Why Gold Is Essential for National Health & Your Investment Health
Jay Taylor
I may be dating myself a bit by telling you my interest in gold began during my sophomore college days, in 1967, at a small school named Hesston College in the tiny town of Hesston, Kansas. A history professor named Dr. Payton Yoder offered the thesis that when nations debase their currencies by reducing the amount of gold and/or silver backing those currencies, over time, the work ethic and morality of a nation declines.
After two years of college I joined the work force, at which point I had time to ponder Dr. Yoder's thesis. It always made a lot of sense to me. So as I watched events unfold during the volatile 1960s and early 1970s, it became crystal clear to me that Dr. Yoder was correct. Presidents Johnson and Nixon did not want to tax Americans to pay for the Vietnam War or for Johnson's socialist programs known as "The Great Society." So both Presidents signed into law, budgets flowing with huge amounts of red ink.
As now, but on a much smaller scale, federal debt was funded with newly created money, thus leading to a cheapening or debasing of the U.S. dollar. Foreign countries then, as now, said we don't really very much want your increasingly worthless U.S. dollars. At that time, global currencies were fixed relative to each other, and countries that accumulated dollars could turn them in for gold, with each $35 fetching one ounce of gold. And that is exactly what foreign nations did. President Charles De Gaulle of France, in particular, sent huge amounts of U.S. dollars back to the U.S. in exchange for real money-gold.
Alarmed by the sudden plunge in gold reserves and realizing that confidence in the U.S. dollar would quickly evaporate unless policies were changed, Nixon opted for the cowardly way out. He said to the rest of the world, Look! You can all go to hell! We are the United States of America and we are not going to give you our gold. With that unilateral default and declaration by America, the whole world ceased to be on a gold standard. And with that change, huge amounts of debt money and inflation were unleashed around the world, setting the stage for a catastrophic economic calamity that I believe we are just now starting to witness.
Where do we go from here?
Because of mounting strains on the global economy caused by a fiat currency regime that has denied the ability of markets to operate freely, the world economy is buried in a business contraction the likes of which we have not seen since the Great Depression. In fact it may be worse because the amount of over indulgence that led up to this depression is far greater than the over indulgence engaged in during the 1920s that led up to that Great Depression. This over indulgence has taken on two forms. First, we saw the mal investment in the investment world during the 1990's dot com bubble and then during the first decade of this century from the housing bubble. Both of these bubbles were manufactured by the Federal Reserve Bank.
Secondly, mal investment has taken place at the hands of American consumer who has lived so far beyond his means that he became the only meaningful engine of the world's economy. That consumer driven bubble was also manufactured by the Federal Reserve Bank by pumping huge amounts of money into the banking system which induced banks to lend recklessly to consumers.
All this mal investment and over consumption has left the American economy and global economy in a shambles. It has resulted in an exceedingly over leveraged and hence unstable financial system. This instability has led policy makers to think they need to create even more money in order to stabilize the system when in fact the creation of more money only makes it less stable. Why so? Because our fiat money is built upon liabilities, not an asset as is the case with a gold backed monetary system.
As a result of current policies, we are witnessing the creation of an exponential growth in the money supply. In other words, with a rapidly growing number of dollars being printed, the value of those dollars in terms of real money, namely gold must decrease. Hence the price of gold is destined in terms of dollar purchasing power, is destined to rise dramatically over the months and years to come.
How much higher gold can rise in nominal terms will depend on whether the impending monetary and economic chaos follows a path of deflation or inflation. In either event, I do feel safe in predicting that gold will soon be permanently marked in four or even five digits rather than three. The only question is what will the first digit be?
Either extreme, inflation or deflation will be kind to those who own gold bullion. We feel certain, however, that the very best environment for gold mining companies will be a deflationary environment. And at this point in time, I continue to believe the global economy is heading over into a deflationary abyss. That should be very helpful for gold mining profits, for reasons I will discuss in upcoming blogs. We will also be providing you with a gold stock idea from time to time on this site and sharing with you the ideas of a brilliant investor, Chen Lin, who works with me in producing his profit-earning newsletter called, What Is Chen Buying? What Is Chen Selling? You can subscribe to both of these letters, as well as Roger Wiegand's Trader Tracks newsletter, at www.MiningStocks.com.
I remain hugely bullish on gold and gold stocks but believe we are going to witness a downturn in the equity markets in general during the second half of this year and it could be one that scares the heck out of everyone. Initially, we think gold shares will suffer as well, but as the cost of producing gold declines, relative to its price, we anticipate gold mining profits will surge into 2010. With that, some major fortunes will be earned by holders of gold shares, even as most other sectors continue to watch their earnings plunge with a continuing depression. Financially, it will be the worst of times for those who do not own gold, but it will be the best of times for those who do. Stay tuned!
July 23, 2009
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
Email this Article to a Friend 
Printer Friendly Version