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There
has been a sense in the gold market through the month of February that gold
is going down, a sense of negativity and discouragement. Gold bugs are
giving up and pulling out. The U.S. dollar index hit 81 on
Friday. The Fed is tightening. “What more,” say the
bears, “is there to say?”
Is
this true? Is gold going down? Let us look at the chart.
Let us
see. Gold has gone from a low of $254 (in 1999) and is currently at
$1,123. This does not fit my definition of down. Of course, I am
being facetious here. Gold bears are talking about the decline that
began on Dec. 3, 2009.
I
was not unaware of this decline. Indeed, on Dec. 2, 2009 I sent out a
special bulletin in which I wrote, “I am giving a sell signal for all
three of our gold stocks….Sell all shares and stand aside from the
precious metals for a while.”
That
while is now over, and my point is that the vast majority of speculators, in
gold or any other good, are much too close to the market. They follow
news items day-to-day. They get excited by little up and down
moves. They rarely look at a long term chart.
Indeed,
I challenge you. Go through the commodity web sites and try to find a
chart of gold which goes back to the 1970s. Here we are in the second
upswing of the commodity pendulum. Doesn’t it make sense to go
back and look at what happened during the first upswing of the commodity
pendulum? Wouldn’t it be likely that there would be
parallels? Being an old timer I saved my charts from that period, but I
feel bad for younger students who are brought up in a society which pressures
them to only pay attention to the short term.
What
did the chartists of the early 20th century, the ones who were my
teachers, say about this issue? Very simply, they said:
·
“The
trend is your friend.”
·
“The
big money is made in the big move.”
These chartists
knew that the vast majority of traders are caught up in the present.
They lose sight of the big picture, and their behavior becomes so irrational
that it can hardly be believed. For example, take the events of August
15, 1971. Richard Nixon abolished the last link that the U.S.
had to the gold standard. He also imposed price and wage
controls. This paved the way for the Fed of the day to go wild printing
money, and they continue to go wild today.
What
was the long term reaction to this event? We know that over the decade
the price of gold, then only a small amount above its $35/oz. low, rose to
$875. What was the short term reaction? Gold sold off. After
all, hadn’t the President said that he was going to take action against
“inflation” by forbidding prices from rising? Since
“inflation” was now as good as defeated, what need for
gold? Such was the short term reasoning of the day. (Actually,
the price controls of 1971 were such a blatant failure that they have
discredited such a policy to the present day.)
But
actually, it was precisely the fact that people thought that
“inflation” had been defeated which led them to support the
Government and the administration in power and which allowed the Fed to ease
in 1971-72. This printing of money led to an 8.7% increase in prices in
1973 and a 12.3% increase in prices in 1974. This increase in prices
was not totally caused by the money printed in 1971-72. Part of it was
due to the rise in commodity prices, which was the result of the money
printed during the 1960s. That is the tricky part of the commodity
pendulum. It occurs over such a long period of time that the vast
majority of the people cannot connect cause and effect. And, of course,
we face the exact same situation today. There was massive printing of
money over the ‘80s and ‘90s (16.9% in 1986, 14.3% in
1992). It did not have its price rising effect at the time.
Essentially the losses (which corresponded to the gains of the paper
aristocracy) were taken by commodity producers, and many of them had gone
under by the late 1990s. (Real commodity prices fell by 2/3 from 1980 to
1999.). Now those commodity producers are no longer around. In this
sense, there is a fundamental shortage of commodities. Thus commodity
prices go up at the drop of a hat. This passes through into producer
prices and then into consumer prices. For this reason, I was alarmed by
the 1.4% increase in producer prices for January 2010. Over the past 6
months, the Producer Price Index has expanded at an annual rate of
9.8%. The establishment was too dumb to become alarmed. But a
serious increase in consumer prices is around the next corner.
On
top of the increase in consumer prices caused by the money created by Volcker
and Greenspan in the 1980s and ‘90s, there is a massive increase in
money due to Bernanke. The Fed started to lie about the nation’s
money supply in 2008, reclassifying certain demand deposits as time
deposits. That is, the owners of these deposits are being told that
they have demand deposits (which can be withdrawn at any time and are counted
in the money supply), and the Fed is telling the public that these are time
deposits (which have limits on their withdrawal and are not counted in the
money supply). It was my estimate that the money supply for 2008 rose
by 70%.
