Why the Price of Gold Goes Up in a Struggling Economy

by Bill Bonner.Posted Sep 16, 2010.

We’re not exactly in Las Vegas. Not yet. But we’re on our way. Yesterday, we had a funeral in Paris. Today, we have a speech to give in Las Vegas.

This is not the way we planned it. It’s just the way things work out.

Yesterday was a bit of a letdown. After having hit a new record high on Tuesday, gold decided to take it easy on Wednesday. The price slid $3.

Stocks, meanwhile, showed a little progress. Not much.

So we still have no clear trend. We wait. We wait.

For a while it looks like the next leg down has finally begun. Then, it looks like we’re in for another rally.

The only sure thing, so far, is that gold goes up. Even that is not really sure…but it is surer than just about everything else.

Our dear readers who bought gold back in 1999 have made about 4 times their money. This year alone it is up 15% – a very respectable return. Most of that has come as a result of paper currencies going down. Investors are buying gold to protect themselves.

They may also be getting a little insurance from a much more serious level of inflation which many think is coming. We think it is coming too. But in our view it looked like it would be awhile before it showed up. We’re in a major de-leveraging. You don’t get the normal cost-push or demand-pull inflation in a de-leveraging cycle. You get something else…something much more violent and dangerous.

But, heck, we wouldn’t rule out anything.

We made money on gold over the last 10 years simply because gold was cheap when we bought it. We were betting on regression to the mean. Nine times out of ten, when you bet on regression to the mean, you’ll make money.

Can you make money buying gold now? Yes, but now you’re betting on a different phenomenon. Actually, to hear the analysts tell the story, you’ve still got a good chance of making money. If the economy picks up, inflation will likely pick up too – ergo, higher gold prices.

If the economy sinks into deflation, gold still goes up. Why? Because deflation is sure to bring worry, doubt, and trouble.

Then, there are those who think we’re headed to hyperinflation. If so, you ain’t seen nothing yet as far as gold is concerned. The price could get to $5,000 an ounce…and beyond.

What do we think? Well, we agree with them all, more or less. The best bet is probably that we’ll stay in a Japan-like trance for a while longer. This is not necessarily good for gold. And not necessarily bad. Most likely, the yellow metal will meander around…generally headed upwards.

On the other hand, who knows?

The trouble with this market is that there are too many people who think they know. Many are saying that gold is a “can’t lose” investment. Maybe they’re right. But we don’t like the sound of it.

Bill Bonner
for The Daily Reckoning

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.

Roadside Goldsmith

We can be assured of plenty of paper money in the market right now. And, we are confident more and more money is on the way to the market. And, once the printer silents the entire global economy … you can tell me better.

Initially, those fiat will jerk up stock.
When the actual productivity is measured, where price-earning ratio is out of shape, speculated capital return is meagre, risk running higher and higher as more stock poured into the market, more financial derivatives call the market.. then stock investors call it a day.
Ultimately, money runs after the glittering yellow stuff for its proven intrinsic value. Gold has been in history for thousands of year as compared to paper relatively short life span. $5000 barrier is not a hurdle.
http://www.investorsfriend.com The InvestorsFriend

Bill, you say gold is going up becasue currencies are going down.

Really?

That would mean currencies purchase less goods and service than before. That is called inflation.

You are saying there is inflation? Where is it?

Gold is up 15% in U.S. dollars this year you say. Has there been 15% inflation Bill?

Maybe the air up there on your way to Vegas is a little thin on oxegen and you are writing without thinking today Bill?

Id there is little or no inflation, maybe Gold is going up for the other reason you gave. People protecting themselves against a possible future currency devaluation. It has not happened yet. Dollar may be down against other currencies but it is not down in real terms, that is, what it will buy in the United States in terms of goods and services.
a devils advocate

The gold bugs are rushing to the cliff faster than anyone else because they believe the Association of Gold Producers hype and cannot imagine that the price can fall as fast as it rises. Me I don’t really care. I have a place where I can pan an ounce or two a day with hardly any effort at all. It must be a terrible feeling knowing that the speculators can destroy anything you have bought.
a devils advocate

I can pan an ounce or two of gold any day of the week. The question I have is if it is such a good safe investment why is anyone selling it?
Jed

“I can pan an ounce or two of gold any day of the week. The question I have is if it is such a good safe investment why is anyone selling it?”

…because they aquired it cheaper than where they are selling it. The markup for gold over spot is substantial.
http://www.rampartsilver.com PAMP Gold Bullion

Jed is correct – dealers buy large amounts of metal directly from mints or refiners, then sell small amounts for a mark up. This is the economy of volume… it is the same reason a 12 pack of soda cost less per unit than a single can.
http://www.investorsfriend.com The InvestorsFriend

Why is anyone selling Gold?

duhh… ’cause of a little thing called supply and demand and the intersection is called the price.

For every ounce bought there is a seller. And it’s mostly not new gold from mines, it’s the same ounces sold back in forth in the market.
a devils advocate

OK that’s the story huh? Gold is a good investment but its better to sell it for those rotten falling dollars if there is even the slightest hint of a profit in it for even a little bit. Hahaha and when you have those rotten dollars you also need to buy more gold to keep even. This is getting funny. And all I have to do is pan it out of the creek which doesn’t cost much at all. Wheee this panning is easy.
http://www.investorsfriend.com The InvestorsFriend

Why anyone sells gold?

The point is it is impossible for all investors to think something is a good investment at the same time.

When that tries to happen the price rises to a neutral point where the marginal investor is about indifferent to buying it or selling… That’s the equilibrium price.

It’s supply and demand. Basic economics.

If everyone thought gold price would rise, it would, not tomorrow but right now.

Difference of opinion is what makes a market. For every buyer there is a seller.
Bruce Walker

As much fun as it has been watching gold achieve new highs each day, I still wish it could light a fire under rare coins. Sure, most of them have gone up. But we are still considerably short of the highs (in constant dollars) seen in August and early September of 2008.

I think it will happen, but unlike the current bullion rally, the next big leg up on the rare coin side of the market will most likely be as the economy (somewhere, not necessarily in the USA) starts to make some dramatic improvements.

When that happens is anybody’s guess, but my own suspicion is sometime in mid-2012 in the BRICs. Which, of course, means much higher prices for world coins, not so much for US material.
Kyle

I don’t like the sound of it either Bill. The problem with the current predicament is that it’s a credit bubble (STILL!). When credit implodes and deflation sinks it teeth in…people need the asset in which their credit is denominated in; namely, U.S. dollars. Dollars go up for a while (until folks catch on to the Ponzi scheme) and gold, silver, stocks, etc. get hammered. The trouble is in the timing…after the run up in safe haven dollars has run its course the game is over…folks realize the U.S. is no more than a hollowed out con man of its former self…that’s when owning gold, silver, oil, etc. is “golden”. But buying now is likely overpriced…if one waits…one will get an extraordinary opp. But getting the timing right will be difficult…so if you just want protection, hell, dollar cost gold and silver until the cows come home (this is what i’ve been doing). Good Luck everyone!
a devils advocate

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