The Problem with Goldbugs

COMMENT: Mr. Armstrong, I just wanted to say thank you so much. I was listening to the perpetual gold analysts for years who never changed their tune. It was always buy, buy, buy, and the dollar would go to zero any day now. They always looked at the Fed and the balance sheet, and when they were wrong, they blamed the bankers for manipulating gold.

I sold out in 2013, and you said gold would decline for two years. It did not crack $1,000 as you hoped, but it elected two monthly bullish reversals within two months of that low, and you said it would rally to test $2,000. You also projected that the stock market would outperform gold, and contrary to all the gold bugs, you said they would rise together. Nobody made that forecast.

I had two friends who did not listen to you. They took home equity loans to buy more gold and did not sell in 2013. The gold bugs ruined the marriages of my former friends, and both lost their houses. We no longer talk because they lost everything when I followed you. The stock market did much better. People need to understand that when you forecast the world, you see things are all connected.

Thank you so much for the education.

ED

REPLY:  I am glad you understand that you cannot forecast a single market to the exclusion of everything else. The world economy is all connected. As I have said, without World War I & II, the USA would still be an agrarian society. The capital shifted, transforming the USA into the world’s financial capital. The problems with the goldbugs’ view of the world is that:

1. They have broken rule #1 of investing – NEVER MARRY THE TRADE.
2. They are prejudiced by old economic theories that have not been updated since the 16th century.

When Sir Thomas Gresham  (c. 1519 – 1579) devised his Law that bad money drives out good, the metal content determined foreign exchange on the Amsterdam Exchange. Today, the backing of a currency has returned to the days of the Roman Empire. Rome was militarily superior, as is the case of the United States, when it became the #1 military power after WWII. Yet more importantly, Rome had a consumer-based economy, so everyone was proud to be Roman, for it gave them access to the largest consumer market in history. The Emperor Marcus Aurelius (161-180 AD) had even sent an ambassador to meet with the emperor of China. The United States currency is NOT backed by gold or any commodity. It is supported by a consumer-based economy, the same as Rome.

India traded with Rome. That is where the silk from China moved through India to Rome. However, India was also the supplier of dyes and spices. Rome’s coinage was worth more than the metal content of the time of Gresham during the 16th century, for there was no significant military power nor a consumer-based economy. For over 200 years, Southen India imitated Roman gold and silver coins; at times, they even weighed more in gold than genuine coins.

Here we have an imitation gold aureus of Septimus Severus (193-211AD), which weighs 11.3 grams compared to 7.1 grams for a genuine Roman aureus. That meant that the Indian imitation was nearly 60% heavier. The coinage had a premium because of the consumer-based economy in Rome, and that attributed a premium to the coinage that had NOTHING to do with the metal content. Southern India NEVER issued their own gold coinage. They imitated that of Rome. Today, many emerging markets use the US dollar and borrow in dollars.

The world has changed – I hate to tell them. The old theory of the Quantity of Money does not hold up under any correlation. The nonsense that gold rises with inflation has ruined many and bankrupted others. The central banks have used this theory supported by Keynesian Economics, and it has utterly failed. We have ballooning national debts thanks to Austrian Economics, which propagated the idea that borrowing rather than printing would be less inflationary because you were not creating more money – you were supposed to be draining the money supply.  Everything is connected. If a foreign investor buys property in the United States, his money, be it in euro, yen, or yuan, is converted to dollars, and the domestic “real” money supply increases, for the seller, now has that cash to spend. This is not accounted for in any of these antiquated theories.

It is time we reassess how the modern economy of the 21st century truly works. Currency pegs, gold standards, and schemes like the G5 Plaza Accord, which tried to lower the value of the dollar to reduce the trade deficit being oblivious to the fact that they also lowered the value of foreign investment in the dollar, have done nothing but create confusion and economic chaos. Central banks have nothing other than the old-fashioned 16th-century theory of the quantity of money to play with.

Keynes added to the chaos by advocating, like Marx, that the government had the power to control the economy. Keynes advocated the end of Laissez-Faire in 1926. Yet, before he died, Keynes admitted that he was wrong. Nobody paid attention because once the government seized that power, they refused to hand it back to the people.

Gold is NOT a hedge against inflation. It declined for 19 years after 1980 when inflation rose, as did the national debt. Gold is a hedge against the government. That will be why it will make new highs on the 4th run – not because of the Fed or the CPI.

I am finishing up a new book on this crisis in theory. Not only have the godbugs been wrong, but so have the central bankers and those in government. It is time we take a closer look at how things truly function that apparently, like Thomas Gresham, it takes someone to observe reality from a trader’s perspective.