 Gold
and the Parabolic Plateau
Alex
Wallenwein
September 27, 2004
What on earth is a "parabolic plateau?" Isn't that
a contradiction in terms?
In
the investment world, when an asset price trend experiences a
parabolic curve, it exhibits a geometrically increasing slope
that goes so high so fast that it eventually collapses in on
itself and literally "crashes." Like the moods of a
manic-depressive person, a parabolic rise-and-crash is synonymous
with "excitement." A plateau, on the other hand, is
the exact opposite. In investor lingo, it is the epitome of "flatness."
In other words - boring.
How
can these two go hand in hand, or even coexist in the same time
frame? That's the subject of this part of September's issue of
the Monitor.
The
following thoughts are an extension of Adam Hamilton's recently
published seminal gold editorial entitled Gold Bull's Three Stages. Please read that
essay first, if you haven't already. Most of these thoughts are
built directly on it.
Hamilton
analyzes the current outlook for gold according to rock-bottom
fundamentals and extrapolates from there to come to a conclusion
that leaves such adjectives as "reasonable" or "highly
probable" far behind. In my eyes, his essay portends near
absolute inevitability.
But
the purpose of this Monitor issue is not to prove that inevitability
all over again by more facts and arguments. Instead, I want to
invite you to join me on a short journey of what some might call
a pure flight of fancy - and they may be right. In one sense
it surely is speculation. Yet, in another more fundamental sense,
what we are about to engage in is the application of experience,
logic, and known economic processes to a set of circumstances
dictated by nothing short of reality itself.
Just
for orientation's sake, and not to belabor the points Hamilton
makes, here are his main contentions:
1.
Secular gold market trends are those that last three years or
longer.
2.
Secular trends can be slowed or exacerbated by manipulators (i.e.,
central banks, et al) both on the upside and downside - but they
cannot be effectively opposed.
3.
Unlike other economic goods, investment assets do not experience
slowing demand with rising prices (as other commodities do),
but demand actually accelerates as prices rise, persuading other
investors to "get in" on the bandwagon.
4.
In "Stage I," secular gold bulls attract only the contrarians,
and are characterized by prices rising primarily in the currency
in which gold is denominated (today, the dollar). The curve slowly
rises.
5.
In "Stage 2," other investors begin to take note and
want in on the game, causing gold prices to rise in all currencies.
The curve steepens.
6.
In "Stage 3," the mania stage, investors throw all
caution to the wind as gold's skyrocketing prices make headline
news 24/7, driving prices ever higher way past the "equilibrium
stage." The curve goes nearly vertical for a short period
of time.
7.
All manias eventually come crashing down, and so will gold's.
Hamilton's
analysis is cogent and convincing, but when it comes to his final
statement that the mania will come crashing back down is only
true if you assume there is a currency system left to go back
to once gold reaches the heights he forecasts.
The
analysis totally changes if you assume that, by the time gold
reaches such heights, the fiat systems that were so carefully
crafted over the past few decades will have outlived their arguable
usefulness - and will have succumbed to their genetic flaw: a
condition that can only be called "worthlessitis."
Is
this possible? Yes. Is it likely, then? Or is it just a naive
phantasy? Let's take a look:
Hamilton
predicts a time that should arrive within the next year or so
in which other countries' investors are beginning to jump aboard
the steam-gathering gold train. At that time gold will bust out
of its dollar-shackles. It will no longer be a slave to the dollar's
forex exchange movements but will rise even faster than the dollar
is falling.
The
problems for the dollar do not end here. If Hamilton's secular
gold-bull scenario plays itself out to its conclusion, gold will
go parabolic. That's already bad enough for the dollar, whose
forex value will enter an inverse parabolic curve - downward.
What's
really scary is that under this analysis, even though in "Stage
II" the rise of gold will accelerate faster than the dollar's
fall, this does not mean the dollar can from then on simply coast
and ride out the storm.
At
first, the gold price will rise faster than the dollar falls
because it won't be only American investor's in whose currency
the price of gold will be attractive. This means the dollar will
no longer bear the brunt of the new gold rush all by itself.
The effects will be spread over all of the major currencies.
