Gold bugs have been sad for the past few weeks as gold has tumbled from above $1200/oz. Cheer up gold bugs. Happy days are coming. One of the great buying opportunities of all time is just around the corner, and our next task at the One-handed Economist is to identify this buying point as closely as possible. As always, to get the really good stuff you must cross my palm with silver. However, do not let this discourage you. My business model is Henry Ford. He made a lot of money for himself, but he did it by making cars so inexpensive that the average person could afford one. A typical car, pre-Ford, cost $2,000 (in gold dollars), but a just-as-good Ford cost $400. Henry Ford was better off, and the average Ford buyer was better off. That is what is called win-win. That is the real America. People got rich by making others better off. They did not get rich by taking irresponsible risks and then getting bailed out by the government. They did not buy politicians by donating to their campaigns and having one of their agents (Henry Paulson) placed in a high government position where he could steal from the people and put the money into their own pockets.
No, at the One-handed Economist, we make money the old fashioned way. A true-blue subscriber, who faithfully followed all our recommendations and started back in 2000 with a portfolio worth $100,000, made $45,000 in profits (thus far) in 2009 and is now close to doubling his money for the decade. What did this cost him? $300 per year. $300 current dollars equals just over Â¼ oz. of gold. Henry Fordâ€™s Model T, which cost 400 1932 dollars, was actually 20 oz. of gold. A yearâ€™s New York Times, which peddles a pack of lies designed to help the paper aristocracy rob you; costs over $800 per year (newsstand price). A yearâ€™s Wall Street Journal, which does the same, costs over $600.
As previously noted, we are engaged in a nefarious scheme to corner the world market for truth by the year 2020. At that time, we will have all the truth in the world and its price will soar. However, it is our intention to grandfather in old subscribers at that time as a reward for their faithfulness.
A reader who identifies himself as Tom of the North asks the following question:
A wonderful post, Mr. Katz. With respect to the deflation vs. inflation argument, I suppose Iâ€™m six of one and a half dozen of the other. Iâ€™m no economics scholar but it seems logical that a massive credit bubble bursting would unleash monstrous deflationary forces into the world. Regrettably, in order to combat these â€˜monstersâ€™ our elected officials, arguably being directed by self-dealing financial institutions, are deploying their arsenal of Financial Weapons of Mass Destruction (apologies to W. Buffet). Theyâ€™re trying hard to reflate. At some point, that effort may reach a critical juncture. One possible outcome is that they propel our economy into an inflationary spiral to the stars through the debasement of our currency. Hello Zimbabwe! However, the US predicament is not unique and we are not alone, wedged between the rock and the hard place in these darks days. And therein lies my question. If all of our trading partners similarly debase their currencies, is the net effect of our debasement zero in terms of global trade? Furthermore, would not such a situation defeat the inflationistasâ€™ intentions by maintaining a deflationary cycle? Itâ€™s all so confusing!â€
It is actually very simple. There are a group of bad guys (the paper aristocracy). They are trying to steal from you. Their method of stealing is counterfeiting. They were given the â€œlegalâ€ privilege to counterfeit by Franklin D. Roosevelt in 1933. (Itâ€™s not actually legal. Nothing can be legal in the United States which is not in accord with the Constitution, and the Constitution was adopted in large part to abolish all monies not gold or silver. However, the majority of the people today do not understand the Constitution; so the true law goes by the boards.)
Once the paper aristocracy had received the privilege of legal counterfeiting, it moved to take advantage of its privilege. The first thing it did was to â€œhireâ€ a group of crackpot economists who were arguing that creating money was the â€œroad to plentyâ€ for a society. The careers of these crackpots were promoted. Top universities were bribed to hire them as professors, and they were given prestigious positions by firms in the paper aristocracy. Some examples here are Harvard University, which hired John Kenneth Galbraith, and Salomon Brothers, which hired Henry Kaufman.
The press of the nation are so stupid that they accepted these crackpots as economists. Thus the economic discussion, as it exists today, is about a bizarre never-never land which exists only in the fantasy of the media. They talk about recessions, depressions, booms and economic growth. This is on the level of the discussion in western society in the Middle Ages, which talked about witches and dragons. Nothing had any connection to reality.
If you want to see reality as it is, then the first thing you must do is to make sure that your concepts are correct. We humans do our thinking with our basic concepts. If our basic concepts are confused, then we will not be able to see reality as it is.
