The Daily Reckoning February 25th
I’ve just left the Liberty Forum in New Hampshire, a three-day gathering of hundreds of people who are trying to find ways of living freer lives in times of despotic control. Among many things, this might be the world center for exhibiting monies of the future.
I leave as the proud owner of three types of nonpaper, nongovernmental monies. They operate in competition with the government’s dollar. Yes, these include Bitcoin, the mind-blowing digital currency that has techno-geeks, edgy global traders, and even the World Bank buzzing about its potential to finally separate money from the state.
Why are people working on alternative forms of money? It’s all about escaping a 100-year-old trend. Back in the day, the dollar was a name for gold, not just a paper ticket manufactured by a government-chartered central bank.
Depression, war, and deliberate debasement have left us with a dollar that is a mere shadow of its former self. It keeps losing value, of course, rather than gaining value as it would in a free market.
Just as critically, the dollar today serves as the enabler of all regulatory control over our economic lives. Using the dollar means dragging a gigantic and burdensome machinery along with you. It means tens of thousands of regulatory controls, government spying, confiscatory taxation, and endless burdens that are bad for businesses and individuals.
Ideally, the dollar would be totally reformed, made good as gold, and restored to its former integrity. How likely is that to happen? The whole idea depends on the wisdom, good will, and public beneficence of the political and elite class of banking moguls.
Is there any wonder that there is a clamor for the private sector to come up with something new? It’s been going on for several decades now, this discovery process we might call “monetary entrepreneurship.”
People in ancient days had to discover the best commodities to get progress beyond mere barter. What would best serve as money: something to acquire not to consume, but to trade for other things to consume? Is it salt? Shells? Silver and gold? Many options are available, and only the best money can win the market competition over time.
Something like this is taking place again today. Government money is risky, carries too much cost, and has an uncertain future to it. People put up with it for convenience and because nothing better seems to present itself.
There is a real opportunity here for monetary entrepreneurs to get to work coming up with something new and letting the markets try it out. Over the last 10 years, governments have shot down a number of experiments in private money that used digital networks to monetize gold and silver. It’s been a brutal job to retain the government’s money monopoly.
Entrepreneurs have learned. New monetary instruments have to protect themselves against government attempts to shoot them down in obvious ways. There are three general ways to do this: back to the basics with precious metals, onward to the future with purely digital money, and some combination of both of these.
My first acquisition is an innovative way to save and spend smaller units of silver. The tiny bars are pretty and clearly mark their weight. Today, each one is worth about $1. In the future they could be worth much more. For daily spending needs for cabs, food, and water, these would work quite well.
It’s true that they are pretty small and might get lost in your pocket. You have to have some pretty nimble fingers to handle them in a hurry. And even young eyes might need reading glasses to discern the weight.
A solution to this problem comes from Shire Silver and entrepreneur Ron Helwig. It’s a simple, but ingenious idea, one he is very anxious to share with others. He takes various strands of gold and silver of many weights and laminates them in a credit-card size monetary instrument.
The result is convenient and easy to carry and spend. He is not the only maker of these cards. Many others are picking up the idea — a fact that makes Mr. Helwig very pleased (he is the last one to attempt to gain a government monopoly through a copyright, patent, or trademark).
Shire Silver cards are commonly accepted all over New Hampshire. But they are in use all over the world. Helwig gets orders from New Zealand, Brazil, and even Japan. Some orders are valued as low as $6, but he receives orders valued at $5,000 too. At the Liberty Forum, he couldn’t keep up with the demand, so he brought his machine to the booth. He even let me make a 1-gram card myself!
Jeffrey Tucker making a Shire Silver card with help from the company’s founder, Ron Helwig.
While I sat at the Shire Silver booth, people were also purchasing cards with Bitcoins. This is the first time I had seen Bitcoins in operation as real money. In fact, most things were available in Bitcoins. Here we have a currency created only in 2009, and already it is making possible global transactions every one or two seconds with someone somewhere in the world.
I downloaded a smartphone application called Blockchain that gave me a wallet of Bitcoins. I’ve been curious about this whole phenomenon, but there is nothing like owning the currency yourself to underscore the point.
