"Black Friday" - The Great Gold Crash...Of 1869

When one thinks of gold crashes, one typically visualizes a trading floor from the 1980s onward, predicated by Nixon's nixing of Bretton Woods 40 years ago, which removed gold from the list of accepted currencies and converted it into a government-manipulated pariah, whose core function was to be suppressed in an ongoing (failed) attempt to make the dollar the undisputed reserve currency (something even China comprehends). Well, readers may be surprised to discover that one of the first, and probably biggest on a relative basis, documented gold crashes was not 3 weeks ago, nor back in October 2008, nor any time since the advent of Nixon, or even the Federal Reserve, but over 140 years ago, on September 24, 1869 when a massive gold price manipulation scandal created a financial panic. That day, also known as "Black Friday", was the culmination of an attempt to corner the gold market following the latest, however brief, termination of the gold standard, when during the reconstruction period following the US Civil War, the US dollar was backed not by gold, but simply by credit (sound familiar). The result was a surge, and then collapse in gold.

What is the take home, if any? Perhaps that any time the government attempts to interfere with gold's status as a natural safety currency, it is not only gold price discovery that suffers, but virtually every other asset class, as central planning once again tries to order capital flows, however inefficiently, always, and without fail, leading to financial catastrophe.

The chart below demonstrates the intraday swing from that long ago Friday 142 years ago:

For those curious to learn about one of the first record gold price manipulations... and crashes, can do so below, courtesy of Wikipedia.

Black Friday, September 24, 1869 also known as the Fisk/Gould scandal, was a financial panic in the United States caused by two speculators’ efforts to corner the gold market on the New York Gold Exchange. It was one of several scandals that rocked the presidency of Ulysses S. Grant. During the reconstruction era after the American Civil War, the United States government issued a large amount of money that was backed by nothing but credit. After the war ended, people commonly believed that the U.S. Government would buy back the “greenbacks” with gold. In 1869, a group of speculators, headed by James Fisk and Jay Gould, sought to profit off this by cornering the gold market. Gould and Fisk first recruited Grant’s brother-in-law, a financier named Abel Corbin. They used Corbin to get close to Grant in social situations, where they would argue against government sale of gold, and Corbin would support their arguments. Corbin convinced Grant to appoint General Daniel Butterfield as assistant Treasurer of the United States. Butterfield agreed to tip the men off when the government intended to sell gold.

In the late summer of 1869, Gould began buying large amounts of gold. This caused prices to rise and stocks to plummet. After Grant realized what had happened, the federal government sold $4 million in gold. On September 20, 1869, Gould and Fisk started hoarding gold, driving the price higher. On September 24 the premium on a gold Double Eagle (representing 0.9675 troy ounces (30.09 g) of gold bullion at $20) was 30 percent higher than when Grant took office. But when the government gold hit the market, the premium plummeted within minutes. Investors scrambled to sell their holdings, and many of them, including Corbin, were ruined. Fisk and Gould escaped significant financial harm.

Subsequent Congressional investigation was chaired by James A. Garfield. The investigation was alleged on the one hand to have been limited because Virginia Corbin and First Lady Julia Grant were not permitted to testify. Garfield's biographer, Alan Peskin, however, maintains the investigation was quite thorough. Butterfield resigned from the U.S. Treasury. Henry Adams, who believed that President Ulysses S. Grant had tolerated, encouraged, and perhaps even participated in corruption and swindles, attacked Grant in an 1870 article entitled The New York Gold Conspiracy.

Although Grant was not directly involved in the scandal, his personal association with Gould and Fisk gave clout to their attempt to manipulate the gold market. Also, Grant's order to release gold in response to gold's rising price was itself a manipulation of the market. Grant had personally declined to listen to Gould's ambitious plan to corner the gold market, since the scheme was not announced publicly, but he could not be trusted. Gould had promoted the plan to Grant as a means to help farmers sell a bountiful 1869 wheat crop to Europe.

