(This
appeared in the Huffington Post on October 9, 2009.)
http://www.huffingtonpost.com/nathan-lewis/new-highs-for-gold_b_313692.html
"New
all time highs."
How
many things can you say that of? Stocks? Real estate? Commodities?
No, no
and no. I'm talking about gold.
This
price action grabs attention. People like to bet on a winner.
The
gold market is highly politicized. Official intervention is chronic.
Governments understand that a "rising gold price" is a universal
signal of macroeconomic instability.
That is why the mainstream media is being saturated right now with
"don't buy gold" stories. Did you notice? For example, here's one
from the Wall Street Journal:
Gold is Still a Lousy Investment
Here's
another one:
Beware the Gold Bubble
Gold
is rising because the dollar is falling. The dollar is falling primarily
because of the extra-super-easy monetary policy favored by the Federal
Reserve. Gold itself is -- as I've said previously -- stable in value. It's
not going up or down, it's the currency you're comparing against gold.
Whenever
there are economic difficulties, governments turn to monetary manipulation to
bail them out of their problems. Of course this has consequences.
From
1789 to 1932, the U.S. dollar maintained the same value. It was 1/20th of an
ounce of gold in 1800, and it was still 1/20th of an ounce of gold in 1932. A
$20 coin was literally made of an ounce of gold.
The
U.S. had a hyperinflation in the 1780s. Afterwards, people were very serious
about keeping their currency stable.
Here's
the similar chart, but inverted so that a declining dollar value is
represented by a downward line.
Ever
since the 1930s, we've had an ideology of monetary manipulation. Beginning in
1933, we embarked on a series of experiments: when recession threatens, what
if we monkey with the currency in the form of interest rate manipulation and
"quantitative easing"? The result of this tomfoolery since 1933 is
that the dollar is worth 1/50th of its prior value, or 1/1000th oz. of gold.
Maybe
the next 50:1 decline will happen faster. Then, it would take $50,000 to buy
an ounce of gold.
There
is a whole library of economic justifications for this monetary manipulation.
The short-term effects can feel good. What the economists would really like
is to be able to have an "extra super easy" monetary policy with no
consequences. All of the upside and none of the downside.
Crackheads
probably have similar fantasies.
What
this means in practice is: an extra-super-easy monetary policy, but no
decline of the dollar vs. gold.
This
can actually be maintained for brief periods. Recently, the government's
helper banks -- primarily JP Morgan and Goldman Sachs -- have been keeping a
lid on the gold market by selling futures around $1000/oz. (Yes, there is
some quid-pro-quo for the obscene banker bailouts.) Usually, they have been
able to engineer a minor but sharp decline in the gold price, inducing a
brief bout of panic selling which allows them to cover their shorts. Then
they start the process all over again.
However,
this time, they sold a lot of futures short but were unable to cram the
market down enough to get people to panic. Apparently, they ran into Middle
Eastern and Asian (especially Chinese) buying in the bullion market. Now, the
manipulators are getting steamrolled higher with big short positions.
In the
big picture, this is a minor event. A similar thing happened in late 2005.
However, I wanted to explain why you are being fed a truckload of "pleeeeaze
don't buy gold" manure by the mainstream media at this time.
It's
because JP Morgan and Goldman Sachs want to buy gold -- to cover their shorts
-- and they don't want any competition from you.
Personally,
I think that we will have a move higher in gold to about the $1650 area
suggested by Jim Sinclair, with a pause around $1200. Of course, what I'm
really talking about is a further decline in the dollar.
Is
gold a lousy investment? Sometimes. At other times, it's a wonderful
investment. Over the past ten years, gold has outperformed both stocks and
bonds by an immense margin -- just as stocks and bonds outperformed gold in
1980-1999.
Here's
a funny fact: since 1965, if you owned stocks, bonds, or gold, your
investment would be worth about the same today, 45 years later. This is the
entire history of floating currencies, which began in 1971.
I
think that most regular people should consider holding about 20% of their
portfolio in gold at this time. The best thing that can happen is that this
20% investment in gold will be flat, or go down slightly.
The
worst thing that can happen is if this 20% investment rises by several
multiples. Because, that would mean the other 80% -- the stocks and bonds --
are getting pulverized in real terms.
I
think we will have a new gold standard eventually. At that point, I would
sell my gold and buy stocks and bonds.
However,
there will probably be some difficulties before then. It's human nature. It
took two world wars before Europeans finally figured out that attacking your
neighbors is pointless and stupid.
It
looks to me like we are going to learn that monetary manipulation is
pointless and stupid. We are going to learn why a gold standard was
explicitly mandated by the U.S. Constitution.
We are
going to learn it all the hard way.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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