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Gold Inflation Big Picture

Commodities / Gold & Silver 2009 Dec 14, 2009 - 03:01 AM GMT

By: Howard_Katz


Diamond Rated - Best Financial Markets Analysis ArticleRight now the financial markets are telling us a story which is so incredible, so fantastic and filled with such opportunities for profit that I am in awe.  I can only remember two comparable opportunities in my lifetime, the bottom in gold at $35/oz. in the summer of 1970 and the bottom in stocks in the summer of 1982 at 780 DJI.

The purpose of a financial market is to value economic goods.  The successful speculator is one who correctly values goods; the unsuccessful one fails at this crucial task.  All you have to do is to look at history and you can see that the majority of speculators have done very badly at their job.  Why did the speculators of the day sell gold for $35 in 1970?  Couldn’t they see that gold was one of the few economic goods which had failed to triple in price since 1933?  A check with the Bureau of Labor Statistics “Inflation Calculator” shows that a basket of goods whose average price was $1.00 in 1935 had risen to $2.83 in 1970.  And yet gold had first been set at $35 in 1935 and was still $35 some 35 years later.  Since everything in the country had close to tripled by 1970, then wasn’t that some kind of a clue that gold also should have tripled?

But their incompetence is our good fortune.  When the majority of speculators wrongly value goods, they create opportunities, sometimes fantastic opportunities, for us to profit.  And since we have truth and truth is good, it is only right that we should profit.  The key is to be sure that one has the truth.

We know that from the summer of 1970 to January of 1980 the price of gold rose by a factor of 25 times.  You could make 25 times your money – without having to use margin.  Again from the summer of 1982 to October 2007, the DJI rose from 780 to 14,200.  You could make 18 times your money.

Yet what were speculators doing at that time?  They had been fanatically bullish on stocks from the mid-1960s all through the long, painful bear market.  They used to say, “Buy and hold good, sound stocks for the long pull.”  And so they did.  And then, after 16 years of losing money, they suddenly turned bearish.  Suddenly they pulled a crackpot from out of the refuse which litters Wall Street, a crackpot named Henry Kaufman (and nicknamed Dr. Doom).  Suddenly the entire nation was told that Dr. Doom (whose name I had never even heard up to that time) was the greatest economist in the country.  Whatever he said, one must believe.

What Dr. Doom said in 1982 was that interest rates are going up, and stocks are going down.  The prime rate was then 20%, and the DJI, as noted, was 780.  That was the exact top in interest rates and the exact bottom in stocks.  What a disaster.  From 1966 to 1982 the value of the U.S. dollar (related to real goods, not other currencies) had fallen by 2/3.  All stock speculators had to triple their money JUST TO STAY EVEN IN REAL TERMS.  Did they do this?  No.  Their capital shrunk by 22% in nominal terms AND BY 74% IN REAL TERMS.

How could the people of America go so badly wrong by listening to “the greatest economist in the country?”  Perhaps we can gain a perspective on this by considering an equal and opposite error.  Let us shift forward in time to the year 2,000.  Now the DJI is no longer 780.  Now it is 11,000.  The people who refused to buy stocks at 780 are screaming to buy them at 11,000.  Oh, please excuse me.  Most people were not buying the DJI in 2000.  They were not buying “good, sound stocks for the long pull.”  They were buying internet start ups for a short term profit (they thought).

You know what happened in that case my aspiring speculator.  These people bought internet stocks with the NASDAQ composite at 5,000.  Over the next 2½ years it fell to 1,000.  These NASDAQ stocks had no earnings.  All they had were aspirations.  They were the wave of the future.  They were as progressive as a Democratic politician.  The only difference they had from the Democrats was that they had to pay for their own mistakes.  At that time, the New York Times, which had just published a book predicting that the DJI would go to 36,000, was so full of itself that it purchased large blocs of its own stock at $40/share.  Earlier this year it got down below 4.  They had to mortgage their new office building and take a loan from Carlos Slim.  (I am sorry for bringing you into this, Mr. Slim.  You are probably a very nice man, but you got mixed up with some bad characters.)  My point is simply that the New York Times does not know anything about economics, and anybody who takes their advice is likely to lose money.

       “Alright, Mr. Katz, what has this to do with me?  I don’t read the New York Times.  I am living peacefully out here in Podunk Hollow.  All I want to do is to make money in the markets.”

Not so, dear critic.  You may think that you do not read the New York Times.  But the editor of your local Podunk Weekly News does read the New York Times.  He believes every word, and he passes these words on to you without your suspecting their source.  So you think what the New York Times wants you to think even though you do not know that the New York Times  exists.

This is the world in which we live, dear people.  Most everyone is running around obeying the orders of…they know not who.  But they all think the same, and they all act the same.

The larger tragedy here is that the New York Times was once a great paper.  That was when Adolph Ochs took it over in 1896.  At that time the Times was for the gold standard.  In 1896, supporters of William McKinley were called gold bugs, and Adolph Ochs was a gold bug of his day.  After McKinley’s election, the gold standard was reaffirmed by the Gold Standard Act of 1900, which defined the dollar as 25.8 grains of gold, 9/10 fine (approximately 1/20 of an ounce).  This kept the country on the gold standard for (almost) the remainder of Ochs’ life.  In all, America went 140 years (1793-1933), and prices came out exactly the same at the end of that time as they had been at the beginning.

But Ochs’ descendents were small men.  They inherited a great paper, and they are in the process of destroying it.  All of the political and economic knowledge which Ochs had back in 1896 has disappeared, and the paper is now operated by socialists and other reactionaries.

One of the prime motives of today’s Times is to continue F.D.R.’s policy of robbing from the poor and giving to the paper aristocracy.  This is why they crow so loudly about doing the opposite.  Socialism (or a far left agenda) is their cover.  They are not very far to the left, as they claim.  They are very far to the right.  They don’t want to rob from the rich to give to the poor.  They want to rob from the poor and give to the rich.

Do you know what the economic crisis of 2008 was?  It was that the Times’ rich Wall Street friends might go bankrupt.  What was the Times’ solution to this “crisis?”  It was to rob the average American and give the wealth to Goldman Sachs et al.  How was the average American robbed?  Not in his role as a taxpayer.  The much discussed taxpayer bailout of Wall Street never occurred.  The money for Wall Street did not come from a tax increase.  It came from massive printing of money by the Federal Reserve.

Prior to the Chrysler bailout of the 1980s there were never any government bailouts of large corporations.  If you couldn’t make it on your own, then have some friends take up a collection.  (This quaint custom is still practiced here in New Hampshire to this day.)  You say that the whole system would have collapsed if the government had not bailed out Goldman Sachs?  Well, in truth, every failing business is in the process of destroying wealth, and destroying wealth makes the country poorer.  (Somebody ought to tell this to Barack Obama.)  If a company is failing, then the best thing one can do for the whole country is to put it out of its misery ASAP.  The longer it struggles on the more wealth it destroys.  Too big to fail?  That is New York Times thinking.  No.  Too big to be allowed, while failing, to continue in existence.

And don’t be fooled by the fact that many of the rescued banks are repaying their Government loans.  They were bailed out on two levels: 1) a chunk of cash from the (Democrats in the) U.S. Congress.  (The Republicans did something right for once.)  2) a second bailout from the Fed when it printed a trillion dollars in the autumn of 2008.  It is this second bailout which is bringing in the big money and is being used to repay the first.  That is, on an emergency basis the Wall Street banks robbed us from our front pockets.  And now they are robbing us (big time) from our back pockets.  And the editor of the Podunk Weekly News doesn’t even have a clue.

What fools many people is that this false news hits most people from several different corners.  The Times influences many sources.  It influences many newspapers in the country.  It influences the national TV news.  You read it in your daily paper.  You hear it from a friend (who read it in his paper).  You see it on TV.  All these sources say the same thing.  ‘EVERYTHING IS GOING DOWN”

And then you know what the truth turns out to be?  EVERYTHING IS GOING UP.

Think about it.  How could everybody be wrong?  And yet we know from studying the financial markets that everybody is wrong.  Everyone is wrong, and then wrong again, and then wrong yet again.  As Humphrey Neill used to say, “When everyone thinks alike, everyone is likely to be wrong.”  And the reason for this is that they all follow the New York Times.  There is really only one guy who is wrong, but the whole rest of our society is following him like a pack of sheep.

And what is the reason for these outrageously wrong predictions at crucial times over and over in our society?  The reason (in most cases) is that the Fed needs cover in order to be able to print money.  The Fed needs a society which is convinced that there is a “deflationary” crisis (which they have to solve by creating an “inflationary” crisis).

Just in case anyone is interested in what is really happening, for 145 years prior to the time the Fed was given the paper money power prices in the U.S. were stable.  If the Fed is the nation’s “inflation fighter,” then how come “inflation” began at the precise time that the Fed acquired the power to print money?  If the Fed is trying to balance the forces of “deflation” vs. economic growth, then how come before the Fed this country had the greatest economic growth in the world?  How come the most prosperous country in world history had no central bank?

As one of this country’s greatest Presidents, co-founder of the Democratic Party, stated in the campaign of 1832: “The people can have a [central] bank and no Jackson or no bank and Jackson.” -      Andrew Jackson, campaign of 1832.

So everything you heard last year was a lie, the purpose of which was to generate public support for the printing of money.  The monetary base increased by $700 billion in autumn 2008; then it paused in the first half of ’09, and since July it has increased by another $400 billion.  Look at the chart above.  Gold is going up because paper currency is going down.  This autumn gold broke above $1,000 and raced to $1,200.  Now it may dip to $1,000 again, but if it does, this will be a time to buy.  It will be similar to the gold bottom of summer 1970 and the DJI bottom of 1982.

Once again, the Podunk Weekly News, the New York Times, the TV news, pretty much every newspaper in the country/world and your friends will be wrong and will lose their money.  They do not learn from their mistakes.  This is the difficult part of being a great speculator.  You must stand alone and see reality as it is.  Harder to do than to say.

Hard to do, but very rewarding.  It takes a different kind of courage from the kind which leads you to “charge that hill.”

My name is Howard S. Katz, and I am looking for men who have that kind of courage.  I write the One-handed Economist, and I sell subscriptions for $300//year.  You can get one by visiting my website,, or sending $300 to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  You can also visit my blog (no charge) at  This week’s blog is “The Origins of Christianity.”

© 2009 Copyright Howard S. Katz - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Bryan Mowry
16 Dec 09, 15:52
Very Smart Man

Dear Mr. Katz,

Please do not stop sharing your insight with us- you are one very wise gentleman. Thank you.

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