The Rat(e) Trap & Universal Law

By: Randolph Buss | Mon, Mar 28, 2005
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I started to write this letter on Thursday, 24 March, and had planned to finish it for the site as promised, but alas a few things got in the way. At these times I am reminded of the saying: "Life is what happens when you're busy making plans". And so it was. First, my wash machine blew up and with piles of laundry I had to find alternatives during the holidays. Secondly, thereafter I was struck with one of my rather infrequent migrain headache attacks which is so painful and debilitating, I spent the next 18 hours in bed in a darkened room with ice on my head - no help. I had run out of medicine and had to wait until today to buy medicine. And thirdly, a reoccuring middle-ear infection came back to haunt me. It all seemed so Woody-Allen-ish in a sublime sort of way. Self-deprecating laughter keeps me going. So, am now just trying to return to my normal routine of things.... As they say, the road to hell is paved with good intentions.

By the way, Happy Easter !

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Before getting into the nitty-gritty of this past week, which indeed saw some rather nasty corrective movements, even if not wholly unexpected, I wanted to take the time and look at a few results of "Happines Research". It was a long holiday so we had a bit more time to look at some interesting facts regarding money and happiness and other psychological factors which research has uncovered. Here are some recent facts from economist Bruno Frey - I find them quite interesting...

Does money make one happy? On principle, yes. Those with less money are less happy. With increased wealth there is however not increased happiness. For example, those individuals with 1 million dollars or 10 million or 100 million - no appreciable difference in happiness could be found between them.

Where do the happiest people live? The Danish are the happiest. In second place are the Swiss. The Germans are less happy. This is due to increased unemployment and a drop in personal earnings.

We always thought the lonely fisherman on a beautiful Greek island is the happiest. That is pure myth. People in poor countries are mostly unhappy.

Wealth is an important happiness factor. What is the most important factor? Job satisfaction. Those without jobs are most unhappy even when their salary is kept constant. They become outsiders to normal life, lose social competencies, and their feeling of self-worth sinks dramatically.

Are there other economic factors besides salary and work which affect happiness? Inflation. Here I am talking about 5 or 10 percent which make things then very uncertain and this causes unhappiness because people know that a bad ending is coming.

What other factors play a role? Social factors play a role. Family life is important. A partner can stabilize the feeling of happiness.

Kierkegaard said " Better well hanged than poorly married" Yes, better to be single than in a poor marriage. But in general, those married are happier.

What other factors play a role, for example, sex? Studies show that a satisfactory sex life does not show signs of wearing thin but rather continues to inspire the individuals.

What role do children play in personal happiness? So long the children are still at home they are not necessarily a cause for happiness. Once they have left the parents house and with that the associated problems and worries, are the parents happier.

Let's summarize: Those happiest are married without children. Yes, or married and have grown children.

And who should one marry? Studies show that couples should have a similar level of education. We call that homogamie. With large educational differences most marriages do not survive.

We thought opposites attract. In the beginning yes, but in real life it is a disaster.

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I had planned an exquisite piece for you today, but then, as often is the case, I dumped the entire article after taking a walk in the sunshine and contemplating the markets - something I am obsessive about - I thought about the "big picture" and gold and education and psychology and universal law - imagine, all at the same time!

Over the years we have heard the incessant cheerleading of gold and silver and the precious metals by many a newsletter writers who, just by the way, happen to analyze and make money off of the precious metals markets. There is nothing wrong with that and I think they are to a certain degree on the right track of tangibles and monetary metals versus paper, fiat money, it just disturbs me a bit to keep hearing "this is the bottom - $500 gold is on its way". Well, I think they are on the right track, it's just that a certain saying keeps popping into my head "There is nothing more powerful than an idea whose time has come". Unfortunately I feel that this "gold idea" has not quite fully come full circle to sit squarely on the public's head. They are still far too enamoured with condos and big houses and 0% downpayment.

