“It does not take a
majority to prevail…but rather an irate, tireless minority,
keen on setting brushfires of freedom in the minds of men.”
~
Samuel Adams
“…an
irate, tireless minority…keen on setting brushfires of freedom in the
minds of men.” I guess I would fall into that category, as would many
hundreds and thousands of others whose lives are consumed by this passion. Most
of the ones that we all know spend hours hunched over their keyboards
bringing us the latest gold and silver news on an hourly, daily, or weekly
basis.
I
didn’t start out as a ‘freedom fighter’, but if one
believes that gold and silver are the only true forms of money…and that
Alan Greenspan meant what he said in Ayn
Rand’s book back in 1967…then that would make all of us freedom
fighters in one form or another, whether we want to be or not. Jay Taylor
pointed this out to me a couple of years ago, and although I never gave it
too much serious thought at the time, I’d have to agree with him now.
And
don’t think for a moment that because you don’t live in the
United States, and don’t have a Constitution that proclaims gold and
silver to be the only true forms of payment of all debts, that you are off
the hook. Since you (and I) all live under governments that have fiat
currencies, we are all slaves together. It’s just that in the United States
it happens to be written down in their most sacred of national documents. Good
men and women died so that it would be so.
Talking
about dying for your cause, let’s see (besides the founding fathers of
the United States
back in the 1700s) who else has paid either a heavy price, or the ultimate
sacrifice, for their beliefs in the last 100 years. First would be Mahatma
Gandhi, followed by Nelson Mandela. Both these figures are 20th
century titans of freedom that need no further introduction or explanation. These
two names are synonymous with the word. Look it up in your dictionary and
you’ll find their pictures…if you know what I mean.
Then
there’s John Kennedy and his famous brother…killed by ‘the
powers that be’ because they were actually going to do something for
the people. Then there was Martin Luther King Jr….shot
dead by a sniper’s bullet… again under mysterious circumstances. America just
celebrated him on January 19th. Once again, nothing has to be
said…everyone knows the stories.
But
there are other stories about other people that few in the world know about,
and I’m going to tell one today. Not in my words…but in his. I
must admit that it set me back on my heels when I read it…as it will you. From that point on, I’ve had to reassess
what the word “freedom fighter” really meant…at least to
me. And if you consider yourself in this august group, then you must prepare
yourself for a paradigm shift in your thinking.
Most of
us have had at least one ‘crossing the Rubicon’ or some such
experience in our lives that has changed everything…and when that event
happens, we can never go back to what once was.
This
story is like that.
It all
started out innocently enough. My home page is Dave Morgan’s web site
www.silver-investor.com. When I power up the computer to see what’s
happening, I want the gold and silver price in my face immediately. Besides
which, it’s a good site, and I’m a huge silver fan…plus
I’m a subscriber to his most excellent newsletter.
His
latest (free) offering under “Essay of the Month” was a piece
entitled “The Cold North Wind” written by Franklin
Sanders. As Dave says in his preamble to the essay “Franklin is famous for his work
in the book "The Silver Bonanza" and also his newsletter
"The Moneychanger." We encourage all readers to visit his
website at http://www.the-moneychanger.com/, and inquire
about his newsletter and book.”
So do I.
I’d
heard of Franklin Sanders off and on over the last number of years, but had
no idea of where he hung his hat. He must have been making every attempt to
keep a low profile in the gold and silver world, because he doesn’t
seem to go out of his way to build a high one. I hope that I can change that
for him just a little.
You can
go to Dave’s site and download the original pdf
file that includes all graphs and charts, or you can read the text of the
essay below. The graphs and charts don’t really add anything to the
work and it’s a much easier read (and word for word) in this essay,
then in the pdf format that is provided at Dave
Morgan’s site. You chose. I’ll let Franklin take it from here…
Ed
Steer
THE COLD NORTH WIND
Dr. Gary North Pans Silver
Not
much sooner than Dr. Gary North’s Nov. 21 Remnant Review had hit
subscribers’ mailboxes, I began to receive phone calls and e-mails
about it. It denounced silver as a useless shadow of gold, a superfluous
investment best avoided.
For the
past couple of decades I’ve been reading Dr. Gary North’s work,
and have grown to respect him, but respect that doesn’t tell the truth
is mere flattery. About silver, therefore, I must respectfully disagree with
Dr. North. Silver will, I believe, outperform gold from two to four fold
(will rise two to four times as fast as gold). In a companion article in this
issue I explain why, while below I answer in detail Dr. North’s
objections to silver.
OLD
BULLS DIE HARD
The
market proverb holds that “the trend is your friend.” Once you
identify the primary trend in any market, the trend that will persist
for several years, you simply invest with that trend and ride it for all its
worth. All markets -- stocks, commodities, bonds, currencies, camels,
goats, chickens, potatoes -- swing between primary bull markets (up trends)
and primary bear markets (down trends). The extremes of both
trends, peak or trough, are always characterized by extremes in market
sentiment or psychology.
There
is a time to get on the trend, and always, a time to get off.
At the
peak of a bull market, you can’t find a bear with a telescope and a
Geiger counter. Common knowledge and received wisdom believe beyond all doubt
or cavil that the bull market will keep on rising until it hits the moon and
makes a bridge to outer space and eternal prosperity for everyone. At that
point, all the old bears, the ones who had kept refusing for years to believe
it would really rise, “capitulate.” They throw in their towel of
resistance and buy, just in time for the bull market to peak and transform
itself into a bear market.
On the
other hand, it is proverbial that at the trough of long bear markets, old
bulls capitulate. You can’t find anybody who believes the market
will ever recover, and everyone believes that the stuff’s going to get
cheaper than sand and they’re going to start paying people with trucks
to haul it off to the dump. Old bulls who have held on for 15 or 20 or 30
years get disgusted and sell it all…just in time for the bear market to
bottom and become a new bull market.
Old
bulls always sell out around market troughs when a new bull market is just
beginning.
Early
in his article, Dr. North sets out to establish his credentials as an old
silver bull. As he puts it “In the world of international
espionage, a spy must establish his bona fides.” He began
investing in silver in July, 1963. He sold silver coins for Pacific Coast
Coin Exchange (now Monex) in 1973. “Silver
was the #1 bear commodity investment of the post-1980 period. Nothing else
comes close. No other commodity investment matches the losses imposed on `buy
& hold’ silver investors. I know. I was one of them.” Based
on the above autobiography, you decide whether Dr. North now
classifies as an “old silver bull.”
