Missed trade: Gold stock rebound. But no worries about a runaway.

I entered an order to buy GDX (a gold stock ETF) calls on Monday, but didn’t hit the buy button, since no matter the technicals, I’m never very comfortable going against my understanding of the forces at play, even just for a short-term trade. Turns out those contracts would be up by a factor of three by today. I’ll just wait out the rally and go short again if things get out of hand, as in $32 for GDX. I have a hard time believing that the bear market in commodities is finished after only 4-7 months, when the economy is crashing through the floor and credit remains extremely tight.

Here’s a visual of the bloodbath and bounce in gold stocks (three-month chart from bigcharts.com):

Click for sharper view.

I’m in no hurry to go long anything at all, since the unwinding of the credit bubble will take years. I don’t think that we have seen any bottoms, not in gold, oil, copper, wheat or any kind of equities or bonds.

The risk is all to the downside. The looming risk of currency failure is the lone caveat, so it behooves everyone to have some physical gold — more if you are a renter with no other hard assets, less if you are an oilman or farmer or own significant real estate, within the range of 5-20% of assets for now. I intend to bump up my own allocation to near 50% or even much higher over the next couple of years, hopefully at very favorable prices.

This intention is predicated on the expectation that the US and other governments will before long saturate the markets for their treasuries and follow up by saturating the markets for their fiat monies. This will create all manner of chaos and depress real asset prices yet further, even from the very low nominal prices that I expect in the interim.

The assets to buy in the nominal and continuing real deflation will be those that generate income, since anything spinning off cash two years from now will have proved its mettle. Those companies and properties will be the most likely to hold their value in currency mayhem, and could generate fantastic capital gains in the recovery as earnings and multiples expand from highly depressed levels.

That said, all of this will take longer than even I think. Buffett, sell-out that he has become, was once a great investor, and he has remarked that sitting in T-bills is one of the hardest things to do.

An Austrian makes the bear case on gold.

Michael Rozeff crunches historical CPI and the gold price in this essay on Lewrockwell.com. Right off the bat, let’s clear the air with this statement, with which I am in complete agreement:

If the economic world of the dollar is going to end anytime in the next few years, then the difference between paying $735 for gold and paying $500 for gold will be irrelevant. I am making no comment about the likelihood of these scenarios, other than to say that they are more likely today, in my opinion, than ever before.”

My suspicion that gold could break $500 is not an argument to sell or not to buy, but reason to buy slowly and without the panic so often associated with this particular economic transaction.

Give the article a read. It is not an exhaustive discussion, but the bear case on gold is still rarely heard, especially from a market participant with a hard-core laisse faire perspective (Robert Prechter also comes to mind).

I was a bit surprised that Rozeff’s record of 1967 grocery prices from his family’s store actualy reflected a slightly lower rate of inflation than CPI.

Apple jelly was $0.40 and is now $2.48. Up by a factor of 6.2.

Red raspberry preserves were $0.55 and are now $3.00. Up by a factor of 5.5

Jif peanut butter was $0.60 and is now $2.37. Up by a factor of 4.

Skippy peanut butter was $0.61 and is now $2.71. Up by a factor of 4.4.

Mazola was $3.07 and is now $13.59. Up by a factor of 4.4.

Pompeiian olive oil was $0.49 and is now $4.08. Up by a factor of 8.3.

Crisco shortening was $0.95 and is now $5.18. Up by a factor of 5.5.

Carnation evaporated milk was $0.19 and is now $1.17. Up by a factor of 6.2.

Borden condensed milk was $0.42 and is now $3.04. Up by a factor of 7.2.

Nestle’s morsels were $0.55 and are now $3.21. Up by a factor of 5.8.

The average inflation factor of these items is 5.75.

The CPI calculator here shows that $1 in 1967 is $6.15 in 2007. …

Rounding, I take $550 to be an estimate of gold’s 2008 price that is consistent with the CPI index. This calculation is supported by the fact that the rather stable price of gold in 1994 grew from a stable price in 1977 and that the growth rate tracked the growth rate of the CPI index between 1977 and 1994. …

Another very simple approach that does not use the CPI at all is to find a linear or arithmetic trend between 1977 and 1994 and project that trend forward. Gold rose from $148 to $384 in those 17 years or $13.88 a year. Over the next 14 years, similar increases would add up to $194. That gives a projected 2008 price of $384 + $194 = $578.

