This week, during our wanderings, we have pondered remarks made by the following commentators.
• Mary Holm
• Bob Prechter
• Stephen Leeb
• Texans think big
• Eric King on the Bank for International Settlements
In the NZ Herald on Saturday last, Mary Holm was asked her opinion about gold as an investment. This was her reply…
“I don’t know a lot about gold as an investment. That’s because I’ve never come across anyone whose opinion I respect who recommends gold in any quantity for ordinary investors. For one thing, it generates no income. For another, the price can be pretty erratic.
Sure, this century gold has risen dramatically. But in the past few decades of last century the picture was decidedly different. What’s more, the recent rise is making some people worry about a bubble. Here’s an interesting quote from Anders Bylund on the Motley Fool website:
“Is gold bullion the new tulip bulb? Looking at a long-term chart of gold prices, it’s hard not to reach that conclusion. The glinting stuff has tripled in value in five short years, and it’s currently riding a rocket sled of seemingly speculative gains.
“But there’s nothing intrinsically valuable about gold. You don’t eat it, you can’t sleep on it, and the metal has rather limited real-world uses in general. Shares rise over the long term because people work at making the underlying businesses better and more profitable. Gold? Eh, dig up some more.”
I don’t know much about Bylund, but I like his argument better than yours. I would never suggest someone sell their house and invest the proceeds in gold”.
This reply prompted the following rejoinder from me – I don’t think Ms Holm is that likely to publish it though…
This is interesting, Mary. You open by saying that you don’t know a lot about gold as an investment, yet you close by saying you would never suggest someone selling their house and investing the proceeds in gold….
Gold has been the premier choice to preserve wealth for over 5000 years. Sure there are ups and downs – just like there is in any share market. However, of note is the fact that a fairly good suit would have cost you around USD 35 dollars in 1970 – equivalent to an ounce of gold. What’s the cost of a good suit now? Hmm, you can buy a fairly good suit for around USD1200 – the current price of that same ounce of gold – I would think…
I gather you have no respect for the investment acumen of Jim Rogers, Marc Faber, George Soros, David Einhorn (of Greenlight Capital), or Robert Kiyosaki, well-known to New Zealanders, who are a few of the more outspoken proponents of ownership of gold (and silver, by the way).
The critical issue at this moment in time is the dilemma of Governments around the Western World (and Japan) who are facing extreme economic and financial headwinds –rapidly aging populations who are placing, and will continue to place, increasing demands on state coffers, together with a financial system which has a rotten core because banks are not disclosing their real losses, even now, but have been allowed to “mark to model”. Mr Bernanke would like to flood the US economy with helicopter money, if this does indeed happen, there will be severe inflation down the road – one of the environments in which gold does indeed thrive. Interestingly, gold shines in severe deflationary times also. In the deflation that occurred during and following the Great Depression, the best performing stocks were gold miners, such as Homestake Mining.
If you would like to get up to speed in the world of investment in gold (and silver), may I suggest that you check out our website, goldsurvivalguide.co.nz, where you will find a wealth of material discussing this topic. In fact, further on in this article, you will find Stephen Leeb discussing Homestake Mining…
Yes, we are involved in selling gold – we’ve bought it for ourselves as well!
Wild Bill (Forrest Hill).
Bob Prechter is a well-known practitioner of what is known as Elliott Wave theory, and the application of this discipline in conjunction with socioeconomics. He is also a noted permabear, having long held the view that a market crash is looming just over the horizon. However, he is also of the opinion that gold will be subject to a severe correction, but that he would become a big buyer if the price were to drop back to $200 per ounce. Well, all I can say is if that were to happen, I would be a big buyer also…
The following interview is excerpted from The Elliott Wave Theorist by Robert Prechter, published June 18, 2010
The Daily Crux: OK, so you don’t think the Fed will go that far. But what if the government got involved and tried to inflate its way out by issuing massive amounts of Treasury bonds to the Fed? Wouldn’t that create inflation?
Robert Prechter: If the government tried to do that, bond holders would get spooked, and interest rates would go up and stay ahead of the printing. At the same time, other credit prices—municipal, corporate and consumer—would implode. When the supply of credit is far bigger than the supply of money—and it is by a huge margin—the value of old credit can contract faster than new bonds can be printed. The net result would still be deflation.
But this is not the most likely scenario. Have you noticed that even the Fed chairman has been telling Congress it needs to stop spending and borrowing? The Fed doesn’t want this to happen any more than other creditors do.
