A Gentle Bull Market in Gold

28 November 2007

Gold's last bull market was in the 1970s. That market's period of greatest strength was from August 1976, where gold had actually fallen by almost 50% (from almost $200 in February 1975) to about $100 per ounce, to January 1980, where gold briefly traded over $800 per ounce in a 3-day spike.


That $800 gold price was not to be revisited for 27 years, as new technologies and industry consolidation made commodity extraction cheaper and cheaper, conservation moderated demand, and economic dynamics strongly favoured increasingly globalized business and industry over commodity production.


During our era, the Dow Jones Industrial average has mounted a 33-year bull market extending from 1974 (or if you prefer, from 1982) through 2007. Our generation has only known rising financial markets. (These charts are available through Adam Hamilton at Zeal.)

In my view, we are therefore ill-prepared for the economic fate that soon awaits us. The present 2001-2007 gold bull market has already extended much longer than the 3-1/2 year bull run of the late 1970s. As already discussed on this site, in inflation-adjusted terms, gold's 1980 high was actually closer to $5000 per ounce.


Our present gold bull market has been very gentle, as the present chart (borrowed from Richard Russell) illustrates. Most citizens are unaware that financial investments are collapsing in value in terms of gold, or that they are soon likely to decline in US dollar terms as well.

From all appearances, the present gold bull market will extend much longer than the 1970s gold bull market, even if we date that historic run from $35 in 1970 to $882.50 in January 1980 (with that dramatic 50% pullback situated almost dead-centre, from 1975-1976).

The present gold bull market remains in its gentle stage, and parabolic growth (of the kind which attracts popular attention) is likely still many years away. It appears that our present gold bull market will be of much longer duration, and that suggests to me that the corresponding inflation-driven economic decline, which is generally associated with gold bull markets, will very likely be of longer duration also.

My advice - take care, and continue investing in gold and silver. It appears that this strategy will work for many more years to come!

Finally, Gold Has Reached a New High in Canadian Dollars!

25 November 2007

It has been a long wait. Gold has been logging new highs in US Dollars for much of the latter half of 2008.


On Friday, gold eked out a new high in Canadian Dollars, at $813.00 (CDN), finally bettering its $807.00 level in February 2007 and its $810.00 level in May 2006.

Gold's recent $848.00 high in US Dollars did not phase the Canadian market, as our dollar had soared to $1.10 US at that time. Since then, the Canadian Dollar (along with the other resource-based global currencies) has retreated, in our case, to parity with the US Dollar.

So, for Canadians, gold's early November 2007 $848.00 US Dollar high was not sufficient to move the precious metal into record territory, but the recent $824.70 US Dollar close on Friday, November 23, 2007 moved us to a 27-year high gold price.

I note that gold has also attained a 27-year high in Australian Dollars.

The gold bull market continues to unfold.

It is most meaningful when gold rises in all currencies, and finally, that is now happening. Gold's ascending move as the resource-based currencies consolidate is particulalry meaningful, as this development reinforces the message that gold is a currency, not a commodity.

A Better Way to Understand Excess Liquidity

23 November 2007


Excess liquidity is a difficult concept to grasp.

Let’s try this explanation for simplicity:

In 1980, there were 1.8 trillion US dollars in circulation.

Now there are 13 trillion US dollars in circulation.


That is an increase of 722% in 27 years.

Is the US producing 7.2 times as many goods and services now as in 1980?

Of course not – the economy has grown, but not that much.

This means that, in fact, too many extra dollars have been produced during the past 27 years.

Who dishes out the extra dollars?

This is the designated role of the US Federal Reserve Board.

Who, therefore, do you conclude that Wall Street watches most closely? (a) The US consumer? (b) US business leaders? (c) The Chairman of the Federal Reserve Board?

If you guessed “c,” move to the head of the class!

The Federal Reserve Board is more important than either the US consumer or US business leaders in creating a flow of money in the country. And, by producing so many US dollars, the Federal Reserve Board has had a major role in enhancing the flow of US dollars around the world at large as well.

Now, what do you think happens when too many US dollars chase too few goods and services?