I was able to sit and talk with some of the major players in this emergent industry and gain a clearer understanding of what it is and what it is about. As a result, I’m pretty confident that this is the real the thing and has a spectacular future.
I went over to the Bitcoin ATM machine and loaded up while I could. Of course, you can also buy them online (there are many options, but try bitstamp.net or buy them locally from localbitcoins.com), but in person, you can get digits for cash, which is especially nice. The trading relationships between Bitcoin and government currency are always in operation, so there is never a doubt about the value of your portfolio.
A year ago, there were more skeptics than there are today. And this is because the market is expanding. There are websites that accept only Bitcoins, such as Silk Road. I also met many people who are paid their normal salaries almost exclusively in Bitcoins. There are companies planning to go public in Bitcoins, which thereby means completely bypassing the SEC and the whole regulatory apparatus.
As you can see, we are really talking about the emergence of a countereconomy, a free-market universe that runs parallel to the dollar-based economy.
[Ed. Note: As Jeffrey said, these alternative currencies are still in their early stages. But considering how the Federal Reserve is treating our dollar, it’s only a matter of time before these ideas reach a broader audience and achieve the critical mass they need to become mainstream.
If you’re interested in learning more about alternative currencies in history, be sure to check out Good Money
by George Selgin. Selgin’s book is a lively tale about how monetary entrepreneurs took it upon themselves to solve the problems caused by the Royal Mint, which failed to meet the needs of a growing economy.
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Skeptics say: “But I can’t use any of these monetary instruments to pay rent, buy a car, or get groceries.” Well, that’s because these ideas are all ventures that take time to develop. Money is like any other good: It begins with speculation and goes through a period of gradual adoption until it is universal.
Phones were not universally useful until many people had them. It was the same with email. When I first saw an email address, I thought: That’s the silliest thing ever, because who will even write this guy? Eventually, the network grew and reached the critical mass and the government’s system of mail delivery took a massive hit for the first time ever.
Why wait for monetary reform to come from the top? If the market wants a better-quality money, one that frees markets and makes economic exchange more beneficial, markets will create it out of existing resources and realities. This can even happen when government objects. Government can only defy human desires for so long before people decide that the costs of compliance outweigh the benefits.
The government’s money monopoly is crucial to its control over society. What happens when that comes to an end? Imagine the future.
At the time, I called it the most obvious breakdown on the market…
“The greenback is starting to walk the plank this morning,” I told you on Jan. 31. “Now it’s only a matter of time before it breaks down and moves sharply lower. When it does, it will complete the final part of a downside move that’s been forming for the better part of the past six months…”
Now that a few weeks have passed, things have not turned out exactly as planned:
I was dead wrong on this one. Looks like the most obvious breakdown isn’t so obvious anymore…
A lot has happened over the past couple of weeks that have turned this dollar breakdown into a massive run higher. The British pound was absolutely stomped last week, hitting its lowest level since 2010 after Moody’s downgraded the UK’s credit rating from AAA to AA1. And the media has really run away with the “currency war” theme as Japan pushes the yen lower…
For now, the dollar wins the “best of the worst” award. And after a failed breakdown, it’s not unusual to see a big move in the other direction. With the dollar index topping 5-month highs this morning, you should take warning. Don’t bet against the greenback right now…
Have you seen the news reports about the awful air pollution across China? With all its breakneck growth over the past 25 years or so, the words “air pollution” and China are almost one and the same. Chinese growth has created huge investment opportunities, in recent years. But now we’re at a critical point in the “China story,” where Chinese air pollution is investable, too.
Hint: Think platinum and palladium.
Air pollution in the Middle Kingdom is downright awful. Beijing often disappears into a thick, “pea soup” of smog which reduces visibility to just a few feet, in many instances.
On Jan. 12, an air monitor atop the US Embassy in Beijing recorded an astonishing 755-reading by the Air Quality Index devised by the US Environmental Protection Agency (EPA). For perspective, this scale usually goes no higher than 500. Furthermore, the EPA considers any reading above 100 to be “unhealthy for sensitive groups.” Readings above 400 are “hazardous” for everyone.
