Recently
by Peter Schiff: Sock
Puppet Kabuki; Nikkei Today Parallels Dot-Com Bust
The New York
Times had the definitive take on the vicious sell off in gold. To
summarize one of their articles:
Two years
ago gold bugs ran wild as the price of gold rose nearly six times.
But since cresting two years ago it has steadily declined, almost
by half, putting the gold bugs in flight. The most recent advisory
from a leading Wall Street firm suggests that the price will continue
to drift downward, and may ultimately settle 40% below current
levels.The rout
says a lot about consumer confidence in the worldwide recovery.
The sharply reduced rates of inflation combined with resurgence
of other, more economically productive investments, such as stocks,
real estate, and bank savings have combined to eliminate gold’s
allure.Although
the American economy has reduced its rapid rate of recovery, it
is still on a firm expansionary course. The fear that dominated
two years ago has largely vanished, replaced by a recovery that
has turned the gold speculators’ dreams into a nightmare.
This analysis
provides a good representation of the current conventional wisdom.
The only twist here is that the article from which this summary
is derived appeared in the August 29, 1976 edition of The New York
Times. At that time gold was preparing to embark on an historic
rally that would push it up more than 700% a little over three years
later. Is it possible that the history is about to repeat itself?
At the time
The Times article was written gold had fallen to $103 per ounce,
a decline of nearly 50% from the roughly $200 it had sold for in
the closing days of 1974. The $200 price had capped a furious three-year
rally that began in August of 1971 when President Nixon “temporarily”
closed the gold window and allowed gold to float freely. Prior to
that decision gold had been fixed at $35 per ounce for nearly two
generations. That initial three year 450% rally had validated the
forecasts of the “gold bugs” who had predicted a rapid rise in gold
prices should the dollar’s link to gold be severed. The accuracy
of these formerly marginalized analysts proved to be a bitter pill
for the mainstream voices in Washington and Wall Street who, for
reasons of power, politics and profit, were anxious to confine the
“barbarous relic” to the dustbin of history. Incredulous as it may
seem now, with gold still priced at $35 per ounce, official forecasts
of both the Secretary of the Treasury and the Chairman of the Federal
Reserve were that demonetizing gold would undermine its value, and
that its price would actually fall as a result.
Of course government
experts could not have been more wrong. Once uncoupled from the
dollar, gold’s initial ascent in the early 1970’s was fueled by
the highest inflation in generations and the deteriorating health
of the U.S. economy that had been ravaged by the “guns and butter”
policies of the 1960’s. But the American economy stabilized during
the mid-years of the 1970’s and both inflation and unemployment
fell. When gold reversed course in 1975 the voices of traditional
power elite could not contain their glee. When the gold price approached
$100 per ounce, a nearly 50% decline, the obituaries came fast and
furious. Everyone assumed that the gold mania would never return.
Although the
writer of The Times piece did not yet know it, the bottom for gold
had been established four days before his article was published.
Few realized at the time that the real economic pain of the 1970’s
had (to paraphrase The Carpenters 1970’s hit) “Only Just Begun”.
When inflation and recession came back with a vengeance in the late
1970’s, gold took off (to quote another 1970’s gem), like a skyrocket
in flight. By January 1980, gold topped out at $850 an ounce. The
second leg of the rally proved to be bigger than the first.
The parallel
between the 1970s and the current period are even more striking
when you look closely at the numbers. For example, from 1971 to
1974 gold prices rose by 458% from $35 to $195.25, which was then
followed by a two-year correction of nearly 50%. This reduced total
gains to just under 200%. The current bull market that began back
in 2000 took a bit longer to evolve, but the percentage gains are
very similar. (We should allow for a more compressed time frame
in the 1970s because of the sudden untethering of gold after decades
of restraint.) From its 1999 low to its 2011 peak, gold rose by
about 650% from $253 to $1895 per ounce, followed by a two year
correction of approximately 37%, down to around $1190 per ounce.
The pullback has reduced the total rally to about 370%. The mainstream
is saying now, as they did then, that the pullback has invalidated
fears that rising U. S. budget deficits, overly accommodative monetary
policy, and a weakening economy will combine to bring down the dollar
and ignite inflation. But 1976 was not the end of the game. In all
likelihood, 2013 will not be either.
The biggest
difference between then and now is that until 1975 ordinary Americans
were barred by law from buying and owning gold. About the only route
available to participate in the earlier stage of the precious metal
rally was by hording silver dimes, quarters and half dollars minted
prior to 1965. My father indulged in this process himself by sifting
through his change, the cash registers of any merchant who would
allow him (exchanging new non-silver coins and bills for silver),
and by sifting out silver coins from rolls he bought from banks.
It was a time-consuming process, and most of his friends and family
members thought he was crazy. After all, he had $10,000 worth of
pocket change earning no interest.But the $10,000 face value worth
of those coins he collected had a melt value of over $350,000 when
silver hit its peak.
By the mid
1970’s none of the problems that initially led to the recession
in the early years of the decade had been solved. Contrary to the
claims of the “experts” things got much worse in the years ahead.
It took the much deeper recession of the late 1970’s and early 1980’s,
which at the time was the worst economic down-turn since the great
Depression, to finally purge the economy of all the excesses. The
lower marginal tax rates and cuts in regulation implemented by President
Reagan and tight money under Volcker helped get the economy back
on track and create investment opportunities that drew money away
from gold. As a result gold fell hard during the early 1980’s. But
even after the declines, gold maintained levels for the next 20
years that were three to four times as high as the 1976 lows.
Although the
economy improved in the 1980’s, the cure was not complete. Government
spending, budget and trade deficits continued to take a heavy toll.
The U.S. was transformed from the world’s largest creditor to its
largest debtor. When the time came to face the music in 2001, the
Fed kept the party going by opening the monetary spigots. Then when
decades of monetary excess finally came to a head in 2008, the Fed
open up its monetary spigots even wider, flooding the economy with
even more cheap money.
Unfortunately
just like 1976, a true economic recovery is not just around the
corner. More likely we are in the eye of an economic storm that
will blow much harder than the stagflation winds of the Jimmy Carter
years. And once again the establishment is using the decline it
the price of gold to validate its misguided policies and discredit
its critics. But none of the problems that led me and other modern
day gold bugs to buy gold ten years ago have been solved. In fact,
monetary and fiscal policies have actually made them much worse.
The sad truth is that as bad as things were back in 1976, they are
much worse now. Whether as a nation we will be able to rise to the
occasion, and actually finish the job that Ronald Reagan and Paul
Volcker started remains to be seen. But I am confident that the
price of gold will rise much higher, and that its final ascent will
be that much more spectacular the longer we continue on our current
policy path. Don’t believe the mainstream. Just as before, they
will likely be wrong again.
July
2, 2013
Peter
Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse. His
latest book is The
Real Crash: America’s Coming Bankruptcy, How to Save Yourself and
Your Country.
Copyright
© 2012 Euro Pacific Capital
Republished with permission from:: Lew Rockwell