Month: September 2013

By MoneyMorning.com.au

According to a weekend report from Bloomberg News:

‘A U.S. government shutdown means President Barack Obama will have fewer people to cook meals, do the laundry, clean the floors or change the light bulbs, according to a White House contingency plan…

‘Of the 90 people who maintain the President’s family living quarters, only 15 would remain to provide “minimum maintenance and support.”

And apparently in the event of a government shut-down, the US president will have to send home three-quarters of his 1,701 permanent staff.

For some reason the market didn’t like that news. Yesterday the Aussie index fell 88 points. The US Dow Jones Industrial Average dropped 128 points.

It was a big fall for the Australian market. But it’s still above 5,200 points, which is a key level as we head towards the end of the year…

But how much attention should you pay to the US debt ceiling?

After all, this isn’t the first time you’ve heard a bunch of shrieking and wailing as the government nears its spending cap.

So our inclination is to ignore the fuss and use the current pull-back as a chance to buy stocks rather than sell stocks.

Of course, like the boy who cried wolf, there’s always the chance that this is the big one. One day investors will become bored with all the nonsense and decide that stocks can’t rise in this environment, and so they won’t pay the current prices.

This is Why Government Money is Doomed

From a philosophical standpoint the market should embrace the idea that the US government is about to shut down (midnight US Eastern time, 2pm AEST).

The less government spends and the less it can inhibit the free market, the more businesses can focus on doing things that really matter – such as innovating, making products and providing services.

This is why, despite the criticism we face from folks who say that we don’t understand the seriousness of the problem, we choose to pay more attention to individual companies and emerging trends rather than whether the US government can afford to pay its bills.

Take the work we’re doing for subscribers of Revolutionary Tech Investor. Technology analyst Sam Volkering has just arrived back in London after spending a week in Dubai at the SIBOS conference.

SIBOS is an annual get-together for the banking industry. They meet and discuss the latest developments – mainly on the technology side – in the financial markets.

While he was in Dubai, Sam met with and talked to some of the people shaping the technological future of money and banking.

But as Sam sees it, as technology moves ahead at a faster speed, the banks will struggle to keep up.

This is another reason why we’re amused by the current fuss over the US debt ceiling. The fact is the whole thing is actually speeding up the demise of government-issued money. Governments have shown that you can’t trust them to look after money, and so at some point the private sector will show them how to do it.

Three charts show how the US government in particular is ‘helping’ with this shift to private money.

First, a chart of the US debt ceiling, which was USD$16.39 trillion at the end of 2012:

Source: Heritage.org

Next is the chart of the US monetary base that shows the extent of inflation and money printing:

Source: Federal Reserve Bank of St Louis

And finally, this chart shows the decline in the purchasing power of the US dollar since 1900:

Click to enlarge

Would you trust someone who had done that to your money?

The New Way for Money

If you gave a friend a loan and he or she used it as capital to borrow more money from the bank and then made you pay the interest to the bank, would you keep handing over your cash?

One day you’d say enough is enough.

And one day that will happen to the US government and every other government that thinks it can borrow without ever paying back the loans.

But will that day arrive tomorrow? Our bet is that it won’t. Instead, our bet is that you’ll see a continued decline in faith that governments can manage money correctly.

This will happen at the same time as individuals transition towards using non-government forms of money. In a way this is here now with PayPal, iTunes and Amazon.

Soon enough the transition will be complete to the point that you won’t store Aussie dollars or US dollars in a PayPal or iTunes account. Instead you’ll store units of currency issued by these private companies.

But whether that happens next year or next decade, one thing is certain: the private sector will easily adapt to this change – including most of the companies you invest in today.

That’s why for all the bumps in the market we view issues such as the US debt ceiling as an opportunity. Anything that hastens the end of devalued government currencies and heralds the rise of secure and valuable private currencies is a good thing in our book.

Cheers,
Kris+

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Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years

By MoneyMorning.com.au

OK, I admit it. I watch the television series The Walking Dead. If you’re not familiar with this triumph of modern Kultur, it’s a cable TV show about people battling zombies in a post-apocalyptic world.

Basically, The Walking Dead‘s premise is that an exotic disease killed off most of the world’s population, but in the process reactivated the basal sections of their brains. Now the not-entirely-deceased entities prowl the land as zombies. As a counterpoint to these ‘walking dead’ critters, an array of struggling humans battle to survive.

