Gold's Eternal Truth

The Daily Reckoning PRESENTS: This week, the Mighty Mogambo tries to convince his gathered audience that owning gold is the only way to save yourself from bubbles and a falling dollar. Well, gold and the Mogambo Time-Sharing Investment Scam (MTSIS). Read on…


All of this economic stupidity will end in tears (as it always has) as inflation in prices destroys economies by destroying a lot of people’s lives. That is the problem with creating money: It shows up in prices, higher and higher. And after awhile you get really sick and tired of hearing the whining and complaining of your family about how they can’t afford to buy anything, and how it is all your fault just because you are lazy and stupid, and how you are the worst parent and worst husband in the whole world. Then one day you find yourself thinking of murder-suicide scenarios and what the newspaper headline would say, until you say to yourself, “Whoa!”

Better that you start thinking about robbery, or better yet, getting money that does not depreciate in the first place – gold. And if you also want a little capital gain with that buying-power-security, then Nick Barisheff at Bullion Marketing Services Ibbotson Associates has some news that will be of interest to you. It concerns the Eternal Mogambo Truth About Gold (EMTAG).

He claims that he has never heard of the EMTAG, but notice that he does not explain how he stated it exactly when he said, “It takes fewer ounces of gold to buy a house, a car, the Dow, or almost any other good or service than it did in 1971.” And even more damning, he admits that he said, “Gold will continue to increase in purchasing power as long as its inflation rate (mine supply) is lower than the increase in the money supply.”

In case you were wondering, like me, he added, “Mine supply increases by about 1.5% annually.”

So (and this is so exciting!) as the money supply has been expanding by almost 12%, you would certainly expect gold to rise in price? Well, that is exactly what has happened, QED (picking my own entry and exit points to skew the data the way I want)!

And, since the money supply is still expanding exponentially, you can also certainly expect the price of gold to continue to go up, too! Whee!

Michael Nystrom at hears me chortling and giggling like a little girl in my childish glee about the coming rise in gold, and notes that Robert Prechter has pointed out that “the nominal Dow peaked at 381 in September 1929, and today it is hovering somewhere around 11,500, a 30X increase over 77 years. Not bad, right? But amazingly, measured in gold, the recent Dow highs are actually right about where they were at their 1929 peak!”

For those interested in the actual details, he says, “It took 18.5 ounces of gold to buy the Dow on September 3, 1929. On May 10, 2006, it took 16.5 ounces of gold, so it is actually cheaper.”

So gold made slightly more gains! Hahaha! He adds, “As Dr. Gold would put it: One dollar won’t buy what it did in 1929, but one ounce of gold (about $20 at the time) sure will (about $650 today)!”

I see the audience getting up to leave, obviously taking the lesson to heart, and are going out to get some gold immediately. I am suddenly in a panic, as I need them to come back for the next part of the presentation, where I hopefully sell them a sizable interest in my exciting, new Mogambo Time-Sharing Investment (MTSI)! So I leap up, seize the microphone, and order them all to come back and sit down – right now! – or I will hunt them down, one by one, and shoot them through the head. But, as usual, nobody listens. They continue to stream out, only now making rude hand gestures at me.

And I could hardly blame them for their disinterest. I am as full of empty bluster as I am full of crap about most things – as long as you don’t keep pestering me, like that stupid credit-card reader at the damned grocery store that kept pestering me, pestering me, pestering me to “Enter PIN number”, and I keep telling it that I don’t HAVE a PIN number. It’s a credit card, you stupid machine, and it keeps beeping, beeping, beeping for me to “Enter PIN number”, and I am yelling that I don’t have a damned PIN number, dammit. And it is still beeping, and we’re all yelling and beeping, and after awhile I grab a can of stewed tomatoes and shout, “You want my PIN number? Is that what you want? Okay, here’s my PIN number, you damned beeping machine from bleeping hell!” I was winding up to really smash that hateful little device to little tiny pieces when the ashen cashier said, “I’ll enter your credit card number from here, sir! Just don’t kill me or break the machine!” which I figured was a fair compromise. So I said, “Okay.”

