Sunday, January 20, 2013

A Better Idea Than the Trillion Dollar Coin

11 & 20 January 2013

Perhaps you have heard the recent discussion about printing a trillion dollar platinum coin to pay off debts incurred by the United States government. Paul Krugman and a cohort of others are promoting the idea, which has been well-covered by Business Insider: click here. The US Treasury Secretary may be permitted to do this by law, and it's a way to get around the anticipated and potentially rancorous debt ceiling debate.

(James Grant is the one who has perhaps best explained why the trillion dollar coin is not as great an idea as Paul Krugman thinks it is: click here.)

However, there was discussion on Bill Fleckenstein's subscriber website today about an arguably much better, though equally ludicrous idea.

As all major world governments are now essentially just printing money to cover their excessive expenditures, and the US central bank specifically is printing new dollars to purchase government treasuries, a reader pointed out that the same central bank which is purchasing essentially worthless government bonds could legally print inherently worthless money to purchase inherently valuable gold, so as to increase the store of real assets in that country's treasury.

As Mr. Fleckenstein pointed out, any central bank that wishes to could proceed to do this now, until the same currency markets which tolerate moneyprinting (which is usually done for the politically expedient purpose of purchasing government bonds) would (ultimately) be forced to reply, "Hey, you can't do this anymore!"

At this final point, presumably, the central bank which had purchased the most gold with newly printed unbacked currency would be the "winner."

On a related and timely note, James Buchanan, who, like Paul Krugman, won the Nobel Memorial Prize for Economics, died Wednesday at age 93. Mr. Buchanan helped to found the field of public-choice theory, which examines how bureaucracies and elected leaders make decisions.

In 1962, with co-author Gordon Tullock, Mr. Buchanan published "The Calculus of Consent," which challenged the idea of government as a force for good. Experience showed, Mr. Buchanan later said, that "government did not behave benevolently." Rather, "Bureaucracies expanded exponentially" and "the welfare state itself created more demands than it satisfied."

One could argue that Mr. Buchanan "got out just in time!" However, those of us who truly care about our economic wellbeing will miss his presence among us.

13 January 2013: On a related note, the US Treasury Department has ruled out minting the trillion dollar coin. My comments are attached to the linked article: click here. (The Federal Reserve has not announced a decision to print dollars to buy gold, by the way. More's the pity - for the US Treasury.)

My guess, before this decade is out, some country somewhere will in fact decide to print money for the express purpose of buying gold - and will continue brazenly to do so, so long as this practice is allowed by the international marketplace.

Note that a number of nations, with Russia perhaps the most notable among them, have been buying gold aggressively. Russian gold reserves have doubled in the past five years. Russia is also expanding its money supply by 14-22% per year, according to figures published by the Russian Central Bank. (I haven't crunched the numbers, but China is also both printing money and buying gold on a large scale.)

In Russia's case, therefore, the printing of money to buy gold is already occurring on a de facto basis. Is it time for other nations to start playing this game? I think so, though of course, long-term, it is a policy which illustrates more clearly than any other the bankruptcy of the world monetary system.

20 January 2013: I am sorry, I cannot top Mark Steyn on the trillion dollar coin, so I'm linking to his scintillating and timely opinion piece: click here

You've gotta read: 


Friday, January 11, 2013

Last Friday Might Have Been the Start of the Next Rise in the Gold Price

11 January 2013, 14 July 2013

I have mostly stopped commenting on the gold bull market, as the widespread adoption of inflationary monetary policy by every major government on the planet has all but guaranteed a continued rise in the gold price. However, last Friday (January 4, 2013) may possibly have been the day that the most recent gold price decline came to an end, due to the technically meaningful and usually decisive "bull hammer bottom" technical signal that day (this type of bottom usually confirms an exhaustion of selling pressure).

My current thoughts follow. The use of the capital letters "A" through "D" refers to the theoretical model of gold price advances and declines put forward by Mary Ann and Pamela Aden. That is, "A" is a modest gold price rice (the last one occurred between December 2011 and October 2012), "B" is a modest decline (we have been in a B decline since early October 2012), "C" is a massive and extended gold price rise running for a year or longer (the last one extended from May 2009 through September 2011 - over 2 years), and "D" is a sharp and decisive (though temporary) downturn in the gold price, with the last one having occurred between September and December 2011.

Nobody I know of can predict "when," but the directionality of the gold price has been clearly upwards since December 2011 (D bottom). The current (C) rise appears only to have started last Friday, January 4, 2013 (the probable conclusion of the "B decline"), so it is "young." 

Friday, January 4, 2013 looks like the "bull hammer" bottom, which appeared decisive. However, since this is (probably) the C rise now, it can run 1-1/2 to 2-1/2 years. What we're waiting for now is for the mainstream analysts to stop saying, "Oh, gold topped out in September 2011, it's done now." (Before that, it had supposedly topped out in 2006, 2008 and 2009, not to mention 2003 and 2004). 

The way you know that gold is nearing a top is when the people you meet on the street are buying (and talking about) gold investments - just as they did with tech stocks in the 90s, and with real estate investments this decade. That has not really started, though you do now have little stores selling gold as well as "taking it off your hands." There is also gold advertising on television now. 

Following this "last" very big pullback, the final blowout bubble top in gold would finally occur. By the Adens' charting system, 2019 would be the true top of the secular gold bull market - if it is typical, and it would be somewhere north of $5000 by then, probably $8000 or higher. This is all approximate. 

It is also possible that gold could go into an extended secular mega-bull market, as bonds have done for the past 30 years.That is, most bull markets seem to run 17-18 years (so 2001-2019 would be a "standard" 18-year gold bull market, as was the case from 1962-1980). 

But mega bulls are almost twice that duration. The duration of the gold bull market, of course, depends on fiscal policy. 

So long as governments print trillions per year in new and worthless currency, we know that gold will rise (nothing else is possible). When that stops, the gold bull market will be over. 

However, I'm not sure that moneyprinting and competitive currency devaluation by most major world governments will necessarily stop in 2019. Note that bonds have been in a 3-decade-plus uptrend since 1981-82 (the end of the last major inflationary period). If gold is in a mega bull market, it could rise through 2030 or longer, before massive global inflationary monetary policy would ultimately defeat itself.

So, hang on until 2019 at least (be careful in 2016), and keep your eyes on 2030 if governments are still printing away by the end of this (still young) decade. 

14 July 2013: But it wasn't....

Well, my last few predictions on the price of gold have been dramatically wrong. Despite arguably the strongest fundamentals in history, gold has managed to plummet while essentially all the factors that normally tend to lift the price of gold have been advancing steadily. I've been watching the gold market for a decade now. What have I learned? In brief, when the fundamentals are bullish, the following two rules have so far applied: (1) When the price of gold goes down more, it then goes up more. (2) When the price of gold goes down longer, it then goes up longer. Stay tuned for $5000 gold, and higher. When? Don't ask me. I don't know. But nothing has happened to alter my prediction.