I
OUGHT TO KNOW
How do
I know that “old bulls die hard”? Simple -- I was one. Some
people learn by theory and instruction; others, the hardheads, learn by
experience. I learned by painful experience that buy and hold does not work.
Unlike diamonds, no investment is forever. I rode gold (but not silver) up in
the 1970s, and, investment genius that I was, I rode it down through the
1980s.
Now I
had never been a silver bull. In the 1970s I had gotten on the precious
metals train late, investing in gold. By the late 1980s, I could hardly
pronounce the word “silver” without spitting. I was sure that
silver would never recover, even if gold some day might.
That
all changed in the late spring of 1993, when Jim Blanchard hired me to write
a book about silver, later published as Silver Bonanza. When I
started, I was a hard-bitten silver bear. When I finished three months later,
I had become a raging silver bull.
WHAT
CHANGED MY MIND?
Two
things: fundamental analysis and discovering the real driver behind
silver demand.
Fundamental
analysis showed that the supply glut of the 1980s had turned into a supply
shortfall. During that time the world used 1.21 billion ounces less silver
than it produced. Obviously, that silver surplus would have to be worked off,
but with deficits of 150 million ounces a year, that wouldn’t take
long.
Further,
silver has a quirky supply and demand profile. Supply is quirky because
silver is rare in primary form and therefore produced mostly a by-product of
zinc, lead, copper, or gold mining. Since primary silver mines are usually
expensive deep rock mines, they are the first to shut down when
silver’s price falls, and they can’t be quickly re-opened when
silver rises. On the by-product side, nobody with a $200 million zinc mine is
likely to double Inc production because the price of piddling silver
by-product rises -- especially if zinc’s is flat or falling.
Silver
demand is quirky because a little goes a long way. Silver has unique
physical properties, and in most uses there is no good substitute at anything
close to silver’s price. For example, nothing else (except some salts
of much more expensive platinum) behaves like silver halides in the presence
of light. That’s what makes silver-based photography possible. It
doesn’t take much silver to make a roll of film (compared to the price
of the roll), but without the silver, it ain’t
a roll of film, it’s merely a roll of useless Scotch tape without any
‘stickum’ on the back.
Most
silver applications are like that -- the silver used contributes only a small
part of the total product cost. That makes silver demand “price
inelastic,” as the economists say. Demand responds only sluggishly to
higher prices. Silver must rise very high before producers begin to
curtail use or substitute.
Hundreds
of other silver uses repeat that photographic-silver story uses. It has hundreds
of other uses because no other element conducts heat and electricity as well,
or reflects light as well, or resists wear so well, or kills bacteria as
efficiently, and on and on.
Yeah,
yeah, yeah, I know about digital photography and I know digital is supposed to
replace silver and yakka-ti-yakka, but
I’ve been watching the market for eleven years. In that time
photographic usage has been up five years and down six years, but without
meaningfully reducing silver use in photography. In fact, digital photography
has increased silver photographic use in some cases. Moreover, it will
be decades before silver photographic technology disappears, because it is so
dirt-cheap compared to digital. The “digital bruising the head of
silver” story is a red herring so old and smelly that it can only suck
in the ignorant public and wet-behind-the-ears analysts new to silver.
THE
SECOND THING
The
second thing that changed my attitude toward silver was an interview with
Harry Browne. Browne belonged to the loudest silver bulls during the 1970s.
During that interview he pointed out that it was not fundamental
forces (supply & demand) that had driven silver and gold to wild heights.
Rather it was the preceding decades of government price suppression that had
supercharged the metals. When government could no longer hold down their
prices and was forced to let them float, the slingshot effect of
long-suppressed demand sent them flying toward the moon.
Harry
Browne’s explanation began to gestate and develop in my mind. After a
long time I began to comprehend that government price fixing had many other
results. Keeping silver and gold artificially cheap encourages consumption.
But compared to using silver and gold as money, all those other uses --
jewellery, photography, dental, medical -- were low order uses.
Besides, the factors that control fundamental supply and demand do
not change quickly, but only very slowly. While fundamental changes may
occasionally alter the price suddenly, more often prices adjust to those
changes gently over time.
Monetary
or investment demand, however, differs from all other demand. It is demand
for silver (and gold) as money. It appears suddenly, grows like
fertilized kudzu, and refuses to satisfy its appetite with any substitute.
Furthermore, it is a human demand, engendered by the same crowd
psychology and swings in social mood that underlie bull and bear markets.
Monetary demand feeds on itself. The faster investor buying drives silver and
gold higher, the more investors’ decisions are confirmed, and the more
silver and gold they buy, and so on as the rising price reinforces itself.
In a
severe inflation, monetary demand doesn’t simply feed on itself, it
panics. Panic will buy at any price.
Pondering
all this over many years, I came to a conclusion: Write it down & never
butt your head against it:
Supply and demand
fundamentals do not drive silver and gold prices;
monetary demand drives silver and gold prices.
Without
monetary demand, silver & gold will go nowhere. With monetary demand, no
matter how many new silver mines are opened or earrings are sold or snapshots
are snapped -- silver and gold will rise.
I
believe a technical case can be made for silver rising faster than gold,
based on (1) historical performance, and (2) silver’s greater
volatility, and (3) silver’s lower inventory. You’ll find this in
another article in this issue, “Why Silver Will Outperform Gold.”
Dr. North doesn’t believe this case can be made, while I do. Read the
article and make up your own mind.
Now
let’s look at Dr. North’s objections to silver. I’ll take
them as they occur in his article.
THE
WRONG QUESTION
Dr.
North sets up silver by sending us down a false trail. He begins with four arguments
for silver outperforming gold:
- "Central banks
don’t hold silver, so there is no inventory overhang.
- Silver’s
aboveground stocks are at last becoming depleted: less
overhang.
- Silver is the little
guy’s gold: more potential buyers.
- At over 70:1, the
gold/silver price ratio is far from the traditional 16:1.”
