first majestic silver

The mongoose and the Snake

May 12, 2003

Sections 8 and 10 of Article I of the Constitution of the United States of America read:

"Congress shall have the power -

To borrow money … to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures; … [and] to provide for the punishment of counterfeiting…

No state shall … coin money; emit bills of credit; [or] make anything but gold and silver coin a tender in payment of debts."

As far as I am aware, the Constitution of the United States of America is still the governing law of the land, and this therefore raises the question regarding the Constitutional legality of the Federal Reserve System (which is not even a Federal Government organization). It also raises the question regarding whether "fiat" money is legally acceptable as a medium of exchange.

Whilst the Constitution does not specifically instruct the Federal Government itself not to "emit bills of credit", it specifically does require Congress to "provide for the punishment of counterfeiting".

A dictionary definition of the word "counterfeit" is: "made to resemble and pass for something valuable; not genuine; sham".

From the above, it would appear that the Congress of the United States of America is nothing but a pathetic parody of what the founding fathers intended it to be. It also seems reasonable to conclude that the Congress of the United States of America - in allowing the establishment and tolerating the existence of the Federal Reserve System - has been made up of a group of gutless individuals who are devoid of the strength of character required to lead the country with integrity.

Strong language? Sure, it is. And there doubtless exists a phalanx of amoral lawyers who will be both able and willing to manipulate and convolute the English Language so as to demonstrate that there is a legal loophole in the wording of the Constitution, and that the view expressed above is therefore totally out of court.

However, the term "strength of character" was used advisedly. The INTENT of the founding fathers - when interpreted in the context of what the country had just been through at the time the Constitution was drafted - should be blindingly clear to even an intellectual hunchback: "Fiat money is bad, and we want to have nothing to do with it going into the future. Period"

Since the 1980s I have been watching the gold price and the currency markets with the sort of fascination that one watches a mongoose and a venomous snake. The reason? During the 1980s I came to understand - right down to the marrow of my bones - that when the gold price finally entered a Primary Bull Market, that would be a sign that the mongoose (gold) was once again starting to prevail over the snake (fiat currencies). Certainly that time has not yet arrived, but it is drawing inevitably and inexorably closer, and it was a recognition of this fact that prompted me to write my first Gold-Eagle article, dated 6th August, 2002 ; entitled "A Bull Market in Gold - The Flip Side".

The Primary Bull Market in equities - that gained momentum during the 1980s and 1990s, and peaked in 2000 - was "driven" by liquidity; by a flood of money which was created out of thin air by the Federal Reserve System and the Establishment banks.

That the world economy was at risk of running out of control began to manifest during the Nixon years, and this led to the final abandonment of the gold standard in the 1970s. In turn, this paved the way for an unfettered expansion of the money supply. The underlying problem finally came to a head in the early 1980s during the Reagan administration when (as a result of bookkeeping skulduggery) the liabilities of Federal Government sponsored pension funds were seen to exceed their assets, and it was at that time that a decision was finally taken to open the monetary floodgates.

What was the underlying problem?

Please read the following sentence repeatedly until it reverberates in your head:

The underlying problem was that markets for products based on old technologies were beginning to saturate in the mid 1970s, (ie when world-wide production capacity for these products began to exceed the capacity of the world markets to absorb them).

As a generalised statement, Economists and Bankers never fully understood (and still do not fully understand) that the above was in fact the problem. Yes, they understand that when the capacity to produce exceeds the capacity to consume, prices fall. What they cannot seem to get their heads around is that it matters not how much money you make available to the consumer, he cannot wear more than one shirt at a time. Market saturation cannot be "fought" by loosening the money supply. Under these circumstances, loose money leads to waste, misallocation of resources, and corruption.

From the perspective of the Fed (and given their stubborn obtuseness flowing from a built-in conflict of interest) it seemed safe to open the floodgates of money creation - because it was reasonable to expect that the pressures of price inflation that are normally generated by inflating the money supply would be offset by the downward pressure on prices caused by a flood of product into the market place. In fact, from their perspective it was not only "safe" to open the floodgates, it was "necessary" - because if this had not been done, price deflation would have led to a deflation in the money supply as cash became king, and we would have entered a deflationary Depression as early as the 1980s.

