|
|
Many a weekend
since the beginning of the year has been occupied by a “crisis”
in the euro. But this weekend’s “crisis” seems to be
the mother of them all. As such, it will probably put an end to them,
and the gold market will pull out of its funk and resume its bull trend.
The euro is based on
the West German deutschmark. In 1957, Konrad Adenauer instituted the
Bundesbank and started Germany on a path of very limited issues of
money. Like all other countries of the time the Bundesbank issued paper
money. However, it issued it far more conservatively than any other
central bank. As a result, Germany’s progress was so rapid that
it became known as the “German Economic Miracle.”
U.S. dollar vs.
Deutschmark, including period 1957-1999.
Above is the chart of
the U.S. dollar against the deutschmark. Although the dollar was a
(relatively) strong currency, at least until 1970, from 1957 to 1999 it fell
from 4.2 to less than 2. That is, the dollar lost over half its value
against the deutschmark.
This echoes the
experience of the U.S. dollar and the British pound in the 19th
century. Both countries went on the gold standard (U.S. in 1788,
Britain after the Napoleonic Wars). And the two countries then
proceeded to become numbers one and two in the world economy.
The opposite situation
happened at the time of the collapse of the Roman Empire in the 5th century
A.D. In the late 4th century A.D., the Roman Empire split into two
parts, and the two countries were as alike as could possibly be. Before
the split, the joint Empire depreciated its currency. (Over a 50 year period
[235 A.D. to 285 A.D.], the average emperor managed to reign for 2½
years, the vast majority meeting an untimely end.) Prices kept rising
until Diocletian imposed price controls.
These controls stopped
the price spiral but at the cost of putting every enterprise in the empire
out of business. Suddenly no one could buy anything. Money was no
good because no one could use it to buy goods. Everyone needed to make
everything for himself. The vast majority moved out into the
countryside and started to farm (food being the essential economic
good). There was little time to produce other forms of wealth.
Of course, Hollywood
has given us grand movies of the Roman legions with their glittering metal
helmets and breastplates. That was before they had started to
depreciate their currency. After Diocletian’s controls, the
Romans could no longer afford metal armor and reverted to leather. At
that point, the Romans could no longer defeat the barbarians. The Western
Empire fell, defeated by the depreciation of the currency, and the barbarians
came rushing in. At the same time, the Eastern Empire must have figured
things out. They restored a gold standard, and with their name changed
to Byzantium they survived for another thousand years. Around the year
1000 A.D., Richard Erdoes writes:
“Byzantium was then at its zenith, the shield of Christendom
against Islam, the largest and most populous of all Christian cities.
It was said that two-thirds of all the wealth on earth was concentrated in
Constantinople [Byzantium], the other third scattered throughout the
world. An Arab visitor proclaimed that at one end of the inhabited
world stood Cordova [Spain] and at the other Byzantium, and that nothing in
between was worth mentioning.
“As the first millennium approached, Byzantium had regained the
power and magnificence of the days of Justinian. The city reigned as
the head of a large empire, much of it reconquered from Slavs and Muslims,
wealthy not only through its trade and heaped-up treasure, but also through
the competence of its soldier-emperors, the imagination of its artists, and
the learning of its scholars. During Gerbert’s lifetime,
Byzantium reached a population of almost one million, of whom only the
families of a small ruling class were Greek. More people lived in
Byzantium than in all the other European cities combined.
Constantinople, in the words of Will Durant, ‘was at the crest of its
curve, surpassing ancient Rome and Alexandria, contemporary Baghdad and
Cordova, in trade, wealth, luxury, refinement, and art.’”
Richard Erdoes, AD 1000, (New York, Barnes & Noble,
1988), p. pp. 96-97.
Sadly, a few centuries
later Byzantium gave up its gold standard and started to depreciate its
currency. Gradually the Empire became smaller and smaller.
Finally it extended to no more than the city of Byzantium and its
suburbs. In 1453 A.D., it fell to the Turks, who control it to this
day. It is interesting that here today, over 500 years later, the
Greeks still hate the Turks, but they have not restored their gold standard,
and they have not retaken the city of Byzantium.
So do not allow anyone
to tell you that great empires are built on war and toughness. Great
empires are built on two things: wealth and political freedom. (And
since political freedom leads to great wealth, these two factors reinforce
each other.)
