"Oh yes, we met a couple of years ago," said a new friend at a party last night. "You said to buy gold. At the time I thought it was a little flakey...buying gold, that is. But then the price went up...and I thought of you."
"Well, it isn't going up now," we replied. "But we wouldn't give up on it. Not yet. Most analysts think the crisis in the financial sector is pretty much over. They think we've seen the worst. They don't expect any more major banking failures. They think the dollar is coming back. And they expect the rate of inflation to moderate. They're looking for a huge soft landing for the entire world economy.
"But financial analysis, at least on this kind of macro level, is mostly fraud. It's impossible to keep track of all the various inputs - many of them purely psychological or emotional - and make a logical judgment about what will happen. You can form an opinion. But your opinion is usually driven by some kind of philosophical prejudice. Say, for example, you just don't like to see all those Wall Street hotshots making huge bonuses for doing something that you know is mostly a kind of razz-ma-tazz designed to wow the little guys in the market. Then, you're sure that they're going to get their comeuppance, one way or another. So you look around and try to find justifications for your point of view. And there are so many facts and theories around, you can always find whatever you're looking for.
"You know, things in the financial markets have been going very well for a very long time. Major stock market indices are down only about 15% from record highs. No major economy is even - for now - in a recession. Unemployment in the U.S. still hasn't risen to 6%. Gold is no higher than it was 28 years ago - in nominal terms. People still lend money to the world's biggest debtor - the U.S. government - at only 3.94% for 10 years. And the dollar is still taken as a 'store of value,' even though there are trillions of them in central bank vaults...and a whole rickety tower of dollar-based credits reaching up to the sun.
"But investors talk as though it were the end of the world. It's not. It's only the beginning of a major correction...and probably, only the beginning of the beginning.
"And when it is over, people will want more than 10% yield before they will lend to the feds. The world's monetary system will probably have collapsed and been replaced with something new. Stocks will probably sell for less than 8 times earnings. Ten percent of the U.S. population will probably have gone bust - that's 30 million people. And gold will probably sell for more than $2,000 an ounce.
"Of course," we had to admit, "between here and there, anything could happen."
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Jason, Bondi on 16 August 2008:
I have heard many myths to date. Saddam with WMD, the free world being free, despite more rules and goverenment than most other nations, US troops in 2020 being issued laser guns and laser swords...the list goes on. There are also economic myths as bloated as any "warie" to date.
The global economy is in trouble! And smart people buy gold. In the past it was considered that the only people who hoarded gold were drug dealers and right wing nationalists.Now the smarter investors are taking up gold as it holds value, instead of the toilet paper debt notes everyone calls "the dollar".
The latest press releases on economics all appear to water down the serious debt crisis, housing crisis and oil declines as "temporary" issues. Of course, I cannot see Aramani-suited yuppies in glass towers considering the impact of stagflation/debt crisis on the rest of the population.I know because I worked with many such people. The economy is just numbers and stats, bullshit statistics every bit as ficticious as the demographic projections that ignore things like "resource avaliability".
The investors who are weary of the dollar's value and who opt for gold are probably more clued onto the whole socio-economic issues of the current economic climate. They know that the current surge in the dollar's value and oil price drops are temporary, just like what happened in september to november 2006. Back then the dollar rose and oil fell from $80 to$60 and many overpaid skyscraper dwellers declared "good times until 5000AD" and "Globalisation will last a million years." But, oil went up and the dollar again showed itself to be as worthless as used toilet paper. The fact that the Americans borrow so much money dosen't help, especially when its economy is full of people who produce absolutly nothing. No economy like that can survive.
Listen to the Gold Bugs, because very soon gold will go to $2000 and more...and oil production will fall off the supply cliff at the same time.
Comment by Luke on 17 August 2008:
Hi Dan
One thing to note is the volatility in gold is a US thing not a rest of the world issue. If you take gold from it's peak in march to today the following drops have occured (approx) :-
US 20%
CNY 21%
EURO 15%
JPY 13%
Aud 13%
CHF 14%
CAD 13%
As you can see Gold has two stories to tell and none of it looks good for the US. It's too late at night to work out the % difference between log curves but I am guessing the inflation (increase in money as opposed to CPI) in the US is around 6%-12% more a year than the 4 countries at the bottom.