If you lived in Alabama in the 1950s, you would have been struck by a meteorite.

Five decades later, Alabamians still reeling from meteorite strike.


It’s true. Read the history.

Ok, maybe not. Yes, it’s true a meteorite did strike Alabama in the 1950s and yes, a 32-year-old lady, Ann Hodges, was struck. Nevertheless, the spectacular incident falls short of supporting the bold assertion that all Alabamians were struck by meteorites in the 1950s – far from it.

An accurate statement might instead read: A person sitting on the couch of Mrs. Ann Hodges at her home in Sylacauga, Alabama on November 30, 1954 around noontime might have been hit by an 8.5 pound meteorite as it crashed through the ceiling of the single-story home. To provide historical context, one might add that the incident resulted in no permanent injury to Mrs. Hodges and at the time was the first modern record of human injury due to meteorites.[1]

This is common-sense analysis.

Anti-gold nonsense

Ever since gold began its historic bull-run in 2001 it has been the center of great discussion and criticism. While goldbugs (those enamored with the metal) celebrate the nine-year bull-run, anti-goldbugs (those who disdain the metal) argue furiously against its effectiveness as a safe-haven investment.

For many years, as their primary argument, anti-goldbugs claimed that if one bought gold in the 1980s, that person’s investment return would still be negative even several decades later. The argument, purely empirical (not logical) in form, self-destructed earlier this year when gold eclipsed its previous all-time high. Still undiscouraged, anti-goldbugs add that their argument still holds if one calculates inflation adjusted returns.

Nevertheless, just like my initial Sylacauga meteorite claim, the statement is flawed and terribly misleading.

While it is true that gold reached a high of $850 per oz. during the 1980s, not every purchaser during that decade paid that lofty price. Indeed, the majority of buyers paid far less. According to figures published by The London Gold Market Fixing Ltd., gold traded between $284 and $850 per oz. during the 1980s but only reached the $850 level once, on the afternoon of January 21, 1980.

Why then would one select the gold price precisely on the afternoon of January 21, 1980 as the universal basis for evaluating its long-term effectiveness as a store of wealth?[2] Why not instead consider the prior week, month, year, or decade?

Furthermore, if one is to allow such arbitrary generalization, why not expand the argument to cover multiple decades or even centuries by claiming for instance, “If one bought gold in the 20th century that person’s investment return today would still be negative.”

These arguments are foolish and absurd.

Common-sense is golden

Anti-goldbugs consistently offer spectacular viewpoints, yet they rarely produce substantive information for concerned investors. Their singular objective is to discredit gold and nothing else.

But when viewed objectively – over its entire history and alongside competing alternatives – gold as a store of wealth is unrivaled. Common comparisons to stocks, rental properties, or interest-bearing money accounts are invalid since the zero-yield penalty often associated with holding gold is not characteristic of the metal but of the application – no asset, including a vacant commercial property or coins in a piggybank, generates income when held idle in storage. Yet in tumultuous times, many investors, concerned with the risk of failing businesses and banks, gladly forego yield in favor of security. And for those investors, there is no better choice than gold.

The Lesson

Take the advice of anti-goldbugs and the next crash you hear won’t be a meteorite – it will likely be your investment portfolio.

[1] Time.com, “Science:  Star on Alabama,” Dec. 13, 1954, http://www.time.com/time/magazine/article/0,9171,935435-2,00.html. Accessed Dec. 8, 2009.

[2] Bloomberg.com, Nicholas Larkin and Millie Munshi, “Gold Can’t Beat Checking Accounts 30 Years After Peak (Update 2),” Dec. 7, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIMzb9wGeAB8. Accessed Dec 9, 2009.

For more economic commentary, join Albert Lu with host Kevin Price on “The Price of Business” Thursdays at 11:00AM (CST) on CNN Radio 650AM or contact the author at Blog@WoodlandsBullion.com.

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A breakthrough in Sesame Street economics

These days economists tend to express economic forecasts using those alphabet letters they feel best illustrate future stock market performance—hence the popularity of the letters V, W, U, and L in modern economic parlance. In this jargon, a V-shaped forecast refers to a quick economic recovery whereas a W-shaped forecast describes the proverbial “double-dip” recession. U and L-shaped forecasts denote prolonged recessions with the latter corresponding to a downturn with no relief in sight.

