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Gold - on the Cusp

By Howard Katz      Printer Friendly Version
Dec 8 2008 11:26AM

This was an exciting week as the gold stocks – to superficial observers – appeared to be hit hard on Thursday and Friday morning. But gold stocks are up substantially from their Oct. 24 low, and one of my favorites finished the week up 100% from that point. And more substantial market students saw that a great deal of good, solid technical work had been done paving the way for a long advance.

But first, what was the big news of the week?  It was that the National Bureau of Economic Research declared that the country is in a recession, indeed has been in a recession since December 2007. Now doesn’t that prove me wrong? I mean, the newspapers all told us that this makes it official.

So I went to my dictionary and looked up “official.”  I found: “of or pertaining to an office or position of duty, trust or authority.”  Does the NBER hold any office? Has it been appointed to any position of authority? The answer is no. The NBER is a “private, non-profit research organization dedicated to studying…economics….” (Wikipedia). In short, the NBER is just a bunch of guys

If the Chief of Police makes a ruling on sick pay for policemen, then it’s official.  If the Head of the School Board declares a school holiday, it’s official.  But if the NBER calls me an elephant, that does not make me an elephant because in point of fact I am the best darn economist around.

No, when I declared that there was no recession, I was referring to the NBER’s original definition of a recession: 2 consecutive quarters decline in real GDP. I don’t agree that this is the correct definition, but I am bending over backward to be nice to the establishment. So why don’t we take a look at real GDP and see what it has been doing since December 2007?

Here is real GDP from the 4th quarter of 2007 to the present. These figures are from the Bureau of Economic Analysis, which is the Government agency charged with calculating GDP. (So these numbers are official.)

What conclusion can we draw from these GDP numbers?  Well, it appears that from Dec. 2007 to the present real GDP has mostly gone up. Now the NBER stoutly maintains that GDP is a valid measure of the U.S. economy. So by their own logic, the economy of the U.S. must be significantly higher now than it was in December 2007. In Dec. ’07, real GDP was $11.620 trillion. Today it is $11.712 trillion. 

So how can the country have been in a recession since last December when the figures which really are official tell us that the economy is going up?

I go into this to point out to you just how ignorant and unreliable the nation’s media is. Notice how easily they gobbled up the NBER’s claim to be the official arbiter of recessions. When I started writing economics, the NBER used the 2 quarters definition. They would wait for 2 consecutive quarters decline and then they would declare a recession. But later they saw their chance. They changed their definition from 2 quarters to a long doubletalking definition which said, “a recession is whatever we say it is.”  And how easily the nation’s media were willing to snap to attention when they cracked the whip.

Because declaring a recession is not simply a neutral, scientific, intellectual act. All of Wall Street and many associated interests want the Fed to violate the free market by easing credit and printing money. The Fed can more easily do this if we are in a recession. So they strain every muscle, twist their minds into pretzels and wish desperately for a recession. And when one is wishing so hard, it is not so bad to cut a few corners, is it? 

So all the bearish prognostications are not evidence against my position. They are proof that I am right. The establishment is saying that we are going to have “deflation” because they want the Fed to give us “inflation.”  What is the Fed doing? Here is the St. Louis Fed’s data on the monetary base:

Not even during WWII have we seen monetary expansion of this magnitude.

It is also argued that the Fed could reverse itself and destroy the money that it has just created. Well, this is possible. But human nature being what it is, it is not going to happen. It has to be kept in mind that the Federal Reserve is a counterfeiting operation. Once a government comes out against property rights and starts to redistribute the wealth, taking from one man to give to another, an ugly side of human nature comes out. People want economic goods, and most people are not terribly ethical about how they get them. The bankers and Wall Street have a nice operation going. They pay a small group of intellectuals to say that they are “the economy” of America. The people can then be deceived into voting for politicians who are going to rob them and give to the rich

Take President-elect Obama, for example. He ran on a program of robbing from the rich to give to the poor. He spoke movingly about the plight of the poor. And now that he has won he is moving forward with a program to rob from the poor and give to housing speculators, banks and worthless, incompetent auto industry executives. And all that is necessary to get away with this is to call such people “the economy.”

So you say to me that it is possible that the Fed will neutralize the money it has just counterfeited. Yes, and it is possible that, after you have been mugged in a dark ally, that the mugger will turn around and give you your money back. But I would not wait around that dark ally expecting it.  We had a good example of this last week when the auto executives were made to drive their cars to Washington to put in their claim on our money.  “Going by private jet makes a bad impression” the congressmen explained to them. When you are begging for other people’s money, you must appear humble.”  This subtle point had gone over the auto executives’ heads. They were so used to their perks and life styles that they took them as a matter of right.

The auto industry began in 1908 with Henry Ford, who figured out how to make a car so inexpensively that almost all Americans could afford one. Henry Ford gave to the American people. The auto executives of 2008 steal from the American people. The paper money system is the technique of stealing they use.

