Golden Dreams & Delusions: The Story about Gold You Haven't Heard (PART 5)

Continuing from PART 4

Gold Dealers are Ripping You Off

You certainly don’t have to be an annoying, brainless talking head to make money pumping gold. Anyone without a conscious could have been a millionaire if they had been a gold dealer over the past few years, and if indeed their goal was to make money by that means.

But hey, for those of you out there who don’t mind ripping people off or at the very least deceiving them, there’s still time to make buckets of cash selling gold.

After all, with typical fees of around 3-5% per transaction, it doesn’t take more than a third grade education to realize that the higher the price of gold rises, the more money gold dealers extract from buyers.

Gold bugs will most likely cherry-pick this statement (while neglecting mention of others I’ve made) by claiming that “such and such charges 1% or 2%,” but that’s generally only the case if you buy a HUGE amount of gold. But still, even when purchased in very large quantities in a retail setting, the fees are excessive.

When you buy gold from a dealer, it’s like an ATM transaction, except you’re paying a whopping 3-5% fee. This is huge. Even 1% is excessive in my view considering that the gold dealer doesn’t do much to snag that fee.

To put this into perspective, consider that professionally managed investment funds charge similar fees. However, the costs are much more justified in relation to the fees charged by gold dealers because funds have very large expenses. They employ a large number of individuals; they spend large amounts of money on research and other resources for the benefit of managing the fund. And let’s not forget that the fund is managed every day as they look to maximize the return on investment.

In contrast, when you buy gold, dealers are simply placing an order for you. They do basically NOTHING, yet they charge huge fees which are based on the amount of gold you buy and the price of gold. This in itself represents a huge scam in my opinion.

Thus, compared to the fees charged by gold dealers, those charged by professionally managed funds represent a bargain. At least you’re paying 3-5% annually to fund managers for doing something requiring some level of skill and constant oversight in the process of managing the fund.

What this amounts to is that gold dealers have been ripping off their customers for decades. This scheme only scratches the surface of the widespread fraud that has become a standard practice in the precious metals industry.

The types of scams used by gold and silver coin dealers are even more numerous. Many dealers charge huge markups for gold and silver coinage claiming the coin’s numismatic value is worth the premium over the spot price of gold. In many cases this is simply not true, especially during a gold market.

The fact is that as gold and silver prices have soared, the numismatic value has vaporized for the vast majority of coins (unless they are very rare and very old).

But since the gold and silver industry has very little regulation, gold dealers can basically charge whatever they want. To carry out this heist, they disseminate myths and delusional statements about gold so that the sheep won’t pay much attention to the huge fees they are charged. Because the vast majority of gold “investors” are unsophisticated in the realm of investments, they don’t realize that the fees being charged by dealers are exorbitant.

This adds another incentive for gold dealers to flood the Internet and other media venues with propaganda about how gold is headed to the moon. After all, if you believe gold is headed to $6000/ounce, what does it matter if you pay some parasite a 5% fee to get your gold? After all, you stand to make 400%, right?  Keep dreaming.

The gold charlatans make sure to keep things real simple so that the most naïve individuals can follow their dog-and-pony logic. When it comes to the sales pitches used by gold dealers, nothing goes beyond the tenants of what is taught at Simpleton University. They never discuss the full picture. That is, they don’t look at inflation and gold data from sufficiently long periods. If they did, they would see that gold underperformed inflation.  

Instead, they cherry-pick the data, much like Wall Street does when they want to convince you that you should buy-and-hold. The same goes for mutual funds.

When the gold bugs cherry-pick the data, they certainly won’t mention the 1980s and 1990s because gold got decimated versus inflation.

The Myth about Money Supply and Inflation

When they want to really drive their point home to the sheep they’ve herded, these charlatans talk about all of the money the Federal Reserve has printed. They show charts of the money flow and point out that it has soared.

Like roaches in the ghetto, these analogies spread to every website as do these charlatans. And no one is permitted to publish articles on these websites that discuss the other side of the picture because it would counter everything these sites are trying to accomplish; duping people into paying high fees for gold and silver, pumping up the prices of these metals, clicking gold and silver ads and so forth.

