09/10/09 London, England
Gold closed at $999 on Tuesday. Then, yesterday, it closed down $2.
There’s a time to buy gold; and there’s a time to sell it. Which time is it?
The question rose with the gold price itself. It needs an answer.
The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars), in 1980, the price fell to the $1,000 level (in today’s money) in 1983.
We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years.
Some people draw the wrong lesson from this experience – that gold is always a bad place for your money.
Today’s Financial Times:
“In spite of low interest rates, that make owning gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns.”
But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic.
What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled.
Was it smart to buy stocks or bricks and mortar during the ’70s? Not at all. Stocks bounced around, but they were no higher at the end of the decade than they were at its beginning. Meanwhile, high inflation rates took a big toll on real values. Stock market investors lost 75% of their money – maybe more. As for those who bought bricks and mortar, they lost too – but it’s hard to say how much.
And meanwhile, gold went from $41 an ounce to over $800.
Which would you prefer?
As you can see, dear reader, timing is everything. There are times to be long gold. And there are times not to be.
For thousands of years gold has been the money of last resort. It is the money you can trust. They can’t make more of it. They can’t counterfeit it. They can’t put extra zeros on it and pretend it is worth more.
But it is most useful when other money goes bad. Inflation rates in the United States during the ’70s went over 10%. Clearly, gold was a better thing to own to protect your wealth than dollars. You could have bought an ounce of it (outside the United States…it was still illegal for private citizens to hold gold in America) for, say, $45 in the early ’70s. By 1982, you could have used that single ounce of gold to buy up the entire list of Dow stocks. Gold and the Dow traded at a ratio of only one-to-one that year. Then, if you’d held onto those stocks, you could have sold them in 2006 for $14,000.
Not bad, huh? Two transactions. Forty-five bucks to $14,000. Invest $100,000 and you would have ended up with $30 million.
But let’s get back to where we are now. Still in a bull market in gold…or at the end of one? Are we idiots for holding it now…or idiots for not buying more?
As you know, we’ve begun a new project: the Bonner & Partners Family Office. It’s our own family office that we’ve opened up to a few non-family members. But just as soon as the non-family members came in the door they started asking questions. Specifically, they wondered why…after all the preaching we’ve done about buying gold…we don’t have more of it in the family portfolio.
One our new partners wrote a very shrewd comment. We’ll pass along a little of what he had to say, but first, some context. The feds are desperate to restart the economy. The only way they can imagine is by increasing the money supply…and inducing people to spend money. They want inflation, no doubt about it. And they’ll get it – no doubt about that, either.
The question is when. Our view is that they’ll get more than they expect, but later than they want it. We’re looking for another crack in stocks…followed by more fear and loathing in the economy. This will have two major effects. First, investors will turn to the familiar dollar for safety. Second, everyone will hoard money…speculation will cease…and prices will fall – including the price of gold. Our first writer disagrees:
“One mistake [your editor] might be making is his belief that we are already in another Great Depression. We probably will be in a depression or some other form of economic calamity, but not yet. Every Depression (or monetary contraction) in history has followed a similar pattern – expansionary monetary policy followed by a contraction of the money supply… While we have experienced a huge monetary expansion/easy money in the ’90s, we have not yet experienced a real monetary contraction (which is a scary thought). Instead, the central planners did the opposite and doubled the monetary base (keep the addict happy with more heroine). These extra paper dollars have to go somewhere, and we are seeing the results in higher prices for stocks, oil, copper, sugar, gold, so far…”
Well, yes…as long as the economy seems to be on the mend, investors’ “appetite for risk” improves. They want to speculate on the recovery. But then, when the recovery proves an illusion…they’re going to run for cover.
Then, another new partner came to help us roll our stone.
“Bill is correct, not from money supply & credit data, but from ‘black swan’ type events such as: how deflationary forces will play out for lenders and holders of mortgaged backed bonds both commercial & residential, in a disruptive resetting of interest rates for Option ARMs, ALT-As and various other prime borrowers in the next 6-12 months… Will we witness another series of major bank failures from this next round of resetting? And if so, how disruptive, in a deflationary sense, will this be?”
Either way, the result is the same. Market events – such as another big break in the banking sector – could bring a deflationary collapse. If not, the Fed itself may have to step in to protect the dollar. In either case, gold is not likely to reach its final, bubble phase until this contraction is over.
In the meantime, our advice remains unchanged: buy gold on dips.
We continue to laugh at recovery sightings. Yesterday, for example, the Fed reported to the nation that a recovery was underway. But even the Fed couldn’t ignore the fact that consumers aren’t spending money the way they used to. The New York Times comments:
“The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed’s warning about it deflated some of the market’s optimism. About 70 percent of the economy depends on spending by consumers.”
The other sticky wicket in this game is unemployment. Jobless ranks are swelling like a floating corpse. But the jobless numbers don’t tell the whole story. There are 34 million Americans who live on food stamps. One out of every nine people depends on the government for his daily bread. The Financial Times fills in the details:
“Less attention has been paid to those still in the workforce, whose incomes are also being squeezed. The average working week is now about 33 hours, the lowest on record, while the number forced to work part-time because they cannot find full-time work has risen more than 50 per cent in the past year to a record 8.8m. Wages and benefits have decelerated.
