By Peter D. Schiff
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, Wall Streeters' rationalizations come thick and fast.
And nowhere is this spin more pronounced than in their dismissal of the surging price of gold as a relevant indicator.
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 the yellow metal's soaring price to other factors. The most common explanations include strong economic growth, rising jewelry demand, speculative buying, higher oil prices, the weak dollar, terrorism, economic uncertainty, Middle East tensions, volatility, supply and demand, and many others.
Every possible explanation is offered save one: Inflation.
Some explanations, such as a weak dollar, have some validity, but ignore the point that the dollar is weak as a result of inflation [thanks to too much money creation by the U.S. Federal Reserve]. In a commentary I penned back on Sept. 30, 2005, I noted that rising gold prices were the inflationary equivalent of a canary in a coal mine. However, rather than fleeing for better air, Wall Street miners merely go about their business, confidently deluding themselves that the canary died of natural causes.
Given central bank Chairman Ben Bernanke's recent promise 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 leader obviously does not believe] – inflation has been given much more room to run.
Of course, the Fed's free money fest will not be sidetracked by recent news demonstrating that the November trade deficit surged to $63.1 billion, and that 2007 import prices soared 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 couldn't care less. As the price of gold continues to climb as a result, look for more excuses to minimize the significance of the yellow metal's 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 the gold market. The bubble crowd was particularly vocal back in April 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.
Why the Pundits Are Wrong
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 peak-1980 price of $850 an ounce as a way of discrediting the recommendation. It happened again recently when CNBC's Mark Haines – who in an on-air comment three years ago bluntly asked me: "Who cares about the price of gold?" – and pointed out that if an investor bought gold at $850 dollars per ounce in 1980, he'd finally just broken even.
Haines compared "speculating" in gold to "investing" in General Electric Co. (GE), claiming that buying and holding GE for 10 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 were recently trading at the same price they were eight years ago – while the price of gold has tripled.
I will say this: I do agree with Haines on one point. Watching gold go from $35 per ounce in 1970 to $850 an ounce in 1980 – then buying at the absolute peak, and holding on though the entire bear market – was pretty foolish. But let's be realistic here: 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 the $150 per ounce range. And while most of these folks probably did not cash out at the peak, it's a near certainty that they sold above the $450 level sometime in the early 1980s. As a result, those investors protected their wealth during the inflation-ravaged 1970s, and were well positioned to acquire other financial assets at depressed prices.
Now, as then, gold's 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.
Don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late.
[Editor's Note: Money MorningGuest Columnist Peter D. Schiff is president of Euro Pacific Capital Inc., a Darien, Conn.-based broker/dealer known for its foreign-market expertise. A well-known financial author and commentator, Schiff is a regular Money Morning contributor, and last wrote about the problems with the Bush Administration's economic policy plans. In mid-August, when analysts were touting beaten-down financial shares, Schiff said the stocks were "toxic," were destined "to get hit hard," and advised investors to "stay away." Investors who heeded that advice, and avoided such shares as Merrill Lynch, also avoided some stressful, subprime-induced losses. Schiff's first book, " ," was published by Wiley & Sons in February 2007. To order the book, please click here].
News and Related Story Links:
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Canaries in Coal Mines