The term "leverage" is used in several ways.  All of them apply to gold, i.e., the owners of gold. 

     The word usually refers to influence.  When someone says of a politician, "he's got a lot of leverage," this means influence.

     Consider a U.S. Senator.  He has one vote out of 100.  But if he is the chairman of a major committee, he has more influence than his single vote indicates.  If his committee is important for generating pork barrel spending projects for the voters in other Senators' states, he has even greater leverage.  Same person; different leverage.

     A preacher has leverage in his congregation.  But if he is a satellite TV preacher, he has a lot more leverage.  He has leverage in other preachers' congregations.

     The term "leverage" also applies to the world of investing.  It usually refers to certain debt contracts, but not always.
 

LEVERAGING GOLD

     Consider gold.  Say that you own a one-ounce gold coin.  (I hope this is true several times over.)  Gold's price in dollars then doubles.  Your gold coin is worth twice as much in dollars.  Of course, if the price of everything else has doubled, your gold coin is worth twice as much in dollars, not twice as much in goods.  But that's still much better than having held dollars instead of gold.

     But what if your gold investment was leveraged?  What if you had borrowed half of the dollars to buy the gold coin?  The gold price doubles from (say) $400/oz to $800/oz.  You had $200 of your own money in the deal.  Your investment is now worth $800.  Your profit is $400 ($800 minus the original $400).  You sell the gold coin for $800, pay off the $200 loan, and pocket $600, of which $200 was your original investment.  It cost you $200 (plus interest) to make $400 free and clear.  You made close to 200% (after interest), meaning you made two to one on your money.  That's sure a lot better than 100%.

     But what if gold's price had fallen to $200?  You would now owe $200, and your original $200 would be gone -- "NASDAQed," so to speak.  Worse; the lender might have been in a legal position to "call the loan" by selling the gold coin and getting his $200 back before gold went to $100.  This arrangement called buying on margin, and forced sell-outs happen all the time.  The broker sells out the client's account.  The client loses his ownership completely.  Even if the asset's price rebounds, he is out of the market.  The rebound does him no good.

     I assume that you want a safer kind of leveraged gold, a kind where you can't be sold out for this reason: you never borrowed any money.  You don't have a margin account. It's as safe as owning a gold coin -- you can't be sold out against your will -- but it still offers leverage upward.  Of course, it is risky on the downward side, too, but you can't be sold out because you aren't in debt.  You want debt-free leverage.  You can get it.

     This is what North American gold mining shares offer.  Sam Parks described this feature in his interview.

     Marginal producers offer the most leverage to gold. Say that a mining company can show a profit of $5.00 per ounce of production when gold is $350 per ounce. If we up the gold price by $50 per ounce, and the company's profit increases to $55 per ounce of production. This leverage of course works both ways. If gold goes down $50, the company's profit per ounce will go from $5.00 per ounce to a loss of $45 per ounce. 

     They have heard of gold coins, but hardly anyone buys them.  The number of dealers who make a living by selling bullion coins such as American eagles or Canadian maple leafs can be counted on the fingers of two hands.  The general public isn't in this market.

     Another gold market is the commodity futures market: mostly debt-based, highly speculative, and very risky unless you put down a high margin.  The contracts are so large that hardly anyone can afford to invest without a lot of margin debt.  Also, investors are personally at risk for every cent borrowed. 

     This leaves gold mining stocks, which are mostly South African mines -- two miles deep, operated by Africans with AIDS, and supervised by a socialist government.  The few other mines that stock brokers know about are the larger North American mines.  The most famous is Barrick.  But Barrick has a problem: it is sold short.  That is, it has promised to deliver gold in the future at a fixed price.  Parks comments:

     In the past, hedging was profitable for the gold producers.  In its 2001 annual report, Barrick stated that over the preceding 14 years, it had made $2 billion from its hedging activities. 

     GN:
     Two billion?

     SP:
     Yes, two billion.  For several years, Barrick was the most popular gold stock.  Much of its popularity came from its profitable gold-hedging activities.  But, as the gold market began to improve in mid-2001, the effect on Barrick turned negative.  Gold stock investors shunned the company because it had so many ounces sold forward.

     GN: 
     Quantify that -- how many ounces?

     SP:
     At year end, 2002, Barrick had 18 million ounces sold forward at an average price of $341 per ounce.

