THE “GOOD”
AND “BAD” FORMS OF EACH
Bad inflation.
This type of inflation typically means an expansion of the money
supply and bank credit ahead of gains from productivity and asset
growth. More money and credit chasing fewer goods and services
typically means higher prices over the long run.
The public often thinks that light to moderate
bad inflation is good for the overall economy both in the short
term and the long term. It usually thinks that any degree of bad
inflation from its inception is automatically good for gold. Both
beliefs are demonstrably false in many if not most cases.
Government and central bank spokesmen typically
call this good inflation. They claim that credit expansion and
government deficit spending “stimulus” helps to generate
full employment and full capacity utilization. This in turn supposedly
generates additional earnings and economic growth that offset
any increased indebtedness and long-term price inflation.
From their “top down” macroeconomic
vantage point, this is definitely good inflation to the extent
that it allows government and Fed officials to create money and
bank credit out of thin air and spend heavily without the aggravation
of overtly raising taxes and receiving immediate negative political
blowback.
One reason why this is really bad inflation is
because it results in an eventual loss in real purchasing power
for the average consumer. This is a hidden form of taxation. Creating
more money and credit per se does not in itself create any new
wealth any more than a counterfeiting ring. The act of simply
increasing spending and the process of creating more useful goods
and services in a balanced economy are usually two very different
things. “Stimulus” spending typically creates the
short-term illusion of prosperity at the long-term price of distorting
the economy and debauching the currency.
In the short run, the price inflationary impact
of new money and credit is usually muted and ignored by most investors.
One reason often involves governmental deceit. The article “They
Are Lying to Us Again,” archived at www.jimrogers.com
describes how government can selectively edit and misrepresent
statistics.
Price inflation may also remain initially muted
because excess liquidity can first find its way into stock, real
estate, or bond asset bubbles. It may experience a prolonged delay
in running up commodity and consumer prices.
Lastly, price inflation has been reduced because
the dollar has served as a global reserve currency since World
War II. Dollars currently comprise around 68% of global reserves.
Foreign banks and trade surplus partners have been willing to
sop up excess dollars for their own reserve needs or to try to
humor the “last remaining global superpower.”
Gold has historically been slow to react to the
initial onset of bad inflation. A likely reason is that the first
waves of broad money supply and credit growth (M3) tend to give
a false impression of economic health. M3 growth may take longer
than a year to begin to show up in price increases for consumer
goods. In the initial phase of this cycle, banks acquire more
deposits, and in turn have more money to lend. Spending increases,
corporate earnings may rise, and the stock market may be spurred
on by accelerated business activity.
As business activity picks up, the Fed may hike
interest rates ostensibly to “cool the economy” while
insisting that it has inflation tightly under control. Higher
bond yields look even more attractive relative to gold bullion,
which pays no interest.
So-called “bond vigilantes” at major
investment firms may insist that the free market is raising bond
yields at the “whiff of inflation,” and this in itself
is adequate to help cut back excessive monetary growth. The public
usually buys off on this, and ignores the fact that investment
houses have their own axes to grind.
Investment firms typically want to avoid “unnecessarily”
scaring their fixed income clients into another asset class such
as gold that could help dry up their bond business. Their bond
departments are usually major profit centers. Investment firms
often use the attractiveness of bonds for conservative investors
as a means to open up new accounts and build up their asset base.
Elderly people, who control a major portion of
this country’s wealth, tend to perceive gold and other commodities
as volatile and risky. It is not uncommon for an elderly person
to shop long hours among brokers to get an extra 50 to 75 basis
points in bond yields. He may need to be almost hit over the head
with very strong gold trend evidence and very bad inflation news
before switching over to gold. We may be talking about the kind
of person who is becoming increasingly reluctant to drive at night.
In Part X of this series I discuss evidence supplied
by the Gold Anti-Trust Action committee that major investment
firms have other conflicts of interest. As two examples, they
have apparently been in bed with the Fed through the repurchase
agreement market that provides backup support for them to manipulate
certain markets. They also need to retain access to Long Term
Capital Management-type Fed bailouts to deal with the high
risks entailed by their very profitable hedge fund clients.
