Is Gold Over?
For those invested in gold and other precious metals, the last several months have been disappointing. No one truly knows the reason(s) why gold has not continued its rise, although many pontificate as if they do.
Gold could be over in terms of its price climb. Nothing goes on forever, and gold has been going up for 11 consecutive years. Has the tree grown to the sky, or at least as far as it can grow?
My take is that gold will continue up from here, although mine is just another opinion in the noisy web world. My view rests on the belief that the Fed and other central banks cannot stop printing money. Without an ever increasing money supply, governments will default on obligations.
The Political Choice
Governments around the world need to cut back dramatically (think in terms of cuts of about 30% of current spending for the US). If they don’t, then they have to finance continuing deficits via central bank money creation. There is no third alternative because there is not enough private credit willing to cover the deficits at current interest rates. Government debt is increasingly risky, as the ratings agencies have belatedly recognized. These agencies are still behind the curve in terms of their credit evaluations.
As it becomes more apparent that government will not stop spending and will never be able to honor its existing debt and social obligations, credit agencies will forced to react. They, however, are unimportant in the larger scheme of things. It is markets who will re-rate bonds and they will do so without regard to politics, need or proper political timing.
Rick Mills believes that gold will resume its upward climb. His rationale is similar to mine — government will not cut spending. Instead they will continue to expand the money supply to fund the unfinanceable and unsustainable deficits. In an article which contains some interesting data and graphs, Mr. Mills concluded:
The resource boom isn’t over, someone hit the pause button on the printing presses to take stock, do a review of their attempted fix methods and success achieved to date.
Single minded money printing has to be the next stage. Politicians, governments and central banks will abandon the restraints they have been operating under and do whatever they think it will take to pacify voters, save their re-election chances, “right” their economies and salvage the fiat monetary system. Tax cuts, more and bigger deficits, continued low interest rates into the forseeable future and aggressive asset purchase programs, steroidal quantitative easing, are all going to achieve previously unimaginable levels.
The monetary base will explode, and if the money velocity chart reverses – if small businesses and consumers actually get their hands on some of this money – precious metals and commodities prices will soar.
Neither Mills nor I truly know how matters will play out. No one does. The best that can be done is to analyze the factors at work, which are most likely to strengthen/weaken and what that would do to the asset class of interest. In this particular case, Mr. Mills and I are speculating on what government and the Fed will do. We agree, independently, on the likely course.
Whether things develop according to these expectations is obviously not assured.
The Political Gene
To understand why I reach my particular viewpoint, it is useful to digress to what I call the “political gene.” I am not a biologist or geneticist, and reference to such a gene is obviously figurative. But it is a useful metaphor for explaining why I believe gold will continue to be a reasonable hedge/investment for the intermediate term.
The political gene applies to a particular type of behavioral response. Normal people generally accept responsibility for their actions. Politicians never do. Whether power corrupts their DNA and distorts this gene is up to others to decide. The fact is that no politician accepts responsibility for anything that goes wrong or is unsatisfactory. It is always someone or something else’s fault. Often there is complete denial that anything is wrong at all.
Whatever the “responsibility gene” once was, mutates into a “cover-up” gene as a result of serving as a politician. People outside of government sometimes cover up, although it is not a universal trait. Inside government it is. A “cover-up” response to all problems is common. Rather than deal with solutions it is easier to deny the problem or to produce token action and claim the problem has been solved. Because all meaningful change is painful to some degree, it is easier to tinker with problems and claim them solved.
This genetic defect has been operating full speed since the economic crisis began. Common sense tells non-economists that doing more of what created the problem cannot solve it. The problem of too much debt cannot be solved by adding even more debt. Yet that is what government wants you to believe. Such a course qualifies for Albert Einstein’s definition of insanity — repeating the same act(s) and expecting different results.
Common sense also tells people that we are not in a recovery. Yet government insists that things are getting better and issue data that conform to their conclusion. Anyone with his eyes open knows that employment is not getting better and that prices on necessities are skyrocketing despite government claims otherwise.
Bizarre? Yes, but only if you don’t understand the “political gene.”
The Crisis Is About To Return
Every economic policy action taken by government was designed to “pretend and extend.” That is, pretend the problem is solved and hope that time will magically heal whatever is wrong in the economy. Sadly, the US and Europe have practiced the same charade. Both have accompanied their economic actions with ridiculous propaganda proclaiming the crisis solved . Sadly, nothing has been fixed and even government-doctored economic statistics and establishment proclamations of how much things have improved cannot hide reality.
Now we are about to witness another round of this pretend and extend as the problems, never solved, begin to worse once again. First up will be Europe, followed shortly thereafter by the US. Both approaches will involve massive amounts of new money, created out of thin air with nothing backing it.
Europe created a Trillion Euros to cover up their problems. That worked for about a month. Now it appears that Germany, the only restraint against unlimited money creation in the Eurozone, has capitulated. John Mauldin provided his interpretation in his latest newsletter entitled “Waving the White Flag:”
This week the German Bundesbank waved the white flag. The die is cast. For good or ill, Europe has embarked on a program that will require multiple trillions of euros of freshly minted money in order to maintain the eurozone. But the alternative, European leaders agree, is even worse. Today we will look at the recent German shift in policy, why it was so predictable, and what it means. This is a Ponzi scheme that makes Madoff look like a small-time street hustler.
The US is not far behind. QE3, QE4 or QE10 is not far off. This pretend economics will continue right up to the economic collapse.
Gold and The Political Gene
In a world of honest money and honest government, there would be no need to own gold. But we don’t live in such a world and there is no indication anyone ever will. If such a world could be created, the price of gold would plummet.
We live in a world which is becoming increasingly corrupt in terms of the integrity of its money and its politicians. That is not new, although the extent of the duplicity of both has accelerated, no small feat. After all, in less than 100 years of pretty good economic times, the Federal Reserve has managed to destroy 96% of the dollar’s purchasing power. Imagine what they may do in the crisis ahead.
Gold is a hedge against political and monetary corruption. Owning it is to behave in a manner consistent with the existence of the imaginary political gene. While this gene doesn’t exist, it is a metaphor that does explain past, present and likely future government behavior.
Gold is simply a bet that countries will continue to ignore reality and try and cover up, rather than solve, problems. Ownership of gold, given these beliefs, is quite rational (and may even be quite profitable).
If you believe politicians are wise, honest and have your interests at heart, then there is no reason to own gold. It would be irrational to do so. But, with such a belief system, you might consider the purchase of an old bridge in Brooklyn to be rational (although it would end up being quite unprofitable).
My opinion of politicians is low, make that very low! I see pols continuing to pursue feckless, cowardly cover-up policies. They will pursue policies that benefit themselves rather than the country. Eventually markets will collapse, but by then it will be too late to protect yourself. To me, betting on the political gene appears as sure a bet as betting that the sun will rise tomorrow. Some day that will be untrue, although I don’t believe it will be tomorrow.
Last Minute Add
As I finished this article, I learned of David Rosenberg’s bullishness on gold. While that doesn’t make this position correct, it makes me feel a bit more secure when someone of Rosenberg’s stature sees the same scenario as I do. Rosenberg is bearish on everything but gold. He explains that it is not about being “bullish or bearish,” but about “stating how you view the world.” He is bullish on gold because he believes that the the major central banks are going to keep printing for “as far as the eye can see.” (Video presentation here.)
You should not make investment decisions based on these speculative considerations. Use your own judgment and the advice of those you know and trust.