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The 21st Century Gold Rush

-- Posted Tuesday, 28 January 2003 | Digg This ArticleDigg It!

Xtreme Investing


The 21st Century Gold Rush 



Guest Editorial: Jake Nelson



January 27, 2003


Executive Summary


This report highlights the current geo-political risks and their affect on the US economy.  An in depth look at possible explanations of the US stance toward these issues is given.  GDP and a few of its components are analyzed for static changes that could arise given the policy governing the United States.  We take a close look at consumer debt and the cost of servicing such debt, as well as the use of stimulus to boost consumer spending, a driving force of US GDP growth.  A comparison between equity investment and gold is outlined with regard to the argument whether gold is a viable investment tool.




Throughout the history of the United States the strength of democracy and capitalism in modern society has been tested to no end, usually resulting in long-term positive outcomes.


Few events in the history of the US have had as much of an impact on the way the government handles policy as war.  This history is rich with changes to American ideals as a result of both global and domestic conflict.  African Americans were open to the path of freedom after the Civil War.  World War II brought numerous changes to our interests as well as to many other countries.  The Vietnam War showed the American people how messy a political battle can be and the Gulf War allowed us insight into the damaging effect of a job left unfinished.


Now we enter new conflict, preferably with the international community, to defeat terrorism.  The only question I have regarding this conflict is, will compassion kill us before the terrorists do?  It appears to this point that the United States is entering into a significant conflict with “many fronts” while one arm is tied behind it’s back.  With deafening economic turmoil at our fingertips it seems a little naïve for the US government to believe that sanctions and negotiations have any effect at all on the policy of dictatorships and socialist regimes.  None-the-less, this is our current fate and not one that I look forward to.  It would appear then that a new policy regarding rogue nations should be considered.  While the world community waits for nations to break under economic and political ignorance, the truth is “terrorists” become that much stronger and ever so determined to undermine democracy.  A democracy that so many “westerners” have taken for granted, the freedoms allowed them have been passed on to increased government control willingly.  As the US prepares to take action against its enemy the clear impossibility of such a response grows more evident.  As time passes by its “allies” increasingly dictate the policy of the United States as they become aware of America’s exposure to foreign investment and grow weary of a falling dollar.  It is reasonable to assume that OPEC controls a majority of the policy passed through our government.  OPEC maintains a “cheap” price for oil as a wild card in this crazy game of poker.  Think of how much sense it makes for OPEC to cut supplies inline with the falling dollar to maintain wealth, yet they don’t.  The reason is simple.  As long as they maintain prices they gain an edge on US policy.  In essence the card is and will always be theirs to play.


The same effect goes for Europe.  Europe happens to have a lot of exposure to dollar based investments and as such feel the effects of a losing “buck.”  However we know they haven’t run out of their dollar investments even though they are losing.  Why you ask?  The same principle is in play here.  As a form of leverage for governing US policy Europe holds dollar investments given the US knows they’d bail if policy didn’t reflect Europe’s wishes.  All things considered, this is the outcome one would expect from globalization as US maintains its position as the leading economy.  As such it is imperative that the citizens of the United States make aware of this fact and prepare for the changes to come.  It will not be disclosed by elected officials that this is taking place, as the potential outcome appears to be one that would end a politician’s career.


As time passes our economic woes are deafening yet unheard.  As big government takes over GDP we pass on in ignorance and denounce any opinion that remains unpopular without even considering there may be a better way.  This is the idea of socialism, an idea rich in western societies.  As governments take more active interest in inflating growth with fiat capital they in turn become a greater force in deciding what is and is not right.  As people covered by this blanket of popular opinion we are therefore convinced that what is, is and what is not, should never be.  It can be compared to sheep that follow their Shepard to the slaughterhouse.  So clueless in euphoria is the majority, that any uprising is quelled by popular opinion and convinced to follow the rest of the herd.


