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Gold Reality vs. Media Myth

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I live for the day that investors blow up their television in unison having become disgusted with the idiocies uttered in the name of journalism. I will also probably die with that dream unfulfilled.

Be that as it may, I'm on a rant today about the completely false premise that Iraqi war jitters are the cause of gold's rise in recent months. Makes me want to revert back to the days when I'd "mute" the volume on CNBC, as I watched parades of analysts talk about compelling values, great buys, market bottoms, and last chances to buy stocks while the train was leaving the station - for the last three years, and so far, this year too.

Come to think of it, the train never left the station and thankfully, I still have a "mute" button! Honestly, the War with Iraq has been the explanation de jour for the market's movements either up or down, and I say that for both equities AND gold. There are no shortage of talking heads noting that, "Fears of war sent the market tumbling today", or "Iraq is deciding whether it will dismantle its missiles this weekend, which helped the markets close sharply up today", or some other such flimsy explanation that begins with, "In the war on terrorism today, . . . "

Talking Heads, please forgive me for this public service announcement, however, this is a bear market! Equity values decline in general. Bear market rallies always suck in bulls who still want to believe in the magic of Free Money From Greenspan. Undesirable outcomes, often unforeseen, happen. It is the nature of the bear.

It is also the nature of humans everywhere to find, right or wrong, an answer to every question we have. Since we are collectively asking, "Why did the market move today?", those "in the know" (who really know no more than any of us in the trenches) are searching for a sound bite answer rather than devoting a segment to education. Today, we dispense with the sound bites, and as Jethro Bodine of Beverly Hillbilly's fame would say, "Let's commence to educatin'!"

Please note that I am not infallible, nor am I a guru. The trouble is that gurus are wrong eventually, and I will be wrong on many occasions, as I have been in the past. I hope I never attain the status of guru. For I would know then that my reputation and integrity will soon be destroyed. And that is too valuable to risk. But back to Professor Bodine. . .

Myth

Gold is also presumed to be rising and falling on investors' moods regarding an Iraqi war and the War on Terror. When uncertainty is thought to eventually lead to conflict, common wisdom is that 'fraidy cats and the delusionally paranoid will buy gold, and that that must be the reason we've seen the price rise in recent months. Similarly, common wisdom also states that when war jitters ease, the paranoid leave their mountain huts and revert back to a diet of speculative stocks and 110% equity financing to assimilate with society. Gold is for kooks.

What we often hear in the press are references to "barbarous relic", thing of the past, gold fever, currency of the wacked-out hermits, etc. The presumption is that when the war is won quickly and easily, gold will be recognized as a sideshow, uncertainty will end, and gold will sell off. No longer in need of protection from uncertainty, we are cautioned now about the probable sell-off once the nerves of a nation on the brink are calmed, and terrorists are brought to justice.

In short, the thinking is that gold prices are in an Iraqi war/War on Terror bull market, and the bull will die when the war is over. I disagree with both premises. In fact, I would postulate, as have many smarter than me, that gold is in the early stages of a secular bull market and that the prices will continue to rise.

Reality

How can I say that when, "All the experts are saying otherwise"? The question contains part of the answer. Experts are often wrong. See "guru" above. But contrarianism is a small, empirical phenomenon compared to the mechanical reasons supporting my theory. Let me first start with the timetable.

$GOLD weekly (Stockcharts.com)

Notice that gold bottomed in early 2001 - eight months before the 9/11 attack and certainly before war with Iraq became a blip on America's and the world's collective psyche. Clearly gold's rise has little to do with war jitters in Iraq. Gold was rising before most knew how to spell Iraq. That alone should tell us that the mainstream media has it all wrong. But for the skeptics, let us continue.

Second - and all else stems from this - The Fed, who can print money at "virtually zero cost" per Fed Governor Bernanke, has turned into a giant printing press, both paper and electronic, which is flooding the market with the equivalent of Monopoly money. The Dollar (an every other currency in the world, to be fair) is only valuable because the specific country's central bankers say it is valuable. The only currency that can ever hold its value through the ages is gold. It will not take long before foreigners and those at home realize that a decrease in scarcity of currency, aka increase in supply, is a recipe for inflation and they demand gold in place of a currency with inflated supply. "Inflate or die", has to be the slogan of the century tacitly implied by the Fed. Deflation is worse.

Third (we can hit these in nearly bullet point form from here on out, as they flow from #2 above), there is less supply of gold produced every year than is demanded. Demand outstrips supply.

Fourth, the U.S. trade deficit is explosive, which puts tremendous pressure on the Dollar to devalue. We have counted on an infusion of over $2 bln per day under the notion of keeping the Dollar strong. Just how long will foreigners want to possess Dollars as they devalue? Europe's Euro value has already risen 8% against the Dollar this year.

Fifth, this brings up the idea of deflating currencies. With other nations also teetering on recession, the only way to keep their citizens employed is to make their goods cheaper to produce than the next country's. That is accomplished by devaluation in order to undercut your neighboring country's ability to sell cheaper products compared to yours.

Remember Felix Zulauf from the January 30th Options 101? "Other central banks will at some point then try to support the dollar, because if it declines too much, it hurts their exports. They will be forced to adopt the same policy as the U.S. central bank, and you will have the whole world creating more fiat currencies. That's when gold will really run."

Zulauf goes on: "How far? In 2000, the ratio of an ounce of gold compared to the Dow stocks was 45 to 1. It took 45 ounces of gold to buy the Dow. Now, the ratio is down to 25 to 1."

Sixth, which reminds me, China's Yuan is tied to the Dollar, which makes Chinese goods cheaper to produce as the Dollar declines in value. Few will find it attractive to purchase goods other than those from China. I might add here too that China bought over 1 mln ounces of gold in December. Are they doing this for fun? Not on your life. They will buy on the sly. Remember, China set up a gold exchange less than 18 months ago and is encouraging its citizens to buy it.

As a point of historical fact, countries with gold as the standard of currency have become great powers in the world. Those who abandon it have eventually faded from glory. Not that I enjoy the thought, but I'm thinking that our granddaughters may be doing eau paire work in China 30-50 years from now. That ought to get some hate mail!

Seventh, security spending will likely produce huge deficits at the Federal level.

Last, a mortgage debt bubble promises to slow the U. S. economy as homeowners realize what they have done (borrow up to their eyeballs) and begin to repay loans, thus foregoing the ravenous consumer spending that has fueled the economy for years.

My point is that all this goes un-noticed or at least unreported in the dominant financial media. Gold's ascent isn't just about a war with Iraq, contrary to popular belief. It's an investor's reckoning that the Fed printing press will render the Dollar worth much less than it is now, and/or that China will export deflation of goods to every producing nation on Earth. Either way, gold wins - with or without war anywhere.

Frankly, this was not a pleasant piece to write today. But all of the above reminded me why I felt compelled to get interested preserving wealth in the first place. And the Fed is certainly not there to HELP us preserve it.

That said, I increased my exposure to gold today through the purchase of more CEF, as all the technical and fundamental information available suggests it's a good trade while gold enjoys the early stages of a bull market. I am pleased that few talking heads believe that, which tells me gold has yet to be adopted as a mainstream investment. I'll know it's time to sell when CNBC is high-fiving the headiness of the whole thing and gold becomes the social chatter at cocktail parties in much the same fashion as Dow 11,000 in February, 2000 was.

Between now and the time gold brings grins to the majority of everyday investors, I will sleep well knowing my financial ark is watertight and survivable if the economic storm worsens, and others too begin to realize the importance of a financial ark.

Until next time, make a great weekend for yourselves!

Buzz



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