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Bill Bonner
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Bill Bonner is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and the principal author of a daily financial column, Inside Investing Daily.
My company:
Bonner & Partners
  • Is It Time To Sell Your Gold?

    Dear readers ask about gold. Is it time to sell? To buy? To forget about it?

    Gold fell $25 yesterday; it now stands at $1,575 per ounce. The gold price could break all the way down to $1,000. But we don't expect it. Gold is not in a bubble.

    As you have seen, gold is neither overpriced nor underpriced. It buys about what it should buy. Maybe a little less. Maybe a little more.

    How do we know what gold "should" buy?

    We don't, really. But gold is a natural thing. It is pulled from the earth by people, using the technology and resources available to them. As their productivity in other areas goes up, so does - generally - their ability to extract gold from the ground.

    If GDP goes up 10%... the quantity of gold usually goes up about the same amount. If the economy goes into a decline, so does the gold mining industry... reducing the rate of growth of the gold supply.

    For these reasons, the supply of gold is usually more or less in sync with the supplies of other goods and services. And the exchange rate between gold and other goods and services is usually stable.

    This was also the observation of Roy Jastram, who wrote The Golden Constant in 1977. Jastram looked at 500 years of British history. He found that prices - in terms of gold - were remarkably stable.

    And here we see that prices for stocks, too, were also stable... as long as gold - rather than an economist - stood behind the currency.

    (click to enlarge)
    View Larger Image

    You can see for yourself from the above chart of the Dow/gold ratio going back to 1800. Prices for stocks went haywire in gold terms only after Congress created the Federal Reserve System in 1913.

    Then the world went off the gold standard during World War I. (It was partly the struggle to get back on the gold standard that set off the bubble of the 1920s.)

    Then there was another big run-up of stock prices - in terms of gold - in the 1950s and 1960s... and again in the 1980s and 1990s. The chart also shows the Dow/gold ratio heading down for the last 13 years... with no clear sign that it has reached the bottom.

    But wait. Hasn't most of the profit for gold buyers already been made? Tekoa Da Silva from explains:

    In response to that, the Pareto Principle suggests that 80% of the gains are found in the final 20% of the bull market. As it currently stands, the Dow/gold ratio is sitting at roughly 9-to-1. A move to a 5-to-1 ratio would require a $2,907-per-ounce gold price, a 3-to-1 ratio $4,845 per ounce, and a 2-to-1 ratio would require a stunning $7,268-per-ounce gold price.

    A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course, a 1-to-1 ratio ($14,500 per ounce) would equate to an over 900% move left remaining in the gold bull market.

    Be Happy

    Da Silva does not say so, but the Dow/gold ratio could come down in another way. Gold does not have to go up in price; stocks could fall. If the Dow were to slip to 8,000, for example, this would be equivalent to a 5-to-1 ratio.

    When the stock market cracked in 2000... and gold continued to rise... we thought the two were headed for a historic conjunction. Perhaps at 2-to-1. Perhaps at 1-to-1. Where would the two meet?

    We guess it would happen at about 5,000. Gold would rise to $5,000 per ounce... and the Dow would fall to 5,000.

    Or at 2-to-1 - the Dow could fall to only 10,000... while the gold price rose to $5,000 per ounce.

    Who knows? But there is no reason to think that things have changed in any fundamental way.

    Gold is still real money. It is still brought forth only with much effort and investment. And the Dow stocks still represent a certain group of publicly listed, US-domiciled companies from which you can expect a certain earnings stream. There is no reason to think that the basic relationship between the Dow stocks and gold has been altered in any fundamental or everlasting way.

    For practically the entire 19th century... many years of the 20th century... and as recently as the 1980s, the ratio of the Dow to gold was 1 to 5 or less. Investors paid 5 ounces of gold to buy the Dow and its earnings.

    Will the Dow once again trade for 5 ounces of gold or less? Almost certainly. And it will probably happen before this historic drop in the Dow/gold ratio has reached its final bottom.

    Hold your gold. Sell your stocks. Floss your teeth. And be happy.


    Bill Bonner


    To learn more about Bill visit his Google+ page or Bill Bonner's Diary

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 05 1:53 PM | Link | Comment!
  • Turning Argentine...

    U.S stock markets were closed on Good Friday. When they reopened on Monday, investors seemed unmotivated. Neither the Dow nor the price of gold moved appreciably. Gold ended the day right on the $1,600 mark.

    Not much to report, in other words.

    Here in Argentina, most things were closed on Monday for the Easter holidays... and are closed again today, too.

    What do these Argentines think they are? French?

    We wandered the streets. Here in the Palermo Soho neighborhood of Buenos Aires, where we are staying, there were thousands of people window-shopping, eating in restaurants and drinking in outdoor cafes.

    Inflation is running about 30% per year. The government is proposing to use citizens' pension funds to pay off its creditors. You get 50% more for your money if you trade your dollars for pesos on the black market. And experts are predicting another big devaluation of the peso after the October elections.

