There will always be someone who will want to buy your gold By Richard Daughty " The Mogambo Guru" March 14, 2007 www.dailyreckoning.com While Total Fed Credit was down by a miniscule $1.7 billion last week, the Federal Reserve managed to buy up, for themselves and their Treasury co-conspirators, $1.3 billion of U.S. government securities. Not much, to be sure, but this slimy tactic is called "monetizing the debt"; the government wants to spend money, but doesn't have any, so it creates and sells some bonds, and the Federal Reserve (to its everlasting shame) dutifully creates the money to buy them, and then actually buys the bonds with the money! This is, in essence, the government buying its own debt by creating the money (increasing the money supply) for the purpose! This is absolutely crazy! And while there are plenty of those of you who correctly say that the Federal Reserve is a private bank and is not a part of the government at all, I will agree that, yes, it is a private bank, but their website address suffix of ".gov" says it all for me about the supposed independence of the Federal Reserve, partly because I am so paranoid and distrusting, mostly because the Fed has done such a pathetically poor job of preserving the value of the dollar, but also with Very Damned Good Reason (VDGR), as the economic history of the results of central banks colluding with governments is bleak, bleak, bleak indeed. And if you don’t think that this monetization of debt is an economic horror, I will note that 1) this means that you have never uttered such nonsense around The Mogambo or you would still be carrying scars to remind you of your folly, and 2) this kind of monetary crap does not appear anywhere, in any book on economics, except as an illustration of how an economy was horrifically destroyed by its government acting like idiots and debasing the currency, which set off a war, or revolution, or something. Never anything good. But foreigners slurped up another huge $15 billion load of government and agency debt last week, so we still have "selling ourselves to foreigners" going for us, purely as a stopgap scheme, you understand; we are assured that a blessed miracle will appear shortly. One never has appeared before, but this time, they say, it will, for some reason that they can't say. Right. I personally don't think a miracle will happen, because, I mean, it's not like any of this is new or anything! This is the same government malfeasance and stupidity that is the bane of the entire history of mankind! All governments want to spend more and more money all the time! And when they do, it is disastrous! And that is why I say buy gold! And when people write to me and say "Hey, Big Mogambo Doofus (BMD)! If you're so smart, who will buy our gold when the cataclysmic collapse comes, the one that you yammer about and yammer about until I am sick of hearing it?" The audience was stilled by the fierceness of the attack, but calmed by the beaming smile of beneficence that then crossed the face of The Mogambo, as they knew that soon they would all be blessed with another Timeless Mogambo Truism (TMT), and additionally, that somebody was going to get a smack upside the back of their stupid head by which to remember the lesson! An excited murmur went through the crowd! Who would it be? Who? I rise, and casting my eyes languidly over the cowering crowd, said, "Have no fear. There will always be someone, my Adorable Mogambo Darlings (AMD), who will want to buy your gold. If you want proof of my words, because you can’t take my word for it because you are a hateful little snot who just wants to show off by being deliberately obtuse and contrary, then I can shut you up pretty fast by merely pointing out that there has never been a time in history when there was nobody to buy your gold, because if there was such a time, I think I would have remembered it." This memory thing is pretty profound stuff, as I have a pretty good memory! For example, I can remember everything about the precise moment that my wife discovered she had made a terrible mistake in marrying me, and she let out this long, terrifying, blood-curdling wail. To this very day, I can describe the scene in exquisite detail; the bouquet with one flower akimbo, the cute little lacy veil she was wearing, the organist stopping playing in mid-arpeggio, the stunned look on the minister's face, all are frozen in time. But you are not interested in my Moment When Fate Turned Tragically Awry (MWFTTA), but about gold and who is going to buy it from you. First, let's take a look at who is interested in gold. The answer is "Everybody in the world that has two nickels to rub together," and which, when added together, will equal (depending on your assumptions) probably somewhere between the equivalent of $54 trillion and $450 trillion. Maybe more. Maybe a lot more! Who knows? But it's a lot, whatever it is! Now, let's look at