World Gold Council data
released earlier this month reveal a paradox. Demand hit 4,389 tons during
2016, but mines produced only 3,236 tons. Yet despite differing supply demand
fundamentals, gold prices rose by only 9%. A supply squeeze that size, should
have produced far bigger price action.
As with many of life’s mysteries, a good place to start is with Chinese thinkers.
No, not Confucius, Lao Tse, or even Sun Tzu. I am talking about Bruce Lee.
In a competitive investing world, in which price discovery, financial reporting
and economic data are systematically distorted, the best parallels are with
competitive boxing, which is governed by the Marquis of Queensbury rules, and a
“When you talk about fighting with no rules,” said the late martial
artist, in the lost Bruce Lee interview, “you had better learn to use every
part of your body. Your feet. Your elbows. Thumbs. Everything.”
That sage advice increasingly applies to an investing world, in which
supply-demand fundamentals, as measured by official statistics, don’t tell you
To avoid being fleeced, gold investors - indeed all investors - need to know a
bit about everything. Some examples:
Economics and central bank manipulation
Most seasoned investors have caught on that the US Federal Reserve has been
intentionally manipulating housing, bond, equities and other asset prices
higher. Ben Bernanke, a former Fed chair, and Richard Fisher, former president
of the Dallas Fed, have admitted as much.
Less well-known, as Bill Gross recently pointed out, is that while Fed
manipulations have tapered off, European and Japanese central banks continue to
buy $150 billion a month in assets.
This has swelled global balance sheets to $12 trillion and distorted prices
throughout the system. Ten-year bond rates would be nearly 3.5% (instead of
2.45%) Gross suggests, without the manipulations.
If interest rates were 43% (1.05 percentage points) higher, this would bring
down the implied value of stocks (by more than 30%, according to this writer’s
back of the envelope calculation).
The question gold investors need to ask themselves is how long the central
bank manipulations can continue. And which asset classes would best hold their
value if current unconventional monetary policy proves to be a bust?
History: no fiat (printed) currency has ever survived
Good investors also need to know a bit about history, which today is taught by
professors who grew up in the 1960s. Today’s crop of politically-correct
academics teach that the most interesting thing about the Roman Empire, are its
public baths, mosaics and approaches to women’s rights. Greece, for its part,
is taught for its poetry, philosophy and rhetoric.
Hints regarding how these empires ruled much of the earth, for nearly 2,000
years, might be in a footnote somewhere.
Few ivy league professors today will explain what happened in both empires, and
in 1780s France and 1920s Germany, when governments engaged in precipitous
currency debasement, that recalls what we are starting to see in Western
Before investing in gold, investors need to assess whether the yellow metal,
which has acted as money for at least 3,000 years (many claim longer), has
better staying power than paper and digital currency.
More important, how long will it take for the disparity to show?
Math: the US dollar has lost 98% of its value since 1933
Asking investors to learn math, which is so badly taught in Western schools,
that the public is essentially innumerate, may be asking a bit much. But one
example demonstrates its importance.
In 1933, just prior to the US government’s confiscation of Americans’ gold
holdings, an ounce was worth US $20. Today (Feb 15th EOD) an ounce of gold is
worth $1,234. That means a dollar buys less than 1/50th as much gold as it did
back then (1.6%), and has lost more than 98% of its value.
Worse, almost all that decline occurred since 1971, when the United States, led
by President Richard Nixon, defaulted on its international obligations to back
the dollar with gold.
Before investing in gold, investors will need to assess whether US dollar
debasement will continue, (in truth this is generally accepted) and calculate
what pace that will occur.
Complexities surrounding outstanding derivatives contracts, ETFs, and other
“paper gold,” complicate things even further. Many investors who have been
following markets all their lives remain baffled.
That said, one question seems more straightforward. Does one trust all of one’s
assets to a paper and digital-based system, run by politicians, central bankers
and ivy-league economists?
Or does one hedge one’s portfolio with real economic assets, of the kind that
Lao Tse, Confucius, Sun Tzu and Bruce Lee would understand?
Peter Diekmeyer is a business writer/editor with Sprott Money News, the National Post and Canadian Defence Review. He has studied in MBA, CA and Law programs and filed reports from more than two dozen countries.
The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.