The Endgame has begun, says mr marc faber. A pension fund manager had proposed to invest some of the fund's liquidity in gold. The response has been similar elsewhere in the world, he says.
The Endgame has begun, says mr marc faber. A pension fund manager had proposed to invest some of the fund's liquidity in gold. The response has been similar elsewhere in the world, he says.
The Endgame has begun, says mr marc faber. A pension fund manager had proposed to invest some of the fund's liquidity in gold. The response has been similar elsewhere in the world, he says.
The Endgame has begun, says mr marc faber. A pension fund manager had proposed to invest some of the fund's liquidity in gold. The response has been similar elsewhere in the world, he says.
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‘THE GLoom, Boom & Doom REroRrT
ISSN 1017-4371
‘A PUBLICATION OF MARC FABER LIMITED
The Endgame has Begun
INTRODUCTION
I was having a smoke outside a
conference centre in Switzerland
when a personable young man
approached me. He introduced
himself and explained that he was
the pension fund manager of a
substantial Swiss pension fund. He
said that over the past thr
had submitted 38 different
investment proposals to the pension’s
fund board of directors. They had
approved all but one of them, which
years he
DECEMBER 20, 2010
JANUARY 204.1 REPORT
“The truth that makes men free is for the most part the truth
which men prefer not to hear.”
Herbert Agar
“When others asked the truth of me, | was convinced it was
not the truth they wanted, but an illusion they could bear to
live with.”
Anais Nin
“An yes, truth. Funny how everyone is always asking for it
but when they get it they don’t believe it because it’s not the
truth they want to hear.”
Helena Cassadine
“There never was an idea stated that woke men out of their
stupid indifference but its originator was spoken of as a
crank.”
be had regularly re-submitted, but
still to no effect. His proposal! To
est some of the pension funds
liquidity in gold!
Now, ler’s consider this for a
minute. An investment committee
that, according to my new friend, had
approved all kinds of investments
over the years — in exotic products,
emerging stock markets, frontier
markets, developed markets,
bonds, real estate
and which held cash positions in
different currencies, was refusing to
squities,
Oliver Wendell Holmes
put even a small sum of money into
gold and gold-related investinents.
| wasn't even surprised. I had just
finished presenting to an audience of
about 1,500 mostly conservative,
upper middle-class Swiss people who
lived in small cities ot villages. I had
asked who among them owned gold
No mote than five people raised theit
hands. The response has been similar
elsewhere in the world. Among a
crowd of over 1,000 people at a
conference in South Korea, just two
people raised their hands. Ataconference in Singapore organised by
an investment bank, which was
attended by long-only fund managers
and hedge fund managers, only about
three people raised their hands. I was
surprised and asked the audience:
“You are all intelligent people. You
invest in all kinds of assets and
currencies. Your livelihood depends
largely on financial assets. So, why
don’t you diversify some of your
personal money into an insurance
policy against a systemic failure? Why
don’t you own some gold or silver?”
The audience just looked at each
other in silence.
Tam not mentioning these
findings here because I want to make
a case for gold. Rather, I am asking
myself —and I have done so for the
past few months — why, ten years
into a bull market, the vast majority
of people still don’t own any gold
After all, by the same stage of the
1970s’ bull market, a huge gold bubble
had formed, with investors the world
over speculating around the clock in
London gold. Similarly, ten years into
the Japanese bull market of the 1980s,
the entire world was heavily exposed
to Japanese shares. (At the peak of
the market in 1989, Japanese stocks
made up more than 50% of the
world’ stock market capitalisation.)
The same thing occurred at
NASDAQ's top in 2000. You couldn't
go toa cocktail party ot a dinner
without some dumb-dumb —
sector (technology, media, and
telecommunication) accounted for
more than 25% of US stock market
capitalisation. In late 2006, the
financial sector (including financial
subsidiaries of industrial companies)
accounted for over 40% of S&xP 500
cearnings, and pure financial stocks
accounted for 22% of S&P market
capitalisation (see Figure 1).
Therefore, we can see that
widespread and euphoric public
participation, as well as the bubble
sector becoming either
disproportionately large or profitable
compared to the rest of the economy,
or accounting for a disproportionate
share of total market capitalisation,
are symptoms of a bubble or mania,
But, this doesn’t seem to be the case
Figure 1 Financials as a Percentage of S&P 600 Market
Capitalisation, 2001-2010
‘2000 2001 2002 2003 2004 2008 2006 2007 2008 2009 2010
‘Source: John Rogue, WB Capital Group, www capital.com
Financials market
cap 435.2% of
SEP 500, Lowest
levelalnce
January 2010,
cos
(60
Figure 2 Gold Price, 1999-2010
pretending to be an expert at picking | fesse, ee
high-tech stocks — telling you how ee
much money he was making by ined
buying and selling NASDAQ stocks ‘em
every day. US residential real estate os
became the talk of che town in 2006 so
and 2007, right at the time ie peaked pe
out, and after an approximately ten- jee
year bull market. Moreover, when a ing
sector reaches the bubble or manic Ce
phase, it accounts for a very large =~
percentage of the economy, or of the
stock market capitalisation, and tmaiensee
usually also of the rotal credit (this
certainly in the case of realestate |
bubbles), In 1980, at the peak of the =
energy stock bubble, capital spending i
in the oil industry was extremely high, ae
and the energy sector accounted for SR
32% of the market capitalisation of setpoint
the S&P 500. In 2000, the TMT Souce women
The Gloom, Boom & Doom Report January 2011currently for gold and precious metals
So, I have to say, l'm truly puzzled
as to why more investors don’t own
gold, given that its price has risen
more than five-fold since its 1999 low
(see Figure 2).
