Bill Bonner

“Is gold going vertical?”

The question was put to us by our Family Office strategist, Rob Marstrand.

“We could be getting to the final stage of this bull market faster than we thought,” he added.

Yesterday, the price of gold rose to new record – over $1,400. This was also the day that news reached the world that the head of the World Bank had defected. Mr. Zoellick jumped the fence…he’s no longer among the dopes.

You know who we’re talking about…the vain and foolish economists who think central planning will work. “Give the economy more liquidity!” “Raise rates!” “More fiscal stimulus!” “More austerity.”

These guys act like they know what they are talking about. But they are quacks. Mountebanks. Phonies.

Not Zoellick. He said it was time to begin talking about a new gold standard.

Gold jumped $5. What can stop it now?

But there’s always a surprise, isn’t there? We know that the dollar is going the way of all paper – to the dump. Maybe the surprise is how long it takes to get there.

Maybe gold is going vertical. Or maybe it is just toying with us.

A friend came to us over the weekend. He had four Austrian Corona 1 oz. gold coins. He wanted to sell them.

“I just need some cash now. It breaks my heart to sell them, but I’ve got to pay expenses.”

The expenses were a little unusual. He was buying a ticket for a Vietnamese woman and her children to come to the US to live. But that’s another story…

Somehow, your author has gotten a local reputation as a buyer of gold coins. So much the better. We’re not trading. We’re not investing. We’re just adding a coin now and then to our collection. We buy. We put them away. We forget about them.

“But at $1,400 an ounce?” you ask. “Isn’t gold in a bubble?”

Well, yes…and no. We liked buying the coins much more at $500 than we do today at $1,400. The price makes us a little nervous.

Gold is in a bull market, not yet a bubble. It will probably stay in a bull market for a long time – until they re-establish a gold standard for paper money…or until the international monetary system cracks up…whichever comes first.

But there’s something a little dangerous about $1,400 gold. Too much, too fast. Of course, in the final stage of the bull market, the yellow metal will trade for far more. Ordinary people will buy gold to protect themselves from inflation. They’ll get sick of watching prices on bread, diapers and gasoline go up. They’ll be desperate to grab hold of something more stable. They’ll buy gold at almost any price.

But we’re not there yet. There’s very little consumer price inflation now. The inflation we’re experiencing so far is the monetary kind – an inflation of the monetary base, not consumer prices. No one particularly cares about this kind of inflation. The other kind of inflation – in the CPI – could still be years ahead.

Right now, the economy is still de-leveraging. Bloomberg has the news:

US households cut their debt last quarter, borrowing less against homes and closing credit card accounts, according to a survey by the Federal Reserve Bank of New York.

Consumer indebtedness totaled $11.6 trillion at the end of September, down $110 billion, or 0.9 percent from the end of June, according to the New York Fed’s quarterly report on household debt and credit. Households have slashed about $1 trillion from outstanding consumer debts since the peak in the third quarter of 2008, the New York Fed said.

US households, facing a jobless rate that’s persisted near a 26-year high, have slashed debt and increased savings following the worst financial crisis since the Great Depression. That’s pared consumer spending and slowed the economic recovery, helping to prompt the Fed’s decision last week to start another round of unconventional monetary stimulus.

“Consumer debt is declining but only part of the reduction is attributable to defaults or charge-offs,” Donghoon Lee, a senior economist at the New York Fed, said in a statement. “Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior.”

People still lack jobs…which means, they still lack money. And while they lack money, they need to cut back on their spending – which helps keep prices down.

The common man is not fretting about inflation. He’s not worrying about his savings or the cash in his pocket. He’s not desperate to get out of the dollar. Au contraire, he’d like to get into some cash…so he could pay his bills.

Which brings us back to this weekend’s transaction. If the gold market had entered its third and final stage, our friend wouldn’t have come over to offer us gold coins. Instead, he’d be holding onto his gold and would be desperate to get more of it.

“But what if he needed to buy something – like airline tickets?” you ask. “You can’t buy things with gold.”

True enough. But when we get to the last stage of the gold market…when gold really does go vertical…gold will be the LAST thing people will sell. Gold may have gone up $5 yesterday. But in the final stage it will go up a hundred dollars per day…or more.

Yes, dear reader, the excitement is still ahead. More hurrahs for the gold market. More profits for gold investors.

Trouble is, it could be far ahead.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Mike O’Connor

    In China, according I believe to Bloomberg, the popular thing to do in the face of inflation there (which they have quite a bit of), for those who have money, is to buy an apartment— even if they know that they won’t have a tenant (they may even not want one but may plan to simply let the apartment stand vacant).

    This is partly because they are limited as to what kind of securities they are allowed to own. So their idea is that at least as cash becomes less valuable they will still have the apartment. This is happening because apartments have been inflating in price, like gold.

    So possibly, as inflation rears its ugly head in the US, people with money will all become landlords and we’ll at least get rid of the house foreclosure problem that way.

  • Dean

    Unfortunately the gold standard won’t be coming back as policy. At least not for the Dollar. Not now and not ever. The federal debt is beyond the point of return so whatever happens from here on, gold and the dollar will walk different paths. Amen

  • a devils advocate

    “Gold is in a bull market, not yet a bubble. It will probably stay in a bull market for a long time – until they re-establish a gold standard for paper money…or until the international monetary system cracks up…whichever comes first.” Gold will never be the standard again. It didn’t work when they took it off before and it won’t work now. Another thing there isn’t enough gold in the world and way to many people. There will be a new theory of money. To bad and you that hold on to the idea of a gold standard will lose big time.

  • http://dailyreckoning mike

    …i cover my eyes with my hands and say “Gold will never be the standard again. It didn’t work when they took it off before and it won’t work now.”-translation-YOU CAN’T SEE ME…then i cover my two little ears and say” Another thing, there isn’t enough gold in the world and way to many people. There will be a new theory of money. To bad and you that hold on to the idea of a gold standard will lose big time…”…translation-I”M NOT MAKING A SOUND….

  • Bruce Walker

    Ah, but there ARE expenses that must be met. How else to do this without dipping into the hoard? Dollar cost averaging works great on the way up as exess earnings were poured into precious metals. But with no marginal income to spare for additional accumulation, along with expenses rising to meet income, its only natural to think about selling some gold off. Gold is not of much use in the afterlife, and to the extent that it can be used to purchase other necessary things in this life, it makes little sense to hold onto every last gram with a death grip.

  • a devils advocate

    Mikes neurons are firing randomly and never do make a connection.

  • Aticus

    i’d always believed the gold standard was they way to go until I saw that video on YouTube called the story of Oz.

    It had a couple million hits or something…

    It was so well researched, I no longer believe in the gold standard. I think it’s a trap.

    It is of critical imprtance to have adequate money in the system. Gold requires that our money be obtained offshore by the hands of the miners and goldsmmiths from countries with which me may not be friendly.

    The important thing is that the RIGHT amount of money be in circulation and this means that the issue is generally who CONTROLS the money supply. FOr HUNDREDS of years, England used a a currency called talley sticks – literally sticks with notches in them and the country thrived as the supply was kept near optimum levels because the country itself was controlling the supply of money.

    There were several presidents who understood the importance of controlling supply and these presidents (such as Jackson and Lincoln) fought the central banks. These preseidents alos had assassination attempts against them which is probably not a coincidence.

  • Gautam

    Thank you Mr. Bonner,

    Your cryptic messages are very useful. I do wish you would talk about silver too.

  • CT

    We are at a time and age where no one knows what tomorrow will bring. Hope for any type of out come is a futile attempt to predict a future that will not happen.

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