Gold Bug Bashing, 1976 Edition

The Golden Cycle

The New York Times had the definitive take on the vicious sell off in gold. To summarize one of their articles:

Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.

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The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold‘s allure.

Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.

This analysis provides a good representation of the current conventional wisdom. The only twist here is that the article from which this summary is derived appeared in the August 29, 1976 edition of The New York Times. At that time gold was preparing to embark on an historic rally that would push it up more than 700% a little over three years later. Is it possible that the history is about to repeat itself?

At the time The Times article was written gold had fallen to $103 per ounce, a decline of nearly 50% from the roughly $200 it had sold for in the closing days of 1974. The $200 price had capped a furious three-year rally that began in August of 1971 when President Nixon “temporarily” closed the gold window and allowed gold to float freely. Prior to that decision gold had been fixed at $35 per ounce for nearly two generations. That initial three year 450% rally had validated the forecasts of the “gold bugs” who had predicted a rapid rise in gold prices should the dollar’s link to gold be severed. The accuracy of these formerly marginalized analysts proved to be a bitter pill for the mainstream voices in Washington and Wall Street who, for reasons of power, politics and profit, were anxious to confine the “barbarous relic” to the dustbin of history. Incredulous as it may seem now, with gold still priced at $35 per ounce, official forecasts of both the Secretary of the Treasury and the Chairman of the Federal Reserve were that demonetizing gold would undermine its value, and that its price would actually fall as a result.

Of course government experts could not have been more wrong. Once uncoupled from the dollar, gold‘s initial ascent in the early 1970′s was fueled by the highest inflation in generations and the deteriorating health of the U.S. economy that had been ravaged by the “guns and butter” policies of the 1960′s. But the American economy stabilized during the mid-years of the 1970′s and both inflation and unemployment fell. When gold reversed course in 1975 the voices of traditional power elite could not contain their glee. When the gold price approached $100 per ounce, a nearly 50% decline, the obituaries came fast and furious. Everyone assumed that the gold mania would never return.

Although the writer of The Times piece did not yet know it, the bottom for gold had been established four days before his article was published. Few realized at the time that the real economic pain of the 1970′s had (to paraphrase The Carpenters 1970′s hit) “Only Just Begun”. When inflation and recession came back with a vengeance in the late 1970′s, gold took off (to quote another 1970′s gem), like a skyrocket in flight. By January 1980, gold topped out at $850 an ounce. The second leg of the rally proved to be bigger than the first.

The parallel between the 1970s and the current period are even more striking when you look closely at the numbers. For example, from 1971 to 1974 gold prices rose by 458% from $35 to $195.25, which was then followed by a two-year correction of nearly 50%. This reduced total gains to just under 200%. The current bull market that began back in 2000 took a bit longer to evolve, but the percentage gains are very similar. (We should allow for a more compressed time frame in the 1970s because of the sudden untethering of gold after decades of restraint.) From its 1999 low to its 2011 peak, gold rose by about 650% from $253 to $1895 per ounce, followed by a two year correction of approximately 37%, down to around $1190 per ounce. The pullback has reduced the total rally to about 370%. The mainstream is saying now, as they did then, that the pullback has invalidated fears that rising U. S. budget deficits, overly accommodative monetary policy, and a weakening economy will combine to bring down the dollar and ignite inflation. But 1976 was not the end of the game. In all likelihood, 2013 will not be either.

The biggest difference between then and now is that until 1975 ordinary Americans were barred by law from buying and owning gold. About the only route available to participate in the earlier stage of the precious metal rally was by hording silver dimes, quarters and half dollars minted prior to 1965. My father indulged in this process himself by sifting through his change, the cash registers of any merchant who would allow him (exchanging new non-silver coins and bills for silver), and by sifting out silver coins from rolls he bought from banks. It was a time-consuming process, and most of his friends and family members thought he was crazy. After all, he had $10,000 worth of pocket change earning no interest.But the $10,000 face value worth of those coins he collected had a melt value of over $350,000 when silver hit its peak.

