Why the Price of Gold Goes Up in a Struggling Economy

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We’re not exactly in Las Vegas. Not yet. But we’re on our way. Yesterday, we had a funeral in Paris. Today, we have a speech to give in Las Vegas.

This is not the way we planned it. It’s just the way things work out.

Yesterday was a bit of a letdown. After having hit a new record high on Tuesday, gold decided to take it easy on Wednesday. The price slid $3.

Stocks, meanwhile, showed a little progress. Not much.

So we still have no clear trend. We wait. We wait.

For a while it looks like the next leg down has finally begun. Then, it looks like we’re in for another rally.

The only sure thing, so far, is that gold goes up. Even that is not really sure…but it is surer than just about everything else.

Our dear readers who bought gold back in 1999 have made about 4 times their money. This year alone it is up 15% – a very respectable return. Most of that has come as a result of paper currencies going down. Investors are buying gold to protect themselves.

They may also be getting a little insurance from a much more serious level of inflation which many think is coming. We think it is coming too. But in our view it looked like it would be awhile before it showed up. We’re in a major de-leveraging. You don’t get the normal cost-push or demand-pull inflation in a de-leveraging cycle. You get something else…something much more violent and dangerous.

But, heck, we wouldn’t rule out anything.

We made money on gold over the last 10 years simply because gold was cheap when we bought it. We were betting on regression to the mean. Nine times out of ten, when you bet on regression to the mean, you’ll make money.

Can you make money buying gold now? Yes, but now you’re betting on a different phenomenon. Actually, to hear the analysts tell the story, you’ve still got a good chance of making money. If the economy picks up, inflation will likely pick up too – ergo, higher gold prices.

If the economy sinks into deflation, gold still goes up. Why? Because deflation is sure to bring worry, doubt, and trouble.

Then, there are those who think we’re headed to hyperinflation. If so, you ain’t seen nothing yet as far as gold is concerned. The price could get to $5,000 an ounce…and beyond.

What do we think? Well, we agree with them all, more or less. The best bet is probably that we’ll stay in a Japan-like trance for a while longer. This is not necessarily good for gold. And not necessarily bad. Most likely, the yellow metal will meander around…generally headed upwards.

On the other hand, who knows?

The trouble with this market is that there are too many people who think they know. Many are saying that gold is a “can’t lose” investment. Maybe they’re right. But we don’t like the sound of it.

And more thoughts…

After the church service, the black-clad, downcast group made its way a few blocks to one of the main entrances to Père Lachaise cemetery – probably the most famous cemetery in the world. It’s the largest cemetery intra-muros in Paris, laid out by the same person who designed the stock exchange. We followed the casket…up over the cobble-stoned streets between the large sycamore trees to its final resting place.

At first Père Lachaise was thought to be too far from the heart of the city, so its sponsors began a marketing campaign. They advertised that they were moving the bones of a few famous people to the cemetery. Pretty soon, people couldn’t wait to be buried there; they must have figured since they would be there for a long time they might as well enjoy the neighbors.

Now there are over 300,000 people buried in Père Lachaise, including Sarah Bernhardt, Georges Bizet and Jim Morrison. But one of the most interesting internees is probably Judah P. Benjamin.

Here’s a question for you, dear reader. Who was America’s finest president?

Chester Arthur? William Henry Harrison? No, Jefferson Davis!

We’re not really serious about that. The War of Secession was a disaster for the South. Davis should have done more to avoid it. A campaign of non-violent resistance, a la Gandhi, for example, might have been more successful.

But who knows. When people get their blood up they’ll do any fool thing you can imagine. A president has to follow them. Because he’s their leader.

So who was America’s best Secretary of State? Maybe it was Judah P. Benjamin.

Benjamin was an accomplished lawyer and planter. Then he became the second Jewish senator in American history and later took the role of Secretary of State of the Confederate States of America. He was invited to join the US Supreme Court twice. Both times, he refused. Once in the US Senate a fellow senator referred to him as a “Hebrew with Egyptian Principles.”

Benjamin replied:

“It is true that I am a Jew, and when my ancestors were receiving their Ten Commandments from the immediate Deity, amidst the thundering and lightnings of Mt. Sinai, the ancestors of my opponent were herding swine in the forests of Britain.”

And when they drove Ol’ Dixie down, Benjamin fled to Britain, where he had another successful legal career.

In some ways his personal life is more curious. He married a woman from a great Creole family in New Orleans. They had one daughter. But his wife decided she’d rather live in Paris, so she took the daughter and left. She spent the rest of her life in Paris, where Benjamin came to visit every summer.