I
don’t know what silver bulls Dr. North has been talking to, but they
must be very, very old. Most of these arguments for silver outperforming gold
can be made, but are irrelevant or not that important. Certainly they are not
central to the case, except for the last. And that last argument, as we shall
see, is stated rather misleadingly. Certainly “tradition”
contributes a powerful argument to any silver bull’s armoury. The accurate
statement would be, “At over 70:1, the ratio is far from historical
values and at statistically improbable levels.
Dr.
North next applies linear extrapolation to silver. “Let me say
up front that both [gold and silver bulls] have lost money, 1980 to 2001
– huge amounts of money. But silver bulls have lost more.”
He
implies that one must extrapolate that performance into the future in a
straight line. Things will continue as they always have, world without end.
Actually, the opposite is true. The longer any bear market continues, the
closer it is to turning around. Bear markets don’t continue forever.
Besides, both gold and silver have already turned up into new bull
markets. Technically, that’s what the long rounding bottoms on the
charts mean.
SMALL
POINTS
To Dr.
North’s page two, here are three small corrections. First, the US government
did not cease redeeming silver certificates for silver until July 21, 1968,
and to give the devil his due, the government announced it a year earlier.
Silver
dollars do not contain a higher percentage of silver than 90% silver coinage.
Silver dollars and 90% dimes, quarters, and halves are 90% silver. However, a
silver dollar is larger than ten dimes, four quarters, or two halves.
In circulated condition, a silver dollar contains 0.765 troy ounce of pure
silver, while a dollar’s worth of subsidiary coin contains 0.715 troy
ounces. The coin was made subsidiary in 1853 to keep the small change in
circulation. Throughout the middle two quarters of the 19th century silver
kept on rising against gold. A dollar’s weight of silver bought more
than a dollar’s weight of gold, so people melted the coin and sold
it as bullion. To keep the small change in circulation, the government
reduced the coin weight and made it a “subsidiary coinage.”
Also,
the US
government introduced clad cupro-nickel dimes and
quarters and 40% silver-clad halves in 1965, not 1964.
NO
NEWS
Dr.
North writes, “[Silver after the 1980 peak] began a descent that took
the dreams, schemes, and sophisticated theories of the silver bulls into the
valley of the shadow of debt. Silver became the single worst commodity
investment of the next two decades.” Well, there’s no news there.
The longer and stronger a bull market is, the sharper the decline in the following
bear market. Nor does it surprise anyone that bear markets follow bull
markets. That’s just what happens. Old bulls, however, never
believe the primary trend has turned down, until they ride it all the
way to the bottom and there capitulate.
What has
happened to silver is not the question, but what will happen. Unless
the past helps us forecast the future, it is just restating facts we already
know. To make sure everybody knows the numbers, however, silver topped at $50
in 1980, and bottomed in 1991 at $3.50, losing 93% over the bear
market’s course.
This
93% loss illustrates bull to bear market turnarounds. Typically, bull markets
lose 50% to 95% of their peak value.
Wonder
what that means for real estate? Stocks? Or are they somehow different? Dr.
North doesn’t say.
The
only pertinent inference from what Dr. North writes here is the general
observation that no investment is forever. At some point “buy &
hold” always becomes “hold & die.”
“Silver
was the #1 bear commodity investment of the post-1980 period.” Right
– it was also the #1 star bull commodity
before 1980, outperforming everything else. It rose from 90 cents in 1960 to
$50 in 1980, a
5,556% increase.
THE
MYSTERY OF THE MISSING SILVER
The
greatest mystery for any silver analyst is, Where
has the silver come from in the last 14 years? Since 1990, year after
year the world has consumed about 11% more silver (averaging 111 moz.)
than it has produced, by now totalling 1.5 billion ounces. But year
after year the price has either stayed flat or refused to rise.[i]
Now the
so-called law of supply and demand says that the lower a price drops,
the less the market will supply, and the higher the price rises, the more
the market will supply. But in silver’s case, the more silver stayed
flat or dropped, the more silver flowed to the market.
Gold
Fields Mineral Services can’t tell you why. CPM Group can’t tell
you why. The Silver Institute can’t tell you why. Neither can I. But something’s not right.
Oh, I
have a theory, but I can’t prove it. I believe that the phantom
silver has been paper silver. That is, the silver shortfall has been papered
over with futures and over-the-counter derivatives, and silver borrowed from
future production. The bullion banks and hedge funds discovered they could
borrow silver for next to nothing (1% or less), sell it into the market, then invest the funds in T-bills or other gilt-edged
government debt until they had to pay the silver back. It was free money,
with only one danger, namely, that silver’s price might rise. This same
game has (most likely) been played out in the gold market since 1995, with
central banks conniving to suppress gold’s price, cover their
inflation, and keep interest rates low. As my friend James Turk observed, to
suppress gold, it would be very helpful to keep down silver, too.
But all
that remains my un-provable speculation. The long & short is that nobody
has yet brought forth any reasonable explanation why more silver would
be produced as the price remained flat or fell. If there is a gigantic hidden
silver stockpile somewhere, none of the world class analysts with personnel
& contacts scattered around the globe have yet been able to locate it.
SCRAP
SILVER
Dr.
North seems to think that the phantom silver has come from scrap or
recycled silver. This baffles me. Scrap coming back into the supply
stream has remained roughly constant since 1985 at around 150 moz.
Oh, it’s been higher and it’s been lower, and beginning in 1994
it has increased gradually from 150 to 185 moz.
But the cumulative increase from 1994 – 2002 amounts to only 215
million ounces…barely enough to fill one year’s silver shortfall.
Further, while silver use has risen from 595 moz
yearly to 863 moz, scrap remained virtually steady
at 150 moz.
Silver
scrap, of course, comes mostly as a by-product of industrial silver use.
True, some little bit comes from jewellery or silverware people are willing
to sell for scrap, and from melted coins, but most of it merely whirls around
in a circle between factories and refineries, part of an industrial process.
While silver use 1985-2002 has increased by 45%, scrap production has increased
by only 20%. Scrap hasn’t even kept up with the overall increase in
silver use.
Nor
should that come as any surprise. Silver at $50 an ounce is valuable; silver
at $5 an ounce is contemptible. With prices that low, very few people will
exert themselves to bring in more scrap silver. So wherever the silver
has come from in the past 14 years to fill the shortfalls, it has not
come from increased scrap recovery.
