Gold and Money in Extremis... One Man's Story

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The Daily Reckoning | Thursday December 15, 2011 How to proceed with an unrequited love of gold... A harrowing story regarding the benefits of a knowledge of history and money... Plus, Bill Bonner on what to make of gold’s up and down nature, and more... ------------------------------------------------------- What could be the biggest financial shock of 2012? Not the euro crash. Not the end of the gold bull. Not even a new bank scandal or another crash on Wall Street. You’ll want to see for yourself, while you can still take steps to protect yourself This frightening video spills the details. In or Out How to Play the Swings in the Gold Price Bill Bonner Reckoning today from Baltimore, Maryland... Hey...what’s going on with gold? The dollar up, gold down. When we checked yesterday the price was crashing through the $1,550 level. Our friend, Dennis Gartman, tells us to get out. Here’s the report: Gold, in the 11th year of its longest winning streak in at least nine decades, is poised to enter a bear market, according to Dennis Gartman. The metal...may decline to as low as $1,475, the economist wrote today in his Suffolk, Virginia-based Gartman Letter. He sold the last of his gold yesterday. Bullion has already dropped 13 percent from the record $1,921.15 reached Sept. 6 and $1,475 would extend that to more than 20 percent, the common definition of a bear market. “Since the early autumn here in the Northern Hemisphere gold has failed to make a new high,” Gartman wrote. “Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.” In China, the second-largest consumer, gold imports to the mainland from Hong Kong surged 51 percent to 86.3 tons in October to a monthly record, according to the Census and Statistics Department of the Hong Kong government. China imported more than 300 tons for all of 2010, Yi Gang, People’s Bank of China Vice Governor, said in February. “Buying of that sort should have sent gold prices soaring,” Gartman wrote. “One of the oldest rules of trading is simply this: a market that cannot or does not respond to bullish news is a bearish market not a bullish one.” But another friend, Dominic Frisby in London, says ‘not so fast...’ Well, gold is up about 16% on the year so far. So no bear market there. This compares with an S&P 500 which is ever so slightly down; a FTSE 100 that’s down around 10%; a commodities index that’s also down around 10%; a US bond market that’s up about 17%; and a US dollar which is ever so slightly up. If we use the definition that a bear market is a market that is down 20% from its highs, then Gartman may well be right. I don’t say it will happen, but there is a very good chance that gold could fall more than 20% from its early September high of $1,920 an ounce. This would be perfectly normal. Gold has had three 20% corrections since this bull market began in 2001. Once in 2006, again in 2008, and just three months ago in September — yes, just three months ago. If you look at intra-day prices, it fell from a high on 6 September of $1,923 to a low on 26 September of $1,535. I make that 20%. So, first, I look at the fundamentals for gold. Have these changed? No. If anything they’ve intensified. I won’t go on about them here save to say we are going through a generational monetary [unraveling] and in such a situation you want to own gold. You may well also need your metaphorical tins, guns and bomb shelters at some stage, but I do not have a buy signal on those just yet. So...in or out? You know our answer, dear reader. Gold has been going up for 11 years straight. Or is it 12? It needs to settle down. Rest. Catch its breath. And, like a lover, it needs to test its most ardent admirers. How far would it have to go do to give gold buyers a proper shake- out? Maybe to 1,300. Maybe 1,200. Typically, a bull market retraces nearly 50% of its gain before completing its rendezvous with the top. We don’t know if that’s true or not...it’s just what the old- timers say. Gold has gone from about $260 to over $1,900. Let’s see, take off half of that gain and you have $1,080. Whoa... Are you ready for that kind of test, dear reader? If it goes down that much, even we might have to revisit our convictions. In the meantime, sell stocks on rallies, buy gold on dips. This is THREE Times Bigger Than Subprime! Market analyst Dan Amoss predicted the subprime real estate bubble. Now he’s predicting a crisis coming to America that could be THREE times bigger than subprime! Take one step before January 2012 and you could protect, and even grow your wealth. But fail to do anything, and your retirement could get CRUSHED! Click here to learn more. Looking Past Gold's Poor Performance Eric Fry Reporting from Laguna Beach, California... You don’t go into a Mexican restaurant to order Fettuccine Alfredo; you don’t go into Home Depot to buy a wedding dress; you don’t go into Goldman Sachs to get fair a deal...and you certainly don’t go into gold and silver to lose money during a currency crisis. But that’s exactly what’s happening. What the heck is wrong with the precious metals? Sure, gold has performed admirably over the last few years, but it has performed dismally over the last few weeks...and horribly over the last few days. As the chart above shows, most major stock and commodity markets have already surrendered the huge gains they achieved after November 30th, when six central banks announced “coordinated intervention” to support distressed European banks. (Only US stocks still cling to a slight gain). But gold has been the biggest