Then, at the end of his career, Benjamin rejoined his family, died in Paris and is buried at Père Lachaise.

Regards,

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.
Bill Bonner

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Comments

  1. Soros says Gold is in a bubble…. He is still holding the stuff though ;)
    I’m guessing he is trying to spook the market into a sell phase so he can buy more

    Meanwhile back at the ranch gold keeps rising….

    The price of gold struck a record high above $US1280 an ounce in Hong Kong trade on Friday.

    The precious metal rose to $US1280.20 an ounce in afternoon trading, after opening at $US1274.00.

    Stillgotshoeson
    September 17, 2010
    Reply
  2. Surely those who bought ten years ago, if there are any left holding gold should be dumping at these all time high prices?

    Or maybe they’re just enjoying the thrill to see how high this bull can climb?

    The real answer is, what are the alternatives?

    I think everyone should take on board the advice of old to keep 10% of one’s net worth in gold. In uncertain times, and this article just reeks of uncertainty or caution – a rising gold price will automatically float your gold holding up to higher levels percentage wise.

    A good strategy could be to rebalance things once in a while (say when the gold became 30%). Sell the excess gold to keep it at 10% overall and invest the proceeds into other assets etc.

    Reply
  3. Comment by Ben on 19 September 2010:

    A good strategy could be to rebalance things once in a while (say when the gold became 30%). Sell the excess gold to keep it at 10% overall and invest the proceeds into other assets etc.

    I rebalanced my portfolio UP to 30% exposure to Gold (mining companies) 20% other shares and 50% Cash.. Portfolio is now around 37% Gold with increases in the Gold Mining Company shares… One of my other stocks is up 27% but the holdings are small so has not really impacted the value of the portfolio much.. (.29%)
    I am expecting more up side to the gold price so will stick with my holdings.. I have reset my stops in light of the increase in share value of those companies.
    I have a sell position, if Gold continues past that I don’t care.. timing the market is a mugs game.. set stop loss/profit targets.. adjust stops as shares rise closer to your profit point to limit profit loss on a reversal.
    eg Buy ZXY at $1.00 set stop at say $.90 Limit losses to 10% Share rises to say $1.45 raise stop to $1.30 If share reverses and you sell at $1.30 you have locked in the 30 cent a share profit..
    I believe there is still too much volatility in the market for a buy and hold strategy for someone my age or younger..

    Stillgotshoeson
    September 19, 2010
    Reply
  4. Shoes: “I believe there is still too much volatility in the market for a buy and hold strategy for someone my age or younger” – That should apply even more so to oldies approaching retirement age I imagine?

    I believe there is too much risk in stocks/bullion/currency for people my age or older who aren’t skilled traders to have significant exposure to them. Not that I’d recommend buying Oz housing at these prices either. But if a correction comes I’ll want in.

    Reply
  5. Comment by Ned S on 19 September 2010:

    Shoes: “I believe there is still too much volatility in the market for a buy and hold strategy for someone my age or younger” – That should apply even more so to oldies approaching retirement age I imagine?

    There are some good income yielding stocks that are attractive, not much growth prospects in the near term but income should be ok…

    Income/Asset/Taxation issues are different for a 55+yo than they are for a 42yo for sure..
    Overweight in any one asset class is not my idea of a good retirement plan..
    Shares, Cash, Property and Superannuation figure in my retirement plan, my plan for retirement is figured differently.. Goals, Plans and direction with flexibility has served me well and I believe it will continue to do so into the future.. a few months ago I rebalanced my portfolio to take advantage of a change in mindset, when I think the time is right I will rebalance again.. I am strong on Gold rising however I still hold a good cash position.. I could go heavier in Gold and PROBABLY make more money.. If I am wrong I could lose too so I have a balance.. Have never been an eggs in one basket person..

    Stillgotshoeson
    September 19, 2010
    Reply
  6. It’s just been a different game at different times over the years for different people Shoes. Both you and Biker value flexibility. I’m a bit more of a ‘stick in the mud’ I imagine. Not that highly motivated. Worst case scenario for me though, should be the home is paid off and I’ll go into retirement on the aged pension debt free with tax free rental income from one house in the name of my SMSF coming in. I’d hope to do a bit better than that of course. Avoi being relient on a p[ension at all even. But if I don’t, my hope is that is I’ve at least established some sort of bottom line that will be enough above penury I can say this is quite acceptable for me.

    Reply
  7. Yes, flexibility is the key, Ned. Along with good health.