THE GREAT LIE ABOUT GOLD
LEADS TO A MISINFORMED
PUBLIC
I would even argue that investors and
central banks have currently a lower
exposure to gold than in 1999 relative
to the size of all financial assets (see
Figure 3). In the case of the US, gold
reserves as a percentage of the
monetary base have barely moved up
since their 2001 low; and in Asia,
where money and credit have
expanded rapidly over the past ten
years and where gold reserves were
tiny to start with, gold reserves as a
percentage of the monetary base have
declined. "How is that possible?” some
readers will ask, “After all, the gold
price is up five times since 1999."
‘Very sitnple! The value of financial
assets in the world has expanded at an
even faster pace than the value of
gold. In the case of China alone, M2
is up from USS1.5 trillion in 2000 to
over US$10 trillion currently (see
Figure 4). (In addition, bank lending
in China is now larger than in the
US, although its economy is still far
smaller.)
10%
100%
em =
0%
0%
19105
8154
We, therefore, have to ask
ourselves why central bankers, fund
managers (with few exceptions), and
individuals haven't meaningfully
increased their exposure to gold
compared to financial assets. Tam
aware that the Reserve Bank of India
botight 200 tons of gold this year (at
about US$1,040 per ounce), but why
did they wait so long before making
this purchase? Ifstocks or real estate
in any country had gone up five-fold
in cen years, the entire population
Figure 3 Gold and Gold Mining Share
Financial Assets, 1920-2010
cnn 8 Geld Resenes 38 0% of Monetary Base
as a Percentage of Global
‘Source: World Gold Council, Kinto Asset Management
‘would be gambling on these assets
appreciating much more. However,
this hasn’t happened yer in the case
of gold and other precious metals.
Why not?
Joseph Schumpeter was right
when he wrote: “The modern mind
dislikes gold because it blurts out
unpleasant truths.” Not surprisingly,
governments and central banks form
the greatest “anti-gold” league. (This,
{n't to say that they have intervened
actively in the gold and silver market
wz
10 (rilion US dottars)
— china
poo oar
‘Source: Ed Yarden, wniyardeni.com
poor T3008
Figure 4 M2 in China Now Exceeds M2 in the US
or 1 008
zoos 007
Dos
rT
January 2014
The Gloom, Boom & Doom Reportto suppress prices.) The price of gold
reveals the truth, and the truth is
that che purchasing power of paper
money is continuously diminishing.
Over time, no government and
central bank can resist the
temptation to issue more paper
money (see Figures 5 and 6). Most
fund managers, financial planners,
and investment advisors love gold
when it is declining in value, because
decline in the value of gold is a vote
of confidence in financial assets from
which the entire financial sector
‘makes its living. Conversely,
financial people hate gold when it is
appreciating. Charlie Munger
described gold as “stupid”. However,
it isn't gold that’s “stupid” rather,
when the price of gold moves up
more than paper assets appreciate, it
is most of the “paper shufflers’, who
don’t own any precious metals and
who invest only in stocks, bonds, and
cash, who look “stupid” (see
Figure 7). Of course, Mr. Munger and
Mr. Buffett will never tell you that,
although their fund may be up by
30% over the past ten years in US
dollars (with some help from the
government bailouts), itis down by
710% in a reliable unit of account
(gold). Most of the other fund
‘managers are in the same boat. They
completely missed the bull market in
precious metals. Therefore, either
they don’t talk about gold and silver,
or they talk it down,
The deflationists are another very
special breed of gold “haters”.
Although, every year, they and their
families spend more on food,
education, transportation, energy,
insurance premiums, health care, and
hidden taxes, they want you to
believe that the overall price level is
declining. To be fair, they are at least
intellectually honest: they hate
everything — including stocks, real
estate, industrial and agricultural
commodities, art, wines, jewellery,
and collectibles — because they
believe all assets are in a bubble (see
also below). The only asset classes
the deflationists really love ate long-
dated US government bonds and
cash. Bill Gates, while discussing
(both positively and negatively)
Mate Ridley’s book The Rational
aeeses
Ounces of Gold $1000
‘Overtime $1000 has bought you...
Figure 5 How Many Ounces of Gold US$1,000 Would Have Bought
between 1920 and 2010
ota
1400
1200
000
00
00
400
200
4920 1920 1940 1960 1960 1970 1960 1960 2000 2009 2010
‘Source: John Rogue, WB Capital Group, wnswbcaptal.com
0% cM
20% \
\
40%
60%
80%
100%
20%
SO a ey
Figure 6 Purchasing Power of the US Dollar, 1930-2010
‘Which means that using 1920 as our starting point.
‘Overtime the § has been devalued by.
