-- Posted 19 March, 2004 | | Source: SilverSeek.com
“It does not take a majority to prevail…but rather an irate, tireless minority,
keen on setting brushfires of freedom in the minds of men.”
~ Samuel Adams
“…an irate, tireless minority…keen on setting brushfires of freedom in the minds of men.” I guess I would fall into that category, as would many hundreds and thousands of others whose lives are consumed by this passion. Most of the ones that we all know spend hours hunched over their keyboards bringing us the latest gold and silver news on an hourly, daily, or weekly basis.
I didn’t start out as a ‘freedom fighter’, but if one believes that gold and silver are the only true forms of money…and that Alan Greenspan meant what he said in Ayn Rand’s book back in 1967…then that would make all of us freedom fighters in one form or another, whether we want to be or not. Jay Taylor pointed this out to me a couple of years ago, and although I never gave it too much serious thought at the time, I’d have to agree with him now.
And don’t think for a moment that because you don’t live in the United States, and don’t have a Constitution that proclaims gold and silver to be the only true forms of payment of all debts, that you are off the hook. Since you (and I) all live under governments that have fiat currencies, we are all slaves together. It’s just that in the United States it happens to be written down in their most sacred of national documents. Good men and women died so that it would be so.
Talking about dying for your cause, let’s see (besides the founding fathers of the United States back in the 1700s) who else has paid either a heavy price, or the ultimate sacrifice, for their beliefs in the last 100 years. First would be Mahatma Gandhi, followed by Nelson Mandela. Both these figures are 20th century titans of freedom that need no further introduction or explanation. These two names are synonymous with the word. Look it up in your dictionary and you’ll find their pictures…if you know what I mean.
Then there’s John Kennedy and his famous brother…killed by ‘the powers that be’ because they were actually going to do something for the people. Then there was Martin Luther King Jr….shot dead by a sniper’s bullet… again under mysterious circumstances. America just celebrated him on January 19th. Once again, nothing has to be said…everyone knows the stories.
But there are other stories about other people that few in the world know about, and I’m going to tell one today. Not in my words…but in his. I must admit that it set me back on my heels when I read it…as it will you. From that point on, I’ve had to reassess what the word “freedom fighter” really meant…at least to me. And if you consider yourself in this august group, then you must prepare yourself for a paradigm shift in your thinking.
Most of us have had at least one ‘crossing the Rubicon’ or some such experience in our lives that has changed everything…and when that event happens, we can never go back to what once was.
This story is like that.
It all started out innocently enough. My home page is Dave Morgan’s web site www.silver-investor.com. When I power up the computer to see what’s happening, I want the gold and silver price in my face immediately. Besides which, it’s a good site, and I’m a huge silver fan…plus I’m a subscriber to his most excellent newsletter.
His latest (free) offering under “Essay of the Month” was a piece entitled “The Cold North Wind” written by Franklin Sanders. As Dave says in his preamble to the essay “Franklin is famous for his work in the book "The Silver Bonanza" and also his newsletter "The Moneychanger." We encourage all readers to visit his website at http://www.the-moneychanger.com/, and inquire about his newsletter and book.”
So do I.
I’d heard of Franklin Sanders off and on over the last number of years, but had no idea of where he hung his hat. He must have been making every attempt to keep a low profile in the gold and silver world, because he doesn’t seem to go out of his way to build a high one. I hope that I can change that for him just a little.
You can go to Dave’s site and download the original pdf file that includes all graphs and charts, or you can read the text of the essay below. The graphs and charts don’t really add anything to the work and it’s a much easier read (and word for word) in this essay, then in the pdf format that is provided at Dave Morgan’s site. You chose. I’ll let Franklin take it from here…
THE COLD NORTH WIND
Dr. Gary North Pans Silver
Not much sooner than Dr. Gary North’s Nov. 21 Remnant Review had hit subscribers’ mailboxes, I began to receive phone calls and e-mails about it. It denounced silver as a useless shadow of gold, a superfluous investment best avoided.
For the past couple of decades I’ve been reading Dr. Gary North’s work, and have grown to respect him, but respect that doesn’t tell the truth is mere flattery. About silver, therefore, I must respectfully disagree with Dr. North. Silver will, I believe, outperform gold from two to four fold (will rise two to four times as fast as gold). In a companion article in this issue I explain why, while below I answer in detail Dr. North’s objections to silver.
OLD BULLS DIE HARD
The market proverb holds that “the trend is your friend.” Once you identify the primary trend in any market, the trend that will persist for several years, you simply invest with that trend and ride it for all its worth. All markets -- stocks, commodities, bonds, currencies, camels, goats, chickens, potatoes -- swing between primary bull markets (up trends) and primary bear markets (down trends). The extremes of both trends, peak or trough, are always characterized by extremes in market sentiment or psychology.
There is a time to get on the trend, and always, a time to get off.
At the peak of a bull market, you can’t find a bear with a telescope and a Geiger counter. Common knowledge and received wisdom believe beyond all doubt or cavil that the bull market will keep on rising until it hits the moon and makes a bridge to outer space and eternal prosperity for everyone. At that point, all the old bears, the ones who had kept refusing for years to believe it would really rise, “capitulate.” They throw in their towel of resistance and buy, just in time for the bull market to peak and transform itself into a bear market.
On the other hand, it is proverbial that at the trough of long bear markets, old bulls capitulate. You can’t find anybody who believes the market will ever recover, and everyone believes that the stuff’s going to get cheaper than sand and they’re going to start paying people with trucks to haul it off to the dump. Old bulls who have held on for 15 or 20 or 30 years get disgusted and sell it all…just in time for the bear market to bottom and become a new bull market.
Old bulls always sell out around market troughs when a new bull market is just beginning.
