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Jim Grant and the GOP Joining Forces to Bring Back the Gold Standard

With two GOP presidential candidates saying they'd add legendary Wall Street pundit Jim Grant to their administrations, bringing back the gold standard clearly has moved up on the Republican agenda.

Ron Paul, for whom returning to the gold standard has been a decades-long crusade, has said he would name Grant chairman of the U.S. Federal Reserve. In his case, that would be a compromise - Paul has often called for the Fed to be abolished altogether.

Meanwhile, Newt Gingrich has promised to appoint Jim Grant to head a commission to study the possibility of going back to the gold standard.

Grant, who publishes Grant's Interest Rate Observer, is a well-known gold bug and critic of the Fed.

His ideas have attracted increasing favor in a party that blames the Fed's easy money policy for the country's economic problems.

Grant calls the current system of fiat currency an "anachronism" and questioned the "command and control, top-down system of having a handful of people at the Fed dictate interest rates."

He's worried that the Fed's quantitative easing policies have created a bubble in Treasury bonds.

And make no mistake: If a Republican president gives him the opportunity, Grant already has a plan, starting with making a public case for the gold standard.

"I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers," Grant told MarketWatch.

Grant said he believes a dollar should be fixed "like a foot, or a pound."

Such a policy would arrest the steep decline in value the dollar has suffered since the United States abandoned the gold standard in 1971 - a point Paul often raises on the campaign trail.

"Since 1971, since we lost our link to gold, the dollar has lost 85%," Paul recently told NPR. "So if you were a saver and wanted to take care of your kid's education, even if you made a little interest, you're going to lose money."

Middle-class worries like that have helped make a return to the gold standard a major issue in the 2012 Republican primary battle.

The other two remaining GOP contenders, Mitt Romney and Rick Santorum, are believed to be against a return to the gold standard, though both refrain from talking about it.

Of course, Republican proponents of the gold standard may not need Paul or Gingrich to win the nomination to move the issue forward.


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The Madness of Crowds: How to Play Bonds, China, and Gold in 2012

Yes, I know that markets are irrational.

I read Charles Mackay's 1841 classic, "Extraordinary Popular Delusions and the Madness of Crowds" long before it ever became fashionable.

Even so, when you think about it, 2011 must set some kind of record.

As investors, that means we need to decide whether this madness will continue in 2012 and which direction to take.

Take the madness in the bond world, for instance.

Long-term bonds of a country with an out-of-control budget deficit and a worrying trade deficit are currently yielding 1.6% below inflation.

In other words, year after year, investors are willing to pay 1.6% of their capital to hold them. On top of that, investors have been so keen on this miserable asset in 2011 they have bid up its price by no less than 26%.

Conversely, China is revolutionizing the world economy.

Year after year, China puts up growth rates of 8% or more, and the latest data suggest that will continue throughout 2012.

What's more, Chinese stocks stand on a bargain-basement price-to-earnings (P/E) ratio of less than 8-times earnings. Yet, in 2011, investors shunned these bargains, giving the Chinese market a pathetic return of minus-22%.

It is Madness I Tell You

Do you see what I mean when I talk about irrational?

To a Martian, these statistics would be proof that earthly markets had lost their collective minds. That's not just a random walk - it's a deliberate stroll that will destroy your wealth.

For investors, it raises the question of how long this irrationality is going to last. Will this extreme irrationality persist in 2012, or will it reverse?

The first conclusion to be drawn is that current markets...



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What the World Will Look Like if Occupy Wall Street Wins

There are many reasons why the Occupy Wall Street movement could fail - a lack of cohesion, too many directions, no leadership, not enough money, and no representation, to name a few.

But what if it "succeeds?"

What would our investing landscape look like and what would we do about it?

I think that's an interesting question, especially since Occupy Wall Street has gained some traction, even taking on a global appeal. And more importantly, there are two other reasons the movement could succeed:

  • First, our political system is broken and has deteriorated into little more than a fancy debating society.
  • And second, the world's central bankers remain out of control; their bailouts are saving the irresponsible at the expense of the hardworking. Our regulators and Wall Street remain locked in an unholy alliance that has done very little to fix the underlying problems that have resulted from decades of bad fiscal policies, unsound monetary practices, and dysfunctional leadership.
You may remember the 1960s and the many protest movements that were very clearly focused on civil rights and the Vietnam War. You even may have been part of a few.

