Happy Friday!

I am home sweet home from my travels for a bit and excited to resume my writing to you! I love featuring guest posts from time to time because I love the extra dimension and added perspective they bring to our community (and I hope you do, too!) but I really miss writing you on those days!

This weekend is a big one for our Kung Fu Family…we are celebrating Easter this year by inviting 12 or so families over for a champagne brunch and Easter Egg hunt on Sunday. (We are big on any excuse for champagne in our household!) 🙂 It’s one thing being the “Easter Bunny” for my two little Kung Fu Kids, but add another 15 or so kids to the mix and I have a lot of eggs to stuff and hide this weekend!

It’s also a big weekend for Kung Fu Finance…we are moving to a new server which should hopefully improve the speed of the site…fingers crossed!

What a week in the markets…more tumultuousness with the Dow “plunging” after the Fed released their latest minutes inferring that QE3 would be less likely, gold and silver taking a hit only to rebound slightly later in the week after the weak jobs report, and Spain’s less-than-stellar bond auction (they sold only €2.6 billion worth of bonds, on the low-end of the estimate between €2.5 billion and €3.5 billion). And locally here in Silicon Valley, despite all of the IPO excitement, Yahoo cut 2000 jobs.

I had a great Skype call with my friend The Austrian this week, too, who reports from Uruguay that things are heating up in Argentina…just recently Argentina has decided to nationalize their largest oil company, YPF, and they have instituted capital controls which spells further trouble for the peso. Now, if you are an Argentine citizen traveling to the U.S. or anywhere, you cannot simply go to an ATM and withdraw U.S. dollars (or your country of choice’s currency!). The black market exchange rate is also returning, circa 2001…interesting times, indeed.

Anyway, it is great to be home and I look forward to bringing you lots of “smart money” (hopefully!) missives next week!

Now on to this week’s questions:

Gautam asks, regarding my experiences buying physical silver (Technically Speaking, I Was An Idiot),

Hi, This is one of your best posts!
I’m thinking of buying some silver as well, and would greatly appreciate you sharing information on your dealer and the terms you finally decided to go with.
Thank you and keep up the good work!

Hi Gautam, Thank you! Of course, no problem—it has now been several years since I’ve been accumulating physical silver and I have purchased from a number of dealers whom I’ve been happy with and would recommend.

My favorite by far is:

Camino Coin Company
1301 Broadway Avenue 
Burlingame, CA 94010

Telephone 1-800-348-8001
Telephone   1-650-348-3000
Fax   1-650-401-5530
http://www.caminocompany.com/contactus.htm

They have been in business for ~50 years and have always been patient, honest, and very ethical. (They are also extremely convenient for me…just 20 miles from my house, although I believe they ship nationwide.)

I’ve also purchased from various websites with varying degrees of “success” with terms:

http://www.goldsilver.com/ (Michael Maloney’s company)
http://www.kitco.com/

(I’ve purchased from several more, but these are two I would recommend). I’ve had good success with both of these, although I have only bought from Kitco once and they had some tax trouble with their pooled accounts a few years ago so make sure you are comfortable with the options you are choosing (in general I don’t recommend pooled accounts, anyway!).

When buying physical silver I buy either silver eagles or “junk” silver, because it is an easily recognizable form and denomination and will be easy to either use in trade if ever needed (let us hope not…) or to sell back to a dealer when you’re ready.

I sold a few 500-oz. “sealed mint cases” (the big green boxes filled with silver eagles) that I had purchased from GoldSilver.com back to Camino Coins last year when silver was “going parabolic” and it was very simple….they didn’t even need to open the cases; just helped me get them out of my car and issued me a check on the spot. Very liquid!

As far as terms, the premiums that dealers charge will vary with current demand. Silver eagles have a much higher premium over spot price than do junk silver or silver bullion bars. The best idea is to call three or four dealers and get a quote on the type of silver in which you are interested and then make your decision. The premium will also vary slightly depending on the quantity you decide to purchase.

Good luck, and let me know if I can help you any more!

Hi KFG,

I just read a rebuttal in the New Yorker of Kelefa Sanneh’s latest article on Ron Paul and I wondered what your thoughts are on it. Is a return to the gold standard really feasible and would it truly be “better” than what we have now? I love your site and would really appreciate your thoughtful comments on this matter. Thank you! — Ann

Here is the letter:

“Kelefa Sanneh, in his article on Ron Paul, gives too much credit to the feasibility of a return to the gold standard (“Party Crasher,” February 27th). The dollar most certainly did not hold its value steadily under that system; in the twentieth century, the five years of highest inflation were all before the U.S. went off the gold standard. The years of deflation were just as dramatic.

