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The Great American Collapse, The Gold Decade

Commodities / Gold and Silver 2010 Aug 06, 2010 - 08:31 AM GMT

By: Peter_Schiff

Commodities

Best Financial Markets Analysis ArticleAs gold hovers near $1,200 an ounce and pundits speculate about a 'gold bubble', it's important for investors to remember that a mere decade ago the picture was very different. In the year 2000, gold sat at an unimpressive annual average of $279 an ounce - a two-decade low. At that time, most analysts thought gold was finished as a monetary metal. They said its price would never recover and only kooks with tin hats would invest in it. I was one of the very few financial commentators publicly saying that gold was not only viable, but entering a long-term uptrend.


With the benefit of hindsight, we can all see that the consensus was wrong. Gold has performed remarkably against the Dow, NASDAQ, and US real estate. The reason I was able to confidently forecast this result is because I ignore the 'certainties' determined by Wall Street consensus, and instead study the fundamental trends.

2000's - The Great American Century?

Ten years ago, the United States was the world's largest consumer of energy, house prices were steadily appreciating nationwide, the government was running a budget surplus, and there was widespread consensus that the world had entered a period of Pax Americana - stability brought about by permanent US dominance.

Overseas, the euro was just getting to its feet, no Western country could even imagine facing default, and the only BRICs anyone had heard of were the ones used to build houses. These circumstances were extremely bearish for gold, especially as the dollar was at a multi-year high against other major currencies.

But I correctly perceived that this grand tapestry would quickly unravel.

The Tortoise & The Hare

China started moving toward a market economy in the late 1970s. In the ensuing decades, their economy grew exponentially as more than a billion people won the economic freedom to compete in the world economy. While others were stuck in the Cold War mentality of the US versus the Soviet Union, where the Soviets' collapse guaranteed America's perpetual dominance, I was paying attention to this Chinese freight train that was gaining on us at a million miles an hour.

I saw that while the entire Third World was embracing capitalism, the West was embracing ever more lavish entitlements, ever more debt, and was using inflation to pay for it all. Developing economies were buying many of these new dollars, thus keeping the dollar index deceptively high; but all chickens come home to roost and I knew this inflation would come back to haunt us.

Moreover, all the money printing was creating tremendous distortions in the domestic economy - first the dot-com bubble, then the housing bubble, then the financials bubble, all the way to the current Treasuries bubble.

2010 - The Great American Collapse

Today, China is the world's largest consumer of energy, American house prices are at generational lows, Washington is running deficits in the trillions (an order of magnitude used only sarcastically back in 2000), and the United States is suspending military exercises because they might upset the Chinese government.

Since 2000, the euro became the world's backup reserve currency, Iceland's economy collapsed, Greece averted this fate only by the grace of its neighbors, and savvy American investors have turned to the BRICs for growth and preservation of capital.

This transformation of the global economy, and the turbulence that accompanies it, has been bullish for gold. We have now seen the yellow metal reach new nominal highs, causing former critics to go silent for awhile, then re-emerge claiming there is a 'gold bubble.'

Bubble or Bull?

In response, I will return to the only strategy that ever matters to long-term investors - analyzing the fundamentals. The truth is the fundamental trends haven't changed.

The US government continues to add new spending programs (Obamacare, homebuyers tax credit, extended jobless benefits) and new regulations (1099s for small transactions, bank taxes, credit card fee limits), undermining our competitiveness and driving us deeper into debt. Though the euro has grown up somewhat, it is still too young and too troubled to take the place of the dollar as the world's reserve. The Chinese government has maintained a counterproductive peg between the yuan and the dollar which is only beginning to be relaxed. This process would have to be completed before the Chinese currency could win reserve status.

In short, the dollar is closer than ever to collapse and there is no other national currency ready to take its place. I believe the world may soon discover that there is no better alternative than history's proven money - gold.

