“The Daily Reckoning is a freewheeling Web site for libertarians,
gold bugs and doom enthusiasts of every stripe.”– The New York Times
Investing in Gold
The big news so far this year is the steep rise in the price of gold. The old yellow metal is telling us something. But most people are deaf to gold. They can’t hear it laughing.
Most people believe that gold is a “speculation.” They’ve heard that it pays no dividends. They’ve never heard of any “progress” or any quarterly earnings projections from gold. Gold never announces any fancy new technology. It never tells investors how fast it is growing or how many new customers it has.
Nor do people have any reason to think that the world’s financial system is in danger. “Hasn’t it always been this way?” they ask.
The answer is “no.” The present international financial system is an experiment. It has only existed since 1971, when the United States cut the umbilical cord between the dollar and gold. Before that, gold almost always stood behind the dollar, and other paper currencies. Why? You might just as well ask us “Why do fools fall in love?” or “Why is there air?”
If central bankers could create “money” simply by printing paper currency on a printing press, the world would soon be full of paper currency. And everywhere and always, the price of a thing varies with its availability.
The more there is, the cheaper it is. Generally, as the volume of paper money increases, its unit price falls. Always has; always will.
This is not the first time central bankers have tried a system of purely faith-based currency. Every previous experiment ended in the predictable way: the bankers created more and more “money.” And as the quantity increased, the quality decreased. Eventually, the “money” was of such poor quality that people would no longer accept it. In recent history, the Argentine currency lost 90% of its value in a single year. In less-recent history, the German currency lost 999% of its value in a matter of weeks.
Between the time a man ordered a beer and the time he finished it, the price might have risen two or three times.
“Money” comes in many forms and guises. In our wallet, we have paper notes that remind us of our travels. There are British pounds, of course. But we also have a few euros, a few hundred Argentine pesos, one half-torn 10-cordoba note from Nicaragua, and exactly two U.S. dollars.
We also have a collection of credit cards, each one of which has a certain purchasing power. And if we check our accounts, we find that we have “dollars” or “euros” in various forms and various amounts. At least, we believe we have dollars and euros. We have had them for many years, but we’ve never actually seen them. As far as we know, they exist in no other form than the electronic information that arrives to our computer terminal.
Still, we are confident that we could convert them into goods or services at any time we needed to. We could even sell our farm in America.
According to friends, its value has more than doubled in the last six years. That is, we could get twice as many dollars for it today as we would have gotten in 1999. Where did this extra purchasing power come from, we wonder?
The trouble is, depending upon time and circumstance, the amount of goods and services we would get for our dollars is subject to change. That’s why gold is chuckling to itself. It is watching the supply of “money” and potential purchasing power increase at shocking rate. As it goes up, the quality of the money we hold goes down.
For the first time since the Great Depression, Americans are spending more than they earn. The savings rate is negative. This gap has to be filled with “money.” The nation’s trade deficit was $664 billion in 2004. In 2005, it rose to $806 billion. And the IMF estimates that it will hit $890 billion this year. These gaps, too, must be filled. Each deficit ends up in foreigners’ hands as purchasing power. In three years time, more dollars are added to the world’s supply than the current price of all the gold ever mined since the beginning of time.
Meanwhile, the U.S. federal budget deficits shoot up, too. During the two terms of George W. Bush alone, the feds have borrowed more money from foreign governments and banks than was borrowed by all other American administrations put together, from 1776 to 2000. So too will more debt be added to the national burden in the eight Bush years than in the previous 224.
According to the Bush-friendly Heritage Foundation, federal deficits are expected to rise to $1 trillion per year, by the year 2017, with a $16 trillion national debt, twice today’s level. After that, deficits should grow to $2 trillion per year.
Money, money, money…the Fed is also recreating new money at the fastest pace in history. At the present rate, M3 is ballooning even more rapidly than the trade deficit.
Gold guffaws…snorts…and chortles. It knows something, but it isn’t talking. Yesterday, it rose to another new high – over $550. It’s even higher than Google.
Investing in Gold II
Our advice at the beginning of last year was the same as the advice we gave the year before…and the year before that:
Happily, gold was the year’s top performing sector, for which we claim no distinction nor ask for any thanks. We have only one virtue here at The Daily Reckoning headquarters: humility. And we are even insincere about that. But even false modesty is a great advantage in the forecasting business…that, and not watching television.
Nobody knows what will happen. The worst thing you can do is to listen to other forecasters. The New Year brings them out like a new moon brings out werewolves. All tend to howl the same thing: next year will be more or less like the last. How do they know? They read it in the paper!
If you follow the consensus view, you are doomed to mediocrity. You will make the same investments everyone else makes and get the same returns that everyone else gets. That is not only a dull and cowardly way to do things, it practically guarantees that you will eventually be looking for coins under cushions and asking your brother-in-law for a loan. Over time, the great mass of investors loses money. Every bull market is followed by a bear market. Every bubble pops. Every great company fails. G.M. lost half its value last year. Fannie Mae fell 31%. The typical investor merely goes along; he follows the trends up, and back down. All the while he is paying Wall Street’s costs.
