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My position on the monetary policy of the United States Government and all governments which permit/endorse/profit from central banking is suspect, at best, certainly elitist, and at worst, a plague to mankind. I have been researching this subject since the adjustment of the US equities markets and subsequent beginning of the gold bull in 2001. I must now admit that I was not fully sold on the idea at that time. It actually took almost 2 years before I was convinced. They say that a person does not truly believe something, unless there is a corresponding action. In 2003, I put my money where my mouth was and convinced some of my family, friends, and clients to do the same. If it was just my money, it would be no big deal. But it wasn’t. Others too had a stake in the outcome. I remember giving the advice like it was yesterday, because I continue to give the same advice. But what sticks out is my inner conflict. The conflict between preaching what I thought was a good idea and having it turn out like I planned. This is the psychology of investing and, in my opinion, the most critical ingredient to success. I thought I would share some of my psychology (thoughts/beliefs) about gold in an effort to solidify the reasons for a position taken in physical gold as insurance against the fiscal irresponsibility of governments and central banks. This irresponsibility results in inflation at best, but could result systemic breakdown. I honestly have little doubt the USD is toast. What makes me so sure? Thousands of years of data and human nature. There has yet been a fiat based currency that has stood the test of time. What I do doubt however, is the timing of this breakdown. It is quite conceivable the USD will last longer than I will in this world. Timing, therefore, is crucial. I have often said that things are as they are until they actually change. Although such a statement sounds obvious as if spoken by a famous Yankee catcher, my point is that it will take a great deal of energy to change the system. Without it, this inflationary world will simply continue. Maybe we are close to this critical mass. Maybe not. In my opinion, however, one need only look to preserve their wealth in uncertain economic times. Since your wealth is relative to everyone else’s, keeping yours while everyone else is losing theirs to inflation is simply another way of creating wealth. Such was the primary rationale for my recommendation and purchase of gold. This thought process continues today. But if I had to make an argument in favor of fiat currency, I would argue the USD, structured as fiat, propelled itself as the world’s reserve currency - the “King of Fiat Money”, if you will. As a result, the benefits to the US are hardly marginal. In fact, these Federal Reserve Notes are essentially a debt which never has to be repaid. If you think it’s unfair for the Joe American Citizen in the form of inflation, it’s far worse for the workers and business people of other countries. FRN’s are simply printed (borrowed into existence) in the US and exported abroad. Other nations send over their goods and services. What a deal. Paper for actual, tangible goods and services? How can these nations stand by and allow it? How long will it last? In my opinion, the foreign governments are only too happy to exploit their own citizens. After all, the people do the work and the governments hold the paper used as a medium of exchange (FRN’s). It’s not such a bad deal for the foreign governments, who play the same print and spend game as the FED within their own borders. This tends to lessen the incentive for foreign governments to pull out of the USD altogether as many economic armageddon predictors imagine. It does not necessarily mean, however, these governments will sit idle while the US government and Federal Reserve create as much money as they want for as long as they want. And of course, there is a morality issue here too. But apparently, there is no morality in economics. And so we have layers of exploitation upon nations, workers, savers and everyone else who is not “connected” to the inner circles of government. This is nothing new. Also not new is the
understanding that monetary metals, specifically gold, stand in the way
of the “insidious process”. Yet, if you bought gold in 1987 to hedge
against inflation, you would have to wait almost 20 years to break even
nominally. You would have been safe from a monetary meltdown, but you
would have lost opportunity cost on your gold, priced in a currency
which losses value every day through the stealth tax called inflation. A
double whammy. See the chart below to view the decline of gold in
the 1980’s and 90’s. (Courtesy of Kitco.com) The men over at GATA believe the gold market was rigged for years. If it was, it continues today, which is a sticking point for gold bugs everywhere. This all reminds me of my reading of Frederic Bastiat’s (1801-1850) “The Law”, first published right around the time of the Revolution of February 1848 in France. According to Bastiat, France was trending toward Socialism. Bestiat commented upon the arguments for and against state action. Perhaps more interesting is the marked similarities between France in the mid 1800’s and present day America. Read the text, it is only a few pages, and see what you think. The point here is not to give political commentary. But, unfortunately or not, state action does play a role in the markets. All of them - without exception. If everything is priced in State mandated money, then everything is subject to the money making power of the State, with help from their cohorts, of course. But, gold is not only moving up in U.S. dollars, but in all major currencies. Universally recognized as the safest investment in times of uncertainty, perhaps major foreign players are hedging their risk with gold, making gold even more scarce. Take a look at the following 5 year charts in various currencies. (courtesy of Kitco.com)
You will undoubtedly notice price channels from 2001 to about the summer of 2005. This would suggest that the price of gold rose in USD terms because the USD fell. See the USD Index chart below. (courtesy of SuperCharts by Omega Research) Notice the nose dive the USD took beginning in 2002 and ending in early 2005.
Yet, since the summer of 2005, gold has risen in multiple currencies suggesting a valid bull market internationally. Which is good news to us gold enthusiasts. And really all the evidence I currently need to maintain my position in Precious Metals. Thanks for listening. Paul Paulson DISCLAIMER: This writing is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.
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