I love Economics! It’s like a puzzle where I get to put the pieces together and then get to see the big picture. It makes me understand the principles of Free Market Capitalism, the causes of economic depressions and how they could be avoided (if only governments and central bankers stopped thinking they can control everything.) It also helps me understand how fiat currency destroys wealth and brings on poverty, and the peculiarity of the fractional reserve banking system that enables central banks to create money out of thin air.
One of my favorite professors of Economics is Krassimir Petrov. His lectures are fun and he uses logic and common sense approaches. That’s quite unique for a professor of economics, but that’s why I like him. Throughout my journey of discovering the basics of macroeconomics I also learned to be a better investor. Knowing and recognizing the symptoms of the Boom/Bust economic cycles helps me put together a better investment strategy. I now know that there is a direct correlation between the economy and our investments. A successful investor is a good planner; and a good planner is an educated forecaster. I also prefer to be fully educated on ways to invest before allowing an “expert” to handle my money. Sadly I have been exposed to financial advisers that had little to no knowledge in the field of macroeconomics.
Speaking of economic bubbles I have heard all too often many saying “gold is in a bubble and is due to burst”; that “its price is inflated and is not going to last. Therefore I shouldn’t invest in gold.” Of course, if one is to look back in time at the 1970’s gold charts they’d be quick to conclude that we are now experiencing similar times. Indeed in 1971 when Nixon took the dollar off the gold standard the value of gold rose against the dollar that was plunging. Gold had a bullish decade followed by two bearish decades, when the dollar gained strength, lots of strength. The prosperity America gained during the last two decades during the past century enticed the world’s central banks to acquire dollars in reserves. Thus the whole world wanted our dollars causing its demand to rise against gold. Yet few economists at that time paid attention to Murray Rothbards’ theory of how bubbles come to life. A bubble, simply put, is a camouflaged inflation of assets. As explained in my previous article Economic Bubbles 101 it is the expansion of credit and money supply that is at the root of the bubble formation. This event is not a normal cause of a free market’s law of supply and demand but a result of a fractional reserve banking system that allows the Central Bank to lend more than they hold in reserves by creating an artificial supply of new credit and money. In conclusion the prosperity America enjoyed was an artificial one that burdened our country with excessive debt.
After the NASDAQ bubble burst – during the very early 2000’s – a few classic economists and investors that followed their advise recognized that gold was starting another phase of appreciation against the dollar. It has now been a decade since gold has been rising against the dollar and many think it’s coming to an end. But wait a minute! Before running to the conclusion that the decade of run on gold is over and it’s time for the dollar to regain its supreme position maybe we should evaluate the big picture ahead of us.
What I ask myself is why are the world’s Central Banks, including our own Federal Reserve Bank, rushing to buy gold? Why is China not selling the gold they mine? Why are most governments secretive of their gold reserves and quietly acquiring more of it? Could it be that the world knows the dollar is on its last breath but no official is willing to go out of its way to say it? Simply put the dollar has been killed by the excessive debt of a government and a people living beyond their means for way too long. And because the world reserve currency is already in its metastatic phase most countries are now realizing there’s an end altogether to the fiat currency. Running to real money such as gold is what makes sense to them.
Back in April of this year the University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion. The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board who said “Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services? I look at gold as just another currency that they can’t print any more of.”
In Utah Governor Herbert signed into law the Utah Legal Tender Act, a bill that essentially restores the hard money options enjoyed by past generations. The bill recognizes gold and silver coins as legal tender – not just their face value, but also their value in gold and silver. The new Utah law derives its legal authority from Article I, Section 10, of the U.S. Constitution, which provides that no state shall “make anything but gold and silver coin a tender in payment of debts.”
I haven’t watched any of these events make the big headlines news on ABC, CBS, or any other media channel. They may not be important to them but I know they are very important to me and plenty of other investors. Whether you consider yourself an investor or not it should be of importance to you, as well, because I am convinced that you’d want to maintain your current standard of living. I, for one, prefer not to be distracted by news they consider worthy. What’s important for me to know – and it should be for you, too – is that the value of gold is being suppressed by the major players on Wall Street yet the main stream media considers it unfashionable to elaborate on.
So, is gold in a bubble that is soon to burst? I seriously doubt it! There is no logical explanation to prove it. Those adamant are either of the group that can’t see the forest from the trees or the group that has a lot of faith that somehow miraculously the fiat dollar will revive. I choose to follow my knowledge of the fundamentals. In the past the very few who were vested in gold during economic crises were the very few who were not negatively affected. Not to forget that during the last seventy years gold and oil moved in tandem. That tells me both gold and oil maintained their value relative to each other and it is the dollar that lost value against both. After all the price of oil and gold has really not gone up but the value of the dollar has continuously been eroded causing us to lose purchasing power. Ultimately $200, $300, or $500 for a barrel of oil should not sound as scary when assets are held in gold. That’s why for me gold is an unambiguous winner!