Gold and the Great Depression; the Great Myth

October 24, 2010
By Paul Mladjenovic
Copyright 2010 Paul Mladjenovic. All rights reserved.


As I peruse the usual financial sites that I am also fortunate to be on, I noticed an article that made a reference about gold and the Great Depression. The writer normally covers investing and the financial markets but this time he veered into a topic that I have had a keen interest in since my college days; the Great Depression.

Just know that the causes and issues of the Great Depression are not bygone events; They are very relevant to today’s economy and financial markets.

I will try to keep this article short but I read something in his piece that compelled me to address it. He writes:

“…We no longer have a gold standard, which is a GOOD thing.
The gold standard of years past…was largely to blame for the Great Depression.”

Now, keep in mind that I normally think that this writer offers good commentaries and I wish him well. Readers will find his views on financial markets very useful. However, I can’t let items like this pass by without commentary. Let me state the main point of my essay:

The Gold standard had NOTHING to do with creating the Great Depression.
Absolutely NOTHING!

Blaming the gold standard for the Great Depression would be like blaming a seat belt for a multi-car crash. It defies common sense and logic.

In fact, had the federal government adhered to a gold standard, it would have curtailed the dangerous over-production of fiat currency. Remember that the first event of the Great Depression was the collapse of the stock market in 1929. This event was largely due to the government’s reckless creation of easy credit and a currency bubble (sound familiar?). If America’s central bank, “the Fed”, was constrained by a gold standard, a bubble would not have been created in the first place. A gold standard puts a “straight jacked” on reckless currency inflation.

We must also keep in mind that the Great Depression was not a singular event…it was a series of events induced by federal government blunders that hurt (and suppressed) economic activity for over a full decade.

Massive, stifling regulations (such as Smoot-Hawley) were implemented along with oppressive tax rates (hitting 96% by World War II!) that kept the economy struggling throughout the 1930s. From massive stimulus spending, the government burden grew beyond the economy’s ability to carry it (does that also sound familiar?).

In addition, federal wage policies made hiring employees too expensive and this forced unemployment to stay at artificially high levels for years. It can not be emphasized enough; depressions are NOT caused by a private, free market economy. The culprit is government.

Lastly, the next persistent myth was that that World War II got us out of the Great Depression.

Wrong! Wrong! Wrong!

World War II only gave us the ability to give the unemployed a uniform and a gun and ship them overseas.
War doesn’t solve economic problems…it creates them. If war actually helped an economy then the answer is simple; produce a million bombs and then dump into in the ocean! Wouldn’t that create prosperity?! Of course not!
War is actually the most obvious example of the “broken window fallacy” that the great Henry Hazlitt so ably described in his book, “Economics in One Lesson” (available at Fee.org).

Before we make the same destructive mistakes (which have been happening in recent years anyway, it seems), we need to understand the truth because the causes and symptoms of depressions and recessions. A good place to start would be to go the Mises institute website (Mises.org) and get a copy of Murray Rothbard’s excellent book, America’s Great Depression.

The bottom line is that if America (our government, actually) adhered to a gold standard, we would be much, much better off than we are now.

The sooner we learn the lessons of history (and the value of gold and a gold standard), the sooner we would be much more prosperous.

Until the government its their act together (never?), we need to take measures to protect our personal prosperity. Accumulating gold and voting for those that want to severely limit the government’s role in meddling in our private economy are good for starters.

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Paul Mladjenovic, CFP is the author of the ebook “Financial Firewall: How to Protect your Money and Investments in the Age of Financial Chaos” and he also does national seminars on investing and financial planning concerns. He is also the editor of the free financial newsletter, the Prosperity Alert ezine, which is found at www.RavingCapitalist.com.

Come Hell or High Water…Discipline is Profitable

October 7, 2010
By Paul Mladjenovic
Copyright 2010 Paul Mladjenovic. All rights reserved.


Yesterday (Oct. 6th) gold hit an all-time high of $1,349 (spot price) while silver hit a 30-year high of $23.19. Today, Gold and silver are pulling back from these record highs as profit-taking is occurring.

In recent years, you and I have constantly heard about the problems with precious metals. We have seen and heard much about the corrections and bearish forecasts. When a particularly strong pull-back occurs, the critics tell us “the bubble has popped” or “the bull market in gold and silver is over”.

I have heard from students and readers about their worries about gold plummeting or how the price of silver cratered. We all remember the second half of 2008. Gold held up well but silver was massacred! Silver was over $20 during the spring of 2008 but massive panic selling forced the price of silver to a mind-boggling low of $9.17 by November 2008 (using the data at Kitco).

In 2008, Silver started the year at $14.93 and ended at a dismal $10.79 for a disheartening plunge for the full year of about 28%. However, as of yesterday, silver over the past 24 months had risen by 120%. Of course, you know gold’s performance during that time. The precious metals had proven their “mettle”. Those that were buyers (especially in bullion and quality mining stocks and ETFs) in recent years and stayed the course were rewarded with strong gains. Short-term speculators were hammered but long-term investors prospered.

In 2008, Gold was one of the few investments that ended up. It started the year at $846.75 and ended the year at $869.75 for a gain of about 3%. In a normal year that is nothing to crow about but don’t forget how bad that year was; most investments were down by double-digit percentages. Many stocks ended up in the graveyard of forgotten securities like Bear Stearns and other financial firms (R.I.P.).

How many investors panicked and sold their quality holdings at the bottom of the plunge? Investing means that you choose wisely and logically and then have the discipline to stay the course.

A student of mine was quite disheartened when she bought a silver stock at $14 during the first half of 2008 only to see it lose over 50% of its value in the subsequent months. During that horrific period, the best stocks joined the worst stocks in a terrifying plunge. However, when the recovery took place, the best stocks regained their footing while bad stocks stayed down for the count.

Fortunately, that student did not panic and her silver stock is up 80% since she acquired it. yes…discipline can be profitable.

For us, the lessons are clear. In recent years, precious metals have been a good place to put our money. If you choose good investments, they will make it through the market storms that occur. Unfortunately, the market storms have gotten very strong in recent years and the volatility and tumultuous activity will continue and probably get worse. For investors, that means not only diversification and patience (and aspirin) but also discipline.

This does not mean being complacent and hands-off with your investments. It just means that you monitor them and see if they still make sense as the market goes through its roller-coaster path. It the investment has strong fundamentals and nothing is a direct threat to it, in due course it will do well.

What is the outlook for precious metals and their related securities (stocks and ETFs)? The fact that the economy is still very shaky and the central banks of the world will continue to pump up their money supplies bodes well for gold and silver. Yes… they will continue to have un-nerving corrections.

As I tell always tell my students, bull markets zig-zag upward while bear markets zig-zag downward. Precious metals (along with commodities in general) are in a long-term, historic bull market. Their fundamentals have been strong in recent years and that strength should continue.

The wise investor uses the corrections in a bull market to accumulate more positions. In the end, the disciplined and patient investor wins.

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