubt that the Gold Price has been and may well be either suppressed or managed today, writes Julian Phillips of GoldForecaster.com.

Just look at the record of central-bank gold sales in the 1970s, ’80s, ’90s and in this century so far. Gold was sold during these periods first by the United States. It was done to discredit gold as money and to support the US Dollar as the prime global reserve currency.

President Nixon removed the convertibility to gold in 1971 but faced a world that did not want to replace gold with the Dollar. Tying the US currency to oil payments made it a globally needed currency. But the Gold Price still rose and in so doing cried ‘foul’, pointing to the fact that the Dollar was simply an American government promise to pay.

By discrediting gold it was taken out as an alternative money, implying that paper money was superior to the "barbarous relic". In fact, it allowed the development of the present banking system with US bankers very much at the global money helm.

Considered on a global scale, it became clear that ‘paper’ money allowed more scope for banking systems than gold (it governed the money system, bankers didn’t). So Gold Bullion was shunned to the distant background of the monetary system.

After the US gold sales stopped in the late 1970s (the demand was just too great), the International Monetary Fund (IMF) tried to disconnect gold from perceptions of money with its own sales, but these too failed to achieve their aim. Then, as stronger interest rates helped defend the value of paper money and reduce the money-price of gold, the implied threat that European central banks would sell gold deterred investors and the price steadily fell further, falling over two decades from $850 to $275 an ounce.

This fall was extended by central banks lending gold to Gold Mining producers, so they could "hedge forward" their future output for many years to come and thus maximize income, locking in current prices for fear of further drops, while actually helping drive Gold Prices down. The loans would then be repaid when the gold was produced, effectively ’shorting’ the market in the meantime.

In 1999, with the arrival of the Euro currency, the Eurozone banks signed their first "Washington Agreement", limiting their gold sales and ensuring their remaining gold reserves were not devalued. This agreement, while supporting the arrival of the new currency, helped to "contain" the Gold Price and discourage any flights to gold from the new and untried currency.

Now take a look at today’s central banks and their present policies. The European Central Bank promises not to increase or open new leasing or lending of gold. Britain is not in a position to do so, nor inclined to do so after its gold sales debacle. The United States could, but at heart (and on historical evidence) will not sell gold. (It seems they may have lent far more gold than they admit to?) And don’t expect any new gold hedging from the miners, for there are insufficient Gold Mining executives who would want to place their careers in the toilet again.

The Third Central Bank Gold Agreement is a farce with less than a tonne sold since its inception. So count out significant future central bank gold sales in support of currencies.

Look to the east, in contrast, and we see that Asian central banks are now buyers – not just "net buyers", but big buyers, having bought over 300 tonnes in 2009 alone. And they are still buying persistently, quietly each weekday.

We point to Russia and China specifically, but let’s not exclude India (with 200 tonnes of IMF gold so far, they have indicated they will buy any leftovers too), plus other smaller banks following their lead.

Why are these countries and perhaps more in the future now Buying Gold? Simply put, the trust that existed in the Dollar is diminishing. With Dollar reserves sprinting towards $2 trillion in China, they are very worried by the fall in its value, and they are right to feel that way when one looks at the almost imperial attitude of the US money lords in Treasury and the Federal Reserves. Their attitude to the international value of the US Dollar is that it is not a major concern. So if you were China, an Opec oil-producer or other Dollar-surplus holder, wouldn’t you feel vulnerable?

Wealthy central banks now want to reduce that vulnerability through gold and currency diversification. Yes, Dollar surplus holders are in a cleft stick with little way to turn but to the US currency at present. But with a potentially new petro-currency being formed, and China soon to turn to a "basket of currencies" in trade deals – rather than just the Dollar – the signs are that the days of the Dollar leading international trade are numbered.

It may take some years, but the fact that the Dollar’s position is slipping makes it clear that major currency crises are on the way. With gold an important "counter to the swings of the Dollar", it is imperative that the gold content of foreign exchange reserves be increased in those countries whose reserves are growing. Either that, or they will suffer the damage a falling Dollar will bring.

It takes gold sales to hold down and manage Gold Prices. Lending won’t do it, nor will hedging any more, because any large sales of gold will be snapped up without a really significant and semi-permanent lowering of the Gold Price. When you find huge buyers in the market, whose only concern is not to drive the Gold Price higher on small purchases, you don’t sell gold to manage or suppress price.

