Can't Go Home Again

The Daily Reckoning PRESENTS: Therole of gold in the 21st century is not just to act as a barometer of financial anxiety, but to ultimately return to the forefront as sound money. Justice Litle explores…


A few nights ago, my wife and I were at a dinner party, and Cassie (my wife) happened to be seated next to an ex-investment banker (currently a business consultant, used to be an investment banker). Before long, the conversation turned to the Gold Cruise and the fact that I was scheduled to give a talk on gold.

His response was immediate and enthusiastic: “Oh wow, that’s great! Gold is really hot right now! Precious metals are the place to be!”

The point of that little anecdote is that the word is clearly out. When you get that kind of response at a dinner party, people know. It’s no longer our job to “evangelize” anymore. We don’t have to go out and pound the table for investing in energy and metals. As recently as a year ago, we did, telling everyone and their brother to buy gold and oil stocks, but now people get that. They see the opportunity is here. But does that mean our job is done? Not at all. In fact, our job is just getting started, just like these trends.

There are only a few ways for the bull market in gold to play out, and supposedly a fixed ending in all cases. The yellow metal’s dollar price will violently launch into orbit at some point, arc into a near-vertical crescendo and ultimately burn itself out supernova style. Either that or a long, drawn-out grind – a steady sloshing higher over the course of years, punctuated by occasional hiccups and countertrends to keep us on our toes. Or perhaps a combination of both, in homage to the disco era – a multiyear rise capped off with a blaze of glory.

But no matter how it happens, gold will eventually return to Earth. The fixed ending is a return to normalcy, which in gold’s case equates to dormancy. After all, what goes up must come down. Right? It’s only logical. That is what everyone expects. Yet, what if, this time, the future doesn’t look like the past? What if gold were to climb to new highs, breaking the $1,000-an-ounce barrier, and never return from whence it came? With apologies to Thomas Wolfe, what if the bankers can’t go home again?

Now that would be something.

This talk will discuss exactly that possibility. In the long run, I believe, the fiat money bankers will not be able go home again. The role of gold in the 21st century is not just to act as a barometer of financial anxiety, but to ultimately return to the fore as sound money.

Even with gold at 25-year highs, only a modest percentage of the population continues to insist – and to remember – that gold and silver are money. It is surprising, and sometimes breathtaking, how quickly modern man forgets his past. Born of Nixon’s infamous utterance, fiat currency is little more than a brief experiment in the grand scheme of things – still shy of its 40th birthday. Gold and silver, on the other hand, have functioned as money for roughly 98% of recorded financial history, dating back to the Lydians in the seventh century B.C.

Some dismiss gold as “just another commodity.” Those who say that gold is just another commodity either have a hidden agenda, a blindness to human nature, or both. While true that gold responds to supply and demand just like any other commodity, it is also the only commodity to have been bound up with the human psyche for thousands of years. As Peter Bernstein recounts in his excellent book The Power of Gold: The History of an Obsession, gold has been driving men to great lengths of desperation since time immemorial. There is something deeply moving about it.

Some things are just bred into us. Certain habits die hard, or never die at all. Modern suburban man, for example, has a deep attachment to his lawn. There is just something about owning a piece of fertile land, even if it is barely the size of a postage stamp, that makes a guy feel like king of his castle. This feeling can be traced back to our ancestors, for whom possession of sufficient hunting and gathering territory was a matter of life and death. The man rich in land was rich indeed. Gold inspires a similar primal connection. It is not just another commodity.

Gold represents more than just the wealth of kings. On a more everyday level, gold is simply money – a store of what you have worked hard to earn and keep. Money you can sink your teeth into, hide under your mattress, store up in your vault. Real money.

In our modern world of bits and bytes, money is brushed off as an abstract concept. Talking heads regularly maul and distort its meaning at will. Yet money is one of the most important “abstract concepts” in history. It prices the fruits of our labor and the value of our efforts. It makes savings and investment possible. Money is not wealth in itself, yet it measures out the wealth of nations. Mentioned in the Bible more than any other topic, money speaks to the state of a man’s soul.