Right now, the public is mostly obsessed with real-estate and the stock markets and hedge funds and whatever. The only problem I have with these are that they are contingent upon certain other parameters of the economy not falling apart - and to a large degree I mean the bonds and oil prices and hence inflation. Currently, these things certainly are not looking good. As we know, or should know, there is no free lunch - but certainly the investing rats keep trying to nibble at the edges of the Return-On-Investment Cheese without getting financially caught in the proverbial rat(e) trap - pun intended.

Another thing I find very interesting is the view of fund managers and bankers and specialists. Most of these guys have never lived through rough times because most of these people were born and have lived through the last 60 years, ie. since WWII. Me included but I do read history incessantly. Let's be honest, the world financial system has been basically humming along very good for the last 50 years or so. And on top of that, the excesses of the 1990s are still very fresh in the minds of most "financial specialists". Happy Days will surely live on forever......wont they? But in talking with older people, you find a certain contempt for the "system". They all recognize it's a delicate financial house of cards, but who ever listens to the old guys these days ? They are has-beens. Well, I am not going to argue the contrary to this because that is another story for another day - but mind you, they recognize that massive debt and endless printing presses cannot go on forever, no matter what voodoo economics one applies. In writing to a colleague, I wrote that energy can neither be created nor destroyed, but can only change form. Well dear reader, money is energy. It is a certain form of energy. And when the money is simply created out of thin air, then it takes on the form of real debt, i.e. the energy is created at a deficit and Universal Law states that energy must be kept in equilibrium And so debt must be worked off in real blood, sweat and tears because that is GDP. Or it must be written off entirely. And if it is written off, then all the energy created in managing that energy (money) and invested with it will also be gone - i.e. banks, institutions, savings, houses, jobs, etc. I am sorry to inform you of this - but it is Universal Law. There are no financial free lunches. Universal Law sees and adheres to ensure that energy is kept in equilibrium.

Finally, on the issue of education - don't get me started please - we find that most people do believe in the free-lunch syndrome. What do you mean? Well look at, everybody wants to get rich quick - buy & sell real-estate at a pop, flip it, get in get out. It is a mind set. It is a rare few who take long and solid steps these days to building businesses and also society. The managers are off-shoring jobs to save money in the short term and all the while purchasing power at home stagnates as wages fall and jobs become scarce. In fact, many of these high-flying managers could not give a damn about the business they are managing - it's all about "What can I get out of this system for me?". It comes down to the morality of those in charge.

As long as the Federal Reserve and Federal Governments continue this game of massive liquidity injection with no inherent physical infrastructure to back it up, i.e. real GDP capacity, then they are in fact with their deficit spending creating a massive energy deficit and keeping the energy equilibrium out of balance. As this imbalance grows, the resultant re-alignment of the energy equation must be necessarily larger and more tsunami-like as compared to smaller imbalances, i.e. recessions to work off the debt. The forthcoming re-alignment may thus be conjectured to be more massive than expected, i.e. depression. This is not a black painting of the future, but is rather a necessary adjustment within the equilibrium of all closed systems, and the world is a closed economic system. All the economic energy on this planet is trying to be maintained within a "bollinger band" of limits. Unfortunately, few people within the economic system are taking the necessary measures to ensure a deflating of the debt overhang, but in fact, are doing the exact opposite - creating more debt and to cover their behinds, they create more paper money to paste over their mistakes.

Joe Public has not caught on yet to this government induced debt scheme. After all, those addicted to cheap money and no pain financing would rarely want to give up a good thing. Heck, why not have two SUVs a million dollar home all on a $35.000 per annum salary? Yee haw! At that is why the governments are scared of gold. Gold has shown throughout history that it was the only tool to be used within the realm of economic Universal Law. Gold cannot be destroyed. It's physical properties are such that once mined and smelted it remains forever - it can only change form, i.e. coins, jewellry, bars, leaf, etc. It cannot be destroyed. That is why any Central Banker with a clue, and who is not on public record, does not really want to sell it. It is what makes a national currency liquid and valuable.

