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Why It’s Not Time to Dance on Gold’s Grave

By Bill Bonner on August 3, 2015

PARIS – Today, help comes from an unexpected direction – Alan Greenspan!

After so many years of mumbly-dumbly gobbledygook and credit-pumping folderol (much of the blame for the credit crisis of 2008 can be sent to his inbox), we had forgotten about Greenspan’s earlier oeuvre.

Yes… before he became a public servant he might have passed for an honest man.

And his 1966 essay “Gold and Economic Freedom” is a classic. It helps explain how this credit bubble finally ends.

(Thanks to Pater Tenebrarum at David Stockman’s Contra Corner for reminding us.)

A City Gone Quiet

We are sitting at a sidewalk café in Paris. It is August. Families have decamped for the country. So it is quiet in this part of the city (the 16th arrondissement).

At this hour of the morning, there would normally be children going to school with satchels on their backs. The streets would be clogged with commuters. And the cafés would be crowded with all manner of people.

But the children are gone. Along with their parents. All that is left are a few fathers wondering how to get into trouble with their families gone, along with some old people, tourists, and mental defectives, dragging behind them their worldly goods in rolling caddies.

We are not sure which category we fit into.

At one table sits a pair of elderly women enjoying a morning coffee. At another are a man and a woman. Both attractive. Fortysomething. They are talking about real estate. Probably planning an affair.

At another table is a man of our age. He drinks his coffee. He might otherwise read the paper, but the news kiosk is closed for the summer. There are no papers to be had – not in this neighborhood. So he just stares out into the street, looking at nothing in particular.

Two workmen – their clothes spattered with white splotches – sit at another table. They are rough-looking sorts in T-shirts taking a morning coffee break.

Buses go by. A few cars. Passersby, none moving very ambitiously. It’s going to be a warm summer day.

The Dow was off a little bit on Friday. Shanghai stocks were off too. And oil.

But gold rose $7.40 an ounce in New York trading. So let’s return to gold.

And an avant-propos

Rich Man, Poor Man

Poverty is better than wealth in one crucial way: The poor are still under the illusion that money can make them happy.

People with money already know better. But they are reluctant to say anything for fear that the admiration they get for being wealthy would turn to contempt.

“You mean you’ve got all that moolah and you’re no happier than me?”

“That’s right, man.”

“You poor S.O.B.”

We bring this up because it is at the heart of government’s scam – the notion that it can make poor people happier.

In the simplest form, government says to the masses: Hey, we’ll take away the rich guys’ money and give it to you.

This has two major benefits (from an electoral point of view). First, and most obvious, it offers money for votes. Second, it offers something more important: status.

After you have food, shelter, clothing, and a few necessities, everything else is status, vanity, and power. Extra money helps us feel good about ourselves… and attract mates. It’s not just the money that matters. It’s your relative position in society.

From this point of view, it does as much good to take away a rich person’s money as it does to give money to a poor person. Either way, the gap closes.

Never, since the beginning of time up to 2015, has government ever added to wealth. It has no way to do so. And no intention of doing so. All it can do is to increase the power, wealth, or status of some people – at others’ expense.

The Trouble with Socialism

That is a perfectly satisfactory outcome for most people, at least in the short term.

But the more this tool is used – the more some people’s power, status, and wealth is taken away – the more the wealth of all of them declines.

The trouble with socialism, as Maggie Thatcher remarked, is that you run out of other people’s money.

You run out because there is only so much wealth available… and because the redistribution of that wealth distorts the signals and incentives needed to create new wealth.

This means that society gets poorer relative to other societies that are not stealing from one group to give to another. After a while, the difference becomes a problem.

The meddlers see that they are falling behind and change their policies to try to get back in the race. (This is more or less what happened in Britain and China in the 1970s and the Soviet Union in the 1980s.) Or the poorer society is conquered by the richer one (which has more money to spend on weapons).

There is one other wrinkle worth mentioning…

Although it is true that “leveling” may have a pleasing aspect to the masses (bringing the rich down so there is less difference between the two groups)… it is also true that leveling is just what powerful groups do not want to happen.

Even when the elite go after “the rich” with taxes, confiscations, and levies, they tend to look out for themselves in other ways.

They allow themselves special rations – special medical care… special pensions… special parking places… and various drivers, valets, and assistants.

One study found that there was more difference between the way Communist Party members and the masses lived in the Soviet Union than there was between the rich and poor in Reagan’s America.

Alan Greenspan Was Right

All of this brings us to here and now… and to gold.

Traditionally, gold is a form of money.

Money has no intrinsic value. It is the economy that gives money its value. The more an economy can produce the more each unit of money is worth. It doesn’t matter whether it is gold, paper, or seashells.

But just as the common man is deceived by money (he thinks more of it will make him happier), so are policymakers.

Their belief is a little more sophisticated. They know it is the economy, not money, that creates wealth. But they believe that adding money (and more demand) will make the economy function better… and make people wealthier.