The biggest trick played by western governments to date is the act of convincing the world that fiat money has real value.  This paper is exchanged for goods and services on a regular basis while gradually more and more fiat money is required to purchase the same set of goods even as the supply of such goods increases in an accelerated fashion when compared to population growth.  Are we still to believe that this money has value, if so for how long?  These questions will be given thorough attention later.


War with Iraq


Supposedly the United States is taking an “aggressive” stance toward Iraq to secure world democracy and freedom.  However, with the apparent lack of solid support from Arab nations, war seems unattainable and for good reason.  If the US takes out Saddam then Iraq is free to direct itself in a democratic manner which would be devastating to a country like Saudi Arabia given the fact that the Saudis have had complete control of Middle East oil supplies for so many years.  A democratic government in Iraq would be a major threat to Saudi Arabia as well as all other oil producing countries given new supply would hit the market.


What is liberation of the Iraqi people worth if we don’t free up oil supply?  If you look for the politically correct answer you would hear something to the effect that, “we are engaged in an aggressive stance against Saddam in part due to his support for global terrorism and pursuit of weapons of mass destruction.”  Valid points though these may be, it is also clear that the US economy is going to need some help if consumer spending is to continue to drive it.  Saddam is the pit in our cherry pie and as such is an excellent target to kill two birds with one stone.  If Saddam is ousted then the US looks like a powerful nation that defeated a rogue dictator.  In addition, the US government’s tight relationship with the Iraqi National Congress will be assurance enough that the black gold will run as fast as the Colorado River.  In all it’s simple; war with Iraq is good policy for the US and bad for everyone else.


War a Result of Economic Discontent


One thing is for sure regarding the possibility of war in Iraq.  It provides a valid excuse for massive defense spending by the US government and directly provides a boost to US GDP.  We’ve already mentioned the possibility that the government plays an important role to influence the popular opinion if not control it outright.  A major reason for this growing trend is a result of the government’s increased assumption of budget deficits to boost economic output.  Popular ideology within the realm of economists suggest that deficit spending is a good thing, in fact most believe it is the best method for bringing a country out of recession or at the very least spur economic revival.  I happen to agree to theory but fall short of putting full faith into the method when it becomes clear that deficit spending has been taking place to not only spur economic growth but to sustain it.  There is a fine line here.  If it is necessary for deficit spending to spur GDP then why doesn’t it ever lift off consumer spending?  The reason is simply the fact that consumer’s are programmed to spend on discounts and have become very savvy in the last 20 years at holding off big purchases knowing a price reduction is around the corner.  This phenomenon draws up stimulus spending by the government to fend of potential deflationary effects, which in turn causes increased inflation as more dollars are thrown in the market place.


A Visual Presentation of the Current State of the US Economy


We’ve already touched on a few ideas regarding the US economy and GDP in particular but it is difficult to gain a complete grasp of what is taking place without some form of visual aid.  The following is a companion to the information I’ve made available thus far and should help make sense of the situation.


Here we have graphed the percent change in Real Quarterly GDP over the last 15 years.  The outcome is straightforward and uneventful, it is however imperative to note that the volatility of quarterly GDP over this period was 0.56.  A little higher than I originally had anticipated.  Notice as well the negative GDP in 1990 and 2001.


It gets a little more interesting when we take a look at a few of the components of GDP.  We found that there is much uncertainty in the economy and according to a few of the graphs this “nervousness” has been persistent for a while.  Take a look at the charts below.  A clear pattern forms to point out this uncertainty.  We find it amusing to see that our elected policy makers and corporate management are the most uncertain of all.  However this is more than likely for good reason as these individuals are privy to knowledge sources that the public is not aware of.

When comparing Personal Expenditures to Real GDP it is more clearly drawn to us the correlation that exists between the two by which US economic growth is driven.  The correlation we found in this example was 0.53.  Our volatility number for Personal Expenditures came in at 0.49, which is evident of a high degree of consumer confidence and content.


