How To Make More Money

“The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault.”

That report from Bloomberg is the latest chapter in the amazing gold story. The report notes the endowment fund holds 664,300 ounces of the shiny metal in a New York vault.

So, does that mean gold – and silver – have hit the mainstream?

No. It’s still a fringe investment.

As our old pal, Diggers & Drillers editor, Dr. Alex Cowie likes to point out to anyone who’ll listen:

“Gold bears like saying gold is in a bubble. It makes them feel better about not owning any yet. It’s hard to see how gold is in a bubble when it still only makes up 0.6% of global financial assets – the same as it did 20 years ago.”

Besides, you only have to watch the mainstream reaction to gold and silver, to see the majority still don’t have a clue.

Laughing at Schiff

Take this clip from a recent edition of Fast Money on CNBC.

The guest, Peter Schiff, tries to explain to the mainstream drones how the price of petrol is actually at an all-time low, not an all-time high.

But how’s that possible?

Everyone knows a barrel of crude oil is over USD$100. And that petrol in Australia is above $1.30 a litre and more than $3 a gallon in the US.

Only a fool would claim petrol is cheap. Amazing as it sounds, it’s true…

Petrol and oil are only expensive if you price them in dollars.

But if you price petrol in ounces of silver, guess what? The price has actually fallen… by about half! Watch the clip to hear the explanation.

Put simply, a US 1946–1964 silver dime (10 cents) has a melt value of about USD$3.30. It’s about 90% silver and 10% copper.

During the 1950s, gasoline in the US averaged around 18 cents per gallon. So you’d need two dimes – and get two cents change – to pay for a gallon of fuel.

Today, the cost of gasoline in the US ranges from USD$3.57 to USD$3.82 a gallon.

In other words, you’d only need one and one-tenth of a 1946–1964 silver dime to pay for a gallon of fuel!

So Mr. Schiff is right. Priced in terms of real money – silver – as opposed to fiat paper money, US gasoline has never been cheaper! Yet still the drones on CNBC laugh at Mr. Schiff.

At the end of the clip he asks if they’ve bought any gold and silver yet. They just ignore him.

Inflation is state-sponsored theft

Unfortunately, because of the wholesale theft of wealth from the people by the state, few individuals have been able to protect their wealth. The US and other countries on a fiat currency stopped producing real money decades ago.

And remember the Stock Doc’s comment, “gold… still only makes up 0.6% of global financial assets.”

Silver probably makes up an even smaller amount of global financial assets. So only the lucky or well-prepared few would have bothered keeping a stash of old dimes in their pocket.

It’s an amazing indictment of the incompetence and fraudulent money creation of central banks and retail banks.

But not only that, it provides a perfect example of how precious metals can protect your wealth against the policies of central bankers. The very people lauded as gods by the mainstream are actually more interested in inflating the money supply to serve their political masters and help line the pockets of themselves and corrupt bankers.

For all the talk the central bankers blab about controlling inflation, be under no illusion – they’re lying.

The last thing central bankers, retail bankers and politicians want is to stop inflation. It’s not in their interests. They need inflation to march higher… because they benefit from it… while you lose.

This is precisely why we insist on holding gold and silver in our portfolio. Diggers & Drillers editor, Dr. Alex Cowie thinks the same.

As the Stock Doc pointed out yesterday afternoon:

“The silver price has just hit an all-time high if you price it in Aussie dollars.”

Does that make it a sell? Not likely…

This month the Stock Doc plans on making the case for silver in his next issue of Diggers & Drillers. If you haven’t caught up with the Dr. Cowie’s monthly resources-based investment advisory, click here for details.

Aussie best of a bad bunch

But while the US dollar has lost value against gold, it has also lost value against the Aussie dollar.

Reports such as this have been all over the press this week:

“Dollar riding high on market confidence”

Although we’ll argue the high Aussie dollar has absolutely nothing to do with “market confidence”.

It’s simply a reflection of the weak US dollar.

And the US dollar isn’t weak because investors are confident about the economy. The US dollar is weak because the US Federal Reserve is printing about ninety billion new dollars each month… something it has done for the past five months.

That means investors the world over are ditching greenbacks that pay nothing and searching for assets that pay something… such as the Aussie dollar.

In other words, the Aussie economy is the best of a bad bunch. It’s the one-eyed man in the kingdom of the blind. But that doesn’t mean it’s good.

As we’ve written for a long time now, the only thing keeping the Australian market from crashing is the Chinese buying Australia’s resources.

When that stops… kerblam! It won’t be pretty.

But even our explanation simplifies things. Because it’s not just investors buying higher yielding Australian assets. What it also comes down to is China exporting its inflation to Australia.

Why else have the official Australian inflation figures ramped up to 3.2%? Oh yes, I know, bananas and petrol is the cry from the mainstream.