But
as this phenomenon spreads, central banks will be forced to recognize
the inherent weakness in their currency systems. Witnessing the
dollar's downfall they will, at first very slowly and reluctantly,
and then with increasing ferocity, attempt to stock up on gold
again to bolster confidence in their falling currencies in the
eyes of their respective countries' citizens and foreign investors
in their currencies. This is not to say they will return to a
gold standard, but in an environment where even regular people
within their own currency systems are loading up on gold, being
able to point to increasing gold reserves will undoubtedly have
the desired, nerve-calming effect on their subjects.**
Globally
rising gold prices means globally falling fiat values - at least
relative to gold. As against each other, in the forex markets,
this "price effect" will not be terribly noticeable
- except when it comes to the dollar. So, there are two possible
scenarios:
1.
The worldwide fiat currency system stays afloat as it only sinks
as a whole relative to the price of gold. People who are conditioned
to look at fiat as the measure of value only see an "investment
opportunity" in gold. The notion that the entire fiat system
may be in structural default does not enter their minds. So they
merely "invest" in gold for future paper-profits, and
the system survives; or ...
2.
The nearly inconceivable run-up in gold prices presages a huge
run-up in real asset prices that brings the entire fiat system
to its long overdue demise. In this scenario, although foreign
currencies more or less simultaneously sink relative to gold,
they also drop relative to all other goods and services within
their own spheres of use. Hyperinflation results, and people
start to demand gold and silver in payment for goods. The difference
this time: the hyperinflation is not limited to one country's
currency (as in the oft-cited post WWI Germany example) but spreads
among all systems simultaneously, spawning a wholesale exodus
from fiat into precious metals.
Hyperinflation
of the kind experienced by post-WWI Germany only threatens the
very fabric of the economic system when prices far outpace rises
in incomes. If the process is slower and increases in income
are able to more or less keep up with the general price rises,
then we have a scenario similar to what happened in the US since
1975. (See,
where the US CPI chart since 1975 reveals "only" a
300% increase in thirty years accompanied by largely commensurate
income improvements.)
Unfortunately,
there is a little hick-up in that calculation. Income increases
can only keep the pace with price rises if what increases is
people's actually disposable income, as that is the only kind
of income that really counts.
Currently,
the debt explosion that made the 2003-2004 economic and stock
market "recovery" possible is set to choke off any
possibility of disposable income climbing in a lockstep fashion
with general price inflation. All of that illusory wealth supposedly
created since early 2003 is totally dependent on low interest
rates. Without these emergency-level interest rates, servicing
this additional boatload of debt is no longer possible for ordinary
consumers.
A
case in point: Friday saw a huge rise in 2-year treasuries yields
in response to lower than expected durable goods orders for August
and report on leading economic indicators (third monthly decline
in a row for the first time since early 2003) that throws serious
doubts on Greenspan's attempts to call the recent economic flat-lining
a "temporary soft-patch." Short to mid-term rates are
the ones that affect consumers monthly credit card statements
the most - and consumers are maxed-out.
We
have now entered an era of continuous rate increases that has
no chance of turning back anytime soon. Greenspan must raise,
or the dollar will fail. A growing economy is the best excuse
for raising rates without scaring people out of their wits, so
a growing economy is exactly what we live in right now - at least
according to the Fed's spin machine.
They
are really not to be envied, those folks at the Fed. They must
soft-pedal any news on inflation to keep consumers from pulling
in their horns, while making sure that everyone believes that
inflation is sufficiently large to warrant a new cycle of rate
increases.
Currency
traders will interpret any failure to raise rates in the next
year or so as a sign of weakness for the dollar, which will hasten
the dollar's inevitable decent into Hades. At the same time an
actual rate decrease in this climate will be the equivalent of
exchange-rate suicide for the dollar. So, rates must go up fast
enough to keep the dollar from imploding, while they cannot go
up too fast - or risk a pullback in consumer spending, which
will bring the entire house of cards down in a flash.
Since
rates will have to rise from now on - however slowly - disposable
income will shrink.as a result of increasing debt repayments.
Ergo: any price inflation caused by across-the-board drops in
currency values relative to gold in the coming gold super-bull
is bound to outpace disposable income inflation. Hyperinflation
will most surely follow.
But
things are not that simple. It gets even more complicated. This
kind of inflation will be accompanied by a simultaneous deflation
in other parts of the economy, especially those areas where it
hurts the average consumer the most:
In
housing prices!
The
real asset price-bubble that was powered by the public and private
spending spree we saw during the late nineties and early 2000s
is simply not sustainable. Rising debt service costs shrink disposable
incomes and therefore the ability to keep up with mortgage payments.