Perhaps
the reason Dr. North believes that scrap silver is furnishing the silver
shortfall is that he has misread the statistics. Citing http://www.silverinstitute.org/supply/index.php,
he places 2002 scrap at 252 moz. But when you
visit that site you will find that he has taken the 252 moz. number from the total of the table, “Supply from
Above-Ground Stocks.” True, this table includes “scrap,” at
184.9 moz.
in 2002, but it also includes “Implied Net
Disinvestment, Producer Hedging, and Net Government Sales.”
But the
first two are accounting balance figures, and the last relies
on an estimate so tenuous that in the 2003 Silver Survey GFMS felt obliged to
publish a full page focus box explaining it (page 34).
By
“balance figure” I mean that when GFMS tallies up all its numbers,
and finds that more silver has been consumed than was produced, they have to
stick in a number to make their sheet balance. If the market showed a supply
shortfall, then the silver must have come from somewhere, right?
Perhaps investors sold some silver, so we’ll plug in 20.9 moz.
for them under “Implied Net
Disinvestment.”. But we know that producers lifted hedges, so we have
to subtract 24.8 moz. for that. Whoa! We’re still short 71.3 moz.
I’ll bet the Chinese must have sold about that much, so we’ll
plug in that number for them.
This
does not tell us where the silver is coming from, it only tells us that we
don’t know where the silver came from, but that much came from
somewhere.
This…the
work of Gold Fields Mineral Services, probably the world’s largest
precious metals network…Dr. North calls “tooth fairy
economics.” That’s great comedy, but poor argumentation. Dr.
North concludes that “the entire industry can survive, year after year,
on scrap recovery techniques and new production even though silver is a
by-product of copper and other primary metals mining. This has gone on for
over two decades. The investment question is: Why can’t this go on
forever?” (p. 4)
The
first answer is monetary demand. The second answer is anything that
doesn’t make sense has another answer. The last 14 years’
silver supply shortfall doesn’t make sense, from what we can see
because lower price seems to bring out greater supply. Therefore, we are all
failing to see something.
But it ain’t scrap silver and balance figures
plucked out of the air.
SILVER
STOCKS
While
we’re talking about silver scrap, let’s look at existing silver
stocks, and whether they might be brought to market quickly. Remember that in
1979-1980 the prices paid for silverware, jewellery, coins, etc. ran
from $20 to $35 an ounce. That was a powerful inducement to liquidation. In a
scrap dealer’s vault in 1982 I myself have seen a silver tea service
inscribed to the mayor of an old Southern town in 1858! High prices in the
late 1970s and early 1980s acted as a vacuum to suck silver out into the
scrap supply.
In 1991
the Silver Institute commissioned Charles River Associates to research and
report how much silver existed in the world. The result was a report,
“Stocks of Silver Around the World.” CRA estimated that since
human history began, about 37 billion ounces of silver had been produced,
about half of that mined after 1923 (p. 24). Of that, about 19 billion ounces
were estimated to still exist.
In
1991, CRA wrote, “CRA concludes that, even though the aboveground
silver stocks in various forms are large, they are not readily available
to the market. Only a fraction of the worldwide stocks are potentially
available to the world market under a realistic set of market conditions.
Thus, for all practical purposes the “truly available relevant
stocks’” are:
146 moz.
at $5 per ounce
541 moz at
$10 per ounce silver
1,148 moz
at $15 per ounce silver, and
2,208 million troy ounces at $20 per
ounce silver
|
“Further,
such potential outflow of stocks into the market is unlikely to be immediate
and would occur only in increments over a span of some years if silver prices
prevailed at these levels . . . CRA estimates that total aboveground silver
stocks are about 1.4 billion troy ounces of bullion, 1.2 billion troy ounces
of coins plus medallions. Thus total stocks are defined at 2.6 billion troy
ounces.” (p. 1 & 2) (Stocks unavailable to the market are estimated
at 16,847).
Here we
are 11 years later, and the shortfalls have burned up about 1.5 billion
ounces, nearly three times the supply CRA estimated it would take $10 silver
to entice out. But the price hasn’t moved.
At the
bottom line we can conclude:
|
scrap silver has not been filling in the supply shortfalls of
the past 14 years
|
|
no large inventories of
“attic silver” are hanging over the market, because most of it
that would be sold was sold around 1980, and the rest won’t come out
at prices under $10, not to say $20.
|
Finally,
some one might protest, if so much silver came out in 1980, why not
today? I’ve shown above that the silver just isn’t there.
But more than that, the dealer and refiner infrastructure that
collected and processed the silver leading up to 1980 no longer exists. Nobody
would be there to bring the silver to market, if there were any out there.
BUNKER
HUNT
On page
5 Dr. North explains Bunker Hunt’s role in the 1980 silver peak. He
follows the official story about Hunt, which makes it appear that the Fed
bailed out Bunker. No, the Fed co-operated in the fraud on the public
committed by the Comex when it changed the rules on
silver investors. When Hunt’s legitimately built-up silver position
threatened to bust a commodity house that was short silver, and trigger a
“cascading default” across the entire US financial system, the Fed was
forced to bail out Bunker Hunt. Throughout rest of the 1980s the federal
government persecuted Mr. Hunt, apparently to make the point that Wall Street
would never let an outsider, let alone a Texan, beat them at their
game. Bunker Hunt was a sacrifice to the fiat money system, and a
better man than Paul Volcker, Alan Greenspan, and
all their trolls, gnomes, and nerds put together and stacked on top of each
other.
Dr.
North also states, “What killed gold and silver was the Fed’s
decision [in October 1979) to cease inflating the money supply, to allow
interest rates to soar, and thereby to put an end to Carter’s
Fed-funded price inflation.”
Whoa!
This
proves my point, that monetary demand alone makes metals bull
markets. When the public perceived Iron Paul Volcker
was serious about choking off inflation -- including the message sent when
the Fed collapsed the silver price in March -- then gold and silver
prices subsided because public perception and mood changed and monetary
demand vanished.
ANOTHER
SMALL CORRECTION
On page
5 Dr. North rehashes the old arguments against bimetallism and repeats the
common legal misunderstanding that the US was on a silver standard.
