LAS VEGAS (ResourceInvestor.com) -- Market commentator Paul Van Eeden spoke to a rapt audience during this week’s Las Vegas Hard Assets Conference, sounding off on the U.S. Federal Reserve, the true nature of inflation and the best way for retail investors to keep their shirts in a volatile stock market.
The True Nature of Inflation
Inflation, according to Van Eeden, is not best reflected in the prices of goods and services (such as shown by the Consumer Price Index [CPI]), given that those are subject to numerous hedonic adjustments and one-off events (supply problems, for examples). The true nature of inflation, he said, can be seen in the money supply.
Given the recent credit problems and the uptick in market volatility, it’s more important than ever investors understand this phenomenon, according to Van Eeden.
“The root of the uncertainty and the confusion and the panic that we have seen [in the market] stems from the fact that people get so caught up in the little tidbits of data coming in, that they forget to think…what is inflation?”
“Thirty or forty years ago, if you asked someone, what is inflation - they wouldn’t hesitate to tell you - ‘changes in the money supply.’ Now, they would say, ‘changes in consumer prices, I guess’.”
The nature of consumer prices as calculated by the Federal Reserve, according to Van Eeden, doesn’t truly reflect the erosion in purchasing power caused by the growth in money supply.
Based on rough calculations of M3 (the most comprehensive measure of money supply discontinued by the government about 2 years ago) Van Eeden said: “right now M3 is running at about 13% per year. And that, unfortunately, is the closest measure to what we have of what inflation actually is ... that means that all of our money is losing value at 13% per year.”
What’s the best way to protect ones money from this persistent devaluation? Gold.
The Nature of Gold Investing
“What should we do? We can recognize inflation exists, but what should we do about it? The first thing is to recognize that it is not a coincidence that inflation exists, and that it is not going to go away.”
While gold can help individual investors maintain their purchasing power and fight inflation over long periods of time, even gold investments are victim to government confiscation by taxation. So while your gold may hold its value, said Van Eeden, you’ll still end up losing purchasing power once you sell that gold and pay capital gains.
“What should we do ... we cannot change the inflation rate, we cannot change the taxation rate. You have to decide one of two things - do I want to preserve my capital, or do I want to try and grow my capital?”
“If you’re trying to preserve your capital, your only question is risk. What is the lowest risk instrument you can buy? The answer is probably gold - physical gold - because gold is a constant in the monetary world ... and then you have to accept the fact that if you buy physical gold, the government will gradually confiscate it by taxation and inflation, and you have to plan for that.”
“The other thing that you have to decide is if you want to speculate or gamble on these companies. And you have to realize that it is gambling, because there are more factors than you can predict ... and when you’re gambling or speculating or investing as most people like to think about it, there’s only thing that you have to realize - recognize that you cannot predict the market consistently.”
The Way to Real Investment Success
Once one recognizes that beating the market and finding the perfect companies is impossible to do with complete success - even for professionals - then how can individual investors hope to actually grow their wealth?
By controlling your emotions through disciplined, timely investing, said Van Eeden. Or, in other words: buy fear, sell greed.
“We need to control our greed, and we need to control our fear. And a very good friend of mine has a good way of expressing this. He says, ‘you have a choice: you can either be a contrarian, or you can be a victim’.”
“Making money in the market is at once the simplest thing and the most difficult thing to do. Buy low and sell high - it’s not more difficult than that. But it’s difficult because you cannot do that without being contrarian to what other people are doing.... I can honestly and truthfully tell you that in the last 10 years I have been fortunate enough to make more money than I can spend in the rest of my life.”
“It wasn’t because I was smart, and it wasn’t because I was lucky ... but there was one thing I could do. I had the conviction and the courage to buy gold when it was $250/ounce and uranium when it was $7/pound. I had the courage and conviction to sell my uranium stocks when I made 4 or 5 times my money, and to sell half of my gold stocks in May 2006 when I thought gold had exceeded its intrinsic value. And that’s all that is required to be a successful investor.”
Right now, he added, with people still quite sceptical about the price of gold - and the long-term bull market still very much in place - Van Eeden believes that this is likely a good time to continue holding onto your gold-related investments.
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