REASON believes its readers (mostly hard-money people) have a right to know exactly what went wrong with those rosy predictions of two and a half years ago by most gold-bug forecasters. And now that gold is glittering again, where, they ask, is it going?
Because so many gold devotees among newsletter writers (along with their followers) got their faces splattered with egg, it's important to point to an understandable human failing—which lay at the cause of the over-enthusiasm for gold in late 1974. The failing was love and righteousness. Sound crazy? Not really. Gold investors fell in love with gold and refused to be objective about it—to see it as an investment that is subject to technical factors, as are all other investment forms. Most were also, correctly, righteous in feeling that gold ought to be crowned and made central to the monetary system, to give stability and accountability.
Of course, just because one feels this way, doesn't mean that realization will follow the desire. Goldphiles assumed that a rising price meant monetary recognition. They were partly right. But there is much ebb and flow in getting changes in a monetary system, and the investment arena is not the best place to fight battles for one's political beliefs.
So, because of love and righteousness, most advisers failed to see the flashing red light. Happily, I did. I told a large press conference in Toronto in the fall of 1974 that golds should be gradually sold and NYSE stocks should be gradually bought. Gold was very high and Wall Street was very low. Most of my contemporaries were saying: sell short NYSE and buy gold; it's going to $300. I wasn't more intelligent than they, just less emotional.
The signs were there, if one looked hard. The chart pattern was blatantly bearish, being both a top pattern and yielding a specific downside target (which I was too chicken to mention just then). The odd-lotters were into gold shares. Some people were buying gold without really knowing what it was; to them it was just another crapgame. When my $20-a-minute consultation phone calls became 95 percent about buying gold and none about selling, I believed the top had come. I wrote in my newsletter, in late December 1974, to start selling.
The nearly two-year gold bear market that followed was dispiriting to all who like gold for political reasons. Many (me included) made errors during that time by getting back in and then having to exit again. We felt for the bottom for months. When it came, the signs were fairly clear—but by this time we were all gun-shy, afraid to say "buy" in case our heads got shot at, again. But a few of us did say "start buying slowly; it looks like the worst is over." Soon the evidence piled in and one could begin to say again what one was happy saying—but had become conditioned to avoid.
Recently, the evidence has become so overwhelming that only a masochist would stay out of the gold market. Technically overwhelming, that is. One should only be gung-ho for an investment, however, when there is both a fundamental and a technical case. Is there a fundamental one? A real one, I mean, not just because we believe in gold-backed money, etc. Yes, there most certainly is. Multi-pronged in fact.
Most importantly, there's the specter of inflation. The raging argument over deflation versus inflation has become a bore and the statistics coming out now are making the inflation case the clear winner. Nothing is more bullish for gold than an increasing rate of inflation.
Next comes the interest rate battle. Here too, people lined up on the sides of predicting either higher or lower interest rates. Short-term, the lower-lads were right, but medium- and long-term, the higher-rate view will prevail. In fact, as REASON goes to press there may be a sharp turn-up being unveiled. I predict an almost unbelievable two percent rise in interest rates very soon. This too is always positive for gold.
Then there's the monetary aspect. While there is great talk at IMF (International Monetary Fund) meetings about dethroning gold, the truth is that while speaking to limit gold's role central bankers have acted to increase its role. For example, by killing the official price for gold (which sounds bearish and is intentionally reported that way), they have freed its price to rise—which most central bankers privately desire. And it was made permissible for central banks to reprice their gold reserves at the free-market price if they choose to do so. A few have. Soon they will all do so. Also, it was made legitimate for central banks to buy gold thru the BIS (Bank for International Settlements in Basel, Switzerland), even though slightly frowned upon. When the new IMF amendment is fully ratified (perhaps by June 1977), central banks will be permitted to buy gold directly from IMF auctions. In theory, maybe even open-market buying will be allowed. Also, gold has been monetized in the last two years by central banks' sanctioning of loans being granted with gold as collateral and tied to a market-related price, sometimes a flexible and adjustable price. Nothing could be more bullish.
And so it goes. Step by incredible step, gold is being pushed into the monetary system, while speech after speech talks about how the opposite is being done. It's a case of "believe what you see, not what you hear."
The IMF gold auctions have been hailed as the great bear event of 1975-76. And it certainly had its bad psychological side. But again, it helped gold get further into the monetary system, because some of this gold has already been bought by central banks, giving them a greater vested interest in gold and its price. Then too, industrial and jewelry consumption of gold has increased to the point where it absorbs most of the new supply by itself. That can only mean more competition for the inventoried gold. The effect on price is clear. One can add that political instability seems to be increasing. That's a bull point too.
And if we fail to mention currency nervousness, we would be negligent indeed. Floating currencies have been a disaster. It's just managed rates now. Floating hardly comes into it. There has been more currency instability since floating started than in the decade of fixed rates that preceded it. When currencies gyrate, people turn more to gold.
And then there's the big "nuclear bomb" of the gold picture—Russia. If she decides to back the ruble with gold, as my sources advise me she will (for an "external ruble" only and not for locals) then the pressure on the gold price will redouble.
So there you have it. Technically and fundamentally, the cases are solid. The gold bear market is over. A new gold bull market is on. Where next? Well, since the recent price push, people have been flocking back into the market, and that means a correction is due. A lot of to-ing and fro-ing should be seen in the gold price for the remainder of this year. But the trend will be upward. Those who buy on setbacks and sell on runups will fare best and sleep most soundly. Goldphiles simply must face the facts of life—that gold is an investment like all others, to be sold and bought back and sold again. Gold is not a religion—at least your investment in it isn't. Or shouldn't be. It may be a religion for political purposes and I'll always be a bull on gold in this respect—never a bear—for gold can create and preserve freedom. The absence of it kills liberty, creates slavery.
And what about those $300 predictions of yore? Well, I suspect they weren't wrong, just premature. We'll see $200 gold before long. And if inflation really gets rolling, $300 is not the least ridiculous. But for the short term (which is where we live), don't invest today and hold for a big number like that. It may never come. And even if it does, it certainly won't be in a straight line. Gold will rise and crash a thousand times before it goes to $300—small rises and small crashes, but hard on the emotions just the same. And you can make 500 times more profit if you keep selling and then keep buying back, rather than just buying and holding. It's safer too. I recommend it for widows and orphans. Why? Because if it should go sour (because of government regulations, for example, prohibiting gold ownership again, etc.), then selling is wise. Riding things down hoping for a comeback is never wise.
But this was not meant to be an article including investment tactics. The major points are, rather, that gold reflects certain economic conditions. Gold rose in the early seventies for logical reasons. It fell in 1974-75 for logical reasons. It is rising in 1977 for the reasons set forth herein, which I trust are likewise logical. Viewed in the terms of this reasoned REASON article, I hope we make ourselves able to outguess gold—most of the time, anyway. Gold is almost a law unto itself. Trying to understand it can be rewarding. Gold luck.
Dr. Harry Schultz is the author of 13 books on money and puts out three investment newsletters—the International Harry Schultz Letter, Exodus, and Gold.
This article originally appeared in print under the headline "The Lowdown on Gold".