Witches & Dragons
The Long Term
Howard S. Katz
Feb 1, 2010
In the short term, gold bugs are in pain.
The last 3 weeks have seen a pull back to the Dec. 22 low of
$1,075 and have created a lot of short term anxiety. We have
two possibilities. Either gold will continue down to the $1,000
support level, or it has already made its turn, will leave a
gap above $1,000 and then break out above $1,229, April contract
(the Dec. 3 high).
When the short term is a puzzle, I take
refuge by studying the long term. Above is the 15 year,
monthly basis chart of the CRB index, which gives us a good handle
on the (second upswing of the) commodity pendulum. The horizontal
line in the middle of the chart is at 337, and this was the top
of the (first upswing of the) commodity pendulum in 1980. Note
that this level, which was then resistance, was penetrated in
2005, and this was followed by the blow-off of 2008.
As is normal in technical formations,
a resistance level, when penetrated, turns into support. Therefore,
in Dec. 2008, when the CRB once again came down to 337, this
level provided massive support, and the commodity markets turned
on a dime. Also note the double bottom of 1999-2001, which is
serving as the bottom pattern for commodities and is similar
to the 4½ year saucer pattern in gold (1998-2002).
The key to the CRB chart is the sudden
collapse in the 2nd half of 2008 (from just over 600 to a little
under 337). This period stands out on the chart, and the normal
chart interpretation would be that some important (bearish) news
item had occurred at that time and caused the decline.
But of course we know that this was the
period when massive fears of "depression" swept our
society. The media began to scream "financial crisis,"
and commodity speculators ran for the hills. Even gold was hit,
although it declined less than other commodities and was the
first to bounce back strongly. An analysis of the panic of 2008
shows the following:
The panic was started by the New York
Times, which was ringing the alarm bell as early as mid-September.
What was the Times' source for this news item? The sources
were Secretary of the Treasury Henry Paulson and President George
Bush (Jr.). We now know that Paulson used his public office to
persuade Congress to steal (a stated amount of) $750 billion
from the working people of America and give it to (creditors
of) Goldman Sachs (Paulson's former firm). That is, Goldman Sachs
donated money to the Republicans (and probably also to the Democrats)
in return for which they were given influential positions from
which they can persuade politicians to steal money from the public
and give it to them. Also, the Times had been carrying
on in the most disgraceful fashion for the previous 7 years saying
that President Bush was stupid. (Although I cannot land a jet
airplane on the deck of an aircraft carrier, and I don't think
that anyone on the Times can do so either.) If President
Bush was stupid, then why cite him as an authority with which
to throw the country into panic?
In this regard, it must be pointed out
that recessions and depressions do not exist. They have the same
reality as witches and dragons. And debating whether the country
is in a recession is similar to debating whether unpopular women
in Salem, Massachusetts in 1693 were witches. This is why it
is so important for you to understand that the economics taught
in our nation's colleges and universities is (to quote Shakespeare):
"a tale told by an idiot, full of
sound and fury, signifying nothing."
These events, wrongly called depressions
and recessions, can be traced back to the days of Abraham Lincoln.
Lincoln could not persuade Congress to lay the taxes for the
Civil War. So he paid for the war by printing money (the greenbacks).
The U.S. money supply approximately doubled from 1861-65, and
the price level did likewise. The gold standard was temporarily
suspended. Now it is important to understand that, when prices
rise, wages also rise but much more slowly. Thus the real value
of wages declines. Therefore, all employers are making bigger
profits, and all workers find that their wages have less buying
power. In such a period, employers are looking to expand, and
unemployment is driven down very low. However, after the Civil
War Congress and the new administration withdrew the newly created
money from circulation. By 1879, prices were back down to their
level of 1860. This period of declining prices had the opposite
effect. Prices fell, but wages fell more slowly, and therefore
the real buying power of wages rose. With real wages higher,
employers started to hurt, and unemployment rose. The economists
of the day had one concern: to further their careers by kissing
the hindquarters of the rich and powerful. What was happening
was that wealth was flowing back and forth between two classes.
During the money expansion wealth flowed from the workers to
their employers. During the money contraction wealth flowed from
the employers to the workers.
How did the economists of the day deal
with this situation? They asked, "How can I serve the interests
of the rich?" Well, the rich were hurting during the money
contraction. "Therefore, I can kiss up to the rich by renaming
this money contraction as though it were bad for society as a
whole." And so the word "depression" was invented.
They were, they told us, academics who studied depressions and
made scientific commentary. Conversely, they called the periods
when the rich were benefiting at the expense of the poor "booms"
or "periods of economic growth."
In short, these economists were the leeches
of society. They defined their job as helping the rich to steal
from the poor, and to that end they made up nice sounding words
for the periods (and policies) to the advantage of the rich and
bad sounding words for the periods (and policies) to the advantage
of the poor.