    Reading DR(US) today, I was intrigued by the gloomy picture painted on Baby Boomer security in the US. It does not look good for Americans retiring now.

    Over three decades ago we reasoned that inflation might make Australian pensions barely enough to survive on by 2012. The plan we developed definitely exceeded our expectations, to the point where we’ll never get a cent in OAPs. Not complaining about that! :) It remains critically important to be able to take advantage of opportunities and that’s why offsets remain a vital part of our flexible plan… .

    Reply
  8. Comment by Stillgotshoeson on 19 September 2010:
    Your comment is awaiting moderation.

    Comment by Biker on 19 September 2010:

    Yes, flexibility is the key, Ned. Along with good health.

    Reading DR(US) today, I was intrigued by the gloomy picture painted on Baby Boomer security in the US. It does not look good for Americans retiring now.

    Reported Attack Page!

    This web page at http://www.dailyreckoning.com has been reported as an attack page and has been blocked based on your security preferences.

    Attack pages try to install programs that steal private information, use your computer to attack others, or damage your system.

    Some attack pages intentionally distribute harmful software, but many are compromised without the knowledge or permission of their owners.

    http : // safebrowsing.clients.google.com/safebrowsing/diagnostic?client=Firefox&hl=en-GB&site=http://www.dailyreckoning.com/

    Stillgotshoeson
    September 19, 2010
    Reply
  9. Thanks Shoes – Run a scan here and leave DRA to sort it out tomorrow then hey!

    Reply
  10. Just another reason to use Apple products. :D

    Reply
  11. better still, linux (open source, unlike what Aus. Defence forces uses ffs).

    in times of trouble, wont the government demand a hand in of all that gold? I thought that’s what happened in the US in the only Great depression (as opposed to this greater depression). gov’t wants it for the same reasons the owners did, stability and influence. again, in your teeth and never smile at a crocodile.

    Reply
  12. “…better still, linux…”

    As you say, it’s even less a target. We’re penguins from way back.

    “…wont the government demand a hand in of all that gold?”

    Probably have a go at our Super first…! Hopefully ours will be in offsets before they can grab it… . :D

    Reply
  13. This is one that DR might be interested in too. Journo’s get at it for free but we have to pay. I believe that rents might have seen Australia dive on the index from the mid 80’s onward in Australia, with UK a year or two behind, and the mid 90’s in America – but that is an untested assumption. I’m not sure if the report is historical.

    http://www.nber.org/papers/w16352

    The reference came from an article in The Economist

    Standards of living, Beyond GDP
    A new global comparison of standards of living

    Reply
  14. Some News Items

    This is the first of two posts – so that it is not too long. The first post set the scene for an update of the James Scullin, Gough Whitlam and Kevin Rudd Rhyme in light of the recent election and as what it may indicate for the future in light of the American recession ending in 2009.

    In regard to the latter, the quote below is from James Stack’s subscription Newsletter of June 5, 2009:

    “Although it won’t be recognized by the NBER or economists until much later this year, the 2007-09 recession is likely ending this month (in June), plus or minus a month. However, the path out will be much slower… much rockier… and more risky… than the journey out of past recessions. And some lagging statistics, including unemployment, will continue to worsen for months to come. Here’s the most compelling anecdotal evidence…” (“New Bull Market Confirmed,” Market Analyst, p.4).

    * Elaine Garzarelli, President, Garzarelli Capital, Market Monitor, pbs.org/nbr, September 17, 2010:

    Well, we`ve been in a trading range for five or six months. Usually after the initial surge in a new bull market – the market went up 70 percent for the S&P 500 after a recession – the usual case is that the stock market goes into a trading range for six to 12 months. So that is normal. And every time that happens, there is talk about double dips. And I don`t see a double dip, therefore I think we`re going to come out of this trading range, which has been 1050 to 1150 for five or six months…

    Well, my indicators have gone up from 67 percent to 82 percent which is quite bullish. The 100 percent is the maximum, so 82 percent is fairly good. Thirty percent would be a new bear market. I have earnings for 2011 at 86. The consensus now is at 95. So I`m way below the consensus and with the P/E normal of about 15, that gets us to 1300 on the S&P 500. What`s that, 15 percent … That is only based on `11, not based on 2012 earnings.

    * Rodrigo Campos, U.S. stocks to rally as recession fears ebb, reuters.com, September 16, 2010:

    For the Dow Industrials, the median estimate for end-2010 was 11,140 among 25 respondents, which would translate into a gain of 7 percent this year in the blue-chip index. The June poll forecast was for a close at 11,500. For mid-2011 the Dow is now seen rising to 11,620, down from the June poll’s estimate of 11,663.

