By
Peter Schiff:
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. But the $10,000 face value worth of those coins he
collected had a melt value of over $230,000 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.
Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.
Source: http://www.streetinsider.com/Commodities/The+Golden+Cycle+-+Peter+Schiff/8463244.html
