Jonathan Lebed and the National Inflation Association: On ending ad hominem attacks

In my last post, “Why Warren Buffet is Wrong about Gold”, which was published first by Mich at Beating the Index, I mentioned that the National Inflation Association (NIA) had decried the massive silver short position that banks, especially J. P. Morgan, had taken. J.T. McGee, 21 year old blogger and college senior, wrote:

The National Inflation Association is a joke, and it is run by a man who has been convicted on pumping and dumping stocks. He’s back at it again, this time he just takes in fees to pump stocks to his newsletter subscribers. Do a search for “Lebed.”

I knew that NIA was using its position to pump their stock choices, mostly junior silver miners.  Whether they are guilty of pumping and dumping is nevertheless unverified and there have been no convictions.  You may as well put me, Mich, and especially Eric Nuttal–for that matter just about every financial blogger in jail because we’ve all pumped our stock choices, and we make decisions to dump–which just means to sell–based upon our target prices.  We all hope that our stocks go up and that we can sell at a huge profit, and if our promotion of the stock helps, well, ain’t that just too bad?

Nevertheless, I did some research on Jonathan Lebed and his relationship to NIA.  Lebed is famous because  at the age of fifteen he settled out of court with the SEC who accused him of a pump and dump scheme whereby he would promote stocks on his website and through Yahoo bulletin boards (pump) and sell them after the suckers who read his recommendations bought in and pushed up the price (dump).  The SEC settled with him for a $285,000 of his earnings but let him keep $500,000.  In a well-researched and balanced article about the subject, Michael Lewis brings up some serious questions about the Lebed case.  He portrays Lebed as a kind of wiz-kid investor who was trading himself to a fortune already as a teenager but whose techniques of promoting his picks drew the ire of the SEC.  The article is an entertaining and informative read.  At one point Lewis asked for a statement from Lebed about the SEC accusations and their attack on him; Lebed responded with a four-page e-mail that began:

I was going over some old press releases about different companies. The best performing stock in 1999 on the Nasdaq was Qualcomm (QCOM). QCOM was up around 2000% for the year. On December 29th of last year, even after QCOM’s run from 25 to 500, Paine Webber analyst Walter Piecky came out and issued a buy rating on QCOM with a target price of 1,000. QCOM finished the day up 156 to 662. There was nothing fundamentally that would make QCOM worth 1,000. There is no way that a company with sales under $4 billion, should be worth hundreds of billions. . . . QCOM has now fallen from 800 to under 300. It is no longer the hot play with all of the attention. Many people were able to successfully time QCOM and make a lot of money. The ones who had bad timing on QCOM, lost a lot of money.

This perceptive response from 15-year old shows remarkable insight into a problem.  The real issue is to ask the question why the SEC was going after some high school kid who used alternate media to promote his stocks, when big names on Wall Street do the same using major media outlets and made billions of dollars?  Is it just because he’s a kid and therefore is not allowed to inform others of his opinion?  We all love Eric Nuttall, but every time he goes on BNN and promotes his stock picks we notice on the next market day a serious surge in the share price of his longs and a painful plunge of his shorts.  Shouldn’t he be fined and imprisoned for expressing his opinion?  Yet by all accounts, his pump and dump has many times greater effect on the oil and gas market than anything Lebed could have done on Yahoo boards and with his pathetic little website.

There is a principle in law that goes back at least to Jesus–one should not go after minnows when there are whales to be caught–or as Jesus himself said while criticizing the Pharisees and the legal experts of his own day (Matt 23.24):  “You blind guides, straining out a gnat and swallowing a camel!”  Nowadays, there are so many laws that governments could probably throw us all in jail and throw out the key, as Stalin’s chief of police said, “You show me the man, I’ll find you the crime.” It is incumbent upon government to show self-restraint and wisdom in the application of the law, lest we all find ourselves in federal penitentiaries.  But perhaps it is time for people to rise up and to curtail this arbitrary and capricious power that governments have to whimsically go after anyone that they feel like, while leaving true crooks free to exploit and game the system.  Just a few days ago, I find out that a marathon runner, Charlie Engle, who bought a couple houses goes to federal prison while the folks at Country Wide, Freddie Mac and Fannie Mae get a pass.  And why?  Because an IRS agent saw him on a running program on TV and decided that he had reason to suspect that the man had lied on his income taxes!  Beware of fame!

The NIA writes about their association with Lebed,

Jonathan Lebed learned at a young age of 15 years old from first hand experience why Americans should never believe the propaganda that is in the mainstream media. His life experiences made him uniquely qualified to write ‘End of Liberty’ and we believe he did a very good job.

End of Liberty is well-done indeed, and it points out how Americans’ constitutional rights are being abused.  I too have become a victim of the US Federal government, which is currently being run as a criminal organization.  So I have great deal of sympathy for Lebed’s opinions.  Is Lebed a good man?  I don’t know him.  Is he guilty of pump and dump?  Probably, but then so am I, Mich, and Eric Nuttall.  Do I recommend the man?  No.  Do I recommend NIA’s videos on inflation?  Yes indeed, because they are telling a very important story about how the US is going down the tubes.

