Of all the many miseries that man faces on his journey from cradle to grave, few of them can be eased by enlightened central banking. And a credit contraction is not one of them. Japan proved it. After the Japanese market collapsed in 1990, public officials went to work with their characteristic energy and incompetence. They lowered the cost of borrowing to nearly zero. But did consumers take up the money and add to the demand for bread and bicycles? No. They didn't want to borrow. They wanted to save. They had speculated during the previous bubble years and lost money. Then, with retirement approaching, a penny saved was worth even more to them than a penny earned. They saved more than ever...and the consumer economy sank.
The Japanese persisted. They lent so freely that the yen became the 'funding currency' for a worldwide boom. Prices rose all over the planet - except in Japan itself. The land of the rising sun couldn't seem to get up in the morning. Property investors lost money. Stock market investors lost money. Japanese consumers sewed their pockets shut.
And now that the dollar is the world's 'hot money' the world's surviving gold bugs see their moment of rapture fast approaching. Gold is not an investment category. It is no investment at all. Instead, it is more like a religion or a political position. True believers stick with it through thick and thin. When gold goes up, they are insufferable. When it goes down, they are unrepentant.
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The price of gold peaked out in real terms in 1979 at over $2,000 in today's money. Briefly, an ounce of gold was so loved - and stocks so despised - that you could buy all the stocks in the Dow index for just a single ounce of gold. But then, the gold martyrs suffered a terrible persecution - nearly two decades years of steadily falling prices. Not just in real, inflation adjusted terms, but in absolute terms. By the end of the period, it took 43 ounces of gold to buy the Dow stocks, and gold bugs were gathering in small groups praying for salvation and awaiting the end of time. It seemed as though the cult might be extinguished; few were still alive. Fewer were still solvent. Of those, even fewer were still sane. But then, like Christians huddled clandestinely in an unheated Soviet apartment, the wall fell. Gold began a comeback.
What inspires this little reflection, apart from a night of heavy drinking, is the price movement. At the beginning of the week, gold closed comfortably above the $1,000 an ounce mark. Then, on Wednesday morning...it shot up. The end of the world has been delayed, perhaps indefinitely. And yet, gold - an option on financial chaos - trades as if it were coming next week.
What gives? Here on the back page we keep an eye on the yellow metal. Not because we expect the end of the world. Still, you never know; maybe the gold bugs are onto something. No monetary system lasts forever. This one - an impromptu experiment, at best; premeditated larceny at worst - has already lasted longer than most marriages. The bust-up, when it comes, threatens to be nasty and expensive.
The easiest story to sell in the current marketplace is the inflation story. In an effort to revive the go-go economy of the bubble era, the feds are adding to the money supply. They will continue doing so until inflation rates go up. They make no effort to hide it. They have as much as warned the world: prepare to be robbed. According to the popular story line, the gold market now anticipates inflation. Investors should too. We have told this story ourselves; we still believe it. But today, we caution readers: there may be a plot twist.
The problem with inflation is that there is none. Consumer prices are falling in China, Europe and America. And if we look harder, we find out why. The feds are pumping the money supply as hard as they can. David Rosenberg reports that the monetary base rose at a 141% annual rate over the past four weeks. But the money fails to reach the real economy. The money supply figures that relate to actual cash in people's hands - M1, M2, and MZM - are shrinking, at -28%, -4.9% and - 6.2% respectively. Why? Because the banks don't lend and consumers don't borrow.
In short, the feds' money goes into cool bank vaults and hot speculative trades. When it tries to find its way to the consumer, it gets lost. As Rosenberg explains it, the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers cannot borrow. They have nothing to borrow against. Both their wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself 12 months ago.
And even if consumers had access to credit, they wouldn't take it. Consumers too, almost went broke a few months ago. Instead of saving money during the boom years, they spent it...or gambled with it. Then, when the bust came in '08, they realized that they were 10 years closer to retirement with little money saved. Now they have to make up for that lost decade, by cutting spending and saving as much money as they can.
