This past week we received the final 4th Quarter GDP number which came in at 0.39%. The total 4thQuarter growth was terrible, plain and simple. Based on the performance in the equity markets that we have seen thus far in the 1st Quarter of 2013 investors would expect strong GDP growth. However, the only thing spurring stock market growth is the constant humming of Ben Bernanke’s printing press.
The real economy and the stock market are no longer strongly correlated. Essentially, they are meaningless. How do you evaluate risk when Treasury linked interest rates are artificially being held down by the Federal Reserve? How do you evaluate earnings growth estimates when most government based statistics are manipulated or “smoothed” to perfection?
My final argument to anyone who is a true believer that the stock market is representative of the economy is a very simple premise. If the stock market is the economy, how does the stock market evaluate small business earnings growth when most small businesses are not publicly traded? It is a simple question, but I have yet to find a sell side analyst that can work around it with facts.
To back up this information, here is a chart courtesy of www.zerohedge.com that demonstrates the S&P 500’s price action compared to economic data and overall macro risk.
The chart above clearly depicts the divergence between the macroeconomic data and the performance of the S&P 500 Index. Yet the sell side continues to scream that stocks are cheap, earnings are going to ramp up later this year on insane S&P 500 earnings growth expectations, and the consumer is going to remain strong even though payroll taxes have increased and the “wealthy” are paying more in taxes.
Even amid those concerns, no one knows for sure what the impact that Obamacare and the various new taxes associated with it will have on the business community. Again, the only thing driving growth is directly linked to the Federal Reserve’s balance sheet expansion. The chart below is courtesy of the Federal Reserve’s website.
On August 8, 2007 the Federal Reserve’s total assets were $869 billion dollars. As can clearly be seen today, according to the Federal Reserve the central bank’s total balance sheet has grown to over $3.2 trillion dollars. The increase is on the verge of rising exponentially. With QE, QE2, QE3, Operation Twist, Extended Operation Twist, and now with QE 4 in Perpetuity this trend is certainly unlikely to shift.
At this point in time the Federal Reserve is printing roughly $85 billion dollars each month to purchase Treasury securities with a focus on the long end of the maturity curve. As primary dealers of Treasury securities process these flows the money eventually finds its way into riskier assets that offer higher rates of returns through balance sheet machinations at large money center banks.
It has proven that the flow of the Federal Reserve’s printed monies are more important than the total money stock for a variety of reasons and inflation according to the government’s data is under control ex food and energy.
However, how are people supposed to survive without food and energy in today’s world? The last time I went to fill up my gas tank or to purchase food prices have gone up significantly. According to the 1990 version of consumer price reporting, real consumer inflation is running around 6% currently and shadowstats.com has the following comparison.
Unfortunately the 1980 based inflation numbers are even uglier, which based on Shadowstats’ data chart would place consumer inflation at nearly 10%. The calculations being used by Shadowstats.com are based on the government’s OLD ways of calculating inflation. The calculations were adjusted over time and today the data is completely manipulated by not including items that typically experience the largest levels of inflation.
Normally I talk about price action, probability based option trading, and technical information. However, before investors consider buying stocks near the all-time NOMINAL (non-inflation adjusted) highs, why not simply consider the backdrop of the total economic situation.
Central banks around the world are printing money at an alarming rate and their balance sheets are growing to levels not seen in human history. Interest rates are being manipulated to levels that are historically at record lows or near record lows based on real inflation data.
Macroeconomic indicators are issuing a cautionary tone with significant divergences showing up in many areas. Earnings expectations for the S&P 500 in the 3rd and 4th Quarter of 2013 are extreme and borderline ridiculous.
So before jumping headlong into equities based on some sell side analysts recommendation or even worse, a financial advisor who is more interested in his/her commission than they are about producing gains consider the following comparisons.
S&P 500 Index (SPX) Price Chart – 1 Year Price History
Gold Futures Spot Price Chart – 1 Year Price History
Clearly paper gold represented by gold futures is no substitute for physical ownership, but when one considers the fundamental backdrop for gold versus the S&P 500 Index, it should be clear which asset is offering the most value at current price levels. It does not require any inserted trendlines or oscillators, it should be clear which asset is expensive and which asset is cheap based on the real long-term economic fundamentals.
I will give you a hint regarding which asset is offering the most value. It can’t be printed, it has represented the store of value since the advent of modern civilization, and it is senior to all paper currencies.
A little over a month ago we did a quick poll on what our readers thought the real rate of inflation was. The idea for polling our readers came from the disconnect between the official government rate of around 1% and what some had told me they were experiencing first hand.
Thank you to everyone who participated, particularly those who shared frustrating examples of the ever-increasing cost of living. There were close to 100 pages of reader comments, and I read them all… every single word.
This week’s column is primarily written by you, our loyal readers. You will recognize the reader comments as they are indented. Here is one example to get us started:
I bought a down jacket from L.L. Bean four years ago for $100. Today, that same jacket is $250. You know you have inflation when even the price of down is up!
The weighted average for our reader-reported inflation rate is 8.07%. We are rounding this to 8%, and calling it the Money Forever Reader Poll Inflation Rate. We will use this rate in examples and graphs throughout the year, along with the BLS Rate and the Shadow Government Statistics’ alternate rate.
I know our rate is unscientific, but I trust our readers more than I trust the Bureau of Labor and Statistics. In addition, Vedran Vuk, our senior research analyst at Miller’s Money Forever prepared the graph below showing the distribution of responses. We were hoping for a bell-shaped curve, but you will notice it stops with 23.6% of the respondents reporting that they believe inflation is 11% or higher. In light of this, we will add higher rate choices the next time we run our survey.
Time to Hear from Our Readers
Some readers disagreed with the rate options presented in the survey, apparently believing we are experiencing deflation:
There is no choice for 0-1%, -1%-0%, etc. I have found prices to be deflationary. Consider what my family buys on a regular basis and the trend since last year. Food: +1-2%; Gas: flat; Consumer electronics: -10 to -20%; Wood pellets: flat; Cord of wood: -10%; Kids’ preschool and babysitting: flat; Propane fuel for heat/hot water/cooking: -25%; Labor for electricians/plumbers/landscaping: flat; Electric bill: flat; Construction materials: -5%; Skiing: +3%.
Many of the responses varied based on where the reader lives.
I track all my expenses using Quicken. My expenses in 2012 have gone up as follows: Groceries, +10%; utilities and property taxes, +9%; gas/diesel for vehicles, +1%.
I chose that example because of the property taxes. Many folks mentioned real-estate tax increases. In my case I have two homes, one in Illinois and one in Florida. Both were assessed at lower rates after the 2008 real-estate crash. My FL real-estate taxes have decreased accordingly. However, in IL they just changed the formula, and my taxes keep going up despite the decreased value of my home. Like many of the examples, it depends on where you live.
There were hundreds of examples of price increases due to smaller package sizes and/or reduced quality.
I am retired now, so my principal purchases are food, gas, and some clothing. … As to clothing, while Kohl’s pricing looks great, the cotton thread count in Dockers pants is way down, and they wear and fray out a lot sooner.
One reader mentioned how much easier it is to carry home $100 in groceries, while another said he thought he was just getting stronger.
It looks like the cost of hosting a party is increasing rapidly.
A one-pound bag of Lay’s Potato Chips used to cost $0.99. It is now 10.5 oz. and costs $4.99 if you can’t find it on sale.
Stroh’s beer cost me $4.39 a 12-pack at Food Lion before I left for Australia for 17 months in April 2011. It now costs $8.89 – up 100%. Schlitz and Pabst Blue Ribbon also went up 100%.
Nuts that used to cost $9.99 at Costco now cost $18.99.
There are specific items that have gone much higher: quality cheeses have gone up double digits.
My favorite cheese (Hoffman Sharp Cheddar) had a price jump of about 12% – about the same for Bass Ale.
The cheapest wine in California known as “2-buck Chuck” recently went against its famous name and raised the price from $1.99 to $2.49! That’s a 25% increase.
