by Ned W. Schmidt, CFA, CEBS
Schmidt Management Company
February 10, 2010
The great blizzard that rolled across the eastern United States this past week should have served as an icy funeral pyre for the Global Warming Scam. Charles Ponzi was a rank amateur when compared to the attempt by climate evangelists to extract money from the gullible public. These would be weather Madoffs dream of the money extracted from the public by Keynesian economists, the clear champions of money Ponzi schemes. Money that appears to have been squandered.
Consider the complete failure of Keynesian economics in the U.S. Over the past two years, the U.S. government has run a deficit approaching three trillion dollars. Results? More than 8 million people lost their jobs. Get it right. As the deficit gets bigger, more people lose their jobs. Seems like even a devoted Keynesian economist would begin to understand that their holly doctrine is fatally flawed. Apparently, the only thing rising in this Keynesian mess has been the price of Gold.
Why does a nation allow these purveyors of economic drivel to manage its monetary affairs? Distortion after distortion of the marketplace by the Federal Reserve, as well as central banks in Spain, UK, etc., have resulted in repetitive economic dislocations. But, they are still allowed to distort the market for money by setting interest rates. Free markets set the price for everything from marijuana to food to gasoline to airline tickets, but the price of money is fixed by a group with no apparent divinely inspired wisdom.
Gold has served us well in recent years, returning far more than the paper equities so popular with some. We should recognize that the high return on Gold was due to special factors that may not be repeated exactly in all periods of time. That reality does not mean we should shed our Gold, for the evil brought on by Keynesian economists will again threaten us some time in the future. The enemy has not been vanquished, but remains lurking in the halls of government everywhere.
At the present, $Gold seems to be correcting. That should have been expected as no market rises without interruption. Some reasons can be found which may help explain this consolidation. Gold, remember, is just the universal currency. If dollars are bountiful, in dollars the price of Gold should rise. It acts just as the Euro or yen might do, as it is simply another form of money
Two major reasons exist for the U.S. dollar strength and Gold’s price weakness. First is the non-inflationary expansion of the U.S. money supply. Second is Greece. The latter simply has scared many investors. Greece is symbolic of the widespread sovereign risk in the world brought on by Keynesian inspired government deficit spending. Those investors have simply sought haven from sovereign risk by moving into U.S. dollars. Now the U.S., we well know, is a financial mess under the Keynesian economists. However, the U.S. mess may persevere for some time, while that of Greece and others seem more immediate.
As to the currently non-inflationary expansion of the U.S. money supply, M-2 NSA, we must remember what happened in 2008 and early 2009 is history. The impact of monetary activity in that period is fading. More important today is that the U.S. money supply is only 2-3% larger than a year ago. That rate of expansion in non-inflationary. That rate of increase in the quantity of U.S. money is such that the dollar is becoming rarer on a relative base. The value of the dollar should go up. The value of competing currencies, such as Gold, should recede.
For an understanding of why the growth of the U.S. money supply is so lethargic we can turn to our first graph, above. In that graph, thanks to the elves at FRB St. Louise that provide FRED, is plotted the year-to-year change in commercial and industrial loans at all U.S. commercial banks. Money is created when banks lend excess reserves. Money disappears when banks loans are repaid. As is readily apparent in that graph, U.S. bank C&I loans are in major retreat. That development has provided downward pressure on the size of the U.S. money supply. Until that line turns up, and it will, U.S. money supply growth, and hence $Gold, will be lethargic.
Our second graph, above, brings U.S. money supply growth and the price of $Gold together. We have reviewed it many times before, and the current message remains the same. As the red line shows, the inflationary component of U.S. money supply is actually negative. That condition is normally associated with weakness in the price of $Gold. When it turns positive, the time will have arrived again for $Gold to again move higher in price.
Will that red line turn positive? Yes. Already the lack of economic growth inspired by weak U.S. money supply growth is evident in the economic statistics. Preliminary report on the U.S. economy for the fourth quarter of 2009 was dismal, despite the praise of journalists unschooled in economics. That weak economic growth will increase the pain felt by the Obama Regime and the U.S. Congress. With U.S. national election only nine months in the future, great pressure will be applied to the Federal Reserve. Bernanke may finally get to use that helicopter, either from which to hurl money or to seek asylum in some other land.
When the U.S. money supply again begins to grow rapidly, $Gold will advance. In the mean time, when selling pressure on $Gold becomes intense, investors should add to their positions. Investors living in currencies other than U.S. dollars should be adding to Gold positions during this period of currency turmoil. The EU is not going to dissolve, but using Gold to safeguard wealth from currency turmoil and tax collectors gone berserk seems like a good idea.
© 2010 Ned W. Schmidt
GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. For a subscription, click here.
Disclaimer: Please remember that no method is perfect nor is the one running the model. All estimated returns are for the model portfolio and do not reflect those earned on actual portfolios.