Right now, large central bank buyers want tonnage, large tonnage, but it is not there at the moment, so they content themselves with buying small amounts persistently as it comes onto the market. It’s a dealers dream to find a big seller and place it with a big buyer and not move the price. And it’s a buyers dream to buy big quantities and neither move the Gold Price nor be noticed. Which is where the market is now.

Yes, short-term forays into the market may happen to even out these moves, but not by central banks of note. So any scheme from now on to suppress or manage the Gold Price will face central bank buyers who will take all gold on offer. Even large quantities could be transferred with little downwards price movement.

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Source:End of Gold Price Suppression

Could today’s monetary crisis create a new Gold Standard worldwide…

The US DOLLAR has reigned as the world’s reserve currency for more than 30 years, notes the Gold Report.

That’s a real anomaly in the history of paper money, according to Stansberry & Associates Investment Research founder Porter Stansberry, but the Dollar’s days on the throne are numbered.

Celebrating its 10th anniversary this year, S&A have subscribers in more than 130 countries and employs some 60 research analysts, investment experts and assistants at its headquarters in Baltimore, Maryland, as well as satellite offices in Florida, Oregon and California.

With a sea-change in the monetary system on the horizon – and drawing ever-nearer as more and more US creditors turn toward hard assets and away from paper Dollars – he tells the Gold Report here that the world is approaching a return to "at least a de facto Gold Standard." Porter does not recommend bullion as "insurance" (because that suggests hope for the Dollar when there is nothing to pin hope on) but rather as "the perfect natural money."

The Gold Report: As someone who invests in many sectors, Porter, what major trends are you watching in the global economy?

Porter Stansberry: The major trend is a switch in central banks’ recycling of Dollars. As you know, the United States has been a net debtor to the world each year since 1976, I believe. We’ve put a huge amount of Dollars out into the world and those Dollars have to be recycled in some way.

Up to this point, central banks have been buying mostly US Treasuries. Over about the last 10 years they organized so-called sovereign wealth funds (SWFs) and have been buying trophy properties mostly, but also some operating US businesses as a way to recycle those Dollars. The most interesting thing I’ve seen in a very long time is that suddenly some central banks have decided to begin to exit the Dollar system by using trade surpluses to Buy Gold instead of either US Treasuries or US assets. I happen to believe that this is a sea-change in the gold and monetary system that will ultimately result in a return to at least a de facto Gold Standard.

I know my view is pretty far outside the mainstream, but historically, paper monies don’t last. Our paper money, which has been exclusively a paper system – not backed by any precious metals since 1971 – is getting long in the tooth and US creditors are beginning to seriously doubt its sustainability. At some point, they will say, "This is ridiculous. We’re not going to let you pay us back in Dollars that you print. We’re going to dump our Treasuries and Buy Gold because you can’t print it." Gold has always been the stable basis of money and credit because it’s very difficult to produce and it’s timeless. It isn’t consumed, it doesn’t rust. An ounce of gold mined 10,000 years ago is very likely still in circulation today.

TGR: Granted, the US Dollar is the reserve currency, but could a single currency drive the whole world to return to a gold standard?

Porter Stansberry: If you want to understand how one currency could replace the US Dollar as the global reserve currency, look into Gresham’s Law. Historically, bad money always drives out good. Accordingly, if a central bank anywhere in the world sets up its currency to be backed by any kind of hard currency, it would cause people all around the world to desire that currency for their savings, rather than Dollars.

The Swiss don’t do it anymore, but suppose, for example, that China decided to back all of its currency in silver. That would make a big difference in the market for Dollars in particular because there are so many excess Dollars around the world that have to be purchased every year that it would displace the Dollar very quickly. All you would need is a country with a large role in global trade deciding to establish a currency based on a hard commodity standard, whether gold or silver or a bi-metal standard. Those standards historically have always been very respected.

Then as soon as you have a hard currency standard, people will begin to hoard that currency and dump the Dollar. For example, the US bi-metal standard in the 1800s undervalued silver relative to gold. Within about 10 years – from 1810 to about 1820 – no silver coinage was left in the country. That happened in the 1960s as well, by the way. At that time, the face value of silver coins in circulation, the pre-1964 quarters, for example, was lower than the value of the metal. So they disappeared from circulation almost overnight.

