04/27/2005

The Coming Collapse of the Dollar 4/27/05

"Or - the most intriguing speculation, in our opinion - was a deal struck between the US and Chinese governments, in which the US would keep a lid on gold's exchange rate while China did the same for silver?"

"Gold is money, fiat currencies are not, and the difference will become increasingly apparent in coming years."

"We support a return to an objective standard of value independent of government interference as the only logical way for the coming mess to be resolved. This is also a moral imperative, because sound money is, after all, an ethical as well as economic issue. Our currency is the promise we make to ourselves, our children, and our trading partners that our word is and will be good, that the value we receive today will be repaid with equal value in the future. And in all of human history, only gold has been able to fulfill this promise."

- James Turk & John Rubino, The Coming Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets, December 2004

There's a very interesting book that hit the USA market at the end of December 2004. It has excellent advice for anyone interested in the free market money industry. Excerpted above are several of the quotes that caught our attention.

The fact that China's central bank still has substanital reserves of silver to dump on the market while the Federal Reserve and USA at least pretend to have substantial reserves of gold to dump is an interesting connection.
We've not seen it elsewhere in print.

The quote about gold being money and fiat currencies not is quite apt.
The major thrust of the book is captured by this one sentence.

Of course, mainstream political and economic reporters and leaders don't agree that the dollar is about to collapse. According to Turk & Rubino, they say things are stable now for two reasons: they hardly ever recognize a trend reversal before it blows up in their faces, and they suffer under several misconceptions. Here at The Indomitus Report we think there's a third reason not fully examined in The Coming Collapse. We suspect there's a preference not to be forthcoming with the facts about which many of these political and economic leaders are familiar. One cannot lead lambs to the slaughter if one frightens the lambs away from the abattoir.

What misconceptions? The ideas that debt doesn't matter, that governments can be trusted (to manage a country's currency), that the USA economy operates independently of foreign exchange markets, and that gold is a relic with no role in a "modern" economy. Of course, these are misconceptions, and their opposites are reasons why the dollar is about to collapse.

It should be clear at this point that the nature of the collapse is not deflation. Rather, Turk & Rubino expect an inflationary death spiral, perhaps as early as 2006. Keep in mimd our examination of the Yugoslavian five quadrillion percent inflation as an example of what such a death spiral looks like.

Will the dollar collapse? The case made in The Coming Collapse is quite thorough. Debt levels are at an unmanageable high level. Consumer debt, mortgage debt, corporate debt, federal debt, unfunded federal mandates, federal obligations to the coming tidal wave of retirees, and the trade deficit are discussed. But the really terse explanation shows up on page four of their book.

"All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. ... Either they simply collapse under the weight of their accumulated debt, as did the US and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos.

This time around, governments the world over have clearly chosen the second option. They're cutting interest rates, boosting spending, and encouraging the use of modern financial engineering techniques to create a tidal wave of credit. And history teaches that, once in motion, this process leads to an inevitable result: Fiat (i.e., government-controlled currencies will become ever less valuable, until most of us just give up on them altogether."

Naturally, as a result of this anticipated dollar collapse, other fiat currencies would likely inflate at the same time, and suffer similar, if slightly later, fates. Yet, for all this soothsaying about doom, the authors are quite optimistic. They believe that, among other things, digital gold will be embraced by merchants and consumers, creating a power shift of tremendous proportions.

There's a lot to like about this book. We don't agree with the traditional line that gold confiscation won't touch pre-1933 gold coins, and that the premium for such coins, even in non-numismatic quality, is a sort of insurance against confiscation. Since governments cannot ever be trusted, they certainly cannot be trusted not to seize wealth in whatever form they find it. On the other hand, we do agree completely that digital gold offers useful offshore storage, a diversification of vaulting services, wholesale pricing of storage, and low transaction fees. Unfortunately, the opportunity to discuss the many legitimate players in this market such as e-Bullion, the Liberty Dollar, and Pecunix was missed.

Instead, industry founder e-gold is mentioned along with industry leader in terms of gold in storage, GoldMoney. The treatment of e-gold focuses on the failure of Standard Reserve and the fraud conviction of one of Gold & Silver Reserve's largest shareholders. JP May's alternative explanation for the plateau of e-gold bars in inventory is not included. Of course, the recent surge in e-gold bars is an event after the book was in print.