By the mid 1970′s none of the problems that initially led to the recession in the early years of the decade had been solved. Contrary to the claims of the “experts” things got much worse in the years ahead. It took the much deeper recession of the late 1970′s and early 1980′s, which at the time was the worst economic down-turn since the great Depression, to finally purge the economy of all the excesses. The lower marginal tax rates and cuts in regulation implemented by President Reagan and tight money under Volcker helped get the economy back on track and create investment opportunities that drew money away from gold. As a result gold fell hard during the early 1980′s. But even after the declines, gold maintained levels for the next 20 years that were three to four times as high as the 1976 lows.

Although the economy improved in the 1980′s, the cure was not complete. Government spending, budget and trade deficits continued to take a heavy toll. The U.S. was transformed from the world’s largest creditor to its largest debtor. When the time came to face the music in 2001, the Fed kept the party going by opening the monetary spigots. Then when decades of monetary excess finally came to a head in 2008, the Fed open up its monetary spigots even wider, flooding the economy with even more cheap money.

Unfortunately just like 1976, a true economic recovery is not just around the corner. More likely we are in the eye of an economic storm that will blow much harder than the stagflation winds of the Jimmy Carter years. And once again the establishment is using the decline it the price of gold to validate its misguided policies and discredit its critics. But none of the problems that led me and other modern day gold bugs to buy gold ten years ago have been solved. In fact, monetary and fiscal policies have actually made them much worse. The sad truth is that as bad as things were back in 1976, they are much worse now. Whether as a nation we will be able to rise to the occasion, and actually finish the job that Ronald Reagan and Paul Volcker started remains to be seen. But I am confident that the price of gold will rise much higher, and that its final ascent will be that much more spectacular the longer we continue on our current policy path. Don’t believe the mainstream. Just as before, they will likely be wrong again.

Source: http://www.zerohedge.com/news/2013-07-01/gold-bug-bashing-1976-edition

Gold returns, bonds die, plus other investing themes to watch for

Everything is changing, so what sort of themes should you look for in the balance of the year? Read on to find out.

The year is half over and investors don’t have much to show for it: A TSX loss of nearly 4%, the Canadian market is underperforming the U.S. and just about everything else, and there’s a market backdrop where all the rules for Canadian investors seemed to have changed overnight.

What’s new? Plenty and it’s not good.

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Golds, which every Canadian has loved for 12 years, are dying. Every day, it seems, the sector is taken down another notch, even as they seem ‘cheap.’ The problem: massive fund redemptions and no buyers in sight.

REITs, which provided stable income and gains to investors for a decade, are now treated like lepers.

And telcos, one of the best places historically for both income and growth, are now dropping like a junior miner’s shares thanks to seemingly random CRTC rules on competition.

Everything is changing, so what sort of themes should you look for in the balance of the year? We’ve outlined five to consider, but keep in mind we are in a rapidly changing landscape. Flexibility might be an investor’s key to surviving what lies ahead.

Interest rates will keep rising, but not as much as you think

The devastation in the REIT and utility sector this past month was brought about by higher interest rates, and, more importantly, the fear of more rate increases to come. Suddenly, fixed-income payouts don’t seem so attractive.

But, seriously, is the economy really fixed? Are we surging so much that interest rates need to move way higher to slow things down? Hardly.

Yes, there is economic improvement, but we are not out of the woods yet. Rates are unlikely to head to 6% from their 2% levels now. Yields of 7% on REITs such as Artis (AX.UN/TSX) will start to look attractive again at some point.

Bonds are… dead

Despite the first theme, it might indeed be over now for the bond market. After years of bubble talk, the bond market may not have popped, but it surely has sprung a leak.

A bond coupon of 2% that is taxed at the highest rate, and then subtract 2% for inflation, means you lose money on your so-called safe investment. Compare that with the 14% market return in the U.S. and you can see why investors are reconsidering — and selling — their bonds.

Dividend growth is back

If the economy is going to grow again, investors will want to participate in that growth. Being the nervous nellies that investors are, however, they are still going to want dividends. Any company paying dividends that also has the ability to grow its dividend is going to attract interest.

For example, Alaris Royalty Corp. (AD/TSX) has increased its dividend not once, but twice this year alone. Its stock is up 30% on the year and investors ponied up $92-million for new Alaris shares this week.