The next approach I use is to relate gold’s price to the prices of base metals. Copper, zinc, nickel, aluminum, and lead all rose substantially along with gold between 2003–2005 and 2008. They were all part of the commodity price rise. Now all of these metals have fallen back sharply. They are either back to their 2003–2005 levels or getting quite close. If gold mimics their behavior, then gold will return to its 2003–2005 level. That level is about $400.

If we see more negative CPI figures in the coming months (raw August and September month-to-month figures were negative — pdf here for Sept), as I expect, the reality of deflation will start to set in, and consensus opinion on cash in general and the dollar in particular will complete a 180-degree turn from the the atmosphere of 2005 to 2008, when gold leapt out of trend.

What a close. Down 473 points in 15 minutes.

I have built up a position in DIA Nov. 08 puts on rallies over the past couple of weeks, and with the Dow up 300 at 3:30 today, I couldn’t resist adding a few more than I would ordinarily be comfortable with. I intended to part with the extra contracts maybe tomorrow or the next day in the inevitable correction after such an awesome rally (1,208 points, 14.8%). As it turned out, the Dow proceeded to drop 473 points in about 15 minutes, and I unloaded the contracts at the close for the fastest money I’ve ever made (as regular readers know, I’m more fond of buying LEAPs to capture the big, multi-month moves).

From Bigcharts.com, here’s the 1-day chart (1 minute):

Click image for sharper view.

As I count the Elliott Waves, this pattern has the A-B-C shape characteristic of a countertrend move, so it doesn’t change my expectation for new index lows in the coming days or couple of weeks. The mini-crash at the close looks like waves 1, 2, 3 and 4 of an impulse wave, which would resolve with another drop below the wave 4 low near the open tomorrow. Impulse waves move in the direction of the one-larger degree trend, as opposed to A-B-C moves.

Today’s chart also illustrates another textbook pattern: the contracting zig-zag from 2:40 to 3:15 resolved in the direction of the previous trend — up, way up. The 1-month pattern is still a very large contracting zig-zag, which, should it stay true to form, would resolve downwards, perhaps to Dow 7000, though a push above the October 14th high first is also possible:

Click for sharper view.

All of this near-term wave counting and trading is really just a hobby for me. I don’t use big money in it, but just enough to keep my attention so that I learn something. My real money is in T-bills, gold and still a boatload of 2010 puts that I accumulated over the last 15 months (see disclaimer), though I have been paring that position in the crash. If I hadn’t been selling, it would be about 85% of my portfolio by now.

Sorry for the paucity of posts lately. I’m in the middle of a trans-oceanic move, ditching a ridiculous Latin American country for a central European one known for staying sane while the rest of the world goes nuts.

The Gold:XAU ratio is off the charts. How will it correct?

A ratio of the gold price to the XAU gold stock index of greater than 4 is traditionally considered a buy signal for gold stocks, with 5 a strong buy. Today the ratio is an unheard-of (to my knowledge) 10.65.

Are gold stocks a screaming buy or could this mean that gold has much further to fall? Mining stocks and other metals are down from 50% to 80%, so gold bullion stands alone with roughly a 30% decline. It is money, so it should fall less than other assets in deflation, but these ratios may be a bit extreme.

I considered GDX calls today as a short-term trade but thought better of it. This deflation is powerful stuff, and I want to stay out of its way for now.

Cool-headed interview with John Nadler of Kitco

Nadler is great to read because he’s in the precious metals industry (Kitco is a bullion dealer), but he isn’t a perma-bull. He takes a non-hysterical approach to the market, and provides insights into internal supply and demand forces.

This is a long interview, published here. Here’s an excerpt:

“…If deflationary pressures really take hold, we may have a case of “reverse hedge” developing, whereby gold might still fall to the mid-$600s or even as low as the low $500s, but still fall less in percentage terms than other assets might. In that case, investors would still be better off holding some gold and lots of cash rather than equities or real estate and such. Hopefully we don’t head into that deflationary spiral because that could hurt a lot of higher-priced producers of gold. Certainly a lot of the mining companies would have to reconsider what projects to mothball if that happens.

If we don’t go into that vortex and confidence returns by whatever means, things could stabilize. Stability in gold would imply a trading range between $650 and $850. It’s definitely a blow to the doomsday newsletter writers, who thought the circumstances we are seeing now were the ideal scenarios they’d dreamt of as far back as we can recall. They know, however, that the world of $2,000 gold is not one they would want to live in.

