09/17/09 London, England
Gold took off yesterday…closing at $1020. Here at The Daily Reckoning, we’re impressed. But we’re not that impressed. Gold, of course, is half of our Trade of the Decade, which we announced almost 10 years ago. We’re bullish on the metal…have been for a very long time. But recent comments in this space have made readers wonder what the Hell is going on…so we will spend a few minutes clarifying.
First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper…and so much more apparently on the way…that the gold play seems like a winner. It’s a bet that the money system that has been around since August ’71 is going to fall apart.
We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We’ve done well with this trade; we’ll stick with it a bit longer.
But what if you don’t own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal – with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see – the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers’ money becomes worthless?
Recent comments by a group of Chinese officials make it clear that they are thinking of these things…and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug’s game – which it is. Replacing gold with paper? C’mon, what were they thinking?
So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do – China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.
We don’t know what their buying strategy is…but the Chinese are probably going to be big buyers over the next few years.
Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?
Good question. Unfortunately, we don’t have a good answer. So let’s try a different question: Is gold going up or down?
The answer to that is simpler: gold is going up…then down…then up again. It is going up because the feds – including the feds in China – are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up…much farther and faster…when the Fed becomes desperate and finally throw caution – and dollars – to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation…but it soars in a period of inflation. That period could be a long way off.
The feds can’t revive the consumer economy. Despite all you read…the consumer economy is probably going to limp along for many years. No boom in consumer spending = no inflation.
“US retail sales surge as economy strengthens,” announces a Reuters’ headline. Don’t believe it. Between the seasonal adjustments and the feds’ giveaways the retail sales numbers are meaningless. The real story is that there is little – or no – real organic improvement in the economy. The largest banks that get federal bailout money, for example, have actually reduced their lending for 6 months in a row.
But the feds can stimulate speculation. The dollar has become the ‘carry trade’ currency. The big players borrow in dollars…and use the money to speculate – against the dollar! They buy gold. They buy Brazilian bonds. They buy aluminum futures. They buy stocks.
The Dow rose 108 points yesterday. Oil rose over $72. Almost all commodities are up – except natural gas.
The post-crash party seems to be going well. It may continue. But the underlying problems of the real economy have not been corrected. They will rise up like zombies in a bad horror movie and bring the party to a close. Absent support from the Chinese, the price of gold will probably go down along with everything else. Which brings us back to the question we dodged.
“Dad, I made $2,000 just in the last couple of days…on that gold play I got in. But I’m nervous…should I sell it?”
Jules has graduated from college. He’s investing his meager savings, trying to put together a big enough stake so he can take a year off from work and concentrate on his career as a composer and performer.
“Jules…I don’t know,” began the answer. “But you’re a young guy. You can afford to speculate. If it goes your way, you make money. If it goes against you, you learn something…and you have plenty of time to recover.
“It looks to us as though this party is going to continue for a while. If I were you…I’d stick with it a while longer.”
Our advice to a man of 21 is not the same as our advice to a man of 60. The older man would get older advice:
“Gamble not thy whole wealth on the gold market,” we would say.
The older man needs gold. But he needs it as insurance…as a reserve against catastrophe…as a form of savings. The Fed has been negligent and derelict. It is not protecting America’s money and Americans’ wealth. The average fellow has to do it himself. He has to have reserves of his own…reserves of real money – gold.
He should buy. He should hold. He should buy the dips. But he should not speculate on higher prices…nor risk his wealth gambling in the gold market. Most likely, after this speculative boomlet, the price of gold will go down. How much? How far? For how long? Of course, we don’t know the answer to those questions.
We’re not buying now. But we already have our position in gold. We will add more – on the next big dip.
“Why capitalism fails” is the intriguing and misleading headline of an article in The Boston Globe. It is a reminder of the theories of Hyman Minsky, who pointed out the obvious: capitalism is inherently unstable…it proceeds in booms and busts…not steady, incremental growth. Of course, that is just the way it works – like nature herself. And that’s why people don’t like capitalism…they can’t control it. So, whenever a bust comes, they imagine that it has ‘failed’ or ‘broken down.’ Then, they propose ways to fix it.
“Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own,” starts the article. “Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.
“Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a ‘Minsky moment,’ and a growing number of insiders began to warn of a coming ‘Minsky meltdown.’
“‘Minsky’ was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through.
“A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.”
Economists went off their heads in the last few decades. They thought capitalism would make us all rich. And they thought capitalism automatically tended toward beneficent equilibrium.
Here at The Daily Reckoning, intuitively, we guessed the contrary. The system produces a kind of orderly chaos…in which the rich are frequently impoverished, the proud are humbled…and the goofballs who think capitalism fails inevitably make things worse.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Spot on!
Rare that I don’t automatically agree with your deadly accurate views and readable prose! However, I think that serious inflation will happen sooner rather than later—some argue that the published rate is already a lie.
Higher food prices, gasoline and utilities are not exactly discretionary spending yet cause higher personal inflation. Sales and real estate taxes to which the states are turning to balance budgets are impacting consumers. And the proposed health care costs? The latest version will force everyone to join or pay a penalty.