Air pollution is so bad, in fact, that the usually taciturn Chinese leadership is permitting public discussion about the issue, in that “we’ve got to do something” sort of way.
No less than the hardline, Communist party mouthpiece People’s Daily newspaper asked, in a front page editorial the other day, “How can we get out of this suffocating siege of pollution?”
In a recent interview with the South China Morning Post, Qu Geping, China’s Minister of Environmental Protection between 1987 and 1993, stated, “I have to admit that (national and local) governments have done far from enough to rein in the wild pursuit of economic growth, and failed to avoid some of the worst pollution scenarios we, as policymakers, had predicted.”
This is about as close to admitting a mistake as China’s top-down government will ever come.
Let’s peer just a bit further behind the Great Wall. Why, exactly, is the air so bad in China, just now? Well, it’s winter, and the wind isn’t blowing the air pollution out to sea, and over towards Korea and Japan, which is the usual pathway of nature.
Chinese air pollution casts a “global shadow,” according to several years’ worth of science reporting in The New York Times. Here in North America, air monitoring stations up and down the west coast — California to British Columbia — routinely trigger alarms when clouds of Chinese pollution arrive, essentially intact, after a trans-Pacific journey.
At least 30% of the air pollution on the US west coast is attributable directly to “imported” Chinese clouds of gunk, according to Chemical & Engineering News.
But blowing China’s air pollution out to sea, and over to California, is a “non-solution” to a critical problem — and a temporary one, at that. The key is to find the origins of China’s air pollution problem. China needs to go to the source.
The worst of China’s air pollution, just now, is comprised of fine particulates. It’s the small stuff that forms into smog, gets into peoples’ lungs and causes all manner of other health and safety problems.
What’s the origin? Well, most of the really bad material in China’s air comes from uncontrolled diesel exhaust. This exhaust spews from the tailpipes of literally millions of trucks and other diesel vehicles that ply China’s roads, as well as innumerable electrical generators that back-up China’s unreliable power grid.
As I dug into the news accounts of the air pollution crisis in China, over the past couple of weeks, I found a few (very few!) references to the widespread lack of catalytic converters on most Chinese trucks and stationary diesel generators.
According to one account, from the Associated Press, emission control devices can add up to $3,200 to the price of a truck or large generator. According to John Zeng, of the research firm LMC Automotive, Ltd., “It’s not a problem of technology. It’s more about consumer affordability. Increasing the emissions standard greatly increases the cost.”
Look back over the past quarter century of development in China. China was a “poor” country, in that its economic starting point was very low on the development ladder. It’s no wonder that vehicle- and generator-buyers didn’t want to spend “extra” money, up front, for pollution-control equipment.
This kind of micro-economic choice may have made sense for the individual buyer, over the past 25 years or so. But when you add it all up, and calculate the long-term, macro-effect? Now China has millions of vehicles that lack catalytic controls. It’s no wonder that China’s air is so fouled.
China has reached its pollution tipping point. The Chinese are going to have to do something before they suffocate to death.
What’s the key part of that $3,200 “extra” price for emission control? It’s the catalytic converter. In particular, it’s the cost of platinum and/or palladium metal that catalyzes the chemical reactions that dramatically reduce exhaust emissions. Without these scarce metals, no one can manufacture a catalytic converter. So platinum and palladium are essential metals for these attachments to diesel engines.
Palladium, in particular, is in the spotlight since it is the metal of choice for catalytic converters in diesel engines. And as the chart below illustrates, annual auto-catalyst demand is currently soaking up a whopping 81% of the world’s annual mined supply of palladium — up from about 60% just a few years ago.
This chart also illustrates that the palladium price trend tracks very closely with the auto-catalyst demand trend. Back in 2000, for example, when auto-catalyst demand was consuming more than 100% of the mined supply (above-ground stockpiles plugged the supply gap), the palladium priced soared to more than $1,000 an ounce!
