The Ups and Ups of Gold Ownership

What have we got today?

The Dow fell 86 points. Oil slipped to $76. Gold rose $5.30.

Does gold do anything but rise? It goes up when the news is bad. It goes up when the news is good. When doesn’t it go up?

The prevailing opinion of the smart money is that gold is a one-way bet. As long as there seems to be some kind of recovery, inflation rates will rise and gold will rise too.

If the recovery stumbles, the feds will rush to pick it up with more stimulus. This will lead to even higher rates of inflation…and gold will rise.

Here at the Daily Reckoning headquarters we admit; we’re unreconstructed gold bugs. We own gold. And we’re not going to sell it until we can buy the entire list of Dow stocks for less than 2 ounces worth. At the same time, we’re suspicious of one-way bets. They have a way of going the wrong way…

Meanwhile, the big emerging markets seem ready to add to their gold supplies. As a nation becomes rich – from the time of Solomon – it seeks to increase its gold supplies. Gold is wealth. Wealth is gold. In the old days, gold was taken as war booty. Troops in the medieval world, for example, were given 3 days to loot a city. They didn’t waste their time looking for paper. Especially not the paper issued by the people piled up outside the city walls. They wanted gold. Gold was real money and everyone knew it.

Not only was gold wealth, it was also power. Remember the golden rule; he who has the gold makes the rules. In the old days, it was more obviously true. Time and time again, kings washed up – not because their soldiers were bad – but because they ran out of money to pay them. Charles V almost lost his fight against the French in Italy when he ran out of money; though he was the protector of Western Christianity, at one point he only kept his soldiers going by promising to allow them to sack Rome!

Now, the days of rape and pillage are mostly in the history books. Nations build their gold supplies by buying it. Even central bankers are beginning to wise up. For the first time in a quarter century, central banks are net buyers. India just made a huge purchase of IMF gold. And China is such a major buyer it alone could take up the entire world’s production for years.

For 38 years, the world has operated on the dollar standard. Foreign nations rested their own money on a foundation of dollar reserves. The US offered its full faith and credit to back its green paper…which had been, up to then, almost as good as gold.

But between 1971, when Nixon broke the last link between the dollar and gold, and today, a lot of water has gone under the monetary bridge. Even in the ’70s, investors were scared to death that the US might let the dollar go down the river. Only after “Tall Paul” Volcker stiffened his back and hiked rates up to 18% did speculation against the dollar stop. Until that happened, gold had raced up to $850 an ounce.

At $850 per ounce, the US had enough gold in Fort Knox to back 100% of every dollar of its monetary base – and more. Since then, the money supply of the US, as measured by Austrian economists, has gone up 5 times. Gold would have to go over $2,000 to equal its inflation-adjusted price in 1980. By another calculation, the price of gold would have to be over $6,000 to back-up the US money supply to the same degree it did in the ’70s.

So, central bankers are beginning to wonder if the US can pull off “another Volcker.” Even Paul Volcker himself, who is still alive, doubts it. Today, too many people owe too much money and too many political favors. Put up rates to 18% today? Unthinkable. Cut 10% off government spending? Impossible.

But don’t worry about it. Now, we’re not threatened by inflation…but by depression!

It’s fighting the depression that makes people worry. Smart investors and shrewd central bankers are afraid the depression-fighters will go too far…that they don’t really know what they’re doing.

Ben Bernanke is up for re-appointment. “Bernanke fights for 2nd term,” says The Wall Street Journal. Does he know what he is doing? Well, no. He was wrong about the biggest single event in recent financial history. He thought the 2004-2007 super bubble was actually a period of “great moderation” brought about by his own superior monetary policies! He was still patting himself on the back when it blew up in his face.

And now, he still thinks the way to solve a problem caused by too much debt is to offer more debt. Of course, it didn’t work for the Japanese. It won’t work for us. But what we don’t know is HOW it won’t work.

That is big question. Will the feds simply retard a real recovery….with their bailouts and boondoggles…causing a long, slow motion depression, a la Japan? (In this case, gold may not be the one-way bet the smart money thinks.) Or will they tip the world into a hyperinflationary catastrophe, like the Weimar Republic in the ’20s or Argentina in the ’80s?

We don’t know. No one knows. We wait to find out…