Still, gold speculators think they've got God on their side. They march into the coliseum confident that the feds will inflate consumer prices and cause the price of gold to soar. Maybe gold will rise. If so, it will be thanks to speculators and Chinese central bankers, not consumer price inflation. The smart money is still on the lions.
Regards,
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- The Interest Only Mortgage Option
- Gold is Suddenly Looking Good to Investors Again
- You Can Have a Deadly Depression and Dizzying Levels of Inflation Simultaneously
- Who Can Blame Consumers for Being More Ready to Spend Money?
- Japanese Practically Gave Away Money to Anyone Who Would Borrow It
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 genesis on 21 September 2009:
Long live the stockmarket,god bless investors and lions who will feast on gold speculators.
Comment by Dan on 22 September 2009:
The Christians will continue to be slaughtered until the Emperor converts. This too is the problem with Gold - aside from the fact that it is an inanimate object.
Comment by Lachlan Scanlan on 22 September 2009:
I dont believe the emperor will convert this time around.
Perfection (at least relative stablility/life without risk etc) has proved unobtainable in this world by the hand of mankind whether through gold or whatever else.
Gold is good money, but perfect money only in a free market....which is maybe a fantasy at best a fleeting state.
Therefore gold is a gamble like anything else and a religion to some.
Comment by Dan on 22 September 2009:
Who knows, we once again might be made to worship a golden calf. Wouldn't put it past them!
Comment by Biker Pete, Montreal, Que., Canada on 22 September 2009:
The gold bulls, you mean, Dan?
Comment by Pete on 22 September 2009:
Bill's underlying point is that whilst we may get deflation, those who hold gold for the right reasons will not be concerned.
The right reasons are for wealth preservation, and as a hedge.
The wrong reasons are for speculation and capital gains. The irony being that gold goes up in price due to loss in confidence of fiat money - it goes up in price proportionate to 'fiat money'. Therefore it is the ruler that is changing dimensions, not the gold that is being measured. Realising a capital gain by selling gold for fiat money contradicts the 'right reasons' for holding gold.
(obviously you may need to sell gold at some point though...but what are your motivations?)
Comment by Biker Pete, Montreal, Que., Canada on 22 September 2009:
Aahhh, the _ethical_ reasons for owning gold... there you have it, folks, Ain't greed at all!
Let's remember the two primary motivators for any market: fear and greed. I prefer Bill's honest admission that it's about greed and his use of the fear rationale to support almost every daily post, to the BS that you're buying gold for some lofty and noble purpose, Pete. Seriously, you don't _believe_ this tripe you spout, do you?! It's as shallow as the 'God-made-gold' thesis, son...! 
Comment by Dan on 22 September 2009:
But Pete, you can't ignore how gold's price is being manipulated. This has to be taken into account when defining gold as a hedge and as a wealth preservation strategy. Ideally, you should be able to sell gold whenever you need to, and be comfortable that you will recover an equivalent value. But this has clearly not been the case. Gold has a big speculative component, and as such gold has to be watched and its merits reconsidered periodically, just like anything else. Get to know this devil before you adopt it over something else (such as real estate, of which most people now have a very sober appreciation). It might be the right thing to buy into gold, but there are genuine reasons to be sceptical.
Comment by Greg Atkinson on 22 September 2009:
I have to say that digging something up to put in a vault so people can feel safe is a bit odd. Demand for gold for non-investment purposes is falling see for example: http://timesofindia.indiatimes.com/news/city/ludhiana/Diamonds-rise-at-golds-cost/articleshow/5039326.cms. In many cases the use of gold can be scaled back very easily when it becomes pricey, so to support prices at the moment more investment buyers are needed to keep existing investors happy.
You know what this sounds like don't you?
Even the world gold council openly admits that investors are the primary reason demand is holding up. Care for a tulip anyone?
Comment by Pete on 22 September 2009:
I feel a bit like a cat that just strayed into the local dog pound.
Dan:
"Ideally, you should be able to sell gold whenever you need to, and be comfortable that you will recover an equivalent value."
The question is, sell it for what? Fiat money?