1920 1990 1840 1950 1960 1870 1880 1960 2000 2009 2010
‘Source: John Roque, WI Capital Group, wawbcapita.com
Optimist, quoted John Stuart Mill,
who in 1828 opined that, “T have
observed that not the man who
hopes when others despair, but the
rman who despairs when others hope,
is admired by a large class of persons
as sage.” Ican only confirm this
observation. [have a far larger
audience when I am extremely
rnogative about stocks than when I
‘am positive, as has been the case
over the last 18 months. In fact, at
conferences, people often approach
me looking disappointed and saying,
“You're not bearish.” I then have to
explain that because I am ultra-
negative about everything, I prefer to
own precious metals, real estate, and
stocks, rather than bonds and cash.
But, what I wanted to explain is that
the deflationists have a wide and
loyal audience because of the
tailwind the central bankers provide
through their continuous warnings
about “deflation”, and because (as
mentioned above) most investors
missed out completely not only on
the five-fold increase in gold prices
since 1999, but also on the powerful
stock market rally since March 2008.
So, forthe deflationist camp, a huge
victory would be a collapse in gold
and stock prices. (Iam sure that the
deflationists will be right one day,
but whether you would wish to
invest in US government bonds and
The Gloom, Boom & Doom Report
January 2044Figure 7
Is Gold Really That “Stupid”?
‘Source: waw.decisionpoint.com
cash until that day of reckoning is
another matter — see below.)
The media is another gang of gold
detractors. They need to supply the
public with what the public wants to
hear. The media touted NASDAQ
stocks in the late 1990s, hyped
residential real estate in 2005 and
2006, flaunted deflationary fears in
2008, and was an ardent supporter of
Keynesian interventions over the last
two years. Therefore, it's not an
option for the media now to explain
the unintended consequences of
those Keynesian interventions and
expansionary monetary policies, and
to admit to having missed the five-
fold increase in gold prices.
The worst crities of appreciating
gold prices, however, are academics
in the field of economics. Equipped
with supercomputers, they have
devised sophisticated economic
models about everything that are of
no, or very little, practical use. What
these academics have in common is
that they have never read about John
Law and his experiment with paper
money that led to soaring commodity
prices (and the eventual
expropriation of gold and silver in
France). For these academies, who
are completely removed from
economic reality, gold has always
been and will always remain a
“barbaric relic”. Whenever gold
prices move up, they dismiss it as a
completely “irrational bubble”, (But
when the NASDAQ went to 5,000
in March 2000, or when home prices,
soared, they claimed that the market
was perfectly “rational”,)
‘As I said at the beginning of this
piece, [ am not discussing here the
future price movement of gold but
the fact that, unintentionally (and in
some cases intentionally),
governments, academics, fund
managers, the deflationists, and the
media have completely misinformed
the public about the value of precious
metals (real money) in a money-
printing environment. These people
have labelled gold asa barbaric relic,
useless commodity, a speculative
investment that will go nowhere, and
a bubble, They have even compared
it to washing machines. However,
‘what all these experts have failed to
explain to the public — whether
intentionally because it served their
purposes, or unintentionally
because of their ignorance — is that
in a zero interest-rate environment
‘with negative real interest rates in.
most countries, and with central
banks having no exit strategy at all,
gold and silver have again become
“hard currencies”, as has been the
case throughout history. This is the
only explanation I can come up with
for why only a tiny minority of
investors own gold and other precious
metals.
There isa point I have made
previously that I need to repeat here.
A central bank can easily defraud the
public. Lam not talking here about
such things as questionable bailouts
at taxpayers’ expense. Lam alluding
here to a central bank pegging short-
term interest rates below a broad
measure of consumer price inereases.
(Probably the worst offencler in this
respect is the People’s Bank of
China.) By maintaining short-term
interest rates negative in real terms
(adjusted for a broad measure of price
increases), a central bank can — and
it is well understood thar this is done
intentionally — defraud honest
depositors, because negative real
interest rates amount to an annual
expropriation. Lee's say that you
deposit $1 million at a zero interest
rate for a year, and that within this
year a broad measure of price
increases (not the Consumer Price
Index (CPI), which is massaged by
the Bureau of Labor Statistics, or
BLS) shows that prices rose by 5%. In
this ease, the depositor will have
been defrauded by the central bank of
5% upon maturity of the one-year
deposit (see Figure 8)
Bear in mind when looking at
Figure 8 that, according to Ron
Griess, who produces some of the
best historical charts, “the real
interest rate is equal to the monthly
average interest rate reported by the
Federal Reserve Board minus the
year-over-year rate of change of the
Consumer Price Index as reported by
the Bureau of Labor Statistics”
(emphasis added). However, since
the statistics published by the BLS
are about as unreliable as the CPT in
China and likely understate the cost-
of living increases by at least 3%
(and possibly by as much 2s 7%), real
interest rates are far more negative
than shown in Figure 8.
January 2014
The Gloom, Boom & Doom ReportFigure 8 Real US Treasury Monthly Average Yields, 1953-2010
yeu an ay
os os
“ oe *
. [i in ; Ta *
a m= ‘\ fi
is i a wae \ | ~
om AL Wf i, i | ! *
=f = H | Fl " = i" pod.
