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.The previous reflationprogram, the one that followed the real estate crash in theearly 1990s that put the U.S.banking system on hold forabout six months, was the monetary fuel that led to thestock market bubble that started around 1995.The questionto me in 1999 was, where was the liquidity going to go thistime? My deduction was that commodities in general andspecifically gold was a likely candidate.The gold price increased more than 100 percent sincemy one and only prediction in September 2001.Comparingthe 1974 to 1984 period with the 2001 to 2006 periodshows marked similarities.As Mark Twain once said, History does not repeat, but it does echo. In the 1974 to 1984 graph shown in Figure 6.2, weuse the Federal Reserve as our source for inflation data forthat period but use Gillespie Research data for the 2001 to2006 period shown in the chart below (see Figure 6.3).188 c06.qxp 8/8/06 1:40 PM Page 189Gold for People Who Hate GoldFigure 6.3 Average Annual Dow and Gold Values and InflationRate 2000 2006The data collected for the CPI inflation index and the methods of analysisused to arrive at the numbers reported by the Bureau of Labor Statistics(BLS) have changed several times since 1980.If the same methods ofcalculation are used today as were used in 1980, CPI inflation averaged7% in 2005 versus 3.5% as reported by the BLS.Inflation growing from 4%to 7% between 2002 and 2005 helps explain why the price of goldincreased from $270 to $580 during the period.The government s methods of inflation indexing, col-lection, and analysis have been modified so much since theNixon administration, most notably under the Clintonand Bush II administrations, that it s necessary to useGillespie s ShadowStats.com data to get an accurate pic-ture of what s going on.Use the Fed s current data andrecent commodities price increases do not fit any rationalpricing model.However, plug in Gillespie Research snumbers, and the price increases in commodities, includ-ing gold, begins to make sense.While the commoditiesmarkets have not been fooled by the dubious governmentstatistics, bond yields are lower than expected given thereal rate of inflation.There are two possible explanations.189 c06.qxp 8/8/06 1:40 PM Page 190Profit When It Pops with Alternative InvestmentsOne is that ongoing vendor financing of U.S.consump-tion by Asia through the purchases of U.S.treasury andagency debt are artificially lowering bond yields.The alter-native conclusion is that, on a risk-adjusted basis, a 10-yearU.S.treasury bond is still considered a good deal at 4.5percent even with inflation running at 7 percent.U.S.citizens were not permitted to own gold bullionfor 42 years, from 1933 until January 1975.After that, thelast gold bull market began.It got off to a slow start.Privateand institutional investors had not had any experienceinvesting in gold for 42 years.Plus, right after the gold mar-ket reopened in the United States in 1975, inflation fell dra-matically, from 10 percent to 2.5 percent and with it theprice of gold.Even the following year when inflation shotback up to 12.5 percent, the price of gold increased onlymodestly, as market participants were slow to catch on towhat was happening.But gold continued to climb modestlyeven as inflation fell again between 1977 and 1978 as thefirst wave of buyers the early adopters started to showup.Then, a couple of years into the bull market, the secondwave of buyers entered the market and gold took off in itssecond stage of growth in 1979, even though inflation wasrelatively tame that year compared to recent spikes.Thatprice rise anticipated the spike in inflation that occurred in1980 when both inflation and gold peaked in its final bub-ble wave in 1980.Back then you couldn t find an invest-ment book that didn t tell you to buy gold and other hardassets and stay away from stocks.That was the exact oppo-site of what investors should have been doing because incame Paul Volcker to take over the Fed from Nixon s palBurns.Volcker put the hammer down, cranking interestrates up in 2 percent rate hikes.None of this baby-step stuff190 c06.qxp 8/8/06 1:40 PM Page 191Gold for People Who Hate Goldthat the Fed s doing today.Inflation collapsed from 18 per-cent in 1980 to 2.5 percent in 1983.The U.S.economy fellinto a deep recession for most of that period.What does this mean for us today? After a 20 year bearmarket that started in 1980 and ended in 2001, investorshave been as slow to catch on to the new bull market ingold, as well as other commodities including silver and plat-inum, as they were after the previous bear market in gold,or rather nonmarket in gold, as U.S.citizens were notallowed to own it.The DJIA has for the past several yearsbeen rising, much as it did between 1978 and 1981 wheninflation and gold were also rising, but in inflation-adjustedterms in both periods the DJIA declined.The painful periodof adjustment that the Volcker Fed created set the UnitedStates up for a long and massive expansion that, during itshealthy prebubble phase from 1982 to 1995, saw the DJIAgrow in inflation-adjusted terms by nearly 400 percent.The crucial question is whether the rising price of com-modities is again predicting a future rise in inflation.I believethat it is.We will see this inflation spike at some point andthe price of gold with it.The second wave of gold investorsis getting on board as we enter the next phase of the bullmarket, not only gold but silver and platinum as well.At some point commodities will also reach a bubblephase.The bookstore shelves will again be stuffed withbooks that tell you to buy hard assets, and everyone fromyou mail carrier to your neighbor will be lecturing youabout gold.Then it will be time to get out.Most likely with a change of political administration,the source of inflation that is driving gold up will beaddressed by the Fed in a manner similar to Volcker s.Thistime the job will be to put an end to the cycle of asset191 c06.qxp 8/8/06 1:40 PM Page 192Profit When It Pops with Alternative Investmentsbubbles that have been driving the economy since around1995 [ Pobierz całość w formacie PDF ]