    But even more negative sentiment can be good news for the stock market. A poll from the American Association of Independent Investors showed late in August bets on future gains were at their lowest since March 2009, the month stocks hit their cycle bottom.

    “I think the biggest (upward) driver is the fact that everybody’s bearish,” said Arthur Hogan, chief market analyst at Jefferies & Co in Boston, who forecast a 2010 close of 1,225 on the S&P.

    * Whitney Kisling, U.S. Stocks Rise as S&P 500 Completes Longest Rally Since June, bloomberg.com, September 10, 2010:

    “I don’t think there’s a whole lot of downside here anymore,” Jeff Saut, who helps oversee about $235 billion as the chief investment strategist at Raymond James & Associates, speaking from St. Petersburg, told Bloomberg Television’s Susan Li. “You got to extremely oversold levels and you got to extreme pessimism levels, equal to the levels we got to in March of 2009.”

    * Edward Krudy, Wall St buoyed by upbeat economic data, reuters.com, September 9, 2010:

    The S&P 500 has risen for six of the last seven sessions. Technical analysts continue to point to a bullish inverse “head and shoulder” formation in the index with a “neck line” at 1,130 that could signal a potential break out to around 1,250.

    “The frustrating sideways action in the S&P 500 and many developed markets belies a burgeoning build-up of bullish demand, which holds the potential to power prices significantly higher over the final stanza of 2010 and well into 2011,” wrote Auerbach Grayson analyst Richard Ross in a research note.

    Reply
  15. James Scullin, Gough Whitlam and Kevin Rudd Rhyme Update

    The Australian Labor party defeated Conservative parties and came to power just as the American post-war booms were about to go bust – post-WW1, 1921-1929; post-WW2, 1949-1973 and post-Cold War, 1991-2007.

    James Scullin Labor PM, October 22, 1929 – January 6, 1932.

    Gough Whitlam Labor PM, December 5, 1972 – November 11, 1975.

    Kevin Rudd Labor PM, December 3, 2007 – June 24, 2010.

    Dow Jones Industrial Average peaks:

    September 3, 1929.

    January 11, 1973.

    October 9, 2007.

    The nominal high in the American blue-chip sharemarket, index the Dow Jones Industrial Average, peaked six weeks before the Labor took office in 1929;

    the Dow peaked five weeks after Labor took office in 1972; and

    the Dow peaked eight weeks before the Rudd Labor government took office in 2007.

    The Great Depression of the 1930s, the Great Stagflation of the 1970s, the Great Recession of the 2000s were the economic backgrounds behind Labor Prime Ministers, who came to power as the Dow Jones was peaking, were in office for just over 2 years, just under three years and two and a half years respectfully.

    Labor was defeated in the December 19, 1931 election.

    Labor was defeated in the December 10, 1975 election.

    “[The Gillard Labor was] the first government since 1931 [that] was not returned with a majority of seats at the end of its inaugural term” (Gerard Henderson, Coalition can lay blame at its own door, smh.com.au, August 31, 2010).

    While Labor has retained government (for how long?) there are some interesting ‘rhymes’ with the 1930s and 1970s in the election. But a couple of quotes to set the scene.

    “The All Ordinaries index [in 2008] also had its worst calendar year on record, plummeting 43%, compared to the 32% slump during the oil shock of 1974 and the 34% fall in 1930, during the Great Depression” (AAP & Reuters, Stocks post worst ever year, @smh.com.au, December 31, 2008).

    “The Leading Index continues to point to a dramatic improvement in growth prospects,” said Westpac senior economist Matthew Hassan…

    “This large swing is not only the fastest reversal since the economy bounced out of recession in the mid-1970s but also puts the growth outlook back on a par with that seen in 2007 at the height of Australia’s resources boom” (Chris Zappone, Economy headed for ‘boom-time’ growth, smh.com.au, February 17, 2010).

    When Rudd defeated John Howard the latter entered the record books, in a way that he would not be too proud of:

    “The declaration confirmed Mr Howard’s position as only the second sitting prime minister to lose his seat at an election, after Stanley Bruce in 1929” (AAP, Howard congratulates McKew on win, @news.com.au, December 12, 2007).

    James Scullin, who defeated Stanley Bruce, was defeated in the 1931 election by Joseph Lyons, who was

    “a Minister in the James Scullin government from 1929 until his resignation from the Labor Party in March 1931. He subsequently led the United Australia Party and was the tenth Prime Minister of Australia from January 1932 until his death” (Wiki).

