I recall a couple of years ago when son Scott and I visited Congressman Ron Paul in Washington being eager to explain to Dr. Paul why I thought deflation, not inflation, was the biggest problem facing the American economy. After I began explaining my views, the Congressman quickly interjected, "But aren't we really talking about the same thing?" I had to agree that we were. Inflation and deflation are two sides of the same messed up fiat monetary system. Without gold or silver or some commodity as money, bankers/politicians force a definition of money on the people rather than allowing the market to determine what will serve as money. Then, having defined money, these ruling elite rip us off by printing more of it, which they then proceed to use to their own benefit, at the expense of the productive sector of the economy. Because this legalized means of theft is pleasing to the selfish interests both of politicians to steal votes and bankers to steal wealth, there is an unmistakable lure to create more and more money which, given the fiat money fractional reserve banking system, means creating more and more debt. In that process unnatural behavior begins to result that leads to a massive misallocation of resources, market distortions and disequilibria and growing instability in the economy.
But there is an end to the extent to which inflation of the money supply can rise, and when that end comes, we shall unfortunately witness a collapse of the system. Congressman Paul is a student of the Austrian economists, and I'm sure he is very familiar with the arguments of Ludwig von Mises that I published last week. Mises understood that ultimately the banks would have to tighten credit and that when they did that, the inevitable deflationary collapse of the system would result.
But what if the bankers never do tighten credit, as seems to be the intention of the Greenspan Fed? Can't deflation be avoided by an ever-increasing supply of money? And cant these "wise men" know when to shut the spigot off before hyper inflation breaks out? Mises understood that hyperinflation would break out eventually when people begin to believe that rising prices are not a temporary phenomenon. I think the answer to that is "no," for some of the reasons outlined in my answer to the following question.
QUESTION: Mr. Taylor, Given your dire predictions of a serious depression it would seem that gold equity stocks would not fare much better than other asset classes. Recent sell-offs in the US markets over the past 2 years have seen equal sell-offs in the gold shares as well. Should such a dooms-day scenario take hold--and there's plenty of fuel for such an event--will gold equities really fare much better as people rush to raise cash?
ANSWER: Let me say first that I do not agree that the gold stocks have suffered the same fate as the general equity markets in the United States. Gold shares have charged ahead over the past two years; at least ours have. In 2002, our "A" Progress shares were up as follows:
2001 - "A" gold stocks (+11.08%) vs. S&P 500 (-13.04%)
2002 - "A" gold stocks (+148.04%) vs. S&P 500 (-23.37%)
2003 - "A" gold stocks (+19.2%) vs. S&P 500 (+26.38%)
So, over the last three years, we had a combined gain of 178.32% for our Progress "A" or producing companies, compared to a LOSS of 10.03% for the S&P 500!
What about the junior gold stocks? They lost 23.01% in 2001 when it was not yet apparent that the Gold Cartel (headed by our ruling elite bankers) and Barrick Gold's manipulation tactics could be overcome. In other words, as long as the markets viewed the rise in gold as a temporary move, the juniors did not do well. However, in 2002, the juniors, which normally lag behind the seniors at least on the upside, gained 113.46% and then another 142.61% in 2003. So the junior gold shares from 2001 through 2003 gained 233% vs. the above noted loss for the S&P 500 of 10.03%.
Therefore, I do not agree with your statement that gold shares have done as poorly as general equities have over the past two or three years. To the contrary, gold shares (both producers and exploration firms) have already, even in this very early stage of the equity bear market, worked extremely well in protecting investors from general stock market losses. Gold and gold shares are the best insurance you can "buy" to hedge against stock market losses, because history has proven there is no other asset so negatively correlated with stocks and bonds (and in fact all paper assets) than gold, and perhaps to a lesser degree, gold stocks.
However, your question about the performance of gold shares in a deflationary environment is a very good one. We can never know for sure what will happen to gold stocks or anything else in a devastating deflationary collapse. But a collapse of liquidity is likely to take place as the Greenspan bubble machine stops functioning and is thrown in reverse. As Richard Russell points out, what we have now is a huge global short position against the dollar. At some point in time, those shorts will have to be covered. The scramble to cover those shorts will begin to take place when so much debt money (fiat money) is created that debt can no longer be serviced. Beyond that tipping point, what currently may appear to be very healthy balance sheets will suddenly become insolvent. A growing number of debtors will not be able to service their debts, thus setting in motion a string of domino-like corporate and personal defaults that feed on one another, cascading out of control until all the implosion energy is consumed and the system collapses. At that point in time, the enormous Keynesian and monetarist lies will be exposed. We will finally come to realize the fallacies that are being fed to us every day on CNBC, that all we need is a loving Santa Claus at the Fed named Mr. Greenspan to push the money-supply buttons, and lower interest rates to shower eternal prosperity on the world.
