“My Grandchildren Won’t see $500 an ounce on Gold”

I was at a small social function on Saturday night, when a lady I didn’t know introduced herself and reminded me of my infamous quote on television.  (For those of you who don’t know I have been on a Canadian cable financial business television channel for the past 13 years.  I appear about once a month giving my opinion on equities and other financial news of the day.) I made this comment – see title of this blog – back in 2003, nearly 10 years ago, and people still remember my call for one reason or another.

Looking at gold today at $1770 US an ounce I obviously blew that call long ago.  Behind this quote I intended a subtle message, which I tried to make about monetary policy.  Since Paul Volcker arrived at the Federal Reserve Board in August of 1979 we have been fighting the war on inflation.  To put this another way, my whole business carrier I have not known a period of time when we, US and Canada, didn’t fight inflation.  When the price of gold topped $800 in the early 1980’s, the price of gold steadily fell as a price signal that holding paper money had greater value than gold or any commodity for that matter.

The pain and the human cost of these Federal Reserve policies of disinflation were high – record unemployment (at the time), transferring low wages jobs overseas, and reducing the power of unions, with decreasing membership. High interest rates and tight money supply where used to ring inflation out of a complex system known as the economy.  This period from 1980’s to mid 2000’s the US economy transformed itself into an economic powerhouse of innovation and efficiency.  This took hard work.  Vigilance from policy makers and politicians kept productivity high and inflation low.  The $500 dollar mark represented to me the point of no return.  If gold traded above this value, all the hard work of the last 25 years would go out the window.  To me this marked the beginning of the end of paper (money) versus stuff (hard assets, commodities).  I didn’t think the Fed would let this happen, and that was the point to my quote.  Gold passed the $500 mark in December 2005, maybe an early warning for the financial crises that was yet to come.

I was feeling melancholy on Friday, the day after the Fed announced Quantitative Easing 3 or QE3.  QE3 will be remembered as the Fed’s “all in” strategy.  The Fed will purchase $40 billion worth of mortgage-backed securities in the private marketplace, and will not stop until policy goals, as set out by the Fed, have been accomplished.  The financial world has become complicated beyond belief, with Fed and ECB (European Central Bank) making macroeconomic policy impossible to extrapolate.  Add on the fact that capital allocation in today’s marketplace can be massively misdirected because of central bank interference prevents one from having a good night sleep.  Investors’ are looking for income or return on their investment dollars “goddam it” and willing to sacrifice their principal – though they don’t know it yet!

Serendipity prevailed on Saturday night with this nice lady’s comment.  Yes, I was wrong in my outlook but it reminded me how far we have come in terms of central bank intervention, the massive devaluation of paper money, and the future impact and implications of financial markets and of society as a whole.

The good news for you the reader, we will see the future unfold within our model price charts. The future financial markets will be interesting, anything can and will happen – then again maybe nothing will happen, for a while – but equity prices transiting through our Economic Book Values (EBVs) will give clues on the future direction of the financial world and equity security prices.

The central banks want inflation.  They will get inflation.  Gold bullion is signaling massive inflation however we don’t now when or where this inflation will show up, but when it does the impact on financial markets will be huge one way or the other.  For instance, the last bond bear market was in 1994, yes believe it or not some 18 years ago!  Once the inflation genie is out of the bottle, another younger version of Paul Volcker will enact policies as we enter a new disinflation period sometime down the economic road.

“The investing public invest on the basis of what occurred over the last 5 years”, an investment great once told me.  I wonder how many of us remember investing in the inflationary times of the late 1970’s and early 1980’s or better still 1994, when there seemed to be no end to bond prices going down.

Yes, there is a lot to think about but at least I have my model price charts, and this helps me sleep at night and dream of $500 gold and my potential grandchildren.

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