Are "gold bugs" Unpatriotic?

Those of us in the investment business who advocate individual gold ownership are often accused of being unpatriotic. In part, this charge stems from the dire economic forecasts that often form the basis for such recommendations in the first place. However, our critics often confuse the recognition of a problem and the belief that its inevitable resolution will be painful, with an actual preference for such an outcome in the first place.

I can not speak for everyone, but as a self professed "gold-bug" myself, if there were any way for America's many economic imbalances to be resolved painlessly, of course I would root for that outcome. However, as this is no more possible than a heroin addict kicking the habit without going through withdrawal, it makes no sense to hope for it simply to satisfy someone else's misguided concept of patriotism. In fact, from my perspective, letting my emotions guide my investment recommendations, even under the pretext of patriotism, would be completely irresponsible.

As I have often written, America's problems are in reality no different than the problems facing many of its individual families -- we live beyond our means by consuming more than we produce, financing the difference by borrowing from abroad. Ultimately the enormous accumulation of external liabilities means that Americans will be forced to significantly reduce their future consumption in order to service and repay these debts. In effect, rather than our excess consumption reflecting superior economic performance, it merely evidences our willingness to trade future for present consumption.

Of course, a significant reduction in consumption, which accounts for better than 70% of GDP, means a severe recession. However, recognizing that this recession is absolutely necessary, and preferring that it occur sooner rather than later, does that make me unpatriotic. On the contrary, the further in the future this recession takes place the more painful and disruptive it will be. The bigger the economic hole we dig for ourselves, the more difficult it will be to get out. My forecast however does not imply that I am happy about having to make it. I would certainly have preferred it if Americans had not gotten themselves into this mess in the first place.

Because of my concerns, I have advised my clients to invest abroad. When the dollar falls, those investments benefit from that decline. Certainly as a broker I am happy about that outcome, but as an American I would have preferred not to have been forced to invest abroad in the first place. While it is true that a falling dollar benefits my clients, in the long run it will also benefit America, as its decline is a necessary step in the badly-needed, long overdue adjustment process. The longer the dollar is supported at artificially high levels, the deeper our imbalances become. Would I prefer it if a fundamentally strong U.S economy produced an equally strong dollar? Would such an outcome be preferable to an unbalanced economy producing a dollar collapse? Of course, but since that scenario is impossible, why waste time or risk my clients' money, on sheer fantasy?

While I am certainly glad that I have been able to protect so many Americans from potentially suffering the full impact of the dollar's coming demise, that does not mean that I am happy about having to have done so in the first place. As I am powerless to alter the course our nation is on, I am making a difference the only way I can. However, I am keenly aware of the pain millions of Americans not fortunate enough to be among my clients will undoubtedly suffer, and expect to take no joy in their collective misfortune. On the bright side, at least those Americans whose wealth I am able to help protect will be better positioned to assist other Americans who lacked the foresight to do likewise.

Ironically, despite aspersions about their patriotism, I find most "gold-bugs" to be among America's most patriotic citizens. The Constitution of the United States specifically establishes gold and silver as money in Article 1, Section 10 by denying the states the power to make anything other than gold and silver coin legal tender in payment of debt, and in Article 1, Section 8 by only authorizing the Federal government to coin money (gold and silver) and regulate its value. Since none of the monetary provisions of the Constitution have ever been repealed or amended, they remain in effect to this day. Since in America we do not swear oaths to defend the government, but to preserve and protect the Constitution, not only is gold ownership financially prudent, it is down-right patriotic.

Note on today's GDP numbers

Today's weaker than expected GDP numbers are just the tip of the iceberg. As consumers continue feeling the pinch of higher interest rates, mortgage payments, rents, taxes, gas and other consumer prices, health care costs and insurance rates, together with vanishing home equity, look for the economy to continue to weaken in the quarters ahead. This weakness will ultimately spill over to business spending and employment, further exacerbating the problems confronting America's over-leveraged consumers, and its equally vulnerable bubble economy. Expect the first of many out-right quarterly contracts to begin sometime in 2007. A slowing U.S. economy and a potential pause in future rate hikes will knock the legs out from under the dollar, causing consumer prices to rise even faster, further suppressing consumer spending and intensifying the downward pressures on GDP.

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