Many folks mentioned the cost of meat.
Groceries are the worst – but not all groceries. Three years ago, when I moved here, I could catch bacon on sale for $1.79/lb. Now they advertise it for $3.50 for a 12-oz package.
I asked the guy at the meat counter if they were making bacon from “gold-plated” pigs. The “sale” price on fryers is 50% (that’s fifty) percent higher than last winter.
And then eggs were mentioned.
I live in David, Panama, and while the cost of living here is generally less than in most of the US, we have seen real inflation in three years. Here are some examples of price increases in the past year or two: a dozen eggs, from $1.59 to $2.09; a pound of good coffee beans, from $5.79 to $6.49; a pound of tomatoes or potatoes from the produce stand, from $.50 to $.80; a gallon of milk, from $3.99 to $4.49. Some things have not changed much, such as meat, poultry, and canned and dry goods.
Some folks went bananas.
I judge real inflation by checking the price per pound of bananas at Fred Meyer’s. That price has increased from 39 cents per pound at the beginning of last year to 59 cents per pound, i.e., around 50%.
As a monitor I use the price of bananas. They have gone from $.58/lb. to $.77/lb. in 2012. That would be a 33% increase.
Of course many mentioned McDonald’s and other fast-food restaurants.
I don’t know the percentages, but a filet o’ fish at the local McDonald’s is $4.16 (including tax) – this is at Lahaina Maui (Hawaii)… the combo meals go up to almost $8.00; this is considered cheap?
And not just in Hawaii.
What I’ve used to gauge real inflation for several years now is the extra-value meals at McDonald’s. Between 1 January, 2012 and 1 January, 2013, average prices have increased by over 8%.
This reader takes on McDonald’s, Subway, and Taco Bell.
I have a couple of examples based on a few of my semi-regular activities. The first would be lunch. Personally I like Taco Bell. I know, I can already hear the groans, but frankly, I like the food and the value. At times in the past when my schedule would dictate a quick lunch out, Taco Bell would cost me $2.75. My standard order was a taco, burrito, & medium Pepsi. I loved the fact that I could eat for under $3.00. Now, I like the fact that I can eat lunch for under $4.00, but I don’t love it. The second item is that our local McDonald’s recently increased my “senior coffee” from 37 cents to 55 cents. All right, call me cheap. I still like my senior coffee, but I no longer love it. Oh, I almost forgot. Subway recently had their “customer appreciation” promotion for December. They advertised $2.00 for one of two sandwiches, but at our local store they said they had to charge $2.55 because of “shipping costs”? I guess they don’t appreciate us here as much as other places.
Restaurants in general were mentioned several times.
My favorite breakfast, 3 eggs & bacon in November 2012, $4.25; 3 eggs & bacon in January 2013, $6.00.
Biggest surprise over the last twelve months is the cost of dinner at our local Tex-Mex restaurant. The same basic dinners with a cocktail for each of us has risen 25%. We know the owner well, so we felt we could ask about the increased prices. He told us that everything he uses to provide his food to the customer has risen more than 20%, and then there is his staff. The word “lie” describes to a T what the government is doing to Americans, and I find it despicable.
Over the past two years prices on the restaurant menus have increased three times. We can’t afford to eat out anymore; back to the slow cooker. Damn, I hate to wash dishes! Even dish soap has gone up.
Seems that folks in Australia have differing opinions.
I live in Australia, but I couldn’t resist chucking in my 2 cents worth as we share the same crime here of manipulated government CPI numbers. In the last year my estimates for price rises living in Sydney are as follows. General household & food costs, + 10%. Restaurant food, + 10-20%. Beer at a pub, + 15%. Public transport, + 5%. Electricity bill, + 30%. Council rates, + 10%. Doctor’s consultation, + 15%. Petrol, + 10%. Internet ADSL costs, + 10% (to be fair this one increased last year for the first time in 6 years). On average the cost of living here has easily gone up over 10% in the last year, and the government’s reported CPI figure is 2.2%, laughable.
If anything, I’d say we are in a deflation. All the goods and services I access (except food and power) seem to be falling. I live in Australia, so maybe our (ridiculously) high dollar might be in play; I’d like to believe the inflation story, but here it just ain’t so…
And now around the globe to Europe.
I live in Norway. Large plate of sushi used to cost 155 kroner (this was in 2011). In 2012 it costs 170 kroner, almost a 10% increase. Needless to say, I don’t eat out as often as I would like to now, and if I do I order a smaller size! Inflation is rampant worldwide, not just the US.
Right now the Norwegian kroner and the Australian dollar are doing well against the US dollar, yet some still believe they are experiencing inflation.
Some readers mentioned the cost of feeding pets and other animals is also on the rise. I have a cousin who owns three horses. While we all love our pets, when the time comes for them to head for the great kennel in the sky, I wonder how much economics will factor into the decision about replacing them.
I own four dogs. Dog food has increased from $17.00 to $25.00. Again, this is for the same bag of dog food!
Big increase in feed prices for chicken feed and calf feed. I paid $13 for a 50# bag of poultry pelleted feed a year ago. I paid $17.80 yesterday. Calf feed went up over $13 for a 100# bag in August and has stayed there.
We shop for groceries at a DISCOUNT, no-frills store, which is much less expensive than the grocery stores. In the past year, we have noted increases, gradually, in items that never went up. Cat food in a can has increased from $0.27 per can to $.50. We live in the Sacramento area.
There are a lot of people who are already making tough decisions and adjusting.
The increase in private, grade-school tuition is my biggest issue. It’s becoming too expensive to be a good Catholic.
As a single-income family of 5, I have no choice but to constantly think about saving. The little things we do change our lifestyles to compensate change in our inflation rate. When we switch from beef to pork we can’t measure the true rate, because we have saved some of the difference financially while making up the difference in lifestyle. I have always done my own oil changes on my vehicles. I now change the oil filter every other oil change to save the cost of the filter. No more takeout lunches, and only one takeout coffee a day. Save, save, save! Sometimes I feel like a lean, mean saving machine, which doesn’t make life as much of a pleasure as it could be. However not to complain; it is working. I am working, and the wolf is still stuck outside the door.
We defend ourselves from inflation as much as possible by investing in home essentials, like energy. We’ve installed a solar water heater to eliminate the cost (and inflation exposure) of propane to heat water, installed a high-efficiency pool pump to dramatically reduce electricity consumption, and unplug appliances when not in use to eliminate phantom loads. These investments are guaranteed, inflation-proof, and tax free. The best kind… in my opinion.
Greens fees at all three of the golf courses I play at regularly have increased about 10% over what they were 13 months ago. This has caused me to cut my three rounds weekly down to two. Also, local restaurants have boosted prices 5 to 15%. We now eat out once every two weeks, on average.
I gift my wife with a simple bouquet of flowers each week, at a cost of a mere $4.99. (How simple can I get?) Last week, the cost of that simple bouquet went from $4.99 to $5.99 – for the same flowers, same number, same wrapping. That’s a 20% increase!
Umm, keep it up! It promotes family harmony.
You certainly get the picture. Some folks added a bit of humor.
I think a button with “WIN” on it would solve the problem, don’t you? I mean… the government has to DO something, and a button is the clear answer.
Who would do a silly thing like that?
Some offered analogies.
In the first phase of a tsunami (The “drawback”), people stand around the beach, wondering what is going on. Things look different from the shore. They can’t put their finger on exactly what is wrong and they are unaware of the devastation about to crash down upon them. This is where I feel that we, as a country, are regarding inflation. People are beginning to realize that something is happening, but they are not sure why, and they are certainly not aware of the danger just ahead. Just like during a tsunami, they should take this opportunity to head, very quickly, for higher ground.
The inflation in the USA feels like something is “stalking” you – not all the time; but it is definitely there.
And some understand the effects very clearly.
