Gold Rallies the Youth Vote

“Cable news is scaring the crap out of me,” tweeted Bloomberg TV Washington correspondent Lizzie O’Leary, “and I WORK in cable news.”

Yet for all the bluster, Irene turned out to be about as exciting as a cage match between a St. Bernard and a tortoise on a hot day. That is to say, well, underwhelming.

Wall Street’s investment banks were not deluged by storm surge… as had been hoped by many on Main Street. There was no damage at the New York Stock Exchange. Unless you count the water tracked in by traders this morning, careless enough to forget they’d donned their galoshes.

The mere fact the Apocalypse had been averted sent up the major indexes 1.5% this morning. That, or the early news announcement pop diva Beyonce is pregnant. (Hey, you can’t be too sure these days!)

Gold moved up big on Friday “on the belief that the Fed’s September meeting would offer even more monetary stimulus,” says Euro Pacific Capital’s Michael Pento.

After we went to press with our Irene forecast issue, gold powered its way up $50, to $1,830. Over the weekend, it settled back to $1,805. Still, gold sits higher this morning than it’s been any time in history before this month.

“The chairman’s ‘tools’ all offer different variations of the same idea,” Pento continues, critical of the Fed’s insinuation they can add stimulus to the economy when needed. “That is, what is the best way to destroy our dollar?”

On Oct. 6, 2008, through the Economic Stabilization Act of 2008, the Fed began paying interest on excess “reserve balances” at banks, as well as on the cash reserves required for daily operations.

The stabilization act is credited with being one of the many reasons banks have been reluctant to lend: They get paid by the Fed to hold on to excess capital.

“This next meeting,” Pento speculates, “will most likely produce a reduction in interest paid on excess reserves, in an effort to force banks into” lending those reserves out.

“Just imagine,” Pento goes on, “the amount of inflation you’ll get when banks are compelled to start loaning money through the drive-through window.” That, too, will be a good day to own gold.

Every year since 2002, Gallup pollsters have asked 1,000 or so Americans what they believe is the best long-term investment.

This year, for the first time, gold was added to the list of possibilities… along with more “conventional” assets like stocks, bonds, bank CDs and real estate.

This year, gold assumed the top spot:

Gold As a Long Term Investment

Not a majority, to be sure, but a convincing plurality.

Even more noteworthy was the demographic breakdown. Gold tops all political affiliations, income levels, age cohorts and genders:

Gold Popularity Across Demographics

The age progression is what caught Byron King’s eye. “Age is correlative,” he says. “Baby boomers are turning into gold bugs,” and so is Generation X. The older Silent Generation? “They’re already there.”

Meanwhile, real estate is waaaaay out of favor. So much for “buying as much house as you can afford,” as many old-timers were thought to have believed until yesterday.

On any ordinary day, we might be inclined to view the Gallup poll with suspicion… even derision. Even the pollster seemed skeptical of the results: “That one in three Americans see gold as the best long-term investment,” said Gallup chief economist Dennis Jacobe, “may indicate a bubble in the value of this precious metal.”

But the numbers might well have been skewed by when the poll was taken. Stocks had just reached 11-month lows, while gold had been on an almost nonstop run-up for seven weeks, from $1,500 to $1,750.

Gallup’s website doesn’t post the results from previous years, but somehow we suspect Mr. Jacobe was not saying the same thing about real estate in 2006… nor would he have of tech stocks in 1999, were there a survey taken that year.

Perhaps the most compelling argument from the polling data to refute the “bubble” argument: the breakdown by income. The middle class sees gold as the best long-term investment by a far wider margin than those polled with higher incomes.

How many people living on middle-class incomes have actually bought gold?

The pollsters didn’t follow up… but our scientific wild-ass guess is “not much.” Folks with incomes of $30,000-75,000 aren’t responsible for pushing gold into record territory this month.

The conventional “smart money” is still investing in the last bull market… and, comparatively, loaded up on equities, and even real estate. Worldwide, the percentage of financial assets comprising gold bullion, ETFs and mining stocks is minuscule:

Gold and Gold Mining Shares as a Percent of Total Assets

That tiny bar on the right doesn’t even begin to approach those previous peak levels until institutional investors get back in the gold game.

“Expectations of dramatic monetary easing in Europe and more QE from the Fed will keep a strong bid under gold prices,” our short strategist, Dan Amoss, writes. “These bids for gold are coming from institutions and the central banks of emerging markets.”

Indeed, central banks purchased 69.4 metric tons of gold during the second quarter of 2011, according to the World Gold Council. That’s quadruple the year-ago figure. Mexico and South Korea were the big purchasers.

With these factors gathering, Dan concludes, “it’s easy to imagine gold trading in a range of $1,800-2,200 in 2012.”

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning