THE LIBERTARIAN ENTERPRISE
Number 615, April 17, 2011
"The state is a dead man walking"
Special to The Libertarian Enterprise
My friend Jesse wrote today to inquire about the upcoming Summer doldrums. Almost every year there is a seasonality to the price of gold and silver. It is a fixture in our industry, and all gold bugs know about it.
The saying is: "Sell in May and go away. Try to remember to buy in September."
It applies primarily to resource company stocks, especially junior mining shares. But it only applies during periods that are not hyper-inflationary. And this Summer may be an exception.
There have been other exceptions such as 1978, 1979, or 1980, when the price in September was substantially higher than it had been in May in each case. You can get historical data on prices at Kitco.com as easily as me, and you can also find seasonality charts for gold, silver, and other commodities everywhere you look.
There are some Spring festivals in India which tend to keep the price of gold high on the world market. There are also Autumn tendencies in the West, where jewellers are preparing for the Christmas season by buying gold and silver and making it into jewellery starting in the early Autumn. Not much happens in the market over most Summers. And not much merger and acquisition activity happens in August in any market. All of Europe seems to go on vacation in August, for the last few decades.
There is some reason to wonder about this year, though. In particular, in 1979-80 the Hunt brothers were cornering the market in silver, and making a small fortuneout of a very large one. Nobody is trying to corner silver today, but the price of silver is once again closing in on $50 per ounce. The price of silver has literally never been higher except for a very few weeks in January 1980.
The question really is, why would you sell this May? If you have good reasons for doing so, then do. If you don't, then don't.
Tax reasons are never a good reason to buy or sell anything. Simply put, the tax deals are always changing, in the name of "closing loopholes." So any investment you make for tax reasons today is likely to become a dead albatross around your neck tomorrow.
As to suggestions, which is all I'm doing here, making suggestions, discussing my insights, I think you should probably buy on dips, not on rises. There have been plenty of dips over the last 12 years. Since 1999, the prices of gold and silver have been on the rise. There are good reasons to suppose that a secular bull market can last fifteen or twenty years, and that we may be seeing something other than a secular bullwe may be seeing a currency failing on a global basis, something which hasn't really been seen since at last AD 1722, arguably since AD 1453.
What I would do is look at your cash position as a potential disaster. If you buy during dips in the prices of silver and gold then you stand to protect or at least hedge some of your currency risk in holding dollars as cash. I would leave at least as much cash in hand as you need to pay, say, two months of bills.
The problem, of course, is that the bills don't necessarily stay stable as hyperinflation hits. So you have to think about what you can do to prepare for currency devaluation. Gold and silver are traditional hedges against inflation.
The problem with buying now is that prices are rising. So, I would wait a few days. Almost always, we find that these big "gaps up" are filled in later as the price gets "too high" in the short run and people sell. So, in the short term, watch for those "gap filling" drops in price.
The problem with waiting several months is that nobody, and I mean nobody, outside the Federal Reserve can predict anything about currency printing and monetary inflation, let alone interest rates. That's why the markets are much more volatile since 1913. If there were market signals that set interest rates, the market would be able to adjust to volatility, and people would have various tools for predicting some of the interest rate changes. But, of course, all that is off the game board since the Fed sets interest rates.
I believe this chart illustrates that effect very dramatically.
Since there is no way to know anything, the best you can do is look at the other pieces of the picture. Are the bankers happy with monetary inflation? Yes. Bankers are known to be happy by looking at the LIBOR overnight ratethe London inter-bank offered rate (LIBOR) overnight rate is below 0.14% and falling. It has been falling for weeks, very dramatically, back to very near 2007 levels (0.11%). This means that the bankers see nothing in the world to trouble them, and they are happy to lend to each other. During the height of the financial crisis, LIBOR o/n was up around 4.8%.
Is the fiscal situation the same? Yes. Deficit spending everywhere you look. There are always noises about debt limits, and they are always reset. There are always noises about cutting spending, and only the rate of growth of spending is cut a tiny bit, for a time. There are always noises about balancing the budget on the backs of those who produce jobs and create wealth, and they almost always prove to be politically untenable.
Is the trade policy situation the same? Yes. Wars here and there and there, and no end to protectionism in sight. The war on drugs is a trade war. The wars in Iraq, Afghanistan, and Libya are trade wars.
Is monetary policy the same? Yes. Inflation is the plan, by various euphemisms, such as "quantitative easing."
So, nothing fundamental about the price of gold and silver has changed.
If the Dow to gold ratio were to get down to around 3 ounces of gold to buy the Dow, I might want to curtail gold buying for a while. I think it is about 8 now? Let's have a look.
The Dow Jones Industrial Average right now (2:40 p.m. on Friday 15 April 2011) stands at 12,344.52 and gold stands at 1,485.30 per ounce troy. That means that with 8.3 ounces of gold, I can buy the Dow. Back in 1999 when the stock market peaked against gold, it was something like 42 ounces of gold to buy the Dow.
I believe the price re-set in the 20th Century to levels below 3 ounces to buy the Dow something like eleven times. My guess is that until the current sovereign debt and global currency crises are resolved, the price of the Dow in terms of ounces of gold is going to continue to decline. That volatility chart I mentioned above suggests that the Dow might be bought for less than one ounce of gold some time in the near future.
As Doug Casey noted in another context (discussion of phyles in his Conversations with Casey) the state is a dead man walking. Technologies have arisen since 1993 when the state butchered seven dozen Texans and burned them in their church in Waco over some tax papers the government claimed weren't filed properly. It is increasingly difficult for the state to even know about economic transactions, let alone collect its confiscatory dane geld.
So is it really going to be different this time? No, probably not. But some time soon, many things that you have come to think of as inevitable: death, the weather, taxesare going to prove to be less than inevitable. Change is the nature of reality.