What does this have to do with investing? Glad you asked!

The Walking Dead helps, in perhaps a peculiar way, underpin a new investment thesis. It’s all based on the Fed’s ‘dead money’ philosophy.

While there may be no way of stopping the Federal Reserve’s plague of zombie money from flooding the market, there’s still plenty you can do to ‘arm yourself’ against its deadly advance.

Specifically, you can buy into the idea of holding gold or buying a few undervalued gold companies.

Investing in the Living and the Dead

I recently uncovered a fascinating chart, from Bianco Research LLC, of long-term US interest rates covering 222 years, from 1790-2012.

Click to enlarge

Pretty cool chart, eh? I could discuss this chart all day. But the take-away here is that since 1790, the average long-term interest rate on US Treasuries has been about 5%. When you look back over all of US history, interest rates have almost never been under 3%, excepting during the total national effort of the Second World War. Keep that 5% in mind!

The Current Historically Low Interest Rates

So what are the current interest rates for US 30-yr bonds? At last check, according to the US Treasury, they’re sitting at just above 3.6% – up over the past five months on the hopes of a Fed taper.

What’s the point? As the chart shows, historical rates for US bonds have averaged about 5% over the past 222 years. Yet right now, according to the US Treasury, short-term bonds yield just a hair above nothing. Medium-term bonds (one-five years) yield way under 1.5%.

We’re a long way below the historical average of 5% money, right? Treasury yields are as dead as doornails. Looking ahead, what if there’s even a slight reversion of Treasury rates to the historical mean? What if these near-dead current interest rates start to rise via the Fed’s promised taper?

Greasing the Treadmill to Nowhere

What do these superlow, historically anomalous Treasury interest rates tell us? On that point, I’m reminded of the words of the great Austrian economist Ludwig von Mises, who wrote that ‘Public opinion always wants easy money, that is, low interest rates.‘

Well, clearly, we have a government policy of easy money and monetary populism. The US government – and its associated class of media and financial enablers – wants cheap interest rates to mask the true cost of horrific, irresponsible levels of federal borrowing and spending. Low interest rates are just grease for the country’s financialised treadmill to nowhere.

With Treasury bonds continuing to offer historically-low interest rates, it sets a funereal tone for interest rates through the rest of society. Why bother saving? Could it be that American money is ‘cheap’,’ in terms of interest because over the long term, it’s not worth all that much anymore? Do you see the issue?

Back when I took the basic survey economics course at Harvard – Economics 10 – I recall the late Otto Eckstein (who worked for presidents Kennedy and Johnson) saying that cheap money destroys capital. That was just a fundamental point. If you missed that, you failed the course.

In other words, we live in a capital-intensive world. Capital requires savings and investment. Yet low interest rates undermine people’s incentive and ability to save and invest. So low interest rates are – over any prolonged period of time – thoroughly destructive toward capital in many ways.

We could go back to von Mises, who stated, ‘True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late, and to bring about a depression.‘

Soon or late? My bet is soon.

Byron King
Contributing Editor, Money Morning

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By MoneyMorning.com.au

Prices for gold and silver are down on the year – gold off 20% and silver down 28%. One sage banker explains – in the Wall Street Journal, no less – that the economy is improving. Thus people are less inclined to ‘keep their money idle‘ by buying gold, he says. Better to ‘put your funds to good use,‘ he says, by channeling it into other investments. Really?

Evidently, this banker-guy missed the class in which the instructor taught that ‘gold is money’. Because there’s nothing ‘idle’ about holding gold. Ask the rest of the world, especially the East. They’re buying gold.

Indeed, my tally of national central banks that have been buying gold, in recent months, includes Russia, Turkey, India, Brazil, Canada, Mexico, Saudi Arabia and Vietnam. What do they know?

Of course, China is also building a gold stash, but not bragging about it. They’re building nuclear weapons, too, and not bragging about it. To paraphrase that oft-noted Las Vegas line, what happens in China stays in China.

Back at Harvard, I learned that gold is money. Then again, I learned that in the Geology Department, from the mining geology guy, Prof. Ulrich Petersen, and not in the Economics Department.

Still, every now and then – back in the 1970s – one could overhear a Harvard economics professor say something like ‘a dollar is as good as gold’. Yes, it was a reminiscence of the days of the Bretton Woods Agreement, which established the dollar as a currency ‘backed’ by gold.