But nobody was pestering me; in fact they were doing the opposite by leaving. But I could not blame them for leaving to buy more gold, either, as this is the everlasting beauty of gold: It has preserved buying power over the last century, and over the millennia, while I laugh the Haunting Yet Scornful Laugh Of The Mogambo (HYSLOTM) at the dollar, the greenback dollar, the bigshot dollar, the Almighty Dollar, which as lost about 97% of its buying power in just 94 years, which it will never get back! And it had a 30% decline in buying power in just the last few years!

So if you have not had a net-of-tax, net-of-expenses, net-of-fees, net-of-everything profit of 43%, measured in nominal dollars, in the last four years, then you lost buying power, chump! Hahaha! So much for the promises of “investing for the long haul!” Hahaha! You invested a $20,000 car and netted a $25,000 bicycle!

Well, my laughter rang hollow in the now-empty room, as none of the audience came back, and now I am still stuck in my own crappy, dilapidated house, instead of being able to unload that eyesore on a bunch of suckers in the Mogambo Time-Sharing Investment Scam (MTSIS).

Thinking quickly, I deduce one other good idea to make a lot of money, enabling me to get out of this dump and say “goodbye” to family, friends and angry creditors: Maximize some profits from the guaranteed rise in gold, that can supposedly be estimated by (for one thing) the percentage change of the fall in the dollar.

It’s a lot, I know that, but now much is all over my head, of course, and it’s all academic anyway. That is why we turn to Puru Saxena, in his Money Matters newsletter. He reports that the shares of gold mining companies go up when gold goes up, like you would expect, but (even better!), they go up as a multiple of the rise in the gold itself! He reports, “So far in this bull-market, mining stocks of precious metals have on average outperformed physical bullion by 300%. In other words, investors who bought the mining shares made three times more money than those who bought the physical bullion.”

I seem to remember that this is also what happened after the stock market crash in the ’30s, and everywhere else before and since then, too, when the government acted stupidly.

Like in Argentina now, where President Kirchner just had a government statistician fired when, as the Wall Street Journal put it, “she refused to alter the ‘methodology’ used to calculate inflation in January. Armed guards then escorted a political appointee to replace her.” Hahaha!

Mogambo Memo (MM) to Argentinians: Buy gold now, while your money still has some buying power, because you will soon be screwed otherwise!

Speaking of actual money, Bob C. was wondering about the acronym “FIAT” when used to describe our “money”. He says, “I believe it is short for Financial Instrument Administering Theft, but I am not sure. Could you please confirm? Thanks!”

I can, and will, answer that question in genuine Inscrutable Mogambo Gibberish (IMG)! With a phony-baloney gravitas, my voice resonates, “No, it isn’t, but at the same time, yes it is. Thank you for coming. Please leave a donation on your way out. A big one! Now scram!”

Until next week,

The Mogambo Guru
for The Daily Reckoning
February 26, 2007

Mogambo sez: Gold, silver and oil have suddenly declined in price a little bit, and that can only mean one thing: It’s getting to be time to buy more, and you would buy some, too, if you had some money, which you don’t anymore. Welcome to the hell of inflation!

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

“You can never really know about these things,” said a guest at our beach shack on Saturday night. Our friend runs an investment fund, mostly family money and mostly following a macro-economic analysis.

“There is clearly a bubble in liquidity. But when they are throwing a big party like this you don’t like to miss it. We pulled out of Russia too early. We could have made a lot more money by sticking around a bit longer. Now, we’re in Chinese stocks, oil, and tourism. And cash. We’ve increased our cash to 25%. We’re definitely worried that this thing is going to come to an end. And when it does, those Chinese stocks will take a beating. But we don’t invest for the short term. We’re looking 10 years ahead. And what we see 10 years ahead is higher prices on Chinese shares, higher energy prices, and a real boom in tourism in many places.

“Have you seen what is going on in Costa Rica? The place is booming. People are paying huge amounts of money for resort properties. And the same thing is happening in Panama. A place like this would cost millions in California…and almost that much in Panama or Costa Rica. Here in Nicaragua it is still very early in the cycle. The same piece of property that you can buy here for $100,000 would cost your $400,000 or $500,000 in Costa Rica.

“But let’s get back to the macro situation. We’re 25% in cash, as I said. The trouble is, we’re worried about cash too. We hold our cash in dollars, just like everyone else. It’s the safest, surest currency around. And we presume that when the liquidity bubble pops, the price of financial assets will go down. Which means, that the value of the dollar – to an investor – must go up.

