It is indisputable that:
(1) History has much to teach us; and that
(2) We ignore historical evidence that is useful in predicting the future far too often, even though history has demonstrated time and time again that it repeats itself.
With the benefit of hindsight, let’s review the chatter of the leading US economists before the stock market crash of October 29, 1929 that ushered in the global Great Depression:
“We will not have any more crashes in our time.” – John Maynard Keynes, 1927.
“There may be a recession in stock prices, but not anything in the nature of a crash.” – Irving Fisher, leading U.S. economist, New York Times, September 5, 1929.
“There is no cause to worry. The high tide of prosperity will continue.” – Andrew W. Mellon, Secretary of the Treasury. September 1929.
Even after the stock market crash occurred, there was still no stopping the economic-political propaganda machine.
“[1930 will be] a splendid employment year.” – U.S. Department of Labor, New Year’s Forecast, December 1929.
“I am convinced that through these measures, we have reestablished confidence.” – Herbert Hoover, US President, December 1929.
“While the crash only took place six months ago, I am convinced we have now passed through the worst – and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”– Herbert Hoover, US President, May 1, 1930.
If one studies economic history, one will uncover a clear and distinct pattern of unbridled and highly unwarranted optimism that defied underlying, sickly fundamentals during every recession that has occurred in the last century. Overwhelmingly, there is a clear and distinct pattern among these egregiously poor predictions, as they consistently are issued by the world’s most prominent economists and politicians. In fact, if you follow the financial media, I am sure that you recognize striking similarities between the propaganda issued before and during the Great Depression and the propaganda issued during this current monetary crisis.
Though this is not a warning that another Great Depression will inevitably materialize, I do believe that the second phase of this monetary crisis is inevitable, that it is likely to be worse than the first phase that we suffered in 2008, and that it is likely to challenge the depths of the prior Great Depression unless our leading governments drastically alter the banking and monetary policies they are currently choosing to embrace. At a very minimum, the brief historical record at the atrocious quality of unwarranted optimistic economic predictions from politicians and economists alike in the face of dire economic circumstances should warn us to completely ignore the repeating pattern of propaganda about imminent recovery that is occurring today. If we do not take notice of the mountain of historical evidence regarding the close bonds forged between economists, and politicians and bankers that lead to the deceit of such propaganda, we have only our own stupidity to blame when the collective wealth of nations are destroyed in 2010 and 2011.
Yes, the cat is out of the bag. There is an alliance between bankers and the politicians and economists they monetarily support to purposely mislead the public through well-timed pieces of propaganda. Either this aforementioned sentence is true, or the people we continually propel to the forefront of the media in politics and academics are the dumbest people that reside on our planet. One of these two statements must be true.
Even among the most prominent people that advocate gold and silver today, I observe a wealth of misguided commentary about gold that largely has arisen due to the propaganda campaigns that bankers have continuously waged against gold. And what about prominent economists beliefs about gold? Today, economists still have not broken their shameful history of making awful predictions. For this reason, one should ignore every politician and economist that states that gold is currently a bubble. However, let’s dissect one case in particular.
A couple of weeks ago, well-known and often-quoted American economist and economic professor at New York University, Nouriel Roubini, scripted some of the most inane arguments I’ve ever read in support of the “gold is a bubble” argument. In fact, some of his arguments were so vapid that it would not surprise me, if one day in the future, an investigative journalist uncovered a direct deposit from the US Federal Reserve into his bank account a few days prior to his writing of the article, “The Gold Bubble and the Gold Bugs.”
The economists and politicians that continually rail against gold do so because gold is the enemy of a fraudulent monetary system, one that continually steals the wealth of nations through a silent tax called inflation. In his article, “The Gold Bubble and the Gold Bugs”, Roubini wrote, “since gold has no intrinsic value, there are significant risks of a downward correction.” Indeed, today, despite a decent rally in the gold futures market on Christmas Eve, gold still appears vulnerable to further downside action, and further downward pressure at the end of this month would not surprise me, if it happened. However, when Roubini wrote this article in mid-December, a gold correction had already commenced (so there was zero risk in his prediction of a gold correction at the time he scripted his article).