Great! You’ve got it again! It now takes more US dollars to buy the equivalent goods and services, and we call this “monetary inflation.” No wealth whatsoever has been created, we have just increased the number of dollars that are required to purchase more or less the same quantity of goods and services.

Are you ready for the next question?

How do these new dollars get distributed – after the Federal Reserve Board has dropped them out of a metaphorical helicopter?

You’ve guessed it again!

Everybody who is alert to this game scrambles to get their hands on them first!

And who watches this game most closely? You guessed it – the professional investment community!

Now – who do you think actually lays their hands on these excess dollars before anyone else?

If you guessed “Wall Street financial firms,” then keep your seat at the head of the class.

The denizens of Wall Street watch every move that Ben Bernanke (the current chairman of the Federal Reserve Board) makes, and every breath he takes. They read tea leaves to divine his every move!

Why?

Mr. Bernanke dishes out the excess dollars that the Wall Street players desire to get their hands on first – ahead of you, me, or anyone else.


Do you imagine that this is an orderly process?

Aha! You’ve guessed correctly again! The process is in fact quite disorderly – in fact, it is a mad scramble.

The financial professionals on Wall Street (figuratively – really the US and global financial services industry) engage in inventive processes to rake in the new funds as fast as they flow out of central banks around the globe (as central bankers almost everywhere engage in more or less the same process as the US Federal Reserve Board).

In the late 1990s, these “financial innovators” promoted IPOs (initial public offerings) of technology and internet stocks. More recently, they have capitalized on the liquidity-inflated housing market, creating “mortgage-backed securities,” “collateralized debt obligations” and off-balance-sheet “structured investment vehicles.”

They sell them to second, third and fourth parties down the line, charging significant fees in each case. Ultimately, the money that we invest in housing and mortgage payments flows through these vehicles. It is a game of hot potato – as the last one holding the hot potato (yet another over-valued and over-hyped Wall Street investment product) loses the game.

How do human beings feel – psychologically – when the quantity of money keeps increasing – and as the value of the money we hold in our pockets inevitably dwindles?

You’ve got it right! We feel insecure.

Case in point – the real rate of inflation is on the order of 10%. Let’s say your bank is paying 3-4% interest on savings. If you are a saver, you are losing, say, 6-7% per year. On a long-term basis, your savings will so substantially dwindle in value that you will not be able to guarantee a secure retirement.

Add to that the fact that your take-home pay is probably not increasing at a 10% per year rate to match the rising real cost of living.

How do humans respond to such a guaranteed losing game?

We enter into higher-risk games, attempting to protect and enhance the value of our diminishing (due to monetary inflation) assets.

In the 1990s and early 2000s, we bought internet and technology stocks.

Then as the technology and internet bubble faded, we increasingly bought homes (as a “real investment”) and risky investment products based on questionable mortgage loans to unqualified buyers.

Many Americans (in particular) pulled equity out of their supposedly ever more valuable homes in order to pay down other debts and to purchase consumer products (as saving had become increasingly counter-productive, spending was the remaining alternative for many).

International interest in casinos and other forms of gambling has exploded as the money supply has ballooned out of all proportion to the real growth of the domestic and global economies.

Result?

The gap between the rich and the poor in the US has increased to its greatest level in history.

The middle class has stopped participating in the wealth creation process.

Many speculators, borrowers and risk takers have lost much or all of their risk capital – and in too many cases, their life savings.


Chief executives of Wall Street firms have recently lost their jobs due to the emerging discovery of the worthlessness of the investment products they have been buying and selling (taking with them $150 million compensation packages, as well as the proceeds from commissions on the worthless pieces of paper that they had been buying and selling, often many times over).

Where did the $150 million packages come from?

Remember – that was the money that Mr. Bernanke – and before him, Mr. Greenspan – handed out – and which came back to Wall Street through mainstream investors’ purchases of hotly-promoted financial products (most recently, “creative” mortgages and home equity lines of credit, etc.).

What is the solution?

The increase in the money supply should not exceed the increase in production of goods and services – period.

