History Is Always Written With A Gold Pen

Perhaps the greatest weakness of man is his unceasing effort to defy history, and in the process, he simply apes its previous disastrous outcomes. Not only that, he also portends the distant future with the sagacity of a biblical prophet and yet rarely can he remember what he had for dinner two nights ago. In the process, wisdom descends upon him (if at all) when either the years or the opportunities have all but vanished. The truly astonishing thing in all this, is that man is so knowledgeable when it comes to recalling great historical events and yet so hopeless in extracting and applying the lessons of history. The result is that he is always trying to make up for, avoid paying for, or making excuses for, the errors of yesterday.

THE DIFFICULTIES IN SEEING INTO THE IMMEDIATE FUTURE

Any extrapolation from today's circumstances in an attempt to see into the immediate future (let's say 2010) is hamstrung for a number of reasons. These include:

1. There is probably quite a bit happening behind the scenes that is hidden from us. Anyone who doubts this merely has to recall the story last month of how the Bank of England revealed that it had extended secret emergency financing exceeding $100 billion to Royal Bank of Scotland and to what was then HBOS during the banking panic in October 2008.
2. The next problem is that "bombs" keep going off. How many more Dubai's are out there waiting to explode? How long before Ireland and Greece crumble?
3. Then there are the ongoing attempts by Chairman Bernanke to withhold information about who the recipients are of almost $2 trillion of emergency loans. Is this non-disclosure protecting the confidence in the system, is it protecting the recipient banks from a proper valuation of their share price or is it now protecting Chairman Bernanke from the wrath of the people and any decent congressmen?
4. The third aspect is that the Federal Reserve is still refusing to submit to an audit of its activities. So is there a Loch Ness monster(s) lurking in the Fed's swamp?
5. The general public does not know with any degree of certainty what gold the US government still has in its repositories and which is not owned by foreign governments.
6. Through a combination of softened accounting standards and opaque reporting techniques it is almost impossible to safely analyse either the solvency or the profitability of the banking system. If you think this is an exaggeration then may I remind you that the head of the IMF Strauss-Kahn told a CBI conference in London last month that global banks have so far revealed only half their losses from the financial crises. Or how about the directive to banks to allow commercial property valuations to remain on the books at previous values as long as repayments are being met?
7. Then there are the actions of governments the world over which defy logic. How many more unexpectedly unsound decisions will governments make? Just one example is the commitment of 30,000 additional troops to Afghanistan at a cost of $30 billion. This equates to $1 million per soldier. Whilst I am against governments printing/borrowing and spending more money, I would imagine that a $10,000 subsidy for every additional employee taken on by private enterprise would result in 3 million people being employed over the next 12 months with incredible flow on effects to the economy at large. Such a move (to extend the commitment to Afghanistan) is logical only if the outcome is guaranteed and the purpose is justifiable.
8. What, if any involvement, has there been in the stock markets of the world, by governments either attempting to smooth out sudden movements or perhaps even trying to egg the market upwards in an attempt to restore balance sheets and confidence?
9. Very importantly, what are the US's creditors thinking and planning in relation to the continued issuance of US debt and the monetisation of a large part of it?
10. Finally (if there can ever be a "finally"?) what if anything is the US and Israel planning against Iran and in turn what if anything are enemies of the US planning against Western interests?

All of the above points more or less have one thing in common - they are attempts to defy history by either hiding the truth from the people or else they display conduct which will only pronounce the final reckoning. What we know for sure is that what people will get in the end is "taxes, widows, wooden legs, and debt."

What is also certain, is that if all of the above unknowns finally reveal unpalatable truths AND Central Banks and governments continue all of their illogical actions, then only gold can withstand the consequences of such collective insanity. History guarantees this and it is the only ongoing eye-witness to man's folly. In the long run only gold emerges with its reputation intact.

PERSPECTIVE

All the unknowns in the system make predictions difficult. More importantly they make decision making extremely risky. Judgment is more often than not clouded by the constant deluge of information which barely allows time for processing or reflection. It is for this reason that day to day movements in the price of gold must be seen within a historical or end user context. In other words if you are a day trader you will respond to every new bit of new information. If you are a gold bug then perhaps it is wiser to view today's movements as simply a dot on the end of a very long line.

THE GOLD PYRAMID

Reading and listening to the various commentators on gold, one is struck by the wide variance in opinions not only as to its value but also its role. Despite this, the average person exhibits the contradictory behaviour of not owning any gold but nevertheless being mesmerised by stories of or the thought of discovering gold. It's a hard one to figure out.

The sudden shifts in the dollar price of gold leave us all confused at times. In an earlier piece (Why Goldbugs Can't Beat The Conspirators - 23 April 2009) I outlined the various issues facing the short term directions and gyrations of the gold price but also the inevitability of its long term upward journey. In closing I will leave you with a Gold Pyramid to ponder. Perhaps some of the readers out there can embellish it a great deal with insights and knowledge of their own.

The purpose of the Gold Pyramid is to remind everyone that there are a great many players in the market for gold and not all of them are driven by the same considerations. The one thing that is certain, however, is that when a panic sets in they will all be attempting to trade in paper assets for gold. In the meantime the usual tug o' war plays out. The foundation of the pyramid is the gold bug who values gold as the ultimate financial insurance policy. The tip of the pyramid is occupied by the manipulators who have the broader agenda of "controlling the world". The hierarchy is based on their propensity to hold onto gold. A pyramid based on actual levels of gold held by each category would of course be totally different.

In closing, it is my belief that deep down every single player knows that the current printing and spending frenzy of governments and central banks along with the self serving actions and influence of big banks will only lead to the destruction of nations, institutions and individuals. The only unknown is the exact timing and sequence of events but you can be sure that the winners in the end will be those left with power, gold or both.