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.The previous reflationprogram, the one that followed the real estate crash in theearly 1990s that put the U.S.banking system on hold forabout six months, was the monetary fuel that led to thestock market bubble that started around 1995.The questionto me in 1999 was, where was the liquidity going to go thistime? My deduction was that commodities in general andspecifically gold was a likely candidate.The gold price increased more than 100 percent sincemy one and only prediction in September 2001.Comparingthe 1974 to 1984 period with the 2001 to 2006 periodshows marked similarities.As Mark Twain once said, History does not repeat, but it does echo. In the 1974 to 1984 graph shown in Figure 6.2, weuse the Federal Reserve as our source for inflation data forthat period but use Gillespie Research data for the 2001 to2006 period shown in the chart below (see Figure 6.3).188 c06.qxp 8/8/06 1:40 PM Page 189Gold for People Who Hate GoldFigure 6.3 Average Annual Dow and Gold Values and InflationRate 2000 2006The data collected for the CPI inflation index and the methods of analysisused to arrive at the numbers reported by the Bureau of Labor Statistics(BLS) have changed several times since 1980.If the same methods ofcalculation are used today as were used in 1980, CPI inflation averaged7% in 2005 versus 3.5% as reported by the BLS.Inflation growing from 4%to 7% between 2002 and 2005 helps explain why the price of goldincreased from $270 to $580 during the period.The government s methods of inflation indexing, col-lection, and analysis have been modified so much since theNixon administration, most notably under the Clintonand Bush II administrations, that it s necessary to useGillespie s ShadowStats.com data to get an accurate pic-ture of what s going on.Use the Fed s current data andrecent commodities price increases do not fit any rationalpricing model.However, plug in Gillespie Research snumbers, and the price increases in commodities, includ-ing gold, begins to make sense.While the commoditiesmarkets have not been fooled by the dubious governmentstatistics, bond yields are lower than expected given thereal rate of inflation.There are two possible explanations.189 c06.qxp 8/8/06 1:40 PM Page 190Profit When It Pops with Alternative InvestmentsOne is that ongoing vendor financing of U.S.consump-tion by Asia through the purchases of U.S.treasury andagency debt are artificially lowering bond yields.The alter-native conclusion is that, on a risk-adjusted basis, a 10-yearU.S.treasury bond is still considered a good deal at 4.5percent even with inflation running at 7 percent.U.S.citizens were not permitted to own gold bullionfor 42 years, from 1933 until January 1975.After that, thelast gold bull market began.It got off to a slow start.Privateand institutional investors had not had any experienceinvesting in gold for 42 years.Plus, right after the gold mar-ket reopened in the United States in 1975, inflation fell dra-matically, from 10 percent to 2.5 percent and with it theprice of gold.Even the following year when inflation shotback up to 12.5 percent, the price of gold increased onlymodestly, as market participants were slow to catch on towhat was happening.But gold continued to climb modestlyeven as inflation fell again between 1977 and 1978 as thefirst wave of buyers the early adopters started to showup.Then, a couple of years into the bull market, the secondwave of buyers entered the market and gold took off in itssecond stage of growth in 1979, even though inflation wasrelatively tame that year compared to recent spikes.Thatprice rise anticipated the spike in inflation that occurred in1980 when both inflation and gold peaked in its final bub-ble wave in 1980.Back then you couldn t find an invest-ment book that didn t tell you to buy gold and other hardassets and stay away from stocks.That was the exact oppo-site of what investors should have been doing because incame Paul Volcker to take over the Fed from Nixon s palBurns.Volcker put the hammer down, cranking interestrates up in 2 percent rate hikes.None of this baby-step stuff190 c06.qxp 8/8/06 1:40 PM Page 191Gold for People Who Hate Goldthat the Fed s doing today.Inflation collapsed from 18 per-cent in 1980 to 2.5 percent in 1983.The U.S.economy fellinto a deep recession for most of that period.What does this mean for us today? After a 20 year bearmarket that started in 1980 and ended in 2001, investorshave been as slow to catch on to the new bull market ingold, as well as other commodities including silver and plat-inum, as they were after the previous bear market in gold,or rather nonmarket in gold, as U.S.citizens were notallowed to own it.The DJIA has for the past several yearsbeen rising, much as it did between 1978 and 1981 wheninflation and gold were also rising, but in inflation-adjustedterms in both periods the DJIA declined.The painful periodof adjustment that the Volcker Fed created set the UnitedStates up for a long and massive expansion that, during itshealthy prebubble phase from 1982 to 1995, saw the DJIAgrow in inflation-adjusted terms by nearly 400 percent.The crucial question is whether the rising price of com-modities is again predicting a future rise in inflation.I believethat it is.We will see this inflation spike at some point andthe price of gold with it.The second wave of gold investorsis getting on board as we enter the next phase of the bullmarket, not only gold but silver and platinum as well.At some point commodities will also reach a bubblephase.The bookstore shelves will again be stuffed withbooks that tell you to buy hard assets, and everyone fromyou mail carrier to your neighbor will be lecturing youabout gold.Then it will be time to get out.Most likely with a change of political administration,the source of inflation that is driving gold up will beaddressed by the Fed in a manner similar to Volcker s.Thistime the job will be to put an end to the cycle of asset191 c06.qxp 8/8/06 1:40 PM Page 192Profit When It Pops with Alternative Investmentsbubbles that have been driving the economy since around1995 [ Pobierz całość w formacie PDF ]