Jan 02 The Gold Owner's Guide to 2015 USAgold

The Gold Owner's Guide to 2015

by Michael J. Kosares

Looking back - Two surprise transformations at the end of 2014

A year of many surprises, 2014 ended with a couple surprise personal transformations largely passed over by the mainstream media.

– Berkshire Hathaway chairman Warren Buffett startled recipients of his annual shareholder letter by revealing an instruction to the trustee for his wife's estate that 10% of her inheritance should be invested in government bonds and the other 90% in a low-cost S&P 500 index fund.

– Similarly former Fed chairman Alan Greenspan shocked the financial world by announcing that his years at the Federal Reserve cemented his long-held view of gold as an important asset allocation for the times given governments' (note the plural) predilection to print money.

Buffett points to saving fees and the inability of fund managers to beat the indices as the chief reasons for his decision, but one wonders if there might be more to it than that. Since the 2008 meltdown and the subsequent bailouts things have changed considerably on Wall Street and at the Federal Reserve. Interest Rate Observer's James Grant attempted to define the complicated change in the stock market's monetary underpinnings in a speech this past November before the Cato Institute.

"My generation," he said, "gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates. We put the cart of asset prices before the horse of enterprise. We entertained the fantasy that high asset prices made for prosperity, rather than the other way around. We actually worked to foster inflation, which we called 'price stability' (this was on the eve of the hyperinflation of 2017). We seem to have miscalculated."

Stocks in this scenario become fungible, an asset class driven as much by monetary policy as it is a solid track record or growing market share. In the end, Buffett is not just saving fees by putting his wife's inheritance in index funds, he is also betting, like it or not, on the Federal Reserve's ability to keep stocks as an asset class headed in a northerly direction. Not everyone harbors the same high degree of confidence in the Fed's grand monetary experiment that Buffett does.

Alan Greenspan, for one, sees it as fraught with danger as does another former Fed chairman, Paul Volcker. Late last year, Greenspan likened the Fed's over-blown balance sheet to "a tinder box that has not been lit," characterized the job of Fed chairman as one subject to the heavy dictate of the federal government, and recommended gold ownership as a hedge for private investors. "Gold," he said, "is a good place to put money these days given its value as a currency outside of the policies conducted by governments." Stocks, on the other hand, have taken a position at the opposite end of the investment spectrum – an asset class that has become overly reliant on the policies conducted by governrment.

Looking ahead - Much food for thought on gold and the economy for 2015

At the start of 2015, armchair economist-gold owners like Mr. Spot -- pictured below in his study -- remain content, confident and assured this New Year's Eve. He does not own gold simply to make profit. He owns it to protect the wealth he has already garnered. He keeps in mind the historical cycle described by Alexander Tyler, the 18th century historian and jurist:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasury. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage."

He judges that we are now somewhere between the "selfishness" and "dependency" stages of Tyler's cycle, hopes that things will turn around, but keeps his diversification intact just in case it does not. The politicians, he observes, have not acted well this past year. Washington, he says, seems to be confused and lacking direction and more interested, as Tyler suggests, in getting re-elected than making responsible decisions about the future of the country.

He points to Neil Howe's conclusion that the Fourth Turning started with the 2008 financial meltdown and that we are likely to be in a transition period for some time to come. He takes Howe's observation to heart: "You are not just into it and out of it immediately. . .It is a season you have to move through before you are born again, so to speak, as a society, and regain institutional confidence. You have go through the crucible to get there."

(Editor's Note: Those of you who have followed my writings over the years know that I consider “The Fourth Turning” (1997) by William Strauss and Neil Howe one of the most important books published over the past two decades.  In that book, eleven years before the 2008 meltdown, the authors made one of the most stunning calls of all-time: “The next Fourth Turning,” they predicted, “is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire.”)

Ever the amateur historian, Mr. Spot takes special note of the drain of Western gold to the East through the London-Zurich-Hong Kong-Shanghai pipeline. He is aware that a drain of gold from declining cultures to rising cultures usually accompanies the end phases of Tyler's cycle. Gold, he recalls, fled Rome just before the empire collapsed in the third century A.D. and the British Empire began to lose gold following World War I. Though he does not believe the end is nigh, he does believe that gold movements on this scale proceed for good reason. Many years ago, he tacked a sign on the bulletin board above his desk. It reads: "He who owns the gold makes the rules."

Like just about everyone else, he enjoys the end of year prediction festivities but he points out that almost all forecasting is necessarily based on trends already in motion. What foreasting inevitably fails to embrace is the surprise event, or even the surprise policy, launched by one government/central bank or another. He has structured his portfolio as a philosopher/investor not as a trend chaser. At a dinner party recently he caused some discomfort among an erudite group of analysts by asking how many predicted Russia's invasion of Crimea, the crash in oil prices or the rise of the Islamic State in Syria and Iraq.

We provided Mr. Spot with an advance copy of The Gold Owner's Guide to 2015. In appreciation he sent over the IPhone snapshot posted above and an encouraging note:

"I wholeheartedly approve! The 2015 Guide is even better than last year's."

And so, dear reader, we send you along to our annual catalog of opinion and predictions posted below with our own fondest wishes for a very happy and prosperous 2015.

We shall start with recent predictions posted by the big global trading banks -- the bulls and bears of gold finance.