I have stressed holding coins, especially tenth-ounce American gold eagles.

I am writing this for those who did what I recommended, have quadrupled their money (on paper and in digits), but who may be getting cold feet.

There are good reasons for buying gold. But you should have an exit strategy in mind.

We are told by the mainstream financial media, which never told investors to buy gold over the last decade, that gold is in the final phase of a bubble market. But how can any market be a bubble market when the mainstream financial media are not running report after report on the bubble, telling readers and viewers about how much money people are making.

What mainstream financial outlet warned investors loud and clear, issue after issue, in 1999 that the dot.com market was a bubble? I told my subscribers in February and March of 2000 that it was, and that they should get out. But I published a newsletter. I was not mainstream.

What major outlet warned people in 2006-2007 that the real estate market was a bubble, that wise investors were getting out? I did in November 2005.

Bubbles always continue for months or even years after old timers say they will pop. Old timers have trouble estimating the fear of the buyers at being left out and the fear of lenders at being left out. The two sides — debtors and lenders — keep the dance of doom going much longer than old timers can imagine possible. But eventually the dance ends.

I spoke at Lew Rockwell’s conference. One of the speakers is a banker. He lives in Las Vegas. He was taught by Austrian School economist Murray Rothbard. He earned a masters degree in economics. Then he went into banking.

As an Austrian School economist, he understands the business cycle. He understands that the Federal Reserve system has pumped money into the economy, creating a housing bubble since 1996. He knows this boom will bust.

He has no illusions about this housing market. Compared to him, I have been Pollyanna. He spoke of the mental outlook of the builders in Las Vegas. They all know it can’t go on, but they are determined to party until it does. “Then they will declare bankruptcy and start over,” he said. This is their exit strategy.

He was correct. It happened. He lost his job as a Las Vegas banker. He is now the president at the Mises Institute.

I went on to write the following:

I think a squeeze is coming that will affect the entire banking system. The madness of bankers has become unprecedented. They have forgotten about loan diversification. They have been caught up in Greenspan’s counter-cyclical policy of lowering the federal funds rate. Now this policy is being reversed. Rates are climbing. This will contract the loan market. Banks will wind up sitting on top of bad loans of all kinds because the American economy is now housing-sale driven.

But I was on the fringes of the investment community. The bubble was about to burst, but the media attracted viewers and readers by staying on the bandwagon. To call attention to what should have been obvious would have reduced the audience. The editors knew better.

So, when I read articles about gold in a true bubble market, I know it isn’t. The salaried reporters with no savings, underwater in their homes, and in a dying industry are merely writing what their editors think will sell.

What sells? Articles that confirm what conventional viewers and readers want to hear, namely, that they were not really losers by staying out of the gold market (they were), and that those who buy good now will lose everything (they won’t), and that now is a good time to buy stocks and bonds (it hasn’t been ever since March 2000).

Mark Faber, who recommends owning gold as a hedge against a declining dollar, recently wrote this: “In my opinion the Fed funds rate should be at 5% . . . That will provide real interest rates. I don’t think the Fed will increase interest rates to a positive real rate. So, I’d say to an investor, he should have at least 20 to 30 percent of his money in precious metals.”

When asked about his opinion about renewed fears of a bubble forming in the gold market, the student of the Austrian School of economics theory scoffed at the pundits who say the gold trade has become crowded.

Faber said he routinely sees less than 5% of attendees at his speaking engagements raise their hands during his casual sentiment polls regarding the precious metals. Sometimes he sees no hands raised, he said.

There are many ways to own gold. The ones that most investors choose, and which most investors will rush into during the final phase of the bubble, is in fact not gold. It is a promise to invest in gold. It could be an ETF, which is a form of derivative. It may be a commodity futures contract — another promise.

But what about gold, in contrast to a promise — “cross my leveraged heart and hope to die” — to invest in gold on your behalf?

Gold coins are gold.

Why Gold Coins?

The problem with today’s economy is that it is built on promises and trust. It is therefore built on debt.

In the United States, the financial promises always come back to these:

1.    The Federal Reserve System will remain the lender of last resort.

2.    The Federal Deposit Insurance Corporation (FDIC) will pay off all bank accounts up to $250,000.

3.    The U.S government stands behind the FDIC’s promise with a $600 billion line of credit.

4.    The government can get this money from the Federal Reserve System, if necessary.

The problem with these promises is this: the ultimate insurer — the FED — can fulfill its obligations in a deflationary crisis only by hyperinflation. That means that the only sure guarantee against the systemic failure of the American banking system is the destruction of the dollar.

If we get the latter, do you want promises to pay gold, which can be settled legally by the payment of digital dollars? Or do you want coins where you can get your hands on them?