Ultimately, money is linked to something even older and more abstract: the concept of trust. So how is it that when you follow modern money to its birthplace, you wind up in a politician’s headquarters – a place utterly devoid of trust if ever there was one? This does not make sense. It is an anachronism of 20th-century government, a byproduct of industrial oligarchy and short-lived economies of scale. As free market capitalism evolves, the temporary arrangements that gave birth to fiat currency will not survive. The hoary old concept of trust, on the other hand, most certainly will. This is why gold will rise again.

Successful traders have a saying: “Avoid the middle like the plague.” Basically what this means is that you can make money in the short run and you can make money in the long run, but the middle is often a fog.

In the short run, you have what I call “pockets of clarity” – moments where all the pieces fall into place and you can see, if only for a few precious moments, what is likely to happen next. Finding and exploiting pockets of clarity is the bread and butter of successful trading. In the long run, you can see the big trends, “megatrends” as some call them, that will eventually run to inescapable conclusions. The only things absolutely certain are death and taxes, but some other things come close. A few major cycles, rooted deeply in human nature, have the predictability of gravity or the sun rising each morning – but only over the very long term.

In discussing the return of gold as money, this talk is clearly focused on the long run – where the current trends we are seeing will ultimately lead us as far as gold is concerned. The evidence to support our conclusions is right before our eyes… but in terms of how long everything will take, we cannot know.

It is the middle span that is truly hard to predict, yet as investors, we must get through it. We do not know how long it will take for certain trends to play out, but we do know the long run shapes the middle as we go from here to there. When you have conviction, patience is your ally. It is easier to get through the valley when you know the mountain is in the distance.


Justice Litle
for The Daily Reckoning
March 21, 2006

P.S. The nature of gold’s rise – sometimes meek and docile, sometimes violent and dramatic – will dominate the headlines for years to come. Look around and you can already see it happening. The return of gold as money will change how people think. It will change how the world looks. And it will have a dramatic impact on your portfolio, for good or ill. Which one is up to you.

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Editor’s Note: Justice Litle is an editor of Outstanding Investments, ranked number one by Hulbert’s Financial Digest for total return performance over the past five years. He has worked with soybean farmers, cattle ranchers, energy consultants, currency hedgers, scrap metal dealers and everything in between, including multiple hedge funds. Mr. Litle also acted as head trader for a private equity partnership, and made contributions to Trend Following: How Great Traders Make Millions in Up or Down Markets, a popular trading book by Mike Covel (FT/Prentice Hall).

Isn’t this the second day of spring?

You wouldn’t think so. Here, it is just another cold, dark day in London.

And in the U.S. markets, yesterday passed as just another day without history. Nothing much happened. Still, we thought we felt a chilly wind…like a ghost crossing a room. We thought we saw the candles flicker.

History hesitates. History feints. History even seems to pause. But, history never stops. Here we offer a prediction: history will grind Mr. Greenspan’s reputation to dust – along with the finances of millions of American families.

“The national debt – currently over $8 trillion – is only the tip of the iceberg,” explains a review of Kevin Phillips’s new book, American Theocracy.

“There has also been an explosion of corporate debt, state and local bonded debt, international debt through huge trade imbalances, and consumer debt (mostly in the form of credit-card balances and aggressively marketed home-mortgage packages). Taken together, this present and future debt may exceed $70 trillion.

“The creation of a national-debt culture, Phillips argues, although exacerbated by the policies of the Bush administration, has been the work of many people over many decades – among them Alan Greenspan, who, he acidly notes, blithely and irresponsibly ignored the rising debt to avoid pricking the stock-market bubble it helped produce. It is most of all a product of the ‘financialization’ of the American economy – the turn away from manufacturing and toward an economy based on moving and managing money.”

Most economists would put it differently. They would say that the U.S. has moved from old industry – making things – to a new form of industry in which services are emphasized. But the service that is offered is a financial one – helping Americans borrow money they can’t pay back and spend it on things they can’t afford.

A recent study by the Fed tells us where this new service economy has gotten us:

“The typical family now has $3,800 in the bank, but owes $2,200 on a credit card. The typical family owns a house worth $160,000, but has a mortgage of $95,000 on it. The typical family earns $43,000 per year, but has no bonds, no mutual funds, no stocks, and no retirement plan.”

The Washington Post showed the figures to financial planners. “What do you think of this?” asked the newspaper. The planners were appalled. “I had no idea that it was this bad,” said one.