Early in his article, Dr. North sets out to establish his credentials as an old silver bull. As he puts it “In the world of international espionage, a spy must establish his bona fides.” He began investing in silver in July, 1963. He sold silver coins for Pacific Coast Coin Exchange (now Monex) in 1973. “Silver was the #1 bear commodity investment of the post-1980 period. Nothing else comes close. No other commodity investment matches the losses imposed on `buy & hold’ silver investors. I know. I was one of them.” Based on the above autobiography, you decide whether Dr. North now classifies as an “old silver bull.”
I OUGHT TO KNOW
How do I know that “old bulls die hard”? Simple -- I was one. Some people learn by theory and instruction; others, the hardheads, learn by experience. I learned by painful experience that buy and hold does not work. Unlike diamonds, no investment is forever. I rode gold (but not silver) up in the 1970s, and, investment genius that I was, I rode it down through the 1980s.
Now I had never been a silver bull. In the 1970s I had gotten on the precious metals train late, investing in gold. By the late 1980s, I could hardly pronounce the word “silver” without spitting. I was sure that silver would never recover, even if gold some day might.
That all changed in the late spring of 1993, when Jim Blanchard hired me to write a book about silver, later published as Silver Bonanza. When I started, I was a hard-bitten silver bear. When I finished three months later, I had become a raging silver bull.
WHAT CHANGED MY MIND?
Two things: fundamental analysis and discovering the real driver behind silver demand.
Fundamental analysis showed that the supply glut of the 1980s had turned into a supply shortfall. During that time the world used 1.21 billion ounces less silver than it produced. Obviously, that silver surplus would have to be worked off, but with deficits of 150 million ounces a year, that wouldn’t take long.
Further, silver has a quirky supply and demand profile. Supply is quirky because silver is rare in primary form and therefore produced mostly a by-product of zinc, lead, copper, or gold mining. Since primary silver mines are usually expensive deep rock mines, they are the first to shut down when silver’s price falls, and they can’t be quickly re-opened when silver rises. On the by-product side, nobody with a $200 million zinc mine is likely to double Inc production because the price of piddling silver by-product rises -- especially if zinc’s is flat or falling.
Silver demand is quirky because a little goes a long way. Silver has unique physical properties, and in most uses there is no good substitute at anything close to silver’s price. For example, nothing else (except some salts of much more expensive platinum) behaves like silver halides in the presence of light. That’s what makes silver-based photography possible. It doesn’t take much silver to make a roll of film (compared to the price of the roll), but without the silver, it ain’t a roll of film, it’s merely a roll of useless Scotch tape without any ‘stickum’ on the back.
Most silver applications are like that -- the silver used contributes only a small part of the total product cost. That makes silver demand “price inelastic,” as the economists say. Demand responds only sluggishly to higher prices. Silver must rise very high before producers begin to curtail use or substitute.
Hundreds of other silver uses repeat that photographic-silver story uses. It has hundreds of other uses because no other element conducts heat and electricity as well, or reflects light as well, or resists wear so well, or kills bacteria as efficiently, and on and on.
Yeah, yeah, yeah, I know about digital photography and I know digital is supposed to replace silver and yakka-ti-yakka, but I’ve been watching the market for eleven years. In that time photographic usage has been up five years and down six years, but without meaningfully reducing silver use in photography. In fact, digital photography has increased silver photographic use in some cases. Moreover, it will be decades before silver photographic technology disappears, because it is so dirt-cheap compared to digital. The “digital bruising the head of silver” story is a red herring so old and smelly that it can only suck in the ignorant public and wet-behind-the-ears analysts new to silver.
THE SECOND THING
The second thing that changed my attitude toward silver was an interview with Harry Browne. Browne belonged to the loudest silver bulls during the 1970s. During that interview he pointed out that it was not fundamental forces (supply & demand) that had driven silver and gold to wild heights. Rather it was the preceding decades of government price suppression that had supercharged the metals. When government could no longer hold down their prices and was forced to let them float, the slingshot effect of long-suppressed demand sent them flying toward the moon.
Harry Browne’s explanation began to gestate and develop in my mind. After a long time I began to comprehend that government price fixing had many other results. Keeping silver and gold artificially cheap encourages consumption. But compared to using silver and gold as money, all those other uses -- jewellery, photography, dental, medical -- were low order uses. Besides, the factors that control fundamental supply and demand do not change quickly, but only very slowly. While fundamental changes may occasionally alter the price suddenly, more often prices adjust to those changes gently over time.
Monetary or investment demand, however, differs from all other demand. It is demand for silver (and gold) as money. It appears suddenly, grows like fertilized kudzu, and refuses to satisfy its appetite with any substitute. Furthermore, it is a human demand, engendered by the same crowd psychology and swings in social mood that underlie bull and bear markets. Monetary demand feeds on itself. The faster investor buying drives silver and gold higher, the more investors’ decisions are confirmed, and the more silver and gold they buy, and so on as the rising price reinforces itself.
In a severe inflation, monetary demand doesn’t simply feed on itself, it panics. Panic will buy at any price.
Pondering all this over many years, I came to a conclusion: Write it down & never butt your head against it:
Supply and demand fundamentals do not drive silver and gold prices;
monetary demand drives silver and gold prices.
Without monetary demand, silver & gold will go nowhere. With monetary demand, no matter how many new silver mines are opened or earrings are sold or snapshots are snapped -- silver and gold will rise.
I believe a technical case can be made for silver rising faster than gold, based on (1) historical performance, and (2) silver’s greater volatility, and (3) silver’s lower inventory. You’ll find this in another article in this issue, “Why Silver Will Outperform Gold.” Dr. North doesn’t believe this case can be made, while I do. Read the article and make up your own mind.
Now let’s look at Dr. North’s objections to silver. I’ll take them as they occur in his article.
THE WRONG QUESTION
Dr. North sets up silver by sending us down a false trail. He begins with four arguments for silver outperforming gold:
- "Central banks don’t hold silver, so there is no inventory overhang.
- Silver’s aboveground stocks are at last becoming depleted: less overhang.
- Silver is the little guy’s gold: more potential buyers.
- At over 70:1, the gold/silver price ratio is far from the traditional 16:1.”