A highly fictionalized account of Fisk's life, culminating in a dramatic presentation of the gold corner, was shown in the 1937 film The Toast of New York.

Where does gold go from here - $1,500 or $2,000?

For the last week and more gold has been on a roller coaster moving between $100 and $200 each way until now where it is hovering above $1,800. A broad spectrum of analysts points either to $1,500 or above $2,000. With gold currently just above $1,800 we are around the half-way point for each move. The move each way would represent a move of just over 16%, which is not deeply significant in today's gold world except for the trading fraternity; there is more, however, beneath these moves than meets the eye!

$1500 Implications

• The fall to $1,500 is only 16%+and would therefore not represent a change of trend to us.
• Should the price only fall to $1,650 it would be a correction caused by significant selling in the face of rising seasonal demand.
• A fall to $1,750 would be large buyers standing back and shaking out weak holders, who are, primarily, holding gold in the U.S. based SPDR gold ETF. They sold 50 tonnes last week.

U.S. Involvement in the Gold Market

The holders that sold gold from that ETF could be one of two types. Either a holder who took advantage of the sudden jump over $1,910 sold into strength heavily, as part of an ongoing sales program, or a broad spectrum of U.S. sellers, believing that neither inflation nor deflation is a future danger for the U.S.

Either way, buyers outside the U.S. welcomed the supply and absorbed the amount quickly. This resulted in the fall from $1,910 to $1,716 and then a race back over the $1,800 line again. The significance is that the price correction/consolidation is a movement of U.S. long-term holder's gold into central bank of Eastern demand hands.

What has been remarkable in the gold price rise is that U.S. demand for physical gold has been negligible. Compared to the original growth in the U.S. gold ETF the demand this year and last year has been modest against the initial rises in the holdings.

The behavior of the holdings has reflected not just the conservative nature of the fund but some of the investment policies of the investors. Take the holdings of George Soros. After taking his position he has decided that deflation is not a danger and has dropped his physical holdings in favor of gold shares. The switch appears reasonable in the light of the poor performance of gold shares relative to gold itself and the reality is that he did not drop his exposure to gold at all. But he remains invested in gold. The amount of buying to sell for a profit in the medium term is small and is expected to remain so. At these levels it represents less that 1% of the total investment funds in the U.S. (more)

Can anything stop the Swiss franc?

The Swiss franc just won't quit.

The currency jumped more than 2% against the euro and the U.S. dollar Wednesday after the Swiss government announced a stimulus package that was smaller than investors had anticipated.

While the currency's strength diminished in August, it is still up 9% against the euro and 13.5% against the dollar so far this year.

The Swiss franc has appreciated as investors sought out safe-haven investments amid the waves of uncertainty that have hit markets this year.

But the currency's strength is causing major problems for the Swiss economy.

A strong franc makes Swiss goods less attractive to trading partners, and tourists -- a major source of income for Switzerland -- are less likely to visit.

"The largely overvalued Swiss franc against the euro and the dollar poses great challenges for certain export-oriented sectors ... like manufacturing and tourism," said Swiss economic minister Johann Schneider-Ammann earlier this week.

Complicating matters, the country's central bank chose to leave its money supply unchanged on Wednesday.

"Where the franc goes from here depends on what the Swiss National Bank does and developments coming out of the eurozone," said Brian Dolan, chief currency strategist at Forex.com.

In early August, the franc's sharp rise prompted the Swiss National Bank to step in to try and cool the rally.

The Zurich-based central bank cut interest rates to "as close to zero as possible" and boosted the supply of Swiss francs to money markets.

At the time, the bank said it considers the franc to be "massively overvalued," and that its strength "is threatening the development of the economy and increasing the downside risks to price stability in Switzerland."

Not that much has changed. The currency is still very strong, but the brief weakness in August might have given the central bank pause.

The Swiss National Bank "still has plenty of options" to control appreciation, Dolan said.

