Friday, February 12, 2016
As Central Banks Dim, Gold Brightens
Why Buying Gold Won't Save You from the Zombie Apocalypse ... Despite any advice you might have heard to the contrary, gold bullion is far from a good investment, even if the world is coming to an end. The idea of having a hedge against the end of the world and the collapse of our financial institutions might be alluring. But actually, buying and storing significant amounts of gold bullion won't do you any good in that unlikely event, despite any advice you might have heard to the contrary. – Fool.com
Of course the above excerpt is brought to us by the Motley Fool, one of the bigger mainstream investment web destinations. The description is entirely predictable and could have found a home at Bloomberg, CNN or even CNBC. Gold is always to be portrayed as a Keynesian "barbaric relic."
In fact, we learn later in the description that there are specific assets you should own "in the event of an apocalypse." Gold is not one of them.
The featured expert, John Maxfield, has a thing or two to say about gold.
"Here's how I think about gold, and this is how I would recommend that investors think about gold, or anyone who's thinking about buying gold for any type of investing purposes. As a general rule, investing in gold is a bad idea, and here's why.
"When you invest, your biggest ally is compound returns, because that grows the size of your returns without you doing anything on an annual basis, and pretty soon, your small returns of 1% or 2% a year turn into 50%, 60% a year on your original basis. But in order to tap into compound returns, you've got to be invested into an income-earning asset. And the problem with gold is it doesn't own any assets."
Maxfield does grant that gold is a "hedge against anarchy" but says if society is really collapsing, you probably want to stock up on medicine and antibiotics rather than gold.
Ironically, another anti-gold epicenter – Reuters – provides us with a rebuttal to the Fool. In a post just today entitled, "Central banks and Chinese buyers helping to spur gold demand," Reuters is uncharacteristically upbeat about the yellow metal's prospects going forward.
Buying by central banks as well as Chinese investors seeking protection from a weakening currency helped lift demand for gold in the final quarter of last year and the trend looks set to continue, the World Gold Council said ...
China remained the world's biggest consumer of gold last year, ahead of India, with economic headwinds influencing purchasing, the WGC said in its annual "Gold Demand Trends" report. The WGC's members include the world's leading gold mining companies. Chinese demand for gold coins surged 25 percent in the fourth quarter from a year earlier as consumers sought to protect their wealth after Beijing devalued the yuan currency.
It's not just physical gold. Miners are up and silver is up, too. Oddly enough, it is central banks that have been leading the charge toward gold.
Reuters: "Central banks have been buying gold to diversify their reserves away from the U.S. dollar and their purchases edged up to 588.4 tonnes last year, second only to a record high 625.5 tonnes in 2013."
Turmoil in the markets, falling oil prices and a potential global recession have all contributed to a positive precious metals outlook, according to WGC.
We agree about gold – we can see and sense the resurgence of the price against the dollar – but we disagree that the world is going back into a recession.
In fact, we think the world is in a kind of greater depression and that the golden bull goes all the way back to the early 2000s after the dotcom bust.
But let's go back even farther.
Central bank business cycles are manufactured ones and if you really want to make sense of where we are today, you have to start after World War II when the global economy was "reset."
The paraphernalia of the modern world was created after World War II, including the IMF, the World Bank and the United Nations. The Bank for International Settlements was rejiggered as well.
The later 1940s were a time of gathering energy and then the '50s and the '60s were explosively "prosperous" in the US and even the West. There were many books written about the "miracle" of the US economy and the superior model of US capitalism itself.
We've called this period in the US – and the West – "dreamtime."
That's because a good deal of the prosperity was due to money printing and other kinds of financial manipulation. In 1971, when France attempted to take delivery of the gold it was owed, the US promptly went off the gold standard and Nixon created the petrodollar.
The 1970s reverberated with the monetary sins of the previous decade. Keynesians discovered "stagflation," which wasn't supposed to exist. And as price inflation rose, so did middle-class anxiety.
Enter Paul Volcker, David Rockefeller's right-hand man. Early in the 1980s, Volcker did what most thought was impossible. He raised rates near 20 percent and froze the dollar in its tracks. Banks foundered and another Great Depression loomed. But instead, the economy recovered.
Post-Volcker, the next great Paper Bull arose. Wall Street shone and securitization boomed. For another 20 years, through 2000, the Paper Bull roared. But that was the end of it.
The dotcom crash definitively crumpled the Paper Bull. Gold began an unstoppable rise that culminated at the end of the decade near US$2,000.
Of course, most believed we were in "another" recession by then, post-2008. But really it was just a continuation of what was begun in 2001.
Everything else is just a manipulation.
Bernanke screwed rates down to a point where he created a faux recovery in the mid-2000s. But it didn't last because it couldn't.
The great gold plunge was likely a manipulated one, further confusing people's perceptions of what was really going on.
Today, people speak confusedly about a "recession" and the "recovery" of gold.
In truth, the "recession" began in the early-2000s and is more of a "greater depression."
The "recovery" of gold well may be simply the reassertion of reality.
Gold will return to where it should be against the dollar – at US$2,000 or more. Some say the dollar should be trading against gold at US$5,000.
From our perspective, this makes what's going on now a good deal clearer – along with the inevitable results.
There have been two great Paper Bull runs in the 20th century. And now in the 21st, the Golden Bull dominates.
In fact, this is the reason for so much unease in the financial community. The Golden Bull is rampant and they know it.
The Golden Bull probably will not be turned aside again. Make your plans accordingly.