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Protection Against the Rising Risk of a Systemic Financial Meltdown or... a The forgotten role of gold Louis Boulanger, CFA, Founder and Director, LB Now.

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Presentation on theme: "Protection Against the Rising Risk of a Systemic Financial Meltdown or... a The forgotten role of gold Louis Boulanger, CFA, Founder and Director, LB Now."— Presentation transcript:

1 Protection Against the Rising Risk of a Systemic Financial Meltdown or... a The forgotten role of gold Louis Boulanger, CFA, Founder and Director, LB Now Limited New Zealand Society of Actuaries 2008 Conference + 11/12 Feb 2009 Gold is money and nothing else J P Morgan, 1913, to the US Congress

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3 3 It is not because things are difficult that we do not dare; it is because we do not dare that things are difficult. - Seneca (ca 4 BC - 65 AD) Roman stoic philosopher

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5 5 All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self- evident... - Arthur Schopenhauer (1788-1860) German philosopher; influenced Einstein

6 6 Agenda About prudence now... The truth about money today Economic Freedom vs. Debt & Delusion The role of gold as a standard The need for monetary reform How to protect until then Some of my sources

7 1. About prudence A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences. - Proverbs 22:3

8 The paradox of prudence Prudence defined by man-made laws and court cases IS NOT the same as the virtue itself Who ever said that to be prudent is to imitate your peers? Is fiduciary irresponsibility not partly to blame for this crisis? The word now seems synonymous with cautiousness In this sense, prudence means a reluctance to take risks Such reluctance is prudent only for unnecessary risks But when unreasonably extended or applied based on false beliefs, then it becomes reckless and cowardly 8

9 False beliefs Todays USA is still based on US Constitution Government guarantees are as good as gold Central bankers can and will save the world US government cant default on its debt Inflation is dead or no longer a worry NZ is in better shape than ROW Monetary system is sound

10 Forgotten aspects of prudence Caution is not the only or main aspect of prudence The following are the other integral parts of prudence according to Scholastic philosophy: Memoria (accurate memory) Intelligentia (understanding of first principles) Docilitas – the most forgotten one Solertia (sizing up a situation quickly) Ratio (discursive reasoning) Providentia (foresight) Circumspection (ability to take all relevant circumstances into account) 10

11 Docilitas – lets remind ourselves The kind of open-mindedness which recognizes the true variety of things and situations to be experienced and does not cage itself in any resumption of deceptive knowledge; the ability to make use of the experience and authority of others to make prudent decisions 11

12 2. The truth about money Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold. - Leo Tolstoy (1828 - 1910) Russian author

13 What is money? Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are: 1. as a medium of exchange; 2. as a unit of account; and 3. as a store of value 13

14 Is this good (sound) money? 14

15 There sure is a lot of it around… 15

16 16 If the American people ever allow private banks to control the issuance of their currencies, first by inflation then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered. -Thomas Jefferson (1743 - 1826) One of Americas Founding Fathers; 3 rd President of its United States (1801-09)

17 Well, guess what? Its already happened! I call it the Monetary Tragedy of the 20 th Century 1910: the Fed is surreptitiously created 1913: the Federal Reserve Act is passed 1934: gold possession became illegal in US 1971: END of gold exchange standard set in 1944 in Bretton Woods (President Nixon unilaterally declares US dollars owned by foreign states are no longer redeemable in gold, as was intended by the BW system) 17

18 Money (as we know it) is dying I know… your mind is repelled by this assertion BUT ITS THE TRUTH (which can set you free) Thats why you need to rethink your ASSET MIX This is the 1 st time in history that NONE of the worlds currencies is redeemable in gold (or silver) Cause & effect in economics can be separated by decades, as was clearly the case with this crisis The derivatives monster (>US$1Q!) is mostly credit! 18

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20 Unprecedented Fed action… 20

21 Inflation time bomb… 21

22 Whos going to buy @ 2%? 22

23 23 In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and godlike intelligence for kings. - Aristotle (384 BC - 322 BC)

24 3. Gold & economic freedom This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard. - Who said this??????

25 Alan Greenspan did! In an essay entitled Gold and Economic Freedom he wrote in 1966 and which published in Ayn Rands Objectivist newsletter and reprinted in her book Capitalism: The Unknown Ideal, in 1967 In his essay he wrote: gold and economic freedom are inseparable. Greenspan has never publicly retracted a word of this essay, not even in The Age of Turbulence, in 2007 25

26 What you should know about gold Gold is one of the worlds most misunderstood assets Powerful forces govern its price (especially since 71) Despite barbarous relic, gold remains valued RTW Why? Because it is useful as a monetary commodity Its the only asset that can compete with Govt bonds It cannot be debased by creating it out of thin air by government fiat – like all currencies today are incl USD Gold is nobodys liability (unlike any other asset) Hoarding gold is a protest vote on Govt issued money 26

27 Gold is special and unique The only commodity produced for accumulation The entire aboveground gold stock is only about 155,000 tonnes (less than 8,000 cubic meters) Golds supply is its aboveground stock This is crucial to understand how to analyze gold Annual supply is falling and is currently increasing aboveground stock year after year by only about 1% p.a. A gram of gold mined today is no different from a gram of gold mined by the Romans two-thousand years ago price is principally a function of demand 27

