How the Government Caused the Financial Meltdown

Three Decades of Subsidized Risk

There's a reason Dick Fuld didn't believe Lehman would be allowed to fail.

By CHARLES GASPARINO

I recently sat down with legendary investor Ted Forstmann to discuss why, on the one-year anniversary of the financial meltdown, the press has largely ignored the role of government in creating the meltdown—and possibly setting the stage for another one—by allowing Wall Street to borrow cheaply and easily during the past three decades.

"I guess reporters think writing about greedy investment bankers is more interesting," Mr. Forstmann laughed.

Mr. Forstmann knows a thing or two about greedy investment bankers: He's been calling them on the carpet for years, most famously during the 1980s when he fulminated against the excesses of the junk-bond era. He also knows that blaming banking greed alone can't by itself explain the financial tsunami that tore the markets apart last year and left the banking system and the economy in tatters.

The greed merchants needed a co-conspirator, Mr. Forstmann argues, and that co-conspirator is and was the United States government.

"They're always there waiting to hand out free money," he said. "They just throw money at the problem every time Wall Street gets in trouble. It starts out when they have a cold and it builds until the risk-taking leads to cancer."

Mr. Forstmann's point shouldn't be taken lightly. Not by the press, nor by policy makers in Washington. But so far it has been, and the easy money is flowing like never before. Interest rates are close to zero; in effect the Federal Reserve is subsidizing the risk-taking and bond trading that has allowed Goldman Sachs to produce billions in profits and that infamous $16 billion bonus pool (analysts say it could grow to as high as $20 billion). The Treasury has lent banks money, guaranteed Wall Street's debt and declared every firm to be a commercial bank, from Citigroup with close to $1 trillion in U.S. deposits, to Morgan Stanley with close to zero. They are all "too big to fail" and so free to trade as they please—on the taxpayer dime.

The conventional wisdom as perpetuated in the media is that these bailout mechanisms are unique, designed to ameliorate a once-in-a-lifetime financial "perfect storm." They are unique, but only in size. A quick look back at the past three decades will demonstrate what Mr. Forstmann meant when he said the government has been ready to hand out free money nearly every time risk-taking led to losses.

The first mortgage market meltdown of the mid-1980s, spurred by the Fed's supply of easy money, was among the most painful market upheavals in the history of the bond market. The pioneers of the mortgage bond market, Lew Ranieri of Salomon Brothers and Larry Fink of First Boston (the same Larry Fink now considered a sage CEO at money management powerhouse BlackRock), lost what were then unheard-of sums of money. (Mr. Fink concedes to losses of over $100 million.)

"What happened then was a dry run of what was to come," Mr. Fink recently told me, as he looked back on the market he created, which would eventually lie at the heart of the most recent financial crisis. Wall Street took excessive risk in mortgage bonds amid the easy money supplied by the Fed—and lost. When the crisis began, the Fed under then Chairman Alan Greenspan slashed interest rates—as it would do after Orange County, Calif., declared bankruptcy in 1994 because of bad bets on complex bonds; and again in 1998 when the hedge fund Long-Term Capital Management (LTCM) blew up; and of course in the bond-market crisis of 2007 and 2008. The lower rates each time lessened the pain of the risk-taking gone awry, and opened the door for increased risk down the line.

Easy money wasn't the only way government induced the bubble. The mortgage-bond market was the mechanism by which policy makers transformed home ownership into something that must be earned into something close to a civil right. The Community Reinvestment Act and projects by the Department of Housing and Urban Development, beginning in the Clinton years, couldn't have been accomplished without the mortgage bond—which allowed banks to offload the increasingly risky mortgages to Wall Street, which in turn securitized them into triple-A rated bonds thanks to compliant ratings agencies.

The perversity of these efforts wasn't merely that bonds packed with subprime loans received such high ratings. It was also that by inducing homeownership, the government was itself making homeownership less affordable. Because families without the real economic means to repay traditional 30-year mortgages were getting them, housing prices grew to artificially high levels.

This is where the real sin of Fannie Mae and Freddie Mac comes into play. Both were created by Congress to make housing affordable to the middle class. But when they began guaranteeing subprime loans, they actually began pricing out the working class from the market until the banking business responded with ways to make repayment of mortgages allegedly easier through adjustable rates loans that start off with low payments. But these loans, fully sanctioned by the government, were a ticking time bomb, as we're all now so painfully aware.

A similar bomb exploded in 1998, when LTCM blew up. The policy response to the LTCM debacle is instructive; more than anything else it solidified Wall Street's belief that there were little if any real risks to risk-taking. With $5 billion under management, LTCM was deemed too big to fail because, with nearly every major firm copying its money losing trades, much of Wall Street might have failed with it.

That's what the policy makers told us anyway. On Wall Street there's general agreement that the implosion of LTCM would have tanked one of the biggest risk takers in the market, Lehman Brothers, a full decade before its historic bankruptcy filing. Officials at Merrill, including its then-CFO (and future CEO) Stan O'Neal, believed Merrill's risk-taking in esoteric bonds could have led to a similar implosion 10 years before its calamitous merger with Bank of America.

We'll never know if LTCM's demise would have tanked the financial system or simply tanked a couple of firms that bet wrong. But one thing is certain: A valuable lesson in risk-taking was lost. By 2007, the years of excessive risk-taking, aided and abetted by the belief that the government was ready to paper over mistakes, had taken their toll.

With so much easy money, with the government always ready to ease their pain, Wall Street developed new and even more innovative ways to make money through risk-taking. The old mortgage bonds created by Messrs. Fink and Ranieri as simple securitized pools had morphed into the so-called collateralized debt obligations (CDOs), complex structures that allowed Wall Street banks as well as quasi-governmental agencies Fannie Mae and Freddie Mac to securitize ever riskier mortgages.

Mr. O'Neal, the man considered most responsible for Merrill's disastrous foray into risk-taking, told me in an interview last year that in the fall of 2007, when he saw that the firm's problems were insurmountable, he had a deal to sell Merrill to Bank of America for around $90 a share. But Merrill's board rejected it, believing he would be selling out cheaply. The CDOs would eventually recover, they argued, as the Fed pumped life into the markets.

Likewise, nearly to the minute he was forced to file for bankruptcy, former Lehman CEO Dick Fuld believed the government wouldn't let Lehman die. After all, government largess had always been there in the past.

All of which brings me back to Mr. Fortsmann's comment about policy makers helping turn a cold into cancer. What if the Fed hadn't eased Wall Street's pain in the late 1980s, and again after the 1994 bond-market collapse? What if policy makers in 1998 had allowed the markets to feel the consequences of risk—allowing LTCM to fail, and letting Lehman Brothers and possibly Merrill Lynch die as well?

There would have been pain—lots of it—for Wall Street and even for Main Street, but a lot less than what we're experiencing today. Wall Street would have learned a valuable lesson: There are consequences to risk.

Mr. Gasparino is a CNBC on-air editor and the author, most recently, of "The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System," just published by HarperBusiness.

GOLD - 2009 November 4

Welcome to Miles Franklin

WEEKLY GOLD AND SILVER UPDATE

2009 November 4

New York Spot Gold Bid = $1,091.90 on 2009 November 4

"Of all the contrivances devised for cheating the laboring classes of mankind, none has been more effective than that which deludes him with paper money"... Daniel Webster

If you are hoping for a return to stability and safety and normal times, forget it! If you are counting on recovering all of your losses from last year's market debacle, forget it! "You can't always get what you want." The past is gone and the investment strategies that worked before will not help you now.