Here we can see that quarterly changes in Private Investment is all over the place allowing us to immediately assume a higher volatility ratio.  Our assumptions were correct as volatility was calculated at 3.22.  This high volatility can “possibly” be attributed to the shifting of capital expenditures in an attempt to create a steady earnings growth model for corporations but that is only an assumption.  Although our volatility for changes in federal consumption and expenditures fairs a little better we can see a potential pattern of manipulation that begs us to question the integrity of GDP data as a whole.  In this component our volatility calculation came in at 1.88.  It is necessary to point out that in 2001 and 2002 public spending appeared to offset a drop in private investment.


This chart jumps out at you and we apologize for that.  Its inclusion is simply an attempt to remain unbiased in our analysis of the US government’s role in GDP growth.  Foreign investment represents the most speculative play on US GDP with a volatility of 47.53, which clears out any intrigue to why foreigners dislike the United States.  In respect of this we’ll have to drop a little prop to the Fed for stabilizing growth.


To summarize the previous outline it is clear that the US government and corporations are putting money to work to capitalize on dollar investments while the consumer remains highly complacent and somewhat lackadaisical in his/her confidence.  Therefore it is no wonder the policy makers and corporations are in a mad dash to find new ways to further boost consumer spending as it is the only true contributor to GDP.  In looking at the stimulus package presented by president Bush, it seems as though the flow of capital from consumer to corporate manager will be accelerated via a drop in double taxation of dividends.  It’s really ludicrous if you think about it.  The real beneficiaries of such a policy are those that hold majority stakes in the companies that issue dividends.  The increased expected return as a result of a slightly ballooned dividend yield hardly makes up for the contracting profit margins.  It is moreover another method of filling the pockets of corporate management and large private investors.  However, this plan is on a good track to being passed as Tom Daschle failed to bring anything better to the table. 


Another reason we feel this plan will be passed soon is because stimulus is desperately needed.  As consumer debt grows the ability of corporations to tap the consumer for more sales grows limited especially given that the cost of servicing debt appears to be heading toward a point of growing inline with total consumer debt.


In the graphs you can see that while consumer debt has been in an acceleration phase, consumer debt service payments have lagged somewhat.  The reason behind such a phenomenon is relatively simple.  Given the fact that interest rates have been falling the consumer garners the ability to take on more total debt due to his/her new ability to pay on that debt without affecting his/her paper wealth.  In the case of homebuyers, the person can take on debt for an equity stake, although a risky decision.  As we’ve explained in past issues. 



Our previous statements become clearer when we take a look at the changes in each.  While Consumer Debt has been growing steadily at about 2% in the last 10 years, we’ve realized a recent drop in the growth of Consumer Debt Service Payments as a result of lower interest rates.  Given the outlook that interest rates will increase the picture is clear that stimulus will be absolutely necessary for continued growth in consumer spending.   Just like a painting by Monet, we had to step back a little to see the picture clearly.  If the government doesn’t get stimulus to the consumer we’ll see GDP fall.  This is why the forecast for the near-term remains cloudy (for most).


Down with the Dow


While digesting these economic issues it is evident that we are experiencing a continuation of the devaluation of the US economy.  So where should money be put to work? 


If you frequent the mainstream media you’d be well aware of the rally that ensued in equities following the New Year.  Although we’ve had the opportunity once again to see this rally fail it is never the less disturbing to think of the “noise investors” that were roped in at the top and taken out by a mathematician’s computer program.  The idea of buy and hold is still prevalent among equity investors even though they continue to lose.  Now it’s a point of which they’ve lost too much to get out of the market.  If only these people knew that assets whose value is based on fiat capital are worthless.  If the Fed says they plan on printing money to infinity to fend of deflation then the long-term true value of these assets has to “approach” zero.  Therefore the target for the Dow is essentially zero.  Some may say I’ve taken the subject a little “Xtreme” but is there a contrast to such opinion given the information available to us?  The only value in the Dow today is a result of capital invested by individuals that have no comprehension for what is truly happening in the marketplace.  They are subject to information made available to them.  Information that is tailored to keep them invested while capital accelerates its alignment.  “Only the strong survive.” 