where the money is currently stashed; stocks, bonds, and real estate, as those are the only places that can absorb so freaking much money, but mostly stocks and bonds, as they are the most liquid (instantly tradable). So our little nickel-rubbers are constantly trading back and forth in stocks and bonds, gaining a little here, losing a little there, all the while with the Federal Reserve constantly creating the money to enable these purchases, which make prices go higher and higher, and who now are in the unenviable position of having to trade in and out of stocks trading at a P/E of more than 20 (at the historically far high end of prices versus their earnings) with a paltry dividend yield of about 2 stinking percent, and bonds yielding less than the rate of inflation (and after taxes and expenses, MUCH less!). It always happens, out here on the tail ends of bubbles, that one day people look at themselves in the mirror and say, as if awakening from a bad dream, "What in the hell am I doing? This is insane! Inflation is outpacing my gains, and I am losing buying power out the freaking wazoo here, no matter where I go! Oh, woe! Oh, woe! What can I do?" Then they will, one by one, do just like all the other people in history have eventually done, and they will start buying gold. And they will buy gold because, after long reflection and study, they discover that there is nothing else that has such a guarantee of keeping its value. Nothing even close, now that you mention it. And that, to answer your question, is who will buy your gold! And how much gold is there? Well, not much! In the government/Fed basement, according to the new, January 31, 2007 report from the Department of the Treasury, Total Treasury-Owned Gold is 261,498,899.316 ounces. Less than one ounce for every man, woman and child in America. From the mouth of PreciousMTrader, we get the related interesting world statistic that "Today, there are 4.3 billion ounces of gold in the world and the supply is increasing by only 1.8% each year. On the other hand, $5.8 trillion US dollars are floating around the world, and the supply is growing 4 or 5 times faster than gold." And now add to the obvious intrinsic value of gold versus the falling value of currencies (due to global over-issuance of money and credit) the premium for the "fear factor", as Rense.com reports that "March 21st 2007 will be one of the most significant dates this month. Iran has outlawed the American dollar and will put anyone in jail that uses it in their country after that date. They have the ominous notoriety of being the first nation in the world to do such a thing. On the heels of Iran's decision, North Korea has followed suit and also outlawed the use of the American dollar in their country. Finally, Malaysia the next day did the same thing." "Whoa!" I say to myself. Immediately, the Amazing Deductive Mogambo (ADM) starts churning this data, and quickly comes to the precisely correct conclusion from these few, fearful facts, namely "This can't be good!" One of the places where Fed-supplied monetary inflation ended up (after percolating through the housing bubble) is in the hands of state and local governments, which happily spent the enormous out-of-nowhere revenue streams of the last few years that resulted from the housing bubble. And in their idiocy and damnable stupidity, they thought that such sudden money flows would be permanent, unending, and eternally increasing, and they spent it like that silliness was true or something! Hahaha! Fools! And now, in addition to expensive and perpetual new benefits and services being larded out like candy to the electorate, at every level of government in America (which collectively employs one out of every seven workers in the country), public-service employees now receive such generous pay-and-benefit packages that they are literally unknown anywhere outside of government, and by a long shot, too! When the average household income in America is somewhere between $35,000 and $50,000 a year (which seems roughly to be the range of estimates), the annual compensation for government employees and officials commonly run to much more than that! Often to a hundred thousand dollars, sometimes hundreds of thousands of dollars, sometimes even millions of dollars for top echelon employees of any government, agency, bureau, department, university, school system, etc. receiving tax money! Almost half the police in Boston make more than $100,000 a year! Hell, here in Pinellas Park, not only do all the employees make more in salary than the average household income, but they also get astonishingly generous benefit plans, exemplified by the City's employee pension plan, which GUARANTEES at least a 9.5% return on their invested pension money! Any shortfall suffered by the fund by a market downturn is to be collected, by law, from the taxpayers! A guaranteed minimum return of 9.5%! Double what