Be careful my friends. The gains over the past 6 months in the stock market can disappear in a flash. Even if you "can't always get what you want," you can still "get what you need" but you will have to move a meaningful portion of your dollar assets and investments into gold and silver now. Only then will you get the safety, stability and return of your lost investments that you desire.

In an article from our friend David Morgan, below, he advises that you should have at least 20% in silver or gold. We would suggest a larger percentage. Those of you who followed our advice over the past 8 years already have stability, have made a great deal of money and are in great shape now and going forward.

Be careful, time is running out. Jim Sinclair's "countdown" ends this week. If he is correct, that's when the dollar starts to tank and that's when gold starts to rapidly rise. Richard Russell is very nervous and just last night warned his readers that it's time to get out of the stock market. He wrote: Honestly, I'm more concerned now with not losing money than I am in trying to garner profits over coming months. My stance -- Treasury bills (rather than money market funds) and gold. My objection to money market funds is that I don't know what's in 'em. If T-bills aren't safe, then nothing is safe -- except gold. At this point, I prefer gold, the metal, to gold mining stocks.

Gold and T-bills is my advice. Unless you're in love with a stock, get rid of it. The gold shares (but not physical gold) worry me. Too often they follow the rest of the stock market -- and I don't like the action of the rest of the stock market.

The trillion-dollar argument continues as to whether we are in a new bull market or whether the rally since March was simply an upward correction in an ongoing bear market.

The difference in the two arguments is absolutely critical. If the March low was indeed the end of the bear market it ended in a manner different from any I have ever seen. First, big bear markets end with stocks at bargain valuations. At the March lows, the dividend yield on the Dow and the S&P was below 3%, more characteristic of a bull market top than a bear market bottom. At previous bear market bottoms, the P/E ratio was near 5 to 7, a far cry from the P/Es at the March lows. At other bear market bottoms, the sentiment toward the stock market was black-bearish. Investors would denounce the stock market, saying that they "never wanted to go near the stock market again." That was not the sentiment that I heard at the March lows. Two months later, people were excited and bullish about the market again.

The so-called March bear market bottom took the shape of a huge V. I've never seen a bear market end in a V-pattern. In all, my opinion is that March did not represent a true bear market bottom. If it wasn't, then the market advance from the March low was a bear market rebound-rally following the market "crash" of 2007 to 2009.

If my analysis is correct, then what we're seeing now is a topping out of the bear market rally that began in March. If the bear market rally is now in the process of topping out, then the bear has the market in its grip again. If the bear market rally is now topping out, then I would expect the market to head down towards the March lows again. Worse, I'd expect the March lows to be violated, something that the majority of analysts believe is well-nigh impossible.

The bull argument is now ingrained in the minds of most of the experts. It's dangerous in this business to adopt a mindset. A mindset prevents you from seeing and taking in what is actually happening. If this rally shows further signs of breaking up, my advice is to assume as defensive a posture as possible.

The Committee. If it's too much of a political "hot potato" to handle, turn it over to a committee or a commission. The growing federal deficit has become an electoral liability for the Democrats -- what to do about it? The Dems would like to turn over the deficits problem to a commission. They want to continue to spend and now they would like to raise taxes. The Republicans want to lower taxes and are absolutely opposed to higher taxes.

The situation is grim. The deficit for the fiscal year ended Sept. 30 is a mind-bending $1.4 trillion, and the combined deficits projected for the next decade would add about $9 trillion to the national debt (some say $13 trillion). With the national debt now $12 trillion, the would mean a national debt of $21 trillion by the year 2017. Interest on the national debt is now about a million dollars a day. If the projections of the national debt are anywhere near correct, the interest on the debt in the year 2017 would bust the US and surely head us into the second Great Depression. Before that, the dollar would collapse under the burden of debt, and interest rates would sky-rocket. As matters now stand, the US is in the position of being an over-rated "Banana Republic."

The only remedy is -- higher taxes and a sharp curtailing of government spending. How can that be managed during the current atmosphere of high and rising unemployment and a contraction in federal tax receipts? I can't imagine. Ah, the simple answer -- turn the whole thing over to a bipartisan commission. Surely they'll figure it out, and if the answer is too painful, there'll be nobody to blame -- reality is reality.

David Morgan wrote, A well-known truism is that every investor needs to start with savings. But what if that "savings" gave the investor too much exposure to risk? What investors or people in general need in this financial environment is savings that don't deteriorate. We are in an environment now where the idea of making money, which is kind of the preamble to being American, is going away. In other words, today's environment is, he who loses the least, wins, and the way that you do that is to hold a currency that doesn't devalue over time.

There really are only two currencies, and they are gold and silver.

I remember starting my quest in this silver journey that has been ongoing for several decades, beginning in the mid 1960s. Silver was the coin of the realm here in America, through 1964. In 1965, coins were minted but they did not contain silver. (Just to be accurate about this, there were some exceptions with the 50-cent piece.)

The futures market back in the late '60s and early '70s had two silver markets, actually. There was the bullion market that we still have, and there was also a coin bag market. The bag market consisted of "junk silver" as it was referred to, which is U.S. coinage that is 90 percent silver. I remember people asking questions such as, how can you make money by buying money?

In other words, the link between the dollar and silver had been cut but people didn't even understand it, because it hadn't drifted that far-they didn't get it. Paper money, silver money, what the heck is the difference?

In fact, in years hence, many people my age or older tell me it never dawned on them to obtain the silver coinage that was available for the taking and hold on to it. Of course some people saw right away what was happening, and silver coinage in general circulation disappeared very quickly.

What you need now is real money and that means silver and gold. I advocate silver "junk bags"-quarters or dimes or even half dollars that are 90 percent silver and placed in bags of $1,000.00 face value or some fraction thereof, such as a ½ bag, which is $500.00 face, etc.

Today that full bag of junk silver $1,000.00 face value is going to cost you probably 12,000 in Federal Reserve Notes. So they both say a dollar on them but one's a little different than the other-one is real, and the other is a promise, but not much of one.

Once an investor has accomplished a physical metal holding in both silver and gold, he or she might want to speculate. Personally, I favor top-tier, cash-rich, unhedged mining companies for serious money.

The next level of risk to reward is a very high-risk sector but very high reward at times, and that is the junior mining sector. Let me be clear: I don't sell bullion but do advocate that everyone buy coins (buy silver) and bars of both gold (buying gold) and silver. I think that's your best savior in this kind of an environment.

Often the question arises, what percentage of someone's assets do you recommend in the precious metals sector? Let us understand that we're talking in a very generic sense here without any kind of suitability or special circumstances or things like that. But what range or percentage is recommended that people allocate through real money?

In The Ten Rules of Silver Investing, I was asked that question. At that time I said 10 percent; however, after that was published, my inclination was to move it up to 20 percent, because the financial system was becoming much more unstable.

The best investment you could ever make is in yourself. If you have a going business, put money in your business, make it stronger, make it better, and market it better, whatever. Or get an education for yourself so you can get a better job or a promotion and so forth. Having said that, you do need some exposure to the metals, and 10 percent as a minimum is a good place to start.

The next question of course is how much gold or silver? This is subject to the individual. The older you are, the less time you have to recover from a mistake. Thus, the older you are, the more gold you should have-so you should probably favor the gold market. The younger or more aggressive you are and the more risk you can take, the more you might consider the silver market. Then there are those who watch the market carefully (such as I do) and trade the gold/silver ratio when it seems favorable. If this is done properly, an investor can actually end up with more metal, with very little effort.

