A Bull Market in Gold - The Flip Side

August 5, 2002

It is interesting how, when you are long a particular investment, you try to find reasons to justify the long position; and when you are bearish and out of the market you tend to want the market to fall. It's a phenomenon called "talking to your book" and it is potentially counter productive to wealth accumulation.

Around 35 years ago I came across the Kondrat'eff cycle, when I was (then) a relative expert in technical analysis of stock prices and markets. The concept made sense to me then, as it still does. In short, I have since that time devoted a small part of my mind space to contemplating the potential consequences of economic swings and cycles. For the past couple of years I have been long gold and silver shares and completely out of the equity markets, but my thoughts tend to focus more on Social issues than on Financial issues.

I have been reading the essays on this web site for about two years now, and it is of interest to me that we have a sort of cheerleading atmosphere going here. About the only technical analysis technique I have not seen discussed here is Gann Theory, and about the only significant omission in the field of cyclical analysis is the reference to importance of Pi (22/7) in cyclical timing. Otherwise, the subject has been pretty well covered - right down to the "outing" of the behind-the-scenes manipulation of the gold price.

For the record, I believe the S&P can (probably will) fall at least a further 50%, and I can make a fairly solid argument for gold heading towards at least US$3,000 an ounce over the next decade or so.

You would think that being out of equities and long gold, I would enjoy talking to my book, but I have also been focusing on the flip side - and I feel far less sanguine about that. There is a part of me that is fairly uncomfortable about the prospect of being correct this time around.

Let's take a short look at the "drivers" behind the economies and the markets.

Whilst Kondrat'eff is famous for his Long Wave Theory, he was not the first, and some significant work has been done since his day. From subsequent, more refined research it has been identified that the core "driver" of the world's economies from the commencement of the Industrial Revolution right up to the present appears to have been the Technologies that were related to successive waves of energy sources - wood, coal, oil and, next, natural gas. As an aside, it is of interest to me that Warren Buffet has recently been amassing assets in Gas Pipelines.

The primary technologies that drove the 20th Century economies were transport related (automobile, jet aircraft) and man-made petrochemical based raw materials such as plastics and fibers. As a baby boomer growing up in the 1950s and 1960s it came to my attention that one out of every four people in the developed world was at that time employed in an activity that was somehow related to the automobile.

Because I came to understand that it has been "energy input" related technologies that have historically provided the single largest segmental source of employment opportunities in the Long Wave economic up-cycle, I also understood that Information and Telecommunication Technologies merely provide a support infrastructure to the world's economies. I.T & T facilitates greater efficiency of communication and trade, but it defies common sense that I.T & T would or will ever be a "driver" of wealth (except maybe of Bill Gates' personal wealth).

In 1975 the world's markets for automobiles approached saturation point. In that year, the oil price peaked and it has been languishing ever since. To sustain the automobile industry, manufacturers have diversified into niche products like 4 wheel drives, and open top sports cars. The Leveraged Buyout "mania" of the 1980s was merely a natural response to the opportunity to recycle previously accumulated wealth. The explosion in the IT & T Industries in the 1990s was facilitated partly by a need for increasing efficiency in markets that had, to all intents and purposes stopped growing, and partly by a loosening of the money supply. Of significance is that in 1982, during Ronald Reagan's regime, a decision was taken to allow the USA to become the "driver" of the world's economy through deficit spending. Bill Clinton's strong dollar policy was merely an afterthought to the main decision.

Since the early 1980s, (when the US Government Pension Funds were close to insolvency because a balancing of the US budgets had been "engineered" through fancy bookkeeping by transference of wealth from these funds) the USA and its citizens have been increasingly living off capital and on credit.

To mask the high probability that the gold price would start to rise strongly as a result of these decisions, and would thereby unmask the behind-the-scenes shenanigans, a decision appears to have been taken in the early 1990s to actively manage the gold price. If it could be kept from rising, perhaps we could buy some time to allow the next set of technological drivers to emerge and become economically significant.