Was there any real economics here? All
we have to do is to look at some facts. The "boom"
of the early 1860s occurred during the Civil War. Millions of
men were pulled off the farms and factories and put into the
army. These men, to say the least, did not produce any wealth.
Many of the goods that were produced, furthermore, were not wealth.
What wealth is represented by a bullet, a cannon or an explosive?
Nothing except to destroy other wealth. A war (if we set aside
the loss of life) is simply two groups of people destroying each
other's wealth. One side creates an explosive and destroys some
buildings and equipment of the other side. Then the other side
does the same thing. At the end, both sides are poorer. In what
sense is this a period of economic growth?
After 1865, there were a series of "depressions"
which were caused by a long contraction of the money supply.
This lasted until 1896. This period of "depressions"
was the most productive in the economic history of any nation.
It was the age of Thomas Edison and Nikola Tesla. It was the
age of railroad expansion. The automobile, the telephone, the
electric light and many other inventions were created. From 1866-1896,
the real wages of the average American worker increased by 90%.
People from other countries (my great grandparents among them)
flocked to America because the streets were paved with gold.
This was true in more than one sense. Despite the opposition
of the railroad interests the country returned to the gold standard
in 1879. It was also the period when America took the world economic
leadership from Britain. I ask all of the economic idiots, in
what sense was this a period of depression?
The same thing happened in the early
20th century. The Government increased the money supply during
WWI. The economic leeches called this a boom although the real
wages of the working man fell sharply. The Republicans of that
day figured out what was happening and realized that the extra
money had to be taken out of circulation (a good 5¢ cigar).
In the period 1920-1933, they reduced the money supply and brought
the average price level down to that of pre-WWI. During this
time real wages rose, per capita meat consumption increased (from
129 lb in 1930 to 144 lb in 1934), people switched from margarine
to butter and gave more to charity. And yet the idiots tell us
that this was a depression and the nation was poorer. Statistics
available from Historical Statistics of the United States,
Colonial Times to 1970, published by the U.S. Department
of Commerce.
So you see what the nation barely escaped
in 2008. And you see what Ben Bernanke has spent his life studying
and wherein lies his field of expertise. He is an expert in dragons
and witch infestations. Greenspan at least knew that he was a
liar and a fraud and acted ashamed. He is on record (before he
became Fed chairman) as condemning the policies he later practiced.
But you can bet your life that the national and world media did
not report a word of this. Greenspan was repeatedly on the record
as favoring the gold standard.
AND YOU CAN TRUST ALL OF THE MEDIA WHICH
REPORTED THIS CRUCIAL FACT (which is very close to none).
Now let us return to the commodity collapse
of 2nd half 2008, which itself was caused by the media in general
and the New York Times in particular as these media were
screaming "Great Recession" and "depression"
at the top of their lungs.
What happens to human beings who go through
a panic? During the panic they are wildly irrational. But as
the emotion gradually subsides, there is a return to reason.
That is what we have seen in the commodity markets since early
December 2008. The CRB first formed a small head and shoulders
bottom and has now recovered almost 2/3 of its loss. There is
no recession or depression. It is all a figment of our society's
imagination.
The State of the Union Address was used
by Obama to shout defiance against the newly emerging conservative
movement, and this can be taken as evidence that he will pursue
his policies, including massive budget deficits, as long as he
can. This printing of money has to cause both gold and commodities
in general to make massive further advances. The chart of gold
indicates this with several aggressively bullish patterns. The
CRB will not be aggressively bullish until it breaks above its
July '08 high of 618.
Right now gold is hanging just above
its Dec. 22 support area at $1,075. If the gap between $1,075
and $1,000 remains open, this will be an aggressively bullish
signal. If gold returns to $1,000, closing the gap, it will still
be bullish (but less aggressively so). $1,000 is strong support,
and the odds that it will be broken are very small. Meanwhile
any analysis of the long term, as above, shows that commodities
are extremely bullish, and that is the place for the astute speculator
to be.
###
Howard S. Katz
email: howardkatz@hotmail.com
website: www.thegoldspeculator.com
Howard S.
Katz
holds a BA in mathematics from Harvard University. He became interested
in Austrian economics and started a successful investment newsletter,
The Speculator which focused on gold and gold stocks. He is a
lifelong advocate of gold and gold stock investing. Later, he
published The Gunslinger for investors interested in gold and
gold stocks. In addition, Mr. Katz authored three books on gold,
the gold standard and money in politics: "The
Paper Aristocracy",
"The
Warmongers"
and the soon to be published "Wolf in Sheep's Clothing".
He was involved in the Objectivist movement in New York in the
1960s and was an early member of New York's Free Libertarian Party.
Mr. Katz is a contributing author to The Ludwig von Mises Institute
where his writings appear along with those of contemporaries Llewellyn
H. Rockwell, Jr., Murry Rothbard and Robert Murphy, among others.
He has been interviewed on numerous radio programs. He is currently
Chief Investment Officer, editor and publisher of the gold and
gold stock investment newsletter, The One-handed Economist.
321gold Ltd
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