    Kevin Rudd, who defeated John Howard, instead of being ‘dismissed’ by the Governor-General as occurred with Whiltam, was ‘dismissed’ by Gillard a minister in the Kevin Rudd government from 2007.

    Whitlam was dismissed on November 11, 1975 and was defeated in the election one month latter on December 10, 1975 by the caretaker Prime Minister Malcolm Fraser.

    After ‘dismissing’ Kevin Rudd, Gillard, the new Prime Minister, called an election that occurred just under two months after taking office and as noted above Labor became “the first government since 1931 [that] was not returned with a majority of seats at the end of its inaugural term”. Gillard followed Fraser in that the Prime Ministers, between the “dismissals” and the elections, retained office.

    Where to now?

    When Scullin left office in 1932 there was over a year left of the Great Depression, but once it was over the American economy was to expand for four years.

    When Whitlam left office in 1975 the American Recession of 1973-75 was eight months out of recession, in an expansion that lasted just under five years.

    Rudd left office in 2010 in the same month as the American economy began its climb out of the Great Recession one year earlier, as we learnt today:

    “The worst U.S. recession since the Great Depression ended in June 2009, the National Bureau of Economic Research said today…

    “Marked by a collapse in housing and sub-prime mortgage lending that triggered a global meltdown in financial markets, the 18-month downturn trailed [the] Great Depression that lasted from 1929 to 1933, surpassing the 16-month contractions of 1973-75 and 1981-82…

    “The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the biggest slump since the 1930s, revised figures from the Commerce Department showed in July. Household spending dropped 1.2 percent in 2009, the biggest decline since 1942.

    “The previous contractions in the post-World War II era lasted 10 months on average” (Steve Matthews, Worst US Recession Since 1930s Ended in June 2009, bloomberg.com, September 20, 2010).

    The Prime Ministers, and parties, that won the 1931 and 1975 elections were still in power when the American Recessions of 1937-38, 1980 and 1981/82 respectively, occurred.

    Still looking for a new nominal high in the Dow in the cycle that began in 2009, interest rate increases to counter inflation leading to a Great Depression comparable and most probably worst that the Hoover recession of 1929-33, occurring during a Republican administration.

    Some other rhymes:

    * Sewell Chan, Fed Leaders Show Division Over Deflation, nytimes.com, July 14, 2010:

    The central bank has already held interest rates lower for longer than at any time since the Great Depression, keeping the benchmark short-term interest rate near zero since December 2008.

    * Michael Duffy, Judgment day for bikie brotherhood, smh.com.au, July 5, 2010:

    History suggests this law has the potential to greatly diminish these outlawed gangs. The organised crime expert Bob Bottom has noted how a consorting law introduced in NSW in 1930 wiped out the razor gangs and the cocaine trade, which had been flourishing. The question now is the extent to which the new law will be applied”

    * NewsCore, Curfew imposed in Christchurch, New Zealand after major quake, news.com.au, September 4, 2010:

    Scientists have described the earthquake as the most significant since the 1931 magnitude 7.8 Hawke’s Bay earthquake, the New Zealand Herald reported.

    * Charles Waterstreet, Combat fatigue, smh.com.au, September 5, 2010:

    The tragedy of this war came home during the week when US President Barack Obama announced Operation Iraqi Freedom was over and handed responsibility for security back to the people from whom we took it. Iraqis will no longer suffer from a false sense of insecurity. It was a melancholy reminder of president Richard Nixon’s announcement on January 23, 1973, that Henry Kissinger and special adviser Le Duc Tho had just initialled an agreement ending war and restoring peace in Vietnam. Within two years Saigon fell to the relentless peacemakers from Hanoi. Nixon had called it peace with honour. Thereafter the war would continue by proxy.

    Lyndon Johnson had officially died the day before but in reality he began to die when he realised as president that the war was unwinnable and unrewarding but there was little he could do about it. There does seem to be a bit of deja vu.

    * David Leonhardt, For Blacks, Progress in Happiness, nytimes.com, September 14, 2010:

    In 1975, per capita black income was 41 percent lower than per capita white income. Since then, the gap has shrunk only modestly, to 35 percent. The black unemployment rate today is nearly twice as high as the white rate, just as it was in 1975. And by some measures – family structure, college graduation, incarceration – racial gaps have actually grown.

    Reply
  16. So, summing up watcher7, nothing ever changes.
    Groundhog decades.

    Reply

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