You could look at it this way: if you're 50 years old, you're 50 percent gold, 50 percent silver; if you're 60 years old, you're 60 percent gold, 40 percent silver, that type of thing. Several people I know who are in their fifties, sixties, and seventies believe silver will outperform gold, but it's a rougher ride.

I think you definitely should have both, a metals portfolio; it's not a metal portfolio. And while there aren't very many silver-only bugs out there, there are more gold-centric people who really don't want any silver exposure. And I'm not against them; I think that they're going to really see something that's going to take their breath away in a couple years. I think once silver rises above the $25.00 level, there will be an acceleration in price that will absolutely astound people. But we're not there yet. That's sort of the end of the story, and we've still got several innings left in this ballgame.

A couple of weeks ago in my weekly posting I stated,

"I would be much more comfortable saying this is the final blast-off if silver were hitting $21.00 right now as gold is trading over $1,000-that would be confirmation in my book, and I'd be very, very bullish. Unfortunately, silver isn't leading the charge at this time and that is acceptable. It's certainly shown some good strength this whole year, but not quite the amount of strength I would expect if we were to see all this inflation pouring into the financial markets. Again, I still suspect that there's probably some more recessionary, deflationary, depression type of news coming."

Looks like the markets are responding to the downside-how far and how long is tough to state at this time.

Have you noticed that things really seem to be different now? Oh, in the past there were hints of troubled times a-coming, but doom-and-gloom was quite out of favor. Well, doom-and-gloom is now alive and well. In fact, it's hard not to pay serious attention to the growing legion of dire warnings. It's hard to ignore the facts! The government is out of control. The Fed is out of control. The dollar is a disaster that is already happening. The glimmer of hope, peddled by Wall Street and the government is based on lies ineptitudes and deceptions. Is the economy really better because fewer people are losing their jobs every month? Is the economy getting better because the government has borrowed the money to prop it up via cash for clunkers and cash for first time home buyers? Where is the REAL growth? Are our banks stronger just because they are allowed to hide their toxic assets off-balance sheet or to assign unrealistic values to their portfolio? Can we really "print our way to prosperity?" If it were that easy, why not just send every US citizen a million bucks to spend that could be created out of thin air, and then everyone would have a job and a new car and a new house. It sounds ridiculous doesn't it - and yet that's exactly what the government (on a smaller scale) is doing. All of those trillions of dollars that they are creating somehow are not creating new jobs or new wealth - unless you are one of the Wall Street favorite sons who gets all the money.

Be Prepared for the Worst

Forbes Magazine dated November 16, 2009

You know it's bad when a former presidential candidate, and respected member of the house, Ron Paul has this to say:

The large-scale government intervention in the economy is going to end badly.

Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.

Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate. We have seen the results of Alan Greenspan's excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.

This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve's balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.

Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.

The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.

Gold hits new all-time (non inflation adjusted) high today.

Yes, my friends, gold will pass $1100 shortly and gold is on the way to $1650 or much higher within the next year. Silver will soon look cheap at $20. It's all coming to play just as we have laid it out on these pages for the past several years. Do you think that you're too late? Will a double in the price of gold in the next 15 months be enough for you? If so, then by all means, it is NOT too late.

We should always try and keep things in proper perspective. With gold, it's hard to do. We think in terms of hours or days when we should think in terms of months or years. The short-term moves are hectic and confusing. The more we can step back, the clearer the picture becomes.

Let me ask you a question - without checking, what was the price of gold five weeks ago? What was the price one year ago? If the answer doesn't surprise you then I will be surprised. One year ago, the price of gold was $760.50. In the last year, gold is up $323.90, a gain of 42.56%. In the last five weeks gold is up - well, look at the chart below and see for yourself:

Yes, gold was priced at $990 just five weeks ago and has risen nearly $100 in a short period of time. Gold has gained almost 10% in just five weeks. Of course, the idiot, Jon Nadler who writes on behalf of Kitco will do his best to convince you that gold is NOT in a bull market. He has been downplaying gold for years. Gold, he told us, was too expensive at $400. It was too expensive at $500, at $600, at $700 and $800 and $900. It is still too expensive, according to Nadler, whose price projections have been wrong every year since I can remember. There are those who will try and find an excuse to "dis" gold at every opportunity. These people are either brain dead or they have an agenda, one that will cost you a great deal of money.

Last summer, I met and spoke to several people on Wall Street who expressed a curiosity in gold. The price at the time was around $916 an ounce. Several of them seemed to be genuinely interested in buying. I have yet to see a single order. They still think that the price is too high and will fall back. I guess a gain of $268 an ounce in five months isn't enough to spawn the desire to buy. Around that same time, I spend an afternoon with a relative who is a cardiologist, and his friend who is also a cardiologist. These are very likeable bright guys. I gave them an hour lecture on why they should buy gold at that time and afterwords, my relative told me that his friend said that gold was too expensive and it would fall back to $850. He is still waiting to see $850. Heck, he will never see $1000 again and he is waiting for $850.

The thing is - most professional people and certainly most of the Wall Street crowd have yet to discover gold. Oh, they may be aware of the rise in price but there is always an "excuse" why they need not buy it. It is either too expensive and they are waiting for it to pull back - or they missed the move and it's too late now. All bull markets eventually go through a third phase, the blow off phase where the price launches vertically and on a chart it looks like a rocket taking off, straight up! The bull market will not end until this blow off stage is reached. That said, is gold too expensive? Has it reached its peak? Once again, it's time to step back and look at the big picture.

What do you see in this 10 year gold chart? The red line is rising at pretty much a 45 degree angle since 2001. When you see gold rising at a 90 degree angle for a matter of months or years, then we can start talking about a topping out, but not now. This is a fabulous looking chart, and if were the chart of a stock that you owned, you would be thrilled. It represents nearly a decade of steady respectable growth. And you should remember that during this same time frame most of you lost a fortune in the stock market and the real estate market. The Dow today is where it was in 2001. The price of gold, on the other hand, that shunned metal of kings, has increased nearly three and one quarter times. But all the way up, so many of you have listened to the awful advice emanating from Wall Street or your money manager and you have found excuse after excuse as to why NOT to buy gold.

I often wonder how so many of you can read our newsletter week after week, year after year and still have yet to call us and buy gold. I'm talking about those of you who have the means to make a purchase. I know that I have given you mountains of accurate and timely information and presented it in a form that you can surly understand. Why am I failing you? What more can I say? Have I been wrong? Hardly! Has gold underperformed you other investments? Most likely not! Is it too late to buy? Absolutely not!

Yesterday, Richard Russell asked the question "Is it too late to buy gold?" His answer was "for those of us who, years ago, were buying one-ounce gold coins at $350 a piece, the current record gold price probably seems dangerously high. But to India and China the current price of gold doesn't appear high. I can't tell whether gold has entered its speculative third phase yet, but often buyers in the third phase make greater profits in a shorter time than the early buyers made while accumulating gold during the first and second "bargain" phases. With US national debt climbing into the trillions of dollars, who knows where gold is going?

In the US, "nobody" (and this includes most funds) owns gold. Somewhere ahead it will be considered mandatory to own some gold. When that happens, "Katie bar the door." I've often said that one of the most difficult things to do in investing is to sit through the greatest part of a primary bull market. To subscribers who bought gold early and still have their gold -- my congratulations."

What is it then? Do I have less credibility than Cramer or Kudlow or Abbey Joseph Cohen or your money manager? More than likely, yes! That's too bad, because chances are my advice would have made you a great deal more money than there advice over the past decade. That's not to say that I am smarter than they are, but I guess I don't have their agenda, their anti-gold bias.