Which brings us back to China and its pollution problem, which is literally “off the charts.” There’s reason to believe that the Chinese will start requiring more emission control devices on all new trucks and generators, if not requiring retro-fit to older models. And what will this do to demand for platinum and palladium? It’s going to rise, and prices will strengthen.
The bottom line is that we’re looking at an entire nation — China — awakening to the problems of air pollution. The engineering solution is that China must solve its problems by increasing the use of catalytic converters on its fleet of diesel engines. This can only be good for platinum and palladium demand and pricing, going forward.
Invest in emission control by investing in platinum and palladium.
Airpocalypse Now!…Profit From China’s Air Pollution appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.
“For him, hoarding silver is not just his way of hedging inflation: It is also part of his attempt to create his own independent economy, his own money.”
– Harry Hurt III
Dear Resource Hunter,
What if I told you, by January 2014, the price of silver is set to jump 525%.
From its current price around $28/oz, the metal will subsequently rise to $175/oz. – and yes, in less than 12 months.
You’d think I was crazy, right? Today I want to show you why history says I’m not…
“IN THE SUMMER of 1979, an invisible hand reached out from an island in the Atlantic and quietly began tightening its grip on the world’s supply of silver” Harry Hurt III penned in the September issue of Playboy in 1980.
In an article titled “Silverfinger,” Hurt wrote the tale of the Hunt brothers’ activities between the spring of 1979 and January 1980.
The Hunt family had wealth. Texas-sized, oil wealth in the billions. Continuing their father’s business, but also living in the shadow of his legacy, Nelson Bunker Hunt, along with brothers Herbert and Lamar were on a mission to grow the family’s wealth.
So in the 70’s when inflation started eating away at the family oil fortune the Hunt brothers started buying silver. Smartly, may I add, in an effort to avoid government confiscation the brothers personally transported it to a vault in Switzerland.
It was the beginning of the gutsiest, daylight heist ever witnessed – and today it can point to our next opportunity in the metals market.
Indeed, the summer of 1979 taught us an important lesson – somewhat forgot in today’s daily press – that finite resources trade in fragile markets.
Back then, Bunker Hunt, a Texas oilman along with a few rich Saudi businessmen, was able to bring the market, for one of history’s most coveted metals, to its knees.
In the 11 months following February 1979 the price of silver jumped from $8 to a high of $50 – marking a 525% rise. Take a look:
Indeed, the real-life drama that unraveled that year was better than fiction. I mean really, who would have thought a few of the world’s elite could snatch up nearly all of the marketable silver on the planet. But they did!
Here’s a timeline of events, outlined by silver trader Larry Laborde:
- Summer of 1979: the Hunt brothers started buying silver through the International Metal Investment group along with their Saudi partners.
- Fall of 1979: the silver price doubled from $8 to $16/oz in only two months. The COMEX and the CBOT started to panic. Many people, including the Hunts through their International Metal Investment group were taking delivery on all their contracts!
- Late in 1979: the CBOT changed the rules and stated that no investor could hold over 3 million oz of silver contracts and the margin requirement were raised.
- The price on the last day of 1979 was $34.45/oz. At this point Bunker and Herbert held 40 million oz in Switzerland and 90 million oz of bullion they jointly owned through International Metals.
- January 7th 1980: the COMEX changed their rules to only allow 10 million/oz of contracts per trader and that all contracts over that amount must be liquidated before February 18th.
- January 17th 1980: silver hit $50/oz, At that point in time the Hunt’s silver position was worth $4.5 billion dollars bringing their profits in silver to $3.5 billion dollars.
- January 21st 1980: the COMEX announced that it was suspending trading in silver. They would only accept liquidation orders. Silver dropped $10/oz and stayed around $39/oz until the end of January.
- March 14th 1980: silver was down to $21/oz.
In the months following this massive silver spike, prices pulled back, finally reaching a baseline price of $5-10/oz. Through the fiasco, the Hunt brothers lost a substantial fortune (through market losses and fines) and were treated to more than one court hearing. No jail-time though (I guess those were the good old days.)