Old monetary habits die hard. Hey, maybe old monetary habits were the right thing to do, in their day. They deserve to die hard.

At any rate, I’ve never thought that US currency was real ‘money’. Those green pieces of zombie paper are merely a medium of exchange, and ‘legal tender for all debts, public and private‘. Where did I get that offbeat, countercultural idea? Well, start with the text that’s printed on every Federal Reserve note, that’s where. It says exactly that.

There’s a difference between currency and money. Modern America has been able to get away with blurring the currency-money distinction for a couple of generations. But with federal spending out of control, each day brings us closer to our own, contemporary version of economic apocalypse.

Really, who needs a zombie apocalypse, when you’ve got a federal government that spends astronomical sums of ‘money’ that, apparently, comes from nowhere? Well, okay, it comes from the Federal Reserve. But when you get down to the essence of things, Fed-money is equivalent to a ‘Big Bang money machine’ – from nothing, comes something.

The Gold in Fort Knox?

This reminds me of a story – a true story, no less. I was in the Pentagon, some years ago, in the days of the Bush II-administration. It was E-Ring stuff. I was in the very spacious office of a very senior guy in the US Air Force. We were discussing energy issues, particularly Air Force programs to spur a US ‘synthetic fuel’ industry.

Our discussion touched issues of government funding of private industrial development, and questions about who owns the intellectual property (IP). New energy-development technology has national security implications. Should the IP go into the public domain? Or do we keep parts of it classified?

One of the military staffers at the table spoke up, and said, with a downbeat voice, ‘I don’t know if we can keep this kind of tech classified. We’re terrible at keeping these things under wraps for long.‘

As everyone around the table nodded in agreement, I decided to test their hearing. I said, ‘That’s true. Really, the only two national secrets we’ve ever been able to keep are about those space aliens, and the captured flying saucer in Area 51, and that there’s no gold in Fort Knox.‘

The room went quiet. You could hear a pin drop. The senior Air Force guy leaned over the table, and looked right at me. He said, ‘Really? There’s no gold in Fort Knox?‘

That’s all for now. Thanks for reading.

Byron King
Contributing Editor, Money Morning

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By Profit Confidential

Gold bullion isn’t getting much respect these days…and that’s perfectly fine with me.

The Goldman Sachs Group, Inc. (NYSE/GS) says the precious metal has a risk of going below $1,000. Bank of America Merrill Lynch cut its forecast for the yellow metal as well. Its forecast says gold bullion prices in 2014 will be around $1,294 an ounce. (Source: Market Watch, September 27, 2013.) Other big banks have similar opinions.

While the big banks were proven right back in April and June when they said gold bullion prices would decline (and much had been written on that “forced” price decline), I don’t think their predictions will come true this time.

At the very core, gold bullion is a store of value, and it protects against uncertainty and currency fluctuation.

As readers of Profit Confidential know, I believe central banks will ultimately be the biggest buyers of gold bullion, and they will ultimately be responsible for higher prices.

Long-term, history has proven when there’s too much money in circulation, the value of paper money goes down and the hard asset prices go up. This economic cycle will be no different.

In fact, at his point in history, central banks in the global economy are printing paper money in overdrive mode, and they presently don’t seem worried about any consequences. Our own central bank is printing, the European Central Bank is printing, and the Swiss National Bank said it will print an unlimited amount of paper money if that’s what’s needed to keep its currency value low.

And while developed nations are printing, money printing in emerging markets is out of control. (In the end, it will be the central banks in the emerging countries that will be the ones desperate for gold bullion.)

Just look at these hard facts:

The basic money supply (paper notes and coins in circulation) has increased 156% since January of 2006. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 27, 2013) And the printing continues in India.

The situation is similar in China. The basic money supply there more than doubled from January of 2008 to this June. (Source: Ibid.)

Central banks are wrong in thinking money printing will solve their economic problems (Japan today is proof that money printing doesn’t work). Sure, the longer paper money printing goes on, the better the outlook for gold bullion. But it’s not just about central banks. Actual demand for precious metals by citizens in countries that are increasing their money supply (the U.S., India, China, and others) has been aggressively rising.

For now, I sit back and anxiously wait to see how this will all unfold. I am not worried about the short-term picture for gold bullion, as I believe the long term looks nothing but shiny for the yellow metal.

