THE LONG TERM

By Howard S. Katz
2-1-10

In the short term, gold bugs are in pain. The last 3 weeks have seen a pull back to the
Dec. 22 low of $1,075 and have created a lot of short term anxiety. We have two possibilities.
Either gold will continue down to the $1,000 support level, or it has already made its turn, will
leave a gap above $1,000 and then break out above $1,229, April contract (the Dec. 3 high).

When the short term is a puzzle, I take refuge by studying the long term, and so I thought
that this week might be a good time to review the long term situation. Above is the 15 year,
monthly basis chart of the CRB index, which gives us a good handle on the (second upswing of
the) commodity pendulum. The horizontal line in the middle of the chart is at 337, and this was
the top of the (first upswing of the) commodity pendulum in 1980. Note that this level, which
was then resistance, was penetrated in 2005, and this was followed by the blow-off of 2008.

As is normal in technical formations, a resistance level, when penetrated, turns into

support. Therefore, in Dec. 2008, when the CRB once again came down to 337, this level
provided massive support, and the commodity markets turned on a dime. Also note the double
bottom of 1999-2001, which is serving as the bottom pattern for commodities and is similar to
the 4½ year saucer pattern in gold (1998-2002).

The key to the CRB chart is the sudden collapse in the 2nd half of 2008 (from just over
600 to a little under 337). This period stands out on the chart, and the normal chart interpretation
would be that some important (bearish) news item had occurred at that time and caused the
decline.

But of course we know that this was the period when massive fears of “depression” swept
our society. The media began to scream “financial crisis,” and commodity speculators ran for
the hills. Even gold was hit, although it declined less than other commodities and was the first to
bounce back strongly. An analysis of the panic of ’08 shows the following:

The panic was started by the New York Times, which was ringing the alarm bell as early as
mid-September. What was the Times’ source for this news item? The sources were
Secretary of the Treasury Henry Paulson and President George Bush (Jr.). We now know
that Paulson used his public office to persuade Congress to steal (a stated amount of) $750
billion from the working people of America and give it to (creditors of) Goldman Sachs
(Paulson’s former firm). That is, Goldman Sachs donated money to the Republicans (and
probably also to the Democrats) in return for which they were given influential positions
from which they can persuade politicians to steal money from the public and give it to them.
Also, the Times had been carrying on in the most disgraceful fashion for the previous 7 years
saying that President Bush was stupid. (Although I cannot land a jet airplane on the deck of
an aircraft carrier, and I don’t think that anyone on the Times can do so either.) If President
Bush was stupid, then why cite him as an authority with which to throw the country into
panic?

In this regard, it must be pointed out that recessions and depressions do not exist. They have
the same reality as witches and dragons. And debating whether the country is in a recession is
similar to debating whether unpopular women in Salem, Massachusetts in 1693 were witches.
This is why it is so important for you to understand that the economics taught in our nation’s
colleges and universities is (to quote Shakespeare):

“a tale told by an idiot, full of sound and fury, signifying nothing.”

These events, wrongly called depressions and recessions, can be traced back to the days
of Abraham Lincoln. Lincoln could not persuade Congress to lay the taxes for the Civil War. So
he paid for the war by printing money (the greenbacks). The U.S. money supply approximately
doubled from 1861-65, and the price level did likewise. The gold standard was temporarily
suspended. Now it is important to understand that, when prices rise, wages also rise but much
more slowly. Thus the real value of wages declines. Therefore, all employers are making bigger
profits, and all workers find that their wages have less buying power. In such a period,
employers are looking to expand, and unemployment is driven down very low. However, after
the Civil War Congress and the new administration withdrew the newly created money from
circulation. By 1879, prices were back down to their level of 1860. This period of declining
prices had the opposite effect. Prices fell, but wages fell more slowly, and therefore the real
buying power of wages rose. With real wages higher, employers started to hurt, and
unemployment rose. The economists of the day had one concern: to further their careers by
kissing the hindquarters of the rich and powerful. What was happening was that wealth was
flowing back and forth between two classes. During the money expansion wealth flowed from
the workers to their employers. During the money contraction wealth flowed from the
employers to the workers.
 How did the economists of the day deal with this situation? They asked, “How can I
serve the interests of the rich?” Well, the rich were hurting during the money contraction.
“Therefore, I can kiss up to the rich by renaming this money contraction as though it were bad
for society as a whole.” And so the word “depression” was invented. They were, they told us,
academics who studied depressions and made scientific commentary. Conversely, they called
the periods when the rich were benefiting at the expense of the poor “booms” or “periods of
economic growth.”

