Tuesday, November 3, 2009

Perceptions of Reality & The Markets

It’s been very interesting to me lately to read all the articles pertaining to silver and gold bullion and stocks right now. There’s a flurry of charts, graphs, predictions, opinions and multitudes of other data that are trying to get a grasp of the “reality of gold”.

When I say “reality”, what I’m trying to get at is that most folks, including research analysts, stock analysts, pundits, news letter writers, chartists, etc., etc., simply don’t understand the “reality” they are all in. And to try and clarify further, I’m really talking about where we are at a place in time. Where we are as a people, race, collective organism in a vast, changing world with so many intricate parts and complex systems of economy, ecology and sociographic dynamics.

Now do understand that I’m not claiming that I have a firm grasp on all these things but I know one thing for sure, no one understands the total, complete dynamic of all the intricacies of the world, markets and really life as we know it. Some do have intimate knowledge of what they write and speak of and work with on a daily basis but we can truly get lost in what we think “we know”.

I have a friend, G.B., who once told me something I never forgot and I actually refer back to from time to time to gauge whether or not I really know what I’m talking or thinking about. He said, “It’s not what you know, it’s what you know that ain’t so.” What he meant by this of course is that if you simply stick to the same old paradigm because it’s familiar you can really get yourself off course in life and really every microscopic decision that you make.

So here’s where I’m going with all this. When things get very complicated for me I simply try and eliminate as much “noise” as I can. And by noise I mean charts, opinions, technical analysis. Whatever. The minutiae. What I do is go to the long term fundamentals that will hold true and guarantee certain outcomes based on decisions and actions done today.

Let’s start here. This is a gold chart for the past 30 years.

What do you see? I see a gold price continuously climbing. Now what do we know about the world today? We know that the US, whose dollar is used as the reserve currency of the world, is currently in it’s worst financial crisis ever. We know that there is NO WAY that we can meet all of our debt obligations without drastic measures. Those obligations being consumer debt and government debt. Consumer debt including mortgages, credit cards, car loans, student loans and personals loans. Government debt being (where do I start, and end may be a better question!) Social Security, Medicare/Medicaid, etc, etc. How will they meet all these obligations?

Well it’s very simple. You either default or you devalue the dollar. If you default or devalue the dollar it is going to be a very negative situation for the dollar. So why in the world would we believe that gold and silver would do anything but go up in price? Simple as that. No degree required.

What else is it going to do? Stabilize? Now I don’t generally pick on individual writers but there was an interview done recently by The Gold Report with Richard Grey from Blackmont Metal and Mining Analyst. He says the following, “I believe there are two real drivers behind the gold price: the fear trade vs. the U.S. dollar, and the potential for inflation.” He goes on to say, "I don't think gold's going to take off and go to $1,500 or $2,000. I think the upside scenario is maybe $1,100 or $1,200 and then somewhere in a range between $900 and $1,100 is probably where the gold market is healthy and where the economy, as it compares to the gold market, is also reasonably stable.” And then later, “I think the silver market at $17 or $18 an ounce is quite healthy.”

Ok, now these statements are really the whole motivation for this blog piece.

Understand that Richard Grey works for a company and is expected to give reasonable analysis using historical data that people will use to make investment decisions. What he writes and what he thinks I believe may diverge. I would hope so anyway.

Let’s start with his inflation comment. “Potential for inflation”. HELLO! Did anyone inform the writer that we have a Keynesian economy. The only way it continues to survive is through inflation. That’s why it exists. INFLATE the currency. It’s 101. First grade economics. That being said, if you inflate the currency gold will rise. Simple. No need for charts or commentary. That’s it. Ahhhhh, I can already feel the stress reducing knowing that little fact. Already the confusing world has just become more understandable. Why does he not mention this? I don’t know really but there are a lot of people in the world who really believe that government is going to “figure it out” and bring fiscal responsibility into the picture. If you believe that then stop reading now and I apologize for wasting your time up to this point. I would also suggest you get some therapy. Yup, I said it.

What else does he say….”…upside scenario is maybe (not guessing are you?) $1,100 or $1,200…is healthy and where the economy, as it compares to the gold market, is also reasonably stable.” Ok, first of all, what in the world in this market right now is stable? The stock market? The S&P has a p/e ratio of over 140. If you call that stable you’re fired. And what is the gold market right now? It’s one of the most highly rigged markets (along with silver) due to the highly unstable world market.

So to try and determine an upside to the price of gold in a deteriorating currency market and a crumbling housing market in an inflated stock market is a fool’s errand. I posit that all we can summarize from this situation is that gold and silver will continue to rise in price, indefinitely, until we have a complete paradigm shift from the current economic and cultural system we have built up around ourselves.

Enough with Richard, I bore with that sorry analysis.

What else can we look at that will bring clarity to our understanding of an insane world full of analytical trite. How about a paradigm shift underway? What paradigm shift you ask? How about an event that takes place with all fiat currencies and markets over time? Here's a chart from ZeroHedge for you to ponder....

As it pertains to fiat currencies: Fiat means, “by government mandate”. They print a currency, in the case of the US, the dollar. They assure the rest of the world that they can tax the citizenry who will continue to work and be productive and subscribe to this system and therefore guarantee that the dollar will now be worth something. Time and labor and “stuff” at least. You could include oil as well and our military’s assurance that they can “secure” it but that’s a topic for another day. Ever heard of the “Petro Dollar”?

Well, except for the fiat currencies in existence today, not one currency in over 540 has existed the inexorable temptation of governments to print the currency “to death”. Over time, governments have spent their currencies into non existence. And every time, as they spent more money the price of gold and silver has risen. Why would this time be different? Why? Because someone thinks that a “healthy” price is $xx. I’m not buying it. Feel free to yourself, but not I.

At this point I would like to recommend a book: The Guide to Investing in Gold and Silver by Michael Maloney. It’s one of the Rich Dad series and it’s an excellent overview of the way money, gold and silver are all intertwined.

Well, as this post is getting rather lengthy I’m going to follow up with Part II shortly. What I’ll cover is the Dow/Gold ratio over the past 100 years and we’ll also cover currencies and the metals more.
Stay tuned and Happy Halloween.

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