US Debt, Money, and Future growth

The US National debt is now on AVERAGE 139,747 dollars per taxpayer, and over 50K per person.
I think its pretty clear by now, this debt based money system is doomed to fail.
Back in the 40s through 1980, wages grew for general americans, and disposable income rose.  Savings per person also grew.  Since 1980, all of that has reversed or at a minimum flatlined.

Per person, people are not experiencing increase wealth or prosperity, overall.  This is not the baby boomer go-go years, we are in the baby boomer retiring years.

There are only a few end games to the debt based system the US and by extension most of the world is on.

Currency Devaluation - Basically we borrow money for 10 dollars that can buy 20 apples, and pay back 10 dollars that can buy 1 apple.  If this manages to occur, there is much political volitility going to happen, not to mention possible currency collapse.  Also historically Wars are started over such gaming of the system.

Economic Growth - The idea basically is the US and other debt based countries (think most of europe) reverse course and start to grow well.  Salaries grow, disposable income rises, and more taxes are collected.   This time around the politicians won't do what they did in the 90's to 2012, and that is increase spending.  Instead they curb spending AND pay back the debt AND the country continues to prosper economically.   While a great outlook for the next 30 years, I highly doubt it.

Indefinite Debt - the idea basically is interest rates can fluctuate, but yet the countries manage to refinance debt indefinitely.  This is problematic, simply look at Ireland, Portugal, Greece, Spain, etc.

Default - Basically do a Greece thing, and tell the world they can't have money back for their US bonds.  Not a pleasant aftermath.

Pay It Back without significant growth - Basically all services would need to be cut to near zero in the US government on Federal, State, and Local levels.  The money collected redirected to pay off the national debt over 10-20 years.  While possible, the effect on society may lead to revolution, as basic services cut to zero.  Not to mention the army of jobs lost between government layoffs, and the jobs related to those employees. (restaurants, taxi, air, lawn guy, landlords, etc - whatever employed people spend money on)

Change the Monetary System - At the heart of what I see happening is two elements.  Lack of law enforcement and a debt based money creation system. The lack of law enforcement I'll leave aside, but it is a critical component to changing the monetary system.

Every Dollar the US government creates currently is done so with banks buying US government bonds, that once purchased, allows the US government to create new money to pay bills.   In essence, the government if forbidden to create money unless a bank buys a Bond, and assigns a rate of interest.

Granted, these bonds can be bought by anyone, but the broker-dealer system has the bonds primarily passing through the Banking system.

What if the government didnt need to sell a debt-based interest bearing bond to gain "permission" to create new money?  What if, it simply created new money?  Most equate this to currency collapse, and in some ways cheating.  Perhaps.  I think that the government should be able to simply print new cash.

For forcing an interest rate onto the government to create new money is not sustainable.  Also it smacks of why does the government need someone else's permission and a tax-rate assest to it to print new money?  How does that make it more legitimate?

The current debt system is now so deep, I think its time to realize it is impossible to pay back.  Us can default, which i think may bring down the entire system.  Indefinite debt won't work if rates rise.  Economic growth of significant magnitude while possible, is unlikely.  A new boom such as biotech will lift only the most educated, not the masses.

That lease a system change.   I dont think any major shift can be done to prevent a crisis.  It is ONLY in a crisis will people accept basic sweeping change.  If raw printing is decided, and currency does not collapse, we will enter a new era of money creation without debt.

Then, the only thing left is to enforce the law and ensure the currency faith is kept.

What does this have to do with investing?  Well, people keep worrying about the US debt.  At this point it is almost irrelevant.  The end game is known, the debt cannot be paid back under the current situation.

People think that growth, indefinite debt, etc will be the answer.  I say we are headed for a radical shift, and a debt based system being modified is the path of least resistance.

I would expect for the years ahead, gold, silver, and other "backward' money systems will gain in value significantly, as countries like China try to become a legitimate option to the USD as currency leader.   Once such a shift is announced, I expect gold will hit the high of this entire bull run.