Most of these people make a living by getting you to TRADE, to move in and out of this and that and they charge you a commission with each and every move. Or, they charge you a management fee and convince you that you need their services. I guess they are better salesman than I am, because you listen to them and find a litany of reasons why not to listen to me. I can proudly state that at this point, we don't have a single client who has lost money taking our advice, not one!

I know so many wealthy people who are very conservative by nature and keep their money locked up in bonds or (still) blue chip stocks. They do this not for profit but for safety. Times change, and that kind of thinking is obsolete and is going to cost them dearly. They sit back and watch their dollar portfolio grow and grow, but are oblivious to the reality that there ever increasing pile of dollars is buying less and less and less. That's because they do NOT understand money! Increasing your pile of money is not the same thing as increasing you wealth. Last night I was reading a wonderful article by Adrian Douglas on LeMetropole Café. Let me quote you some of what he had to say - it's important.

When observed over a long period of time gold preserves wealth because it maintains its buying power. When you purchase something there is an exchange; you give the seller something in return for the item you are purchasing. For example, if you were to pay directly with gold for a sack of rice then the price in ounces of gold would be determined by how scarce gold is compared to rice. Because gold is very scarce with respect to rice one ounce of gold will buy hundreds of ounces of rice. On the other hand large high quality diamonds are much more scarce than gold so you would have to give several ounces of gold to get one ounce of high quality, large diamonds. The various industries of the world have considerable inertia. One cannot suddenly double the production of rice overnight or the production of large, high quality diamonds, or bread, cheese, gasoline or anything else, and neither can the production of gold be doubled overnight. In fact the global production of almost all real things can only be changed by one or two percent each year and likewise the production of gold can only change by one or two percent each year. However, we don't pay for things with gold. Governments around the world have decreed that transactions should use the legal tender that they produce, the so called "fiat money." Now this is where the problem arises because, unlike the real things that you want to purchase, fiat money has no intrinsic mechanism for controlling the speed or magnitude of its production. If you are holding $1000 in fiat dollars and the Federal Reserve doubles the money supply overnight then shortly thereafter your $1000 will buy half as much rice, half as much bread, half as much cheese and so on, as it used to. If on the other hand you were holding one ounce of gold that was valued at $1000/oz then after the Federal Reserve has doubled the money supply your gold ounce will be worth $2000. This means you will be able to buy exactly the same amount of rice, bread, cheese or anything else as you could before.

Traditionally gold has been a way to preserve wealth not to become wealthier. The only ways in which the buying power of gold could increase are

1) The supply of all real goods, except for that of gold, increases dramatically

2) The supply of gold, and not that of other real goods, declines dramatically

Option 1 is impossible because we have already discussed that there is a certain inertia in any industry that prevents output from being significantly increased in a short period of time.

In two recent GATA dispatches entitled "How much imaginary gold has been sold?" I discussed what could essentially bring about option 2.

http://www.gata.org/node/7908

http://www.gata.org/node/7911

In those articles I looked at the gold market from an inflation point of view and from analysis of trading on the London LBMA OTC market and I infer that there are likely 50,000 tonnes of gold that have been sold that do not exist. This is possible when trading is via unallocated accounts and investors do not ask for delivery but instead trust that the gold is in fact safely in a vault. Once investors demand gold from the OTC and it is discovered that the market is run on a less than 100% reserve basis then the gold price will increase dramatically and it will have nothing to do with the money supply. It will be as if 50,000 tonnes of gold has disappeared...which it will have, except that gold has been priced up until now as if it really did exist. Over the last year investors have come to realize that the scarcest commodities in the world are "honesty" and "trust." As a result large hedge funds are investing in physical gold, and not paper promises for gold, sovereign nations are asking for repatriation of their gold from New York and London. There are the early signs that we are starting to see the "run on the gold bank." So If I am right the purchasing power of gold will go up and investors can become wealthier holding gold instead of just preserving their wealth as has been the time honored function of gold.

The way to become much, much wealthier is to have many more ounces of gold (or silver). Your wealth needs to be measured in ounces not in fiat money. How wealthy would you be if you receive 1 trillion Zimbabwe dollars for an ounce of gold?

November 3, 2009. Mark it down. Chances are it is the launch date for the final stage of the greatest bull market in your lifetime. Will you sit idly by and watch or will you participate?

On November 3, three unusual things happened. First, the price of gold exploded while THE DOLLAR ROSE. Gold rarely ever rises unless the dollar is falling. Most analysts "explain" the rise or fall of gold to the rise or fall of the dollar. Dollar up - gold down. Not yesterday. Gold had one of its biggest single day performances as the dollar rose too. Next, gold rose around 3% and gold is NEVER allowed to rise more than 2% in a single day. Trust me, this is BIG news. And finally, the Fed meets today and gold almost always is taken DOWN right before a Fed meeting. It certainly is not allowed to strut its stuff like it did yesterday. There even seems to be some carryover. I am writing this at 4:00 A.M. Eastern time on Tuesday and as of now, gold is UP another $7.13 to $1091.90 with no end in sight. Will gold actually hit my TARGET of at least $1100 by the end of the year? It may well, even before I am finished writing this newsletter. It looks like my upper end estimate of $1250 by the end of the year is in sight.

I am so happy for those of you who have taken our advice, against all the negatives thrown your way from Wall Street and the media. This is what we have been waiting for, isn't it! How about giving credit where credit is due. Four months ago, Jim Sinclair, who I quote in every issue, started a "countdown," which incidentally ends on Friday. Well, he was wrong! He was 3 days early! I don't know how he does it, but he does it! Here is what Sinclair wrote last Tuesday evening. Today's Comments On Gold:

1. Is there any question left out there about gold going to $1650?

2. Do you really believe the shorts can sit on the gold shares as financing windows open up and gold starts its march past my estimates and on to Alf's numbers ($3000 - $5000)?

3. Closing your derivative book now is not good news. It is a public admission that you are an ass.

4. On the countdown - not too shabby so far.

5. To the hoard of whiners from $248 up, next time I reserve the right to yell at you.

So what could possibly have caused the launch this week? Here is what they are saying at the LeMetropole Café

(www.lemetropolecafe.com)

There was immediately no doubt in my mind the revelation last night that India took 200 tonnes off the hands of the IMF over the last two weeks in October was a seminal bullish event for the gold market. What the real story is behind this "sale of gold" is another matter. But, for now, let's take the announcement at face value, for no matter what the real story is, the announcement is extraordinarily bullish. WHY?

*The gold bears, which have been most of Planet Wall Street and most in the mainstream gold world, were counting on IMF gold sale supply to suppress the price. That illusion has now been crushed.

*A COUNTRY was willing to buy gold IN MASSIVE SIZE between $1027 and $1065. The accumulation of gold at prices well above $1,000 per ounce is an enormous psychological endorsement for much higher prices in the near future. It also projects that the $1,000+ area is now the new floor for gold. Investors will begin to think how do I get in this play versus I don't want to be in gold because it is too expensive.

*As oft-mentioned here, central bankers are "sheeples." They are risk adverse folks who tend to look at markets as a herd. The Gold Cartel made it fashionable to dump gold, so many of them did ... at THE BOTTOM of course. All to foster The Gold Cartel's price suppression scheme. It was fashionable to be seen dumping gold back then. Fashions change and it surely has for gold. The in crowd fashionable thing to do now is to be seen BUYING gold ... a la the Chinese, Russians, and Indians, etc.

*The ECB gold sales have slowed to a wimpy trickle or nothing. The Gold Cartel needs their selling to fill a huge/supply demand gap ... met now by The Gold Cartel's shrinking available supply. This latest IMF/Indian announcement is surely going to affect other central bankers who will not want to be seen selling gold. If anything, it is going to encourage a few more to BUY. This means The Gold Cartel is in the deepest of trouble, or as I mentioned the other day, "sucking wind!"

