Gold historical charts
May 25

Why the Economist is wrong on gold

When reading the financial press, the amount of coverage one sees on the topic of precious metals, is almost nonexistent. Most pundits don’t care for the metal, nor do they understand it. In fact, former Federal Reserve Chairman Ben Bernanke told Congress that he doesn’t understand gold.

Yet, when you read articles on gold from media pundits, all one hears is negativity about why you shouldn’t invest in the yellow metal. The best example of this is a recent article I read in the Economist. It is called, Russia is buying gold, but few others are. This article claims that despite the low interest rate, easy money environment, combined with the fact that half the gold mining companies are generating negative cash flows, gold is still stuck at a stagnate price of $1200 per ounce. The economist claims, that this is due to the fact that no one is buying the yellow metal, except for Russia. They end the article by stating that gold has lost its luster to real estate, bitcoin, and contemporary art.

I believe the Economist only views gold from a short time frame from the year 2011 to 2015. People claim that gold has declined due to weak fundamentals. I believe it has declined for different reasons. I am going to debunk some of the facts cited by the Economist, make my case for gold, and explain why I believe gold declined from the year 2011 till now.

The first reason I believe the gold price has decreased from over $1900 an ounce, to roughly $1200 an ounce, is because gold was due for a normal market correction. From 2001-2011, the price of Gold increased every year. The price of gold increased from roughly $250 an ounce, to over $1900 an ounce. Any upward move such as that will certainly be followed by a long and sharp correction. That is just the normal nature of markets.

The Economist is also incorrect when it states that only Russia is buying Gold. Currently, China buys more gold than the world produces. Now most gold bulls believe that consumption exceeding production will ultimately lead to a price increase, but the problem with that assumption, is that you can’t analyze gold production and consumption levels, like you would oil or coppers. This is due to the fact that when gold is produced, it’s not consumed like oil, and that all the gold produced stays above ground. This means that all Gold purchased, will eventually be resold into the market at a later date. As a result, Gold production metrics won’t have a similar affect on the price of gold, as it would on oil, copper, or other consumption based commodities.

In terms of the Economist’s theory on new alternatives to Gold, I believe they are incorrect based on past history. Real Estate has always been available for people to own in the US. In fact, George Washington was a land speculator. In terms of art investments, people have been investing in art for hundreds of years, and art prices have been in a current upward trend since the 1950s. When it comes to Bitcoin, the price of Bitcoin has decreased drastically since its high of $1,200. In reality, that hasn’t proven to be a viable alternative to gold.

I believe the main reason the price of gold has declined since 2011, is because Wall Street investors believe that the economy is in recovery, and that the Fed is going to raise interest rates. When people believe interest rates are going to rise, non-yielding assets such as gold become less attractive to investors.

This incorrect Wall Street assumption is why I believe gold will become relevant again. What Wall Street is ignoring is the recent data that has been released lately. In Q1, the gross domestic product (NYSE:GDP) only expanded at .2 percent, the US manufacturing PMI index is reporting its lowest numbers in 16 months, and the ISM manufacturing index is reporting its lowest numbers since May of 2013.

These less than stellar numbers can be attributed to the Federal Reserve’s ending of QE. In my opinion, once Wall Street and the Fed finally admit that the economy isn’t healthy, a rate hike will no longer be considered by the Fed, and quantitative easing will come back into the picture. That will be the catalyst for the next bull market in gold. These actions will cause a huge short covering rally, followed by traders initiating new long positions.

This is why I believe within the next 12-18 months, gold will enter a new bull market.One analyst believes that when it comes to price movements, that $5,000 dollar gold is realistic when looking at historical charts.

Feb 25

Sean Hyman: Higher Oil prices on the way

I Interviewed Sean Hyman from the Ultimate Wealth Report. We discussed oil prices and where they are heading, Sean also talks about oil stocks he likes, then we discussed Gold, an alternative to penny stocks, High Frequency Trading, and more.

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Oil Barrels
Feb 17

Great Buys in the Oil patch

Listen to my interview with Kerry Lutz about oil stocks and prices

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Feb 16

Gallup Is Right: The Unemployment Rate Is A Big Lie

Here is a Summary of an article I just wrote for Seeking Alpha.

-The BLS overlooks underemployment.
-Most jobs created are part-time.
-Labor participation rate is low.
-Why aren’t the energy jobs lost counted?

Click on the link below to read the article.

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Jan 28

Jason Stevens: Diamonds, Oil, Gold, and everything Resourceful

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Jan 24

Bo Polny- 2015 Should be a good year for Gold

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Jul 20

Tapering Is Bullish For Gold

I wanted to address tapering, an end to monetary stimulus, and what it means for gold. In 2013 the price of Gold suffered its worst year since 1981. The general consensus on why gold crashed was because of the Fed’s forward guidance stating the US economy is on the verge of recovery, with government data supporting an economic recovery, which will ultimately lead to the end of monetary stimulus, followed by interest rate normalization.

In terms of fundamentals, none of the fundamentals that lead to a rise in gold from 2003-2011 have changed. When stating this, most people would think I’m crazy, partially because I am ;), but mainly because when one invested in gold, the decision was made because the Fed was printing money, and that the price of gold would rise because of the continuous injection of monetary stimulus. But what those people forget is that Gold is money, and the reason the US is printing money is because it’s insolvent. If interest rates were to rise to a fair market value, the interest on government debt would greatly exceed government revenue, thus leading to a national default on its financial obligations. That is why analyst have said if you believe in math buy gold.