On the other hand, if the FED ever refuses to create money, and if the banking system then begins to implode, do you want promises to pay that were issued by a limited liability corporation, such as a futures exchange?

In between hyperinflation and a deflationary banking collapse, people can buy and sell promises to pay gold. They can pay 28% on all profits (no capital gains protection). They can become self-conscious speculators. There is nothing wrong with this.

But what if you are speculating against long-term price deflation? Then you want paper money. But paper money leaves you at the mercy of the Federal Reserve System and the commercial banking system. Mass inflation could appear rapidly (up to 20% price increases), followed by hyperinflation (anything from 20% to infinity).

What if you want an asset that will do well in mass inflation or hyperinflation, but which will not do as badly as most other leveraged capital assets in a banking collapse?

I keep getting this answer: gold coins.

Procrastinators Pay Premiums

Most people listen to a story for years before taking action. This has surely been true of the story of gold. When Gordon Brown, as Chancellor of the Exchequer, sold off half of Britain’s gold, 1999-2002, he depressed the world price. He sold it at an average price of $276 per ounce.

This was a massive transfer of wealth from the British government to other central banks, which bought most of the gold. This kept down the market price, as central banks shifted demand from the private markets to the Bank of England’s bars of gold.

This was the last chance for gold speculators to get in on the deal cheap. Not many people did, of course, because not many people ever buy close to the bottom of any market.

So, gold has steadily moved higher over the last decade. Still, the procrastinators procrastinate.

I don’t mean Joe Lunchbucket and Tom Temp. The vast majority of Americans have no liquid savings above a few thousand dollars in the bank. Fewer than 50% have pensions of any size, and the money in these tax-deferred accounts are not at their disposal. The funds they can invest in are not related to gold. They are categories that will keep the fund managers from a lawsuit when markets collapse: American stocks, American bonds, and Treasury debt.

Gold is an investment asset. It therefore will not become popular short of an economic collapse — hyperinflation followed by a depression. The average person owns no gold coins, nor will he anytime soon.

Where would he buy them? How could 100 million households buy a single gold coin per household? This would be impossible. There are only a few small coin stores in any community. They are mostly mom-and-pop outfits. The U.S. Mint could not meet the demand.

When Wal-Mart has a gold coin section in the jewelry department, then we can start talking about a possible bubble in gold. Not until then.

As more people on the fringe of the Tea Party find out about American gold eagles, they will start buying. This will force up the coins’ premiums.

As word gets out about the scarcity of small-weight gold coins, there will be more interest in owning them.

As word gets out that the Federal Reserve’s exit plan is a myth, they will start looking for hedges. Gold is a hedge against serious price inflation.

The government is working hard for existing gold coin owners. The government clearly cannot bring the budget deficit under control. Congress has no intention of doing so. When the government can borrow $1.6 trillion a year at rates as low as four-one-hundredths of a percent (90-day) to under 3% (7 years), why should we expect Congress to cut spending?

Conclusion

If you have yet to buy a single gold coin, buy a tenth-ounce American eagle to get started. That will not bankrupt you. It will get you over the hump.

Most Americans will never take this initial step. Those who procrastinate will pay a high premium when they at last think: “Maybe I really do need some gold.”

Regards,
Gary North
Whiskey & Gunpowder

April 13, 2011

Your Gold Coins vs. the Federal Reserve and the Mainstream Media was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Money magazine’s January/February edition ran an article near the rear of the issue titled, “Coming Down with Gold Fever.” The author paints a decidedly negative picture of gold, going so far as to compare gold’s rise to some of history’s greatest asset bubbles (tulips in the 1630s, Internet stocks in the 1990s). The article is so blatantly biased and inaccurate that I decided to have a little fun with my rebuttal.

I affectionately refer to the gold debunkers as “Bert.” You judge if this author is worthy. What follows are the article’s claims, along with my advice on How to Talk to a Nincompoop (HTTTAN)…

“Gold is now the world’s ‘it’ investment.”

HTTTAN: You’re absolutely right! A few cable TV commercials clearly signal the world has latched on to gold and is dizzy with excitement. The bestsellers at my local bookshop all scream with titles about gold. The radio waves are sparking with talk about buying, storing, testing, and securing all the different options with gold. And all those live newscasts from the lines outside gold shops across the country are really getting old.

►If gold were in a mania, it would resemble the dotcom craze of 2000, where companies with no profits traded at 400 times earnings; when investors were leaving their brokers to chase the latest tech stock; and where everybody and their brother’s dog was talking about the hot technology stock they just doubled their money on. None of that is happening now.

Besides, there’s a good reason investors have been buying gold: it outperformed most other investments last year.