That will be the time to sell, it will be hard, for everyone will be running to gold afraid of the new system,  Couple this with China/India populous buy gold/silver in huge quantities as their countries grow and I still like precious metals.

Chart state of Gold, Silver, Oil. Time to buy?

Lets recap from my view on the events around natural resource pricing in the last year or so.
On August 1st 2011, posted that a market crash may be around the corner, this was based on the long term weekly trend lines, in post This Week in Charts.  S&P was about 1300, just off the high of 1350.
Then August 8th posted about not panicking about US debt downgrade. The market low was the very next day and the market hasn't returned to that level since.

I started to get nervous on August 18th, sold longs 9-1-11 in post know when to hold them, know when to walk away. Then made it official with my 9-11-11 post down market ahead in charts, 9-15-11 posted about gold down ahead in Gold Break Trendlines.  Then added a bear icon added to the top of this blog on 9-18-11 in post the Bear is Back.

Since then I have been very nervous about going long just about anything.  A few times posted nibbles on natural resources.
Little bit on gold and silver on 10-26-11, in hindsight way to optimistic.
Little bit of GDX on January 26 at 55, with stop of 49 (triggered)
Little bit of GDX and GDXJ at 46 and 21 respectively on April 26 12.
Finally a timid (should have been more aggressive) in post Decent entry for miners.  GDX at 40, GDXJ at 18.50.
So here we sit with GDX at 47.73 and GDXJ at 21.13.
To date all buys since April 26th have been vindicated as good buys.  Lets try again at future telling charts.
I look at these charts and see building blocks for movements higher.
I am cautiously moving from my natural resource timid attitude as of 9-1-11 to a resource bull now.

Don't forget my disclaimer, I am an idiot throwing darts on a dartboard, invest at your own risk.

To the charts!

Gold explodes upward

Today, Gold exploded up, also silver.  Gold miners had a nice up day also.  Gary of the Smart Money tracker is convinced its time to buy.

I am real nervous.  We are on the cusp of an announcement from Europe.  If your of the belief the Germans will cave and finance the debt of Spain, Greece, Portugal, and Ireland, then buy Gold and miners on the open Wednesday.

If you think the Germans won't go for this, then a deflationary collapse is about to begin.  In such a collapse, I have a hard time believing gold rockets up.

So I am splitting the baby.  I am buying a little bit of GLD (gold) and SLV (silver) .  Why? Because if the metals explode up, it will be very hard to buy.  Each day you will look and say "that has to come back down".  It may not.  I'd rather have a toe hold to use as leverage to buy more as gains amass.

Conversely, if gold and silver are indicating a rise, but instead collapse trapping all of us in those sectors, I want to minimize losses by not taking huge positions.
I cannot day trade, i have no time.  I don't like stop losses since as we saw today, metals can move huge swings in a day.

In addition, probably buy 100 shares of gdxj, the junior gold/silver miners.
Again a toe hold, and each day I wait for the market move of Europe indicating, inflationary or deflationary event in the year ahead.  Also if the Fed announces yet another attempt to break the USD into a death spiral.

One thing is on the side of Gold and silver, no matter what happens fear tends to push up the precious metal sectors, and European fear can only help Gold Silver.

Macro View of Economics

I have mentioned the Financial Sense News Hour before, a wonderful podcast that provides a wealth of information. This particular podcast episode is one of the best I have heard in a very long time. I strongly recommend everyone to listen to it. Jim talks to George Karahalios and can be found by clicking here.

I may refer back to this entry, when it comes to justification about US Monetary Policy, Corruption, and economic competitiveness.

The world will transition in a major way in the future, natural resources are key holdings to maintain wealth.

In addition, an excellent podcast from Marc Faber, and why currency devaluation will overcome deflationary forces, and why buying gold now is still a great idea. I was surprised by Marc's comments on many of his Jewish friends purchases gold related assets in the 50 to 100% allocation level. Jewish heritage has a long term view on how to preserve wealth and build it for generations to come.

