11/17/09 London, England – Gold hit a new record yesterday. The price rose $22.50 to $1,139.
And today we take up a foul and disagreeable task. We ask ourselves: what if we are wrong?
If you bought gold when we first recommended it, ten years ago, you are in a very comfortable position. Gold sells for more than 4 times as much today. But what should you do now? And what if you didn’t go for broke on gold in the early ’00s? Is it too late to get in on the bull market?
To give you a warning, in the following windy ambulation we come to no conclusion we haven’t come to before. We say gold is going to the moon. If we are wrong about when…we will be delighted sooner than expected…self-satisfied…and insufferable for years. If we are right, we may have to wait a long time before saying “I told you so.”
First, the press has certainly noticed the bull market in gold. How could it not? Most reporters say gold is going up simply because the dollar is going down. In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15 month low…and, coincidentally, gold has just hit an all-time high.
There’s something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn’t the whole story.
Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level…was it a year ago…more…? And it’s been at that same level, more or less, all the while gold has gone up more than 10%.
It’s not the fall of the dollar that is driving the gold market, in other words, it’s something else…it’s the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them – more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world’s biggest spenders. They spend dollars…not rubles…not euros…not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs – in local currency – go up while its sales – in dollars – go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose…thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.
Since all the world’s central banks, more or less, are doing this, all paper currencies are going down together – compared to gold.
But wait, wouldn’t they be going down together against everything else too? If currencies are getting weaker…shouldn’t they be getting weaker against oil…and McDonalds’ hamburgers…and woolen underwear? The oil price is at $78 – where it’s been stuck for a while. Oil is a special case, but almost all consumer prices are stuck too. Take out energy and food, and consumer prices are deflating in the US. Put back in the energy and food and they’re just stuck. There is no sign of generalized consumer inflation – not in the USA and not in Europe either.
The only thing that is going up is gold. There is a bull market in gold and gold alone. But why?
According to the law of supply and demand, you expect the price of a thing to fall when its supply increases faster than the demand for it. In today’s news are two reports on gold production. One, from South Africa, tells that a scientist says the nation’s residual gold in-the-ground is much less than expected. It has been overstated by 900%, he says. Another report shows the output of from the gold mining industry clearly topping out. Gold supply, in other words, is increasing, but not as fast as it used to.
The supply of paper money, on the other hand, needs no new discoveries. Since there have been huge increases in the monetary base of paper money all over the world, it is reasonable to expect the price of paper money to go down. Gold, traditionally the thing that paper money is priced in, should go up. Speculators are buying it now in anticipation. Even central banks are buying again. And nearly everyone expects the price to continue going up.
As near as we can tell, gold is properly priced already. Comparisons are rough, but an ounce of it appears to buy about as much stuff as it did 2,000 years ago. You can buy a suit of clothes for an ounce of gold – no problem. Go to Wal-Mart; you can buy 4 suits.
As Roy W. Jastram wrote in his 1977 book, The Golden Constant, gold’s “price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century.”
Gold…or the people who speculate in it…may be looking ahead. Or, they are dreaming. If gold is already about where it should be why would you pay more? You must expect paper currencies to go down…to buy less stuff. In other words, you’d have to be anticipating a fall-off in the value of the paper currency.
It may come to pass exactly as they imagine it. Gold may rise and rise and rise…as paper currencies fall and fall and fall some more. In that case, we here at The Daily Reckoning headquarters as well as all of our dear readers who followed our advice 10 years ago will be delighted. Gold may hit $1,500 by the end of the year. By the end of next year it may be $3,000. By the year after, well…who knows…? “We told you so,” we will say.
But there is almost always more under Heaven than speculators think. When we look into it, we see gaudy increases in the monetary base…but only very modest increases in M2, the money that buys stuff. What’s more the rate of increase for M2 has fallen in half over the last 8 months. It’s now only about 7% annually in the US. And when we look at the CPI we see no increase at all. And despite the ‘recovery,’ unemployment is still rising and house prices are still falling. So, if speculators see the price of stuff going up in paper currency terms, they must be looking way over our heads.
To more fully describe our own state of mind, we don’t doubt that all the liquidity added to the world’s monetary system will eventually be soaked up by paper currencies. But it could take a long time; we might be dead before it actually happens.
But since we are entertaining the possibility that we might be wrong; let us look at what is going on in more detail. If there were a real recovery – as announced in the world’s newspapers and proclaimed by its stock markets – you’d expect a rising increase in demand…leading to higher prices…leading to a higher gold price.
Yesterday’s news brought word of greater retail spending than anticipated. This was greeted as more evidence that a recovery is actually underway. But upon examination, we discover that the evidence comes almost all from auto sales. We also find that the number crunchers contributed to the lift by revising figures for September. These are month to month movement numbers. So you can raise October’s number simply by lowering the number for September.