I will admit if the Fed stopped easing, printing money, providing monetary accommodation, whatever you want to call it, that would cause a knee jerk reaction, and create selling pressure, thus reducing the spot price of precious metals. But the reality is, if they completely ended stimulus, slowly at a gradual pace, or quickly, interest rates would inevitably spike, thus causing sovereign debt crisis, which will ultimately lead to a default in the US treasuries market. This would then create a mad panic rush into monetary alternatives to the US dollar, and the strongest alternative to fiat currencies for the past 5,000 years was, is, and most likely always will be, Precious Metals.

I admit I don’t think the Fed will end stimulus, in fact I believe they will reverse the tapering, or come out with a much larger stimulus program in the future; but even if they ended stimulus, the gold fundamentals are still strong because of all the debt in the system, and because it is an alternative to the paper money system we are presently stuck in.

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Jul 1

Bernanke’s Bluff

Check out my new article on Seeking Alpha

Sep 14

3 bubbles in the US economy that have yet to pop

1. The Student loan bubble
Student loans aren’t going to be around much longer, when people come to a realization that college is borderline worthless, kids are going to stop going. Currently, I see people graduating college, and the type of job they get when they graduate is a McDonald Cashier, or Starbucks cashier. Did you really need to go to college so you can do that, I don’t think so. Eventually, when the masses see that college isn’t what it used to be, they’re going to stop going, and what you will see in the future are one of two things. Either numerous universities are going to go out of business, or foreign students will price the US citizens out of the college market, and most of the US universities will be filled with foreign students from other countries. In my opinion, when you get older, your kids are going to say, Mommy and daddy, what were student loans?

2. The credit card bubble
Will Credit Cards still be around in the future, yes, but will almost everyone own them like they do now, no. Very few are going to own them, it will be like the 70’s where interest rates were sky high, and only the super wealthy owned Credit Cards. Americans are going to learn you don’t get to just consume, you have to produce first, than after you produce you can use that money to go to college, or buy tangible goods. You can’t just keep barrowing money to live beyond your means, while consuming foreign products, that type of economy is not sustainable. In the near future, you’re going to see many credit card companies go out of business. Eventually foreigners are going to come to the realization that they won’t get their money back from the US, and they’re going to stop lending to the US. When that does happen, the US citizens will only be able to barrow from US savers, and very few people in the US save their money, this will bankrupt a lot of credit card companies, and due to the lack of savings in the US, there will be very little barrowing.

3. The Treasury bond bubble
If you own treasuries, get rid of them now, while idiots on Wall Street still think they have value. The USA owes 14 trillion dollars and counting. If you spend a dollar every second from now, till the day you die, you still wouldn’t spend a trillion dollars. And the US owes 14 trillion. Mark my words the US will default on its debt, it will be done by either inflating their way out of debt, or it will be honest default. But that money will not be repaid either way.

I am not saying these are the only the bubbles in the US economy, I am just saying these are the three most obvious bubbles, that anyone with half a brain should be able to see.

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Aug 9

1920 depression

When one discusses the 1920’s people think of the roaring twenties, a time of prosperity, speak easies, dancing, and singing the night away. But contrary to popular belief, that wasn’t always the case. In the beginning of the decade a depression was on the horizon, one where the first year was worse than that of the Great Depression. This depression is often referred to as the forgotten depression.

In the first year of the 1920 depression, production fell 21%, GDP (Gross Domestic Product) fell from 91.5 billion dollars to 69.6 billion dollars, and unemployment went from 4% to 11.7%.

When Warren Harding took office in 1921, he knew he had to act. But, Harding didn’t take action in the same manner as FDR, Bush, or Obama did. He used a different approach.

Here are some quotes from President Harding that sum up his actions. “We must deflate in deliberation”, and “we will attempt intelligent and courageous deflation and strike at government borrowing.”

When President Harding initially took office, the first action he took was to slash, not cut, but slash spending, from 18.5 billion dollars to 6.4 billion in the first year of his presidency. No, they weren’t spending cuts that were going to be made three years from now as in the debt ceiling compromise, they were immediate cuts. During the next three years, the amount of government spending went down from 6.4 billion dollars to 3.3 billion.
Warren Harding, also, cut taxes drastically, freeing up the economy from interference by government bureaucracy.

As a result, unemployment lowered from 11.7% to 6.7% in the first year, and the next year the unemployment rate dropped even further to 2.4%.
GDP also rebounded to 79.1 billion dollars the following year, up from 69.6 billion dollars, and the CPI (consumer price index) fell 15.8 percent.

What also made this recovery possible was the fact that the Federal Reserve didn’t interfere with the markets until 1922.
On the contrary, Japan in the 1920s didn’t let prices fall, and failed to take their losses like the US did. As a result, their economy went stagnate.

In 1913, Japan’s economy began its boom, which was fueled by cheap credit policies and WW1. The wholesale price index finally reached 322 points by the end of Japan’s boom period in 1920. This was a sure sign that Japan’s credit expansion was out of control. But in April of 1920, the wholesale price index finally dropped to 190 points. This brought Japan’s prices back in line with its trading partners.

During Japan’s boom period, the central banks of Japan created cheap credit, which was then loaned out at rates which were below the market rate. This caused firms to engage in projects and investments that were unprofitable due to their dependence on unsustainable low interest rates. These projects couldn’t be completed because there was an insufficient amount of capital goods available, and businesses were unable to cover the rising costs that low interest rates always create.

As a result, Japan’s government froze its banks and large industries, and didn’t permit the adjustment process to take place. As a result the Japanese economy did not recover, it went into economic stagnation, and resulting in Japan’s first lost decade.

This series of events shows that the government and the Federal Reserve cannot spend, or print their way out of a recession. The market must be allowed to run its course and permit bad businesses to fail. Low taxes, little or no intervention, and letting the market run its course is how to have a growing and thriving economy.

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