Gold is trading within a secular bull market for metals and all commodities, whereas stocks and the U.S. dollar have been decimated over the past decade with unfathomable losses; investors quietly seek out stores of value, rather than equity ownership returns of capital.
The happenings represent a stark tribute to these uncertain times of warfare, economic misery, and political shenanigans. Alarmingly, the recent actions of the Federal Reserve Bank and Washington leadership have signaled absolutely no intention of reversing this trend. Gold and commodities outperform stocks, bonds, and currency (for now).
The Incestuous Relationship of the Federal Reserve, Politics, and Fiat Currency
The role of The Federal Reserve Bank, as articulated by its 1913 creation by Congress is to both promulgate economic growth through full employment and enforce price stability. Outside of the 1982-2000 boom time Nirvana, Basic Economics 101 proves that this Fed charter is perfectly contradictory. Full employment ignites inflation, whereas aggressively destroying price level increases cools the economy at best, and fosters recession - at worst.
The Federal Reserve regulates banks and enacts monetary policy via buying / selling U.S. Treasury securities in order to manage interest rates by creating or effectively destroying money with the magic wand printing press. This is fiat currency.
These dollars are legal tender notes of exchange notes simply because Washington says so.
Basic Economics 101 also indicates that increasing the supply of any asset diminishes the value of said asset. Well, the marketplace has been flooded with dollars since the stock market crash of 1987, my friend. The Federal Reserve Bank, established to operate as an independent unit outside of government control, returned to Arthur Burns - Richard Nixon money politics with the "Greenspan put"; that was the beginning of the end for price stability and the U.S. dollar.
Alan Greenspan slashed interest rates to the floor with ever greater urgency through the Black Monday 1987 Wall Street crash, Russian default, Asian financial crisis, technology dot-com collapse, and the September 11 disaster that left the Federal funds rate at an unprecedented 1%. Informed observers must note the fact that the living dead / addict U.S. economy has required increasing amounts of stimuli to achieve even lesser highs over the past twenty years.
The junkie mentality has culminated with today's shock treatment featuring bizarre TARP / TALF acronyms, Economic Stabilization Acts, and the injection of capital onto the balance sheets of Big Banks. The creative technicalities are little more than Washington mumbo jumbo policy wonk speak for literally creating money out of thin air and airlifting it to desperate institutions via helicopter.
Although I remain firmly in support of fiscal Marshall Law, I fear that the mechanics of the system have become increasingly politicized to pander to populism - rather than slaying the deflationary machine. The punch bowl will be impossible to retrieve and will exacerbate ever larger Great Bubble dislocations. Fiscal Marshall Law will degenerate towards Fiscal Debauchery - yet again.
Growth at all costs saves jobs. The jobs of politicians.
The U.S. Economy is a Sham
Of course, the market did not acknowledge the writing on the wall until the year 2000. The 2000-2002 bust marks the inflection point where inflation, oil, gold, and the entire commodities complex re emerged from their long, drawn out slumber to dominate equity and bond market returns. This is a secular bull (bear) market for commodities (stocks/bonds).
Contrary to (nearly) efficient markets that vote with dollars, government officials will never face reality. Facing reality does not win elections.
Ramshackle growth is always embraced at the expense of price stability. Certainly, accepting a nominal raise at work while enjoying skyrocketing home and stock market values is a visceral, good feeling. Never mind that the price levels of real, every day inflation - which does include energy and food (contrary to U.S. Bureau of Labor and Statistics propaganda) - is actually outpacing these paper gains. Never mind that U.S. travelers that may be wealthy stateside degenerate into tattered paupers overseas.
Washington leadership never got the memo. Any elementary graph of the Dow Jones Industrial Average versus inflation indicates that true, economic productivity is absolutely impossible without a stable price level. The Fed has demeaned monetary policy as a quick-fix heroin type of program that ignores the fundamental imbalances of the world economy, prints money, and throws the global marketplace into the fells of further addiction. According to CNBC contributor and 1985-1991 FDIC Chariman Bill Seidman:
The Fed is providing the market with a shot of dope.
This is not a free market. Rather, this is an oligopoly of Banks that are "Too Big to Fail," hack politics, and Sham Economics. Let's propose that Sham Economics is added to the Business Academic Lexicon along with "free markets" and "modern portfolio theory."
Gold and Commodities Store Value
Gold, oil, commodities, and materials stocks are the only sectors of the investment universe that have not been absolutely destroyed by this 2000-2008 debacle. The price of gold has surged from $250 to $1000 per troy ounce over the period. Meanwhile, the Dow Jones Industrial Average peaked at 14,000 and was unceremoniously slammed towards 6500.
Investors are fleeing fiat currency that risks maddening political devaluation in exchange for scarce commodities that must be mined - rather than created by Man. The weak dollar perpetuates the cycle as oil, agriculture, and metals traders demand additional compensation in exchange for increasingly worthless paper currency.
Although commentators attribute 2006 and the housing collapse as the beginnings of today's recession, intelligent observation argues that the global economy has been ensnared amidst a real, secular bear market for the past decade. Stocks have returned nothing in twelve years - which is an unmitigated disaster per inflation adjustments.
This is the "lost decade" and any person that argues otherwise remains heavily invested with commodities, is a tool of the U.S. Government, Zimbabwe, or works for Bernard Madoff.
Admittedly, AIG, Lehman Brothers (LEHMQ.PK), Bear Stearns, the current housing bust, collapse of the Dow Jones Industrial Average, and the circus - like confusion dominating Washington is disturbing proof positive that the U.S. economy has been an outright sham for the past ten years.
The U.S. Ponzi scheme will continue for another ten years without significant intervention.
Disclosure: Author holds a long position in XOM