The Naked Truth


In December, the gold price raced off to record highs for the first time in almost three decades. Now it looks to be closing in on 1,000 U.S. bucks. That is four digits. It will also be four times the 1999 low.

The market has added dollars to the gold price for seven consecutive years now, making it the longest-lasting such stretch in history without more than a 25% correction. Even in terms of magnitude, it is the best move since 1979-80. This suggests two things right off the bat. First, it is a bull market; second, the market needs to blow off more upside if it is to give the bears anything more than 25%.

(Although, this latter idea does rest on a few other premises.)

John Kaiser of the Kaiser Bottom-Fishing Report believes the market is nearing a flashpoint where the skeptical public finally turns into believers and comes rushing in. It’s pure mathematics from his point of view. He reasons forecasts for gold $2,000 are more plausible now that it is but “a mere double”!

It may be a little early to say that gold bugs have been proven right.

Undoubtedly, it is getting tougher for the bears to argue that they have been wrong.

But what exactly might they be right about?

Gold Is Sounder Money!

The market has once again started looking at gold as money, rather than as a mere commodity. The following excerpt from the Jan. 8 Financial Times article, “Gold Is the New Global Currency,” highlights this increasingly frequent theme in the leading financial papers:

Gold’s rise shows investors are nervous. That is an important message for central banks contemplating interest rate cuts. The Fed must show it is not prepared to allow inflation to take off. Keynes called gold a barbarous relic. It has life left in it. But it is in the interests of business and consumers that its most bullish fans are proved wrong.

I like this quote because it highlights two important and typical contrasting insights.

The first underlined sentence reveals the most important rule that the Fed and its peer central bankers are breaking, which is one of the main factors driving gold prices higher today. The second underlined sentence reminds gold bugs that their clairvoyance is unwelcome and unhelpful, just in case they feel any vindication in others’ misery. This will continue. As legendary broadcaster Ed Murrow once said, “Most truths are so naked that people feel sorry for them and cover them up.” This is one of those.

But that won’t make it go away.

The fact that getting rid of a dishonest monetary regime might cause depression is a bad reason to stick with a system that promotes that injustice in the long term. But if central bankers want to preserve such a system, above all, they must avoid prompting too many headlines like these:

  • “The Helicopters Start to Drop Money” — Financial Times, Dec. 12, 2007
  • “Cheap Money Is ECB’s Answer” — Wall Street Journal, Dec. 12, 2007
  • “World Bankers Resort to Firebreak” — Telegraph, Dec. 15, 2007
  • “Flight to Gold as Investors Lose Faith in Money” — Telegraph, Jan. 6, 2008
  • “Bernanke Opens Door to ‘Substantive’ Rate Cuts” — Wall Street Journal, Jan. 11, 2008

One of the mainstream criticisms of the Bernanke Fed is that it should have lowered interest rates sooner and more aggressively. One reason it didn’t was because Bernanke had tried to fight the spreading of the idea that the Fed was going to continue inflating. But that resolve is now buckling under peer pressure. We are probably not yet at the inflection point where the public has become convinced the Fed will inflate endlessly, but recent actions are not helping to discourage this expectation.

So prices will continue to rise, eventually resulting in unemployment and some sort of depression.

The pundits will call it stagflation.

If the Federal Reserve fails to heed the aforementioned rule by then, it’ll lead to hyperinflation, or worse. So far, there is no reason to believe that it plans to abandon the inflationary policy.

What with squadrons of central bank choppers swarming like locusts over the major cities on both sides of the Atlantic, hurling bank notes into the thinning air as gold, oil and wheat prices charge to record highs, it would seem rather that central bankers believe money should be able to grow on trees.

Central bankers continue refusing to accept the idea that the cause of these crises is their very own inflation. In a recent interview I read, an old partner of Milton Friedman’s, Anna Schwartz, was the first of her kind to point out that Greenspan was responsible for the current crisis by keeping rates down too long. But she said that mistake is behind us now and the current Fed should step up to the plate and inflate like mad in order to prevent making the mistakes of the 1930s Fed.

What were those mistakes?

Apparently, Washington and the moral ethics of Fed officials prevented the Fed from inflating after the 1929 stock market crash. This thinking is a prerequisite for central bankers. They ignore the fact that the ultimate cause of these crises is the intervention required to manipulate interest rates.

That is, inflation.

Until they change their thinking (they probably won’t), and while the pool of skeptics about this evil remains large, gold has nowhere to go but up. We will continue to have booms and busts and crises, and price and interest rate spikes, and wars, and so on as long as paper money backed by nothing remains the motive power of the world economy. Thus is the general message of gold bugs.

Don’t shoot the messenger.

My forecast for 2008 is a $1,200-1,400 high for gold that will break the bond market’s back, and make stocks cheap again. I am also looking for an intermediate bottom in the dollar, big corrections in the energies and base metals, and a global recession. It is still timely to buy the dips in gold prices and to accumulate sound gold mining assets — though good share values are becoming more difficult to find.

Ed Bugos
January 22, 2008