BACK UP THE TRUCK ON GOLD
By Doug Casey
Since reaching a recent peak of $427.25 on April 1, gold
has dropped about 7%, with most of the action happening in
the last few days. Silver, which peaked at $8.29 on April
2, has come down even more, losing about 14% to $7.15 as I
write. These moves have apparently scared a lot of people
(mostly latecomers in the market) and they're wondering if
the steep drop signals an end to the metals bull market.
In my view, the fall shouldn't concern anybody but a
futures trader who was long and who didn't have a close
enough stop-loss. Markets fluctuate more or less randomly
in the short run, which helps account for why 95% of
futures traders walk away losers. People with such a short
time frame shouldn't be in the markets; they should go to
casinos.
The skilled speculator and the experienced investor,
however, take a longer view. The key is to identify major
trends in the markets, understand why they're occurring,
and stay with them for as long as possible. Jitterbugs that
worry about daily movements will eat their capital up with
commissions, fees, taxes, and bid/ask spreads in the
process of whipsawing their accounts to death with the
vagaries of their own psychology.
I don't have a crystal ball, but I do have a sense of
market history. Most of the people that were active players
in the last real gold bull market, from August 1971 to
January 1980 (which took gold from $35 to over $800) are
now either dead or retired. Most of the players in today's
markets only know of gold as a dog, dropping from over $800
to under $253 in July of 1999. Those few who even watched
it came to see every rally over a 22-year slide as nothing
more than a selling opportunity.
Understandably, people tend to predict the future by the
past. So they expect both bull markets and bear markets to
go on forever. Right now, most of those who've even noticed
gold has moved from $252.80 at the bottom to its present
levels see it as just another rally in a never-ending bear
market.
How do I know they're not right? Well, nobody can know that
until long after the fact. But I've been long both the
metal and gold stocks since the late 90's (I was early;
generally speaking only liars buy at the exact bottom), and
I'm planning on staying long for the indefinite future, but
at least several years. Why am I so bullish? The purpose of
this article isn't to make a definitive case for gold, but
I will list six outstanding factors worth noting.
1. THE FOREIGN TRADE DEFICIT. The U.S. is currently
importing about $500 billion more than it exports every
year. That's been going on for many years, so there are
trillions of U.S. dollars now held outside of the U.S.
Since U.S. dollars are only "legal tender" within the U.S.,
whether foreigners continue holding them depends on whether
they have confidence in the dollar. Confidence can vanish
like a pile of feathers during a hurricane. I would suggest
that they're becoming increasingly aware that the dollar
is, in fact, an "IOU Nothing" on the part of the U.S.
Government, which is itself bankrupt.
2. U.S. GOVERNMENT DEFICITS. The U.S. Government is also
running $500 billion domestic deficits, and that number is
not only grossly understated - because of (a) off-balance-
sheet spending; (b) cash rather than more appropriate
accrual accounting; and (c) the adding of Social Security
funds into the general revenue - but it's likely to go way,
way up. Why? It's being financed with some of the lowest
interest rates in history, and when rates cyclically rise
to more normal levels (forget about the 15% long rates of
the last generation - which I expect will be exceeded), the
deficit could reach a trillion. That's not counting greatly
diminished tax revenues and the greatly increased
government spending that always accompany a recession. And
I think we're heading for something worse than a recession.
3. THE WAR. My guess is that the adventures in Iraq and
Afghanistan are, for reasons I won't go into now, going to
get much, much uglier. And likely spread to other parts of
the Islamic world. The U.S., which has troops in over 100
countries, isn't going to withdraw; it's going to become
more involved. This could be a $200 billion-per-year drain,
on top of the regular Defense Department and Homeland
Security budgets, for many years to come.
4. SUPPLY/DEMAND. Although most of the gold that's ever
been mined is available (either as bullion, coins, or
jewelry), the fact is that more is being consumed than is
being mined each year by a substantial margin - by about
640 tons in 2003 alone. Most of this deficit has been made
up by sales and loans from Central Bank inventory,
compounded by forward sales from gold mining companies. The
loans and forward sales constitute a short position of
substantial size that will have to be covered. And my
suspicion is that, at some point in the next few years,
Central Banks will go from being net sellers to net buyers.
5. THE REAL PRICE. At $35 in 1971, gold was artificially
suppressed in price by government edict. By the time it
reached $800 in 1980, it was caught up in a speculative
mania. Since then it's been able to achieve something of an
equilibrium. But $400 today is really only worth about $75
in 1971 dollars - so it's quite under-priced. And, in real
dollars (whatever they may be), gold isn't down just 50%
from its 1980 peak; it's still down about 85%. I expect the
conditions that drove the bull market in the 70's are going
to be much, much stronger this time around.
6. GOLD AS A CURRENCY. Take your pick: a piece of paper
with less than zero intrinsic value, or a tangible and
relatively rare metal that has been viewed as a store of
wealth over thousands of years? In addition to holding the
physical metal, new services such as GoldMoney.com that
offer electronic transaction services based on gold will
revolutionize the ways you can buy and sell the metal.
In essence, you want to own gold because of all these
reasons. But above all, you want to own gold because it's
the only financial asset that is not simultaneously someone
else's liability - which is why I expect Central Banks
around the world will increasingly be selling dollars and
buying gold in the future.
I believe we're looking at a gold bull market of historic
proportions in the years to come. Retrenchments such as
we're seeing now are not only normal, but trivial. You
should use them to buy bullion and aggressively add to your
mining share positions. Despite returns of 5-to-1 almost
across the board in these stocks, there's every reason to
believe that when the gold bull really gets under way,
these stocks will be wilder than Internet stocks were in
the late 90's. |
