As the price of gold has taken some lumps since it
crashed into the symbolically significant $1,000 per ounce mark back in
March, those on Wall Street who had consistently underplayed its potential on
its way up are now assuring its continued retreat. According to these gold
market spectators, prices have risen solely as a result of financial panic,
and now that the fear has apparently subsided, gold's gains will evaporate as
well.
I have been buying gold and gold stocks for myself
and my clients since 1999 and not once did I buy out of fear. In fact, from
my perspective the only fear I've observed in the gold market is from those
who have been too afraid to buy.
While fear may from time to time play a role in
creating price spikes in gold, the underlying bull market has been driven by
solid fundamentals. Those who have been too afraid to buy simply do not
understand the underlying dynamics and have instead decided that the market
is irrational. As a result, gold continues to climb the classic wall of worry
as any dip in its otherwise upward trajectory causes the speculative
investors to jump ship.
Gold's ascent from less than $300 an ounce to its
current level was, and is, being driven by those who prefer it as a store of
value to the paper alternatives offered by governments. As the Federal
Reserve's dollar debasement policy kicks into high gear and other central
banks around the world are forced to follow suit to maintain their pegs
against the dollar, the rational choice for long term investors is gold. Thus,
the decision to buy is not rooted in fear but reason. On the other hand, the
decision not to buy is not only rooted in fear, but ignorance as well.
Those oblivious to gold's warnings instead place
their trust in government-supplied statistics. Based simply on flimsy CPI
reports, these observers believe that inflation is nowhere in evidence, and
that the flight to gold is therefore unwarranted. Yesterday's GDP report
provides the latest illustration of this dynamic. The government was able to
present an annualized first quarter growth rate of .9% based on an assumed
annualized rate of inflation of only 2.6%. In other words, inflation in the
first quarter of 2008 was the lowest first quarter inflation in the last four
years. How such a claim did not elicit howls of laughter is beyond me. The
government previously reported that in the years 2007, 2006, and 2005,
annualized first quarter inflation rates were 4.2%, 3.4% and 3.9%
respectively. Does anyone, besides Fed governors and Wall Street economists,
really believe inflation so far in 2008 is 33% below the average rate over
the past three years?
Many of those who place their faith with government
figures and dismiss the movements in gold believe that inflation is not a problem
so long as wages are not rising rapidly. The fact that wages are lagging
other prices merely means that inflation is that much more problematic for
average Americans. Ironically, what is overlooked is that wages are in fact
rising, just not in America.
They are rising in the nations that produce the goods that we consume, and
those higher costs are indeed being passed on to Americans.
However, recent action in the bond market suggests
that a few more people are getting wise to the government's con. This week,
yields on long-term treasuries hit new highs for the year, with the yield on
the ten year up 90 basis points from its March low. While the Pollyannas on Wall Street attribute this move to the
strengthening U.S.
economy, those of us buying gold know it's more likely a long overdue
increase in inflation expectations.
Got
gold?
Peter D.
Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA
92660
Toll-free:
888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
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