The more false claims about gold are repeated, the more people believe them due to the flooding effect. Moreover, the validation through consensus effect comes into play. The only problem is that whenever you visit a pro-gold website the consensus is always going to be filled with myths and lies about gold, hyperinflation and so forth.

Think about it; would you go to a realtor website to find out about the health of the real estate market? 

Let me tell you something. If anyone knows about the money that’s been printed and the effect it will have on the economy, it’s me. My track record proves I know what the hell is going on. And I have no bias for gold.

What’s more, I rode the gold wave up from the very beginning in 2001. I realize that there is a time to buy and a time to sell. And I understand this because I AM NOT SELLING GOLD or MAKING MONEY IN ANY WAY FROM GOLD.

So I have no motive to deceive people.

The only other possible source of attack against me would be to challenge my credibility. As far as my credibility is concerned, consider this. I know of no one in the world who has ever issued a $100,000 challenge for anyone who could prove that someone could match my track record.

Although gold could rise from current levels, the fact is that now is not the best time to be buying it unless you are able to actively manage your position.

Once again, I’m not saying gold will not rise from current levels. We provide gold and silver forecasts in the Intelligent Investor.

This article is not a forecast. It is a description of reality.

What I am telling you is that these claims about gold going to the moon, never again falling below $1000, protecting against inflation, imminent hyperinflation and the dollar going to 0 are all bullshit.

I could make a boatload of money by pumping gold, like thousands of others. These other guys have no way to provide real value so they always jump aboard of a bull market so as to make you think they are geniuses. We will see just how genius these guys are when I am proven right.

At some point, the sheep need to pin gold charlatans down to a time frame for their forecasts to materialize. Otherwise, this grand delusion could continue for eternity.

I am actually sacrificing a huge amount of money by telling the truth because people tend to subscribe to newsletters and research that validates their views. And since most people have a delusional view of gold, I am obviously missing out on potential subscribers who want me to preach $10,000 gold.

Now let’s get back to the printing of money by the Fed. Obviously, the Fed has printed a massive amount of money over the past few years. And gold bugs are using this fact to position gold as the place to be when hyperinflation takes off.

But the money flow argument used by gold bugs is weak for several reasons.

First, as I have pointed out on numerous occasions, gold is NOT a hedge against inflation.

But let’s assume for a moment that gold does protect or even outperform inflation. Economists recognize the association between the money supply and inflation. However, there is one very important caveat to this relationship that many economists fail to understand, so you can imagine how lost the gold bugs are. While an increase in the money supply is often an indicator of future inflation, this is not always the case because it depends on where that money goes.

Obviously, when the Fed prints large amounts of money, this might seem to imply that hyperinflation is on the way. The money supply-inflation argument assumes that banks make this money available to lend to consumers and businesses because that’s what they normally do. Because this money has gone almost exclusively to the banks, they ultimately determine whether there will be a commensurate level of inflation relative to the money supply. 

How do banks determine this?

By whether or not or by how much money they make available to consumers and businesses. In other words, if the Fed prints massive amounts of money, the money supply will soar since it measures the currency in circulation. However, unless the banks distribute this money into the economy so as to shift the supply-demand curve for consumer goods and services, there will be no inflation.

Now, ask yourself what banks have done with this stash of cash from the Fed.

Have they flooded it to consumers and businesses?

Of course not (at least not commensurate to the increase in the money supply).

Where has this cash gone? 

A good portion of it has gone to purchase U.S. Treasury securities. The other portion has flooded into emerging and developing economies.

This is largely why the U.S. has not experienced a level of inflation commensurate with the growth in the money supply.

Some might counter that inflation has not soared according to the official data due to the government’s suppression of the data.

I know well about the methods used to mask inflation data. I wrote a detailed chapter discussing the methods used to manipulate government data in America’s Financial Apocalypse in 2006. So when I tell you that hyperinflation isn’t coming to the U.S., I have obviously factored the suppression of inflation data into my analysis.

While inflation data is being suppressed, the amount of suppression is not sufficient to mask hyperinflation.

Furthermore, one of the strongest forces suppressing inflation data over the past few years has been the excessive weighing of shelter costs, largely rent and owners’ equivalent rent, which makes up around 41% of the core CPI.