I don’t know what silver bulls Dr. North has been talking to, but they must be very, very old. Most of these arguments for silver outperforming gold can be made, but are irrelevant or not that important. Certainly they are not central to the case, except for the last. And that last argument, as we shall see, is stated rather misleadingly. Certainly “tradition” contributes a powerful argument to any silver bull’s armoury. The accurate statement would be, “At over 70:1, the ratio is far from historical values and at statistically improbable levels.
Dr. North next applies linear extrapolation to silver. “Let me say up front that both [gold and silver bulls] have lost money, 1980 to 2001 – huge amounts of money. But silver bulls have lost more.”
He implies that one must extrapolate that performance into the future in a straight line. Things will continue as they always have, world without end. Actually, the opposite is true. The longer any bear market continues, the closer it is to turning around. Bear markets don’t continue forever. Besides, both gold and silver have already turned up into new bull markets. Technically, that’s what the long rounding bottoms on the charts mean.
To Dr. North’s page two, here are three small corrections. First, the US government did not cease redeeming silver certificates for silver until July 21, 1968, and to give the devil his due, the government announced it a year earlier.
Silver dollars do not contain a higher percentage of silver than 90% silver coinage. Silver dollars and 90% dimes, quarters, and halves are 90% silver. However, a silver dollar is larger than ten dimes, four quarters, or two halves. In circulated condition, a silver dollar contains 0.765 troy ounce of pure silver, while a dollar’s worth of subsidiary coin contains 0.715 troy ounces. The coin was made subsidiary in 1853 to keep the small change in circulation. Throughout the middle two quarters of the 19th century silver kept on rising against gold. A dollar’s weight of silver bought more than a dollar’s weight of gold, so people melted the coin and sold it as bullion. To keep the small change in circulation, the government reduced the coin weight and made it a “subsidiary coinage.”
Also, the US government introduced clad cupro-nickel dimes and quarters and 40% silver-clad halves in 1965, not 1964.
Dr. North writes, “[Silver after the 1980 peak] began a descent that took the dreams, schemes, and sophisticated theories of the silver bulls into the valley of the shadow of debt. Silver became the single worst commodity investment of the next two decades.” Well, there’s no news there. The longer and stronger a bull market is, the sharper the decline in the following bear market. Nor does it surprise anyone that bear markets follow bull markets. That’s just what happens. Old bulls, however, never believe the primary trend has turned down, until they ride it all the way to the bottom and there capitulate.
What has happened to silver is not the question, but what will happen. Unless the past helps us forecast the future, it is just restating facts we already know. To make sure everybody knows the numbers, however, silver topped at $50 in 1980, and bottomed in 1991 at $3.50, losing 93% over the bear market’s course.
This 93% loss illustrates bull to bear market turnarounds. Typically, bull markets lose 50% to 95% of their peak value.
Wonder what that means for real estate? Stocks? Or are they somehow different? Dr. North doesn’t say.
The only pertinent inference from what Dr. North writes here is the general observation that no investment is forever. At some point “buy & hold” always becomes “hold & die.”
“Silver was the #1 bear commodity investment of the post-1980 period.” Right – it was also the #1 star bull commodity before 1980, outperforming everything else. It rose from 90 cents in 1960 to $50 in 1980, a 5,556% increase.
THE MYSTERY OF THE MISSING SILVER
The greatest mystery for any silver analyst is, Where has the silver come from in the last 14 years? Since 1990, year after year the world has consumed about 11% more silver (averaging 111 moz.) than it has produced, by now totalling 1.5 billion ounces. But year after year the price has either stayed flat or refused to rise.[i]
Now the so-called law of supply and demand says that the lower a price drops, the less the market will supply, and the higher the price rises, the more the market will supply. But in silver’s case, the more silver stayed flat or dropped, the more silver flowed to the market.
Gold Fields Mineral Services can’t tell you why. CPM Group can’t tell you why. The Silver Institute can’t tell you why. Neither can I. But something’s not right.
Oh, I have a theory, but I can’t prove it. I believe that the phantom silver has been paper silver. That is, the silver shortfall has been papered over with futures and over-the-counter derivatives, and silver borrowed from future production. The bullion banks and hedge funds discovered they could borrow silver for next to nothing (1% or less), sell it into the market, then invest the funds in T-bills or other gilt-edged government debt until they had to pay the silver back. It was free money, with only one danger, namely, that silver’s price might rise. This same game has (most likely) been played out in the gold market since 1995, with central banks conniving to suppress gold’s price, cover their inflation, and keep interest rates low. As my friend James Turk observed, to suppress gold, it would be very helpful to keep down silver, too.
But all that remains my un-provable speculation. The long & short is that nobody has yet brought forth any reasonable explanation why more silver would be produced as the price remained flat or fell. If there is a gigantic hidden silver stockpile somewhere, none of the world class analysts with personnel & contacts scattered around the globe have yet been able to locate it.
Dr. North seems to think that the phantom silver has come from scrap or recycled silver. This baffles me. Scrap coming back into the supply stream has remained roughly constant since 1985 at around 150 moz. Oh, it’s been higher and it’s been lower, and beginning in 1994 it has increased gradually from 150 to 185 moz. But the cumulative increase from 1994 – 2002 amounts to only 215 million ounces…barely enough to fill one year’s silver shortfall. Further, while silver use has risen from 595 moz yearly to 863 moz, scrap remained virtually steady at 150 moz.
Silver scrap, of course, comes mostly as a by-product of industrial silver use. True, some little bit comes from jewellery or silverware people are willing to sell for scrap, and from melted coins, but most of it merely whirls around in a circle between factories and refineries, part of an industrial process. While silver use 1985-2002 has increased by 45%, scrap production has increased by only 20%. Scrap hasn’t even kept up with the overall increase in silver use.
Nor should that come as any surprise. Silver at $50 an ounce is valuable; silver at $5 an ounce is contemptible. With prices that low, very few people will exert themselves to bring in more scrap silver. So wherever the silver has come from in the past 14 years to fill the shortfalls, it has not come from increased scrap recovery.
