December 19, 2005 – I wrote my last commentary when gold was $503, having just broken above the $500 level the day before to make a new 22-year high. Notwithstanding gold’s outstanding achievement, a lot of bearish sentiment prevailed, with nearly everyone expecting gold to have a hard time climbing any further. Many pundits were actually predicting an imminent decline that would take gold back into the low $400s. I took the opposite point of view.
I wrote: “I expect gold to go through $500 quickly” and went on to provide more “evidence that gold will blow through $500”. And it did. Gold climbed to $540 without any hesitation. A number of readers asked how I knew it was going to happen.
Truth be told, I didn’t ‘know’ anything. The reality is that no one can possibly ‘know’ anything about the future. We can only use our experience and judgement to make a determination about future events, and these are the factors that I relied upon to forecast that $500 would not be a formidable barrier.
I also relied on a number of trusty indicators that have proven their worth over the years. Some of these are proprietary, which I do not discuss in these letters, but of course nevertheless make use of them when providing my forecasts. A number of them deal with market action. Others measure prevailing sentiment, and in this category, perhaps the most trustworthy indicator of all is articles about gold in The Economist – experience has shown that this esteemed rag always gets it wrong!
Its latest gold article on December 1st is just one in a stream of many proving this indicator to be an ‘old faithful’ of reliability. In short, when it comes to gold, always do the opposite of what The Economist may be recommending or saying about gold. Because they are a ‘one-way’ street and are always bearish, their articles therefore are an unfailing indicator to buy gold.
What’s more, take the position as soon as they publish. Their timing is impeccable, as they usually catch the bottom just before gold begins to take off.
I have had a lot of fun over the years poking fun at this wonderful track record compiled by The Economist. I am particularly proud of my “No Fool’s Gold” article, in response to the bearish view on gold taken by The Economist in an article published January 22, 1993, just before gold and the gold mining stocks began a spectacular year-long rally.
Pity its poor readers who followed The Economist‘s advice back then, and missed one of gold’s best and biggest moves in the 1990s. But The Economist clearly shows no pity for its hapless readers, so earlier this month it decided to mislead them again in its December 1st article, amusingly entitled: “Gold: The little yellow god”. And if that title was too subtle for its readers to understand what was coming, the sub-title left no one in doubt about The Economist‘s point of view: “Even at $500, it’s still a barbarous relic”.
As I usually do, I will take apart The Economist‘s article and correct all the errors, and point out the instances of anti-gold propaganda. But first some background. When it comes to discussions about money, it is important to understand that The Economist is a tool of central banks. It delivers the “party line”, so gold-bashing – rather than the truth about gold – is what The Economist aims to achieve. What follows is their article in italics, with comments from me.
Nothing swells the breast so much as the thought that you have been proved right at last. [Yes, and when it comes to gold, The Economist can only imagine that feeling!] After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, [No, it stayed within a $250 to $500 trading range, which provided a great opportunity to accumulate gold at relatively cheap levels. So it has not been “miserable” at all for people who knew the value of gold and aimed to accumulate it when it was undervalued.] mocking their credo that the security of the financial system ultimately depends upon the yellow metal. [It does, as The Economist and everyone else will find out in the months and years immediately ahead.] Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs’ excitement as the message sinks in: gold is back. [It was never ‘out’. Gold still purchases approximately the same amount of crude oil it purchased at any time over the last sixty years, which is a record no national currency can match.]
This being gold, the resurgence has brought forth all manner of alarming prophecies. [Propagandists always belittle the things most important to them. Even the purposeful choice of the term ‘prophecies’ is meant to belittle – otherwise, they would be called ‘forecasts’. That The Economist goes on to individually mention these ‘prophecies’ shows how important they really are to central banks, which is why they attempt to dismiss them by belittling them.] The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States’ reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats. [All of these are of course true. Note that the propagandists at The Economist do not say they are false. That would be unethical because they know them to be true. What’s more, it would also prove embarrassing that they got it wrong as all of these problems continue to unfold in the months ahead. Instead, trained propagandists that they are, they just point the readers to the open trap and let them fall in by making “their own” conclusions. And of course, what The Economist says about the euro is true for all national currencies.]
The world is an unpredictable place. [At last, an element of truth!] But, with the possible exception of a fall in the dollar, [Hmmm, that means central bankers are willing to let the dollar fall further against the euro once this bear market rally in the dollar ends.] not much of the above catalogue of doom looks likely; [Note that it doesn’t say these events “won’t happen”. Propaganda is more subtlety than a sledgehammer. Good propaganda – and the writers at The Economist are pros at it – attempts to appeal to one’s reason, rather than a person’s emotions. Hence, between their half-truths and subtle twisting of the facts, The Economist‘s propagandists aim to leave you with a ‘rational’ reason to not own gold.] and none of it has much to do with gold’s good run. The dull truth is much less bullish for gold. [Truth of course is never “dull”. The Economist is just trying to make you believe the bullish facts surrounding gold are uninteresting.] Investors have put money into a wide range of metals, and precious metals’ prices, including gold’s, have risen with the base. [It of course says that prices have risen, rather than the correct description, which is that the purchasing power of national currencies is being eroded away by inflation.] Meanwhile, gold remains fundamentally unattractive. [What follows is a telling absence of any “fundamental” analysis – no discussion of value, no discussion of risk.] It yields nothing [Unless you take risks with it by lending it out to earn interest, just like any money. Paper currency doesn’t yield anything either, unless you take a risk with it by depositing it in a bank, which is of course what The Economist and its handlers want you to do.] and central banks are sitting on vaultfuls [sic] of the stuff that they want eventually to sell. [How does The Economist know that? Does it speak for all central banks, including the Chinese, Argentinean and Russian central banks, among others, who have been adding to their gold reserve?]
Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. [In fact, that is exactly what is happening, and it’s no wonder central banks are worried and all pulling out all stops to disparage gold. So the appearance of this article in The Economist is no surprise. For the first time in twenty-five years, mainstream investors all over the world are looking closely again at gold and buying it – and for good reason. Look at all of the monetary problems developing, which explain why gold is rising against all of the world’s currencies.] Caveat emptor. [I think “reader beware” would be a more appropriate warning.]
The fascination of gold [Not “fascination”, but rather, its “attributes”] lies in its being not only a commodity but also a store of value and means of exchange. [Gold is a store of value, but it was stopped from being a means of exchange – a currency – by central banks. But the company I founded, GoldMoney, is changing that by enabling gold to circulate once again as currency.] The glamour [gold’s attributes] and the mystique [Central banks always like to paint gold as being mysterious and therefore something beyond everyone’s comprehension, except their own. It of course serves central banks’ interests to keep people ignorant about money, and to let the central banking ‘priesthood’ explain the mysteries of money. The reality, however, is that just as one does not have to be an astronomer to understand the earth revolves around the sun, one does not have to be a central banker to understand money.] lie in the latter, monetary part. This is what draws gold bugs, but their story doesn’t quite add up. [The Economist needs to have its calculator checked.] The unbalanced world economy still faces risks. [Their second true statement.] But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. [This half-truth is of course designed to mislead the novice reader about what really is driving gold higher. The whole truth is that gold is rising against all currencies, and not just the US dollar.] Oil prices are plainly far higher than they were, but they have come off their peaks. [And the inflationary impact of $60 crude oil is still working its way through the economy. Only now, for example, are consumers starting to get their winter heating bills.] Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening. [The Economist is conveniently – and dishonestly – choosing to ignore all the dark clouds on the horizon. Central bankers tell you what they want you to hear. The Economist is simply following this same practice.]
Bear on bullion [They conveniently provide you with another sub-title, so if you were too busy to read the whole article, your point of view would still be warped by this bold-face heading offered at the concluding paragraphs.]
Gold’s renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. [That gold has to be dug out of the ground is one of its enduring attributes. It distinguishes gold from national currencies, an unlimited amount of which can be created ‘out of thin air’ by central banks with essentially no toil or effort.] In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist‘s metals index, [Ignored of course has been the concerted efforts by central banks to keep a lid on the gold price, which has been well documented by www.GATA.org.] which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. [A conclusion which is preposterous on the face of it. Given the new wealth creation in China and the propensity of Chinese to own gold, demand in China has obviously risen. However, in order to account for GFMS’s erroneous disregard of the true amount of gold loaned by central banks, GMFS has played ‘fast & loose’ with its Chinese demand estimates by understating them to bring its supply & demand calculations into balance.] Chinese investors now have other places to put their money. [Sure, just try selling a mutual fund or a T-Bill to your average Chinese peasant.]
Gold is still cheap compared with its peak of $850 in 1980. [Hooray, an undisputable fact. By including it, The Economist can now say that its article covered both sides of the gold story.] Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs [It’s not just gold bugs seeking value and safety for their money. People around the world who do not carry a gold-bug label are also buying gold.] might see that as a chance to buy; others as a reminder of gold’s enduring capacity to disappoint. [How can anyone be disappointed by accumulating an asset that is undervalued?]
Well, there you have it. Draw your own conclusions about the motives of The Economist, and as you do, keep in mind the following words from my 1993 “No Fool’s Gold” article. These words ring true today as much as they did twelve years ago.
“There are other aspects of this [January 1993] article in The Economist that also distressingly propagandize an anti-gold, pro-central banking mentality. And then, The Economist tells us to “Strip history away” in order to evaluate the role of gold, but does anyone really want to follow that advice? We all know the maxim that those who ignore history are condemned to re-live it. To be fair, I must report that there is one thing within this [January 1993] article with which I agree. Ignoring its own advice to ignore history, the article states that “history shows that cartels eventually collapse.” It is an accurate observation, and any reasonable person who believes in the free market process can only hope that the central bank cartel [emphasis in original] will collapse sooner rather than later. With it will go the wrong-headed thinking that so frequently permeates any discussion about gold because the collapse of this cartel will lay bare the illusion that sustains the myth of central banking. National currencies do not give value to gold. It is in reality the other way around. Gold gives value to national currencies.”
So here we are more than twelve years later, and The Economist still shamelessly wallows in its pitiful anti-gold propaganda. From this we can only draw one conclusion – even at $500, The Economist is still barbarous for not telling the truth about gold.