A decade ago, Miller Highlife beer aired a series of wonderful light beer commercials on TV during the NFL season staffed with a large number of celebrities who waged a battle – One group shouted “Great Taste” and the other group shouted back “Less Filling”. The debate ran for years without a winner, but the message was, of course, that the beer was BOTH great tasting and less filling.
Another great debate has been raging for many years and it focuses on gold. One side presents compelling arguments that Deflation is winning out, (which they say will be bad for gold), and the other side has their own compelling arguments that Inflation is winning out (and that will be good for the price of gold).
The debate is not merely an “intellectual” exercise. It gets emotional. There is no topic that get’s investors more confused or nervous than the Inflation/Deflation debate.
Last week, one of our readers sent me a link to a long-winded audio presentation by Harry Dent. I sat through the presentation and it was impressive. A great marketing piece! I was ready to call my wholesaler and sell all of my gold and silver, and had to fight the urge to slit my wrists. On the one hand, I agreed with Dent’s presentation that focused on demographics. He argued that the economy runs in approximate 40-year cycles, based on the spending habits of an aging population. The boom in the 1990s and 2000s was a reflection of the Baby Boomers impact on the economy during their peak earning/spending years – but a couple of years ago, as the Boomers faced retirement, they started to cut back on spending, and they started saving for retirement. There is nothing waiting in the wings to replace this huge “bulge” of spending, so “demand” slowed down for housing, new cars, appliances, vacations, etc. Prices started to fall and the economy is in decline due to the forces of Deflation, caused by demographics. This phenomenon is not confined to America. Europe, Russia and Japan are in the same (demographic) pickle. Dent argued, effectively, that the global economy was now entrenched in a Deflationary spiral that would last for five to ten years. His message was loud and clear. Sell your gold and silver now!
But just because I buy his Deflationary argument that an aging Baby Boomer bulge is bad for the economy, I strongly disagree with his conclusion that this would be bad for gold and silver. It is the very Deflation that Dent writes about that is creating the NEED for QE to INFINITY that Jim Sinclair writes about. Dent takes the position that the Fed will not resort to QE3. I disagree! I strongly disagree! Richard Russell understands the Fed and he sums their policy up in a sentence: “Inflate or die!” Whether overt or covert, the Fed is and will continue to inflate. Will they succeed? We will find out soon enough, but one thing is certain, in the process they will debase the dollar. The yen and the euro are also being “printed into existence” by the trillions, in an effort to combat Deflation and demographics, just like here in the US. It is the currency “debasement,” caused by central bank monetary policy to fight the forces of Deflation that are directing record amounts of currency into PHYSICAL gold and silver as a “safety” hedge against the debasement. I do NOT see this coming to an end anytime soon. Although I agree with Dent’s argument that demographics are causing Deflation, I take the opposite stand to Dent on how to invest to survive this. Those who follow Dent’s advice and buy dollars (Treasuries) will find themselves caught in the next great bubble, the bond market. Gold and silver will be the “GO TO” investments BECAUSE of the (futile) central banks reaction to Deflation.
In a nutshell, Deflation and Inflation can co-exist. The economy and the stock market can implode but the money supply can also inflate (as it is now) and a percentage of the new currencies will find their way into precious metals. In an earlier decade, they called this phenomenon Stagflation.
I think I will make that call to my wholesaler after all and BUY some more gold and silver.
There is another great debate raging. I am caught in the middle of opposing views from two of my friends, Ranting Andy Hoffman and Trader David R. Ranting Andy is absolutely certain that there are no more free markets and that the price of gold and silver are manipulated by the central banks (led by our Fed) and governments for the sole purpose of keeping the sheeple in their “fiat” currencies. They paint a false picture that gold and silver are not a replacement for the dollar or euro. Andy Rants every day that you must run for the exits, while you still have time, and accumulate as many ounces of gold and silver as you can. Trader David R just smiles and shakes his head and says “I wish those guys would just go away.” Having worked for some of the largest bullion banks in the world, including Barklays in London, and having also worked with central bankers in Russia, China and all over the globe, he says, “In the 1990s there was a large turn-over at the central banks. The old guard, who understood gold and sound monetary policy, started to retire and they were replaced by young in-experienced MBAs who had no understanding of what gold was all about. These new bankers saw large piles of gold sitting in the bank’s vault, gathering dust, and they decided they could sell and lease it out for interest. There was nothing “conspiratorial” about this, the bankers were just plain stupid! David R is not saying that the markets aren’t controlled by the bullion banks deep pockets. He is saying that their MOTIVES are for profit not some deep dark plot to keep Americans in dollars.
David R has a long and successful track record and it is based on technical analysis. In HIS case, it works. For the record, David R is as bullish on gold as Ranting Andy, but for different reasons.
Last week, Ranting Andy presented a series of graphs that proved gold and silver were “manipulated” at precisely at 3 A.M. New York time almost every day. I sent the graphs to David R. for his comment. (Here is an example of the 3 A.M. “FIX” that Andy rants about:
David R. replied:
It’s not manipulation, just lack of liquidity…. we have seen this in platinum in 2006, palladium in 2000, silver many years over and now gold ! This is what happens when you have large amounts of money involved in a small market…… this is the norm now. That’s why we say, “Eats like a bird, shits like an elephant” or “takes the stairs up, and the elevator down!”