Prices fell more than twenty per cent between 1929 and 1932, and wages generally fell with them. A farmer who lived through the years 1915 to 1935 would find the notion that prices were stable during that time comical. Anyone nostalgic for deflation must not be familiar with its effects. Ben Bernanke– and the Federal Reserve generally– seemed blind during the run-up to the current crisis. But now I am hard-pressed to fault their strategy. This is probably the first debt crisis of this scale that didn’t involve a sustained period of deflation. Taking Paul’s ideas on monetary policy seriously is as difficult as earnestly considering the stilted arguments against global warming and evolution. Bob Stewart, Florence, Mass.”

Hi Ann, thank you for your great question!

There is so much to address here…where to begin? I’m going to leave his last sentence on politics, global warming, and evolution aside :), but even so, there’s a lot to address here!

First, I do agree that a gold standard is not necessarily a panacea to all monetary things that ail us. Hopefully Gary’s guest posts illustrated that a bit this week. There is a tendency among the various schools of thought to be very “all or nothing” about everything, hence the two “corners” with gold standard advocates on one side crying, “There is nothing except gold that will save us!” and the interest-free / social credit advocates on the other side saying, “a return to the gold standard is crazy and will never work, unless and until we get rid of the Federal Reserve!”.

Gold standard advocates maintain that having a gold standard doesn’t necessarily prevent deflation and inflation, but that it “equalizes” those competing forces out over time based on the well-understood concepts of supply and demand.

So for example, when countries experience economic “booms” under a gold standard, they import more goods and pay for those goods with gold, so gold flows out of that country. As the gold flows out, the currency supply contracts (deflation) which causes the economy to slow down and the demand for imports to fall. As the economy slows, prices fall (deflation) making the country’s goods more attractive to foreign buyers.

So, demand for the country’s products then increases again (because the prices are so attractive) and gold flows back into the country and this process just continues to repeat itself, keeping within a “reasonable” equilibrium.

This is how the gold standard worked before the Federal Reserve was created in 1913.

But this doesn’t mean that there was never inflation nor deflation beforehand…on the contrary, there definitely was, and there were also banking panics and scares and all sorts of “nefarious” (I love that word) 🙂 dealings in the financial world, even under “the illustrious gold standard”.

For example, one panic that is well documented is the banking and stock market panic in the U.S. in 1907. Most people believe that the “Money Trust”, the big New York banks, had been causing crashes and then capitalizing on them by buying stocks cheaply from scared investors and then later selling them for tremendous profits just a few weeks later. (Some things never change, right Goldman Sachs?) 🙂

But seriously, this panic of 1907 was terrible, and this was while the U.S. was on the gold standard. Up until this point, the money supply in NYC fluctuated with the annual agricultural cycle. (Perhaps this is what “Bob” was referring to when he thought that farmers would consider “stable” prices during this time period comical…I’m sure they were not—I’m sure they were extremely dependent on supply and demand, and weather and crop conditions, etc.) Every Autumn money flowed out of the city to purchase the various crops that were harvested, and then the NYC banks raised interest rates in order to attract money back into the city.

However, in 1906 there was the horrible earthquake in San Francisco (way too close to where I live now…) and a lot of money had already flooded out of NYC to aid in repairs in San Francisco, causing the NYC banking industry and markets to be more unstable than usual.

Supposedly, the 1907 panic began with an attempt to corner the market for Heinze’s United Copper Company. (This is actually really fascinating, and you can read all about it here on Wikipedia: http://en.wikipedia.org/wiki/Panic_of_1907)

But the point I want to make is that was a terrible panic and stock market collapse that had nothing to do with the presence of a gold standard or not…it was just mankind being mankind.

Most people DO believe that this 1907 panic was the impetus for the creation of the Federal Reserve, however. The people cried out for the U.S. government to “do something!” so in 1908 Congress created the National Monetary Commission (because that’s what they do, they create “commissions”, rather than solving problems…but I digress) to recommend “banking reforms” that would prevent these panics.