8 eee $6
Now, it should be clear that when. WIKILEAKS government” (emphasis added).
real interest rates are negative, money
is no longer a store of value and at
the same time is an unreliable unit of
account. Mr. Munger, when interest
rates are negative in real terms, itis
not gold that is “stupid”, but “cash”
and bonds, which yield less than the
cost-of-living increases. Possibly, even
‘Mr. Munger’s and Mr. Buffett’ fund is
“stupid” in the current monetary
environment. After all, Berkshire
Hathaway's stock is down by 70%
against the price of gold since 2000.
‘Actually, L wasn't particularly keen
to write about gold, although |
thought that discussing the low
ownership of gold among central
banks in Asia, rautual funds, and the
public would refute the contention
that gold is a bubble. However, what I
‘was interested in was to show how
governments, special-interest groups,
academics, and well-respected business
leaders can completely misinform the
public if it serves their purposes.
“The whole problem with
the world is that fools and
fanatics are always so
certain of themselves, and
wiser people so full of
doubts.”
Bertrand Russell,
It is against this condition of
deception by the government and the
media, and widespread dubious and
illicit practices, that we need to
consider the recent uproar by many
politicians and their loyal supporters
directed at Julian Assange, the
founder of Wikileaks. According to
Hillary Clinton, “Let's be clear. This
disclosure is not just an attack on
‘America — it'san attack on the
international community... [Such
leaks] tear at the fabric of responsible
Sarah Palin, that eminent and wise
expert on international aff
weighed in by asking, “Why was
Julian Assange not pursued with the
same urgency we pursue al Qaeda and
Taliban leaders? What if diplomatic
pressure was brought to bear on
NATO, BU, and other allies to
disrupt Wikileaks’ technical
infrastructure?” Dennis Gartman,
author of The Gartman Letter
([email protected]), which
consider a very good and
informative daily read, and to be fait
to Dennis he acknowledges that he is
on “the political right”, thought that
WikiLeaks had “done what shall
eventually be seen as irreparable
damage to the US diplomatic corps
and to our military leaders
domestically and abroad. People’s
lives have been put at risk because of
these leaks, and certainly people's
reputations have been done
enormous and very probably
‘The Gloom, Boom & Doom Report
January 2011.inteparable damage in having these
cables made public.” Gartman then
quotes the views of the US
‘Ambassador to Iraq, Mr. James
Jeffrey, who opined: “To be clear —
such disclosures put at risk our
diplomats, intelligence professionals,
and people around the world who
come to the United States for
assistance in promoting democracy
and open government. These
documents also may include named
individuals who in many cases live
and work under oppressive regimes
and who are trying to create more
‘open and free societies” (emphasis
added). Gartman further adds:
[T]he more we consider the
damage done by Mr. Assange of
Wiki Leaks the angrier and the
‘more fearful we become. The
repercussions of what this idioe .
and we know of no other word
that we can use to describe this
fellow than this, for he is an
idiot” of the very first order...
has done in exposing backchannel
diplomatic conversations and
strategy discussions will echo for
years into the future. People will
be killed because of what he's
leaked; the course of history will
be changed ... and not for the
better ... because of what he's
leaked. Israelis in greater jeopardy
now than it already was because of
what he's leaked. Iran’s nuclear
capabilities are safer now because
of what he’s leaked. The Saudi
Royal family is more fearful for
their lives because of what he's
leaked, The President of Yemen's
life is in jeopardy because of what
he’s leaked. The lives of US CIA
‘agents stationed around the world
are in far greater jeopardy because
of what he’s leaked. The
propensity on the part of Arab
informers within Hamas, or the
Brotherhood, or Hezbollah or AL
‘Queda itself to continue to pass
along information to the CIA, or
MS, or Mossad or the Saudi
intelligence ageney are [sic] now
all but ended because of what he's
leaked... What this man has
done is unconscionable and yet he
is seen by the Left asa hero. What
are these people thinking? Indeed,
‘who are these people?
Glenn Beck was distinctively
more relaxed when he (rightly)
remarked: “Nothing! Nothing in this
report so fa is shocking; it’s al stuff
‘you already know because you
watch this show or you're not a
moron. Or you knew it in your
gut.... How many times does this
show have to be right before
Americans start listening either to
this show, or more importantly their
gut!”
Tam hearing here some very
strong views. Not surprisingly, 1
might add. [just wonder what Hillary
Clinton has in mind when she speaks
of “responsible government”. A
goverment that sanctioned the
creation of one bubble after another,
and in the process badly damaged the
working class and the middle class? A
government chat isa bedfellow of the
Royal Family in Saudi Arabia — the
only country in the world where
women are not allowed to drive and
which, according to The World
Economic Forum 2009 Global Gender
Gap report, ranked 130th out of 134
‘countries for gender parity. Saudi
‘Arabia was also the only country to
score a zero in the category of
political empowerment. Or a
‘government that supports President
Hamid Karzai in Afghanistan, who
last year pardoned five border
policemen who were caught with 124
kilograms of heroin and had been
sentenced to terms of 16 to 18 years
in prison, and whose vice president
was caught in the UAE carrying
US$52 million in cash? In june, The
Wall treet Journal (not WikiLeaks)
reported that more than US$3 billion
in cash has been openly flown out of
Kabul International Airport in the
past three years, “packed into
suitcases, piled onto pallets and
loaded into airplanes”, and calculated
that “more declared cash flies out of
Kabul each year than the Afghan
government collects in tax and
Customs revenue nationwide”.