Let us take, for example, the concept of a depression. A depression is a period when the vast majority of people in a society are getting poorer. Has there ever been such a period in our society? Actually, there has. From 1942-1945, it was impossible to buy a new house. It was also impossible to buy a new car. Meat, butter and many other food items were rationed. Gasoline was limited to 3 gallons per person per week. And yet, there is hardly a single person with a title in the field of economics who will acknowledge this. They all report that the period of 1942-45 was a boom (defined as a period of generally increasing wealth). It is repeated over and over that World War II brought the country out of the Great â€œDepression
If there is anything more insane than this idea, I am hard put to tell what it is. Here are two groups of countries (the Allies and the Axis). They have each pulled millions of men out of the labor force. They are each spending enormous amounts of money and labor time on things which do not improve human life in any way, shape or form. And each is trying to destroy the wealth the other has created. How can any of this create wealth? How could it pull us out of a depression (if indeed a depression had been there in the first place)? A war may be necessary, but it is certainly not a wealth-producing event. (A good case in point is Britain, which won WWII and yet ended the war militarily and economically exhausted.)
To cut to the bottom line, the â€œeconomistsâ€ in the country at the present time are a group of crackpots who know absolutely nothing about economics and whose â€œjobâ€ is to support and defend the paper aristocracy. To this end, they make up lie after lie, the purpose of which is to help the paper aristocracy take your wealth and leave you poorer.
This is done in two ways. First, paper money steals from the creditor and gives to the debtor. If Donald Trump buys a gambling casino, then the casino does no useful work; i.e., it does not create any wealth. But the casino will go up in (nominal) value for the simple reason that, when paper money is issued, pretty much everything goes up in nominal value. So Trump sells the building for more than he paid. And since he is highly leveraged, he makes big money. Second, prices rise more rapidly than wages. Your average guy finds that the real value of his wages go down. Note that the real wages of the average American working man went up from 1623 to 1972. Since that time, they have gone down.
To make the paper aristocracy richer, the Fed must continue to print money faster and faster. To head off the public protest against the rise in prices, the crackpot economists weave a story of lies and deceit. To get the Fed to ease money, they announce the coming of a gigantic â€œdeflation.â€ It sort of appears like magic, out of nowhere. This, of course, is impossible. The only declines in prices which have occurred in American history have been directly caused by a government contraction of the money supply. Further, each of these periods of declining prices have led to a major rise in wealth for the average American. For example, the average wage in America in 1932 was $1120. (At this time, the U.S. was on the gold standard. A new car cost $400. A 4-room apartment in San Francisco rented for $25/mo. And the daily paper sold for 2Â¢.) At that time $1120 translated into 56 oz. of gold. Today, however, the average working man earns $35,000, which is equal to 32 oz. of gold per year.
All of these lies are, in turn, based on an earlier set of lies to the effect that the period of the early 1930s was a terrible period when most Americans got poorer. After they have been inundated by all these lies, most Americans will not actively oppose a Fed easing of money and credit. And that is exactly what happened in 2008-09.
So what was the point of everything you have read in the papers since autumn 2008? The point was to get you to support Bernankeâ€™s easing. But remember, for the paper aristocracy to get rich the vast majority of the country must get poor.
Now there is one way to counter Ben Bernankeâ€™s program to rob your wealth. You must not own U.S. dollars, or any financial instrument equivalent to them (savings accounts, corporate bonds, T-bills, etc.). You must own real goods. And there are 3 types of real goods which qualify: stocks, real estate and commodities.
These real goods take turns in putting on their best moves. They move in the cycle I call the commodity pendulum. When commodities move down, real estate and stocks move up (because the Fed gets the chance to ease). When commodities move up, real estate and stocks move down (because the Fed is forced to tighten). When trying to protect your assets from the depreciation of the currency, you need to understand whether we are in the upswing of the commodity pendulum or the downswing.
Right now we are in the upswing of the commodity pendulum. Commodities are making powerful up moves. And gold is the most user-friendly commodity there is. It is well traded and follows the technical rules (set out by Edwards and Magee in Technical Analysis of Stock Trends). You do not need specialty knowledge to trade it, as is the case with most commodities. Platinum and palladium are not well traded, and most of the platinum production in the world is in the hands of Robert Mugabe, a crazy African dictator who is capable of anything. If you are a silver bug, then great. But bear in mind that silver is more speculative than gold: Bigger rewards, but bigger risks. At some point when the precious metals markets become overconfident, then I will probably become a silver bug for a time — but not quite yet.