The result was that even as "officially measured" price inflation remained benign, there emerged horrendous price inflation in both the equities and real estate markets. This caused the average citizen to "feel" richer, but the fact was that it was merely a mirage. Some people who were fleet of foot did indeed prosper. The rest (majority) have experienced an overall growth in liabilities as their increased - and typically hedonistically wasteful - consumption was funded by leveraging off their apparently growing equity. In short, since the early 1980s, the average citizen has been enjoying an unsustainable improvement in living standards, funded by a consumption of equity.

Yes, equity has "appeared" to increase as asset prices inflated, but what if asset prices start to head south - as they have already done in the equity markets?

At this moment in time, the US consumer seems to be suffering from consumption satiation similar to a restaurant patron who has eaten a five course meal. He just cannot consume another morsel. Currently, motor cars are being sold on a zero deposit, zero interest, and zero payment for some months. One would think that SURELY the Fed should understand from this that ballooning the Money Supply is not the way to go! Apparently not - given that the money supply ballooned by around $50 billion last month.

Economically questionable approaches like these "Zero" deals are evidence of market saturation of "old technology" products. And it was the inevitability of this saturation that was pointing to the concomitant inevitability that the mongoose would eventually overcome the snake - that gold (and silver) would eventually triumph over fiat money.

The logic is not difficult to follow (think of Japan when you read the following)

When supply of goods exceeds demand, prices fall. When prices fall it becomes sensible to defer purchase decisions because cash increases in value over time. Velocity of money slows because demand for borrowing slows. This gives rise to a shrinking of the money supply. This, in turn, not only exacerbates the deflationary cycle, but it also places the entire banking infrastructure at risk - because banks cannot earn profits if they cannot lend money. Further, the QUALITY of bank loans becomes suspect as borrower cash flows come under pressure; and these two factors together put the spotlight on the "sensibility" of holding fiat currency - which is essentially a bank IOU that has no backing. At some point, the public starts to recognise that fiat money is not really "cash", and that the banking system is not as safe as the authorities would have us believe. (In Japan, this fact was highlighted further by a reduction of the size of bank deposits that the Central Government was prepared to insure)

It was always inevitable that the house of cards would eventually tumble as money supply would inevitably (one day) starts to shrink. It was therefore also inevitable that gold and silver would eventually start to prevail as currencies. It was a matter time.

The fact that all this was inevitable, flows from the obtuse refusal of the authorities to recognise the real problem as I have defined it above. The Nasdaq bubble represented a false dawn of "new technologies" because its underlying products/services were largely based on Information and Telecommunications technologies. These latter technologies are not "drivers" of the economy. They form part of the economic infrastructure. They do not drive commerce, they facilitate commerce.

The ultimate "drivers" of an economy have to do with Utilities (electric power generation and distribution) and Transportation (individual, mass, and goods); and that is precisely why Dow Theory monitors the technical price performance of these sectors relative to that of Industrial Equities.

But there is also GOOD NEWS.

It is becoming manifestly more urgent that we need to find NEW ways of accommodating the infrastructural needs of both our growing population and of the environment which supports this population. And, at bedrock, where there is a need there is a potential market.

At bedrock, it will require "clean" energy and "clean and fuel efficient" transport to accommodate the transportation and power consumption needs of vast hoards of people.

  • Coal fired power stations are no longer appropriate. We need to embrace clean sources of energy.
  • Oil fired internal combustion engine technology is no longer appropriate. Fuel Cell powered engines for personal transport, and magnetically levitated trains to transport large numbers of people offer the potential to solve the problems of (cleanly) moving large numbers of people and large volumes of goods.
  • Chlorine is no longer appropriate for treating large quantities of water - because of the resulting tri-halomethanes that pollute the environment. Going forward, chemical free water treatment systems will be required.