the historical return of the stock market, even given generous assumptions, has been! Double! Such grubby, greedy arrogance on behalf of public-service employees is absolutely unbelievable and completely unprecedented! And there are 22 million government employees already, which is not to mention all the retirees we're already supporting, or (if you want to talk about a population bubble heading towards us!) the future bubble of these massive numbers of new government employees moving to retirement in the future, all with their fat and fabulous (F&F) retirement packages! If I haven't said it enough until you are sick of hearing it, "We're freaking doomed!" Productivity, or output (GDP) per hour of labor, is supposed to have risen by 1.6% in the fourth quarter of last year. Big deal. The way I figure it, the inflation in prices contributed the whole of the rise in GDP, and that's why GDP went up to start with. And then they lie about the true rate of inflation when they have to deflate the raw GDP numbers by the rate of inflation to get "real" GDP growth, so it still looks like the economy grew! And with not many more people working (they didn't produce any more actual stuff, so there was no need to hire more people) you will get, by simple arithmetic, higher productivity! Hahaha! And even so, the best they can get is 1.9%? Hahaha! We're freaking doomed! The bad news is that labor costs jumped up by a whopping 6.6% in the fourth quarter! As regards this woeful statistic, I notice that nobody mentioned that a lot of new, higher minimum-wage laws went into effect after the last elections in the fourth quarter, and I am apparently the only one rude enough to mention that labor costs rising 6.6% is exactly the kind of thing you would expect from forcing the minimum wage to rise by 40%! Hahaha! Did anybody really think that labor costs would go down by forcing the employers to pay 40% more? Hahaha! And now does anybody still believe that prices will not go up, too, when the price of labor is forced up? They do? Hahaha! We're idiots! Hahaha! And speaking of jobs, BOB B has another take on the jobs report. He writes "I haven't had time to study the components, but 97,000 jobs were added. That's 3,464 per day." The humorous offset was that "In February, an estimated 252,000 people turned 62 years of age. That's 9,000 per day." Money and Markets writes that it appears Peak Oil has affected Mexico, as "In December 2005, Mexico sent the U.S. 1.7 million barrels of oil per day (bpd). This past December, Mexico only exported 1.2 million bpd to the U.S." He asks "Why is Mexico sending less oil?" For some reason, I thought that he was really asking a question, so I leap up and say "Because they are selling it to China and India and everywhere else, but they don’t need the money, anyway, because my appetite for tacos is off the charts here lately, and they are making plenty of money that way! And speaking of tacos, that sounds good! Let's break for lunch! Your turn to buy! Let's go! Hup! Hup! Move it! Let's go, go, go!" This was, as I interpret the pained and angry look on his face, the wrong answer, probably because it is only 9:30 in the morning. He pointedly ignores me and explains, instead, "Because it’s producing less oil. Total oil output fell to just below 3 million bpd in December 2006. That’s down from nearly 3.4 million barrels at the start of the year, and Mexico’s lowest rate of oil output in seven years." This is bad news for Mexico because "Mexico relies on oil exports for about 40% of its revenue." Notice the complete lack of exclamation points in those four previous sentences. When it is reported in the Mexican newspapers, you can bet your burrito supremo that headlines will have PLENTY of exclamation points all over the damned place, as, for example, (showing off my impressive command of Spanish) "Ustamos Mucho Grande Freaking Doomed, Just Exacta Mundo Para El Mogambo Habla!!!", which got three exclamation marks, since they understand the true significance of "Mexico relies on oil exports for about 40% of its revenue"!!! It seems that half of the revenue of the whole economy of Mexico is unhealthily dependent on just one source of revenue! Hahaha! If the Mexican government had taken the time to look, they would have seen that my family is dependent on me as their sole source of revenue, and as I am as similarly corrupt, stupid and worthless as the Mexican government, they should have noticed from the chaos and hostility that it clearly hasn't worked out here, either! I mean, the parallel is obvious! What in the hell is the matter with those people? Even worse, "55% of Pemex’s sales revenue went to the Mexican government last year." And it is not just the Mexicans that seemed to be gripped by the looming terrors of Peak Oil Syndrome, as "Kuwait’s giant Burgan field has also peaked. Iran’s energy use is rising so fast that its oil exports are being crimped badly. And despite the fact that the Saudis are supposed to be sitting on a thousand years of oil, their oil production declined 8% last year", although "The Saudis will say they made their cuts to 'stabilize' the market." Hahaha! "Stabilize" the market! I did not realize the generous beneficence of the Saudis! They will sell less oil and make less money, while their competitors wax rich by continuing to pump furiously, so that the cost to the ultimate consumer, mainly Chinese and Western infidels, doesn't rise! What can I say, except "Thanks, dudes!"