The book's treatment of GoldMoney was also far too circumspect and even modest to a fault. There's no mention of the many active uses for GoldMoney, except to suggest that some newsletters on the gold mining industry and related economic sectors are available in exchange. No mention is made of the prospect of paying dividends in gold, no mention is made of a major mining company (Durban Roodeport Deep) investing in GoldMoney, no mention is made of the user base or the quantity of gold in storage. These lacunae combine with the fact that diversification is the watchword for surviving the coming collapse but the divers gold and silver storage alternatives operated by the second oldest, third oldest, and fifth oldest major players in the market are not mentioned to suggest that the book is not as complete as it should be.

In the table below are the securities which were recommended by the Turk & Rubino duo at the end of December 2004. Assuming you bought their book when it first became available after Christmas 2004, the table below reflects the current value of their suggested investments.
In each case where a 28 December 2004 closing price was not available, we grabbed 29 December 2004.

Turk and Rubino Suggestions

Security	Symbol	28 Dec 2004	18 April 2005	Delta
Gold	Au	444.1	426.50	(17.60)
Silver	Ag	7	7.00	-
Platinum	Pt	874	860.00	(14.00)
Palladium	Pd	187	198.00	11.00
Golden Star Resources	GSS	4.01	2.65	(1.36)
Glamis Gold	GLG	17.5	14.18	(3.32)
Meridian Gold	MDG	18.75	15.38	(3.37)
Eldorado Gold	EGO	2.95	2.47	(0.48)
Nevsun	NSU.TO	2.21	2.48	0.27
Newmont	NEM	44.69	40.62	(4.07)
Gold Fields	GFI	12.53	10.71	(1.82)
GoldCorp	GG	15.02	13.16	(1.86)
IAMGold	IAG	6.94	5.44	(1.50)
Agnico-Eagle	AEM	13.87	13.80	(0.07)
Harmony	HMY	9.19	7.21	(1.98)
Rio Narcea	RNG.TO	2.6	1.75	(0.85)
Royal Gold	RGLD	17.89	17.47	(0.42)
Crystallex	KRY	3.68	3.81	0.13
Durban Deep	DROOY	1.49	0.75	(0.74)
Freeport McMoran Cu/Au	FCX	38.1	35.00	(3.10)
High River Gold	HRG.TO	1.77	1.45	(0.32)
Kinross Gold	KGC	7.07	5.35	(1.72)
American Century Global	BGEIX	12	10.29	(1.71)
Central Fund Canada	CEF	5.47	5.28	(0.19)
Gabelli Gold	GoldX	16.22	13.86	(2.36)
Invesco Gold	FGLDX	3.65	3.24	(0.41)
Rydex PM	RYPMX	38.31	32.17	(6.14)
Tocqueville Gold	TGLDX	32.93	29.71	(3.22)
US Global Gold	USERX	8.23	6.83	(1.40)
US Global PM	UNWPX	16.72	14.42	(2.30)
USAA Gold	USAGX	15.3	13.55	(1.75)
Apex Silver	SIL	17.5	14.67	(2.83)
Coeur d'Alene	CDE	4.03	3.29	(0.74)
Hecla Mining	HL	5.96	4.78	(1.18)
Pan American Silver	PAAS	16.38	14.67	(1.71)
Silver Standard Resources	SSRI	12.47	10.57	(1.90)
Anglo Platinum	AAPTF.PK	39.5	37.20	(2.30)
Aquarius Platinum	AQPBF.PK	5.1	5.10	-
Impala Platinum	IMPAF.PK	78.25	84.52	6.27
Lonmin	LNMIF.PK	19.17	18.50	(0.67)
Norilsk Nickel	NILSF.PK			-
North American Pd	PAL	8.48	5.91	(2.57)
Stillwater Mining	SWC	11.24	8.03	(3.21)
American Century Cap Pres	CPFXX		2.18%
Dreyfuss 100% UST	DUSXX		1.96%
Fidelity Spartan UST	FDLXX		2.23%
Schwab UST	SWUXX		1.98%
US Treasury Securities	USTXX		1.77%
Weiss Treasury Only	WEOXX		2.04%
American Century Int'l Bond	BEGBX	14.81	14.16	(0.65)
Loomis Sayles Global Bond	LSGLX	16.01	15.63	(0.38)
Managers Global Bond	MGGBX	22.36	21.86	(0.50)
Payden Global Fixed-Income	PYGSX	10.47	10.36	(0.11)
PIMCO Foreign Bond	PFODX	10.48	10.59	0.11
T Rowe Price Int'l Bond	RPIBX	10.72	10.10	(0.62)
Shorts				-
Ambac Financial	ABK	83.03	73.94	(9.09)
American Express	AXP	56.35	51.20	(5.15)
Bank of America	BAC	46.97	44.61	(2.36)
Capital One Financial	COF	83.95	73.06	(10.89)
Centex	CTX	58.84	56.78	(2.06)
Citigroup	C	48.35	46.3	(2.05)
Countrywide Fin.	CFC	36.86	31.84	(5.02)
Fannie Mae	FNM	69.84	54.38	(15.46)
Freddie Mac	FRE	72.49	61.22	(11.27)
JP Morgan Chase	JPM	39.21	34.82	(4.39)
Lennar	LEN	55.35	53.39	(1.96)
MBIA Inc	MBI	63.73	53	(10.73)
MBNA	KRB	27.99	23.45	(4.54)
Providian	PVN	16.37	16.38	0.01
Wells Fargo	WFC	62.58	59.4	(3.18)
Berkshire Hathaway	BRKa	88590	85250.1	(3,339.90)
Cisco Systems	CSCO	19.26	17.18	(2.08)
Dell Computer`	DELL	41.99	35.5	(6.49)
Intel	INTC	23.28	22.28	(1.00)
Microsoft	MSFT	26.95	24.761	(2.19)
iShares Dow RE	IYR	122.31	113.67	(8.64)
Merrill Regional Bank	RKH	142.53	130.53	(12.00)
iShares Dow Fin Serv	IYG	112.9	103.61	(9.29)
iShares Dow Fin Sect	IYF	97.58	89.14	(8.44)
Select SPDR Fin	XLF	30.56	27.92	(2.64)
Bear Funds (Long)				-
Comstock Part Cap Val	DRCVX	2.83	2.93	0.10
Comstock Part Strat	CPFAX	3.35	3.33	(0.02)
Prudent Bear	BEARX	5.26	5.6	0.34
Leuthold Grizzly Short	GRZZX	6.69	7.34	0.65