The same thing would happen were another currency to be made more secure – with backing from gold or silver, for example – than the Dollar. People would begin to hoard that currency and dump the Dollar.

I believe that’s what we’re beginning to see with the central bank purchases of gold. It may be hard to believe, but it’s true, that central banks have been net sellers of gold since the end of Bretton Woods. It’s really an anomaly that for 35-plus years, there has been no challenge to the Dollar standard. There’s never been a time before in human history that the world reserve currency wasn’t backed by gold or by a combination of gold and silver.

TGR: Is there enough gold in the world to return to a Gold Standard?

Porter Stansberry: Not enough, perhaps, to return to the earlier standard of $35 per ounce of gold. There are far too many Dollars out there to make that conversion work. Clearly, the exchange rate would have to differ dramatically. Estimates I’ve seen say that if you divide the US gold reserves by the total number of Federal Reserve base money, you get something $6,000 per ounce of gold. It just needs to be a new hard standard that the either the central bank begins to enforce or you abolish the central bank and set up state banks or private banks based on a firm foundation of gold.

TGR: With gold at $6000, the doom-and-gloomers say, the government would confiscate it from private investors. Is that a legitimate concern?

Porter Stansberry: You wouldn’t want to underestimate the perfidy of the government. I have no doubt that the government will need to increase revenues substantially to avoid default on either debt or social welfare promises. How they will increase those revenues, I can’t predict. It seems unlikely that they’ll be able to effectively increase revenues by raising taxes because it just doesn’t work. People will find ways to reduce their income to avoid the taxes or simply leave the country. So I wouldn’t be surprised at all to see some kind of a land grab or an asset grab. I don’t believe it will focus on gold because there just isn’t enough privately held gold in the country to make a real big difference in revenues. I think they’ll go after something else, perhaps a tax on net worth, which I’ve seen discussed in Congress already.

TGR: If central banks accumulate enough gold and if a major economic power moves to gold, how long would it be before we have a de facto gold standard?

Porter Stansberry: I don’t think it would take very long at all. And in reference to a de facto Gold Standard, you can look at the European Central Bank. Of all the central banks in the world, it’s really the only one that has been reducing the size of the balance sheet over the last couple of years. It’s doing so because the Germans, in particular, have a memory, a recent history, of hyperinflation. They greatly fear hyperinflation so they’re keeping the balance sheet relatively sound compared to the others.

That’s why you’ve seen the Euro go so high against the Dollar and why lots of people around the world demand Euro-based contracts. Brazilian Supermodel Gisele Bundchen, who’s married to New England Patriots quarterback Tom Brady, is the highest-paid model in the world and she was supposedly insisting on Euros in her contract instead of Dollars.

Speaking of Brazil, there’s a country that may be strong enough to influence a global gold standard. It has almost no gold reserves now, but I think that in the next 12 months Brazil will buy enormous amounts of bullion. I also think you’re going to see the same thing from countries in Asia, particularly South Korea and China. I’m telling you, it won’t take very long to set off a firestorm of panicked gold buying by the world’s central banks.

TGR: The other metal that people consider a basis for exchange is silver, which you touched on earlier. Do you think if we move away from fiat currencies into precious metals, that silver will continue in that vein as currency?

Porter Stansberry: I certainly do, and I think that’s actually the best way for people to speculate on a change in the global monetary system. Historically, when there’s been demand for monetary silver, silver traded at roughly a ratio of one-fifteenth the price of gold. The Gold Silver Ratio does change slightly over time, going from 14 up to maybe 16.

But any time you have a monetary standard in which the ratio is set by fiat, you end up having a problem in that monetary system; so I would oppose any kind of mandated silver ratio. Given the market dynamic, it will tend toward one-fifteenth the price of gold. The silver ratio is between 50 and 60 now, so you’d have an enormous amount of leverage to the upside if there were to be a sudden demand for silver as a monetary base.

TGR: Would we need to see the beginnings of the conversion to gold as a monetary base to have silver rush up?

Porter Stansberry: There is no doubt in my mind that as central banks begin to abandon the Dollar, there will be an enormous amount of monetary demand for silver and the silver ratio will plummet. If you look at all of the monetary crises over the last 100 years, any time that there has been even a whiff of a collapse of the Dollar, the silver ratio has soared.

