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A Hedgehog’s Notes From All Over
(October 20, 2005) “The fox knows many things, the hedgehog only one. But it's a big one.” Roughly translated, so said the Greek poet Achilochus. This week, we will amble amiably from hedge to hedge, touching gold everywhere.
“Do you know what separates those who make the biggest impact from all the others who are just as smart? They're hedgehogs. Freud and the unconscious, Darwin and natural selection, Marx and class struggle, Einstein and relativity, Adam Smith and division of labor—they were all hedgehogs. They took a complex world and simplified it.”-Jim Collins


This month we find gold rising not just in dollar terms, but also against the euro, yen, and pound, a revaluing of the yellow metal that constitutes a sea change in perception. Investors have traditionally fled from the currencies of countries perceived to have relative economic weaknesses, and gravitated to currencies of the stronger economies. Today, however, the market is not finding any government currency to be particularly attractive.

Recent strength in oil prices, increased inflation, and the prospect of even more inflation as the effects of higher oil prices work their way through the world’s economies - these are the factors that have made the currencies of ALL the oil-consuming countries less desirable. Only gold, well nigh forgotten in the West, yet a favorite store of wealth of the Middle East’s oil-producing countries, has risen in price – this time, not just against the dollar, but against virtually every traded currency.

With gold achieving new multi-year highs against the dollar, yen, and pound; and all-time highs against the euro, there is no denying that we are in a genuine, full-blown gold bull market. And why not? International demand, both in jewelry and as an investment medium, is increasing each year much faster than newly mined gold is being brought out of the ground, and central banks cannot make up the shortfall forever.

From here on in, the strength or weakness of the dollar may have much less relevance to gold prices. Rather, the basic law of supply and demand will drive gold prices, in both real and inflation-adjusted terms, higher no matter which currency you use as a measure.


Doug Casey of the International Speculator writes:

“Many people think commodity prices are higher now, but in inflation-adjusted dollars many key commodities are actually cheaper than they were before the last great commodities bull market peaked. For example, the current "record high" crude oil price of $68 is only $31.63 in 1981 dollars, when oil peaked at $38.34. Gold, at $440, is only $185.55 in 1980 dollars, when gold peaked at $850. In fact, at $440 in 2005 dollars, gold is actually lower than it has been in 30 years save for the 2000-2003 period when it bottomed. At $1.73, copper today is at about half of the 1980 peak of $1.44. This doesn't mean prices can't temporarily go lower….but it does paint a bullish picture for commodities for years to come.”


“Gold equals fear plus respect.” – Venetian saying, circa 13th century.


It’s All In How You Say It Department:

In an October 8th Wall Street Journal article written by Craig Karmin about James Turk’s, an electronic gold transfer system, the following paragraph appears:

“For the past 25 years, holding gold actually has been a good way to reduce wealth. While bullion prices recently hit $472.30 an ounce, their best level since 1988, that is down from $834 an ounce in 1980.”

That dramatic first sentence seems to assert that that gold has been a losing proposition for 25 years. But the second sentence undercuts the first, and reveals that what he is really stating is that if you had bought gold on the one day in history that it ever traded over $800 (January 21st, 1980), then you’ve lost money. When Mr. Karmin used the phrase “For the past 25 years..” his actual meaning is “If one bought gold at its record highest price…”

Changing the tone of the paragraph, and using the same facts, might have read something like this: “Although gold prices are nowhere near the $834 level reached in January of 1980, every investor who bought gold since 1988 is in a profit position.” But such a gold-friendly statement wouldn’t have pleased his editors at the WSJ.


South Africa, the world’s largest gold producers, employs a labor force of some 400,000 souls. Timothy Green in The World of Gold, states that “To produce one ounce of fine gold requires thirty-eight man-hours, 1400 gallons of water, electricity to run a large home for ten days, 282 to 565 cubic feet of air under straining pressure, and quantities of chemicals including cyanide, acids, lead, borax, and lime.”


In the Financial Times of October 15, 2005, an article entitled “US Inflation Rate Hits 14-year High,” explores the recent jump in inflation. Seemingly, there is something called “headline” inflation, which in the US rose 4.7% in September alone.

“Headline” inflation should not be confused with something called “core” inflation, a measure which excludes food and energy prices, and has only risen some 2% this year.

The Federal Reserve is probably the source of this two-headed inflation, and, yes, we mean that in more ways than one. The article goes on to state:

“In the year to September, hourly earnings rose by just 2.6 per cent, well below the rising cost of living. This provides some reassurance to the Federal Reserve that salaries are not chasing prices higher.”

In other words, the Fed is breathing easier because working people, while being slowly impoverished by inflation, are not demanding higher salaries!

In 1975 Gerald Ford vowed to “Whip Inflation Now.” Today, Fed strategy seems to be, first of all, define it to death, and secondly, just hope that people who work for a living never catch on to what’s happening.


As hedgehogs, we know only one thing. But it’s a big thing:

Money today is an artificial construct, a phantom, a will’o’the’wisp. The stuff we call money does not exist in and of itself, but only as the obligations of others. Money was once a store of value that also could be exchanged – today, only the exchange function remains, giving money no more intrinsic value than store coupons or postage stamps.

Gold, on the other hand, is permanent, incorruptible wealth, now and forever, and we are here to provide it for those who want it.

And that is all this hedgehog knows.


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