loser. Despite the obvious inflationary implications of central bank intervention in the currency markets, gold can’t seem to get out of its own way. In the midst of a currency crisis that has seen the euro lose 9% of its value against the dollar in just three months, gold is down 17%, while US stocks are up. Not surprisingly, gold’s numerous naysayers are wasting no time saying their “nays.” “When it comes to investment safety, gold has near-mythical status,” writes James Mackintosh for The Financial Times. “Sadly, it has repeatedly turned out to be a myth that gold holds its value during periods of panic. Investors were reminded of that once again yesterday, when the precious metal plunged 4 per cent or $68... “Gold is meant to be a haven, and in periods of mild fear it does rather well,” Mackintosh continues. “But just as in 2008, when times get really tough, investors prefer cash to gold — and dollar cash at that.” The guy’s got an argument. But is it a good one? Without a doubt, gold has delivered a disappointing performance of late. But even after yesterday’s shellacking, gold is still up 9% over the last 12 months, compared to a loss for the S&P 500 Index. Likewise, gold has greatly outpaced the S&P over the last one, three, five, ten and fifteen years! (The 20-year mark is a “dead heat.”) Bottom line, gold has performed its job with meritorious distinction. But of course, that’s history. The future is what most of us care about. And we’d care to know if gold’s future will look anything like its illustrious past. Over the short-term, the financial markets can fall hostage almost any form of groupthink, no matter whether that groupthink be intelligent or idiotic. But over the long-term, the markets usually escape their captors. Free from the shackles of groupthink, good investments excel; bad investments don’t. At the moment, gold is disappointing its fans, which begs the question: Is gold a good investment, temporarily held hostage by the groupthink that considers the dollar a safer “safe haven” asset? Or is gold genuinely a bad investment that deserves exactly what it is getting right now? Your California editor cannot answer that question with certainty, but he can respond to it with conviction: Long-term, gold is a better safe haven than the dollar. Short-term, anything goes. Having said that, unrequited affection is always painful. Those of us who have embraced gold as our “main squeeze,” financially speaking, are receiving nothing but backhands across the face. No love whatsoever. In fact, the more we commit to the relationship, the greater our pain. So we’d like to know, will gold ever love us back? Probably. “The fragments of alarming news that fill the pages of The Wall Street Journal and The Financial Times are not unrelated,” observes James Grant, editor of Grant’s Interest Rate Observer. “They form a coherent design. The derangement of money and banking is the central organizing principle. Banks are teetering and currencies are churning because of the ideas we live by. Paper money and socialized risk-taking got us into this mess. More the same is how the central bankers seemingly intended to lead us out... The world over, governments have met, are meeting, or will soon meet financial and monetary troubles with the printing press or its digital equivalent.” Unfortunately, Grant’s compelling long-term argument for owning gold is providing very little solace at the moment. Gold is falling...and it may continue falling, if we are to believe what the “charts are saying.” Gold fell through its 200-day moving average yesterday, which is very “bad voodoo,” according to those folks who divine future price trends from squiggles on a chart. Furthermore, the precious metals are clearly suffering from one trend we can clearly see, and maybe one more that we can’t see. The visible trend is the German non-response to euro crisis. So far, the Germans refuse to launch a rescue campaign that relies on printing euros. Instead, the Germans advocate a combination of austerity and tax hikes. However prudent this strategy may or may not be over the long term, near term it looks awfully deflationary, recessionary...and bearish for gold. As for influences we can’t see, rumors are running rampant that the MF Global bankruptcy is triggering a series of forced liquidations. If true, such liquidations could easily produce steep price drops across the commodity complex — corn and wheat, as well as gold and silver. And clearly, the entire commodity complex has been in liquidation mode — a fact that lends credence to the rumors. On the other hand, it is also possible that MF Global’s bankruptcy has nothing at all to do with the selloffs. Either way, the bull case for gold (and also for silver) has little to do with short-term noise and volatility. Rather, it is the long- term story that matters most — the story of the “derangement of money and banking.” And that’s the kind of story that could produce another spectacular run in the gold price! Maybe the last 20 years were the “glory days” for gold, never to be seen again...at least not soon. And maybe, as Mr. Mackintosh asserts, gold is no longer a reliable “crisis asset.” Or maybe, as your editor suspects, the crisis is simply not bad enough to really terrify folks. The column below provides a fascinating and worthwhile perspective. It is a true story about the extraordinary value of gold during the Nazi era. Regards, Eric J. Fry for The Daily Reckoning Can Ronald Reagan Save You from Obama? I know it’s hard out there in the markets. Obama and Bernanke have made a mess of the economy, crushing jobs and retirements from