Ten Years of Gold

"Gold is the money of kings
Silver is the money of gentlemen
Barter is the money of peasants
Debt is the money of slaves”

[From Money and Wealth in the New Millennium by Norm Franz]

Over the years, I have encountered many people who have considered any investment in gold to be foolhardy in concept. Recently though, I have been finding that more and more of them are beginning to turn around. As their fears grow about the market and the future of various currencies, many are now seeing gold as a possible light at the end of the tunnel. Trouble is, having spent years as naysayers, they are having a difficult time making the dreaded plunge, as it goes against former beliefs that were firmly held. I can sympathise - none of us likes to reverse a view that we have held for years as having been gospel.

This article is intended to provide them with a rather abrupt shove. I should apologise in advance, as it includes a fair bit of “I-told-you-so” pronouncements. While this is rather ill-mannered, its purpose is to be blatant enough to provoke a decision to take positive action.

For more than ten years, my brother (and investment partner) and I have been advising friends to buy gold, stating that it was a long-term investment that would pay well over the long haul, but, more importantly, would keep them from losing their wealth, through the inflation that we believed was coming. In the last ten years, here’s where gold was at the end of each year.

2000                                $273.60

2001                                $279.00              up  22.0%

2002                                $348.20              up  24.7%

2003                                $416.10              up  19.5%

2004                                $438.40              up    5.3%

2005                                $518.90              up  18.5%

2006                                $638.00              up  22.9%

2007                                $838.00              up  31.3%

2008                                $889.00              up    6.1%

2009                              $1118.40             up  25.8%

2010                              $1413.00             up  26.4%

We began buying gold over twenty years ago. It wasn’t intended as an interest-bearing investment, as gold pays no dividends. It was meant to be more of an insurance policy, as we believed the first world was, long-term, headed for hard times and we wanted monetary safety. Gold is a good one, as it doesn’t deteriorate, you can keep it where you can get your hands on it, governments can’t mess with it too much and, for thousands of years, it has always been the fallback whenever other forms of wealth have collapsed.

In 1999, the US repealed the Glass-Steagall Act, which was created in 1933 to assure that the banks could never again loan out money that didn’t exist, making themselves wealthy but destroying the economy. This was a red flag to us that another Great Depression was going to occur as a byproduct of banker greed. In the ensuing years, we studied current and historical economics in order to be able to predict what would happen and when. We believed that there would be a major real estate crash, followed by a stock market crash, creating what would be termed a “recession”. However, it would actually be the first phase of a depression. (Depressions occur in waves. The worst wave is always the third, a downward wave. It normally takes a few years to occur, after the initial wave. The third wave of the Great Depression occurred in 1932.)

We also predicted a number of other occurrences along the way. We expected that the occurrences would follow more or less in order, as they tend to do in economic cycles. These “dominoes” would keep us on track as to where we were in the depression process. We predicted the real estate crash for 2006, but were a year off in our prediction. We predicted the first stock market crash to follow, and it did. Since then, the dominoes have been falling pretty much as anticipated and, if this trend continues, we are now on the verge of the second major crash in the depression. Although there will be others, we expect that this one will be the longest and deepest.

We projected that 2011 would be the Big Year, the equivalent of 1932 when the US hit bottom in the Great Depression. Like the other events, we consider this to be a near-certainty, but, again, like the other events, timing is another matter. Powerful forces such as governments and the central banks can often delay the inevitable for long periods. We therefore can only say that 2011 was a logical year, but it could be 2012 or even later.

Now, as in the past, most people are naysaying the logic in owning precious metals. When the next downward wave does occur, many of them will finally reverse their opinion and start buying. But precious metals are unlike paper money in that they are finite. Virtually all the gold ever produced in the history of the world is still in use and, although there is more that can be mined, it is not a simple process. Therefore, as a major move away from paper currencies develops, there will be far more buyers than sellers. This will result in gold reaching its “mania” stage when, eventually, everybody and his dog will be seeking to get his hands on whatever he can pay for. The mania will cause a dramatic rise in the selling price, eventually leading to an unsustainably high price that ultimately will begin to drop and gold will then level off to a more realistic price.

The object is to predict the peak and get out shortly before then. (More about that later.)

We bought gold heavily in the early 2000’s, feeling that it would never be so low again in our lifetimes. Not surprisingly, we were (literally) laughed at. Since then, we have continued to buy whenever there was a correction in the market and a bit of a drop occurred. In 2002, we predicted $500 gold within a few years. Again, we were laughed at. Gold topped $500 in 2005. Expecting a stock market crash to occur in 2007 (It didn’t occur until 2008), we predicted that gold would reach $1000 by the end of the decade. While this prediction was also laughed at, gold topped $1000 in 2009. Two years ago, we predicted $1200 - $1500 gold by December 2010. This, too, was laughed at. On December 31st of 2010, gold was at $1413.

Presently, we predict that gold will reach $5000 by 2014-2015, but, before we reach that date, we may adjust our prediction upward, depending upon how crazy things get. And, of course, this prediction is also being laughed at.

We are not terribly interested in receiving praise for correct prognostications, as we consider these prognostications to be self-evident with only a modicum of study. But we are very eager to be able to help our friends to avoid losing money as fiat currencies throughout the first world collapse.

We have heard some investors predict a peak of $6000, $7000 and, in recent months, some have suggested that $12,000 gold would be logical by 2015. Our projections are more conservative, but we could be wrong, as there is no way to predict the outer limits of an investment mania. There is certainly logic in $12,000 gold.

So, after the naysayers were consistently wrong over the last ten years, why are they not now saying, “I’ve bet wrong every time, I think I’ll now go with the guys who’ve been right every time”? There is still an abiding (and logical, if not sensible) reason for this. They are saying to themselves, as they have every year in the last ten, “What if we are already at the peak?” The answer to this question is simple: Do your homework. This isn’t rocket science. It’s merely analysis of events. The most basic significant events are these:

  • The US government owes far more money than it has. It can no longer even pay the interest. This dilemma cannot be fixed, but the crisis can be delayed a few years with trillions of dollars in bailouts that will, ultimately, significantly worsen the problem. They are now three years into the band-aid solution and the band-aid is starting to peel off.
  • The Fed has announced that they intend to print money in unprecedented amounts. Ben Bernanke has famously stated, “I don’t care if we have to dump it from helicopters.”
  • The American people (in total) owe more than they are worth. The population as a whole is bankrupt; the house of cards just hasn’t fallen yet. The party is over and the money doesn’t exist to pay the bill.
  • Europe is in a similar situation.
  • A basic economic truth is: The more fiat currency is created, the greater the inflation.
  • Throughout history, whenever dramatic inflation has occurred, people have taken refuge in the few currencies that have intrinsic value – primarily, precious metals.

We are therefore on the cusp of a MAJOR increase in the value of precious metals. Up until now, the rise in precious metal values has been created by those with a vision as to where we are headed and have been buying-in steadily (particularly China, Russia, India, etc., but also private buyers.) Soon that vision will be shared by everyone including Joe the Plumber. Right now, the naysayers are still very much in the majority, but we are already beginning to see people on TV offering to buy or sell gold.

We believe that the next crash, whenever it occurs, will be the wake-up call.

Still, even those who wait until gold is ramping up dramatically will worry if a peak has already been reached and, accordingly, stay out of the market. So how will people know when the peak has arrived? We look back to the Great Depression. By 1929, even shoeshine boys were in the stock market. When that happens, you know that the game is peaking and is ready for a fall. When every cab driver and every newspaper boy are stuffing away gold coins in their mattresses and the whole world has gold fever, it’s time to quietly get out.

Another basic principle of economics is that primary bull markets never end with a whimper, they end with an upside explosion. There is no way to predict exactly when the peak will be reached, but we can watch the dominoes fall and know when the time comes. In the meantime, anyone with even $1600 to spare can still buy an ounce of gold with it.

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