And gold stocks tripled the performance of the Dow, more than doubled that of the S&P, and outran the Nasdaq.

“The price of gold is the only thing rising… gas costs less than it did a year ago.”

HTTTAN: Well, my blood pressure rose when I read your article – does that count? And whew, I’m glad I misread my DirecTV bill announcing higher monthly charges. Higher fees from my bank? Must’ve had my glasses off while checking my last statement. So, are you suggesting we wait till there’s rampant inflation before we buy gold?

►To start, the national average gasoline price rose from $1.70 to $2.70 a gallon over the past year, a 58% increase. The data disproving this blatantly inaccurate and misleading claim is available free on the Internet. If you want to talk about things rising, how about the monetary base that more than doubled over the past 18 months to nearly $2 trillion, the steepest increase ever.

When you think of inflation, you apparently think “higher prices.” News flash: price inflation stems from monetary inflation, and monetary inflation has ballooned. Price inflation is a tidal wave building off the coast. Don’t get caught sipping piña coladas on the beach.

And you’re right: gold is the only thing that’s been rising over the past decade! Ergo, that’s been the place to be with a meaningful portion of one’s investments.

Gold is doing what it’s supposed to do: rise in times of crisis!

“Gold isn’t that inexpensive. And who says it’s guaranteed to return to old highs?”

HTTTAN: Who says?! How about the laws of economics! My teenage son even understands this: the more you print of something, the less each one is worth. And as the dollar continues deteriorating, gold will continue rising. And gee, Wally, they can’t print gold.

►Adjusted for inflation, gold’s peak at $850 in 1980 would equal about $2,300 today, more than double its current price. Guaranteed? Of course not. Where would I find a guaranteed investment? But I’ll put the 5,000-year history of gold ahead of anything that is touted as “guaranteed” in the popular press.

“Even China is wary of gold prices rising too much.”

HTTTAN: Huh? China’s recent comment that they may not buy much gold right now was referring to their desire to get a better price, not a change of heart. In fact, there are so many articles about how the Chinese want gold that it’s hard to catalog them all.

►Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said last quarter that China might again scale back purchases of U.S. debt on concerns the dollar will decline. And this after their holdings were already lower in November than they were last July. Is it possible the Chinese – and the myriad other governments concerned about what U.S. leaders are doing to the dollar – will stop buying gold for protection? Anything is possible, but it’s far more likely that they’re just getting started, considering that just 1.9% of their foreign reserves are held in gold. I think even Money magazine agrees with the merits of diversification.

And this just in: An ING survey reports that 45% of investors in Asian markets (excluding Japan) picked gold as their most favored tool to protect their returns from inflation, more than any other asset.

“Only a small number of sophisticated investors are getting in on the action.”

HTTTAN: You mean like some of the most successful hedge fund managers in the world? Wait – are you suggesting we follow your advice instead? I’ll consider that when you show me that article warning of a market top in ‘08 and urging your readers to get out. Instead, I seem to recall your magazine’s giddiness as the market peaked. Perhaps that explains why many “sophisticated” investors use your magazine as a contrary indicator.

► Investment management firm Moonraker reported in a 2009 survey that 20 out of 22 fund managers interviewed bought physical gold for personal investment because they fear quantitative easing programs may lead to inflation. In other words, not only are they buying gold in their funds, they’re stashing some at home.

Further, central banks are now net buyers of gold for the first time in 22 years. And last quarter it was reported by the Financial Times that the world’s wealthiest families are also switching to gold. ”Two-thirds of the 100 respondents to a survey by the Family Office Channel, a new website, said that super-rich families are now more likely to invest in gold and other commodities.”

“Since 1974, when restrictions on Americans’ owning gold were lifted, stocks have actually done a better job beating inflation than gold has.”

HTTTAN: You’re kidding, right? You actually know someone who has held a stock since 1974? I suppose we could contact Warren Buffett and get a couple names. Otherwise, get real: there’s a time for everything, and right now is clearly the time for precious metals.

► Doug Casey made a fortune investing in gold stocks in the mid-’90s during a mini bull market in gold. Generational wealth was created during the late ‘70s gold run. I have colleagues that have already retired from gains they made in gold stocks this past decade.

“Ask yourself how long this delirium can last.”

HTTTAN: Until people like you start telling readers to buy gold, that’s how long. And, delirium? Tsk-tsk, your envy is getting embarrassing.

►There has been little involvement by the general public in the current gold bull market. While there are many examples of this, perhaps the best one is that your magazine doesn’t recommend buying it and really never has. And when you finally do, that will be my signal to start selling. I might as well thank you now.

