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Part of the
explanation for the Dec.-Jan. decline in gold is the attack on the euro which
is now going on in the media. Indeed, the euro topped out very close to
the exact day of the top in gold. The market is thinking: decline in
euro = rise in dollar = decline in gold.
First,
let us ask what is the euro and how did it come to be? Here there is a
little historical background. After we beat a little sense into them in
1941-45, the Germans gave up their attempt to become the master race and
rejected all of the thinking which had led to the Hitler victory in
1933. In 1949, they elected as chancellor a man who admired America,
Conrad Adenauer, affectionately called der Alte or the Old Man,
Germans
back at that time remembered the depreciation of the German mark in 1923, which
had wiped out the middle class and destroyed their savings. Adenauer
admired America,
in part, because of the stability of her currency. The American dollar
had kept its value from 1793 to 1933, meaning that average wholesale prices
were the same in 1933 as they had been 140 years before. In 1949, the
depreciation of the U.S. dollar had only just begun, and America
was regarded, at that time, as a relatively sound money country.
So
Conrad Adenauer set up a German money system modeled on America.
In 1957, he created the Bundesbank. The Bundesbank did print money, but
it was committed to a policy of printing it in a very stingy fashion.
And then Germany, which
had been bombed into rubble and overrun with foreign armies, emerged as the
best economy in Europe. German
tourists stirred up resentment as they visited other countries in Europe.
“Hey, didn’t we just beat those guys? How come they can
afford to tour here, and we can’t afford to tour there?”
Even
establishment economists spoke of “the German economic
miracle.” Even Sweden,
which had escaped the devastation of the war completely, could not keep up
with Germany.
Put
simply, during the 19th century the two countries on a firm gold
standard, America and Britain,
had the two greatest economies in world history. Observing this, the
“economists” of the 20th century all turned against
the gold standard. All countries left the gold standard. So
during the second half of the 20th century the best economy in Europe
and the fastest growing in the world was the one which issued the least paper
money, the German economy.
After
this period of massive irrationality, somebody finally did something
sensible. The nations of Europe noticed that Germany
was beating the pants off of them. So they decided to imitate the
German monetary system. They created a European Central Bank s (ECB)
bound by the same rules as the Bundesbank and issued a new European currency,
the euro, intended to be a currency which followed the same conservative rules
as the German mark.
Today
the ECB is fulfilling its planned role, and its head, Jean-Claude Trichet, is
following the vision of Conrad Adenauer: a conservative central bank which
issues only modest amounts of new money and takes as its only principle the
battle against rising prices.
This
is not easy to do. There are vested interests who want to steal your
wealth, and the counterfeiting ability of a central bank was intended to
benefit such people. These interests are trying to use the Greek crisis
to destroy the basic concept of the euro.
What
happened was that Greece
did not abide by the rules to which she had agreed when she joined the euro
zone. She ran enormous budget deficits. Here in the U.S.,
when we run large deficits, the Federal Reserve just counterfeits up some
money and lends it to the Government. This is done in such a manner as
to steal from the ordinary people of the country and enrich a small group of
wealthy people. To trace the gains and losses from paper money is a bit
complex; so I just sum it up by referring to the beneficiaries of this paper
money as the paper aristocracy.
The
key concept here, which made the whole system work, was the redefinition of
“the economy” as “the interests of the paper
aristocracy.” For example, it has been beaten into your head ever
since you were young that a depression is a general decline in the wealth of
an entire country and here in America
we had a Great Depression in the early 1930s.
Depression?
From 1929-34, real wages in this country rose. People started to eat
more meat. Per capita meat consumption in 1930 was 129 lbs. per person;
in 1934 it was 144 lbs. per person. During the same period people
switched from margarine to butter, and also gave more to charity.
During the early 1930s most Americans were getting richer. The Great
Depression was only a depression for the paper aristocracy.
The
unemployment of the early 1930s was caused by a rise in real wages.
Nominal wages declined, but prices from 1930-33 fell faster (by about 30%).
