For anyone interested in making money, I will give you one very important tip here: Ignore almost everything you hear from talking head economists on the financial networks and news shows.

Half the time they are defending the latest government intervention into the economy. When they are not doing that, they are making quite useless forecasts. Following their advice will often cost you a lot of money.

Their ad nauseam forecasts about, say, GDP to the .0001 range is just some goofball parlor game not much different from attempting to guess Barry Bonds' batting average at the end of the season.

The way you guess Barry Bonds' batting average for the end of the year is by looking at his batting average now and then guessing a number somewhere around it, a little higher or a little lower (depending if you think he is going to have a little bit better or a little worse second half). That's what these economists do. They just guess a number somewhere around where the number already is. 

Now, even if they guessed this number exactly (which they rarely do), there is little practical investment value in knowing the number. As the great economist Ludwig von Mises pointed out, it is a market of stocks, not a stock market. Stock averages can go up or down, that doesn't mean all stocks will go up or down. This year, for example, the averages have been going down, but gold stocks have been soaring.

It is much more important to know a lot more about the companies and industries when you are making investment decisions, than whether GDP is going up by .0001% or .00012%.

Now, of course, it would be different if an economist came around and identified and explained a trend in the economy. I'm talking about precise reasons for a trend as opposed to making parlor game guesses at meaningless numbers.  Then you might have some useful information with which to make an informed investment decision.

Such a situation came in May 2001 when I saw an article at Mises.org by the then-79 year old economist Hans Sennholz. Sennholz is a free market, "Austrian" economist, and I would venture to guess he has never, in his long career, made a ridiculous parlor game forecast of the next quarterly GDP.

What Sennholz does is think about the economy, understand the economy and teach about the economy. 

For sometime before May 2001, I was a little bit confused by some price action in the economy. The stock market had been soaring for years as a result of the Federal Reserve flooding the market with money. I knew that this would, at some point, result in higher gold prices and higher consumer prices. But I wasn't really seeing any of that kind of movement. Gold started the year 2001 at $271 per ounce, and by May 1 it was at only $276. 

Now, while I thought there should be some upward move in gold, I wasn't making a Milton Friedmanesque error of thinking there was some automatic macro movement in money, whereby an increase in money automatically resulted in an inflation in gold and consumer prices down the road.

No, I have read enough "Austrian" texts to know that the economy is a pretty tricky thing with lots of variables, so I wasn't confused by a Friedmanesque formula that wasn't working. I just knew that a lot of money had been pumped into the economy for a long time and that the money had to be going somewhere. I just couldn't figure out where. Then I read Professor Sennholz's article.

His article was about the Euro and why it was weak at the time. Here is part of what he wrote:

". . . there are two important reasons why the euro in a state of chronic depression. First, the governments of the eleven euro-zone countries are using the introduction of the common currency as an opportunity to seize and confiscate funds acquired illegally. They are determined not only to prevent money-laundering--that is, making illegally acquired cash look as if it were acquired legally--but also to obstruct or even close the black markets, the illicit markets in which goods are sold in violation of tax laws, price controls, or other restrictions."

"All euro-zone commercial banks, which are scheduled to handle the exchange of new money for old, therefore, are required to report every exchange of 'large sums' to the authorities. No matter what they may report, many savers with illicit savings, no matter how small, may be fearful of being reported by name. They are seeking to avoid criminal prosecution and loss of funds by spending their savings or converting them into dollars."

There was my first important information. Europeans were converting their funds into dollars.

Professor Sennholz continued:

"Second, there are millions of people outside the euro-zone who are holding European currencies. Merchants, farmers, and workers in Poland, Croatia, Slovenia, Hungary, and other European countries have savings in trusted German marks. They may have heard rumors about the coming currency reform that will render their savings worthless, but they may not know where to exchange them for new euros. Their own governments may want to seize them, which are scarce foreign reserves, or want to tax them for reasons of tax evasion. Helplessness and fear may force the savers either to spend their holdings or convert them into dollars."

Interesting, I thought, another new demand for dollars. But how much demand?

Professor Sennholz continued:

"It is difficult to estimate the magnitude of both sources of funds seeking exchange. The amounts involved are huge. The black-market economy of the euro-zone has been estimated at some 16 percent of official gross domestic product (GDP). As it cannot use the banking system and is forced to use cash only, its stock of cash is bound to be way above the 16 percent of illegal GDP. If we assume it to be only 25 percent, with some 256 billion euros of bank notes presently in circulation (European Central Bank,   Monthly Bulletin, April 2001), some 64 billion euros are serving the black market."

Wow, this was BIG!

"In addition, the old stock of convertible money held in the non-euro parts of Europe is estimated at some 50 billion euros. (The outstanding German mark holdings alone are estimated between 30 billion and 45 billion.) Altogether the stock of European currency seeking U.S. dollars is significant; it is bound to depress the euro and lift the dollar."

There it was: a huge, big-time absorption of dollars in Europe before the mandatory conversion of currencies into the euro starting January 2002 and ending, for most currencies, by March 2002.

Now this was valuable information. I could complete the analysis for myself from here. The artificial demand for dollars in Europe would start to end in January 2002 because the new euro would be introduced and the black market would be able to use the new euro. Since most currencies would be completely converted to the euro by March 2002, the artificial demand for dollars would certainly be over by March 2002.

I now had important information with dates attached. Buy gold at the start of January, I thought. I did buy some at $278 per ounce. Gold started to slowly climb. By February 1, it was at $283. I bought more gold in early March at $295. Currently gold is at $320 per ounce. Professor Sennholz's insights have proved very valuable.

Now here is what is interesting. I think all that has really occurred to date is that NEW demand for dollars has stopped in Europe. Most of the dollars that were purchased in Europe pre-January 2002 are probably still sloshing around in Europe. When this super cluster of greenbacks (I think of it as the "Sennholz Super Cluster," you know, just like they name star and star clusters after the astronomers who first discover them) start to come back to their motherland, we will really see an upward move in gold.

Thanks, Professor Sennholz, for some real great analytical economics work. I think I owe you dinner.