    "The Argentine economy has been supported by strong farm sector prices," reports the local paper. "High agricultural prices should help support the peso and the Kirchner government."

    Eager to Spend

    People on the streets seem to have money to spend. And they are eager to spend it.

    "Are you kidding?" said an Argentine friend. "Nobody wants to save pesos. You get them. You spend them."

    "I've seen this show before," said another friend. "I was here in Argentina in the 1980s, when we had inflation of 1,000% per month. And I was in Moscow when the Soviet Union fell apart. Inflation hit about 800% there in 1993. I see signs of a big takeoff in inflation again. Watch out."

    But for well-to-do Argentines, the quality of life here must be among the highest in the world. There are dozens of restaurants within a five-minute walk. You can sit outside. The weather is nice. And prices are cheap, if you convert your money on the black market.

    But the quality of life is more than just sitting in outdoor cafes sipping a café con leche. Being able to work is important too... and so is being able to keep your money. You need to be able to save money... and then you'll have enough money to be able to hang out in outdoor cafes!

    The world is a rich place. It is so rich that it can afford more and more people who don't have to work and more and more people -- such as Ben Bernanke -- whose work reduces standards of living for practically everyone.

    The waiter who brings your morning coffee is providing a valuable service. The plumber who makes sure your water flows is also giving you something of value. So is the autoworker who welded together your automobile.

    All increase the real wealth of the planet.

    But Bernanke? Is there any evidence that any central banker from the dawn of time until April 2, 2013, added a centime or a farthing to the wealth of the world?

    Not that we know of!

    Instead, Bernanke fiddles with the monetary base... jiggles interest rates... and generally diddles the economy.

    You might say, if it weren't for his jiggling and diddling and so on, that the "crisis would be worse" or even that "we would have had a depression." But you might also say that if he hadn't been diddling and fiddling with it, we wouldn't have had a financial crisis in the first place!

    Subtracting Value

    How about Nancy Pelosi or Lindsey Graham? Do they provide a useful service? Do they make the world richer... or better... in any way at all? Are they productive members of society or bloodsucking parasites?

    It seems obvious here: Argentine politicians do not add value. They subtract it. They spend money that is not theirs and sap wealth they never created. They drain away the real wealth of the world by transferring money from those who earn it to those who consume it. Then it is gone.

    Is it any different in North America?

    "You get what you pay for," said Milton Friedman. You pay for zombies, you get all you want -- and then some.

    What about tax lawyers? People on disability? Defense contractors?

    Aha! You will say that defense contractors provide a useful service. Without their work, the U.S. would be attacked and invaded.

    In the 1930s, major industrial nations were on the march... and there was at least some remote danger that they could march against the USA. Japan bombed Pearl Harbor, but it never posed much of a threat to the continental U.S. And Nazi Germany couldn't even conquer Britain, let alone America.

    Back then, the U.S. spent 1% of GDP on defense, which was probably more than enough.

    Today, the Pentagon consumes nearly five times as much. There are no hostile, aggressive nations endangering the peace of the world -- as far as we know. So, for our purposes, we assume that the Pentagon wastes an amount equivalent to about 4% of GDP.

    That is to say, it takes wealth from the productive sector and destroys it. Maybe worse. By overspending on "security," the U.S. armed forces may make Americans less secure.

    But wait -- we're not going to spend our time complaining about the zombies. Instead, we're going to come to the point...

    Which is, no matter how rich a place is, it can always be impoverished by careful government planning!

    Argentina is a rich country. It has boomed in spite of itself. Thanks to a productive agricultural sector, it earns enough revenue to keep the economy functioning and the government supplied with payoff loot.

    But as revenues rise, so does the number of people who want to be paid off: unions, the poor, the rich.

    No matter how much they get, the authorities will find ways to spend more. This is how they caused a disaster in the 1980s... and again at the end of the 1990s.

    Is Argentina ripe for another financial crisis? Maybe.

    The U.S. is an even richer country, but not so rich that a determined government cannot ruin it. Maybe it already has.

    Stay tuned...


    Bill Bonner


    To learn more about Bill visit his Google+ page or go visit Bill Bonner's Diary of a Rogue Economist

    Apr 03 10:24 AM | Link | Comment!
  • He Is Risen!

    We attended Easter Sunday mass at Our Lady of Pilar in Recoleta yesterday. The small church was crowded. Most were dressed casually -- the men in open shirts and slacks, the women in dresses. They were middle-aged, for the most part, and middle-class, but it was hard to tell.

    However, they knew the plot.

    Let us bring you into the picture...

    The smart money, in the year of our Lord 33, was on the Romans and the Pharisees. They were the insiders. They controlled the courts. They had the military budget and the "boots on the ground" that could kick any butt they wanted.

    Then the skinny Jewish guy came into Jerusalem. The crowd loved him. They dropped palm leaves in this path. Here was an underdog; the "king of the Jews," they called him.