Michael’s Personal Notes:

The bear dressed as a bull has done a masterful job at luring more and more investors back into key stock indices.

Data from the Investment Company Institute shows that for the week ended September 18, long-term stock mutual funds had inflows of $3.3 billion. For the week prior, inflows were $5.2 billion. (Source: Investment Company Institute, September 25, 2013.)

Those who are buying stocks now cannot see the losses ahead!

The fundamentals behind the rally in key stock indices continue to deteriorate.

Companies in key stock indices are playing tricks to make their corporate earnings per share look better. They are buying back their own shares; and the more they buy, the better their corporate earnings per share look. In the second quarter of this year, the S&P 500 companies in total bought $122.8 billion worth of their own shares. The stock buyback activity in the second quarter was 24.2% higher than the previous quarter! (Source: FactSet, September 23, 2013.)

The troubles for key stock indices don’t just end here. Look at the chart below. It compares consumer sentiment (green line) and the S&P 500 (red line). Pay close attention to their relationship.

Chart courtesy of www.StockCharts.com

While consumer confidence has basically been flat, the S&P 500 has risen. The theory behind this is that when consumer sentiment is better or increasing, consumers go out and spend. As a result, companies’ corporate earnings increase. This is not the case right now.

Last but not least, we are hearing companies in key stock indices warning about their corporate earnings going forward. So far, 82% of the S&P 500 companies have issued negative guidance about their corporate earnings for the third quarter. How significant is this? The five-year average of S&P 500 companies providing negative guidance about their corporate earnings is 62%. As a whole, the number of companies proving a negative third-quarter outlook, in numbers, makes up almost 18% of the index—or 88 companies. (Source: FactSet, September 20, 2013.)

From my point of view, the disparity between the underlying fundamentals and stock valuations has increased to an unprecedented level. Be very careful with equities; easy money and tricks can only drive key stock indices higher for so long.

Article by profitconfidential.com

By Profit Confidential

The bear dressed as a bull has done a masterful job at luring more and more investors back into key stock indices.

Data from the Investment Company Institute shows that for the week ended September 18, long-term stock mutual funds had inflows of $3.3 billion. For the week prior, inflows were $5.2 billion. (Source: Investment Company Institute, September 25, 2013.)

Those who are buying stocks now cannot see the losses ahead!

The fundamentals behind the rally in key stock indices continue to deteriorate.

Companies in key stock indices are playing tricks to make their corporate earnings per share look better. They are buying back their own shares; and the more they buy, the better their corporate earnings per share look. In the second quarter of this year, the S&P 500 companies in total bought $122.8 billion worth of their own shares. The stock buyback activity in the second quarter was 24.2% higher than the previous quarter! (Source: FactSet, September 23, 2013.)

The troubles for key stock indices don’t just end here. Look at the chart below. It compares consumer sentiment (green line) and the S&P 500 (red line). Pay close attention to their relationship.

Chart courtesy of www.StockCharts.com

While consumer confidence has basically been flat, the S&P 500 has risen. The theory behind this is that when consumer sentiment is better or increasing, consumers go out and spend. As a result, companies’ corporate earnings increase. This is not the case right now.

Last but not least, we are hearing companies in key stock indices warning about their corporate earnings going forward. So far, 82% of the S&P 500 companies have issued negative guidance about their corporate earnings for the third quarter. How significant is this? The five-year average of S&P 500 companies providing negative guidance about their corporate earnings is 62%. As a whole, the number of companies proving a negative third-quarter outlook, in numbers, makes up almost 18% of the index—or 88 companies. (Source: FactSet, September 20, 2013.)

From my point of view, the disparity between the underlying fundamentals and stock valuations has increased to an unprecedented level. Be very careful with equities; easy money and tricks can only drive key stock indices higher for so long.

Article by profitconfidential.com

By Profit Confidential

In a world where genuine revenue and earnings growth is a tough thing to come by, the company with the iconic “swoosh” did so with flying colors. NIKE, Inc. (NKE) is a business that continues to defy its maturity as a brand.

The company posted 2014 fiscal first-quarter earnings that beat Wall Street consensus, with revenue growth coming in at a solid eight percent with no significant impact from currency translation.

The company was able to increase its gross margin substantially and total earnings grew an impressive 33% to $780 million. Diluted earnings per share grew 37% to $0.86 a share on one percent less in weight average diluted shares outstanding.