Central banks have been sellers for the past decade+. However, they have now become net buyers, led by China and Russia, both top global gold producers. Thus, it is in their special interest to accumulate gold instead of depreciating dollars...

So India gets 200 tons of gold? I don't even know where to start with this one. We all expected China would be the buyer, and in fact China may yet step up to buy the remaining half of the gold scheduled for sale. But China was looking for a better deal and suggested they would buy the gold if it was presented at a bargain price. India stepped in and scooped the lot at market value.

So we know China is still looking to buy a large amount of gold, and they will have to become more aggressive to get it. The Russians are also buyers. Could we be seeing the early stages of a bidding war?

Lets also keep in mind that a lot of the spin by the Cartel is suggesting that India suffers from sticker shock and demand is lower for gold now that its above $1000. The action by the Indian central bank clearly demonstrates that they believe gold is cheap and this message will not be lost on the entire nation that is historically the largest gold buyer on earth. And wasn't India considered a financial basket-case as recently as the 80s? How things have changed that this nation can now sling $6.7 Billion on a gold purchase. This is just another hint that economic leadership has been passed from the west to the east.

Let's keep in mind this is central bank buying. We know that China is encouraging its people to buy gold, and there are new outlets for gold sales in the Mideast, and even department stores in the UK are now offering gold. Investment demand is climbing as some of the smartest people in the fund universe are redirecting their capital into physical bullion. And the hedging strategies that have blown up for gold producers are leading to new buying to cover those hedges, further adding competition to bid the market higher. All of this at a time when the net outstanding short position on the COMEX is at high levels and all of those positions are currently underwater.

MIDAS has been one of the few out there pounding on the table that the key to the gold market is NOT what the dollar does. The KEY is the ability of the physical market buyers to overpower The Gold Cartel. This is exactly what you saw today.

The Americans may be a little frustrated with gold's performance these last few weeks, but not so for those in central Europe. For while Gold is yet to take out its highs of circa $1072 in US Dollar terms these last few weeks, it is currently trading at multi-month highs in Euro terms...

Turning to the weekly chart of Euro Gold the RSI analysis looks very positive. Should it break its current declining trend line then history suggests a multi-month advance should follow!

As for gold in Sterling terms, again current price action looks most encouraging. Declining RSI has been broken and now battling with resistance at £650, which when/if overcome should set it up to challenge all time highs.

As I have been writing about for some time the physical market has smoke pouring out of it.

Yesterday Barrick announced an accelerated buy back of its hedges and actually bought back one million ounces in October when the gold price rose 3.2%. This is essentially panic short covering

Then India announced yesterday they are buying 200 tons and may be interested in more of the IMF gold sale. But the IMF has a gold repository in India. Could it be that India has been part of the cartel's scheme to suppress prices? Could India actually be covering a short position through this 200 ton purchase?

Then there is Anglogold who also announced yesterday that they covered approximately 800,000 ounces of its hedges bringing its book down to 4.3 million ounces.

http://www.marketwire.com/press-release/Anglogold-Ashanti-NYSE-AU-1068817.html

I believe there is a run on the bank of the gold cartel and it is NOT at the COMEX. It is in the physical OTC market in London that trades 90% of the world's physical gold trades. This cannot be fixed by selling paper promises. This can only be fixed by supplying physical gold, and I don't believe they have it. In fact I estimate they be missing 50,000 tons, a mere 25 years of global production!

Frame today's gold chart and put it on the wall. Today the gold market changed, maybe forever. The cabal couldn't contain gold at 2%. In fact we closed near the $1,085 area, (3%) which I earlier mentioned as crucial to smashing the 2% rule. The world now knows something is different. November 3rd, 2009 may be the day best remembered for the true end of cartel control. The cretins will no doubt keep trying, but for the cartel the hound dogs of gold hell just got out. Only fools would dispute the path of least resistance for gold is now decidedly up. WAY up.

Richard Russell Comments on Tuesday's monster gold move

A major shocker! Without any haggling India took the gold at a near-record price. This could be the beginning of a panic for gold "at any price." China, Russia and Brazil are rumored to be eager to buy the rest of the IMF that's gold for sale. How long can it be before the world follows in India's and China's footsteps? Do you want to know where the wealth and the power are heading for? Then follow the real money, and the real money is, and always has been -- gold. Note that Dec. gold closed just three dollars off its high. There was very little profit taking on today's dramatic surge -- bullish action.

November 4, 2009 -- I'm going to start today's site with what I call "My two charts of the month." CEW is made up of a basket of emerging market currencies. The chart shows the ratio of GLD to CEW. Gold is now far outperforming the emerging market currencies. In fact, gold is out-performing almost every currency on the planet, including the dollar, the Aussie dollar, the Canadian dollar, the Euro, and the Brazilian real. Central bankers who have loaded their banks (reserves) with fiat "junk" currencies (i.e. the dollar, the euro, the pound sterling, the yen) may now be forced to swap their junk for real money -- gold. The same is true for holders of dollars the world over. The Chinese who hold the largest monetary reserves in the world (well over $2 trillion) don't want any more junk currency, they want the real thing -- gold.

You may remember that I said Bernanke can flood the system with Fed Notes until the bond market says it "can't." The chart below shows the 30 year T-bond. What I see here is a head-and-shoulders top in the bond. The horizontal blue line identified the support. The bond broke support for two days, then rallied back -- and today closed below support again. I'd say that if the bond closes below 118, that would be the warning that the Fed is wrecking the bond market and that interest rates are heading up.

Monty Guild comments on Tuesday's gold move on Sinclair's (www.JSMineset.com)

News overnight that India was going to stand for half of the proposed IMF gold sale sent shock waves through the gold bear camp resulting in a near panic among trapped shorts. Their buying sent prices ripping through overhead resistance just above the $1,070 level setting off a cascade of pre-placed buy stops that propelled gold above $1,080, a mere $20 from psychologically significant $1,100.

By the way, let me take a minute here to give a Hat Tip to Jim who has been saying for YEARS (and received a fair amount of trash talk for so doing), that any gold sold under an IMF arrangement would never see the light of day as Central Banks would gobble it all up. That is precisely what India did and I am convinced that China is also looking to do. As a matter of fact, India probably got the jump on China because they knew that they were lurking in the background looking to buy.

How many times over the last few years did we hear talk about IMF gold sales just about the time gold was threatening to put in a technical break out on the price charts. The news would cause a near panic among ignorant analysts and talking heads who would promptly advise their clients to dump their long positions playing right into the hands of those who originally trotted out the story. Let's hope that after today, gold longs are no longer the least bit troubled by any further chatter concerning IMF gold sales. Do not forget, that the Central Banks of the rising powerhouse economies of the East are looking to diversify their foreign reserves and need large block sales of gold at a preset price in order to facilitate an order of the magnitude that they are placing. Try obtaining 200 tons of gold on the open market! That is why they welcome such large sized gold sales.

What makes the surge higher in gold even more impressive is that it came in the face of a weaker Euro, a stronger Dollar, and most particularly, a dropping equity market. The net result of such occurrences is that gold moves higher in terms of nearly all of the major foreign currencies. Gold priced in terms of Euros is at its best level since March of this year with British Pound priced gold back near the 650 level.

