Prejudice and Pig-Headedness vs Ethics and Integrity

At the time that I wrote my first Gold-Eagle article (August 6th 2002) I was nervous that the world economy might be heading towards a "train crash", but I was fairly optimistic that the train crash could be avoided.

Since that date my optimism has been eroding as I have observed some important policy mistakes by various Western Governments.

In fairness, it's easy to be a couch politician/philosopher and its much harder when you are actually sitting in the firing line with direct responsibility for outcomes. But there are some decisions which have been blatantly wrong - to the point of raising serious questions about underlying motivations. Precisely who were the politicians looking to protect?

Bear with me here. This may sound like a political diatribe. It is not. There are some serious economics related issues that are intertwined with the current mindset of Society as a whole.

As a point of departure in this argument, consider what happened (and is happening) in Australia. Our Prime Minister, Mr John Howard, seems a decent sort. He has a loyal and strong willed wife and he appears to have a fairly close-knit family. The man is a "regular bloke" and, until last year, took his annual vacation at a sleepy little coastal village, staying there with his family in the town's local hotel - with no airs or graces. I happen to take my own vacation in the same sleepy little village and enjoy kayaking on the mangrove lined lakes amongst the pelicans, cormorants and dolphins. Life there is "even keeled".

Against this benign background, there are some jarring notes. Mr Howard came to power on two major platform promises:

• I will not introduce a General Sales Tax
• I will not privatise Telstra (the Australian telco)

GST was introduced a few years ago, and the 51% of Telstra - which Mr Howard gave his word he would not sell - is currently being prepared for sale.

At the time that George W Bush was contemplating the invasion of Iraq, John Howard pledged unquestioning and unwavering Australian support. Arising from this display of "solidarity" hundreds of thousands of concerned citizens (some estimate a high as a million ordinary Australians) demonstrated in Sydney and Melbourne. Mr Howard chose to totally ignore this display of public outrage. We were amongst the first to send troops to the gulf.

In the media during this past week the issue of "faulty intelligence" regarding Iraqi purchase of Uranium from Niger has been aired. Mr Howard has made a statement to the effect that he will not apologise for relying on the incorrect information regarding uranium when making his decision.

Now this is a very interesting line of approach, but it totally misses the point. The point is not whether Mr Howard should apologise regarding the reference to uranium.

The point is: Why did the "Coalition of the Willing" invade Iraq? What was the justification for such an act? If the uraniumintelligence was faulty, what other intelligence was faulty? How can we just sit back and say "Oh well, we seem to have goofed" . An entire country (Iraq) has been dislocated and made dysfunctional because the "Coalition of the Willing" invaded it. People died. National Treasures (important to mankind as a whole) have been looted. There is untreated sewage running in the streets. Unemployment is high. The Iraqi economy has been traumatised.

The above raises a question regarding "master/servant" relationships. Have Public Servants (of which Mr Howard is supposedly one) become Public Masters? What has happened to the principle of Accountability? Have citizens in Western Democracies been reduced to slaves of the politicians?

All very interesting, but what - if anything - has this got to do with the markets?

Well, apart from the obvious reference to the Enron Management's lack of accountability, there is a mind-set issue here that needs to be explored. It goes to the psyche of society as a whole.

This issue is very well mirrored in the following RELATIVE STRENGTH chart which compares the performance of the Gold Price to Commodities in general ($CRB Index) which dates back to 1990.

Point and Figure charts are a bit confusing to some because they do not plot price against time. They merely plot price movements of significance, and the above chart is even more potentially confusing because it compares the price movement of gold relative to that of the commodities index, so I will explain its implications a bit later on.

What motivated me to go down this particular road of thought was the fact that, in scanning a whole bunch of "news" articles on the gold price movements in the past week I found the word "GARBAGE" popping into my head a disconcertingly high proportion of the time. Many reporters appear to have no idea what they are talking about and are padding their reports with nonsensical opinions just to fill up space.

The above chart shows that from 1990 - 1994 Gold tracked commodities almost in lockstep. The period of 1994 - 2000 reflects the price manipulation of the Central Banks - which caused gold to UNDERPERFORM relative to commodities. Since 2000, gold has moved up again, relative to commodities, but the critically important issue is that the Relative Strength chart has not yet even reached a position of normality as benchmarked by the 1990 - 1994 period. Under these circumstances, what justification is there for anyone to talk about Gold (in recent historical terms) as if it were a currency? Since 1990 at least, the hard evidence is that gold has NOT been performing like a currency. This is not to say that it will never perform as a currency, but one needs to keep one's feet on the ground. The FACT is that, to date, gold has been behaving more like a commodity than a currency.

The word "Prejudice" is defined in the dictionary as: "An opinion formed without taking time and care to judge fairly"

And now my reference to "Social Psyche" starts to make sense. Right now, the world is so full of information that the processing capacity of people's minds appears to have gone into overload and "Prejudice" seems to have taken over. Critically important decisions are being made - at all levels of society, from Joe Citizen to George W Bush - based on nothing more than "Sound Bite" arguments and Prejudice.

Examples:

• Will the Dow Jones rise from here? Nah! P/E ratios are over 30 X. the DJIA can't rise from here
• Will Gold take over from the Dollar as the currency of last resort? Of course! The days of fiat currency are over. There's too much paper around.
• Should we invade Iraq? Damned right! This Saddam guy is a crazy loon who needs to be stopped if the world is to survive
• Should we invade Afghanistan? Absolutely. Let's bring back Osama, dead or alive.
• Is the world facing a risk of deflation? You betcha! We had better man the printing presses.

The gold price is in a Primary Bull Trend. Will it become a currency of last resort, or is the price (in dollars) merely rising because the value of the dollar itself is deteriorating? This is not an easy question to answer objectively. Will the "weight of money" overwhelm the fact that equities are overpriced in terms of historical P/E ratio analysis - thereby causing share prices to rise even further? Again, not an easy one to answer objectively.

But here is a clue as to a possible future direction.

From an "Economic Governance" perspective, there is a dichotomy between a "Central Bank" approach - which is essentially oriented towards money supply and the price of money; and a "Wealth Generating" approach - which seeks to stimulate and encourage entrepreneurial energy to drive employment generating ventures.

I strongly believe that the Central Bank approach is now no longer appropriate and, indeed, may even be counterproductive; and - if I am right - then it follows that the alternative road is the only rode that can be travelled where a sensible outcome can be anticipated.

All of which brings us to the question of ethics and integrity. In my mind, if we are to weather the political/economic crisis which is now almost certainly brewing, we need to guard against prejudice and pig-headedness and we need to embrace ethics and integrity.

At this juncture in our history - if mankind is to survive intact - we need to paraphrase a very similar question to that which was asked of Lot those thousands of years ago: Does there exist - anywhere in the Western World - a single "totally honest" Leader who can lead us out of this mess?