28 Demand IS rising; mostly ETFs 28 Source: Casey Research LLC, Big Gold, Vol II, Issue 7, July 2008, p7

29 Consider this: At the moment, the sum total of the worlds paper financial assets (including equities, bonds and bank deposits) comes to a grand total of about US$100 trillion. Value of all physical gold held by private investors and central Banks, on the other hand, is only about US$1 trillion. Now, just suppose that some of the owners of all that paper got a wee bit spooked and decided to convert a mere 5% of it into gold. Anyone need a tutor to understand what US$5 trillion in new demand would do to the gold price? Didnt think so. 29

30 4. Gold as a standard Ownership of gold is not about lust: it is about liberty of the individual. The gold standard is not a game: it is the embodiment of the timeless principle pacta sunt servanda (promises are made to be kept). -Professor Antal E. Fekete (1932 - ) Renowned mathematician and monetary scientist (

31 31 In any discussion of the future of gold, or the price of gold, the first thing that must be acknowledged is that gold is a political metal for the simple reason that gold, in its historical role as a currency, is fundamentally incompatible with the modern financial system. Ferdinand Lips (1931 – 2005) Swiss banker, author of Gold Wars, Foundation for the Advancement of Monetary Education, 2001

32 Is gold a barbarous relic? Some have claimed so with great effect: In truth, the gold standard is already a barbarous relic. John Maynard Keynes (1883 – 1946) British economist whose ideas had a major impact on modern economic and political theory. He was a key figure behind the 20th Century global monetary system post WWII (Bretton Woods). Above quote is taken from his Monetary Reform, 1924, p172 32

33 33 I dont think so...

34 Need more evidence? 34 Gold Price % Annual Change USDAUDCADCNYEURINRJPYNZDCHFGBP 2000 -5.66%10.56%-2.19%-5.80%0.68%1.24%5.61%11.64%-4.68%2.06% 2001 2.50%11.30%8.80%2.50%8.10%5.80%17.40%9.10%5.00%5.40% 2002 24.70%13.50%23.70%24.80%5.90%24.00%13.00%-0.96%3.90%12.70% 2003 19.60%-10.50%-2.20%19.50%-0.50%13.50%7.90%-4.50%7.00%7.90% 2004 5.20%1.40%-2.00%5.20%-2.10%0.00%0.90%-4.07%-3.00%-2.00% 2005 18.20%25.60%14.50%15.20%35.10%22.80%35.70%24.45%36.20%31.80% 2006 22.80%14.40%22.80%18.80%10.20%20.50%24.00%19.39%13.90%7.80% 2007 31.40%18.60%10.40%23.00%17.90%17.50%24.70%20.53%21.50%29.20% 2008 5.80%32.50%32.40%-1.10%11.90%30.40%-14.90%39.27%0.20%44.30% Average13.84%13.04%11.80%11.34%9.69%15.08%12.70%12.76%8.89%15.46%

35 Familiar with the Dow/Gold ratio? 35 Before the Fed After the Fed QUESTION: Will the Dow/Gold ratio drop to 1 again?

36 Still doubtful gold is money? 36

37 The true nature of this crisis Its not a credit crisis Its not a housing crisis Its not a banking crisis Its not a financial crisis The above are all symptoms/manifestations of… The Great Global Monetary Crisis 37

38 The true nature of the problem You cant solve a problem with more of the same the problem cant also be the solution! The true cause is the fiat money system itself its a financial bubble machine! The nature of the problem is one of MEASURE Money should once again be defined as a unit of weight of gold after all, thats how it used to be (but we forgot!) 38

39 About the gold standard The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The gold standard is not currently used by any government, having been replaced completely by fiat currency, and private currencies backed by gold are rare. This has never happened before in human history... There is no measure for what our money is worth!!!

40 Greenspan (again) Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. Source: Gold and Economic Freedom, 1966

41 The gold standard strikes back Thats how Professor Antal E. Fekete sees it The chickens of 71 are coming home to roost All fiat currencies are in a race to the bottom Asset price volatility is highest in living memory WHATS GOING ON? Capital is being destroyed Global monetary system is collapsing

42 4. Need for monetary reform We cannot solve our problems with the same thinking we used when we created them. -Albert Einstein (1879 – 1955) A man who should know…

43 My newfound purpose First, look after myself and my family then look after OPsM as I do my own Educate, awake as many as I can thats why I write the e-letter Prosper! Advocate actively for monetary reform both here in NZ and overseas Sound Money = Economic Freedom

44 Bretton Woods III What do I mean III? BW I died in 1971 (and was buried in 1976) BW II has been in place ever since (37 yrs) Whats BW II? The Great Delusion of Money as Debt What will BW III be? That depends on who wins the war…

45 5. How to protect? It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. -Warren Buffett (1930 - ) American investor

46 Own some bullion! ETFs are NOT the same (thats paper gold) Gold mining shares are NOT the same thing Bullion is the only asset that has ever been able to successfully protect ones wealth from the devastating effects of systemic risk Bullion IS NOT an investment… ITS MONEY Think of it as INSURANCE (or a protest vote)

47 Want to know more?

48 Some of my sources 48

49 Suggested books to read Gold Wars, by Ferdinand Lips, 2001 Debt & Delusion, by Peter Warburton, 2005 Petrodollar Warfare, by William R. Clark, 2005 The New Paradigm for Financial Markets, by George Soros, 2008 The Case Against the Fed, by Murray N. Rothbard, Ludwig von Mises Institute, 1994 The Theory of Money and Credit, by Ludwig von Mises, Liberty Fund, 1981 (translation of 1924-34) 49

50 Thank You. Louis Boulanger, CFA Founder & Director, Louis Boulanger Now Limited P O Box 25 676 St Heliers, Auckland 1740, New Zealand tel: +64 9 528 3586; mob: +64 275 665 095; email: Any Questions?

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