When People Fear Inflation or a Falling Dollar They Find Refuge in Gold

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Uh oh…maybe it will be a Red October after all…

Two important things happened yesterday, both of which cast a crimson light on things.

First, the Dow dropped again; it has only gone up one of the last 7 days. It went down 203 points. Could be nothing. Could be something big…the beginning of the long awaited ‘next leg down’ for the bear market…the opening day of a bloody Red October.

Charts of oil, commodities, copper, the dollar, and Treasury bonds tell us the same story. The greed investments are topping out. The fear investments are headed up.

What’s a ‘greed investment?’ It’s anything that benefits from an improving outlook for the economy and inflation – oil, commodities, and stocks, mainly.

What’s a ‘fear investment?’ It’s something that goes up when people begin to suspect the boom is a phony – namely the dollar and US Treasury bonds.

The dollar is rising. So are Treasuries. Yesterday, 30-year US Treasury bond yields fell below 4% for the first time since April.

And what about gold?

Well, that’s the other important thing that happened yesterday. Gold held above $1,000.

So what?

So what?? Well, dear reader, you are in a prickly mood this morning, aren’t you?

This is important because gold could go either way. Gold is a refuge in times of fear – especially when people fear inflation or a falling dollar. Gold is also a target of greedy speculators sometimes, even when the going is good. According to a study done by the World Gold Council, you never know what gold will do. That study was a great comfort to us here at The Daily Reckoning; we thought we might have missed something. But no. We may not know what gold will do, but neither does anyone else.

Looking around, we see no sign of consumer price inflation. So gold’s recent rise must have been driven by optimistic speculation – along with oil and stocks. Now, when oil and stocks go down… we have to wonder whether gold will go down too. The answer, given yesterday, was what we expected – yes, but not as much.

There’s substantial risk in gold as well as stocks. The ultimate low for the Dow should be below 5,000. That is, let’s say, about a 50% haircut from current levels. And let’s assume that gold does what it did yesterday…let’s suppose that it goes down only 40% as much as stocks. That would still be a drop of 50% of 40%, or 20% – to the $800- an-ounce level.

If you would be gravely upset by a drop of that magnitude…you probably shouldn’t buy gold at this level. And, of course, you should have sold your stocks already. Stick to cash – and gold, if you’re long-term oriented – until this next phase is over.

The economic news was mixed, as usual…with nothing to make us think that our basic outlook is wrong.

On the optimistic, bullish side…consumer spending rose in August. Pending homes sales went up too.

But on the pessimistic, bearish side… “September auto sales plunge,” says a Reuters headline. Yes, auto sales drove off a cliff last month – just like we said they would. GM reported a 47% drop.

What happened? The clunkers program was an economic fraud. Like all attempts to boost consumption, it merely shifted sales from the future to the present (now the past). Which is a big reason why August consumer spending looked good too.

But wait a few weeks for the September consumer spending numbers. Especially if the stock market continues to fall… Then we’ll find out how sustainable those retail sales numbers really are.

As you know, here at The Daily Reckoning headquarters…in the building with the gold balls on the south side of the Thames…we are often accused of ‘pessimism.’ We deny it. We’re optimistic about the fate of mankind. But we are pessimistic about many of his current pretensions – such as health food, enlightened central banking, contemporary art, mass education, global climate control and progressive democratic government.

But maybe we are wrong to be optimists. Pessimists always have the last laugh – when the optimists die. “I told you so,” they say, under their last breath.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

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.
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Ned S
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Gold as something that might spike a lot IF the Middle East (or somewhere else?) blows up – Only if it affects oil. And only then to the extent it provokes long term fear – With such fear being minimal given the sure expectation that NATO/the US will jump in – Things ARE different (in that regard this time around people) because the USSR is dead. Gold as the future basis of all fiat currency worldwide – Roll me over and tickle me ribs while I wet myself and feel the tingly sensation as it runs down my inner thigh… Read more »
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