NZ Gold ::: Is The Precious Metals Bull About To Charge?

Is the precious metals bull about to charge?

Sunday 14th October 2007

One of the Sirens from Greek mythology - who lured unsuspecting mariners to their doom!

At NZ Gold we can recall reading some interesting advice. It offered words to the effect of "put a proportion of your money into precious metals - and hope like mad you are wrong". On the surface such a suggestion seems absurd. After all, making a real return (that often derisory bit left after the governments has ruthlessly taxed and debased your interest and dividends) is hard enough. So why would you make an investment in gold and silver and then hope you have made a misjudgement? The reason is because gold and silver, particularly in their physical forms, are effectively insurance - financial insurance! In the same way that you probably take out insurance on your life, your health, and your house - and presumably hope never to make a claim - so it can be argued you should hope that the precious metals never explode to the upside.

If your family has to claim against your life assurance policy, you have to claim against your healthcare policy because of serious illness, or your house burns down, a disaster has occurred. We would suggest that the compensatory cheque, received by you or your survivors, can't really 'undo' the calamity - but it can ameliorate some of the associated hardship. At NZ Gold we would suggest that gold and silver can play a similar role, in terms of potentially softening some of the worst consequences of a financial disaster.

As regular readers will be aware, it is our view that the makings of a historic 'financial disaster' can be found in the unprecedented credit creation of recent years. The problem, of course, is that easy money is superficially very attractive. Like the Sirens of Greek Mythology - those voluptuous beauties who tempted mariners with the prospect of their bodies - credit tempts with the immediate pleasures that it can bring. The problem is, that just like the Sirens, a point is reached when what seemed so wonderful suddenly becomes very ugly and threatening. As the great Austrian economist Ludwig Von Mises (1881-1973) once noted:

"True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression".

We would imagine that those ancient mariners were none to happy, when they discovered that the visions of fulsome womanhood on whom they were planning to pleasure themselves, had turned into a hideous collection of murderous, psychopathic, hags! Likewise, we suspect that the general public will not be too happy when they discover that the great credit driven prosperity - on which our lives now seem so ubiquitously reposed - has a dark and destructive side. A flirtation with logic must surely tell us that it cannot be possible to become sustainably rich, by doing no more that creating money and inflating asset prices. At NZ Gold we perceive a giant pyramid scheme, in which it becomes necessary to inject ever greater quantities of newly created credit in order to keep the con going. Both history - and intellectual analysis - declare that at some stage an inflection point will be reached and the bubble will burst.

Important questions for precious metals investors revolve around whether the terminal stages of the credit cycle are approaching - and what other factors might mitigate towards a major price advance for gold and silver. Recently we have seen the 'subprime' mortgage crisis and associated liquidity squeeze, that is having a marked impact in the United States and elsewhere. We suspect these unfolding events are indicative of an easy credit dream run that is fast approaching its inevitable and unpleasant conclusion! In a true market economy reckless lending would, of course, be punished - and those who seem to have 'doled out' money like confetti would be courageously allowed to go bust. Yet, in what we perceive as the 'anti-capitalist' world of contemporary political leaders, there appears to be no 'moral hazard'. Foolhardy behaviour no longer attracts political opprobrium - rather it is rewarded with the creation of however much new money is needed to save the skins of the corporate elite and to keep the public conned for that little bit longer. We urge our readers to be more discerning! At NZ Gold we would suggest that now is the time to be cutting back on credit and making a determined attempt to 'live within your means' (even though such an old-fashioned sentiment would be dismissed as absurd by contemporary financial wisdom).

Yet there are further concerns. At NZ Gold we fear that ominous similarities with the financially turbulent nineteen seventies are casting a shadow over our great credit driven utopia. The difference, we suspect, is that this time things could be a great deal worse - especially if you are not 'holding gold'. It seems to us that, in particular, the activities of the United States are indicating something of a 'renaissance' of that fascinating era of flared trousers, platform shoes, and jumbo collared shirts. (What a pity we didn't keep those long disposed of items of sartorial splendour - they might be worth something today!). As in the seventies, Uncle Sam is fighting a ruinously expensive war that he probably cannot win - at the same time as energy prices 'go through the roof'. His currency proliferates like a medieval plague, suggesting that the profligacy of the Nixon era was merely a 'dress rehearsal' for the main event over three decades later. For today he has to 'counterfeit' his money - not just to pay for his latest military faux pas - but to finance his insatiable appetite for items of personal consumption that are now largely made by his competitors from overseas. At NZ Gold we wonder what those great and prudent men, who founded the United States, would have to say about the state of their nation's finances? Likewise, what would earlier generations of New Zealanders - who tried to prevent their young country becoming beholden to overseas creditors - make of our simply astonishing levels of external debt today?