(Unofficially, probably another US$2
t0 $3 billion left the country.) Well, I
suppose that the US supports Mr.
Karzai in order to try to create a more
“open and free” society, as Mr. Jeffrey
said.
One of my more knowledgeable
friends, who writes under the pen
name “Pater Tenebrarum” (and who
is, aside from Jim Walker, the most
accomplished economist of the
‘Austrian School that I know —
‘www.acting-man.com), argues that
Gartman is quite mistaken when he
thinks Assange is a hero of the Left.
In fact, Assange isa hero to
‘everyone who does not worship at
the altar of the State like Mr.
Gartman, who seems to think that
US government intervention all
over the world isto be welcomed
and has nothing but good results
‘We could probably easily find
rillions of people who would
disagree rather vehemently with
Gartman’s view. (Frankly, who
cares if the authoritarian king of
‘Saudi Arabia “sleeps less well”
now? The alleged increased risk to
the safety of various people due to
‘Assange’s revelations sounds just
like a regurgitation of goverment
propaganda, Putting the
‘government on the spot for its
violations of hurman rights is far
more likely to save lives than harm,
them.) Lastly, Assange is
extremely courageous for exposing
the lies and subterfuge
of governments — we are alla tiny
bit mote free because of him. We
‘owe him a preat debt for opening
people's eyes to what scoundrels
populate the political clas... Our
standard for judging WikiLeaks
should be: ate we, as citizens,
better or worse off hecause it exists?
for one think anything that
seriously hampers the State
should be welcome to society (Le.
all of us)... WikiLeaks is
uncomfortable because it reminds
everyone how much lying and
killing and whatnot is done in our
name. That however makes it
necessary, It isthe modem-day
replacement of what used to be the
free press — the comporatist media
that ate too often confusing the
dissemination of government
propaganda with journalism
[emphasis added]
January 2014
The Gloom, Boom & Doom Repert
7Personally, although certainly not
a leftie, but still having some social
conscience (guess who in the US
might be a bit of a leftie?), I support
‘WikiLeaks for several reasons, though
not because Weakileaks' revelations
were anything I either didn't already
know or suspect. As Glenn Beck said,
“Nothing in this report so far is
shocking; it’ all stuff you already
know.” I think we live in a world
where itis perfectly acceptable for
governments to spy on each other
and on corporations and individuals,
‘but that in the view of some people
(mostly politicians) i isn't acceptable
that private individuals spy on the
government. In addition, it seems
perfectly fine for spy agencies to bribe
and blackmail desperate people to
“pass along information to the CLA",
‘but for a company to bribe somebody
to do business is a crime. OF course,
the government will tell you that
they pay out bribes “for our security”,
whereas the private sector pays bribes
because of greed. This isthe line
every dominant institution has raken
throughout history, from
governments and religious
institutions to unions, the mafia, and
sects. These institutions have also
always persecuted people with ideas
or beliefs that challenged (or were
perceived as challenging) their
authority. The Roman emperors
perceived the early Christians as a
threat to the Empire, so they burned
them. The Catholic Church, fearing
for its authority, ordered Galileo
Galilei to stand trial. The Inquisition
sentenced him for “heresy” and sent
him to prison. (The sentence was
then converted to life-long house
arrest and a complete ban on his
publications.) Therefore, it shouldn't
be surprising that governments and
their eronies are after Julian Assange.
Their aim isto bring him to court
and, ideally, lock him up for the rest
of his life — not because, as Mrs,
Clinton claims, WikiLeaks “is an
attack on the international
“community”, but because it calls
‘governments to account and
challenges their authority. As the
famous late columnist Sydney J.
Harris remarked, “Intolerance is the
‘most socially acceptable form of
egotism, for it permits us to assume
superiority without personal boasting.”
‘The Economist wrote that
WikiLeaks, by “simply grabbing as
many diplomatic cables as you can
get your hands on and making them
public is not a socially worthy
activity”. Sure, it isn't a “socially
worthy activity”, unlike selling
weapons around the world, carpet
bombing entire countries, printing
money, manipulating markets, bailing
out cronies of the government, and
algorithmic trading. [ sure don’t
know what a “socially worthy
activity” is, but in this respect, 1
certainly wouldn't rely on the
judgment of The Economist.
‘Astonishingly, The Economist
then goes on to explain:
There are echoes here of
Facebook founder Mark
Zuckerberg’ famously aggressive
position that society is evolving
towards more transparency and
less privacy (a belief which is
certainly convenient fora social-
networking site that wants to be
able to sell users’ data). Maybe it's
something about tech geeks, or
raybe it's just related to the self
interest of people and
organisations whose particular
strength lies in an ability to get a
hold of other people's
information. But it definitely
seems like we're learning a lesson
here: while information may
want to be free, human beings
are usually better off when it's
on a leash [emphasis added}.
This says it all. We should have
freedom of the press and of
information, but only when it suits
the government's purpose, and when
ie is acceptable to a board of editors
particular interests and political
views. Afterall, we all know how
qualified politicians and editors are at
judging which information should be
kept “on a leash’. (I suppose The
Economist will soon be praising China
for keeping information on a leash.)
Since have never met Mr.
‘Assange, I wouldn't know ifhe is an
“idiot” or not. But let us assume that
Mr. Gartman is in the know and Mr.
