SCHMIDT'S GOLD THOUGHTS
Did some of you feel safer this past weekend? Your wealth was certainly safer. For three days much of the Western world was closed for a religious holiday. Even Keynesians take the holiday. As the Keynesians were away from their government offices, their relentless attack on wealth was silent. As hard as they have been working to destroy wealth in the past year, a rest was probably needed.
General Theory of Employment, Interest and Money by Keynes probably holds the record as a wealth destroying book. From it justification for replacing private property and initiative with government controls and restrictions bloomed. Somehow, per the Keynesians, transferring wealth to the government would make a nation more prosperous. Fortunately, the world discovered Gold as a defense against the evils of Keynesianism.
The U.S. stock market has failed as an investment over the past decade. At the same time the price of $Gold has soared by 400%. In a time when the Keynesians are contending that markets are not efficient, we would argue that these results demonstrate market efficiency in an exemplary manner. Both the stock and Gold markets have correctly assessed the Keynesian policies of Western economies. They did so by giving those policies a failing grade, and that is the correct assessment.
Economic policies should, in part, make economies more durable. Those policies should follow the first essential rule: Do no harm. In our first graph above we can observe one source of instability being unleashed on the U.S. economy by Keynesians running amok at the Federal Reserve. In that graph is plotted the per capita U.S. money supply. The quantity of M-2, NSA, is divided each month by the population. Data is from the St. Louis Federal Reserve.
From the beginning of the graph through early 2008 per capita money supply in the U.S. was rising. That era coincides with the inflating of the housing bubble. With the amount of per capita money seeming to ever rise, some means of spending that growing claim to paper had to be found. Rather than that abundance of money pushing the general level of prices higher, it pushed up one sector, housing.
That process stopped in 2008. In the graph the per capita U.S. money supply ceased growing. Then in 2009 we again observe this money measure moving higher as the Federal Reserve unleashed vast quantity of liquidity into the system. The correct assumption when that development occurred was that prices, somewhere in the system, would rise. But, that liquidity flow was not to continue.
For the past year the U.S. per capita money supply has not grown. The growth rate of that measure, the red line in the chart, plunged into negative territory. Until that measure again begins to rise, expectations of the rate of U.S. inflation rising will not likely be met.
Before going on to the implications for the U.S. dollar and $Gold, let us reflect on that red line. It is the growth rate of the money supply measure. Note the incredible volatility of that measure. That pattern is the equivalent of alternating between stomping on the gas pedal and then on the brake. It is a measure of the instability being injected into the U.S. economy. Little wonder the U.S. stock market has been an investment failure when the central bank's primary achievement is economic instability.
As shown in the first graph, the U.S. per capita money supply has changed little in the past year. A consequence of that is that fewer and fewer have excess dollars of which they need to dispose. In short, dollars have been becoming rarer relative to other moneys. In the above chart of the U.S. dollars value we can observe that it is just about where it was a year ago. In short, the value of the dollar has changed very little in a year. Second, the U.S. dollar is deeply over sold within a broadening base which may set the stage for a serious rally.
$Gold being simply another currency has little reason to change in such an environment. That means that $Gold was probably pushed well above equilibrium, and has been correcting that excess since November. With all the above as a history lesson, what about the future?
Given the size of the Obama Regime deficit and focus on nationalizing the U.S. health care system rather than economic growth, we can expect that ultimately the Federal Reserve will be forced to monetize massive amounts of U.S. government debt. When that begins to happen, the U.S. money supply will begin growing again. At such time the dollar will again depreciate and $Gold will rise. Remember, $Gold is the only defense from the wealth attack being engaged by the Keynesians in government.
As we have written before, those living in other currencies have their own unique situation. Investors residing in Canada and India should use price weakness in Gold when it develops to buy Gold given their over valued currencies. Loonie is an extremely high risk currency at the present. British investors should use price weakness to buy Gold as the pound has no long term future, despite the likelihood of the Labour party being tossed next month.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He publishes The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to