As this deflationary Kondratieff winter default begins to expand, there will be an enormous scramble for cash, as what is currently an enormous dollar short position will have to be covered in order to meet debt obligations and to merely buy life's necessities. At this point in time, two or three assets (gold, cash, and possibly silver) will be the most sought after assets of all. Cash, gold, and possibly silver will gain enormous levels of purchasing power relative to everything else, as massive and unprecedented levels of debt are repudiated through bankruptcies and defaults. There can be no doubt that this deflationary outcome will take place. The only issue is the timing.
Again, the real live dynamics that are inevitably bringing about the ultimate deflationary collapse are pictured by the following chart, which shows total debt growing much more rapidly than income (GDP) in the United States.
The Debt/GDP Chart
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Greenspan and Bernanke can try to remedy this problem by printing more money. But, as we have pointed out time after time, to do so means that debt grows even more rapidly relative to income, because debt is the raw material from which money is manufactured in a fiat currency system, at least as long as we have a fractional reserve banking system in place.
But what about gold stocks? If the price of gold rises dramatically, into thousands of dollars per ounce, will this enormous deflationary (loan reversal) scramble for cash mean that people will go out and sell their gold stocks? What happened during the last deflationary collapse in America, during the 1930s?
I think the answer to the first question is yes. Gold stocks may come under some pressure when the scramble for cash comes about because some folks, who are over-indebted or who lose their jobs or for whatever reason MUST raise cash to survive, will so to speak, sell gold stocks to put food on their tables. And to be sure, initially, to the extent the gold stocks begin to lose value (at least their nominal value), it will be come more difficult to raise capital to explore and develop gold mining projects. And bear in mind, gold mining is a very capital-intensive industry. It seems clear to me that junior mining firms will be more at risk, however, than senior gold mining firms that are in production because they will have cash flow from which to fund their expansion.
As for the 1930s, it is very important to realize that Homestake Mining increases very dramatically, so that if you had placed as little as 15% of your portfolio in that one stock, you could have basically negated the losses you would have suffered had you owned the Dow Jones Industrials during the 1930s. So I believe building your gold share portfolio around a company like Newmont Mining and to a lesser degree the Agnico Eagles or Gold Corps or other larger "A" progress companies on our list is a very sound strategy. That, in fact, is why we keep these companies that are less risky in production in our Model Portfolio, even though I still believe that over the long haul, the juniors who are successful in their exploration efforts will be the really big winners. But I do believe junior gold shares are likely to be more at risk than those companies in production because it may become very difficult for smaller companies to raise capital. The question we will need to ask each and every junior on our list when this deflationary scenario unfolds is what, if any, bargaining power they have. Can they stay in business until competing interests give them a fair price for the assets they have proved up in the ground? Companies that are real grassroots companies without having established gold mineralization in the ground (our Progress "D" and to a lesser extent our Progress "C" issues) will be more at risk than the "B" and "A" firms.
GOLD
This picture illustrates how gold has broken through the recent corrective downtrend line. It looks like gold is ready to challenge the $430 level in the near future.
Silver continues its dramatic rise and as we were going to press with this message, it was trading over $8 per ounce. Speaking of silver, the following chart is hugely bullish. Silver is now knocking on the door of $8/oz. with nothing but "blue sky" above us. We are happy to say that we are well positioned in our newsletter, having a host of company recommendations with both gold and silver projects being explored and developed.
Published with permission of www.decisionpoint.com
As James Turk pointed out in his latest newsletter, gold is now rising against not only the dollar but also against the Euro and the Yen. Although I continue to think the dollar will decline, vis-à-vis other currencies, ultimately the fraudulent currency system that has been forced on the world's citizens by the unholy alliance that exists between bankers and politicians will break down. When it does, gold and possibly silver will rise dramatically against these paper money currencies, once their worthlessness becomes apparent to citizens around the world.
Target Prices for Gold
Below is a chart showing the average monthly price of gold since it began to float from its fixed price of $35 per ounce until the of 1966 through the end of March 2004. The average monthly price of gold in March 2004 was $406.68. The next peak that needs to be taken out for gold to move higher was the average price of $420.27 in February 1990. Following that, we have a peaks of $492.63 in November of 1986; $500 in January 1986 and finally $670 in September 1979.
With gold now making progress against currencies other than the dollar, the likelihood of some or perhaps all of these former peaks being taken out over the coming months and years appears very good. How quickly the price rises above these former peaks will depend in my view on how quickly confidence is broken in the U.S. dollar which in turn is likely to depend greatly on the U.S. equity markets (which we believe has begun its next leg down in what will prove to be the worst bear market since the 1930's) and what transpires on the global economic scene. If as we predict, the U.S is entering the Kondratieff winter, a shattering of global confidence in the world's reserve currency cannot be far behind that. Or perhaps, a gradual erosion of confidence in the dollar will provide the trigger mechanism for a Kondratieff cycle decline in the U.S. and to an extent in the global economy.
April 5, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com