by
Bill Bonner
Gold closed at $999 on Tuesday. Then, yesterday, it closed down $2. There’s a time to buy gold; and there’s a time to sell it. Which time is it? The question rose with the gold price itself. It needs an answer. The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars), in 1980, the price fell to the $1,000 level (in today’s money) in 1983. We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years. Some people draw the wrong lesson from this experience – that gold is always a bad place for your money. Yesterday’s Financial Times: “In spite of low interest rates, that make owning gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns.” But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic. What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled. Was it smart to buy stocks or bricks and mortar during the ’70s? Not at all. Stocks bounced around, but they were no higher at the end of the decade than they were at its beginning. Meanwhile, high inflation rates took a big toll on real values. Stock market investors lost 75% of their money – maybe more. As for those who bought bricks and mortar, they lost too – but it’s hard to say how much. And meanwhile, gold went from $41 an ounce to over $800. Which would you prefer? As you can see, dear reader, timing is everything. There are times to be long gold. And there are times not to be. For thousands of years gold has been the money of last resort. It is the money you can trust. They can’t make more of it. They can’t counterfeit it. They can’t put extra zeros on it and pretend it is worth more. But it is most useful when other money goes bad. Inflation rates in the United States during the ’70s went over 10%. Clearly, gold was a better thing to own to protect your wealth than dollars. You could have bought an ounce of it (outside the United States…it was still illegal for private citizens to hold gold in America) for, say, $45 in the early ’70s. By 1982, you could have used that single ounce of gold to buy up the entire list of Dow stocks. Gold and the Dow traded at a ratio of only one-to-one that year. Then, if you’d held onto those stocks, you could have sold them in 2006 for $14,000. Not bad, huh? Two transactions. Forty-five bucks to $14,000. Invest $100,000 and you would have ended up with $30 million. But let’s get back to where we are now. Still in a bull market in gold…or at the end of one? Are we idiots for holding it now…or idiots for not buying more? As you know, we’ve begun a new project: the Bonner & Partners Family Office. It’s our own family office that we’ve opened up to a few non-family members. But just as soon as the non-family members came in the door they started asking questions. Specifically, they wondered why…after all the preaching we’ve done about buying gold…we don’t have more of it in the family portfolio. One our new partners wrote a very shrewd comment. We’ll pass along a little of what he had to say, but first, some context. The feds are desperate to restart the economy. The only way they can imagine is by increasing the money supply…and inducing people to spend money. They want inflation, no doubt about it. And they’ll get it – no doubt about that, either. The question is when. Our view is that they’ll get more than they expect, but later than they want it. We’re looking for another crack in stocks…followed by more fear and loathing in the economy. This will have two major effects. First, investors will turn to the familiar dollar for safety. Second, everyone will hoard money…speculation will cease…and prices will fall – including the price of gold. Our first writer disagrees: “One mistake [your editor] might be making is his belief that we are already in another Great Depression. We probably will be in a depression or some other form of economic calamity, but not yet. Every Depression (or monetary contraction) in history has followed a similar pattern – expansionary monetary policy followed by a contraction of the money supply… While we have experienced a huge monetary expansion/easy money in the ’90s, we have not yet experienced a real monetary contraction (which is a scary thought). Instead, the central planners did the opposite and doubled the monetary base (keep the addict happy with more heroine). These extra paper dollars have to go somewhere, and we are seeing the results in higher prices for stocks, oil, copper, sugar, gold, so far…” Well, yes…as long as the economy seems to be on the mend, investors’ “appetite for risk” improves. They want to speculate on the recovery. But then, when the recovery proves an illusion…they’re going to run for cover. Then, another new partner came to help us roll our stone. “Bill is correct, not from money supply & credit data, but from ‘black swan’ type events such as: how deflationary forces will play out for lenders and holders of mortgaged-backed bonds both commercial & residential, in a disruptive resetting of interest rates for Option ARMs, ALT-As and various other prime borrowers in the next 6–12 months… Will we witness another series of major bank failures from this next round of resetting? And if so, how disruptive, in a deflationary sense, will this be?” Either way, the result is the same. Market events – such as another big break in the banking sector – could bring a deflationary collapse. If not, the Fed itself may have to step in to protect the dollar. In either case, gold is not likely to reach its final, bubble phase until this contraction is over. In the meantime, our advice remains unchanged: buy gold on dips. We continue to laugh at recovery sightings. Yesterday, for example, the Fed reported to the nation that a recovery was underway. But even the Fed couldn’t ignore the fact that consumers aren’t spending money the way they used to. The New York Times comments: “The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed’s warning about it deflated some of the market’s optimism. About 70 percent of the economy depends on spending by consumers.” The other sticky wicket in this game is unemployment. Jobless ranks are swelling like a floating corpse. But the jobless numbers don’t tell the whole story. There are 34 million Americans who live on food stamps. One out of every nine people depends on the government for his daily bread. The Financial Times fills in the details: “Less attention has been paid to those still in the workforce, whose incomes are also being squeezed. The average working week is now about 33 hours, the lowest on record, while the number forced to work part-time because they cannot find full-time work has risen more than 50 per cent in the past year to a record 8.8m. Wages and benefits have decelerated. “The food stamp data suggest that ‘the labour market problems are more significant than you would expect, given just the unemployment rate’, said John Silvia, chief economist at Wells Fargo. ‘For me it suggests the consumer is not going to rebound or contribute to economic growth for the next year, as the consumer would in a traditional economic recovery.’ “Consumer spending has traditionally been the engine of the US economy, making up about two thirds of GDP. Economists fear that people may be unwilling to resume that role. “Food stamps are distributed once a month on electronic cards that can be spent at many grocery stores. The $787bn stimulus bill added about $80 (€55, £50) to a family’s monthly allowance, which now stands at an average $290. Nothing very original about keeping the masses fed with government food. The Romans figured it out 2,000 years ago. You have to distract the mob with pane et circenses (bread and circuses). Otherwise, they vote you out of office…or burn down the capitol. “Everything, now restrains itself and anxiously hopes for just two things: bread and circuses,” wrote Juvenal. September 15, 2009 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 and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Copyright © 2009 Bill Bonner
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