“Make terror your friend,” says our old friend Doug Casey. By that, Doug means that you should befriend the things likely to go up in price in a terror-worried world. Gold, for example.
But the quip has a deeper meaning, too.
There is more than one kind of strife, wrote Hesiod, around 700 B.C. There are two, he goes on to explain. One is destructive. Wars, cruelty: “her no man loves,” says Hesiod. But the other form of strife stirs man to action. “Even a rich man hastens to plough and plant and put his house in order…this strife is wholesome for men.” The trick is to make strife your friend, to let it stir the brain and body to new efforts and better insights.
We don’t have anything particular in mind. But we came across Hesiod in a new book just published by…us! The Essential Classics from Les Belles Lettres contains the critical works of the Classical period that you always meant to read, but never got around to doing so. It is available from Amazon.com.
Meanwhile, another old friend, Jim Rogers, was in town last night. We caught up with him in a pub in Knightsbridge.
“Well, Jim, what do you think of the world economy?” we asked.
“I don’t know, but I’m making sure my little girl learns Chinese,” was his reply.
Jim is three-times famous for turning strife to his advantage. First, for having been a partner of George Soros in one of the earliest and most successful hedge funds: The Quantum fund. He is famous, too, for taking his money off the table. At 37 years old, he retired and took a trip around the world on a motorcycle, writing a book about it called “Investment Biker.” Most recently, he is famous for having been right about commodities. “The next big thing is things,” he began saying in 1999. That was when things were the last thing anyone wanted. That was at the tail end of the dot.com boom, when things were taken for granted and strife was thought to have disappeared.
But that New Era ended and soon people wanted things again. The Chinese were making more things than ever before. But, they needed things to make them with. And all over Asia, people were beginning to have enough money to buy things. Even in the West, people liked things so much they mortgaged their houses to buy them.
Prices of the things Asians make have remained mostly steady, because they are able to make them in greater volume and with lower labor costs. But the prices of the things that people use to make things have gone way up. When no one cared about oil, gas, cotton, or copper, nobody bothered to dig new mines, drill new wells, or plant new fields. Now, with demand much higher, it takes a while for production to catch up. This is the classic model for a boom in prices.
“Commodities are notoriously, unbelievably, treacherously cyclical,” we recall another old friend, Rick Rule, telling us recently. “They are much more cyclical than anything else in the marketplace…and much more cyclical than the average investor realizes. He sees a big increase in the price of copper and he assumes the time has come to buy a copper mining stock. What he doesn’t realize is that the time to buy the company was when the price of copper was low, not when it is high. The time to buy the miners is when they aren’t making money, not when they are. By the time the general public comes into the commodity market, you can be sure that the cycle is ready to turn down.”
We were on our third glass of Shiraz in the Tattersall Pub (a cozy little establishment…with plenty of trash on the floor) before we got to the critical question: Where are we in the cycle?
Oil has already risen from $10 to $72. Silver has tripled. In 2006, alone, copper practically doubled. But then came what Jim calls a “consolidation.” Others might call it a collapse. Silver fell 20%. Gold has lost $100. Copper is down nearly 20%, too.
Does this mean it is over? Is it too late to buy silver or other commodities? What about gold?
As for gold, we have our own thoughts, which we pass along, below. For the rest of the commodities, we’ll let Jim do the talking:
“Looking at the previous bull market in commodities, the shortest lasted 15 years and the longest lasted 23 years. This one just got started in 1999. We’re only about a third of the way.
“This isn’t exactly like a boom in dot.com stocks. You can create a dot.com company in about 20 minutes. But it takes a long time to get a copper mine up and running. If people think the price of copper is going to go down, they must think that the supply is going to go up. I’d like to know where all this new copper is going to come from. Where are the mines? Where is the ore? Where is the oil? Nobody can give me an answer. So, what’s going to drive down prices?
“And when you look at today’s prices adjusted for inflation, these things are still cheap. Silver is 75% below its all-time high. And after the last two weeks, it’s 20% cheaper still.
“But if you really want to make some money, you’ll invest in food. Agricultural commodities are cheaper than the minerals. Sugar is 80% below it all-time high. Corn is 60% below its all-time high — so is cotton. In the last five years, the world has consumed more food than it has produced. As far as I know, that has never happened before in human history. And the amount of land used to grow these things — wheat, for instance — has been declining for 30 years. If people think these prices are now on the way down, I want to know where they think they are going to get more food.
“No, this bull market has a long way to go. And somewhere along the way we’re going to have a drought — like we did in the 1960s and 1970s — and then you’re going to see some of these prices really take off. It happened in the 1960s and ’70s, when the price of sugar went up 47 times in an eight-year period.”
u2022 Back in the United States, “builders crumble under pressure,” says a headline at TheStreet.com. New orders fell 40% for Standard Pacific. Ryland, Toll, and Pulte have all recently cut earnings projections. The building stocks on the Philadelphia housing index are all coming down.
Why? Because the housing bubble is over. Mortgage activity is at a four-year low. Nationwide, foreclosures rose 75% during the first quarter, over a year ago.
Houses are still selling, but more slowly. Prices are holding up…we are told.
But for how long? If you intend to cash in on the biggest housing boom in American history, you had probably better do it soon.
u2022 Gold dropped down to $634 yesterday.
“I tell people that instead of trying to turn base metal into gold, they’d be better off turning gold into base metal,” says Jim Rogers. “Over the last 30 years, lead has made more money for investors than gold.”
That may be. But we have never been interested in lead coins. We don’t recall anyone using the expression: “as good as lead.” Or saying of someone that she “has a heart of lead.” Nor does the new U.S. Treasury secretary hail from a firm known as Leadman Sachs.
Lead is certainly a useful thing. You can use it to weigh down corpses before you toss them in the river. Only a fool would do that with gold. Lead was once useful for writing; in ancient Rome, scribes used a stylus made of lead for their calculations. Gold is useless for writing; it leaves no mark on the paper. You can add lead to gasoline to stop engine knock, and knock out bicyclists. Add gold to your gasoline and who knows what you would get?
But gold’s lack of usefulness is its great merit. It is never used up in idle doodles or lethal fumes. It just sits there looking pretty — through boom and bust. Not so, lead. In a boom, lead sprouts wings. It soars in price because people are so eager to use it in the hubbub of their industries. In a bust, the wings fall off…and the price drops. Who needs a lead stylus when there are no longer any profits to calculate?
Gold is so useless; it is practically indispensable. It is still there after lead has crashed to the ground, looking prettier than ever. If Jim Rogers is right, a commodity boom will lift prices on almost all commodities. Gold will go up, too, maybe as much as lead — maybe less, maybe more. But thoughts of Armageddon dog us here at The Daily Reckoning. Any day now, we expect China to blow up. Or the Dow to crash. Or the dollar to collapse. The whole world economy is a public spectacle, too, begun on a fraud (that central planning by central banks can create prosperity), and now deep into the farce stage (in which bankrupt Chinese companies expand production in order to sell products to insolvent consumers on the other side of the world). At some point, we look for trouble. And when the ship starts going down, we doubt investors will reach for life preservers of lead. Gold, on the other hand, should be remarkably buoyant.
And since we don’t know what to expect — either the inflation of a commodity boom or the deflation of Armageddon — we still wait for the dip…and buy gold.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.