These new technologies - some of which require Silver as a raw material - cannot yet be commercialised because they are typically not cost competitive at present; and they are not cost competitive because there is no market driven imperative for them to become cost competitive. To commercialise them will require a legislated approach, such as the commitment by the USA Government to submit to the Kyoto protocol guidelines. (Historically, Governments and Central Banks and have relied on wars to provide the imperatives, but this is no longer appropriate given the dangers of world-wide destruction)

Given the mind boggling size of the Debt Mountain, I am prepared to stick my neck out here and make an unqualified statement as follows:

If the authorities continue to follow the lead of the Federal Reserve Board (which is maniacally oriented towards the supply and cost of money) and if they fail to focus on the problem of saturated markets, then we are inexorably headed for a Depression of unimaginable proportions.

The way to address the problem of saturated markets is to "force" new technologies to become commercially viable, and the way to do this is to ratify the Kyoto protocols.

The Fed is a slave to its self-interested masters - the Establishment Banks. The politicians need to take cognisance of the fact that the needs of Society now transcend the needs of the vested interests of the Establishment. A line needs to be drawn in the sand - NOW!!

In short, we are perilously close to an implosion of the House of Cards, and this is evident from the Gold Price performance since it entered a Primary Bull Market. The mongoose is prevailing over the snake.

What the World needs now is leadership with integrity.

Summary and Conclusions

It goes without saying that the following needs to happen OVER TIME, as moving too quickly could rupture the currently fragile world economy.

  • Get rid of the Fed. This Institution is becoming dangerous to the point that it will likely CAUSE a world Depression if our elected leaders do not take control of the economy, and start to behave with integrity.
  • Move to a gold standard, and exclude the Establishment Bankers from policy making discussions. They do not understand the true nature of the problem, and are blinded by self interest
  • Ratify the Kyoto protocols so that we can "force" the new technologies towards commercialisation.
  • Start NOW! We are running out of time.

Post Script

Silver is GROSSLY undervalued

In context of the above, probably the most underpriced commodity on the planet today is Silver, and for the following reasons:

1. Silver as a currency

[At the time of the drafting of the Coinage Act of 1792] "It was determined after careful analysis of the free market that the value of gold at that time was approximately fifteen times the value of silver. The Coinage Act of 1792 accordingly set the relative value of gold-to-silver at fifteen-to-one. It then authorized the federal government to mint coins called Eagles, and it specified that their value was ten dollars. In other words, the gold coins would be equal in value to ten silver coins. Ten silver coins, each of 371.25 grains of fine silver, would contain 3,712.5 grains. The content of the Eagle, therefore, was one-fifteenth that amount, or 247.5 grains of fine gold" (Source: The Creature from Jekyll Island, G. Edward Griffin, America Media, 2003, at page 321).

At today's market price of gold - of roughly $350 per ounce - the implied legislated value of silver (assuming the 1792 Act still has relevance today) is $350/15 = $23.33.

Of course, if gold emerges to become a currency AND the historical price relationship of gold to silver re-emerges, then Silver has even further upside potential.

2. Silver as a commodity

Silver is an extremely efficient conductor of both heat and electricity - much more so than copper.

For this reason, silver is a key component in the manufacture of High Temperature Superconductors - which will be used in delivering clean energy.

The use of superconductor cabling will significantly reduce (up to 33%) electricity that is wasted via heat as it is transported along copper cables. In turn, this will reduce the need to produce electricity which, in turn, will reduce the consumption ofcoal and the production of greenhouse gases. (Note: This is an oversimplification, but it makes the point)

High Temperature Superconductors will also be used as components in the production of the magnets for the magnetically levitated trains.

Silver also has an application in water disinfection.

Against a background of waning of confidence in fiat currencies, 1 and 2 above should ALSO be seen in context of the current exhaustion of the worlds' above ground silver inventories; and of the open short position of over 80,000 contracts of 5,000 ounces each on the silver futures market.

A 400 million ounces short position represents almost half the world's annual production of silver, when annual consumption of silver already exceeds production by a margin of approximately 10 million ounces p.a.

Without an increase in the silver price, mothballed silver mines will stay mothballed.

It follows that without a significant increase in silver production, there is NO WAY that this short position will be able to be covered - particularly given the likely growth of industrial silver demand in the years ahead.

It follows that Silver will rise strongly in price - whether we have a boom, recession or Depression.

Nearly 40 percent of all gold ever mined was recovered from South African rocks.
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