Ruminating on Recent Market Trends and Gold's All-Time High

What a wonderful time to be on the South American continent!

The cafés are filling up again after the early week slumber. The sun is back, peering through the clouds and pushing back against the stubborn winter chill. Songbirds in the courtyards sing a merry tune, oblivious as to whether the country around which they fly is destined to succeed despite its government’s best efforts, or to fail because of them. Argentina’s flamboyant capital comes alive late at night and late in the week. And spring is just around the corner…

In entirely unrelated news, stocks in the US went just about nowhere yesterday. Not so for gold, however, which scooted to a new nominal record. History’s anti-dollar hedge is still only about halfway to its “real” record – adjusted for inflation, that is – but it’s a start.

“Why now?” is the first question that might pop into a gold bug’s mind. After all, the underlying market realities upon which gold buyers place their bets hasn’t changed one iota; the west is still accruing debt faster than it can sell it; currency abusers at the world’s central banks haven’t budged from their inflationista tendencies (and, if anything, look set to soon redouble their efforts); and the stock market bounce, posing as it did for a short while as “genuine recovery,” appears to be coming apart at the seams.

Why then should gold be shooting for the moon only now? And, if a lunar landing is on ol’ Midas’ medium-term “to-do” list, is there still time to buy?

Your editor has no firm answers to these questions, Fellow Reckoner…but we do have hunches, suspicions and two eyes wide open.

Market trends, for one thing, do not change overnight. It takes time for them to unfold and broken egos to nourish their metamorphosis. Fortunately for Mr. Market, he has nothing if not the length of days and the arrogance of man on which to feast.

Long time readers know the story already and may wish to skip ahead a couple of paragraphs, but for those unfamiliar with our oft-repeated themes, a quick macro recap…

For the better part of the last half-century, the world, particularly the western, “developed” hemisphere, embarked on a debt-financed party cruise. It was “full steam ahead” as credit expanded, the economy “grew,” and consumers came to see the trappings of a sophisticated lifestyle as their God-given right. Pretty soon, everyone had a plasma television on their wall and a shiny new ride in their driveway. Folks came to measure their wealth by the thread count of their sheets rather than dollar amount in their banks. In other words, “stuff” came to replace savings, and the delusion of wealth – borrowed from today’s foreigners and tomorrow’s Americans – came to replace actual wealth.

By the time the ship hit the great iceberg of ’07, welfare costs in both the private and public sectors had grown to such gargantuan levels that spaces for extra digits had to be added to calculators.

At the private level, companies like General Motors and Ford found themselves crippled by union-won legacy costs. In the days following the collapse of Lehman Bros., these giants of yore found for themselves new homes on the penny listings and in the arms of a mollycoddling, welfare-prone government. But this weight was nothing compared to the load with which the state had saddled itself.

What began as President Hoover’s “a chicken in every pot and a car in every garage” had, over the course of the century, grotesquely morphed into “a non-worker for every house and an SUV for every non-worker.” The terrible twins of mortgage lending, Fannie Mae and Freddie Mac, had, with governmental carte blanche, driven the cost of borrowing down and the price of homes to all time records. Sallie Mae, as Eric Fry explained in “A College Education of Diminishing Returns”, did likewise for the education sector, sending the cost of obtaining a tertiary qualification higher even than the aspirations of the starry-eyed students in attendance.

Having gorged itself on the borrowed earnings of others for over five decades, it is little wonder that an overstretched, underfunded economic system should begin collapsing beneath the burden of its own obligations. Smaller wonder still is the fact that a handful of long-view investors should seek refuge from the inevitable fallout by purchasing the only investible currency that is, by its very nature, free of any such onerous obligation.

But at yesterday’s nominal record of just over $1,270 per ounce, surely gold is approaching bubble levels, right?

Maybe…but probably not. As Adrian Ash, former correspondent for The Daily Reckoning’s London office and now head of research for the indispensable BullionVault, puts it, “No one’s obligation and no one’s liability, gold owned outright is quite literally the opposite of debt.”

“Gold from here is a speculation,” Adrian wrote in his essay “Speculating In Gold” last week, “but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.”

Joel Bowman
for The Daily Reckoning

The Daily Reckoning