Gold Goes Begging
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From Richard Russell's web site
by Rick Ackerman marketwise.com
For more than ten years I've been writing in this newsletter, and in other
publications such as Barron's and the San Francisco Examiner, about the
mounting juggernaut of deflation. One prediction that I hammered
relentlessly all along was that, no matter how expansive Fed monetary policy
was about to become, the chances of the U.S. economy returning to
1970s-style inflation were nil. As some of you may recall, the supposed
threat of inflation was an obsessive concern of nearly all economists,
pundits and policymakers throughout most of the 1990s. It was only from my
equally obsessive, deflationist perspective that I was able to understand
that, no matter what the Fed might say, the central bank had no intention of
tightening credit significantly or for long. In a typical policy speech of
the mid 1990s, Fed governor Lyle Gramley once all but promised that a round
of tightening would begin the very next month. Black Box readers were
advised to ignore the blather -- that no tightening would be effected, since
the Fed well knew that there were no indications, statistical or anecdotal,
of an incipient inflation.
In retrospect, I made three significant errors of judgment. First, I did not
recognize that the low-inflation environment of the 1990s would provide
absolutely perfect economic conditions for an unprecedented easing by the
Fed, and that the result would be an epic and hitherto unimaginable
ballooning of financial assets. This is what Kondratiev-wave theory had
predicted all along - that between the wage/price inflationary spiral of the
1970s and the 12-15 years of deflation that lie just ahead, there would be
an "autumnal" period of disinflation in which only ostensibly benign price
rises would occur, mainly in stocks and bonds.
My Errors --
My second error lay in thinking that the U.S. economy had maxed out on debt
in the early 1990s -- so much so and that there would be no way we could
inflate ourselves out of the hole. In fact, in the perspective of economic
cycles that stretch out over generations, there was still enough oomph in
the recovery phase of the early-to mid-1990s to buttress the massive
asset-giveaway that characterized the S&L bailout. "Bill" Seidman is a
genial presence on CNBC these days, but had it not been for a felicitous
upturn in the U.S. economy in 1991, he would be reviled in history as the
man who presided over the biggest financial-system failure in U.S. history.
As it stands, that role has been preserved for Alan Greenspan, whose
failures will be vastly larger in scope than any that could have been
imagined in Seidman's bureaucratic heyday.
My third error - one whose rectification has very positive implications for
all those willing to take certain precautionary steps immediately - is that
even the financial geniuses would lose most of their assets in a deflation.
To be sure, the wealth of many investors is going to be destroyed by their
uncontrollable urge to bargain-hunt well before a true bottom is reached.
This is just beginning to occur now, as the supposedly smart money, thinking
the economy is about to come out of its swoon, plunges willy-nilly into
REITs and other real-estate-based assets. Before a deflationary bottom is
reached sometime in the next decade, however, I think they will have their
imaginations stretched concerning how low asset prices can fall.
Leveraging Deflation?
Meanwhile, the other errant piece of my forecast - one that I made as
recently as a year ago - was that there would be no way for an investor to
leverage deflation. Granted, one could short a few housing-related stocks,
and one might even sell one's house and rent for the next few years, ahead
of a price collapse in residential property values. But this would provide
nothing like the leverage we enjoyed when the dot-com stocks in our
portfolios were appreciating 20%-30% or more per year over a period of
several years. Quite a few investors became instant billionaires from gains
in paper wealth during this short-lived era, but there can be no such
explosion of wealth when stocks begin to fall with a vengeance, as they are
about to.
A year ago, I would have said you'd be doing great if you can merely hold
onto 30%-40% of your current assets. This is how deflation is supposed to
work - no big winners, just a relative handful of investors smart enough to
have some cash left when assets are going for 5 cents on the dollar
somewhere down the road. But it has become clearer and clearer to me over
the past year or so that there is indeed a way, not only to hedge against
the ravages of deflation, but to leverage them in one's favor. How? Very
simply, by buying gold bullion or gold stocks.
Throw Out the Textbook
Until fairly recently, this has not been at all obvious for one reason: In a
textbook deflation, "cash" supposedly is king. This implies that, to survive
deflation, you must stay mainly in cash or near-cash until a bottom is
reached. But this is not a textbook deflation; rather, it is like no other
deflation that has occurred before in human history, since it will be the
first to emerge atop a global currency system that has been hollowed to the
core. I will not elaborate here on why money is no longer money, but rather
a form of debt. But suffice it to say, the implications of a fundamentally
valueless global currency system could only be hugely bullish for gold.
That this fact remains largely unappreciated by investors is indisputable,
since they've valued the shares of all the gold-mining firms in the world at
a current $60 billion. This compares with a value for Cisco alone, at its
peak, of about $400 billion. And that is why I continue to assert that it
matters not at all which gold stocks one should own as a perhaps
decades-long bull market in gold gets underway.
All gold stocks are going to scream, eventually reaching prices that will make dot-com excesses of the
late 1990s pale by comparison. The amazing thing is, these stocks are not only cheap in comparison to the prices they might reach in 5-10 years, but in comparison to their recent price lows.
Gold Still THE No-Brainer
I cannot say it often enough, or stridently enough, but here it is one more
time: Gold is the no-brainer investment of our lifetime. Moreover, it offers
an opportunity to leverage the destructive force of a millennial deflation
that is certain to devastate the net worth of millions of investors, as well
as to ravage valuations across a broad swath of asset classes. Let me go on
record as having begged you to move immediately into gold, perhaps with
10-20% of your investment capital. Meanwhile, do not be fooled by the
occasional downdrafts in the price of gold on futures markets. These swoons
are manipulated or technical events that are largely meaningless within a
much bigger picture. And such fright-mask feints, it must be noted, are no
longer receiving the concurrence of some gold stocks such as Newmont Mining
and Royal Gold, which continue to rise even on days when bullion prices are
weak.
The steady, confident accumulation that has begun to lift these stocks, and
which will soon begin to lift many other gold stocks, could not be more
obvious. It is a great chance to hop aboard, but the bargain prices will not
last for much longer. As far as I can recall, it is unprecedented that the
escape route from a severe economic downturn should be so cheap, so obvious,
and so essentially riskless. Gold assets are going begging right now, in
part because they are not structured to receive the huge volume of capital
that has flowed into euro-related paper over the last several months. But
just because the Big Boys are obliged for reasons of size to seek safety in
the "wrong" investment vehicles does not mean we have to follow them over
the cliff. |