There’s actually more, but you get the idea. When I finished the article, I couldn’t help but wonder what Bert is really trying to sell us here. He’s clearly either biased, blind, or bought.

Because otherwise, he truly does meet the definition of my Grandma’s favorite word.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

February 3, 2010

How to Talk to a Mainstream Nincompoop About Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Inflation is destroying fixed-income bonds. Stocks have tipped into a bear market, down more than one-fifth worldwide. Real estate suffers both over-supply and an historic shortage (too many units vs. no mortgage finance). And this is clearly no time to launch a business relying on discretionary spending, consumer debt or prompt payment.

As for cash-on-deposit, you’re fighting not only tax and inflation, but also the very real threat of banking failure. Anyone taking sizable profits elsewhere has to go “on risk” until they’ve found a new home for their wealth.

“Ironically,” reports MortgageNewsDaily.com, “while the Federal Deposit Insurance Corp. (FDIC) maintains a ‘watch list’ of banks in need of close supervision, IndyMac did not appear among the 90 names on the current roster.”

Between the demise of Countrywide in March and its own collapse last week, IndyMac was briefly the second-largest independent mortgage provider in the United States. Now one-in-twenty of its customers is owed a deposit exceeding the insured U.S. limit of $100,000. Attracted no doubt by the bank’s offer of 4.75% per year in interest — twice the interest paid most everywhere else on $50,000 or above — they’re now uninsured to the tune of $1 billion.

Of course, in hindsight, it’s easy to guess the good reason why IndyMac was paying above-market interest. Like everyone else, it needed the cash — only much more so! And until the FDIC either finds a buyer or goes ahead with running the new IndyMac Federal Bank as a going concern, those uninsured depositors have been told they can access only one-half of their funds. The other half-a-billion remains out of reach

The takeover of IndyMac is expected to drain $4-8 billion from the FDIC’s insurance pool. Quite what the Fed’s new loans to Freddie Mac and Fannie Mae will do to the purchasing power of what’s left — plus the Treasury’s explicit promise to underwrite their bonds — remains to be seen. They owe some $5.5 trillion between them. Now the credit-ratings agency Standard & Poor’s puts the full cost of a tax-funded bail out of the two government-sponsored home lenders at between $420 billion and $1.1 trillion.

That compares, as the RGE Monitor reports, with a final cost to U.S. taxpayers of $250 billion for the Savings & Loan rescue of the mid-1980s (inflation-adjusted).

No bail out, of course, and the destruction of wealth hardly bears thinking about. But just what would an extra $1.1 trillion in U.S. obligations mean for the value of existing dollars and T-bonds?

“[He] caused an Iron Chest to be brought, and put the money in it, then drove Posts into the Ground in his Cellar, and chained it down to the Stakes, then chained it also to the Wall, and barricaded the Door and Window of the Cellar with Iron, and all for fear, not of Thieves to steal the Money, but for fear the Money, Chest and all should fly away into the Air…”

So wrote the anonymous hack behind The Chimera, a pamphlet recalling the French Way of Paying National Debts for investors in London in 1720. The French way, the author explained — just before the British got caught using the same trick — was to print new paper money in whatever quantity took the government’s fancy, and use this new currency to pay off its creditors. It worked only as long as the paper retained some level of trust.

The anxious (if not deranged) investor described above was owed 10,000 crowns in such paper. But he gladly sold his claim for 2,500 in actual coin. Because a smaller quantity of very real wealth still beats a great sum of value-less debt.

Is that where investors today should hide their wealth, securely and safely? Inflation in prices and deflation in assets is an ugly combination. It also turns the “Long Boom” of the last 25 years on its head. So a growing number of advisors would point you to that long-forgotten asset class — physical gold or perhaps silver — as a rare store of wealth.

It might also help that you can chain down this wealth behind a thick vault door, deep underground.

“There really is no other place to hide,” believes Stephen Platt, an analyst at Archer Financial Services. “Gold’s about the only real currency out there that might hold value.”

Even after trebling in price from the low of eight years ago, there may be plenty of room for gold to rise from here. “In 1959, the amount invested in gold was about one-fifth of the market value of all U.S. common stocks,” writes Peter Bernstein in his classic, The Power of Gold. “In 1980, the $1.6 trillion invested in gold exceeded the market value of $1.4 trillion in U.S. stocks.”

The sum total of gold investment lags far behind the value of stock and bond markets today. Indeed, a 2005 study from Tocqueville Asset Management noted that, if taken altogether, “the market cap of all above-ground gold — including central bank reserves — [now] equals about 1.4% of global financial assets.”