coast to coast. But did you know about this maverick law that Ronald Reagan signed on October 22, 1986? It could be the VERY THING that prevents your retirement from taking any more hits from Obama Team. Watch the urgent presentation on the power of the “10-86” law right now. The Daily Reckoning Presents Gold and Money in Extremis... One Man's Story By Rich Rabkin The fascinating story of Marion Szablicki, as reported in Marc Faber’s Gloom, Boom and Doom Report My economics education was started as a child by my grandfather, Marion Szablicki, who was a living testimonial to the value of gold. Notably, toward the end of his life at 99 years of age in 2010, he felt there was simply too much debt, and that a long downward spiral was underway with difficult times ahead. He had lived through times of “extremis” and his account of fiat money, war, gold and survival should serve as a reminder to all people that those who choose to ignore history’s lessons do so at their own risk. On September 17, 1939, Russia invaded Poland, and over the next year over 1.7 million Poles were deported to labor camps or sent into exile into Kazakhstan and Siberia. Their only crimes at the time were being Polish citizens. None of the land or homes taken by the Russians was ever returned to these Poles after the war, despite their release from the Gulag in 1941 to fight with distinction under the British army. Per the 1943 Tehran Declaration, post WWII, Eastern Poland remained a part of Russia. Winston Churchill said of Poland in 1946, “We who went to war on her behalf...watch with sorrow the strange outcome of our endeavors.” Fiat currencies are particularly vulnerable during war and often become rapidly worthless as countries fail. Such was the case for my grandparents, who in 1939 resided in eastern Poland. This is their story as told to me by my grandfather, Marion Szablicki: Early morning on September 18th, 1939, I learned the rumors of the Russian invasion of eastern Poland were true. Just three weeks prior, we had been attacked by Germany. Russia now attacked Poland from the east. In a matter of weeks, Poland was overrun. I had re- enlisted in the army after the Germans invaded, but upon hearing this news, those of us from the east were told to go home. I had a wife and a three-year-old daughter to protect. I left to go back to our village immediately, covering the 40- kilometer journey on foot in a day. We lived near the Russian border and I knew the soldiers would arrive soon. I was a working-class man; however, my wife’s family were better off, and we had a very modest amount of gold and jewelry kept by her family. I hid it carefully in a hole in the ground. I knew our currency (the Zloty) would not last and I knew that gold would be the only money I would have to try and save us. Poland’s great inflation (1923) happened when I was a boy and was concurrent with the Weimar hyperinflation in Germany. My father, brothers and I bartered for food, goods, services, and gold. Gold was preferred then to cash. My father was well versed in history, and often cited the great inflation in pre-revolutionary France. It was he who taught me that gold was the only money that knows no sovereign borders. Russian soldiers arrived at our village two days later. Having been born in far eastern Siberia, and a boxer in Russia years earlier, I was fluent in Russian. I remembered the Russian revolution; anyone who was not a common peasant or was in any way educated was in danger. I spoke with many soldiers seeking clues about our fate. Two weeks later, my wife’s father, a recently retired Polish officer and landowner, was arrested and taken away by the NKVD. We never saw him again. He was likely executed at the Katyn massacre, where thousands of other Polish officers were later found to have been killed. I immediately sent my wife’s mother away. We would never see her again either. Winter came in earnest with a scarcity of goods and whisperings of mass deportations. In February of 1940, policemen and landowners, and many educated people, were arrested and deported along with their relatives. Late one night I received a knock on my door. In walked four armed Russian soldiers. One of them was a man I had spoken with several times over the previous months. I greeted them all politely in Russian. I was ordered to get my coat and accompany them. I was taken to a station and asked many questions. It was a stroke of luck for me that the Russian soldier to whom I had spoken in the past was here among them. After conferring with the others, he said: “Because you were born in Siberia, speak Russian, and you’re an uneducated worker — much like us — we will not detain you further. You may go for now.” He then gently grabbed my elbow and said very quietly, “Go back to your family, Marion. Get prepared for deportation to Siberia.” I ran home. At dawn, I retrieved the gold and jewelry. I found my largest boots and heaviest jacket. I lined the bottom of my boots carefully with small coins and put leather over the insoles. I slit the heels, carefully hollowed out what I could and stuffed larger gold coins inside the cavities. Finally, I opened up various parts of my jacket and distributed more gold chain and coins in it — with great care so they did not rattle and were hard to detect. Several days later, we were awakened by a knock at 4 a.m. and told we were being deported to Siberia. We were given 15 minutes to gather any personal belongings needed for immediate use. Our land, homes, and possessions were now property of the Russian state. My wife, my three-year-old daughter, and I were put into a truck with