If the Treasury’s interest rates do soar, it will not likely be due to inflation fears but to fear of government default. If the government is forced to pay higher and higher rates, it will become a black hole for money. Spiraling Treasury rates would suck money from other sources, causing banks, municipalities and companies to fail, ruining all of their debts, which would be deflationary.
Crux: Will hyperinflation ever happen in the U.S.?
Prechter: It certainly might. But it could only happen after the bond market implodes, not before. Then, if politicians get hold of a press, they might decide to print. But this is political conjecture, not monetary analysis. First we have to cross the deflationary valley, and this could take longer than almost anyone thinks.
Crux: So what you’re saying is that inflation is possible, but that it can’t happen until deflation has run its course. What would you be looking for to indicate that deflation was over and that inflation was beginning to become a danger?
Prechter: A banking crisis, in which thousands of banks shut their doors. Thirty-three percent unemployment. A ruined private and municipal bond market. And a panic in government bonds. If all those things happened, then you would have to be on the lookout for legislation allowing the government to take over the printing of money or to force the Fed to monetize new federal debt at a rapid rate. I think we will have to see all these things before hyperinflation will become possible. If all of this happens, trade all your greenbacks immediately for gold and raw land.
Crux: Are there any scenarios that would change your mind, that would make you think you may be wrong and that inflation is becoming a threat?
Prechter: If the S&P index, real estate and the CRB commodity index all take out their price highs of 2006-2008, it would probably be enough to indicate runaway inflation. We keep a very close eye on all the key markets and will try to be ahead of any such development.
***** This century’s best asset, so far.
***** Why gold could rise 4X higher by 2015.
***** Why gold stocks could soar 8-10X higher.
For the past 10 years, investors have had almost nowhere to hide – that is, almost no asset that would let them preserve wealth and make a little money over and above inflation.
Oh sure, a few stocks have done well – including a number of our recommendations. But stocks in general, bonds, cash, real estate, etc. have been disappointing.
The one exception has been gold. Gold prices have risen each year since 2001. From its low of around $250 in the late 1990s, an ounce of gold today costs roughly 5X more, and its annualized rate of return since then has averaged 15% – far in excess of the inflation rate. In fact, no other major asset class has been so rewarding during this period.
Moreover, gold has withstood the test of time. Since it started trading publicly in the early 1970s, its returns have closely matched those of the S&P 500.
Traditionally, investors have regarded gold as an inflation hedge. It certainly served that role in the 1970s. However, gold is more than just an inflation hedge or a tool for diversification. It’s also a powerful deflation hedge.
For example, one way to get an idea of how gold has fared over the long term is to look at the history of Homestake Mining. This gold company, which is now part of Newmont, began trading in 1879 and was listed on the exchange for more years than any other stock. During the deflationary period of the Great Depression, from 1929-36, Homestake’s share price went from $65 to $544.
Gold also rose 100% during the deflationary period from 1814 to 1830, and its gains over the past 10 years were made under deflationary conditions.
In fact, if we look a little deeper, we can see that gold is not really a ‘flation hedge but a hedge against the debasement of currencies, particularly the U.S. dollar. Gold functions as a currency more than a commodity. It was used as money for most of history, and it is still the money of last resort when all others fail.
Both inflation and deflation can lead to the debasement of currencies, and that’s why gold prices rise during both phenomena. Gold prices soared in the 1970s as higher oil prices led to a higher cost of living and thus a weaker dollar. Today, governments around the world are trying to combat deflation and recession by debasing their currencies through liquidity and spending. So again, weaker currencies mean higher gold prices. Whatever ‘flation we get, it’s good for gold.
With gold prices rising so strongly, many have started wondering if gold is in a bubble – and just how high gold prices can go before they peak.
We said last week that gold could take a little breather in the next few weeks. However, looking at the 5-year horizon, gold appears far from expensive today. If anything, its upside potential is tremendous.
One way to judge whether gold is over- or under-priced would be to look at the ratio between the gold supply and the money supply. However, nations today have very different ways of measuring money supplies. (For instance, the U.S. no longer calculates M3, which was a very useful measure in the past.)
A more accurate way to evaluate gold today is to look at the ratio between gold prices and the Gross World Product (like GDP, but for the entire planet), before inflation. This tells us how much gold there is in the world versus the goods produced in the world. Because gold is one commodity that doesn’t get consumed or destroyed the same way as oil or iron, the price of gold is a good reflection of the total value of its supply.
The simple premise here is that the more volatile and iffy the world the greater the need for a shelter. And the larger the ratio of gold should be to underlying economic activity.