This Week in Charts - Natural Resource Update

After this past weeks natural resource correction, I figured I'd check the sectors for status update.

Below are the charts. I think buying any precious metals this week is risky after such heavy losses.

So why am I buying? Because the media loved to report on how things fell, how gas will be cheaper this summer, etc. Also, some of the charts don't look too damaged yet.

Of course, I won't go full in, the losses could continue.

But I avoided most of the damage, so why not jump on in? To the charts!

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2 From WebSufinMurfs FinancialBlog2

Damage done to silver, rebound rally buy

I may buy back into silver Friday, and hopefully my AVL positions hold.

I talked to a friend .. "happy john" stating I thought this was a setup to get gold/silver weak hands out for the next run up. I also admitted the dollar may be near a new low.

And now I just finished listening to a podcast here.

Then followed up reading the blog here.

http://www.grandich.com/

Plus Gary of smart money tracker is hitting out of AGQ.

Put this together I smell panic run! And that may be best time to buy.

If silver closes on a low Friday, its a now brain-er, I am in full force!

So I'll see what I do Friday, but starting to buy looks good.

Silver got SMOKED, as well as resources

If your in natural resources you may have seen some horrible losses on your screen.

I hit the bids hard Monday AM, as my post HERE stated.

It was a gamble, the markets could have recovered and I'd be the idiot selling at the low.

As luck would have it, what was a risky run-for-the-hills move, it turned out good.

The market was near upper trend line, and at the bottom of this post, you can see what happened once the market hit that line Monday.

Further, I sold my AGQ position last week at 364....well.....the charts tell all on how lucky I got.

So if you have been reading this blog, I am not saying now is the time to buy into resources, but things just got a nice haircut, making entry less risky.

And today the US Dollar EXPLODED higher. if this doesn't change soon, we may have seen the USD hit a year low, and we are going to see USD make a nice long run for years up....until I expect it to return downward in 2013 into new lows by 2014-2016.

For now, I am waiting to see what happens as I stated Monday. Mostly cash, just some money left in AVL, it almost hit my stop losses today. I may get hit out of that next.

I may dive right in and try to catch the falling silver knife...but I'll play that by my gut.

To the horror charts!

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

USD hits all time low....what is next?

CORRECTION, did NOT HIT 2008 lows, hit 2009 lows. See this link

http://websurfinmurf.blogspot.com/2011/04/correctionusd-broke-2009-lows-not-2008.html

No country in history has flourished with a free floating currency devaluing as a driver.

The question is, how much lower? As the currencies go lower, precious metals explode higher, as other natural resources can go higher.

Could this be the start of the end of the USD? Making not marginal lows but drastic lows from her? Could the USD enter into a death spiral here and now resulting in USD failure?

All of this is possible, anyone who says it isn't possible has a faith based bias on alternate viewpoints. The facts clearly say it is POSSIBLE, but I must agree, not PROBABLE.

Why not probable? Same as it has been since 2008, if the USD implodes, so goes the world. The world hasn't taken enough steps to decouple from USD as the reserve currency. It has made huge progress, and I predict will be ready for USD collapse 2014+, but not yet.

Back to the FACTS about this situation
1) S&P announced DOWNGRADING US credit worthiness, first (baby) step in currency collapse

2) USD hits new LOW, breaking 2008 low. Note the last time this happened, the Fed collapse the market to force people into the USD, contributing to the 2008 market crash.

3) Rumors that China is to increase YUAN valuation by 10%, a significant shift for world's second largest economy. (not fact per say, but we'll know soon)

4) The US government has proposed NO REAL debt reform, forcing dollar lower.

5) Gold, Silver, and precious metals are breaking to the up side.

