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The Axis of Monetary Lies

BY ROB KIRBY | OCTOBER 19, 2009

This past weekend, much celebrated Bush-era speech writer David Frum took his best shot at defaming gold in a National Post [one of Canada’s major dailies] op-ed titled, Beware the gold bug.

Frum began his uninformed attack [er, article] by immediately trying to infer that the cause of the “gold bugs” as hyperbole fit for nothing more than the satirical publication, The Onion. 
There are some that might say it’s too bad Mr. Frum’s, Axis of Evil, tall-tale wasn’t relegated to the back pages of The Onion instead of the floors of Congress – but I digress.

After setting this clever but false backdrop, Mr. Frum then launches into what can only be described as a “cherry-picked” ambush of America’s top business leadership when he states,

“A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest. "What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution" ...”

Frum “the economist” then leaps into the fray unleashing this dalliance;

“That bubble has now arrived here in the real, non-satirical world: It's gold.”

I must admit, Mr. Frum’s comprehension of economics and what’s really happening in the gold market made me want to cry [perhaps there’s hope for Frum writing editorial content for “The Onion” after all?]. He goes on to suggest that, because the price of gold has “zoomed” past 1,000 per ounce, its price has reached bubble status.

Then Frum states that gold is, “a strange investment vehicle”.  I’ve got to give him high marks there, because gold is strange in that it’s the only official monetary asset in the world that IS NOT someone else’s liability – which is exactly why it is so desirable.

Frum then chides that, “gold, like cash, unfortunately offers no return” – citing the oft used example;

“If you put a roll of coins in a safety deposit box, a decade from now you'll have the same roll of coins -- and in the interim, you'll have paid 10 years' rent on the box.”

What Mr. Frum fails to recognize is that gold is the ultimate form of cash ie. gold is money.

To speak to Mr. Frum’s assertion, let’s take a look at what the price of gold has done in the past 10 years:

                 

So, if one had purchased a roll of one ounce gold coins [20 per roll] at 300 per ounce 10 years ago – they would have invested 6,000 dollars back in 1980.  Clearly, we can see such an investment is now worth in excess of 20,000 dollars [albeit in diluted dollars].

Frum then acknowledges gold’s historic role as a hedge against inflation but retaliates,

“Most U.S. indices continue to warn of deflation ahead, not inflation.”

We suggest that Mr. Frum read a bit of Economics 101 and try wrapping his head around the notion that – despite his blather - inflation is a monetary event.  And here’s what the beloved Federal Reserve has done to the monetary base [MZM] over the last 20 years:

   
                                            source:  St. Louis Federal Reserve

The Fed has grown the monetary base [diluted the value of money] by a factor of close to 10.  The last time gold was acknowledged to have “been in a bubble” was back in 1980 when its price reached a “high” of 850.00 per ounce. 

If we apply the same metric to gold as the Fed has to the Monetary Base [MZM] – gold would be in a bubble today [perhaps?] if it’s price were 8,500 per ounce.

Perhaps what we all really need to beware of is disinformation-artist-speech-writers disguised as wannabe economists.

Today’s Market

Overseas equities began the week on a slightly negative note with Japan’s Nikkei Index giving up 21 points to 10,236.  North American markets shook off that sentiment with the DOW ahead 96.30 to 10,092.20, the NASDAQ adding 19.52 to 2,176.32 and the S & P gaining 10.20 to 1,097.90.  NYMEX crude oil futures added .67 to end the day at 79.20 per barrel

Benchmark interest rates: the 5 yr. Government bond ended the day at 2.34 % and the 10 yr. bond finished the day at 3.38 %.

On foreign exchange markets the U.S. Dollar Index fell .20 to 75.37.

In the precious metals complex COMEX gold futures added 9.10 to 1,062.90 per ounce while COMEX silver futures added .27 to 17.73 per ounce.  The XAU Index gained 1.47 to 177.97 while the HUI Index added 2.62 to 448.63.

On tap for tomorrow, at 8:30 a.m. Sept. PPI data is due; headline number expected 0.0 % vs. prior +1.7 %, core PPI expected +0.1 % vs. prior +0.2 %.  Also at 8:30 a.m. Sept Building Permits data is due; expected 580K vs. prior 579K.  Lastly, at 8:30 a.m. Sept. Housing Starts data is due; expected 585K vs. prior 598K.

Wishing you all a pleasant evening!

Rob Kirby
Registered Representative

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Rob Kirby
Kirby Analytics Newsletter | Toronto, Ontario, Canada
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