“He’s the man, the
man with the Midas touch. A spider’s touch. Such a cold
finger. Beckons you to enter his web of sin. But don’t
go in.” (Shirley Bassey, Ringtones). The price of gold
reached another high this week at $1,100 per ounce. There
are three primary reasons for the flight to gold:
1. India has been purchasing huge quantities of gold (other
nations have also cued up the gold window).
2. Fear of inflation. The massive amount of money created
by the Fed will likely lead to inflation. Some economists
even see hyper-inflation. Hard assets (gold, oil, real estate)
do well in inflationary periods.
3. The weak dollar. The US dollar has declined 16% since March
– coinciding with the rise in gold and the rise in stock
prices. As the dollar declines, anything priced in dollars
rises (at least for the time being).
Gold has always been powerful stuff. It has long been associated
with the gods, with immortality and with wealth itself. Prospecting
for gold was a worldwide effort going back thousands of years.
The first form of gold as money appeared around 700 BC. The
Greeks mined for gold by 550 BC and Plato even wrote about
it. Since that time gold has either been used as currency
or as a backing for paper currency. US currency was backed
by gold. Gold clauses were written into both government and
private contracts. These clauses committed signatories to
paying not merely in dollars but gold dollars. In 1933, FDR
virtually took us off the gold standard when he eliminated
the gold clause in relation to government bonds. The treasury
called in all the gold in the country forcing citizens to
sell their gold for dollars. FDR was then able to dictate
the price of gold which stood at $35 per ounce until the 1970s
when Nixon took us completely off the gold standard. This
allowed the Fed the freedom to print as much money as deemed
necessary to stimulate the economy. This resulted in a rapid
rise in inflation to 15% by the early 1980s. Here we are again
with the Fed printing money to stimulate the economy and investors
turning to gold as an inflation hedge.
Cause and effect. In this case the zero interest rates are
the cause and the weakening dollar and strengthening gold
prices are the effect. Any time you treat the effect rather
than the cause it leads to the next problem. Japan kept interest
rates near zero throughout the 1990s, yet the Japanese economy
continued to suffer through a decade long recession. Low interest
rates were not the cause of the problem. The slow growth in
money supply was. When they started to increase the money
supply the economy recovered. Our problem today is a little
more complex. We have a plentiful supply of money and low
interest rates. That is not the cause of our current 10.2%
unemployment rate. The cause is the reluctance of financial
institutions to make loans. New businesses create most of
the jobs in this country, and these new entrepreneurs are
either reluctant to start a new business or they cannot obtain
the necessary funds. That is understandable considering all
the uncertainties surrounding us – trillions of dollars
in government debt and possible tax increases looming. We
need some clear and concise policies from Washington as to
whether the future environment will be favorable for business.
Kennedy, Reagan and Bush understood that a low tax rate is
needed to promote investing in new businesses and that is
one thing we need now. We are resilient people with a resilient
economic system. We just need to let it work.
What, me worry? This is the Alfred E. Neuman stock market.
Neuman, of course, was the iconic character whose face adorned
the cover of Mad Magazine. His face often replaced a celebrity
or character that was lampooned in the issue. Mad’s
mission was to exploit the illogical, hypocritical, self-serious
and ludicrous events of the day. The stock market certainly
has a what, me worry attitude today. High unemployment –
what, me worry? Trillions of dollars in debt – no worry.
An unpopular war – not to worry. It has been said that
the market climbs a wall of worry. It’s also been said
that the trend is your friend and don’t stand in front
of a moving freight train. All true. The market discounts
both good and bad news. Right now it is discounting the bad
news and saying things are improving. So, stay with the trend
until it proves otherwise.
Thanksgiving is upon us and 15 million Americans are unemployed.
However, it is the nature of Americans to lend a hand to those
that might be temporarily down. We would ask all of us to
look around this holiday season and lend a hand or words of
encouragement to our fellow Americans that need a boost right
now. It is good karma for the nation as a whole.
HAPPY THANKSGIVING!
Random thought for November 2009:
“I try to be cynical, but it’s hard to keep
up.”
- Lily Tomlin |
