I recall a terrifying experience years ago. It was my last flight of
the year, and I was headed home for Christmas. The plane was speeding down
the runway to take off, when the pilot suddenly reversed thrust and slammed
on the brakes; the plane shook like I have never experienced before as the
pilot aborted the takeoff. As we stopped mere feet from the end of the runway
and caught our breath, the pilot came on the intercom and announced,
"I'm sorry to frighten you, ladies and gentlemen. I have been flying for
many years. There was nothing on our instrument panel that says we have any kind
of problem. It just did not feel right, and I want to have some things
checked out before we go vaulting into the air."
We taxied back to the gate and several mechanics descended on the
plane. Within ten minutes they made the announcement that the flight had been
canceled due to mechanical difficulties. As I exited, I stuck my head in the
cockpit door and exclaimed, "Captain, I will fly with you any time –
thank you! I hope you have a wonderful Christmas season." As a seasoned
traveler, it was probably the only time in my life that I was happy about
having a flight canceled.
It just doesn't feel right
As of this moment, the business columns are blaring headlines about
the Dow hitting a record high. At the same time, gold and gold stocks have
been taking a beating. If you are like a lot of us at Casey Research and have
sizeable positions in gold and silver, it can certainly be a test of courage
and patience.
At times like this, it seems appropriate to review why we made certain
decisions in light of new facts. Have things changed? Is it time to adjust
our holdings?
As luck would have it, Federal Reserve Vice Chairman Janet Yellen sheds some light on the subject. Bloomberg's
recent headline, Yellen
Says Fed Should Press on With QE Amid Limited Risk,
sums it up well. Basically she reiterated that the Federal Reserve will keep
on purchasing $85 billion in government debt for the foreseeable future. OK,
no changes here, folks; we will continue to spend money we don't have, and
the Fed will cover us.
The same day I read about Ms. Yellen, the
March issue of BIG GOLD
hit my inbox. In the introduction, our own Jeff Clark has this to say about
the situation (italics his):
"[T]he fundamental drivers for investing in gold have not
changed. If they had, then we should sell, but clearly they
have not. This is a short-term correction within a secular trend, despite
what some may proclaim.
The primary impetus for a sustained gold bull market is that
government debt is a structural
problem, in the US and across the globe. Most of it will never be paid – and
more piles up every day, to the tune of tens of billions of dollars. The
economies of the world's indebted nations are not and cannot grow fast enough
to pay off the debt (GDP shrunk
[sic] last quarter in the US, the Eurozone, and Japan), and outright default
or restructuring (i.e., a "soft default") isn't an option. The only
politically acceptable way out is for government to create the money to
service the debt and pay its bills, inflation be
damned.
This default-by-inflation has been repeatedly employed by governments
throughout history. We don't see a different outcome this time.
The Fed has said it wants inflation – and we're sure it'll get what it
wants. No forecast comes with a guarantee, but it seems virtually certain
that central banks will continue to print money. Since those currencies can't
get "unprinted," they'll eventually enter the system and fuel
double-digit rates of price inflation. When that process starts to unfold,
gold and silver will respond, as they dependably have throughout
history."
And of course I catch a quick glimpse of talking heads on CNBC
enthusiastically discussing the Dow. One of the experts makes the snide
remark that all the gold nuts talking about Zimbabwe need to step aside,
because they just want to make some money.
Much like the pilot, my intuition is sending me a message – I am
trying to figure out my emotional conflict at the moment. I know I'm heavily
in the market with my share of metal and stocks, because I have no choice.
They took away our interest income. Most all of my peers feel the same way.
We are not heavily in the market because we want to be; we really have little
other choice.
Maybe the Dow did hit a high, but it feels more like the Great
Depression than the roaring '20s. Unemployment is through the roof, record
numbers of people are on food stamps, and we see study after study about our
net worth decreasing rapidly.
So here is my current thinking
Let the talking heads at CNBC continue to make fun of me. I think we
can do two things at once: make some money and do everything we can to
protect ourselves against a possible Zimbabwe moment.
There are certain potential catastrophes that can be so threatening we
must take steps to insure ourselves even though the probability of one
actually occurring is slim. I cannot put my life savings and my family at
risk by trivializing the dangers which are potentially on the horizon.
While CNBC may want to pooh-pooh the probability of something similar
happening in our country, we all know that creating massive amounts of
currency out of thin air always results in the currency collapsing or being
revalued. A prudent investor (particularly one on either side of the cusp of
retirement) would do well to take out some insurance. That is generally done
by investing in metal, farmland, and other forms of hard assets.
In the same Bloomberg article quoting Ms. Yellen,
there is another clue for us: "Kansas City Fed President Esther George
has warned that prices of some farm land have hit 'historically high
levels.'" I wonder if the CNBC folks feel that is a mere coincidence.
In the fall of 2011, I attended the Casey Summit, which featured three
speakers who had lived through hyperinflation in their home countries. They
shared their personal experiences with us.
All three speakers went through very similar cycles. All said
inflation was rising and then it spiked to astronomical proportions.
The following are a couple of slides used by the speaker from
Yugoslavia. Note the last line that indicated that during its hyperinflation,
on average every 1.4 days prices doubled.
The presenter showed a 500-billion denominated bill, which had the
same purchasing power as a 500 bill was worth just 24 months earlier. His
slides documented the hyperinflation, starting at 5.00 and building up to 500
billion.
Can this happen in the United States? Are we immune from the natural
laws of economics?
We see inflation on the rise in the US and know our government is not
telling us the truth about it. We have discussed the record debt and Federal
Reserve spending until we are blue in the face.
Here is my personal bottom line
I have yet to see anyone present any logical economic premise that
concludes that our country will not eventually see a currency collapse. Many
have put us down, called us "gold nuts" and the like, and
trivialized our concerns. Just show me the facts.
I see several other clues that reinforce my concerns. Throughout
history thousands of currencies have collapsed, but precious metals hold
their value. It should come as no surprise to learn that over the last few
years China, Russia, and many central banks are stockpiling gold. Germany and
Venezuela just announced they are bringing their gold back to their shores.
Not wanting to start a panic or gold rush, they played it down by saying they
just feel it is easier having their metal inside their own borders. It sits
in a lump and earns no interest, so there must be a good reason why they are
going through all that effort and expense.
At Casey Research, we have regular editors' conferences. The subject
of the last two was precious metals and the direction of the market. If I may
summarize, we came to several conclusions. We may be in for a rough ride in
the short term; however, the fundamental reasons for owing gold and silver
have not changed. If anything, the reasons to own gold and silver are more
evident than ever before. At the end of the day, none of us is selling, and
we are going to be ever alert for some terrific buying opportunities.
Sure, all the contraptions on the airplane might be telling us
everything is just fine: the Dow reaches new highs; unemployment slowly
drops; and cheap credit is endless. But as experienced pilots, we're reading
into the market beyond what the gauges are saying. That's the sort of insight
that can mean the difference between and a crash landing and a takeoff for
the value of your portfolio.
Denis Miller