TGR: In our last interview, one of the nuggets of advice you gave was "Don’t buy if other people are." With ads to buy Gold Coins on commercial television now, isn’t that a signal that other people are buying?

Porter Stansberry: I can’t deny that there is more public interest in gold than I have ever seen in my career and, of course, the price of gold is the highest it’s been during my career. I would much rather have built the portfolio of gold investments starting 10 years ago than now. It would be difficult to consider allocating a large amount of capital to gold at the moment.

On the other hand, a lot of the advertisements we see are not selling investors gold, but instead are asking people to send their old junk jewelry in exchange for some cash. To me, that’s more evidence of people fleeing from the Dollar than a sign of a top in Gold Prices. I don’t think we’re anywhere near the top in gold. That’s because the key players in the Gold Price are central banks and it’s only been in the last six months that they’ve even begun to Buy Gold. So this bull market for gold has a lot, lot further to run.

TGR: As you look at gold and silver investments, how do you evaluate the difference between actual bullion and equities?

Porter Stansberry: I don’t consider the equities a gold investment. Gold equities are stocks in operating businesses that have depleting asset bases and very low margins. They’re mostly very lousy businesses, and it’s a very competitive commodity business. A whole different expertise is required to analyze the gold companies, and some people are very, very good at it. I would point to John Doody, an economist and publisher of the Gold Stock Analyst newsletter as one example. He has it all down. He’s studied the relationship between gold stocks and the price of Gold Bullion for the last 30 years.

I would tell you for most people the answer is to avoid gold stocks altogether and simply hold bullion. If I’m even halfway right about central banks abandoning the Dollar and Buying Gold over the next several years, the price of bullion is going to go up considerably. Then you wouldn’t need the extra leverage that was possible in the gold stocks to do well. Likewise, you can avoid all the risks of buying the wrong ones or getting into a period of time when gold stocks underperform the metal. And that does happen from time to time.

TGR: Many equate gold with an insurance policy and hold about 10% of gold in any portfolio. Given the situation we’re in with currencies and the central banks, are you suggesting more than that?

Porter Stansberry: That’s an interesting question. You buy insurance to cover yourself if the unlikely occurs. Homeowners insurance, for example, protects you if your house burns down or if you are robbed or something really unusual and terrible happens to your home. Most people never make a major claim on their homeowners insurance. They might have claims, but most people’s houses don’t burn down.

But to say that bullion is insurance is misleading because there is no doubt that today’s paper monetary standard will fail. There is no doubt. It’s not a question of "if" but "when." You’re seeing all the signs of a monetary collapse, where enormous debts are made because paper currency is very flexible and can be expanded. Those debts can never be repaid.

This is always how paper monies collapse and that’s exactly what’s happening to the Dollar today. You can view bullion as insurance if you think it’s unlikely the Dollar will collapse. But the Dollar is collapsing now, so I wouldn’t describe Gold Bullion as insurance. I would say that it’s natural, sound money and that everyone should consider their own personal net worth in terms of Gold Bullion. That’s how I measure my own net worth, that’s how I advise other people to do it.

TGR: So 10% isn’t enough?

Porter Stansberry: Talking about allocation is like asking, "How wealthy do I choose to be?" I keep all of my savings in Gold Bullion – no Dollars, no Treasury bonds – and try to add to my savings hoard every year regardless of the price. If the Dollar has an intrinsic value of zero, what is an appropriate price for Gold Bullion? In terms of Dollars, there would be no cap, so pricing it in Dollars is impossible. So I just advise people hold their savings in gold and to own as much as they can reasonably afford.

TGR: Is your Gold Bullion in physical coins and bars, or in some sort of trust like an ETF or something like Turk’s GoldMoney?

Porter Stansberry: A year ago, I did recommend Market Vectors Gold Miners (NYSE:GDX) , which is the ETF of gold producers. At that time, the spread between the value of their gold production and the current bullion price had never been wider, so it was simply recognition of the fact that gold stocks were really cheap relative to bullion. Because I was bullish on gold anyway, it made sense to take that arbitrage opportunity.

But generally speaking, I don’t know enough about the Gold Certificate programs or digital receipts. It would take a lot to convince me, because in my mind, gold is the perfect natural money. How can you improve on it? I don’t believe you can. I am much more comfortable simply owning the bullion, which is perfectly transportable, perfectly divisible, doesn’t rust, and is no one else’s liability.

