The gold stocks caught on fire over the past fortnight. They have lagged behind the metal in relative strength, but, since they are more volatile than the metal, bigger profits are the result. For example, gold is well above its early September levels, but the XAU and the HUI have only broken above their corresponding levels just last week.

Measuring from May 22, 2009, when I last resumed a full bullish-gold position, the metal is up 16.5%. My Model Conservative portfolio is up 33.6%. The further back you start, the prettier it gets. For example, starting with the beginning of the grand cycle gold bull market (early 2001), the price of gold has multiplied by 4.4 times. The HUI has multiplied by 12.4 times. Pretty it is, and pretty it will continue. During the same time period the S&P is down 7%.

Yet all I hear from the establishment is the same mantra: “Buy stocks. Stocks must go up. They always have. Don’t buy gold. Gold is a collectable.” Sad, very sad. Beating these people is like taking candy from a baby.

Last week I received a letter from a reader who poses some interesting questions, questions I think many of you have. So I would like to address these questions in hope that I can clear up some confusions.

“I read your opinion pieces religiously.

I am by no means a wealthy man, or a learned one.

My wife & I, have limited funds saved.

I DO have about a 15% position in metals, but got in late, at the $970s. Better than $1200, but still late.

My QUESTION for you, if you answer such emails….

Is WHAT do I do with the U.S. Dollars I have left? (before they become toilet paper?).

Where do I move them, NOW, to keep what we have managed to save over a lifetime.

We are too old to start over, and our government is going to cheat us out of the funds they STOLE over our careers……

Medicare first, and then I am sure SS.

I love it when they call these entitlements.

That means FREE……

If they were FREE WHY did we PAY for them, (involuntarily) for 40 yrs?

I would love to have it back, and paying just 1-2% over that 40 yrs…..then, I could afford to MOVE out of here, or pay someone to give me SOLID advice for investments (not in the US dollar/mkts).

Thanks, and I sincerely thank you for your expertise, and articles.

Best Regards,

TS

Dear TS:

You have some understanding of our economic situation. Still, I think that what I have to say will be a shock. Seeing reality as it is can hurt, but it is the first step toward doing the right thing so that you can improve your life.

First, what do you do with the US dollars you have left before they become toilet paper? This should be answered on two levels. In terms of the immediate situation, you should not have any US dollars left. That is, whatever assets you have above and beyond short term expenses should be in real goods.

In terms of the more distant future, you are fighting an almost impossible problem. You are probably thinking in terms of accumulating enough capital to retire. The point to understand is that in today’s world it is (virtually) impossible to retire. This is not merely your problem. Everyone has the same problem. You are merely more perceptive than most and have recognized the problem. Let us do a little compound interest problem such as you were taught in 8 th grade math class. Let us say that you start to work at age 16 and continue until age 66, saving 15% of your salary each year and putting it in the savings bank at 5% interest. If your salary is 32 oz. of gold per year, then you save 15% x 32 oz. = 4.8 oz. of gold each year.

(To put this in context, the salary of the average American in the middle of the “depression” (1932) was 56 oz. of gold per year. In 1974 (when gold ownership was legalized again), the salary of the average American was 40 oz. of gold per year. In 1987, it was 32 oz. of gold per year. And today it is also 32 oz. of gold per year. So much for the myths that the “depression” was a depression and that we are making economic progress.)

Here is the key to figuring out your economic situation. If you save (toward retirement) 4.8 oz. of gold per year for 50 years, then you have saved 240 oz. Whether you call this 240 oz. or $264,000 (2009) dollars, it is not enough on which to retire. If you could manage to find a bank or savings institution which would pay you 5% interest, this would give you an annual income of $13,200 (2009) dollars, about one-third of what the average American makes per year.

This underlines a key point recognized by Noah Webster and the Founding Fathers in the 1780s. Saving alone cannot provide you with enough money on which to retire. What Webster realized is that what you also need is to make your capital earn interest. In 1785-86, he toured the U.S. and legalized interest (in the northern states). Average interest rates in the U.S. from 1788 to 1933 were 5% per year.

Eighth grade students are taught that, if you invest $100 at 5%, then after 1 year you have $105. Leave it in the bank for a second year, and you do not have $110; instead you have $110.25. (1.05 x 1.05 = 1.1025) Leave it in for 4 years and you have $121.55. That is, your money does not grow at a steady rate. It grows at a faster and faster rate. This so impressed the people of the 19 th century that it was called “the miracle of compound interest.”

The savings of this first year’s salary will earn interest for 50 years. The second year will earn interest for 49 years, etc., and the 49 th year will earn interest for 1 year. In effect, you can pair off your yearly savings into 25 two-year bundles, each of which earns interest for (on average) 25 years. So you have 9.6 oz. times (1.05) and then multiplied by 1.05 49 more times. This gives you 1632 oz. of gold or, in today’s paper dollars, $1,795,200. If you could save this much money, then your annual income (at 5%) would be $90,000, about 2½ times the average person’s salary.

This is the key. TO RETIRE, YOU MUST INVEST AT INTEREST. THE “”MIRACLE” OF COMPOUND INTEREST MAKES RETIREMENT POSSIBLE. Before Noah Webster legalized interest in the (northern) U.S. and Jeremy Bentham did the same thing in Britain, there was no retirement. Everyone worked until they died.

