Michael’s Gold Machine Picture
While traveling home from India last week, I spent some time in Dubai. After seeing the strong demand amongst consumers for gold in India, I thought I had seen it all. That’s until I got to Dubai and toured the Dubai City of Gold—basically a giant multi-story flea market where a consumer can buy 24-carat gold in any form. (If you can imagine it, they can make it in gold.)
Then I came across what I have read much about, but never actually seen—the gold vending machine! Below you’ll find a picture of me next to one such machine. These machines, which are a common find in hotel lobbies and malls, dispense gold bars, gold chains, and gold coins, just like other vending machines dispense sodas or a chocolate bars here in the U.S.
Why all these vending machines dispensing gold? I mean, who would buy gold from a machine? I know I wouldn’t.
I talked to some locals and did some research. I found that these gold-dispensing machines have been gaining a lot of attention. Tourists in the United Arab Emirates (U.A.E.) have spent million of dollars at these gold vending machines in the last 18 months. (Source: Arabian Business, August 12, 2012, last accessed November 28, 2012.)
If you are a regular reader of Profit Confidential, you know gold is one of my favorite metals and that I believe it is a true hedge against the rapid money printing of world central banks. I see a future where paper (fiat) money becomes less valuable, because there is so much of it in circulation, and where gold shines. I’ve been bullish on gold for 12 years now. Although, some analysts suggest gold prices are in a bubble, I disagree with them and see more upside for the metal in the years ahead.
Photo © Lombardi Financial, 2012
Central banks have created this monster called “fiat currency” (the paper money we carry in our wallets and purses). Fiat currency started out as a good concept, but central banks abused their powers and simply created too much paper money. This has resulted in years of inflation and the erosion of the value of paper money. Simply, it will cost you many more dollars today to buy the same item than it would have 10 or 20 years ago.
As an example, in 1985, the total amount of notes and coins in circulation in the U.S. economy was $193.756 billion. Fast-forward to today, and we have total notes and coins in circulation of $2.6 trillion—an increase of 1,273%! (Source: Federal Reserve, November 16, 2012.)
And let’s not forget that we are just talking about coins and notes. Nowadays, central banks can create money (increase the money supply) without actually printing money—they do it electronically with the help of a computer keyboard!
As long as the central banks continue to print, gold prices will continue to rise. These vending machines dispensing gold will only gain more popularity, as people start to realize their dollar of paper money is worth less and less. Gold is not useless, nor do I believe it is in a bubble. It has been a store of value for thousands of years.
Central banks in the global economy are facing dilemmas like never before. If they let their currencies rise in value, they lose their competitive edge in the global economy, as consuming countries will buy cheaper goods somewhere else. Hence, it is in the best interest of central banks to lower the value of their currencies to spur exports and their economies. On the other hand, if central banks print more to devalue their currency, how do they protect themselves from inflation getting out of control? The ultimate solution looks to be to print more paper money and buy more gold to back that money.
In the third quarter of 2012, central banks in the global economy bought 97.6 tonnes of gold year-to-date, nine percent higher than what they bought in the same timeframe in 2011. (Source: World Gold Council, November 15, 2012.)
Ironically, by printing more paper money, central banks in the global economy could be the driving force of gold demand. They will continue buying gold because that’s the only way they can protect themselves against the deterioration of their paper money, inflation, and the uncertainty in the global economy.
My opinion on the yellow metal has not changed—I’m still bullish. Until the central banks in the global economy stop printing, I will continue to be in favor of gold.
Just how bad is the U.S. economy?
Unfortunately, nothing has really changed in the U.S. economy since the credit crisis hit in 2008 except for a record increase in government debt, a record increase in the money supply, and years of artificially low interest rates. There have been no real structural changes to the U.S. economy.
But putting the economic issues aside, what has changed is the confidence of people in the government and the U.S. economy. Why would I say that?
Americans from more than 40 states have filed a petition with the U.S. government seeking to secede from the union. Citizens in Texas collected 100,000 signatures, and Louisiana, Florida, North Carolina, Alabama, Georgia, and Tennessee combined have collected 30,000 signatures. (Source: Reuters, November 14, 2012.)
If this wasn’t enough, in September, U.S. residents increased their holdings of long-term foreign securities, with net purchases of $14.6 billion. Similarly, over time, their appetite for long-term U.S. domestic securities has gone down significantly.
In 2010, U.S. residents purchased $908.3 billion worth of domestic securities. In 2011, they purchased $493.4 billion—a decrease of almost 46% from the previous year. (Source: U.S. Department of the Treasury, November 16, 2012.)
The financial crisis in the U.S. economy devastated pockets of average Americans, but the government chose to bail out Wall Street and not the common man. Average Americans were the ones who lost their jobs and saw their wealth and wages decline.
Will these 40 states be able to walk away from the debt-infested U.S. economy? I doubt it very much. We are simply dealing with pockets of very upset citizens. People in the U.S. have suffered long enough. The U.S. economy is nowhere close to the levels seen before the financial crisis started. All the recovery talk—it’s nothing but a speaking point for politicians.
Unfortunately, my biggest fear is that, four years out, we will be in the same situation as today. The gap between the rich and poor in this country will only get wider…more and more people will become dependent on government handouts…we will get closer and closer to a socialist system, in which the government supports its citizens financially with different kinds of handouts.
How can economic growth be achieved under such a scenario? Here’s a better one for you: how can the stock market rise in such an economy?
Where the Market Stands; Where It’s Headed:
We are near the end of a multi-year bear market rally. Phase II of the bear market (often called the bounce) is coming to an end.
What He Said:
“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in Profit Confidential, August 27, 2007. A dire prediction that came true.