The major question that people ask when they hear this story is: “why?” And other than the quick answer, “to make money”, there’s a deeper emotion than just greed. Indeed, the main reason why this silver grab began was fear. Here’s another telling comment that Hurt penned in Playboy’s pages:
“The government treasuries of the world used to be the ones to issue currencies backed by precious metals. Like the United States, most countries have long since ceased that practice. Bunker has been trying to revive it for himself and his silver buying partners. Hoarding silver is part of his scheme to replace paper with something of “real” value. It is his hedge against the “avalanche of evil” he fears is engulfing the world. Ironically, it was also what brought about a personal and public financial apocalypse of the first order.”
Bunker Hunt had a lot of the same fears that you and I share. He worried about his wealth, the government’s growing budget and the Fed’s propensity to print first and ask questions later. Hunt, of course, took his fear and greed to a level that only a cowboy from Texas could. Quite a show, might I add.
Besides the spectacle, though, this story acts as a great, modern day example of how currencies and the world’s finite resources commingle. Also, it’s a great example as to how hard assets can explode in value — something that could be coming down the pike, sooner than you think…
How Do You Say “History Rhyming” In Mandarin?
Indeed, history doesn’t repeat itself, but it often rhymes.
China is this generation’s version of the Hunt brothers. Only instead of having the faults and worries of a single person/family, China plays by its own rules.
You can see this in the recent espionage case – where China is accused of hacking into various American companies for the gain of their country. If any person/family/group were to hack into Coca Cola or Ford and steal information that benefits a financial negotiation or business deal, you can rest assure they’d be burned at the stake – or in today’s case, put behind bars for a long time. Who knows, maybe a one way ticket to Gitmo.
But that’s not the case with a sovereign nation, especially one as strategic as China. So far the country has denied claims that its government participated in the hacking. “It wasn’t us” they say, as they retract back into their secretive, communist shell.
So you see, this time around – whether it’s gold, silver, rare earths, copper, oil or any other of the world’s coveted resources – China is upping the ante. The Chinese don’t have to play by the rules of the U.S. sandbox, they don’t have to disclose their gold holdings or admit wrongdoing in a hacking allegation – instead, thus far, they just deny or remain quiet.
Along with upping the ante, the Chinese have another strategic advantage. The Hunt brothers corning of the silver market gave China a playbook. China knows that they can’t buy massive amounts of silver or gold on the open market and expect to take delivery. During the Hunt brothers attempt to corner the silver market the COMEX changed the rules. Limiting the amount that one person could hold and upping the margin requirements to control trading.
Likewise, the U.S. government stepped in during the bankruptcy trial. The Hunt brothers owed a lot of money – somewhere to the tune of $1.5B – so much so that a bank-backed bailout was prescribed.
Trading regulations and government involvement? Rule changes and bailouts? That’s just a few of the out-of-the-box actions that China plans to avoid. Indeed, the Chinese have history as their guide. And where the Hunt bros. fell short, China will likely succeed.
One recent example of China’s strategic nature is the 2010/2011 rare earth supply crunch. When China realized the card it held, it quickly recoiled and unveiled export quotas for rare earths, a group of specialty metals vital to modern technology. Then, after they’d made some quick cash and the outcries got louder, China retracted their quotas. They played the game and they played it well.
I don’t have to be the first to tell you that if China had a full monopoly – meaning no other locale could produce rare earths – they would have increased their grip strength and constricted the market into submission. Instead, they saw the writing on the wall, others had rare earths and it was only a matter of time before they ramped up supply – so naturally the Chinese retracted their monopoly power.
The rare earth squeeze was just a preview of what the Chinese are capable of. And the recent espionage allegations follow suit (what a way to start off the year of the snake, eh?)
Looking forward, the one market that still has the ability to be cornered, as shown 1979/1980, is the precious metals market. And just like it would have paid to hold your share of precious metals back when the Hunt bros made their run at silver, it’s even more vital today. After all, the Hunt brothers were just trying to make and protect their money, whereas China’s ambitions could be much more sinister.
As the year of the snake continues, keep your eye to the East.
Keep your boots muddy,