NIKE purchased 8.4 million shares of its own common stock in its fiscal first quarter for $526 million, and its cash position soared $2.3 billion (after a debt issuance and the sale of Cole Haan and Umbro) to $5.6 billion.

With such strong numbers and such a solid cash position, I’m actually surprised the company didn’t effect an increase to its quarterly dividends. The company raised its dividend at the end of last year, and management may do so in the next quarter; the business can certainly afford it.

NIKE has been able to get away with price increases without affecting demand, and with strong expense control, the extra margin goes right to the bottom line.

The company had a very successful fiscal 2012 fourth quarter, and its operational momentum continues. The stock is at an all-time record high, with a current dividend yield of just over one percent; but like most successful enterprises, the company’s share price is often trading at new highs.

This business is worthy of consideration when it pulls back on the stock market. The position really hasn’t had a major period of consolidation since back around 2000. The company’s latest quarter was a standout.

In the retail landscape, brand power matters and NIKE continues to execute tremendously well. Excluding changes in currencies, the company said that global orders for its NIKE-branded footwear and apparel for delivery from September 2013 through to January 2014 is up eight percent compared to the same quarter last year. It’s therefore reasonable to expect the company to post another solid quarter of revenues and earnings growth. Earnings outlooks from major Wall Street firms are very likely to improve over the coming weeks. (See “What NIKE’s Earnings [To Be Released This Afternoon] Could Reveal About This Proven Wealth Creator.”)

I always follow NIKE for its financial results. I use it as a benchmark stock on consumer retail spending. While the stock is fully priced, it’s earned the right to be, with such impressive growth in a still slow-growth environment.

The only low point in NIKE’s business currently is China. But this was widely expected, as company management already guided accordingly. NIKE is a solid long-term holding to consider for any equity market portfolio.

Article by profitconfidential.com

By Profit Confidential

I was looking at the chart of priceline.com Incorporated (NASDAQ/PCLN) the other day, as the stock surpassed the $1,000 level. But why would I consider paying so much for a stock when there are cheaper comparables in the same online travel space?

It’s true; there are less expensive online travel stocks than priceline.com. But when you are stock picking, you should look at the comparative valuation and growth metrics, and not simply stock prices. The problem is that many investors will tend to base their stock picking on the share price, but the reality is that determining which stock to buy is not like shopping for goods—you don’t always go for the lowest-priced item. It’s like the old adage, “You get what you pay for.” This also applies to stock picking.

Online travel provider priceline.com beat Google Inc. (NASDAQ/GOOG) to become the first company to break the $1,000-a-share barrier (excluding Berkshire Hathaway Inc.). This is an amazing accomplishment for a stock that debuted at $75.25 on March 31, 1999.

The key to priceline.com is that it was the first company to really drive the online travel segment and innovate its service offering along the way in spite of a growing number of competitors. This is why it is tops in the online travel sector.

Chart courtesy of www.StockCharts.com

Of course, there are competitors such as Expedia, Inc. (EXPE) that you could consider when stock picking, but the company is over seven-times smaller than priceline.com, based on market cap.

Chart courtesy of www.StockCharts.com

Based on comparative valuations, however, Expedia is more attractive, trading at 14.4X its 2014 earnings per share (EPS) and 1.6X its trailing sales versus priceline.com’s 20.24X 2014 EPS and 8.74X trailing sales.

When stock picking for the long term, try to always stick with the market leader; in this sector, that’s clearly priceline.com. However, for many, it may be more prudent to go with the number two player when stock picking in this case. Unless you want to spend $1,000 for a share of priceline.com, Expedia may be a better bet to consider when stock picking.

If you are looking at higher-risk small-cap stocks, take a look at Orbitz Worldwide, Inc. (NYSE/OWW) and Travelzoo Inc. (TZOO). Both of these companies are clearly cheaper, but there’s a reason why companies like priceline.com deserve the higher valuation.

Let’s take a look at the comparative revenue growth rate based on data from Thomson Financial:

As you can clearly see, priceline.com has the top revenue growth rates, which is why the stock market had rewarded this stock. It’s not always about the valuation when stock picking, but rather how fast the company is growing. For priceline.com, the growth is impressive, given the size of the company and its ability to maintain growth rates that are superior to its rivals and peer group.

Orbitz Worldwide and Travelzoo are cheap for a reason—just look at their estimated revenue growth rates, which are well below both priceline.com and Expedia.