Any paper, including cash, ETF’s, equities or bonds is vulnerable to manipulation and confiscation by taxation. I suggest holding only enough cash to provide liquidity—the rest should be in bullion.
As the economic boom gathers steam over the next few months, equities are going much, much higher. At some point, and we’re probably there now, gold will drop hard and fast. By end of 2010 the Dow will be challenging new all time highs and gold will be back to the mid 300’s where it belongs.
“The system produces a kind of orderly chaos…”
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That’s why I’m here BB. That and the extra twenty five cents an hour.
Wow Harry, what a dynamo. I’d guess you were marreid to Abby Joseph Cohen, but she’s MUCH too attractive for you.
I’ll gladly sell you as many Dow 14,000 calls as you want.
And I’d let you borrow my gold to short it, but your comic book collection and Mama’s basement aren’t sufficient collateral for me.
Harry, It’s past your bedtime. If what you say is true, then there were never any problems with the economy to begin with. The fundamentals have not changed in real life, so, according to your logic there must never have been a recession. Twas all a bad dream….
I suppose US Gov, World Commercial Banks, Hedge Funds, Realtors and all economy can´t hide its failure anymore. October will be the time to know our fate?
For an investor with USD as a home currency, what Bill writes about gold makes a lot of sense.
But here on the other side of the pond, it’s a lot harder…gold reached EUR 870/oz in Q1 this year but as the bear market rally has raged has been doing nothing – stuck between EUR 650 and 700 (EUR 688 this morning)…no raging bull here. And against the ultra-safe norwegian kronor (think rich and stable country with oil, current account surplus and a huge state investment fund – and no government debt), gold has been trending slightly downwards.
Should we really trust in gold over here? Or maybe norwegian kronor is better?
Harry,
In January 1946, Gould changed Dick Tracy forever with the introduction of the 2-Way Wrist Radio after a visit to inventor Al Gross. This seminal communications device, worn as a wristwatch by Tracy and members of the police force, became one of the strip’s most immediately recognizable icons, and can be thought of as a precursor to later technological developments, such as cellular phones.
Given enough dreams and enough time the world goes forward, but it is the backwards that happen regularly that hurt. Hope you do not get badly hurt.
Cosmo Hippy
Harry’s our modern Irving Fisher, a new kind of crisis and natural economic laws negationist. It’s nothing to be bothered with though, in fact perfect ignorants and morons appear for what they are sooner or later. Problem comes when they are numerous and absolve each other, therefore setting the path for further absolute moronness. Facts.
I would dearly love to know what drug Harry is taking, it must be really nice up there.
Only time will tell if your right Harry, but as you don’t ever support your arguments i’m inclined to believe you are just saying these things for attention.
I know gold is gonna be the play of lifetime in the next 10 years but how come you never mention silver or the giant spread on palladium vs platinum – silver and palladium are 2 plays that have the next 3 – 5 years of boom in their future…. i wouldn’t mind hearing some insight on the 2 metals – gold is unfortunaitly being the steriotipical play being called by everyone which to me.. puts it in bubble territory until a generous dip scares the uneducated and impulse money away…don’t get me wrong but im all over gold like white on rice but silver especially is what I would call the underdog of the next quarter century and will see a bottom at 500 an ounce in the next few year’s – silver has always been a logical medium of exchange and will be the poor mans gold of the next century -…+ Lets hear what you think about silver BB … keep up the good work:)
Knucklehead, here, but perhaps gold is the next bubble.
I love everything you write. Very insightful and enjoyable. However, if gold is too risky to sell then it’s too risky not to own. Even if you are 60. It’s insurance. It should be view as a hedge and if it loses value, then other commodities are probably losing value and we win in other ways.
If the Chinese buy gold and the IMF sells is one thing. Red or Black in Vegas would probably be a better bet because this is nothing more than gambling. Maybe gold will go up and maybe its the next big bubble. No one knows.
I don’t agree with Harry, either; but, like everybody else, he is entitled to state his opinion. To those who are posting denigrating comments about Harry because they disagree with his opinion I would suggest that the last refuge of a debater whose arguments cannot stand on their own merits is to attack the debater personally. Doing that just discredits your own position – aside from being unnecessarily rude. Don’t be a bully. If you still don’t understand what I’m on about, please review the DR’s Comment Policy – Item 7, specifically.
Further to Peter’s comments, the same applies to buying gold in Canadian dollars. I bought some gold when it was around $900 an ounce but the Canadian dollar has increased in value against the U.S. dollar by about as much as the price of gold has risen so my gains in the price of gold have more or less been absorbed by foreign exchange. Maybe I should be in Forex options instead of – or as well as – in gold.
I’ll load up on gold when the CAD and USD come to par again. That doesn’t happen often or last long when it does, so it almost won’t matter if I’m buying on a dip or at the peak of a rally in gold price. Perhaps the principal gamble here is whether the CAD and USD will reach parity again before the USD ceases to be the world’s reserve currency.