Adam Hamilton charts the short term paradox where a rise in interest
rates can hurt gold in the short run in his July 20, 2001 article
“Real
Rates and Gold.” In the long run, higher interest rates
should coincide with rising real inflation, and motivate people
to buy more gold as a hedge against inflation. However, in the
short run, if people think that interest rate increases are not
part of a sustainable rising trend, they may sell off their gold
and drive it lower and jump into bonds to try to capture higher
yields. Once it becomes more obvious that inflation is very real,
is rising, and is no longer containable, then gold starts moving
up along with long-term interest rates. But that usually comes
very late in the bad inflation cycle.
Fraud Note:
Usually government and central bank authorities never admit that
spending stimulus and credit expansion is “inflationary,”
in fact, quite the opposite, even though M3 growth may already
be showing an upward diagonal line on the money
supply charts for a number of years. Inflation is always politically
unpopular, and politicians typically have to be dragged kicking
and screaming to admit to it. In addition, government tends to
be a heavy borrower, and does not want to hike its own interest
rate burden. Nor it is anxious to index upwards retirement, Social
Security, and other transfer payments in the social welfare state.
Nor does it want to excite union members and other workers into
hiking wage demands. To the contrary, inflation has always been
the government’s sneaky way of dropping real wages to bring
the labor supply and employer demand curves in alignment and increase
employment while pretending to be “doing something”
to stimulate the economy and boost wages.
According to “Austrian” economists,
the short-term illusion of heightened economic health created
by the “stimulus” spending equivalent of a “counterfeiting
ring” has other negative ramifications. M3 growth creates
false pricing signals that can seriously distort the economy and
undermine entrepreneurial calculation and capital formation. “Austrians”
argue that artificial stimulus and artificially low interest rates
encourage speculative and wasteful economic activity precisely
at that time in the classical economic cycle when the write-down
of bad debt and more savings and more prudent investment are required.
“Stimulus” tends to help sweep underlying problems
under the rug where they may fester and grow larger.
But even worse than false pricing signals and
governmental deceit, however, is the ability of the Fed and US
Treasury to actively engage in interventions that further distort
and compromise the free market. According to the Gold Anti Trust
Action Committee (GATA), the
Fed has orchestrated central bank dishoarding to artificially
suppress gold to create the illusion of low inflation. GATA also
believes that through the repurchase agreement market, the Fed
has induced its Wall Street allies to use the gearing of futures
contracts to suppress the price of gold and silver even further.
As previously mentioned, bullion dealer Blanchard & Co. has
filed a $2 billion law suit alleging that J.P. Morgan Chase and
Barrick colluded in an artificial gold price suppression scheme.
Good inflation:
Since I am discussing opposing concepts, I necessarily have to
mention “good inflation” to complement the aforementioned
discussion of “bad inflation.” The only problem is
that I have never seen anyone discuss such as thing as “good
inflation” in this context. At the risk of sounding academic,
“good inflation” could mean adding new assets to the
system (asset “inflation” in the sense of asset accretion
or asset accumulation) while keeping the money supply roughly
the same, such as doubling the land mass of the U.S. for nominal
cost under the Louisiana Purchase or adding more manufactured
goods without raising prices due to enhanced production methods.
These accretions tend to drive down average prices while adding
tangible wealth and would tend to have the same positive impact
as good deflation mentioned later.
Bad Deflation:
This is the kind of environment where gold often outshines all
other asset classes, and merits extended discussion. This is the
overall underlying environment I believe we have been in since
the Nasdaq top in March 2000, and it could last for many more
years. But first some background on the bizarre situation that
currently exists with both the gold market and the stock market.
Bad deflation is typically the back-side of the
aforementioned bad inflation cycle, where over-inflated asset
prices created by excessive “stimulus” start coming
down. As discussed in my paper “Amidst
Bullish Hoopla: A Behind the Curtain Look at Fed Desperation
and Intervention Wizardry,” where I describe stock market
overvaluation in more detail, the Fed has been fearful that if
the stock market bubble starts deflating too quickly, this could
lead to a negative wealth effect, reduce consumer confidence and
spending, undermine bank collateral, dramatically increase bankruptcies
and unemployment, and risk a depression. However, by dropping
the Federal Funds rate down to 1% and by gunning the money pump
by about 10% a year over the past few years to stave off asset
bubble deflation, the Fed has risked creating more bubbles elsewhere,
such as in the real estate and bond markets. This money supply
growth has been showing up in rising consumer prices. This is
the type of inflation that the Fed and US Government try to ignore.
Hence, we are now simultaneously experiencing consumer price inflation
while witnessing overvalued stock, bond, and real estate markets
that threaten serious deflation.
