Barbarous Relic vs. Brown Bottoms

– Markets were a snooze yesterday. On the back of some ambiguous housing data and a much ballyhooed, though ultimately underwhelming, consumer confidence report, major U.S. indexes barely managed to budge a fraction of a percent.

Gold was rallying this morning, up $12 to $1,115 an ounce last we checked. Crude was lately nudging $83 per barrel.

And here’s some news: A great-grandmother in England was slapped with a £1,000 fine and forced to wear an electronic tag for seven weeks after it was revealed she had sold a goldfish to a person under the age of 16. The case was part of a trading standards ‘sting’ conducted by local authorities in the woman’s hometown of Trafford.

The prosecution of the “culprit” (and her son, presumably for “aiding and abetting” the offender) is estimated to have cost taxpayers £20,000 and has left the 66-year old woman with a criminal record. It must be lovely for a nation to be in a position to burn through public cash with such little regard for budgetary responsibility, and where its law enforcement agencies have nothing better to do than conduct sting operations targeting local goldfish peddlers.

But wait, according to data published by National Statistics today, the U.K.’s Maastricht Treaty Deficit, its general government net borrowing, amounted to £159.2 billion in 2009, some 11.4% of GDP. Meanwhile, private sector employment in Ol’ Blighty has fallen 4% since the start of 2008, amounting to over half a million jobs lost…and counting…

More on England’s welfare woes, and the growth of the fetid, developed world nanny state below. First, we’re here to discuss the inaugural Daily Reckoning Group Research Project. We’ll start at the beginning…

“Long suffering” readers, as Bill jokingly calls them, will remember when our Reckoner-in-Chief issued his first Trade of the Decade, some ten years ago. With the benefit of hindsight, the trade seems simple enough: Buy gold on dips; sell stocks on rallies. The trade proved to be a superb market call, but it also provided a sound philosophical footing on which Bill and his DR co-editors erected many of the major editorial narratives of the past decade.

As Eric Fry reflected in Monday’s edition of the Daily Reckoning:

“This Trade of the Decade provided a great thematic backdrop for everything we would write about during the ensuing 10 years. We would write about the coming housing bust, about runaway government deficits and about lots of other things that provided absolutely no reason whatsoever to buy stocks, but plenty of reasons to buy gold.”

Of course, not everybody was so enthusiastic about the trade at the time. The majority of investors adored the stock market; “stocks for the long haul” was their collective mantra. Conversely, that “barbarous relic,” as British economist John Maynard Keynes famously dubbed gold, was viewed as the scourge of the investment world.

Having passed away more than half a century earlier, Baron Keynes was not on hand to take the other side of Bill’s trade. Unfortunately, plenty of proponents of his philosophy were…and still are.

One such man was Keynes’ fellow countryman, the then Chancellor of the Exchequer, Gordon Brown. From 1999 to 2002, Brown took advantage of a 20-year bear market bottom in gold to unload approximately half of his nation’s total reserves. During the three-year selloff, carefully spread over 17 separate auctions, Brown dumped 395 tons of the U.K.’s yellow metal…for an average price of $275 per ounce. The proceeds, again under Brown’s sage stewardship, were then reinvested in foreign currency deposits, most notably in the euro. By the time gold hit its to-date record of $1,214 in late 2009, the estimated loss to the British taxpayer was somewhere in the vicinity of £5 billion.

The fiasco was to go down in history as the “Brown Bottom.” Readers who wish to put a face to the metal component of Bill’s Trade of the Decade, therefore, might like to think of it as, “Buy Bonner; Sell Brown.”

To kick off the next ten years, Bill offered dear readers a “Trade of the New Decade” – Buy Japanese equities; Sell U.S. Treasurys. More recently still, your editorial director, Eric Fry, offered his own version – Sell everything…except uranium.

Joel Bowman
Managing Editor, The Daily Reckoning