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Gold Bugs All Aboard the Last Train For The Coast

Commodities / Gold and Silver 2010 Jun 14, 2010 - 03:22 AM GMT

By: Howard_Katz


Best Financial Markets Analysis ArticleAll aboard, dear gold bugs.  The train is slowly picking up speed and is leaving the station.  It is your last chance to get aboard at a price reasonably close to $1,000/oz.  Now you may not agree that $1,250 is reasonably close to $1,000, but when you see gold at $3,000, then you will agree.  From the vantage of $3,000, then $1,000, $1,250 no big deal.  The point is to be long of gold.

You have undoubtedly heard the expression, “Fool me once, shame on you.  Fool me twice, shame on me.”  Well people, (some of) you ought to be ashamed.  The paper aristocracy has fooled you again and again and again and is fooling you in the exact same way today.  Let us take 3 examples.

In 1982, an economist named Henry Kaufman, and nicknamed “Dr. Doom” by the media, was suddenly on the front page of pretty much every newspaper in the country.  He was predicting higher interest rates, lower stock prices and a possible depression.  All over the country people rushed to take Dr. Doom’s advice.  They had stubbornly held onto their stocks for 16 years, while (from 1966 to 1982) the real value of the DJI dropped by 74%.  The selling was so great that, by 1982, the DJI was forced down to a P:E ratio of 6:1.  Its price was 780.  What a place to sell.  Over the next 25 years, the DJI went from 780 to 14,200

First, let us ask, why did the media select the most wrong economist in the country and tell people that he was a brilliant genius?  To understand this, you must understand the paper aristocracy.

The paper aristocracy, as the name indicates, are a group of people who benefit from the Government’s issue of paper money (and easing of credit).  However, they do more than just benefit.  They help to bring it about.  They exert a major influence over the government (as the medieval aristocracy did for many centuries).

The issue of paper money and the easing of credit bring benefits to debtors (who get away with paying below free market rates of interest) and harm to savers (who receive below free market rates of interest).  They also bring benefits to employers at the expense of lower wages to their employees.

The paper aristocracy first got power in the early part of the 20th century when they created the concept of a depression.  If the word had any meaning, a depression would have to be a period when a large majority of the country got poorer.  Was this what happened during the period 1929-1933?  Not by a long shot.

From 1929-1933, prices in the country fell by about 30%.  This made most goods cheaper (because prices were falling more rapidly than wages).  As a result, Americans could afford more.  For example, from 1930 to 1934 per capita meat consumption rose from 129 lbs. per person to 144 lbs. per person.  (At the time, eating meat every day was just changing from a luxury good to one within the means of the average person, and the Republicans bragged in 1928 that they had put “a chicken in every pot.”  At the same time, people switched from margarine to butter and also gave more to charity.  These are not the behaviors of people who are getting poorer.  They are the behaviors of people who are getting richer.

“But Mr. Katz, what about unemployment?  Weren’t a lot of people unemployed in the early 1930s?”  This is true, but it is hardly a measure of economic hardship.  As prices declined, wages also fell but more slowly.  The real buying power of the average man’s wage rose, and he could afford to buy more goods.  Since at the height, unemployment hit 25%, then 75% of the nation remained employed and was getting those high real wages.

But even the minority who was unemployed were doing quite well.  In those days, Americans were able to save for retirement (not like today when they desperately try to take their retirement out of their house).  An average person in the early 1930s received a wage of 40 oz. of gold per year (not quite as much as today).  He saved about 15% per year (6 oz. of gold) for a working lifetime of 49 years, giving him a total savings of 294 oz. of gold.  Since interest rates averaged 5% over this period, his savings at 5% would multiply by 4.25 over a 49 year working lifetime, giving him a retirement stake of 1249 oz. of gold, enough for a comfortable retirement in any age.

During WWI, the Democrats reduced the value of the dollar in half (a program which Obama is imitating today)  The average American working man thus saw his retirement stake fall from 625 oz. of gold to 312.5 oz. during WWI.  In 1919, the Republicans adopted a policy of raising the working man back to his original condition by restoring the currency to its pre-WWI value.  This policy was called “a good 5¢ cigar” because the idea was that not only cigars but average goods would return to their pre-war level.  (5¢ had been the price of a cigar in 1914.)  This policy was successful and in 1921 and again in 1929-33, prices in the U.S. fell sharply, reaching their 1914 level in 1933.

This fall in prices doubled the value of the savings of the average person.  The average American saw his savings double from 312.5 oz. of gold to 625 oz.  So even the minority of Americans who lost their jobs made close to 8 years wages (in a 3 year period) in the form of a more valuable retirement account.

No, the people who were hurt in 1921 and 1929-33 were the employers (who were paying high wages) and the debtors (which are generally the big corporations).  The average American was not hurt in (what is falsely called) the Depression.  It was only the rich who were hurt, but they could not come out and say this openly.  Hence they hired (fraudulent) economists to tell the country that the whole society was getting poor.  These fraudulent economists compounded the insanity by telling us that the period of the early 1940s was an economic boom.  But the early 1940s was a time when 10 million men were pulled out of the labor force and could not produce wealth.  No one could buy a new house or car.  (They were not being made.)  Food items were rationed, and gasoline was limited to 3 gallons per person.  In short, the early 1940s were a depression, but you could not get one of these “economists” to admit this if you put him on a torture rack (which might be a good idea on general principles).

