-- Posted Monday, 8 September 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
9-8-08
The technical evidence is pouring in that gold is making a secondary test of its Aug. 15 low. This means that we are at an important buy point for gold, and people who have been watching from the sidelines now have an opportunity to enter the market.
What we have just been through is a central bank dollar support operation. The paper aristocracy badly injures the economy under the rationalization that they are creating wealth out of nothing. You remember the description of Greenspan as a miracle man. This is because he was able to create money and ease credit, and thus push up the stock market, without causing (much of) a rise in consumer prices.
This appeared to be a miracle to the paper aristocracy. He was creating wealth for them, and there were no bad consequences. But you can’t create something out of nothing. You can’t create real wealth by printing up pieces of paper. And a person who believes in miracles is not a scientist..
The explanation is that the establishment’s methods for measuring the economy are sadly deficient. They have no understanding of the commodity pendulum. When a Federal Reserve easy credit policy makes stock market traders richer, then someone else has to get poorer. Ultimately this will feed through to the general public, and the public will become poorer via higher prices. But ultimately can be a long time.
The commodity pendulum occurs because, when the money supply increases, commodity producers do not raise their prices anywhere near as rapidly as producers of consumer goods. There is thus a period when the stock market (and other members of the paper aristocracy) are gaining, and the gains correspond (in part) to losses incurred by commodity producers. In the U.S. over the Volcker-Greenspan era, this was the period from 1980-1999. The stock market went up, but there was little “inflation” because commodity prices were being driven down, and commodity producers were absorbing the loss. Since commodity producer losses are not measured (by the establishment) as part of the economy, then, “Wow, Greenspan is a miracle man.”
Well, commodity prices were driven so low by 1999-2001 that they were seriously undervalued. The past 7 years have seen a partial correction of this undervaluation – but only partial. As the higher commodity prices feed through into consumer prices, all of a sudden the Consumer Price Index is starting to accelerate to the upside. In July, the 12 month rate of advance was 5.5% (the highest in 17 years).
So the rise in consumer prices, which the establishment feared but which did not happen in the ‘80s and the ‘90s, is happening today. They are too short range in their thinking.
Mull this over in your mind, and you will see the impossible problem the establishment faces. They drove commodity prices down for 20 years, and during this time they printed massive quantities of money. The first aggressive rise in commodity prices was from mid-August 2007 to mid-March 2008. You are not going to correct 20 years of imbalance in 9 months. Neither are you going to correct it by attacking gold via a dollar support operation.
We have a guide to future events from studying the commodity pendulum of the 1960s and 1970s. The downside of this pendulum was from 1963 to 1971. The upside was from 1971 to 1980. As commodities rose, bonds and stocks declined. The total decline in real stock prices (1966-19982) was almost 75%. All of those people who listened to the establishment of the late ‘60s and “bought good, sound stocks for the long term” lost their shirts. Meanwhile this same establishment was heaping scorn on the gold bugs of that day. From 1970 to 1980, the price of gold multiplied by a factor of 12 in real terms. What do you want to do, reduce your wealth by ¾ or multiply it by 12?
To paraphrase Voltaire, the current establishment “has learned nothing and forgotten nothing” since that time. Today they still recommend buying and holding blue chip stocks for the long term. And they still heap scorn on the gold bugs. The average mutual fund has not made a dime since the beginning of the 21st century. The price of gold? It has multiplied by a factor of 2.8 (so far).
In 1980, most of the top performing mutual funds (10 year record) were the gold funds. How did the establishment of that day deal with this? They said, we will pretend that this never happened. Whisk, whisk, it is out of our minds.
How repugnant. Imagine trusting your life to a doctor who said, “Well, this medicine killed the last 5 patients I used it on, but I will pretend that this never happened. Whisk, whisk.” Imagine trusting your car to a mechanic who said, “This part failed in the last 5 cars I used it on, but I will pretend that this never happened. Whisk, whisk.” Well, the vast majority of the people in this country trust their money to a financial adviser who does the same thing. They are a horde of lemmings rushing blindly toward the cliffs.
I am the economist who discovered the commodity pendulum back in the mid-1990s and the one who fashioned Austrian theory economics into a tool for forecasting market action.. To my knowledge, the One-handed Economist is the only financial newsletter which analyses today’s events based on these principles. Here in the 21st century we have a great advantage. We have the record of the first upswing of the commodity pendulum, which occurred in the 1970s. We are now in the second upswing of the commodity pendulum, and while things will not be exactly the same, they will follow the general script. This gives us a sizable advantage over all other analysts. We have the big picture.
Right now the big picture tells us that, from time to time the establishment declares war on gold bugs. Currently we are in one of these wars, as there has been a central bank support operation in favor of the dollar which has pushed it up above 79. Indeed, the current situation looks a lot like November 1978 when Jimmy Carter declared war on the gold bugs and knocked the price of gold down by 20%. What a buy opportunity was there my friends. Gold went from $200 to $875 in the next 14 months. You have to make a decision. Are you going with the lemmings, or are you going with the winners?
In the One-handed Economist, I analyze both gold and gold stocks using basic technical principles. In each issue, I review bonds, stocks and commodities. Sometimes I stand back and look at what is happening over the long term. Sometimes I zoom in close and look at the short term.
If you want to get the flavor of my writing, I invite you to visit my web site www.thegoldbug.net (no charge). This is devoted to social commentary (with an economic orientation). For those who want the hard analysis which helps you make money, I invite you to subscribe to the One-handed Economist ($300 per year). Here I select the area of the financial markets which I think will be the most profitable (currently gold) and then narrow things down and make specific recommendations.
I am a strange bird and hard to classify. I was a gold bug starting in 1965 and held on, calling the top nicely in January 1980. Then I became a stock bug in 1982 and remained grand cycle bullish on stocks until 2007. Meanwhile I became a gold bug again in 2002 (on the breakout of a giant saucer formation). That is what I expect to be for the foreseeable future, but when we do come to the ultimate top in gold, I think I can claim to have the best chance to call it in the market of the future as I did in the market of the past.
As Homma Munehisa, the inventor of Japanese candlestick charting used to say, “Are you making money today?”
# # #
-- Posted Monday, 8 September 2008 | Digg This Article | Source: GoldSeek.com
