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Geezer Investing

Mises Daily: Monday, September 11, 2006 by

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It is not unusual to hear about the virtues of hard money and the evils of the paper variety at a gold conference. However, Austrian business cycle theory is rarely cited given the audience is only interested in hot stock tips. But at the Las Vegas Hard Assets investment conference held last week at Mandalay Bay Resort & Casino, the Austrians were mentioned prominently in two separate presentations.

Keynote speaker John Dizard, columnist for the Financial Times, told the gold crowd that Austrian economists believe in "free markets and evidently, bow ties." He admitted that he was initially skeptical of the Austrian argument but has since come around. Austrian business cycle theory is based on intertemporal misallocation of resources. Excessive credit creation lowers interest rates below the natural rate, spurring malinvestment.

Dizard believes the effects of the misdeeds of the worlds central bankers are about ready to be felt. No financial crisis since 1994 has been allowed to run its course without central bank intervention. These crises are needed in order to liquidate malinvestments.

The FT columnist believes Fed Chair Ben Bernanke has read the Austrians and knows deep down that they are right. But, the Fed will inflate away a portion of the massive debt build-up leading to an increase in the price of gold. However not right away. Dizard said the gold price will head up six to nine months from now and he has even delayed the release of his forthcoming book entitled Gold Now to coincide with that prediction.

A couple hours after Dizard's presentation, newsletter writer Jay Taylor made the case that John Maynard Keynes and Milton Friedman were wrong and that Ludwig von Mises was right. Inflation and depression are caused by excessive credit creation. The Austrians advocate for a gold standard while bankers and politicians hate gold.

Of course conference attendees are gold fans, but judging by the attendance our legions are not growing despite the ongoing bull market. The original gold and uranium bug James Dines described attendance as "sparse" and remembered the days when it was standing room only. "The show is not as zippy as I thought it would be," silver guru David Morgan said during his presentation.

Only a small portion of a huge hall was curtained off for Hard Assets presentations, and often speakers were forced to compete with the rumble of forklifts operating just a few feet away.

Investing in natural resources and the companies that mine the stuff has clearly not caught on with young people. One presenter referred to investing in hard assets as "geezer investing," and indeed the conference crowd resembled the cast of Boynton Beach Club, sans Dyan Cannon and Sally Kellerman.

Plus, Mandalay Bay is not an easy layout for those depending on walkers, canes or scooters. Plenty of walking is required at Mandalay, as presenter Richard Sacks joked, "the hotel should provide a bicycle with each room."

Investment newsletter legend and author Howard Ruff made a comeback at the conference promoting his new book, Ruff's Little Book of Big Fortunes in Gold & Silver: A Middle Class License to Print Money. Ruff is most famous for recommending the purchase of gold at $120/oz in 1975 and more importantly recommending that people sell the yellow metal near its peak of $850/oz in 1980. "I'm a has-been that's here now," Ruff said, and believes that investors will earn 500 to 1,000 percent in gold over the next eight years, twice that in silver and a multiple of that in the right mining shares.

Virtually every speaker was positive on the precious metals and commodities markets. Although, technical analyst Ian McAvity sees the potential for a meltdown in the stock market that would take all other markets with it. But broker Ben Johnson cautioned in his workshop session that newsletter writers have to be bullish, because if they don't have any stocks to recommend they're out of business.

Global Resources Investments Chairman Rick Rule said investors have a choice between being contrarians or victims. Rule pointed out that Levi Strauss and the Hearst family made the most money during the California mining boom, one selling britches to miners the other selling newspapers. On that theme, Rule sees financial services and intellectual capital for the mining industry as cheap, as well as, profitable alternative energy, micro-cap Canadian natural gas producers, and mining companies with perceived political risk. "The Congo exhibits no more political risk than California does," Rule quipped. His company's head office is located in Carlsbad.

Numerous small mining companies were at the conference to make slick PowerPoint presentations full of drill results, maps, and slides of guys in hard hats standing in front of holes in the ground in the middle of nowhere. More than a few conferees wisely used these stock hustling presentations for napping.

Much more of last week's conference was devoted to oil than in the past. Craig R. Smith, co-author of Black Gold Stranglehold was a keynote speaker and also shared the stage with University of Houston professor Dr. Michael Economides for a panel on energy's future. Both Smith and Economides contend there is plenty of oil in the world, but that it's just harder and more expensive to get to. Smith doesn't believe decaying dinosaurs created oil. He thinks oil and gas are being created constantly and is brought to attainable depths by the centrifugal forces of the earth's rotation. Refining capacity is another thing however. It has been 29 years since the last refinery was built in the US, probably because it requires 800 permits to gain approval to build one.

Dr. Economides told the crowd that ethanol is the biggest scam ever, that it takes 1.6 gallons of gas to produce just a gallon of ethanol. He called it the dotcom of the energy business. Economides is a naturalized US citizen and emphasized that the biggest freedom he enjoys in this country is "the freedom to drive my car and not be forced to take any cockamamie public transportation." He loves global warming and thinks the planet will freeze over before it burns up. Economides sees lots of upside for the price of natural gas, and thinks the price of oil should be $40 per barrel based upon supply and demand, but points out that it could go to $100 per barrel if Israel attacks Iran, Al-Qaeda does something nasty to Saudi Arabia, or Venezuela's Hugo Chavez makes a deal to sell all of that country's oil to China.

But the primary theme of the conference was the pitiful state of the overleveraged world economies, and the coming weakness in paper currencies. Goldmoney.com's James Turk stressed that gold is not going up in price so much as the dollar is going down in value. Because of central banking chicanery, Turk predicts the dollar will collapse leading to $8,000 per ounce gold and $400 per ounce silver.

"We are being lured into a massive debt pyramid that will eventually collapse," Gary North wrote on LRC back in 2002, "either into deflationary depression or, more likely, into what Mises called the crack-up boom, in which the nation's currency is destroyed by the central bank."

It was Mises who predicted both the Great Depression and the fall of communism. Now, while but only a few notice, the Fed continues to set the stage for another of his predictions to come true: the crack-up boom and the destruction of the dollar.