What’s more, while sales went up…auto prices actually went down – in paper dollar terms. This doesn’t sound inflationary to us.
Meanwhile, news reports said that fewer people are defaulting on credit card debt. The reports also tell us that delinquencies on credit card debt are up. So, we’d have to call that a draw.
And then there’s the news from GM. The giant, government-owned auto company says it will repay its loans from the feds earlier than expected. But wait…we also find that the company continues to lose money. How then will it repay debt? Perhaps by refinancing!
Other reports are similarly confusing and inconclusive. Profits are up on Wall Street. But wait…sales are down. You can increase profits by cutting expenses (getting rid of employees, mainly). But you can’t increase sales. And as long as sales are falling you have to expect lower profits in the future. (Stock market buyers…take note.)
Our colleagues over at The 5-Min. Forecast sent through this chart, illustrating the “recovery that wasn’t.”
“With the majority of publicly traded companies done reporting third quarter earnings,” writes 5 editor, Ian Mathias, “the trend is clear: Profits were way better than expected, revenue was flat at best.
“Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can’t be any questions left as to how the market pulled off this quarter…companies are simply trimming the fat at an incredible clip. Not exactly a long-term plan for growth.”
The New York Times reports that job losses continue to be “deep and enduring.” Mortgage applications are running lower than they were 9 years ago. “More households report food shortages,” says a Wall Street Journal headline. And insiders are still selling their own companies.
So, it still looks to us as if we are in a depression…one that will take many years to sort out. It is unlikely that the bull market in gold will reach its final blow-off top while the depression continues. But stranger things have happened. Eventually, gold will reach the apogee of its bull market. And when it does, we want to be ready for it. We will celebrate with champagne and sparklers.
Still, we wouldn’t get out the party hats…not just yet.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Bill says: “The only thing that is going up is gold. There is a bull market in gold and gold alone. But why?”
I guess you haven’t noticed the stock markets around the world. They’re pretty much up and up nicely. But since that doesn’t fit into your neat little gloomy future (although I did notice the hedge on the “So, it still looks to us as if we are in a depression…”) Nice job on that. So when we are sitting here next year in full recovery and jobs beginning to grow, you can at least save a little face.
LOL… Harry you should go into comedy… I really liked that joke. Good job, you brightened my day.
Denial doesn’t save you from anything. The writing is on the wall. History repeats itself.
Diddy, yes, history repeats itself and is cyclical. Our down cycle has concluded and we are clearly in an up cycle now. Expect this bull market cycle to run quite a while.
Harry, how can you have a recovery when people aren’t spending and the unemployment rate is increasing? You are delusional. The stock market is incredibly overpriced as measured by price/earnings. This is nothing but a bear market rally.
It will be 20 years from 2007 before the number of jobs in the economy is what it was at its peak.
Daniel: The p/e on the indices forward looking is about 18. Historical avg. is around 16. We were so far below that we certainly will go much higher than the mean. That would put the Dow somewhere in the 15,000 range before it would be considered overpriced. But of course by the time it hits that, earnings will have improved dramatically, as we’re seeing now, and 15k will be a rather average p/e.
Harry hasn’t yet learned that the stock market is not the economy.
Psst- GM reported that it lost $1.2 billion in two and a half months. Things are looking up.
What will next year’s full recovery look like… 4% unemployment and the Dow at 15,000? I’m so holding my breath.
So, you call Harry delusional because he believes in jobless recoveries?
Tough crowd…
Dear BB,
I usually can follow your train of thought, but today I couldn’t.
Are you saying that gold will come down first (maybe when stocks crash again) before it REALLY goes up?
The main point of the article is that gold is going up when inflation is not. That is true. The author touched upon the reason for the increased price of gold…and then strangely ignored this reason when looking ahead at the future price of gold. Looking at the gold market, we see that the “suppliers/sellers” of gold in the past are now becoming net buyers of gold. That means that there is less gold entering into the market than there was in the past. Add to this the fact that gold production is diminishing year after year and you have all of the makings of higher priced gold. Central banks around the world are moving into position to remove the US dollar as the global reserve currency. They are moving to monetize gold because they cannot stop Bernanke and Obama from printing more US dollars. When the central banks feel that they are ready, they will drive the price of gold up and thereby increase the wealth in their reserves. It takes very little of their wealth to actually drive the price of gold to the moon. The global gold market is only about $80 Billion globally. The Chinese have trillions in their savings. When they are ready, they will spend some of it to drive the gold price to the moon. Once it is there on the moon, gold will stay there and not come back down because the central banks will be hoarding gold in order to back their own currencies with it.
Take a minute to think about this. Are the central banks of the world buying stocks? Are they buying oil? Are they buying natural gas? Not really. Some governments like China are buying those commodities and stockpiling them. But their central banks are not buying those commodities. The central banks are buying gold. Now why do you think that they are doing such a thing?