The bank could levy a tax on foreign deposits, making it more expensive for investors to hold francs. Or the bank could move to negative interest rates.

"The Swiss need to be continually applying pressure on markets to prevent another surge," Dolan said. "The more they step back, the more investors will move back into the franc."

Protect Yourself From Rising Food Prices : AGU, COW, CROP, MOO, PAGG

Many consumers have recently felt the effects of rising oil prices in their wallets. With turmoil continuing to rage in the Middle East, oil prices have been volatile. Funds like the United States Brent Oil (NYSE:BNO) have rallied in the face of higher prices. Analysts predict that this trend of higher oil prices could continue for awhile as the political situation in the Middle East remains in a quagmire. However, while consumers focus on the gas in their tanks, a potentially more serious problem is still brewing - rampant food inflation.

Biggest Increase

The United Nations Food and Agriculture Organization's (FAO) latest report showed that global food prices rose 39% in June versus June 2010. So far, consumers in the United States have not really felt the full effects of this rising food price inflation. Recent weather calamities such as a drought in Russia and flooding Australia, have disrupted harvests and helped push food prices higher. In addition, long term demand from emerging nations for new sources of food and biofuels is putting continued pressure on food prices. The USDA estimates that throughout 2011, its all-food CPI will increase 3 to 4%, with food at home (grocery store) prices forecast to rise 3.5 to 4.5%. The USDA forecasts are based on strengthening global food demand, mostly in the developing world.

Emerging World Demand

That demand in the emerging world is growing quite rapidly. The FAO projects that global populations will increase nearly 11% by 2020 and 20% by 2030. Analysts at Goldman Sachs expect the global middle class to expand considerably over the same time frame, to over 3.5 billion by 2030. Worldwide demand for beef is at all time highs, with beef exports surging by 19% in 2010. Wheat imports in China will need to rise by more than 30% this year. Last year, China was a net importer of corn for the first time in 14 years. Unlike developed nations such as the United States, citizens of emerging nations can spend as much as 40 to 50% of their income on food.

Sowing the Seeds

With the trends pointing in the favorable direction, investing in agriculture has been a big hit. While many agricultural commodity prices have climbed already, investors with a long term focus should consider adding the sector to a portfolio. Both the Market Vectors Agribusiness ETF (NYSE:MOO) and the PowerShares Global Agriculture (Nasdaq:PAGG) offer broad global exposure to some of agriculture's biggest companies like Deere (NYSE:DE) and fertilizer maker Agrium (NYSE:AGU). These two funds can form a great base in sector. However, there are other ways to play the growth in Ag.

The agricultural sector accounts for a big portion of total economic activity in both New Zealand and Argentina. Argentina is the second largest corn exporter and third largest soy exporter in the world. The nation is also top beef and lamb producer. New Zealand has seen its milk exports to China rise more than five times since 2008 as rising incomes increase demand. Both the iShares MSCI New Zealand (Nasdaq:ENZL) and Global X FTSE Argentina 20 ETF (NYSE:ARGT) should do well as the Ag sector grows.

Higher beef prices may be here for awhile as it takes two to three years for a cattle rancher to substantially increase herd. The U.S. currently has the smallest cattle herd since the 1950s, even though exports are surging. The iPath DJ-UBS Livestock ETN (NYSE:COW) and UBS E-TRACS CMCI Livestock ETN (NYSE:UBC) allow investors to bet on the prices of livestock.

Bottom Line

With global demand surging, higher food prices are here to stay. Investors with long term timelines should consider the sector. Growing populations, coupled with the newly minted middle classes desire for new sources of protein makes the sector a great place to be for the next few years. Funds like the new IQ Global Agribusiness Small Cap (Nasdaq:CROP) should continue to do well as global populations increase exponentially.