While the silver dollar (371.25 grains of fine silver) was the standard coin
by the Coinage Act of 1792, the system was not bimetallic but symmetallic.
The
founders were wiser men than most recognize. They set up a system which could
be periodically adjusted to allow for changes in the market ratio by
adjusting gold coin’s weight. The government did this in 1834, in fact, reducing
the gold coin’s weight without defrauding the public of a single
penny. Also, in 1792 they intentionally set the ratio lower than
the world ratio because silver was the money of daily commerce, and they
wanted to draw scarce silver into the country.
RED
HERRINGS
On page
6 Dr. North continues. “So never forget these rules governing silver
investing:
- "There is no
intrinsic value.
- There is no fixed
gold/silver ratio.
- Silver is not a
guaranteed inflation hedge.
- Above ground stocks
have supplied 30% of demand.”
Except
for the last, these are all red herrings. So, whether silver has intrinsic
value or not, it is subjective monetary demand that will make both silver
and gold rise. There certainly is not a fixed gold/silver ratio, there is
only the historic performance of regressing to the mean and beyond, and the
present technical evidence that the ratio topped in 1991 and is headed down.
There is no “guaranteed” inflation hedge, not silver or anything
else, including real estate. However, the monetary assets gold and
silver have performed well in previous inflationary spasms, and probably will
in the future.
Finally,
Dr. North thinks above ground silver stocks can keep on supplying silver into
the indefinite future. I’ve shown above why that is very unlikely.
Besides, if above ground supplies (and not paper silver) have supplied the
1.5 billion ounces, where will the next 1.5 billion ounces come from?
On page
10 Dr. North sets up another red herring, that silver is a “shadow
currency [in case of] economic collapse.” While silver might indeed
function that way, it is a very minor reason I recommend owning it.
DIGITAL
HEAVEN
On page
10 Dr. North speculates about the world adopting digital gold backed money.
Reasoning from his monometallic presupposition, he says, “Digital gold
money will prevent the appearance of digital silver money” because
digital accounting makes possible breaking down gold into units small enough for
daily transactions. “In fact, if the world turns to any commodity as
money, it will be gold. Silver will not be necessary as money.”
Unfortunately,
his argument proves too much. If digital technology makes possible breaking
down gold into small units, it also makes possible and easy moving
balances from gold-backed digits to silver-backed digits. And, if the free
market is as efficient as Dr. North and I believe, then demand for silver
digital money will surely give birth to a supply of it. In fact, the
arguments Dr. North makes against bimetallism are all negated by a
digital system that makes it easy to transfer from one metal to another.[ii]
But
what would make people want to do that?
Simple…silver’s
price rising faster than gold’s.
CONCLUSIONS
Both
Dr. North’s arguments and mine are all up in the air. We all know what
happened last time, but that was a long time ago. The rest is
theory and speculation. Will history repeat itself? The event will prove
whose arguments are correct.
In any
event, don’t misunderstand. “Buy and hold” is not
what I recommend for silver investors, or anyone else. We will use the
volatile and fluctuating gold and silver ratio to trade from one metal to
another, increasing our holdings every time. And when this precious metals
bull market ends, we’ll be looking for something else to buy with all
those ounces.
F.
Sanders
I’d
say that it was a pretty honest assessment of the situation. And although I
haven’t seen the good Doctor’s original article, I can assume
from Sanders’ take on it, that it wasn’t silver
friendly…and that’s probably being kind.
Once I
found Franklin Sanders’ web site, I decided that I would take a look
around and get the lay of the land so to speak. The last thing I read from
the home page was the bullet entitled “Who is the
Moneychanger”. From that point on, my definition of a true
“freedom fighter” changed quite a bit.
Again,
I’ll let Mr. Sanders explain….
The Most
Dangerous Man in the Mid South
by Franklin
Sanders
(From the 2/97 Chronicles, the American
Culture Magazine)
Almost
30 years ago, just a few weeks before I got married, on a drugstore bookstand
I found a strange book: Capitalism, the Unknown Ideal. It was a
collection of essays about a philosophy of freedom. Two dealt with the
American monetary system. The author explained that nothing -- no gold or
silver -- backed our currency. He argued that sooner or later, this fiat
money system would lead to disaster and that only money backed by real value
-- gold -- could last.
That
author was Alan Greenspan.
Since
then our careers -- Alan's and mine -- have taken very different paths.
In
1967, Alan Greenspan was already a fairly well known economic consultant. In
the 1970s, President Ford appointed him to his Council of Economic Advisors. In
1987, Alan Greenspan was appointed Chairman of the Federal Reserve Board of
Governors.
Funny,
he doesn't talk much about gold anymore.
In
1967, I was a college senior. Susan and I were married on December 16th, and
when I graduated in 1968 the draft board gave me 30 days' to frolic before
conscription. I arrived at Fort Polk,
Louisiana one hot October
night, caught the Army bus out to the post and sat down behind the driver,
facing across the bus. I opened my copy of Aristotle's Works and began reading.
I
noticed I was the only man on board with hair. The fellow sitting across from
me asked, "Whatcha reading?" Wordlessly,
I flipped up the book so he could read the title on the spine. "Boy, he
said without any reflection. "Have you come to
the wrong place."
In 1969
I retired from the Army to attend graduate school in German at Tulane University. The next year I received a
full scholarship to the Free University in West Berlin,
where I saw first hand what unchallenged state power could do. The West was
pulsing with life and light…the East dead and
empty. In the Museum of the Wall at Checkpoint Charlie I read the last radio
message from the Free Hungarians in 1956: "Tell Europe we are dying for
them."
After
Susan and I came home late in 1973 I worked in several businesses, learning
first hand what it means to "make your way in the world." I kept
studying economics and monetary systems, on my own and in graduate classes.
In 1980
I opened my own business in West Memphis, Arkansas, across the Mississippi
from Memphis,
selling physical gold and silver. First thing I did was write to the Arkansas
Attorney General to explain that I thought exchanges of gold and silver money
for paper money weren't subject to the sales tax, since they were exchanges
of money for money. What was his official position?
He
never bothered to answer my certified letter. Or the second. Or the third.
When he
finally responded, it was only to say he wouldn't answer. I wrote to the
Commissioner of Revenue, and told him what I was doing. Nobody ever bothered
to answer that certified letter either, so I reported all my sales as
"exempt". Every month.
