It's Inflation Stupid By Peter Schiff
Jan 11 2008 11:49AM
Holding onto its "all is well" bias like a terrified
cowboy on an enraged bull, Wall Street has managed to convince
itself, and much of the world, that inflation is a non-issue.
When confronted with facts to the contrary, their rationalizations
come fast and thick. Nowhere is this spin more pronounced
than in their dismissal of the surging price of gold as a
Rather than favoring the logical conclusion that the rise
in gold prices results from an inflationary expansion of money
supplies around the world, Wall Street has credited its rise
to other factors. The most common explanations include strong
economic growth, rising jewelry demand, speculative buying,
higher oil prices, the weak dollar, terrorism, uncertainly,
middle east tensions, volatility, supply and demand, etc.
Every possible explanation is offered save one, inflation.
Some explanations, such as a weak dollar, have some validity,
but miss the point that the dollar is weak as a result of
inflation (i.e. too much money creation by the Fed). In my
commentary from September 30, 2005, I noted that rising gold
prices were the inflationary equivalent of the canary in a
coal mine. However, rather then fleeing for better air, Wall
Street miners merely go about their business confident that
the bird succumbed to natural causes.
Given Ben Bernankes promise yesterday to supply substantive
interest rate reductions, despite his belief that the U.S.
economy is not headed toward recession (a claim that even
the Fed Chairman obviously does not believe), inflation has
been given much more room to run. Of course, the Feds
free money fest will not be sidetracked by todays data
that showed the November trade deficit surging to $63.1 Billion
(some export boom), limit-up moves in commodity prices (beans
in the teens!), and 2007 import prices rising by 10.9%, the
largest calendar-year increase since 1987. Basically the Fed
is sending the message that inflation is going to get a whole
lot worse and that it couldnt care less. As the price
of gold continues to climb as a result, look for more excuses
to minimize the significance of the move.
Further, as the price of gold approaches the historic $1,000
level, get ready for the pundits to proclaim the market a
bubble. Of course, those same experts could not see the bubble
in tech stocks in the 1990s or the larger one in real estate
that followed, but they have no problem spotting a non-existent
bubble in gold. The bubble crowd was particularly vocal back
in April of 2006 when gold first broke $600. As a reminder,
I suggest reading two commentaries I wrote at the time: one
titled Top Ten Signs of a Precious Metals Bubble,
and a follow up Would you like Ketchup with that Hat,
that I wrote in response to a commentary in which the author
confidently promised to eat his hat if he was not witnessing
a precious metals blow-off top in the making.
It also amazes me how every time a guest on financial television
suggests gold as a sound alternative investment, the host
invariably points to the 1980 price of $850 to discredit the
recommendation. Such was the case again this week when CNBCs
Mark Haines, who three years ago told me on the air who
cares about the price of gold, pointed out that if an
investor bought gold at $850 dollars per ounce in 1980 that
he finally broke even. He compared speculating
in gold to investing in General Electric, claiming
that buying and holding the former for ten years assures investors
a good return, but that buying and holding gold for a similar
time period was much riskier and would likely produce losses.
I don't know if Haines has noticed but GE shares are still
trading at the same price they were eight years ago while
the price of gold has tripled!
I agree with Mark Haines on one point. Watching gold go from
$35 per ounce in 1970 to $850 in 1980, then buying at the
absolute peak price and holding on though the entire bear
market was pretty foolish. However, how many people actually
did that? Certainly those who understood the problems the
Fed created in the 1960s likely got in much earlier; say when
prices were still well below $150 per ounce, and though they
probably did not cash out at the peak, they likely sold above
$450 sometime in the early 1980s. As a result, they
protected their wealth during the inflation ravaged 1970s
and were well positioned to acquire other financial assets
at depressed prices.
Now, as then, golds warning is crystal clear and obvious
to anyone who honestly evaluates it. Those who heed it will
be rewarded while those on Wall Street who rationalize it
away will likely share the canary's fate.