Tom, you say you are â€œsix of one and a half dozen of the other.â€ Sorry Tom, with that attitude you have no chance. You are facing a criminal gang which is trying to steal your wealth. You have to fight them with every fiber of your being. Suppose you were dealing with a group of conventional criminals, the kind who meet you in the back alley and carry knives, guns and chains. You would understand that with these people you cannot be equivocal. When they tell you that they are beating you up to save the country from economic disaster, you cannot give this any credence. That would undercut your ability to take forceful action whether it be to fight or run.
But these conventional criminals are the honest crooks. They admit they are crooks, and they say, â€œYour money or your life.â€ The paper aristocracy consists of the dishonest crooks. They say, â€œWe are conventional businessmen. When we borrow from you (without your consent), we pay it back.â€ What they donâ€™t tell you is that the government loans of 2008 are being repaid by wealth which Bernanke is stealing from you on a higher level (through the further printing of money). For example, right now Goldman Sachs (the final recipient of most of those Government â€œloansâ€ is borrowing money from the Fed at near-zero interest rates and reinvesting at higher rates in more distant instruments. They are rolling in dough. Right now, you donâ€™t even know that you have been robbed, and you wonâ€™t know it until there is a massive rise in prices. But by that time it will be a bit late to protect yourself by owning gold. Furthermore, when you finally do realize that something is wrong, the media will divert your wrath from the real robber by finding some scapegoat. OPEC was the scapegoat for the â€œinflationâ€ of the 1970s. Charles Colson was the scapegoat for the S&L crisis of the late â€˜80s.
You know that there is a group of people who were equivocal in 2008. They went along for many years preaching that one should keep 10% of oneâ€™s assets in gold just in case there was a disaster. Then the disaster came. In October 2008, world stock markets collapsed.. The margin calls went out to these people who were six of one and a half dozen of the other. How did they react? They decided that they could not sell their conventional stocks. Conventional stocks always go up (because like obedient establishment followers it is an article of faith with them that the 1970s never happened). So they sold their gold stocks, and the gold stocks were hit badly. Note that gold protects one from the depreciation of a currency against real goods. Depreciation of one currency against another involves currency speculation and is a much more difficult proposition. These fluctuations of one nationâ€™s currency with another are of no fundamental importance and do not affect the real flows of wealth in the world.
So what happened to these six-of-one gold bugs? They managed to sell their gold stocks at the worst possible time. I toughed it out, and my gold stocks came back. You canâ€™t compromise with a criminal gang because the more you give them the more they want. Every morning they wake up and ask, â€œWho is the easiest mark?â€
If America is to be saved, we will have to return to a gold standard. Until that time, if you are to be saved, then you must put your financial assets into gold.
As noted, I am the editor/publisher of the One-handed Economist, a financial newsletter published fortnightly ($300/yr.). I have been bullish on gold since 2003 and have been recommending gold stocks since 2006. I stepped aside (except for a small lumber position) early in December, and I am waiting for an opportunity to jump back in. If you are interested in subscribing, you may go to my web site, www.thegoldspeculator.com. Or else, you can simply send $300 to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.
You can also visit my blog at www.thegoldspeculator.blogspot.com. (no charge).
I’m quite delighted that your post is in reply to my earlier question. With respect to my uncertainty as to whether we are facing deflation or inflation, perhaps I was too vague and my time horizon was undefined. Allow me to be more clear:
1)Â It is my conviction that we are undergoing a credit bust unparalleled since the Great Depression
2) I am also convinced that this bust has considerably more to go with respect to a credit unwind
3) I am further convinced that credit busts are unavoidably deflationary (as per Von Mises)
4) The Govt is attempting to reflate on a previously inconceivable scale
Here is where I vacillate and where you have stakedÂ your claim: While we agree the Fed and the Legislative & Executive branchesÂ are attempting to reflate, you are certain this will lead to hyperinflation. Whereas I consider hyperinflation an outlying possibility. Definitely possible but not a foregone conclusion. Â As such, I’m prepared to react quickly but am not jumping onboard just yet. Frankly, if the ‘stimulus’ package had in fact been trulyÂ stimulative, I’d be much closer to your line of thinking. But instead, I just see a lot of wealthÂ transfer going on – and to no good effect. The printing presses are merelycreating wall paper to cover the black holes in the TBTF’s.Â I personally don’t see that $$$Â adding significantly to demand. But all of that aside, my original question was (and perhaps you answered it in some other way) how does the economic condition of our trading partners figure into your viewpoint. Are they all reflating too?Â Just some? Also, if you’re advising investors to convert their financial assets into gold, what is your strategy if the Government were to issue an edict similar to Executive Order 6102 -“forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates”Â by U.S. citizens , as was done during the Great Depression?
Thanks again for singling me out!