Some of you might be familiar with these arguments, and say they are old hat. The same Wall Street analysts who missed the dot-com bubble and the real estate bubble are now warning that gold has already had its run up and is way overvalued. However, they were making this same argument back in 2006, with gold at $600/oz.

Meanwhile, in April of that year, I wrote a commentary with a few personal observations: none of my mining stocks had split, precious metals investors were not rubbing shoulders with real estate moguls or dot-com millionaires, and I was still running my gold investment division with only one employee. On TV, Flip That House wasn't followed by Deal That Gold. My taxi driver wasn't offering me hot bullion tips. In fact, nine out of ten people you stopped on the street couldn't even tell you the current price of gold within $200! And that's still the case today.

A Healthy Appetite For Gold

A decade after gold started its current bull run, we are still at half its inflation-adjusted peak. The run-up has been slow and orderly, with the price consolidated over the last three months at around $1,200. Dips like the recent drop below $1,160 have been correctly identified as bargain buying opportunities.

Despite a long rally without a major reversal, Wall Street aurophobes still refuse to see gold as a good investment; but they were wrong on the fundamentals in 2000, and the fundamentals haven't changed. As the world edges closer to the collapse of the US dollar system, gold prices have nowhere to go but up.

I continue to recommend that investors hold five to ten percent of their wealth in physical precious metals. Aside from the likelihood that gold and silver will rise in price, precious metals offer timeless benefits, such as financial privacy, elimination of counter-party risk (if you store them yourself), as well as protection from government confiscation, onerous securities regulation, and punitive tax rates.

Unfortunately, there are a lot of scammers out there who take advantage of rational interest in gold coins to sell people irrational investments. That is why I am so proud to finally offer a straightforward, ethical, no-gimmicks way to buy gold and silver coins and bullion, Euro Pacific Precious Metals. My company does not sell numismatics, proof sets, commemoratives, leveraged contracts, or any product that distracts from our goal: preservation of your capital. I encourage you to add precious metals to your portfolio now, because those waiting for a big correction before coming aboard may just miss the train entirely.

Click here for a description of Peter Schiff's best-selling, just-released book, How an Economy Grows and Why It Crashes.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Fred
06 Aug 10, 14:56
Mr. Schiff It's Time to End the Fairy Tales

Come on Schiff. It's time to wake up to reality. Looks like you are crying desperately for your $10,000 gold mark. You already said gold would be at $2000 in 2009. You continue to be so wrong you have made a fool of yourself. Hyperinflation? Wrong. You are truly a clown. Here, educate yourself.

http://www.avaresearch.com/article_details-589.html


Shelby Moore
07 Aug 10, 07:47
Patience

Fred commented:

"Hyperinflation? Wrong."

It will happen suddenly, due to the fiscal abyss in front of us.

The only way we get deflation is if gold is returned as the legal tender, which is of course politically impossible until after the entitlements and debt has been inflated away. Now can you inflate that away without causing a stampede into hyper-inflation? I say no way, because once the cracks in the damn break on the fiscal insolvency, it will very fast, with Greece as an example. Who will bailout the USA in that case?


Shelby Moore
07 Aug 10, 17:26
Why hyper-inflation is certain

Perhaps this may be my final comment on inflation vs. deflation, as I am starting a new company and will be busy.

Fred,

Regarding your link arguing against hyper-inflation by Stathis, I had already refuted him about gold, see my comments at bottom of the following article:

http://www.marketoracle.co.uk/Article19888.html

Also specific comment:

http://www.marketoracle.co.uk/Article20327.html#comment93378

Let me expound on that. In addition to the points I had already refuted at link above, Stathis is also arguing at your link, that since the banks are hoarding the QE as reserves, we can't get the monetary velocity of hyper-inflation. Mish and other deflationalists provide this reason as well.

