The financial world was shocked this month by a demand from Germany’s Bundesbank to repatriate a large portion of its gold reserves held abroad. By 2020, Germany wants 50% of its total gold reserves back in Frankfurt — including 300 tons from the Federal Reserve. The Bundesbank’s announcement comes just three months after the Fed refused to submit to an audit of its holdings on Germany’s behalf. One cannot help but wonder if the refusal triggered the demand. 

Either way, Germany appears to be waking up to a reality for which central banks around the world have been preparing: the dollar is no longer the world’s safe-haven asset and the US government is no longer a trustworthy banker for foreign nations. It looks like their fears are well-grounded, given the Fed’s seeming inability to return what is legally Germany’s gold in a timely manner. Germany is a developed and powerful nation with the second largest gold reserves in the world. If they can’t rely on Washington to keep its promises, who can?

Ed Note: Fed Has Bought More U.S. Gov’t Debt This Year Than Treasury Has Issued

Where is Germany’s Gold?

The impact of Germany’s repatriation on the dollar revolves around an unanswered question: why will it take seven years to complete the transfer?

The popular explanation is that the Fed has already rehypothecated all of its gold holdings in the name of other countries. That is, the same mound of bullion is earmarked as collateral for a host of different lenders. Since the Fed depends on a fractional-reserve banking system for its very existence, it would not come as a surprise that it has become a fractional-reserve bank itself. If so, then perhaps Germany politely asked for a seven-year timeline in order to allow the Fed to save face, and to prevent other depositors from clamoring for their own gold back — a ‘run’ on the Fed.

Now, the Fed can always print more dollars and buy gold on the open market to make up for any shortfall, but such a move could substantially increase the price of gold. The last thing the Fed needs is another gold price spike reminding the world of the dollar’s decline.

Speculation Aside

None of these theories are substantiated, but no matter how you slice it, Germany’s request for its gold does not bode well for the future of the dollar. In fact, the Bundesbank’s official statements are all you need to confirm the Germans’ waning faith in the US.

Last October, after the Bundesbank had requested an audit of its Fed holdings, Executive Board Member Carl-Ludwig Thiele was asked in an interview why the bank kept so much of Germany’s gold overseas. His response emphasized the importance of the dollar as the world’s reserve currency:

“Gold stored in your home safe is not immediately available as collateral in case you need foreign currency. Take, for instance, the key role that the US dollar plays as a reserve currency in the global financial system. The gold held with the New York Fed can, in a crisis, be pledged with the Federal Reserve Bank as collateral against US dollar-denominated liquidity.”

Thiele’s statement can lead us to only one conclusion: by keeping fewer reserves in the US, Germany foresees less future need for “US dollar-denominated liquidity.”

History Repeats

The whole situation mirrors the late 1960s, during a period that led up to the “Nixon Shock.” Back then, the world was on the Bretton Woods System — an attempt on the part of Western central bankers to pin the dollar to gold at a fixed rate, while still allowing the metal to trade privately as a commodity. This led to a gap between the market price of gold as a commodity and the official price available from the Treasury.

As the true value of gold separated further and further from its official rate, the world began to realize the system was unsustainable, and many suspected the US was not serious about maintaining a strong dollar. West Germany moved first on these fears by redeeming its dollar reserves for gold, followed by France, Switzerland, and others. This eventually culminated in Nixon “closing the gold window” in 1971 by ending any link between the dollar and gold. This “Nixon Shock” spurred chronic inflation throughout the ’70s and a concurrent rally in gold.

Perhaps the entire international community is thinking back to the ’60s, because Germany isn’t the only country maneuvering away from the dollar today. The Netherlands and Azerbaijan are also discussing repatriating their foreign gold holdings. And every month, we hear about central banks increasing gold reserves. The latest are Russia and Kazakhstan, but in the last year, countries from Brazil to Turkey have been adding to their gold holdings in order to diversify away from fiat currency reserves.

And don’t forget China. Once the biggest purchaser of US bonds, it is now a net seller of Treasuries, while simultaneously gobbling up gold. Some sources even claim that China has unofficially surpassed Germany as the second largest holder of gold in the world.

Unlike the ’60s, today there is no official gold window to close. There will be no reported “shock” indicator of a dollar flight. This demand by Germany may be the closest indicator we’re going to get. Placing blame where it’s due, let’s call it the “Bernanke Shock.”

