by Gary North
I am not writing this for those readers who have bought gold and silver, sold their stocks, and bought foreign currencies. I am writing this for readers who have read my recommendations for over six years and who have not done what I recommended.
I am writing to people with the hesitation blues.
If you are unfamiliar with the hesitation blues, you need to hear Jesse Fuller explain them. He was the legendary one-man band of the folk-blues era: 12-string guitar, harmonica, kazoo, cymbals, and the world's only fotdella — a six-string hammer-activated base fiddle activated by piano keys played with his right big toe. Click the fourth (last) song. It explains the hesitation blues.
The chorus says it all: "Tell me how long will I have to wait?"
Back in 1961, I sat in the front row of the Ash Grove in Los Angeles to hear the Lone Cat. I bought my first silver coins two years later, at face value at the bank. That was a long time ago.
Yes, I should have bought Berkshire-Hathaway shares instead.
NAGGING DOESN'T WORK
In the various publications sent out free of charge by Agora, one theme has been constant in the 21st century: buy gold. Agora editors told readers to buy gold in 2001, the year it bottomed at $256. They told readers to buy gold every year thereafter. Over and over and over, the refrain has been the same: buy gold.
Have most of our readers bought gold? I have taken no survey, but this I do know: (1) the main coin sales firms are still tiny, just as they were 20 years ago and (in one case) 40 years ago; (2) there are only about half a dozen of them well known to hard-money newsletter subscribers, just as was the case in 2000 and 1990.
In 1964, Camino Coin company in Burlingame, California had as many employees as it has today. That was when my father-in-law told his readers to buy gold coins — U.S. double eagles — from Camino.
Franklin Sanders, the Moneychanger, has been selling gold coins for over 25 years. His on-line sales operation is still family-staffed.
Investment Rarities was larger in 1980. It got a lot of free promotion from Howard Ruff. It also hired Jay Abraham to design its marketing program. It is a much smaller company today.
For details on how to contact these firms, click here.
With the growth in the number of Agora letters and subscribers, these firms should have their phones ringing from morning to night. Such — sadly — is just not the case.
For most of my readers, paralysis regarding gold was widespread back in 2001. Gold had fallen for 21 years. Paralysis regarding the purchase of gold was healthy, 1980—2001. But not after 2001. Yet the hesitation factor seems to get worse for most readers. They want confirmation that they were correct in 2001, 2002, 2003, 2004, 2005, 2006, and 2007, when they made a bad decision: sitting tight (standing pat). Their hesitation will probably be repeated in 2008. It will not end for most of my readers until a few weeks before precious metals mania peaks. At last, they will buy. "I can't stand it any more! I've got to get in!"
The price of precious metals will then fall like a stone.
This is what happened to gold and silver in late 1979 and January, 1980. My hard-money newsletter, Remnant Review, went from 2,000 subscribers in 1978 to 22,000 in early 1980. That was the peak — for gold, silver, and my newsletter's subscriber base.
We see hesitation in every field. The question is: Why do we see mania moves at the high and low peaks of an investment cycle?
Most people are not early adopters of new technologies. They wait and see. This is sensible for most people most of the time. "If you live by cutting-edge technology, you will die by cutting-edge technology."
With technology, there is no mania-driven peak curve. People are still buying microcomputers today, just as a few people did in 1978. These computers are no longer called microcomputers, because the mini-computer market died by the late 1980's. There are mainframes and desktops and laptops today. Mini's are gone. Non-mainframes are called PCs or Macs. This market is huge, and it will remain huge. But sales growth has slowed.
You don't really need a faster computer. I am composing this on a 1995 166mz computer using a 1991 word-processing program. The key to my productivity is a 1984 PC AT keyboard. Without that, I would be in big trouble. I have spares.
Nevertheless, we will buy faster computers. Computers will get faster every year, even after 2020, when a $1,000 computer will have the computing capacity of the human brain (sharper than mine, I hope). Raymond Kurzweil, the inventor of speech-recognition technology, in March, 2001, described the future as follows.
Already, IBM's "Blue Gene" supercomputer, now being built and scheduled to be completed by 2005, is projected to provide 1 million billion calculations per second (i.e., one billion megaflops). This is already one twentieth of the capacity of the human brain, which I estimate at a conservatively high 20 million billion calculations per second (100 billion neurons times 1,000 connections per neuron times 200 calculations per second per connection). In line with my earlier predictions, supercomputers will achieve one human brain capacity by 2010, and personal computers will do so by around 2020. By 2030, it will take a village of human brains (around a thousand) to match $1000 of computing. By 2050, $1000 of computing will equal the processing power of all human brains on Earth.
Even so, people in 2051 will still buy new computers. They will have to, just to keep competitive. "My computer is smarter than your computer!" "The software designed by our computers' software is smarter than the software produced by our competitors' computers' software!" In short, the computer market will not peak in the way that gold and silver peaked in mid-January, 1980.
Why are investment markets marked by manias when technology markets aren't?
One reason is better understanding of cause and effect. An individual inventor may be driven by a belief that the big event — a technological breakthrough — will happen to him. He will get rich overnight. Consumers of technology have no similar faith. They know that their lives improve by only tiny steps most of the time, as new information, new technology, and new applications of older technology transform their lives. There will be no major breakthrough in lifestyle except possibly for someone suffering from an obscure disease who becomes the beneficiary of a major medical breakthrough.
In contrast is the get-rich-quick-and-easy dream that drives investment manias — that, plus central bank monetary inflation, which creates investment bubbles. The dream of easy riches and the policy of easy money are made for each other. "And he spake a parable unto them, Can the blind lead the blind? Shall they not both fall into the ditch?" (Luke 6:39).
