As I began my career in the 1970s, a wise investor told me that the best investment arenas involve willing losers. This particular person had made a great deal of money in commodities. He told me that the classic candidates for willing losers throughout history are governments. Governments are willing to lose in attempting to maintain national pride or to pursue the retention of political power. In trying to provide context for what we are witnessing in the paper and physical metals markets, I was reminded of this sage advice given to me long ago.
The 1970s held the same features as we see today. It began with uncontrolled printing in the mid-60s with the pursuit of both “Guns and Butter” as it was called. The U.S. was trying to create the Great Society and fight the Vietnam War at the same time.
It led to a race for precious metals, primarily gold. President De Gaulle of France was one of the first to recognize that the rampant printing would begin to destroy the value of the U.S. dollar and demanded that France’s holdings of dollars be exchanged for gold. It was De Gaulle that forced Nixon’s hand in terminating the conversion of paper money for U.S. gold in 1971.
Consequently, we saw a dramatic increase in the price of oil. The Arabs also realized that the value of the dollar was going down, and rightfully demanded a higher price per barrel.
Rampant money printing, a race for oil and a scramble for precious metals…. sounds familiar, doesn’t it? So here we are again. This time, it involves the whole planet and truly massive printing.
Returning to gold and silver, the battle is being fiercely fought. The willing losers are governments, of course, a sub-set of the hedge fund world, individuals speculating in the paper markets and holders of physical metals that become scared and sell their positions.
Governments are losers, as they no longer care about the value of currencies. Their goal is to dampen the volatility of the price increases, not the ultimate ascent. Jim Sinclair has been very eloquent in pointing this out.
Hedge funds are losers, too. In general, investors in hedge funds are chasing a dream of aggressive returns in exchange for paying above normal fees. One way for the funds to have a chance at aggressive returns is to use maximum leverage in the paper gold and silver markets. For most of them, there is no intention to own physical metals. The paper markets are simply a leveraged, computer driven poker game. When the hedge funds move, they tend to move together, both in and out of the market, often at the wrong times.