6) 30 year US treasury rates are going LOWER not HIGHER

Given above and all other information, its very confusing what to do. Gary of the Smart Money tracker gave a tepid partial buy here and now. I bought in SLIGHTLY yesterday back into AVL and AGQ.

So what am I doing? Keeping my core positions through whatever happens, tinie-tiny buy above, and rest cash with a couple of shorts.

SEE UPDATE link

Monday I'll re-evaluate, for if the USD is headed into the abyss, I doubt it collapses over night, there will be time to jump onto precious metals and out of cash. I fear the weekend, for that is when politics announces major changes, shifting the market. The USD is so stretched low, it could jump overnight and crush metals. This is more possible than USD overnight crash.

For this reason, for me its a holding pattern. Good luck. See USD charts below.

Precious metals into 2015-2017

I reserve the right to change my view that I have today in the years to come.
For after all, one must remain flexible to change their outlook as new events and information come to light. Those who subscribe to a religious like belief into any one destined outcome are 99.9% likely to be wrong in the final outcome. Only the either super smart, or probably, super lucky, are those that attain the 0.1% correct outcome.

Since the start of this blog, I was ranting about not trusting the stock market valuations, the problems with financial system, the lack of law enforcement, and many other topics. I have evolved into focusing on the positives of investing in natural resources as a long term positive investment. I say long term, but that depends on the sector. For precious metals of gold, silver, etc, I have been quoting in past posts about 2013 and beyond for a top. I have said as far out as 2016, but could be farther.

Gary Savage, of the Smart Money Tracker, has become my guide for precious metals investing. I recently posted how I am sitting more on the sidelines as per his paid service recommendations. I am keeping core positions, as I will until this run ends, sometime after 2013.

Since Gary has become my guide, for precious metals investing, it is important to listen to Gary himself on his vision. I have found a nice interview with Gary about the course through 2017.

Gary DOES NOT look at things like investing in Uranium (URA, CCJ), Rare Earth Minerals (AVL, REE, MCO, LYSCF), Oil and natural gas (OIH, FCG), alternate energy (MGMXF), Food (RJA, DBA) and other resources like I do.


But Gary will probably have the last laugh as he world cannot afford the same parabolic valuation in any of those resource plays as it can in Gold and Silver. For the other resources if they go parabolic, there would be many more countries experiencing revolution. The world can remain relatively stable with expensive gold, for the world truly does not require gold to operate. The other resources....well....without them people die.

So onto Gary's interview, a must watch if your interested in precious metals.

Summary: Gold/Silver A-B-C patterns on stock relies on 3 year cycle low of USD.

2011 will see 3 year dollar low, then 2014, then finally 2016-2017

Gold/Silver will enter into a parabolic upswing for a straight year in the end.

Next cycle for gold top in May-June.

Recommend silver miners, AGQ or GDXJ.

C waves are parabolic moves, so must correct.

During correction, Gold/Silver trade sideways for a year before next C wave advance.

All systems are go

Gold breaks to new highs, gold miners breaking out, avl looking great, all systems are go.

Every cent I can is deployed with almost no shorts to be found. SLW has been a big mover, as my favorite AVL.

Other stocks that jumped today are GSS, AUY, GDX, IAG, IVN. Others with only 2-3% gain are NAK, NXG, RGLD, IVN, HMY and ANO.

GLD, PSLV didn't do so bad either.

For now, the world looks great in resources, especially precious metals and miners.

Good luck, and although nothing has been fixed in the economy, for now, its up up up and away.

Percent gains have been very welcome the last few weeks. Hard to hang on for this upswing.

Trade idea I like is Uranium sector on Slope of Hope, they got slammed with Japan problems.

Uranium is here to stay with china building crazy number of reactors.

In particular, some decent risk play is DNN and CCJ.

And I agree AAPL stock owners should take heed and put stops in, click to read more.

Sign Silver and Gold may be peaking soon

Jim Cramer to me is pretty much on target to drive the masses off a cliff. I am amazed this guy gets so much air time.

