In episode 56, Phil interviews Christopher Casey of WindRock Wealth Management for an update on gold, mining stocks and oil. Phil also offers his solo commentary on Sam Zell and “irrational exuberance.” Be sure to contact us with an example from your town!
The sentiment against precious metals, especially gold, reached its apex around July. In his now famous Wall Street Journal piece, Jason Zweig entitled his article, “Let’s Be Honest About Gold: It’s a Pet Rock.” Zweig wrote, “Own gold if you feel you must, but admit honestly that you are relying on hope and imagination.” He then went on to compare gold bugs as subjects of a “laboratory experiment on the psychology of cognitive dissonance.” What Zweig fails to recognize is that he is describing himself.
The level of hope and hubris that one must possess to have faith in a 40 year old monetary experiment like the fiat backed U.S. dollar is really quite disturbing. The only lab experiment taking place is that by Keynesian central planners on what has become a Frankenstein world reserve currency. Pardon me if I’d rather put my faith in 5,000 years of monetary history.
Zweig then went on to write that gold is difficult to price because it is intrinsically worthless. This assertion is ironic because he fails to realize that he’s describing paper money, which cannot even be used to blow your nose. Worthless currency is merely good for building blocks as the Weimar children above are illustrating. Zweig goes on to point out that gold miners were losing money on more than an eighth of gold dug from the earth. But he never asks why gold mining suddenly became so unprofitable. Would it have anything to do with the 300 to 1 suppression taking place on the Comex? Zweig didn’t bother to address any irrelevant details like that.
Zweig’s article then goes onto to imply that gold is still a “barbarous relic” because you have to lug it around and it is a clumsy form of payment. But he never reveals any of the technology based gold payment systems like BitGold, gold backed debit cards and the United Precious Metals Association in Utah. Zweig wraps up his article by alleging that gold has had a meager 0.8% return since 1975, but he never provides any history to offer a possible explanation. I’ll have to do that for him.
First, from 1975 to 1980, gold fell in value against stocks until Americans could finally buy the Dow Jones with only one ounce of gold! In order to defend the dollar, then Federal Reserve Chairman Paul Volker had to raise interest rates to 20%! If Janet Yellen tried this today, the U.S. treasury would need to spend almost $4 trillion on interest payments. Since Uncle Sam only collects $3.25 trillion in annual tax revenues, this is clearly not an option for Yellen.
After Volker defended the dollar, the U.S. stock and bond markets began a 35 year ascent, but it was not without problems. In Octrober 1987, the stock market fell 25% in a single day. If that happened today, the Dow would fall over 4,000 points! The late 90’s revealed an internet stock bubble that finally burst around 2000, cratering the Nasdaq as it fell from 5,046.86 to 1,114.11. It wouldn’t see it’s high again for another 15 years!
The next stock market implosion occurred in 2008, when the artificially low interest rates that created a housing bubble finally moved up. While foreclosures piled up, the Dow and S&P index fell by well over 50%. The central planners couldn’t watch their Keynesian house of cards fall, so they unleashed unprecedented monetary policy. Quantitative easing and zero percent interest rates became the norm for over 7 years, which leads us to the present moment in which I write.
A walk through recent monetary history is required in order to understand the lunacy taking place in the U.S. stock market. When the world finally wakes up to the reality that the Fed can no longer send markets higher in real terms, then the Dow gold ratio will descend below its 1980 low to one half ounce of gold. That’s when it will be time to spend your gold on other things because people like Zweig will finally be buying it.
Here’s an excerpt from my interview with Bernardo Bieler Romero in April. It’s an excellent lesson to teach us what happens when socialism is carried out to its logical conclusion. Click the photo above to see the interview.
Phil: Back to gold. It’s a shame Venezuela is going to sell its gold at $1,200 an ounce. Great Britain sold its gold for $250 an ounce, and I suspect they did it in order to pay for the promises made to their people. I can assure that the gold price is going to rise and Venezuela will no longer have any gold. What do you think?
Bernardo: Just as they are going into debt with China, Venezuela is also going to sell its gold to pay for populist or social programs. The government tells the people that they have a right to them, but the message that the government is sending is that the Venezuelan people have rights but no obligations. This government has taught Venezuelans that they have something to claim but nothing to offer. People think they have the right to be fed but no obligation to work. In fact, the worst way to earn money in Venezuela right now is by working for it. For example, look at my case. I am a civil engineer working in a consulting company. If I worked for a engineer’s salary in Venezuela, it would not provide me with the purchasing power I need to buy the things I need for my family. I would need a second job. The government has fixed prices on items that everyone needs, so manufacturers lose money when they sell these items. The smarter thing for me to would be to buy things for a fixed price and then find a way to sell them for a 400-500% markup on the black market.