While the analogies themselves are harmless, and admittedly convenient, tools of expression, some economists dangerously take the practice a step further by instituting the analogies as economic laws in their own right. In adopting this Sesame Street economics, they confuse description with prescription — a fallacy best illustrated through yet another analogy.

We all know that clouds sometimes take on interesting, life-like shapes. And when they occur, these natural coincidences can be amusing, particularly to children playing the “look-like” game. Yet, despite the uncanny resemblance between clouds and their real-life counterparts we understand that any comparison is no more than a superficial visual analogy.

For instance, although a cloud may look like a bunny rabbit we have no expectation that it will act like one. We are neither surprised when its nose fails to twitch or its tail to wiggle. Nor do we wait eagerly for it to hop around the sky or express disappointment at the cloud’s failure to find and devour “carrot clouds.” In other words, we recognize the analogy is visually descriptive but not behaviorally prescriptive.

Sadly, in economics, this distinction is often lost.

Too often we encounter economic pundits who not only describe but also justify their forecasts on the basis of crude visual analogies.

“Clearly, we are entering a classical W-shaped recovery,” they say, when in reality there is no such classical W-theory of business cycles just as there is no such bunny-method of weather forecasting. The coincidence of trajectories and shapes is merely that – coincidence, which ultimately reveals nothing about causality or future behavior. As such, any attempt at logical inference must be fallacious.

Proceeding nonetheless with this Sesame Street economics, we might propose yet another interesting possibility: the O-shaped recovery, in which government stimuli, not free-market forces, become the basis of recovery. Central to the O-shaped theory is the idea that free markets, unable to provide the necessary aggregate demand, must be supplemented by government spending.

Nevertheless, in time it becomes all too clear that the O-shaped recovery is not a recovery at all, as each successive stimulus adds to the degenerating stock of mal-invested capital, in effect compounding the problem and finally resulting in more business failures, more job losses, more government debt, and, in the worst case, a monetary catastrophe.

For more economic commentary, join Albert Lu with host Kevin Price on “The Price of Business” Thursdays at 11:00AM (CST) on CNN Radio 650AM or contact the author at Blog@WoodlandsBullion.com.

In the economy, as in life, productivity is key

Last week’s announcement by the Commerce Department drew cheers as the group revised its April-June report on annualized gross domestic product (GDP) growth to -0.7%, indicating a smaller economic contraction than was originally reported. While the news prompted optimism among some, the celebration was cut short two days later when the government also reported a 26-year high jobless rate of 9.8% and an “underemployment” rate of 17%. The data, which at first glance appear contradictory, paint a consistent and painful picture of a failing economy.

In economic jargon, GDP (the combined dollar-value of domestically produced goods and services) is a commonly accepted measure of overall productivity; hence a growing GDP is seen as “good” and a falling GDP as “bad.” A similar rule applies to unemployment statistics where low unemployment is preferable to high. The reality, however, is more complex.

Both GDP and unemployment data are measures of economic participation, not productivity. And although participation can also be productive, it is not always so.

If a student dutifully participates in class activities but studies the wrong material prior to examination, he will likely fail his test. The poor student, misinformed, expends great effort yet achieves little – his participation was high, but his productivity was low. The same is true in the greater economy.

Over the past decade, our economy expended great effort (evidenced by the growing GDP and low unemployment). Yet today we find ourselves in a quagmire, engulfed by bankruptcies, unemployment, collapsing asset prices, and a looming currency crisis. Why?

Like the poor student, our economy expended great effort but in all the wrong ways. At a time when the economy required higher interest rates, the central bank held loan rates down. When consumers should have curtailed spending, they borrowed to consume more. When governments should have contracted, they instead expanded aggressively. And when poorly managed businesses should have failed, they rode to safety on taxpayer shoulders. And now, with the test scores in, the result is indisputable – like the frustrated student, we too failed, quite miserably.

Nevertheless, with GDP figures reversing course, some pundits are signaling the end of the recession. But again, the analysts confuse participation and productivity since the new figures, spiked with inflation and government spending, only reflect a continuation of poor policy and not the economic realignment we so badly need.

