Gold Paradox Recalls Bruce Lee’s Fighting (and Investing) Advice

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Gold Paradox Recalls Bruce Lee’s Fighting (and Investing) Advice

Written by Peter Diekmeyer (CLICK HERE FOR ORIGINAL)

 

 

 

World Gold Council data released earlier this month reveal a paradox. Demand hit 4,389 tons during 2016, but mines produced only 3,236 tons. Yet despite differing supply demand fundamentals, gold prices rose by only 9%. A supply squeeze that size, should have produced far bigger price action.

What gives?

As with many of life’s mysteries, a good place to start is with Chinese thinkers. No, not Confucius, Lao Tse, or even Sun Tzu. I am talking about Bruce Lee.

 

In a competitive investing world, in which price discovery, financial reporting and economic data are systematically distorted, the best parallels are with competitive boxing, which is governed by the Marquis of Queensbury rules, and a street brawl.

“When you talk about fighting with no rules,” said the late martial artist, in the lost Bruce Lee interview, “you had better learn to use every part of your body. Your feet. Your elbows. Thumbs. Everything.”

That sage advice increasingly applies to an investing world, in which supply-demand fundamentals, as measured by official statistics, don’t tell you much.

To avoid being fleeced, gold investors - indeed all investors - need to know a bit about everything. Some examples:

 

Economics and central bank manipulation



Most seasoned investors have caught on that the US Federal Reserve has been intentionally manipulating housing, bond, equities and other asset prices higher. Ben Bernanke, a former Fed chair, and Richard Fisher, former president of the Dallas Fed, have admitted as much.

Less well-known, as Bill Gross recently pointed out, is that while Fed manipulations have tapered off, European and Japanese central banks continue to buy $150 billion a month in assets.

This has swelled global balance sheets to $12 trillion and distorted prices throughout the system. Ten-year bond rates would be nearly 3.5% (instead of 2.45%) Gross suggests, without the manipulations.

If interest rates were 43% (1.05 percentage points) higher, this would bring down the implied value of stocks (by more than 30%, according to this writer’s back of the envelope calculation).

 

The question gold investors need to ask themselves is how long the central bank manipulations can continue. And which asset classes would best hold their value if current unconventional monetary policy proves to be a bust?

 


History: no fiat (printed) currency has ever survived



Good investors also need to know a bit about history, which today is taught by professors who grew up in the 1960s. Today’s crop of politically-correct academics teach that the most interesting thing about the Roman Empire, are its public baths, mosaics and approaches to women’s rights. Greece, for its part, is taught for its poetry, philosophy and rhetoric.

Hints regarding how these empires ruled much of the earth, for nearly 2,000 years, might be in a footnote somewhere.

Few ivy league professors today will explain what happened in both empires, and in 1780s France and 1920s Germany, when governments engaged in precipitous currency debasement, that recalls what we are starting to see in Western countries.

Before investing in gold, investors need to assess whether the yellow metal, which has acted as money for at least 3,000 years (many claim longer), has better staying power than paper and digital currency.

More important, how long will it take for the disparity to show?

 

 


Math: the US dollar has lost 98% of its value since 1933



Asking investors to learn math, which is so badly taught in Western schools, that the public is essentially innumerate, may be asking a bit much. But one example demonstrates its importance.

In 1933, just prior to the US government’s confiscation of Americans’ gold holdings, an ounce was worth US $20. Today (Feb 15th EOD) an ounce of gold is worth $1,234. That means a dollar buys less than 1/50th as much gold as it did back then (1.6%), and has lost more than 98% of its value.

Worse, almost all that decline occurred since 1971, when the United States, led by President Richard Nixon, defaulted on its international obligations to back the dollar with gold.

Before investing in gold, investors will need to assess whether US dollar debasement will continue, (in truth this is generally accepted) and calculate what pace that will occur.

******

Complexities surrounding outstanding derivatives contracts, ETFs, and other “paper gold,” complicate things even further. Many investors who have been following markets all their lives remain baffled.

That said, one question seems more straightforward. Does one trust all of one’s assets to a paper and digital-based system, run by politicians, central bankers and ivy-league economists?

Or does one hedge one’s portfolio with real economic assets, of the kind that Lao Tse, Confucius, Sun Tzu and Bruce Lee would understand?

 

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

Gold Paradox Recalls Bruce Lee’s Fighting (and Investing) Advice

Written by Peter Diekmeyer (CLICK HERE FOR ORIGINAL)

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Rufus Temblor's picture

How long can each CB debase its currency? Answer: Until it's dollar exchange value gets unbearably weak so that the country's politically connected dollar debtors get concerned about their ability to repay or roll their dollar debt. Seems like this is already happening in China. If this trend continues (of each CB printing currency to buy assets) the weaker countries will drop out first. The US probably wins this game, except for the blowback from countries in financial turmoil. The USD appreciates versus every other currency, but they all lose versus gold. But beware the blowback. It's a bitch.

MikeOz's picture

Really, who cares? They will just keep printing & buying.

Never, in the field of human corruption, has so few made so much, in so short a space of time!

Bluntly Put's picture

They've been increasing the debt at around 8.5% a year every year since at least 1971, and close that rate since 1933.

The economy is mired down with debt, so it will only "grow" around 1.5% a year, interest rates can't rise much higher, they'll stay around 2.5%. So in 10 years, the federal government can only effectively tax around 17% or GDP drops, so

GDP 2027 = $18.860(1+0.015)^10 = $21.89 trillion

Debt 2027 = $20.0(1+0.085)^10 = $45.22 trillion

Interest 2027 = 0.025($45.22 trillion) = $1.13 trillion

Taxable amount 2027 = 0.17($21.89 trillion) = $3.72 trillion

Percent of taxes going to interest on debt in 2027 = 30%

Do you think the government can continue to roll it's debts when 1/3 of it's taxes are going to pay the interest on the debt?

peterdiekmeyercontributor's picture

Great analysis. This is one guy who did not fail his math class.

If I was a betting man, I'd take your estimates over those of the CBO any day of the week.

 

 

Know shit's picture

Dear Sprott Money, perhaps I can help a bit?

Gold, and silver, is money, all the rest is fried air or less.

Now that wasn't so hard was it?

Take care.

ToSoft4Truth's picture

"In 1933"

 

In 1933 GM would have folded and the peoples pensions flushed.  The Snowflakes were rescued.  That's where a little of our purchasing power went. 

In 1933 granny died in the back bedroom or tenement because government wasn't there to care.  The Snowflakes were rescued again.  That's where a little purchasing power went.

In 1933 the "New Deal" was passed...  drip, drip, drip...

 

 

bardot63's picture

The fiat, dollar price of gold is no mystery.  Illegal, naked shorting (selling what you don't have) by bullion banks on behalf of government(s) is designed to 1) make banks rich and 2) protect/disguise paper and/or digital money values.   If I sell what I don't have and then cannot deliver, I go to jail, because I have been dishonest.  When banks, acting in collusion with government(s) (COMEX, etc) do the same, they maintain a dishonest power based on inflated paper money and are rewarded with continued power. 

Not so hard to understand why gold and silver are not many times current dollar values.