So I commented to J.T. as follows:

The National Inflation Association does promote stocks. I get their e-mails. I never buy the stocks or even look at their suggestions. I found that there is the broad accusation that they pump and dump but no proof and no convictions. So I will consider your criticism ad hominem guilt by association: The logic is basically that my view is wrong because I cited NIA, which has an association with Jonathan Lebed, and both the NIA and Lebed pump and dump and therefore their information can’t be trusted. But it doesn’t deal with the substance of the issue, i.e., how big is the short silver position of the banks.

I find that many people today feel that its ok to shoot down your position by simply associating it with some kind of nefarious or criminal activity–this is classic case of ad hominem and guilt by association.  I would simply respond that when it comes to NIA, you’re gonna hafta do better than that.  When you should be attacking their views on gold and inflation, you instead attack their character.  J.T.’s argument was not substantial on this point but even after I pointed it out, he denied the logical fallacy and continued in his line that they were fear-mongering about inflation.  Well, I happen to agree with NIA and the fear-mongering, for we all need to prepare for Weimar America.

In conclusion, Monty Pelerin writes about ad hominem: “Ad hominem attacks are not refutations of ideas, merely the refuge of scoundrels promoting a logically indefensible agenda.”  Those like NIA, who offer opinions against the mainstream media and the criminals in Washington, will be subject to character assasination.  This should not bother us if our opponents cannot refute the basic arguments.

So without further ado, here is Jonathan Lebed’s (writer) video, The End of Liberty:

Why Warren Buffet is wrong about gold

NB: This post first appeared at Beating the Index.  To read or add to the comments and discussion of this post please go here.

Following the controversial Warren Buffett on Gold Investing article, I thought it would be interesting to read a different opinion on gold.  I asked my fellow blogger and gold investor Peter from the Righteous Investor if he would like to provide an alternative view on gold investing and he kindly accepted. Thank you Peter for providing us with the view from the other side.

Money is a commodity which serves both as an intermediate of trade and a store of wealth.  Money must have the following characteristics to function properly: limited quantity, fungible, portable, available.

An increase in the money supply without a corresponding increase in production of goods and services leads to inflation; inflation of the money supply leads to price increases in the following order:  (i) commodities; (ii) consumer prices; (iii) cost of labor.  Inflation therefore results in a de facto garnishing of wages.  Thus, if a government sells debt which its central bank then monetizes (i.e., quantitative easing), then government spending benefits recipients through doing irreparable harm to savers and wage earners.  Thus, if possible, retail investors must protect themselves from this harm.

Humankind has used gold and silver as money since the dawn of history.  History has shown that gold is too rare and valuable to function as the only money, for the gold standard has led in the past to scarcity, making money too little available to common people. I’ve seen first hand how scarcity of money has lead to serious problems in the Central African Republic, where the local currency is tied to the Euro, which benefits international commerce but doesn’t really help the people on the street to conduct their daily transactions because there are too few small bills and coins.  The gold standard can also lead to this sort of scarcity and that is why in the late 19th century, there were many advocates who wanted to monetize silver.  Nevertheless, the great advantage of precious metals over paper currency is the inability of a government or a central bank to create it at a whim, and therefore they are far less susceptible to inflation.

Warren Buffett’s advice about gold has had a profound effect on retail investors.  He advocates common shares in stocks as better than gold; ironically, one of the most famous articles on how companies do poorly during times of a high inflation was written by none other than Buffett himself ( “How inflation swindles the equity investor”).  So he knows very well that stocks provide little protection from inflation.  So what are retail investors supposed to do?  They can’t buy bonds or common stocks, and in Buffett’s opinion, they are speculating if they buy precious metals. But I ask, why should Buffett care?  Remember, he’s an insurance salesman and he is out to get your money.  He himself has greatly benefited from the bailouts and the monetization of the US Federal debt.  I don’t think he has the best interest of ordinary investors in mind.  And I am not alone in this opinion.

