Thoughts from Trader Vic Sperandeo – Fri 21 Aug, 2020

A Historical Synopsis of Money in the U.S.

Trader Vic recently send me this article that he wrote. I will be chatting with Trader Vic next week to get some more market thoughts but I wanted to post this in the meantime. I hope you all enjoy.

With gold at all-time highs against the U.S. Dollar – as well as against all fiat currencies – and silver finally breaking out to the high $20’s per ounce, a recap of this history of “money” in the U.S. seems like a worthwhile discussion.

The U.S. was on a bimetallic standard for its first hundred years (meaning the currency was tied to both gold and silver).  With the ratification of the U.S. Constitution in 1791 and the passage of the Mint Act of 1792, the ratio of the price of gold to silver was set at 15:1.  The 1834 Coinage Act moved the ratio to 16:1.  During the Civil War inflation rose to over 40%, which pushed the price of silver to $2.94 an ounce.

Then came the 1873 Coinage Act, which has also been referred to as the Crime of 1873.  Signed by President U.S. Grant, the act was ostensibly passed to change the U.S. Mint’s structure.  But the main purpose was to remove the U.S. Dollar from bimetallism, adopting the Gold Standard.  As a consequence, the standard silver dollar would no longer be minted.  

Then in 1884, we come to the Supreme Court case “Juilliard v Greenman.”  In this case, in an 8-1 ruling, the Legal Tender acts of the 1860’s were found to be constitutional.  The legal ramifications were that it was now accepted precedent that the U.S. Federal government had the power to borrow money and establish a national currency, and establishing that paper money was now legal tender and must be accepted for payment of public and private debt.  Under these guidelines, the government was free to print paper currency in any amount and for any reason.

This begs the question: why doesn’t the U.S. Treasury simply print paper (a.k.a. fiat) money without issuing debt (and being liable for the resulting interest payments)?  Instead, the debt is issued and the paper money is used to buy the debt (mainly by the banks and the Federal Reserve).  Could it be that eliminating the debt would deprive the banking cartels of their immoral gains? 

The first central bank after the ratification of the Constitution was commonly called the First Bank of the United States.  It was chartered in 1791 for twenty years and was promoted heavily by Alexander Hamilton when he was Secretary of the Treasury.   Its charter expired in 1811.  The Second Bank was formed in 1816, and again chartered for twenty years.  Its charter ended in 1836 (when it became privately owned), but by 1833 it was effectively shut down by President Andrew Jackson, who had the Federal deposits moved to state and private banks.

Fast forward to 1913, when the Federal Reserve Act created another central bank to create fiat currency, set interest rates, and manufacture the money supply by buying government debt.  Understand that except for minted coins, all money is now “loaned” into existence. The phrase “Federal Reserve“ was used to confuse the public into believing it was a government institution instead of a private bankers’ cabal.

From 1792 to 1833, gold was priced at $19.39.  Not including a price spike during the Civil War, from 1834 through 1933 it was priced at $20.67.  So, during this period, inflation (as measured by the price of gold) was 0.04% annually, an infinitesimal amount.

All of this changed in 1933.  That’s when F.D.R. (via an Executive Order, later backed by the Gold Confiscation Act – for once a piece of legislation accurately named) ordered citizens to turn in their gold to the Federal government (with some minor exclusions for business use, and a small personal exception), in exchange for $20.67 in paper money.  Historians call this “voluntary surrender” despite the threat of fines and prison for anyone caught hoarding gold.  Immediately following the surrender period, the price of gold was reset to $35 an ounce, resulting in a “profit” of 70% on all the gold the government had forcibly collected.  More to the point, that was a profit denied to the rightful owners of the gold.

In my view, both the Executive Order and the Congressional legislation were both unconstitutional.  It wasn’t simply the illegal confiscation of the gold, but also the entire position that the government can print paper fiat currency.  Refer to the U.S. Constitution itself.  Article 1, Section 8, Clause 5 states: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”  (For example, fixing the value of an ounce of gold at $20.67).   Also see Article 1 Section 10:  “No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.”

