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The Contagious Gold Bug

Gold is holding above $1,700. And everyone says the economy is recovering.

The worriers can stop worrying, say the pundits. The US has plenty of cheap oil. Unemployment is going down. Housing is going up.

This is not the time to buy gold, they say. The world is not going to end. You won’t need it.

All year long, we’ve heard analysts tell us that the bull market in gold is over. Most recently Goldman’s top commodity man announced that gold will go down next year, as real interest rates once again turn positive.

Gold was a nice thing to hold when the world was in a financial crisis, say the bears. It didn’t hurt to have it when the price of oil was flying over $150 a barrel, they admit. But now…the trouble is behind us.

Markets have stabilised. Europe has figured out how to manage its sovereign debt issues. China is not going to blow up anytime soon. And the US is on the road to a sustained recovery, thanks in large measure to huge new oil and gas output.

Who needs insurance in a world where nothing goes seriously wrong?

And yet, gold holds above US$1,700. It’s up about $150 from the beginning of the year. Let’s see, that’s nearly a 10% increase. Not too shabby for an insurance policy.

And now comes word in the Financial Times that Americans are buying so many gold coins the US mint can barely keep up.

‘Sales of American Eagles soar in fear-driven search for gold.

‘Demand for gold coins in the US has soared since the presidential election, as small investors fret about the lack of action to address America’s ballooning debt.’

Silly fellows. Don’t they know there’s nothing to worry about?

But what’s this? Apparently, foreign central banks are being silly too. Here’s another FT report:

‘In 2009… China announced that it had been buying gold and India purchased 200 tonnes from the International Monetary Fund.

‘Since then, Thailand, South Korea, Sri Lanka and Bangladesh have all bought significant quantities for the first time in years, making Asian central banks the driver of official sector purchasing.’

Now the gold bug appears to be catching in Latin America.

Why are these central banks buying gold? Don’t they know that gold holdings don’t earn them any money? Don’t they know they’d be better off with US Treasuries? Don’t they know the dollar is as good as gold?

Apparently not.

And we’re not so sure either. If the US really were in a recovery we’d soon see interest rates rise… and consumer prices go up too. You would expect the gold price to go up along with everything else. Then, things would get very interesting. The Fed would have to choose – either back off from EZ money policies or risk runaway inflation.

If the Fed were to “pull a Volcker”, we’d agree; it will be time to sell gold. But 2013 is not 1979. And Ben Bernanke is no Paul Volcker. More than likely, Bernanke will “pull a Gono”. Gideon Gono was responsible for the hyperinflation in Zimbabwe, 2006-2008, when the value of the Zim dollar didn’t just go down – it disappeared completely.

Regards,

Bill Bonner
for The Daily Reckoning Australia

From the Archives…

Will Lower Interest Rates Impact Australia in 2013?
7-12-2012 – Greg Canavan

Is the Australian Economy in Recession?
6-12-2012 – Greg Canavan

US Debt: Why America May Need a Bail Out by the IMF
5-12-2012 – Bill Bonner

If Profits are Falling Why are Stocks Rising?
4-12-2012 – Dan Denning

The Frontier Way
3-12-2012 – Dan Denning

Bill Bonner
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.

1 Comment

  1. rick how says:

    Hey Bill,
    Why don’t ya tell us, how good it is, in Argentina at the moment.It’s been awhile ,is it still all milk and honey .?

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