Since the early 1970s, the ratio of gold:GWP has averaged 0.65. Today, it stands at 0.57, which tells us that gold is actually cheap today, despite its gains over the past decade.
So how high would gold prices need to go before they could be considered overvalued? The last time gold peaked was in 1980, when the ratio averaged 1.72. At the absolute peak in February that year, the ratio was over 2. Therefore, gold prices would have to more than triple from today’s price before we would consider gold overpriced relative to its past peak. Specifically, we would be looking at a gold price of $4,300 per ounce.
However, we actually think gold’s potential is even greater. In the 1980s, for instance, there were ready answers as to what was wrong with the world and how it could be fixed. Today, the solutions are not so clear. We have no Paul Volker-like figure who can assure us that commodity prices will stop rising, that China will stop growing, or that U.S. real income will stop falling. There are no magic bullets in the chamber, and the cavalry isn’t racing towards us over the horizon.
Besides, we calculated that ratio based on today’s GWP. Over the next five years, growth will rise some 5% annually (remember, this is nominal growth, not real growth). The price gold must reach to return the ratio to its previous peak will also rise. Our five-year target for gold prices comes to $5,500 per ounce.
Of course, this assumes that the process of currency debasement will be no worse than it was in the 1970s. In fact, it could be much worse, which would mean the gold:GWP ratio could rise much higher before peaking.
The bottom line is that, until we have a basis for low-inflationary economic growth – that is, growth without currency debasement – as we had in the 1990s, gold prices will continue to rise in an accelerating trend.
The other question you may have is whether gold or gold stocks will give you the best return. We lean towards gold stocks as the potentially largest source of investor profits. However, at the same time, we must be careful what we wish for.
Since 1972, the ratio of gold stocks to gold has averaged between 0.2 to 0.4. At the peak in 1974, the ratio reached 0.61. That’s when gold stocks were worth the most in terms of gold.
A high gold stock:gold ratio turns out to be a good sign that gold is in a bubble or at least ready for a big correction. A high ratio (everything else equal) means investors are pricing larger gains in gold than they do on average. In the years that followed 1972, gold prices fell by a third. (Gold stocks also corrected, but not as much.) And this has been the pattern over history. The higher the relative strength of gold stocks, the less likely gold prices will rise.
On the other hand, when the relative strength of gold stocks falls under 20, as they did in 1979, it bodes very well for investors. Gold prices spiked to a record high in 1980 that stood for the next two decades.
Today, the ratio of gold stocks:gold stands at a very low 0.1474. Apart from October 2008, this is the lowest level the ratio has ever been at. It tells us that investors are still pessimistic about where gold prices are headed. This confirms our opinion that gold is undervalued, and that gold stocks have a very long way to rise.
In fact, if gold prices do rise more than 4X over the next five years, as we expect, gold stocks would have to soar 8-10X higher just to reach the historical average.
All this tells us that investors ought to be buying gold now and buying aggressively on any dips that arise. We used to recommend you hold 10-15% of your portfolio in precious metals, but we have no objection if you want to raise that percentage. The more nations debase their currencies, the more gold will reward you.
Even if you just see gold as insurance against potential ‘flations, that insurance is very cheap right now. What’s more, until the world economy gets a lot healthier, your need for insurance is very high. So take advantage of the opportunity.
The Republic of Texas Begins Minting Private One-Ounce Silver Proof Medallions…….
Victoria, TX – June 23, 2010 – As the U.S. federal government increases its pressure on states and individuals working to reclaim rights guaranteed by the U.S. Constitution, the response from the freedom movement varies across the U.S., from the subtle “Tenth Amendment” resolutions to the re-awakening of state militias. But to the south, the republic of Texas nation has taken a slightly different, yet more pro-active and hands-on approach.
“Everything’s bigger in Texas,” says District 8 senator Robert Wilson, “especially our will to resist tyranny. Remember the Alamo? We won nationhood by international treaty in 1836 when we soundly defeated Mexico’s president Santa Anna and his armies at the battle of San Jacinto. And since the U.S. Constitution doesn’t grant congress the authority to ‘annex’ another nation by a ‘resolution’, we stand on a solid lawful foundation to enjoy all the rights God granted us, like establishing our own separate economic system.”
While the rest of the country’s economic outlook turns more bleak by the day, the republic of Texas’s elected government implements precautionary measures to weather the storm. “Our three-tiered approach keeps us virtually unaffected by the federal reserve’s inflationary policy: we store our nation’s wealth in Silver, trade Silver with local vendors as often as practical, and help Texians ditch the sinking U.S. dollar by providing a cost-effective method to revert to the republic of Texas national metal currency, modeled from our currency of the 1800’s.”