“But remember, it’s all relative. If we lose some money in a credit meltdown, we won’t be the only ones. And if we lose less than other investors, we’re winners. Because we’ll be in a better position to buy back some of those financial assets at distressed prices.

“The trouble with moving into cash, generally, is that you have to worry about the cash too. I mean, there’s nothing sure about the dollar either. We could suffer a big loss from the dollar itself…against other currencies or against consumer prices. So we don’t like to go too far into cash.

“You probably go into gold. We don’t. Gold has been a terrible investment for most of our adult lives. Besides, we just don’t know anything about it.”

Our friend was right about gold. It was a terrible investment for most of our adult lives. But the thing about gold that makes it a terrible investment most of the time makes it an exceptionally good one occasionally. One of those occasions happened in the last five years of the 1970s. The price of the yellow metal rose from the low $40s to over $800. Gold was reacting…then over-reacting to the consumer price inflation of the ’60s and ’70s.

Now, gold is reacting again. But to what? There is very little consumer price inflation, and yet the yellow stuff has more than doubled in price since the beginning of the long war against terrorism. Last year, it rose nearly 20% against dollars. This year, you could have already made more from gold than you could have from an entire year’s worth of return on Treasury bonds.

We guess that gold is reacting to the inflation of ASSET prices, not consumer prices. And we guess that the trend still has a ways to go. As we keep pointing out, the worldwide money supply has been going up about 10% per year for the last 10 years. That’s about three times as fast as the supply of the goods and services the money is used to buy. So far, consumer prices haven’t been much affected, because the money has gone into investments, not into the cost of goods produced. That is subject to change, of course. Consumer price inflation could increase – which would drive up the price of gold.

But there is another potential outcome…an asset price collapse. And if the price of stocks, bonds, property and Andy Warhol paintings goes down, what happens to gold?

We don’t know. Gold may soar – as people seek shelter from collapsing asset prices. Or, it may wobble too…or even go down. But the price of gold is still low, compared to other financial assets. It has gone up…but not yet reached a frenzy. Even sophisticated investors, like our friends in Nicaragua, do not own it…yet. In a meltdown, typically the things that go down the most are the things that went up the most. Gold is still below its peak set 27 years ago…while almost everything else is setting records.

GoldMoney’s James Turk echoes our sentiment, saying, “Because the future is unknowable and markets are therefore unpredictable, nobody knows, but I don’t think gold will be stopped at $715. There is just too much buying power coming into the market to stop it. There are just too many reasons to buy gold, number one of which is the tremendous volume of new dollars being created by the Federal Reserve aimed at flooding the economy with ‘liquidity’.

“All this so-called liquidity does is add to the mountain of debt and debase the purchasing power of the dollar with inflation. It’s therefore no wonder that the CRB Continuing Index made a new all-time record high this past Friday, closing at 412.90, which is a 17.5% gain from one year ago.

“With the CRB at a new all-time record high, it seems to me that it won’t be too long now before gold also reaches a new record high. So while gold may stop for a breather at $715, I expect this level to soon be exceeded.”

Remember, it’s all relative. Gold has performed well, but only in the last few years. Our guess is that it will perform spectacularly well when this liquidity bubble finally pops – and reaction turns to overreaction.

More news:


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“So the sour note that I thought the currencies could end the week on was swept under a rug, and instead the currencies rallied! The euro made it within spittin’ distance of 1.32 before it settled in, closing up almost three quarters of a cent at 1.3175!”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more views:

*** Chris Mayer, reporting from Buenos Aires, Argentina…

“One of the things I enjoy when I travel is seeing how bigger global trends impact a local economy. There is no escaping the high cost of fossil fuels, for example, or the growing importance of finding reliable supplies of water. Last week, I traveled around rural areas in Salta. I spent some time at a ranch and also viewed properties owned by American and European investors seeking to develop them into residential communities, golf courses, vineyards and more.

“So it was interesting to hear them talk about water rights and energy issues. In the fertile valley of Cafayate, there is plenty of water. In some other areas, there are worries of polluted water supplies. Energy is also an important issue. Farmers complain of diesel shortages. While I was in Salta, the regional government reportedly signed a contract with a firm to construct 130 miles of gas pipelines in the area.