Reining in money supply growth would bring the current madness to a screeching halt – initially creating substantial economic disruption – but ultimately allowing for the restabilization of financial, real estate and other markets, thereby – somewhere down the road – making saving worthwhile again – and financial speculation and risk-taking considerably less attractive.

What would it be like on Wall Street in such an environment?

At first, it would be like watching paint dry, there would be almost nothing for the Wall Street professionals to do, and many would leave the business as the commissions and speculative gains evaporated. But gradually, over time, there would re-emerge an honest business in selling much more modest and straightforward investment products of real value to American and global investors.

But that is not here or now. Not yet. Not for many years to come.

We have to wring out the excesses of the current glut of North American and global liquidity.

This wringing out will be a lengthy and painful process. But its eventual outcome will be positive – normalizing and restabilizing our economic system – at a much scaled down pace and scope of operations.

What to do here and now?

Gold and silver remain wise investments when the financial system is insecure, though their volatility (in terms of unstable US and other world currencies) will continue to reflect the vagaries of wide-ranging and often irrational human sentiment.

Buy gold and silver and diversified shares of the mining companies that produce them, gradually, fewer ounces and shares when prices rise, and more ounces and shares when prices fall. Over time, the value of precious metals and mining companies will certainly rise, and you will be well-rewarded for your self discipline and longer-term vision.

I am hopeful that this brief lesson may prove of value to you…………………

The Swiss Franc Continues to Climb in Canadian Dollars

21 November 2007

Just an update from my November 9, 2007 post.

The Swiss Franc has continued to climb steadily since I recommended it as a purchase for Canadians on November 9.


As you can see, this one has legs. There is still further room to move just for the Swiss Franc to get flat for the year (2007) against the Canadian Dollar.

The Swiss Franc is still a good buy, even here, though most of the quick and easy gains have been taken.

See my more recent Swiss Franc comments here, here and here (9 February 2008).

My July 14, 2008 analysis of the Swiss Franc (based on conservative money supply growth in Switzerland) is here: "All You Need to Know About Global Money Supply in One Place."

Here is a list of my blog entries concerning the Swiss Franc:

1. Canadians, Buy the Swiss Franc Now!

2. The Swiss Franc Continues To Climb in Canadian Dollars.

3. My first compliment from Fleck.

4. Currencies 101.

5. Another Swiss Franc Buying Opportunity for Canadians.

6. All You Need To Know About Global Money Supply in One Place.

7. The Swiss Franc Is Still Strong.

8. Use "FXF" (CurrencyShares Swiss Franc Trust) To Buy the Swiss Franc.

9. Gold is Better Than the Swiss Franc.

10. Swiss Franc Alert.

11. Gold Isn't Gaining All That Much... In Canadian Dollars!

Addendum: Many visitors to this site have enquired about how to purchase the Swiss Franc. The most direct method is simply to purchase Swiss Francs from a currency dealer. In Canada, Custom House Currency Exchange offers competitive rates. You may also wish to contact your broker about an exchange-traded fund or a Swiss Franc government bond (which would pay interest on your investment, but could be subject to decline in value even if the currency itself rises relative to other currencies). Additionally, some banks permit investors to maintain foreign currency accounts. Sophisticated investors may wish to enter this trade through purchasing futures contracts or other types of options, such as calls. Many brokers specialize in foreign currency purchases, so I suggest that you start with a broker familiar to you. As I understand it, Pamela and Mary Anne Aden at Aden Research, for example, will execute foreign currency trades for their customers. But for those who don't know how, simply purchasing the currency from a competitive currency trader (possibly your local bank, or a trader recommended by your bank) will be a good place to get started. Ideally the "spread" between the buy and ask price for the currency should be less than 4 cents on the dollar (roughly 4%). That is, you should not pay a premium of greater than 2% to purchase the currency. This being said, my own experience with currency dealers is that it is very difficult to exchange currencies in this idealized range. Our local broker's rates are much higher, for example. Never exchange currencies in large amounts at airports, hotels and other locations that are charging large premiums to provide a convenience service to travellers. Look for the best rates any time you exchange currencies!