So where did FDR get the power to crown himself a king, with Congress his willing and obedient nobles?  The government made itself into a criminal enterprise, colluding to take people’s wealth (in the form of gold).  All three branches of government played a part in the scheme, as the Supreme Court refused to hear any of the lawsuits.  So much for the laughable notion of “separation of powers.”  Despite the constitutional restrictions on government “impairing the obligation of contracts,” the Gold Confiscation Act effectively resulted in all of the “Gold Clause Contracts” outstanding to become null and void.  A “Gold Clause” agreement was a contract between parties to borrow and repay in gold rather than in fiat currency.  The only legal way to have enacted these laws and orders was through a constitutional amendment.  Instead, the Supreme Court refused to enforce the restrictions of the Constitution, and consequently what should have been illegal decrees became the new law of the land.

The United States – as it was founded – basically ended in 1913 under Woodrow Wilson.   That was when the nation implemented the Second Plank of the Communist Manifesto: “A heavy progressive or graduated income tax.”  This was exacerbated in 1933 when the Fifth Plank was instituted: “Centralization of Credit in the Hands of the State, by Means of a National Bank with State Capital and an Exclusive Monopoly.”  With the surrender of gold by the public, the official money of the nation was now in the hands of the government.

In 1963, President Kennedy made the only modern move away from the Federal Reserve system when he signed Executive Order 11110.  This order decreed that the U.S. Treasury would be solely permitted to issue Silver Certificates as currency, backed by the silver held by the U.S. government.  These United States Notes were very similar in appearance to the fiat Federal Reserve Notes and were issued in $2 and $5 denominations ($10 and $20 denominations were printed but had not been distributed by the time JFK was assassinated less than six months later).  While Executive Order 11110 has never been repealed, the Silver Certificates were taken out of circulation and have never again been issued.

Instead, LBJ became President and soon increased the war efforts in Vietnam while asserting his “guns and butter” policies.  Inflation accelerated, and silver coins began to be hoarded as paper money declined in value.  In response, the Coinage Act of 1965 was passed and signed.  This eliminated silver entirely from dimes and quarters and cut the silver content of half-dollars to 40% (before silver was eliminated from those as well in 1970).  With this one act, the composition of coins in the U.S. was forever changed from the silver standards set in 1792. 

In 1971, Richard Nixon enacted internationally what FDR had enacted domestically: taking the U.S. currency off the gold standard.  This began the exponential increase in government debt, as the entire monetary system was now a fiat paper-based concoction.  From June 1971, to an estimated September 2020, total stated U.S. Federal debt (not including unfunded liabilities and “off-balance sheet items”) will have grown at a 9.02% compounded annual rate.  Compare that to Real GDP growth between June 1970 to June 2020 of only 2.54% compounded annually.  Debt has grown at 3.6 times the rate of real growth.  If this rate of debt increase continues, by September 2030 the U.S. Federal debt will be $68.8 trillion.

When you start to talk about such vast sums of money it is difficult to understand exactly what it means.  Let me try to put a trillion into perspective.  If you counted back just one trillion seconds from today, you would be in the Paleolithic period, around the year 29,690 B.C.  We’ve had a major ice age more recently than that! 

Historic Gold and Silver Prices in key years

YearGoldSilver
1792$19.39$1.29
1913$20.67$0.58
1971$40.80$1.39
7/31/2020$1962.80$24.21

The official CPI rate from December 1913 to June 2020 shows a 3.1% compounded annual rate of increase.  Over that same period, gold has increased in value at a 4.28% compounded annual rate (using the June 30th close of $1,800.50).  Gold has beaten the official inflation rate by 38% per year over this 106½-year period.

The question remains, what will the “end game” look like in the U.S.?  In my view, I am 100% certain it will not be bankruptcy.  In today’s world, we don’t even allow junk bonds to fail.  That kind of default would also focus the public attention – and blame – on the government, which is something it never allows.  Instead, in my view, it will be through hyperinflation that the government fails.  This was defined by economist Phillip D. Cagan as a month in which the price level increases by 50%. At that rate, the $29 trillion that is estimated to exist in September 2020 would be washed away in a mere 4 months, dropping to 6.25% of its original value over that period.  I believe that when hyperinflation hits the U.S., it will happen fast and be over, which is the only way to go.

Inflation will be pushed via the adoption of Modern Monetary Theory and exacerbated by the implementation of minimum basic income (or perhaps even universal basic income).  My guess is we’ll eventually see $2,000 a month going to everyone over 18 years old, and that money will be printed (rather than borrowed).  That amount would total $6.5 trillion a year going into the hands of pure consumers ready to spend it (as opposed to the Quantitative Easing programs, which have mostly gone to investors). 