Why there is no gold bubble

An investor, particularly the value investor, must seek to avoid overpriced assets.  Value investors want to find undervalued, underappreciated investments.  There are some pretty strong reasons to believe that precious metals are oversold and not overbought:

  1. Not that much global wealth is invested in gold (see Eric Sprott and Andrew Morris).
  2. There are too many anti-gold bugs.  Despite the performance of gold in the last ten years, there are still many who, like Buffett, do not understand why it is attractive.  There is also an entire school of economics, the Keynesians, who consider gold a “barbaric relic”, and this school has an enormous influence on governments, universities, and the media.  Keynesians have been adamantly opposed to gold and silver money, because it prevents them from manipulating and controlling the economy through monetary policy.
  3. Gold is just keeping up with other commodities and is also tracking the increase of the Federal Reserve money base.  The real bubble is not gold but the US dollar.
  4. Unallocated gold and gold derivatives make up an enormous and extraordinary portion of the supply of gold in the market.  Certain banks have supplied unallocated gold certificates on a fractional reserve basis to their customers (see this explanation by Avery Goodman).  It is difficult to say how much paper gold there is, but GATA’s Adrian Douglas has estimated that there is a 40 (or as high as 100) to one ratio of paper to physical gold.  This is the crux of the matter.  If and when a physical gold run occurs we could see gold jump to 40x the current price in a few days.  For this reason, every prudent value investor should invest in some physical gold and avoid all paper gold derivatives like the plague.  The same is true of silver, but according to analysts such as Eric Sprott and the National Inflation Association, the paper to physical silver ratio is much higher than it is for gold.  This is an important warning:  Do not believe any author who says there is a gold bubble but doesn’t deal with the question of unallocated gold.  In the end, the collapse of the unallocated gold, which is so deceptively co-mingled into the gold market, may become the financial disaster of the century, eclipsing the sub-prime mortgage crisis in its wake.

How I make money from the sector

The gold sector is not safe because of its great volatility.  Since I took my first position in 2006, gold has traded in the range of $600-$1400 per ounce, and gold mining companies have experienced an even greater range of prices.  So it is inadvisable to put all of one’s saving into precious metals in a single day.  The volatility, on the other hand, lends itself to the possibility of a profitable trading scheme.  So my strategy consists of both a base position of shares that I am holding for the long haul, and the trade itself.

(1) Base position:  I started five years ago by establishing a position in Barrick Gold at CDN $33.50.  I’ve never sold those shares.  I have also averaged down, when possible  (e.g., with NGD), to establish my current position.  Here are my current positions that I have accumulated over the last five years, followed by the average cost price:

Barrick Gold (CDN $34.185; +48%), Detour Gold (CDN $14.25; +121%), Lake Shore Gold (CDN $3.41; +19%), and New Gold (CDN $1.94; +471%), Sprott Physical Gold Trust (US $12.24; +2.5%)and Sprott Physical Silver Trust (US $12.65; +37%).

Gold and silver coins and bullion must be stored in a safe place, so I wouldn’t own any unless I believed that the economic collapse was imminent.  Therefore, the Sprott physical gold and silver trusts are a means of having direct exposure to the physical metal without having to worry about being robbed.

(2) Trading:  (a) I used to trade gold mining stocks, especially ABX and NGD.  I would try to buy on dips and take profits as enthusiasm picked up.  (b) One year ago, I started to sell put options because it was safer than taking long positions, though it would reduce the upside potential of my positions.  I have been selling these puts (in ABX, GG, NGD and DGC) since 2010.  I do this trading on the US market whenever possible.  I was of the conviction that QE would cause the mining companies at very least to remain static in value vis-à-vis the US dollar, and indeed, only one out of the multiple positions that I’ve taken in put options has ever been assigned.  I try to sell the puts on dips and I will occasionally buy them back if they make considerable gains in a short period of time.

P. W. Dunn holds a PhD in theology, has taught biblical studies at the undergraduate and master’s level in Africa and Canada, and now is a DIY investor who publishes his ideas about investing and how it relates to Christianity at theRighteous Investor.  His other posts on gold can be read here.

To read the comments and discussion of this post please go here.

The gold ponzi scheme II: Jim Rickards’ anecdotal evidence

A few days ago, I suggested that paper gold was ponzi scheme.  Banks are selling unallocated gold certificates to customers on a fractional reserve basis.  This is what is called a “naked short”.  It is naked because the banks don’t have access to the assets to cover their short.   Jim Rickards reported an anecdote that would verify this very point in an interview with (hat tip Business Insider’s Gus Lubin):  The owner of a ton of physical gold, who had placed it in safe keeping at a Swiss bank, recently asked for delivery, and it took the bank a month to comply with his request, only after requests from lawyers and threats to expose the bank publicly.  The story is told at about the half way point on the MP3 that can be heard here.  The best explanation for this delay in delivering their client’s gold is that that the bank had shorted it, and it literally took them a month to buy back the ton of gold; but they were supposed to be holding it in their vault for the client.

Needless to say, I’m not investing in banks–even the “safe” Canadian banks like the Bank of Nova Scotia; my last position was closed when I bought back a put option on BNS on 21 Oct–I’ve become convinced that banks are far too complicated for a simple guy like me to own.  When they have to cover the gold and silver that they’ve shorted, it will make the sub-prime mortgage crisis seem insignificant by comparison.  Yes, they have shorted silver too.  This is the conclusion of this video (@ 26:35):

Thank you Ben: in celebration of $90 oil

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?):

hat tip: Monty Pelerin, “How inflation occurs”