So when Cramer backs buying physical silver and gold.....that can't be good.
I am still sticking with my silver and gold miners, but I'll be quick to lighten the load if I see something that shocks me.

I still think gold/silver have years more to go, but I'd like to avoid the full pain when the market pulls back for a break.

This Week in Charts

Well, Friday's bounce was a surprise to me. In any event, it doesn't change the fact the market looks shaky to me. Everything looks shaky to me really, even natural resources.

But if you want to be in the market, I still contend food, Gold, Silver, and energy are best places to be. If I had to cut that down to top two, it would be gold and silver. Oil will continue to be very volatile between mid east and japan issues.

Why? Because in times of panic, I expect Gold and silver to climb. In 2008, the collapsed, I think this time around it may be the exact opposite. But really, who knows.

So hold onto a core position of Gold, Silver, both direct metal ETF's and miners. Keep an half an eye to either double up, or cut to the core position. But never, NEVER lose your core position.

The KEY thing to remember when looking at these charts is the USD, it is not gaining strength. That is a real problem, for what USD has had going for it is "everyone else in the world stinks, so US is better" doesn't seem to matter. Once that ace in the hole goes, watch out!

Anyway, to the charts!

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Gold, Silver, and Oil podcasts

I am recommending two podcasts to listen to from Financial Sense News Hour.

The better of the two is on peak oil, oil prices, and middle east problems. (click)

Second is gold and silver. (click)

imminent US Dollar crisis?

The US dollar has been building strength/support from a chart perspective since 2008, with the lower trend line illustrated in the first chart. From a chart perspective, if the USD breaks this trend line ,there is very little resistance from US dollar falling further. The crisis point will be 70.70.

Evidence of this is the PREVIOUS trend break, back in 2007, where the USD for the first time since 1971 (ever?), broke below 78.19, a low set back in 1992. In 2007, the US broke this level and entered a free-fall until a new low was made in March 2008.

During 2007, the US stock market made new highs, as valued in US dollars. Once the market made new highs, Oil continued to climb even after the USD dollar bottom was put in March 2008, until markets crashed in September 2008.

The USD valuation in my opinion as a key component in driving assets to extreme levels, both US stock market and resources. Notice that the USD rose rapidly mid 2008, and Oil still spiked to extreme levels, soon after the markets crashed.

The USD is currently at a level that is a critical indicator for the next crisis. Assuming the USD breaks the recent trend line, it will likely spark yet another run-away asset valuation somewhere. And USD will enter into a true crisis if it breaks the low of 70.70 set in 2008.

This is a very likely scenario in 2011. If this comes to pass, any economic recovery that is occurring in the US should be badly hurt.

It is quite likely Oil will rise with US dollar falling, but also quite likely that Gold and silver will rise much more rapidly. For in 2007-2008, speculators on overheating economies and tight supply of oil drove oil to new highs. In 2011, mid east crisis and currency crisis will drive likely both oil and gold/silver.

There is a second indicator, in the second chart, US 30 year bonds. The trend line dating back to 1985 is in jeopardy. I had previously posted that we broke this trend line, I was wrong. The tools I have don't go back to 1985 on a daily basis. The Chart Store has charts updated periodically, going back decades. From this latest long term chart, it looks like we are pressing on the downward trend line since 1985.

A combination of breaking cheaper bond rates combined with USD driving to new lows will provide a super-charged cocktail mix that should drive some asset classes to new highs. My bet is gold and silver will benefit based on previous posts. See "Time to play parabolic chicken" for investments I am interested in.

Losers will be those invested in longer term bonds, mostly over 5 year maturity. Also pure cash storage will be damaged ASSUMING the USD never returns to current levels. I think that this is quite unlikely, and instead what will occur is after a crisis occurs the USD will regain value.