Is it just me or has everybody forgotten that the US Gov. is borrowing trillions of dollars and if the economy does not improve they will have to borrow even more. So when the Treasury will have to raise 3 trillion next year where do you think that money will come from. They will print it.
It will take exactly 1 day for gold to go through the roof. The day when people loose confidence in the dollar. After all gold is not going up in value is just the dollar is falling. BTW, there was an article on Bloomberg on how central banks stopped trying to defend the dollar and will let it go down.
Gold is just taking over from the bubble in stocks, even speculators can see that the stock market is hugely overvalued, Bonds are also not cheap enough to consider a safe investment right now, the only place left for this years gains is the gold market, this will also fall in line with stocks early next year when the market resumes it’s downward march.
R. P. Reitz:
Sounds about right to me. OTOH, the IMF trying to “sell” the 203tons left from the 400 tons they started with last August, I’m thinking that certain players may want the IMF to throw that tonnage on the open market. The effect would be to spring a bear trap on US$ sales. The RBI only bought 200 tons. They could have bought it all, and China interestingly enough hasn’t moved. Are they expecting a pull back???
Some kind of short trap seems just ahead. But which one?
Hey, dude, maybe just maybe, gold is going up, up and up for a completely different reason than inflation. I.e. it may rise a bit even if inflation never comes. That would be something new from a historical perspective, or not?
One of these days you gold bugs will be trying to dump that gold and the only solution you will be left with is to hammer out gold neck chains and stand on the street corners hawking them and hoping some fool will want to trade for them for something you will be able to eat. Go ahead and keep buying gold and hope you don’t fall into the greater fool theory. As far as the stock market goes it is rising because of the massive liquidity out there with nowhere to go to so it keeps creating bubbles thanks to big ben and the crooks on wall street. Its all just a crap shoot. Welcome to the world of capitalgambleism.
So Bors, are you saying that it’s bad to have made soaring profits in an investment because one day the price is going to down?
What in the world is gold good for? Copper conducts. Platinum and Magnesium..tech and scientific stuff. Wood..you know. Aluminum, yeah beer. Steel..everything. But gold is only good for jewelry and a few specialty things. It’s value can’t be endless, can it? I’m asking, not telling.
Gold and Silver is going up from now on and you can thank the Federal Reseve for devaluing your paper dollar. Watch “Fall of The Republic: The Presidency of Barack H. Obama” and “The Obama Deception” for FREE on youtube.com
Tell your friends, family and neighbors to watch it. Also attend the End The Fed Rally coming up this Sunday, November 22, 2009 at your local Federal Reserve branch.
Bambingo. If you don’t know the answer to your question you really haven’t been paying attention. Don’t worry though you are not alone.
So, Bors, what good are fiat currencies?
I betcha you can find way more OLD gold than you can find OLD fiat money!
Gold is a decent conductor. And don’t underestimate the value of shiny things- it’s what made the US the US; and, really, gold does shine pretty well.
As to Larry’s comments… clearly clouded, must be that flag waving in front of his face that’s keeping him from seeing reality. Que sera sera…
Ultimately everything that’s not Food, Shelter or Water is pretty prone to foolhardiness.
Gold is a fear trade. That simple. And there’s going to be lots of fear for a while yet.
And hey, Bors, what makes you think some of us good Mormons ain’t got food, too? I’m so sick of people telling me obvious things like “you can’t eat gold”. Duh.
News flash: The US government “can’t pay back its debt”. This will become clear…someday. And you can take that to the bank. Like I said, a fear trade.
Come on everyone think about it. Gold isn’t a fear trade its a sucker trade. Think about it. What is it really going to replace? Compared to paper it is difficult to move and to store and the value as in anything is what everyone agrees it is. Remember gold can be manipulated and is now and it also can be confiscated as Roosevelt did and made illegal by law and those that are in power and wish to manipulate it. On one hand you are saying the dollar is of no value because of government (Fed) manipulation but some how think that gold will not be manipulated or isn’t now but someday you are going to need to trade it for something else. For what is the question. Probably for some new kind of currency and that will be manipulated also. A real rat race you are riding on. I am also glad that Mormons have been stock piling things that can be eaten. Which tells me that Mormons do not trust the government but are willing to own something that the government can control. Interesting.
By the way the plan is that the central banks with their governments behind them are going to confiscate your gold and pay you a pennies on the dollar and issue you a debit card because currency and gold and whatever is going to replaced by plastic that can keep track of you and what you are doing. Good luck.
I want to convert my IRA to gold & I was just ready to do it except the spread with almost every broker that I have looked at is 20-30% !!!!
I know the dollar is tanking & I know that my IRA will more than likely be worthless but to lose 20% right off the bat? There are also other fees for start up, maintenance, etc.. Which all seem trivial to the spread that I have to pay. That seems absurd. Am I missing something here?
Any advise on this would be greatly appreciated.