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Gold Vs. the Dollar

By Howard Katz      Printer Friendly Version
Nov 24 2008 9:55AM

Happy days are here again for gold bugs. The 43 dollar up move on Friday completed a double bottom formation, which counts up to $860. This should be enough to break the back of the bearish forces which have been dominant since March.

Also, the large trader shorts in gold have made another losing play. Most every time gold makes an important bottom these people get very excited. They have been prejudiced against gold by their Keynesian professors at college. So, encouraged by the decline, they rush in and short heavily. For example, from Aug. 12 to Sept. 16, large trader shorts went from 28,653 to 57,429 -- an increase of almost 30,000 contracts. This sparked the 180 point gold rally of late September, and there was a very painful rush to cover.

Now these gold shorts are evil people (corrupted by their evil Keynesian professors), and it is your job as a gold bug to punish them by taking their money.  In addition to being your job, it is also a fun thing to do. But there are a great many of them, and they are very stupid.  No sooner had they been burned in September than they committed the exact same mistake in October.  Large trader shorts went from 24,268 on Oct. 14 to 52,392 on November 11. Again these people were so gullible that they shorted almost 30,000 contracts. The relentless grinding upward on Friday was the sound of short covering. (Oh my, those margin calls do hurt.)

But the important thing is not what caused the gold rally. The important thing is what the gold rally will cause. The very unusual thing about the rally is that with gold up on Thursday by $13 the dollar was up for the day. Again on Friday, with the dollar up gold still made a massive gain. Further, if we look at the other commodities, they have been sold down to absurd levels.

The entire bearish case for gold and other commodities is based on a very thin reed.  It is based on a group of speculators who have turned massively bearish over the past several months and have spent almost all of their ammunition causing the recent declines. As the gold shorts are forced to cover and gold rallies smartly, it will hurt the dollar. This will frighten the shorts in other commodities, and they will be forced to run for cover. Like a row of dominoes, the collapse of the gold shorts will turn into a general rout of bearish speculators in commodities and a collapse of the dollar.

Let us go into this more deeply. You know that there is a widespread sentiment today that we are headed for a serious period of falling prices (what the establishment calls deflation although the correct term would be appreciation of the currency). Quite frankly, this is garbage. There is no excuse for anyone being this stupid.  And all of the people telling you that prices are going to fall are badly in error (in the best case) or outright frauds (in the worst case).

Why are they saying this?  Because Henry Paulson saw his little world of Wall Street falling apart. It should have fallen apart because these people made outrageous (and unearned) profits in the early years of the century when Greenspan put short rates down to 1%. When rates rose to over 5% in 2006, then profits were not so easy to come by. They defrauded investors with their NINJA loans and sub-prime mortgages. Many companies had let themselves go soft. They were due a very normal shaking out.

But to Paulson this normal shaking out was a crisis. It was his friends and his world which was being shaken. So he ran to President Bush screaming, “crisis.”  Bush, who knows nothing about economics, bought his story, hook, line and sinker.  He announced a financial crisis. On Sept. 15, the New York Times decided to run with the story and startled the world with the front page news: “FINANCIAL CRISIS.”

Papers all over the country are in awe of the Times.  It has too much power and not enough brains. Pretty soon “FINANCIAL CRISIS” was coming at people from every opinion source. The average American thought that he was getting 5 or 6 opinions. He does not know that all of these go back to Henry Paulson.

When there is too much opinion around, the recourse is facts.  Here is the fact about the coming “deflation.”

To save the country from this imaginary “deflation,” Ben Bernanke has started the money creation process.  In the last 10 weeks, he has increased the monetary base (the second step in the money creation process) by 69%. Federal Reserve Credit, the first step, has increased by 145% over the same period. So there is a lot more money in the pipeline coming through. The money supply proper will increase more slowly, over the next 6-12 months. But if they stop here, then we will have more than a doubling of the U.S. money supply and a corresponding increase in prices.

That is an INCREASE in prices, Mr. Bernanke, not a DECREASE. You are living in the 1930s. You are out of touch with reality. What caused the 1930s was a 30% decrease in the money supply over a 3-year period. There has not been anything like it since.  Indeed, there has not been a decrease in the Consumer Price Index since 1955. You are living in the past. You are out of touch with reality.

In simple terms, the facts predict an increase in prices.  99% of all economists are predicting a decrease in prices.  Because of this enormous weight of opinion speculators have sold down the various commodities, and there have been intermediate declines in commodities over the middle part of this year. That is, the declines in prices to which everyone is pointing are caused by speculative moves, not by fundamental supply and demand.