It Takes One to Know One

In last month’s Gold Letter, I wrote about the three pillars supporting the US Treasury’s persistently low interest rates: the Fed, domestic investors, and foreign central banks — led by Japan. I examined how Japan’s plans to radically devalue the yen may undermine that country’s ability to continue buying Treasuries, which could cause the other pillars to become unstable as well.

While private investors and even the Fed might be deluding themselves into believing US bonds are still a viable investment, Germany’s repatriation news makes it clear that foreign governments are no longer buying the propaganda. And why should they? If anyone should appreciate the real constraints the US government is facing, it is other governments.

Our sovereign creditors know that Ben Bernanke and Barack Obama are just regular men in fancy suits. They know the Fed isn’t harboring some ingenious plan for raising interest rates while successfully selling back its worthless mortgage and government securities. Instead, the Fed is like a drug addict making any excuse to get its next fix. [See Bernanke’s tell-all interview with Oprah where he confesses to economic doping!]

US investors should be as shocked as the Bundesbank about the Fed’s deception. While we cannot redeem our dollars for gold with the Fed, we can still buy gold with them in the open market. As more investors and governments choose to save in precious metals, the dollar’s value will go into steeper and steeper decline — thereby driving more investors into metals. That’s when the virtuous circle upon which the dollar has coasted for a generation will quickly turn vicious.

Regards,

Peter Schiff
for The Daily Reckoning

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices. 

Click here for a free subscription to Peter Schiff’s Gold Letter, a monthly newsletter featuring the latest gold and silver market analysis from Peter Schiff, Casey Research, and other leading experts. 

And now, investors can stay up-to-the-minute on precious metals news and Peter’s latest thoughts by visiting Peter Schiff’s Official Gold Blog.

For further reading, please check out Peter’s excellent book How an Economy Grows and Why it Crashes, available now from Laissez-Faire Books.

Pimco’s Bill Gross looks at the investing universe and sees a dangerous supernova – a looming explosion that could see investors lost in space.

The head of the Pacific Investment Management bond giant has issued an ominous forecast in which he worries that the global central bank-induced credit bubble “is running out of energy and time.”

…..read much more HERE

“The World’s Bubble Economy Getting Bubblier”

Dividends have a long history of providing returns to intelligent investors. Only in the last 60 years, has investing for stock price appreciation surpassed dividends as a key source of return in the eyes of the common investor. Recent market volatility however, has caused most players in the market to rethink their investing strategy and in many cases, re-embrace the wealth-building power of dividend investing. For those who are not already aware of fundamental benefits of dividend investing, we have provided four important arguments below.

Dividend Stocks Have Outperformed Non-Dividend Stocks over the Long Term

A very common misconception with the investing public is that dividend stocks provide a lower, albeit safer, return on investment. This has helped dividend stocks earn an ill-conceived reputation for being boring. The facts however, present a completely different picture – dividend stocks actually outperform non-dividend stocks by a significant margin over the long term.

The graph below (from RBC Capital Markets) clearly illustrates that over a 20 year time horizon, dividend growth stocks and dividend payers generated an average total return of 12.2% and 10.5% per year compared to 6.9% for the overall TSX index and only 1.6% for non-dividend paying stocks. Additional research we have studied provides the same conclusion – that dividend stock should form the core of any investor’s portfolio.

Dividend Stocks Can Pay Investor’s for Being Patient – You Get Paid as You Wait

Patience is a virtue when it comes to investing, but dividends give investors a reason to be patient, even when the market is not performing. You can wait years for a good company to complete their growth plans, become accepted by the market, or to rise out of a downturn. If they are not issuing a dividend however, you may not be making a return. But if you are being paid a dividend, you are being paid to be patient. If the company struggles with any kind of market head winds, you are continuing to earn a real return on your investment.

Dividends Can Help to Provide Price Support for the Stock during Bear’ Markets

A regular and safe dividend can also provide price support for a company’s stock. During a market downturn, a good company can be punished even if the financials remain intact. If the market is bearish, investors can lose short-term reasons to own non-dividend stocks. In such circumstances, the stock price will typically fall. Why own a stock in the short term if the market is against you? But a company with a stable or growing dividend presents a very compelling reason for ownership – even in a bear market – the more compelling the reason, the more stable the company’s stock price.

Dividend Stocks Can Provide Investors with Growth as Well as Regular Cash Flow

Another common misconception about dividend stocks is that they are pure yield investments – meaning that while they provide a dividend, they also provide little or no potential for stock price appreciation. Once again, this notion is false. There are select opportunities in the market that not only pay a generous dividend, but also retain cash for re-investment into the operating business. This allows the company to grow their earnings and in turn increase the distribution on a regular basis – these are referred to as dividend growth stocks. Not only are you receiving a higher dividend (and yield) after every increase, but you will also likely see the value of your stock price increase as well.

