Gold Investment

Today might be one of the biggest news days in the various bullion markets that I’ve seen in almost a year. The price of gold isn’t big news, not to gold bugs such as myself. We all know that not only is the dollar being devalued faster and faster as the U.S. Treasury printing presses are run at full speed, but we’re also seeing nearly every other paper currency in the world following along.

Most mainstream media outlets are talking about the U.S. dollar’s year-low against the Euro, but most are ignoring the fact that both currencies are at nearly record lows against gold and silver. As I’ve said before, no matter where you are on a sinking ship, you’ll both eventually be under water. The U.S. dollar might be sinking faster, but it is crazy to compare it to any other sinking currency just because the other currency might have a better view of the ocean closing in.

The fall of paper currency reminds me of a historical disaster that occurred 100 years ago, in April 1906: the burning of San Francisco. This nearly-forgotten quake was followed by a massive fire that left every nearly building in rubble. The story that comes to mind is that of A.P. Giannini, who was woken up by the great quake, and then performed a market miracle: he grabbed some horses, a borrowed produce wagon, and headed on in to save his business. Giannini was the founder of the Bank of Italy in San Francisco, which was founded in 1904. His bank building was in ruin, but Giannini was able to sift through the rubble and ruin to collect his deposit: nearly US$2 million worth of gold. Giannini was wise not just to save the gold deposits, but he also secured them by covering his produce cart filled with gold with vegetables to mask the value as he rolled out of town.

The other San Francisco bankers were attempting to shut down the entire market by closing the banks, giving them time to figure out what to do. Giannini wasn’t part of that, the market must continue was likely his thoughts. He opened up his temporary loan center on the docks of San Francisco’s North Beach, opening up lines of credit to those ready to rebuild their lives and their businesses. There was no Federal bail-out here, there was an entrepreneur with insight who was the main reason that San Francisco was rebuilt. FEMA did not come to the rescue, a child of immigrants did what was needed, and businesses went up nearly as quickly as the fire took them out.

Giannini spent the next 3 years building his own wealth by helping others do the same. In 1929, he purchased the Bank of America, a bank that today is second only to Citigroup in assets over half a trillion USD. Giannini wasn’t an educated man, heading to work in his early teens, and building his empire before the age of 60 on hard work and a focus on real capital and solid loans. Today’s Bank of America looks nothing like the business that Giannini strives to build. His was based on gold, strong currency, and investing in a business market that isn’t complicated by a failing currency and excessive regulations.

I look today over the wealth of news from the mainstream and the sidestream media and wonder what happened to people like Giannini who were able to use a strong money (gold) to help build a strong economy. Bolivia just nationalized its gas resources, a sure sign of future instability in the price of oil. Just as nationalized health care and nationalized education leads to critical resources being reduced in supply, Bolivia’s public acquisition is one that will rear its ugly head soon enough. Watch the Bolivian market fall quickly, as history has shown it will do for a country dependent on the entrepreneurs to market resources wisely and efficiently. Bureaucracy is the greatest tax on human growth. The more international the bureaucracy, the harder it is to get anything accomplished.

It looks like Indonesia understands this, to a point. They announced today that they will be accelerating their payment of nearly US$8billion in debt to the IMF, getting them out of the regulatory bureaucracy associated with receiving an emergency loan from the international fund. Paying off the debt in 2 or 3 installment payments will relieve Indonesia from a great burden, and allow it to compete again on the international market.

Investors are becoming angry at Bernanke’s and Trichet’s failure to communicate properly. It seems that the collusion between the U.S. Central Bank chair and the Euro’s chair is easily ignored as long as the currencies don’t rise or fall much against each other. Rather than asking both to stop devaluing their currency, in unison, investors would rather see them both devalue them equally. These aren’t investors such as you and me, these are the players who depend on charts moving up — charts that move up based on the influx of new money injected in the world market by both Central Banks.

I’ve spoken about how bubbles never really disappear, they just shift from one market to another. Austrian School economic scholars such as von Mises have shown that bubbles are created by an increase in money supply — the main game of the various Central Banks. The European Manufacturing Sector announced today that their base has expanded the most in 5 years, with a big thank-you to the Euro’s power over the dollar since 2001 (nearly a 40% increase). Creating this easy money is an excellent process for those well connected to the banking industry and able to not just acquire the new cash at low interest rates, but also use it before the new cash creates the long-term inflation that comes along with money supply creation. It is no wonder that the investor insiders are mad at Trichet for considering slowing down the money supply growth.

Looking back at late Giannini’s Bank of America, it seems like the big news on that megabank is their sales of their Brazilian unit for nearly US$2.2billion, announced today. The South American unit of Bank of America has a history almost as long as the bank itself, with the original acquisition (BankBoston) doing business in South America as far back as 1791. It looks as though Bank of America will use the funding from the sale to acquire banks in China and other Asian nations.

In other South American news, Chile is planning on investing the profits from their copper mines in foreign markets. This could lead to an inflation in the indexes of the markets as the new money floods in, reducing the supply for lower prices stocks and making the investors happy. For a gold bug such as myself, I would not think of selling off a hard money such as copper for paper stocks, but it is always part of the game to try to acquire more liquid resources that might have a higher upside potential. I don’t believe this will be a wise decision for the Chileans, but only time will tell.

Bullion Market Recap

Gold Close: US$664.20 (up 1.00% from yesterday, up 54.93% for year)
Silver Close: US$14.19 (up US$0.27 from yesterday)
Oil Close: US$74.55 (up from yesterday)

Gold to Oil Ratio: 8.9095 (dropped from yesterday)
Silver to Oil Ratio: 0.1903
Gold to Silver Ratio: 46.8076

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