facebook
CAD
USD
back to top
News

Gold Paradox Recalls Bruce Lee’s Fighting (and Investing) Advice - Peter Diekmeyer (16/2/2017)

Gold Paradox Recalls Bruce Lee’s Fighting (and Investing) Advice - Peter Diekmeyer

February 16, 2017

World Gold Council data released earlier this month reveal a paradox. Demand hit 4,389 tons during 2016, but mines produced only 3,236 tons. Yet despite differing supply demand fundamentals, gold prices rose by only 9%. A supply squeeze that size, should have produced far bigger price action.

What gives?

As with many of life’s mysteries, a good place to start is with Chinese thinkers. No, not Confucius, Lao Tse, or even Sun Tzu. I am talking about Bruce Lee.

In a competitive investing world, in which price discovery, financial reporting and economic data are systematically distorted, the best parallels are with competitive boxing, which is governed by the Marquis of Queensbury rules, and a street brawl.

“When you talk about fighting with no rules,” said the late martial artist, in the lost Bruce Lee interview, “you had better learn to use every part of your body. Your feet. Your elbows. Thumbs. Everything.”

That sage advice increasingly applies to an investing world, in which supply-demand fundamentals, as measured by official statistics, don’t tell you much.

To avoid being fleeced, gold investors - indeed all investors - need to know a bit about everything. Some examples:

Economics and central bank manipulation

Most seasoned investors have caught on that the US Federal Reserve has been intentionally manipulating housing, bond, equities and other asset prices higher. Ben Bernanke, a former Fed chair, and Richard Fisher, former president of the Dallas Fed, have admitted as much.

Less well-known, as Bill Gross recently pointed out, is that while Fed manipulations have tapered off, European and Japanese central banks continue to buy $150 billion a month in assets.

This has swelled global balance sheets to $12 trillion and distorted prices throughout the system. Ten-year bond rates would be nearly 3.5% (instead of 2.45%) Gross suggests, without the manipulations.

If interest rates were 43% (1.05 percentage points) higher, this would bring down the implied value of stocks (by more than 30%, according to this writer’s back of the envelope calculation).

The question gold investors need to ask themselves is how long the central bank manipulations can continue. And which asset classes would best hold their value if current unconventional monetary policy proves to be a bust?

History: no fiat (printed) currency has ever survived

Good investors also need to know a bit about history, which today is taught by professors who grew up in the 1960s. Today’s crop of politically-correct academics teach that the most interesting thing about the Roman Empire, are its public baths, mosaics and approaches to women’s rights. Greece, for its part, is taught for its poetry, philosophy and rhetoric.

Hints regarding how these empires ruled much of the earth, for nearly 2,000 years, might be in a footnote somewhere.

Few ivy league professors today will explain what happened in both empires, and in 1780s France and 1920s Germany, when governments engaged in precipitous currency debasement, that recalls what we are starting to see in Western countries.

Before investing in gold, investors need to assess whether the yellow metal, which has acted as money for at least 3,000 years (many claim longer), has better staying power than paper and digital currency.

More important, how long will it take for the disparity to show?

Math: the US dollar has lost 98% of its value since 1933

Asking investors to learn math, which is so badly taught in Western schools, that the public is essentially innumerate, may be asking a bit much. But one example demonstrates its importance.

In 1933, just prior to the US government’s confiscation of Americans’ gold holdings, an ounce was worth US $20. Today (Feb 15th EOD) an ounce of gold is worth $1,234. That means a dollar buys less than 1/50th as much gold as it did back then (1.6%), and has lost more than 98% of its value.

Worse, almost all that decline occurred since 1971, when the United States, led by President Richard Nixon, defaulted on its international obligations to back the dollar with gold.

Before investing in gold, investors will need to assess whether US dollar debasement will continue, (in truth this is generally accepted) and calculate what pace that will occur.

******

Complexities surrounding outstanding derivatives contracts, ETFs, and other “paper gold,” complicate things even further. Many investors who have been following markets all their lives remain baffled.

That said, one question seems more straightforward. Does one trust all of one’s assets to a paper and digital-based system, run by politicians, central bankers and ivy-league economists?

Or does one hedge one’s portfolio with real economic assets, of the kind that Lao Tse, Confucius, Sun Tzu and Bruce Lee would understand?

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

Learn More
about-sprott-skyline

About the Author

Peter Diekmeyer has been a business writer/editor with publications such as Sprott Money News, the National Post and Canadian Defence Review and Jane's Defence for nearly three decades. He has studied in MBA, CA and Law programs but dropped out of all three after failing to convince the academics that they were wrong about everything.  Diekmeyer has interviewed more than 200 CEOs and filed reports from dozens of countries. 

His most terrifying moment came when he spoke to central bank economists for the first time and realized that (unlike politicians) they actually believed their own analysis and forecasts. 
He has been a regular contributor to the Sprott Money blog since 2015.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

no_comments

Looks like there are no comments yet.