Perhaps the reason Dr. North believes that scrap silver is furnishing the silver shortfall is that he has misread the statistics. Citing http://www.silverinstitute.org/supply/index.php, he places 2002 scrap at 252 moz. But when you visit that site you will find that he has taken the 252 moz. number from the total of the table, “Supply from Above-Ground Stocks.” True, this table includes “scrap,” at 184.9 moz. in 2002, but it also includes “Implied Net Disinvestment, Producer Hedging, and Net Government Sales.”
But the first two are accounting balance figures, and the last relies on an estimate so tenuous that in the 2003 Silver Survey GFMS felt obliged to publish a full page focus box explaining it (page 34).
By “balance figure” I mean that when GFMS tallies up all its numbers, and finds that more silver has been consumed than was produced, they have to stick in a number to make their sheet balance. If the market showed a supply shortfall, then the silver must have come from somewhere, right? Perhaps investors sold some silver, so we’ll plug in 20.9 moz. for them under “Implied Net Disinvestment.”. But we know that producers lifted hedges, so we have to subtract 24.8 moz. for that. Whoa! We’re still short 71.3 moz. I’ll bet the Chinese must have sold about that much, so we’ll plug in that number for them.
This does not tell us where the silver is coming from, it only tells us that we don’t know where the silver came from, but that much came from somewhere.
This…the work of Gold Fields Mineral Services, probably the world’s largest precious metals network…Dr. North calls “tooth fairy economics.” That’s great comedy, but poor argumentation. Dr. North concludes that “the entire industry can survive, year after year, on scrap recovery techniques and new production even though silver is a by-product of copper and other primary metals mining. This has gone on for over two decades. The investment question is: Why can’t this go on forever?” (p. 4)
The first answer is monetary demand. The second answer is anything that doesn’t make sense has another answer. The last 14 years’ silver supply shortfall doesn’t make sense, from what we can see because lower price seems to bring out greater supply. Therefore, we are all failing to see something.
But it ain’t scrap silver and balance figures plucked out of the air.
While we’re talking about silver scrap, let’s look at existing silver stocks, and whether they might be brought to market quickly. Remember that in 1979-1980 the prices paid for silverware, jewellery, coins, etc. ran from $20 to $35 an ounce. That was a powerful inducement to liquidation. In a scrap dealer’s vault in 1982 I myself have seen a silver tea service inscribed to the mayor of an old Southern town in 1858! High prices in the late 1970s and early 1980s acted as a vacuum to suck silver out into the scrap supply.
In 1991 the Silver Institute commissioned Charles River Associates to research and report how much silver existed in the world. The result was a report, “Stocks of Silver Around the World.” CRA estimated that since human history began, about 37 billion ounces of silver had been produced, about half of that mined after 1923 (p. 24). Of that, about 19 billion ounces were estimated to still exist.
In 1991, CRA wrote, “CRA concludes that, even though the aboveground silver stocks in various forms are large, they are not readily available to the market. Only a fraction of the worldwide stocks are potentially available to the world market under a realistic set of market conditions. Thus, for all practical purposes the “truly available relevant stocks’” are:
|146 moz. at $5 per ounce|
|541 moz at $10 per ounce silver|
|1,148 moz at $15 per ounce silver, and|
|2,208 million troy ounces at $20 per ounce silver|
“Further, such potential outflow of stocks into the market is unlikely to be immediate and would occur only in increments over a span of some years if silver prices prevailed at these levels . . . CRA estimates that total aboveground silver stocks are about 1.4 billion troy ounces of bullion, 1.2 billion troy ounces of coins plus medallions. Thus total stocks are defined at 2.6 billion troy ounces.” (p. 1 & 2) (Stocks unavailable to the market are estimated at 16,847).
Here we are 11 years later, and the shortfalls have burned up about 1.5 billion ounces, nearly three times the supply CRA estimated it would take $10 silver to entice out. But the price hasn’t moved.
At the bottom line we can conclude:
|scrap silver has not been filling in the supply shortfalls of the past 14 years|
|no large inventories of “attic silver” are hanging over the market, because most of it that would be sold was sold around 1980, and the rest won’t come out at prices under $10, not to say $20.|
Finally, some one might protest, if so much silver came out in 1980, why not today? I’ve shown above that the silver just isn’t there. But more than that, the dealer and refiner infrastructure that collected and processed the silver leading up to 1980 no longer exists. Nobody would be there to bring the silver to market, if there were any out there.
On page 5 Dr. North explains Bunker Hunt’s role in the 1980 silver peak. He follows the official story about Hunt, which makes it appear that the Fed bailed out Bunker. No, the Fed co-operated in the fraud on the public committed by the Comex when it changed the rules on silver investors. When Hunt’s legitimately built-up silver position threatened to bust a commodity house that was short silver, and trigger a “cascading default” across the entire US financial system, the Fed was forced to bail out Bunker Hunt. Throughout rest of the 1980s the federal government persecuted Mr. Hunt, apparently to make the point that Wall Street would never let an outsider, let alone a Texan, beat them at their game. Bunker Hunt was a sacrifice to the fiat money system, and a better man than Paul Volcker, Alan Greenspan, and all their trolls, gnomes, and nerds put together and stacked on top of each other.
Dr. North also states, “What killed gold and silver was the Fed’s decision [in October 1979) to cease inflating the money supply, to allow interest rates to soar, and thereby to put an end to Carter’s Fed-funded price inflation.”
Whoa! This proves my point, that monetary demand alone makes metals bull markets. When the public perceived Iron Paul Volcker was serious about choking off inflation -- including the message sent when the Fed collapsed the silver price in March -- then gold and silver prices subsided because public perception and mood changed and monetary demand vanished.
ANOTHER SMALL CORRECTION
On page 5 Dr. North rehashes the old arguments against bimetallism and repeats the common legal misunderstanding that the US was on a silver standard. While the silver dollar (371.25 grains of fine silver) was the standard coin by the Coinage Act of 1792, the system was not bimetallic but symmetallic.
