Gold: A Few Russell Thoughts
December 31, 2007 -- A few Russell thoughts with accompanying advice:
(1) The key words in building a fortune is Compounding, the "royal road to riches."
(2) The most precious commodity you'll ever have in investing is TIME. Compounding over time equals increasing wealth.
(3) Debt is the destroyer of wealth. Debt leaves you vulnerable in any downturn. Today young people start out life buying a house with an accompanying fat mortgage. In most cases, this puts them in perpetual debt and prevents their ever saving.
(4) "Those who understand interest, collect it. Those who don't understand interest, pay it."
(5) Timing is the most difficult thing to master in investing. My old friend John Magee's motto was -- "Don't tell me what to buy, tell me WHEN to buy it." Almost any item, bought at the right time, will produce profits. Most people lose money because they fail in timing their purchases, and they fail in timing their sales. Compounding eliminates the problem of timing. In compounding you add to your portfolio regardless of what the market is doing. In compounding you're not depending on timing, you're depending on mathematics.
(6) One of an investor's worst enemies in our central bank economy is inflation. Your single best and most reliable defense against inflation is the only stateless non-debt money -- gold.
(7) You don't time your gold purchases, you simply accumulate gold. Gold is pure tangible wealth and therefore it can never go bankrupt. In contrast, no fiat currency has ever survived the passage of time. All fiat currencies eventually become worthless in that over time they lose almost all of their purchasing power.
This is the current case for owning gold. Pressured by politicians, the Fed and central banks the world over want good times. And currently they're doing their share to create and maintain good times. They're creating money (fiat paper) by the tens of billions in an effort to ensure good times. Part of the current move to create more paper has to do with the declining dollar. Every nation's central banks want a competitive currency for export purposes. The US dollar is the world's central currency and the world's reserve currency. If the dollar is declining, the various central banks will create more of their own money in order to buy dollars. In so doing, they increase the price of the dollar in terms of their own currency. Thus, the world's total amount of paper currencies continues to expand. The steadily-increasing amount of world currencies is inflationary. It amounts to "too much money chasing an insufficient amount of goods."
Currently, the US is facing a daunting housing problem. An army of home owners will be facing increased mortgage costs in 2008. That's bad enough, but another nightmare would be mass housing foreclosures leading to US consumers cutting back on their spending. In the face of this possibility, the Fed has embarked on a policy of expanding M-3 growth along with incremental declines in short rates. Thus, the Fed is fighting the potential forces of deflation. What deflation? Deflating home prices, a potential decline in consumer spending, plus the specter of rising unemployment.
Next, for the sake of this argument, let's say that in 2008 the economy turns "bad." In that case, the Fed will step on the accelerator and fight the downturn with everything at its command, which again means expanding liquidity and declining short rates.
Rising money supply, declining interest rates -- the ideal atmosphere for a rising price of gold.
OK, that's the case of deflationary forces in the US possibly setting off a recession. Now, let's examine the opposite side of the coin. Let's say that the US economy stabilizes. The housing situation hits bottom and begins to improve. In the face of this, all the Fed's previous monetary machinations begin to "kick in." Business realizes that the worst is over for banking and housing -- the economy is starting to recover. The stock market is advancing steadily, and suddenly Wall Street and Main Street turn optimistic. Housing firms up, the stock market is heading up, commodities are surging and inflation is in the saddle.
Under those conditions, gold is again advancing. All the money that was created during 2007 to counteract recession now acts as an "overflowing punch bowl." Business around the world accelerates. The global economy is "on fire." Stocks are climbing.
Under these conditions, gold heads sharply higher.
OK, Russell, but in what circumstance would gold be hurt?
Here's my answer to that question. In 2008 recession sets in. US consumers, loaded with debt and with little or no savings, cut back sharply on their buying. The economies of the world slow down. We might even be facing a world depression. Suddenly, there's a panic for cash. An ocean of debt screams to be fed with dollars. Worldwide the most-wanted currency is the dollar. Cash, the dollar, is needed to stave off bankruptcy. Deflation takes over. Suddenly, there's a panic for dollars and the dollar heads higher.
Under these conditions, which I think highly unlikely, gold does poorly. Everybody wants dollars -- all variety of assets are sold to raise dollars, even gold is sold for dollars.
Question -- Get real, Russell. If the central banks can flood the world with liquidity, if the world's central banks can create any amount of fiat currency at will, how can you have deflation? Deflation is too little money chasing too much in the way of goods.
Answer -- Deflation isn't going to happen, not while the central banks can create fiat money out of thin air. Bernanke explained that in his famous "helicopter" speech.
Question -- That's right, Russell, the central banks can make the money available, but frightened, debt-laden people don't have to borrow, and they don't have to spend. The Fed could be pushing on a string.
Answer -- Well that's the theory, and that is the worry. But it doesn't work that way, not in the real world. Make the money available, make it plentiful -- and the American public will spend it. Ever since World War II, whenever the money was available, America's consumers spent it. They not only spent it, they went into debt, thereby spending even more than they had coming in.
No, Americans are professional spenders. "Create it and they will spend it." Paint that in large black letters and post it on your wall. It's a time-honored truth. As night follows day, Americans will spend any money that's coming their way -- and more!
Under these conditions -- again, gold should head higher.
Question -- C'mon, Russell, are you telling us that there's no way that gold is going to go down?
Answer -- I'm saying that gold is in a primary bull
market, and bull markets are always subject to corrections. I'm
not talking about timing gold today any more than I was talking
about timing gold in 2001 or 2002 or 2003 or 2004 and so forth.
I'm talking about the overall, long-term direction of gold.
Before the bull market
in gold is over, people will be lined up to buy gold. That's
the way bull markets end, not by Richard Russell having to explain
why you should own gold.
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