Wilson, who is on the nation’s Depository Committee, views the strategy as a proportional response to the U.S. federal government’s recent rumblings regarding Americans’ right to own guns and organize local militias. “They don’t want us to have the means to protect ourselves. What are they afraid of? We must protect the Texian people with our independent silver-backed system, immune from their fraudulent and inflationary manipulation.”
The basis for the new Silver currency is established in partnership with the American Open Currency Standard, an organization most well known for the design of a similar economic system built for the Lakota Nation and the Free Lakota Bank.
“We are delighted that the republic of Texas selected the Open Currency standard for their new currency,” says Rob Gray, Executive Director. “This is a major accomplishment for our mission and a huge step in the direction of an honest system of trade not just for Americans, but also for nations across the world.” Gray’s group helps communities mint precious metals for local currencies and barter purposes.
Future plans for the republic include recruiting manufacturers and producers to trade with the government and Texians, as well as the establishment of a metals ‘bank’ to facilitate commerce and create an opportunity for loans and investment. Wilson concludes that more is to come: “The rest of the world is invited to join us in this historic project by purchasing our Silver currency and investing in our first depository. This is just the beginning; we don’t intend to sit on our hands and watch our nation and the U.S. drift into financial slavery.”
Secretive and Powerful BIS Annual Report Released
The very fabric and the seams of the financial system are coming apart. Who knows what the timetable is for the implosion of the current monetary system? We are witnessing the greatest wealth transfer in history, and the horrors of the aftermath of this tragedy will not be forgotten for decades. Keep in mind that the stark warnings from today’s annual BIS (Bank for International Settlements) report are the very reason why it is so important for all readers globally to protect themselves and their families by owning gold.
June 28, 2010
This was from the annual report released today by the very secretive and extremely powerful BIS: “Three years after the onset of the crisis, expectations for recovery and reform are high but patience is wearing thin. Policymakers face a daunting legacy: the side effects of the ongoing financial and macroeconomic support measures, combined with the unresolved vulnerabilities of the financial sector, threaten to short-circuit the recovery; and the full suite of reforms necessary to improve the resilience of the financial system has yet to be completed.”
The BIS release continues: “When the transatlantic financial crisis began nearly three years ago, policymakers responded with emergency room treatment and strong medicine: large doses of direct support to the financial system, low interest rates, vastly expanded central bank balance sheets and massive fiscal stimulus. But such powerful measures have strong side effects, and their dangers are beginning to become apparent.”
“Here are the worst problems arising now from the continued use of the extraordinary programmes: Direct support is delaying vital post-crisis adjustment and runs the risk of creating zombie financial and non-financial
firms. Low interest rates at the centre of the global economy are discouraging needed reductions in leverage, thereby adding to the distortions in the financial system and creating problems elsewhere.”
“The sustained bloat in their balance sheets means that central banks still dominate some segments of financial markets, thereby distorting the pricing of some important bonds and loans, discouraging necessary market-making by private individuals and institutions, and increasing moral hazard by making it clear that there is a
buyer of last resort for some instruments. And the fiscal stimulus is spawning high and growing government debt that, in a number of countries, is now clearly on an unsustainable path.”
The first section of the BIS report concludes: “The financial disruptions in the first half of 2010 have brought the fragility of the industrial world’s financial system into stark relief: a shock of virtually any size risks a replay of the events we saw in late 2008 and early 2009. The sovereign debt crisis in Greece is clearly jeopardising Europe’s nascent recovery from the deep recession brought on by the earlier crisis.”
“Unlike then, however, we have hardly any room for manoeuvre. Policy rates are already at zero and central bank balance sheets are bloated. Although private sector debt has started to decline, public debt has taken its place, with sovereign fiscal positions already on an unsustainable path in a number of countries. In short, macro-economic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis – it will be difficult to find a source of further treatment should another emergency arise. Regaining the ability to react to economic and financial crises, by putting policies onto sustainable paths, is therefore a priority for macroeconomic policy.”
Notice the BIS report describes zombie banks and even zombie non-financial firms. They also describe the “high and growing government debt” as clearly unsustainable. They then go on to note the fragility of the financial system and the fact that another shock would be extraordinarily dangerous to the system because central banks are losing the ability to maneuver as interest rates are low and “central banks balance sheets are bloated.”
Gold is often referred to as an insurance policy, and it is one insurance policy you cannot be without when the financial system ultimately implodes. You must own gold to be on the right side of the greatest wealth transfer in history.