August 5, 2008: As currency purchases at fair exchange rates are extremely difficult to obtain, I am now recommending that mainstream investors simply purchase the FXF exchange traded notes, "CurrencyShares Swiss Franc Trust" (denominated in US dollars) through their broker. This exchange traded note uses the interest on its deposits to cover the management fees of the fund, with the result that you will receive modest interest income via this method.

Note (9 August 2008): Most global currencies happen to be weak against the US dollar right now, as the US market is presently driven by the fantasy that the US government's now $800 billion rescue of the financial system by "nationalizing" the government sponsored enterprises (Fannie Mae and Freddie Mac) and using taxpayer money to guarantee worthless bank assets will make everything "all right again." That fantasy will persist for a season, and then it will fade, as all fantasies do.

In the meantime, the Swiss Franc may not have bottomed for US investors. However, I note that the Franc is holding up fine against the Canadian dollar, as both are under pressure versus the US dollar, which is presently enjoying a transient upward move due primarily to concerns about the stability of the Euro. Pamela and Mary Ann Aden advise that the market value of the Euro is presently stronger than that of the Swiss Franc. My own take is that the Swiss Franc clearly possesses superior fundamentals compared to the Euro, which relies upon the historically unproven concept of international cooperation (don't expect the cooperation of the European countries to be maintained in hard times or in crisis!).

October 11, 2008: If you're interested in Swiss Franc Government Bonds, here is a recommendation from WikiAnswers. This brief note recommends EuroPacific Capital. Its C.E.O. and Chief Global Strategist, Peter Schiff, is a long-term US dollar bear who saw the present economic meltdown coming years ago. EuroPacific Capital is a secure and well-managed company, and I can certainly vouch for the reputation of Mr. Schiff, whose articles on the mismanaged US economy I have been reading for years on Safehaven.

While I am currently recommending gold as a superior store of value to the Swiss Franc, gold trades as both a commodity and a currency, with the result that its market price is much more volatile. If you are a long-term buy-and-hold investor, gold will certainly outperform the Swiss Franc as a long-term store of value. But if you don't like $100 price moves in a day (gold has had two such moves in the past month - including only yesterday!), then holding the Swiss Franc may prove less unsettling.
_

Canadians: Buy the Swiss Franc Now!

9 November 2007, edited 27 July 2008

The Canadian Dollar "bubble" is now winding down. (We bought our US Dollars for travel on Wednesday, when the Canadian Dollar hit its peak. It's lost its bloom for now.)

The Swiss Franc has been traded much more conservatively this year, as it is a low-interest carry trade currency, similar to the Japanese Yen, but with better fundamentals in my view.

Carry trades are gradually unwinding, meaning that the carry trade currencies are rising.


The Swiss Franc is now taking off relative to the Canadian Dollar.

Canadians - buy the Swiss Franc now!

You heard it here on November 9, 2007!

Here is a list of my blog entries concerning the Swiss Franc:

1. Canadians, Buy the Swiss Franc Now!

2. The Swiss Franc Continues To Climb in Canadian Dollars.

3. My first compliment from Fleck.

4. Currencies 101.

5. Another Swiss Franc Buying Opportunity for Canadians.

6. All You Need To Know About Global Money Supply in One Place.

7. The Swiss Franc Is Still Strong.

8. Use "FXF" (CurrencyShares Swiss Franc Trust) To Buy the Swiss Franc.

9. Gold is Better Than the Swiss Franc.

10. Swiss Franc Alert.

11. Gold Isn't Gaining All That Much... In Canadian Dollars!

Addendum: Many visitors to this site have enquired about how to purchase the Swiss Franc. The most direct method is simply to purchase Swiss Francs from a currency dealer. In Canada, Custom House Currency Exchange offers competitive rates. You may also wish to contact your broker about an exchange-traded fund or a Swiss Franc government bond (which would pay interest on your investment, but could be subject to decline in value even if the currency itself rises relative to other currencies). Additionally, some banks permit investors to maintain foreign currency accounts. Sophisticated investors may wish to enter this trade through purchasing futures contracts or other types of options, such as calls. Many brokers specialize in foreign currency purchases, so I suggest that you start with a broker familiar to you. As I understand it, Pamela and Mary Anne Aden at Aden Research, for example, will execute foreign currency trades for their customers. But for those who don't know how, simply purchasing the currency from a competitive currency trader (possibly your local bank, or a trader recommended by your bank) will be a good place to get started. Ideally the "spread" between the buy and ask price for the currency should be less than 4 cents on the dollar (roughly 4%). That is, you should not pay a premium of greater than 2% to purchase the currency. This being said, my own experience with currency dealers is that it is very difficult to exchange currencies in this idealized range. Our local broker's rates are much higher, for example. Never exchange currencies in large amounts at airports, hotels and other locations that are charging large premiums to provide a convenience service to travellers. Look for the best rates any time you exchange currencies!

August 5, 2008: As currency purchases at fair exchange rates are extremely difficult to obtain, I am now recommending that mainstream investors simply purchase the FXF exchange traded notes, "CurrencyShares Swiss Franc Trust" (denominated in US dollars) through their broker. This exchange traded note uses the interest on its deposits to cover the management fees of the fund, with the result that you will receive modest interest income via this method.

Note (9 August 2008): Most global currencies happen to be weak against the US dollar right now, as the US market is presently driven by the fantasy that the US government's now $800 billion rescue of the financial system by "nationalizing" the government sponsored enterprises (Fannie Mae and Freddie Mac) and using taxpayer money to guarantee worthless bank assets will make everything "all right again." That fantasy will persist for a season, and then it will fade, as all fantasies do.

In the meantime, the Swiss Franc may not have bottomed for US investors. However, I note that the Franc is holding up fine against the Canadian dollar, as both are under pressure versus the US dollar, which is presently enjoying a transient upward move due primarily to concerns about the stability of the Euro. Pamela and Mary Ann Aden advise that the market value of the Euro is presently stronger than that of the Swiss Franc. My own take is that the Swiss Franc clearly possesses superior fundamentals compared to the Euro, which relies upon the historically unproven concept of international cooperation (don't expect the cooperation of the European countries to be maintained in hard times or in crisis!).

October 11, 2008: If you're interested in Swiss Franc Government Bonds, here is a recommendation from WikiAnswers. This brief note recommends EuroPacific Capital. Its C.E.O. and Chief Global Strategist, Peter Schiff, is a long-term US dollar bear who saw the present economic meltdown coming years ago. EuroPacific Capital is a secure and well-managed company, and I can certainly vouch for the reputation of Mr. Schiff, whose articles on the mismanaged US economy I have been reading for years on Safehaven.

While I am currently recommending gold as a superior store of value to the Swiss Franc, gold trades as both a commodity and a currency, with the result that its market price is much more volatile. If you are a long-term buy-and-hold investor, gold will certainly outperform the Swiss Franc as a long-term store of value. But if you don't like $100 price moves in a day (gold has had two such moves in the past month - including only yesterday!), then holding the Swiss Franc may prove less unsettling.
_

Social Stability, Population Regulation and Global Warming

4 November 2007

A brief comment.

In my view, the global warming debate boils down (no pun intended) to a question of how we regulate the size of our planet's human population.

I don't see how our planet stands a chance if population continues to grow vigorously from its present base of 6.75 billion souls.

But there is a deeper conundrum.

How can we go about answering the questions of regulating population size and carbon and greenhouse gas emissions and promoting resource conservation, etc., without first answering a far more fundamental question?

The fundamental question is, what kind of society do we wish to inhabit?

Specifically, how do we wish to balance the competing demands of civil freedom, economic freedom, the rule of law, security of title/ownership, limits on license, protection of the vulnerable, restraint on the powerful, etc.?

Until we have decided what kind of society we desire to share with our fellow homo sapiens, there is literally no hope of resolving the critical questions of human population regulation, environmental degradation, resource conservation, global warming, species diversity, ecosystem preservation, etc.

In the interim, I favour a single strategy: role-modeling.

What do I mean?