“In 1934 and 1982,” on the other hand, “when investor stress reached extreme readings, that percentage was between 20% to 25%.” If you wanted to steal a march on the market, you might want to consider moving that portion of your wealth into physical gold today.

No, the metal isn’t guaranteed to keep gaining as “investor stress” rises to match the Great Depression or early ‘80s recession. But nor will its value fly away into the air.

For as long as the cost of living is rising but asset-prices are falling, that should prove a major advantage over holding bonds, stocks or cash.

Regards,
Adrian Ash
BullionVault
July 18, 2008

IndyMac’s Collapse was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Big institutional players in the New York futures market slashed their bullish betting on gold in the week of June 10. Data from the CFTC — the U.S. regulator — shows a net reduction of 11 percent in the long gold positions held by what it calls “large speculators.”

And this “reduction in the gross longs may be a further sign that gold is losing its attraction,” reckon analysts at the Swiss banking and wealth management giant.

But less pressure from large investment funds could alternatively signal more loss of froth from the gold market since it shot 54 percent higher in the seven months to mid-March.

Topping out at a new all-time record above $1,032 per ounce — just as the Federal Reserve lent $29 billion to support J.P.Morgan’s fire-sale purchase of Bear Stearns — the gold price has gone on to drop 15 percent of its value against the Dollar.

Versus the Euro and British Pound, the loss has been just as dramatic. And looking at the technical action on its charts, “any meaningful bounce from the 200-day moving average could bring back a lot of money into gold,” the UBS comment goes on.

That’s what “happened last year,” it adds:

The 200-day moving average, as the name says, measures the average price of an asset over the last two hundred days. It’s called “moving” because, as time rolls ever onwards, so too does the average — used by chart-loving technical analysts to see what the deeper, underlying trend is up to.

And why 200 days? Because that’s roughly the number of trading days during one year. So the chart here, therefore, shows both the daily gold price as well as its 12-month trend. And you can see how the 200-day average has indeed acted as “strong support” during the bull market so far.

Well, kinda. Most of the time.

Nine times since gold quit its 20-year bear market in 2001, the price has either bounced off or moved sharply higher through its 200-day average. The following surge — lasting an average of 21 weeks — delivered a 28 percent gain before the price of gold tipped lower again, back toward that ever rising up-trend.

The leap starting in late September last year was the most spectacular, as UBS notes. By the top of March 17, 2008, the gold price moved some 54 percent higher. Might that happen again now?

Two points to note if you’re chasing the bull market in gold for short-term gains to shoot out the lights:

1. Summer Lull — as the chart shows, gold typically moves flat to lower during the middle four months of the year. And even as the global banking crisis hit in August 2007 it still took another six weeks before gold started to vault higher;
2. Pre-Empting the Bounce — prior to last year’s jump — sparked by the U.S. Federal Reserve slashing the cost of borrowing below the rate of consumer-price inflation — the gold price had dipped below its 200-day average seven times during this bull market so far.

Buy gold now, in other words, and a keen market timer might well have to endure a further drop first, even if the apparent magic of the 200-day average does come good once again.

But with the 200-day moving average now just above the $850 level, longer-term investors who’ve been considering a purchase — but were put off the huge volatility of 2008 to date — might want to stop waiting around. Precisely because larger investors are sitting it out, and precisely because technical analysts like the UBS team are pointing to a possible dip before advising you buy.

You see, that price of $850 marked the bottom of gold’s fast & furious sell-off in March. It was also the previous bull market’s top, hit just as Soviet tanks rolled into Afghanistan on January 21, 1980. So a return to prices below that level might actually signal a longer-term drop. If the price is to push higher from here instead, a drop below $850 might be a long time in coming.

Hanging on for another pullback from today’s current gold price and so trying to nick a little extra off your investment outlay might prove expensive, in short. If you’re looking to take a position in gold for longer-term or deeper fundamental reasons, the kind of low-profile flat action we’re seeing this June could offer your best chance to get in.

Just ask anyone who tried to wait for a pullback once the last surge in gold prices had started in Sept. ‘07.

Regards,
Adrian Ash
BullionVault
June 19, 2008

Gold Price Dips was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Now remember another one: “Don’t fight the Fed.”

Well, what happens when the Fed fights the trend, as it has been recently? Which axiom to believe?

Historically, the Fed loses that fight until the trend is ready to turn back around. Admittedly, the central bank’s inflationary policies will likely help this occur at a higher nominal dollar value than otherwise.

Nevertheless, the historical odds favor the trend over the Fed when these two maxims collide. But putting aside my autistic wisdom for a moment, let’s consider what the Federal Reserve is doing for the trend in gold prices — a trend, I am loathe to inform you, which it is not fighting.

