The following speech was presented by Alan Brown at the CMRE meeting, Policies, Power – and Problems,
held May 11, 2006.

 Mr. Brown is President of Aurumbank, Inc. and a gold mine developer.
His speech was part of the session entitled,
"Black Gold - Yellow Gold – and Corn

                                  Back To Basics. 

Got Commodities? 

Well good evening ladies and gentleman. The theme of this presentation which I have entitled “Back to Basics” is about commodities, in particular the metals and in general all commodities. We all need to remember that it was commodities that came first, not paper assets or fiat currencies and if we examine the rationale for the existence of CMRE and look at some of the early monographs published by the committee, such as The Origin of Money, by Carl Menger with an introduction by Antal Fekete, or The Failure of International Monetary Cooperation, by Rene Berger, or The Worldwide Inflation and Its Causes, by Jacques Rueff, or The Triumph of Gold, by Donald H McLaughlin you can’t help arriving at the conclusion that we are seeing the unfolding of the fiat monetary system as they predicted, but some 30 odd years later. 

The debt levels that some of the gentlemen in these monographs referred to are minuscule when we look at today’s levels, in fact not once did I see the word trillion used in any of these publications. 

In actuality it now seems that most of the fiat monetary world has duplicated the American system of inflate or die and now finally after all these years we are beginning to see this system unravel as these earlier hard money men predicted. 

Antal Fekete in the introduction to the excellent book by Ferdinand Lip entitled “Gold Wars” says and I quote: “Ownership of gold is not about lust; it is about liberty of the individual. The gold standard is not a ‘game’ it is the embodiment of the timeless principle pacta sunt servanda (promises are made to be kept.)” 

The fiat monetary system has, it seems, lived up to its expectation of inflate or die to the degree that there is very little left to inflate and very little left to inflate it with. The securitization of debt has about reached its maximum with the last push perhaps being the rising real estate market, which may or may not have topped out in some US cities. It certainly is beginning to look like it. 

In The Failure of International Monetary Cooperation; published in 1973, Rene Berger wrote: “Once upon a time, when things were not going well in the Middle Kingdom, the emperor of China appointed a commission to revise the dictionary definitions of important terms. Political action is guided by words, by formulas and doctrines, the meaning of which is subject to gradual and sometimes total change. 

This has happened to the language of economics and finance in the last forty years. When writing or talking about banks, money, inflation, etc these terms are no longer used in their original meanings, but in new ones, sometimes far removed. This change has been so gradual and imperceptible that most people are under the impression that in using the same words they are still talking about the same things. 

Today, the bank of issue has become very much a credit institution, but instead of lending the money received in deposits, it continues to produce ‘money’ as if it had the power to create wealth by printing paper. While in the past every precaution was taken to prevent the issuing bank from becoming a tool of the state and from helping to finance public deficits, today financing government deficits by printing money is looked upon as the normal way of controlling the economy. 

In the past issuing an excessive quantity of a means of payment was called inflation. In view of the fact that such an excess generally results in rising prices, price fluctuations were used to measure the degree of monetary inflation. But now we have gone one step further, calling every rise in prices inflation. The consequences are serious. By using the same word to describe the cause and the effect, it becomes impossible to understand monetary phenomena and the market economy, which is naturally based on upward and downward price movements caused by disparities between supply and demand.” End of quote. 

Commodities came first and it was the exchange of commodities that became defined as trade. Gold became the most favored commodity for settlement because of its liquidity, even if you did not want it; it was always handy to have because you could always trade it for something else. Because of this the difference between the bid and ask was always and still is quite low. There was little if any need to heavily discount as an incentive to the purchasing party because it was widely accepted.  

In July of 1999 commodities were at multi year lows in terms of prices with the CRB index bottoming at 182 a level which was retested in October of 2001 and since that time the index has increased to new all time highs albeit not inflation adjusted ones. 

Gold is now trading at $720 an ounce, silver at $14.00 an ounce and copper at $3.80 per pound. Somebody obviously is buying commodities.  

Now as I see it the only way to offset the risk of fiat currencies is to go back to what was prior to their current incarnation, which is as we all know a paper promise to not pay anything at all other than another promise ad infinitum.  John Exter referred to the dollar after the closing of the gold window in 1971 as an “I owe you NOTHING.” I suspect that currently the smarter smart money men have figured this out and that we are seeing the beginnings of a major restructuring of monetary policy as it has been practiced for the last 35 years and as predicted by the previously mentioned writers of the wonderful monographs produced by CMRE over the years. 

As an aside I note that the cost of Monetary Tract Number 2, The Triumph of Gold by Donald McLaughlin and published by CMRE in Feb of 1974 was 50 cents a copy while the latest publication, the “Barbaric Relic – It is not What You Think,” by James Turk, one I highly recommend if you don’t have a copy, is priced at seven dollars.

 Now gold was priced at around $170 per ounce in Feb 1974, which suggests that either CMRE is over charging, which I doubt, or gold has some ways to go yet before it catches up with the loss of purchasing power of the unit of measure.  

As we know one of the problems with paper assets is that they can depreciate, quite quickly at times and what are you left with? Why paper of course whereas with the metals you still have the metals and they do not deteriorate any where near as quickly as their paper imitations. 