‘Assange is an idiot. If that were the
cease, we would really need to ask who
is behind his organisation. Personally,
I think he must have some very
powerful backers, (Some
knowledgeable people think it may
be the Chinese government.)
‘Therefore, if I were the US
‘government, rather than trying to
bring him down, I would try to find
‘out precisely where his backing is
coming from (maybe even from the
“right wing"). I should also like to
call the attention of the Assange
haters to these words of Erich Fromm:
“Understanding a person does not
‘mean condoning; it only means that
cone does not accuse him as if one
rere God or a judge placed above
hhim [emphasis added.”
One more observation about
‘Wikileaks: Governments may lock
up or assassinate Julian Assange and
shut down his site. However, the
‘genie has been let out of the bottle
and thousands of other sites will be
set up and dissipate similar news.
Some readers may be wondering
why Iam discussing WikiLeaks, since
it has nothing directly to do with
‘economics and financial markets
Correct. However, indirectly,
WikiLeaks has a lot to do with
economics. In the Western world, we
find governments that have
essentially bankrupted their countries
(or will inevitably do so in future)
demanding full disclosure from the
comporate sector (e.g, about food and
pharmaceutical products) and
intruding on people's civil liberties,
but getting upset when the private
sector and people fight back. In the
US, the government has so fat
refused to have the Fed — probably
the world’s most important financial
institution — audited. In other
words, it’ fine for governments to
manipulate markets, statistics, and
information, and to mislead the
public, but it’s not OK for the private
sector to do so. Such a social,
political, and economic environment
can hardly be very conducive to
growth and “socially worthy”!
‘The attentive reader will also
note the connection between the
attacks of politicians on WikiLeaks
and the central bankers’ dislike of
‘The Gloom, Boom & Doom Report
January 2011gold. WikiLeaks exposes abuses by
governments, and gold “blurts out
unpleasant truths” about the value of,
paper money.
INVESTMENT OBSERVATIONS
‘What caught my attention on my
recent visit to Switzerland is how
‘many investors questioned the merits
of investing outside Switzerland.
‘Their argument was: “Yes, stocks in
emerging economies might be
attractive in the long term, but when
valued in Swiss Francs they are not
attractive because of the strength of
the Swiss Frane.” What these
investors are overlooking, of cours, is
that there will be times when a
foreign stock market will appreciate at
amuch faster rate than the Swiss
Franc (SFR) appreciates (see
Figure 9). From Figure 9, we can see
that, in Swiss Franc terms, the S&P's
performance has been horrible since
2000 (a fairly well-established
downtrend). However, there were
times, such as between 2003 and 2007
and between 2009 and 2010, when,
despite the weakness of the US dollar
(strength of the SFR), a Swiss
investor would have done well by
investing overseas (a point |
explained about the performance of
Mexican stocks in Peso and US dollar
terms — see October 2010 GBD
report), US stocks went up by 84% in
SFR terms between 2003 and 2007,
and by 67% between March 2009 and
April 2010. (Since the April 2010
high, the S&P is down 9% in SFR
terms — see Figure 8.) However, this
isn’t the issue I wish to discuss here.
‘What I wanted to say is that no
lividual investor or fund manager
anywhere in the world has ever
approached me to ask about the
‘merits of investing in paper assets
when they were all depreciating
against hard currencies such as gold,
silver, and platinum. Interestingly,
the Swiss investors who are
concerned about investing in foreign
stock markets never seem to consider
thar, in gold terms, their own
investments had also been a disaster
(see Figure 10).
I should add that, in Swiss Franes,
the Swiss Stock Market Index (SMI)
Figure 9 S&P 500 Adjusted for the Depreciation of the US$ against
the Swiss Franc, 2000-2010
vden/S wise Frane (SPX:SXSA) nooo
Source: waw.declsionpoint.com
Figure 10 Swiss Stock Market Index in Gold Terms, 2000-2010
ct 0D) ASMISGOLD) rox
Source: www.decisionpoint.com
hasn't exactly been a stellar
performer either. It is at the same
level as in early 1998. Therefore, | am
wondering how long i will ake
individual investors, pension fund
trustees, and fund managers like Mr.
‘Munger to look in the mirror and
face the truth, and ask themselves
January 2044
The Gloom, Boom & Doom Report
9why their performance in paper
confetti terms is OK, but isa disaster
in terms of hard currencies
My readers will now understand
why the entire financial sector,
economists, and especially central
bankers, hate gold. As long as assets
are valued in paper currencies, and as
long as economists measure growth
rates in paper currencies, everything
looks fine, and for the fund managers
the performance fees keep coming in.
But if, one day, the investment
community smartened up and asked
for portfolios and economic statistics
to he valued and measured,
respectively, in gold terms, the game
would be up — even for Mr. Munger
and Mr. Buffet.
I don’e want to be misunderstood.