A year
later, in 1981, a
Revenue officer showed up to audit my books. I told her what I did wasn't
taxable, and that every trade contract contained a confidentiality guarantee
to my customer. She could see them if she would indemnify me in case some
customer sued for breach of contract. Alas, she didn't want to co-operate, so
she just multiplied all my "exempt" sales by the sales tax
percentage, added penalties and interest, and sent me a bill for about
$30,000.
Thus
began my merry pilgrimage through the courts. I had landed smack in the
middle of Legal
Never-Never Land:
monetary law. Of course Article I, Section 10 of the U.S. Constitution says,
"No State shall make any thing but Gold and Silver Coin a tender in
payment of debt." Of course the definition of "money" at the
head of the Arkansas
tax title says, "The term 'money' or 'monies' shall be had to mean and
include gold and silver coin." Of course the U.S. Code at Title 12,
Section 152 says that "lawful money" means gold and silver coin of
the United States.
Of
course, of course, of course . . . it goes on and on. State and federal
constitutions, state and federal statutes, state and federal court decisions,
US supreme court decisions, all speak with one voice: gold and silver coin
are money, bank notes are not money. But whether I raised the issue in a
Revenue Department administrative court, chancery court, or federal district
court, I ran into the same terrified reaction. "The monetary emperor is
naked! Federal Reserve notes aren't really money! Quick, rule against this
clown and drag him out of here!"
I
appealed the agent's assessment, and lost at the administrative level. Then
at the administrative court too. I appealed to chancery court. Had a trial.
Lost there too. By then it was December, 1983, and I received a letter from
the Arkansas Revenue Department demanding I fork over $120,000!
A few
days later two deputies came to collect their "judgment." Through
several well-nigh miraculous providences, they got nothing. That night, I
decamped from Arkansas.
I was so amazed at God's protection through this event that I wrote a friend
a long letter about it. Remember that letter.
I moved
my business to Tennessee,
doing exactly the same thing, exchanging gold and silver money for federal
reserve notes. By this time I had realized that although every American had a
constitutional and legal right to gold and silver money, the problem was, you
couldn't use them in everyday business. We had the right to sound money, but
no means. We needed an interface between the paper system and gold and
silver.
So in
May, 1984 I opened a gold and silver bank. It attracted depositors like
wildfire, but somebody didn't like my idea. On June 18, 1985, two IRS
Criminal Investigation Division (CID) agents popped in to announce that I was
under criminal investigation. ["Surprise! We just dropped by to pull out
your fingernails with pliers!"].
In the
next three years IRS treated me to the full court press. They got my bank
records, and on US attorney's stationery wrote all my customers, demanding
that they send records from their dealings with me to the IRS CID agent and
threatening the recalcitrant with subpoenas. These letters remarkably chilled
my customers' enthusiasm. It got harder and harder to make a living.
On
September 18, 1986, five agents from the Tennessee Revenue Department
appeared at my office with a search warrant, pawed my files and records for
two hours, and hauled off boxes of personal papers. That was the first -- and
last -- I heard of them for a long time. They immediately turned over my
papers to the IRS.
In the
spring of 1988, the IRS and the US Attorney's office leap-frogged
their investigation from me to my church. There was nothing unusual about the
church. It wasn't a "tax protest" church, just a member
congregation of the conservative Presbyterian Church in America. The
assistant US
attorney subpoenaed church members before the grand jury and grilled them
about what the church taught. Did the pastor teach people how to not file
income tax returns? Did the church have militia practice in the woods?
Survival training? Did the church hand back contributions under the table?
About the only thing they didn't accuse us of was trafficking in nuclear
warheads.
We
landed in the Catch 22 maelstrom of official suspicion. The more the pastor
and the elders proved to the US
attorney's office that these accusations were lies, the more convinced they
became that we were such clever conspirators that their suspicions must be
true. The assistant US
attorney issued a subpoena to the church for all her records: counseling, sessional,
financial, everything. The session of the church offered to consider any
request for specific documents, but refused to open the Bride of Christ up to
a fishing expedition.
On
January 9, 1990, just at dawn, the IRS struck. Although the agent
investigating me knew very well that I was not violent, IRS agents and
Tennessee Revenue Department agents roared in my driveway while the SWAT team
in their black ninja suits poured out of the woods on either side of my
house.
They
attacked with reckless, malicious disregard for the safety of my wife and
seven (7) children. All they needed to do was pick up the phone and tell me I
had been indicted, and I would have gone downtown. No, these IRS thugs wanted
headlines from a sensational "pre-dawn raid" to scare the sheep for
tax season, and to make me and my wife, the mother of my seven children, look
violent and dangerous.
After
they arrested me and Susan, the IRS refused to leave my home. Contrary to the
law and over the protest of my spunky 15-year-old daughter, Liberty, three IRS agents stayed and held
my children hostage until the end of the day. They were waiting for a search
warrant so they could come back and steal my records and my computer.
On the
ride downtown I had no idea what was going on. Why would they arrest Susan? She
had never done anything other than minor secretarial work in my business, and
spent all her waking hours home-schooling and
raising children.
When I
stepped into the jail cell, I began to understand. They had indicted her to
blackmail me. My friends, customers of the gold and silver bank, and numerous
church members were already there, including my pastor and assistant pastor. The
indictment was an inch thick. In 72 pages it charged 26 defendants with
conspiracy to defraud the government, willful
failure to file, and divers other malefactions.
The
government claimed that the gold and silver bank was a tax evasion scheme to
hide income. Not even two years in the US Army had prepared me for stupidity
of this magnitude. How could we hide income when almost everything we took in
was in checks, and we deposited the checks into our bank account? Oh, yes, we
did pass some of the checks along to other dealers to pay for gold or silver
we bought for them, a common practice in the industry and perfectly legal. This,
the government taught us, was "laundering checks," a sinister
activity proving we were up to no good. But every bank deposit I had made was
a count on the indictment! And Susan -- poor home-making, home-schooling,
never-stop-running Susan -- was the Number Two conspirator, right after me!