Based on today's price action, one would have to say that the price of gold has consolidated long enough above $1,000 that the market has now come to terms with a permanently higher gold price of 4 figures. Without wanting to be premature, gold under $1,000 would undoubtedly be viewed now as a bargain. That is why markets that move higher, consolidate, move higher, consolidate, etc, are sustainable bull runs. The run and pause effect gives the industry TIME to become acclimated to the new, higher price level whereas markets that launch into parabolic type blow offs, while spectacular, are generally unsustainable and short lived in the broader scheme of things. They come crashing back to earth as quickly, if not faster, than they went up.

THE NEXT U.S. FINANCIAL CRISIS IS ALREADY ON THE WAY.

It will be an inflationary crisis, and it will commence about 2012.

The U.S. Government has guaranteed banks and the housing market. It has borrowed hundreds of billions of dollars to strengthen the economy at the same time tax revenues are collapsing. Social Security and health care financing will add to the burdens. The banking crisis will probably turn into a long-term government debt crisis.

The United States has been living beyond its means, over-borrowing, and engaging in other irrational, unwise, and destructive behaviors. These behaviors have been encouraged and abetted by the Congress, former Federal Reserve Chairman Greenspan, and both Republican and Democratic administrations. A less powerful country, perhaps one which was not providing a military shield for much of the world, would have seen their currency and debt markets subjected to immense scrutiny and widespread suspicion and may have been forced to default long ago.

History has demonstrated two likely outcomes for the situation in which the U.S. currently finds itself. The first is that bond and currency market speculators make default the inevitable outcome. The second is that they devalue their currency substantially in order to pay back their debts in a diminished currency. The day approaches when the U.S. dollar will meet the fate that so many other currencies have faced over the millennia...it will suffer a substantial decline and inflation will resurge. This will probably occur no later than the end of 2012.

Bill Murphy discusses Tuesday's events

(www.lemetropole.com)

What I think is directly ahead is no laughing matter. Many things that we take for granted will be no more, including the ability to protect yourself financially. As long as you have enough "cash in the bank" that will spend until our "holiday" and some spending money on hand I don't think you have a problem as long as you can sit on your metals assets through whatever happens. I just can't see trying to trade or time this though a downdraft may occur, the bottom line will be "how many ounces and shares do you have?" as a measure of wealth when the smoke clears. I have given this MUCH thought and will continue to do so but trying to time this will be difficult and being even 1 second too late is the equivalent of a lifetime too late! Once the bells toll, the ability to protect yourself will be history.

Hedge manager Sprott sees trouble when easing ends. US government is new "dead man walking"

When quantitative easing by central banks ends, the world economy may slip back into trouble, Canadian hedge fund manager Eric Sprott warned recently.

Toronto-based Sprott called Citigroup, Fannie Mae, Freddie Mac, and General Motors "dead men walking" in late 2007. Last week he said the U.S. government is the new dead man walking, partly because it may struggle to keep borrowing enough money if the Federal Reserve stops buying Treasury bonds.

Sprott's Canadian hedge fund, Sprott Hedge Fund LP, is up more than 400% since inception in 2000 as it rode a surge in gold prices and shares of gold miners and other raw materials companies.

Bank bailouts and other dramatic efforts by central banks have stopped the world "going into the abyss," Sprott said during a presentation at the Value Investing Congress in New York.

The "granddaddy" of all those bailout efforts is quantitative easing, in which central banks in the US and the UK especially buy government bonds to keep interest rates low, Sprott said.

Here are some of Sprott's comments taken from his excellent report:

We do not mean to pick on the United States alone. The proclivity to overspend has spread to most governments throughout the developed world. According to recent estimates, the countries that make up the G20 will face a combined budget deficit of 10.2% of GDP in 2009, the biggest since World War II. The US leads this 'rogue's gallery' of government spending on a percentage of GDP basis at 13.5%, followed closely by Britain and Japan at 11.6% and 10.3%, respectively. If governments choose to continue down this path, it must be questioned where all their funding will come from, not to mention the impact it will have on their respective currencies.

Hemingway wrote that a man goes broke "slowly, then all at once". We believe the same sentiment can be applied to governments. If fiscal abuses continue unabated, confidence eventually erodes until investors just stop lending. It happened famously to Lehman in September 2008, and it is happening now to the US government. The Q2 Flow of Funds Report published by the Federal Reserve revealed that the Federal Reserve purchased as much as half of the newly issued treasuries in the second quarter.14 This means that the Federal Reserve isn't merely supporting the market for US treasuries... it is the market for US treasuries. Printing new dollars to support an almost $9 trillion dollar budget deficit that stretches out over the next ten years puts the US on the road to ruin, and the major governments of the world have noticed and are taking action.

How could they not after all? Most of these countries have historically supported their own currencies by stockpiling an average of 63% of their foreign currency holdings in US dollars. Recently, however, it was revealed that the US dollar now makes up only 37% of new foreign reserve holdings. There is also little doubt that the USD is now a hot topic in central bank circles. A recent article in Britain's "Independent" revealed secret meetings held between the Arab states, China, Russia, Japan and France to replace US dollar transactions for oil with transactions made in a basket of major currencies - including the euro, the yen and the Chinese yuan. Officials in several of the participating countries denied the talks or any knowledge of them, but that didn't stop the US dollar from selling off when the story broke. We interpret these actions by foreign governments to be evidence of this erosion of confidence. We don't know when this will translate into a failed auction for US debt, a currency crisis or other significant event, but the signs that the world is losing economic confidence in the US government are becoming more pronounced every week.

So what can be done to avert catastrophe? As Will Rogers' once said, "if you find yourself in a hole, the first thing to do is stop digging" Put simply, the US government must reduce its spending. It is the only effective way to directly address its unfunded obligation issues. Closing Social Security to new entrants and using vouchers to reduce the cost of Medicare, as recommended by Kotlikoff, are economically valid options that should be considered. Unfortunately, neither Congress nor the President have shown a willingness to heed Will's advice thus far.

We believe the US government's current trajectory presents one of the greatest macro-economic risks at play today. The Federal Reserve and the US government have assumed the toxic financial trash that brought the banking system to its knees a year ago. By monetizing debt to support their budget deficit and 'save the system', both entities have chosen to walk a well worn path traveled by so many governments before them. Like dead men walking, the US government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors or Citigroup, however, there is no one left to grant a reprieve

Pension Fund Manager: Fearing Inflation, Institutions Will Turn to Gold

The director of global research at America's seventh largest public pension is predicting that many of his peers will turn to gold to hedge against currency devaluation and inflation.

At least one pension fund is predicting that retirement systems will buy increasing amounts of gold in order to protect themselves against currency fluctuations and inflation.

Shayne McGuire, Director of Global Research at the $95 billion Teachers' Retirement System of Texas, recently told Bloomberg that he expects a sea change in gold investing at large institutional investors worldwide. Accordingly, Texas Teachers' has launched an internally managed gold fund with $250 million behind it.

"I think the largest institutions like our own are realizing that we barely own any," McGuire told Bloomberg. "The same thing applies to most of the pension funds that manage trillions of dollars in world wealth."

McGuire's-and, it must be said, many others'-interest in gold stems from a wish to hedge against a fall in the U.S. dollar, as well as worries about inflation following government actions to prop up U.S. markets, which injected nearly $2 trillion into the economy. The total U.S. marketable debt now stands at $7 trillion, an increase of 22% over 2008 figures.

"I don't think the question really is what is gold worth, but what are currencies not worth?" McGuire is quoted as saying. "Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing."

Paul Tudor Jones is bullish on gold

Paul T. Jones II of Tudor Investment Corporation has approximately $11.57B under management and has earned $1.22B year-to-date in 2009. Mr. Jones is a serious money manager who makes serious money. In the 2009 Q3 report he wrote, I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.