You are definitely right that gold has a huge speculative component.
But, as idealistic as it sounds, gold is what you use when fiat money not longer works properly. It might not hold its value perfectly, or then again it may increase in value.
The point is that it cannot be created by central banks.
So whilst they can manipulate it as much as they want for now, I think it is still a decent insurance measure against central bank shennanigans.
(although I do suspect it will deflate in price in the shorter term)
Comment by Dan on 22 September 2009:
Point taken, Pete, but it only works IF gold is adopted as a basic unit of currency and not something else (if something else is adopted, gold will plummet). Is it a dead set certainty? Central banks are the reason I don't trust gold, as it happens.
Sell gold for what? What about a house, or a part ownership of a GP clinic, or some other item which retains its usefulness and demand, regardless whether people are paying in notes, coins, chickens or loaves of bread, as dictated by central banks.
Comment by Coffee Addict on 22 September 2009:
Bill is actually saying his money is on the lions rather than those gold speculators who now march into the Colosseum (with a belief that God is on their side). I agree.
The bottom line is that this is a traders market. The winners will be those who anticipate the timing of events and who maintain a bearish long term outlook. Today I sold off most of my (meger) energy holds. At the same time I'm holding onto the the goldies. Who knows whether this was the right thing to do. We all have to do our own research and trust our own instincts. Next week or next month I may well do the opposite (buy energy // sell gold). Who knows .... except that all asset classes including cash have risks attached.
I agree with earlier posts by Bill and others that suggested consumer inflation and asset inflation were NOT mutually exclusive. The cost of your weekly shopping suffer a steep rise while the value of your house falls off a cliff. You may be feeling the pain at both ends however as far as government statistics are concerned they will balance each other out. I hold to my previous posts about inflation actually being the Fed's preferred adjustment tool.
Cheers
Comment by Pete on 22 September 2009:
"Bill is actually saying his money is on the lions rather than those gold speculators who now march into the Colosseum (with a belief that God is on their side)."
My interpretation is that Bill is trying to distinguish between gold speculators and people who use it to preserve wealth or as a hedge.
Any market can attract speculators. And speculation can blow out the prices of assets completely - just look at property.
But, that does not mean that the asset does not have it's uses anymore. It is just overpriced due to speculation.
Where this gets confusing is that gold's use (besides jewelry, manufacturing) is as a hedge against inflation. When speculation is thrown into the mix we get competing concepts of increasing asset prices (due to demand/speculation) and increasing asset prices due to lack of confidence in the fiat money system. Whichever way it goes, people will claim either "speculation" or "inflation".
But I think they are missing the point. Gold is insurance against fiat money fallout.
I won't go into 'is gold currency'. That has been discussed many times.
CA: Gold miners are possibly the best way to capitalise on gold speculation profits. Small shifts in the gold price can amount to large shifts in producers prices. But these prices are still fiat money.
(I own shares in a few gold miners actually. Your ALK is doing very well)
Comment by Coffee Addict on 22 September 2009:
Hi Pete
I actually bought a few more ALK at 43c the other day. BDL has also delivered 3 digit returns. The CGT is where it was ages ago at 4c - the only hope for this firm is either a T/O of some sort of farm-in, merger or partnership. I also hold CTO but with a neutral opinion.
Cheers
Comment by Dan on 22 September 2009:
Well, I like the articles on ADR, but the posts are practically always very insightful. The funny thing is that, although we know fiat money is freakin' doomed, it's still worth something. $5 will buy you a Big Mac pretty much anywhere still.
Comment by Ross on 22 September 2009:
I think a number of these Gold opinions above can coalesce despite different views. The pro's and con's have odds and it is a matter that will be determined by the behaviour of the masses after the messing around by the govts and the reserve bankers. It surprised me that Gold didn't go much lower at its lowest point after the mass dumping by so many reverve banks over the past 30 years so that reflects resilience that debasement of currency will surely build upon. But Govts could even influence events beyond the crash of their fiat currency, imagine if, in the face of famine, they suddenly decided that taxes must be paid in wheat or fuel!