Tam not saying this because I failed
to capitalise on rising asset prices. I
hhave had a lange gold position for
‘years and, thanks to Mr. Bernanke's
outstanding skills in printing money,
my asset management and
performance fees have benefited
Still, [admic that, valued in gold, the
assets [had in 2000 are also down in
value. (The overall assets are up even
in gold terms because I have a high
saving rate.) “How preposterous is it
to demand that we should value asset
prices and measure economic growth
rates in gold and silver terms,”
economists at universities and central
bankers will claim. Fine, | admit that
gold and silver are not perfect value
indicators of asset prices (see
Figure 11). However, are confetti
currencies printed by central bankers
a more desirable indicator of real
values and growth rates? Moreover,
what seems to escape these
academies, whose knowledge of
history amounts to next to nothing, is
that since human civilisation began,
everything was always valued in gold
and silver. Either there was an official
gold standard (in the 19th century),
o money consisted of gold and silver
coins. In addition, when
governments diluted the content of
gold and silver coins with copper and
lead (as in the Roman Empire), the
price of gold adjusted on the upside.
So, in a way, we always had a gold
and silver standard, either officially
or through the market mechanism,
‘Above, I mentioned that gold
isn’t a perfect indicator of asset prices
(sce Figure 11). However, it has
given several incredible buy and sell
signals on the stock market: Excess
valuations in 1929, 1969, and 2000,
as well as tremendous
undervaluations of stocks in 1932 and
1980. Two observations: First, a
continuously rebalanced portfolio of
stocks, which would include the
return from dividends, would have
performed far better than gold over
the last 200 years. However, you
would have had to rebalance the
stock portfolio continuously, because
stack toh
eittow
io 1800 10
‘Source; Nick Land, www.sharebynx.com
Figure 11 Dow/Gold Ratio, 1800-2010
Trendlne with 75% Confidence Band
)
stoss Hh
“so
Sleds tow
atom 1
“08
02
a a)
‘The Gloom, Boom & Doom Report
January 2011,90% of companies you might have
‘owned in 1800 (canals and banks)
‘would have gone bustin the “poor
man's depression” of the carly 1840s.
Investors never had to rebalance
gold. Moreover, if we don’t consider
gold asan investment class but as
cash, then I would imagine that gold
hhas performed better than most paper
‘currencies in the last 200 years.
During that time, most paper
‘currencies became worthless — that
is, with the exception of the US
dollar, the Pound Sterling, the Swiss
Franc, and a handful of other
currencies such as the Canadian,
Australian, and New Zealand dollars.
Second, when the US
expropriated gold in 1933, it gave a
perfect buy signal for stocks (see
Figure 11). And when governments,
which control their central bankers
(there is nowhere independent any
longer), sold their gold in the late
1990s, it provided a perfect buy
signal for gold. I have been trying to
tell my readers that most central
bankers (not Paul Voleker and Karl
‘Otto Pahl) are ignorant in terms of
broad economic and monetary
tatters, but these facts clearly
confirm my point. There was no
necessity to expropriate gold in 1933,
because stocks and the overall price
level were already deeply depressed
and would have recovered anyway
(see Figure 11). Equally, it was a
Jhuge mistake to sel gold in the lace
1990s, near its price low, when the
Dow/gold ratio gave a clear buy
signal for gold and a sell signal for
stocks. (At the time, some central
banks even started to buy stocks...)
If explained this to a man on the
street, a man with some common
sense — not an economist at a
university or at the Fed — he would
scratch his head in disbelief. But
what can you expect from academics
‘who, as James Grant pointed out,
spend their time writing papers paid
for by taxpayers, with titles such as
“The Two-Period Rational
Inattention Model: Accelerations
and Analyses" and “Continuous
Time Extraction of a Nonstationary
Signal with Ilustrations in
Continuous Low-pass and Band-pass
Filtering"?
From Figure 11, we can see that
gold is moving into a relatively,
expensive area compared to equities.
Moreover, it is in my nature to
become more cautious about an asset
class, such as gold and silver, afer it
has had a stunning performance over
the last ten years (see Table 1). Then,
I think that under a gold standard in
the 19th century the Dow/gold ratio
was reasonably constant. However,
following the introduction of modern
central banking it would appear that
the Dow/gold ratio has become far
more volatile, with higher peaks and
lower lows. Therefore, I believe that
it is realistic to expect a Dow/gold
tatio of between I and 5 over the
next few years, and that we cannot
tule out a ratio of 0.5.
In recent weeks, there has been a
lor of discussion about competitive
devaluations. In particular, Mr.
Bernanke seems to think that rising
stock prices are more desirable than a
stable or appreciating dollar. The US
administration's pressure on China to
lec its curreney appreciate strongly is
essentially the same as devaluing the
dollar against the Asian currencies.
