Wednesday, February 18, 2009

SEC Discovers Fraud Exists/Smart Money Buys Gold

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday, SEC officials raided the offices of R. Allen Stanford, a Texas billionaire listed as one of the 400 richest by Forbes magazine, and froze the assets of three companies he controls. The SEC is accusing Stanford of perpetrating an $8 billion investment fraud, something that would have had to have been conducted over many years if not decades because of its size. The fraud was centered around CD's, usually considered the safest of investments, with higher than the going rate of return. Just as with the Madoff investment scam, the too good to be true returns were a fantasy. At the same time that the Standford fraud news appeared, figures for gold consumption in 2008 were released and they indicate that the smart money was loading up on the precious metal last year.

When news of the Madoff scam broke, only the incredibly naive would have thought it was the only one being perpetrated. Madoff's fraud indicated an SEC permeated with corruption. It is not far fetched to say that the SEC itself was in on the Madoff scam. Madoff himself sat on an SEC board. At least one (more likely several) former SEC regulator left the SEC and started a feeder hedge fund that funneled at least $7 billion into Madoff's operations. That fund changed its auditors every year (something which is not done) in an obvious attempt to hide what it was really doing. Even though Madoff's operations would have required that he was conducting more than 100% of the trades in the SP100 futures markets, the SEC didn't see anything suspicious about this. FINRA, the other regulatory agency that investigated Madoff, reported that parts of Madoff's firm had no customers, but was still making money. They didn't find anything impossible about that one either. The head of FINRA at that time is now the current head of the SEC.

The most recent statements from the SEC indicate they believe the Madoff scam began in the 1970s. In over three decades they noticed nothing. How long the $8 billion Standford scam has been going on is not yet known. However, it usually takes a long time to steal $8 billion. Stanford has significant operations in off-shore money haven Antigua, where he has been knighted. It is quite possible Madoff has stashed a lot of money at one or more off-shore locations himself. It takes a lot of money to bribe judges and other U.S. government officials after all.

Lost amidst all the fraud news was that gold demand hit a record in 2008, surpassing the $100 billion mark for the first time ever. Demand for the precious metal in the form of jewelry, for industrial uses, gold bars, coins, and gold exchange-traded funds, hit $102 billion, up 29% from 2007. Many of the buyers of Standford's 'safe' CDs may have shunned gold because it was 'risky' and the wanted 'cash flow'. Many of those people will lose everything. The actual smart money knows that paper assets are now the riskiest of all and has been loading up on gold behind the scenes for awhile now.

NEXT: Gold and Silver Rise, Oil Falls

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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