An unremembered victim of the paper asset boom we have seen over the last 35 years is the gradual destruction of the US mining industry. While the US is still ranked by some as the second largest gold producer in the world after South Africa, a large percentage of that production is now either Canadian owned or Canadian dominated, mostly out of Toronto. The same applies to Australia where upwards of 70% of all gold produced is either by Barrick or Newmont. In fact 25% of all gold produced in the world today is by two companies, Newmont Mining and Barrick Gold. Even the once mighty Homestake Mining Co is no more, having being taken over or perhaps best described as surrendered to Barrick Gold. As an example of how much thought went into some of these mining mergers I have with me tonight a one ounce silver medallion minted by Homestake Mining to commemorate the existence from 1876 to 1989 of the mine in Lead, Dakota. I was given a sheet of these by a senior officer of Homestake some time after the merger with Barrick had taken place. Homestake’s head office, like others, was closed quite quickly and this particular gentleman had rescued these medallions from a dumpster. 

The rationale that is presented by the investment bankers and advisers to the majority owners of these companies, these days mostly mutual funds, is that mergers are needed to increase production, reduce costs and add more reserves. There are few sizable gold deposits left in places like the US they say, so we need to expand via acquisition.  

Now what has really happened when it comes to the US is that following the boom years of the early 1980’s when exploration was at its best, when competent exploration teams were out in the field, with boots on the ground and pick in hand, there has been due to these mergers an ongoing reduction in exploration, especially since 1997, along with a reduction in exploration staff. Experienced geologists now days are getting very hard to find and geological data bases, accumulated over years of field work have been either lost, thrown out, misplaced, or just forgotten about. There is not a shortage of mining properties in the Southwest; rather there is a shortage of people who know how to look and more importantly where to look. True those deposits that are out there today may not all be 5 million ounce deposits but 1 million ounces or less are not all that hard to find. 

Recently a good friend of mine, a geologist based in Elko, Nevada received a phone call from a New York based broker wanting to know who was doing what, how much drilling was taking place, who was exploring etc. and my friends answer was basically nobody. The level of activity has not increased significantly and if this is a bull market then it sure seems to be missing some important ingredients. 

Over the last few decades, well up until 1997, money for exploration has come from Canadian companies via either the Toronto or Vancouver stock exchanges. The recent rise in the gold price has not as yet it seems worked its way into the exploration plays and gold stocks are all acting as if a pull back is imminent. In the late 80’s and early 90’s it was not uncommon to come across a geologist out in the field sampling a property, even on ones they did not own. I have not seen anybody apart from weekenders in the field since 1997. It may seem surprising but the activity one would expect to find is not there.  

It is the same with project development, the story that the US is too difficult when it comes to permits is not necessarily true. This is another one of those investment banker & advisor clichés used to direct client money into South American projects. Yes there was a couple of higher profile US mining projects that did run into permitting problems but some of them should not have been started in the first place. Planning heap leach operations in high rainfall, mountainous areas with rivers nearby, complete with trees and wildlife is not a good idea. But it has been my experience that both State and Federal officials in the South West are reasonably pro-active and not at all difficult to work with but you need to be prepared to work on the relationship aspect. Certainly smaller operations are easier to permit because they pose less environmental risk and in most cases are easier to understand. The location is also important in the sense that poorer counties tend to be more user friendly. 

 I would like to add that the recent confiscation of  oil & gas assets in some South American and Asian countries, such as we have seen in Venezuela and Bolivia may become more common place and eventually include the metals, even more likely if the metals price continues to reflect the debasement of the currency they are priced in. 

One needs to understand that if you are going to protect yourself from debasement of the dollar and plan on residing in the US then it is best that your assets are located here as well. Fred Sheehan, who is in the audience tonight, recently published an excellent article entitled “The Inevitable Flow from Paper Assets to Real Assets.” In it he makes the case for looking at commodity ownership, including the precious metals, base metals, land that contains useful deposits such as gold, coal, trees, water rights and ranches. I agree with everything he says and one should indeed be looking at these asset classes sooner rather than later. 

Recently I came across a link to an article entitled: “Archeologists to establish true value of Roman silver coins”, which caught my eye. The article referred to a Dr. Mathew Ponting of the University of Liverpool who went on to say:  

“In the 1970’s a study documented the silver contents of Roman Imperial silver coins by analyzing their surface. Until recently this was the principal reference for economic historians on the monetary policies of the Roman Empire. During the 1990’s, however, historians realized that many of these Roman silver coins were deliberately treated to remove some of the copper from their surface, giving the impure coins the appearance of being pure and disguising the debasement of the currency. Analysis of the coins surface had therefore overestimated their silver content.” 

It’s a good thing that the Romans did not have printing presses! 

When inflation began with agusto after they debased the currency by introducing other metals, the result of which was that people eventually had to leave the cities and go back to the country and return to agricultural life simply to be able to eat. Now that sounds like back to the basics to me!  

I would like end tonight with a quote from Donald McLaughlin, actually an answer to a question published in an interview he gave in a book entitled “The Homestake Centennial.” 

The question was:  

“Gold has been a traditional hedge against currency inflation. If this is true, do devaluations increase the demand for gold?” 

Mr. McLaughlin replied:  

“Worried people do indeed turn to gold for protection against depreciation of a currency. When the discipline of the gold standard is respected and currencies are convertible into gold the money supply cannot be expanded indefinitely. If great deficits arise from overwhelming events such as wars for survival, the right to redeem currencies in gold is inevitably suspended or even abandoned completely as far as a specific form of currency is concerned and inflation results as the paper money supply grows in response to mounting claims. In such times people would turn to gold if they were allowed to. When this right – this protection – is denied, the money managers can meet deficits without restraint by creating more and more unredeemable paper money, thus bringing about a selective and most unfair confiscation of wealth through inflation. Confidence in gold is far more enduring than respect for fiat currencies and when currencies are not convertible into gold their official valuation in such terms becomes meaningless.”