As a response to the Fed’s alleged anti-deflation
activities (and related factors), the S&P 500 has risen about
43% since March 2003. Conversely, as a response to fears about
long-term inflation (and related factors), the un-hedged gold
stock index (HUI) has climbed over 500% in the last three years
in a “stealth bull market” that most Wall Street firms
have downplayed.
Historically the gold market and the stock market
have been negatively correlated. Rising long-term inflation is
usually very good for gold, and very bad for the stock market.
The bullish activity of both markets may be signaling two completely
different outlooks for the US economy.
Negative real interest
rates are usually a crucial factor in a bad
deflation cycle to account for the out-performance of gold. Negative
real interest rates mean that the rate of real inflationary erosion
in purchasing power from the long-term impact of the underlying
growth of M3 is greater than the nominal interest rates one can
get from CDs at the bank. Although Americans have been in a negative
real interest rate environment since at least the mid- 1990’s,
it has become particularly dramatic since the Fed reduced the
Federal Funds rate down to 1% by summer 2003 while maintaining
broad money base (M3) growth in the 8-10% a year range.
An important cause of negative interest rates
is central bank intervention. Let us compare how interest rates
set by the Fed may differ from those that might be created by
a free market. The Fed has dropped its Federal Funds rate to a
45 year low of one percent to ostensibly stimulate the economy
to avoid a collapse of puffed-up asset prices. The Thirty Year
Treasury bond hovered around 4.9% as of mid Jan 2004. In my Amidst
Bullish Hoopla article, I discuss how hedge funds can work with
the Fed and allied Wall Street firms to transmit lowered interest
rates out the yield curve with the bond carry trade. Also, the
Fed can use Open Market Operations to buy bonds to prop up bond
prices and drive interest rates down, often by making purchases
with money created out of thin air that ultimately create a hidden
tax on the average American.
Contrast all of this with M3 growth, a truer
indicator of real long-term inflation. This has been growing between
7%-10% a year since 1995. Let’s say 8% on average. If the
free market were to price a bond, it would probably take into
account this truer long term inflation rate, and add on top of
that a risk premium of let’s say a historical average of
around 2.50% . That gives us 10.5% as a rational hurdle rate for
setting a free market floor on expected interest rates. Now, let’s
deduct the aforementioned Thirty Year Treasury rate of 4.9%, and
we get a possible real negative interest rate of 5.6%. For individuals
in money market funds that pay less than 1%, the negative spread
could be over 9.5%.
Gold, which pays no interest but has the potential
to appreciate, starts to look very attractive compared to the
negative real rates of return on bonds, CDs, and money market
funds. Better yet for gold, if interest rates eventually go up,
the resale value of bonds will come down, giving bond investors
double black eyes. They will lose both from their low rate of
current interest income combined with capital losses on the reduced
resale value of their bond holdings. (When interest rates go up,
bond resale values go down). Conversely, to the extent that rising
long term interest rates signal rising long term inflation, this
becomes another plus for gold. Last, but not least, once investors
sense that stocks have peaked and may be set for a price decline
(deflation), gold and other “commodities” begin to
look relatively more attractive. We live in era of central bank
and government intervention whose continuous stimulus efforts
to arrest asset price deflation are likely to add inflation to
the pro-gold story.
There is evidence that markets may tend to be
inefficient in adjusting to an environment of continually rising
interest rates. British economist Prof. Tim G. Congdon noted in
his WGC
research study no. 28: “As the double-digit annual inflation
rates of the 1970s came as a shock to savers, it took them time
to catch up with the new investment paradigm. Interest rates lagged
behind inflation and real interest rates became negative, creating
the ideal conditions for rising prices of gold and other so-called
"hard assets" (oil, real estate, commodities).”
Fraud note: From the
Austrian viewpoint, bad inflation cannot go on forever, even as
a way to stave off bad deflation. Bad inflation stimulates speculative
mal-investment, excessive debt, and asset bubbles that distort
the economic system while debauching the currency. The economy
may become so distorted that new waves of money only generate
stagnation and inflation (“stagflation”), analogous
to a drug addict whose fixes start breaking down the body. Since
summer 2003 the M3 growth and money velocity charts have been
tapering off, partly because the system is getting so saturated
with cheap credit that the Fed is beginning to push on a string.
Also, a debauched currency may trigger a currency crisis (a rapid
exchange rate slide) that can cause foreign imports (10% of US
GDP) to become more expensive and contribute towards prolonged
malaise.