Let me sum it up by reminding you that the trajectory of this bull trend shifted north when Bernanke took the helm of the Federal Reserve System, and that the policies pursued by the Bernanke Fed have confirmed the investment thesis driving the bull market in gold. As one pundit recently noted during a Bloomberg interview, “You gotta go with the inflation theme…it’s the only thing still working.”

After upping the size of its new Term Auction Facility from $60 to $100 billion last weekend, the Fed revealed another innovative tool that might help it manage liquidity in the banking system.

The new facility, the Term Securities Lending Facility (TSLF), will offer up to $200 billion in Treasury securities to primary dealers in exchange for a wide variety of collateral the Fed has never before accepted, including private-label mortgage securities. It also eased swaps with other central banks.

The controversy is that although the Fed has been allowed to accept mortgage-backed securities as collateral since 1980, it has never outright bought them, and only recently enacted legislation that allows it to actually monetize them — which means buying them without having to sell other assets.

Gold bugs have followed the Fed’s legislative changes with interest. This move should not surprise any of them, but it does hold a special significance in its long-term implications, and for gold prices.

And even though the Fed hasn’t expanded bank reserves or the monetary base much since August, it is helping the banking system postpone an increase in reserve demands triggered by criteria built into the Basel II framework, a generally accepted model for capital adequacy standards. By boosting the quality of bank reserves, even if temporarily, the Fed hopefully won’t need to increase the quantity of bank reserves, which have been sufficient to fuel an $800 billion expansion in the broad U.S. credit aggregate, MZM, since August. That is 11 percent, or 15 percent year over year. The highest rate since 2002.

That is a bullish recipe for the precious metals. There is nothing more bullish for gold than a situation in which the central bank refuses to acknowledge that it is pouring gasoline on a raging fire.

Forget the dollar and oil. Those were just interim preoccupations.

The real bull market is about to stand up.

If gold prices are going to continue to drive through $1,000, they are going to do it because the central banks are all inflating madly at the worst time. This means that a good old-fashioned bear market on Wall Street is sufficient to keep central bankers’ collective pedal to the metal and sustain the gold bull.

So far, the precious metals stocks have bucked the general stock market trend since August.

This is as it should be, and it is impressive because, by most counts, gold stocks are quite expensive relative to today’s gold price. But investors are complaining about the underperformance of those stocks relative to gold, and also about the lackluster performance of their junior mining assets, which haven’t participated in the precious sector rally at all since August — when the current leg started.

There are a few explanations for this. Perhaps John Embry said it best at a gold conference in Vancouver, British Columbia, recently, when he remarked that gold shares sometimes act like a bet on gold, but sometimes they just act like plain old shares.

We should leave it at that.

However, that is not like me.

Historically, I have found that gold shares are susceptible to market declines, except occasionally during a major bull market advance in gold, when they tend toward counter-cyclicality — the more so as the bull market progresses. They will still fall during stock market panics, as all shares do, but they are likely to come back harder and hold their trends better. Still, since 2004, I’ve held the position that, as an asset class, gold shares would not outperform gold prices for the remainder of the primary leg.

I continue to think that, with the qualification that we are talking about the average gold stock. Junior markets are wired differently. They do not correlate that well with the underlying commodity trend in the first place. In my experience, they correlate better with market attitudes toward risk.

Junior and small-cap markets have never fared well in a general market meltdown, because they are typically risky assets, and in a selling panic, the crowd is averting risk. The larger-capitalization precious metal producers are different. The reasons for this are sound. But as a rule, speculative assets do well when the gambling environment is friendly.

However, within the small-cap resource sector, there will invariably be exceptions. Many of them are cheap now, and the supply fundamentals for gold are tightening.

Production from many gold-producing regions of the world is currently constrained by power shortages, and rapidly inflating development costs are causing the postponement of several otherwise promising development projects around the world.

Meanwhile, gold producers need reserves!

The large-cap producers are on the hunt for sound mining assets. And they aren’t going to be discouraged by a 20-30 percent drop in gold or stock prices.

I’m lining up several potential takeover targets for my new report right now. These include small-cap gold miners that have either just finished developing a new mine or soon will be, or whose assets are otherwise overlooked. And we’ll be publishing option strategies to profit from swings in the large-cap miners, too. Regardless of which way the markets go, I’ll show you how to profit from trend changes…

Regards,
Ed Bugos
March 20, 2008

Junior Mining Markets was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In December, the gold price raced off to record highs for the first time in almost three decades. Now it looks to be closing in on 1,000 U.S. bucks. That is four digits. It will also be four times the 1999 low.

