A dollop of nonsense about Gold Investing, courtesy of Money magazine...

MY GRANDMOTHER'S favorite word for politely describing the obtuse among us aptly characterizes a recent attack on Gold Investing, writes Jeff Clark, senior editor of Casey's Gold & Resource Report.

Money magazine's Jan/Feb edition ran an article near the rear of the issue entitled "Coming Down with Gold Fever". The author paints a decidedly negative picture of gold, going so far as to compare gold's rise to some of history's greatest asset bubbles, such as tulips in 1630s' Holland, and internet stocks in late-90s' America.

That this attack on Gold Investing comes from a finance magazine commanding front-of-the-rack prominence in waiting rooms across our great land is reassuring evidence we still have a long way to go in this gold bull market. And the article is so blatantly biased and inaccurate that I decided to have a little fun with my rebuttal.

Regular Casey Research readers know I affectionately refer to self-declared Gold Investing debunkers as "Bert". You judge if this latest nay-sayer is worthy. What follows are the article's claims, along with my advice on how to respond...otherwise known as How to Talk to a Nincompoop (HTTTAN)...

#1. "Gold is now the world's 'it' investment..."

HTTTAN: You're absolutely right! A few cable TV commercials clearly signal the world has latched on to gold and is dizzy with excitement. The bestsellers at my local bookshop all scream with titles about gold. The radio waves are sparking with talk about buying, storing, testing, and securing all the different options with gold. And all those live newscasts from the lines outside gold shops across the country are really getting old.

If gold were in a mania, it would resemble the dotcom craze of 2000, where companies with no profits traded at 400 times earnings; when investors were leaving their brokers to chase the latest tech stock; and where everybody and their brother's dog was talking about the hot technology stock they just doubled their money on. None of that is happening now.

Besides, there's a good reason investors have been Buying Gold: it outperformed most other investments last year.

Gold Mining stocks tripled the performance of the Dow, more than doubled that of the S&P, and outran the Nasdaq.

#2. "The price of gold is the only thing rising...Gas costs less than it did a year ago."

HTTTAN: Well, my blood pressure rose when I read your article – does that count? And whew, I'm glad I misread my DirecTV bill announcing higher monthly charges. Higher fees from my bank? Must've had my glasses off while checking my last statement.

But either way, are you suggesting we wait till there's rampant inflation before we Buy Gold?

To start, the national average gasoline price rose from $1.70 to $2.70 a gallon over the past year, a 58% increase. The data disproving Money magazine's blatantly inaccurate and misleading claim is available free on the internet. And if you want to talk about things rising, how about the US monetary base...which more than doubled over the past 18 months to nearly $2 trillion, the steepest increase ever?

When you think of inflation, you apparently think "higher prices". News flash: price inflation stems from monetary inflation, and monetary inflation has ballooned. Price inflation is a tidal wave building off the coast. Don't get caught sipping piña coladas on the beach.

And you're right: Gold Bullion is the only thing that's been rising over the past decade! Ergo, that's been the place to be for a meaningful part of your investing.

Gold is doing what it's supposed to do: rise in times of crisis.

#3. "Gold isn't that inexpensive. And who says it's guaranteed to return to old highs?"

HTTTAN: Who says?! How about the laws of economics? My teenage son even understands this: the more you print of something, the less each one is worth. And as the Dollar continues deteriorating, gold will continue rising. And gee, Wally, they can't print gold.

Adjusted for inflation, gold's peak at $850 an ounce in 1980 would equal about $2300 today, more than double its current price. Guaranteed? Of course not. Where would I find a guaranteed investment? But I'll put the 5,000-year history of gold ahead of anything that is touted as "guaranteed" in the popular press...

#4. "Even China is wary of Gold Prices rising too much."

HTTTAN: Huh? The People's Bank of China merely said they may not buy much gold right now, referring to their desire to get a better price, not a change of heart. In fact, there are so many articles about how the Chinese continue Gold Investing it's hard to catalog them all.

• Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said last quarter that China might again scale back purchases of US debt on concerns the Dollar will decline...
• This came after their holdings were already lower in November than they were last July...
• Is it possible the Chinese – and the myriad other governments concerned about what US leaders are doing to the Dollar – will stop Buying Gold for protection? Anything is possible, but it's far more likely that they're just getting started, considering that just 1.9% of their foreign reserves are held in gold.

