again on Wednesday, January 25. Gold shot up by $50.
nation, a band of perpetual procrastinators thought to themselves:
"I knew! I knew! Why didn't I buy?"
the never-ending cry of the perpetual gold procrastinator, year
after year. "I knew! I knew!"
It is immediately
followed with: "I've learned my lesson this time! The next time
gold's price falls, I'll buy."
No, he won't.
Because, when gold falls, he'll say this: "The decline is just
getting started. It will fall even more. I'll wait."
wait patiently until gold's fall reverses. He will then say to
himself: "This is temporary. It will fall back." Then comes the
explosive move upward. Then he will say: "I knew! I knew! The
next time gold's price falls, I will buy. I mean it this time.
I really mean it."
year after year, this is the pattern.
a page you can go to and find exactly what gold sold for, stretching
back for over a decade. It's
here. Here we learn this: on September 5 and 6, gold peaked
at $1,895. Then it fell. It bottomed on December 29 at $1,531.
It had moved
back up to $1,600 by January 3. That should have sent a "buy"
signal to every gold procrastinator. But gold procrastinators
do not respond to buy signals. Ever.
But this does them no good financially.
in agony. They never buy, and gold moves up. It has for over a
decade. They do not learn. They prefer agony to profits.
does not make sense. No one prefers agony to profit.
do. We call them masochists. "It hurts! It hurts! Don't stop!"
was a missionary to the Western Shoshone Indian tribe in Nevada/Idaho
from 1945-1955. He and an alcoholic physician with the Indian
Health Service were the only full-time white men on the reservation.
occasionally be visitors on vacation. He told me about one of
them. The man worked for one of the casinos in Reno. He worked
at the craps table. He told my father-in-law about a man who had
made $11,000 at the table. In the late 1940s, that was a lot of
money. "He was drunk. He passed out just after he won. We put
his chips in his pocket and put him in his room. He left the next
day. That was the only man I ever saw who came out that far ahead."
My father-in-law asked him why. "They gamble to lose" was the
gamblers. But what about investors? Do they invest to lose? I
think a lot of them do.
want to make money. But they want to make it conventionally. They
want to make it as upstanding defenders of the American dream.
23, 2000, the Standard & Poor's 500 index peaked at 1527. Today,
it is around 1320. But
the dollar has depreciated by over 30%. Anyone who took the
standard advice to buy and hold a no-load index mutual fund of
the S&P 500 has lost 12 years and 40% of his investment. He still
believes the story. He will believe the story until an hour before
he reaches room temperature.
that's the American dream. It confirms the story of American industry,
American ingenuity, and American know-how.
It is also
the story of Keynesianism, Federal Reserve monetary policy, and
If you call
into question the American dream, you call into question Keynesianism,
Federal Reserve monetary policy, and federal regulation. That
would rather lose all of their wealth than call into question
the American dream, as promised by Keynesians, Federal Reserve
economists, and Civil Service-protected federal bureaucrats.
are like that guy at the craps table in Reno. Their only hope
is to pass out in front of their chips.
a message. Here is the message: "You should not put your hope
in Keynesianism, Federal Reserve monetary policy, and federal
why gold as an investment has had a bad reputation in the media
ever since 1965, when Charles de Gaulle told the Bank of France
to start handing in dollars to the Federal Reserve System in exchange
for gold at the guaranteed price of $35 an ounce. This is also
why there is no discussion in history textbooks or economics textbooks
of price stability under the international gold coin standard
from 1815 to 1914. This is why there is no discussion in history
textbooks or economics textbooks of all central banking as a government-licensed
1967, my first article in a national publication appeared: "Domestic
Inflation Versus International Solvency." It was published
in the free market magazine, The Freeman. It was a defense
of the traditional gold coin standard, which ended with the outbreak
of World War I in 1914. I ended the article with these words.
gold coin standard would unquestionably solve the problem of
international acceptance and solvency. Gold has always functioned
as the means of international payment, and there is no reason
to suppose that it will not in the future (assuming that prices
and wages are permitted to adjust on an international free market).
The opposition to gold in international trade is based upon
ideological assumptions which are hostile to the idea of the
free market economy. Gold would insure monetary stability, if
that were what the economists and legislators really wanted.
It would insure too much stability to suit them, and this is
the point of contention. As the late Professor Charles Rist
those theoreticians dislike monetary stability, because they
dislike the fact that by means of money the individual may
escape the arbitrariness of the government. Stable money is
one of the last arms at the disposal of the individual to
direct his own affairs, whether it be an enterprise or a household.
It is certain that nothing so facilitates the seizure of all
activities by the government as its liberty of action in monetary
matters. If the partisans of [unbacked] paper money really
desire monetary stability, they would not oppose so vehemently
the reintroduction of the only system that has ever insured
it, which is the system of the gold standard.
that 45 years ago. My views have not changed. What has changed
is the consumer price level. An item that cost $1,000 in 1967
would cost $6.735 today.
this does not apply to gold. To buy as much gold (which was illegal
for Americans in 1967) today as $1,000 would have bought in 1967
would take $48,570.
