Sit Back and Enjoy the Depression

What happened in the gold market yesterday? The price of the yellow metal held steady.

So what do you do? Is this the dip you should buy?

Well, as we keep saying…it depends. A few months ago, our view was simpler. We trusted gold because we didn’t trust central bankers. We still trust gold. And we still don’t trust central bankers. But now we see that the central bankers are even more unreliable than we imagined. They are diligently trying to do the wrong thing, as usual. But they’re not very good at it.

They increase the monetary base at central banks. But they can’t melt the huge overhang of cash and credit frozen in the system. A depression has iced over the economy. The feds turn on the pumps, but the liquidity freezes up. This cold snap could last a long time. In fact, with the feds blocking necessary adjustments, it could turn into an Ice Age. And there’s not much they can do about it – except make the situation worse.

Bond yields are already rising. There is a report of rising prices at the producer level. It wouldn’t take much to spook lenders and force the Fed to retreat…just as Greece did.

What’s more, there are two major trends underway. Neither has fully expressed itself. The bear market that began in 2007, for example, never took stock prices down to the levels you’d expect at a major bottom. Far from it. That means a major bottom is still ahead. We have had Crisis I. We will probably have Crisis II in 2010. It will make it easier for the feds to finance their deficits. But it will make it harder for the rest of the world to pay its debts.

On the other hand, the other major trend that has not fully expressed itself is the bull market in gold. When we were in the US last week we saw an ad encouraging people to sell gold “while prices are high.” People think the rise in gold is a fluke. But markets make opinions. At the top, they will believe that higher gold prices are permanent. Then, we will see ads encouraging consumers to buy gold before the price goes higher.

But don’t expect the top in gold any time soon. The major top in gold may have to wait for the major bottom in stocks. And the whole process could take many years.

So, relax. Sit back. Keep your seatbelt buckled. And enjoy the depression.

The Daily Reckoning