 The Fed Can't Stop Inflation
Kenneth J. Gerbino
Posted May 28, 2004
The following
is an excerpt from a recent client letter
Here are some hard-core facts
that you need to consider.
Starting in 2000, the U.S. has created $1.5 trillion new dollars
(M2), and has a cumulative trade deficit of $1.6 trillion. This
totals $3.1 trillion on the negative side of the dollar equation.
To say the least, this is bad monetary karma and will lead towards a very strong gold price.
From 1973 to 1981 the inflation
rate in the U.S. averaged 9.2% per year! The Fed raising
interest rates during this time, on balance did nothing!
Why? Because the money increases from prior years were already
in the systemthe horses were out of the barn. For most of this
time gold went up, interest rates went up and inflation went
up. Prior to this time the money supply (M2) from 1965 to 1974
increased 101%. This caused the inflation from 1973 to 1981.
The Fed could not stop it. Gold went from $100 to $850.
Here is a reality check on
the above mentioned $1.5 trillion created from the year 2000.
First, I will refer to the U.S. money supply (M2) in 1980. It
was $1.5 trillion. All the tangible wealth in the United States,
every bridge, office building, home, car, television, plane,
everything was created over 200 years with a money supply
that ended up at $1.5 trillion. 200 years of blood, sweat and
tears to create all the tangible wealth in the U.S. Our
country in a bit more than four years has created the
same amount of money! $1.5 trillion! This new money has
not created anything near the tangible wealth of the first 200
year's $1.5 trillion. This is currency depreciation on a grand
scale.
This is economic madness and
this is the madness that has made people like Warren Buffett
recently increase his foreign currency investments (out of dollars)
to over $12 billion.
Bill Gross, who manages the
largest bond portfolio in the world and is considered on the
same world class investment level as Buffett, was on CNBC just
last week and in response to Ron Insana's question of "what
to do now" stated, "Move money elsewhere to a central
bank in Euroland that is more rational."
Warren Buffett, Bill Gross,
and hopefully you understand this situation. The smart thing
to do is to protect oneself with assets of real monetary value.gold.
One of the best ways to own plenty of this time-tested asset
is with gold and silver mining companies that are sitting on
mountains of resources and reserves in the ground.
Here is something else important
to understand. The dollar is not always that good a barometer
of the gold price. From 1976 to 1980 the dollar index went from
106 to 92, down only 13%, yet gold during this time went from
$103 to $850, up over 700%.
From 1985 to 1995 the dollar
index collapsed from 140 to 80, down 43%. Gold during this time
went from $325 to $390, up only 20%. Gold should go opposite
to the dollar but the magnitude of the move has a life
all its own and regardless of all complexities and theories the
bottom line is that it is the world's heavyweight champ of money
and liquid wealth, regardless of whatever everything else is
doing. Besides, the price of gold is based on supply and demand
of gold not dollars. If the top 10 gold mines in the world closed
down for any reason, that would take 20% of the mine supply off
the market. Regardless of the dollar, you could bet gold would
go up. The gold/dollar relationship has merit, but it is not
the key determinate to the ultimate value of gold.
Gold is headed higher regardless
of the dollar, the Fed, or interest rates. The gold stocks are
also. The current sell-off in the mining shares is a buying opportunity.
The U.S. stock market is worth
about $13 trillion and the bond market about $22 trillion. That
would be about $35 trillion. Since the U.S. has about 30%
of all the liquid wealth in the world, we could assume that the
global stock and bond markets would be about $100 trillion.
The market value of every gold
mining company in the world on every stock market in the world
is $200 billion. For comparison General Electric's market value
is $300 billion. The point is that there is an awful lot of money
that could potentially flow into these gold mining shares and
most likely will. The wake up call will certainly be there when
the economic repercussions of all the past and current monetary
and economic mismanagement manifest themselves. Not only
are the chickens coming home to roost but in the next few years
the debt levels and the printing of money will most likely have
to increase even more to keep the show on the road.
Despite all this bad news,
the world will still turn, people will get up in the morning
and eat breakfast, the cereal makers will still be in business,
their employees will still shop at stores, the store owners will
still buy cars, the PGA Tour will go on, etc., etc. A depression
of productivity will not be the end result. Life will go
on. But the big change will be the value of everyone's
assets. Here is where a massive shift of value and wealth will
take place.
M2 just since 2000 is up 32%.
Since 1995, up 73%. This means plenty of inflation in the next
5-10 years, and although hard to imagine, the bond market could
lose 30-40% of its value. Raising interest rates couldn't
stop inflation from 1973 to 1981 and it won't stop it now. All
the money printed in the late 60's and early 70's was already
in the system. Today it is no different. This time it could be
much worse because of all the debt, which dwarfs the debt levels
of the 70's. Also the new economic power, China, has increased
its money supply (M1) by 84% just since 2000. All this is bullish
for gold and the mining stocks.
The monetary insurance of gold
mining stocks, coupled with the growth and value attributes of
this investment group make a compelling and logical rationale
in this day and age for investment capital. It is your life
jacket on a sinking ship.
In 2004, we just could be seeing
the last real great buying opportunity in the mining shares for
a generation. I would encourage clients to contact our office
and add funds to your gold mining stock account this quarter
and take advantage of this opportunity.
Kenneth J. Gerbino
May 2004
Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com
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321gold Inc
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