? But the underlying message is that (and pay particular attention here) demand for oil is going up, but supply is going down. And I am sure that something flickered in your Fledgling Mogambo Mind (FMM) about the effect on the price of oil (an absolute energy necessity) resulting from such a falling supply/growing demand imbalance, that is actually getting worse rapidly, and which will continue to get worse for a long time. And if you are a Junior Mogambo Ranger (JMR), then you are probably salivating, literally, at the prospect of reaping a lot of those enormous oil riches for yourself so that you could easily afford to stretch your Second Amendment rights to include getting some tactical nuclear weapons and showing that pesky Skyview Neighborhood Association who's REALLY the freaking boss around here, and it will be very educational to see if the threat of imminent nuclear obliteration will make my decrepit hovel seem a little less of an "eyesore" and "public nuisance" to them! I'm betting it will! Hey! I love this investing stuff! Doug Noland's Credit Bubble Bulletin at PrudentBear.com starts out this week with some interesting graphs, all of them bad news, of course, but the one that really grabbed my attention was the one labeled "Balance Sheet of Household Sector". Going back to March of 1989, eighteen years ago, the average household had $19,000 in net worth, which was, back then, about the average household yearly income. Now, as our bloodshot eyes nervously scan across the graph, we see that the average household net worth is nowadays about $55,000, which is, again, about the average household yearly income! Hahaha! You are right back where you started, in terms of buying power, and yet you think that the stock market and the housing market and the bond market are going to provide you with a decades-long comfortable retirement? Hahahaha! I'm laughing so hard that I am actually spitting up blood! Hahaha! I can't stop! Hahahaha! With a burst of Mighty Mogambo Self-Control (MMSC), I gain dominance over my giddy emotions, and with rasping, gasping breath I say that I'm (pant, pant) here to tell you that the lie that "Everyone will make money and retire in comfort by investing long-term in the stock and/or bond markets" is the biggest load of hooey that a gullible, dimwitted population ever swallowed without even gagging. The ugly truth is that the majority of investors will not only suffer a loss in strict dollars ("the majority is always wrong"), but even those who manage to get marginally ahead, in nominal terms, will have the purchasing power of the money stolen by the ravages of the inflation caused by the Federal Reserve constantly creating so much money and credit, which is, ironically, where the money came from that enabled them to buy the stocks and bonds! The bottom line? The best that you can expect to do is to invest one dollar's worth of buying power to get, in the future, an equivalent amount of buying power. The majority, alas, will lose both nominal money AND the buying power of what's left! And as for housing, Alan Abelson, in his Up & Down Wall Street column in Barron's, writes "The best, most concise and easily the pithiest assessment of the outlook for housing is this by D.R. Horton's CEO, Donald Tomnitz" who is quoted to have said "2007 is going to suck, all 12 months of the calendar year." An interesting point, which you will soon realize is a delicious play on words, is that all interest rates are now seeming to converge to a point at just above 5%, give or take. No spread anywhere! This probably stems from the yield curve being inverted, of course, meaning that long term interest rates are lower than short term rates, which makes a mockery of pricing risk, as if the current economic stupidity hasn't made a mockery of every other economic thing, too! This is all very, very interesting (VVI) to me, because it is so weird. But lots of things are getting weird, as we hear from Alan M. Newman at crosscurrents.com, who writes "One of the principal statistics we utilize for measuring the breadth of the mania is Dollar Trading Volume (DTV)." Since technical analysis is so arcane and bewildering to me, I am starting to nod off just as he is saying " Our database extends back to 1926 but recent years have seen such a dramatic increase in activity that even we are not entirely sure just