These facts have not been understood yet fully by Joe Public. That is why I think the gold complex continues to be traded and invested in by "knowers" of history. At some point Joe Public's house will be worth 50% of what he paid for it, oil will be moving much higher, industry staples moving higher and his salary will be falling. Only then will the magnificent traits of gold be understood but I fear by the time Joe Public really undertands all what I have here written about, gold will be priced out of normal people's scope.

My tip: get as much physical gold as you can and keep it stored away. Nobody knows when the equilibrium will start to tip towards the side of real money, gold, which has no "down side". Gold is at worst a non-income producing tangible and is at best a life-insurance policy which can be carried with you at all times.

We cannot know the future of when an economic conflagration may grip us and shake society but the Universal Law of Energy Equilibrium will ensure us that unless a severe depression and/or rebalancing takes place in order to re-stabilize the economic landscape then only a violent re-adjustment is the inevitable answer. Governments currently show no signs of ramping down liquidity nor do they show signs of strong fiscal management and debt reduction or savings programs. In fact, it is as Stephen Roach states in the article below, the race is on to beggar thy neighbour or, in other words, force the pain on "them", not us, i.e anybody but me.

In that case I would suspect the price of gold to be far above today's price. Far above. I'm not a gambling man because I've done far too much mathematics in my life to know the chances of winning are usually poor at best, if not infitessimal (lottery). The point is, Gold is now to be in the accumulation phase.

For those that state the commodities are in a blow-off stage, that may well be. But I believe that gold and silver will, although initially be caught up in any down wave of metals movement, will at some stage stop being considered a metal only and will, in conjunction with the psychological market atmosphere, return to being a monetary vehicle apart from the general "commodity story". When will this happen? Who knows, but should the broad markets continue a further steepened decline in conjunction with inflationary tendencies a la the bond markets, then this may be the impetus for a fundamental paradigm change back into an historical store of value. Gold and Silver. Albeit, we are not just there yet.

And if all of the above has no meaning or relevance for you, then know this: lexigrams are hidden word meanings : What comes out of the word "GOLD"? -----> old, good, God and dog. Old for it cannot be destroyed and remains forever. Gold was and still is considered good. Good for money, especially. God, as it was the purest form used by kings and throughout all religions. How many scepters or chalices are covered in dollar bills ? And, finally, they say that nothing is closer to the love of god than the love of a loyal dog. Fascinating. You decide.

And now, the gold charts...

At this moment, I see the HUI at a critical support level, i.e. in the range 196 to 200. That is both a fibo 61% level and is the green support line from June / July 04 and also is the blue uptrend line. If that fails, then a next support level is 180. Looking at the RSI it is signalling a bounce....but how much. I would be surprised if sentiment allows the HUI to fall to the 180 range simply because this would imply gold going quite a bit lower. At this stage, I think gold is a buy, especially in Euro terms.

Again, the weekly chart gives us a similar picture of the 180 and 200 support levels. The reverse Head/Shoulder formation from Dec 04 to March 05 failed miserably as HUI corrected abrasively back down to the 200 level.

Ditto for the gold contract price. The weekly chart shows the red line head/shoulders failed but so far the uptrend blue is still fine around the $420 level. Below that the recent low around $416 is a key support area.

The long term monthly chart does not need a lot of commentary - still in a well defined uptrend. Although here I would continue to keep an eye on the weekly chart for tell-tale signs of further longer term weakness.

More on this in upcoming issues - if you would like to know more, please sign up for a free subscription to Der Invest Informant here. As well, please visit the site daily and read my Latest Letter.

Have a good start into Tuesday... a short week, I love it.


 

Randolph Buss

Author: Randolph Buss

Randolph Buss
Berlin, Germany
www.dinl.net

Randolph Buss, currently works in portfolio & asset management | commodity fund advisory & management | macro investment research as editor and publisher of his newsletter read in over 45 countries.

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