The following appeared in the Investor’s Digest of Canada and can be found on the Sprott Website:
The gold price experienced a virtually uninterrupted rise of more than $200 in a 2 1/2 month period from the end of July through mid-October. This came on the heels of an orchestrated $100 price takedown following an all-time price high in mid-June as the authorities took great pains at that time to ensure that the gold price wasn't flying as the necessity for further quantitative easing (QE) became obvious.
Not surprisingly, we saw a replay of this mindset in late October as the gold price came under renewed attack in the aftermath of a large buildup in Comex open interest during the aforementioned price rise. With the U.S. elections and an important Federal Open Market Committee meeting (where another massive QE operation was expected to be announced) in the offing, the U.S. powers-that-be wanted to make sure that the gold price wasn't surging to new highs.
I am not in the least bit concerned about these shenanigans because I believe considerable additional quantitative easing is inevitable, irrespective of what the Fed says or does in the short term. Goldman Sachs's chief U.S. economist Jan Hatzius clearly shares my view as he has suggested that ultimately as much as $4 trillion maybe required although he anticipates that it will be staged. In my opinion this will act as catnip for gold and silver prices, which could go ballistic by year-end.
What is really at issue here is the fate of the U.S. dollar. Aggressive QE will steadily undermine the relative value of the U.S. dollar, and the rest ofthe world is already unhap¬py, to put it mildly, with the U.S.'s cavalier attitude about the value of the dollar.
However, in an environment where unemployment remains intractable despite massive government deficits and rock bottom interest rates, the U.S. is running out of policy options to revive its flagging economy, and cheapening their currency to enhance ex¬ports is obviously the latest ploy.
In my opinion, quantitative easing is actually a horrible policy, which, pursued aggressively enough, will inevitably lead to a collapsing currency, rapidly mounting inflation and considerable social unrest. There is no ex¬ample in economic history where following this course of action has led to a positive outcome.
Nevertheless, it appears that Fed Chairman Ben Bernanke and his cohorts seem determined to follow this path and I expect that it will have a very salutary effect on the price of all hard assets but, most particularly, the monetary ones, gold and silver.
I find it beyond remarkable that U.S. Treasury Secretary Timothy Geithner can say with a straight face that the U.S. would not devalue the dollar for export advantage. He did exactly that in a speech to Silicon Valley business leaders just before an important meeting of the finance ministers of the G20 countries in Seoul, South Korea, in late October. I would suggest that this represents another classic example of making sure you pay attention to what people do rather than what they say. Geithner's obvious mendacity probably also contributed mightily to the essential failure of the Seoul conclave to arrive at any substantive answers on the subject of the intensifying currency wars.
The incessant top callers in the gold and silver markets have changed their tune somewhat and, instead of hammering away at the ridiculous gold bubble thesis, have focused recently on the technical angle that gold and silver are overbought and therefore subject to a serious correction. My rejoinder to that, irrespective of whether they are overbought or not, is to ask the simple question, "Why should they correct significantly?"
The fundamentals remain impeccable. The U.S. Federal Reserve is going to print staggering quantities of money as a matter of necessity. "Foreclosuregate" is breaking wide open, imperiling hundred of billions of dollars worth of mortgage-backed collateralized obligations, thus putting the originating banks in a particularly precarious position. I don't think it is any accident that bank stocks underperformed noticeably in the recent U.S. stock market rise.
Debt is continuing to proliferate in many parts of the world as an evermore frenetic attempt is made to keep the world economy moving forward. The ultimate outcome is increasingly tilting towards massive competitive currency debasement worldwide and eventual hyperinflation.
In fact,! believe it is becoming more dangerous by the day to trade your gold and silver positions at the present time. If you are a believer and share my view that we are heading for very large trouble in the near future, the worst possible outcome would be to be out of gold and silver in a trade at the very moment the crisis arrives. Repositioning would be psychologically difficult, and in a time of rapidly shrinking stocks of physical gold and silver, could prove challenging.
My formula
My formula for this entire bull market, which has now spanned 10 years, has been to increase exposure on every correction. Investors should not be focused on the dollar value of the gold and silver that they own but rather on the number of ounces that they possess. Gold and silver represent real money, time tested for centuries, while every pure fiat-currency system has ended in ruins.
Thus I find some commentary on this subject from two American investment icons to be very disturbing. Warren Buffett's business partner Charles Munger recently said the following in a speech at the University of Michigan.