Anyone who has been living on SS [Social Security] checks since 2000 will tell you the same thing. They could not live on those checks alone, and depended on the interest they received from their savings accounts or CDs. They cannot do this any longer; they now need to withdraw principal or redeem some CDs just to make ends meet. This is not meant to debate the merits of the SS system, but it shows how inflation and the currency manipulation by the federal government is affecting those on fixed incomes with no hope of getting a raise. These people understand the effects of inflation more than any other group. These people live with fear every day, understanding they have little control over their financial future, while watching their life savings slowly vanish every year.
So there you have it – a representative sample from our readers. Food, pet food, health care, insurance, taxes, and more are on the rise for the most of us. One respondent lamented that most of the increases are for staples and not the kind of things you can easily ignore.
What Can We Do?
First and foremost, don’t get too discouraged, and never, ever give up! We all may have to cut back, downsize, go back to work, or find alternate sources of income like annuities and reverse mortgages. We saved up our nest eggs with the idea that it would supplement our Social Security or pension, and now it is getting more difficult.
Personally, I will be damned if I am going to throw in the towel! If it takes more time to study and learn about investments, so be it. I made that commitment to my wife and myself – and to you. I have learned the value of top-quality research, and the Money Forever portfolio is reaping the benefits of that research (we just recently celebrated when the 5th of our 6 dividend stocks raised its dividend payout amount). If you would like to learn more about our portfolio and premium publication and how to use our system to stay ahead of rising inflation, I invite you to click here.
There are millions of retirees, seniors, and savers who share the same concerns. We are all fighting the inflation tsunami. Our subscribers are very like-minded when it comes to fighting for their portfolios; none of us is throwing in the towel.
In the next article I will break down the results and suggest ways to meet the challenges brought on by inflation.
“All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I’m beginning to believe that either the deflationists are right, or the Fed’s interventions are working.” – Anonymous Casey Research reader
The CPI, in our view, does not accurately measure inflation, which accounts for some of the discrepancy our reader is pointing out. However, the proper definition of inflation is “an increase in the quantity of money,” which we’ve had in spades. We’ve not experienced the concomitant increase in prices, which is what we’re addressing in this article.
It’s logical to assume that when you create more of something, you dilute the value of what’s already in existence. That’s exactly what has happened to the US dollar since the 2008 financial crisis hit. Economics 101 says this should lead to higher inflation – yet official Consumer Price Index (CPI) levels remain benign.
It’s this unexpected development that led a reader to pen the above quote. Is the inflation argument dead? If so, does that mean gold’s big run is over? It’s a timely question since the current selloff in gold is largely attributed to low inflation expectations.
This is the first installment in our in-depth series of examining the next big catalysts for the gold price. This month we’re looking at inflation. While a low CPI may be puzzling in the midst of massive, global currency abuse, there are three realities about inflation that convince us it’s not only coming, but will catch an unsuspecting citizenry off guard.
Let’s take a look at why we’re convinced inflation will be one of the next big catalysts for the gold price…
Reality #1: History shows that high levels of debt and deficit spending eventually lead to inflation.
This statement makes sense on the face of it, but seminal research has been done that confirms it. A country simply cannot escape high inflation when carrying oversized debt levels and/or running massive deficits. Sooner or later, these sins catch up to you, regardless of what the current thinking may be.
Debt. The first of these historical studies is detailed in the book, This Time Is Different by Carmen Reinhart and Kenneth Rogoff, who’ve extensively researched the impact of high debt on inflation and gross domestic product (GDP).
Based on a comprehensive study of global incidences, Reinhart and Rogoff gave the following conclusion:
Debt levels over 90% of GDP are linked to significantly elevated levels of inflation.
When specifically studying US history, they again observed that:
Debt levels over 90% of GDP are linked to significantly elevated inflation.
When US debt levels met or exceeded 90% of GDP, inflation rose to around 6% – roughly triple current levels – vs. the 0.5% to 2.5% range when the ratio was below 90%.
However, with regard to timing, they state:
There is no apparent pattern of simultaneous rising inflation and debt.
In other words, inflation is a clear and definite result of high debt levels, but it’s not a day-to-day link. This likely explains the current lag between high debt and a low CPI reading.
So are we nearing that 90% mark? Bud Conrad, chief economist of Casey Research, estimates we’re currently at approximately 110%. Further, he projected from his research in December that…
Using my assumptions, gross debt to GDP crosses 120% in 2014. That is well past the danger point of 90% that Reinhart and Rogoff cite. What’s scary is that my assumptions are not even close to a worst-case scenario, so the situation could be much worse.
Bud does not expect to see much more deflation. One reason is because…
In essence, much of the deflationary pressures have been cleared out. Going forward, there should be fewer outright losses from bad loans, and thus less deflationary pressure. For that reason (and many others), I expect higher inflation sooner rather than later.
Deficit Spending. Peter Bernholz is widely considered the leading expert on the link between deficit spending and hyperinflation. He conclusively states from his research that…
Hyperinflation is caused by government budget deficits.
The US budget deficit totaled $5.1 trillion during Obama’s first term in office. The longer deficits last and the bigger they are, the closer a country moves toward very high inflation levels.
The Congressional Budget Office (CBO) recently reported, however, that the 2013 deficit will drop to $845 billion. Good news, right? Not exactly, because the reduction is largely a result of higher taxes. The CBO was therefore forced to admit…
The fiscal tightening from higher taxes and lower spending will slow economic growth to an anemic 1.4 percent by the end of 2013, causing the unemployment rate to edge back higher.
It turns into a vicious cycle, because if unemployment grows, money printing will continue and even increase. The CBO further admitted…
Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.
If deficits grow – or even just remain elevated – we inch closer and closer to the hyperinflation Bernholz warns about. Breaking this cycle will be very difficult, if not impossible… at least not without serious consequences.
These studies present clear and direct evidence that spending more than is brought in and continually adding to the national credit card leads to higher inflation. Sooner or later, this type of reckless behavior catches up to an economy. The sobering reality is that avoiding moderate to high levels of inflation in our current fiscal state would be an historical first.
Unfortunately, that’s not the only inflationary fear we have to contend with.
Reality #2: History shows that inflation can occur suddenly and grow rapidly.
Not only is higher inflation a near certainty, history tells us that once it grabs hold, it can quickly spiral out of control. Given our crumbling fiscal state, we must consider the possibility that price inflation could kick in abruptly and rise rapidly.
Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. Look how quickly inflation rose in just two years from “benign” levels.
According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Within just two years, it soared to 17%. As she states, it happened because the Treasury “spent like crazy on the war, creating money to pay for it…”
In 1945, the official inflation rate was 2%; it accelerated to 14% in 24 months. Inflation registered 3.2% in 1972 and hit 11% by 1974.
It’s clear that the arrival of inflation can be sudden, and that prices can quickly spiral out of control. Given the profligate amount of money being printed by many countries around the globe, we could easily become victim to rapidly rising inflation. If we matched the increases in the chart, our CPI would register 11%, 15%, and 19% respectively, by February 2014.
Regardless of the timing, though, this is a clear warning from history: expecting the CPI to remain low indefinitely is a dangerous assumption.
Reality #3: Most developed-world governments need inflation.
It is a fact that high inflation reduces the real cost of servicing debt. Our debt levels have grown so high that the only politically acceptable way to deal with them is to inflate the currency. Politicians and central bankers have no incentive to stop, and thus will continue until disastrous price inflation emerges. Just because it hasn’t occurred yet doesn’t mean it won’t.
Other political solutions simply aren’t realistic. There is no amount of politically acceptable increase in tax revenue or austerity measures that can meet existing and future obligations. Printing money is the only viable solution. Once you internalize this, an understanding of the most likely consequences becomes clear.
Even if deflation in select asset classes persists or we get another deflationary event like 2008, we can rely on central bankers to concoct more rescue schemes financed with freshly created money. Perhaps just as likely is that the economy does improve and all the money that’s been held back enters the system and sparks inflation.
Conclusions
Based on these realities, we can draw some well-grounded conclusions about the coming rise in inflation.
The onset of higher inflation isn’t certain, but the outcome is. These realities make clear that higher inflation is virtually ensured at some point. It’s thus imperative we prepare for it.