As you can imagine, with home prices having declined by a larger percentage than during the Great Depression, the inflation data is not providing us with an accurate picture of costs, unless you just bought a home.

Essentially, the deflationary effect of the housing price collapse is neutralizing the inflationary effect of other items in the CPI basket. But a collapse in home values does nothing to lower the costs for those who bought a home prior to the collapse. So yes, the CPI is being suppressed using the deflationary effect of shelter costs. There are many other ways Washington is suppressing the CPI.

So why hasn’t the price of gold risen over the past several months? Inflation is real no matter what the government reports right?

The reason why gold isn’t rising is the same reason why gold fell in 2008 during the most rapid acceleration of inflation in years (the run up of oil to $148/barrel). Gold is NOT a hedge against inflation.

Won’t massive inflation eventually hit the U.S.? 

This is quite possible. In fact, I think it will, but it won’t be for several years. Regardless, again we must ask to what extent inflation will be created relative to the growth in the money supply. That is all that matters for those who believe gold hedges against inflation.

Depending on how the Fed scales down its balance sheet and how banks withdrawal this wave of foreign capital, the effects of inflation in the U.S. would range from above average to massive, but nowhere near enough to be considered hyperinflation.

Why Hyperinflation Isn’t Going to Happen in the U.S.

Depending on who you ask, you’re likely to hear many different definitions of hyperinflation. Generally speaking, hyperinflation is defined at around 30% to 50% inflation EACH MONTH.

The exact amount doesn’t really matter. What matters are the effects of hyperinflation.

So what happens when a nation experiences a period of hyperinflation?

The price of everything soars very rapidly. As a result, hyperinflation destroys the currency of the affected nation, making its essentially worthless. 

But hyperinflation isn’t going to materialize in the United States; at least not in our life time. I will guarantee it.

In fact, I would like you to contact Peter Schiff, Marc Faber or any of the other media clowns who insist the U.S. will experience hyperinflation and let them know I am willing to bet them $10,000 that it isn’t going to happen. Then ask them why they fear an open debate with me on a neutral platform.

By now, I think you know what their answer will be.

Salesmen make poor research analysts and vice versa. But salesmen make all of the money. Some people focus more on HOW they make their money rather than how MUCH they make. Some people have a conscious, others don’t. Some people are very honest, while others aren’t.

It doesn’t matter to the gold charlatans that the U.S. won’t enter a period of hyperinflation. As long as they have suckers naïve enough to buy into their rubbish, the gold charlatans will keep making excuses to explain why it hasn’t happened, year after year. In the meantime, they’ll have made millions of dollars suckering their sheep into sending them money to buy stocks using a buy-and-hold approach, and selling their useless self-promoting, generic books which serve as marketing tools rather than real insight that investors can use to make money.  

Why do I say hyperinflation isn’t coming to the U.S., and how can I be so sure? 

As I first detailed in America’s Financial Apocalypse, the key to understanding why hyperinflation is a virtual impossibility in the U.S. is to understand how the game is played.

You see, the U.S. dollar is linked to oil and other commodities. President Nixon inked this arrangement with the Saudis in the early 1970s. Since that time, all commodities have been denominated in U.S. dollars. This is why the U.S. dollar is the world’s reserve currency.

As a result of the dollar-oil link, the U.S. is able to export inflation throughout the world since you must have dollars to buy commodities. The net effect of this is that the U.S. taxes the world via inflation. In fact, one could argue that based on the dollar-oil link, the U.S. dollar is not a fiat currency.

Although I have written about the dollar-oil link several times over the years, apparently some individuals who have read these articles have been unable (or unwilling) to connect the dots. As they say, “You can lead a horse to water, but you can’t make it drink.”

Instead of rewriting the reasons why the U.S. won’t experience hyperinflation, I will present some excerpts from a previous publication…

“Many feel hyperinflation is a certainty due to the printing frenzy by the Fed. Upon first glance, this seems possible. However, once you use stop and think for a moment, you’ll realize it’s a ridiculous assertion.

Why? First of all, the banks have held most of this newly printed currency so it hasn’t reached consumers. It’s a well-established fact that bank lending during this economic collapse has been much lower than in previous recessions dating back to the Great Depression. Since consumers account for about 70% of the U.S. economy, how can the U.S. experience hyperinflation if consumers aren’t receiving the dollars printed by the Fed?