Very well, if the average person benefited in the early 1930s, where did the wealth come from?  The answer is simple.  As noted, from 1914-1919 the paper aristocracy got richer at the expense of the average person.  In a 2-step process (1921 and 1929-33) wealth flowed back from the paper aristocracy to the average American.  The decline in the stock market from 380 to 40 dramatically illustrated this flow.  In reality, the Republicans were the party of the working man, and the Democrats were the party of big business and Wall Street.  In words of one syllable, most of what you have been taught is a lie.

In 1933, the Federal Reserve was given the power to counterfeit money.  They used this power to steal from the working people and the savers of the country and give to the paper aristocracy.  This was called “getting us out of the Depression.”  And that same confidence game went on in 1982 and has been going on ever since.

The second example I want to discuss of the paper aristocracy’s tactic of shouting “depression” occurred in the late 1980s when Ravi Batra wrote a book entitled, “The Great Depression of 1990.”  Mr. Batra was not a member of the paper aristocracy, just a simple man who was in way over his head.  A member of the paper aristocracy came across the book and saw how useful it could be to them.  He invested in it and gave it enormous publicity.  As 1990 approached, the fear of a Great Depression swept across the land.  Alan Greenspan lowered interest rates from 10% in 1989 to 3% in 1993 to avert this “depression.”  The DJI went from 2,500 in 1990 to 11,500 by the end of the decade.

And, of course, the same game was played in 2008.  The media started to scream about a depression (in this case they called it the “Great Recession”).  Again they lowered interest rates (this time to virtually zero) and massively increased the money supply.  The Fed has started lying about the nation’s money supply redefining demand deposits as time deposits.  However, we can get a good handle on the money supply by examining the monetary base.  This has more than doubled in less than 2 years.  What are you going to do when gasoline is $6 per gallon, coffee is $3 per cup and the average employee, making $60,000/year, can’t buy as much as he buys today making $35,000?

Do you see the pattern?  The paper aristocracy screams a number of cue words: “deflation,” “depression,” “recession.”  This provides the political cover for the Fed to print money and ease credit.  The Fed’s printing of money causes prices to rise so the original prediction of “deflation” has a snowball’s chance in H___ of coming true.  (In fact there has not been a single year of price decline in the U.S. since 1955.)  But the average American is taken in by the prediction and rushes out to do the exact wrong thing.  He sold stocks in 1982.  He sold them again in 1990.  He refused to buy gold in 1999-2001.  But he did buy stocks in early 2000.  And then in 2008 he sold stocks again.  He believes the propaganda of the paper aristocracy, and he follows their advice.  And then he losses his money.  The paper aristocracy gets rich, and he gets poor, and he can’t understand what is going on.  He will not learn from his experience.

There is a cynical comment made about such people.  “If God did not want them to be sheared, then he would not have made them into sheep?”  Of course, we human beings have free will.  We don’t have to act like sheep.  But that is the fundamental human choice: to think or not to think.  Those who are thinking will make one or two mistakes, but they will not continue to make the same mistake over and over.

In the late 1940s, these big New York bankers built on the privilege given them by FDR to create money out of nothing.  They collected a group of crackpot “economists” (the best known of which was John Kenneth Galbraith) and planted then into key positions in the country’s top universities (via some well-placed bribes (excuse me, “donations”).  As a result, today they control the teaching of economics through most of the country, and pretty much everyone writing about economics in almost every newspaper, news magazine or other media is a crackpot.  When all of these crackpots agree, it is pretty certain to be a lie.

If you are truly interested in learning economics, I recommend Adam Smith, the classical economists of the 19th century (who followed in Smith’s tradition) and the Austrian school of economics (particularly Ludwig von Mises) who advanced Smith’s teaching by discovering that interest is the price we pay for time.  (I studied von Mises in the 1960s and was able to put his time theory of interest to work in 1969 by predicting the bear market in stocks of 1969-70.  Since that time, I have correctly predicted about 90% of all major term bull and bear markets in the common stock averages.  (A major term move in stocks is about 2-4 years.)

So, to be blunt, “there ain’t gonna be no ‘deflation’”  All the idiots out there selling gold are being taken to the cleaners.  They are giving their wealth to the paper aristocracy.  The money which the Fed has unleashed on the country over the past 2 years will cause a massive increase in prices.  The paper aristocracy will win, and the people who believe their lies will lose.

Above is the chart of the monetary base (from the St. Louis Federal Reserve) which ran in the 6-11-10 issue of my newsletter, the One-handed Economist (published every other Friday with special bulletins when necessary, posted on my web site on Sat/Sun, password protected).  If you wish to subscribe ($300/yr.), then visit my web site, and click on Pay Pal.  Or you may send in $290 via check ($10 cash discount) to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  The last train is pulling out of the station (the $1,000 area) and heading for the coast (much higher levels), but you can catch it if you hustle.  Don’t commit the fallacy of the fair price.  And remember that the trend is your friend.  If you play this market right today, then you can invite me to visit your mansion a decade (or so) from now.  Best of luck.  All aboard, all aboard.
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