A few thoughts: Yahoo Finance disappoints on the prices of treasury funds.
These are shown as Yahoo reports them, without any historical data. Norilsk Nickel seems to have changed its symbol. In the interest of getting this report out on time, we skipped a symbol lookup and any search on treasury fund prices. (These are left as an exercise for the reader.) You can see that the price of gold is down, which is not consistent with the timing Messrs. Turk and Rubino suggest for their stock picks.

Palladium is the only metal up since their suggestions.
Few of the stocks they suggest for long positions have done well, with the notable exception of Impala Platinum. On the other hand, these are stocks which are supposed to do well in a dollar collapse, which hasn't yet been fulfilled.

On the plus side of the ledger, their recommended short positions are all down, except Providian which is trivially up. We used the green ink to show negative numbers for short positions, since in this case down is good.
Berkshire Hathaway is the most impressive short in dollars, but is only off 4%. Fannie Mae is off 22%. These successful short calls, especially in finance and home building, suggest that there is something to the dollar collapse expectation.

Also on the plus side, the bear funds have done pretty well, with the exception of one of the two Comstock suggestions. The best performer on the whole rack is the Leuthold Grizzly Short, up 10%.

We'll not be following all these stocks, since they aren't our picks.
However, we'll revisit this table again next year sometime to see how the dollar collapse is going, and how the resource stocks are faring.

On the whole, The Coming Collapse is a nice, brief book at some 200 pages.
It has a pleasant dust jacket and a nice hard cover, with appropriate gold foil on the inner spine. There were more than $25 of insights and unique thoughts, and plenty more than $25 of upside in the suggested short positions. When precious metal prices recover, the long stock picks should be good, as well.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=

The Indomitus Report covers sovereignty, free market money, launch technology, the space frontier, new country developments, and longevity research with the unique perspective of Jim Davidson and his team of undominated individualists. A special offer for KitcoCasey readers: subscribe for one year for $120.
See contact details at www.indomitus.net

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