It was the legalization of interest in late 18 th century Britain and America which caused these two countries to explode with economic progress. The American North opened up a huge gap with the South because the North legalized interest, and the South (prior to the Civil War) refused.

The great disaster of the American New Deal was to abolish interest. F.D.R. was not a traitor to his class. He was a representative of the bankers, Wall Street and the big corporations. He robbed from the common man to give to the rich.. The New Deal retained nominal interest, but abolished real interest. If you receive 5% (money) interest in a year in which prices are rising by 5%, then in real terms you have made zero interest. All you have to do is to calculate real interest rates since 1933. From 1933 to 2009, real interest rates in the U.S. have averaged zero.

But if the real interest rate is 0, then retirement is impossible. That is the source of the problem. You write that you have limited funds saved. But that is true of 99% of all Americans. You are worried because you are closer to seeing reality as it is than most people.

This system of robbing our interest is dealing a death blow to our economy. The New Deal claimed to have made retirement possible by starting Social Security. But American retirement existed for 145 years before Social Security began. The past 2 generations have gradually dissipated the nation’s store of capital.

Alright, this is the world in which we live. People lived in this kind of world for thousands of years. It’s not good, but it is possible to live in such a world. But actually the New Deal made two big mistakes in setting up their system: the stock market and the real estate market.

In the traditional American system of retirement, the average person took his money to the savings bank and received 5% real interest. This depended on a stable currency, which existed from the time that the Constitution was written to 1933. This system no longer works. However, there are two ways that we can still receive real “interest” (or a real yield). Stocks, of course, yield a return based on their earnings. The Government cannot steal this return by depreciating the currency because the depreciation of the currency causes stock prices to rise (faster than they otherwise would). You get your “interest” (called yield), and your capital is protected. A similar thing happens with regard to real estate. However, real estate is not very liquid. If you have a crisis and need to raise cash, real estate can take 6 months to sell while some shares of stock can be sold in 6 minutes.

So far the establishment is correct. It tells you to always be in stocks. But what they do not understand is the commodity pendulum. Starting in 1963 giant swings started in the American economy. From 1963-1971, commodities were down in real terms. From 1971-1980, commodities were up. From 1980-99, they were down again, and from 1999 to the present commodities have been up. When commodities are up, it feeds through into consumer prices. These rise, forcing the Fed to tighten, and this makes bonds and stocks go down. Looking back we can see this effect in the 1970s, and it is starting to unfold at the present time.

In the last cycle, stocks peaked (in real terms) in 1966, hit a low in 1982, recovered and (in my opinion) peaked in 2007. That is a 41 year cycle. It was not something that the average person could play. From 1966 to 1982, the stock market fell 70% in real terms. Pretty it was not. And then in 1982, the very establishment which had told its followers to buy and hold “good, sound stocks” for the long pull started to tell them to sell stocks and run for the hills. So what happened to the typical establishment follower? He lost 70% and then he sold out at the bottom. And by not being in gold through the 1970s, he missed out on an opportunity to multiply his money by 25% in nominal terms and by 12% in real terms.

I can tell you what the establishment will do on this cycle of the commodity pendulum. They will scream at their followers not to sell stocks as stocks go down in real terms. They will keep people in the market to the bitter end, and then they will scare them out of stocks right at the bottom.

My approach is different. I advise being in commodities (mostly gold) during the upswing of the commodity pendulum and being in stocks (or real estate) during the downswing of the commodity pendulum. I was a gold bug from 1970 to 1980, and I was a stock bug from 1982 to 2007.

Thus, if you do not listen to the establishment, you can escape them by playing the commodity pendulum. Right now I believe that the upswing in commodities started with a double bottom (in the CRB) in 1999 and 2001 and that it will end about 2020 (although catching the exact top will be difficult and will have to wait on signals given at the time). For example, the wild year in gold in 1979 was a signal of the coming top in early 1980. You should also plan for a business enterprise to bring in income in a tough period as employment for older people is very difficult because of the high health insurance costs imposed on employers.

For most people, the only solution is to restore the gold standard. I can play the commodity pendulum, and I can teach a few economically sophisticated people to follow me. But the real solution, for America and the world, is to follow the lead taken by Ron Paul and restore the gold standard. It worked for a century and a half. Now that we have given it up we are getting poor again.

The idea that the dollar will become worthless in not realistic for the foreseeable future: worth less, perhaps, worthless no. The complete collapse of a currency has only happened 5 times over the past century Germany and Austria in 1923, Hungry in 1944, Yugoslav in 1994 and Zimbabwe in 2008. The paper aristocracy of a country always wants a little more paper money but not too much. In the U.S. in 1967-68, the Fed went too far in easing credit and printing money with the result that a new class of speculators (the New Breed) arose who used extreme leverage to challenge the old establishment. This latter then were able to get the Fed to tighten credit, and this caused the New Breed to collapse into bankruptcy.

I hope the above is useful information for many people. I publish a fortnightly newsletter, The One-handed Economist ($300). You can subscribe via my web site, www.thegoldspeculator.com or send $300 to The One-handed Economist, 614 Nashua St. #122 Milford, N.H. 03055. You may also enjoy reading my blog at www.thegoldspeculator.blogspot.com. This week’s blog is “Attempted Murder” about the recent attempt of the medical establishment to murder anti-cancer activist Suzanne Somers.

# # #