-- Posted 17 December, 2005 | | Source: SilverSeek.com
“Did you say ‘over’? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no! And it ain’t over now.”
- Bluto Blutarsky, Faber College, Class of ‘62
The shadowy and legendary metals investor known as “Spike G” sent me an article this week, one of many he emails to his trusted inner circle on an almost daily basis these days. Though most of his offerings tend to be of the “Go Gold!” school of thought (tempered always by his sage commentary) this one was different: rather than explaining why gold was on the cusp of a glorious rise, it congratulated the investor on enjoying a generational blowoff top and urged him to book his profits in hope of another one in the next decade sometime. Though I don’t recall the author (and it really doesn’t matter; no one knows the future, he can only reason his way there) I’ve seen the argument before: in short, the charts of today mimicked the charts of the mid ‘90s and history had repeated itself. The run was over.
“Rubbish,” says I.
It’s not that I don’t find charts valuable or interesting. Charts are tools that tell a story, but they do not tell the whole story. And the whole story is this: markets move until they resolve the problem that is causing them to move. Then they go the other way, reacting to (and causing) a completely different set of problems.
In metals, the underlying problem is often a simple one. It may be inflation. It may be a physical shortage. It may be one causing the other. But commodity markets, if they are truly in a bull or a bear, continue until the overhang is eaten up or until supply increases over demand to the point that people’s expectations of the market change.
A look at the ‘79-‘80 silver blowoff is illustrative. If one looks at a chart of physical supply (they are found in many articles explaining the current silver deficit), the deficits of the ‘70s are replaced by surpluses in the ‘80s as high prices brought new mines and old silverware into the equation. In addition to the new supply, the ‘81-‘82 recession killed off visible inflation, resulting in a demand for long bonds over physical bullion. But there was a resolution: the problems which caused the rise were resolved through pain. Then the deficits began building again.
In this newborn bull, we see nothing of the sort.
Yes, gold and silver have gone up very quickly. But that has not yet resulted in new supply. It has not yet resulted in lower demand. There has been no change in the paper money problems or the industrial demands that are driving the current rise. In short, nothing is over.
Gold may go down a bit here, as may silver. But until we see traveling buyers renting hotel rooms to buy silverware and gold teeth, we have not seen a blowoff. And until demand is damped by prices that buyers refuse to bid up (and gold and silver are shilled on financial TV), we have not seen the end of the bull.
It’s said that no tree grows to the sky, but the sky is a very high place, and this shrub of a bull market has barely begun to grow. It will not stop growing until the fertile soil that anchors it is depleted. And that’s most likely a very long time from today.
Bookman’s Picks:
Being the owner of a bookstore, I’m blessed to have a continuous stream of old economics and investment books crossing my desk. The fact that they are old and out of date gives them two advantages over new ones: they are inexpensive (some sell online for literally a penny plus shipping) and the reader can understand which analyses have withstood the test of time. Each month I’ll bring a pair of reviews of old books that seek to answer the same questions investors are (or should be) asking today.
“The Great Money Panic,” by Martin Weiss, 1981 (updated in 1989 as “How to Survive the Great Money Panic”)
As the inflation of the 1970s came to a head, Martin Weiss laid out a sobering case for sane debt resolution: America would have to undergo a voluntary period of depression in order to re-found an economy that had reached the brink of implosion. The “Great Money Panic” is a 3-part story about how it would have to happen.
Parts one and two are familiar to all hard-asset investors; they recount how inflation and leverage cause underlying waves in the economy that demand resolution, either through hyperinflation or uncontrolled deflation. Part three, however, is where this book is unique, because it is a walk through a future panic where, due to problems caused by leverage, money simply cannot be found or created in quantities necessary to maintain the bubble – or even business as usual. Through riveting narration, Weiss invites us into closed door meetings where a President is taught that you can’t have it all and he allows us to sit in on the congressional hearings that finally convince a nation to honestly and voluntarily pay its debts.
In addition to laying out a case for voluntary deflation to avoid destruction of the currency, Weiss provides a strategy for riding long, medium, and short-term interest rates as they fall from record high levels to record lows. That’s a strategy which may need to be dusted off again once the Bernanke-led Fed helicopters complete their planned deliveries.
“How to Prosper During the Coming Bad Years,” by Howard Ruff, 1979.
The book that catapulted Howard Ruff to nearly legendary status among gold bugs, “How to Prosper” was a best-selling inflation-fighter’s handbook; I still see dog-eared copies at nearly every used book clearance I attend. Though Ruff takes a Weiss-like look at the problems of government debt, spending, and money creation, he provides no hard-nosed or foresighted politicos to lead America back to fiscal sanity. Rather, he lays out a personal survival plan that assumes the dollar will continue to buy less and less, while the average person will suffer for it more and more.
Ruff does not leave the reader without hope, however. Rather he notes that whether “inflation is good or bad for you depends on whether you own some of those things which are inflating in price,” and he lays out a thorough list of those things that are expected to inflate in price, including gold, silver, and rural real estate. And while we never reached his tipping point in the ‘80s, many of the signs that Ruff (and Weiss) pointed to as harbingers of economic woes are once again rising on the financial horizon.
These two books lay out opposing scenarios: one inflationary, one deflationary. Together they provide a pair of contradictory personal strategies that can be melded by the wise investor into a plan to prosper in whatever greets us in the coming years, be they good or bad.
Bill Hoyt
December 15th, 2005
Opinions contained herein are purely those of the author, but he invites you to share them if you wish. Visit his web log, El Borak’s Myopia, for daily commentary and responses to reader email.
-- Posted 17 December, 2005 | |