Who will take the blame for the resulting inflation?  Probably the general population; they will have been given what they wanted and left to deal with the consequences.  I expect gold will increase in value to between $10,000 to $25,000 an ounce conservatively, which is only between 4 and 12.5 times the current value.  That wouldn’t even keep pace with the level of inflation in this example, so much higher is possible.  If you think this sounds too high, remember that in France during the hyperinflation period between 1789 and 1797 gold went up by a factor of 600.

Why will this be the government’s “solution” to the problem?  Let me close with the words of Ernest Hemingway:

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision.  Any investments made by a party in reliance thereon are made at such party’s sole risk.  No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events is provided.  Past performance is not necessarily indicative of future results.

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Comments:
  1. On August 21, 2020 at 9:36 am,
    cfs says:

    Good summary, The only thing I would add, is that the mode of calculation for the CPI has changed to DECREASE its apparent value. (So the Government would not have to raise pensions, etc. so much.)
    Thus the actual rise in price of gold/silver is probably pretty darned close to actual inflation.

  2. On August 21, 2020 at 9:53 am,
    cfs says:
    • On August 21, 2020 at 10:07 am,
      cfs says:

      Great speech….mostly extemporaneous. (Off script)

      Great humor.

  3. On August 21, 2020 at 9:56 am,
    bonzo says:

    Always worth listening to Trader Vic. Remember when FDR forced everyone to sell their gold to the government, those who bought shares of Homestake or Dome Mines made 6 times their money. Anyone here own TSG.V? I bought some@.38 this morning. It should do really well if Vic is right about gold at 10K or 25K.

  4. On August 21, 2020 at 10:40 am,
    cfs says:

    Are the democrats trying to buy postal workers?

    https://youtu.be/M08_V7gDxs0

  5. On August 21, 2020 at 11:10 am,
    Excelsior says:

    Sprott Money News Weekly Wrap-up

    (08.21.2020) – w/ host Craig Hemke #AudioInterview

    “Eric Sprott discusses the events that moved the precious metals markets this week and looks ahead to an interesting week next.”

    https://youtu.be/0N2VKU3V3E0

    • On August 21, 2020 at 11:14 am,
      Excelsior says:

      I agree with a number of the comments that I’m surprised Eric didn’t touch on QMX Gold Corp (QMX) exploring in the Abitibi Greenstone Belt, because they had a massive discovery hole out this week and Eric has a strategic position in the company, as does O3 Mining, Probe Metals, Osisko Gold Royalties, and Eldorado Gold. [that’s an impressive group of stakeholders by the way…]
      ______________________________________________

      (QMX) (QMXGF) QMX Gold Reports 6.48 g/t Au Over 73.2 Metres Within Current Pit Shell and Demonstrates Significant Depth Potential Intersecting 35.56 g/t Au Over 4.0 M at Depth at Bonnefond

      August 18, 2020

      https://www.qmxgold.ca/investors/news/qmx-gold-reports-648-gt-au-over-732-metres-within-current-pit-shell-and-demonstrates-significant-depth-potential-intersecting-3556-gt-au-over-40-m-at-depth-at-bonnefond

      • On August 21, 2020 at 11:24 am,
        Excelsior says:

        My adventure with QMX Gold so far has been a fun ride, initially buying on 07/24/2020, then selling on that news release spike in the afternoon on 08/18/2020, and then buying the position back yesterday and added a bit more today.

        I think there are so many drill campaigns all releasing at the same time from so many companies (literally hundreds of companies have exploration programs going) that it is harder to get noticed in this exploration frenzy. If QMX Gold had released a hole like that in a quieter market, it would have exploded up higher for many more days, but it just shows the lack of energy in the miners at present.

        This is has been obvious the last few weeks when other companies put out stellar exploration results and barely got noticed for it, like Silvercrest, Wallbridge, Amex, Discovery, etc… When there is hardly any reaction to really great news and a mild pullback, then I’d submit we are still in the corrective move in PM stocks, but personally I’m starting to add again to some of these positions, as the companies have further derisked their projects, have shown true exploration success, and yet their valuations actually fell back right after the mild news pops with the sector, making them that much more attractive.