     GN: 
     What effect has Barrick's hedging had on its share price since the bear market in gold ended in 2001? 

     SP:
     At the beginning of the 2001, two companies were trading around $17 or $18.  Newmont, the big major known for its disdain for hedging, is currently about $28 and Barrick is stuck at $17. 

     Sadly, I got stuck with Barrick.  It bought out Homestake, which I owned. 

     What Parks did for REMNANT REVIEW subscribers in 2001 and early 2002 was to identify smaller gold mines that most stock brokers had never heard of.  (They still haven't.)  These are marginal mines, i.e., they are high-cost producers.  But they are well positioned for highly leveraged returns.  They get "more bang for the buck" when gold rises above their production costs per ounce.  These mines are still the Rodney Dangerfields of mining.  They get no respect.  Brokers still are unaware of them.  The REMNANT REVIEW readers who took Parks' advice are up by 100% or 200%, depending on a mine's leverage.

     If you took me up on my offer to send you Parks' reports on these mines as a bonus for subscribing to REMNANT REVIEW, you now know which mines they are.  You also know their stories: why they are leveraged, and to what degree.  In contrast, for those of you who initially decided not to follow through on this investment, and who did not send for Parks' reports, you still can.  You can subscribe by phone.  Call my customer service number:

                          (800) 528-0559

     But enough about how to make money.  Let's get back to the other meaning of leverage: influence.
 

PERSONAL LEVERAGE

     My initial example of leverage was a U.S. Senator with a committee chairmanship.  In a sense, I want to put you in a similar position within your circle of influence.  That's what THE GOLD WARS is really all about.

     The number of people who are willing to read a newsletter like this is so small as to constitute a Remnant.  I'm using the word in the biblical sense.  God told the prophet Elijah, who believed himself to be alone in Israel,

     Yet I have left me seven thousand in Israel, all the knees 
     which have not bowed unto Baal, and every mouth 
     which hath not kissed him (1 Kings 19:18).

     You have decided to subscribe to this report.  You have designated yourself as someone who is interested in gold.  This is not the equivalent of being interested in pork bellies or even copper.

     Gold used to be the industrial world's money.  Then World War I broke out in 1914.  The banks suspended redemption of gold for paper money.  This broke their contracts, but the governments all ratified this action.  Then the governments had their central banks confiscate the gold that had been stored in the vaults of the commercial banks.  The public has never returned to a full gold coin standard.  Instead, the world went onto a fiat money standard. 

     The governments' confiscation of the public's gold transferred enormous leverage to central banks, which can now issue credit money without the restraining factor of a threat of a gold run.  The last gold run ended on Sunday, August 15, 1971, when President Richard Nixon unilaterally "closed the gold window."  He announced that the U.S. Treasury would no longer honor the IOU's to gold (T-bills) in the possession of foreign governments and their central banks.  In the first half of 1971, there had been a run by central banks on U.S. gold (meaning gold which was held in the vault of the Federal Reserve Bank of New York) at $35 an ounce.  Nixon ended this run on gold, which was a run against the dollar, in the same way that the world's commercial banks ended a similar run in 1914, after the war broke out.  He broke the contract.

     If you go to the home page of the Bureau of Labor Statistics (www.bls.gov), you can use the Inflation Calculator (under "Inflation and Consumer Spending") to see what has happened to the dollar as a result of Nixon's action.  Select 1971 as the base year (or "debased" year).  Enter $100.  Then click the CALCULATE button.  See how much after-tax money it would take today to match the $100 in purchasing power in 1971.

     The day after World War I broke out in July, 1914, a wise investor with money in the bank would have gone to the bank and demanded gold.  The handful of people who did this got their gold.  But hardly anyone will do this, even when war breaks out.  The masses lose.  They trust their banks, they trust their governments, and they get their gold confiscated. 

     He who trusts the government to honor its contracts in a major national crisis is a fool.  Most voters are fools.  Most investors are fools.  They trust professional liars -- the same politicians who keep promising the moon in election years but who don't deliver after the election.  They pay a heavy price for their misplaced trust. 