When the current measures fail to revive our ailing economy, we – politicians, voters, businesses, and consumers – will again be faced with a choice between free-market principles and central intervention.

Perhaps this time we will choose more wisely.

For more economic commentary, join Albert Lu with host Kevin Price on “The Price of Business” Thursdays at 11:00AM (CST) on CNN Radio 650AM or contact the author at Albert.Lu@WoodlandsBullion.com.

In the business cycle, delays only make for a painful delivery.

Mainstream economists and politicians make much noise about the current economic depression and, particularly, the deflation that accompanies it. In their hampered view, deflations, marked by falling prices, are the source of depressions and therefore must be avoided at all cost. They maintain that the central bank must do all in its power to reverse the powerful trend. But once again they have it all wrong.

As in previous downturns, the present crisis is the inevitable consequence of past policy mistakes. It is the final stage of the current business cycle. And, in some ways, our economic condition is much like the biology of a pregnant woman. The comparison may be a “stretch” but, in my opinion, it is an illustrative one.

Like a pregnancy, each business cycle has a beginning, middle, and end. More specifically, we can characterize the three phases as the stimulus, the boom, and the bust where government inflation provides the stimulus, false prosperity fuels the boom, and the deflationary depression results in the bust. Once started the cycle must conclude; like a pregnancy the process cannot be reversed. Yet, despite this economic reality, politicians following the advice of misguided economists never pass up an opportunity to re-stimulate a collapsing bubble – always with painful consequences.

Unfortunately, these meddlers fail to understand that the depression they so dread constitutes the essential adjustment of economic resources that must follow the inflationary boom they themselves created. And, although painful in the short-term, the inevitable process represents the only path to lasting prosperity.

But, by delaying the depression, policy makers only allow our economic problems to grow. And, as with an unborn child, excessive delay can only lead to a painful or, in the worst case, catastrophic outcome.

Will they ever learn?

For more economic commentary, join Albert Lu with host Kevin Price on “The Price of Business” Thursdays at 11:00AM (CST) on CNN Radio 650AM or contact the author at Albert.Lu@WoodlandsBullion.com.

Like a corked wine, today’s money is a tainted, malodorous, and ultimately worthless substitute for the real thing.

All wealth derives from some combination of land, labor, and time. Everything we value comes originally from these three independent factors – those provided by nature, the expenditure of human effort, and the duration of production.

In these ways, your wealth is much like a fine wine – produced over decades using generations of knowledge, passion, perseverance, and sweat. And like a precious wine, your wealth is of greatest benefit to you and society when safely preserved and aged for future enjoyment.

Wine makers have long struggled with the challenges of wine preservation, for even the slightest slip can negate years or even decades of planning and effort. Centuries of evolution have resulted in the trusted methods of wine-making traditions. Despite many technological advances, these traditions – among them underground cellars, glass bottles, and cork seals — though imperfect, remain entrenched in the fine art.

In much the same way, preservation is also vital in the art of wealth management. As with a fine wine, your wealth has value only when consumed for pleasure or safely stored for future enjoyment. Here, the need for quality money becomes crucial. Quality money, like a good wine bottle, allows you to safely preserve your wealth for future enjoyment. This critical function facilitates saving and indirect exchange, both of which are essential components of a prosperous society.

Yet despite centuries of monetary evolution, reliable traditions such as gold and silver currency have long since been displaced by depreciating government paper. The predictable consequence has been crippling inflation and an economy plagued by a seemingly endless pattern of boom-bust cycles in which each inflationary “stimulus” provides the seed for the next depression.

Nevertheless, mainstream experts flippantly deny the causal relationship between tainted money, inflation, and the current economic crisis, at times even denying the existence of inflation itself. But to the discriminating “econophile,” the connection is as pungent as the malodorous signature of a wet dog.

In due course, when the pseudo economic recovery gives way to the overriding downward trend, masses of unsuspecting investors will again suffer crippling losses. And ultimately, only the circumspect investor, with his skillfully diversified portfolio, will stand ready to face the coming storm and perhaps avoid an unpalatable finish.

To learn about sensible, alternative investing strategies, join Albert Lu with host Kevin Price on “The Price of Business” Thursdays at 11:00AM (CST) on CNN Radio 650AM or contact the author at Albert.Lu@WoodlandsBullion.com.