        I’m almost hoping other companies will wait to release any more good news as it is not getting value from the market, and the miners have been lackluster for about a month now shrugging off true progress.

        • On August 21, 2020 at 11:29 am,
          Excelsior says:

          To be clear, I’m adding another tranche in many companies as they come down to much lower positions that I trimmed at a few weeks back, but I’m still keeping funds to the side for adding another tranche even lower if the corrective move accelerates to the downside for longer as some expect. While active trading is not for everyone, I’m sure glad I harvested some good profits at higher prices and can buy back now at lower prices, and those that say if you trade a bull market “you’ll lose your position” or “you’ll never get back in” missed an excellent opportunity to sell high, and buy back lower. To each their own…

          • On August 21, 2020 at 2:20 pm,
            David says:

            Great stuff Ex.

          • On August 21, 2020 at 3:28 pm,
            Excelsior says:

            Thanks David. I ended up adding a bit today to top up positions in Maverix, Brixton, Silvercrest, Endeavour Silver, Galiano Gold, QMX Gold, and Metallic Minerals. I was able to get lower prices on all of those than where I trimmed them back, so the positions are a bit beefier now, but I’m ready to buy more if we see the PM miners keep correcting down further.

        • On August 21, 2020 at 4:51 pm,
          Marty says:

          Silvercrest maybe had the Au/Ag drill hole of the millennium 1.7 meters of 73,595 gpt AgEq.and both Schwab & TD Ameritrade didn’t pick up on either the 1st or 2nd release. I did see it on Yahoo Finance and one other sight

          • On August 21, 2020 at 5:45 pm,
            Excelsior says:

            Agreed Marty.

            I saw it hit the news wires over at ceo.ca as well, but thought it was weird that their name and tickers (SIL) and (SILV) were not even in the headline.

            Drilling Success Continues at Las Chispas, Babi Vista Vein Takes Centre Stage, New Record Drill Hole: 1.7 Metres Grading 635 gpt Au, 26,004 gpt Ag or 73,595 gpt AgEq

            by @newsfile on 13 Aug 2020

            https://ceo.ca/@newsfile/drilling-success-continues-at-las-chispas-babi-vista

    • On August 21, 2020 at 12:01 pm,
      Excelsior says:

      Eric Sprott did discuss the great drilling news out from Discovery Metals (DSV), Silvercrest (SILV), and Wallbridge (WM) and how it surprised him again that the market didn’t respond to any of those. They also discussed that Wallbridge may get added back into the GDXJ.

      He also discussed the lack of movement in Teuton (TUO)/Tudor (TUD)after they’ve done well this season, and same thing with Freegold Ventures (FVL).

      Eric did mention selling out of Gran Colombia Gold (GCM) after their disappointing metals stream.

      Overall – good comments from Eric on the mining stocks and I agree that the ounces in the ground for most companies are still not valued where they should be, and the positive news may have been ignored over the last week or two, but longer term it will matter in the valuations.

  6. On August 21, 2020 at 11:44 am,
    Excelsior says:

    Are Gold and Silver Speculative Bubbles?

    Arcadia Economics – (08/21/2020) #VIDEO

    https://youtu.be/nEe5YqydASI

  7. On August 21, 2020 at 11:54 am,
    Excelsior says:

    > Impact Silver is now cashed up and ready to drill their Silver project, gold targets, and base metal VMS targets. Drill baby drill!!

    ___________________________

    (IPT) (ISVLF) Impact Silver Announces Closing of $9.5 Million Financing

    20 Aug 2020

    https://ceo.ca/@newsfile/impact-silver-announces-closing-of-95-million-financing

    • On August 21, 2020 at 12:03 pm,
      Excelsior says:

      Fred Davidson, President & CEO, Impact Silver Corp. (IPT)

      The View From The C-Suite – Aug 18, 2020

      https://youtu.be/A7BNLW6rMuQ

    • On August 21, 2020 at 1:48 pm,
      Dick Tracy says:

      Drill baby drill, Yeah Baby, Austin Powers! DT

      • On August 21, 2020 at 3:30 pm,
        Excelsior says:
        • On August 21, 2020 at 6:35 pm,
          Dick Tracy says:

          I especially like his bad English teeth, almost everyone in The UK as the saying goes ends up with clickers. DT

  8. On August 21, 2020 at 1:45 pm,
    Mike from Albuquerque says:

    Having been burned badly with Energold Drilling I’ll have to make a ton on Impact Silver to get even. So, if I seem a bit unexcited by Fred please forgive me. At one time Energold held a big chunk of Impact silver – I guess that has gone down the tubes too –

    • On August 21, 2020 at 1:58 pm,
      Matthew says:

      Big bad bear markets aren’t kind to the “picks and shovels” plays.