But the Greeks of 2010
not only can’t run their own ship, they are trying to drag down the
rest of Europe with them. There is no politician in the world who
intends to deal with a financial problem by raising taxes. What they
all intend is to print money. Bloomberg reported on Saturday:
The EU, which will finance the rescue with the IMF, said the terms of the aid
package may be agreed ‘in a matter of days….’ Germany
and France will contribute more than half of the bailout funds, Germany
putting in 8.4 billion euros and France providing 6.3 billion euros,
according to an EU document obtained by Bloomberg News. They are followed by
Italy and Spain. “
Greek Bailout May Fail to Ease Investor
Fiscal Crisis Angst, by Matthew Brown and
Bryan Keogh, Bloomberg, April 24, 2010.
I have already pointed
out that, in a rational world, this would be of little concern to gold
bugs. A government’s depreciation of its currency cannot hurt you
if you do not have assets denominated in that currency. What matter to
other peoples of the world if the euro, which has been a noble experiment in
quasi-sound money, is destroyed? After all, in mid-2008 the Zimbabwe
dollar fell to 1 billionth the value of a U.S. dollar. (Over the past
decade, average lifespan in Zimbabwe fell from 60 years to 44.)
What is happening in
the world is that the various national paper currencies are all losing value,
at greater or lesser rates, The solution is to be in gold.
Gold is a real good, and no matter how rapidly a nation depreciates its
currency, gold will retain its real value.
Unfortunately, even
most traders in the financial markets cannot recognize that 2 + 2 = 4.
2010 has been an unusual year for gold. Instead of the previous
autumn’s rally carrying into the winter or spring, it has been cut
short and turned into a sideways move. Most interesting, even though
gold has only been moving sideways an awful lot of gold bugs seen to think
that it is going down. Boy are they in for a surprise.
All you need to do is
to follow the daily news and you have the answer. A protest by the
Greek demonstrators leads to a fall in the euro (in fear of what has just
happened, a decision by the Europeans to print money to bail out Greece).
This makes the U.S. dollar go up against the euro. So far, so
good. But a rise in the dollar is then misinterpreted as a reason to
sell gold. The printing of euros may cause the euro to decline against
the dollar, but there is no way that it can cause the dollar to rise against
gold. Neither is the dollar going up in any real sense. The
various national currencies are all pieces of ballast being thrown out of a
balloon. They are all declining, some faster than others, but none of
them is going up. And the traders who think that the dollar is going up
in any real sense are living in a fantasy world.
It is this fantasy
which has interrupted the normal early year advance here in 2010. But
we can be confident of a return to reality. That is a nice thing about
markets. They can be thrown off their true value in the short term by
any minor event. But then they resume their basic trend toward their
true value. In fact, gold has been going up since Feb. 5 (although so many
people keep trying to convince themselves that it is going down). This
is disturbing the normal seasonal pattern and is one of the difficulties with
which the astute speculator must deal in the short run. That is the
kind of challenge we address in the One-handed Economist. You see, the
one-handed economist cannot say, “on the one hand this,” or
“on the other hand that.” He has to take a stand. So
he cannot be wishy-washy, like so many modern economists. President Truman
said, “What this country needs is a good one-handed
economist.” And now his wish has been granted.
The two basic forces
on the gold market today are: 1) the 10 year bullish uptrend. It must
always be kept in mind that the trend is your friend, and a large uptrend
will telegraph its end by a dramatic bearish pattern (which so far has not
appeared); 2) the gap of Feb. 5, 2010 between the point to which gold did
pull back ($1050) and the point to which it normally would have pulled back
($1,000). Both of these are powerful bullish forces, and any
interpretation of the markets has to take them into account.
The One-handed
Economist is my fortnightly (every two weeks) newsletter. It makes
predictions on the general markets and on specific stocks and
commodities. It is based on technical analysis, Austrian theory
economics and my theory of the commodity pendulum. Our ten year record
shows a 75% gain since the beginning of the decade. (The average U.S.
mutual fund is flat for the same period.) I am now looking for the bull
market in gold to accelerate. You may subscribe via Pay Pal by visiting
my web site, www.thegoldspeculator.com, ($300 per year). Or you
may send $290 ($10 cash discount) to The One-handed Economist, 614 Nashua St.
#122,
Milford, N.H. 03055.
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.
#122, Milford, N.H. 03055.(Include both electronic and mailing address.)
|
|