Palladium Price Lags Gold

Unlike gold, which has rallied recently, the price of palladium has underperformed other precious metals over the past few months. Although palladium wsa one of the best performing commodities last year, signs of an end to its rapid price recovery are growing. According to the latest report of the German precious metals trading group Heraeus, Exchange Traded Funds (ETFs) got rid of nearly four tons of palladium in the last four weeks. While global demand for palladium bars for investment purposes has slightly increased, the total volume remains at relatively low levels.

Palladium was one of last year´s biggest winners after the global automobile industry had significantly recovered again. While the global financial crisis caused a heavy setback in worldwide car production numbers, the industry was able to rebound in the last two years. Even if sales figures in many regions could not reach their pre-crisis levels again, palladium demand among industrial end-users turned out to be strong. This development contributed to palladium price rally, after hitting a low of $161 per ounce in the fall of 2008. Palladium reached a new record high of $855 per ounce in February of 2011; more than a fourfold increase compared to its bottom at the height of the global financial crisis.

In addition, the rally in the palladium market has been fueled by growing concerns over future supply shortages of the white metal. After the mining giant Norilsk Nickel warned of depleting Russian state inventories of palladium in autumn 2010 followed by strikes in South Africa, the largest producer, this contributed to a tightening of the supply situation in global palladium markets. However, the resulting fears among global capital investors have given way to greatly increasing concerns over a new recession in the United States and a significantly slowing global economy in recent weeks. A shrinking demand from the automobile industry would have a highly negative impact, which is primarily used in the manufacture of catalytic converters.

The report from Heraeus also stated that sales in Europe´s automotive sector decreased by 2% from January to July of 2011. While Germany´s car market has proven to be a stabilizing factor for European car sales in the respective period, new vehicle registrations severely fell in those countries most affected by the region´s sovereign debt crisis. Spain, Italy and Great Britain suffered a slump of 24%, 13%, and 6.7% respectively. While vehicle sales in the U.S. rose by 11% compared to July 2010, new car registrations only increased by 1% month-on-month. Similarly in China – the world´s fastest-growing car market – vehicle sales recently posted a drop. Should this situation not change soon, the risk for a continued decline in palladium prices is high. Thus, investors should be extremely cautious were the technically relevant support level of $720 per ounce to be lost.

The World’s Supreme Test for Gold

“Gold is now at its supreme test of desirability. Either it will become much more valuable, or the trend will be away from it altogether. And today economists are not agreed on which will happen; but the opinion is strong that there will be a drastically revised conception of the virtues of gold.”

This excerpt comes from The Vancouver Sun of October 1933. It is a fascinating article. I strongly recommend that you read it in its entirety here. (It should take you no more than 3 minutes to do so.)

The article wrestled with one economically-perplexing question: Did gold become money because people wanted gold in a “special way” or is gold wanted by people just because gold is considered (legal) money? The article remarked that some economists believe it is the former, while others believe it is the latter.

The article---and its question posed---must be understood in context, however. In April of 1933, U.S. President Franklin D. Roosevelt ordered that all gold held by American citizens was property of the United States Treasury and, as such, by May 1933 all American citizens must turn in their gold to the Federal Reserve and/or an affiliate banks.

In other words, gold was no longer deemed (lawful) money in the United States. The article, therefore, pondered the question: Would the demand for gold remain even though the metal was no longer considered money?

The article’s author took the position that, regardless of if gold is deemed legal money, people want gold and that is what ultimately drives its demand. But gold was still considered money in other countries like France, Italy, Belgium, Germany, Holland, and Switzerland. In fact, the author noted that “Frenchmen” were regularly entering into the London Gold market to purchase gold even though it cost those business men a heavy premium compared to simply redemption at their own Bank of France. Why pay this premium?, the author asked. No need to ask why; just note that it is happening, the author said.

But what if the above-mentioned countries followed suit with the US and Britain and made gold “not money” anymore? What then for the demand for gold?

Time will tell, the author concluded.

Let us hope that if [the test of gold] materializes we shall profit by its lesson, for that lesson will be of great importance in clearing people’s minds upon some fundamental principles concerning the nature of “money”---and its “management.”

