I begin today's analysis on the gold markets with a chart that I created trying to connect what I believe to be the important issues facing the price of gold the last 32 years. Anyone who tries to predict the future price of gold needs to understand that all of these issues are all related. From analyzing this chart, you can clearly see where we are with the price of gold, and where we are going.
Presidents, DJIA, Gold, Dollar, Fed & Congress, Wars, Debt
Anyone who has done an ounce of research can logically conclude from the above chart that without the ability of Congress and the President to go deeper into debt via the Federal Reserve, we wouldn't be able to fight wars on multiple fronts. What started the financial crisis however, leaving out the creation of the Federal Reserve as the original source of the issues at hand, was President Clinton's administration repeal of the Glass-Steagal Act in 1999 with the passing of the Financial Services Modernization Act.
It was a Congressional bi-partisan effort led by Charles Schumer (D-NY), Christopher Dodd (D-CT)and Phil Gramm (R-TX), who received millions from the Banking, Insurance and Securities industry that led to the deregulation bill. You can read about it in my book, Buy Gold and Silver Safely, where I have quoted that portion of Chapter 4 here at the wetheserfs.com/blog.
It is the banking system that will bring this economy down, not any short term analysis of whether we are in inflation or deflation which I get into a bit more at the end of this article. I have written considerably on the problems with the banks and you should be aware of what's really going on with our nations top banks that control your future and that of our entire economy.
As to stocks, for reference purposes, the DJIA today is exactly where it was in January of 2007 in the 12,600 range. It had reached its high during October of 2007 during the Bush Jr. administration, before the excesses of the passing of the act and the out of control banking system started to deteriorate.
But what is of most importance from an investment point of view was how gold, priced at $271 an ounce took off from the beginning of the Bush Jr. administration in 2001 with the national debt at just over $5 trillion to where it is today at close to $1,600 an ounce and the national debt approaching $16 trillion. This is what you get with all of the wars our government has pursued, an out of control Congress and President, from both sides of the aisle. One of the reasons I am writing my next book, We the Serfs! is to try and put an end to this madness of an out of control Congress and President who indeed are trying to turn us into serfs whilst they live like Kings and Queens.
The price of gold went up $212.73% during the Bush Jr. administration (8 years) and so far has gone up 88% during the first 4 years of the Obama administration. Yet during this entire run up, CNBC reporters have been confused on where gold fits into a properly diversified portfolio. Nouriel Roubini has been confused calling a top in 2009. Financial guru Dave Ramsey has been confused as well. Same goes with Harvard Economics Professor Martin Feldstein, Money Magazine, Forbes, the WSJ, Bob Pisani and Morningstar. I've challenged them all and their thinking at the time on my blog (which this article links to each challenge for those who aren't receiving the links).
Even many gold gurus who are always bashing the dollar, crying "the weaker dollar" as to why the price of gold is moving higher don't understand the big picture. The Dollar Index is right where it was April 1, 2005 at the low of the day (see chart below) when gold was $427.15 an ounce. So why is gold higher today?
Perception and Safe Havens - Debt, Wars, Gold and U.S. Treasuries
In part, the gold gurus are right. But just know, it's not just about the dollar. The banking issues will also cause the price of gold to move higher. Supply and demand will cause the price to move higher. The Europeans alone can cause the price of gold to move higher.
Going back to the beginning of the Bush Jr. administration, the Dollar Index was north of 125.00. There was a cost to the many wars and National agencies and Bills that Bush Jr. gave us. How could we pay for the Prescription Drug Bill, Iraq War, Afghanistan War, Homeland Security, the Patriot Act, without a complicit Congress and Federal Reserve? Is it any wonder that this resulted in the 2008/2009 financial crisis and TARP? Gold started to take off because people could see that the financial Armageddon taking place and could do simple math. But it seems that many of these same people have lost their calculators of late. Does your calculator go to $16 trillion? Hmmm…
I added the Wars column in the chart at the beginning of this article to stress the failures of the Republican Party, or at least this "New" or "Neo-Conservative" Republican Party lust for wars and the affect it has had on debt and deficits. If the Republican Party was serious about winning this year, they would have picked a candidate from the last two Primaries who was against the wars and understood monetary policy and the root from the evil that loose monetary policy stems from; the Federal Reserve. They would have chose Ron Paul. The candidate they have chosen this time around (it was McCain in 2008 who knew nothing about economics) was/is Mitt Romney who has his eye on Iran and doing something about their Nuclear ambitions. He's even lashed out at Russia. Meanwhile Saudi Arabia, where the radical Wahabbi's and Osama bin Laden come from, goes on with theirs.