    Jesus knew something was up. He had a last supper with his friends, and he turned to Peter.

    "I know I can't trust you," he said... or words to that effect. "You're going to betray me three times before the cock crows."

    Peter flatly denied it. But it was true. Picked up later by the equivalent of the Department of Homeland Security, Peter denied he had anything to do with the troublemaker Jesus.

    So it didn't look good for the maverick Jew. The odds against him rose even higher over the next few days.

    But when he was dragged before the Roman governor, Pontius Pilate, all of a sudden, his stock rose. Pilate saw no reason to prosecute him; he hadn't done anything wrong. For a while, it looked as if he were going to walk.

    But noooo. The local elite came in, guns blazing. They wanted Jesus taken away. He was an "insurgent"; they were sure of it. Did he not claim to be "king of the Jews"? Wasn't that the same as treason? They put him to the test; they would find out if he were really a law-abiding citizen.

    Render Unto Caesar...

    "Shouldn't we all pay our taxes?" they asked. They hoped to trap him, like Senators Graham and McCain trying to get Chuck Hagel to say that "the surge" was a mistake or that the "Jewish lobby" has too much power.

    "Render unto Caesar that which is Caesar's," he told them, tossing a coin with Caesar's picture on it in their direction.

    Pilate wasn't sure what he meant by that. But he didn't care, either. He just didn't want trouble. So he gave the locals a chance.

    "OK, I'm going to nail someone to the cross," he told them. "But I am also going to pardon someone, as it is Passover. You decide who goes free. The thief Barabas... or the pretender, Jesus."

    "Give us Barabas," said the mob.

    At that point, you could have bought all the Jesus stock you wanted... for pennies. No one ever survived crucifixion. It wasn't possible. Unless this was a "new era," Jesus was done for. He was history.

    They drove spikes through his hands and feet and hauled up the cross; he wasn't coming down until he was dead. Even Jesus himself figured he was finished. By the ninth hour on the cross, he had given up hope.

    "Eli, Eli, lama sabachthani?" he cried out.

    And now the skies darkened. Jesus hung his head and breathed his last. If he had been a listed company, trading in his stock would have been suspended. At that point, he had gone "no bid." He was out of business.

    Then they took him down from the cross. They pulled out the nails. And they put the corpse into a hole, with a big stone in front of the opening to prevent dogs from getting to it.

    The End of the Affair?

    The entire affair, at that point, seemed to be over. No more "miracles." Nor more healing. No more talk of loving thy neighbor or everlasting life.

    The disciples, who had given up their careers and families to follow him, were thinking of going back to school... maybe becoming lawyers. A few were going to try to qualify for disability. Others were hoping to return to fishing, farming... or just hanging out in town.

    The next day, Mary Magdalene and some other women went to the tomb. They expected to take out the body and wash it properly. But when they arrived, there was no body there. What had happened to it?

    An angel, dressed in bright white, appeared. He said, "He has risen!" The angel told them to report these facts to the disciples.

    It was about this time that speculation in Christ Inc. began. The company had seemed broke... and finished. Now it was back in business.

    If this "resurrection" thing had any truth at all to it, the stock could go up as high as Apple or Google. It was one thing to give customers a fancy telephone... or a search engine that helped them find out what the Easter story was all about.

    Eternal life was something altogether different. Maybe it would work out. Maybe it wouldn't. But it was worth putting in a few shekels to find out. After all, it could be the biggest hit since... well... bread.

    The disciples ran to see if it were true. On their way to the tomb, Jesus -- in his new, post-real-life form -- met them. They didn't know what to make of him. He was there in flesh and blood... sort of, but not quite.

    "Don't be afraid," he said to them. "I'll meet you in Galilee."

    Jesus did show up at Galilee, as promised. Speculation increased. People could see that the promise of "everlasting life" was not just marketing hype. If Jesus could do it, they reasoned, anybody could.

    Jesus turned to the same Peter who had betrayed him. "You'll be CEO of my new company," he said. "Peter" means "stone" in ancient Greek. Jesus used a little double entendre: "On this rock, I will found my church," he said.

    Shares in the new company rose, off and on, for the next 1,500 years -- peaking only when a breakaway unit, led by Martin Luther of Germany, set up competing companies.

    Today, the church Peter set up still has 1.14 billion members and shareholders and a capitalization (net worth) that is probably in the billions (we found no estimates that appeared authoritative). Not as big as Facebook, but still not bad.

    No one could ever prove or disprove the claim that by joining Christ Inc., you would have eternal life. But most people decided to take the route suggested by the French philosopher Pascal.

    "I don't know if it's true or not," he said, or words to that effect. "But why take a chance? If you're wrong, you don't lose much -- you just give up a few years of naughty behavior. If it turns out to be true, on the other hand, you gain a lot -- an eternity of bliss. You do the math."


    Bill Bonner


    To learn more about Bill visit his Google+ page

    Apr 01 12:04 PM | Link | Comment!
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