Gold dropped 30 points on Monday-Tuesday of this past week thus breaking out downside from a head and shoulders top. The problem here was that most of the indicators on gold are bullish. Thus the head and shoulders is an anomaly. Technical analysis proceeds on the basis of probabilities. One must weigh the bullish and bearish factors and establish a weight of the evidence.
The Monday-Tuesday decline, as it turned out, was caused by Al Abelson of Barronâ€™s, who did a hatchet job on gold in his column of 7-26-10. I have a long acquaintance with Barronâ€™s and was one of its big advertisers (for financial letters) in the 1960s. At that time, I was warning of a grand cycle bear market in stocks, which came true in the early 1970s as the DJI plunged from over 1,000 to 577. During this time gold was rising from $35/oz. to $196/oz. I made the acquaintance of then editor, Bob Bleiberg, a fine man who favored the free market, the balanced budget and the gold standard.
But it appears that Abelson has gone the way of all flesh. He has noticed that, when the Fed prints money and eases credit, the stock market goes up. Indeed it does. Counterfeiting works â€“ for the counterfeiter. The problem is that the wealth flowing into stocks comes from creditors (who put their assets into such things as T-bonds, corporate bonds, certificates of deposit, etc.) and from the American worker (whose wages decline in real terms). It is a redistribution of wealth (and from poor to rich) not a creation of wealth. It makes the stock market richer but the whole country poorer.
We may compare and contrast two periods of American history. First, consider 1866-1896. During this period the U.S. was on (or returning to) the gold standard, stocks were flat, the real wages of the average worker rose by 90% and foreigners poured into this country because the streets were (in a very real sense) paved with gold. Second, consider 1980-2010. During this period the U.S. issued trillions of paper dollars (yes, trillions). Stocks went to the moon. The real wages of the American worker fell (the only generation to be poorer than its fathers) and foreigners are denigrated as â€œillegals,â€ and used as an object of hate. In which period were Americans rich and in which are they poor?
But Al Abelson finds the stealing of wealth to be much more practical than the production of wealth, and therefore he is, Unlike Mr. Bleiberg, an enemy of gold.
Strangely enough, some people in the gold bug community try to erect a wall between gold as an â€œinvestmentâ€ and gold as a political issue. â€œInvestmentâ€ is in quotes because the abolition of the gold standard means that no investment is possible in the world anymore (with the possible exception of Switzerland). Since 1933, the real rate of return on riskless investments here in the U.S. has been zero, and that does not even figure taxes. Since an investor is someone who aims for return on capital, there has been no investment in the U.S. (or most of the world) since 1933. Everyone trying to get wealthy from the financial markets today is a speculator, and if you want to make money as a speculator, you had darn well better be a good one.
The problem is that the political implications of a gold standard and the speculative implications of how to operate in our current climate are intertwined. Abelson seems to understand this. His first objection to gold as a speculation is:
â€œâ€¦gold, in keeping with its hoary tradition revels in the worldâ€™s misery.â€
â€œA Contrarianâ€™s View of Gold,â€ Barronâ€™s, 7-26-10, p. 7.
This is indeed a strange argument. (Hoary means ancient and is a side reference to Keynesâ€™ argument that gold is a barbarous relic. Actually, gold is the same age as democracy, and no one calls that hoary.) What is it to a speculator, and how does it imply that gold is going down? If there is a shortage of food in some country, then the price of food will go up (as per spring 2008). Does this mean that the speculator should not try to make a profit in wheat? Actually, by putting the price higher the bullish speculator helps to create more supply and thus alleviate the worldâ€™s misery.
But above and beyond this how can anyone connect gold with misery? Money, in the form of gold bars, was invented by the Jewish community in Babylon circa 587 BC. The idea of using gold as money instead of merely engaging in barter had a dramatic effect on eastern Mediterranean civilization. Democracy appeared in Athens. The Acropolis was built. Geometry was invented. Philosophy started to happen. All historians since that day have agreed that the 6 th century B.C. was one of the great ages of human history, and a light was lit at that time which has never gone out. By contrast, money was abolished (an effect of the Edict of Diocletian) in the late Roman Empire. The Roman economy collapsed. The Roman armies could no longer defeat the barbarians. When the final invasion came (406 AD), the Romans never even sent an army to defend themselves. Rome was sacked in 410 AD. (â€œThe city that took the world was herself taken.â€) Historians have named the subsequent period the Dark Ages. Interestingly, the decline was only in the West. The Eastern Roman Empire righted herself by returning to the gold standard. By 1000 AD, she was by far the wealthiest nation in the world, and the Eastern Empire outlasted the West by 1000 years (410 AD to 1453 AD).
In modern times, the Americans adopted a gold standard in 1788 with the adoption of the Constitution. Britain followed after her victory in the Napoleonic Wars. Both of these nations then created more wealth over the next century than had ever been seen in human history. America expanded over the North American continent, and Britain created an empire upon which the sun never set.