This is the moment of truth, what I have been concerned over since the start of this blog, and more so since the fall of 2008, when I switched to gold and natural resources. Those invested in pure cash will need to count on USA doing the right thing to generate a sharp turn around in asset classes. I will be making the same decision, but only after gold, silver, oil, food, etc explodes upwards. The decision will be to get off the bullet train before a crash in resources......or not and keep resources to retain wealth in a spiral of USD failure.

I truly have no idea how this plays out, but this is why it is prudent to diversify into 25% resource based investments (or more).

I may be blogging in a month, crisis averted, from a chart perspective, and we have returned to the historical range. But March is likely to bring interesting events.

From a cycle perspective, Gary of the Smart Money Tracker also believes there is a high chance gold/silver and possibly other resources explode upward. Gary's view PRIMARILY uses broader market trend view of gold is in a bull run, where we are in a cycle for a commodity, and other factors.

The fact that my view of USD valuation and interest rates will drive a new USD crisis like we had in 2007-2008 is inline with Gary's method of timing markets makes for a very compelling story.

Good luck, and here are the charts, from The Chart Store.com

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

India and China love gold and Silver

Well, its good to see media finally giving credit where credit is due. Instead of doom and gloom of the dollar moving to worthless as the reason for gold and silver's rise, article links China and India consumption as voracious.

Most interesting is this quote:

"Chinese government is encouraging their citizens to buy physical gold and silver bullion having banned gold ownership from 1950 to 2003"

Woooh! if thats true, I can really see gold launching into the statusphere. As China's economic instability continues due to some pretty horrific monetary policies, I can see people pouring into gold as a safe harbor.

Remember, there are over 1.2 billion Chinese, if even 20% purchase gold aggressively, thats 240 million people. America has total of 300 million people. Then India on top of that is purchasing.

I can see gold going to ridiculous levels, just may not be in a straight line.

When this craziness ends, likely years from now, it isn't going to be pretty. At some point gold will utterly collapse the day those chinese want to sell gold. I don't see that in the next 7 years or so, since most people buy gold like a ponzi scheme and hold.

Good luck.

Comex hikes margin requirements for some commodities

On January 5th, I posted about the intent of the Futures Trading Commission to clamp down on large positions in futures. That event will take months to come into effect. I stated that any regression of commodities due to this action would be temporary, and that speculation is not the root of commodity price jumps over the long haul. Speculation price spikes can only happen in a market where the spread between production and demand is tight.

Recently commodity prices has been falling, and Thursday we know why. Comex today raised margins requirements for gold and silver by 6%, along with some other commodities. The recent price declines I suspect was big money with the inside scoop lightening positions to avoid the required sell off to meet margin requirements.

Of course, I am wrong, since that would be illegal for insider trading information on government regulation changes......

In any event it will be interesting to see what this, and future steps will do to commodity prices. But make no mistake we are in a commodity bubble run, being fueled by all the loose money finding a "home" in commodities.

I am basically waiting for Gary of the smart money tracker to give a green light for gold and silver for me to reload.

Chadv11-23

Ditto Head - One month later

On August 24th, I posted an entry called Ditto Head, where I basically stated I finally became a convert of Gary of the Smart Money Tracker. While I always agreed in general with Gary that precious metals is a good long play in these uncertain economic times, I have been skittish on Gold, Silver, and Gold/Silver miners at times.

Gary on his blog, and on his paid service, is now calling for a possible pullback on gold/gold miners starting as soon as Monday, but the bull will resume. I am not going to republish from his paid service the details of what levels he is predicting, duration, targets, etc.

While I am confident that in the next three yeas Gary is going to make some huge mistake (he is human), I am also confident his insight and methodology is sounder and more accurate than anything I could come up with. Therefore, if you want the odds in your favor, seek out his advice and invest at levels your comfortable with considering the risk the international market faces.

My blog is just going to be commentary on the financial goings on, politics, etc, and not for specific investment advice for the foreseeable future.

