08/29/11 Poitou, France – Last week in the financial markets was unsatisfactory. No clear trend announced itself. The Dow should have gone down. Gold should have gone down too. But they diddled around…and on Friday, both seemed to be back in counter-trends, moving against the direction we think they OUGHT to go.
As for stocks, everything we’ve found out about the economy since 2007 suggests that our Great Correction view is right. This market aims to correct something; we just don’t know what.
Whatever it is doing, it is NOT responding in a typical post-war recovery manner. The feds have pumped trillions into the economy. They’ve gotten nothing for it except more debt.
Which was just what they DIDN’T need. The real problem — or at least the most obvious problem — is too much debt. Adding more, the feds aren’t doing anyone any favors, except the banks themselves.
It’s just a matter of time before investors realize that stocks are not worth prices in the top of the range. In a correction, they’re worth prices in the bottom of the range. And eventually they should fall to the very bottom of the range…where you can buy the entire Dow group for only one ounce of gold.
But that is still a long way away. And in the meantime, what about gold?
Well, bull markets — like lovers — always test their admirers. Remember the stock market crash of ’87? Stocks had been rising for five years. Then came Black Monday. The Dow lost 508 points in a single day. By the end of October, the Dow had lost nearly a quarter of its value.
Naturally, a group of 30 prominent economists got together and made fools of themselves. They announced that “the next few years could be the most troubling since the ’30s.”
And naturally, faint-hearted investors failed the test. They left the stock market — fearful that another Great Depression…or maybe a repeat of a ’70s-style slump…was coming.
When the crash was over, the Dow stood at only 1,738. Investors who had bought stocks 5 years previously were still up 70%. And the bull market had scarcely even begun. Instead of going down, stocks rallied…and never looked back. The Dow rose to over 11,000 in January 2000 — the most spectacular stock market success story in history. The economy, too, roared ahead.
Stock market investors may anticipate a replay of that post-crash world. They’ll be disappointed. Our world today has nothing in common with 1987. To make a long story short, then we were coming out of a long bear market. Now, we are coming out of a long bull market. Then, we were at the beginning of a long bull market in bonds. Now, we must be near the end of it. And then, households and the government could still borrow in order to keep spending. Now, the private sector is played out; government continues to borrow at record levels….but that’s a different story.
The last bull market in gold tested its admirers too. The price had risen from $41 an ounce — when Richard Nixon cut the last link to the dollar in August ’71 — to nearly $200 in 1975. Thereupon began a sell-off, in which gold lost 40% of its value…coming to rest around $100.
Weak sisters, johnnies-come-lately, and camp followers got shaken out. They gave up on gold at $100 an ounce…before it began its real push to the top, which eventually put the price over $800.
Our guess is that this bull market in gold will test its admirers too. So far, it has closed every year higher than the last. Making money was easy. Our faith was never seriously challenged. Even now, the price of gold is close to $1,800. It’s still ahead for the year. It’s still in its upward channel, well above its 160-day moving average.
Gold is still a winner. Gold investors are still winners. There is no reason to doubt that they will be winners this year…just like they have been every year this century.
But that’s not how it works. Not usually. The gold market needs to make its admirers feel like losers. It needs to cause them to wonder…and question their own faith and judgment.
How so? By letting the price fall to…$1,200…or even $1,000. Then, we will be ready for the third and final stage of this great bull market.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I am wondering why WB is not buying gold? Maybe Shawn the expert on WB could chime in?
The US has the choice between the Bernanke version of reflation and bankruptcy. In the first case the US$ will slowly fall apart, in the second creditors will loose most of the value of their bond holdings.
Gold, Norwegian Crowns and until recently Swiss Francs are good alternatives. Now the Swiss have decided to print a money bubble as well.
Bill, good post. Though I assume there were specific economic conditions in 1970-1975-1980. Can you please elaborate on those? There might be reason to believe we’ll not see such a huge correction now, simply because things are much more f****d today. There’s much more uncertainty. As a gold bull myself buying physical near the current top I can attest that I didn’t do it simply because I love shiny metals, but because I don’t know where else to park my hard earned (albeit modest) wealth. I live in the EU: the Euro is dying (or not, who knows what it’s doing), I don’t have much trust in my local currency, the US is a mess (with real debt as per Ron Paul 20 times the GDP), we now live in a (increasingly) multipolar world, overpopulated etc. So, I don’t know really what went on in 1975, but I’m pretty sure people didn’t have as much reason to panic as now.
Shawn is busy playing with his Warren Buffett bobblehead collection and can’t be bothered right now. I can’t even get him to trade for a Jimmy Buffett autographed photo.
PS – Shawn:
I heard WB is going to buy Saskatchewan next. Get your resume up to date!
“The gold market needs to make its admirers feel like losers. It needs to cause them to wonder…and question their own faith and judgment.”
… so we should rely on yours?
this final stage, it’s gonna be the final meltdown?
Okay, let’s hear everyone’s gold prediction for the 52-week low between now and August 30, 2012….
Perhaps Bonner can keep track and give the lucky a winner a free year at Agora.
Here goes:
$1531
1750
Bill,
I have read your stuff for years and I admire your prognostication track record.
No doubt you have many high powered contacts in the investment world and would not have made this call re the gold price an the fly.
However (there is always a however) I must disagree on this occasion.
The gold price in the early 80′s was sunk with with massive interest rate increases.
That option does not seem to be available on this occasion.
These price drops always seem to occur in the same part of the trading day – probably just coincidence.
“That option does not seem to be available on this occasion.”
NO options are available. american businesses are sitting on 1.2 trillion just waiting for an opportunity to invest it. 12 trillion is overseas with the holders just waiting for an opportunity to dump it and send it back here. hordes of retirees and welfare tribes expect their free money that cannot be supplied by dividend or taxation but must instead be printed. the defense machine must be paid for want it or not. the dollar itself is a debt pyramid scheme sustainable only by ever more debt slaves borrowing ever more debt dollars, but insufficient new debt slaves are available, thus there will be no deflation but rather slow or rapid collapse – this will not decrease demand for gold but rather increase demand for it.
I can see only two ways bill’s insider prediction could come true.
1) a giant golden metor falls from the sky. not likely.
2) governments worldwide unite to ban the use and possession of gold. less likely. oh they can try but by the time things come to such a pass they will not be able to pay enough police to enforce any such rule.
3) some gigantic new mine comes into production. if this were about to happen it would not be a secret.
perhaps 1750 was too low?
yep. too low.