Welcome To The 300 Club HUB On AGORACOM
We may not make much money, but we sure have a lot of fun!
Message: All this talk and Stuff in the news about GOLD. Should we buy it?
| Why the Gold Bull Market Will Continue to Charge Ahead | |||
Stocks are plunging again today as we go to press. The Dow Jones Industrial Average is down a whopping 500 points – back below 11,000...AGAIN. Meanwhile, most European markets are off more than 5%. In other news, a small biotech company, Medicinal Genomics, announced today that it has successfully mapped the DNA of marijuana. Also, President Obama leaves today for a vacation. A mere coincidence? Returning from dreamland to the real world... Gold is making headlines again this morning by jumping $30 to a new record high above $1,800 an ounce. Gold has been making a lot of headlines these days – both because of the success it has achieved and because of the failure that so many investors seem to anticipate. Despite the fact that gold has soared more than 500% during the last decade, most professional investors still refuse to embrace the precious metal as a respectable asset class. Gold remains a relic. A has-been. A roll-your-eyes investment. Gold is like a prostitute that becomes a brain surgeon. No matter how accomplished a surgeon she may become, most folks will still consider her a hooker, not a doctor. That’s unfortunate, especially if you happen to need brain surgery. Right now, the entire world needs a kind of monetary brain surgery. Gold can handle the job. So don’t let her skin-tight spandex shorts and her stiletto pumps fool you; this gal can do things with investment capital and personal savings that paper currencies can only dream about. Gold can preserve wealth. It has for several millennia. That’s a track record worthy of at least a 5-Star rating from Morningstar. Here at The Daily Reckoning, we have liked gold for a long time. We still like it. Back in 2000, Bill Bonner named gold his “Trade of the Decade.” And we have been singing gold’s praises ever since. Bravo for us; we got it right. And so what? Most of us care more about what will happen next than about what has already happened. And in the case of gold, most of us want to know if this spectacular decade-long advance can continue. In other words, is gold a “Buy” or a “Sell?” It is a “Buy,” dear reader. At least that’s our guess. We continue to trust gold because we continue to distrust the politicians and Central Bankers of the West. Actually, we do trust them; we trust them to pursue irresponsible fiscal policies and reckless monetary policies. Take a close look at the chart below. Notice that the gold bull market did not kick into overdrive until late in 2008, right about the time the Hank Paulson’s Treasury Department began his ex cathedra dispensations of cash to financial institutions deemed “too big to fail” or merely, “too well connected to fail.”
Hank’s initial $125 billion handout on October 14, 2008, seems almost quaint in the context of the bailout orgy that followed. Throughout late 2008 and early 2009, Paulson’s Treasury and Bernanke’s Fed colluded to funnel trillions of dollars of direct bailouts and indirect subsidies into the bombed out balance sheets of selected financial institutions. Most of these dollars had not even been born yet. They were not even a twinkle in Ben Bernanke’s eye. But Ben went to work right away. He went into the private recesses of the Federal Reserve and started procreating billions of little Benjamins, Andrews, Alexanders and Abrahams. The gold market picked up immediately on this salacious monetary activity, by more than doubling since late 2008. But here’s the really interesting thing: while the gold price was doubling, the rest of the commodity sector was doing nothing. That’s not unprecedented, but it is unusual. As the left side of the chart above shows, gold tends to move up and down with the rest of the commodity sector. But that correlation ruptured in late 2008. Since then, commodities have been slumping, while gold has been soaring. In other words, the commodity markets are saying that the global economy is in trouble; while the gold market is saying that the dollar is in trouble. We agree with both markets. In general, we are confident in the collective incompetence of the individuals who purport to “safeguard” paper currencies. In particular, we are confident in the collective incompetence of those individuals who are safeguarding the euro and the US dollar. Those two pieces of paper are a “Sell,” dear reader, which makes gold a buy. The euro is an immediate “Sell,” which means the dollar might be a short-term “Buy.” But we’d sell the dollar anyway and buy gold. Why mess around with short-term, counter-trend moves? The dollar’s primary trend is down, not up. A growing number of dollar-holders seem to agree. Over the last couple of years, the central banks of China, India and Russia have been swapping some of their vast pile of dollars for gold. Many lower-profile nations like South Korea, Thailand and Mexico have been boosting their gold holdings as well. And now comes our favorite “investment strategist,” Venezuelan President, Hugo Chavez, promising to sever his country’s foreign reserves from the “dictatorship” of the US dollar. Chavez announced yesterday that he does not merely wish to sell all his country’s dollar reserves for gold and a basket of non-dollar currencies, he also wants his country’s gold to sit where he can see it and touch it. According to Bloomberg News, Venezuela will shift its cash reserves “into currencies from emerging markets including China, Russia, Brazil and India...” Additionally, says Bloomberg, “Chavez will move forward with a proposal to repatriate as much as $11 billion of gold reserves held in the US and Europe as part of a plan to shift assets away from American institutions.” What’s he worried about? The US government would never confiscate his gold, would it? We confess, dear reader, it is very hard to buy gold after it has already been rocketing for more than a decade. We must admit; it makes us nervous to buy gold at $1,800 an ounce. But strangely, it makes us even more nervous not to. Bill Bonner makes the case in the column below... |
|||
height="1">
|
|||
| Is Gold Still a Buy? | |||
Meanwhile, Wells Fargo, among others, is warning of a ‘bubble’ in gold. Is there a bubble in the gold market? An AP report explains why people are buying gold: In October 2007, it sold for about $740 an ounce. A little over a year later, it rose above $1,000 for the first time. This past March, it began rocketing up. On Wednesday, it traded above $1,793 an ounce, just shy of last week’s record of $1,801.But wait....there’s more to the AP story: Sharlett Wilkinson Buckner, of Humble, Texas, recently took an old bracelet, ring and necklace to her local jeweler and walked out with $1,070.Do you see what we see? The average person is still ‘out to lunch.’ He has no idea what is happening. Desperate for cash, he sells gold in order to load up on – paper! Of course, it may turn out to be a good move. At least, in the near term. The whole world is drowning in a tub of debt. As debt drains away – we are in a Great Correction, remember, a period of debt- reduction – ‘money’ goes down the drain too. In an expansion, the banking system turns on the taps. It magnifies purchasing power...by making loans. In a contraction, purchasing power goes down...as loans are repaid or written off. A $100,000 loan that is repaid reduces the ‘money’ supply by $100,000 (unless it is lent out to someone else). In a fractional reserve banking system, a loan that can’t be repaid...reduces the money supply by as much as $1 million. It wipes out the bank’s lending capital, forcing it to reduce its loans outstanding. This de-leveraging process should help support the value of the dollar and reduce the demand for gold as a refuge. But so far, gold is still going up. And in the long run...after the feds have intervened...it should soar. Here’s our old friend Doug Casey on the subject: I hate encouraging people to buy gold at $1,800 an ounce, because that level is already more than 700% above the bottom in 2001, and I’m a bottom fisher. I like bargains, and I can’t call gold a bargain today. But it’s plain as day that gold is going to go higher. There’s simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values. What else could people buy as they get more and more afraid of paper currencies losing acceptance? What are corporations going to do with the billions of dollars in their treasuries when their management gets frightened? Where else can they go when they need to get rid of dollars, euro, yen, and yuan? Central banks, too – what will they do when they need to dump dollars in favor of something that will hold value?Gold is fundamentally a bet that the financial authorities are losers...that the world’s paper-based monetary system is headed for destruction, and they can’t stop it. It is a good bet. Regards, Bill Bonner |
New Message
Please
login
to post a reply