Comment by Lachlan Scanlan on 22 September 2009:
I dont see a marvelous new world order with gold as king and personal liberty to the max. It is a nice thought. I dont think its where the powers that be are moving us.
I'm a gold bull because I see gold as undervalued in relation to other fixed assetts all of which have important places in the scheme of life. A return to an economy based on production of firstly essential items might be nice. Not sure how that will play out either. Maybe in times to come we'll be chipping weeds from the fields as our overlords fly overhead in Jetsons style. Will they then finally be happy?
Gold though in the last ten years has moved up steadily against central bank resistance. Quite possibly they are allowing it too. I believe the ends that these people desire will allow room for much higher gold prices for a period at least. The US is going to trash its dollar in my opinion.
Pete, gold as insurance for sure, absolutely. But nothings guaranteed, so I die a gambler.
Greg those poor Indians might have to pay a lot more for their beloved jewelery yet. Just my guess but. We've all had to get used to higher prices. Just look at property.
Comment by Lachlan Scanlan on 22 September 2009:
I like CTO Coffee. At least I like their deposit. They're dragging the chain but they've got plenty of gold and they (somebody at least) can mine it no troubles.
Spot gold up $16 today and hopefully in for new high next day or two. Hopefully then a 3X successive weekly closes above 1000
Comment by Greg Atkinson on 22 September 2009:
Lachlan people will pay more for gold up to a point, then they start thinking of ways of doing with less. All products have a price point. It is not that I think gold is a bad investment, I just reckon we are hearing a lot of "hype" about gold now and that worries me. Remember gold is going up in US dollar terms because the USD is falling, it has little to do with gold fundamentals.
Comment by Pete on 22 September 2009:
CA:
Yeah as you may recall I dropped my ALK shares far too early.
Managed to get out of CGT with a small profit a few months back when it was up at 6c. Sold CTO at a small loss...what an awful company? Something reeks in it. Maybe it will break out later on and make me eat my words, but its growth so far has been lacklustre (pun intended).
Currently I hold TRY (just over 100% gain) and SBM. I am quite fond of SBM, but not for any solid reasons.
Comment by Julian Tonti-Filippini on 24 September 2009:
Again this nonsense of tying gold to inflation. A quick look at history shows that the link between inflation and gold price activity is weak.
No, gold price activity correlates strongly with periods of fiat currency stress. A period of high, *but steady and predictable* inflation does NOT lead to a massive surge in gold prices, as other as other, higher risk, investments are more profitable (the risk being lessened by stable monetary policy).
Precious metals spike when Central Banks are behaving like bulls on LSD in a china shop, playing fast and loose with monetary policy (which can be either inflationary or deflationary), leading to an environment where making any investment decisions makes you feel about as comfortable as walking through a minefield, painting a completely opaque future regarding valuation, and destroying the proper price discovery process.
Hell, with the insane dislocation between bonds and equities right now, even US Treasuries cannot be considered safe. One of these markets *has* to be wrong and when it becomes clear which one it is, there will be a massive move, but which is wrong, which way will the move be? Get it wrong and be wiped out.
That is why all this talk about "gold as an inflation hedge" is just drivel, as is this nonsense about precious metals being "religious". The future looks...volatile. Cash is not safe, stocks are not safe, real estate is not safe, corporate bonds are not safe, treasuries are not safe, derivatives are not safe, etc. As more and more people lose faith in the fractional reserve system, the global derivatives casino, our corrupted politicians, and our moronic economic masters, they pile into precious metals because there really is no other choice.
Comment by Ross on 24 September 2009:
Julian, I also had a piece of this in my post to Lachlan. Beyond Vietnam and the end of the war I can't recall gold used as tender at any time since Nixon broke the chain. In Russia it was all about grabbing distressed equities & commodity titles from the state and funding yourself locally with USDs by selling off smaller bits.
Comment by Justin on 24 September 2009:
Pete, I had a look at SBM. Their share price is currently doing well but they have some connection to Barrick, so I stayed away.