And in today’s post-Bretton Woods monetary system, they don’t add physical money (gold, paper, or coins); they add digital credit.

This new form of money takes the scam to a new level. We have been trying to understand (and explain) how the system works and why it is doomed to failure.

But Alan Greenspan – bless his corrupted little heart – was on the case even before the credit bubble began:

Screen Shot 2015-08-03 at 2.01.32 PM

More tomorrow

Regards,

Signature

Bill

Further Reading: Greenspan’s 1966 essay on the gold standard and freedom was first published in Ayn Rand’s The Objectivist Newsletter. You can find the full essay here.

MarketInsight_header

A strong U.S. dollar means a weak gold price…

That’s the lesson from today’s chart.

It plots the current market price of gold bullion (so-called spot gold) against the U.S. Dollar Index.

This measures the exchange value of the U.S. dollar against a basket of six major trading partner currencies.

080315 DRE DXYGold

As you can see, the performance of gold and the U.S. Dollar Index are a mirror image of one another.

When the U.S. Dollar Index is weak, gold tends to be strong. And when it is strong, gold tends to be weak.

Right now, the U.S. Dollar Index is at a 12-year high. In a world of dollar strength, expect the gold price to stay muted.


Featured Reads

Second-Quarter U.S. GDP Disappoints
U.S. GDP rose 2.3% at an annualized rate in the second quarter. The median forecast of 80 economists surveyed by Bloomberg called for a 2.5% gain. But first-quarter GDP was revised upward…

America’s Mass Imprisonment Has Been a Tragic Failure
Jail is supposed to take criminals off the street and discourage would-be criminals from committing crime. But after imprisoning 2.2 million Americans, neither of these outcomes came to pass.

Greenspan on Gold and Economic Freedom
Back when Alan Greenspan made sense, he penned one of the best histories of the present-day monetary system. It’s essential reading for anyone who wants to understand today’s credit bubble.


Mailbag

On Friday, we asked whether you thought Bill was being unfair to 2016 presidential hopeful Hillary Clinton in his Diary issue about her crusade to save the planet.

It clearly hit a nerve. Below is a small sample of some of the letters we received.

But before we get to that… Have you been affected by the slump in gold prices? Is the negativity in the press making you think of selling?

Bill and the team would love to hear from you. Write us at[email protected].

Now, back to Hillary and the environment…

Absolutely she is right. Voters throughout the country have repeatedly elected people with like views.

The non-elected bureaucracy is finally cementing these beliefs into so many laws and regulations it will be impossible to reverse them. Our schools are turning out legions of like-minded activists to keep the process moving forward at an accelerating rate.

But OBAMA has not gone far enough. Hillary must continue at an increased speed.

This country has sacrificed the environment on the altar of technology and militarism to the detriment of people worldwide. Only a single-minded government can control and manage the necessary de-capitalization of this country to end the pollution it continues to cause.

Those who do not view restoring and preserving the environment as critical don’t matter. They should just sit down and shut up. They have no right to share in what is left of our natural resources nor benefit from dismantling what has evolved.

– Tom S.

I am 71. And I fully remember how bad corporate pollution was before the “greenies” started their movement.

I totally believe strong laws and regulations and egregious fines are necessary to keep the uncaring corporations “clean.”

We have “good guys” and “bad guys,” and we need to keep the “bad guys” clean and green.

– Peggy O.

Hilary is not interested in the environment; she is interested in carbon trading.

She is advancing this as a solution to a man(politician)-made problem. It is a fraud on two counts – it is a scientific fraud as well as a political one.

– Peter B.

I do think that more SENSIBLE regulation regarding environmental protection is needed.

Rules such as Cap and Trade of carbon emissions are not an example of sensible regulation. Tax incentives for renewable energy are also not a sensible solution.

However, a contaminants count in our drinking water is a sensible requirement. An environmental impact study is also sensible requirement so long as it is not legalese mumbo-jumbo, but written by an engineer.

– Tom R.

Anyone who thinks carbon dioxide is bad for us or our environment should go back to high school science class – and stay awake this time.

It has been shown that CO2 does not cause warming. It is necessary for our world and, actually, the more the better – all the plants including food plants grow better in a rich CO2atmosphere.

So we don’t need phony controls on corporate CO2production. On other pollutants, I would agree that we probably need very strong controls.

Corporations are not known for worrying about the polluting of their businesses if they can get away with it.

– Robert C.


In Case You Missed It…

Over the weekend, we sent an email alert about a revolutionary pharmaceutical company uncovered by The Oxford Club’s biotech expert Marc Lichtenfeld. Many of your fellow readers have already viewed Marc’s video presentation about the critical announcement this company will make on August 30.

Sunday_ded_20150802

11 Comments
  1. Robert Hoover

    I started my “adult” life with a fiance at 16 Villa Guibert, byRue de le Pompe (16th). Circa 1959. I bet I know your cafe (Trocadero area?).
    Much envy here. Enjoy one very special place on this planet.

    Reply
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