The fact that in July gold had trouble surpassing $930, (not even matching the March highs when Bear Stearns failed), was definitely a big wake-up call as to what was going on. And of course what’s going on is that a lot of people had already bought gold starting at $252 and all the way up to $400 and $600. When this big crisis hit, if they spotted their 401(k) accounts off by 38% and their gold holdings ahead by 50% or 60% or much more, it wasn’t a hard decision to make. They liquidated that which was profitable in order to mitigate their losses. That’s why they’d bought their gold to begin with.

So the latecomers, those who were rushing in, having put off their gold purchases until it became a burning issue, basically got caught trying to buy into this “runaway train” scenario. The few people who tried cost-averaging higher-level purchases of $900 to $1,000-plus were the freshest of buyers during these past couple of weeks. The difference we spotted in retail transaction patterns is that this particular cycle in the gold market brought out quite a few sellers, along with new buyers. So there’s very good two-way activity going on in the physical market.

TGR: The gold bullion coins appear to have a very high premium over the gold spot price, so there still seems to be some fear out there, or is it shortages?

JN: Some issues in the physical market are really grossly misinterpreted. Observers are not doing anyone any favors. My perception is that we have a contingent of pundits who are extremely panicked that this is a very poor reaction by gold to the crisis, and it will make them look bad. It already has. Now they’re trying to manufacture this global stampede into gold by panicking investors and by scaring them with stories of supplies running out. No one will argue that there are higher levels of individual investor interest, but it’s nothing “unprecedented.” They’re trying to make it out as unprecedented, and that’s simply not the case. Perhaps it says more about how short a time such pundits have spent in these markets.

TGR: Just how real is the shortage in coins, then?

JN: Specifically, what’s going on with the coins is that most of the mints of the world do not operate on a “produce-then-wait-and-see” basis. They don’t pre-mint hundreds of thousands of coins and put them on the shelf waiting for buyers to materialize. They basically operate on a mint-to-demand policy.

Because of the prolonged bear market in the ’80s and ’90s, most of them had slimmed down to bare essentials and, in fact, a lot farm out some components of the coin manufacturing process, such as blanking. The U.S. Mint is one of them. They ran into some blank coin quality problems in silver back in March, with about half a million silver blank rejects. That put them behind the production schedules, and when demand indeed kicked in for physical small coins, they were unable to fulfill commitments on a timely basis. This does not mean they ceased production. In fact, most of these mints consider small-item production quite profitable, which implies that they have added shifts, are finding new suppliers of blanks and new refiners for material, and augmenting production to meet the demand. Inventory build-up is one of their top current priorities.

Look back in recent history at the classical gold rushes, if you will. During the first one, in that inflationary period in the late ’70s and early ’80s, some 16 million Krugerrands were sold globally. The market events of 1987 brought on the next wave of buying, and that is when the U.S. Mint sold more than 1.25 million ounces of gold. Nor should we lose sight of the fact that in the ’91 recession, just a few short years later, they only sold a quarter million ounces. And then we go to about 1999 before Y2K. Again, they suspended sales of certain products like silver rounds, which were being hoarded by people expecting the end of the world. Next would be May of 2006, with the North Korean and Iranian political tensions. Again, very good robust sales, but nothing of the magnitude of ’80 or ’87, and similar to what we’ve had since last year. But at best, I think this year the U.S. Mint will sell about 750,000 or 800,000 ounces. It’s not the level of 1987’s stampede or panic, so I don’t see why they’re trying to make it out to be something bigger than it is.

TGR: Why is there such a premium, though? Just because they’re undersupplied?

JN: Yes, once the retail shops saw the Mint selling coins on an allocation basis, with some restrictions to build up inventories, the retailers started raising premiums on coins that they couldn’t basically get to fulfill previously sold orders. They raised their bids; they also raised their offer. It’s really limited to items like the silver rounds and some of the smaller fractional coins.

But in terms of Kitco getting supplies, basically we took the attitude that if we could not get a commitment from our distributors and suppliers as to a firm premium and/or a delivery date or both, we simply removed the items from the order pages in the online store. Those order pages are limited to items we are confident we can deliver at a decent price within a decent number of days. I know that the list is looking pretty slim, but we do have product to sell, and our pool accounts have never had any shortage of underlying material to secure; namely, 1,000-ounce bars of silver and 400-ounce bars of gold. We continue to offset 100% of all pool account purchases for the peace of mind of our clients.