The economic and political comparisons to the late 1970's are too numerous to ignore. And as such gold is at the center of our thinking as a store of value during a period of potentially large and persistent global portfolio shifts. The temptation to directly, or indirectly, monetize rising and persistent fiscal deficits globally means gold could have a bid for the foreseeable future - compared to the long run average gold appears to be cheap. Certainly it is cheaper in terms of global M2 than it was in the 1970's and 1980's. In our view gold's value should increase as its scarcity relative to printed currencies increases.

It is also important to view gold in terms of supply and demand. Despite a three-fold increase in worldwide metal exploration expenditures, new mine production has remained stagnant at 80 million troy ounces over the last decade. As a result any incremental demand for gold must be met through sales from current owners. They just aren't making that much of it anymore.

The historical drivers of investment demand for gold seem to have simultaneously come together in 2009 and, in our opinion, will continue to stimulate high levels of demand on a sustained basis going forward.

During the second half of 2009 the official sector will become a net buyer of gold. The represents a remarkable change of direction for a market that has been accustomed to absorbing substantial volumes of gold sold by central banks over the last decade.

Total international reserve assets have quadrupled over the last decade, primarily from the accumulation of global money. However, the percent of total reserve assets held in gold has declined markedly.

Just moving [the G20 banks not included in the G7] to a 10% weight would require the purchase of 370 million troy ounces. That represents 20% of current, non-official, above ground supplies.

Our proprietary econometric model, which evaluates the impacts of inflation, M2 growth, and real rates on the price of gold, suggests - under our baseline macro scenario - that gold is 20% undervalued over the next 24 months. Our modeling work highlights the importance of real rates and inflation to the price of gold.

Mr. Jones is not alone with his enthusiasm. He is joined by John Paulson with over $4B in gold investments and David Einhorn of Greenlight Capital who understands the risks of the gold ETF (GLD) and reported to shareholders "We made modest changes to our macro hedges. First, after extensive investigation we switched our entire GLD exchanged traded fund position into physical gold."

Mr. Jones' valuation of gold is $1,040. While Mr. Jones is not a 'gold bug' he certainly sees the value of owning gold now. Mr. Jones is, like most of us, merely on the prowl for a good investment. But there is no market more out of balance in the history of the world than the gold market.

What Has Obama Done For You So Far?

Remarks by former Vice President Dick Cheney

Center for Security Policy
As prepared for delivery
October 21, 2009

Thank you all very much. It’s a pleasure to be here, and especially to receive the Keeper of the Flame Award in the company of so many good friends.

I’m told that among those you’ve recognized before me was my friend Don Rumsfeld. I don’t mind that a bit. It fits something of a pattern. In a career that includes being chief of staff, congressman, and secretary of defense, I haven’t had much that Don didn’t get first. But truth be told, any award once conferred on Donald Rumsfeld carries extra luster, and I am very proud to see my name added to such a distinguished list.

To Frank Gaffney and all the supporters of Center for Security Policy, I thank you for this honor. And I thank you for the great energy and high intelligence you bring to as vital a cause as there is – the advance of freedom and the uncompromising defense of the United States.

Most anyone who is given responsibility in matters of national security quickly comes to appreciate the commitments and structures put in place by others who came before. You deploy a military force that was planned and funded by your predecessors. You inherit relationships with partners and obligations to allies that were first undertaken years and even generations earlier. With the authority you hold for a little while, you have great freedom of action. And whatever course you follow, the essential thing is always to keep commitments, and to leave no doubts about the credibility of your country’s word.

So among my other concerns about the drift of events under the present administration, I consider the abandonment of missile defense in Eastern Europe to be a strategic blunder and a breach of good faith.

It is certainly not a model of diplomacy when the leaders of Poland and the Czech Republic are informed of such a decision at the last minute in midnight phone calls. It took a long time and lot of political courage in those countries to arrange for our interceptor system in Poland and the radar system in the Czech Republic. Our Polish and Czech friends are entitled to wonder how strategic plans and promises years in the making could be dissolved, just like that – with apparently little, if any, consultation. Seventy years to the day after the Soviets invaded Poland, it was an odd way to mark the occasion.

You hardly have to go back to 1939 to understand why these countries desire – and thought they had – a close and trusting relationship with the United States. Only last year, the Russian Army moved into Georgia, under the orders of a man who regards the collapse of the Soviet Union as the greatest geopolitical disaster of the 20th century. Anybody who has spent much time in that part of the world knows what Vladimir Putin is up to. And those who try placating him, by conceding ground and accommodating his wishes, will get nothing in return but more trouble.

What did the Obama Administration get from Russia for its abandonment of Poland and the Czech Republic, and for its famous “Reset” button? Another deeply flawed election and continued Russian opposition to sanctioning Iran for its pursuit of nuclear weapons.

In the short of it, President Obama’s cancellation of America’s agreements with the Polish and Czech governments was a serious blow to the hopes and aspirations of millions of Europeans. For twenty years, these peoples have done nothing but strive to move closer to us, and to gain the opportunities and security that America offered. These are faithful friends and NATO allies, and they deserve better. The impact of making two NATO allies walk the plank won’t be felt only in Europe. Our friends throughout the world are watching and wondering whether America will abandon them as well.

Big events turn on the credibility of the United States – doing what we said we would do, and always defending our fundamental security interests. In that category belong the ongoing missions in Iraq and Afghanistan, and the need to counter the nuclear ambitions of the current regime in Iran.

Candidate Obama declared last year that he would be willing to sit down with Iran’s leader without preconditions. As President, he has committed America to an Iran strategy that seems to treat engagement as an objective rather than a tactic. Time and time again, he has outstretched his hand to the Islamic Republic’s authoritarian leaders, and all the while Iran has continued to provide lethal support to extremists and terrorists who are killing American soldiers inIraq and Afghanistan. The Islamic Republic continues to provide support to extremists in Syria, Lebanon, and the Palestinian territories. Meanwhile, the regime continues to spin centrifuges and test missiles. And these are just the activities we know about.

I have long been skeptical of engagement with the current regime in Tehran, but even Iran experts who previously advocated for engagement have changed their tune since the rigged elections this past June and the brutal suppression of Iran’s democratic protestors. The administration clearly missed an opportunity to stand with Iran’s democrats, whose popular protests represent the greatest challenge to the Islamic Republic since its founding in 1979. Instead, the President has been largely silent about the violent crackdown on Iran’s protestors, and has moved blindly forward to engage Iran’s authoritarian regime. Unless the Islamic Republic fears real consequences from the United Statesand the international community, it is hard to see how diplomacy will work.

Next door in Iraq, it is vitally important that President Obama, in his rush to withdraw troops, not undermine the progress we’ve made in recent years. Prime Minister Maliki met yesterday with President Obama, who began his press availability with an extended comment about Afghanistan. When he finally got around to talking about Iraq, he told the media that he reiterated to Maliki his intention to remove all U.S. troops from Iraq. Former President Bush’s bold decision to change strategy in Iraq and surge U.S. forces there set the stage for success in that country. Iraq has the potential to be a strong, democratic ally in the war on terrorism, and an example of economic and democratic reform in the heart of the Middle East.

The Obama Administration has an obligation to protect this young democracy and build on the strategic success we have achieved in Iraq.