Modern gold bugs are trying to protect themselves from the depreciation of their paper currencies. That is, by an economic act, they are trying to undo what is being done to them by a political act. The politics and the economics are so intertwined that they cannot be separated. This is why the subject was traditionally called political economy. To predict what is going to happen, one must understand both politics and economics.
â€œthe long-term outlook for gold was â€œfraught with risk.â€¦should gold investors become less enamored with bullion, this inventory will hit the marketâ€™ with decidedly unpleasant consequences for the metalâ€™s price.â€
So here is Barack Obama printing money by the trillions, and we are supposed to worry about an increase in the value of the paper dollar. What about the law of supply and demand? Adam Smith taught us that, when supply is increased, then price must come down. Well, Mr. Abelson, the supply of paper money in the U.S. has been (approximately) doubled over the past 2 years.
We went through this in the 1970s. We, the few, the proud, the gold bugs, predicted on the basis of Nixonâ€™s abolition of the gold standard on Aug. 15, 1971 that the value of the paper dollar would go down, and the (dollar) value of gold would go up. We predicted a large scale rise in consumer prices. That rise came in 1979 when the CPI increased by 13.3%, and in that year gold multiplied in price by almost 4 times.
Of course, the increase in paper money during the 1970s was a pittance compared to what is going on today. The worst year for money growth in the â€˜70s was in the neighborhood of 8%. Things are so bad today that the Fed is lying to us about the money supply. However, we can get a handle on it by looking at the monetary base, and this has more than doubled over the past 2 years. So my bet, Mr. Abelson, is that gold speculators are going to become (a lot) more enamored of gold in the future, just as they did in 1979. We gold bugs of the 1970s were right because we understood the law of supply and demand. If the supply of money goes up, then since money is the demand for all goods, the price of virtually all goods has to go up. If you donâ€™t understand that, then go back and start to read Adam Smith.
Abelson, more recently, is known for his statement of some two years ago, â€œChicken Little was right,â€ (Barronâ€™s, 10-6-08) in which he joined with the New York Times to predict an impending â€œdeflation.â€ Chicken Little, of course, was the gentleman who ran around shouting that the sky was falling. He was full of alarm.
Chicken Little was full of alarm, but the science behind his prediction was not very good. And the same is true about Abelson and the other paper money bugs. The purpose of all the media hype against gold is to persuade us to sell out of our gold holdings and to head off a movement to return the country to the gold standard. The idea here is that the paper aristocracy wants to steal our wealth, and their fundamental tool is the counterfeiting of money via the Federal Reserve. Everything they say has this motive and is trying to make us poor. Listen to them, and you will fail.
Sentiment has been negative on gold and other commodities thus far in 2010. But, of course, such periods are great times to buy according to the theory of contrary opinion (which Robert Bleiberg always championed). It would not surprise me if the readers who rushed to take Abelsonâ€™s advice have sold at the exact bottom just before the coming big rally.
The Abelson trashing of gold is simply one more example that we live in a society which is single-mindedly devoted to taking our wealth. It used to be the case that Americans recognized that cooperating with oneâ€™s fellow man and creating more wealth was the way to go. Redistributing (stealing) the wealth was something that the Russians did. But do you know what also happened last week? On Wednesday, just one day after the Abelson gold break, Russian Prime Minister Vladimir Putin,
â€œâ€¦approved a wide-ranging plan on Wednesday to sell off state propertyâ€¦â€
â€œRussia to Sell Off Stakes in State Companies to Fill Budget Gap,â€ New York Times, 7-29-10, p. B-1.
So Barronâ€™s is going Keynesian, and Russia is abandoning socialism.
â€œO tempora, O moresâ€ (â€œOh the times, oh the customs.â€ â€“ Cicero)
I offer Russia a swap. You give us Putin, and in exchange we give you Abelson. We need someone who will sell off state property and reduce the budget deficit.
As the famous speculator Jesse Livermore used to say:
“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
The reason for this is that market trends go on for much longer than almost anyone thinks. It is not too hard to get on a winning trend. The difficult part is to stay on it and not get shaken off by temporary sentiment swings (or bearish media articles such as Abelsonâ€™s). Eventually every trend will reverse. But it only reverses once. People think that it is going to reverse many, many times. So I find that the best thing I can do for my subscribers is to shore up their courage and keep them moving with the trend. THE TREND IS YOUR FRIEND. THE BIG MONEY IS MADE IN THE BIG MOVE.
To help people make the big money in the big move, I publish a fortnightly (every 2 weeks) letter, the One-handed Economist ($300 per year). I will stack my record up against Abelsonâ€™s any day of the week. The One-handed Economist is dated (every other) Friday. The most recent regular issue is 7-23-10, and a special bulletin was sent out on 7-29-10 analyzing the Abelson article (available on the website with subscriberâ€™s password). The next regular issue will be dated Aug. 6. You may subscribe by going to my website, www.thegoldspeculator.com and pressing the Pay Pal button. Or you may subscribe by sending $290 ($10 cash discount) via the U.S. mail to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.
Thank you for your interest.
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