So when considering what companies to buy within a sector when stock picking, remember it’s not always about the sticker price.

Article by profitconfidential.com

Brokers, in their never-ending attempt to entice new traders to their platforms, provide what they call “demo accounts” to anyone who’s willing to drop their email address. Brokers do this officially to give new Forex traders a chance to become familiar with their trading account before depositing. Traders often use these while developing their systems, and they may go through dozens of the dummy accounts before graduating to the real article. Unfortunately, demo accounts aren’t very useful if the goal is to become a better trader.

While a demo account uses the same data feed as the real McCoy and provides the same tools, it is a very poor facsimile for one all-important reason: emotions, or rather, the lack thereof. Live trading elicits strong emotions in practically everyone. These feelings, including greed, elation, terror, relief and elation, must be tempered with experience. Left unmanaged, they lead to carelessness, which results in an empty Forex account. Sadly, a demo account cannot cause these feelings in a new trader if they aren’t risking anything.

The result of this is that profitable demo account traders will graduate to live trading with false confidence. When they take their first loss and are plunged into greed and fear, subtle subconscious changes to their trading style will set in. An ugly self-sustaining cycle can occur in which the trader continually reacts to these alien emotions by making bad trading choices, thus generating more negative feelings. Professional traders, in contrast, develop a barrier between their knee-jerk emotional reactions and their trading decisions through years of live trading.

Furthermore, using a demo account over a long time period can result in the development of two very bad habits: disregard for the stop loss and a focus on individual trades instead of proper money management. Most Forex experts agree that the stop loss is an essential component of a profitable trading method. Many demo traders, however, don’t bother with a stop loss because they figure that they can close the trade manually at any time. In live market conditions, however, when actual money is on the line, such a casual attitude can result in huge losses in moments of inattention, especially during times of economic news releases when prices can plunge hundreds of pips in the span of a few minutes.

Because demo account traders don’t care about their account balance, they’re much more likely to focus on whether a particular trade was profitable or not. Yet in a live trading environment, the focus is on overall system performance and not individual trades. Variance and the law of averages will ensure that all systems experience drawdown from strings of losses, but a system with an edge guided by solid money management will bounce back. Demo accounts, however, over-emphasize the mechanics of trading, encouraging traders to disregard all-important concepts such as money management until it’s too late.

New traders are advised to use a broker’s demo account to become familiar with the features of the broker’s software but to draw the line there. By the time a trader feels comfortable opening positions with the platform’s one-click trading option ticked, they’ve mastered the software, and the demo account has served its purpose. To further test a system or gain trading experience, they need to experience the intense emotions that live trading generates. An economic middle ground may be the mini-accounts offered by most large brokers. Traders can open these accounts with as little as $50, and that’s enough money to get the blood pumping.

To learn more please visit www.clmforex.com

GOLD: With the commodity unable to create a clear directional move, its preceding trend continues to dominate. Support lies at the 1,291.12 level. A violation of here will aim at the 1,250.00 level. A turn below here will turn attention to the 1,215.00 level and next the 1,180.00 level. Conversely, resistance lies at the 1,399.79 level. A cut through here will open the door for a run at the 1,433 level. Further out, resistance resides at the 1,450.00 level, its psycho level with a breach targeting the 1,500.00 level, its psycho level. All in all, GOLD remains biased to the downside on pullbacks.

Article by  fxtechstrategy.com

Source: Peter Byrne of The Gold Report (9/30/13)

http://www.theaureport.com/pub/na/why-don-coxe-expects-gold-to-soar-on-good-economic-news

The standard wisdom on gold is that it does well in times of economic bad news such as in the 1970s, a period of stagflation and recessions, when the yellow metal rose from $35/oz to peak at $850/oz in 1980. But this time, Don Coxe, a portfolio adviser to the BMO Asset Management, believes things are different. In this interview with The Gold Report, Coxe explains why gold will rise when the economy improves.

The Gold Report: Are the days of easy money drawing to a close?

Don Coxe: I don’t think so. Even if the Federal Reserve begins to taper quantitative easing, the front of the curve is going to stay at zero interest rates. A trillion dollars is going through the Fed’s balance sheet, which works its way through the system. As long as the Fed keeps interest rates at zero, it’s easy money.

TGR: Will overt monetary inflation return any time soon?