My bond
was set at $150,000, fully secured. For comparison, that same day they
arrested a child molester and set his bond at $10,000, not secured. I stayed
in jail from Tuesday until Friday, when my parents put up their house to get
me out of jail. When the Federal marshals released me at 5:00 p.m., sheriff's
deputies were waiting to arrest me, and me alone, on
state charges.
I
believe but cannot yet prove that an ex-IRS agent had been sent to work for
the Tennessee
revenue department to get the search warrant IRS couldn't get, and to figure
out some way to charge me under state law. (You're not paranoid if somebody
is really persecuting you.) I was charged with violating a statute that had
been on the books nineteen years: TCA 67-1-1440(d), "delaying and
depriving the state of revenue to which it was lawfully entitled at the time
it was lawfully entitled thereto." In all those 19 years, not a single
Tennessean had discovered how to violate it, but I had. Truth to tell, I
hadn't even figured it out, since I was accused of "delaying &
depriving" the state of revenue the amount of which was unknown and to
which the state had never become lawfully entitled. They accused me of a
crime I could not possibly have committed because I didn't know it existed. Never
mind, due process just slows things down.
They
were charging me with not collecting sales tax on exchanges of gold and
silver money for paper money. You know -- like when you go to the bank, and
give the teller a twenty and she gives you back a ten and two fives, less
sales tax. What? She doesn't charge you sales tax? Of course not, because
it's an exchange of money for money.
But
neither the state of Tennessee
nor any other state can admit that gold and silver coin are
money. If they do, they will admit they are operating outside the law. The
monetary emperor is naked, and state officials from the Chief Justice of the
supreme court to the governor to the second assistant tire checker are afraid
to tell him. They should be afraid, because the monopoly on money creation is
the jugular vein of the American fascist state.
But in
January, 1990, I didn't have time to worry about state charges. Susan and I
were both facing 19 years in jail if convicted in federal court. We knew the
statistics, too. Humanly speaking, we had no chance. Ninety-eight percent of
federal tax prosecutions end in guilty verdicts.
The
next year and a half was a wretched struggle to persevere without despair. Only
a survivor of a criminal prosecution could understand how it hammers your
soul. Most defendants never make it to trial. Through the investigation
alone, federal agents and prosecutors can destroy their businesses and their
families, and break their spirit. Stripped of business, money, family and
hope…most plead guilty just to end the nightmare. In our case one poor
defendant pled guilty with no idea what it meant. When a defense
attorney asked him who he had conspired with, he screwed up his face in
confusion and paused several minutes. "I dunno.
Myself, I guess!"
Our
trial began on February 26, 1991, over a year after our arrest. Right after
the noon break that first day, I received word that our sons Wright (10) and
Christian (8) had been severely burned playing with gasoline. Susan spent the
first two weeks of trial with them in the hospital.
Just
when it seemed that things couldn't get worse, they did. Day after day I had
to listen as the prosecutor hatefully twisted everything I had ever done into
something evil -- including the good things. This went on for four and a half
long months. The government entered immaterial documents by the
hundredweight.
The
vast but tediously shallow silliness of the whole farce made me the maddest. Do
you remember in C.S. Lewis' Perelandra, when the
Unman is struggling to convince the Green Lady to disobey Maleldil's
command not to spend the night on the land? Ransom notes with dismay the
childish silliness of evil. Throughout the night while the Green Lady sleeps,
the Unman repeats, "Ransom? Ransom?" When Ransom answers,
"What?", the Unman responds,
"Nothing." At its depths, evil is not
noble or grand. It's merely a silly, spoiled child, flicking boogers at his
betters.
To the
charges of "willful failure to file income tax
returns" we argued that no statute makes anyone liable for an income tax
(except "foreign withholding agents"). No one -- not the federal
district court judge, not the assistant US attorney, not the IRS, no one
-- was able to point out that statute, because it doesn't exist.
Here
was a "man bites dog" story if ever there was one, but was the
local media interested? Hardly. The first day of trial was covered by an old
reporter for the Commercial Appeal who with great insight described issues
and characters. Next day he was yanked off the case and replaced with a Stalinist
"comrade" who loyally published whatever official line the US attorney's
office gave him.
But our
jury was more open-minded. On July 9, 199, the jury returned its verdict:
seventeen defendants not guilty on all counts! To God be
the glory! We threw an enormous party and that Sunday had one bodacious
worship service.
I still
had to face a state trial. I no more than caught my breath when I had to dive
back down into the sewage of the "justice system."
The
trial started in May, 1992, and lasted three weeks. The judge and the
prosecution did their best to keep out my evidence -- evidence that showed
how many hundreds of hours I had haunted the law library to study out my
position and make sure I was right.
It did
little good. Remember the letter I wrote a friend when I escaped from Arkansas? The Revenue
Department had seized it in 1986, and the prosecutrix
used it to make me look like a hypocrite.
Even at
that, three jurors held out for three days. I later talked to one of the
holdouts, and he said that one of the women who gave up said, "Oh, well,
he'll get another trial on appeal." Can people really be that ignorant,
or will they just use any excuse to justify their own cowardice? On May 18,
1992 I was convicted on two counts of "delaying and depriving."
A month
later the judge sentenced me to two years in jail, but he suspended all but
30 days, provided I would pay $1,000 a month for 73 months as
"restitution" and do 1,000 hours (half a
year's work) of community service. With seven children to support, it was a
deal I couldn't refuse.
I
appealed. In August, 1994 the Court of Criminal Appeals overturned one count
of the conviction for double jeopardy. I couldn't be guilty of one count of
"delaying" and one count of "depriving" for the very same
conduct. On the money issue, however, the real heart of the case, the court
dodged and denied all my arguments.
We
appealed to the Tennessee Supreme Court, and they heard the case on All
Saints Day, 1995. Dr. Edwin Vieira, Jr.,
constitutional attorney and America's
foremost expert on monetary law, prepared the briefs and argued the case. For
over 6 months we heard nothing. Then on May 28, 1996 the Supreme Court
affirmed my conviction, once again dodging the money issue.
I am
still appealing, this time into the federal system, but the appeal couldn't
be filed quickly enough to prevent my arrest on June 28, 1996. The petition
for habeas corpus in federal district court was assigned to the same judge
who had tried our federal case. She took jurisdiction of the appeal, but
refused to order my release. From June 28th until July 23rd, I was a guest of
the Shelby County Jail and the Shelby County Penal Farm.