Austrians believe that often the best thing to do is simply leave
the economy alone and allow the free market to sort things out.
Go ahead and let asset bubbles deflate on their own. After a period
of brief but intense pain from bankruptcies and collapsing prices,
entrepreneurs and other bargain hunters typically step in, reshuffle
assets into more productive enterprises, and economic growth will
start again. That actually happened in America during the Martin
Van Buren administration (1836-1840) that experienced a sharp
stock market correction and a money supply contraction of 30%,
somewhat similar to the first two years of the Great Depression
beginning in 1929. The US Government actually reduced its spending
during this period, and the economy turned around at the end of
the painful two years. (c.f. Dr. Jeffrey Hummel, “Martin
Van Buren: What Greatness Really Means”). In contrast,
the Great Depression dragged on from 1929 to the 1940’s
despite the Hoover administration interventions and FDR’s
New Deal. Dr. Murray Rothbard claims in America’s
Great Depression that government intervention actually
served to prolong and deepen the Depression, and in fact created
a second depression within the Depression.
I consider the aforementioned two paragraphs
a “fraud note” under the theory that many senior government
and banking officials in America are aware of all of this, but
are afraid to educate the public for fear that this could lead
to the curtailment of pork spending and central banking special
privileges that I describe in Parts VIII and IX about the history
of gold in America.
Good Deflation: This
involves price level declines from improved efficiencies and from
asset accretions. The money supply is held relatively constant.
Earlier I discussed how the Industrial Revolution helped drive
down prices while Britain was on the gold standard. It helped
double the purchasing power of the British Pound over a one hundred
year period. When currency is pegged to gold, price deflation
must by definition be good for gold. Today we see another dramatic
example of good deflation in the computer chip industry in which
computing power has steadily declined in price in accordance with
“Moore’s Law.”
America is also experiencing a form of price
“deflation” from low cost imports from Asia, which
actually retard the rise in American consumer prices. I hesitate
to label this “good” deflation because of many complicating
issues. The theory of international free trade is supposed to
enhance the wealth and prosperity for all parties involved, and
not result in the lopsided situation we see in America today with
a serious loss in its jobs and its manufacturing base and a dangerous
rise in debt. (A worthy discussion of these issues would require
another paper).
Most countries today inflate their money supply
at much faster rates than productivity gains. This submerges the
gradual accretive effects of good deflation on the price action
of gold. The big moves in gold prices usually pertain to other
factors such as the deflationary side of business cycles, central
bank interventions, fears of runaway inflation, and changes in
currency exchange rates.
HOW GOLD REACTS TO CHANGES IN THE DOLLAR
EXCHANGE RATE
In August 2003, Newmont Mining President Pierre
Lassonde commented:
“"Eighty percent of the variability of the gold price
is due to the U.S. currency valuation. So where the dollar is
going is the key determinant of the U.S. dollar gold price. And
when you look at the structural imbalances in the U.S. today,
they are no different than they were 12 months ago -- in fact
they are worse,"
A decline in the dollar can help create a rising
floor underneath the price of gold due to an arbitrage principle
often referred to as the “Law
of One Price.” This can apply to other high unit value,
highly transportable goods in addition to gold.
Here is an example of how it might work: Suppose
that $1 US dollar equals 1 unit of Foreign Currency (FC). Imagine
that ounce of gold sells for US $400. An ounce also sells for
FC 400 units. Now suppose as a result of a dollar slide, US $2
now equals FC 1 unit, but the gold price has not changed in the
US or in the foreign country. I can now buy an ounce of gold for
US $400 in the US, sell that gold at an FC bank for FC 400 units,
and then swap the FC 400 units for US $800. By repeating this
all day long, I would put upward pressure on the price of gold
in US dollars, downward pressure on gold in foreign units, and
upward pressure on the value of the $US, causing a decline in
the $/FC unit conversion rate.
The formula for the arbitrage is: $/ounce of
gold = $/FC unit * FC unit/ounce of gold.
If we keep FC/ounce of gold constant, and increase
the $/FC ratio because of a slide in the value of the dollar relative
to FC units, then $/ounce of gold in the U.S. is likely to go
up.
According to gold analyst Paul
Van Eeden, currency exchanges changes are more likely to drag
gold along than gold prices changes are likely to impact on currency
conversion rates. This is because the gold market is relatively
small compared to the gargantuan size of currency markets.