A lot of people thought they would go away, too. But Tom Hayden and his collection of Students for a Democratic Society didn't. Nor did Abbie Hoffman, Bobby Seale, and others. Their passion and that of thousands who joined in eventually succeeded in changing the course of social consciousness.

OWS could too.

By shunning the hierarchy that is organized politics and corporate America, there is the sort of strength necessary to address the growing disparity and the vanishing opportunities that are the new economic reality for millions of Americans.

I, for one, am hopeful that OWS will find the leadership needed to clearly delineate its goals and mandate change on the strength of the raw unvarnished potential that is now driving it.

I am also hopeful that OWS will succeed in raising the social consciousness to the point that living within our means becomes both an economic and political reality.

But that's just me. You may have entirely different feelings. That we might not agree is irrelevant.

Since OWS began, I've been watching carefully and doing a lot of deep thinking about what things might look like if OWS "wins" - however you define the term.

So here's a look at some of the potential changes that could take place if the movement succeeds:

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GDP Is a Lie – It’s Time for a New Measure of Economic Growth

Gross domestic product (GDP) is the most commonly used measure of economic growth. But GDP isn't just inaccurate and misleading - it's the contrivance of Keynesian economists seeking to push their own, big-government agenda.

That's right. GDP is a financial ruse - the biggest of the past half-century. And it's time to move past it to another, more accurate measure of economic growth.

Keynesian economist Simon Kuznets designed GDP at the height of the New Deal era. Kuznets first revealed the measure in a report to Congress in 1934. GDP takes into account consumption, investment and government expenditure to create a measure of economic growth.

But the Keynesians employed some chicanery, or sleight-of-hand, to generate this statistic. A close look reveals the dirty little secret about GDP: It intentionally overplays the importance of government spending - and in doing so inflates the role that Washington plays in each of our lives.

And it's been doing this for 77 years ...

The Biggest Lie of the 20th Century

Gross domestic product is supposed to be a measure of all the goods and services produced here at home.

But there's a discrepancy.

You see, private-sector output is measured by the price people are prepared to pay for it. But government output is fudged: It's measured by its cost.

That means GDP increases any time the government spends money. It doesn't matter if that money is actually put to productive use or not - GDP rises nonetheless.

The bureaucrat devising regulations that damage business? His salary increases GDP. The $300 million Alaskan "bridge to nowhere" of a few years back? That was $300 million added to GDP. The jet-fighter project that costs billions, and is plagued by huge overruns that lead to its cancellation? Those billions add to GDP.

Even public-spending "stimulus" programs, however foolish, are always effective according to the GDP definition, because their cost is simply added to output.

It's obvious why big-government Keynesians would like this calculation: It substantiates their claim that government spending stimulates economic growth.

In the real world, however, this makes no sense. Indeed, none of the examples above actually add to economic welfare.

Don't misunderstand - some government output is very valuable. We could not exist in a free society without a court system that protects our property rights and a national defense that protects our borders. In most other cases, however, if government output were truly cost effective, the private sector would've already taken the initiative (and probably done so at lower cost and greater impact).

So how can you get an accurate measure of economic growth?

Arithmetically, there's a simple solution: You take Line 1, "Gross Domestic Product," in the Bureau of Economic Analysis' GDP Table and subtract from it Line 21, "Government Consumption Expenditures andGrossInvestment. "

That gives you a net number, which we can call "gross private product," or GPP. It's a measure of all the output produced by the private sector. In general, it will underestimate national "welfare" unless government is really bad. But it will give you a much better idea of the output the market economy is producing.

Indeed, looking at GPP's past performance helps to explain some things that GDP doesn't.

Keynesians like to proclaim that World War II got America out of the Great Depression: Thus, if you make stimulus big enough, it will solve economic problems.

This is the biggest lie of the 20th century.

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The Debt-Ceiling Debate: Three Federal Tax Increases That Could Save the U.S. Economy

As the debt-ceiling debate escalates, U.S President Barack Obama says federal tax increases are necessary to close the U.S. budget deficit.

Although Republicans then said that tax hikes were "off the table," this statement is reminiscent of a toddler who threatens to hold his breath until he turns blue if you make him eat spinach.

