Taylor On Gold
Indeed that has always been the purpose of fiat money-to rob those who are
powerless to trade freely. America used its power following World War II to tell the rest of the world to go to hell when in the late 1960's France and
other nations demanded gold in exchange for paper dollars rather than the
increasingly worthless Greenback. They had the right to do so under the old
Breton Woods agreement. But as the worlds' lone western superpower at the time, Nixon had the ability to simply tell the rest of the world he would
not give them honest money (gold) for paper dollars which he continued to
create out of thin air. In other words, like the neighborhood bully who
defines the rules of a playground game and then picks the kids on his team
that allow him to ensure victory, America has used its power and might to:
1) Define for the world what money is and then 2) to print endless amounts
of it which we have been using decade after decade to lay claim to valuable
resources around the world.
The notion that we can have something for nothing did not stop with the greedy bankers and politicians who created this system of theft. It filtered down to Americans in all parts of our society so as the labor union members looked at their fat cat bosses they wanted and got their fair share too. And so we have an auto industry-to name just on industry-that is now so fat and inefficient that it can no longer compete in the global economy.
The right policy now as always, would be one that encourages savings and
hard work. That is what we must do if we are to ever again become
competitive on the world scene. But the politicians have always opted for
the easy way out so they can secure reelection. So they print money and
deficit spend. America has irresponsibly used its super power status to
create massive amounts of money out of thin air that it has used to acquire
and consume for today with little concern of our long term long well being.
But there are growing signs that foreigners are once again getting their
fill of dollars. They are mad as hell and they are not going to take it
much longer. Chavez in Venezuela has reportedly sold his U.S. Treasuries.
Iran is going to start an oil market that will settle in Euros rather than
dollars. China and many other countries are saying they have enough dollars
and want to diversify. And Russia has reportedly said that if the U.S. goes
into Iran to force them to use dollars rather than Euros, they will have to
do it over their military objections. And don't forget, Russia and China
have for the first time engaged in joint military maneuvers.
The handwriting is on the wall. Soon the piper will demand payment and when
Americans with their declining incomes can no longer pay the piper, I
believe it is likely the margin clerks will go to work, forcing a deflationary economic collapse. And by the way, as noted above longer term interest rates are now starting to rise. I'm wondering if the world community has not hammered home the point to the Greenspan Fed. "You guys had better start paying us something more for your increasingly worthless paper money or we will pull the plug on the dollar." And as suggested in our charts above, rising rates may be starting to trigger what could be the start of a housing market collapse?
When the piper cannot be paid, I believe we will enter the freeze-up period
of what Ian Gordon calls the Kondratieff-winter. What happens when incomes are insufficient to pay the mortgage on inflated home prices? What happens is that folks have to start selling all manner of non essentials to come up with the cash to pay for essentials in life like food and shelter and
electricity and heat.
As to the Kondratieff winter freeze up, are we there yet? I think we are
getting close. And by the way it is important to see what foreigners are
saying about America and its profligate economic policies. After Congressman Ron Paul's weekly essay toward the end of our weekly hotline
messages, this week I am publishing an essay by a Chinese writer named Lau
Nai-keung, titled "Its Time To Take Seriously, a US-Led global Recession."
Mr. Nai-keung expects an economic downturn within two years. I think he is
spot on in his analysis of the problems and imbalances that pose to take
the global economy down. The only area of disagreement might be in
predicting that inflation will rise dramatically when foreigners stop
selling their goods to America. In my view, now that we are in the early
stages of the K-winter, before the debt repudiation process has gotten
underway, Americans are so indebted that sharply rising prices will very
quickly trigger "margin clerk" activity which is likely to set deflation in
motion. In other words, I am not so sure we will see anything like a
hyper-inflationary event before the K-winter freeze-up sets in which will
bring with it massive debt defaults, unemployment, plunging incomes and
plunging prices. Gold and cash will be king. More in line with other gold
bugs, he author of this essay seems to think money creation by the U.S.
when foreigners run from America will result in hyper inflation. We will
keep an open mind in that regard but our view is that debt is simply so
great in America that a deflationary tipping point is not far away.
GOLD LOOK BETTER AND BETTER
Getting back to the auto stock charts above, I think what we see here is
just the beginning of a long term trend that will lead to plunging
standards of living for Americans. At this time, this is beginning to take
place as the cost of living for Americans is rising dramatically even as
real wages are in decline.
How do we protect ourselves? We use our paper money to buy real money,
namely gold, which cannot be created out of thin air. This is a long term
endeavor and even though gold may seem expensive now to those of us who
bought it at under $300, the yellow metal remains cheap in terms of the
enormous amounts of new money creation by the Fed (about $1 trillion per
year now) gold remains very, very cheap. It will continue to remain cheap
until Americans wake up to the fact that their paper money is an outright
fraud. That day is coming but before most others wake up to that fact, you
can still use what they think is value-paper money-to acquire the real
thing-gold. When this system breaks down, I agree with John Hathaway who
manages the Tocqueville Gold Fund who says gold will then be quoted in 4
digits rather than 3. The only question in my mind is what the first digit
in that four digit number will be. That will depend on how much longer
policy makers and bankers can keep the current party going. The longer it
goes, the higher the price of gold will go because more dollars will be
created out of thin air against which real money is measured. As the supply
of dollars continues to skyrocket, the less valuable they will become in
terms of real money.
The gold chart above illustrates that we remain in a powerful gold bull
market. The average gold price so far in October is $470.09. The 20-month
moving average is $422.16 and the 40-month moving average is $388.44. With the current monthly average so far above the longer term moving averages, we would not be surprised to see a significant pull back. However, on a shorter time horizon, Bob Hoye who is as good as they get at forecasting future market activity, is suggesting the two month potential for gold is $542 while the short term downside risk is $460.
As for gold mining shares, Bob thinks the juniors will do exceptionally
well during this time frame. Also he notes that gold still has many people
owning it for the wrong reason. They see gold as a commodity rather than
money, and so they are buying it as an inflation hedge. As we have seen, gold
shares especially have been a poor inflation hedge because commodities like
oil and machinery have risen much faster than the price of gold. We are in
complete agreement with Bob and Ian Gordon too, that gold and gold shares
will have their most glorious day when deflationary forces take over the
economic landscape.
October 17, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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