While currency exchange movements may have a
high correlation with short to intermediate term gold price swings,
they do not explain how the price of gold gets calibrated in the
first place before the currency change effects kick in. My history
of gold in America in Parts VII to IX should give the reader a
better sense of how the baseline value of gold can dramatically
decline as the banking system reduces its gold reserve requirements
and engages in other “demonetization” processes. In
addition, currency traders arbitrage against a wide basket of
goods, and not just gold alone. Finally, it may be hard to distinguish
between how movements in gold prices and currency exchange rates
may relate to psychological expectancy effects among traders (also
known as a “self-fulfilling prophecy”) as opposed
to mathematical relationships based on hard fundamentals.
Analyst Clive
Maund has noted that gold has tended to go sideways or slightly
down in foreign currencies such as the Euro, South African Rand,
and in Australian and New Zealand dollars as they have appreciated
while the dollar index has declined
dramatically over the last two years. They have indicated
a weak but not insignificant “Law of One Price” relationship.
Many gold gurus have noted that the rise in the
price of gold denominated in US dollars in the last two years
has actually reflected a dollar bear market rather than a real
gold bull market. Rick Rule,
President of Global Resource Investments Ltd, observes that gold
is the only form of money that does not have an inflationary constituency.
Currently all of the major industrialized nations of the world,
including Switzerland, are debauching their currencies to maintain
export competitiveness relative to the U.S. The next major phase
of a true gold bull market will probably take place when gold
starts moving up against all the major currencies of the world
as countries continue the game of “beggar thy neighbor.”.
To better understand currency exchange
movements, it is helpful to disentangle their short
term, intermediate term, and long term causes. There are many
different causes behind a slide in the US dollar than may not
be directly related gold, but nevertheless may get transmitted
into a rising gold price through the so-called “Law of One
Price” arbitrage.
In the short run, currency
exchange rates tend to be heavily influenced by investment capital
flows. Back in 2000 America received capital inflows in the area
of around two
to three billion dollars a day from foreigners. One important
factor was a desire to participate in the 1995-2000 stock market
mania. Anther important factor was a belief by foreign investors
that the dollar would continue to remain strong relative to other
currencies, and not fall and hurt the value of their non-repatriated
US investments. Lastly, many countries have been willing to continue
investing their trade surplus dollars in US securities to stay
in the good graces of the world’s “last remaining
superpower.”
The US stock and bond markets remain a risky
bet that foreigners will continually hold rather than eventually
bolt for the door. The S&P index is trading at a P/E multiple
that is more than twice its historic average. Its reported or
“pro forma” earnings are often twice “real”
(or GAAP or core) earnings, as noted in my article “Bear
Case Overview.” Also, bond interest rates, at 45 year
lows, seem to have nowhere to go but up. A Forbes magazine charticle
“Here
We Go Again” suggests that the US market could still
be mimicking the early phases of the Japanese market of the 1990’s.
If the secular bear market that may have begun in March 2000 returns,
it could scare foreigners into selling off their US securities
and put further downward pressure on the dollar.
In the intermediate term,
exchange rates tend to fall in line with the Purchase Power Parity
concept. The Economist Magazine’s Big
Mac Index uses the Big Mac hamburger, representative of a
basic consumer item sold in over 118 countries as a rough yardstick
to help calibrate relative currency under-valuations or overvaluations.
In 2002 it signaled that the dollar was very overvalued. Li Lian
Ong, Senior Analyst at Macquarie Bank, has authored The
Big Mac Index. According to the Amazon.com review of
her book, the index “…Could have been used to predict
the Asian Currency Crisis and the Mexican Peson stand-off where
more traditional economic measures failed.”
In the long run relative
currency valuations relate to different rates of productivity
gains and different levels of monetary discipline of different
countries. They bear a rough analogy to relative values of shares
of stocks in companies, in which inflation is similar to stock
dilution and rising debt is bad (to include trade deficits) if
it increases at a faster rate than sustainable earnings growth
(analogous to GDP growth). Professor Tim Congdon, Director and
Chief Economist of the economics consultancy Lombard Street Research
in London, published World Gold Council Research
Study 28 in 2002 which he modeled such factors as debt to
GDP ratios, interest rates, and growth rates for the US. He cites
three reports predicting the strong possibility of a serious currency
slide (more on this later), and asked whether the US could make
the Herculean shift of 5% of GDP to exports fast enough to halt
deteriorating balance of trade and indebtedness trends.