This
new money was created by the Fed mostly in the autumn of ’08. At
that time, the “deflationist” school argued that this was being
offset by a contraction in the portion of the money supply issued by the
private banks. There was a partial truth here. Such contractions
in the private bank portion of the money supply are common and occur in the
latter part of each “recession.” However, the expansion by
the Fed always overwhelms this small contraction, and we can have little
doubt that it will do the same on this occasion.
So
here we face two giant forces causing higher prices:
·
the
(second) upswing in the commodity pendulum, itself caused by the money
created in the ‘80s and ‘90s;
·
the
massive amount of money created by Helicopter Ben Bernanke in 2008-09 and
still continuing. (The Feb. 19 issue of the One-handed Economist
contains an explanation why the Fed’s increase in the discount rate
late Thursday should not actually be considered a tightening.)
As
these two forces hit our economy, prices are going to skyrocket, and the
“deflation” thesis will be decisively refuted (much as the price
control thesis of 1971 was refuted in 1973-74).
At
the same time that these fundamental forces are unfolding, we have one
technical principle after another calling for a massive rise in gold.
As I noted back in October, 2009, the $1,000 level, which resisted any price
increases for a year-and-a-half, has now turned into a support level.
Furthermore, it looks very much as though the pull back which started Dec. 3
did not make it all the way back to $1,000 but ended Feb. 5 at the $1,050
area. This leaves a gap of approximately $50 between the expected pull
back and the actual point.
Such
gaps are unusual. Most pull backs go right to their expected
level. To create such a gap, the long term bullish force must be very
powerful. It means that the bulls do not need any help from the support
at $1,000. Such technical patterns are rare and are a chartist’s
dream. (The fact that gold fought off two back to back bearish news
items on Thursday and Friday, closing unchanged, shows the same kind of
power.)
In
short, the markets take a long time to discount important, grand cycle
events. The trillion dollar deficits and massive increase in the money
supply are coming on top of the phenomenon of the commodity pendulum. Everything
is coming together.
At
the same time, the media have turned most of the people in the country into a
bearish mood. They have been brainwashed to think that everything is
going down. This means that the very bullish situation in gold is not recognized
and has not been discounted in advance. It is a rare opportunity and
corresponds to the stock market in 1983. (People were still bearish
because of the propaganda of 1982, but in reality the stock market was higher
and in fact had turned up into the great grand cycle bull market of
1982-2007.)
There
is one quality which marks a gold bug. All of the people with fancy
titles are against him. So it was in the 1970s. All of the
respected newspapers and magazines, all of the professors of economics, all
of the high muck-a-mucks, laughed at the idea that gold could go up.
All of these people were wrong.
We
find this in many areas of society. The people who can do, who get it
right, have no titles. The Wright Brothers, for example, never graduated
high school. But they invented the airplane. The reason for this
is that everyone who pursues knowledge comes to a point where he has to make
a decision. Should he get knowledge, or should he get an impressive
title which convinces people that he has knowledge. That used to be
widely understood in our society.
Today,
sad to say, the majority of the people are impressed with titles. They
are the world’s losers. After all, by 1979 it was clear that the
gold bugs had been right. What can be said about the younger economists
of today, the ones who got their education after 1979? We know what
these people did. They chose to study under the idiots in the
establishment, the people who predicted, back circa 1970, that gold would go
down to $6 or $8 per ounce. They valued the impressive title more than
the truth. And so, now they have very impressive titles but no truth.
These
people are all around in our society. From whom will you learn your
economics, from a course at Harvard or from the gold bugs of the 1970s, from
the New York Times or from the One-handed Economist? This
is your life. You have to choose. If you make the right choice,
you win. If you make the wrong choice, you lose.
To
help you make the right choice, I publish a fortnightly economic letter
called the One-handed Economist ($300/year). It features my
theory of the commodity pendulum, Austrian theory economics and technical
analysis. In 2002, I turned bullish on gold and gold stocks for the
grand cycle, and I am in them for the big move.
Howard Katz
The Gold Speculator
Howard S. Katz is
the editor/publisher of the One-handed Economist, a financial letter which
combines fundamental and technical analysis. He was a bug on gold in the
1970s and became a bug on gold again in late 2002.
Subscribe to the Gold
Speculator (the One Handed Economist)
You can subscribe
to Howard Katz’s thoughts on commodities, stocks, bonds and real estate
are available in a letter entitled The One-handed Economist and published
every two weeks giving specific advice on trades in stocks and futures. This
letter is available (both electronic and paper copy) for $300/year with a
3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St.
#122, Milford, N.H. 03055.(Include both electronic and mailing address.)
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