"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me, that's not optional; that's a moral obligation. If you understand the world, you have a moral obligation to become rational and I don't see how you become rational hoarding gold. Even if it works, you're a jerk." [And this from the hypocrite telling all those hundreds of millions who unlike Berkshire, did not have direct monetary recourse to the Fed's bailouts, and whom Munger advised to "suck it up."]
These certainly don't sound like the words of a rational man. In fact, they more closely resemble those of a petulant child. Mr. Munger may like to understand what works but, in the current instance, he clearly hasn't applied his considerable intellect to the fatal flaws in the existing world monetary system and the need to protect oneself from its inevitable dissolution.
Mr. Buffett, himself, then offered his opinion in an interview with Ben Stein :"You could take all the gold that's ever been mined and it would fill a cube 67 feet in each direction. For what that's worth in current gold prices, you could buy all— not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which is going to produce more value?"
In my opinion, this is sophistry of the worst sort. I have no objection to Mr. Buffett's endorsement of farmland and stocks like Exxon Mobil. They represent ideal investments in the world I see unfolding. Unfortunately, there are tens of trillions worth of paper money out there and more is being created everyday and, unfortunately, there are a very finite number of hard assets of the type cited by Mr. Buffett available for purchase.
Thus, it comes down to where the population as a whole should collectively hold the remainder of its net worth. Is the choice financial assets (bonds, bank deposits, etc.), the purchasing power of which is fated to be destroyed by inflation, or an eternal monetary asset like gold which has retained its purchasing power for centuries. With all due respect to Warren Buffett, I have absolutely no question as to what my choice would be.
Warren's father
Perhaps Mr. Buffett and his partner Munger should have paid more attention to the wisdom of Howard Buffett, a U.S. Congress¬man from Nebraska in the period immediately following the Second World War and a man who just happens to be Warren's father. The senior Buffett stated succinctly in an essay he wrote in that era that "human freedom rests on gold redeemable money" and that "paper money systems generally collapse and result in economic chaos." He was clearly a far-sighted individual. [TD: for our take on Howard Buffett's view on gold, read here].
To conclude, I expect that gold will be comfortably in new high territory by year-end and that silver will be well on its way to eclipsing the 1980 high of more than $50 per ounce, achieved at a time when the Hunt brothers were trying to corner the market. It most certainly won't be a smooth ride because considerable volatility is a given, but in the fullness of time, I suspect it will be very financially rewarding.
The gold price experienced a virtually uninterrupted rise of more than $200 in a 2 1/2 month period from the end of July through mid-October. This came on the heels of an orchestrated $100 price takedown following an all-time price high in mid-June as the authorities took great pains at that time to ensure that the gold price wasn't flying as the necessity for further quantitative easing (QE) became obvious.
Not surprisingly, we saw a replay of this mindset in late October as the gold price came under renewed attack in the aftermath of a large buildup in Comex open interest during the aforementioned price rise. With the U.S. elections and an important Federal Open Market Committee meeting (where another massive QE operation was expected to be announced) in the offing, the U.S. powers-that-be wanted to make sure that the gold price wasn't surging to new highs.
I am not in the least bit concerned about these shenanigans because I believe considerable additional quantitative easing is inevitable, irrespective of what the Fed says or does in the short term. Goldman Sachs's chief U.S. economist Jan Hatzius clearly shares my view as he has suggested that ultimately as much as $4 trillion maybe required although he anticipates that it will be staged. In my opinion this will act as catnip for gold and silver prices, which could go ballistic by year-end.
What is really at issue here is the fate of the U.S. dollar. Aggressive QE will steadily undermine the relative value of the U.S. dollar, and the rest ofthe world is already unhap¬py, to put it mildly, with the U.S.'s cavalier attitude about the value of the dollar.
However, in an environment where unemployment remains intractable despite massive government deficits and rock bottom interest rates, the U.S. is running out of policy options to revive its flagging economy, and cheapening their currency to enhance ex¬ports is obviously the latest ploy.
In my opinion, quantitative easing is actually a horrible policy, which, pursued aggressively enough, will inevitably lead to a collapsing currency, rapidly mounting inflation and considerable social unrest. There is no ex¬ample in economic history where following this course of action has led to a positive outcome.
Nevertheless, it appears that Fed Chairman Ben Bernanke and his cohorts seem determined to follow this path and I expect that it will have a very salutary effect on the price of all hard assets but, most particularly, the monetary ones, gold and silver.