As singer Eddie Cantor told us, “Potatoes are cheaper; tomatoes are
cheaper. Now’s the time to fall in love.” It is true
that the paper aristocracy was getting poorer. But that argument would not
have gone over too well. So the paper aristocracy (which controlled the
media) argued that everyone was poorer. And for this reason a big to do
was made over unemployment. Higher unemployment is the other side of
the coin of higher real wages. The exact same thing had happened in the
1870s. At that time also, the Government reduced the money supply to
eliminate the money which it had created to finance a war. However, the
unemployment of the 1870s had passed quickly, and the party in power had been
re-elected in 1876. Americans did not know they were in a depression.
Fast
forward from the early ‘30s to the early ‘40s. In the early
‘40s, Americans could not buy a new car or a new house. Many food
items were rationed. Everyone in the country was limited to 3 gallons
of gas a week. Real wages fell, and women were forced, for economic
reasons, to enter the work force.
The
early ‘40s were in truth a depression for the American people.
And yet, the early ‘40s are called a boom by the
“economists” of the paper aristocracy to suggest that people were
richer. Take heart, dear gold bug, these are the people against whom
you are competing in the financial markets. They are stark, raving
idiots. To this day, they do not know that, when a group of nations go
to war, suspend the activities of production and devote themselves to
destruction, that it is natural for them to get poorer. Being richer
means that one has more economic goods. If one has fewer goods, one
is poorer. A war may be worth fighting for reasons of morality or self
interest, but it is not a way to get rich. The war in which a poor
country attacks a rich country and makes up for the normal destruction of war
by taking the wealth of its defeated enemy may exist in theory. But in
history, such wars are few and far between. Mostly, the rich and
powerful country attacks the poor and weak country, beats the dickens out of
it and then finds that there is nothing left to steal. (The Japanese
attack on the U.S. in 1941 was part of complex scenario arranged by FDR to
get into war with Japan’s ally, Germany. The Japanese were
suckered in and then double crossed. Japanese messages, intercepted and
decoded by the U.S., told F.D.R. the exact date and place of the
attack. Read Admiral Kimmel’s Story, by Husband
Kimmel, who was scapegoated to cover for FDR, 1955.)
If
Europe bails out Greece, it will be a victory for the paper aristocracies of
the countries of Europe, and a defeat for the ordinary people. The ECB
will have to print money at a faster rate, and this will be bullish for
gold. If the ECB stands firm, it will be bullish for the euro and
bearish for the dollar. Either way the dollar price of gold is going
up. Note the triangle outlined in the chart above whose apex is at
132. This might be the place where the euro turns. Gold, which is
rising against both the euro and the dollar, has already turned. All
that happened in Dec.-Jan. was that media hype scared traders and caused an
intermediate decline. There will be many such declines in this long
bull market, and if you are going to be a successful gold bug, then you will
have to be tough enough to ride them out. The big money is made in the
big move.
Gold
has now completed the preparatory work for a massive move to the
upside. Who are you going to believe, the economists of the paper
aristocracy or the gold bugs? Your future life and well being depends
on your answer. Be long or be wrong.
To
help you protect yourself against the paper aristocracy, I publish a
fortnightly newsletter on the financial markets. To protect yourself
from paper money, you must be in real goods, principally commodities, stocks
or real estate. Real estate is a bit iffy right now. There was a
time for stocks in 1982 and will be at some distant point in the future, but
the commodity pendulum tells us not to be in stocks today. Now is the
time for commodities, and gold is the most conservative, user friendly and
technically well-behaved commodity there is.
My
newsletter is the One-handed Economist, published fortnightly (special
bulletins as necessary). The price is $300/year if you visit my web
site, www.thegoldspeculator.com and
pay via Paypal. However, Paypal is a good-for-nothing company that does
not follow long established business ethics, and I only keep my relation with
them for the sake of subscribers whose mail delivery to the eastern U.S. is
slow. For those who pay cash (a check via U.S. mail), I offer a cash
discount, and am hereby raising it from $5 to $10. Send a check for
$290 to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H.
03055. We do not accept credit cards. Note, it is my intention to
keep the price of OHE in step with the general rise in prices, which is about
30% since the last increase early in the decade. So a rise is in the
offing. Thank you for your interest.
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.
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