What do I think? This debate reminds me of a comment by Roland Kirk, perhaps the most talented and original jazz horn man in the past 50 years. Kirk was blind and he played two or three horns at THE SAME TIME and it was not just a gimmick, it was great music. My uncle Irving Schectman owned one of the more prominent supper clubs in Minneapolis when I was growing up. I worked there part time, while attending college, for two years when I turned 21. Irv asked me whom he should bring into his jazz room, The Bamboo Room. I said Les McCann and Roland Kirk. He did, in fact, book both and that summer was one of my best jazz experiences ever. One night I was sitting near the stage in the Bamboo Room and Kirk announced that he was about to play a tune (Comin’ Home) based on Dvorak’s New World Symphony. He said, “Some people say Dvorak was a white man and some people say he was a black man.” Someone in the audience shouted out “What do you think?” Kirk replied “I don’t give a damn!” He then proceeded to knock everyone’s socks off with a show to remember. My point is – when it comes to the inflation/deflation debate and when it comes to the opposing views presented by Ranting Andy and Trader David R., my answer is the same as Roland Kirk’s – “I don’t give a damn!” Gold wins in either case. How certain am I? With over 90% of my net worth, that’s how certain I am. And my views on gold and silver have made me a LOT of money in the past decade. And my views have made my readers a lot of money too – at least those who followed my advice.
Chill out. Stop worrying about the price of gold and silver and just sit back and go with the (bull market) flow. All markets ebb and flow, rise and fall and gold and silver are no exception. We are currently in the grip of another “correction,” caused either by the nefarious policies of JPMorgan and the Cartel, or by the predictable trading pattern of the funds. There is no question that banks like JPM and HSBC are the elephants in the room with gold and silver and that as long as the CFTC allows them to take HUGE positions in the metals, and the CME is allowed to thwart every rally with an increase in margin, they will control the price. But their control is SHORT-TERM and they cannot derail the bull market in gold and silver, they merely slow it down. They have been doing it for the past decade and look what has happened to the price of gold and silver. They win a few battles but are losing the war.
Last Friday my son Andy and I were in Denver. We spent the day with Andy Hoffman. The two Andy’s chased gold balls around the course and I cheered them on. We had dinner with four of Andy’s friends and his wife and it was a lot of fun. You know the high regard that I have for Andy Hoffman by the very fact that I feature him in my daily up to five times a week. I am pushing Andy to write about gold and silver exclusively for Miles Franklin. We shall see.
After a long absence, Backwoods Jack re-appeared and sent me the following email the other day. Last fall I told Backwoods that there would be unrest and riots in the streets in 2011. I sent him an article on the recent protests on Wall Street and he wrote back:
I believe you are mistaken. These protesters are under the age of 30 and are paid $17 per hour along with travel costs city to city.
Many are sponsored by the SCIU union and Soros. This has been verified.
We will miss both of you for the next six months. (Susan and I leave for Aventura in two weeks) You should have more time to read the business section of the Miami Herald to gain first hand insight of America`s comeback as it slowly becomes evident that the Titanic will not sink, but will navigate into safe harbors. I hope Andy Hoffman is not a” wingnut” leading you astray. Stay the course and have faith in the US of A. Backwater Jack
Whether or not paid agents are a part of the protests, there is no question that the protests represent the mood of millions of Americans. Main Street has been abandoned and Wall Street has prospered. The mood in America is to re-distribute wealth from the “haves” to the “have-nots.” As the economy moves toward depression, the anger will grow. And so will the money supply, the Fed’s primary tool to fight deflation, and that is the fuel that will propel gold and silver to unimagined new highs. My answer to Backwater is simple: Andy Hoffman is NOT a “wingnut,” he is a passionate convicted gold bug. It wasn’t always that way. He was 100% into stock in the 90’s and the first five years on this decade, but when he finally came to understand the way that stocks are manipulated (working for 15 years as an analyst on Wall Street) he dumped all of them, including his mining shares (except for Scorpio Gold) and moved his entire portfolio into physical gold and silver. Andy is my kinda guy.
Jack, the Titanic is sinking while you lead the band. Put down your baton and run for a lifeboat! You may just have to buy your way on and they ain’t taking dollars – just gold and silver coins. PS: Jack, I am not interested in the business section of the Miami Herald, but I will read the sports page and check on the weather. Bring Judy and come visit us for a week, after the first of the year. We can continue this debate over drinks on my deck, 28 floors up, overlooking Miami Beach and the Atlantic Ocean.
Check out the graph below – gold is once again flirting with $1,690. We need to cut through $1,690 and then $2,000 and let the bull regain control of the market. Silver is $32.33 and silver needs to get comfortably into the $33 range to reverse the downtrend. This week will be interesting. A lot will be settled and I still expect the metals to finish the year on a strong uptrend.