Gold Thoughts 20 July 2012

HOW TO KILL AN ECONOMY

Many lessons have been revealed by the experience of the EU nations this past year. In parts of the EU, those lessons are being given serious reflection. However, two nations, the U.S. and France, seem determined to ignore the adverse financial consequences of bad government policies. Since being elected the French leader, Hollande, has pursued policies that may only serve to destroy the French economy. France is today’s lesson on how to kill an economy. The U.S. may be the second.

Keynesians economists have fervently advocated the precise policies that will kill an economy. Their recommendations, as being implemented in France, are:

Higher taxes on incomes of successful individuals.

Taxes on the wealth accumulated by the work of someone else. 

Higher taxes on those that work.

High government pensions funded by the above higher taxes.

Government regulations that effectively prevent companies from hiring workers.

Higher government spending, a.k.a. vote buying, funded by borrowed money

Higher future taxes to pay for the above mentioned vote buying.

On reflection, could these be the same policies being pursued by the Obama regime?

On the first January the Obama tax increase will hit the U.S. economy. That tax increase is a combination of the expiration of the Bush, a.k.a. source of all evil, tax cuts and the elimination of the payroll tax reduction. One positive aspect of this development is parents may become closer to their married children. They may have to move back home in order to pay the marriage penalty tax that will return in January. Little doubt that the U.S. economy will contract in 2013 as a result of these higher taxes. Only one question remains: How much will it contract under the Obama tax increase?

However, none of the above is news. All the above has been going on for decades in Western nations. To some though, the reality of the above discussion has only been evident in recent years. The enlightened ones have owned insurance against Keynesian wealth destruction policies for years.

Gold has been popular and effective “insurance” against Keynesianism, politicians, and socialists for more than three decades. Gold has been the only successful investment that has a real historical record. Only two issues on Gold require any discussion: When to buy it and where to store it. The price of a Gold insurance policy fluctuates from day-to-day. Like all insurance policies Gold should be stored in a safe location. For example, one clearly does not want to store Gold in France.

Above chart is of our Gold/Silver Index, an index constructed using the daily, geometric returns on $Gold and $Silver. An index is preferable to looking at the individual metals as it is a measure of the central energy of the market for Gold and Silver. Second, it frees us from the analytical biases that exist due to mental price anchors.

We note several conditions in the above chart. First, the 200-day moving average is declining. Second, the index is at a level, ~220, comparable to the previous two lows. This low must hold. However, the case for that low holding in the near term is weak. No market structure exists under that price level to provide support. Further, that chart is filled with over head supply that must be cleared. Technically, this chart suggests that lower prices are likely in the immediate future. Should those lower prices develop, under insured investors should consider purchasing Gold.

On QE-3: Probability of QE-3 prior to the U.S. election in November less than 40%. Probability of QE-3 if Obama is reelected is ~80%. Gold is clearly insurance against the consequences of Obama being reelected.

Change in opinion: In the latest issue of The Value View Gold Report we changed our view on Gold stocks, those included in the GDM. We have moved from negative to neutral. In that issue we also

discussed the argument for Gold stocks becoming long-term investments.

Thoughts for next time: We had some thoughts about which we wish space existed to discuss on this visit. For example, why does the Bernanke Federal Reserve hate old people? Should the U.S. Congress pass a law to require a minimum of 5% interest be paid on the savings of those over the age of 60? Should the U.S. Treasury be required to pay a minimum of 6% on U.S. government debt owned by those over 60 in order to compensate them for the high risk of U.S. government debt? Should tax payers over the age of 60 have a tax deduction for investing in Gold?

GOLD THOUGHTS comes from Ned W. Schmidt,CFA as part of a mission to save investors from the regular financial crises created by Keynesianism, and the high priests of that misguided ideology. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com