What we use for money will experience a significant – perhaps catastrophic – loss of purchasing power. As shown, this is not speculation, but a process of cause and effect observed repeatedly throughout history. As a result, you will likely use some of your gold and silver to protect your standard of living – that is, after all, one of its purposes. The point here is to make sure you own enough ounces to offset a significant decline in purchasing power.
When inflation begins rising, precious metals will respond and move to higher levels. We don’t know if this is the next catalyst for gold, but we’re confident it will be a major driver of future prices.
Keep in mind that gold tends to moves in anticipation of inflation – think of it as inflation insurance. By the time inflation is “high,” the big moves in gold and silver will have most likely already occurred.
Stay vigilant, my friends, because higher inflation is coming – and as a result, so are higher gold and silver prices.
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Goldman Sachs has lowered its gold price projections and says the metal is headed to $1,200. Credit Suisse and UBS are bearish. Citigroup says the gold bull market is over.
So I guess it’s time to pack it in, right?
Not so fast. As we’ve written before, these types of analysts have been consistently wrong about gold throughout this bull cycle. Another reason to disagree, however, is history; we’ve seen this movie before. In the middle of one of the greatest gold bull markets in modern history – the one that culminated in the 1980 peak – gold experienced a 20-month, one-way decline. Every time it seemed to stabilize, the bottom would fall out again. From December 30, 1974 to August 25, 1976, gold fell a whopping 47%.
1976 had to be a tough year for gold investors. The price had already been declining for a year – and it just kept on sinking. Since that’s similar to what we’re experiencing today, I wondered, What were the pundits were saying then? I wanted to find out.
I enlisted the help of two local librarians, along with my wife and son, to dig up some quotes from that year. It wasn’t easy, because publications weren’t in digital form yet, and electronic searches had limited success. But we did uncover some nuggets I thought you might find interesting.
The context for that year is that the IMF had three major gold auctions from June to September, dumping a lot of gold onto the market. Both the US and the Soviet Union were also selling gold at the time. It was no secret that the US was trying to remove gold from the monetary system; direct convertibility of the dollar to gold had ended on August 15, 1971.
The public statements below were all made in 1976. You’ll see that they aren’t all necessarily bearish, but I included a range to give a sense of what was happening at the time, especially regarding the mood of the gold market. I think you’ll agree that much of this sounds awfully darn familiar. I couldn’t resist making a few comments of my own, too.
To highlight the timing, I put the comments into a price chart, pinpointing when they were said relative to the market. Keep in mind as you read them that the gold price bottomed on August 25, and then began a three-and-a-half year, 721% climb…
[1] “For the moment at least, the party seems to be over.” New York Times, March 26.
[2] “Though happily out of the precious metal, Mr. Heim is no more bullish on the present state of the stock market than any of the unreconstructed gold bugs he’s had so much fun twitting of late. He’s urging his clients to put their money into Treasury bills.” New York Times, March 26.
Me: These comments remind me of those today who poke fun at gold investors. I wonder if Mr. Heim was still “twitting” a couple years later?
[3] “‘It’s a seller’s market. No one is buying gold,’ a dealer in Zurich said.” New York Times, July 20.
Turns out this would’ve been an incredible buyer’s market – but only for those with the courage to buy more when gold dropped still lower before taking off again.
[4] “Though the price recovered to $111 by week’s end, that is still a dismal figure for gold bugs, who not long ago were forecasting prices of $300 or more.” Time magazine, August 2.
The “gold bugs” were eventually right; gold hit $300 almost exactly three years later, a 170% rise.
[5] “Meanwhile, the economic conditions that triggered the gold boom of 1973 through 1974, have largely disappeared. The dollar is steady, world inflation rates have come down, and the general panic set off by the oil crisis has abated. All those trends reduce the distrust of paper money that moves many speculators to put their funds in gold.” Time magazine, August 2.
This view ended up being shortsighted, as these conditions all reversed before the decade was over. Does this sound similar to pundits today claiming the reasons for buying gold have disappeared?
[6] “Our own predictions are that gold will go below $100, with some hesitation possible at the $100 level.” As stated by Mr. Heim in the August 19 New York Times.
Yes, this is the same gentleman as #2 above. I wonder how many of his clients were still with him a few years later?
[7] “Currently, Mr. LaLoggia has this to say: ‘There is simply nothing in the economic picture today to cause a rush into gold. The technical damage caused by the decline is enormous and it cannot be erased quickly. Avoid gold and gold stocks.’” New York Times, August 19.
You can see that these comments were made literally within days of the bottom! Take note, technical analysts.
[8] “‘Gold was an inflation hedge in the early 1970s,’ the Citibank letter says. ‘But money is now a gold-price hedge.’” New York Times, August 29.
Wow, were they kidding?! This reminds me of those dimwits journalists who said in 2011 to not invest in gold because it isn’t “backed by anything.”
[9] “Private American purchases of gold, once this was legalized at the end of 1974, never materialized on a large scale. If the gold bugs have indeed been routed, special responsibilities fall on the victorious dollar.” New York Times, August 29.
The USD’s purchasing power has declined by 80% since this article declared the dollar “victorious.”
[10] “Some experts, with good records in gold trading, declare it is still too early to buy bullion.” New York Times, September 12.
Too bad; they could’ve cleaned up.
[11] “Wall Street’s biggest brokerage houses, after having scorned gold investments during the bargain days of the late 1960s and early 1970s, made a great display of arriving late at the party.” New York Times, September 12.
No comment necessary.
[12] “He believes the price of bullion is headed below $100 an ounce. ‘Who wants to put money over there now?’” As stated by Lawrence Helm in the New York Times, September 12.
The price of gold had bottomed two weeks before, making the timing of this advice about the worst it could possibly be.
[13] Author Elliot Janeway, whose book jacket states, “Presidents listen to him,” was asked by a book reviewer about his preferred investments. He writes: “Then, gold and silver? He likes neither. In fact he writes: ‘Any argument against putting your trust in gold, and backing it up with money, goes double for silver: silver is fool’s gold.’” New York Times, November 21.
Mr. Janeway ate his words big-time: from the date of his comments to silver’s peak of $50 on January 21, 1980, silver rose 1,055%!
[14] “Mr. Holt admits that ‘in 1974, intense speculation caused the gold price to get too far ahead of itself.’” New York Times, December 19.
So, anything sound familiar here? Yes, it was a brutal time for gold investors, but what’s obvious is that those who looked only at the price and ignored the fundamentals ended up eating their words and dispensing horrible advice. Investors who followed the “wisdom of the day” missed out on one of the greatest opportunities for profit in their lifetimes.
I was pleased to learn, though, that not all comments were negative in 1976. In fact, in the middle of the “great selloff,” there were those who remained stanchly bullish. These investors must’ve been viewed as outliers – they, much like some of us now, were the contrarians of the day.
Also from 1976…
“Many gold issues, in fact, are down 40 percent or more from their highs. Investors who overstayed the market are apparently making their disenchantment known. The current issue of the Lowe Investment and Financial Letter says, ‘We are showing losses on our gold mining share recommended list… but keep in mind that these shares are for the long-term as investments.’” New York Times, March 26.
Sounds like what you might read in an issue of a Casey Research metals newsletter..
“The time to buy gold shares,” [James Dines] declares, “is when there is blood in the streets.” New York Times, September 12.
If you glance at the chart above, Jim’s comments were made within two weeks of the absolute low.
“We’re recommending to clients that they hold gold and gold shares,” [C. Austin Barker, consulting economist] says. “The low-production-cost mines in South Africa might be interesting to buy for the longer term because I see further inflation ahead.” New York Times, September 12.
Investors who listened to Mr. Barker ended up seeing massive gains in their gold and gold equity holdings.
“The probability of runaway inflation by 1980 is 50%… In light of this, the only safe investments are gold, silver, and Swiss francs,’” said the late Harry Browne on November 21 in the New York Times.
“In the longer run, [Jeffrey Nichols of Argus Research] believes gold’s price trend ‘is much more likely to be upward than downward.’” New York Times, December 19.
