09/13/11 Baltimore, Maryland – First, a look at the markets. They’re becoming exciting. Yesterday, for example, stocks reversed some of the losses from Friday. The Dow ended up 68 points, keeping the index above 11,000.
Going the other way, gold lost $49.
What to make of it?
In our guess…both stocks and gold SHOULD be going down. That doesn’t mean they will go down, of course. But at least it gives us a point of reference.
They should go down because there’s a Great Correction going on. There’s no secret to it. Sometimes stocks are expensive and sometimes they’re cheap. When an economy is expanding, it makes sense for stocks to be expensive…companies’ sales are going up…profits should increase too. But when an economy is contracting…or, more precisely, when credit is contracting…stocks should be priced for shrinking sales, followed by shrinking profits. That is, they should be cheap, not expensive. Stocks are now priced for an expansion, not a correction. They should go down.
Investors are figuring that out…little by little. As they do, stocks go down. Simple as pie.
But gold is a little trickier. By our reckoning, gold is a little expensive. It buys more stuff than usual.
Of course, it should be a little expensive. Looking ahead, the whole world’s banking, credit, and monetary systems are wobbling. Gold is the only money you can trust. So smart investors, smart CEOs, smart family men, and smart central bank chiefs are all thinking the same thing – that they should lay in a supply of gold as a reserve against catastrophe. So they’re buying.
But in a Great Correction…assuming things don’t fall apart…the value of paper money goes up. Or, to put it another way, the price of assets and other stuff tends to go down as demand falls. Broadly speaking, it is a deflationary world. And paper money is good money in deflation. As long as the system holds together.
And since, according to our Daily Reckoning guesswork, the system will probably hold together a bit longer…we figure speculators will begin to sell gold to get cash.
Besides, gold has had a spectacular 11-year run. It’s time for a rest for the metal…and a test for the metal lovers. That’s just the way it works. Markets and lovers always test their admirers. Gold should be giving its fans a test…before moving in the final stage of the bull market.
Will you pass the test, Dear Reader? Will you be true?
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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“But in a Great Correction…assuming things don’t fall apart…the value of paper money goes up. Or, to put it another way, the price of assets and other stuff tends to go down as demand falls. Broadly speaking, it is a deflationary world. And paper money is good money in deflation. As long as the system holds together.”
the dollar is a debt currency. it is a pyramid scheme. it requires evermore debt to function. deflation means the system is not holding together but is falling apart.
“By our reckoning, gold is a little expensive. It buys more stuff than usual.”
when a currency is functioning well there is no reason to own an alternative currency (such as gold). when a currency is failing there are many reasons to own an alternative currency (such as gold). the reason gold is buying more than it used to is because in the past when the dollar functioned well gold was undervalued.
“It’s time for a rest for the metal…and a test for the metal lovers. That’s just the way it works. Markets and lovers always test their admirers. Gold should be giving its fans a test…”
anthropomorphizing gold and markets distracts from what is actually occuring.
Of course I’ll be true to the yellow metal, especially in light of the spectical of the last several years. Nothing is being fixed, except what Mr. Market has fixed, which is not allot yet!
Bill says credit is contracting.
Really? Is it?
Why then can corporations and individuals and governements all borrow at record low rates? Some of the lowest rates in history?
Doesn’t that suggest we are awash in credit and we have our choice of lenders? The lenders are competing fiercly and offering their wares at record low rates?
Is that because there is such a dearth of demand to borrow? I doubt that.If so, how about some facts to prove that.
Yeah, what credit contraction? We are awash in credit my friends.
You’re not my friend.
Go away. Please.
I never dreamed I’d say this, but I wish Harry would come back and Shawn would go away.
The fix is in for Mr. Market. Manipulated to its eyeballs.
Private credit may be contracting, but government credit is exploding. I think we’re going to get more easing and I think people are going to continue waking up and buying gold. I don’t see a significant break in this bull market. Aren’t we headed into the Indian buying season too? Maybe I’m wrong, but that’s my prediction.
The proper way to read a gold chart: First, scratch off the part about “gold” since the graph doesn’t really represent what gold is worth.
Instead, call it a graph of the value of the dollar. To properly view the graph: Turn it upside down and then view in a mirror. What you will see is a graph of the US dollar accelerating towards zero.
Will it hit some turbulence on the way down to slow its decent? Of course. But nothing so substantial that it will reverse the course or trajectory. At this point, gravity has already taken over, and the dollar is going to continue to fall until it meets-up with history as another failed experiment in fiat currency.
“But in a Great Correction…assuming things don’t fall apart…the value of paper money goes up.”
the dollar is a debt currency. it is a pyramid scheme. it requires evermore debt to function. deflation means the system is not holding together but is falling apart.
“By our reckoning, gold is a little expensive. It buys more stuff than usual.”
when a currency is functioning well there is no reason to own an alternative currency (such as gold). when a currency is failing there are many reasons to own an alternative currency (such as gold). the reason gold is buying more than it used to is because in the past when the dollar functioned well gold was undervalued.
“It’s time for a rest for the metal…and a test for the metal lovers. That’s just the way it works. Markets and lovers always test their admirers. Gold should be giving its fans a test…”
anthropomorphizing gold and markets distracts from what is actually occuring.
“the dollar is going to continue to fall until it meets-up with history as another failed experiment in fiat currency.”
do you really think it is an experiment? do you really think it has failed? seems to me it has done everything it was supposed to do.
Hi,
Just saw this report.
http://www.kc.frb.org/publicat/sympos/2011/2011.Cecchetti.paper.pdf
A thorough analysis by 3 Ecnomoists concluding what you have been saying all along.
Great work Bill. Keep writing with more such useful information.
Thanks
Surender
The question is will the pretty shiny metal sop up the world excess fiat or will the Fed raise rates to counter the historic money?
When the confidence in the dollar wanes gold comes out on top. Eventually, paper currency backed by PM, energy and crops will be dictated by the world’s producers.
Big vision, big projects, big maneuvers, big missions, big spendings. After big, big, big all the way, a man doesn’t exist on earth to steer away from the current global woes.
At least for now no man on earth could out of sudden simply slash massive spending, for this will lead to mass wailing on the planet that could awaken a martian in his home ground. The likelihood
is next to zero, besides eyewashes like trimming on a lawn. So, it is quiet though not 100% safe to underscore that the current liberal paper policy persists in preference rather than mass depression installed. It is just ludicrous or preposterous when an astronaut on moon is deafened by high decibel of howling emitted from the vast majority of zombies and morons.
(sorry for the multiple posts. usually when I post it shows up immediately, sometimes it shows up many hours later, occasionally it never shows up, and sometimes a first post never shows up but a second post does immediately. I never know what to think.)
“Eventually, paper currency backed by PM, energy and crops will be dictated by the world’s producers.”
isn’t the dollar backed by oil? more specifically, backed by the american military guaranteeing the continuance of the arab oil state regimes?
Gadhafi and Ahmadinejad might question that point of view.
“Gadhafi and Ahmadinejad might question that point of view.”
they have always rejected american control. that probably is why so much negative attention is focused on them for so long.
And neither are their oil state regimes, as you say, backed and guaranteed by the american military.
Come now, Bill, let Shawn have his say. It makes for a good read! We must have something to laugh at, and be merry about, amidst all this economic doom-and-gloom.
Besides, he never claimed to be YOUR friend. Just the “investors’ friend”. Clearly, he doesn’t see you as an investor.
Allow him to speak for now, and we will let history and time have the last word.