The Star of the Show

Mark Twain, in an unverified quote, once described a mine as "a hole in the ground owned by a liar." Using that definition, a horde of liars were in Las Vegas last week to pitch their projects and bright prospects to hundreds of gold geeks who attended the Gold & Precious Metals Conference.

While most mining company pitchmen and women were putting attendees to sleep with talk of drill samples, stripping ratios, and proven-and-probable reserves, investors perked to rapt attention to hear gold newsletter writers and prognosticators tell them which of these liars were worth investing in and where the economy is heading.

The star of the conference was day two’s keynote speaker, James Grant. Grant, perhaps the finest wordsmith in financial journalism, is the editor of GRANT’S Interest Rate Observer and author of four books on finance and financial history; Bernard M. Baruch: The Adventures of a Wall Street Legend, Minding Mr. Market, Money of the Mind, and The Trouble With Prosperity.

Grant is a devotee of the Austrian school of economics and often refers to the work of Mises, Rothbard, Menger, and Ropke in his books and newsletter.

Grant told the standing room audience that he is a "gold believer" and though he thinks the price of the metal will go up he is an "expert at not knowing when."

Gold competes against other currencies, Grant reminded the crowd, "with one arm tied behind its back." While investments in other currencies pay interest, gold pays none, a huge disadvantage. "Every time I look at a compound interest table I am startled anew," Grant deadpanned.

While not paying interest, gold is an "investment in historical truth." Being long the yellow metal is essentially being short Alan Greenspan and the Federal Reserve.

The most powerful central bank in the world has never been more revered than it is currently. But, when Grant hears central banker, he thinks government employee. When he hears rate setting, he thinks, price fixing. "How could the Fed know what the interest rate should be?" Grant asks.

This year is the ten-year anniversary of the Fed’s 1994 tightening. Greenspan and Co. doubled the federal funds rate from three percent to six percent in the 12 months from February 1994 to February 1995. This year, despite the funds rate being only a third of what is was ten years ago, and the economy being stronger, Greenspan held the funds rate at an emergency level of one percent for over a year (from June 2003 to June 2004) and is just now slowly inching up the rate.

The Fed has waited and been timid to raise rates because "society is encumbered." "The world is more sensitive than ever to short-term interest rate increases," Grant pointed out. Thus the Fed is reluctant to move on interest rates.

Despite a hesitant Fed, Grant believes that a generational bear market in bonds began in January of 2003. All bond bull and bear markets are generational, Grant says, and coincide with the life cycles of monetary systems. But as far as what the bond market will do next week, next month or next year, Grant is an agnostic.

America’s trade, current account and budget deficits will ultimately undo the dollar’s credibility. The only collateral for the dollar is the American persona. The dollar is only "supported by an idea," Grant told the crowd, "but will the idea hold up in the face of adverse arithmetic?" Grant is betting no.

Grant told the audience that Alan Greenspan himself made the best case for gold in a speech just a few months ago. Greenspan pointed to the five percent of GDP trade deficit and the fact that despite having a very low savings rate, interest rates in the U.S. are quite low. The Fed is printing money, and foreigners have been happily trading their goods for the inflated dollars. But, the gold price will likely increase, when foreigners get tired of making this trade.

During the Q &A session, Grant was asked what he does with his money. Other than an investment in small businesses in Japan, Grant described his investments as low-tech and un-leveraged: Cash, mining company mutual funds and when he has extra dollars he buys a few Krugerrands, "which yield about the same as what my bank pays for interest (1%)," Grant joked, "but are not managed by the FOMC [Federal Open Market Committee]."

But, just because he believes interest rates are about to rise and putting away a few gold coins is a good idea, doesn’t mean Grant is all doom and gloom. Grant’s parting words were; "I think this will be a great world for our children and grandchildren."

A higher gold price, increasing interest rates, falling stock prices and lower dollar were common themes of the conference. If these seers have it right, this all bodes ill for the average person with few investment choices available to them other than U.S. stocks and bonds for their 401k’s.