Given that our elected leaders in Congress just can't seem to curb their spending addiction, the unpleasant reality is that some types of tax hikes are essentially inevitable.

Truth be told, I can show you three tax increases that should be enacted.

As a taxpayer, that statement will probably make you wince in anticipated pain.

But once I've made my case, I'm betting that the investor in you will agree that these three federal tax increases could save the U.S. economic recovery.

Let's take a look ...

Federal Tax Increases We Don't Want to See

If we ignore the debt-ceiling debate (and the Aug. 2 deadline for increasing the ceiling) for a minute, and just consider the health and welfare of the U.S. economy, we can see that there are a number of federal tax increases that would be highly counterproductive.

One example: boosting the corporate tax rate above 35%.

Except for Japan, the United States already has the highest corporate tax rate in the Organisation for Economic Co-operation and Development (OECD). Corporations don't pay much tax because they are able to keep profits overseas in tax-free jurisdictions and employ leasing and other tax breaks. It would make much more sense to lower the corporate tax rate - perhaps to 30% - and close many of the loopholes so that the "yield" (what's actually collected) is the same or perhaps even a little higher.

Similarly, it makes no sense to increase the 15% tax on dividend income. Dividends are paid by corporations out of their after-tax income. The levy on dividends - paid by the company's shareholders - means those companies actually suffer from a "double-taxation" rate of about 47%.

This encourages companies to fool around with stock options, repurchase agreements and with overpriced acquisitions, thus ripping off ordinary shareholders and reducing the economy's efficiency.

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How to Fix the U.S. Housing Market

If this week's economic reports showed us anything, it's the fact that two years into what's supposed to be an economic recovery, the U.S. housing market remains on life support.

But here's what those reports didn't tell you: If the housing market isn't fixed soon, it's going to drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of.

The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth.

It's time we fixed what's broken and implemented new financing and tax strategies to stabilize prices.

Contrary to the naysayers - and in spite of political pandering and procrastination - we can almost immediately execute a simple two-pronged plan to fix mortgage financing and stabilize U.S. housing prices.

I call it a not-so-modest proposal.

The Worst Since the Great Depression

The facts are frightening: We are in a bad place. The plunge in housing prices we've seen during the current downturn is on par with the horrific freefall the U.S. housing market experienced during the Great Depression.

And without an effective plan to arrest the double-dip in housing, there's no bottom in sight.

Hope Now, an alliance of lenders, investors and non-profits formed at the behest of the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, counts 3.45 million homes being foreclosed from 2007 through 2010. Current estimates of pending and potential foreclosures range from another 4 million to as many as 14 million.

According to RealtyTrac, a real-estate data provider, the country's biggest banks and mortgage lenders are sitting on 872,000 repossessed homes. If you add in the rest of the nation's banks, lenders and mortgage-servicers, the true number of these REO (real-estate owned) homes is closer to 1.9 million.

These shocking statistics illustrate just how large the current overhang of bank-owned properties actually is (at current sales levels, REO properties would take three years to unload). And they help us to understand how the staggering number of yet to-be-foreclosed, repossessed, and sold homes will depress U.S. housing market prices for years to come.



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Buy, Sell or Hold: Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is a Mining Play with a Major Upside

Sometimes the market offers investors a rare chance to buy shares of a great company on a dip. That's precisely the opportunity we're getting right now with Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX).

The current market volatility is giving investors with an eye toward long-term investments a great chance to buy shares in a world-class company.

FCX is one of the best-run global mining companies and a great way to gain exposure to gold and copper. So it's time to "Buy" Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) (**).

And if scooping up a top-notch commodities play on a pullback isn't reason enough, here are six other reasons to buy FCX.

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Money Morning's Gilani Analyzes Silver, Stocks and Gold During FoxBusiness Interview

Money Morning's Shah Gilani acquitted himself so well on the popular Varney & Co. show on Fox Business early yesterday (Thursday) that program host Stuart Varney invited Gilani back - before the interview was even over.