For long periods of time, he thinks he is smart. The last bull trend in stocks began in 1982. It lasted for 18 years. All an investor had to do was to follow the consensus view and buy stocks ‘for the long run.’ Even now, five years after the peak, he still thinks he will get rich in stocks if he waits long enough. But the typical bear market lasts about as long as the bull market that preceded it. And it wipes out most or all of the gain. By the time it is finally over – perhaps in 2015 – the Dow will probably be back below 5,000 and the average investor will be underwater, because he bought when the newspapers, experts and forecasters told him t when the Dow was over 5,000.
The big opportunities – and big dangers – are all at the turning points. When the Dow turns down, for example, it is time to sell. When gold begins to take off, it is time to buy. But these turning points – these major market shifts – are never foreseen by the forecasters. They are ‘discontinuities.’ That is, they are breaks in the visible and usual patterns. You cannot see them coming by looking at what happened last year or the year before. You cannot predict them by guessing that things, next year, will be more or less as they were the last. They are the very time when things will not be as they have been.
They are the points at which new trends begin.
We are too ornery to follow the crowd, and too modest to think we know what the year ahead will bring. The best we can do is to follow hunches, instincts and old-fashioned theories. ‘You get what you’ve got coming,’ is one of them. ‘Buy low, sell high’ is another.
At $10 a barrel, they were practically giving away oil a few years ago. It hit $70 a barrel on September 1, 2005. Now it is around $60. Stocks were selling at only six times earnings in 1982; they were practically giving them away. Likewise, gold was so cheap in the early ’70s – at $41 an ounce
– they were practically giving it away. Whenever people give away something valuable, we take it.
We’ve never regretted buying at give-away prices. It is what led us to buy buildings in Baltimore in the early 90s, our place in Nicaragua, and more recently, land in Argentina.
By the late 1990’s, gold was being given away again at under $300 an ounce. Then, with the Dow near 12,000, we announced our Trade of the Decade: buy gold, sell stocks. Half the decade has now gone by. Gold has doubled. Stocks have not yet broken down. But we will stick with our trade. They are not giving gold away anymore. Still, a major bull market in the yellow metal is underway. We are too humble to make a forecast, but we stay with our Trade of the Decade, just to see how it turns out.
P.S. – The Daily Reckoning Gold Page is brought to you by the New York Times best seller
Empire of Debt: “I read in the Figaro that the American economy has become completely dependent on China,” said a friend at a dinner party recently. “But I guess the Chinese have no choice. They need Americans to continue buying their products.”
We are alarmed. Even chemists and shoe clerks have taken up macroeconomics. Everyone thinks he understands how the world economy works.
“Well, it is a little like that,” we began to explain. “The Chinese do sell to the U.S. and they do lend money back to the U.S. But there’s no law that says this has to continue.
“Imagine a shopkeeper whose biggest customer was having a hard time paying his bills. He extends credit . . . hoping the man will get his finances in order. But the more credit he gives him, the worse the man’s finances are. It would be very nice if that could work out. But it rarely does. Instead, it eventually blows up. The customer has to stop buying and the shopkeeper has to stop lending. There’s going to be hell to pay, in other words.”
“What should an investor do to protect himself,” our friend asked.
“Gold? What a strange idea. I haven’t heard anyone mention gold in many years. It seems so out-of-date. I didn’t think anyone bought gold anymore.”
“That’s why you should buy it.”
Title: Empire of Debt: The Rise Of An Epic Financial Crisis
Authors: Bill Bonner, Addison Wiggin
Hardcover: 320 pages
Publication Date: November 2005
Click Here to Purchase
Calling All Gold Bugs: Bill Bonner has called gold “nature’s money” – and for good reason. You can’t turn on a printing press or create it out of thin air; this naturally limits the “money supply,” generally keeping it in line with the economy itself. Read…
Investing in Gold: Dreaming of a Gold Christmas
Welcome to the Great Dollar Standard Era
“Removing the U.S. monetary system from the gold standard was not merely a decision of short-term effect. Nixon may have seen the move as a means for solving current economic problems, but it had long-lasting impacts: trade deficits, growing federal debt, and the ability to print money endlessly and build a new credit-based economy. Internationally, the decision by the United States virtually forced all other major currencies to also go off the gold standard.”
A New York Times, Wall Street Journal and Amazon.com Bestseller
What other Gold Bugs are saying….
“Wiggin’s account is artful, direct, and thorough. I liked the historical aspect. But I especially like the way he’s hitting on what’s happening today. That includes all the things nobody seems to want to talk about or admit.”
Looking for a gift for that family Gold Bug?
Introducing The Case for GoldFor all of recorded human history, a single substance – number 79 in the periodic table – has fascinated man above all. Prized above all others, in ancient times it was synonymous with power and wealth. But there’s a struggle of epochal proportions raging today. Forces are lined up in opposing camps. Never before has the struggle been so big…or for such high stakes. Now, publishing history has been made as well.
Related Reports and Articles on Investing in Gold
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Fiat Money: Alchemy’s New Paradigm: We scoff at the duped medieval serfs and many of the intelligensia as well who believed in Alchemy.
Demanding A Divorce!: When Nixon did what so many consider his “dirty deed” back in 1971, he didn’t really file for “divorce” between the dollar and gold.
Shanghai or Lie?: Tomorrow, I’m going to make it down to the Shanghai gold exchange to see what the fuss is all about. It too, is right on the Bund. And as a gold investor, I’m curious to see what attitudes the Chinese have.
The Midas Touch: Gold coins offer the best opportunity to do this in the investment world right now. If the last few coin bull markets are any indication, you could literally make hundreds of percent in the next few years.