The chairman of this National Monetary Commission was Senator Nelson Aldrich, and he was supposed to “investigate” the evil bankers, Paul Warburg, Frank Vanderlip, Henry P. Davison (senior partner at J.P. Morgan), Benjamin Strong (head of J.P. Morgan Bankers Trust, and to become the first Federal Reserve head). According to many sources, these men represented one-quarter of the world’s wealth.

Rather than “investigate” them, Senator Aldrich invited them all duck hunting on Jekyll Island…this is not “conspiracy”, by the way, this part at least is well-documented truth. What arose out of that fateful meeting was the Aldrich Plan, which was skewered by Congressman Charles Lindbergh as a “scheme”, and it never came to a vote…that year.

But in 1913, a nearly identical bill, the “Federal Reserve Act”, was presented to Congress and passed. That was when Congress gave up its right to coin money and “regulate the value thereof”, and passed that right to a private corporation, the Federal Reserve.

Since the creation of the Federal Reserve in 1913, our money has been borrowed into existence, even under the supposed “gold standard”, because of fractional reserve banking (which I attempted to explain here, here, and here…).

My point to all of this is that it is not as “black and white” as Bob portrays it to be.

During World War I alone, the U.S. went “off” of the gold standard twice, so it’s impossible to “blame” the gold standard for any economic problems that happened just as much as it is impossible to “praise” the gold standard for all of the economic wonders that happened to occur during that same time period. It’s just not that black and white.

When World War I occurred, participating countries halted redemption in gold, increased taxes, borrowed heavily, and created additional “currency”. (Basically, they printed money). And when the U.S. entered the war, it did the same thing…the U.S. national debt went from $1 billion in 1916 to $25 billion by the end of the war.

After the war, governments adopted a “pseudo-gold standard”, called the “gold exchange standard”. This basically made the U.S. dollar and the British pound also able to be used as currency reserves by the world’s central banks and redeemable in gold.

The Federal Reserve was required to maintain 40% reserves of this “lawful money”, and foreign central banks could now use dollars instead of gold. This started the currency creation process, as fractional reserve banking created new currency units.

So on came the Roaring 20’s (which I would have loved to have participated in!). 🙂

The abundance of credit caused by the gold-exchange standard and fractional reserve banking caused one of the greatest credit booms the U.S. had experienced. From what I have read about that time, many Americans stopped saving and started “investing”, treating their brokerage account like a savings account, and taking advantage of “easy credit” for cars, houses, and stocks…much like our more recent bubbles.

When the bubble finally burst in 1929, it was immensely deflationary. Homes were foreclosed upon, loans were defaulted on, and the currency supply contracted. Mike Maloney asserts in his book, Guide to Investing In Gold and Silver, that fully one-third of the currency supply of the United States evaporated into thin air. Over the next three years, wages and prices fell by one-third.

Banks failed, and this was before the FDIC was created. People lost their life savings overnight.

There were massive bank runs and banks still left standing were quickly running out of gold coins…the gold-exchange standard was crumbling.

Finally in 1933 FDR was elected and immediately proclaimed a bank holiday, and just a month later required all U.S. citizens to turn over their privately held gold to the Federal Reserve, in exchange for Federal Reserve Notes (U.S. dollars). Just a few weeks after that, he ended the right of U.S. citizens to trade or buy any foreign currencies (does this sound like what Argentina did this week?) or to transfer currencies to any accounts outside of the United States.

And finally, on June 5, 1933, Congress passed a “joint resolution” defaulting on the gold clause in all contracts, public and private, past, present and future, and on August 28, 1933, Roosevelt signed Executive Order 6260 which outlawed the constitutional right of U.S. citizens to own gold.

I give you this history because it is simply not as black and white as Bob would have you believe. Monetary history in this country, and worldwide, is complex and yes, somewhat “nefarious”. I do believe a return to some sort of sound money standard would be extremely beneficial, along with the abolition of fractional reserve banking.

But I’m also a realist, and any move away from our current system, dysfunctional though it may be, will probably be quite painful.

I’m not sure Ron Paul has the “perfect” solution, but I am quite sure that there is no “perfect” solution.

All we can do as investors is to do our best to understand what is happening and why and what the most likely outcomes will be, and then plan, invest, and hedge accordingly!

Thank you so much for your great question, and I hope I’ve answered it! Some of these topics are quite complex and difficult to address in a blog post, let alone a QnA!

Thank you so much for reading, and have a great weekend!

If you celebrate, I hope you have a wonderful Easter!

To your financial success,
— Kung Fu Girl