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Do We See a Golden Lining?

The big news this week: after teetering on and around this level all week, gold futures went above $1,000 an ounce on Friday morning. What drove the boost? Well, the falling dollar, of course. The green back fell against the euro to a fresh one-year low…and investors turned, as the always do, to the yellow metal as a hedge.

This year, as the worldwide deficit spending eats away at currencies relative to gold and commodities, gold has risen 14%…while the Dollar Index has shed 5.6%.

No doubt the dollar will keep in this free-fall as the Feds chip away at it, but is this run-up in gold prices sustainable for the short-term? Probably not, we will most likely see a correction. But in the long-term…those who are holding gold should end up pleased.

In the Highlight of the Week, Bill Bonner looks at commodity prices and wonders why they aren’t following the normal protocol for a depression.

…if it’s a depression, how come commodities are up? And stocks are up? Above all, how come Chinese stocks are up? Everybody knows China earns its money selling products to Americans and other non-Chinese. If the rest of the world is in a depression, who is China going to sell to? How come China isn’t in a depression already? But there you are – there’s another thing that hasn’t happened. Chinese stocks haven’t collapsed.

And getting back to commodities, they’re all up. Commodity prices don’t go up in a depression; everybody knows that. They go down. But commodities are NOT in a bear market. Go figure.

And, of course, there’s gold. The metal gave up a dollar on Friday, but it’s still just $4 short of the $1,000 mark…and just a shadow below its all-time high. Gold is a commodity…but it’s also money in its purest, more reliable form. Commodities go down in a depression. Money goes up. But since gold is an alternative to paper money, it tends to go up only when paper money goes down. As explained above, the dollar has NOT collapsed. So why is gold going up? It should be going down, reflecting the effect of a recession…

There are two possible answers.

First, maybe the iron laws of economics have been repealed.

Or, second…maybe the iron laws just haven’t caught up to the market – yet.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

Enjoy the rest of your weekend,

Kate Incontrera
The Daily Reckoning

The Daily Reckoning