In short, these economists were the leeches of society. They defined their job as helping
the rich to steal from the poor, and to that end they made up nice sounding words for the periods
(and policies) to the advantage of the rich and bad sounding words for the periods (and policies)
to the advantage of the poor.

Was there any real economics here? All we have to do is to look at some facts. The
“boom” of the early 1860s occurred during the Civil War. Millions of men were pulled off the
farms and factories and put into the army. These men, to say the least, did not produce any
wealth. Many of the goods that were produced, furthermore, were not wealth. What wealth is
represented by a bullet, a cannon or an explosive? Nothing except to destroy other wealth. A
war (if we set aside the loss of life) is simply two groups of people destroying each other’s
wealth. One side creates an explosive and destroys some buildings and equipment of the other
side. Then the other side does the same thing. At the end, both sides are poorer. In what sense
is this a period of economic growth?

After 1865, there were a series of “depressions” which were caused by a long contraction
of the money supply. This lasted until 1896. This period of “depressions” was the most
productive in the economic history of any nation. It was the age of Thomas Edison and Nikola
Tesla. It was the age of railroad expansion. The automobile, the telephone, the electric light and
many other inventions were created. From 1866-1896, the real wages of the average American
worker increased by 90%. People from other countries (my great grandparents among them)
flocked to America because the streets were paved with gold. This was true in more than one
sense. Despite the opposition of the railroad interests the country returned to the gold standard in
1879. It was also the period when America took the world economic leadership from Britain. I
ask all of the economic idiots, in what sense was this a period of depression?

The same thing happened in the early 20th century. The Government increased the money
supply during WWI. The economic leeches called this a boom although the real wages of the
working man fell sharply. The Republicans of that day figured out what was happening and
realized that the extra money had to be taken out of circulation (a good 5¢ cigar). In the period
1920-1933, they reduced the money supply and brought the average price level down to that of
pre-WWI. During this time real wages rose, per capita meat consumption increased (from 129 lb
in 1930 to 144 lb in 1934), people switched from margarine to butter and gave more to charity.
And yet the idiots tell us that this was a depression and the nation was poorer. Statistics
available from Historical Statistics of the United States, Colonial Times to 1970, published by
the U.S. Department of Commerce.

So you see what the nation barely escaped in 2008. And you see what Ben Bernanke has
spent his life studying and wherein lies his field of expertise. He is an expert in dragons and
witch infestations. Greenspan at least knew that he was a liar and a fraud and acted ashamed.
He is on record (before he became Fed chairman) as condemning the policies he later practiced.
But you can bet your life that the national and world media did not report a word of this.
Greenspan was repeatedly on the record as favoring the gold standard.

AND YOU CAN TRUST ALL OF THE MEDIA WHICH REPORTED THIS CRUCIAL
FACT (which is very close to none).

Now let us return to the commodity collapse of 2nd half 2008, which itself was caused by
the media in general and the New York Times in particular as these media were screaming “Great
Recession” and “depression” at the top of their lungs.

What happens to human beings who go through a panic? During the panic they are
wildly irrational. But as the emotion gradually subsides, there is a return to reason. That is what
we have seen in the commodity markets since early December 2008. The CRB first formed a
small head and shoulders bottom and has now recovered almost 2/3 of its loss. There is no
recession or depression. It is all a figment of our society’s imagination.

The State of the Union Address was used by Obama to shout defiance against the newly
emerging conservative movement, and this can be taken as evidence that he will pursue his
policies, including massive budget deficits, as long as he can. This printing of money has to
cause both gold and commodities in general to make massive further advances. The chart of
gold indicates this with several aggressively bullish patterns. The CRB will not be aggressively
bullish until it breaks above its July ’08 high of 618.

Right now gold is hanging just above its Dec. 22 support area at $1,075. If the gap
between $1,075 and $1,000 remains open, this will be an aggressively bullish signal. If gold
returns to $1,000, closing the gap, it will still be bullish (but less aggressively so). $1,000 is
strong support, and the odds that it will be broken are very small. Meanwhile any analysis of the
long term, as above, shows that commodities are extremely bullish, and that is the place for the
astute speculator to be.

My economic newsletter is the One-handed Economist: price $300 per year. I use
Austrian economic analysis, technical analysis and my theory of the commodity pendulum to
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www.thegoldspeculator.com. (My political and social blog has been suspended for the time
being.) Thank you for your interest.

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