     If you want a classic pair of examples of those who trust the government and those who don't, watch "Gone With the Wind."  Rhett Butler uses his ship to run guns -- illegal, the North says.  He also gets paid in gold -- unpatriotic, the South says.  When he is caught, he deliberately loses at cards in the yankee prison, so he knows that the commander won't hang him.  He is in a position to settle his bets in yankee dollars.  He has gold hidden somewhere.  In contrast is Scarlett's father, driven mad, sitting in poverty and holding bonds -- "good Confederate bonds" -- as his only form of liquid capital.

     No, gold is not like pork bellies.  Central banks still settle their accounts at the end of the day by means of dollars and gold.  Gold is not just another commodity.
 

THE THREAT TO THE DOLLAR

     The economic problem facing the whole world today is that the means of settling payments -- the dollar -- is the world's reserve currency.  But there are no technical limits on its creation.  The Federal Reserve is pumping dollars into the economy in order to hold domestic interest rates down, so as to stimulate the American economy.  Americans are running a trade deficit of well over a billion dollars a day, 365 days a year.  This deficit is now in the range of 5% of our economy.  To this, add the growing Federal debt, which is also growing at well in excess of a billion dollars a day.

     As Senator Everett Dirksen said a generation ago: "A billion here, a billion there, and pretty soon we're talking big money."

     Will the world keep trading in dollars?  Not if our policies don't change.  But our policies won't change without the outside pressure of an international monetary crisis.  Greenspan has made this clear -- well, at least as clear as he makes anything.  So have other members of the Board of Governors of the Federal Reserve System.  They are going to continue to inflate the dollar.

     The reason why the dollar is the world's reserve currency is two-fold: (1) central bankers refuse to rely exclusively on gold, for gold imposes too many constraints on them; (2) the U.S. economy is the largest on earth.  But the U.S. economy is now dependent on capital injections from foreigners equal to our balance of payments deficit.  Asia is catching up economically.  Asians are supplying Americans with goods in the form of loans and purchases of capital assets owned by Americans.  Americans are mortgaging their future to buy Asian goods; they are going into hock to Asian lenders.
 

THE WAR ON GOLD

     The war on gold has led to the leveraging of government power over the public.  Governments can run huge budget deficits, central banks can crank out credit money to stimulate the economy, and politicians can spend and spend to buy votes because we, the public, have no way to restrain them directly.  Prior to July, 1914, our great grandparents could and did.  One by one, with no one telling them what to do, they could walk into a bank, hand over paper money, and say to the teller, "I want gold coins at $20 per ounce." 

     Today, hardly anyone knows this story.  It isn't found in history textbooks.  Only a handful of people know about the role that gold has played in the war of governments on the public.  What I call "the gold wars" are in fact a series of wars by governments on the voters.  The most powerful means of voting in 1913 was not in an election booth.  It was in a bank.

     Your neighbors are oblivious.  Your friends don't know and don't care.  They may think you're a bit nutty to worry about gold's price.  Ignore this.  To the extent that you understand today what the role of gold was long ago, has been in our day, and will be in the future, you have leverage.  You have information about the past and the most probable future that most people don't have.

     You may also own gold in various forms, from coins to gold mining shares.

     In THE GOLD WARS, I will do my best to explain the gold wars.  I will try to show why gold is not copper or lead, why gold is at the very heart of the conflict between the expansion of government and the ability of the victims to fight back.

     We are in the midst of a war on gold because we are in the midst of a war on our liberties.
 

YOUR FULL SCHOLARSHIP TO OFFICERS' CANDIDATE SCHOOL

     We have the military academies to train our generals and admirals.  We have Officers' Candidate School to train our officers in the field. 

     THE GOLD WARS is a correspondence course version of Officers' Candidate School for a handful of dedicated people who want to know about the nature of the war against honest money by dishonest politicians and their beneficiaries.

     There are not many volunteers.  The army is small.  You are part of the Remnant.

     But if you will stick with me, I'll offer my thoughts after 40 years of study on this issue.  I'll talk straight on gold,  and I'll also send you the best examples of other people who have talked straight on gold.  That's because talking straight on gold is talking straight on freedom: how we lost it and how we can get it back.  And make a few bucks, too.

     As the recruiting poster used to say: "Uncle Sam Wants You." He also wanted our gold, and he got it.

     I'm going to show you how we can get it back, and the liberties that came with it.

     I'm glad you signed up.  I hope you stick with the program.