In the late 1960s, the company where I worked started to “index” wage hikes to inflation. It was a radical new concept at the time. In the early 1970s I got my first dose of rapidly rising interest rates. I leased my car in those days and was horrified at the increased cost, due to interest rate hikes. Then came price and wage controls. Borrowing money to wage the Vietnam War was taking its toll. So why don’t we see the effects of financing one war after another for over a decade? It’s because the Fed is buying up a large portion of the borrowing – they are buying the bonds issued to wage the wars. I don’t recall that being the case, or certainly not to this degree, during the Johnson and Carter years.
One thing that came out of that era was the understanding that trying to finance the Vietnam War and Johnson’s Great Society lead to massive inflation – and enormous gains in gold and silver.
Here we are, 45 years later, and we are doing exactly the same thing. Instead of a single war, we now move from country to country in an endless “war against terrorism.” Instead of Johnson’s Great Society, we have Obamacare.
Do you really think that the results will be any different this time? What have you learned from history? Gold increased 24 times during the 1970s and silver gained even more. So far in this war/social-spending era, gold is only up four times and silver is up four to five fold.
The National Debt was in the $350 billion range in the late 1960s. It didn’t reach $1 trillion until the fall of 1981. By the fall of 2008 the National Debt had increased to $9.6 trillion. It currently is $16.8 trillion and growing rapidly. And that doesn’t account for all the off-budget debt, including Social Security, Medicare and Medicaid.
When Nixon took us off of the gold standard, 42 years ago, the National Debt was just under $400 billion. We will pay 75% of that amount on interest on the debt this year. The debt has increased 42-fold since we abandoned the gold standard in 1971 – and gold is up 32-fold. It looks like gold is anything but overvalued to me.
I would say we are quite early in this cycle, wouldn’t you?
The Disconnect Between Paper Gold and Physical Gold
Tuesday’s headline reads, “Gold solidly lower as risk aversion receding.” This is the usual MSM cover story used to describe the for-profit trading by the hedge funds and bullion banks. Gold is down $22.50 (1.62%) and silver is down $0.77 (3.3%) but the dollar is barely up at all (only 0.02). If investors are leaving gold, then it certainly doesn’t show up in the dollar.
The hardest thing for most of our readers to understand is the disconnect between the short-term, day-to-day paper trading and the long-term, big picture buy and hold physicals mentality. WE view gold as a long-term financial asset and expect it to move logically based on major trends such as QE, unending government borrowing and spending, negative real interest rates and rising interest rates. All of these events are building up toward a perfect storm that will diminish the value of the dollar and send gold (and silver) to all-time new highs. But the traders view gold as a short-term profit vehicle and use every new headline and event as a catalyst to buy and sell, using margin to leverage the small moves into big profits.
The main reason I have followed Richard Russell (DowTheoryLetters.com) for the last three decades is because he understands the primary trends and the big picture. I don’t use his information for daily trading. I use it to gain a better understanding of where we are headed. As you can see, my views parallel his views – and both views are not based on daily price moves. Jim Sinclair is also in this camp and refers to the daily up and down moves as nothing more than “noise.”
Last week Richard Russell wrote:
September 6, 2013
The fundamentals in the US and the world are enough to turn your hair gray. Debt worldwide is out of control. Total debt to GDP in most countries in the world is at a mind-blowing 300-400%. It’s obvious that this debt will never be repaid. As the US continues to grow, it is forced to borrow more money. The Fed now owns $2.2 trillion in federal debt. This year, in 2013, the Fed has purchased more debt than the Treasury has issued. I could go on and on about the horrors of the debt situation. But remember, the market is not stupid. It contains all the information known to everybody. This is the reason that I follow the markets so closely. If we are heading into a brick wall, the market will know it and reflect it.
…Ultimately the nation is caught in a vicious vice in which it must borrow more and more to sustain itself. The question now is not how to generate income but where to find the safe zone. When looking for safety investors normally make a dash for cash. But with the Fed creating cash wholesale, the future of the dollar is in question.
…As the purchasing power of the dollar declines, gold comes to the fore. I see the action of gold as representing an ever-expanding base. JP Morgan currently has a large position in gold. My advice — follow the big money. And there is no bigger money than JP Morgan.
September 9, 2013
A nation is as good as its currency, and a currency is as strong as a given nation. Below we see the US Dollar. I’ve applied the same rules to the dollar as I’ve applied to the Dow … If the Dollar should fall apart, I would consider such an act as bearish as a crashing Dow.
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Frankly, the whole Syria thing (short of a World War or shut-down of the Mid East oil supply) should not much affect the price of gold either up or down. None of the important reasons to own precious metals have changed over the last few days. This must make the buyers of physicals in China and India very happy. In less than two weeks, the price of gold has fallen some $60 an ounce, as gold heads into their Holiday Season, and their peak gold buying season. I expect that a lot of gold will be shipped to the Far East now, even more than usual based on the new discounted price.
The same line of thinking appeared at Zero Hedge. They wrote:
The last 2 days market reaction has been one of war-premium reversion for all asset classes. Oil has tumbled back this morning to around $106.50 (its pre-Kerry level) also in line with the USD, which has fallen back to unchanged from that initial war mongery. European stocks remain the big winner – up 3.5% since Kerry started but today’s rise in stocks lifts the S&P to +1.5% from 6/27 (so no war and we don’t care about Taper). It seems, however, that the safe-havens are having the war premium sucked out and reality of a Sep. Taper pricing back in. 10Y Treasury yields are back above 2.96% (with 30Y bonds -2% in price from Kerry) and Gold and Silver are tumbling (-3.5% and 5.9% respectively from Kerry’s initial ravings). Now, should we worry about crossing 3.00% again (and the surging cost of capital that will crimp consumer spending and corporate buyback abilities)? Or does that not matter now that war is off the table for 10 minutes?
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