I find it beyond remarkable that U.S. Treasury Secretary Timothy Geithner can say with a straight face that the U.S. would not devalue the dollar for export advantage. He did exactly that in a speech to Silicon Valley business leaders just before an important meeting of the finance ministers of the G20 countries in Seoul, South Korea, in late October. I would suggest that this represents another classic example of making sure you pay attention to what people do rather than what they say. Geithner's obvious mendacity probably also contributed mightily to the essential failure of the Seoul conclave to arrive at any substantive answers on the subject of the intensifying currency wars.
The incessant top callers in the gold and silver markets have changed their tune somewhat and, instead of hammering away at the ridiculous gold bubble thesis, have focused recently on the technical angle that gold and silver are overbought and therefore subject to a serious correction. My rejoinder to that, irrespective of whether they are overbought or not, is to ask the simple question, "Why should they correct significantly?"
The fundamentals remain impeccable. The U.S. Federal Reserve is going to print staggering quantities of money as a matter of necessity. "Foreclosuregate" is breaking wide open, imperiling hundred of billions of dollars worth of mortgage-backed collateralized obligations, thus putting the originating banks in a particularly precarious position. I don't think it is any accident that bank stocks underperformed noticeably in the recent U.S. stock market rise.
Debt is continuing to proliferate in many parts of the world as an evermore frenetic attempt is made to keep the world economy moving forward. The ultimate outcome is increasingly tilting towards massive competitive currency debasement worldwide and eventual hyperinflation.
In fact,! believe it is becoming more dangerous by the day to trade your gold and silver positions at the present time. If you are a believer and share my view that we are heading for very large trouble in the near future, the worst possible outcome would be to be out of gold and silver in a trade at the very moment the crisis arrives. Repositioning would be psychologically difficult, and in a time of rapidly shrinking stocks of physical gold and silver, could prove challenging.
My formula
My formula for this entire bull market, which has now spanned 10 years, has been to increase exposure on every correction. Investors should not be focused on the dollar value of the gold and silver that they own but rather on the number of ounces that they possess. Gold and silver represent real money, time tested for centuries, while every pure fiat-currency system has ended in ruins.
Thus I find some commentary on this subject from two American investment icons to be very disturbing. Warren Buffett's business partner Charles Munger recently said the following in a speech at the University of Michigan.
"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me, that's not optional; that's a moral obligation. If you understand the world, you have a moral obligation to become rational and I don't see how you become rational hoarding gold. Even if it works, you're a jerk." [And this from the hypocrite telling all those hundreds of millions who unlike Berkshire, did not have direct monetary recourse to the Fed's bailouts, and whom Munger advised to "suck it up."]
These certainly don't sound like the words of a rational man. In fact, they more closely resemble those of a petulant child. Mr. Munger may like to understand what works but, in the current instance, he clearly hasn't applied his considerable intellect to the fatal flaws in the existing world monetary system and the need to protect oneself from its inevitable dissolution.
Mr. Buffett, himself, then offered his opinion in an interview with Ben Stein :"You could take all the gold that's ever been mined and it would fill a cube 67 feet in each direction. For what that's worth in current gold prices, you could buy all— not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which is going to produce more value?"
In my opinion, this is sophistry of the worst sort. I have no objection to Mr. Buffett's endorsement of farmland and stocks like Exxon Mobil. They represent ideal investments in the world I see unfolding. Unfortunately, there are tens of trillions worth of paper money out there and more is being created everyday and, unfortunately, there are a very finite number of hard assets of the type cited by Mr. Buffett available for purchase.
Thus, it comes down to where the population as a whole should collectively hold the remainder of its net worth. Is the choice financial assets (bonds, bank deposits, etc.), the purchasing power of which is fated to be destroyed by inflation, or an eternal monetary asset like gold which has retained its purchasing power for centuries. With all due respect to Warren Buffett, I have absolutely no question as to what my choice would be.
Warren's father
Perhaps Mr. Buffett and his partner Munger should have paid more attention to the wisdom of Howard Buffett, a U.S. Congress¬man from Nebraska in the period immediately following the Second World War and a man who just happens to be Warren's father. The senior Buffett stated succinctly in an essay he wrote in that era that "human freedom rests on gold redeemable money" and that "paper money systems generally collapse and result in economic chaos." He was clearly a far-sighted individual. [TD: for our take on Howard Buffett's view on gold, read here].
To conclude, I expect that gold will be comfortably in new high territory by year-end and that silver will be well on its way to eclipsing the 1980 high of more than $50 per ounce, achieved at a time when the Hunt brothers were trying to corner the market. It most certainly won't be a smooth ride because considerable volatility is a given, but in the fullness of time, I suspect it will be very financially rewarding.