The banks are using this cash to make risk-free profits via buying U.S. Treasuries. Of course, investors don’t hear this from the financial media, but I can assure you this is what is happening. It should be obvious.

In fact, based on what I see today, I don’t even think the U.S. will experience massive inflation as long as the banks continue to hold onto the money they’ve received from the Fed. As a caveat, I feel the Fed will intentionally cause inflation in order to pay off the massive federal debt, much as I predicted in America’s Financial Apocalypse.

Interest rates ~0% for two years or longer won’t in itself create massive inflation. Ultimately, the money has to be made available to consumers. This is basic economics, but for some reason, I’ve never heard this point mentioned anywhere.

In terms of inflation, oil is the best hedge you can get, specifically, oil securities that pay good dividends. Dividends are the most important thing to own during bear markets. And oil is the best asset to own during inflation. That’s why I like oil securities that pay nice dividends like oil trusts.

Commodities generally provide a good hedge against inflation. But oil is much better because it's more than a commodity. It’s got the dollar-oil link going for it that’s so critical to the U.S. economy. This vital economic link enables the U.S. to export inflation throughout the globe.

But let’s assume a magical fantasy occurred; the U.S. experienced hyperinflation. Oil would eventually soar to millions or even billions of dollars per barrel. So if anything, investors should want to own oil because it serves as the best hedge against inflation.

The next best things to have if hyperinflation were to occur in the U.S. would be food, water, guns and bullets, but not gold.

If gold is such a great investment, why is everyone trying to sell it to you?

If it's still such a great investment, after having already quadrupled in price in the past ten years; if all these guys out there love it so much why are they so desperate to sell it to you? Why don't they just hold on to it?

Gold dealers know gold prices are driven by supply and demand. Unlike securities and most other investments, supply and demand for gold is only based on hype; fear, panic and greed, along with market manipulation of course.

In contrast, supply and demand for securities is based on valuation, which is assessed by comparing business risk versus cash dividends, cash flows and earnings growth.

Gold doesn’t generate a cash flow based on fundamental economics so it doesn’t generate earnings. There’s no way you can produce an income from gold other than if you are a gold dealer and you sell it to people, unlike silver, which has inherent value. Silver is used extensively throughout industry, so it's an income-producing asset. Gold is not. Gold is kind of like artwork.”

Source

Even still, remember that gold doesn’t even protect against inflation so it doesn’t matter anyway!

In not one instance have any of these gold charlatans attempted to refute my claims about gold, hyperinflation, the dollar-oil link, the proper use of gold or anything else.

The reason is simple. In the world of marketing deceit, the last thing you want to do is shine the spotlight on an unbiased voice of reason, especially when he has been right about so many things for so long. Doing so would erase the efforts by the media to keep such an individual from waking Main Street up. 

As the largest purchaser of gold, India has been a frequent topic of discussion by gold bugs who have always been eager to tell you how Indians will keep buying more gold. But India has significantly cut back on its gold purchases over the past several months. So why aren’t you hearing anything about this from the gold bugs?

The answer is obvious.

They only discuss factors that favor higher gold prices, while making sure to leave out factors that support lower gold prices. You’d have to be a complete fool to listen to what gold cheerleaders say. They simply have no credibility because their views are one-sided.

As the European debt crisis continues to spiral out of control, gold pricing continues to weaken. This behavior is contradictory to previous arguments made by gold bugs. Let’s not forget, most gold bugs insisted that as currencies failed or nations collapsed, gold would soar. But gold continues to face a much needed correction.

So if you are going to invest in gold, you are wise to keep these facts in mind instead of the delusional portrayals and myths that have been flooded into every media venue by gold charlatans.

Gold is not a hedge against inflation. It hedges against deflation which typically occurs during a time of crisis. The stock market sells off during a crisis or panic. As a result, gold is often a good hedge against rapid market declines.

But after the panic has subsided, gold often sells off as institutions get back into the stock market. These dynamics add to gold’s volatile pricing. Therefore, you need to actively manage your gold position, and you can’t do that efficiently and expediently if you buy physical gold.

 

 

Read PART 6