My consistent position has been that government actions are the underlying problem causing global financial crises. I pick on President Barack H. Obama because he happens to be the current occupant of the White House, and his political affiliation doesn’t matter to me. If John McCain were the president now, I would be going after his policies as well.
The truth is that both the Democrats and Republicans adhere to the theory that people do not know how to best take care of themselves, so government has to tell them how to run their lives. This is almost directly opposite of the culture of the late 1700s. Back when the Declaration of Independence (1776) and Constitution (1789) were adopted, the attitude was that people were responsible for their own well-being. After all, who would have a stronger incentive to look out for their own self-interest: 1) the person who knows their own facts, circumstances, and opportunities, or 2) a government legislator or bureaucrat who does not know the particular circumstances of each individual?
Rather than talk theoretically though, here is some concrete examples showing that both Democrats and Republicans are dangerous to your wealth:
Date Gold Spot Silver Spot Dow Jones Industrial Average
January 20, 2001 $ 264.50 $ 4.75 10,588
January 20, 2009 $ 858.50 $11.36 8,078
November 7, 2011 $1,790.30 $34.81 12,068
As you can see, during the presidency of George W. Bush, the value of the US dollar fell from 0.0037807 of an ounce of gold to 0.0011648 of an ounce, a drop of 69.2%! Compared to silver, the value of the US dollar fell from 0.2105263 of an ounce to 0.0880281 of an ounce, a 58.2% decline. The Dow Jones Industrial Average fell 23.7% even as the value of the US dollar was sliding. For someone who had their investments tied up in US dollars or US stocks, those results are horrible.
It hasn’t really gotten any better since Obama became president. In less than 34 months since January 20, 2009, the value of the US dollar fell even further, from 0.0011648 of an ounce of gold down to 0.0005585 of an ounce, a decline of just over 52%! The results are even more dramatic for silver. The US dollar has plummeted from being worth 0.0880281 of an ounce of silver down to 0.0287273 of an ounce, a plunge of 67.4%!
While it is true that the Dow Jones Industrial Average has risen 49.4% as measured in US dollars, it has fallen against gold and silver. On January 20, 2009, it took 9.41 ounces of gold or 711.09 ounces of silver to equal the Dow. As of the close on November 7, 2011, the Dow had sagged to be worth only 6.74 ounces of gold or 346.68 ounces of silver.
The average life of a paper currency is 40 years before it fails. Just because the US dollar has been around for more than 220 years doesn’t mean that it will last indefinitely. At the rate paper assets are tumbling right now, I would not even bet that the US dollar will be around two years from now.
Part of the strength of the US dollar has been its use an international reserve currency, where other governments hold dollars for settling transactions with other nations. Until now, gold has been quoted around the world in US dollar prices. Transactions may have been settled in local currencies, but they were first calculated in US dollars.
Two recent news developments both point out how precarious the US dollar has become. In mid-October, one of the Chinese gold exchanges (I’m sorry I can’t put my hands on which one right now) announced that it would start trading gold contracts prices in the China renminbi yuan as well as continuing to offer contracts priced in the dollar. With the yuan likely to continue to appreciate versus the US dollar, I could easily see demand soaring for the contracts denominated in the Chinese currency.
Second, last Friday and Saturday, CME Group issued two advisories that it would be changing margin requirements. The impetus for the change was the bankruptcy of securities firm MF Global. Because of the size of the company’s operations, there are thousands of customers working to recover their assets and transfer them to another firm. Because of the difficult-to- understand language used in last Friday’s advisory, the Saturday advisory was issued explain what Friday’s meant.
In simple language, the advisories stated that the margin requirements for leveraged accounts for all brokerages were being reduced to “maintenance” levels. This was explicitly being done to facilitate the migration of MF Global accounts to other brokerages. What that means is that all accounts at every brokerage that had higher margin requirements has been ordered to lower them to be equal to the margin requirements for the least restrictive accounts.
I have explained repeatedly that it would make sense for the CME Group to raise margin requirements as prices are rising, but often the CME Group has inflicted higher margin requirements on gold and silver as prices were declining. Right now, commodities (including gold and silver) are generally rising in price. Therefore, the proper change in margin requirements, if any, would be to raise the thresholds.
By lowering margin requirements across the board for all commodity accounts at all brokerages, the CME Group is encouraging more reckless speculation—the very activity that almost certainly contributed to the bankruptcy of MF Global. Instead of trying to introduce further safeguards, the CME Group’s actions could hasten the downfall of the US economy—and the dollar.
Your wealth is yours to protect. Physical gold and silver in your direct custody or stored in segregated accounts under your own name can help you protect it.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.