So, could the Fed suddenly neutralize all the money they have created in the past 12 weeks?  Yes, and the Mafia might return their ill gotten gains. What we have been through since September is a classic way for the paper aristocracy to operate. They send out their economic hit squad to predict “deflation,” “depression,” “recession,” etc. Think back to the situation of 1981-82.  We had a prime rate billed as 20%, and Dr. Doom was predicting higher. Think back to the late ‘80s when the hot topic was Ravi Batra’s book, The Great Depression of 1990. A great many people were taken in by these predictions. They sold and took defensive positions. But in each case, the Fed went wild printing more money and further easing credit. The paper aristocracy always wants one thing: more paper money and easy credit. Their propaganda is always the same. They predict a decline in prices. Then the Fed rushes in to rescue the nation from the threat of lower prices. How many times are you going to be deceived by the same lie?  The NBER are not real economists. They are intellectual shills for the paper aristocracy. A real economist knows how to predict the events of the economy. His predictions come true.  But Dr. Doom (Henry Kaufman) is still around. According to the media he has an honored and respected position. The fact that he was terribly wrong in his predictions back in 1982 has not hurt him in the eyes of the paper aristocracy. He served their interests. He frightened people enough so that they supported Reagan’s policy of doubling the money supply (breaking his promise to follow Milton Friedman’s monetary rule).  Here they are with the same lie, and it is still working.

Unfortunately, there are some elements, even within the gold bug movement, who fall for this line. The first are a group of people who are so frustrated and alienated that they want to believe the worst.  When these people heard the word “recession,” they said, “depression.”  But this is badly wrong.  It is true that the nation has been getting poorer since we cut the last tie to the gold standard in 1971. But “depression” is universally used in economics to refer to a credit contraction, and this is accompanied by a decline in prices. That is not going to happen. When you are planning your personal economic strategy, you have to know whether the country faces lower prices or higher prices. There is no strategy which deals with both conditions. They are exact opposites. This is one of the things which is wrong with many economic concepts. They are used in an intellectually sloppy manner. If you give two different meanings to the same word, you can easily come to two different conclusions from the same premise. But that way you don’t get truth. The country could be said to have been in a depression since 1971 because the whole nation has been getting poorer since that time. But what “depression” means to most people is a time of declining prices and high unemployment. If you expect that, then you are going to make serious mistakes in your personal economic planning.

The second mistake is on a higher level.  Ludwig von Mises was a fine man, and all of us in the gold bug movement owe him an enormous thank you. But he was too much in the world of theory and did not get down to practical matters. For this reason, he maintained that it was not possible to predict whether the economy would head toward depression or crack-up boom. (i.e., too little money or too much money).  His strict followers take the same line today.

Well, as long as you stay in the ivory tower of theoretical economics, it is not possible to predict whether we are going to have too little money or too much money. But as soon as you take these blinders off, it is very easy to predict. The Fed turns like a battleship. They usually tell you what they are going to do. The shills for the paper aristocracy are screaming at the top of their lungs in the media. The very large volume of hysteria which has been raised predicting a coming “recession” is probably the clearest indication that the Fed is going to go insane in the opposite direction. Think about it. The Fed doubled the nation’s money supply during the decade of the 1980s. Here in 12 weeks, the Fed has multiplied Federal Reserve Credit by 2½, times with Dallas Fed chief Richard Fischer predicting a triple by the end of December.

So, if you have one ounce of common sense, you know that the “error” the Fed makes this time will be the same “error” they make every time: TOO MUCH MONEY.

So how do you protect yourself from too much money? This is our main subject of discussion in the One-handed Economist. There are 3 popular answers: gold, stocks and real estate. Mostly we think of gold and stocks as moving against each other (with real estate on the side of stocks). But for a while we will have an unusual situation where gold and stocks both move up together. And despite the bad real estate market in 2007 both the Administration and the Fed are making enormous efforts to turn it around. It is too early to be sure, but they are likely to be successful.

Meanwhile, the gold stocks are giving me wonderful technical signals. The whole period since early October now looks like a base for a powerful up move. Three of the XAU stocks now have head and shoulder bottoms (with breakouts on 11-21-08), and three more have double bottoms. These stocks were driven down by the hysteria, but they will be the first to bounce back. (However, it is too early for the more speculative gold stocks. When their day comes, it will be great, but that day is not yet here.)

At this point in time, I am confident that an investment in a year’s subscription to the One-handed Economist ($300/year) will prove very rewarding.  If you want to get more of a feel for my thinking, you are invited to visit my web site, (no charge)  Currently I have a 2-part blog on unemployment showing that unemployment is not natural to a free society, and virtually all unemployment (today and in the 1930s) has been caused by specific government policies.

Thank you for your interest.

Howard S. Katz



Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965.  His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31).  Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.).  Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002.  His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures.  This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100.  Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  (Include both electronic and mailing address.)  Mr. Katz’s blog is available weekly (no charge) at