THERE JUST AIN´T ENOUGH GOLD!

"Alternative I: on average there is more than one ownership claim on each gold bar conforming to London Good Delivery. Essentially, the (gold) market operates on a fractional reserve basis. If it is true, the next phase in the gold bull market will be a religious experience for anyone unfortunate enough to be short of gold."
~ Paul Mylchreest, ‘Thunder Road Report´, October 15th 2009

Dear Mountaineers,

Gold has recently started behaving bullish beyond our short-term expectations. At BFI, we have been watching this phenomenon with interest. Obviously, there are the fundamental reasons that we and others have discussed at length: The medium- to long-term trend of gold certainly has much to do with ‘Easy Money´ liduidity and the related fears of future inflation.

However, inflation is currently on few peoples´ minds and, in my opinion, it is the lesser of two imminent evils. My primary concern is for deflation, or a Deflationary Phase II, if you will. But the reasons for gold´s current strength are possibly a result of more technical reasons. In his Thunder Road Report of October 15th, analyst Paul Mylchreest asks a simple but very important question: how many ‘London Good Delivery´ gold bars are there?

Just like us, Mr. Mylchreest believes that there are fundamental reasons for the surge in gold, amongst them growing fears by individual, institutional and sovereign investors about the real value of fiat currencies, most notably the US dollar. The supply of gold is finite; the supply of dollars is infinite. Certainly, US authorities are printing dollars as if they were going out of style. But Mr. Mylchreest has also researched two more technical scenarios worth consideration:

Alternative 1:

"On average there is more than one ownership claim on each gold bar conforming to London Good Delivery (LGD) standard on the ´pool´ of gold which acts as liquidity for the massive OTC gold trade based in London. Essentially, the market operates on a fractional reserve basis, but if a sufficient number of market participants become concerned about this and there is a stampede to take delivery of physical bullion, there is a risk of market failure. Such a process could be delayed by central banks lending gold to the market, although this would likely be obvious by a spike in gold lease rates, or by a much higher gold price in order to encourage holders to sell bullion. In this scenario, the gold price could soar at any time and the gold market, which is subject to little regulation, is basically an accident waiting to happen;

Or:

Alternative 2:

"There is far more gold bullion held in private hands than is acknowledged by current industry estimates. It is the large amount of additional gold on top of known gold stocks which provides sufficient liquidity to support the high volumes traded through London. The most likely source for this gold dates back to the Japanese conquest of Asia from 1894-1945 when Japan is alleged to have looted the gold and valuables of 12 nations - it is best known as the story of Yamashita´s Gold. If true, my analysis shows that particularly heavy volumes of this gold may have been laundered into the London market during 1986-90 and the mid/late 1990s. In this scenario, the continued evolution of the gold bull market could be more protracted, if supplies of this gold continue to enter the market periodically."

At the following link, we have attached the full Thunder Road Report of October 15th, 2009, titled "Gold market - accident waiting to happen or crime scene? Don´t shoot the messenger". I recommend you take the time to study this excellent report.

I recently had a group of clients ask me why I was putting so much emphasis on holding precious metals, and why I was so adamant about holding at least a substantial part of it in physically allocated format and in a safe jurisdiction outside of your country. Well, I hope that Paul Mylchreest´s report will give those of you who have the same question a solid answer.

Here is how he puts it:

- "Customers holding unallocated gold are nothing more than unsecured creditors from the bank´s perspective - they have even less protection than a holder of a typical current bank account. If the bank became insolvent, the holder of unallocated gold could lose some or all of their money - this is perverse when one reason for holding gold is protection from financial crises;

- "The unallocated gold is nothing more than a financial liability for the bank (not a liability to be paid in bullion unless demanded by the customer). The gold, if it´s there, is the property of the bank (part of its working capital) which can do what it wishes with it, e.g. keep it in the vault, lend/swap it, or even sell it - while retaining a financial liability to the holder of the unallocated account; and 

- "From the bank´s perspective, the gold can be used as an interest free loan, since the banks can sell, lend or structure derivative trades with the gold. One could argue that there is an incentive, therefore, for banks to operate unallocated gold accounts on a FRACTIONAL RESERVE basis in the belief that it is highly unlikely that most holders of unallocated gold will suddenly demand either physical delivery or conversion to allocated gold accounts."

For more guidance on WHY and HOW you can privately and safely keep your PHYSICAL precious metals, give us a call at our offices in Switzerland.

Sincerely,

Your "Swiss Mountain Guide"

Frank R. Suess

STAY CLEAR OF AMERICAN MUTUAL FUNDS!!!

A little known SEC rule affects international investors around the world. Yet, most advisors, bankers and investors are unaware. We had discussed this rule a few years back. However, it is worthy of repeating, as enforcement has increased and relevance with regard to privacy, supposedly noticed by ALL, has risen.

The American Securities and Exchange Commission (SEC) takes an interesting approach in cracking the privacy rules of international bank accounts. Article 22c-2 may well affect the confidentiality of your account if you are invested in US-registered mutual funds. It should, therefore, not only concern Americans, as it may affect the privacy of ANYONE who has invested in US mutual funds!