DC: It will return when we have sustained economic growth. The Eurozone has been the big drag. It is definitely stronger than it was a year ago. The Eurozone has lots of problems, but it is experiencing economic growth despite the European Central Bank reducing its balance sheet in the last 12 months by almost exactly the same percentage amount that the Fed increased its balance sheet. This says that it has lots of firepower if it needs it. In addition, the Eurozone government deficits are lower than ours in terms of percentage of GDP. The Eurozone actually, despite all its highly publicized problems, has improved its financial shape relative to ours.

Also, in the last 12 months, Japan, the world’s third biggest economy, has gone from negative growth to strongly positive growth. It is doing that by printing yen at a prodigious rate. The days of easy money are going strong.

TGR: If inflation returns, will it first appear in goods or services?

DC: In goods. If I had to pick the one point at which we’ll start to see the change, it’s when the razor-thin inventory-to-sales ratio comes under strain. Corporations are controlled by people who learned in business school over the last 20 years that the first thing to manage is inventories. This way they don’t have to worry about prices going up and don’t use corporate cash to finance an inventory that may decline in value. Therefore, when things change, it will show up in the pressure that comes because companies have so little inventory on hand. Corporations will decide that they’ve got to invest in more inventory because they’ve got more demand.

TGR: Do you think that will shake loose the vast amount of capital that’s being retained by the multinationals?

DC: It will shake loose some of it, but the big thing is it will come because prices are starting to rise. The two reinforce each other.

TGR: What do increases in monetary inflation and capital growth mean for gold?

DC: Gold rose along with the Fed balance sheet for years. The two have decoupled in the last two years. I believe the reason is people have just thrown in the towel that there will ever be inflation. If you’re Waiting for Godot, at some point you can reach the conclusion that Godot may never come.

TGR: Should investors bet on gold’s return to previous highs or something in that direction?

DC: I don’t think we’re going to see anything like the double-digit inflation that we saw back in the 1970s. The big difference was the tremendous power of unions then. They all had cost of living adjustments in their contracts; the Consumer Price Index (CPI) would rise in a quarter, then automatically wage rates would increase and the two fed off each other. The weakened power of unions today has meant that we don’t have an automatic reinforcement right at the core of the system.

TGR: Let’s talk about monopolies and competition and why does the focus of big investors shift from growth to income?

DC: I’m not convinced that we’ve got a lot of monopolies out there. OPEC is no longer able to control oil prices, for example, because its share is no longer large enough to give it freedom on pricing. I believe that oil fracking will gradually start spreading from the U.S. to other parts of the world. We don’t have that monopoly, which was the big one back in the 1970s that made it possible for OPEC to quadruple the price of oil. A quadrupling of the price of oil here is impossible because the global economy would collapse with a doubling of oil prices.

TGR: Are companies borrowing money at cheap rates to increase dividends and buy back stock? And, if so, how does that affect the system?

DC: Yes, companies are basically removing from the system what I believe is the core of capitalism, that corporate cash is used to grow a business. Investors pay a high price-earnings ratio for companies because they believe the companies can reinvest that cash and sustain their growth. When we see that corporate cash is being used to buy back stock and pay dividends, the decision-making force in the system becomes stockholders redeploying cash. In the past it was the corporations themselves through their retained earnings and effective reinvestment that drove the system.

If money that people got in dividends was invested in shares of companies that were issuing new stock in order to grow their business, then the whole system would not be losing the money. When you have a system where corporate treasurers do not assume strong future growth and they assume that these zero interest rates are going to continue for a long time, the incentive to retain earnings and plan on capital expenditures (capex) goes away.

Capex is putting money out at great cost, where companies get no immediate returns from it, whether it’s building a new building or opening up a whole area of the country. When you take that out of the system, the result is that you turn the system on its head. It used to be that the companies would, when they had the cash, decide how much was needed for capex; after that they figured out how much they would payout in dividends. The decision makers within the companies are no longer focused on creating overall economic growth through capex and expanding production.

TGR: Are we in a triple dip or a quadruple dip recession here?

DC: No, I think we’re coming out of it, but we’ve come out of it at a gigantic cost. The Fed had to quadruple its balance sheet, which raises all sorts of problems. We have no precedent in history of this kind of expansion of the Fed’s balance sheet.