And here’s where the chicanery of economists like Roubini emerge if one takes the time to dissect his comments. Note that when Roubini released his article to the media that gold had already shed $75 to $80 an ounce from its previous high earlier in the month. At this point, an eight-year-old could have predicted the likelihood of further short-term weakness in gold markets. When the gold correction continued after Roubini’s comments circulated the internet, there were inevitably many people that read Roubini’s comment that erroneously deduced that Roubini correctly predicted the current downward correction, and thus, gold must have no inherent value.
But let’s break down this statement even further to illustrate exactly why Roubini’s comments offer nothing beyond what a shill for the banking industry would state. Roubini claims that gold has no intrinsic value. If we look up the definition for intrinsic, this is what we find: “Of or relating to the essential nature of a thing.” The fact that people are willing to pay more than $1,000 an ounce for gold, by definition, grants gold intrinsic value. The fact that people value gold as an attractive adornment in the form of jewelry and are willing to pay top dollar for gold jewelry, by definition, grants gold an intrinsic value. If gold had no intrinsic value then why do people offer top dollar for it? I wonder if Roubini is married, and if he is, if he bought his then fiancÃ©e a diamond ring? Using the flawed “intrinsic value” argument, if gold has no intrinsic value, then surely diamonds have zero intrinsic value as well. And if so, then why do so many people that accept the flawed “gold has no intrinsic value” argument willingly buy diamonds? Of course, the answer is that both gold and diamonds DO have intrinsic value as indicated by the willingness of people to pay loads of money for these commodities, whether in raw or processed form.
If Roubini is arguing that gold can not serve as money because it has no intrinsic value, then has he ever considered the intrinsic value of all fiat money itself, including not only the US dollar, but also the yen, the euro, and the pound sterling? The only qualities that grant fiat paper money value are the numbers and the pretty ink with which governments adorn it. But strip away the numbers and pretty ink, and how much would someone be willing to pay for that blank piece of paper? Not even a penny I would fathom. Yet, strip gold from its jewelry form, or better yet, offer it to someone in its rawest, unprocessed form, dug up in a core sample from the earth, and you will always find people willing to pay vast sums of money for this raw metal.
By definition, this gives gold far more intrinsic value than any fiat currency, and renders Roubini’s argument as almost laughable. It is even more amusing that the public, en masse, then embraces such silly arguments and repeats them like mindless parrots. Though this is amusing, it does not surprise me. This is the fault of institutional academia that has stripped all young adults of the ability to critically think and reason for themselves. This is why I have argued that business school is an utter waste of time and money (something I unfortunately did not realize myself until completing my MBA), and why some of the worst reasoning about global economics and monetary policies originate from former economic chairs and professors of supposedly esteemed academic institutions such as Harvard and Princeton (aka Ben Bernanke).
The public stands far too much in awe and grants far too much trust to public figures just because they are in a position of authority or because they might possess a degree from Harvard or MIT or Oxford. I’ve seen this pattern of gullibility happen over and over again. Commercial investment firms are able to repeatedly mesmerize and recruit clients by advertising sophisticated quantitative models developed by some Wharton MBA that grant their clients a sense of entitlement and superiority. In reality, this is just nonsense because stock markets are rigged and the only way to guarantee results is to become friends with the riggers or understand how the riggers operate, which no quantitative model can effectively accomplish.
Though I graduated from the University of Pennsylvania, I have met more people on the streets during the course of my life that understand politics and monetary concepts much more fully than any student or professor that I have ever met inside the hallowed academic halls of any Ivy League institution. A fancy degree should never grant anyone a pass as someone to be respected. Rather, one’s logic, rationale, and track record should be necessary to earn the respect of masses, though these ingredients never seem to be essential to the financial media.