The official storyline, as has become a standard line of communication, says that the SEC´s aim is to "protect the interests of long-term mutual fund investors". On the basis of this logic, presumably to avoid the potential volatility that can be created by large institutional investors who invest in mutual funds for short-term profits - i.e. buy and sell large trunks on short notice - the SEC passed the aforementioned Article 22c-2, which can be summed up as follows:

US mutual fund managers have the right, at their discretion, to define a minimal holding period for investors. Should that holding period not be adhered to, the following consequences may be effectuated by the fund managers:

- A penalty liquidation charge of up to 2% on the value of the assets withdrawn from the fund.

- Freezing of your positions in the fund for an undetermined period; a freezing of your position may in fact be effectuated based on another investor´s failure to comply with the agreed minimal holding period. In other words, US mutual funds can, under such circumstances, reject any and all subscriptions or redemptions.

- Finally, they have the right to request the identity of the account holder, the owner of the US mutual fund. In addition, against the banking secrecy rules, the client´s identity can be requested.

While the concept of protecting the interests of long-term fund investors might be considered justified, or at least legitimate, the arbitrary scope of rights given to the fund managers and, most importantly, the divulging of client information, is highly questionable. The new rules easily raise the questions of whose interests are really being protected in this context.

What are the implications for persons with investments in US mutual funds? 

- Unless you stay invested for a long time, you may be faced with the aforementioned issues.

- If you have a Swiss bank account, or an account in another country with banking secrecy rules, such as Austria or Singapore, you may expect receiving a letter from your bank informing you of this situation and asking you to sign a form that instructs the bank to no longer allow for investments in US mutual funds, or to give your approval for the bank to divulge your identity and investor profile on request.

These rules are fairly new and it is yet to be seen how they play out in practice. However, the high level of discretionary power given to the fund managers is troubling. We have two primary concerns: privacy and investment flexibility!

While you may have intentions of investing in a mutual fund for the long-term, markets change, and the performance of the fund may not be what you expected. Furthermore, circumstances may require you to dispose of the assets.

If you do want to hold US funds, you should beware that holding a bank account in your name may not be advisable, and you should consider indirect ownership. However, the rules appear to require provision of the beneficial owner. Should you want to ensure not being exposed to these issues, a few strategies are available. Call us for proper advice.

Based on the fact that US mutual funds only constitute a small section of the international funds available, you should consider avoiding US mutual funds altogether, unless you have made sure that no such restrictions are incorporated in the offering memorandum of a specific fund.

NEWS BRIEFS

Bernanke Signals ‘Extended´ Low-Rate Period May Become Longer

Bloomberg, November 17th: Federal Reserve Chairman Ben S. Bernanke´s diagnosis of a weak U.S. economy and labor market signaled that the central bank´s extended period of low borrowing costs may get even longer.

Bernanke said "significant economic challenges remain," with lending constrained and the jobless rate above 10 percent. Speaking in New York yesterday, he said U.S. asset prices aren´t out of line with underlying values, and central bank policy will ensure that the "dollar is strong."

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A Wave of Municipal Bankruptcies?

US states and municipalities are in deep financial trouble. Pension performance has faltered. Over a trillion dollars worth of municipal pension fund assets have been erased in the recent market meltdown. The average public pension plan is 35% under-funded, and things are getting worse. According to Edward Siedle, a former SEC attorney, a wave of municipal bankruptcies in America could well follow.

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Is China´s Growth Real?

The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It´s China´s turn, the theory goes, as American consumers - who propelled the last global boom with their borrowing and spending ways - have begun to tighten their belts and increase savings rates.

But there´s a growing group of market professionals who see a different picture altogether.

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Liechtenstein Removed From OECD Tax Watch List

Since it was put on the gray list, Liechtenstein has signed double-tax treaties, which include client-information exchange possibilities with countries including Germany, France, the U.K. and the U.S. It still aims to reach deals with Italy, Sweden, Norway and several other countries.

Switzerland and Austria were removed from the grey list in September after they reached similar new double-taxation agreements which should allow foreign governments to monitor and track down potential tax evaders.

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"Awesome Amnesty" for Illegal Aliens in America

The following link takes you to a 2-minute video with CNN´s Lou Dobbs. It discusses an (for us at least) amazing amnesty bill in the making in the US. This time a special amnesty program for illegal aliens -- and gang members!?!? -- is being proposed. To name just a few of the ‘goodies´ envisioned:

- Ilegal aliens to be afforded legal status within 24 hours, even without a complete background check

- Any legal fees to be borne by the US, i.e. American taxpayers

- Temporary visas can be renewed indefinitely, thus, permanent temporary visas

- No back taxes for illegal aliens that register for legal status

- Illegal gang members to be eligible for legal status, if they say that they will no longer be gang members

- Etc. etc.

Certainly interesting stuff! This video should be mandatory viewing for every US citizen.

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America Venturing Ever Deeper Into Unaffordable Spending ...