Large denomination banknotes - 'stores of value' or the 'detritus' of money which has been constantly ground down by chronic over-supply? (Incidentally, can you spot the forgery?)

At NZ Gold we expect the 'price' of the precious metals to go on rising - to reflect the exponential expansion in the supply of 'paper' money that is occurring all round the world. Indeed, we perceive a situation in which the ghost of Weimar Germany is becoming a global brand (do forgive us, isn't the fashionable nomenclature now an iconic global brand?). Look at the examples of 'money' that we have provided above. Even the smallest denomination banknote is still for 1000 - of whatever passed for currency at the time - and we love the bottom left note with a face value of 500,000. At NZ Gold we wonder what the rather austere and classical looking gentleman, who graces this huge denomination note, would think of it being sold for a derisory three New Zealand dollars in the odds & ends bin at the local coin shop! We allow ourselves a moment's enquiry. Wouldn't the original owner of that note, when it was printed in 1944, have been much better off immediately exchanging it for gold or silver. We do not know how much precious metal it would have bought, but we suspect the holding sixty three years on would be worth rather more than that once proud paper promise - that sells today for less than the price of a small cappuccino! It's a salutary lesson - you can print whatever you like on a piece of paper but that act does not automatically create a store of value!

Moreover, as an aside, doesn't it always seem to be the case that counties - with an even worse record of preserving monies purchasing power than 'stealth debasers' like New Zealand, Great Britain, and the United States - have historically insisted on the most incongruous of imagery on their banknotes? Study the enlargements of two of the examples of 'monetary detritus' that we have provided opposite. Aren't the symbols of great abundance and productive industry so tediously predictable? The young woman with her food basket groaning with plenty, the proud men surveying the great industries of which they were a part. Let's hope they insisted on payment in gold or silver and not the banknotes on which they made their cameo performance!

Of course, we have not yet got to the point where you hand over five thousand, five hundred thousand, five million, or perhaps five billion - of whatever transient paper unit your leaders have foisted on you - in order to buy the week's groceries. (Unless we have any readers in Zimbabwe!) Yet patience dear readers, patience! In most established western 'democracies' the destruction of monies value is a subtle affair. After all, it took the entire twentieth century to destroy 99% of the pound Sterling's purchasing power although beware - the majority of that phenomenon took place during and after the nineteen seventies. What seems so disturbing about the Anglo Saxon economies, that specifically interest us here at NZ Gold, is the progressive repudiation of financial responsibility at both a national and personal level. Such a phenomenon, if we have discerned it correctly, is suggestive of a much more rapid loss of currency purchasing power in the future - unless deflation paradoxically takes hold. At NZ Gold we suspect - but cannot be sure - that the inflationary route is the more likely path that lies ahead. So much new money has been, and is being, created that unless people abandon using paper money altogether it would seem that we will just have to get used to each dollar or pound etc buying less and less. Indeed, in this regard we note an interesting article in the latest edition of the British Weekly Telegraph (Wed Oct 10 - Tue Oct 16) entitled: Our disposable income 'lowest for a decade'. A most telling comment in that article "we are working harder, but we are not getting any wealthier" is an insightful reminder of the fact that prosperity based on credit and rising house prices is not really prosperity at all.

Certainly, we tend to the view that the authorities will pursue an inflationary 'solution' to the debt crisis - since this will mitigate in favour of major financial institutions and other vested interests. Within this we have already seen remarkable levels of new money creation as the 'subprime mortgage' debacle unfolds. Moreover, having elevated the overwhelmingly popular phenomenon of rising house prices to something resembling a new supra-national religion (from which the young and those on modest incomes are excluded) we would expect every attempt to be made to underpin 'nominal values' going forward. This, of course, will be blended with all sorts of pieties about 'robust commitment to maintaining general price stability etc'. We hope our readers will not be fooled! Our reading of history also suggests that an inflationary repudiation of debt is more likely to result in social disorder than its deflationary cousin - thus delivering politicians and their corporate masters a potential 'pretext' for a further assaults on civil liberties.

When considering the matters discussed above we are increasingly persuaded to the view that the precious metals bull might well be ready to charge. Since we first became interested in 1999 it has already been advancing, tactically retreating - sometimes brutally bloodied - and then advancing again. Yet now the matador has 'upped the ante'. He is no longer content to debase by stealth, judiciously teasing the beast, but is hurling javelins at a frantic pace. Already the bull appears to be responding - with the price of gold now robustly above US$700 per ounce. Many other factors, that we shall examine in subsequent updates, also mitigate in favour of much higher gold and silver prices in due course. Moreover, even at current prices, powerful arguments can be advanced that they are still cheap. At NZ Gold we cannot tell you to what lofty heights the precious metals might ascend - or how much volatility and turbulence could be encountered along the way. We can only offer our own modest thoughts - buy gold and silver for financial insurance and hope like mad you never have to make a claim!

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