Most politicians, economists, bankers, and media personnel that constantly denigrate gold seem to be embattled in a crusade to paint all gold owners as crazy, lunacy-tinged, tin-foil hat wearing conspiracy buffs that believe gold can only rise in a straight line to $10,000 an ounce. In fact, from my experience, I’ve found almost the exact opposite to be true. In my encounters with gold owners over the past decade, I have found most gold owners to be insightful, of above-average intelligence, and much more capable of independent thought than the average person. Though there is a small contingent of gold owners that may indeed resemble the mentally unstable character, Jerry Fletcher, portrayed by actor Mel Gibson in the movie “Conspiracy Theory”, there is also a small contingent among the investment community, otherwise known as Chief Investment Officers of large commercial investment firms, that always believe that the stock market will rise no matter the circumstance.
Even though I believe that gold will eventually top out at a price multiples of its current price, the truly educated among gold owners don’t expect this price to be achieved as a straight shot higher to the moon. For this reason, we have bought gold since it was $500 an ounce and held on (or for the more sage among us, maybe even at $300 or $400 an ounce). We have acted in this manner because we understand that not only is it natural for gold to correct after rapid surges, but that gold also corrects sharply at times due to price suppression schemes executed by bankers. And we understand that neither occurrence constitutes a gold bubble bursting.
As one of the themes of this essay has been to learn from history, I will conclude this article by stating that one of the best reasons to ignore the gold bubble advocates today is their failure to acknowledge one of the most important contributors to steep declines in the price of gold that occur from time to time — the execution of price suppression schemes and free market interference into gold markets by bankers. To support this thesis, I will reproduce below a portion of an article I wrote on October 16, 2008, in which I discussed the enormous anomalies created in gold markets by these banker executed schemes during the fourth quarter of 2008. Though I wrote this article more than a year ago, it is worth revisiting to understand the ample evidence of gold price suppression schemes that one must account for to understand that gold corrections cannot be a bubble bursting.
“Today (October 16, 2008), there have been four distinctly and differently priced markets established for gold: (1) Futures markets in Asia that consistently establish prices $20 an ounce to $60 an ounce higher than the prices established in (2) Futures markets in New York; (3) Physical bullion bars that dealers are starting to price at healthy premiums above both daily spot prices established in Asia and London/New York; and (4) Physical coins that dealers have always priced at premiums above bars and spot prices, but that are now selling at soaring premiums above spot prices.”
“Since the July 14th (2008) correction in gold and silver markets began, waterfall declines have occurred in gold prices in New York futures markets that trade paper gold where physical delivery of real gold occurs with less than 1% of all paper traded futures contracts. The differences in spot prices in Asian futures markets and in New York futures markets for gold have been staggering for the past 10-12 weeks, so much so that two distinct and separate future markets for gold have been established, one in which the gold price is significantly higher in Asia and another, where the gold price is significantly lower in New York. As they say, a picture can paint a thousand words so below you can find the daily spot charts in Asia and in London/New York so you can compare the huge discrepancies between these markets on a visual basis.”
In the remainder of that article, which you can find here, complete with all graphs, I presented compelling visual evidence of enormous discrepancies in the price of gold between Asian and NY/London markets within the same 24-hour trading day that lasted for weeks on end, and seemed to point to excessive suppression of gold prices in the NY and London markets. The evidence was so compelling, that when I forwarded it to CFTC commissioner Bart Chilton, Mr. Chilton promised me that he would investigate the discrepancies with his team. Given the evidence, I concluded back then “that something [was] seriously amiss in the futures markets for gold…and that rampant manipulation for profits by just a few players [was] occurring in an unchecked fashion. According to data recently released by the Office of the Comptroller of the Currency, a division of the US Treasury, of the $135 billion of gold derivatives contracts (including futures and options) controlled by financial institutions, JP Morgan controls $96 billion (71.11%) of these contracts and HSBC Bank USA controls $34.4 billion (25.48%) of these contracts. In other words, just two players control almost all gold derivatives contracts in the entire United States.”
Thus, if we tackle all flawed arguments against gold on the basis of logic and from the perspective of understanding that from time to time, bankers execute artificial schemes to depress the price of gold to serve their own purposes, then it should be quite simple to ignore your local politician and economist when they tell you that you shouldn’t buy gold because it is a bubble.
JS Kim is the Founder & Managing Director of maalamalama, LLC, a fiercely independent investment research and consulting firm.