"His master said to him, ‘Well done, good and faithful servant; you have been faithful over a little, I will set you over much; enter into the joy of your master.'"
Today oil is above $90. Last night I paid $1.119 (CDN) per litre for gasoline to fill my wife’s RAV4. Unlike most people, I actually have a smile on my face when filling up.
I really owe a debt of gratitude to Ben Bernanke; you see he told 60 Minutes that he won’t stop with QE2–600 billion. Quantitative easing is a fluid concept. It is really as much as you need to make everything happy again. And this is really like pouring money into my portfolio: my positions are short the US dollar. I’ve sold put options in US dollars against Barrick Gold (ABX), Gold Corp (GG), New Gold (NGD), Penn West (PWE), Pengrowth (PGH): gold and oil. I hold long positions in most of these companies too. Thanks Ben. You have provided me with the Bernanke put so that I can invest in these companies virtually risk-free; if the economy sucks, you have decided to poor gas (QE) on the fire, and they are assured to explode in price. Dear Ben, have I told you recently that you’re my best friend? Now I know you think you can control inflation. As long as you believe you can, you will continue to put money in my portfolio. So please, by all means, just keep it up.
Nota Bene to my esteemed readers: I may be just a little ironic in my tone above–I’m yanking Bernanke’s chain–not that that important man has either the time or the inclination to read my humble blog. What I actually believe is this (does this scenario seem unreasonable today?):
I have written a couple of posts on how there is more gold paper than there is physical gold. A year ago, Adrian Douglas wrote that there were four owners for every ounce of physical gold that is traded. Recently, he told Peter Schiff that 45-100 times more gold paper exists than physical gold (see this post).
I concluded yesterday that banks which sell gold certificates do so on a fractional reserve basis. How can they dare take such risk? If the price of gold doubles, so would their liabilities! I was thinking about it after writing yesterday’s post. It is clear that the banks count on always being able to sell new certificates as their old customers begin to cash in the old ones. Thus, they count on an active trade in gold certificates and continue to make a profit on the premiums, as well as continue to lend out the proceeds from the sales. The Bank of Nova Scotia, which today has a market capital of 55 billion dollars, had 3.5 billion in Gold and silver certificates and bullion liabilities in their 2009 Annual Report. Now let’s imagine a scenario in which the majority of holders of gold certificates become anxious and therefore go to their banks and demand delivery of physical gold–a bank run–and that this happens not just in Canada to Scotia Bank but globally to all the sellers of paper gold. Suddenly a 3.5 billion dollar liability could become a 35 or even a 350 billion dollar liability, as banks scramble to buy physical gold, but suddenly gold becomes scarce instead of plentiful because no one is accepting the paper anymore. This is something that could bankrupt the banks–indeed, it is the classic means by which banks have bankrupted themselves. They issue more paper than what they have physical money, and people suddenly all come in to redeem their paper for real money (gold and silver). Some financial institutions have even charged their clients storage fees for the gold and silver that they were supposedly holding for them! (See e.g., regarding Morgan Stanley).
Now, perhaps an esteemed reader of this blog says to me, “The banks wouldn’t be that stupid.” But these are the same banks that bundled good and bad mortgages and sold them to the world in the form of derivative products called “CDOs”, saying that the housing market will never go down; this resulted in the sub-prime mortgage crisis and it has proven that banks are not run by the brightest people, but rather by immoral people whose desire to become rich leads to destruction and chaos.
I picked up some shares of Sprott Physical Gold Trust on a tip from a friend who is a lawyer at a Bay Street firm here in Toronto. What backs up Sprott Physical Gold Trust? Its Net Asset Value (NAV) as of close Friday is $11.60 per share, based upon 820,753 oz of physical gold held in the Canadian Royal Mint.
It is possible to buy Gold certificates from major banks. What backs up the gold certificates of banks? Well, the Bank of Nova Scotia says,
This means that the Bank of Nova Scotia likely sells a great deal more gold certificates than the physical gold that they have to back it up, because they only hold allocated gold if the certificates are bought within an RRSP plan at their Scotia McLeod brokerage. The rest is just paper.
The idea, therefore, that there is far more gold paper than there is physical gold is not at all far fetched. This was exactly the point of a previous post that suggests that gold should be worth $56,000. But because there is many more times more paper gold than physical gold, the gold market is actually flooded with worthless papers. The Bank of Nova Scotia is not alone in this practice of selling unallocated gold.
The fractional reserve system of gold selling is a dangerous practice and it puts the buyer in a position of assuming the bank’s default risk. If you put your money in a savings account, it is insured up to certain amount. But it doesn’t seem that unallocated gold certificates are insured at all. This website seems to give a pretty good explanation of unallocated gold certificates: gold.bullionvault.com/How/UnallocatedGold
The reason why socialism doesn’t work is that it provides no personal incentive for work and productivity. Human nature chaffs against it and hates it. Each person wishes to work above all to provide the needs of his or her own self and family, not for the common good. This is an immutable (at least humanly speaking) characteristic of all humanity. Today, I wish to thank God for instituting private property rights via the Eighth Commandment: “Thou shalt not steal.”
Reason TV has made the following video explaining the true meaning of American Thanksgiving:
Rule of Law and the Subsidiary Role of Government – The government’s primary responsibility is to promote the common good, that is, to maintain the rule of law, and to preserve basic duties and rights. The government’s role is not to usurp free actions, but to minimize those conflicts that may arise when the free actions of persons and social institutions result in competing interests. The state should exercise this responsibility according to the principle of subsidiarity. This principle has two components. First, jurisdictionally broader institutions must refrain from usurping the proper functions that should be performed by the person and institutions more immediate to him. Second, jurisdictionally broader institutions should assist individual persons and institutions more immediate to the person only when the latter cannot fulfill their proper functions.
Creation of Wealth – Material impoverishment undermines the conditions that allow humans to flourish. The best means of reducing poverty is to protect private property rights through the rule of law. This allows people to enter into voluntary exchange circles in which to express their creative nature. Wealth is created when human beings creatively transform matter into resources. Because human beings can create wealth, economic exchange need not be a zero-sum game.
The socialist, utopian dream is not possible. It will result in the poverty of everyone except the ruling classes. Respect of private property and the limited role of government is necessary for a society to flourish. I like especially that the Acton Institute stresses the core principle that government must promote the “common good”. The redistribution of wealth, i.e. socialism, is not the promotion of the common good, but the good of some to the detriment of others. Most of what liberal democracies do today is socialistic: education, health care, welfare. We need to see government limited to the roles of common protection from enemies both foreign and domestic (i.e., military and police) and providing a justice system to punish crimes and to arbitrate between competing interests. Beyond that, government has few legitimate roles.
How should the Righteous Investor consider the question of abortion? Well, it is repugnant from the standpoint of the Christian world view. But should investors have a different take? Well, here is a possible consideration. It is possible to quantify the value of life by multiplying the average earning potential times 38 years (18-65). The typical human being in the USA should be able to earn a modest $25,000 per year. In this case, their lives would be worth $950,000 each. Since there have now been 50 million abortions in the United States, the total value lost equals $950,000*50 million, or 47,500,000,000,000; 47.5 trillion dollars. Now if we consider that the unfunded liabilities of the United States is around 100 trillion, doesn’t the abortion policy seem quite ridiculous from an investor’s point of view? The earnings of these dead people could have quite easily made a huge dent in this coming economic meltdown in the United States.
The Righteous Investor 