Those who think they have a better idea for how we should resolve these fundamental and vexing problems should demonstrate the solutions by living them out in their own lives.

I am intolerant, for example, of demonstrations, activism, continental campaigns mounted in diesel-spewing busses (even if it is bio-diesel), attack ads, public griping and complaining, and blaming the villain of your choice (indolent citizens, greedy corporations, short-sighted governments, Islamic extremists, religious fundamentalists of all stripes, heathens, scheming and manipulative US or Chinese totalitarians, the military industrial complex, bureaucracies at all levels (including the UN), resurgent Venezuelan, Bolivian and Russian Communists, emerging and unstable nuclear powers, oppressive dictators, etc.).

If you think you have a better idea, do it.

If it’s more than you can do alone, find some others to join you, and do it with them.

Don't talk about it. Don't complain about it. Don't blame others for the problem. Just do it.

Live your dream and vision.

Inspire others.


My own role-models remain Helen and Scott Nearing. They wrote about their thoughts and ideas, but simply lived the lifestyle they thought was necessary to make human survival possible. I also believe that Ivan Illich did this well. Ludwig von Mises laid out the theoretical basis for how societies can work in terms of social and economic freedom, and accomplished this from a psychologically enlightened perspective. Hernando de Soto and Muhammad Yunus have articulated how these solutions can be applied to disadvantaged third and fourth world societies.


Therefore, don't be a global griper. Be a global role-model.

$800 Gold, No Headlines

2 November 2007

My wife Susan and I watched as gold crossed over from $799 to $800 per ounce at midday today. Gold has previously traded above $800.00 on only two days in January 1980.

As this is a historic milestone, I immediately checked the news services for the headlines trumpeting $800 gold. I looked all over Yahoo.com's news feeds. Nothing.

In all fairness, both Bloomberg and Reuters UK carried stories, posted at 1:50 and 2:16 pm. Eastern time respectively. Marketwatch picked up the story at 3:21 p.m., and this briefly surfaced on Yahoo’s specialty Marketwatch section for about half an hour before disappearing again. This story didn't make the top ten in either Yahoo business or Canadian business news, let alone “Top Stories” or “World News.” I had to go to Kitco (a specialty precious metals investing site) to find the Reuters and Bloomberg versions of the story.

What does this tell me?

Gold is going much higher than $800.00 this time around. This gold bull market won't slow until virtually everyone has noticed. And it appears that this development will be many years in the future.

At the present juncture in history, gold’s trading in all-time record high territory is news only for those with a special interest in its coverage.


Gold did trade briefly at $887.50 on January 21, 1980 before collapsing in the 21-year bear market that took it to its dismal February 20, 2001 low at $255.00.

Now let’s see if anyone notices when gold reaches $875.00 per ounce.

By the way, on February 20, 2001, the US dollar index traded at .4424 times the price of gold. On October 31, 2007, this same ratio stood at .0961. That is, the US dollar index has lost 77.3% of its value against gold during the relatively short interval from February 20, 2001 to October 31, 2007 (a brief 6-1/2 year period).

My advice – don't let the news pass you by any longer. If you have not already done so, do consider investing in gold in the near future. (By the way, I am not a registered investment adviser, and I can offer no predictions about short-term trends in the gold price, which is very volatile.)

Haven't I suggested investing in gold on this blogsite before – on July 28, 2005, when gold was trading at $425 per ounce?

Susan and I purchased our first gold mining stocks (Northgate Minerals and Bema Gold Corporation) on August 26, 2003. On that date, gold was trading at a price of $362.00 per ounce. Now, 4 years later, gold has gained $444 in added value, in US dollar terms. That is a 123% gain over this period (though the gain is much more modest in Canadian dollar terms, due to the soaring international value of the Canadian Loonie).

With a closing price today of $806.00, the price of gold is still attracting little notice in the mainstream media.

Figure it out – it’s still not too late to be an owner of gold!

I'll meet you here again when gold tops $887.50 per ounce, and moves into all-time record territory. And we'll again examine the headlines on that day. My best guess – our next meeting will be only a few short months away.