The Magic Wand of the Central Bankers

Gold versus paper money

Volatility is back. One day Wall Street is down a few hundred points, the next day, it’s back up. Overnight, the Dow surged 274 points.

Why? Because the US Federal Reserve released the minutes of its most recent monetary policy meeting which showed — surprise, surprise — that they are in no rush to raise interest rates. Oh, and they are also concerned about the strength of the dollar.

The market response? Buy stocks!!

At least this stupidity might give the Australian stock market some reprieve today. The local index has been bludgeoned recently. Even when Wall Street rises, Aussie stocks have struggled to post decent gains.

That’s largely thanks to the surging US dollar, which has dragged commodities down, including iron ore, Australia’s biggest export earner.

For the first time in a few years, stocks at the top end of the market, like the banks and the big resource companies, are leading the sell-off. The recent correction in the market served to break the upward trend that’s been in place since 2012.

The trend is no longer your friend.

Despite this newly ugly market environment, or maybe because of it, Australian Small-Cap Investigator analyst Tim Dohrmann is having a ball. He’s picking winners left and right at the moment.

That’s because Tim doesn’t care what’s going on in the market. He’s looking at small caps with exciting business plans…companies who are getting on with it regardless of QE, government idiocy, budget deficits, or anxious consumers.

Tim’s latest winner is a small oil explorer that just found an ocean of the stuff in Africa. I don’t know what Tim’s secret is…he usually scurries off to the back of the office each day and surrounds himself with company reports and data sheets. But whatever he’s doing, it’s working.

One thing I do know is that Tim isn’t looking closely at gold stocks right now. They are on the nose big time. Recently, gold fell right back down to its recent lows at around US$1,180 per ounce.

Just as everyone starting worrying about a break below the lows and a collapse in gold prices below US$1,000, the price turned around. You can see the turnaround in this chart. The plunge lower that we saw in early October has reversed quickly in the past few days.

Gold price

Maybe the price bounced in sympathy with the start of The Gold Investment Symposium in Sydney, which kicked off yesterday.

I arrived in Sydney early today to catch the day two presentations. I’m scheduled to speak at the end of the day…hopefully there’s still a crowd here to listen.

You can tell when an investment is on the nose by looking around a conference room. There are a good amount of people here, but the room is by no means full. And I get the sense that it’s mostly die-hard gold types in the audience, rather than interested newbies.

Which is a shame. The Gold Symposium is an excellent conference, with quality speakers. The education you get here in half a day beats what you’ll get by listening to the mainstream media drone on for months.

But it’s a great sign if you’re a contrarian. Gold certainly looks like it’s been abandoned by all but the true believers. I don’t know if gold has found a lasting bottom, but apathy and disinterest are two welcome signs that a bottom is close.

You haven’t had the capitulation phase just yet…and it may not even take place. There’s no guarantee that markets bottom out in a textbook fashion. And, as I’ll show you tomorrow, gold is much closer to the bottom here that it is near a top.

Getting back to the actual conference, first up this morning was Brent Johnson from Santiago Capital, based in San Francisco. Brent explained how it’s a mathematical certainty that the current monetary system will collapse at some point.

He doesn’t know when that will be, of course, but he reckons it’s not as far off as many people probably think. Assuming you’re even thinking about an end point for our monetary system…which most people are not.

Brent says you’d be mad not to have some of your capital invested in physical gold, the ultimate insurance against such a collapse.

Santiago Capital tells their clients to have between 15% and 25% of their capital in gold. This may seem ill-advised now…but it won’t in a few years time.

Don’t forget, you make your money in the buying. You buy when things look hopeless and everyone thinks you’re an idiot for doing so. It’s these conditions that produce huge gains in the years ahead.

Brent likens the current day monetary system to a shark. Most sharks must continue to move in order to stay alive. If they stop, they die. In the same way, the monetary system must keep the money flowing. And to do this, debt must keep growing to pay the interest on the previously created debt.

In other words, we’re in one giant Ponzi scheme. That’s a statement that has been bandied around for years now. But because central banks seem all powerful, and nothing Ponzi-like has happened yet, the gravity of the term is lost on most people.

But make no mistake, you’re living through the largest Ponzi scheme in history. It’s only the magic wand of central bankers that keeps this Ponzi scheme expanding. And it has the added benefit of anesthetising people’s brains to the dangers of what they’re doing.

Well, it won’t work. It can’t work. Life doesn’t work like that and the market, at its core, is a representation of life.

So do yourself a favour and buy a little bit of gold insurance… even if you don’t believe anything will happen. After all, that’s what insurance is for.

Until tomorrow…


Greg Canavan+
For The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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slewie the pi-rat
slewie the pi-rat
2 years 11 days ago
“You haven’t had the capitulation phase just yet…and it may not even take place.” i agree. even for gold: don’t fight the FED. however, i am reluctant to call a long-term gold bottom, even with gold’s triple-visit “downtown”, when the US Dollar has broken out, top-side, this recently, and has not reversed, necessarily, yet. nevertheless, it very well COULD be in… if so, first it will confirm on the daily chart. then the weekly. then the monthly. the US Dollar is now rid of the “overbought” aspect. is it resting for another run higher? or is the dollar now back… Read more »
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