Friday, November 24, 2006

For Investors, a Time of Greater Than Expected Change Is at Hand....

24 November 2006

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship." (Alexander Tyler)

"The American Republic will endure, until politicians realize they can bribe the people with their own money." (Alexis de Tocqueville)

“'When I use a word,' Humpty Dumpty said, in a rather scornful tone,' it means just what I choose it to mean, neither more nor less.' 'The question is,' said Alice, 'whether you can make words mean so many different things.' 'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'” (Lewis Carroll)



In recent discussions with friends, I have been noting considerable confusion as to the meaning of recent economic trends. I last addressed this issue in December 2005, in my post entitled “A Three Stage Gold Bull Market?”

The issue has become timely again for several reasons.

Most importantly, the precious metals are building strength for another potentially powerful ascent. Thus, there is a concern as to timing for individuals who feel insecure with the volatile gold and precious metals markets.

In the background, many conflicting messages serve to confuse ordinary people as to what is actually taking place, and particularly as to what is accounting for the strength in precious metals since the period of the 1999-2001 lows in this market.

I commented previously that Fortune Magazine featured gold on its December 2005 cover as a recommended investment for 2006. That has indeed proved to be sage advice, though gold’s strongest advance continued only through mid-May 2006, and had retreated to its December 2005 levels by June 2006, which likely discouraged investors who acted on Fortune’s advice without following the precious metals market trends more closely.

Of course, the present year has seen nominal record prices for the Dow Jones Industrial Average, and this has very much overshadowed gold’s stealthy 5-year advance. In fact, if one charts the value of the Dow against the value of gold, the Dow Jones Industrial Average has been in an unremitting downtrend since 1999, and this is a secular (very long-term) trend that is likely to continue for at least another decade (I suspect longer, though I claim no ability to predict the future). By May 2006, the Dow had in fact lost 65% of its value against gold, and my expectation is that this adverse trend will advance further over the next decade.

My point with respect to the above is that the Dow's advance has been a regular news item in the global marketplace, but its disastrous 65% collapse against the dollar value of gold has been highlighted in only the narrowest of circles.

Let me proffer another example.

There is broad discussion about the dramatic gains in the North American real estate market (which is in fact a nearly-global phenomenon). Most individuals I speak with will acknowledge that the real estate market has now “topped,” but this has not deterred most people from thinking of real estate as a “safe” or “desirable” investment.

It is well known that North Americans maintain most of their net worth in the value of their homes. In itself, this is not at all a bad thing. However, the sustained inflation of the global money supply in virtually all jurisdictions of the world has resulted in irresponsible levels of speculation in this normally conservative market since the 2001-02 recession. As a result, this market, which is almost universally perceived as conservative and safe has in fact become treacherous, and I do not believe that this development is widely appreciated.

As with all markets, the real estate market is driven by the ineluctable law of supply and demand. And the recent speculative froth in this market will inevitably create much more serious damage than most North Americans presently appreciate. In practical terms, this will mean either that real estate values will fall for many years to lower levels than are presently imagined by most home owners (let alone real estate speculators), or that real estate prices will stabilize against the background of a currency that is collapsing in terms of its purchasing power.

Neither of the above-cited developments is desirable for those who wish to protect or add to the value of their savings.

It is here that I must touch on the increasingly confiscatory mood of governments in the present environment.

Without overstating the significance of the first two quotations with which I introduced the present post, I wish to posit that our governments are in fact presently at a time of crisis. Unlike the “uncovered stories” of the real and dramatic decline of the Dow Jones Industrial Average against the value of gold and the recent and highly dangerous secular disruption of the global real estate market by the inflow of a tsunami of speculative funds, this story has in fact received considerable media attention.

The broad issues are understood by most. The “pig in the python” baby boom generation is approaching its retirement years, and there will be relatively few workers engaging in productive activity to support the entitlements due to the present massive cohort of retirees. Estimates of social insurance (social security) and health care obligations soar into the unimaginable trillions of dollars in both the United States and Canada, as well as in all the nations of the west and the developed east (primarily Japan).

Most commentators portray the Canadian government as in a preferable situation vis-à-vis the US government. Unfortunately, the story is not so simple as that, as in fact all governments of developed nations are presently facing a similar crisis, though the United States is in particularly dire circumstances due to its recently-emerging massive dependence upon foreign investment to stabilize the role of the United States dollar as the world’s reserve currency (a function that I am not certain the US dollar will be able to maintain through the anticipated crisis).

Governments are thus engaged in preparations to accomplish the following:

1. Reduction of obligations to citizens, particularly the present cohort of soon-to-be-retiring baby boomers.
2. Development of new tax schemes to assure the filling of the coffers of state treasuries at all levels.
3. Economic sleight of hand intended to diminish the real value of existing and anticipated government debt – without which repayment of present and anticipated obligations will clearly prove impossible.

