Gold Rallies in the Ugly Face of Financial Markets

There is beauty in life, and there is truth. The two are not mutually exclusive, necessarily, though a coincidence can be rare. Often times, the truth is not as attractive as we would like for it to be. And sometimes beauty is but a lie. But every once in a while, the two converge…and the result is rarely displeasing.

More on truth and beauty below, but first, a look at the unusually ugly, perennially untrustworthy financial markets…

The Dow was down by as much as 78 points in morning trading today, adding to yesterday’s 280 point shellacking. Not as attractive as some might have hoped, in other words, but probably more in line with the true, underlying economic trends of the day. The 30 bluest chips on the US market are down more than 500 points (4.1%) over the past month. The newspapers, as usual, are in a scramble trying to determine the cause of the sudden market unrest. And, as usual, they miss the forest for the trees.

Ventured one stock analyst earlier in the week, as quoted by MarketWatch:

“While it is clear economic statistics have softened, we believe this is largely attributable to Japan, the European debt debacle, the Middle East and our continuing weird weather.”

To which he might as well have added, “and the now-confirmed double dip in the US housing market…and generation-high unemployment…and the unreliability of official statistics…and the rise in commodity prices…and the deathly creep of inflation…and the lackluster performance of the home team in this or that local circus/sporting event…”

While it is true that markets react to events such as those described above, it is a mistake to assume that said events occur in a vacuum. Far from being the cause of market distress, they are in fact symptoms of a much greater problem. It is a problem that ratings agency Moody’s – typically late on the scene – addressed just this morning, when it threatened to “place the US government’s rating under review for possible downgrade” if there is no progress made on increasing the statutory debt limit in coming weeks.

Apparently investors needed a friendly reminder from the ratings agencies that the world’s largest economy is also the world’s (and perhaps history’s) largest debtor. Never mind about Greece, or Portugal, or even Spain. Let’s remember for a moment who is holding, by far, the biggest bag of I.O.U.s…about 14.3 trillion of them, at last count.

Gold, that magnificently honest metal, responded to Moody’s announcement exactly as you would expect it to respond. It rallied. In fact, it rallied by about $15 within a couple of hours.

In many ways, gold can be seen as a kind of “BS barometer.” The less trustworthy a currency becomes, the less respect gold affords it.

Over the medium haul – which is to say, the past decade – the anti-dollar hedge has performed this task rather admirably. At the turn of the century, one greenback was worth about 1/250th an ounce of gold. Today, the world’s temporarily preferred fiat money is barely worth 1/1,500th of an ounce.

Gold is beautiful for many reasons, but chief among them must be the fact that it doesn’t tell lies. Gold is beautiful and it is true, in other words…and it is also beautiful because it is true. It responds dutifully, dispassionately to safe haven demand; demand nurtured by reckless and untrustworthy policies perpetrated by those in a position to manipulate dishonest paper currencies.

Expect gold, therefore, to continue “calling BS” on the United States’ commitment to a “strong dollar policy” in the months and years ahead.

Joel Bowman
for The Daily Reckoning