Did I buy
gold in 1967? No. I was a graduate student. Instead, I had my
parents buy U.S. double eagles, which were collector coins. They
I tell them to do this? Because I did not believe in the following:
Keynesianism, Federal Reserve monetary policy, and federal regulation.
in that ancient article, I wrote this:
The nation which indulges itself with an inflationary "boom" inevitably
faces the economic consequences: either runaway inflation or a
serious recession-depression. If the inflation should cease, unemployment
will increase, and the earlier forecasts of the nation's entrepreneurs
(which were based on the assumption of continuing inflation) will
be destroyed. Since no political party is anxious to face the
consequences at the polls of a depression, there is a tendency
for inflations, once begun, to become permanent phenomena. Tax
increases are postponed as long as possible, "tight" money (i.e.,
higher interest rates) is unpopular, and cuts in governmental
expenditures are not welcomed by those special interest groups
which have been profiting by the state's purchases. The inflation
I have not
changed my mind. Nothing that has taken place since 1967 has persuaded
me that my analysis was incorrect.
FED'S LATEST PRONOUNCEMENT
January 25, the Federal Open Market Committee (FOMC), which sets
monetary policy, made
an announcement. Every Austrian School economist had said
it would make this announcement at some point.
To support a stronger economic recovery and to help ensure that
inflation, over time, is at levels consistent with the dual mandate,
the Committee expects to maintain a highly accommodative stance
for monetary policy. In particular, the Committee decided today
to keep the target range for the federal funds rate at 0 to 1/4
percent and currently anticipates that economic conditions
including low rates of resource utilization and a subdued outlook
for inflation over the medium run are likely to warrant
exceptionally low levels for the federal funds rate at least through
a year, the FOMC had said that it would keep the Federal Funds
rate at the low rate until 2013. So, this announcement was a major
change: late 2014. This sent a signal: the FOMC thinks the present
slow economy will last until late 2014. In other words, QE2 was
not enough to goose the economy. Therefore, the FED will inflate.
Anyway, that is what the language indicates.
Let me remind
you one more time: the FOMC has had nothing to do with the Federal
Funds rate for well over three years. The FedFunds rate today
is low because commercial banks have over $1.6 trillion on deposit
at the FED as excess reserves.
rate is a very limited rate. It is the rate at which commercial
banks with excess reserves lend overnight to banks that have fallen
below their legal limit. Why do they need money? Because there
is high demand for loans by the public.
been little demand from the public for new loans ever since 2008.
The banks are risk-averse to the few businesses that are ready
to borrow. So, banks have piled up excess reserves at the FED.
The FedFunds rate is almost zero because every bank in America
is loaded to the gills with legal lending capacity. They are not
lending to the public. They lend to the FED, which pays basically
of this economy are bankers that they are willing to lose money
on their FedFunds accounts at the FED. The revenue received does
not come close to covering the costs of servicing commercial bank
deposits. This is why banks are trying to find ways to stick depositors
with fees. Depositors are rebelling. Bankers are stuck, not their
FOMC has zero to do with the present low rate. All that these
pronouncements do is to convey a false picture: We are still in
charge of interest rates. We are the bulwark of low rates." It
makes it look as though the FED is running the show. It isn't.
did have the effect of running up the price of gold by $50 in
one shot. The pronouncement seemed to guarantee QE3. "The Committee
expects to maintain a highly accommodative stance for monetary
policy." But the FedFunds rate has remained close to zero under
the FED's contraction of the monetary base in the first half of
2010, which was reversed by the policy we call QE2. Look
at this chart.
the FED did in 2010, it had no effect on the FedFunds rate, which
did not change. Fear of the economy, not the FOMC, has set the
spoke of a highly accommodative stance on monetary policy. Yet
the FOMC has vacillated between high accommodation and outright
deflation for two years. The FOMC cannot make up its bureaucratic
is like a young child in a kiddie-car ride at the county fair.
The car is on a track. It has a steering wheel. The wheel is not
attached to the car's wheels. It just spins when turned. The child
turns the wheel wildly, this way and that. The car follows the
track. He is smiling. He is in charge!
point, the kid moves up to bumper cars. There, he really is in
control. But the car can do no damage. It is inside a confined
space. It has rubber bumpers.
16, he gets his driver's license.
is like a teenager who has been given his driver's license and
the keys to his father's car, but who has spent years in bumper
cars: Princeton University. He and Paul Krugman had a great time
racing around the track and bumping into one another. Nobody outside
of Princeton paid any attention to them. Occasionally, Alan Blinder
joined in the fun. They were known as Blind, Blinder, and Krugman.
No permanent harm was done.
appointed him chairman of the Board of Governors. That was his
license. That was his keys to the car.
He has already
caused on massive pile-up: 2008-9. There will be another one soon
and I are all in the back seat. Bernanke is in the driver's seat.
We have two choices: buckle up or not.
If you want
to buckle up, you buy some gold bullion coins. If you want to
live dangerously, you buy and hold a no-load fund of the S&P 500
and a no-load fund of U.S. Treasury bonds.
Obama is in the passenger seat. He is hoping that Bernanke knows
how to drive.
He had better
pray that the air bag works.