And this just in: An ING survey reports that 45% of investors in Asian markets (excluding Japan) picked gold as their most favored tool to protect their returns from inflation, more than any other asset.

#5. "Only a small number of sophisticated investors are getting in on the action."

HTTTAN: You mean like some of the most successful hedge fund managers in the world? Wait – are you suggesting we follow your advice instead? I'll consider that when you show me that article warning of a market top in '07 and urging your readers to get out. Instead, I seem to recall your magazine's giddiness as the market peaked. Perhaps that explains why many "sophisticated" investors use your magazine as a contrary indicator.

Investment management firm Moonraker reported in a 2009 survey that 20 out of 22 fund managers interviewed chose physical Gold Investing for their personal portfolios because they fear quantitative easing programs may lead to inflation. In other words, not only are they Buying Gold in their funds, they're stashing real, physical metal securely, too.

Furthermore, central banks are now net buyers of gold for the first time in 22 years. And last quarter it was reported by the Financial Times that the world's wealthiest families are also switching to gold, reporting that two-thirds of the 100 respondents to a survey by the Family Office Channel, a new website, say they are now more likely to invest in gold and other commodities.

#6. "Since 1974, when restrictions on Americans' owning gold were lifted, stocks have actually done a better job beating inflation than gold has."

HTTTAN: You're kidding, right? You actually know someone who has held a stock since 1974? I suppose we could contact Warren Buffett and get a couple names. Otherwise, get real: there's a time for everything, and right now is clearly the time for precious metals.

Doug Casey made a fortune investing in gold stocks in the mid-'90s during a mini bull market in gold. Generational wealth was created during the late '70s gold run. I have colleagues that have already retired from gains they made in gold stocks this past decade.

#7. "Ask yourself how long this delirium can last."

HTTTAN: Until people like you start telling readers to Buy Gold, that's how long. And, delirium? Tsk-tsk, your envy is getting embarrassing.

There has been little involvement by the general public in the current gold bull market. While there are many examples of this, perhaps the best one is that your magazine doesn't recommend buying it and really never has. And when you finally do, that will be my signal to start selling. I might as well thank you now.

There's actually more, but you get the idea. When I finished the article, I couldn't help but wonder what Bert is really trying to sell us here. He's clearly either biased, blind, or bought.

Because otherwise, he truly does meet the definition of my Grandma's favorite word – nincompoop.

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The Western world's fast-ageing populations face a problem – a big problem...

AUSTRALIANS all, let us become more productive – for we are getting older!

It doesn't quite have the same ring as the first line of the Aussie national anthem, does it? says Dan Denning in his Daily Reckoning Australia.

But even though the country is younger (and perhaps freer) than many other countries, it might not quite feel the same way about itself after reading parts of the government's latest Intergenerational Report, released yesterday.

The problem for Australia, like in all the Western world is that the population is ageing. You have fewer and fewer workers supporting more and more retirees. Those retirees are also drawing down their stock-market based savings vehicles. Their demand for benefits and income is increasing but their liquidating their asset portfolios to meet that demand.

This transfers the burden of national retirement from the stock market to the government. But as the government itself showed yesterday, the numbers don't add up. The ageing of the boomers leads to increased national spending on healthcare as percentage of Australian GDP. As you case see from the chart below, health, aged pensions, and aged care all expected to up as a percentage of government spending and GDP

To pay those bills, you need more tax payers and higher taxes. Or you need more productivity. That's what the government is counting on. It hopes that increases it output per hour by Aussie workers will deliver higher GDP growth and thus higher government tax receipts.

But even so, the government itself projects a growing "fiscal gap", shown below as the annual Federal deficit as a percentage of GDP.

Granted, this fiscal gap isn't as bad as it is in other places like Japan and the United States. Japan's government deficits are even more pronounced, and its demographic math even more dismal. And the United States is also in its own kind of "reality gap" in which expectations of government by the population far exceed what America can afford.

The new Obama budget projects $3.8 trillion in spending a $1.4 trillion deficit. There isn't much in the way of spending cuts to programs what are considered "non-discretionary" (defense, social security, Medicaid, Medicare).