With that said, I also believe Gold is the last, and Ultimate Bubble, one that will come with the eventual international currency crisis. And all bubbles pop. I do NOT believe gold is money, and I do NOT believe Gold is a lifelong investment.

Gold is a commodity, like coal, or oil, or copper. And the hedge why I have always liked gold is as India and China have more paper money liquidity, more money will flow into gold. Both these countries have 1,000's of years of the common people having gold as a centerpiece in the social behaviors. Between the economic and political uncertainty, and 2.5 billion people having more paper money to spend in commodities, is why I like precious metals.

But in the very long run (5 years? 10? 50??) Gold will pop, like all bubbles. But I'll worry about that if/when Gold really starts to skyrocket as a parabolic blow off is occurring.

So, lets take a look how the ETF's and stocks I mentioned on August 24th have done in 30 days, since I announced I am now a Gary Ditto Head. (Note Gary sticks to gold/silver, does not dabble in food)

UPDATE: I screwed up making the chart below, i forgot to make the prices static for 9/24. See post Ditto Head, 7 weeks later

I will be adding this post to my New Reader.

Good luck!

Stock EFT SIL vs PAAS and SLW

Reader Bob G. wrote to me:

With respect to SIL I personally think one is better off just owning PAAS and SLW. The problem with SIL is that its bogged down bu HL, CDE and SSRI the latter of which put forth a huge stock offerring about 6 months ago at $17 which has put a ceiling on that stock.

Thanks Bob, I'll diversify into PAAS and SLW.

Ditto Head

I am 99.9% now a convert of Gary of the Smart Money Tracker. I have been bullish on gold since Sept 2008, but unfortunately, I played in other areas since then. If I was smart enough to have stuck only with gold and resources, I would have saved a bundle in losses.

Gary has a paid service, that I pay for. He is positioning for what looks like will be a huge explosion up in natural resources. (or possibly a huge failure). I'm in the camp with Gary on explosion up.

Gold/Silver valuation is about people diverting savings to "opt out" of the normal financial system. While I am NOT a proponent of "gold is money", I am a proponent that people will flee to gold in times of crisis.

Of note, the USD has been on a rally in value, and is about 83. The crux of the question comes down to will USD continue to rally, or at least trade in a range retaining value, or will it fall?

For those long time readers, you have seen my friend John Chinnock post on this blog. On this one issue, me and him are not in agreement. He has little concern over USD valuation until after 5 years from now. While I am skittish. I'm not YET in the camp the dollar will swoon into the abyss, but I do think it should continue to weaken. I mention John since he is a professional trader for over 10 years, and has been a big influence with me. And we are now parting ways on our approach. He is looking to put savings into bonds. If the USD retains or gains value, he is dead on as the right play. However, if the USD does swoon, or at the very least fear over currency games increases, the better play is in natural resources.

For now, Its still the same old mantra since July, look at buying :

GLD - 120.36

SLV - 17.99

GDX - 50.30

GDXJ - 28.60

SIL - 14.73

Food resources

RJA (food, not metals) - 8.03

DBA - 25.86

Monetary system failings

I have read, and been thinking about money as a problem. A problem that all of society depend upon for functioning. In many aspects a good money system is more critical than fresh water, food, or even air. Without a good monetary system humans would literally not be able to evolve much further than everyone being farmers and hunters.

The function of money, as I previously discussed, has a basic issue. When work is done by a person A for Person B, Person B now has a debt. In effect Person B must provide the amount of work VALUE as person A to repay that debt.

The problem, writing a debt note, is rampant with corruption possibilities. The true nature of the corruption is the act of creating the debt note. A third person not involved in the transaction has no easy way to verify the debt note authenticity. Furthermore, a third person accepting the debt note has no way to ensure exchanging the note with anyone other than the person who wrote it.

So the true nature of money is a system to track the AUTHENTICITY of work being done. Also money has to have the ability to be UNIVERSALLY ACCEPTED. Finally, by limiting the power to create money to a few (such as a one entity, like a government), the risk of creating money for no work done (in effect, distorting the money) is greatly reduced.

