Thoughts on Gold and the Economy

June 19, 2006

I am personally convinced that gold is the most valuable commodity in the world, but my conviction flows from gold's physical properties as opposed to its status as a reserve currency.

On the one hand, logic dictates that gold is an anachronism in terms of its role as a reserve currency - because the amount of gold per capita has been decreasing over the years as the world's population has expanded faster than new gold has been mined. There is simply not enough gold - either in existence or, probably, underground - for the metal to be capable of application to the roles of both currency and commodity. Additionally, there are some physical properties of gold which have only recently been discovered - which, in time, are likely to cause the demand for gold as a commodity to rise significantly. If there is an inadequate amount of "currency" gold now, there will be even less in the future.

On the other hand, over the short term, markets are not driven by logic, they are driven by human emotion. It follows that, over the short term, unthinking people will turn to gold in panic if/when the world economy starts to unravel.

It follows that if one views gold as a long term proposition, one can probably ignore the short term wild gyrations which manifest, as fear and greed vie with each other for supremacy. The only caveat is that gold pays no interest, and so one's investment in gold needs to be Balance Sheet (asset) oriented as opposed to Profit and Loss (income) oriented. In summary, gold is probably an insurance policy over the foreseeable future, and may turn out to be an extraordinary investment over a generational view - provided the world economy survives.

To me the most compelling question before us is not whether or not gold is going to rise, it is whether or not the Central Bankers of the world are going to lose control of the world economy. My reasoning is that if they do lose control, the value or otherwise of gold - in any role - is probably academic. If one takes the trouble to read the very first article I ever wrote for Gold Eagle (August 6th 2002) one will note that my view has been unrelentingly the same.

Morality and Ethics aside - and the ownership structure of the US Federal Reserve is clearly both immoral and unethical - a case can be made for the need for external "control" of the global economy. Markets are not perfect, because in the smooth flow of demand and supply there are turbulent eddies of dishonesty, graft and corruption. Greed has a way of blinding people into accepting stupid, immoral, unethical and socially irresponsible behaviour. The core challenge is to create a structure whereby those who are in control of the system cannot (or have no inclination to) themselves succumb to this same dishonesty, graft and corruption and, in so doing, enrich themselves at the expense of broader society.

Yes, the US Dollar has lost 98% of its purchasing power since the formation of the US Federal Reserve Board. By itself, this statement is horrifying. But, taken in context of a broadening of wealth-generating activities across the world to include the Asian Tigers, India, and China, the question arises: "If the price of spreading wealth more evenly across the face of the planet has been a degradation of the purchasing power of one segment of the world's population, has that price been justified - given that that particular segment of the world's population has enjoyed an extraordinarily high standard of living since WORLD WAR II?"

Of course, along the way Ethics and Morality have been casualties. The rich have become obscenely rich, and the poor have been faced with an escalation of poverty, disease and starvation. But, in the grand scheme of things, a higher proportion of the world may well have been suffering these outcomes of poverty had the fiat currency system not been implemented. No one can know for certain.

The following is a quote from Richard Russell's daily report of June 19th 2006.

"My PTI was down 8 to a new low for the year at 5670. Moving average is at 5694, so my PTI remains bearish." This independent and proprietary indicator is giving off bearish signals.

To my way of thinking, and regardless of the outcome of this manifestation of a potential re-energising of the Primary Bear Trend in the world's equity markets, we need to learn from our mistakes. The ownership structure of the US Federal Reserve in particular, and of the world's banking system in general, needs to be re-jigged in order to re-establish a blanket of ethics and morality over society. For example, I am personally seeing bank charges emerging on my bank statements which cannot be justified from any perspective other than greed on the part of the banks. And when the banks rip off millions of customers every month to the tune of a couple of dollars at a time, who will move to act on this if not the Central Government? But, why would the Central Government move to do anything if it is itself funded - via the US Federal Reserve - by these same banks which are ripping off the public? There is growing evidence that the financial system is now trending towards dysfunctionality because the political system is already dysfunctional.

The starting point for a re-jigging of the political system will be a move away from "democracy" towards "meritocracy". Why? Because the average voter suffers from indifference, and typically only raises his hand when he has a problem or can see a benefit to himself personally. There is no altruism in politics as it is currently structured. Unfortunately, there has been no altruism in any other historical political system either. Human nature has a way of subverting any artificially crafted system. The key therefore lies in Nature.

It follows that a core element of any new system should be that decision makers should be people who have reached the autumn of their lives, and are, Naturally, no longer driven by ego or a lust for power. Leaders should be appointed on "merit" based on demonstrable past performance. This would automatically block people of mediocrity from leadership contention regardless of their political "connections" or "ambitions".

To my way of thinking, we are facing two possible outcomes on the economic front:

Either the Primary Bear Trend will reassert itself, and a virtually certain consequence will be an implosion of the debt mountain and a resulting Depression of possibly greater magnitude than that of the 1930s. Or, the markets will muddle along in a sideways fashion for some time to come, until the excesses have been worked out of the economy. Given the magnitude of the imbalances flowing from these excesses, this might take a long time. Certainly, the US will never be the same in our life times, but the rest of the world may come through it stronger in the longer term.

No one can know the outcome in advance, and the Central Bankers will most certainly be fighting with everything at their disposal to ensure, at least, the latter outcome.

But if we do not learn from our mistakes, and we do not move to restructure the political and financial systems now, we will without doubt - eventually - come to regret it.

The total world's holdings of gold could be transported by a single solitary oil tanker.

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