And we’re adding back a lot of the items that had been removed. For instance, we just got several tens of thousands in gold coins and about a quarter million in silver coins from the Royal Canadian Mint. We’re getting Austrian gold and silver coins in very soon, and I’m sure that the U.S. will restart its sales to distributors once they switch dates on the coins to 2009. This is, coincidentally, the period when mints cease producing old (current year) dating and start with the new ones, and the switchover generally creates a bit of a glitch, too. At any rate, there will be product. We have eggs, thus we will have the omelet as well.

TGR: So it would be prudent to wait a bit.

JN: Absolutely. People are not good consumers if they go out and pay $5 over spot on $10.50 silver just to secure something that they think they’re going to have to barter at the grocery store….”

Grains are starting to look good again.

Almost all of the speculative froth has been blown off the agriculture sector in the past 6 months. The long-term picture for food still looks good, with the world population still growing like mad and Asia in a secular upswing (if cyclical trough). Grains are relatively cheap by historical standards (100 years, not 10!), and while much of this is due to technology, I suspect that this century’s productivity gains will pale in comparison to those of the 20th.

The DBA ETF is an easy way to play, with about equal parts corn, wheat, soy and sugar. I’m going to be scaling in on weakness:

Click for larger view. Source: Yahoo! Finance.

Agriculture is a perfectly good inflation/currency failure hedge, and it benefits from positive fundamentals, unlike many other such plays.

In a depression, grains have a leg up on metals, since even though not much will be built in the next few years, people still need to eat. Furthermore, as governments get more and more reckless with their market interference, they are likely to screw up supply by enacting tariffs, price controls, wars and other nonsense that causes shortages.

Likewise, oil at lower prices will be a great buy. New demand or not, supplies are tight and getting tighter. Peak oil is real — this also has implications for agricultural prices.

I’m no perma-bull here: I made a 10-bagger on DBA calls last fall-winter and got out before the top. This time I’m not trading, but buying to hold. As in gold, I will welcome lower prices in the next few months.

Greenspan knew exactly what he was doing.


by Alan Greenspan, 1966

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one – so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline – argued economic interventionists – why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely – it was claimed – there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930′s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form – from a growing number of welfare-state advocates – was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.



Essay orginally published in Capitalism: The Unknown Ideal, by Ayn Rand.

The end of the crash is nigh (but not the bear market).

If this is ’29, we’ll dip down to new lows in the next few days (tomorrow?) and then rally for five months before getting back to business for two more years of a crushing bear market. The analogous endpoint would be summer 2010 and Dow 1400.

We should be so lucky this time, since we have no productive industry anymore and debt levels are off the charts. That includes the government, so the end game here is either a Treasury and entitlement default or currency failure (de facto default). This is French Revolution stuff.

Right now, prepare for a return to the panic conditions that we saw breifly at the open on Black Friday, October 10. This time everyone will throw in the towel. Dow 7000 will feel like the bottom has fallen out. Then you go long.

The perfect storm for shorts and gold bugs

This is setting up to be a great scenario for shorts (knock on wood): equities crash, but the dollar rallies and gold falls. Profits from shorting are taken in dollars, so they don’t mean much unless the paper still has value. Fortunately, deflation is very dollar positive now because so much debt is dollar-denominated.

That means we can take our dollar profits and exchange them for real money at a great rate. That real money will continue to go up in value for years, no matter what happens to our fiat debt money.

Gold is the bridge across the looming gap of currency failure. You don’t know what is on the other side, but it is a good bet that gold will be exchangeable (via a new worthless script?) for things like equities and real estate at great prices.

Deflation file: All commodities but gold are now bust.

This is a chart post. All materials prices are now way off their peaks, many having retraced the entire manic phase from 2005-2008. Shipping costs are down, too. This is what deflation (aka credit contraction) does.

Here first are the grains (charts from CBOT):

Metals now. All charts from Kitco.


Here is the Baltic Dry Index, a measure of the cost of shipping dry bulk materials (Bloomberg):


Given the strength of the declines in other commodities, I am now calling for $500 gold, not $600, and I am not ruling out $400. Everything else should continue to fall as well. To hedge against the big inflation/currency failure that will follow this deflation, you could buy any commodity or basket of them, but gold’s density and liquidity make things easy.

Gold is a form of money, so it is logical that in deflation it should rise relative to other commodities, even while falling relative to paper for a while. This is setting up as the perfect opportunity to exchange fiat money for the real thing, just before the fiat fails.