In short, dividends should be up a core source of return in any investor’s portfolio. The companies that pay dividends truly come in all shapes and sizes. For those investors that are truly committed to growing their wealth over time, while controlling risk, allocating a reasonable percentage of capital to dividend investing is not just prudent, it is fundamentally essential.

KeyStone’s Latest Reports Section

1/18/2013
UNIQUE FINANCIAL SERVICES FIRM WITH STRONG CASH POSITION (58% IN CASH), SOLID EXPANSION PLANS AND ATTRACTIVE VALUATIONS

1/18/2013
ENERGY & AGRICULTURAL PRODUCT MANUFACTURER AND SERVICE MICRO-CAP STOCK WITH STRONG CASH POSITION, SOLID GROWTH, & TRUE CASH FLOW FROM RECENT ACQUISITION NOT FULLY RECOGNIZED

1/18/2013
CASH RICH TECHNOLOGY EQUIPMENT MANUFACTURER (PRIMARILY FOR O&G MARKET) WITH STRONG CASH FLOW, LOW VALUATIONS & DOMINANT CDN MARKET SHARE IN SOLID NICHE – ESTABLISH HALF POSITION

1/18/2013
CASH RICH (65% IN CASH) EXECUTIVE SEARCH FIRM WITH 6% DIVIDEND, COST CONTAINMENT PRODUCES SOLID PROFITABILITY IN TOUGH MARKET, PLAY ON POTENTIAL US JOB RECOVERY

1/9/2013
STAPLE AUTO REPAIR COMPANY ANNOUNCES SOLID REVENUE GROWTH IN Q3 2012, DESPITE ECONOMIC CHALLENGES – RATINGS MAINTAINED

Interest Rates will shoot higher and spike in 2013 said George Soros, the financier famous making over US$1 billion short selling the British Pound in 1992. 

“It may already have begun,” Soros said of the move in rates. “I think it’s most likely to happen this year. Once you’re past the uncertainty about the budget and investment decisions are made I think you’ll see it.”

You have to respect Soros for his skill, timing and acumen. This former humble porter from Communist Hungary became a Billionaire Investor by developing his own theory of markets called ‘reflexivity’. He has laid out his theory in his recent books THE ALCHEMY OF FINANCE and THE CREDIT CRISIS OF 2008 AND WHAT IT MEANS. He also virtually invented Hedge Funds in 1973 by setting up the Quantum Fund, through which he accumulated a vast fortune (even before the British Pound Short).

…….more on Soros thoughs on Rising Rates and the Euro in this Peter Grandich suggested article HERE.  

…… more again in this Soros article on Rising Rates, Europe, Japan and the US deficit  HERE

Are we about to see a GREAT BOND MARKET MASSACRE like we did in 1994. By total surprise the Fed slammed on the brakes and caught the bond market completely off guard as Fed Chairman Alan Greenspan tried to ‘get ahead of the curve’.

The Question. Can you, or Western Governments handle a short term rate jump of 4% right now?  As happened in 1994 as you can see in this Bank of Canada  chart below. Mortgage rate jump of 3-5%? What happens if it goes even higher, like to the 15%-16% rates of the early 80’s? Some of the numbers below the chart certainly suggest it could be much worse than 1994.

There are stunning similarities and some dangerously different aspects between 1994 and 2013:

In January 1994 before the crash began bond yields were historically low with a 30-year Treasury yield of 6.2% . 

In January 2013 before any crash starts bond yields are historically low with the 30-year Treasury yield at 3.19% now

In 1994 the economy was in the 34th month of economic expansion and Governments worldwide were no where near as in debt as a percentage of GDP as  they are now. 

In 2013 the Western Economies have been sketchy at best and the US is more Broke than ever in History. France is Bankrupt and Britain is losing its Triple A Debt Rating.

In the year before January 1994 the inflation rate averaged 2.96 %

In the year before January 2013 the inflation rate averaged 2.07 %

No wonder the Bank of America issued this warning some days ago:

Bank of America issues `bond crash’ alert on Fed tightening fears

The return of confidence and healthy growth in the US risks setting off a “bond crash” comparable to 1994 and triggering a string of upsets across the world, Bank of America has warned.

…..the whole warning HERE

Your Money Talks Editor put this together – You can Email HERE