The “longer run” won.
“‘I think the intermediate outlook for gold is a period of consolidation and a bit of dullness,’ says Mr. Werden. ‘However, six or nine months from now, we could see renewed interest in gold.’” New York Times, December 19.
He was right; within nine months gold had risen 13.5%.
“Mr. Holt offers some advice to investors who are taking tax losses on their South African gold shares – some of which are selling at just 30 to 35 percent of their peak prices in 1974. ‘If leverage has worked against you on the way down,’ he reasons, ‘why not take advantage of it on the way up?’” New York Times, December 19.
Solid advice for investors today, too.
“What’s his [Thomas J. Holt] prediction for the future price of gold? ‘A new high, reaching above $200 an ounce, within the next couple years.’” New York Times, December 19.
His prediction was conservative; gold reached $200 nineteen months later, by July 1978.
It’s clear that there were positive “voices in the wilderness” during that big correction, and as we all know, those who listened profited mightily.
There were other interesting tidbits, too. For example, gold stocks had been performing so poorly for so long that some advisors suggested a strategy we also hear today…
“It is probably too late to sell gold shares, the stock market’s worst-acting group these days, except for one possible strategy: selling to take a tax loss and switching into a comparable gold security to retain a position in the group.” New York Times, September 12.
Even back then, it was widely known that gold often bucks the trend of the broader markets…
“You might put a small portion of your money into gold shares and pray like the dickens that you lose half of it. In that way, chances are that if gold shares go down, the rest of your stock portfolio will go up.” New York Times, September 12.
Gold miners provided critical revenue and jobs, just like today. From the August 2 issue of Time magazine…
“South Africa, the world’s largest gold producer, is being hurt the most. The price drop will cost it at least $200 million in potential export earnings this year.”
“Layoffs at the gold mines would make it even worse – the joblessness could intensify South Africa’s explosive racial unrest.”
The Soviet Union, the world’s second-largest gold producer, is feeling the price drop, too. The Soviets depend on gold sales to get hard currency needed to buy US grain and other imports.”
Gold was also used as collateral…
“The international gold market was also roiled yesterday by a report by the Commodity News Service that Iran was negotiating to lend South Africa roughly $600 million, predicated on a collateral of 6.25 million ounces of gold.”
And just like today, there were plenty of stupid misguided US politicians: From the New York Times on August 27:
“The drop in gold bullion prices from $126, which was the average at the first IMF auction June 2, provoked the Swiss National Bank to attack Washington’s attitude toward the metal as ‘childish.’ Aside from the estimated $4.8 billion of gold reserves held by Switzerland, bankers there advocate some role for the metal as a form of discipline against unrestricted printing of paper money.”
That last statement from the Swiss bankers is hauntingly just as true today.
Last, you know how the government in India has been tinkering with the precious-metals market in its country? And how it’s led to smuggling? From the New York Times on August 27:
“India announced it was resuming its ban on the export of silver. India is believed to have the largest silver hoard and the government there freed exports earlier this year as a means of earning taxes levied on overseas sales. However, most silver dealers minimized the significance of India’s move yesterday. As one dealer explained, ‘Smuggling silver out of India is so ingrained there that the ban will have no effect on the flow. It never has. Indian silver will continue to ebb and flow into the world market according to price.’”
So what’s the difference in mood today vs. the mid-1970s? Nothing! This shows that the same concerns, fears, and confusion we have now existed at a similar point in the gold market then. There were also those who saw the big picture and stayed vigilant. Virtually every comment made in 1976 could apply to today. Keep in mind that most of the statements above are from two publications only; there are undoubtedly many more similar comments from that year.
The obvious lesson here is that patience won out in the end. It took the gold price three years and seven months to return to its December 1974 high. It only took another 18 months to soar to $850. Today, that would be the equivalent of gold falling until June this year, and not returning to its $1,921 high until April, 2015. It would also mean we climb to $6,227 and get there in November, 2016. Could you wait that long for a fourfold return?
This review of history gives us the confidence to know that our gold investments are on the right track. I hope you’ll join me and everyone else at Casey Research in accepting this message from history and staying the course.
So, what will your kids or grandkids read in a few decades?
“Buy gold. It’s going a lot higher.” Jeff Clark, Casey Research, March 24, 2013.
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By now most people are aware of the events unfolding in Cyprus. The financial world was rocked by the announcement that the “Troika” of the European Central Bank (ECB), International Monetary Fund (IMF), and European Commission (EC) decided to give the tiny island of Cyprus an ultimatum – either pay a 9.9 percent wealth tax on deposits over 100,000 euros, or leave the EU. This tax would be taken directly from bank savings accounts. The expropriated funds would be used to “bail out” troubled Cypriot banks. Those banks will in turn pay off larger European banks to which they owe money. Because some Cyprus banks will fail, some investors stand to lose up to 40 percent of their deposits and many bank employees will lose their jobs.
To describe the events in Cyprus and their relevance to gold, we can start with the analogy of a peaceful, self-satisfied Western investor asleep in a dark room. He has had trouble sleeping lately because he is starting to become more concerned about the safety of his personal wealth. He is unaware that he is sharing his room with three large elephants. They come each night, but remain hidden by the darkness. He awakens for a moment and lights a candle. Suddenly the room is illuminated and he sees the three beasts. The vision terrifies him, so he races to blow out the candle hoping to forget what he saw. Of course, once the light shines on truth it is difficult to return to a state of ignorance. The events in Cyprus had the effect of turning on the lights, if only for a moment, before the financial media and the world’s central bankers began a blitzkrieg campaign of denying the truth that was briefly exposed. The Internet captured the picture, and allowed those who understand the dark side of international banking and the fiat Ponzi scheme upon which most of our lives depend to share their knowledge of the three elephants.
So what do these three elephants represent?
The three elephants represent three secrets that are a direct threat to the illusion of the fiat Ponzi scheme. The first elephant represents inflation and loss of purchasing power; the second elephant represents public confidence in the fiat system; the third elephant is the biggest, most dangerous of all to the sleep of ignorance—uncompromised gold bullion ownership, gold bullion to which we hold title.
Those who have benefited most from the modern fiat system know that to maintain the status quo, the first elephant—the truth about inflation and loss of purchasing power—needs to be kept hidden from the public. After all, the more currency that is created through quantitative easing and bailouts, the more that currency loses purchasing power and the more painful inflation becomes. The public is becoming increasingly suspicious—especially if they eat food, heat their homes or send their children to college—that the dollar is buying less each day. Yet official government figures show inflation is at a tame 2 percent. Were they to use the original basket of goods that was used before President Clinton began introducing metrics like hedonic regression and substitution to alter the consumer price index (CPI), the main measure of inflation, as John Williams of ShadowStats.com still does, they would realize that inflation is running at closer to 10 percent, not 2 percent. The fact that the world’s major currencies (the U.S. dollar, the euro, the British pound and the yen) have lost 80-90 percent of their purchasing power against gold in the past decade is proof of this. Unbounded currency creation leads to exponential debt that leads to more and more of the taxpayer’s money going to pay interest to privately owned banks like the Federal Reserve.
The second elephant, the loss of confidence in the present system, must also be hidden from the public’s sight. This why the Troika, along with the financial media, worked overtime to assure the public that Cyprus is an isolated event and there is no need to panic. The two Cypriot banks were depicted as “casino banks” that were over extended. Later in the week, news began to seep out that other troubled banks in Spain, New Zealand and Italy may suffer the same fate. Savvy Russians moved quickly to remove as much money from the branches of the two banks in question, the Cyprus Popular Bank, also known as Laiki, and the Bank of Cyprus, which remained open in London. Cypriots who didn’t have this opportunity found accounts frozen and doors locked. Trust and confidence takes a lifetime to build and only a second to lose. Thanks to the ubiquity of the Internet and the in-depth reporting of the gold community, the Austrian economists and the developing world that wait patiently for the U.S. dollar to be replaced with something more equitable and real, a currency with some relationship to gold, the entire world caught a glimpse of this truth.
