-- Posted Tuesday, 2 September 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
Gold bugs now face a unique opportunity to profit from the fluctuations in the markets. But in order to understand this it is necessary to understand the relation between economics and politics. The decline in gold from mid-July to mid-August was brutal, and few predicted it. But it is now over, and those who sell at the present time will be selling at the bottom.
THE CORRUPTION OF GOVERNMENT
It is a proposition as old as humankind that some men want to live off of the wealth created by others. The common thief is the simplest example of this. However, the thief is deterred by the local police. Thus, throughout history more intelligent thieves have devised ways to steal which were not against the law, indeed which had the law on their side.
For example, the medieval aristocracy lived in luxury off the labor of the serfs. Serfs were (largely) farmers who were not allowed to quit their “jobs.” When the serfs rebelled, the world moved to the age of democracy.
When the American revolutionaries of 1776 set up their government, their intention was to defend the property rights of the common people (who had been the serfs of previous ages). Many of the state constitutions say this explicitly. But the desire to live off the labor of others is very strong,, and the pro-robbery faction managed, in the 1930s, to devise a clever lie which has enabled them to steal from the American people for the past 75 years. This is where the gold standard, the price of gold and current topics, such as the strength of the dollar and today’s Federal Reserve policy, come in.
THE LIE OF THE WELFARE STATE
The revolution of the 1930s consisted of telling the common people that their government would “rob from the rich and give to the poor.” No government in history has ever done this. The American and British Commonwealth governments of the 18th, 19th and early 20th centuries pretty much stopped the robbery of one man by another. All other governments have robbed from the poor and given to the rich. A simple examination of our current government shows that rich people will “buy” politicians by donating to their campaigns (and sometimes giving them money directly). These rich people are then the recipient of government favors in which a big role is played by the politicians who have been bought. (John McCain’s relationship with Charles Keating and his censure by the Senate as one of the ‘Keating five” is a good example.)
For another example, a drug company will offer an FDA bureaucrat a do-nothing job for $250,000/year to get one of their drugs approved. The drug is approved, kills 100,000 Americans (Viox), and the drug company makes a lot of money. Donations are also made to key members of congressional committees. For another example, Hillary Clinton was called (by those in the know) “the candidate of Wall Street” because she received so much Wall Street money. Another example is former Rhode Island congressman Fernand St. Germain, who spent a long period as head of the House Banking Committee and always ran for election as being an enemy of the bankers. But when he retired in 1989, the Rhode Island banks created a no-show job for him to thank him for all the favors he had done them in his position as chairman..
So our post-1933 governments are based on fraud. They claim to rob from the rich and give to the poor, but what they do in fact is rob from the poor and give to the rich. How is this fraud possible?
The answer is that on March 9, 1933 F.D.R. abolished the gold standard and gave commercial bankers (in conjunction with the government) the privilege to create money. Whenever the government comes up with a new spending program to “help the poor,” it pays for the program by printing money. This depreciates the currency, and makes average prices rise. The poor suffer more from the general rise in prices than they gain from the government program. Further, the easy credit (which goes along with the printing of money) causes a stock market bubble. It is sort of legalized counterfeiting. This is why the gap between rich and poor (which narrowed through most of American history) is now rising.
GOLD IS THE ANSWER
This, of course, opens up an opportunity for more intelligent Americans to avoid the government’s attack on their wealth. The average union worker votes Democrat because he thinks that the Democrats are robbing the rich to give to him. But the Democrats originated the system of printing money and depreciating the currency as a way to rob from the poor. This explains why real wages in the U.S. declined by 18% from 1972 to 2002. However, the person who understands economics will see the need to put his wealth in some real asset. Then, as the currency depreciates, his wealth will be safe.
Three good possibilities are stocks, real estate and gold. All 3 of these move higher over the (very) long term, but the process is cyclical. I call it the commodity pendulum. Commodities are moving in giant long term cycles. When commodities are on the upswing (e.g., 1970-1980), then the play is to buy gold. During this time interest rates will be rising, and stocks will be falling. When commodities are on the downswing (1980-1999), the Fed will be able to ease, and the stock market and real estate will rise. For this reason, I was a gold bug through the 1970s but turned into a stock bug in 1982. In 2002, I became a gold bug once again.
Therefore, the existing establishment hates gold, and every gold bug should know that he will have to fight the (present day) government. Two famous government attacks on gold in the ‘70s were Aug. 1971 and June 1978. In the first, gold fell from $44 to $41, a drop of 7%. In the second, gold fell from almost $250 to below $200, a drop of 20%. In both cases, it was a great buying opportunity. Gold rose to $196 by the end of 1974 and to $875 in early 1980.
ATTACK BY THE OECD
What we have had from mid-July to mid-August was a coordinated attack on gold. The O.E.C.D. (Organization for Economic Co-operation and Development) coordinated central bank buying of dollars and put the dollar up from 71 to above 77 (on the U.S. dollar index). This put gold down and made the charts of gold and the gold stocks look bad. However, central banks are political, not economic, organizations. They do not follow the profit motive, and normal chart studies (which assume that all players are profit oriented) do not apply. They hate gold bugs, and they try to frighten gold bugs and scare them out of the market. If pro-gold ideas spread through the American public, then the establishment’s privilege of legalized counterfeiting will be rescinded.
So the true gold bug will not be unduly sad about the drop of mid-July to mid-August 2008. He will recognize it as akin to the drops of 1971 and 1978, acts of government designed to scare you away from gold. You need to counter this by holding defensive positions which can ride out such dips and still be around to fight another day.
The ideal of a society which would separate politics from economics was advanced in the late 19th century. Prior to that time the subject was called political economy in recognition of the fact that politics and economics were so closely intertwined. They were intertwined because various vested interests used the government to make themselves rich. Sadly, we are back in such an evil age. Gold bugs have to understand that today politics and economics are mixed, and they can expect to be periodically attacked by the government. Most of the ordinary people are deceived by the government and the media. They are lied to. They believe the lie. They lose their money. Then they believe the same government and the same media when they tell their next lie. And so it goes.
Gold bugs have to be made of sterner stuff. Gold bugs have to see reality as it is. And the reality is that you cannot promise everyone something for nothing. You cannot create wealth by printing money. You have to balance your budget. And you cannot base your economy on an elastic currency.
I offer two forums to educate people on money in particular and economics in general. The ideological forum is my web site, www.thegoldbug.net. You are invited to visit this site (no charge) for a discussion of the major ideas behind the institutions of our day. The profit-oriented forum is my newsletter, The One-handed Economist ($300/year). This takes clear-cut positions on the markets of our day and recommends specific stocks (or other ways of playing the dominant trend). In the 8-22-08 issue, I discuss the possibility of a V-bottom in gold and whether Bernanke will give in to the pressures on him to raise interest rates. I thank you for your interest.
# # #
-- Posted Tuesday, 2 September 2008 | Digg This Article | Source: GoldSeek.com
