-- Published: Tuesday, 20 October 2015 | Print | Disqus
By Jeff Thomas
In the early 2000’s, I began to advise friends and associates that much of the world would likely be entering a depression before the decade was out. In my belief, it would happen in stages, first with an initial mini-crash and recovery, but at some point, several years later, the recovery would prove to be a false one. The economy would remain in the doldrums. Then, a far bigger crash would take place and the world would be in a full-blown depression. As a hedge, I recommended that they buy gold, as gold would survive and retain value, as stocks, bonds and even currencies went south.
I turned out to be correct on the timing of the initial crashes, but entirely incorrect on the timing of the second, greater crash.
I considered it possible that the major events could begin as early as 2010, but would more likely occur from 2012 on. That date has passed, and although governments have consistently damaged their economies ever further, the house of cards, however shaky, is still standing.
Thankfully, I’m not alone in my inexact timing. Those investors and economists who have had decades-long records for accuracy in their prognostication have all been early in their predictions with regard to the major events that surround the coming crashes.
And each has recommended gold as a hedge, stating that, if and when markets do crash and currencies collapse, there will be a dramatic rise in the price of gold.
Certainly, gold continued its rise following the mini-crash of 2008 and it seemed that it was on its way skyward. Many prognosticators stated that, if it topped $2000, that would be it – there would be no stopping gold, as even the average person would finally understand that gold is not an investment as such, but a means of wealth preservation , especially during times of great flux.
But, after gold passed $1900, it took a dive. Goldbugs regarded it as an overdue correction, but the “get rich quick” punters dropped gold like a hot potato and gold remained down. Each time gold has rallied, the bullion banks have sold naked gold shorts in the futures market, then purchased the shares to be redeemed for bullion, which has then been sold in the physical market, hammering down the gold price. Now, four years after the fall from $1900, gold sits a price that makes it just low enough to prohibit the profitability of taking it out of the ground.
Certainly, it benefits both the banks and the major governments of the world to hold down gold and we should not be surprised if they endeavour to do so.
Nowhere is the “Gold is dead” message more prominent than in the US, where people tend to see the value of any commodity in terms of its relativity to the US dollar. Understanding gold’s real value would be easier if Americans regarded the dollar as “rising against gold” instead of “gold declining against the dollar.” This may seem like hair-splitting, but in fact, the dollar is concurrently rising against most of the world’s currencies. The currencies of most countries are, in fact, declining against gold.
These Are the Good Old days
The US dollar is looking good worldwide and, in fact, so is gold – it’s just that, at present, the dollar is in the number one spot. In fact, I wouldn’t rule out a burst of faith in the dollar when, inevitably, the recent papering-over of the Greek problem once again fails and the EU as a whole is clearly in trouble. When that occurs, gold will again rise, but the dollar will also be likely to rise – possibly more dramatically than gold.
But, unlike gold, the dollar is at risk. US debt has placed it in a precarious position from which it will most certainly fall. As billionaire investor Jim Rogers has repeatedly stated, “I’m long on the dollar, but I hope I’m smart enough to get out in time.” Recently, he added, "If gold goes under $1,000, I hope I'm smart enough to step up and buy more gold — maybe even a lot of gold."
The dollar is not a truly strong currency - it is essentially, “the best looking horse in the glue factory.” It will be the last to go, but it will indeed go. We may have a bit of time before that happens. Whether it’s measured in months or years we can’t be certain. But right now (and especially if the dollar rises further against gold), gold is a bargain. It has either reached its bottom, or will do so in the foreseeable future. Any significant drop would be a sign to back up the truck and load up, as its eventual rise is inevitable.
These are, in fact, the good old days, a time when gold is comparatively cheap.
Availability of Gold
But those who are just getting on board with the concept of wealth preservation through gold ownership are bumping into a problem that they hadn’t anticipated – it’s getting harder to find any for sale.
With the news of each major sell-off, investors assume that availability must be considerable, yet physical gold is becoming ever-more difficult to locate. The Chinese, who have a vested interest in holding down the price, repeatedly downplay their purchase volume, yet even the amount that is known to pass into Chinese hands far exceeds that which they claim to hold.
Further, the issue of coins by those countries that produce gold and silver coins for sale is steadily diminishing. Large private suppliers are advising their retailers that their inventories cannot be maintained. And at the street level, coin shops are announcing that they’re no longer able to promise even thirty-day notice deliveries of coins.
So, what does this say to the potential gold buyer? Well, first, it says that, whilst there is still paper gold out there in the form of ETF’s, the punters whose approach has been to chase the market, hoping to sell high and buy low, have largely left the market and moved on to other speculations. Those who continue to hold gold tend to be those who do so for wealth preservation. For them, a year (or even several years) of low prices is not a reason to dump the yellow metal. They are the long-termers, who will hold, no matter how low gold may go in the short term. In fact, should the price drop below $1000, they (like Jim Rogers) are likely to buy with both hands.
But, there’s still the dollar to be considered. As long as it continues to rise against other currencies, gold will appear to be falling in price. The dollar promises to remain high as long as the yen and the euro hold out. But should they fall, the dollar will be exposed.
Let’s say the Chinese start selling their US debt back into the US market in a bigger way, or the EU defaults on its debt, or the inflation caused by QE creates commodity price spikes. There are many, many possible triggers that will cause the dollar to tank and, surely, one of them will occur, we just don’t know which one, or, more importantly, when.
Of one thing we can be reasonably certain. If the dollar starts to head south, we will see a flood of people seeking to buy gold in an effort to preserve their wealth. However, as all the punters have already been driven out of the market and only the long-termers remain, potential buyers will find themselves making higher and higher offers, as sellers will be almost non-existent.
With any investment, when panic buying sets in, the sky is the limit. We shall therefore see a gold mania. Most economists predict a figure in the $5000-$8000 range, but other estimates go far higher.
A gold mania is not imminent, but I believe it is inevitable.
Jeff is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government.
He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man.