The market has added dollars to the gold price for seven consecutive years now, making it the longest-lasting such stretch in history without more than a 25% correction. Even in terms of magnitude, it is the best move since 1979-80. This suggests two things right off the bat. First, it is a bull market; second, the market needs to blow off more upside if it is to give the bears anything more than 25%.

(Although, this latter idea does rest on a few other premises.)

John Kaiser of the Kaiser Bottom-Fishing Report believes the market is nearing a flashpoint where the skeptical public finally turns into believers and comes rushing in. It’s pure mathematics from his point of view. He reasons forecasts for gold $2,000 are more plausible now that it is but “a mere double”!

It may be a little early to say that gold bugs have been proven right.

Undoubtedly, it is getting tougher for the bears to argue that they have been wrong.

But what exactly might they be right about?

Gold Is Sounder Money!

The market has once again started looking at gold as money, rather than as a mere commodity. The following excerpt from the Jan. 8 Financial Times article, “Gold Is the New Global Currency,” highlights this increasingly frequent theme in the leading financial papers:

Gold’s rise shows investors are nervous. That is an important message for central banks contemplating interest rate cuts. The Fed must show it is not prepared to allow inflation to take off. Keynes called gold a barbarous relic. It has life left in it. But it is in the interests of business and consumers that its most bullish fans are proved wrong.

I like this quote because it highlights two important and typical contrasting insights.

The first underlined sentence reveals the most important rule that the Fed and its peer central bankers are breaking, which is one of the main factors driving gold prices higher today. The second underlined sentence reminds gold bugs that their clairvoyance is unwelcome and unhelpful, just in case they feel any vindication in others’ misery. This will continue. As legendary broadcaster Ed Murrow once said, “Most truths are so naked that people feel sorry for them and cover them up.” This is one of those.

But that won’t make it go away.

The fact that getting rid of a dishonest monetary regime might cause depression is a bad reason to stick with a system that promotes that injustice in the long term. But if central bankers want to preserve such a system, above all, they must avoid prompting too many headlines like these:

• “The Helicopters Start to Drop Money” — Financial Times, Dec. 12, 2007
• “Cheap Money Is ECB’s Answer” — Wall Street Journal, Dec. 12, 2007
• “World Bankers Resort to Firebreak” — Telegraph, Dec. 15, 2007
• “Flight to Gold as Investors Lose Faith in Money” — Telegraph, Jan. 6, 2008
• “Bernanke Opens Door to ‘Substantive’ Rate Cuts” — Wall Street Journal, Jan. 11, 2008

One of the mainstream criticisms of the Bernanke Fed is that it should have lowered interest rates sooner and more aggressively. One reason it didn’t was because Bernanke had tried to fight the spreading of the idea that the Fed was going to continue inflating. But that resolve is now buckling under peer pressure. We are probably not yet at the inflection point where the public has become convinced the Fed will inflate endlessly, but recent actions are not helping to discourage this expectation.

So prices will continue to rise, eventually resulting in unemployment and some sort of depression.

The pundits will call it stagflation.

If the Federal Reserve fails to heed the aforementioned rule by then, it’ll lead to hyperinflation, or worse. So far, there is no reason to believe that it plans to abandon the inflationary policy.

What with squadrons of central bank choppers swarming like locusts over the major cities on both sides of the Atlantic, hurling bank notes into the thinning air as gold, oil and wheat prices charge to record highs, it would seem rather that central bankers believe money should be able to grow on trees.

Central bankers continue refusing to accept the idea that the cause of these crises is their very own inflation. In a recent interview I read, an old partner of Milton Friedman’s, Anna Schwartz, was the first of her kind to point out that Greenspan was responsible for the current crisis by keeping rates down too long. But she said that mistake is behind us now and the current Fed should step up to the plate and inflate like mad in order to prevent making the mistakes of the 1930s Fed.

What were those mistakes?

Apparently, Washington and the moral ethics of Fed officials prevented the Fed from inflating after the 1929 stock market crash. This thinking is a prerequisite for central bankers. They ignore the fact that the ultimate cause of these crises is the intervention required to manipulate interest rates.

That is, inflation.

Until they change their thinking (they probably won’t), and while the pool of skeptics about this evil remains large, gold has nowhere to go but up. We will continue to have booms and busts and crises, and price and interest rate spikes, and wars, and so on as long as paper money backed by nothing remains the motive power of the world economy. Thus is the general message of gold bugs.

Don’t shoot the messenger.

My forecast for 2008 is a $1,200-1,400 high for gold that will break the bond market’s back, and make stocks cheap again. I am also looking for an intermediate bottom in the dollar, big corrections in the energies and base metals, and a global recession. It is still timely to buy the dips in gold prices and to accumulate sound gold mining assets — though good share values are becoming more difficult to find.