The founders were wiser men than most recognize. They set up a system which could be periodically adjusted to allow for changes in the market ratio by adjusting gold coin’s weight. The government did this in 1834, in fact, reducing the gold coin’s weight without defrauding the public of a single penny. Also, in 1792 they intentionally set the ratio lower than the world ratio because silver was the money of daily commerce, and they wanted to draw scarce silver into the country.
On page 6 Dr. North continues. “So never forget these rules governing silver investing:
- "There is no intrinsic value.
- There is no fixed gold/silver ratio.
- Silver is not a guaranteed inflation hedge.
- Above ground stocks have supplied 30% of demand.”
Except for the last, these are all red herrings. So, whether silver has intrinsic value or not, it is subjective monetary demand that will make both silver and gold rise. There certainly is not a fixed gold/silver ratio, there is only the historic performance of regressing to the mean and beyond, and the present technical evidence that the ratio topped in 1991 and is headed down. There is no “guaranteed” inflation hedge, not silver or anything else, including real estate. However, the monetary assets gold and silver have performed well in previous inflationary spasms, and probably will in the future.
Finally, Dr. North thinks above ground silver stocks can keep on supplying silver into the indefinite future. I’ve shown above why that is very unlikely. Besides, if above ground supplies (and not paper silver) have supplied the 1.5 billion ounces, where will the next 1.5 billion ounces come from?
On page 10 Dr. North sets up another red herring, that silver is a “shadow currency [in case of] economic collapse.” While silver might indeed function that way, it is a very minor reason I recommend owning it.
On page 10 Dr. North speculates about the world adopting digital gold backed money. Reasoning from his monometallic presupposition, he says, “Digital gold money will prevent the appearance of digital silver money” because digital accounting makes possible breaking down gold into units small enough for daily transactions. “In fact, if the world turns to any commodity as money, it will be gold. Silver will not be necessary as money.”
Unfortunately, his argument proves too much. If digital technology makes possible breaking down gold into small units, it also makes possible and easy moving balances from gold-backed digits to silver-backed digits. And, if the free market is as efficient as Dr. North and I believe, then demand for silver digital money will surely give birth to a supply of it. In fact, the arguments Dr. North makes against bimetallism are all negated by a digital system that makes it easy to transfer from one metal to another.[ii]
But what would make people want to do that?
Simple…silver’s price rising faster than gold’s.
Both Dr. North’s arguments and mine are all up in the air. We all know what happened last time, but that was a long time ago. The rest is theory and speculation. Will history repeat itself? The event will prove whose arguments are correct.
In any event, don’t misunderstand. “Buy and hold” is not what I recommend for silver investors, or anyone else. We will use the volatile and fluctuating gold and silver ratio to trade from one metal to another, increasing our holdings every time. And when this precious metals bull market ends, we’ll be looking for something else to buy with all those ounces.
I’d say that it was a pretty honest assessment of the situation. And although I haven’t seen the good Doctor’s original article, I can assume from Sanders’ take on it, that it wasn’t silver friendly…and that’s probably being kind.
Once I found Franklin Sanders’ web site, I decided that I would take a look around and get the lay of the land so to speak. The last thing I read from the home page was the bullet entitled “Who is the Moneychanger”. From that point on, my definition of a true “freedom fighter” changed quite a bit.
Again, I’ll let Mr. Sanders explain….
The Most Dangerous Man in the Mid South
by Franklin Sanders
(From the 2/97 Chronicles, the American Culture Magazine)
Almost 30 years ago, just a few weeks before I got married, on a drugstore bookstand I found a strange book: Capitalism, the Unknown Ideal. It was a collection of essays about a philosophy of freedom. Two dealt with the American monetary system. The author explained that nothing -- no gold or silver -- backed our currency. He argued that sooner or later, this fiat money system would lead to disaster and that only money backed by real value -- gold -- could last.
That author was Alan Greenspan.
Since then our careers -- Alan's and mine -- have taken very different paths.
In 1967, Alan Greenspan was already a fairly well known economic consultant. In the 1970s, President Ford appointed him to his Council of Economic Advisors. In 1987, Alan Greenspan was appointed Chairman of the Federal Reserve Board of Governors.
Funny, he doesn't talk much about gold anymore.
In 1967, I was a college senior. Susan and I were married on December 16th, and when I graduated in 1968 the draft board gave me 30 days' to frolic before conscription. I arrived at Fort Polk, Louisiana one hot October night, caught the Army bus out to the post and sat down behind the driver, facing across the bus. I opened my copy of Aristotle's Works and began reading.
I noticed I was the only man on board with hair. The fellow sitting across from me asked, "Whatcha reading?" Wordlessly, I flipped up the book so he could read the title on the spine. "Boy, he said without any reflection. "Have you come to the wrong place."
In 1969 I retired from the Army to attend graduate school in German at Tulane University. The next year I received a full scholarship to the Free University in West Berlin, where I saw first hand what unchallenged state power could do. The West was pulsing with life and light…the East dead and empty. In the Museum of the Wall at Checkpoint Charlie I read the last radio message from the Free Hungarians in 1956: "Tell Europe we are dying for them."
After Susan and I came home late in 1973 I worked in several businesses, learning first hand what it means to "make your way in the world." I kept studying economics and monetary systems, on my own and in graduate classes.
In 1980 I opened my own business in West Memphis, Arkansas, across the Mississippi from Memphis, selling physical gold and silver. First thing I did was write to the Arkansas Attorney General to explain that I thought exchanges of gold and silver money for paper money weren't subject to the sales tax, since they were exchanges of money for money. What was his official position?
He never bothered to answer my certified letter. Or the second. Or the third.
When he finally responded, it was only to say he wouldn't answer. I wrote to the Commissioner of Revenue, and told him what I was doing. Nobody ever bothered to answer that certified letter either, so I reported all my sales as "exempt". Every month.