Here we have the daily changes in the Dow over the last two years.  Our volatility came in at 1.48.  A little high for someone invested in the long term.  Primarily this represents a static time in the market where change is evident but direction is not visible.  Therefore it is important to take into consideration the comments made by the Fed regarding the printing of dollars.


21st Century Gold Rush


We’re beginning to hear the technical analysts clamor that Gold is overbought and that people are misinterpreting the rise in spot price as a reason to buy and hold.  Their argument is that gold is not a tool for long-term investment rather a commodity that should be traded.  


Here we see clearly that gold should be accumulated rather than traded.  The volatility we calculate for Gold is 1.11 compared to the Dow at 1.48.  Gold is clearly a better choice to buy and hold than equity.  Most of this is available to us through common sense, but it is important to point out to the “fools” that gold is an investment tool.


We say these people should put their money in “fools” gold to match their foolish sentiment.  To say that one should not invest in gold is to say that history is wrong.  Try to make the argument that before the beginning of time people weren’t taking control of and holding gold.  Maybe the California gold rush was just a fathom of our imagination.  While the idea is simplistic it is lost in clutter of people that probably tried to trade gold based on market technicals.  It rarely works in a bull market because emotion is the true driver of the market and fear is the most influential emotion prevalent. 


We as human beings have a natural desire for “stuff.”  We crave stuff so much; we’re willing to take on debt to accumulate stuff.  In a fiat monetary system we are subject to inflation as a result of governments’ need to maintain and in some cases increase control.  The US government continues to make policy changes that drive a consumer to use dollars to purchase goods.  The idea being that an individual should buy goods now given the dollar won’t buy as much later.  Psychologically we are programmed to think the dollar has value while knowing that on an individual basis, each dollar is essentially worthless.  We joke about having been able to purchase a Coke for half of what we pay today.  “It seems like only yesterday.” 


Gradually we increase money supply and devalue the dollar.  So why have we been able to purchase more goods if the dollar continues its downward spiral?  We are tricked into having confidence in our government and its policies.  The only value in a dollar is psychological value.  If a country or individual goes against the US then that entity is destroyed.  The only means of keeping value behind a dollar is causing everyone to back it by fear.  Maybe it is only coincidence that the US is preparing to take unilateral action against its foes if necessary.  If the US can convince the world community that Iraq poses a threat then the world community will see a need for holding US dollars to support the “policing” of these rogue nations.  The only way the US can convince people of this is to appear invincible.  This is the primary reason for such a non-negotiable stance against the likes of Iraq, Iran and North Korea.  These countries represent anti-Americanism and their voices are being heard.  As a result the US must clam them up by any means possible.  If economic aid doesn’t work the target country puts a hard-nosed leader in power.  As a result the US will place sanctions on the target country when the leader begins accusing the US of foul play.  The economic sanctions are meant to target the people and convince them of an uprising.  However the reverse takes place and the leader uses the sanctions to increase fear among his people.  Finally as economic sanctions prove useless the US has a reason to go to war to “save the people.” 


In order for the US to maintain such a program it needs the consumer to spend excessively as we pointed out earlier, to boost GDP.  To stimulate such spending it is necessary to increase money supply and create wealth.  Therefore the Fed clearly presents a plan to fend of deflation by “any” means.  They’ll essentially print money to infinity, which, as we mentioned, drives equity toward zero.  As commodities are positively correlated to inflation; we can assume that if money supply is infinity then the “end-game” target price for Gold is infinity as well. 


This suggests that no matter whether governments choose to utilize a fiat monetary system or not, a gold standard will always exist in relation to the extent of currency inflation.  Given the statements made by the Fed and the stimulus packages available to policy makers it is imperative to realize that we are experiencing a “21st Century Gold Rush.”




All GDP related data courtesy of: United States Department of Commerce


All Consumer Debt related data courtesy of: United States Federal Reserve Board of Governors


Dow Jones Industrial Average data courtesy of: Yahoo! Finance,


Spot Gold price data courtesy of: Hquote, 

-- Posted Tuesday, 28 January 2003 | Digg This Article


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