Regards,
Ed Bugos
January 22, 2008

The Naked Truth was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The collapse of the “strong dollar policy” of that period formed one of the major premises of my case for gold at the time. However, by early 2005, as the currency reached my original target and began bouncing off its long-term lows, I recommended that clients no longer bet against the dollar, because I felt that the dollar would level off. Still, I wrote, gold prices were going to make their biggest move yet. As subsequent events proved, I had that one right.

Now, the gold story is this: The value of money is in danger of dropping precipitously again, and it is increasingly likely that the world monetary system will have another brush with hyperinflation akin to what occurred in the 1970s, except this time, worse.

The evidence supporting this thesis is devastating, yet this story is scarcely factored into gold values, let alone financial markets. That is, we have seen a rush to gold when the foreign exchange value of the U.S. dollar has crumbled, whenever some geopolitical boiling point has been reached, when other commodities have left the station, because the Chinese and Indian economies were heating up, and so on. But there has yet to be a significant enough deterioration of confidence in central banking institutions, or the quasi-fiat money they produce, to herald the kind of buying in which a person is “anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them,” according to Ludwig von Mises.

The evidence suggests we are headed there, but it also suggests that the most spectacular part of the bull market in gold must still lie ahead of us.

But the most interesting part about these “spectacular” moves in gold, where the market’s spotlight focuses entirely on the gold story (the greatest story never told), is the behavior of the currency markets.

What Most Investors Don’t Know About Gold and the U.S. Dollar

The biggest moves in the gold price occur when the foreign exchange value of the U.S. dollar is stable.

Did you get that? It may initially sound counterintuitive, but after reading this article, it shouldn’t.

Consider first the fact that the largest moves in gold’s free-trading history occurred in four brief periods each lasting two-three years: 1973-1975, 1978-1980, 1985-1987, and 2005-? We know that the first two of these occurred during bull markets in gold, the third one in a bear market rally, and the last one we believe to be a bull market move, which can hardly be considered arguable at this point. As a matter of fact, the two former periods and the last (current) one have something important in common — they saw the lowest (inverse) correlations with the currency. That is, they occurred when the U.S. dollar had reached some level of relative stability following a two-three year collapse in its foreign exchange rate.

Since we are still in the midst of the final period, I used the current gold and dollar price for the table, while measuring all the other periods from trough to peak.

But if we take the high in gold prices last year as our peak, the gain in gold was actually 70%, and the U.S. dollar lost just 2% in this period — instead of the 51% and 0% originally in the table — hence making it more substantial than the bear market rally of 1985-1987, when the U.S. dollar dropped more precipitously…and nothing yet suggests those trends have ended.

Since its 1971 fix, the price of gold is up some 1,750%, or 18.5-fold.

Everyone will notice the general inverse relationship between the dollar and the gold price that can be seen in the chart, but it is not a well-known fact that the gains in the price of gold that occurred in the top three bull market moves alone (shaded regions in the above data series), where exchange rates were most stable, explain nearly two-thirds of this whole move in gold prices — more than $400 of the gain from $35 to $650 — while the U.S. dollar’s foreign exchange rate fell less than 5% net.

If we apply the 1970s model to the current move that started in 2005, we would suggest that it could end in late 2007 with a run in gold prices to somewhere between $900-1,200, and the dollar might well be only a few points from where it is today when it all blows over. Both of the instances of dollar stability in the ’70s saw the most spectacular gains in the gold price, and by all counts, the same factors are at play today. Investors were surely just as surprised by it then as they will be today.

There are a lot of strong arguments for why the dollar should continue to new lows. For instance:

• It is no longer an intrinsically viable reserve currency
• China may buy fewer dollars
• The size of the U.S. trade deficit still suggests that it is cheaper to import goods than produce in U.S.
• The trend in interest rate differentials probably favors the foreign currencies in the medium term.

But these arguments may already be factored in the medium-term (three-18 months) currency outlook, and attention should perhaps be drawn to the overlooked bullish arguments favoring the U.S. dollar.

For some of these arguments have potency, yet are least considered.

Here are two very important arguments for this time horizon:

• Money supply inflation by international central banks has exceeded the Fed’s for four years
• Risk premiums have more upside adjustment in foreign currencies than in the U.S. dollar

Don’t worry if you don’t understand these things.

The main point of this article is to illustrate the historical precedent behind a potentially bullish gold price explosion, regardless of whether the U.S. dollar makes new lows or not.

The historical fact is that gold’s biggest moves occur when the U.S. dollar is relatively stable.

Now you know what few people do.

Regards,
Ed Bugos

August 27, 2007

What You Probably Didn’t Know About the U.S. Dollar and Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.