Gold shares will bounce

Seriously. We don’t know when it will happen, but many gold companies are trading near their cash values or far below the replacement value of their still-profitable mines.

We’ve talked to many investors this month who are physically sick over the sector’s plunge. Generally, this means the bottom might be close. (Warning: It could still get very ugly before it gets better.)

We think the best buying opportunity will be in the late fall, when year-end tax-loss selling and portfolio position causes even more sector selling.

Source: http://business.financialpost.com/2013/06/28/gold-returns-bonds-die-plus-other-investing-themes-to-watch-for/

The World Has Never Seen Anything Like This In History

On the heels of incredibly turbulent trading in key global markets, today 40-year veteran, Robert Fitzwilson, put together another extraordinary piece. Fitzwilson, who is founder of The Portola Group, warned that the world is about to see an event that will “shock the financial system,” and set the stage for a “New Financial World Order.” Below is Fitzwilson’s exclusive piece for KWN.

Fitzwilson: “1989 saw the release of a movie called “Field of Dreams” starring Kevin Costner. The film was nominated for three Academy Awards including Best Picture. In the movie, Kevin Costner is a farmer growing corn. While taking a stroll through his cornfield, he hears a voice that says “If you build it, he will come”. The “it” was a baseball diamond. While the movie revolves around baseball, the theme was really about regrets for events in the past and not following dreams….

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“Policies followed by the Federal Reserve resemble “Field of Dreams”. Crafted from a lifetime of studying the failures of the 1930s, the two most recent office holders of the Chairman of the Federal Reserve and their colleagues have been building their own financial field of dreams driven by the whispers of history and the regrets of the men who preceded them during the 1930s. The most recent version has been called the wealth effect.

The idea behind the wealth effect is that when people feel wealthier, they are inclined to spend more freely. If spread across broad populations, that will create demand for goods and services resulting in strong economic growth. Two of those important traditional forms of wealth are stocks and real estate.

The trouble with the plan is that money can be created, but controlling where it winds up is much more difficult. What we now know is that the money largely winds up blowing bubbles in the stock, real estate and art markets as well as being channeled to the proprietary trading desks of the biggest global banking institutions. A $119 million purchase of a house in Woodside, California, and a $95 million penthouse purchase in Manhattan are but just two examples. Banks reporting zero trading losses on any day in the first quarter of this calendar year is another.

The money was created, but little of it reached the people from whom the wealth effect was expected. Temporary wealth was created for holders of fixed income due to the disastrous policy of driving down interest rates, but retirees saw their income confiscated. The income lost would probably have stimulated growth more than the increase in prices given to holders of fixed income. Real estate did see a recovery in some parts of the U.S., but it was driven by financial firms buying huge blocks of properties for repackaging and securitizing.

So, the financial “Field of Dreams” created by our central banks has obviously failed. There were some positive effects, but those are now being seen as temporary. The desperate actions taken to pump up stock prices and to smash historical safe havens, such as gold and silver, signaled that the end was near. It is blatantly apparent to rational observers of markets that the policies of the Federal Reserve are broken. You can even include the Federal Reserve in that group in my opinion.

Last week may have marked the beginning of a serious reversal of any gains realized during the last four years. It was reported that the bond market had the worst week in 50 years, with the 10-Year Treasury rate at 2.50%. Having lived through the 1970s, when Treasury rates were in double digits, if we think this past week was bad, prepare to be really shocked if rates continue upward in any manner which closely resembles that period (of the 1970s). A secular rise in rates theoretically could be described as manageable, but a rapid and dramatic rise in rates will shock the financial system.

Since the first of the year, stocks were the envy of investors. The popular indexes basically went straight up with the help of official policy and company stock repurchases. Up until two weeks ago, all of the gains for the year typically came on Tuesdays. That pattern abruptly halted this past week. After Chairman Bernanke’s press conference on Wednesday, the last two days of the week showed severe damage to the sectors that had led the equity markets higher this year. The combination of rising interest rates and a key breakdown of leadership is a warning that steep declines in stocks and bonds could lie ahead.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/25_The_World_Has_Never_Seen_Anything_Like_This_In_History.html