Don’t believe it. It’s just another smokescreen peddled by the mainstream to try and convince you everything is fine, apart from these short-term hiccups. Just like the property spruikers blame the floods for falling Queensland house prices.

What they ignore is that Queensland house prices were falling before the floods hit. The flooding just gave the market another nudge down.

But back to the Chinese and Australia importing inflation.

Australia importing inflation

You see, what’s happening is a chain of events. The US is creating bucket loads of inflation through printing money. The problem is that in order for the Chinese to keep its currency pegged against the US dollar, it has to create the same amount of Yuan.

If it doesn’t, the Yuan will appreciate because there is less of it relative to the US dollar. That would make its exports more expensive for Americans and would pose serious problems for the Chinese economy. And it would make it impossible for China to hold the peg with the US dollar.

So, the Chinese have to print as much money as the US Federal Reserve. But what does it do with all that new cash? The Chinese have invested it. They’ve been reluctant to buy US Treasuries because they know the US dollar is being depreciated.

Why would you invest in something you know is losing value? So they’ve invested elsewhere – infrastructure, property and resources.

As Dan Denning wrote to subscribers in a recent Australian Wealth Gameplan update:

“When a Chinese firm has export earnings denominated in dollars, it needs to exchange those into Yuan. The government or the banks assist by buying the dollars with Yuan from the PBOC. This creates a torrent of Yuan in the Chinese economy (as does the currency manipulation to keep the Yuan exchange rate fixed by selling Yuan and buying dollars).

“Left to their own devices, banks with too many Yuan would invest them in something else quickly. Cash is no fun to hold when you can speculate in commercial and residential real estate. Hence the report I wrote last year, Exit the Dragon, in which I described how this flood of Yuan (bank lending) was creating huge un-manned cities and massive property price bubbles.”

China has tried to manage the “flood of Yuan” into the economy by increasing bank capital requirements – requiring them to hold more cash in reserve – therefore reducing the amount that can be loaned.

Arguably this has come too late. The best way to prevent a bubble is not to inflate it in the first place.

But as with all investing, the key is not to panic. Dan reckons he’s got the answer to protecting your wealth from the soon-to-pop Chinese resources bubble. If you’d like to find out what Dan has in mind, take a moment to read this special report…

The fact is, it’s hard, if not impossible to isolate bubbles to one asset class or geographic location. As is obvious with Australia’s housing bubble.

The greatest shortcoming of the human race

News out yesterday reveals the Australian housing bubble has already popped and is deflating fast – as we warned it would months ago. Yesterday The Age reported:

“Home prices in biggest drop in 12 years”

The article notes:

“Capital city home prices continued their downward slide in March, posting their worst slump in at least 12 years as the property market showed more signs of sagging demand. Brisbane and Perth fell the most.”

Hmmm, how’s that possible when the “stronger for longer” resources boom is still at top speed?

Interesting, isn’t it? It’s easy to get caught up by the euphoria. You hear a politician, public servant or mainstream analyst claim the resources boom will last fifty years, and some assume that means growth in asset prices will continue at a sustainable rampant pace – even gold and silver will fall in value at some point.

The trouble is, it ignores something in mathematics called the exponential function. Your editor isn’t a mathematician, so we won’t try to explain it.

Instead, why don’t you watch this video of Dr. Albert A. Bartlett, physics lecturer at the University of Colorado. In it he claims:

“The greatest shortcoming of the human race is our inability to understand the exponential function.”

This is how he explains it:

“Every time the growing quantity doubles it takes more than you used in all the preceding growth.

“If this modest 1.3% per year [of population growth] could continue, the world population would reach a density of one person per square metre on the dry-land surface of the earth in 780 years. And the mass of people would equal the mass of the earth in 2,400 years. Zero population growth is going to happen. We can debate whether we like zero population growth or don’t like it, it’s gonna happen whether we debate it or not, whether we like it or not.”

We first highlighted this video just over a year ago. We compared it to the housing spruikers who claim house prices always double every 7–10 years. We also compared it to the drones who bang on about a housing shortage, and pointed out that if the housing shortage did increase at the constant rate the spruikers claim, the shortage of homes would be greater than the entire Australian population by 2050!

Clearly that’s not possible. You can read our March 2010 article here.

To put it in the context of house prices, it means every time house prices double, the total value of the price increase exceeds all previous house price increases!

The point is, exponential growth can’t last. Eventually it breaks down because the growth rate required to sustain it can’t be sustained. This is exactly why the Australian housing bubble was always destined to pop.

In reality, the whole debate wasn’t about whether the housing bulls disagree with the housing bears, it was about whether the housing bulls disagree with the laws of physics… we’d take the side of physics any day of the week.

Cheers.
Kris Sayce
Money Morning Australia