TGR: But you pay a premium to get the physical versus buying through an ETF.

Porter Stansberry: It’s interesting that you bring that premium point up. There is a premium to Buying Gold because you have to pay a brokerage fee. If you buy real estate, car or other kinds of asset, you expect to pay some kind of a fee. I’ve paid premiums ranging from between 1% and 3%, and I always buy whatever the dealer happens to have plenty of to get the lowest possible premium. So the premium has never been a problem for me.

I don’t believe that buying certificates is a way around the premium, either. It may appear to be in the literature, but I just don’t believe it. Fees for shipping and handling and so on have to be paid somewhere in the transaction. But more importantly, assuming that you’re taking delivery of gold in the United States, I would tell you that the size of the premium will be a very accurate measure of the power of Gresham’s Law.

When the US Mint stopped producing Buffalo Gold Coins last year, the premiums on bullion delivery went way up from around 2% or 3% to as high as 8% or 10%. That’s because gold is fleeing the United States and the Mint is apparently the only convenient and easy way to get Gold Coins into the country. That’s a sign of future higher Gold Prices and also a sign of future currency controls. I think the market is judging very accurately that there is a move away from the Dollar and that the US government will attempt to stop people from not only Buying Gold in the future, but also from gold leaving the country.

TGR: Do you think they’re that smart?

Porter Stansberry: Smart would be simply to institute a new Gold Standard at the current price and lower taxes dramatically. Then the economy would boom and the problems of the last bubble would be worked off very quickly. So they’re not smart, but they are rapacious. There’s no doubt that when the Dollar really begins to crack, when China comes out and says they’re going to sell a trillion Dollars worth of Treasuries and they’re going to Buy Gold, and the price of gold goes to $10,000 an ounce and you get three Euros to the Dollar, you’re going to see emergency measures to support the Dollar. This has already happened in our history and it’s happened with lots of other paper standards – Great Britain, for example. In the near term – over the next three to five years – the US government will be forced to support the Dollar via currency controls, making it impossible to take Dollars out of the country and putting strict limits on who (and how much) is allowed to buy commodities. Buying gold will certainly be made illegal.

TGR: So get your gold now?

Porter Stansberry: Get it now or pay a much, much higher premium for it, assuming you’re still allowed to buy it.

TGR: You’ve made it clear that you look at equities entirely differently from having gold, but you did mention China. Not only is China building its gold reserves, on the road to becoming the world’s leading retail buyer of gold and encouraging its citizens to own gold, but also gold production continues to rise in China while many other top-producing countries are in decline. Last year, China’s gold production exceeded 9 million ounces of gold – more than any other country. Against that backdrop, what opportunities for investors do you see in Chinese mining?

Porter Stansberry: I’m clearly very bullish on the amount of central bank buying of gold over the next decade. If you look at the central bank holdings of gold, the first thing that jumps out is how little gold the major emerging market countries have as a portion of their reserves. China has $2.2 trillion worth of foreign exchange reserves and gold accounts for only 1.6% – a very small percentage. Brazil has less than 1% of its foreign currency reserves in gold. Korea has almost no gold. Hong Kong has no gold, period.

These are very large economies with very little gold backing their currency, so a run on the Dollar would make their currencies and their economies suffer. I expect them to move into gold in anticipation of that eventuality. When that happens, there’s obviously going to be a large demand for gold. Equally obviously, China is better off if they’re able to produce it internally. Otherwise, they’d have to buy it on the world markets.

TGR: Doesn’t China itself have some of the biggest gold mines?

Porter Stansberry: China has an enormous amount of gold resources internally as well. Our mining analyst, Matt Badiali (also editor of our Resource Report), has covered several of the different equity securities that are mining gold in China. I have actually toured several gold mines in China myself, but I just don’t know enough about those particular equities to talk about them intelligently, and I don’t personally recommend gold stocks in my newsletter. Analyzing gold stocks is a real specialty and I don’t devote enough time or resources to doing it myself.

TGR: Any other comments for our readers?

Porter Stansberry: No, I think the story is told. It’s mostly a story of central banks now buying and the reason they have to buy is that the Dollar is falling apart.

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Source:De Facto Gold Standard