a group of others and taken to a railroad station. We would never see our parents, our siblings, nor set foot on Polish soil, again. I was greatly relieved that they did not check my jacket or my shoes. My small cache of gold was going with me. When the train arrived many hours later, we were put into cattle cars. The trip to Siberia took almost three weeks. It was hellish: we were cramped in overcrowded cars with no toilet, and only a hole cut in the floor, with scarcely any food or water. We were given dark bread and water every few days. Many died, and they were simply thrown off the train, be they men, women or children. I recall the last time I wept during those years: a baby had been born in our boxcar during the journey; it had died and was cast off the train by the soldiers like rubbish. We arrived in Kazakhstan, near the Siberian border, at a rundown village. This was to be our new home. The Poles could not leave under the penalty of death. It was freezing cold — 20 degrees below zero. The locals were told they must shelter us, but they were also very poor; the NKVD allocated three or four families to a house. The Russian people were as good as they could be to us under the circumstances. I needed to use my gold immediately, as things were dire: I bartered with a man to acquire better living quarters; and then I exchanged, with another better off man, some gold chain links and coins for a fair sum of rubles. I used these to get bread and food for the remainder of that first brutal winter. I bought tools and worked cutting wood, fixing stairs, or any other odd jobs for a few rubles or just food. I sometimes went days without food, so that my daughter and wife could eat. We managed to survive winter and summer, despite my coming down with malaria and my wife nearly dying of typhus. We were able to get medicine and food from those who had it — as long as we had some gold. Polish currency (Zloty) was not accepted, Rubles were, but gold was now preferred over anything. Finally, one day in 1941, the exiled Poles were summoned by the local NKVD. We were being released. Suddenly, we were free to go, but no reason was given. (Germany had attacked Russia on June 22, 1941 and the Poles by agreement were to be released from the gulag to form an army in Persia.) I asked a Russian official I knew. He said, “Marion, get to the train station and get on a train as fast as possible before they change their minds.” We left within hours. Many were too weak to go anywhere and simply remained. At the station, we learned the Polish Army was being reformed, but the man in charge was telling everyone that the trains were already full. I very quietly made my way to the man in charge and offered him three gold coins, among my last, one for each of us for passage on the next train. He agreed. When the train arrived, he quietly motioned us around to the far side, spoke with another official and they put us on the train citing “special orders”. We were finally on our way out of that terrible place and were now among thousands of exiled Poles all racing south as fast as possible to get into General Anders’ Polish Army. We then crossed the Caspian Sea in a ship and arrived in Persia (Iran). We were lucky to be on that train, and hence on an early ship; as some later boats were turned back, the quota deemed filled, those aboard were turned back to Russia. We arrived in Persia emaciated. Local people took our family into their home during the first weeks and they nursed us back to health. They were among the kindest people I have ever met. I joined the Polish Second Corps under General Anders. There was now a glimmer of hope for us. My wife and daughter were evacuated. I thought they were on their way to South Africa, but instead they were sent to India. I didn’t see them again for six years. For a long while, neither of us knew the whereabouts of the other, or if we were dead or alive. I fought in Africa and Italy, and most notably at Monte Cassino. I have never witnessed so much blood and determination. We led the decisive final charge on the German-held Abbey. I was very proud to be a Pole on that day. The war drew to a close and I found out my wife and daughter were alive and still in India, but that they would be moved somewhere near London. I would be going there, too, after I finished my service. When we were finally reunited in London two years later, it was a miracle. Thankfully, Mr. Churchill did not force repatriation upon the Poles. All of my brothers had died in the war in the Resistance. Without the knowledge of history and money imparted to me by my father, we would not have made it. I owe my life to a handful of gold coins and chains. Several days before we were to leave for Australia to emigrate, I received a call: “Marion, we have an open slot for America — do you want it?” I told him, “Yes.” He said, “Then get here as soon as possible.” I ran the entire way. Victoria Szablicki passed away on June 5, 2011. Marion passed away just 11 days later, on June 16, 2011, at 100 years of age and less than two years after receiving his last medal, the Siberian Cross, from the Polish government. They had been married for over 76 years. Regards, Rich Rabkin for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com The Diabolical Genius that is Modern Government Unpopular Cures for Unemployment and Economic Depression On the Uses of Government Gold Drops Through 200-day Moving Average US Retail Sales Disappoint Spain Successfully Auctions Off €4.94 Billion The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. 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