The third elephant, gold ownership, has a way of magically transforming the way we see money and value. When we own gold we start thinking in terms of ounces rather than fiat dollars or euros. For example, we may find ourselves asking, “How many ounces of gold would I have needed to buy a house 42 years ago and how many would I need today?” The answer to that question is that we would have needed 703 ounces to buy an average home in 1971 and 228 ounces to buy an average home in 2012. Or, for the same amount of gold, we could buy three houses. Considering that the price of a home has risen significantly in dollar terms during that time, this should come as a startling realization. The lens of gold ownership provides a much broader perspective, one that encompasses inflation, loss of purchasing power and even unexpected black swan events, such as bank failures, that most risk assessment models consider unquantifiable.
Therefore, the events of Cyprus were similar to lighting a candle in a dark room and they will make it very difficult for investors to sleep the blissful sleep of ignorance. Knowing that the template used in Cyprus is essentially the same for all uninsured deposits should turn some wealthy investors into insomniacs. Governments around the world have been robbing wealth through inflation and a little known but highly effective policy called “financial repression”. Now, they have taken the bold step of expropriating funds directly from savings accounts. This marks the crossing of a sacrosanct red line.
The frightening thing about lying is that it takes a thousand lies to support a single lie and yet truth, once seen, supports itself. This is the significance of the events in Cyprus to gold. What would happen were the Troika to make the same demands on the offshore banks of the Cayman Islands, or even the Turks and Caicos, as they did in Cyprus? First, they would discover billions of dollars they otherwise didn’t know about, and second, the Western investors who held money in these accounts would be outraged, just as Russian investors who used Cypriot offshore accounts were.
So far the Western financial matrix has been successful in sustaining the illusion of safety and security in their banks through something gold investor extraordinaire Jim Sinclair calls “management of perceptive economics” (MOPE). This is the propaganda campaign that started on August 15, 1971, the day President Nixon removed the world’s reserve currency, the U.S. dollar, from its final international peg to gold. As investor perception had to be managed to create confidence in unbacked fiat currency, gold had to be equally disparaged. This is one reason so many wealthy Western investors, funds and even central banks are so dangerously under-invested in gold.
The campaign has been effective for the past four decades and investors have been almost entirely convinced they have nothing to worry about. After all, every financial crisis has been met by an avalanche of new currency creation and a barrage of happy talk about green shoots of recovery, resolution and, of course, the perpetually rising DOW.
Yet Cyprus is a wake-up call that may be what Mr. Sinclair referred to as “the biggest mistake made by the IMF and the ECB in their history.” To date, the gold market has been an orderly one, thanks to the leverage of the paper gold market and the largest accumulators, the Eastern central banks and wealthy developing-country investors, who wish to continue accumulating at bargain basement prices. Panic tends to make for disorderly markets and the wealthy are just as capable of herd mentality as anyone else. When the realization dawns that physical gold, gold to which one holds title, gold that is stored in a vault outside the grasp of the banking system—the ultimate form of wealth protection—is in extremely limited supply, there will be a stampede to obtain it.
Cyprus is a small country of less than a million inhabitants. Apart from its broken banking system, Cyprus in some ways is in better shape than many of the larger European Union members, such as Greece and Spain, which have unemployment in the double digits. Cyprus currently has an unemployment rate of 12 percent. Its debt-to-GDP, at 85 percent, is considerably lower than that of the United States at over 100 percent. Some feel Cyprus was singled out for a daylight robbery test run on personal bank accounts because of its close relationship with Russia, a key geopolitical competitor to the EU. Whatever the motivation, the plan has backfired spectacularly.
Last Friday Nigel Farage, leader of the UK Independence Party, underlined this message in an interview with RT News network, stating that the turn of events in Cyprus leads to one conclusion: “Don’t invest in the Eurozone! Do not invest anywhere in Eurozone. You’ve got to be mad to do so, because it’s now run by people who don’t respect democracy, who don’t respect the rule of law, who don’t respect the basic principles upon which Western civilization is supposed to be based.”
Cyprus was not the first domino in the long line that is poised to topple the entire Western banking system. Iceland was. When Iceland was given a similar ultimatum to pay the European banks or risk retribution, it held a national referendum and decided instead to throw some of the bankers out of the country and incarcerate the rest. The move freed them from the Eurozone’s oppressive grip overnight. Within two years the Icelandic economy was well on its way to full recovery.
Fortunately, this story was easy to bury, because the Iceland domino fell backwards and did not affect the chain. Iceland was not a member of the EU, but Cyprus is. If Cyprus were to leave the Union over this dispute, other countries like Greece could follow suit. Why wouldn’t they? The money Greece is borrowing to remain in the EU is not going to the Greek people who suffer 25 percent unemployment and escalating business failures due to lack of access to credit. It is going to the German and French banks.
Confidence, like truth, doesn’t disappear; it just finds more stable ground. Gold has been the bedrock of the world’s economy for thousands of years, maintaining purchasing power better than any other asset class. Re-allocating wealth to gold restores confidence in money, and storing gold in a secure, LMBA-protected vault is the most effective way of regaining confidence in money at a time when bankers are so desperate they will threaten broad daylight thievery. We encourage readers to act on this lesson from the events of Cyprus and re-allocate assets to gold. This simple move is like buying the ultimate wealth protection insurance policy against black swan events, currency devaluation and now, robber bankers.
In my new book, $10,000 Gold: Why Gold’s Inevitable Rise is the Investor’s Safe Haven, published by John Wiley and Sons and to be released in May, I discuss the long-term and irreversible trends that will lead to $10,000 gold (Source #6). The book looks more deeply at the issues discussed above. It also describes how investors can protect their wealth through precious metals ownership, just as many in the developing nations have been doing methodically for the past decade.
Each week BMG presents a free newsletter called the BullionBuzz that is a compilation of articles, charts and videos that follow the developing trends that will lead to $10,000 gold. The articles in this week’s Buzz include the following:
The Cypriot banks are opening as we speak. What changed did the government and banks agreed on compared to Friday March 15th (the day before the historic bank holiday started)? There are quite some constraints for holders of deposit accounts going forward, also known as capital controls. Zerohedge reports on the measures that were taken and only communicated last night:
In other words, all said “reopening” will do, is to allow physical branches to be used as glorified ATMs but with a very terrified and confused carbon-based teller on the other side(the same ATMs which a few days ago saw their limit reduced from €300 to €120). All other cash transactions will be strictly curbed, virtually no cash will be allowed to exit the island, and the what’s more the government will ban the termination of the oh so ironically-named time deposits. This means that time deposits will now become “permanent deposits”, even if within the €100,000 insured limit. The good news: credit card treansactions will be permitted when paying for goods and services anywhere on the island. Of course, electronic cash just happens to not be physical cash, which is why the bank is so cavalier with allowing people to access their own money. Well, electronic 1s and 0s-based money.
The situation last night in the Cypriot capital appeared to be somehow dominated by the police. Faisal Islam from Channel 4 News tweeted the following (Source):
Meantime, as we speak, the banks did reopen and people are queuing to get their money / savings out of the ailing banks. NY Times writes that the calm of the previous hours has given away to tensions. (What a surprise, no?) The Guardian has an almost real-time reporting with lots of pictures and tweets.
Cyprus has been preparing with never seen security staff. The security firm could not meet the number of people that were requested by the country in crisis. The Greek newspaper Ekathimerini wrote yesterday:
A British security firm that transports cash for Cypriot banks is working round the clock, sending teams out with police protection to stock bank machines and readying guards for when banks reopen on Thursday.
The world’s largest security firm, G4S, moves cash and will provide guards for Cypriot lenders including Bank of Cyprus and Cyprus Popular Bank, the two biggest, which are to be combined and see large depositors’ accounts frozen under a bailout agreed at the weekend.
“Demand is greater than we can provide… We haven’t closed since the crisis started,” he told Reuters. “I’ve never seen anything like it in terms of what is going on from a security perspective. I would say the workload has quadrupled because the whole system has changed.”