They don't seem to understand that hyper-inflation is caused by the public running away from the legal tender, so it does not matter what the banks do, it matters only when the public decides to stampede. At that point the government only has 3 choices, a) back the currency with gold to stop the stampede or allow the stampede to gold to run naturally, b) print currency like mad and drop it from helicopters. Both of those are hyper-inflation.

As to what is guaranteed to cause the public to stampede, it is the fiscal insolvency that they do not yet realize, but the fiscal situation must break at some point:

http://www.marketoracle.co.uk/Article20327.html#comment93486

http://www.marketoracle.co.uk/Article21695.html#comment93525

And it can't mathematically break towards deflation, without BOTH higher interest rates and gold currency (which is precisely hyper-inflation relative to fiat). The reason is political. The promises made with the current fiat system are insolvent. I don't know why it is so difficult for people to admit and accept shocking truths, maybe the public wants to deny that we are all thieves (can't accept responsibility and guilt and self-adjust their lives back to not stealing):

http://www.marketoracle.co.uk/Article21650.html

But once the truth becomes too painful to ignore, there will be hyper-inflation. The longer the denial can go on, the worse the insolvency is going to be.

Please realize that yes we do have general price deflation and it is relative to gold, as only gold can retire bad debt. And that is inflation if holding fiat. And this will soon turn to hyper-deflation for those holding gold and hyper-inflation for those holding fiat. Note we do also have deflation relative to both fiat and gold, in certain credit bubble assets, but this is just the fork in the cooked turkey (the big mis-allocation of capital that is going to cause under-supply/rationing/price inflation of necessary things). Look at the bigger picture of the fiscal situation and the assets (commodities) that the entire word consumes daily to survive.

Remember deflation is an increase in purchasing power, and inflation is the opposite. Those who waste their time on abstract concepts such as the money supply (an arbitrary concept that even Alan Greenspan admitted can never be defined or measured), are missing the truth of the matter.

Also you can be sure that banksters position themselves to profit off the hyper-inflation, and you can see they have been doing all the necessary steps:

http://www.silverbearcafe.com/private/01.10/thinklikeabanker.html

Hope you all realize before it is too late. I can not keep posting comments here to refute all the mis-information.


Shelby Moore
08 Aug 10, 14:19
Hyper-inflation alarm

Banksters preparing for hyper-inflation, we are just 1 step from hyper-inflation:

http://www.silverbearcafe.com/private/01.10/thinklikeabanker.html

"Once the bulk of assets of transferred, write them down to leverage the public financial backstop."

http://blogs.reuters.com/james-pethokoukis/2010/08/05/an-august-surprise-from-obama/

"An August Surprise from Obama?...

...Suppose someone owes $500K mortgage on a house now worth $300K. In a refinance, the original mortgage is paid in full and a new one issued. Fannie would forgive $200K and issue a new $300K mortgage.

Let’s follow the money. Where would the $500K that Fannie (we the taxpayers) pays to terminate the original mortgage end up?...

...Our tax money would bail out the fat cats, pay them in full."

So the banks get relieved of the mortgages (and get the cash before hyper-inflation starts) and the mortgages are transferred to the federal govt GSEs (Fannie and Freddie), because during hyperinflation, the value of the mortgage declines towards 0 from the lender's perspective.

The bankers can use the cash to jump-start the hyper-inflation by completing the last step:

"Buy up as many remaining assets on the cheap as possible. Hide this action."


BH Tan
12 Aug 10, 10:30
Gold is money

I think people of the world have to confront the banking elites and politicians who indulge in mind-boggling abuses of their fiat currencies and global financial systems.

Asians are beginning to wise up to these Ponzi schemes of

Western bankers and governments.

For your information, the State of Kelantan, Malaysia has just embarked on the Gold Dinar experiment: http://thestar.com.my/news/story.asp?file=/2010/8/12/nation/20100812183855&sec=nation


patrick
13 Aug 10, 04:47
Gold might be the only answer

If I was in control of the fed I would start buying up the worlds gold supply. I think it is something possibly the only thing that can fix the economy... Here is the idea... a massive increase in the value of gold could be engineered if the world starts buying. But its not the answer because the US doesn't have enough gold. Sure, the increased value (if its big enough and i'm talking orders of magnitude) would cover the US debt of trillions of dollars. The downside is that other nations have much more and the US relatively speaking would become only the 10th largest holder (say) in the world. However, if the US is the one doing all the buying then it secures the bulk of the worlds gold supply. The price goes through the roof and the US has ample gold to cover its commitments and more to spare. For this to happen the US would have to do a lot of the buying when the price is low and would have to do it in such a way that no-one new what was happening. After a tipping point it can buy openly forcing the price sky high. The currency would be backed by ample gold reserves. When you think about it the actual value of gold is entirely arbitrary... it could just as easily be $100, $1000 or $1000,000 an ounce. It would be necessary to do away with paper gold ie only physical gold would have value. This point is important because there is much more paper gold than there is actual physical gold. This could be engineered easily enough and would be an important part of inflating the value of physical gold. I think that something as crazy as this proposition is necessary to save the economy from falling into the abyss. The structural problems aren't going to fix themselves and some day soon the world might stop placing any value in the paper dollar. When that happens its a doomsday scenario. But a dollar backed by gold at the right price will secure the US's place as the leading economic power. Something has to be done very soon I think. One other important thing is that the US would want to do this with some of its friends. Include them and sort out their problems too. Just an idea


Shelby Moore
14 Aug 10, 00:11
Fallacy of socialism

"If I was in control of the fed I would start buying up the worlds gold supply. I think it is something possibly the only thing that can fix the economy"

You are mathematically advocating hyper-inflation.

That is why you will never work at the fed. This would implode the value of the paper everyone is holding, i.e. hyper-inflation.

The Fed couldn't just magically buy gold at current price without pushing the price up as they gained enough gold to back the current value of the total fiat at the market gold price. For one thing, all gold ever mined is only $6 trillion, and that 160,000+ tonnes. The fed couldn't buy 1000 tonnes without being detected (mines only produce 2000 tonnes per year). Thus the price of gold would rise and the value of what ever gold held by the fed would amply back the fiat in existence, but with the holders of the fiat much impoverished.

Any way, the price of gold (hyper-inflation for those holding fiat) is going to happen, even though the fed is obligated by law to try to stop the hyper-inflation from happening. Which is why the fed is not doing what you suggested.

It is sad that you don't understand socialism. If a centralized force obtains the gold, then there is a huge theft of human capital (you can't just take gold and give it to the population, that is STEALING!). Suggested reading:

http://goldwetrust.up-with.com/knowledge-f9/book-ultimate-truth-chapter-4-borrowing-is-stealing-t152-15.htm#3431

http://goldwetrust.up-with.com/economics-f4/inflation-or-deflation-t9-405.htm#3432

It is really sad how stupid the people are these days. Most everyone is fully indoctrinated into socialism, so much so they don't even realize they are socialists.

And socialism ends horrifically. And people wouldn't have a clue how to avoid the outcome, because they don't even know they are socialists, because they don't even understand anything about what human capital is and how to most efficiently organize it in a free market (certainly not by doing any centralized action).

Sad. Truely sad, is the only way I can describe my experiences commenting on this site. I do appreciate the opportunity to learn and document for myself the pitiful state of the sheeple in our world. At least I won't feel there was any other possible outcome. Revelation in the Bible is mathematically correct. Failure peaks before it implodes. These interactions are proof of how failure peaks as the sheeple emulate each other.


Shelby Moore
14 Aug 10, 03:32
Mad As Hell!

Aaron Russo : Mad As Hell!

http://www.youtube.com/watch?v=J4ry3GzdFBM

From early 1990s:

http://en.wikipedia.org/wiki/Aaron_Russo#Political_career


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