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What have I learned about the gold industry and the economy in the last 30 years?

I have learned that there are three things you have to come to grips with. The first is to focus on the “Big Picture.”  Forget about short-term, day-to-day moves in the markets.  That is “noise,” and will confuse you.  Second, things always take longer to develop and market moves are larger (both up and down) than you expect.  But the most important thing you need to be aware of is summed up by a statement from my associate, Chris Powell (GATA):  “There are no free markets anymore, just interventions.”

Many very smart people that I know disagree with Powell’s statement.  I however, do not.  After nearly three decades of closely following the precious metals markets as an insider, I have absolutely no doubt that what Chris Powell says is the truth.  Without knowledge that you are playing in a rigged game, you will find it difficult to understand that though the game may be rigged, its outcome is already guaranteed and YOU will be the winner.  All you have to do is hang in there, buy the dips, do not leverage or margin, pay cash for your purchases,  take delivery, buy physical metals not paper derivatives (like the ETFs – GLD and SLV) and do not let the “Cartel” scare you out before the fat lady sings.  Honestly my friends, it is as simple as that.

Our success will be determined by the quality of the people whose advice we follow.

I have spent many hours every working day, since 1983, searching for the best, most accurate information I could source that would help me to better understand my industry, the gold and silver business.  I can list a dozen or so of “the best of the best,” but at the very top of my list sits Richard Russell (“The Dean of the Financial Newsletter Industry”), Jim Sinclair (“Mr. Gold”) and John Williams (Shadowstats).  I have been a fan of both Russell and Sinclair since the mid-1980s.  They earned my respect by being right in their market analysis, year after year.  It was Richard Russell who taught me to focus on “The Big Picture.”  It was Jim Sinclair, who more than anyone, not only called the onset of the current gold bull market in 2001, he assured us that gold would hit $1,650 in 2011.  At the time, gold was languishing near $275 an ounce, so the $1,650 number (nearly twice the previous high of $850, reached in January, 1980) was laughed at by most analysts.

A part of the “Big Picture” that Russell wrote about, was the current bull market in gold.  Russell maintained that the Federal Reserve’s policy would be guided by the principle of “Inflate or die.”  Russell has a deep-seated hatred of the Fed and takes every opportunity he can to point out that it is the Fed that causes inflation (by debasing the currency) and will continue to inflate to keep the economy afloat.  If you look at the facts, that is as true a statement as you can find, relative to the value of the US dollar and the economy.   Since the Fed’s inception, in 1913, the dollar has lost nearly 98% of its purchasing power!

Whereas Sinclair gave us a “hard target” of $1,650 for gold, since revised upward to at least $3,000 and $10,000 is not out of the question, Russell uses a ratio of gold to the Dow for his projections of the gold price.  Gold and the Dow both sold at the same “number,” in 1980.  The Dow was 850 and gold was $850.  The ratio, therefore, was one-to-one.  In the early 1930s, the Dow to gold ratio was two-to-one.  Russell believes that the Dow to gold ratio will once again hit one-to-one or two-to-one.  In 2001, the Dow was over 12,000 and gold was under $300, so the ratio was over 40-to-one.   The ratio currently stands at 8.3-to-1.  The Dow is still in the 12,000 range and has, for all intents and purposes, gone nowhere in a decade while gold has increased 549%.  Russell was correct when he called the onset of the new bull market in gold in 2001 and his prediction that the Dow to gold ratio will eventually reach one-to-one or two-to-one is right on track, having tumbled from 40-to-1 to a bit over 8-to-1 in the last decade.

I have a surprise for you – gold isn’t an investment, gold is money.  Gold doesn’t magically go up or go down in price; it simply takes more or less dollars to buy an ounce of gold.  What is happening, and it should be a concern to all of us, is that the dollar is rapidly losing value, right before our eyes and gold is the “canary in the mine shaft,” the barometer of value of our currency.  It is crystal clear to ME that it is impossible under the current political climate and Federal Reserve stance that the dollar will survive as the world’s reserve currency.  We are facing a very dangerous situation where prices will continue to rise, unabated and we face the real possibility of hyperinflation.  What that means to all of us is that it is IMPOSSIBLE to save, or retain our wealth in dollars.  How sad is that?!

Gold’s performance is not limited to just the US dollar.  Check out the following graph, which shows gold’s performance, since 1999, in six major currencies.

The trend is clear – you would have done better in gold than in any currency for the past decade.  That trend is still in force.  Gold is THE PRE-EMINENT CURRENCY!

Garbage in, Garbage out

Most investors use the BLS (Government) data to form the basis of their investment decisions.  Unfortunately, that data is flawed – plain out wrong!  If you follow the government data, as espoused by the major media, you will conclude that the unemployment rate is around 9% and inflation is under 4%.  Williams says, “Not so!”  Here are two charts that he offers up that state the real unemployment rate (which includes those who have given up looking for work) is actually 22% and inflation (as calculated in 1990) is over 7% and rising.

Since the beginning of the 1980s the Bureau of Labor Statistics has “adjusted” the methodology of its inflation model 24 times.

Along with the hedonic approach, the geometric weighting, and the adjustment for intervention, the surrogate approach is dubious as well. For example, if steak becomes more expensive, statisticians assume that instead people will eat hamburgers. The following chart shows the divergence of the new, official rate of inflation and the former method that was still in use in the 1980s. This also explains why the real income of the households has been stagnating for years.

Williams is certain that we will experience hyperinflation as early as 2012.  He, along with Russell and Sinclair believe that gold is your best protection and implore you to own PHYSICAL gold.