Golden Earthquake

  • The 5 survives the Great East Coast Earthquake… The short-term gold price, not so much…
  • How gold and stocks hand off to each other every 17-18 years… and where we are now…
  • Chris Mayer with “the best economic story on the planet” …
  • Readers hope to forestall “communitarian” utopia… plead for precise language when describing gold price…

As my 8-year -old says after a good tumble: “We’re OK.”.

The 3rd floor of 808 St. Paul St. shook during the quake. The floor felt like it was floating on water for about 30 seconds. The light fixtures hanging from our ceiling swayed about a foot in either direction.

In the next room, via a concurrent Skype conversation with a colleague in Philadelphia, we witnessed the quake ripple its way up the coastline.

For a while, there were rumors the Washington Monument was starting to tilt 30 miles to our south.

Washington Monument

Relax. It’s an optical illusion…

We were looking forward to at least one episode of The 5 rife with analogies between the national debt debate and the great East Coast Quake of 2011. Alas, the structure is sound, but for a crack inspectors did find at the very top.

The last time a bigger quake was registered in the mid-Atlantic was 1944.

You might be forgiven for thinking the quake did far more serious damage to the price of gold.

Serious Earthquake Damage

The price had already drifted down from $1,900 in overnight trading, and then staged a brief rally that vaporized within moments of the quake at 1:51 p.m. EDT.

It dropped $40 in the following two hours.

The thumping continues today. At last check, gold was down to $1,780. That’s still a level unseen before this month. Among the contributing factors: the Shanghai Gold Exchange raised traders’ margin requirements. Now there’s speculation the Comex here in the United States will follow suit.

Still, whoever thought $1,780 gold would be a chance to buy on the dip? (Ahem)…

“Gold is due for a correction,” wrote U.S. Global Investors chief and Vancouver favorite Frank Holmes on Tuesday. “In fact, it would be a non-event to see a 10% drop in gold.”

But commenting on the long-term trend, Frank figures we’re only two years into a long cycle in which gold will run ahead of the S&P 500.

Handing Off the Baton
“This chart from Gold Stock Analyst,” says Frank, “pits the performance of gold bullion against the S&P 500 since 1971 — you can see that gold immediately rallied following Nixon’s announcement [cutting the dollar’s last tie to gold] before peaking at $850 an ounce in 1980.”

“At that price, one ounce of gold was 7.6 times greater than the S&P 500, according to Gold Stock Analyst. Gold’s relative performance then declined for the next 20 years, with the S&P 500 taking the lead in 1992 and peaking at 5.3 times the value of gold in 1999. Currently, gold’s value is roughly 1.6 times greater than the S&P 500.”

“What drove gold’s relative underperformance from 1980 to 1999?” Frank goes on. “It was a shift in government policies, which have historically been precursors to change.”

In this case, it was Fed chief Paul Volcker’s pursuit of positive real interest rates… where money you tuck away in a Treasury note or a CD will earn you more than you lose in inflation. That finally came about in 1992… the same year the S&P 500 overtook gold on the chart.

Now? As we’ve talked about before, we’re in an environment of “financial repression” – – where interest rates get eaten up by the cost of living, and then some. That’s bullish for gold.

Stocks are drifting sideways this morning after an epic rally yesterday.

The Dow tacked on more than 300 points… for no obvious reason. We’re tempted to attribute it to the dropping of charges against former IMF chief Dominique Strauss-Kahn… or perhaps the new privacy controls at Facebook… or maybe the release of photos from Kim Kardashian’s wedding last weekend.

But no: “The Dow Jones iIndustrial Aaverage jumped 322.11 points, or 3%,” said The Wall Street Journal, “as a new round of bleak economy data helped buoy investor hopes that [Fed chief Ben] Bernanke will step in with some sort of monetary stimulus.”

Super B

Possibly the most frightening picture we’ve ever published in The 5…

We’re not sure why traders chose yesterday to anticipate Bernanke’s speech in Jackson Hole, Wyo., on Friday. But we’re confident that if he doesn’t deliver “something big,” those 300 Dow points yesterday are toast.

While gold retreats, so does the greenback. The dollar index continues its slow, steady slide this week — down to 73.7 at last check. The euro is up a bit, to $1.441.

“It may be the best economic story on the planet… maybe ever,” says Chris Mayer of Mongolia… where we see Vice President Joe Biden is getting sumo lessons this week:


What do you think the guy in the fedora is thinking? “Jackass,” comes to mind…

“There are huge deposits of gold, coal, copper, crude oil, iron ore and more,” says Chris, determined to keep our minds focused on the investing angle. “Last year, this country exported about $2 billion worth of minerals. But based on mining project startups, exports ought to grow to $20-80 billion per year.”

