The Gold Bull Vs The Paper Tiger

That's all, folks. One look at the headlines will tell you the gold bull market is officially over: the stock market is booming, a modest recovery of the U.S. economy is underway, and the dollar is dominating the forex market. Time to sell your bullion and get back into U.S. stocks!

Does anyone really believe this story at this point? Haven’t we been through this time and again since 2008? Remember “green shoots”?

The sad truth is that American investors, accustomed to a world of rising stock and housing prices for several generations, are experiencing short-term memory loss. It’s as if their longing for the “good old days” has made them subconsciously suppress any unpleasant memories.

The Return of Irrational Exuberance

But it wasn’t so long ago that irrational exuberance over the housing market had seized investor’ logic, and the same thing is happening to U.S. stocks right now. Fair-weather investors are abandoning gold equities, and jumping into the U.S. market in the hopes of making an easy buck, just as people bought property near the housing peak hoping to flip it before those adjustable-rate mortgages reset. This is a game of chicken that makes big banks rich, while destroying the savings of average investors.

So-called experts are pointing to the buoyancy of U.S. stocks and weakness of the precious metals as proof of their viewpoint – but economy fundamentals are still dismal. Unemployment remains persistently high, and manufacturing continues to struggle. In April, the Fed reported that industrial production shrank 0.5%.

The only growing part of the economy is consumption and services. Indeed, U.S. consumer confidence just hit a 5-year high! But this week’s revisions to first-quarter GDP revealed that the household savings rate fell to an abysmal 2.3%, and real disposable income plunged by an annualized rate of 8.4%. It seems that both rising asset prices and consumer confidence are based solely on the expectation of an improving economy still unsupported by the data itself.

The Currency War Heats Up

Perhaps people think things are different this time because of the newsfrom the international currency war zones. Everywhere you look, once-strong economies have begun to vie for exports by devaluing their currencies.

Switzerland had one of the strongest European economies before its central bank capped the value of the franc against the euro in 2011, vastly diminishing its citizens’ purchasing power. The Japanese yen, once the most stable currency in Asia, is falling victim to even more grotesque devaluation policies. Out of irrational fear that their exports will not be able to compete with the yen, Australia and New Zealand are the latest to jump into the fray by cutting interest rates.

Dollar By Default?

Many are examining these conditions and concluding that the U.S. dollar is now the last resort for global capital.

However, this is a narrow and flawed view. The foreign exchange market is typically quoted based on relative valuations, examining one fiat currency through the lens of another. It says nothing of the fundamental value of a currency in terms of goods and services. It is entirely possible for all fiat currencies to collapse simultaneously, even as certain currencies “rise” relative to others. In fact, that is the likely outcome of this race to debase, which in turn is tremendously bullish for gold.

The only way to avoid the collateral damage of the currency war is to refuse to participate. That means selling fiat cash and buying precious metals, commodities, and equities. That is precisely what people are doing in those countries where currency devaluation is well underway – from Japan to Switzerland, everyday citizens are buying gold and silver in record quantities.

A Great Paradox

How can it be that people are rushing to buy physical precious metals around the world and yet the price keeps falling?

This correction is being driven by institutional investors in the paper gold market. There is big money betting against gold and on the Fed. I believe they are in for a rude awakening.
This correction was kicked off by whispers that the Fed might start drawing down QE3 in September. That would indeed be reason to re-evaluate one’s precious metals holdings. But, predictably, the Fed immediately backpedaled, insisting that it would, if anything, only “taper” the QE at some point in the future. John Williams, head of the San Francisco Fed, then came out and said, “You could even imagine a scenario where we adjust it downward based on good data and then adjust it back.”

Again, how many times are the mainline financial institutions going to fall for this song-and-dance? It’s as if these investors are parents of a drug addict wiring money yet again on a promise that this time the kid will clean up his act. It’s not going to happen until he hits rock bottom! In the case of the Fed, ‘rock bottom’ means a dollar crisis with U.S. consumer prices spiraling out of control.

Stay The Course

Given all of this, anyone considering abandoning gold and giving the U.S. markets another whirl should think twice. Lots of people make and lose short-term fortunes, but I’ve always encouraged investors to grow their wealth along fundamental long-term trends. Ignoring this advice means gambling your savings on the hope that there will be a greater fool who will come along and buy your inflated assets at even higher prices.

My fundamental strategy may mean enduring deep corrections or missing out on manic rallies, but it has served me well as measured by long-term rates of return. The fundamentals continue to point toward endless money-printing to support a zombie U.S. economy.
Meanwhile, Gold and Silver are being offered at bargain prices.