Republicans need to get back to their roots in getting us out of wars, not starting new ones. Until that dynamic changes, don't expect Republicans to use "cuts in taxes and government spending" as a means to win over voters. Of course the Democrats aren't any better. The debt has soared under Obama at record amounts, but the good news there, which is in reality bad news, is Obama will drive this nation's economy into the ground because he has a complicit Federal Reserve in adding more water to the sinking ship.
In fact, the sooner we weed out the bad in this economy, the sooner we can get on to recovery. You see, deflation does this automatically, but so does complete and utter failure. Yes, there will be pain, but this pain results in more competition, lower prices and failures for those who have overextended themselves. Yes, jobs will be lost. Yes, homes will be lost. Yes, the Welfare state grows larger. But do you see Congress doing anything to make actual cuts? They are at a standstill till the Fiscal Cliff of January 1st, 2013 arrives. What have they done to stop the debt problems for the last 32 years? And you think Romney, Obama or Congress will all of a sudden change their colors when they can't even say no to war?
The U.S. Dollar and U.S. Treasuries Benefiting From the Euro Crisis
The Dollar Index moving higher is primarily because the Euro is moving lower. Their Fiscal Cliff has arrived. With all the problems occurring in Greece, Spain, Italy and elsewhere, the only real last bastion of safety is the "perceived" safety of the U.S. dollar via U.S. Treasuries. This is why Treasuries recently hit record lows. But this won't last. The U.S. Treasuries will be the next bubble to burst.
The Gold Price Is Doing Better Than You Think
Gold priced in Euros is up almost 14% the last year, while Gold priced in U.S. dollars is about flat today (chart below is as of end of June).
But don't be dismayed U.S. holders of gold. The price of gold was $1,550 on July 11th, 2011 and is $1,572 today, an increase of about 1.5% or what a 10 year Treasury would get you. But the purchasing power of that $1,572 is 13.1% greater than what it was in 2011. Why? Because the U.S. Dollar has gotten stronger by 13.1%. So despite the pullback in price from the highs that occurred during the last year, if you invested in gold just a year ago, you're still way ahead of the game.
As the Dollar moves higher versus the Euro and probably the Yen, and as long as the price of gold holds steady or declines modestly, you will be fine because your purchasing power increases. If gold falters a bit further, keep looking at the chart I created at the beginning of this article…and try and find a way to buy some more!
Inflation/Deflation Debate Comments
I see some are attributing the higher prices in the grains to inflation. Perhaps they don't realize that we are experiencing one of the worst droughts in U.S. history which of course will result in higher prices. But higher prices doesn't signify inflation. It is the result of inflation. We know inflation exists, but it is being swallowed up by the credit contraction. I wrote about this in August, 2010; What Does the Price of Gold Do In Deflation? Otherwise, we would already see higher prices everywhere, including real estate. We are a ways away from that. But it will come.
Right now we are the tortoise vs. the hare scenario where the tortoise (gold) will win the race. My speculation is the tortoise might wait till 2013 to pull ahead in the race, but because of the banking issues everywhere, dollar cost averaging into a position is the best investing practice I can recommend right now.
I still perceive we get one last Market Maker pull down in the price of gold to get the weak hands to sell, before we enter the 3rd "euphoria" stage for gold and silver. I have written that I have seen this pattern many times before. For you chartists out there, look for that long tail on the candlestick chart as an indicator. But if you haven't invested in gold, don't try to time the bottom and expect you will buy exactly at the bottom. Dollar cost average in. Let the market do what it wants, but control your pricing to get an overall better entry. Technically, you actually "hope" the price falls further to get an overall better price.
For those that own gold, it's been tough to see the dip. Don't sell during any of these attempts to drive you out of your position. I know clients who held for 30 years that bought gold at the highs of the 1980 record price. They aren't complaining today and neither will you if you bought close to $1,900. But it won't take 30 years to come back. I think even next year we will break $2,000. Hang in there. Let the government and Congress do what they do best; fail. Let the big banks fail. Gold and silver will rebound here at some point and your timing will be considered close to perfect when you look back on these prices in the years to come. But I wouldn't go "all in" just yet. Let's see how Europe handles their mess first, and if the Euro will hit the 117/118 level which will be the moment of truth for Europe. The U.S. dollar is still, by default, the benefactor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am long physical gold and silver.