This is the second article in a five part series that is based on a Q&A with Nick Barisheff, CEO of Bullion Management Group Inc. and author of the book “$10,000 Gold: Why Gold’s Inevitable Rise is the Investor’s Safe Haven.” His book will be released later this year but is available now for pre-order on Amazon.com. The main idea behind this article: financial assets and hard assets tend to evolve in opposite directions on a very long term timeframe. Those are simply the dynamics of economic cycles.
Many of today’s investors have no other experience than what’s happened in the long bull market of financial assets, between 1980 and 2000. Those two decades are characterized by very successful bond and equity markets. At the same time, gold and silver prices experienced a slow steady decline. It was remarkable to see how central banks, Wall Street and the media were taking every opportunity to make negative comments about precious metals.
The cycle before that started in 1968 and included US President Richard Nixon putting an end to the gold standard in 1971 and peaked with the gold and silver mania in 1980. And here we are again, after 12 years in a row where gold has outperformed every other asset class. Gold and silver are almost off the radar in the mainstream. Gold’s share of the total global asset allocation has risen from 0.5% to 2% between 1980 and 2011, according to a recent speech by Peter Lassonde chair of Franco-Nevada Corp. A survey of 1,000 US investors done in 2012 by Gold Bullion International LLC revealed only 2% of the investors own investment grade gold.
Here is the key point: if you’ve only lived through one cycle, it’s very difficult to change your mind. Essentially it requires a major paradigm shift in your way of thinking. Clearly most people today aren’t able to see beyond the financial asset bull market; they still tend to ignore the spectacular gold bull market. It’s at this point where the psychological factors come into play. In his book, Nick Barisheff talks about three psychological factors that are preventing people from looking at this shift with an open mind:
- Complacency, which is the “routine” behavior that prevents us being open-minded to new evolutions or trends (in this context: willing to admit that the new economic cycle)
- Cognitive dissonance indicates the difficulty of making a choice between conflicting options
- Normalcy bias is our natural tendency to downplay the probability of a non-regular event (in this context: a currency collapse, a long period of economic stagflation, a hyperinflation)
If you take a closer look, you will recognize these patterns constantly around you. Unless you are able to move past these mental issues, you will stay blindfolded. It doesn’t matter which evidence is presented, like for example a ten-year gold price chart or the decline in value of currencies.
Main street public ignores gold’s real benefits
We have such strong evidence of gold’s upward move, with a gold price that has gone from $275 per ounce to a new 11-month high of $1,796.50 on October 10, 2012 as the Eurozone continues to struggle with debts and the IMF just issues a grim warning of a weaker global economy and yet, people keep on talking about gold being overpriced. The most common arguments are that a further increase is irrational so that it’s too late to invest. Apart from the psychological factors discussed earlier, there is a more fundamental issue: the lack of understanding of the monetary system. It’s mandatory that you understand what money is and what currencies are.
Nick Barisheff uses the following example regularly. A lot of people still think that gold’s only purpose is for jewelry. With a price of nearly $1,800 an ounce, gold is probably overpriced as far as jewelry is concerned. It becomes perfectly clear on a day like September 13th, when US Fed Chairman Ben Bernanke announced QE3. The price of gold went up by more than $25 in less than an hour. So does it mean that everyone stood up to buy jewelry right after Bernanke’s speech? The central point is that an announcement was made to debase the US dollar, without any limit, without any timeframe. Anybody with a basic understanding of how money and currencies work could make the connection that this is as close to a sure thing as can be of a continuing increase in the price of gold.
It’s really the currency that is being debased. The rise of the gold price is a natural result of Bernanke’s announcement.
Again, main street members of the public can’t connect the dots, as they don’t understand the connection between money and currency. They are not to blame. In fact, that relationship hasn’t been taught in any university. There are no economics courses that teach the fundamentals of money, how it’s created, the dynamics in the market and so on.
When you start looking at the history of currencies, there isn’t one example in human history where fiat currency didn’t go through a hyperinflation and complete collapse. Not one! You need to get acquainted with topics like money, how the Federal Reserve and fractional reserve system works, how currencies are being debased and the roles of interest rates and inflation. That’s quite an effort in terms of education for most people.
The primary condition for a better understanding: education
People in general are running full speed in their personal treadmill. Nick Barisheff is not saying it’s easy to get up to speed with economic and monetary topics. The day-to-day pressure from society makes it very hard to step back and educate oneself. Today in a typical family, both the husband and wife are working. They need to manage their financial and retirement issues, their daily household issues, and more. We are also exposed to a greater level of change (business, laws, technological advances). So there is a great challenge to gain the needed education on the issues.
Unfortunately that’s exactly the kind of thing that will cause many people to be blindsided. Educational sites, interviews or books are going to help some people but not the majority. The majority will jump on the gold bandwagon when it becomes totally obvious, probably when hyperinflation hits and that is when it’s too late. That will be the time when gold will be occupy common conversation at cocktail parties and when taxi drivers will be talking about it. However, most of them still won’t understand why they are investing in it, even when the price of gold might be rising $100 a day.
We see today that there is a loss of confidence in traditional institutions like the government, banks and (traditional) media. In fact, that trend has been accelerating in the past decade. It could get to the tipping point, as an increasing number of people turn to alternative media which are freely available on the Internet as their primary source of information.
We saw it all before
You can compare today’s situation with the bull market of the 80s and 90s in high tech stocks on NASDAQ. Although that bull market started its run in 1982, it was only in 1998 that 90% of investors started purchasing those stocks. Obviously that was just in time to totally get crushed. A similar evolution took place in the gold bull market of the 70s.
Starting in 1974, the US government allowed their citizens to own gold again. If you look at the newspapers back in the 70s, the main message that was given to the people was how the US dollar was declining x percent against gold. They didn’t say that gold went up x percent. That’s the correct assessment. Now the focus in most media is how gold is going up … for no apparent reason”. All Western economies are accelerating the printing of money and that’s enough reason for gold’s appreciation.
All economic forces are stronger right now compared to the previous gold bull market. Excessive money printing or currency is taking place on a global scale. The 70s bull market wasn’t global in nature. It was a US phenomenon primarily because the US dollar was declining after removing the dollar from the gold standard. To A lesser extent gold went up in Canada and the UK, but it did not in German Marks or Swiss Francs for example.
Why mainstream media avoids talking about the real benefits of gold
There are still big entrenchments from the financial community, the wealth managers, the private banks, and consultants from the pension funds. They are still against the rise of precious metals, perpetuating the idea that gold is a risky asset and that it’s useless, as it doesn’t pay any interest or dividend. Those arguments are all easily refuted. But still, the negative articles keep on appearing, even now after a fantastic 12-year bull market. You don’t see a similar approach towards other asset classes. There are much less negative articles about uranium, potash, oil or natural gas. Nick Barisheff admits that he doesn’t know if it’s on purpose, if it’s going to change, or when it could change.
Coincidence or not, Forbes announced this week an article devoted to gold: Gold can save us from disaster. Could this be a sign that the tide is changing? Are we close to the tipping point? Only time will tell, but things are worsening every day and the least we can say is that the situation is alarming.
Note that BMG offers a lot of valuable resources with an educational character. The information is freely available on the website. Much more insights are published in Nick’s book “$10,000 Gold: Why Gold’s Inevitable Rise is the Investor’s Safe Haven” which will be released later this year and is available for pre-order on Amazon.com.
Read the previous article with Nick Barisheff The Destruction Of Currency And Rise Of Gold our visit the education center of GoldSilverWorlds containing a wealth of knowledge about major gold related themes like inflation, currencies, money printing, etc.