The
next hurdle is securing a stay of execution on the $72,000 fine. Failing
that, I go back to jail for another eleven months while the appeal goes on.
Why
keep on fighting? After 15 years, why not just put down the load and forget
it?
The
fiat money system is both the strength and weakness of America's
tyrants. It bleeds the people's wealth and labor,
but it also threatens to collapse under its own weight -- or whenever the
scales fall off the people's eyes. With its green engravings of famous
Americans, electrons whirling around in bank computers, and loans created out
of thin air, it is one vast confidence game. As long as the people believe
they can't see the emperor's naked pink flesh, his power and dignity will be
preserved. But let one little boy hollers, "Hey, he's nekkid!" and the tyranny collapses.
I
didn't sally forth looking for dragons to slay. The dragon came to me. He
came with a lie, and either you oppose a lie, or you become a liar. You can
kid yourself and say I'm only going along because they have all the guns, but
day by day, year by year, your integrity erodes. Finally, you become like the
tyrants: just one more liar.
Even if
you have no chance to win, you have to fight. Not many are willing, but even
a few keep the tyrants from sleeping at night. If we don't fight, how many
more Ruby Ridges and Wacos will there be? How many
more SWAT team attacks? How many more police check points? How many more
bureaucrats watching your bank account and your finances? How many more
children held hostage by IRS agents? The bill of rights is already dead. Will
it be time to fight when your wife and children are dead, too?
The US government
spent millions of dollars trying to jail me and my wife and my pastor and
assistant pastor. The assistant US attorney here told one lawyer
that I was "the most dangerous man in the mid-South." In a four and
a half year investigation the government spent $5 - $10 million, maybe more. We
heard they spent nearly two million on the trial alone.
We
can't both be right. Either the government is right and gold and silver coin
is not money, or I am right. This is not a gentlemen's "difference of
opinion."
If I'm
right, and if I win in the courts, then no state will ever be able to charge
sales tax on gold and silver coin again. The greatest disability to free
trade in gold and silver will have been removed. We will have broken own the
last illegal roadblock to sound metallic money.
©
Franklin Sanders
Ed Steer Postscript: Because the conditions of
probation were so burdensome on him and his family, Mr. Sanders returned to
jail and was relocated to a medium-security prison on November 4, 1996. He was released on December 20, 1996.
[i] A word about numbers.
Let’s face it: not even Gold Fields Mineral Services or CPM or anybody
else knows exactly how much silver is produced and used every year.
The best their figures can give us is a rough idea for comparison. Every year
the Silver Institute produces a “Silver Survey” with these
numbers, and the agency compiling these changed in 1995 from CPM Group to
GFMS. CPM Group still produces a silver survey yearly, and their numbers
don’t agree with GFMS. Moreover, don’t put too much faith in the
numbers I list before 1990, because they don’t include Iron Curtain
countries, now our socialist/free market trading partners. So when I write
that the structural silver shortfall has been “about 1.5 billion
ounces,” that’s what I mean: about.
[ii] From personal conversations with at
least one operator of a digital gold-backed system I know that he is already
planning to offer silver-backed digital money. All those who are now failing
to provide it are missing a “golden” opportunity.
* * *
In an e-mail exchange with Mr. Sanders subsequent to this essay, he had this
to say about going back to jail….
“It may not be clear from what
you read that at the end of November 2000, the U.S. Supreme Court refused to
hear my appeal from the U.S. 6th circuit court in
Cincinnati…I went back to jail in November 1996 to finish out the
sentence, rather than serve the alternate sentence which would have required
me to pay the state a thousand dollars a month for seven years.”
“Rather than serve a Biblical
term of slavery to them, I went back to jail. I was supposed to serve only a
couple of weeks, but ended up serving forty-six days, and got out about
December 20, 1996. The appeals carried on until November 2000.”
“Whether you know it or not, a
sentence to any state or local penitentiary can easily amount to a death sentence,
because you can get killed in there.”*
* *
So…let me see…where were we? Oh yes...freedom fighter.
Throwing
words out into the Internet is easy. There are some absolutely brilliant
minds out there providing us with the secrets of the gold and silver universe
for free…or next to free. But how many of us (or them) would have the
‘balls’ necessary to “go to the wall” as Franklin
Sanders did? We all have principles…but how far would we be willing to
take it when the rubber really meets the road…and our backs are up
against it?
Mr.
Sanders has already taken on the all the money and all the power in the
world…and lost. But he only lost a battle, not the war.
This is
the same battle that we are all fighting right now.
I’ve
seen some interesting observations around the Net in the last month or so
that “we, the people” may not have to worry about official
convertibility of paper money into specie…as (given time) gold and
silver will re-monetize themselves. This is
precisely what might happen as the current financial system…which was
cut loose from its last golden thread by Richard Nixon back in
1971…draws its dying breath.
And
until that time, it’s up to us ‘freedom fighters’ to live
up to this ‘call to arms’ that we have made…some of us
unknowingly.
As an
aside to Franklin Sanders’ incredible story, it would more than
appropriate to mention a couple of other heroes in this titanic struggle for
honest money and honest government.
Ladies
first…we all have to remember what Catherine Austin Fitts has done on our
behalf…not only for all of us at The Gold Anti-Trust Action Committee (GATA), but for
her attempt to expose the rampant
corruption at HUD when she was Assistant Secretary of Housing under
the George Bush Sr. administration. She has paid a terrible personal and
professional price for her honesty and integrity.
And
then there is that heroic
struggle by Reg Howe in a Boston court room a few
years back…in a modern day version of “To Kill a
Mockingbird”. He was the Atticus Finch for honest money…as he too
was up against all the power in the world as he stood in that courtroom
alone.
But we
should take careful note of the unbelievable personal sacrifice that Mr.
Sanders (and his family) has already made…as the time may come when we
(either individually or collectively) may be called upon to pay that kind of
price ourselves.
And at
that point, we’ll find out what we’re really made of. Let’s
hope that we will be able to live up to the standard that these ‘freedom
fighters’ have already set for us.
Ed Steer
Director
Gold Anti-Trust
Action Committee
www.GATA.org
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S.
Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe
at www.GATA.org. GATA is
grateful for financial contributions, which are federally tax-deductible in
the United States.
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