You could say America itself has a kind of national "mortgage stress". The future has been mortgaged for a higher standard of living today. But it was a national prosperity built on debt. It's all falling down. About the only good news...and only for Aussie stock investors...is that Obama's dollar-busting budget may drive higher asset prices for raw materials like Gold Bullion, energy, and other hard commodities.

But Australia and Australian investors also face a slow motion fiscal trap. The country receives a big boost from trade income with China and the rest of the commodity consuming world. The government can fund its deficits at reasonable interest rates for now. But what yesterday's report set up was a fight between two generations.

The Boomers will slowly liquidate share portfolios to meet rising health care expenses. And what they cannot pay out of pocket, you'd expect them to vote themselves. It's an effective strategy for shifting the retirement burden from the private sector to the public. We have no doubt that Super Funds will be compelled to own government bonds. And the government will sell bonds in order to finance its spending obligations to the Boomers.

Where does this leave the share market and the economy? Can the country really increase output per person and grow its way out of the fiscal gap? The highest paid and largest employing industries are financial services and resources. Are the Boomers going to migrate to those jobs?

In short, will you have 70-year old coal miners working in Queensland? What kind of work can an ageing population reasonably be expected to do? There are more questions to answer. But we're up against our daily deadline so we'll have to leave them until tomorrow...

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Breast is best, robots can't kiss, and paper money fails – in the long run – to become Gold...

SCIENCE & TECHNOLOGY have produced many wondrous breakthroughs, writes Bill Bonner in his Daily Reckoning, but there are some things science cannot improve.

A kiss from natural lips is still the lover's choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction.

The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary...

A Scottish rogue, John Law, was the protagonist of the story. He killed Beau Wilson in a duel in London's Bloomsbury Square. Then, he went on the lam...first to Scotland...then to Amsterdam...and finally to Paris. Like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places – in this case the Duke d'Orleans, who needed money. Law had a way to get it:

"I have discovered the secret of the philosophers' stone," he is said to have remarked, "it is to make gold out of paper."

We need to look no further. Law may have been good with figures; it was at philosophy that he failed.

Because a thing cannot be both one thing and a different thing at the same time. It is either Gold, or it is paper. It cannot be both.

Rarity and durability give gold value as money. Paper's most conspicuous properties are just the opposite – it is common, and it has a tendency to curl up and blow away. Law's new, easy money helped France to an economic recovery – or so it seemed. But in the end, the philosophical error caught up with him.

Gold has real value. So if you can create it at will, why not create more of it? It was just a matter of time before he had created too much. Soon, there was an angry mob outside Law's office on the Rue Quincampoix. People who held his paper gold had come to see it in a different light. Where once they cherished it as paper gold...now they despised it as nothing but paper.

Law's scheme increased France's money supply – including banknotes and shares in his Mississippi company – by 300%. Prices in Paris doubled between 1718 and 1720. Then, when the new money system began to give way, the Duke d'Orleans cranked up the printing press. By 1721, Law's money was worthless. "Banque" became a dirty word in France, and stayed dirty for the next 200 years.

Today's current experiment with paper money began on the Sunday, 15 August 1971. Henceforth, said Richard Nixon, foreign countries that wished to exercise their right to trade US Dollars for Gold could drop dead. From then on, the Dollar was worth only what someone would give you for it.

Philosophers held their breath. But nothing happened. Many have died since, waiting for the Dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch.

The new paper money standard allowed for a worldwide credit boom – just as in Paris following the establishment of Law's scheme. The US created Dollars. Its citizens spent them. The Dollars accumulated as reserves all over the world...and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere.

The Japanese economy was the first to blow up, back in 1989. The tech sector on Wall Street was next to go – in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law's example.

All nations issue paper gold – in the form of bills, notes, and bonds – as if they were the Banque Royale. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, maybe $2 trillion.

How long can this go on? Where will it lead?

"There are no means of avoiding the final collapse of a boom brought about by credit expansion," wrote Ludwig von Mises. "The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Last Tuesday, the S&P rating agency issued a warning. If Japan continues in the direction it is going, it will have Hell to pay.

Japan leads the way into the future. And into a monetary minefield. Her current deficit – a record – is more than her tax revenue. And her public debt is nearly 7 times as great. Her feet grow larger.

No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying.

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