THE DEADLY C-WORD: "CONFIRMATION"
Early adopters in investments take big risks. Early sellers don't seem to, but they do. They take the risk of missing the big move. As word gets out, a few more buyers enter the market, matched by a few more who are willing to exit it.
As word spreads, most people don't hear. "Berkshire-Hathaway? Never heard of it." Of those who do hear, most fail to act. The train leaves the station. It will stop at many stations. Few passengers climb on board. "Warren Buffett? I think I've heard of him. I don't know what he does, really."
I think I remember reading the following story by the Dow theory master, Richard Russell, maybe 25 years ago. He told this story on himself. He had bought Berkshire-Hathaway at (say) $25 and sold it at $75 — I forget the numbers. He had been proud of himself, he said. He had tripled his money! At the time, the stock was probably around $500. Ha, ha. He should have held.
Today, it's $140,000 a share.
Confirmation kept coming, year after year: up 25%. Hardly anyone bought the stock. Buffett's track record was impossible, you see. No man can make 25% per annum long term. It is statistically impossible. It would mean that random walk theory is wrong, that Ph.D. economists with little money to invest are wrong. "Yes, it was a great run of luck. But it just can't last."
It has lasted.
The stock had one really bad move: 1999. In the midst of the final year of stock market mania, the stock fell 50%, from $80,000 to $40,000. Then, exactly at the peak of the mania — March, 2000 — the stock reversed. Up, up, and away it went.
I can remember one newsletter writer chortling in early 2000 that Buffett had lost his touch, that the general stock market would now outperform Buffett, especially the NASDAQ. It didn't.
What keeps confirmation-seekers away from Berkshire-Hathaway is that the stock pays no dividends and Buffett never splits the stock to lower its price. Only the very rich can buy shares.
They tend not to move in and out of a stock. They buy as he buys: long term.
For normal investors, confirmation is the big motivator, but it only registers late in the process, after big moves up.
Some people hear about a hot market in the making, but they don't really hear. As Isaiah, Jesus, and Paul said, "hearing, they do not hear." The competing noise is too loud. Procrastination is too powerful. Their commitment to rectifying their past mistakes is too great. They want to prove that they knew what they were doing. That means sticking with a bad investment, which generally stays bad. "It will go up some day. I'll be proven right." Maybe it will go up. Meanwhile, other things go up more.
So, by the time the confirmation registers — maybe years after they first heard about the opportunity — they hesitatingly invest a little. It rises. Now confirmation registers strongly. Why? Because they are in the market. So, they buy more. It goes up more. Now confirmation creates a new psychology: mania. More, more, more!
Investor by investor, the mania increases. It pulls in new investors, which drives up prices, which persuades late-comers to buy even more. The bubble appears. At this point, confirmation becomes the great enemy.
Then a rumor begins. "It's time to sell. It's even time to sell short." Almost no one listens.
The classic case was October, 1979 to January, 1980. Federal Reserve policy shifted to tight money. Paul Volcker announced this in October. He said the FED would no longer target interest rates. Rates began to climb. No one believed the FED would stick to its guns. It did . . . until August 13, 1982, when Mexico threatened to default and nationalize the banks. Over the weekend, the FED shifted policy, as did the world's central banks. The boom began.
Also in late 1979, the Comex changed the rules for buying silver futures contracts. No more longs would be allowed except to cover shorts. This was to stop Bunker Hunt's attempt to drive up prices. No one listened. No one could believe that Hunt could be stopped. They were wrong. For the next two decades, silver and gold declined.
We are now well into the confirmation stage for gold. Most people still hesitate. "It's January 1, 1980. I'll wait." But is it? Should they?
"WHAT IS THE GENERAL TREND?"
This is what I keep asking, decade after decade. Is the trend toward more or less debt, more or less monetary inflation? I keep answering, "more."
There are interludes when the trend slows. October, 1979 to August, 1982, the trend slowed. There was a massive recession. The Dow hit 777. But then it reversed.
I believe we are in an interlude again under Bernanke. The FED is not expanding the monetary base by much. There are signs that recession is coming. That will eventually slow the rate of price inflation, which is still under 4% (median CPI). But the dollar is falling, gold is rising, and oil is rising. It looks as though the world is in the process of replacing dollar-denominated debt instruments as the central banks' primary foreign reserve. That is undermining the international purchasing power of the dollar. It is neutralizing FED policy in the international currency markets.
Can the precious metals fall in a recession? They usually have. But will it be different next time? That depends on foreign central banks. It also depends on how fast the FED reverses policy in a crisis. That in turn depends on just how bad the capital structure of the banking system is today. It looks very weak to me. The bad news keeps coming, week by week, bank by bank, brokerage firm by brokerage firm: $5 billion here, $10 billion there. The losses add up.
This crisis appears to be international. The dollar and dollar-denominated debt are at the heart of it.
Gold is rising in relation to foreign currencies, not just the dollar. You can see this here.
The trend has not changed: inflation. But the business cycle seems to have peaked. This will put downward pressure on the international economy. Stocks will decline. Commodities used in construction will fall. Bonds will rise.
What of the precious metals? Until you have 10% of your portfolio in them, don't worry about it. You have had confirmation for six years. At some point, you had better decide one way or the other: What is the trend?
When Jesse Fuller sang "Hesitation Blues," he always had one big toe in action.
I suggest that you get at least your big toe into action.
Buy some gold coins. Buy some silver coins. Sell some stocks.
"Tell me how long will I have to wait?"
Copyright © 2008 LewRockwell.com