We should all be concerned as well with the direction of policy on Afghanistan. For quite a while, the cause of our military in that country went pretty much unquestioned, even on the left. The effort was routinely praised by way of contrast to Iraq, which many wrote off as a failure until the surge proved them wrong. Now suddenly – and despite our success in Iraq – we’re hearing a drumbeat of defeatism over Afghanistan. These criticisms carry the same air of hopelessness, they offer the same short-sighted arguments for walking away, and they should be summarily rejected for the same reasons of national security.

Having announced his Afghanistan strategy last March, President Obama now seems afraid to make a decision, and unable to provide his commander on the ground with the troops he needs to complete his mission.

President Obama has said he understands the stakes for America. When he announced his new strategy he couched the need to succeed in the starkest possible terms, saying, quote, “If the Afghan government falls to the Taliban – or allows al-Qaeda to go unchallenged – that country will again be a base for terrorists who want to kill as many of our people as they possibly can.” End quote.

Five months later, in August of this year, speaking at the VFW, the President made a promise to America’s armed forces. “I will give you a clear mission,” he said, “defined goals, and the equipment and support you need to get the job done. That’s my commitment to you.”

It’s time for President Obama to make good on his promise. The White House must stop dithering while America’s armed forces are in danger.

Make no mistake, signals of indecision out of Washington hurt our allies and embolden our adversaries. Waffling, while our troops on the ground face an emboldened enemy, endangers them and hurts our cause.

Recently, President Obama’s advisors have decided that it’s easier to blame the Bush Administration than support our troops. This weekend they leveled a charge that cannot go unanswered. The President’s chief of staff claimed that the Bush Administration hadn’t asked any tough questions about Afghanistan, and he complained that the Obama Administration had to start from scratch to put together a strategy.

In the fall of 2008, fully aware of the need to meet new challenges being posed by the Taliban, we dug into every aspect of Afghanistan policy, assembling a team that traveled to Pakistan and Afghanistan, reviewing options and recommendations, and briefing President-elect Obama’s team. They asked us not to announce our findings publicly, and we agreed, giving them the benefit of our work and the benefit of the doubt. The new strategy they embraced in March, with a focus on counterinsurgency and an increase in the numbers of troops, bears a striking resemblance to the strategy we passed to them. They made a decision – a good one, I think – and sent a commander into the field to implement it.  Now they seem to be pulling back and blaming others for their failure to implement the strategy they embraced. It’s time for President Obama to do what it takes to win a war he has repeatedly and rightly called a war of necessity.

It’s worth recalling that we were engaged in Afghanistan in the 1980’s, supporting the Mujahadeen against the Soviets. That was a successful policy, but then we pretty much put Afghanistan out of our minds. While no one was watching, what followed was a civil war, the takeover by the Taliban, and the rise of bin Laden and al-Qaeda. All of that set in motion the events of 9/11. When we deployed forces eight years ago this month, it was to make sure Afghanistan would never again be a training ground for the killing of Americans. Saving untold thousands of lives is still the business at hand in this fight. And the success of our mission in Afghanistan is not only essential, it is entirely achievable with enough troops and enough political courage.

Then there’s the matter of how to handle the terrorists we capture in this ongoing war. Some of them know things that, if shared, can save a good many innocent lives. When we faced that problem in the days and years after 9/11, we made some basic decisions. We understood that organized terrorism is not just a law-enforcement issue, but a strategic threat to the United States.

At every turn, we understood as well that the safety of the country required collecting information known only to the worst of the terrorists. We had a lot of blind spots – and that’s an awful thing, especially in wartime. With many thousands of lives potentially in the balance, we didn’t think it made sense to let the terrorists answer questions in their own good time, if they answered them at all.

The intelligence professionals who got the answers we needed from terrorists had limited time, limited options, and careful legal guidance. They got the baddest actors we picked up to reveal things they really didn’t want to share. In the case of Khalid Sheik Muhammed, by the time it was over he was not was not only talking, he was practically conducting a seminar, complete with chalkboards and charts. It turned out he had a professorial side, and our guys didn’t mind at all if classes ran long. At some point, the mastermind of 9/11 became an expansive briefer on the operations and plans of al-Qaeda. It happened in the course of enhanced interrogations. All the evidence, and common sense as well, tells us why he started to talk.

The debate over intelligence gathering in the seven years after 9/11 involves much more than historical accuracy. What we’re really debating are the means and resolve to protect this country over the next few years, and long after that. Terrorists and their state sponsors must be held accountable, and America must remain on the offensive against them. We got it right after 9/11. And our government needs to keep getting it right, year after year, president after president, until the danger is finally overcome.

Our administration always faced its share of criticism, and from some quarters it was always intense. That was especially so in the later years of our term, when the dangers were as serious as ever, but the sense of general alarm after 9/11 was a fading memory. Part of our responsibility, as we saw it, was not to forget the terrible harm that had been done to America … and not to let 9/11 become the prelude to something much bigger and far worse.

Eight years into the effort, one thing we know is that the enemy has spent most of this time on the defensive – and every attempt to strike inside the United States has failed. So you would think that our successors would be going to the intelligence community saying, “How did you did you do it? What were the keys to preventing another attack over that period of time?”

Instead, they’ve chosen a different path entirely – giving in to the angry left, slandering people who did a hard job well, and demagoguing an issue more serious than any other they’ll face in these four years. No one knows just where that path will lead, but I can promise you this: There will always be plenty of us willing to stand up for the policies and the people that have kept this country safe.

On the political left, it will still be asserted that tough interrogations did no good, because this is an article of faith for them, and actual evidence is unwelcome and disregarded. President Obama himself has ruled these methods out, and when he last addressed the subject he filled the air with vague and useless platitudes. His preferred device is to suggest that we could have gotten the same information by other means. We’re invited to think so. But this ignores the hard, inconvenient truth that we did try other means and techniques to elicit information from Khalid Sheikh Muhammed and other al-Qaeda operatives, only turning to enhanced techniques when we failed to produce the actionable intelligence we knew they were withholding. In fact, our intelligence professionals, in urgent circumstances with the highest of stakes, obtained specific information, prevented specific attacks, and saved American lives.

In short, to call enhanced interrogation a program of torture is not only to disregard the program’s legal underpinnings and safeguards. Such accusations are a libel against dedicated professionals who acted honorably and well, in our country’s name and in our country’s cause. What’s more, to completely rule out enhanced interrogation in the future, in favor of half-measures, is unwise in the extreme. In the fight against terrorism, there is no middle ground, and half-measures keep you half exposed.

For all that we’ve lost in this conflict, the United States has never lost its moral bearings – and least of all can that be said of our armed forces and intelligence personnel. They have done right, they have made our country safer, and a lot of Americans are alive today because of them.

Last January 20th, our successors in office were given the highest honors that the voters of this country can give any two citizens. Along with that, George W. Bush and I handed the new president and vice president both a record of success in the war on terror, and the policies to continue that record and ultimately prevail. We had been the decision makers, but those seven years, four months, and nine days without another 9/11 or worse, were a combined achievement: a credit to all who serve in the defense of America, including some of the finest people I’ve ever met.

What the present administration does with those policies is their call to make, and will become a measure of their own record. But I will tell you straight that I am not encouraged when intelligence officers who acted in the service of this country find themselves hounded with a zeal that should be reserved forAmerica’s enemies. And it certainly is not a good sign when the Justice Department is set on a political mission to discredit, disbar, or otherwise persecute the very people who helped protect our nation in the years after 9/11.

There are policy differences, and then there are affronts that have to be answered every time without equivocation, and this is one of them. We cannot protect this country by putting politics over security, and turning the guns on our own guys.

We cannot hope to win a war by talking down our country and those who do its hardest work – the men and women of our military and intelligence services. They are, after all, the true keepers of the flame.

Thank you very much.