Our family has been adversely impacted by the surprise Halloween-Day 2006 decision of the Canadian government to remove the favourable tax treatment until recently accorded to oil and natural gas income trusts. These uniquely Canadian business ventures were originally accorded favourable tax treatment to promote the development of stable, marginal and/or declining oil and natural gas wells, located primarily in western Canada.

Under the Canadian energy income trust scheme, government tax revenues were to derive from the investment income of holders of shares in these trusts, rather than through taxes on the profits of the trusts themselves. This quite foresightful government policy measure promoted a massive inflow of private investment funds into the Canadian oil and natural gas sector, from which investors, citizens broadly, and the government have all clearly benefited in a classic win-win arrangement.

The original Canadian legislation permitted the use of the same income trust structure for unrelated businesses having entirely different characteristics, and in order to restrain an accelerating trend of conversion of major Canadian businesses to the income trust structure, the conservative government of Stephen Harper and Jim Flaherty acted to remove the tax protection of all income trusts in Canada on Halloween Day 2006, and this in spite of an explicit campaign promise not to do so.

Here, I do not wish to discuss the specific reasoning behind and implications of this sweeping Canadian government move, though I strongly oppose the policy of the Stephen Harper government in this case, particularly because this confiscatory move punishes those foresightful (and for the most part “ordinary”) Canadian citizens who have chosen to save and invest in Canadian business infrastructure at the expense of those who have not.

The Harper government’s move is particularly worthy of condemnation due to its affording no warning and no recourse to those who have undertaken such investment on a basis of trust that the Harper government would hold consistent with its promise to honour the specific tax policies which were in effect at the time that their original investments were undertaken. (Sign a petition here.)

Of course, government confiscation of the private investments of its citizens is by no means new in history. In most all cases, history teaches us that those citizens who have taken initiative to set aside a portion of their income on a regular basis are those most likely to be victimized by increasingly desperate governments, as there is much less to be gained by robbing those citizens who do not save for future needs.

Again, the primary point I wish to illustrate here, despite my strong feelings about this particular issue, is that in fact all governments of developed nations are in fact in quite dire straits, and the severity of the problem is managed through policies designed to appease the public while at the same time undermining the value of all currencies, so that the payment of present and future government debts and obligations can be made in currencies of declining value.

Since our elected governments represent us as citizens through our own choices made during the course of the electoral process, what is of course happening is that we are in fact choosing to select those leaders who are most willing to preserve this ongoing deception, and thereby protect us from confronting ourselves with respect to this imprudent practice.

What do I mean by the term “deception”?

I have in fact selected this word thoughtfully.

I am not a “conspiracy theorist,” except in the broadest sense. There is no secret cabal who are plotting to rob citizens of their hard-earned savings. The actual process is much more mundane. We simply want to “have it all.” That is, we wish our governments to provide us with the services we desire, and to avoid paying the costs that such programs entail. It is therefore convenient for our elected leaders to suggest to us that they are:

1. distributing the tax burden evenly and fairly,
2. guarding against the wealth-eroding impacts of inflation, and
3. representing our collective interests.

The fundamental problem is that a shared deception is necessary in order for us to perpetuate our present practice, which is to manage government costs and to forestall inevitable economic sources of restraint primarily by inflating the supply of money, rather than by taxing citizens in more obvious ways.

I have written previously about the conundrum of perpetual inflation of the money supply, with resultant excess liquidity, which ultimately disrupts and distorts all markets and erodes the value of all currencies.

That the policy of inflating the money supply alone does not work is evidenced by such recent developments as:

1. The Harper government’s decision in Canada to “raid the treasury” of the income trust sector (rather than taxing citizens by more apparent means).
2. The Bush government’s practice in the United States of continually redefining “inflation” through the cost of living index so as to explain away the fact that virtually all items and services save imported goods are spiralling dramatically upwards in cost, thereby eroding the purchasing power of the paycheques of salaried workers and citizens on fixed incomes.
3. The practice of essentially all governments to state publicly that they are “defending their currencies” while in practice literally every global currency is being systematically shredded – and at an accelerating pace due to the looming crisis that I have described earlier.
4. The international value of the US dollar has recently declined below important technical support levels, creating a timely buying opportunity in the gold market (for reasons explained below).

Again, the conspiracy I am describing is merely one of ignorance, or if you will, of consensual mass deception. There is no war room where conspirators are gathering to plot out the dangerous and potentially disastrous series of future events that I have described on this blog. What we are confronting is merely a set of shared deceptions in which, for the most part, all of us choose to participate, in order to elude, for as long as possible, the inevitable lesson that at the end of the evening, the piper must be paid.

