Gold, Common Sense and Patience

April 10, 1999

During the last part of 1998 and continuing into 1999, there has been an increasing amount of soul-searching among intelligent people around the world over the condition of our money system, asset market price levels, political problems in many countries, and how all of these are impacting the price of gold. This soul-searching is certainly justified in my opinion and is worthy of comment.

Regular and long time readers of Gold-Eagle may remember that I have posted three rather lengthy articles over the last 15 months on gold, stock markets and fiat currencies. I have reread all of these articles recently and I can say to you that all of them are as valid today as they were the day they were written. Needless to say the passage of time has caused some of the charts to be outdated and a few of the items discussed need slight revision. For example, when I wrote "Monetary Gold Mismanagement in the Twentieth Century", I discussed the strength in the Silver market which was apparent at the time. I did not know then that Warren Buffett was a large buyer in that market which has been reported since I wrote the article. I would encourage any reader who has not seen these articles to find them in the Editorial Section of Gold-Eagle and read them. If you read them previously but your memory is hazy on the content, I encourage you to reread them again. The reason for this is simply because they go a very long way in explaining why gold prices are being held down artificially and are at a very low level historically. Why stock prices are too high in relation to gold prices. Why fiat paper money is being devalued around the world. And lastly, why market volatility will stay high and probably increase as 1999 unfolds.

Some market observers appear by their comments to find the manipulation of gold prices to be hard to understand. Let's discuss this. There is certainly no lack of evidence that world governments work very hard and expend a great deal of taxpayer money in their efforts to control the value of fiat paper currencies and interest rates. Gold is the ultimate money and for that reason is anathema to statist politicians around the world; especially in Washington. This is true because they can only manipulate fiat paper currencies and steal wealth thereby from their unsuspecting constituents. When these statist politicians manipulate interest rates and engage in dirty fiat currency floating exchange rates, why should we be surprised when they manipulate gold prices? After all, gold is the ultimate money and has been for thousands of years. They can ignore the price of gold only to their peril.

The current worldwide experiment with fiat paper currencies and the fractional reserve banking system now under way is just that, an experiment. Evidence is everywhere around us, and especially on the Gold-Eagle pages, indicating that both of these experiments are aging poorly and are likely to come apart at the seams. It takes time for systems to prove viable or faulty. We are now undergoing the latter stages of this evaluation. It is impossible to determine to the day or hour just exactly when the system will fail and be replaced.

This brings us to the items in the title. Gold is there because it is eternal, has stood the test of time as a substance that can aid humans through tough times, and because it will reassert its dominant position as the premier form of money at some undetermined future date.

Common sense comes next. It is included because it is just a matter of common sense to realize that statist world governments will control all of the facets of money they can; from interest rates and the amount of fiat paper and digital money in existence, to other items such as the price of gold. It would be foolish of them to let the gold price stand in their way of successfully manipulating the national and world economies, when they have the gold reserves and the means to force gold prices down in the short term. The key here is short term. At some point in the future, the overwhelming amount of fiat paper and digital money currently sloshing around the globe, will swamp the system when enough of the world population finally realize it has little, if any, more value than toilet tissue (In Germany in the 1920's, their paper money became at the end of the inflationary period worth less than toilet tissue). This will happen when faith and confidence is lost in the various governments producing the fiat money. In the last few years we have seen this happen in the Far East, Russia, Mexico and South America. Even the new Euro is having trouble. So far, the US Dollar has escaped this fate and has even strengthened as people around the world have converged on the dollar as a safe haven, since it is considered a reserve currency. We need to remember the inherent value of even the mighty US Dollar is nil when confidence in it is lost, because it is a fiat currency just like all of the others. Also, since all fiat currencies in history have lost value and most ultimately became worthless or nearly so, common sense again speaks to us and suggests it will someday happen to the US Dollar.

Patience is said to be a virtue. If so, it is a virtue hard to acquire. No better evidence of that needs to be searched out than to observe the large amount of anxiety and soul searching that exists on the Gold Forum area of Gold-Eagle concerning the price of gold and the government manipulation of gold supply and demand. I personally have been greatly surprised that the powers that be in Washington and around the world have been able to keep the system operating this long. This is a tribute to the Republican Congress, Greenspan and Rubin in most part. Greenspan's term will expire soon. Rubin may not be around after 2000. The Republican Congress appears impotent lately. It appears to me that patience is required of all of us hard money advocates while we wait for the inevitable to come to pass; namely, some sort of return to a gold standard where gold will be revalued upward commensurate with its long term value. Will that mean a $400 or $4,000 per ounce price, or something in between or above $4,000? I don't know. No one knows. We must be patient and see how the future develops.

What should we do while we are waiting? In my opinion we should already own some hard assets in the form of gold or silver in some form of bars or coins. In addition, owning some precious metal mining stocks is probably worthwhile. People who do not now own any hard assets should start a program of acquiring them soon. People who already own some should reassess the amount they own in relation to total assets and adjust their holding to a comfort level. Gold prices may drop some more to the $200 level. Robert Prechter the Elliott Wave Theorist and Martin Armstrong of Princeton Economic Institute are both gold and silver bears. Armstrong feels that after more of a bear market the price of gold will advance into the new millennium by a significant amount. If a long-term perspective is taken, it will not make a great deal of difference how low prices go before they start up. That is if holders of gold buy only what they can afford and do not get themselves overly leveraged. I will say this. If gold prices do drop to $200 an ounce and the governments of the world keep pumping out more and more fiat money, then supply and demand factors will be ever more strained and when the inevitable bull market comes, prices will probably go higher than anyone thinks possible. Also, while we are patiently waiting, we must not lose sight of the computer bug date problem facing us (Y2K), or of the war in Kosovo, the turmoil in the Middle East, our problems with China, etc. The list seems endless, and all of these factors suggest a prudent individual should use common sense, own some hard money assets, and hold them with patience.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.