What will these technologies be? Well, they will probably be related to Natural Gas and transport, and it seems that they may be related also to electricity generation and power grid infrastructure. The technologies will probably be "clean", and will likely be related to Fuel Cells and High Temperature Superconductors. There is also a need to overhaul the water storage, treatment and delivery infrastructure on a world-wide basis and these industries should probably move out of private hands back into public hands. In this particular area, the interests of the greater community far outweigh the interests of the investors who seek to control - for personal profit - the management of this critically important resource.

Unfortunately, some seriously short sighted decisions were taken which had unforeseen consequences:

  • Loose money policies gave rise to mal-investment, and huge volumes of financial resources were literally wasted. The loose money policy in the USA created the biggest stock market boom in history, and a slew of mind numbingly stupid business ideas were funded under the banner of a "new economic era". (As an aside, the capital that was not lost on the equity markets is now at serious risk as the residential property markets are just beginning to retreat from their own blow-off phase. Further, the equity markets appear dangerously close to entering their second down leg in the Primary Bear Market)
  • Loose money policies gave rise to opportunities (and increased incentive) for corruption, and the ethical fabric of both business and government became noticeably frayed
  • Management of the Gold price gave rise to a suppression of the symptoms which, in turn, allowed the patient's health to continue deteriorating undetected by more trusting and less politically self-serving constituencies
  • Individuals and Governments were allowed to accumulate debt levels that are now, on balance, unsustainable and unserviceable
  • Banks became increasingly creative in developing debt products that could be classified otherwise, and in "hiding" the evidence that they were probably at or below the minimum equity/asset ratios that had previously been laid down by the Bank for International Settlements as a systemic safeguard.
  • Perhaps most serious of all, the USA Government failed to ratify the Kyoto Protocols - thereby sabotaging any lingering possibility that natural market forces would ensure a timely emergence of the technological "drivers" of the next up-wave.

As a result of these six (non exhaustive) consequences of lapses in political judgment, the world now finds itself with a mountain of unsustainable and unserviceable debt, an excess of production capacity in a slew of "old technology" industries, a gaggle of international banks that are in all probability in breach of their solvency ratios, and a significant number of important "clean energy" technologies that have been slowed down in their march towards market penetration and their potential for employment generation.

And all this begs the question: "Do we really want the gold price to explode upwards?"

Surely such a phenomenon will be accompanied by:

  • An implosion of the debt house of cards
  • A collapse of faith in international currencies
  • A series of competing devaluations accompanied by an avalanche of protective trade tariffs
  • A collapse of international trade
  • An economic depression of world-wide proportions on a scale never before experienced - EVEN IN THE 1930s
  • An increasing propensity for war on a world-wide scale

I put it to you here that the collective intellect of the people who recognise that all is not well would be more fruitfully devoted - not to finding reasons to justify an upward explosion in the Gold Price - but to finding ways and means of preventing this from happening.

Just as aspirin will take away the symptoms of a headache, suppression of the gold price is not the way. We need to be applying our minds to how we can accelerate the march to market of the new, employment generating technologies. The politicians should be lobbied - not with wild eyed validations of gold price suppression - but with constructive suggestions of what should be done to avoid the growing threat of an implosion of the debt mountain.

To avoid a capsizing of the social boat in which we all sail, the world absolutely needs to muddle through this unfortunate set of circumstances in which we find ourselves. We would be best served by jettisoning self-serving politicians like Bill Clinton and George Bush, and we need to put into positions of power men (or women) who both understand the problems, and have the integrity to work towards honestly solving them. The world needs to exit the era of Democracy, and enter a new era of Meritocracy, where leaders are appointed because they deserve to lead and not merely because they seek to lead.

What the world absolutely does NOT need - is an exploding gold price. Believe me, not one of the people who have (so far) cumulatively visited this board roughly 60 million times since its inception will enjoy the consequences of having made profits in this particular way.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce