Friday, June 5, 2009

Gold Going Mainstream

Here is a good example of Gold “crossing over” and becoming a mainstream investment, taken from a recent article on

Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time [in] the company’s 152-year history to hedge against further asset declines.

“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview...

Gold is a safety net where the government cannot provide one. Gold is money and is the strongest currency now in existence. The U.S. Dollar, Euro or Yuan are no match for a currency that cannot be created out of thin air. Gold is not an industrial commodity and does not require significant economic activity to maintain its value.

When things get bad in an economy, politicians create paper promises to pander to the proletariat. If it works, inflation results and savers are punished. If it doesn’t work, confidence evaporates. We are conditioned to accept that inflation will always occur, but it can be a question of timing and larger cycles come into play.

In the current cycle, I believe attempts to re-inflate the system will fail for a longer time than currently seems possible. A secular credit contraction is the culmination of a long-term speculative bull market and government stimulus in the past has certainly ramped up the character of the accompanying bull movements in stocks and commodities. Eventually this will be true again, but a turn for the worst in the credit markets has been reached that cannot be undone quickly merely by printing up a bunch of paper tickets and stamping “government guaranteed” on every financial market and transaction in trouble.

For those who think a determined government and central banks can always create inflation and stabilize markets, I would point you to a time in history not so long ago: The Panic of 2008. The government and central bank tried to prevent it, failed, and are now taking credit for the expected technical bounce out of the crash. The gall, the arrogance, the ignorance! Why do people trust incompetent apparatchiks to “stabilize” markets when they have never prevented a bear market or financial panic from expressing itself in the past? All government can do is re-distribute wealth, not create it or prevent it from being destroyed. In fact, governments are the greatest destroyers of wealth in history.

History teaches that at this point, policy failure is more likely than a “reflationary” success, which will result in the current heavily deflationary forces taking over until they run their course and the excess debt is squeezed from the system via painful defaults and private retrenchment and increased savings. Only then can a new cycle of inflation begin. In other words, we have entered the dark stages of a Kondratieff Winter. In such periods, Gold does well as a deflationary hedge because it is true and independent money and the government/”system” cannot be relied upon to fulfill its promises or to safeguard its currency.

Such systemic failure is historically most apparent when widespread bank failures occur, as was seen in the 1930s and as is starting to happen now. It is naïve to think our government “wouldn’t let it happen again” or even has the power to prevent it just because they created another incompetent bureaucracy known as the FDIC. If 10% of the U.S. population went to their bank tomorrow and demanded their money in physical form, the entire banking system of this country would fail immediately. The physical money doesn’t exist in the banks to fulfill this demand!

Anyone with a firm grasp of the fundamentals knows that the banking system has already failed and is now held together by tape, wire, taxpayer money, fraud and government promises. The taxpayer money is long gone and the government promises are reaching a tipping point in the global marketplace, as bonds now need to be monetized by the federal reserve because there is not enough demand to match the supply.

As the next leg down in the stock market begins, people will be looking for anything that can retain value and many will turn to Gold, as Northwestern Mutual Life Co. has done. The turning point is being reached and Gold is about to go from stealth bull market to widespread public and institutional participation. As stocks, corporate bonds, commodities and real estate continue their tail spin downwards into the abyss, people will simply want to get liquid and be in cash equivalents.

However, not all cash equivalents are equal and government actions over the past few years make their respective fiat currencies and bonds increasingly suspect, as governments are willing to go to any length in an attempt to debase the currencies they represent (you can call it stimulus if you want to). Many will be successful, although ironically, it the U.S. that should be the least successful. Regardless, a larger percentage of retail and institutional investors will now be turning to Gold as a cash equivalent. “As good as Gold” was a saying in the past, but now is the time to simply say “Get some Gold!”

Since physical Gold represents a small market relative to stocks or bonds, only a small international shift in money flows into Gold are needed to cause a significant price rise. And please avoid sham ETFs like GLD as a core holding and do not be misled to think that such vehicles are a reliable proxy for physical Gold. JP Morgan, Goldman Sachs, Morgan Stanley and other banksta investment houses are some of the custodians for the GLD ETF and the sketchy promises of these insolvent firms are no match for the integrity and worth of real physical Gold.

Though I don’t see Gold as an opportunity to get rich in this environment (that’s what Gold stocks are for…), I do see it as valuable portfolio insurance that will retain its value and rise significantly relative to traditional asset classes. Where else are you going to put your money?

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