Ironically, the only currencies with
which central bankers around the
world have had a rousing success at
competitively devaluing against theie
paper currencies are gold, silver,
copper, and platinum. (Again,
anyone with common sense will just
shake his head.) As an aside,
Jonathan Anderson, the excellent
‘economist at UBS, recently
completed a study on devaluations
and their impact on economic growth
(wwweubs.com/economies). His
conclusion: “Keep in mind that the
Table 1 Spot Commodities
Siver (Handy & Harman base)
Goid (London P&M Fi)
Tin (London
Copper (COMEX, spot)
Lead (London Metal Exchange,
‘Cocoa (ivory Coast #1, spot)
Dow Jones /UBS Commodity In
Sugar (Raw Cane, Word, spt
‘kel (London Metal Exchan
‘Wheat (No, 2softred, St.Louis, cash)
Patinum (London PM Fis)
Corn No.2 yellow, Cent. IL, cash)
Reuters/CRB Continuous Futures Index
ating OF (Now York #2, soot)
Unleaded Gasoline (New York, spat)
se G5ch
Coffee (Brazian in New York, spot)
ine (London Metal Exchange, cash 3
Cotton 1/16", Memphis, spot)
uw
‘Natural Gas (Henry Hub, spot)
Palladium (Engethardindustia lion)
Ten-Year Annualised Returns for the
Period Ending November 30, 2010
Meal Escharg, cash ole)
Copper (London Metal Exchange, cash seller)
cash seller)
Soybeans (No. 4 yellow, Gent. IL, cash)
rude 01 (West Texas Intormediate, Cushing, spot)
| Exchange, cash sell
im (London Metal Exchange, cash seller)
Source: Ron Gress, www thechar'store.com
“081%
January 2044
The Gloom, Boom & Doom Report 14.evidence in favor’ of devaluation is a
lot less compelling than many people
think.” In addition, he notes (I think
this is the relevant issue for the US):
just because you devalue once
doesn't mean the exchange rate
“stays” devalued; knock-on
inflation can take away
competitiveness very quickly.
Most studies point to the need for
“follow through” in terms of
supporting macro pol
other areas; in particular,
monetary policy needs to remain
tight and credible in order to
prevent the inflationary effects of
weaker exchange rate from
passing through immediately to
domestic wages and wage
expectations. Usually a fiseal
adjustment is also necessary to
ensure that there is no excessive
monetary accommodation of the
public sector and that private
credit demands ean be met.
Anderson (one of the best
macroeconomists I know) really hits
the nail on the head with these
observations. Devaluations are only
helpful if they are followed by “tight
monetary policies” and “fiscal
adjustment”. That is the key.
However, what is the likelihood of
“ight monetary policies” in the US?
Zero! And what is the likelihood of a
‘meaningful fiscal adjustment? Almost
zero! On the other hand, what is the
likelihood of precious metals
appreciating further ifthe dollar
declines more? Rather likely. What
about if the dollar strengthens, and
other currencies, including emerging
market currencies, weaken?
[pointed out above that, at a
conference I spoke at in Seoul, hardly
anyone owned gold. This is my
impression of most people in the
emerging economies. Therefore, if
‘emerging economies’ currencies and
the Euro were to weaken against the
dollar, l could make the case that the
price of precious metals would
increase even more than arnidst
dollar weakness. In many countries
— including China, Vietnam, and
India — there are restrictions on
people investing overseas. But, they
ate permitted to purchase gold. Not
surprisingly, Chinese gold imports
jumped almost five-fold in the frst
ten months of 2010 (to 209 metric
tons) from a total of 45 tons in 2009
If, in 2011, the Chinese public no
longer perceives real estate and
equities as attractive, I wouldn't be
surprised to see gold imports
increasing to 500 tons.
There is another development
that is likely to support gold prices.
‘The Chinese government must be
concerned about its worsening
political relationship with the US.
‘They and other foreign central banks
are also concerned about their lange
exposures to dollar fixed-interest
securities (see Figure 12). Therefore,
why would they not accumulate gold
con any weakness?
‘As said above, I'm not
particularly happy to continue to
accumulate the asset class (precious
metals) that has performed best over
the last ten years. However, what are
the alternatives? Should we invest in
paper cash at zero interest rates and
paper money government bonds?
Investors will lose money either
because of governments’ printing of
money or defaults, or a combination
of the two (Fist, printing of money
and then defaults), or because
investors will underperform in
financial assets compared to sound
carrencies such as precious metals.
(olion dotars, nsa)
Figure 12 Compared to the Increase in Treasuries and Agency Securities Held by the Fed and Foreign
Central Banks, Gold Doesn't Appear to be Overvalued
TS TREASURIES & AGENCIES HELD BY
Fed + Foroign Contral Banks +
US Commercial Banks
s+ Gold Price
(US dally ounce)
1200
oor aon 100s
‘Source: Ed Yarden, wow.yardeni.com
eT
mre) sonn Ton
‘The Gloom, Boom & Doom Report
January 2011.Figure 13 Paltadium (Adjusted for Inflation by CPI), 1917-2010
400
su sy Safarume as
me
=
Source: Ron Gress, wun thechartstore.com
Figure 14 Oil Relative to Natural Gas, 1990-2010
43 Std Devs
. i 425td Devs ih
. EE
-1Std Dev
sysrs90—afii9m —aenisme —arer96 atone ysaaco—ayan002—aysnont syne aero ya010
Source: John Rogue, W8 Capital Group, wirkwbeapital.com
January 2021 The Gloom, Boom & Doom Report 13Figure 15 Suncor, 2003-2004
‘Suncor Energy, Ine. (SU) wse
Jeuacon 26
ea
TORR TSHR SORA I OWI SRR IT SOT TC CETS
Source: wwn.decistonpoint.com
Figure 16 Nomura Holdings, 2001-2010
Nomura Holdings ie. (HMR wise
lewasors sa .
ets) 69
{02 SON as be aa — ee ao ae
‘Source: ww decisionpoint.com
The Wall Street Journal Guide to the End of Wall Street as We Know It: What You Need to Know About the Greatest Financial Crisis of Our Time—and How to Survive It