Hang on to gold – and gold stocks

I make that three crashes in 11 years. Four if you count last year’s ‘flash crash’.

That’s about as many as we had in the entire last century.

Maybe the micromanagement of interest rates and the economy by central banks isn’t such an effective tool after all.

Maybe stimulus packages don’t work.

Maybe trying to put off dealing with problems today does lead to bigger problems later on.

But what do I know?

The response to all this will be more micromanagement, lower rates – oh, hang on, they can’t get any lower – more can-kicking and more ‘rescue packages’ aka currency debasement. Last night, Ben Bernanke took the first steps by promising to hold US interest rates near zero for at least the next two years.

I bet you’re glad you own gold.

Robbing Peter to pay Paul is no way to save an economy

I’m going to have a bit of a rant today. I can’t help it. Bear with me.

In the face of official inflation rates of 5% (real rates were much higher) policy-makers have deliberately suppressed interest rates. This was to protect debtors, the banks, to ‘save the financial system’ and to kick-start the economy.

The prudent saver, who we shall call Peter, was robbed to pay the imprudent – Paul.

Peter was forced either to lose money by saving at a rate below inflation, or to go out and speculate in an economic environment that was not fit for speculation.

Now Peter has had his capital, his pension, and his net worth decimated once again. And Paul – unless he’s a banker – is no better off.

I don’t know how many times my colleagues at Moneyweek and I warned that quantitative easing (QE) and artificially low rates were all just creating another bubble, and that this private debt crisis would morph into a sovereign debt crisis.

You cannot solve a debt problem with more debt. And they should learn this quote off by heart, so as to make sure they get their response to this latest crisis right:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Ludwig Von Mises, Human Action, 1949,
Chapter XX

 

How high can gold go?

Right. Rant over.

Gold has gone ballistic.

The veteran gold trader Jim Sinclair has identified $1,764 per ounce as a big technical number. And parabolic moves like this rarely end well. We could easily get a big correction.

But then again we might not.

Don’t sell your gold. The more money they print, the more debt they issue, the higher gold will go. I have no doubt the response to all this will be some kind of currency debasement. I’m in Cyprus and I can hear the printing presses being warmed up from here.

Looking at the UK, with the riots in London and the state of stock markets, it seems that the ‘endgame’ that so many of the most strident gold bugs warned about has finally come.

I don’t know. But I’m not selling my gold. This isn’t over.

On Monday, when gold rose by something like $50 in a day, which must be some kind of record, the senior gold producers were flat. The junior producers fell marginally. The explorers, well, let’s not talk about the explorers.

The moral – as if we need to learn this again – is that people hoard gold in a panic, but they’re quite happy to ditch most stocks. (A month or two back I warned that the last time gold stocks under-performed gold like this was back in 2008, in the lead up to the crash: Are we heading for a repeat of the 2008 crash? I just wish I had acted a bit more decisively on my own advice).

As of yesterday, the gold stocks will have their day when stocks rebound, just as they did in 1932 and just as they did in late 2008 to 2010. So sit tight.

The same goes for silver, which is being dramatically outshone by its more expensive brother. When the ratio between gold and silver rises – ie when gold outperforms silver – that is a sign of stress in the credit markets. Like you needed telling. Silver’s time will come again.

Protect yourself from central bankers

The ratio between the Dow and gold – ie how many ounces of gold it takes to buy the Dow – is almost at six. It has plummeted this week. Ten years ago it was 42. One of my long-term targets is 2:1. At 10,000 on the Dow that would be $5,000 gold. But at this rate I might have to revise it to 0.5.

The big difference between 2008 and now, is that in 2008 money fled to the US dollar. Bullion dealers reported unprecedented business, but gold futures sold off. This time around money is fleeing to gold.

I have not heard one policy-maker even hint that the fiat nature of money might be the problem. Alan Greenspan knows. He’s said so. Ben Bernanke doesn’t. According to him, central banks only hold gold out of ‘tradition’. To him, gold is not money.

And I’ve never heard dear Mervyn King show any great insight into gold. Though, to give him his due, every time he warns the economy is not in great shape, we seem to get a crash several months later.

I’m convinced their response will be the wrong one. The best response is nothing. Let the market purge itself of all this. Don’t interfere.

But that won’t happen.

So protect yourself. And keep your gold.

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Category: Investing in Gold