“That’s a 10-40-fold increase in a just a couple of years! Some $30-50 billion in new investment is set to flow to this $5 billion economy in just the next few years.”

“Every time someone puts a hole in the ground, they seem to find something valuable,” Harris Kupperman, CEO of Mongolia Growth Group, said in a recent conversation with Chris.

Kupperman is based in the Mongolian capital of Ulan Bator. He sees even better values in local real estate and finance, which should benefit as people become more prosperous.

Mongolia is true frontier investing, in the style of our friend Doug Clayton of Leopard Capital, whom we met in both Colombia and Cambodia this year. Kupperman’s firm, by the way, trades thinly on the Pink Sheets under the symbol MNGGF. But we like the Canadian symbol a lot better — YAK.

Meanwhile, Chris has unearthed an intriguing, $608 billion opportunity next door in China — one that’s been 4,036 years in the making. You can check it out right here.

With copper prices back over $4 a pound, copper thieves are hard at work again.

The hardest work came on Penobscot Mountain in Pennsylvania, where thieves made off with $200,000 worth of antenna tower at this public television station serving metro Wilkes-Barre and Scranton:

“The job took hours and hours,” speculates the station’s chief engineer Joseph Glynn. “It may have happened over the course of two or three nights. The thieves took it off the tower itself, so they had to climb the tower and disassemble it, take nuts and bolts off, drop it down and cut it up into pieces to haul it away.”

Bah, we’re not impressed. The tower’s been out of service since a fire hit the station’s transmitter building 18 months ago.

Far more daring was the Kansas City caper we noticed in May of last year, where thieves hit a live transmitter crackling with 35,000 volts of electricity. They snagged copper tubing filled with scalding-hot fluid. That’s bold…

“I’m very concerned,” writes the first of several readers who were either alarmed, outraged, or both about the reader who pined yesterday for a “communitarian” utopia.

“How many more there are out there who think like this but don’t truly understand what it

is they are suggesting and what it entails?  It’s unfortunate, but it’s exactly crises like what we’re currently going through that make large numbers of people susceptible to this kind of thinking.

“If only this reader could go back in time and space to Germany, Italy or Russia about 80 years ago. It would have been a real eye-opener. But wait! They can! Just read The Road to Serfdom.”

“Has this person no appreciation,” writes another, “of the benefits and the morality of private property ownership?”

“The message was truly frightening,” adds a third, “in that there are millions of misguided people around the world who would fully agree with his misguided message.

“Sadly, it is not surprising that there are so many misguided scary people out there — they vote Democrat in the USA, NDP in Canada, Green in Germany, Labour in the U.K., and similar parties elsewhere.”

“However, it is surprising one of them actually reads The 5.”

“One can imagine that after reading The 5, the misguided fellow needs to let off some steam. Probably grabs his bongo drums, puts on his tin-foil cap, and goes on an anti-capitalism, anti-free-trade, and/or anti-oil -sands protest march. A good old-fashioned protest march does seem to calm those kind of people down… for a while.”

“I wonder if it occurs to the reader,” comments yet another, “that the people who actually bought all of those cheap Chinese products instead of expensive American stuff were the ones who de-industrialized America. If he doesn’t work for the government, he should. Maybe he could be in charge of the Department of Street Light Removal.

“Thanks for the comment on the Killing Fields. Maybe if enough people remember, then America won’t get there.”

The 5: Maybe.

“I am always astonished,” writes a reader turning to other matters, “when I see headlines such as ‘Gold Soars’ or ‘Gold Reaches New Heights.’.

“It would be much more accurate for the headlines to read ‘The Dollar Plunges’ or ‘The Dollar Reaches New Lows.’. After all, one only has to check the currency market to find that the cost of the euro in dollars has gone up, that the cost of the pound in dollars has gone up, that the dollar buys fewer yen.

“What other meaning does a higher price in dollars for an ounce of gold have than Bernanke is steadily inflating the dollar? Eighty years ago, a dollar would buy 1/35th of an ounce of gold; now a dollar will buy only 1/1,800th of an ounce. Let’s start reading the economic news correctly.

“Anyone who is ignorant of economic history is stupid  (is unable to learn);  anyone who thinks one can spend oneself into prosperity is ignorant  (refuses to learn).”

The 5: Ask an old-timer about the difference between ignorance and apathy. “I don’t know and I don’t care,” he will say.


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