“Reading the local newspaper is always a good way to get the pulse of a city. And in reading the Buenos Aires Herald, you can get a sense for what worries the Argentines. There are growing concerns over possible energy shortages and blackouts. I’m not sure of the whole picture, but I know that the government holds the price of electricity artificially low. Argentines pay one-third of what their South American neighbors pay. This has stifled investment in new power generation, as you might imagine. Who wants to spend a bunch of money building new and better power generation plants when the government won’t allow you to charge a market rate?”

*** “We would like to help in whatever way we can,” we told the reporter. “We helped build a clinic over near Rancho Santana. Now, we’re going to help this project for poor children in Tola. The kids need uniforms, because many of their parents aren’t able to buy them clothes. So they don’t go to school. It doesn’t cost much to provide shoes and clothing to these poor kids. We’re happy to do it.”

Your editor made his first radio appearance in Latin America…and did his first interview in Spanish…yesterday. Naturally, it all came about by accident.

Upon leaving Padre Walter’s center for poor children in Tola, Nicaragua, we saw a young man with his thumb pointing in the direction we were headed. We stopped. He got in. Turned out, he was a reporter for the local radio station.

“What were we doing in Tola?” he asked.

We explained that we had come at Padre Walter’s invitation.

The Padre is the priest for the whole of the sector. He makes the rounds of the little churches in all the towns in the area, sometimes on foot, sometimes by catching rides with passing motorists.

“There are so many poor people in this area. And this year is particularly bad. It is so dry. The crops have not done well. A lot of the children I meet just don’t go to school, either because they don’t have clothes or they have to work in the fields. The law says that all children have to go to school until the age of 16, but in practice, many don’t. That’s why we have begun this new project in Tola, to work with the families…to try to help them by providing a secure place where the children can come after school…and where they can get religious instruction…as well as a good meal, and whatever else they need to in order to stay in school.”

The center was a large, modest house, which had been converted into something resembling a school. There was a lunchroom, open to the interior courtyard, as well as several schoolrooms on the other three sides. The courtyard itself was surrounded by various tropical plants…unidentifiable to your editor…with no apparent plan or formula.

Padre Walter introduced us to the two nuns who ran the place – both very pleasant and energetic women in their mid-30s. The two gave us a tour of the establishment.

“We are part of a very small order,” the older one explained, “started by an Italian in the 17th century. He noticed that only rich children, at that time, were able to go to school. The rest were often almost abandoned in the streets. So he started taking in these street children and helping them. Now, our group has only 100 nuns…with centers in Italy, Africa, and Romania. But we are still doing the same work.”

“The key to it,” said the other, “is that we don’t take children out of their homes. And we don’t provide schooling. Instead, we try to help the children stay with their families and in school. So we work with both the families and the school to try to support them. What we find is that if a child comes to us early enough, we can make a big difference. We can help him get what he needs to continue his education. He’ll stay with us for years, coming here after class. We make sure he gets fed properly. We make sure he has shoes and clothes and notepads. These are little things, but many of these families can’t afford them.

“Nicaragua is not a rich country. It is a poor country. And in this area, there are many families that have been broken up by the need to find work. Often, the men go to Costa Rica to get jobs. That leaves the mother in charge…sometimes with a lot of children at home and not enough money to take care of them all. We make a point of visiting the home and figuring out how we can help.

“But it is a big job. This is a Catholic group, but we get no support from the Vatican or from the Curia. So, naturally, we welcome any help you can give.”

We liked the women and Padre Walter. It is one thing to try to improve the world…but it’s another thing altogether to try to help a few poor kids. Here, we are not so far from the facts. We can see with our own eyes that there is much work to do. And we can judge for ourselves how likely it is that these workers will make a good show of it.

“We’d like to at least donate the money for the uniforms,” Elizabeth volunteered. It wasn’t much. $35 per kid…50 kids. But the nuns seemed as happy to get it, as we were to give it.

It was after we had made this commitment that we picked up our hitchhiker. And after we told him what we were doing, he pulled out a tape recorder and did an impromptu interview. It was a small opportunity, but we squeezed it; trying to leave the listener the impression that not all gringos were necessarily the greedy bast**ds some people thought they were.

*** And a quick word from Addison:

Did anyone catch Al Gore at the Academy Awards last night? Have you ever seen a group of people so hell-bent on acting like mindless obsequious sycophants?

The Daily Reckoning