“The staff will be based outside branches and are there to control queues, if there are any queues,” he said. “We will be in contact with the police. Basically it is to make the banking people feel safe and the customers as well.”
From a macro point of view, Moody wrote in an official announcement on March 27th that a Eurozone-exit of Cyprus becomes likely. The Grexit fear and fuzz is now being replaced by Cypro-exit.
While the risk of a euro exit by Cyprus is substantial… …following the economic dislocation that will be caused by the restructuring of the island’s two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further.
On a microlevel, MarketOracle’s founder reports how a personal transaction to move funds from high risk euro-zone banks to low risk UK owned banks failed. He wrote: “Everything went smoothly apart form one transaction of early Friday afternoon for £16,000 which has gone awol. Now well over 60 hours later the funds have still not arrived.” (Source)
This illustrates the risks that the whole banking sector poses in that when it shuts down it will be in an instant, and then it will be too late to draw your funds out so you really need to act well before Financial Armageddon strikes. And certainly d not pay attention to any soothing words out of the Bank of England as illustrated by the fact that one of the last statements out of the central bank of Cyprus prior to freezing the banking system was that depositors money was safe in Cypriot banks.
On KWN, Jim Sinclair pointed out that the mainstream media has been focusing on creating fear on the confiscation of money in such a way to frighten people out of savings, with the aim to increase the velocity of money. With the velocity of money standing at its 50 years low in the US (representative for the rest of the Western world), Mr. Sinclair believes that special efforts will take place to increase the velocity of money “either by loss of confidence, or through the fear being generated by the mainstream media regarding the safety of leaving money in banks and other financial institutions.” (Source)
The spendings of the newly created money, which are trillions of euros and dollars since the big 2008 crash, in order to stimulate the economy (read: the GDP) is what the Fed and ECB were aiming for but did not get. The reason is very simple, and we explained all this before on Gold Silver Worlds:
The quantity theory of money (M x V = p x Y) is an equation in which the monetary base times the velocity of money equals price inflation times real GDP. Central banks use this equation for their monetary policies. It is the reason why one of their focus points is to influence the psychology (mood) of people: if people “feel” that everything is going well, they will spend more, raising the velocity of money and resulting in a higher gross GDP. Given the fact that the economies are not really producing more, for sure not in the in US and Japan, it implies that the central bank efforts to create inflation could very well result in a much higher inflation rate than targeted. While aiming for 2%, the result could very fast be 6%.
Indeed, the last sentence is an important one to note. If the velocity of money picks up, then expect a massive jump in the rate of inflation. We are close to that point, but the key here is that the behaviour of people remains out of control of the powers-to-be. For us, individuals, it remains a matter of being positioned to bear sudden and significant inflation.
Now how does all this relate to gold, the most underexposed topic related to Cyprus? It remains amazing how almost nobody is mentioning the fact that physical gold holders were the only ones not being touched by this historical crisis. Nick Barisheff wrote an outstanding view last night:
The frightening thing about lying is that it takes a thousand lies to support a single lie and yet truth, once seen, supports itself. This is the significance of the events in Cyprus to gold. What would happen were the Troika to make the same demands on the offshore banks of the Cayman Islands, or even the Turks and Caicos, as they did in Cyprus? First, they would discover billions of dollars they otherwise didn’t know about, and second, the Western investors who held money in these accounts would be outraged, just as Russian investors who used Cypriot offshore accounts were ….
“Right now the price in the market for gold is clearly not being made by the paper guys. The price of gold is now being made by the physical buyers, and that is a quantum leap in change in the character of the gold market to the degree that I haven’t seen since 1979 … As we see an increase in the velocity of money, that is also extraordinarily bullish for gold going forward.”
Physical gold outside the banking system is what we have been advocating since our inception here at Gold Silver Worlds. In fact, it was THE reason why we have started this website. Today’s events confirm our vision was correct. Do you hold gold safely?
Bloomberg reported recently that Russia is now the world’s biggest gold buyer, its central bank having added 570 tonnes (18.3 million troy ounces) over the past decade. At $1,650/ounce, that’s $30.1 billion worth of gold.
Russia isn’t alone, of course. Central banks as a group have been net buyers for at least two years now. But the 2012 data trickling out shows that the amount of tonnage being added is breaking records.
The following table lists the countries that have added to their gold reserves this year, while the second one tallies those that have been selling. You’ll see how recently each country has reported, along with its percentage increase.
Changes in Central Bank Gold Reserves in 2012 (Million Troy Ounces)
Year-End 2011
YTD 2012
Last Reported
Net Change
Percent Change
Countries Increasing Reserves
Turkey
6.28
11.56
Dec
5.283
84.1%
Russia
28.39
30.79
Dec
2.405
8.5%
Bank for International Settlements
15.6
16.71
Dec
1.114
7.1%
Brazil
1.08
2.16
Dec
1.08
100.0%
Philippines
5.12
6.2
Nov
1.079
21.1%
Kazakhstan
2.64
3.71
Dec
1.07
40.5%
South Korea
1.75
2.71
Nov
0.965
54.9%
Iraq
0.19
0.96
Nov
0.773
405.3%
México
3.41
4
Dec
0.596
17.3%
Paraguay
0.021
0.263
Sept
0.242
1152.4%
Ukraine
0.9
1.14
Dec
0.239
26.7%
Belarus
1.21
1.37
Dec
0.164
13.2%
Tajikistan
0.15
0.2
Dec
0.05
33.3%
Brunei
0.06
0.09
Oct
0.031
50.0%
Mozambique
0.08
0.11
Oct
0.025
37.5%
Serbia
0.46
0.48
Nov
0.022
4.3%
Jordan
0.41
0.43
May
0.02
4.9%
Kyrgyz Republic
0.08
0.1
Dec
0.014
25.0%
Greece
3.59
3.6
Dec
0.008
0.3%
Mongolia
0.11
0.12
Nov
0.004
9.1%
Suriname
0.071
0.074
Dec
0.003
4.2%
South Africa
4.02
4.02
Nov
0.003
0.0%
Moldova
0
0.002
Dec
0.002
Bulgaria
1.28
1.28
Dec
0.001
0.0%
Pakistan
2.071
2.072
Dec
0.001
0.0%
Subtotal Gross Increases
15.2
Changes in Central Bank Gold Reserves in 2012 (Million Troy Ounces)
Year-End 2011
YTD 2012
Last Reported
Net Change
Percent Change
Countries Decreasing Reserves
Sri Lanka
0.32
0.12
Sept
-0.204
-62.5%
Germany
109.19
109.04
Dec
-0.159
-0.1%
Czech Republic
0.4
0.37
Dec
-0.028
-7.5%
Macedonia
0.22
0.22
Dec
-0.001
0.0%
France
78.3
78.3
Dec
-0.001
0.0%
Malta
0.01
0.01
Dec
-0.001
0.0%
Subtotal Gross Decreases
-0.39
Total Net Change
14.8
Sources: IMF, CPM Group. Data as of 1-31-13.
Based on current data, the net increase in central bank gold buying for 2012 was 14.8 million troy ounces – and that’s before the final 2012 figures are in for all countries.
This is a dramatic increase, one bigger than most investors probably realize. To put it in perspective, on a net basis, central banks added more to their reserves last year than since 1964. The net increase – so far – is 17% greater than what was added in 2011, which was itself a year of record buying.
Here’s a picture of total central bank reserves since the financial crisis hit.
Whatever gold’s price movements, positive or negative, central bank officials have continued adding a lot of ounces to their reserves.
But this understates the case, because most of the data exclude China, as well as a few other small countries. China last officially reported gold reserves in 2009, so the totals in the chart since then exclude whatever its purchases might have been.
Here’s where it gets interesting: Bloomberg claimed that Russia has been a bigger buyer of gold over the past decade than China – by a full 25%. Based on data about gold imports through Hong Kong and the fact that, for the most part, Chinese production doesn’t leave the country, it seemed to me that this could not be right.