A year later, in 1981, a Revenue officer showed up to audit my books. I told her what I did wasn't taxable, and that every trade contract contained a confidentiality guarantee to my customer. She could see them if she would indemnify me in case some customer sued for breach of contract. Alas, she didn't want to co-operate, so she just multiplied all my "exempt" sales by the sales tax percentage, added penalties and interest, and sent me a bill for about $30,000.
Thus began my merry pilgrimage through the courts. I had landed smack in the middle of Legal Never-Never Land: monetary law. Of course Article I, Section 10 of the U.S. Constitution says, "No State shall make any thing but Gold and Silver Coin a tender in payment of debt." Of course the definition of "money" at the head of the Arkansas tax title says, "The term 'money' or 'monies' shall be had to mean and include gold and silver coin." Of course the U.S. Code at Title 12, Section 152 says that "lawful money" means gold and silver coin of the United States.
Of course, of course, of course . . . it goes on and on. State and federal constitutions, state and federal statutes, state and federal court decisions, US supreme court decisions, all speak with one voice: gold and silver coin are money, bank notes are not money. But whether I raised the issue in a Revenue Department administrative court, chancery court, or federal district court, I ran into the same terrified reaction. "The monetary emperor is naked! Federal Reserve notes aren't really money! Quick, rule against this clown and drag him out of here!"
I appealed the agent's assessment, and lost at the administrative level. Then at the administrative court too. I appealed to chancery court. Had a trial. Lost there too. By then it was December, 1983, and I received a letter from the Arkansas Revenue Department demanding I fork over $120,000!
A few days later two deputies came to collect their "judgment." Through several well-nigh miraculous providences, they got nothing. That night, I decamped from Arkansas. I was so amazed at God's protection through this event that I wrote a friend a long letter about it. Remember that letter.
I moved my business to Tennessee, doing exactly the same thing, exchanging gold and silver money for federal reserve notes. By this time I had realized that although every American had a constitutional and legal right to gold and silver money, the problem was, you couldn't use them in everyday business. We had the right to sound money, but no means. We needed an interface between the paper system and gold and silver.
So in May, 1984 I opened a gold and silver bank. It attracted depositors like wildfire, but somebody didn't like my idea. On June 18, 1985, two IRS Criminal Investigation Division (CID) agents popped in to announce that I was under criminal investigation. ["Surprise! We just dropped by to pull out your fingernails with pliers!"].
In the next three years IRS treated me to the full court press. They got my bank records, and on US attorney's stationery wrote all my customers, demanding that they send records from their dealings with me to the IRS CID agent and threatening the recalcitrant with subpoenas. These letters remarkably chilled my customers' enthusiasm. It got harder and harder to make a living.
On September 18, 1986, five agents from the Tennessee Revenue Department appeared at my office with a search warrant, pawed my files and records for two hours, and hauled off boxes of personal papers. That was the first -- and last -- I heard of them for a long time. They immediately turned over my papers to the IRS.
In the spring of 1988, the IRS and the US Attorney's office leap-frogged their investigation from me to my church. There was nothing unusual about the church. It wasn't a "tax protest" church, just a member congregation of the conservative Presbyterian Church in America. The assistant US attorney subpoenaed church members before the grand jury and grilled them about what the church taught. Did the pastor teach people how to not file income tax returns? Did the church have militia practice in the woods? Survival training? Did the church hand back contributions under the table? About the only thing they didn't accuse us of was trafficking in nuclear warheads.
We landed in the Catch 22 maelstrom of official suspicion. The more the pastor and the elders proved to the US attorney's office that these accusations were lies, the more convinced they became that we were such clever conspirators that their suspicions must be true. The assistant US attorney issued a subpoena to the church for all her records: counseling, sessional, financial, everything. The session of the church offered to consider any request for specific documents, but refused to open the Bride of Christ up to a fishing expedition.
On January 9, 1990, just at dawn, the IRS struck. Although the agent investigating me knew very well that I was not violent, IRS agents and Tennessee Revenue Department agents roared in my driveway while the SWAT team in their black ninja suits poured out of the woods on either side of my house.
They attacked with reckless, malicious disregard for the safety of my wife and seven (7) children. All they needed to do was pick up the phone and tell me I had been indicted, and I would have gone downtown. No, these IRS thugs wanted headlines from a sensational "pre-dawn raid" to scare the sheep for tax season, and to make me and my wife, the mother of my seven children, look violent and dangerous.
After they arrested me and Susan, the IRS refused to leave my home. Contrary to the law and over the protest of my spunky 15-year-old daughter, Liberty, three IRS agents stayed and held my children hostage until the end of the day. They were waiting for a search warrant so they could come back and steal my records and my computer.
On the ride downtown I had no idea what was going on. Why would they arrest Susan? She had never done anything other than minor secretarial work in my business, and spent all her waking hours home-schooling and raising children.
When I stepped into the jail cell, I began to understand. They had indicted her to blackmail me. My friends, customers of the gold and silver bank, and numerous church members were already there, including my pastor and assistant pastor. The indictment was an inch thick. In 72 pages it charged 26 defendants with conspiracy to defraud the government, willful failure to file, and divers other malefactions.
The government claimed that the gold and silver bank was a tax evasion scheme to hide income. Not even two years in the US Army had prepared me for stupidity of this magnitude. How could we hide income when almost everything we took in was in checks, and we deposited the checks into our bank account? Oh, yes, we did pass some of the checks along to other dealers to pay for gold or silver we bought for them, a common practice in the industry and perfectly legal. This, the government taught us, was "laundering checks," a sinister activity proving we were up to no good. But every bank deposit I had made was a count on the indictment! And Susan -- poor home-making, home-schooling, never-stop-running Susan -- was the Number Two conspirator, right after me!
My bond was set at $150,000, fully secured. For comparison, that same day they arrested a child molester and set his bond at $10,000, not secured. I stayed in jail from Tuesday until Friday, when my parents put up their house to get me out of jail. When the Federal marshals released me at 5:00 p.m., sheriff's deputies were waiting to arrest me, and me alone, on state charges.