how to report what is occurring", when, suddenly, I am at High Mogambo Alert (HMA) at these words! I am at this heightened state of armed-and-dangerous lunatic paranoid readiness because, if you had carefully read the entire Mogambo Scout Handbook (MSH) like you said you did, then you would know that number 3,772 on the list of Things To Be Afraid Of (TTBAO) is "When you look at statistical records stretching all the way back to 1926 and suddenly things are so weird that you are 'not sure just how to report what is occurring'." Mr. Newman is not interested in me, the MSH, the list of TTBAO or, apparently, anything remotely connected with me or my loud, trashy friends, and prefers his own cold, hard facts and highly-developed sense of humor, both of which he demonstrated when he said "Just for kicks, we'll reveal that the last year the Amex publicly reported DTV was in 2002", which is, I figure, the point in time where they became too embarrassed to reveal it, "when their total was only $651.6 billion." Nowadays, he says, "The top 25 ETFs trading on the Amex accounted for Dollar Trading Volume of $5.59 trillion." Wow! Just 25 ETFs are 900% bigger traders of money and shares than the whole stock market of just 5 years ago! My eyes are rolling back in my head at the enormity of the numbers, and Mr. Newman, seeing the blank look of complete incomprehensibility on my face, tried valiantly to get the point across again, and said "To better put this staggering statistic in perspective, DTV for the entire U.S. market was less than $5.6 trillion in 1995, just about the time the madness of the mania began to take hold." Mentally, I am subtracting 2007 (which is now) from 1995 to get an understanding of the time frame under discussion, and I suddenly notice, to my complete surprise, that this would be a negative number of years! I instantly realize what this means! It means that it IS possible to go backwards in time! Then, for some reason, the first thing I think about is to go back in time to the seventh grade, so I could tell the adorable Betsy at Gordon's birthday party, "Yes, I think I WOULD like you to kiss me and stick your tongue in my mouth! Thanks!" instead of, as it turned out, making one of the first of a long, long, dreary line of Hugely Regrettable Errors (HRE) that have plagued me ever since. Apparently, Mr. Newman mistook my mental reverie for mere misunderstanding of his DTV point, when it was obviously so much more than that, and, with a tone of exasperation in his voice, says "It's not only still a mania, it's far worse than it was in 2000." I naturally think to myself, "Hold it right there, buster! Don't take that attitude with me! If it was such a big hot item, how come you didn't use an exclamation point to denote it as such, you big fat stupid-head?" which I instantly knew would be the wrong thing to say, as he would easily hoist me on my own petard (which is a lot more uncomfortable than it sounds) and say "What in the hell is the matter with you? You care more about some stupid punctuation than about the actual message, you Raving Mogambo Idiot (RMI)?", which means here is one MORE damned guy who can kick my intellectual butt anytime he wants, and who seems to enjoy doing it, so I'm glad I didn't say anything out loud! Tee-hee! Our little secret! Anyway, the point is not that Mr. Newman doesn't comprehend the vital importance of proper punctuation or that we make fun of him behind his back about it, but that the stock market and bond market are where a huge, huge chunk of the money went, where 70% of all the profits in America were generated, where everybody's wealth and retirement accounts are invested, and this explains why the Federal Reserve, the Plunge Protection Team and Congress will be doing everything in their awesome unchecked power, no matter how illegal or incompetent, to make sure the stock market continues to go up, and the bond market continues to go up, and the housing market continues to go up, for which enormous mountains of money will be created by the Federal Reserve, which will cause all prices to go up, which is the killer of economies. The one constant in the historical record? It shows that America will die trying to spend its way out of it problems. Ugh. Mogambo sez: Oil is getting so cheap that I am drooling at the glaring bargain. And gold and silver? Don't get me started, as I could go on for hours and hours about why you should buy as much as you can, as soon as you can, turning the exercise into a long, angry harangue which will end with you desperately trying to get away from me, I'm grabbing you by the sleeve and hitting you up to loan me a lousy twenty bucks so that I could save up to buy some gold, too, but you say "no", you selfish little bastard, and so we get into a big fight, and it's all real, real ugly. Anyway, like I said, don't get me started. Just buy the stuff and save us both a lot of hassle.