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2003 Vancouver Investment Conference. January 26 & 27,
2003.
Featuring an incredible line-up of speakers - covering
all types of direct investments in Canadian public companies
- speculative investing, resource exploration, oil &
gas, world outlook, investment strategies - and more!
Register at www.cambridgehouse.ca
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Gold During Inflation, Deflation and
Chaos
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New production and industrial consumption are
relatively unimportant determinants of gold's price, even
though many pundits make much of them. Unlike any other metal,
most of the gold that has ever been mined is sitting in the
vaults of central banks and the safe deposit boxes of investors.
It's not being "used" for anything: its raison d'etre is simply
to be an asset. What determines the price of gold therefore,
is the desire of its owners to own it or to liquidate it and
own something else.
And that, in turn, depends on the inflation
rate (how fast paper money is losing value), the chances of
a credit collapse (the likelihood of deflation wiping out
paper assets), and the general level of confidence in the
future.
The most likely alternatives are much higher
inflation or uncontrolled deflation. The creation of more
currency and credit are the only ways for the government to
fund its deficits, transfer programs, bailouts and other disasters
waiting in the wings. And if we have a financial accident,
that in itself will be an excuse for the authorities to expand
the money supply further. High inflation rates would send
gold skyrocketing, much as they did in the 70s.
Yet serious deflation would likely also cause
the price of gold to explode. It is the only financial asset
that's not simultaneously someone else's liability. And if
we have deflation this time around, it won't be possible to
buy government paper and wait in safety, as was possible in
the 30s, for at least two reasons.
First, a deflation would set off all kinds of
spending programs and bailouts. The USG would go from being
a questionable risk to a bad risk as it was forced to borrow
on a huge scale to finance emergency spending, much of which
is already mandated by law, while tax revenues were falling.
Second, a deflation would almost certainly result in calls
to reinflate as rapidly as possible-a course of action unlikely
to inspire confidence in the dollar. Gold would soar in a
serious deflation.
Gold is a big winner in either scenario; it
is a matchless crisis hedge. It's the only financial asset
that's completely invisible and private. There are no social
security numbers stamped on gold coins, and they leave no
paper trail when they change hands. Unlike real estate, for
instance, a government cannot easily find gold to tax or confiscate.
Unlike stocks, gold doesn't represent a value that can be
dissipated or mismanaged. Unlike bonds, gold cannot default.
And unlike currency, gold cannot be inflated away.
There are not many low-risk places for wealth
to hide today. But plenty of wealth exists and, as the world's
greatest coward, capital will look for a place to hide when
things get scary. Gold is the perfect financial asset in times
of uncertainty.
This is not the 70s, when gold was a great speculation.
You should view gold as a vehicle for savings and for conservation
of capital. When you save, you're not expecting to hit a long-ball
home run; you are simply trying to put away assets for future
consumption. You want safety. You do not want to have to trust
a government, a banker or the management of some corporation.
You want the asset itself, something you can hold in your
own hands.
Gold is not a trading vehicle; it's a core holding.
Buy it as privately as possible, put it away, and forget about
it.
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GOLD
I was reading over an article
in Forbes, dated July 30. I'm often months behind on periodicals,
as much by intention as happenstance. The reason for that
is twofold: First, I can see, with 20-20 hindsight, what information
is worth knowing and what isn't, so I save a lot of time reading.
Second, it gives me perspective on the value of various people's
opinions; I don't have to guess how much of what they thought
was right or wrong.
In any event, Forbe's reporter
took every opportunity to make snide comments about gold and
it's buyers. Among his opinions was that "the great gold rally
of 2002 may already have run its course" and "The more paranoid
among us can buy some Krugerrands and bury them in the backyard
as a hedge against the complete collapse of the financial
system." Along with a passing mention of Goldmember, "a gold-obsessed
villain," in the recent movie of that name. Perhaps this last
is understandable, in that it's well known that the gold-obsessed
(unlike the dollar-obsessed, or the stock-obsessed) all tend
to be villains. Clearly the reporter, and his editors, don't
believe the recent strength in gold will amount to anything.
That's good.
One thing you should keep
in mind, which I've often emphasized, is that the big percentage
gains in a bull market occur at its beginning, not at its
end. An example. Fidelity Select Gold (FSAGX) had its best
year in 1993, the first year of the last bull market for gold
stocks, when it was up 78.7%. Its worst year was 1997, after
the 1996 peak, declining 39.4%. It's a very bad idea to be
late to the party, either coming or going, especially when
you're dealing in volatile speculations.
The tail end of a bull market
is typically wild, and covered with press ink. But the big
percentage gains are made at the beginning, when few even
know it's underway, and those that do either pooh-pooh it,
or are too scared to join it. That's especially perverse,
in that not only are the biggest percentage gains made at
the beginning of a bull market, but it's where the risks are
lowest. It' a paradox, like so many things in the world. By
the time Forbes (and they're far from the worst offender in
the press) is running cover stories on gold, the way they
all did on the Internet stocks, it's going to be time to play
different game.
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