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December 23, 2004

Gold, Politics, and Debt
by Charles Meek

Dow Jones Industrial Average   10,784
Value Line Arithmetic Index   1775
30-Year Treasury Index   4.83%

The Big Picture for Stocks: We are looking for the bear side of the 4-year cycle.

Technical Trendicator (1-4 month trend):
Stock Prices   Down
Bond Prices   Down

Note the accompanying chart of gold versus the stock market. It suggests that we are in the early stages of a long term uptrend for gold relative to stocks.

I would like to call your attention to an excerpt from an interview by the Wall Street Transcript of Bruce Todd, president and CEO of Crystallex International Corp. (To read the entire interview, go to http://www.twst.com/ceos/ZAS602.htm.)

"At the end of the day, my perspective is that gold is nothing more than money. It's not a commodity in the sense of nickel or copper that is obviously materially influenced on supply/demand balances or imbalances. There are two fundamental characteristics that make gold a better form of money than any other that's ever been invented by mankind in the last 3,000 years or so. The first characteristic is that gold is the only form of money that can't be created out of thin air at no cost. The other great characteristic about it is that because there is a substantial pool of monetary gold in existence, the incremental addition to that pool is, generally speaking, almost insignificant. As a consequence, as a form of money, gold is not like paper currencies which governments and politicians can inflate like crazy and add vast amounts to the money supply since such fiat currencies are created out of thin air at no cost. Undoubtedly, higher gold prices will obviously encourage the markets and investors to employ their risk capital by investing in new gold mines, but I think at the end of the day, when you view gold as money, the incremental addition to the pool of available gold that is governing the monetary nature of it is always going to be very modest and you can't say that about any form of fiat paper currency."

The problem is not a new one. Governments can create money and therefore debase their currency. In the USA, we are potentially nearing a crisis situation. We have accelerating federal budget deficits and a rising trade imbalalance. It is not that we cannot solve it. In fact, it would be fairly easy to solve the deficit problem, the Social Security problem, and the income tax mess - all in a single comprehensive step. For the record, here is my plan to save the economy:

Economic Problems Solved By a Comprehensive Strategy

The administration has a great opportunity to, in one fell swoop, solve

(a)  the deficit problem

(b)  the Social Security problem, and

(c)  the income tax problem

Here's the concept:

1. Freeze federal spending at current levels for every department except defense for as long as it takes to get the budget back in balance. No exceptions. Note that this does not mean that federal workers' pay cannot go up. It just means that each department has to figure out where to conserve so that they spend no more in total each year hence.

2. Cut Social Security payments for those who do not need it. Social Security was originally designed to be a safety net for the truly needy. So perhaps, only the bottom half or bottom third of Americans would receive Social Security income benefits. Everybody would continue to pay into the system as they do now, but only those who find themselves in retirement at the low end of the income spectrum would receive full benefits.

3. Institute a true flat income tax, with perhaps deductions only for charitable contributions. No gimmicks. No baloney. Ideally there would be a constitutional amendment process begun at the same time to prohibit the federal government from ever taking more than 20% of any portion of any citizen's income in federal income tax.

This plan ought to be politically feasible in that the rich would get a lower tax rate but would give up Social Security retirement income benefits. That should be a fair trade-off.

The plan would have to be scaled in over several years to protect people who have made reliances on the current system.

From an investment standpoint, this would be a boon to stocks, bonds, and the dollar. The economy would become more productive. Government would become more responsive and responsible.

The solution is so simple and so obvious, it will surely be missed. It will be missed because nobody in Washington can put three seemingly unrelated issues together in the same package (unless there is pork involved). But this is the key to success - a package deal.

I think that President Bush is hampered by the bureaucracy. But I suspect that he is also hampered by history. He remembers the budget deficit problems of the Reagan years. At the time, conservatives complained about them. But through a good economy we worked through the deficits and many people have become complacent about deficit spending. The slogan became, "Deficits don't matter." Bush is predictable. He will not fix the problem.

The economy will likely not bail us out this time. As we have pointed out several times in these columns, the consumer is so heavily in debt that he is finished. The technology revolution is real, but it cannot save us either. What we have is a crisis in government.

Gold has done well in U.S. dollar terms because the dollar has declined. But that relationship could de-couple. Gold may continue its bull market regardless of what the dollar does. It could be in demand as a worldwide alternative currency, as investors lose confidence in other forms of money.

Accordingly, I am putting three new gold stocks on the Special Situations list. For these and our tax-bounce candidates, go to our website.

Regards,

Charles Meek
MeekMarketModels.com

Mr. Meek is a Registered Investment Advisor and editor of MeekMarketModels.com.

MeekMarketModels does not guarantee the accuracy or completeness of this report, nor do they assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are for general information only . In making any investment decision, you will rely on your own review and examination of the facts and the records relating to such investments. Trading the market is extremely risky. Our suggestions are often very speculative and not suitable for many investors. Past results are not indicative of future returns. Meek Market Models, Inc.

Copyright © 2004-2006 Charles Meek

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