“The food stamp data suggest that ‘the labour market problems are more significant than you would expect, given just the unemployment rate’, said John Silvia, chief economist at Wells Fargo. ‘For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.’
“Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP. Economists fear that people may be unwilling to resume that role.
“Food stamps are distributed once a month on electronic cards that can be spent at many grocery stores. The $787bn stimulus bill added about $80 (€55, £50) to a family’s monthly allowance, which now stands at an average $290.
Nothing very original about keeping the masses fed with government food. The Romans figured it out 2,000 years ago. You have to distract the mob with pane et circenses (bread and circuses). Otherwise, they vote you out of office…or burn down the capitol.
“Everything, now restrains itself and anxiously hopes for just two things: bread and circuses,” wrote Juvenal.
Until tomorrow,
Bill Bonner
The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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BB says: “We’re looking for another crack in stocks…followed by more fear and loathing in the economy.”
Are you going to say this every single day?? It’s not happening and it won’t happen. You were right when you said it the first time and the markets crashed. Now you repeat it daily as the market rises further supporting the idea that you are dead wrong.
There won’t be a recovery in the sense of a return to the way things were. I grew up in the Pittsburgh area; the steel industry dried up, and the economy was awful in the early 80s. Eventually, things did improve, but the changes were permanent. No more steel industry. A loss of population. Many towns and neighborhoods fell into disrepair. So, there never has been a recovery in the sense of a return to the way things were.
Jason: Nor should there be a return to the outdated model. But as you said, things improved and Pittsburgh remains a viable city with 9 of 10 employed.
BB would have you think, by his argument, that Pittsburgh should have disappeared. It didn’t. Nor will the rest of this country. It will get stronger and diversify, as Pittsburgh did.
I really like your stuff, BB. Today, I was left with a sense that I had read a column without an end. Not that you left anything open ended, I just wasn’t able to discern your point.
Probably my problem.
9 of 10 employed? Wouldn’t that make for 10% unemployement?
Don’t stocks always rocket up after a crash?
But in a Depression, after a few jumps, it eventually flatlines.
You can’t take the current jumpin stocks for anything other than a bear rally.
There are far more government employees than unemployed. I consider the parasitically employed to be way more damaging to our economy than the unemployed.
Understanding that the economy is NOT the stock market and vice versa – where is the good news for the economy?
Harry must work for CNBC.
Bill,
I buy into the second crash theory (due to mortgage and CRE resets) resulting in a “flight to quality” and rise in the USD. However, I wonder if the stress on banks has been ameliorated to a great degree by all the money injected into the system. Banks are hoarding it to improve their balance sheets, not leading it out. Doesn’t that provide some defense against more bank failures?
“leading” = “lending.”
Guess who said this?
Rising prices of precious metals and other commodities are an indication of a very early stage of an endeavor to move away from paper currencies…What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.
-Alan Greenspan, 9 Sep 2009
Actually I work for the govermnet, my real name is Ben and I work closely on the fields of money supply expansion and the great crash(plus i have an interest in helecopters), A lesson I learned from the history of 1929 was that you simply had to create the illusion of things improving to sucker a whole new load of mugs into investing into stocks, I particuly like to see mug punters buying at the top of a cycle when they are driven by pure greed, as you can see the market is approaching this level but has some way to go, maybe another 20% gain from current levels will do it.
Then let see the games begin, enjoy.
There is no recovery – the voters have opted to become a welfare nation. “A government big enough to give you everything you want, is big enough to take away everything you have” — Thomas Jefferson
Serious Games and Training Simulations
Consumer? Who needs the consumer? A Business Week writer has recalculated the impact the consumer has on the economy.
He claims it is more like 40% than 70%. And further more most consumption is done by the top 10% of wage earners and they are much less likely to cut back their expenditures. So, you see, the economy will be just fine without the consumer.
Won’t it? This guy has the wrong employer. He should work for the U.S. government. Just recalculate and we will all be fine.
Does BB ever respond to those who make comments or have a question?
Yeah, I’m sure BB has time to publicly acknowledge his groupies (us) as well as detracting pantloads (Harry).
Harry wrote: “Actually I work for the govermnet” (sic)
That explains everything.
Harry, while the Pittsburgh analogy is true, we are not dealing with the same government forces we had decades ago. These people are hell bent on nationalizing everything and destroying the dollar.
Buying gold after the next pop is a smart play – hence after the pop look for the drop – get your facts straight guys – we are the minority in this world of people engulfed in the “sham”. Silver and gold will rise in tandem next year with the impending collapse of commercial real estate and bank bust part due – since nobody else is awake from there “American Dream” is why you just might not grasp the common sense approach to the weights and measures theory…or say.. the round peg and square hole theory.. but what I can say for sure is the framework in which this society rests on just does not fit.. One day people will marvel at our system as they do the leaning tower of pisa- wondering how the hell that thing is still standing- Whenever you find yourself on the side of the majority, it is time to pause and reflect.
Mark Twain