The author would be satisfied to know that history has answered this question and, in addition, has vindicated his position---that gold is desired and wanted by the people not because it is deemed legal money but because it is the truest money. After 70 years, history has proved that people desire gold regardless of what governments call it or deem it.

And right now---at a gold spot price at about $1900 per ounce---the people are showing their strong desire for gold is only beginning to be rekindled. The “supreme test” of gold has been completed. But it has not ended. Not until, that is, gold has been deemed “legal” money once again.

Gold is money.

Low Rates Are Goodand Bad

Borrowers breathed a collective sigh of relief when the Federal Reserve said earlier this month that it would hold interest rates at rock bottom for the next two years. But savers were far from happy.

"The news was a little depressing" for savers, says Jim Chessen, chief economist at the American Bankers Association. "It means low savings rates will be par for the course for the next couple of years."

A divided Federal Reserve conceded Aug. 9 that the economy was weak, with "downside risks" on the rise, and announced, surprisingly, that it would extend near-zero short-term interest rates another two years.

The Fed sets a "target rate" that banks follow closely when setting the "federal-funds rate" they charge each other for overnight loans as well as the competitive interest rates they charge consumers and businesses.

The Fed's move was aimed at goading consumers and businesses to look again at leverage as a means of investing in the economy -- either through big-ticket purchases like houses, cars and large appliances, or, for businesses, in equipment, new systems and even workers. The Fed's thinking is that if interest rates stay low enough, people and businesses won't be afraid to borrow, which could shake this stagnant economy back into growth mode.

But it stings if you're on a fixed income facing rising costs for energy and food, or if you're so wary of your money disappearing in the stock market that you're sitting on a bank savings account full of cash. Most bank-savings rates are below 1%.

Low interest rates hurt, too, if your retirement is dependent on interest income from certificates of deposit. Interest rates on a one-year CD have plunged to 0.42% from 2.38% just three years ago, according to Bankrate.com. Most money-market mutual-fund yields are at 0.01%. And at those rates, there's no wiggle room for inflation, which was 3.6% in the last year.

"It doesn't matter if your money is liquid or tied up in a CD, the yields right now do not compensate you for inflation," says Greg McBride, senior financial analyst at Bankrate.

Though the interest is adding only dimes and nickels to many savings accounts now and for the next two years, a federally insured bank is still a good bet to stash your cash.

If you're a homeowner with, say, a 5-1 adjustable-rate mortgage that's already past five years of the fixed-rate portion, you're in pretty good stead for the next couple of years.

Ditto on those home-equity lines of credit, which carry variable interest rates mostly based on the prime rate, which also trends with the federal-funds rate.

Low interest rates also have contributed to 50-year troughs in mortgage rates, which are determined by a variety of interest-rate benchmarks. Freddie Mac reported the average rate on a 30-year fixed-rate mortgage rose modestly last week to 4.22%, after seven straight weeks of declines. A year ago, the 30-year fixed-rate mortgage stood at 4.36%. The 5-1 ARM slipped to 3.07%, a record low.

Low interest rates are a positive for credit-card holders, unless, of course, you don't pay your bills on time and get slapped with high penalty rates. Thanks to the Credit Card Accountability, Responsibility and Disclosure Act, most banks reset their annual percentage rates to variable terms, meaning they could rise -- and fall -- along with the prime rate.

"It doesn't look like there's going to be any cost-of-funds pressure on credit-card issuers to increase" annual percentage rates, says Ben Woolsey, director of consumer research at CreditCard.com. The cost of funds refers to the rates banks charge each other on overnight loans. "It appears that banks are opening up more credit to people with excellent credit."

A low-interest environment makes it even more important that you pay off your credit-card balances, however. Because you're earning very little return on savings accounts and CDs, the amount you pay in interest-rate charges has more impact on your total budget and cash flow. Generally, interest earned on savings accounts can help offset the interest paid on credit cards.