In the midst of this whirlwind of rationalization and consensual “spin,” there remains one uncomfortable truth teller, and that is – as always before in history – the precious metal gold, which since time immemorial has served humans as the currency of last resort.

The value assigned to gold, as with all items of value, rests on the principle of supply and demand. If the official currencies of all the governments of the world can be printed (or digitized if you prefer) at will, then a currency of lasting value must not be subject to ready manufacture, and that remains, as always before, the case for gold, which is difficult to find and expensive to produce – quite unlike, for example, our proliferating US and Canadian dollars, European Euros, Japanese Yen and Chinese Renminbi.

While supply ebbs and flows at a gradual pace, human sentiment shifts in a much more rapid timeframe, and this drives the dynamics of demand.

Let me state here, quite publicly, that at five years into gold’s bull market, we remain at the earliest stages of the long-term gradually accumulating demand for gold. Based on psychological factors, which are not here possible to predict, the demand for gold (and in fact, all precious metals, also including silver, platinum, palladium, etc.) will certainly continue to ebb and flow. It will not be long before gold surpasses its nominal $800 peak of 1980. This will spark increased public interest, and probably confirm the second stage of gold’s probable three-stage bull market (or at least the end of its first stage).

In fact, there will be many exhilarating “ups” and an equivalent number of harrowing “downs” in the gold market of the future, but combined technical and fundamental analysis make clear that there is little if any global dynamic in place to halt the move of the price of gold into the several thousands of US dollars over the next decade or perhaps longer.

Let me warn the uninitiated, however, that somewhere along the way, a significant retreat in the price of gold (called a primary correction) will likely follow, and the value of gold might seem to collapse for an extended period – perhaps for a year of longer – and this will be due not to any change in fundamentals, but to the variable nature of human psychology.

It is the nature of bull markets to be difficult for those who lack rigorous commitment to them, and our innate psychological processes will consistently drive us to buy when the price is high (because we are given confidence by a favourable trend) and to sell when the price is low (as we fear further losses more greatly than we desire anticipated future gains).

Thus the gold bull market is more like a formidable beast than a gentle steed, and the likening of burgeoning markets to the aggressive and untameable bull is in fact most apt. Bull markets are not in fact friendly at all – they are formidable, intimidating and often harrowing.

Why then do I continue to recommend that citizens consider investing in such a volatile and unpredictable sector?

My reasoning is predicated on the contrast of the precious metals market to literally every one of its alternatives.

My primary concern is that our seemingly safe and familiar everyday reality (with, for example, its “rising” Dow Jones Industrial Average, its “secure and dependable” real estate market and even its burgeoning global commodities sector) is in fact the far more dangerous and deceptive place through which to venture when one is seeking a safe haven for one’s hard-earned savings.

Do not, therefore, seek the safety of conventional wisdom by placing your savings in eroding assets defined in terms of inflation-prone dollars, but instead ride the bucking and obstreperous bull of the precious metals market to find relative safety and security – paradoxical though this advice may seem.

If you have questions about when to buy or sell, there are many advisors far wiser than myself who can guide you in such decision-making. At present, I recommend three advisors in particular as your helpers and guides: the Aden sisters based in Costa Rica, Adam Hamilton in Colorado and Bill Fleckenstein in Washington State – as over the past several years, I have found them to be speakers of truth, possessors of insight, and purveyors of wisdom in a bustling global marketplace where truth is typically the last guest to arrive at the table.


  1. Holy Cow .... you stay quiet for a long time, but when you decide to blog, you don't mess around.

    I'm not sure that I understand, but I'm going back to read it over, then if I still don't get it, I'll get a glass of wine and give it another shot.

    I never really understood all the financial stuff ... except RRSP's which Lexiphage now says are a hoax, so I guess I'm just lost!

  2. RRSPs are a good idea. Much of what is available to invest in approaches the level of hoax.

  3. I have reviewed Lexi's specific comments on the matter, and he is concerned about ever-expanding taxation of citizens' savings. How can I argue with him on that count? He argues for purchases of enduring value now (such as survivalist gear and accoutrements) forgetting, however, that the government is quit capable of taxing literally anything - and he must surely be aware of property taxes? The only possible way through the muddle is to invest in something that is growing in value at a greater rate than taxation. Now that is an honest challenge. But over the next two decades, my thought is that the recovering price of gold - it has been knocked down far too low - will outpace even the rate of growth of governemnt taxation. If I am wrong, please come and visit me at in my tent (at least Susan has researched tent purchases, and we will have a good one).