Gold is a good example of this. According to the Commitment of Traders’ report the net large trader position in gold went from +212,259 contracts on 2-19-08 to +63,959 on 11-11-08.  That is a swing of almost 150,000 contracts. A normal intermediate swing in gold would show a swing of 100,000 contracts.

It is also important to understand that all of these people running around shouting “deflation” have lost their perspective.  Gold had a 7 year advance of 298%. It has now had a 7 month decline of 35%. There was a similar decline in gold which interrupted the rise of the 1970s. Over the course of the ‘70s, gold rose by 2400%. But in the middle of the decade (from year-end ’74 to mid-’76) it fell by 45%. It was no big thing. Any important bull move will have reactions.

Why are all these people so bent out of shape by a perfectly ordinary 35%, 7 month decline when the larger context is a 298%, 7 year advance? Why are they making projections of this 7 month decline for several years into the future? It is obvious that the speculators who have caused these declines have used up their ammunition, and have to go the other way. We can be very confident that some of these speculators started to go the other way on Friday. (“Oh, those margin calls do hurt.”)

Let us take the Wall Street Journal as an example. They claim to be free market advocates. They claim to be monetarists.  But in 2001, they were screaming about “deflation.” They talked as though it were a bad thing. What happened in reality was that commodities turned and rose for the next 7 years, and the Consumer Price Index increase to the highest rate of advance since 1990. And you know what?  Right in the middle of the period when they were trying to scare us about “deflation” they raised their newsstand price from 75¢ to $1.00.  Damn. If there really were going to be a “deflation,” wouldn’t that drive customers away? In a “deflation” you get so many new customers by cutting prices that it brings in a bigger profit.


Now, of course, the newsstand price of the Wall Street Journal is $2.00, and they are once again trying to scare us with “deflation.” Perhaps in the year 2015, the newsstand price will be $4.00 or $6.00, and they will be screaming “deflation” once again.

John Maynard Keynes argued that there was a phenomenon called a liquidity trap in which money simply disappeared. Presumably a liquidity trap would be caused by people burying money in their mattress or in a hole in the ground. Keynes was great at whipping around theories, but he never looked at FACTS. These are not the days of Blackbeard the Pirate.  No significant number of people put money in holes anymore. Every time the U.S. money supply (and price level) has declined has been the result of a deliberate policy decision by the U.S. Government. The two periods of “deflation” in the 20th century (1921 and 1930-32) were both caused by the Republicans, who had a deliberate policy of a 5¢ cigar.”  Since cigars had gone from 5¢ to 10¢ during WWI, this meant a 50% decline in prices bringing the general price level back to its 1914 figure.  And this in fact was achieved in 1933. Some of the price declines which occurred in the 19th century were caused by the retirement of the greenback and the demonetization of silver. Always it was caused by government. Never was it caused by ordinary people. Keynes was a fraud, and all Keynesians are phonies. A college degree in Keynesian economics tells us that you are certified as miseducated

So what is the bottom line? If there were going to be “deflation,” then gold (and everything else) would be going down. But there isn’t. There is going to be a massive rise in prices.  Most everybody is wrong, and I am right.  (I would not normally boast like this, but I have a long history of being right and seeing the establishment pretend that it never happened. I was right on gold in 1970, and Fortune magazine called us a “lunatic fringe.”  I am still waiting for Fortune to admit that gold went up in the 1970s.)

Ben Bernanke is printing cash.  He is printing it faster than ever before in American history. In all of WWII, the U.S. money supply more than doubled.  In the past 10 weeks, Bernanke has beat that record (in terms of Fed Credit).  What we are seeing is unprecedented. Bernanke is living in a dream world.  Cash is trash. GET RID OF IT.

There are two worlds in the financial markets: speculative opinion, which is overwhelmingly bearish, and fundamental facts, which are bullish. Friday’s rise in gold will shake the confidence of the bearish speculators. Since they have played all their cards, all they can do is go the other way. That will start rallies in some of the other commodities and a fall in the dollar. The bearish opinion will be shaken. Finally it will collapse.

The New York Times and the Wall Street Journal have hundreds of analysts and reporters working for them. The One-handed Economist has only one man, myself.  But one man plus the truth is an army.  What do you want, 300 wrong opinions or 1 right opinion? The One-handed Economist sells a 1-year subscription for $300, which is ½ the newsstand price of the Journal and 3/7 the newsstand price of the Times. If you want to get the flavor of my writing, then please visit my web site, (no charge). This week’s blog gives an overview of the economic crisis.

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