Meanwhile, inflation is supposed to be under control, but the typical family’s living costs continue to rise like suds at a sewage plant. “Gas price soars,” says an MSNBC headline. “Retirees face a costly burden for health care,” adds another source.

Why are costs rising? Well, the Bank of Greenspan, now the Bank of Bernanke, added $827 billion to the nation’s money supply (M3) in the last 12 months. The forces of deflation – India, China, the Internet, and Wal-Mart – kept prices down for many things. But, the new money had to go somewhere. So, it went into the items that cheap, globalized labor couldn’t touch: housing, education, health care, gold, and resources.

Eventually, globalization may cut into education and health care costs, too – colleague Lila Rajiva tells us that you can get a perfectly good professional education in India for less than a quarter of the charge in the United States, but for the moment, American families struggle to keep up with rising costs on stable or declining earnings.

Well, thank you, Alan Greenspan.

And thank you, also, George W. Bush. No president has ever added so much to the typical family’s burdens. The debt ceiling has been raised four times during the younger Bush’s years. If it is raised any more, it may pose a hazard to Ben Bernanke’s helicopter – for, how will the government continue to borrow while the Fed is undermining the value of the currency it is borrowing in? And yet, the spending goes on. The War Against Nobody, alone, will cost the typical American family about $10,000 – or about a sixth of its entire net worth.

We don’t know why Americans stand for it, but they don’t seem to notice. Or it doesn’t seem to matter. History is dead, they believe. From here on out, everything just gets better.

But we thought we felt that chilly breeze…as if history had begun to stir.

More news from Aussie Joel and The Rude Awakening…


Eric Fry, reporting from Manhattan:

“Decomposed dinosaurs cannot satisfy the globe’s energy needs forever. Indeed, the soaring prices of crude oil and natural gas suggest that the days of cheap fossil fuels are behind us. Therefore, in the days of expensive energy that lie ahead, many different technologies and fuel sources will emerge to replace fossil fuels. Partial replacements are emerging already. J.P. Morgan predicts, for example, that global bio-diesel production will double over the next two years – consuming 4% of the world’s total edible-oil output by the end of 2007.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


Bill Bonner, back in London…

*** Addison made an appearance on C-SPAN’s “Washington Journal” this morning to talk about Empire of Debt and discuss the economic choices that have put the United States in the current economic condition.

“I think it went well,” Addison said. “We talked for 45 minutes and covered a lot of ground.”

“The best part, though – the president had to wait for us to finish the interview. We held up Bush’s speech by 45 seconds.


*** Just months after immigrant youths took to the streets in France to fight discrimination, more protests and subsequent riots cropped up again this past week. This time, students and labor unions seek to battle the Contrat Premiere Embauche (CPE), or the First Job Contract law, which states that an employer has the right to fire an employee within the first two years on the job without giving a reason.

In Paris, on Thursday, March 16, 2006, those opposed to the First Job Contract law made their voices heard. “Next to the capital’s famous Bon Marche department store, rioters torched a newspaper stand at the end of an otherwise boisterous and peaceful march by tens of thousands of whistling, chanting, drum-beating students in the Left Bank,” reports the AP. “Police fired rubber pellets to disperse the rioters, who formed a very small part of the demonstrators.”

*** India’s stock market just hit an all-time high, but in the Middle East, several markets collapsed last week.

“In Egypt, the Cairo stock market dropped 11.3 percent in early afternoon [Tuesday] trade, its biggest single-day drop in five years. The index was at 5,589 points compared with the close Monday of 6,296,” says Omar Hasan for Middle East Online.

“The Doha Securities Market closed down 3.3 percent at 9,282.42 points. It is 16 percent below last year’s close of 11,053.24 points and down 25 percent on its all-time high of 12,400 points recorded late last year.

“It is a chain reaction. Saudi investors have withdrawn much of their money from stock markets in the Middle East, including Egypt and Jordan, causing them to decline.”

Gulf markets have increased six to seven fold since 2001 due to abundant liquidity generated from a sharp rise in oil revenues. The upward trend and lucrative profits lured millions of small investors including women.

“Almost 60 percent of Saudi investors are small dealers. They depend mainly on speculation and whenever a decline happens they try to exit, causing the market to slide,” Saudi economist Abdul Aziz al-Daghestani said.

“Recently it became like gambling and not investment in most Gulf markets. That’s why we are seeing the fast fall.”

The Daily Reckoning