    • On August 21, 2020 at 3:34 pm,
      Excelsior says:

      In the last 4 1/2 years I’ve already made a ton on Impact Silver and if I added up all the several dozen trades it has been well over a 10 bagger for me, so I can’t complain so I’m very impressed with Fred’s leadership. Having said that, I’m much more excited about the gains to come, than the gains I’ve made since 2016 in Impact Silver, and highly await their drill programs for the balance of 2020 and moving into 2021. Also, at current Silver rates IPT should be doing quite well in the profitability area as well.

  9. On August 21, 2020 at 1:59 pm,
    Matthew says:

    Scorpio Gold finished up 18.18% today on decent volume:
    https://stockcharts.com/h-sc/ui?s=SGN.V&p=D&yr=0&mn=11&dy=0&id=p63578959270&a=803269996

    • On August 21, 2020 at 3:36 pm,
      Excelsior says:

      +18

  10. On August 21, 2020 at 3:18 pm,
    Dick Tracy says:

    Ex, there are a lot of interesting stories out there these days, what do you think of New Found Gold, it is so fitting that their symbol is NFG, and it’s in Newfoundland, a bit of a “newfie joke”, but I’m sure this company is anything but a joke if you read Bob M’s commentary from today. LOL! DT

    • On August 21, 2020 at 3:36 pm,
      Excelsior says:

      DT – Yeah, there are just so many stories to follow out there, and I don’t own NFG, but have watched the Q.H. videos on it, heard Sprott’s comments on it, and have followed the monkey chatter over at ceo.ca about it. I haven’t seen Bob M’s comments on it yet, but he’s usually got a good eye and likes most of the Q.H. companies. It looks quite prospective and I wish you well in the position sir!

      • On August 21, 2020 at 7:08 pm,
        David says:

        I didn’t do too much end of week, but took some small profits from several and added some impact and QMX (after drill results) and bought a starter position to Adamera. Bought back Newrange and took what was left over and put it in my Ely bank. Corrections are no fun as they some times turn into massacres in the metals.

        • On August 21, 2020 at 7:12 pm,
          David says:

          Not sure how this reply got down here as supposed to be half way up the page.

        • On August 22, 2020 at 2:33 am,
          Excelsior says:

          Yeah, I added some Newrange on Thursday (08/20/2020) when it sold off more as it has been a big over-reaction by the market recently. I had also posted Goldfinger’s missive about it that same day (that I saw after I had added Newrange had seen posted over in the NRG chat room and really resonated with it).

          ________________________________________________________

          @Goldfinger – “I see the natives are getting restless here. I have reached out to the company for an update (although i’m pretty sure that things are still progressing as laid out earlier this month). While we wait, a few important points:”

          ~ $NRG went from $.07 to $.43 in four months, that’s a pretty damn good performance in my estimation. If you bought low and took some off the table you should still be in the green.

          ~ I have bought at prices ranging from $.10 to $.25, putting today’s $.175 right in the middle of my buy range.

          ~ This looks like a nice area on the chart to me:
          http://cdn.ceo.ca/1fjt8q0-NRG.V_Daily_8.20.2020.png

          ~ A really important concept is to BUY RIGHT. Novices love to chase highs and get involved when there’s a lot of activity on channel. I generally like to buy low when others are selling out of despair and complaining. This is classic August action in the juniors….buyers go on vacation and prices drift lower on lighter volume. That’s generally one of the best times of the year to BUY. I have some bids laid out today.

          This is JUNIOR MINING, these tiny market cap stocks regularly trade in wild price ranges. $07 to $.43 back to $.17 is actually pretty standard stuff for this sector.”

          — Goldfinger

    • On August 21, 2020 at 7:18 pm,
      David says:

      I was ready to pick up some New Found, but there is no US symbol yet. So I am watching it right now.

  11. On August 21, 2020 at 7:28 pm,
    Dick Tracy says:

    This weekend should be fun, I will be busy letting out the cat! LOL! DT