The problem comes when the entity responsible for creating money succumbs to temptation of creating money without work done. When the central entity in effect doesn't uphold the standards of money creation, retaining it's value.

So therein lies the problem, you want money to be created as a debt note on a person-by-person basis. Creation of wealth is the ACT of doing work for another person, and that person then owes the same value of work back. But creating debt notes on a person-by-person basis is not trustworthy nor is it universally accepted. Therefore, a central agency such as a government creates money in a reasonable fashion to represent the work being generated by society within a reasonable range of accuracy.

Too few dollars created by central government

If the central authority creates money say at the rate of ZERO new dollars per year, the effect on society would be devastating. This can happen when money is based on precious metals such as gold. If a government can only produce X coins per year due to limited production capability, you starve the societies prosperity.

Too many dollars created by central government

If the central government produces too much money for work being done, the government in effect is committing fraud, akin to what would occur if individuals where allowed to make money. This results in currency devaluation, or even collapse. Some economists equate this to the word inflation. Inflation is a word I avoid, since it is used to describe too many different aspects of monetary valuation and policy. I prefer currency devaluation to be more accurate.

Creating dollars by central government AND banks

The US and most of the world use a money and credit creation system called Fractional Reserve Lending. When banks acquire new monetary assets, they can lend out MORE than they have in assets. The ratio of leverage is restricted by the government managing the monetary system. The level that is rational for maintaining low risk is of great debate. A ratio of 1:1 in effect means the bank can only lend out money they have in storage. A ratio of 2:1 in effect allows the banks to create credit at the rate of 2 dollars for every one they have.

Bear Sterns and others had ratio's of 30:1. THIRTY to ONE! That means if one of those loans goes completely south (cannot be paid back), the other 29 dollars have NO assets backing those loans. In effect Bear Sterns would have created money in the form of credit, in a fraudulent manner. Such high leverage by most (not everyone) is considered unsound. I am of the opinion leverage should be set between 1:1 to 4:1 in a Fractional Reserve Lending system.

The benefits of a Fractional Reserve Lending system is it allows money (in the form of credit, which in effect IS money) to be created by others, not just the government! This system comes closer to the ideal system where each person could create money when they do work for another person. By allowing others to create money than the central authority, money in theory can be more effectively created as demanded by the productivity of society.

In a pure precious metal monetary system, the ability to create debt notes for work done would be put into the hands of the very few. A Fractional Reserve Lending standard is in effect an extension of FIAT currencies, and therefore money is not backed by precious metals.

Unfortunately, Fractional Reserve Lending systems also fail because of two sources. First is, the government FIAT currency creation is done in an unsound manner. The banks are also empowered to do the same and can create massive fraud due to high ratio's. (in a 2:1, worst case is create 1 "fake" dollar for every dollar, for example) The higher ratios allow just by pure mathematics more fraudulent loans to be possible in relation to every true dollar saved.

Money Creation Tax

In the US based system, the US government cannot create debt notes without an attached "tax" to each dollar created. In my original money creation example of two farmers, when the farmer exchanges food to a shoe maker, it would be like attaching a interest rate to be paid to a third party for the privilege of the shoe maker writing a debt note. This unseen "tax" on every dollar created eats away at the wealth of society generated, and is a large reason for currency devaluation. The debt based system spirals out of control, eventually collapsing. In the US based system each dollar created by the US government must be first be backed by selling a bond. If the purpose of creating money is to capture work done, this interest rate is not required. Why should the US government have to pay banks to create money? Why do they have some sort of special rite to be the masters of money creation?

Money creation belongs to the people, those who create the work, those who are OWED work. Not the banks.

A better Monetary system

This post turned out to be pretty long. I'll create a new post of my thoughts of a better monetary system.

(thanks to John and Swan for proofreading)