The fundamental outlook for the US remains negative
in this area. The declining dollar is likely to have only a marginal
impact in correcting America’s balance of trade problems.
America has lost about half its manufacturing jobs in the last
thirty years and is addicted to foreign goods, plus certain foreign
producers such as China and Japan loosely devalue or peg in line
with the dollar decline to maintain their export competitiveness.
There is no credible evidence that the Federal Government can
rein in runaway spending on any level, be it military or social,
and is arguably already bankrupt (discussed in more detail in
Part V). Fed Governor Ben Bernanke has announced that the Fed
is prepared to inflate without limit to smooth over problems.
Asian demand is putting steady upward pressure on commodity prices,
which will likely squeeze American incomes. China is becoming
increasingly capable of fueling its growth in Asia independently
of the US, and Chinese investors may become less inclined to support
America’s trade deficits and use their capital instead to
fund internal growth. Other foreigners will likely cut back on
their US investment for fear of suffering further losses from
continued US dollar declines.
Eventually, to fund America’s growing deficits,
the Fed will have to accelerate money creation to monetize part
of America’s debt and also hike interest rates to try to
lure foreign investment back. Rising interest rates will likely
slow the economy and hurt the stock, bond, and real estate markets.
The magnitude of America’s trade deficits and indebtedness
suggest that the US will eventually wind up with double-digit
interest rates and hyperinflation.
HOW GOLD COMPETES AGAINST OTHER INVESTMENT
ALTERNATIVES
I have already discussed in my “bad deflation”
section how gold tends to be a late bloomer in the bad inflation
cycle, often trailing commodities, and how it tends to benefit
in a negative
interest rate environment. James
Turk’s commodity chart shows us the explosive “generational”
bull market in commodities that took place in the stagflationary
1970’s. This followed the sideways commodities markets of
the 1950’s and 1960’s. This raises an interesting
question regarding how explosively commodities might move in the
decade ahead if they become the focus of another generational
event proportional to the commodities bear market that lasted
from 1980 to 2000.
Like gold, commodities in general can have a
dual nature as investment vehicles once investors perceive them
as a store of value in an inflationary environment. The 1970’s
era even showed how commodities could become the focus of an investment
mania.
[Source: "A
Commodity Bull Market" by James Turk]
Interestingly, commodities cycles have been getting
longer in the last eighty years, as suggested below by the
Commodities Cycles chart provided by the Di
Tomasso Group. This may be an indicator that we could be entering
the early phases of a long term commodities bull market.
| Commodity
Market Cycles |
| |
|
|
|
|
|
|
Duration |
|
|
Begins |
Ends |
in Years |
Change |
Type |
|
1921 |
1925 |
4 |
45% |
Bull |
1925 |
1932 |
7 |
-51% |
Bear |
1932 |
1937 |
5 |
70% |
Bull |
1937 |
1939 |
2 |
-25% |
Bear |
| 1939 |
1954 |
15 |
99% |
Bull |
1954 |
1970 |
16 |
-41% |
Bear |
1970 |
1981 |
11 |
106% |
Bull |
1981 |
1999 |
18 |
-68% |
Bear |
1999 |
?? |
?? |
?? |
Bull |
| X |
|
|
|
|
| Duration of Bull Markets: |
35 years |
|
| Duration of Bear Markets: |
43 years |
|
| X |
|
|
|
|
| Average Bull Market Return: |
80% |
|
| Average Bear Market Return: |
-46% |
|
| X |
|
We might also note the “generational"
30 year Treasury Note chart below. Please recall that the Fed
began to hike interest rates between 1998 and 2000 to help keep
a lid on inflation and take some of the speculative air out of
the stock market mania. Jim Roger’s article “For
Whom the Closing Bell Tolls” criticizes Fed Chairman
Alan Greenspan for not hiking margin rates and reducing monetary
stimulus much sooner. My guess is that somewhere around or prior
to 1998 was probably the real bottom of the generational trend
in declining interest rates. The artificially low interest rate
environment we have been in since 2000 could simply reflect a
postponement of fundamental inflationary realities.
[source: "The
Silver and Gold Trainwreck" by James Puplava]
The chart below overlays the price action of gold
on the exponential rise in M3 and government spending. It provides
another perspective on the rising waters that may be filling a
cracking dam to the brim. Eventually, long-term interest rates,
gold, and commodities may make a dramatic upward move together
as they did in the late 1970’s.
at
the Battle of Cowpens, S. Carolina, 1781