A mere slowing in the fast-paced rise of the residential real
estate market will bring price declines with it as the longer
waiting times to sell a house forces owners to become more flexible
with their asking prices. When the market actually goes into
decline, even those new home owners who were smart enough to
have locked in their rates will suffer as their total wealth
position declines.
But
it doesn't stop there, either. Another bubble that especially
gold investors are familiar with has developed during the same
time frame, and it has taken a herculean effort on the part of
both Fed and government to keep this one from blowing since 1999.
Stock valuations!
The
same analysis applies to equities prices - with one additional
twist: Homes aren't put on the market as quickly as stocks are
sold when the fear sets in. Homes have a very high utility value
to their owners. They need to live in them, and so they will
do anything they can to hold on to them.
But
stocks are very different.
Selling
a stock takes but a mouse click in this age of online discount
brokerages and electronic day trading. On top of that, stocks
are often bought on margin, especially by profit-hungry short-term
traders. That will speed the decline.
Given
the parabolic nature of the stock market in the run-up to January
2000, the ensuing drop and subsequent rebound to a lower high
from, which the market has since fallen again and to which it
has tried vainly to ascend once more, we are now locked into
a double-trouble sandwich-type situation.
On
the one hand, we have rising interest rates with their negative
effects in a still very fragile economy. On the other hand, we
have home and equities prices that are set to fall precipitously.
Stuck right in the middle of that is the US consumer - like a
piece of baloney wedged between two looming catastrophes. As
condiments, add an overwhelming debt load (for mayo) and a falling
dollar with rising oil prices (for mustard), and you have the
recipe for a nuclear-powered submarine sandwich.
If
that consumer-baloney was made of carbon atoms, the coming high-pressure
environment might turn it into diamonds someday but, alas, nobody
has ever heard of baloney-diamonds! Have you?
The
important thing to understand is that this deflationary trend,
unfortunately, will not act to counterbalance the inflationary
trends existing elsewhere in the economy. Maybe on some arcane
and utterly cooked government books it will. Maybe the mainstream
press will still inundate us with so-called news of oh-so-benign
inflation figures - but as far as real people living in a real
economy are concerned, the effects will be devastating.
Any
actual human being will experience both a loss of purchasing
power of his already curtailed income and a loss of asset values
of those things (like real estate, stocks, and other paper investments)
on which he or she has hoped to build a retirement fortune. The
resulting picture is anything but pretty - and the powers that
be have already shot their ammo before the final onslaught has
even started. Don't think for a second that "Sir Alan"
or "the government" will bail you out unless you are
willing to trade even the last vestiges of your freedom in for
a completely and centrally controlled market of the old Soviet
kind - complete with "chip-in-your-hand" tracking of
all economic decisions you make.
The
fallout from the impact of these simultaneous financial economic
asteroids on our investment planet will bring about an economic
ice age in which nobody will be really "comfortable."
In such an environment, the difference between owning only paper
assets and owning primarily gold is not the difference between
living on the edge and living in style. In that environment,
the difference will lie between going over the edge - and living,
period!
If
this cataclysmic event should come to pass, the concept of the
price of gold "peaking" and then returning to an "equilibrium"
of sorts essentially becomes a non-issue, because the medium
(fiat) in which gold s priced itself will have become a non-entity
for all practical purposes.
When
the commodity you are trying to "price" becomes the
money in which everything else is priced, who cares whether the
price of gold in terms of fiat currencies is "high"
or "not high"? Then, the only thing that matters is
how much of any other product or service a known quantity of
gold will buy
If
and when that situation arises, looked at from a fiat-economy
perspective, gold bullion will never again "come down"
in value, because fiat will never again recover from its inherent
fatal disease. Universal fiat use will be a thing of the past.
Fiat
is genetically defective, and that defect - once exposed so that
even spoiled western fiat-junkie consumers can see it every day
at the supermarket checkout - will never be cured. And we are
currently on a path of no return that will lead to the defect's
ultimate exposure. Not only that, but we have traveled that path
almost to its destination, now. The time is not far.
Got gold?
Sep 26, 2004
Alex Wallenwein
Editor, Publisher
subscribe to The
EURO VS DOLLAR CURRENCY WAR MONITOR
Email: awallenwein@houston.rr.com
Alex Wallenwein writes the Euro vs
Dollar Currency War Monitor. He is helping thousands avoid the
pitfalls of dollar-asset investing in a falling-dollar world,
exposing how 'euro vs dollar' secretly shapes world finance,
economics, politics - and your pocketbook. To sign up for the
Monitor, please click here.
321gold Inc
Miami USA
|