The ratio of paper wealth to GDP is so high at a time when it’s going to be difficult for corporations to expand because, as I said, they will need a large amount of capex to meet rising demand at a time when there’s all that money out there. I would regard that as a virtual guarantee that at some point we’re going to see inflation.

This time inflation won’t come from rising wages. It will come from rising demand and the inability of corporations to swiftly respond to that demand. The technology industry can expand in a hurry because it keeps coming out with new products, but for most of the rest of the economy, it takes a while to build a plant and get the machinery ready and test it out before there actually is any production. That period of time, if you’ve got strong demand because there’s so much paper money, is the moment at which you will see inflation coming.

TGR: How will that affect gold?

DC: It will deal with the problem of faith in gold. When gold tracked the growth in the monetary base, which it did so well, there was a general conviction based on Milton Friedman’s theories that expanding the monetary base too fast eventually translates into inflation. Inflation is harder to stop than it is to just watch start growing.

We will see that interest rates will have to rise because of another group that has not been heard from in a long time, bond vigilantes. They are threatened with extinction. It will be a combination of rising interest rates and rising prices that will get people to say, ah-ha, Milton Friedman was right after all, if you print the money eventually you’re going to have the inflation.

TGR: When you talk about bond vigilantes are you talking about junk bonds or what’s known as private equity?

DC: The bond vigilantes work primarily on government bonds because they are the ones they can trade most effectively. Junk bonds are a small part of the market. With inflation the bond vigilantes sell off their 30- and 10-year bonds and move down to the 2-year note. At that point the cost of capital for expansion rises through the system because corporations can use short-term cash for some of their work, but they tend to use long-term borrowing from banks and the bond market for major projects. The cost of building those projects increases because of the steep yield curve.

TGR: Do you consider yourself to be a bear or a bull on gold?

DC: I am neutral in the short term. I’m not a bear. I’m a bull in the long term because I believe it’s not a question of if but when all this money printing eventually comes to haunt us. Gold as an asset class is so tiny in relation to the vast expansion of money around the world. With the printing that’s gone on, China has had to expand its renminbi supplies to prevent the currency from soaring relative to the dollar.

TGR: You are appearing at the upcoming Casey Fall Summit. Are you going to talk about gold there and will it be more or less what you just said?

DC: Yes. I am going to point out that the big story for gold is up until now gold has been only a bad news story. The reason why it’s in trouble right now is there always seems to be bad news in terms of inflation. People say if inflation hasn’t come now with the quadrupling of the Fed’s balance sheet, it’s never going to come and the Fed is going to have to keep on pouring out more money because the economy isn’t growing.

When the economy starts to grow all of a sudden because, as I said earlier, of the inventory cycle, we are going to start to see inflation. Gold will become a good news story in the sense it will be responding to strong economic news at a time of massive liquidity, which translates into inflation. The fact that we’ve had all that money printing, which has only prevented us from going down into a pit, at such time as this actually leads to good economic growth. That is the point at which we’re going to see people wanting to have gold. It’s because we didn’t get the direct pass over of the money printing into rising prices that gave people a loss of faith saying, well, if it hasn’t come with quadrupling the Fed’s balance sheet, it’s never going to come.

TGR: Given that, is it a good idea for investors to buy gold stocks while they’re available at basement prices?

DC: I believe that everybody should have gold insurance now. The question varies from investor to investor. What we have is an extremely high-risk central bank policy in the world and it’s high-risk based on monetarism. I believe monetarism will prove to be right because all past experiments with paper money eventually led to inflation and monetary collapse. At some point the fear of that will come. You need gold for insurance, but this time the payoff will come when the economy improves; in the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth.

TGR: Thank you for your insights.

Don Coxe has 40 years of institutional investment experience in Canada and the U.S. As a strategist and investor, he has been engaged at the senior level in global capital markets through every recession and boom since the onset of stagflation in 1972. He has worked on the buy side and the sell side in many capacities and has managed both bond and equity portfolios and served as CEO, CIO and research director. From his office in Chicago, Coxe heads up the Global Commodity Strategy investment management team, a collaboration of Coxe Advisors and BMO Global Asset Management. He is advisor to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and to the Virtus Global Commodities Stock Fund in the U.S. Coxe has consistently been named as a top portfolio strategist by Brendan Wood International; in 2011, he was awarded a lifetime achievement award and was ranked number one in the 2007, 2008 and 2009 surveys.

Learn more about the agenda for the Casey Research Summit, October 4-6.

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