I believe but cannot yet prove that an ex-IRS agent had been sent to work for the Tennessee revenue department to get the search warrant IRS couldn't get, and to figure out some way to charge me under state law. (You're not paranoid if somebody is really persecuting you.) I was charged with violating a statute that had been on the books nineteen years: TCA 67-1-1440(d), "delaying and depriving the state of revenue to which it was lawfully entitled at the time it was lawfully entitled thereto." In all those 19 years, not a single Tennessean had discovered how to violate it, but I had. Truth to tell, I hadn't even figured it out, since I was accused of "delaying & depriving" the state of revenue the amount of which was unknown and to which the state had never become lawfully entitled. They accused me of a crime I could not possibly have committed because I didn't know it existed. Never mind, due process just slows things down.
They were charging me with not collecting sales tax on exchanges of gold and silver money for paper money. You know -- like when you go to the bank, and give the teller a twenty and she gives you back a ten and two fives, less sales tax. What? She doesn't charge you sales tax? Of course not, because it's an exchange of money for money.
But neither the state of Tennessee nor any other state can admit that gold and silver coin are money. If they do, they will admit they are operating outside the law. The monetary emperor is naked, and state officials from the Chief Justice of the supreme court to the governor to the second assistant tire checker are afraid to tell him. They should be afraid, because the monopoly on money creation is the jugular vein of the American fascist state.
But in January, 1990, I didn't have time to worry about state charges. Susan and I were both facing 19 years in jail if convicted in federal court. We knew the statistics, too. Humanly speaking, we had no chance. Ninety-eight percent of federal tax prosecutions end in guilty verdicts.
The next year and a half was a wretched struggle to persevere without despair. Only a survivor of a criminal prosecution could understand how it hammers your soul. Most defendants never make it to trial. Through the investigation alone, federal agents and prosecutors can destroy their businesses and their families, and break their spirit. Stripped of business, money, family and hope…most plead guilty just to end the nightmare. In our case one poor defendant pled guilty with no idea what it meant. When a defense attorney asked him who he had conspired with, he screwed up his face in confusion and paused several minutes. "I dunno. Myself, I guess!"
Our trial began on February 26, 1991, over a year after our arrest. Right after the noon break that first day, I received word that our sons Wright (10) and Christian (8) had been severely burned playing with gasoline. Susan spent the first two weeks of trial with them in the hospital.
Just when it seemed that things couldn't get worse, they did. Day after day I had to listen as the prosecutor hatefully twisted everything I had ever done into something evil -- including the good things. This went on for four and a half long months. The government entered immaterial documents by the hundredweight.
The vast but tediously shallow silliness of the whole farce made me the maddest. Do you remember in C.S. Lewis' Perelandra, when the Unman is struggling to convince the Green Lady to disobey Maleldil's command not to spend the night on the land? Ransom notes with dismay the childish silliness of evil. Throughout the night while the Green Lady sleeps, the Unman repeats, "Ransom? Ransom?" When Ransom answers, "What?", the Unman responds, "Nothing." At its depths, evil is not noble or grand. It's merely a silly, spoiled child, flicking boogers at his betters.
To the charges of "willful failure to file income tax returns" we argued that no statute makes anyone liable for an income tax (except "foreign withholding agents"). No one -- not the federal district court judge, not the assistant US attorney, not the IRS, no one -- was able to point out that statute, because it doesn't exist.
Here was a "man bites dog" story if ever there was one, but was the local media interested? Hardly. The first day of trial was covered by an old reporter for the Commercial Appeal who with great insight described issues and characters. Next day he was yanked off the case and replaced with a Stalinist "comrade" who loyally published whatever official line the US attorney's office gave him.
But our jury was more open-minded. On July 9, 199, the jury returned its verdict: seventeen defendants not guilty on all counts! To God be the glory! We threw an enormous party and that Sunday had one bodacious worship service.
I still had to face a state trial. I no more than caught my breath when I had to dive back down into the sewage of the "justice system."
The trial started in May, 1992, and lasted three weeks. The judge and the prosecution did their best to keep out my evidence -- evidence that showed how many hundreds of hours I had haunted the law library to study out my position and make sure I was right.
It did little good. Remember the letter I wrote a friend when I escaped from Arkansas? The Revenue Department had seized it in 1986, and the prosecutrix used it to make me look like a hypocrite.
Even at that, three jurors held out for three days. I later talked to one of the holdouts, and he said that one of the women who gave up said, "Oh, well, he'll get another trial on appeal." Can people really be that ignorant, or will they just use any excuse to justify their own cowardice? On May 18, 1992 I was convicted on two counts of "delaying and depriving."
A month later the judge sentenced me to two years in jail, but he suspended all but 30 days, provided I would pay $1,000 a month for 73 months as "restitution" and do 1,000 hours (half a year's work) of community service. With seven children to support, it was a deal I couldn't refuse.
I appealed. In August, 1994 the Court of Criminal Appeals overturned one count of the conviction for double jeopardy. I couldn't be guilty of one count of "delaying" and one count of "depriving" for the very same conduct. On the money issue, however, the real heart of the case, the court dodged and denied all my arguments.
We appealed to the Tennessee Supreme Court, and they heard the case on All Saints Day, 1995. Dr. Edwin Vieira, Jr., constitutional attorney and America's foremost expert on monetary law, prepared the briefs and argued the case. For over 6 months we heard nothing. Then on May 28, 1996 the Supreme Court affirmed my conviction, once again dodging the money issue.
I am still appealing, this time into the federal system, but the appeal couldn't be filed quickly enough to prevent my arrest on June 28, 1996. The petition for habeas corpus in federal district court was assigned to the same judge who had tried our federal case. She took jurisdiction of the appeal, but refused to order my release. From June 28th until July 23rd, I was a guest of the Shelby County Jail and the Shelby County Penal Farm.