The Chinese central bank holds an official 1,054 tonnes of gold in its reserves. Bloomberg states, based on IMF data, that China has added somewhere around 425 tonnes over the past decade.
I can’t say exactly what the correct number is, but the Bloomberg number almost has to be wrong. Here’s why:
Gold imports through Hong Kong in December alone hit a record high of 109.8 tonnes.
Imports for 2012 also hit a record high of 572.5 tonnes.
If you add 2012 mine production – remember that China is now the world’s largest gold producer – roughly 970 tonnes of gold was delivered to various entities within the country last year.
Cumulative imports since 2001 have reached 1,352 tonnes.
Since 2001, imports plus production total a whopping 4,793 tonnes.
So Bloomberg is essentially saying that roughly 10% of the total gold available inside the country during that period was added to China’s reserves. While it’s true that Chinese citizens are buying a lot of gold (though perhaps more silver), it’s highly doubtful that private parties bought 90% of all the gold brought to the Chinese market during this period. I think – but can’t prove – that China’s central bank is buying more gold and at a faster pace than its Russian counterpart.
Jim Rickards, a highly respected author and hedge fund manager, said last month that China has probably already accumulated between 2,000 and 3,000 tonnes of additional gold reserves. If he’s right, that would be roughly double or triple the 1,054 tonnes it reported in 2009 – not the 40% increase Bloomberg‘s numbers suggest.
At the very least, we can say that the Bloomberg report left consideration of China’s imports and production out of its report naming Russia the top gold buyer of 2012. Okay…but so what?
Well, Jim thinks the next big catalyst for gold will be an announcement from China about its reserve position. Here’s what he told me in late December:
“The catalyst for a spike into the $2,500 to $3,000 price range for gold will be an announcement by China, probably in late 2013 or 2014, that they have acquired 4,000 tonnes or more in their official reserve position. This will put China on an equal footing with the US in terms of a gold-to-GDP ratio, and validate gold as the real foundation of the international monetary system. Once that position is validated, gold will move to the $7,000 range in 2015 and beyond.”
Even if Jim’s estimate is high or China doesn’t make an announcement until later, it’s clear that central banks around the world are buying gold in record quantities.
It almost makes you wonder… do they know something we don’t?
The Russians gave us some hints.
Evgeny Fedorov, a lawmaker for Putin’s United Russia Party, said last week, “The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound, or any other reserve currency.”
President Vladimir Putin told his central bank not to “shy away” from the metal, adding “After all, they’re called gold and currency reserves for a reason.”
The Chinese have been quiet on this topic recently, after being very vocal a few years ago. Here’s a recent quote.
“The current international currency system is the product of the past,” said Hu Jintao, General Secretary of the Communist Party of China.
Others have provided clues as well.
“We’re in the midst of an international currency war,” said Guido Mantega, finance minister of Brazil.
“Quantitative easing also works through exchange rates… The Fed could engage in much more aggressive quantitative easing, to further lower the dollar,” said Christina Romer, former chair of the Council of Economic Advisors.
Economist Kyle Bass recently spoke to a senior member of the Obama administration about its planned solutions for fixing the US economy and trade deficit. When he asked, “How are we going to grow exports if we won’t allow nominal wage deflation?”, the answer he got was, “We’re just going to kill the dollar.”
Yes, we’re talking about the US dollar. Perhaps some investors have gotten complacent about the risks to the world’s reserve currency – but not central bankers. It’s not hard to see why: whether they admit it or not, central bankers must know what it means to run the printing presses the way the US has since 2008, even if price inflation is not immediately obvious. It’s no surprise they want to hedge their bets, moving more reserves into something with actual value… something that can’t be debased by a few computer keystrokes by an increasingly unfriendly government.
The US dollar has been the world’s reserve currency since WWII. That’s beginning to change, and the movement into gold is just one facet of that change. The buying by central banks is exactly what one would expect to see as we approach the end of the dollar hegemony.
The message from central banks is clear: they expect the dollar to move inexorably lower. It doesn’t matter that it’s been holding up against other currencies or that the economy might be getting better. They’re buying gold in record amounts because they see a significant shift coming with the status of the dollar, and they need to protect themselves against that risk.
This leads to a second message: gold is not overpriced, in spite of the 500%+ increase since 2001. Indeed, with the recent correction, central banks are likely buying more, even as you read this.
Central bank gold buying will continue, of that we’re certain. Even after Putin’s binge, gold accounts for only 9.5% of Russia’s total reserves. China’s 1,054 tonnes is roughly 2% of its reserves. It’s clear that both countries, along with others, have decided to accumulate as much gold as they can, as quickly as they can, before the dollar’s decline becomes more pronounced… and permanent. This could explain why some central banks don’t publicize their purchases. It also means that Bloomberg and other mainstream media outlets could be caught off guard when China announces higher gold reserves than expected – perhaps much higher.
Clearly we should take notice. If central banks are preparing for a major change in the value of the dollar, shouldn’t we? The fact remains that the US dollar cannot and will not survive the ongoing abuse heaped upon it by government planners and federal officials. That not only means the gold price will rise, but that many, if not most currencies, will lose a significant amount of purchasing power. This has direct implications for all of us.
Embrace the messages central bankers are telling us – the ones they tell with their actions, not their words. Buy gold. Your financial future may very well depend upon it.
While buying gold will protect your purchasing power, your best bet at growing it substantially is to stake claims in little-known companies that mine precious metals. That’s how Doug Casey, Rick Rule, and other well-known contrarian speculators made their millions. To learn exactly how they did it – and how you can too – sign up for Downturn Millionaires, a free video presentation from Casey Research.
http://www.goldmoney.com/goldresearch. On behalf of the GoldMoney Foundation, Andy Duncan interviews Robert Wenzel at the Austrian Economics Research Conference 2013 in Auburn Alabama.
At the conference this year, Wenzel is delivering the The Henry Hazlitt Memorial Lecture. His topic: “An Examination of Key Factors in the Collapse of the Soviet Union” leads the discussion. Wenzel, the editor and publisher of EconomicPolicyJournal.com, argues that the commonly held view of President Reagan being instrumental in the downfall of the Soviet Union is questionable and that the policies of Gorbachev were the pivotal components.
The time it took for the Soviet Union to collapse was around 70 years and Wenzel describes 4 reasons why this was so and how these concepts may apply to modern day economic conditions in America.
Tribute is then paid to the late Henry Hazlitt, his work and contribution to economics.
Gold closed down $7.60 to $1606.20 (comex closing time). Silver fell by 52 cents to $28.66.
Here are the final access closing of gold and silver:
gold: $1609.20
silver: $28.76
In physical news at the comex, the CME reported 7 gold delivery notices filed equal to 700 oz , the number of gold ounces standing for delivery rose by 5 contract or 500 oz and thus 12.86 tonnes of gold is standing for March delivery. No doubt this is a record for gold deliveries in the off delivery (non active) delivery month.
The Texas pension fund which has over 1 billion dollars worth of gold stored in New York wishes to “repatriate” this gold back to Texas.
The big news of the day is Cyprus again. This morning we were greeted with news that all deals with Russia are now off the table. Cyprus is scrambling with Plan C to rape the private pension funds and replace them with worthless sovereign Cyprus bonds, and possibly sell their 13.9 tonnes of gold if indeed it is still there and not leased. It looks to me like Russia is waiting for Cyprus to fail and then they will swoop in and take the prize assets for pennies on the dollar.
Late in the day, Europe responded by raising the ante for poor Cyprus from 5.8 billion euros to 6.7 billion euros citing deteriorating conditions.
Cyprus, as a partner with the other 16 EMU nations supplied their share of money needed to fund Ireland, Greece, Portugal and Spain. Now that they are in trouble, the EU are raping private property of Cypriot citizens. Nice people, the EU!!
On the 20th of March Jim Sinclair had a question and answer meeting in New York which many attended. We have a summary of questions asked of him and his answers. We will go over these and many other stories but first…………..
Let us now head over to the comex and assess trading over there today:
