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Article posted Jan 31 2012, 7:30 AM Category: Economy Source: Gary North Print

Gold Procrastinators: The Endless Agony

by Gary North

It happened again on Wednesday, January 25. Gold shot up by $50.

Across the nation, a band of perpetual procrastinators thought to themselves: "I knew! I knew! Why didn't I buy?"

This is the never-ending cry of the perpetual gold procrastinator, year after year. "I knew! I knew!"

It is immediately followed with: "I've learned my lesson this time! The next time gold's price falls, I'll buy."

No, he won't.

Why not? Because, when gold falls, he'll say this: "The decline is just getting started. It will fall even more. I'll wait."

He will wait patiently until gold's fall reverses. He will then say to himself: "This is temporary. It will fall back." Then comes the explosive move upward. Then he will say: "I knew! I knew! The next time gold's price falls, I will buy. I mean it this time. I really mean it."

Year after year after year, this is the pattern.

There is a page you can go to and find exactly what gold sold for, stretching back for over a decade. It's here. Here we learn this: on September 5 and 6, gold peaked at $1,895. Then it fell. It bottomed on December 29 at $1,531.

It had moved back up to $1,600 by January 3. That should have sent a "buy" signal to every gold procrastinator. But gold procrastinators do not respond to buy signals. Ever.

They know. But this does them no good financially.

They live in agony. They never buy, and gold moves up. It has for over a decade. They do not learn. They prefer agony to profits.

But this does not make sense. No one prefers agony to profit.

Some people do. We call them masochists. "It hurts! It hurts! Don't stop!"

My father-in-law was a missionary to the Western Shoshone Indian tribe in Nevada/Idaho from 1945-1955. He and an alcoholic physician with the Indian Health Service were the only full-time white men on the reservation.

There would occasionally be visitors on vacation. He told me about one of them. The man worked for one of the casinos in Reno. He worked at the craps table. He told my father-in-law about a man who had made $11,000 at the table. In the late 1940s, that was a lot of money. "He was drunk. He passed out just after he won. We put his chips in his pocket and put him in his room. He left the next day. That was the only man I ever saw who came out that far ahead." My father-in-law asked him why. "They gamble to lose" was the answer.

GOLD'S HATED MESSAGE

That describes gamblers. But what about investors? Do they invest to lose? I think a lot of them do.

Yes, they want to make money. But they want to make it conventionally. They want to make it as upstanding defenders of the American dream.

On March 23, 2000, the Standard & Poor's 500 index peaked at 1527. Today, it is around 1320. But the dollar has depreciated by over 30%. Anyone who took the standard advice to buy and hold a no-load index mutual fund of the S&P 500 has lost 12 years and 40% of his investment. He still believes the story. He will believe the story until an hour before he reaches room temperature.

Why? Because that's the American dream. It confirms the story of American industry, American ingenuity, and American know-how.

It is also the story of Keynesianism, Federal Reserve monetary policy, and federal regulation.

If you call into question the American dream, you call into question Keynesianism, Federal Reserve monetary policy, and federal regulation. That is unAmerican.

Most Americans would rather lose all of their wealth than call into question the American dream, as promised by Keynesians, Federal Reserve economists, and Civil Service-protected federal bureaucrats.

Most Americans are like that guy at the craps table in Reno. Their only hope is to pass out in front of their chips.

Gold sends a message. Here is the message: "You should not put your hope in Keynesianism, Federal Reserve monetary policy, and federal regulation."

This is why gold as an investment has had a bad reputation in the media ever since 1965, when Charles de Gaulle told the Bank of France to start handing in dollars to the Federal Reserve System in exchange for gold at the guaranteed price of $35 an ounce. This is also why there is no discussion in history textbooks or economics textbooks of price stability under the international gold coin standard from 1815 to 1914. This is why there is no discussion in history textbooks or economics textbooks of all central banking as a government-licensed cartel.

In February 1967, my first article in a national publication appeared: "Domestic Inflation Versus International Solvency." It was published in the free market magazine, The Freeman. It was a defense of the traditional gold coin standard, which ended with the outbreak of World War I in 1914. I ended the article with these words.
A full gold coin standard would unquestionably solve the problem of international acceptance and solvency. Gold has always functioned as the means of international payment, and there is no reason to suppose that it will not in the future (assuming that prices and wages are permitted to adjust on an international free market). The opposition to gold in international trade is based upon ideological assumptions which are hostile to the idea of the free market economy. Gold would insure monetary stability, if that were what the economists and legislators really wanted. It would insure too much stability to suit them, and this is the point of contention. As the late Professor Charles Rist once wrote:
In reality, those theoreticians dislike monetary stability, because they dislike the fact that by means of money the individual may escape the arbitrariness of the government. Stable money is one of the last arms at the disposal of the individual to direct his own affairs, whether it be an enterprise or a household. It is certain that nothing so facilitates the seizure of all activities by the government as its liberty of action in monetary matters. If the partisans of [unbacked] paper money really desire monetary stability, they would not oppose so vehemently the reintroduction of the only system that has ever insured it, which is the system of the gold standard.
I wrote that 45 years ago. My views have not changed. What has changed is the consumer price level. An item that cost $1,000 in 1967 would cost $6.735 today.

Of course, this does not apply to gold. To buy as much gold (which was illegal for Americans in 1967) today as $1,000 would have bought in 1967 would take $48,570.

Did I buy gold in 1967? No. I was a graduate student. Instead, I had my parents buy U.S. double eagles, which were collector coins. They were legal.

Why did I tell them to do this? Because I did not believe in the following: Keynesianism, Federal Reserve monetary policy, and federal regulation.

Earlier in that ancient article, I wrote this:
The nation which indulges itself with an inflationary "boom" inevitably faces the economic consequences: either runaway inflation or a serious recession-depression. If the inflation should cease, unemployment will increase, and the earlier forecasts of the nation's entrepreneurs (which were based on the assumption of continuing inflation) will be destroyed. Since no political party is anxious to face the consequences at the polls of a depression, there is a tendency for inflations, once begun, to become permanent phenomena. Tax increases are postponed as long as possible, "tight" money (i.e., higher interest rates) is unpopular, and cuts in governmental expenditures are not welcomed by those special interest groups which have been profiting by the state's purchases. The inflation continues.
I have not changed my mind. Nothing that has taken place since 1967 has persuaded me that my analysis was incorrect.

THE FED'S LATEST PRONOUNCEMENT

On Wednesday, January 25, the Federal Open Market Committee (FOMC), which sets monetary policy, made an announcement. Every Austrian School economist had said it would make this announcement at some point.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions including low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
For over a year, the FOMC had said that it would keep the Federal Funds rate at the low rate until 2013. So, this announcement was a major change: late 2014. This sent a signal: the FOMC thinks the present slow economy will last until late 2014. In other words, QE2 was not enough to goose the economy. Therefore, the FED will inflate. Anyway, that is what the language indicates.

Let me remind you one more time: the FOMC has had nothing to do with the Federal Funds rate for well over three years. The FedFunds rate today is low because commercial banks have over $1.6 trillion on deposit at the FED as excess reserves.

The FedFunds rate is a very limited rate. It is the rate at which commercial banks with excess reserves lend overnight to banks that have fallen below their legal limit. Why do they need money? Because there is high demand for loans by the public.

There has been little demand from the public for new loans ever since 2008. The banks are risk-averse to the few businesses that are ready to borrow. So, banks have piled up excess reserves at the FED. The FedFunds rate is almost zero because every bank in America is loaded to the gills with legal lending capacity. They are not lending to the public. They lend to the FED, which pays basically nothing.

So terrified of this economy are bankers that they are willing to lose money on their FedFunds accounts at the FED. The revenue received does not come close to covering the costs of servicing commercial bank deposits. This is why banks are trying to find ways to stick depositors with fees. Depositors are rebelling. Bankers are stuck, not their depositors.

So, the FOMC has zero to do with the present low rate. All that these pronouncements do is to convey a false picture: We are still in charge of interest rates. We are the bulwark of low rates." It makes it look as though the FED is running the show. It isn't.

The statement did have the effect of running up the price of gold by $50 in one shot. The pronouncement seemed to guarantee QE3. "The Committee expects to maintain a highly accommodative stance for monetary policy." But the FedFunds rate has remained close to zero under the FED's contraction of the monetary base in the first half of 2010, which was reversed by the policy we call QE2. Look at this chart.

Whatever the FED did in 2010, it had no effect on the FedFunds rate, which did not change. Fear of the economy, not the FOMC, has set the FedFunds rate.

The FOMC spoke of a highly accommodative stance on monetary policy. Yet the FOMC has vacillated between high accommodation and outright deflation for two years. The FOMC cannot make up its bureaucratic mind.

BUMPER CAR BEN

The FOMC is like a young child in a kiddie-car ride at the county fair. The car is on a track. It has a steering wheel. The wheel is not attached to the car's wheels. It just spins when turned. The child turns the wheel wildly, this way and that. The car follows the track. He is smiling. He is in charge!

At some point, the kid moves up to bumper cars. There, he really is in control. But the car can do no damage. It is inside a confined space. It has rubber bumpers.

Then, at 16, he gets his driver's license.

Ben Bernanke is like a teenager who has been given his driver's license and the keys to his father's car, but who has spent years in bumper cars: Princeton University. He and Paul Krugman had a great time racing around the track and bumping into one another. Nobody outside of Princeton paid any attention to them. Occasionally, Alan Blinder joined in the fun. They were known as Blind, Blinder, and Krugman. No permanent harm was done.

Then Bush appointed him chairman of the Board of Governors. That was his license. That was his keys to the car.

He has already caused on massive pile-up: 2008-9. There will be another one soon enough.

CONCLUSION

You and I are all in the back seat. Bernanke is in the driver's seat. We have two choices: buckle up or not.

If you want to buckle up, you buy some gold bullion coins. If you want to live dangerously, you buy and hold a no-load fund of the S&P 500 and a no-load fund of U.S. Treasury bonds.

President Obama is in the passenger seat. He is hoping that Bernanke knows how to drive.

He had better pray that the air bag works.

January 30, 2012

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright 2012 Gary North





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