The next hurdle is securing a stay of execution on the $72,000 fine. Failing that, I go back to jail for another eleven months while the appeal goes on.
Why keep on fighting? After 15 years, why not just put down the load and forget it?
The fiat money system is both the strength and weakness of America's tyrants. It bleeds the people's wealth and labor, but it also threatens to collapse under its own weight -- or whenever the scales fall off the people's eyes. With its green engravings of famous Americans, electrons whirling around in bank computers, and loans created out of thin air, it is one vast confidence game. As long as the people believe they can't see the emperor's naked pink flesh, his power and dignity will be preserved. But let one little boy hollers, "Hey, he's nekkid!" and the tyranny collapses.
I didn't sally forth looking for dragons to slay. The dragon came to me. He came with a lie, and either you oppose a lie, or you become a liar. You can kid yourself and say I'm only going along because they have all the guns, but day by day, year by year, your integrity erodes. Finally, you become like the tyrants: just one more liar.
Even if you have no chance to win, you have to fight. Not many are willing, but even a few keep the tyrants from sleeping at night. If we don't fight, how many more Ruby Ridges and Wacos will there be? How many more SWAT team attacks? How many more police check points? How many more bureaucrats watching your bank account and your finances? How many more children held hostage by IRS agents? The bill of rights is already dead. Will it be time to fight when your wife and children are dead, too?
The US government spent millions of dollars trying to jail me and my wife and my pastor and assistant pastor. The assistant US attorney here told one lawyer that I was "the most dangerous man in the mid-South." In a four and a half year investigation the government spent $5 - $10 million, maybe more. We heard they spent nearly two million on the trial alone.
We can't both be right. Either the government is right and gold and silver coin is not money, or I am right. This is not a gentlemen's "difference of opinion."
If I'm right, and if I win in the courts, then no state will ever be able to charge sales tax on gold and silver coin again. The greatest disability to free trade in gold and silver will have been removed. We will have broken own the last illegal roadblock to sound metallic money.
© Franklin Sanders
Ed Steer Postscript: Because the conditions of probation were so burdensome on him and his family, Mr. Sanders returned to jail and was relocated to a medium-security prison on November 4, 1996. He was released on December 20, 1996.
[i] A word about numbers. Let’s face it: not even Gold Fields Mineral Services or CPM or anybody else knows exactly how much silver is produced and used every year. The best their figures can give us is a rough idea for comparison. Every year the Silver Institute produces a “Silver Survey” with these numbers, and the agency compiling these changed in 1995 from CPM Group to GFMS. CPM Group still produces a silver survey yearly, and their numbers don’t agree with GFMS. Moreover, don’t put too much faith in the numbers I list before 1990, because they don’t include Iron Curtain countries, now our socialist/free market trading partners. So when I write that the structural silver shortfall has been “about 1.5 billion ounces,” that’s what I mean: about.
[ii] From personal conversations with at least one operator of a digital gold-backed system I know that he is already planning to offer silver-backed digital money. All those who are now failing to provide it are missing a “golden” opportunity.
* * *
In an e-mail exchange with Mr. Sanders subsequent to this essay, he had this to say about going back to jail….
“It may not be clear from what you read that at the end of November 2000, the U.S. Supreme Court refused to hear my appeal from the U.S. 6th circuit court in Cincinnati…I went back to jail in November 1996 to finish out the sentence, rather than serve the alternate sentence which would have required me to pay the state a thousand dollars a month for seven years.”
“Rather than serve a Biblical term of slavery to them, I went back to jail. I was supposed to serve only a couple of weeks, but ended up serving forty-six days, and got out about December 20, 1996. The appeals carried on until November 2000.”
“Whether you know it or not, a sentence to any state or local penitentiary can easily amount to a death sentence, because you can get killed in there.”*
So…let me see…where were we? Oh yes...freedom fighter.
Throwing words out into the Internet is easy. There are some absolutely brilliant minds out there providing us with the secrets of the gold and silver universe for free…or next to free. But how many of us (or them) would have the ‘balls’ necessary to “go to the wall” as Franklin Sanders did? We all have principles…but how far would we be willing to take it when the rubber really meets the road…and our backs are up against it?
Mr. Sanders has already taken on the all the money and all the power in the world…and lost. But he only lost a battle, not the war.
This is the same battle that we are all fighting right now.
I’ve seen some interesting observations around the Net in the last month or so that “we, the people” may not have to worry about official convertibility of paper money into specie…as (given time) gold and silver will re-monetize themselves. This is precisely what might happen as the current financial system…which was cut loose from its last golden thread by Richard Nixon back in 1971…draws its dying breath.
And until that time, it’s up to us ‘freedom fighters’ to live up to this ‘call to arms’ that we have made…some of us unknowingly.
As an aside to Franklin Sanders’ incredible story, it would more than appropriate to mention a couple of other heroes in this titanic struggle for honest money and honest government.
Ladies first…we all have to remember what Catherine Austin Fitts has done on our behalf…not only for all of us at The Gold Anti-Trust Action Committee (GATA), but for her attempt to expose the rampant corruption at HUD when she was Assistant Secretary of Housing under the George Bush Sr. administration. She has paid a terrible personal and professional price for her honesty and integrity.
And then there is that heroic struggle by Reg Howe in a Boston court room a few years back…in a modern day version of “To Kill a Mockingbird”. He was the Atticus Finch for honest money…as he too was up against all the power in the world as he stood in that courtroom alone.
But we should take careful note of the unbelievable personal sacrifice that Mr. Sanders (and his family) has already made…as the time may come when we (either individually or collectively) may be called upon to pay that kind of price ourselves.
And at that point, we’ll find out what we’re really made of. Let’s hope that we will be able to live up to the standard that these ‘freedom fighters’ have already set for us.
Gold Anti-Trust Action Committee
© Copyright 2004 Ed Steer, Le Metropole Cafe, Inc.
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-- Posted 19 March, 2004 | |
Last Three Articles by Ed Steer, Le Metropole Cafe, Inc.