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Gilani's Views on Silver, Stocks and Gold

Is now the time to buy stocks? What's driving the stock rally? Is silver a better investment than gold? Money Morning's Contributing editor, Shah Gilani, joins Fox Business Varney & Co. to answer these questions.   Loading the player …

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U.S. Stock Market Forecast: Tech, Energy, Commodities and Gold Are Top Plays For 2011

The outlook for the U.S. stock market in the New Year figures to be an exasperating mixture of promise and peril. Positive momentum is building going into 2011, but so are dangerous bubbles.

The high-tech, energy, materials and commodities sectors will be hot in the New Year. And the U.S. stock market will get an added boost from the fact that U.S. Treasuries, municipal bonds (munis) and euro-based investments will not.

Here's what's in store for the U.S. stock market in 2011.

For the most complete stock-market strategy you'll find anywhere, please read on...

Money Morning Mailbag: Soaring Gold and Silver Prices Point to Profits in Equipment & Drilling Industries

Gold yesterday (Thursday) continued a four-day rise soaring as high as $1,399.70 an ounce as the dollar fell for a second consecutive day.

"Gold is up primarily on dollar weakness and economic optimism," Adam Klopfenstein, a senior market strategist for Lind-Waldock, told Bloomberg. "This is very positive for gold on the future inflation front."

This week Money Morning Contributing Editor Peter Krauth showed why gold and silver are still headed for gains in the New Year, following a 2010 surge.

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Chinese Investors Drive Gold Imports Five Times Higher on Inflation Fears

The gold rush in China accelerated during the first 10 months of 2010 as investors seeking protection from looming inflation drove imports of the yellow metal up nearly five times more than the amount brought in all of last year.

Gold imports rose to 209 metric tons compared with 45 tons for all of 2009, Shen Xiangrong, chairman of the Shanghai Gold Exchange told a conference held in Shanghai yesterday (Thursday).

"The government hasn't officially said that China is encouraging private gold investments, but we in the industry suspect it. And you can see the big jump in the delivered gold imports through the exchange has to be approved by them," Albert Cheng, managing director of the World Gold Council's Far East department, told Bloomberg News in an interview.

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Gold Price Forecast: Four Reasons the "Yellow Metal" Will Hit $1,900 an Ounce in 2011

Gold investors are a happy bunch. Those with the luck or foresight to have boarded the golden railroad back in 2001 have experienced a fivefold investment in the "metal of kings." That works out to compounded return of better than 20% a year.

Such a torrid performance has evoked claims that this is just another financial bubble - that's soon to burst.

But the reality is that anyone who classifies this bull market in gold to be nothing more than a bubble simply hasn't looked at the market fundamentals, doesn't understand them, or has an ulterior motive.

Precious metals - and gold in particular - have been the asset class of the decade. But it's not too late to climb aboard - there's still plenty more growth to come.

In fact, before 2011 closes out, I predict that each ounce of the prized "yellow metal" will be trading at $1,900 - an increase of about 37% from yesterday's (Wednesday's) closing price of about $1,390 an ounce.

To understand why gold prices will advance in the New Year - and to see how to profit - please read on...

Question of the Week: Midterm Elections Leave Investors Wary, Turning to Silver and Gold

The hotly contested midterm elections ended last week, and now U.S. voters will watch to see if newly elected officials will deliver on promises to lift the nation out of its economic morass.

Many voters made their decisions out of frustration with current economic conditions, such as excessive government spending, ineffective stimulus measures and stubborn unemployment. And given the potential for change in U.S. economic policy, investors will likely be eager to see what the stock-and-bond markets will do in the months to come.

Although there is unlikely to be any quick decision making in Washington, investors will hope for the status quo in at least one area - a continued market rally, which is the norm for midterm election years.

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Money Morning Mailbag: When Investing in Precious Metals, 'Physical Metal' Isn't Always Better

If there's one thing that I've discovered in my careers as a hedge-fund manager, investment advisor and financial columnist, it's this: Whenever you pitch a stock that has something to do with mining or metals, you'll always hear the argument that "physical metal is better."

As my experience has demonstrated, however, that's not necessarily true.

Wealth protection in hard economic times is driven by asset diversification. In good times, an investor should concentrate their investment bets on profitable enterprises, in hard times you want to diversify your assets across different asset classes. You will lose some money, but if you choose wisely, you will have real assets and value on the other side.

That's not always the case when you concentrate your assets during a period in which there's substantial market risk.

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