Dan Fitzpatrick

There seems to be an inability to really explain the move in gold among the financial media. I'm not being critical of them at all and actually do understand why they don't understand it. It has to do with personal bias and experience -- there is a contingent of investors, money managers, writers and market commentators that will always be bullish on Gold. So the folks in financial television and in print treat gold bulls as just another fixture in the market. "Hey, bring on John Doe of "Gold Forever Partners" and have him talk about gold. He was great last time, and got shredded by Joe Schmo of "We're Bullish on Everything Except Gold Partners." Great segment, so let's do that one again!"

So the issue of gold is one that is hardly given a second thought. As such, commentators have just stopped listening to the arguments. They don't respect them.

They should!

Here's why.

Wealthy people value money more than "non-wealthy" people. How do I know this? Well, because they have a lot of money. The truth is self-evident. And the funny thing about wealthy people is that, when they loan money, they want to get paid back.

When you buy bonds, you are loaning money. 95% of investors will never buy a bond. Never! Why? Well, because they are not wealthy and bonds are seen as a protective strategy -- you are loaning money with a guarantee of an income stream. Rich people like that...because they value money and like the safety of the fixed income stream that bonds provide.

Lending to sovereign nations is the ultimate in safety. When you buy a US Treasury bond, you are buying the ultimate in safety. Uncle Sam does not default. Ever. So US Treasuries don't pay very much, but they do pay. Bonds of other nations tend to be a bit higher in yield, but they are still quite low.

Corporate bonds (where a company sells bonds to buyers [i.e., the company is the borrower, the buyer of the bond is the lender]) tend to pay a bit better because they are not quite as safe as sovereign debt (i.e., US Treasuries, German Treasury bonds, etc). The difference is the "spread").

When sovereign debt goes up too high (Greece is the ultimate example, but it's just slightly worse than many other nations, including the U.S.), the rich people who loan to those countries want more for their money. They won't buy a bond unless the yield is higher. When that happens (and it is happening now), the price of the bond goes down.

And since corporate debt is always seen as more risky than sovereign debt, corporations have to pay more in interest if they want to borrow money (i.e., sell corporate bonds). So their cost of money goes up...which impacts their ability to borrow, and also impacts the benefit of borrowing money -- they can't grow their business as fast, and can't hire as many people as they'd like to.

But think about this for a sec. This is really a domino effect that starts with government debt. When a government starts borrowing excessive amounts of money, the ultimate impact on the price of money effectively "crowds out" private enterprise. Private industry can't grow as fast. And since private industry generates all the tax revenues that governments feed on, tax revenues drop...which means that governments raise taxes. Higher taxes further impede business growth because more of their profits must be paid in taxes.

And on...and on.

Well, we now finally have a situation where an actual nation might default on its obligations. I.e., those evil rich people who loaned money to Greece by buying its bonds want their money back when it comes due, and it is well known that Greece is bankrupt. They won't get their money back.

Now, most people with less than robust logic don't understand this stuff. They just figure "Oh well, things will work out because they always have." Rich people don't see things that way. Again, they respect money and have a lot of it at stake. They arent the type of people who will just say, "Oh, Greece. I see you're having a problem paying all of your public retirees who are 48 years old and you might not be able to pay me back. That's OK. I'd hate to see those folks not get what you promised them, even though what you really did was promise them benefits that you were counting on me to pay for. No sweat! I have a lot of money and can afford it. Just give me a jingle on the telephone when you have the dough."

Instead, they take action. They'll pull their money and sell their bonds at a cheap price...which raises the yield on those bonds even more...further hurting the debtor nation.

Currently, these evil rich people who everyone loves to hate are looking around the globe and they're not seeing much that they like. They are seeing the US take on piles of debt like never before. And doing so unapologetically, with no accountability. While the public largely buys the argument of "Hey, we had to do this...but we avoided a depression", the rich folks don't. They understand that such a statement is not provable -- it's just rhetoric. They see this type of logic, and they see that the logic is largely unchallenged, and they ultimately see the writing on the wall.

And they don't like that graffiti. They start to look for a safe place to put their money. They're not gonna buy the Euro -- that's a disaster that never should have happened. All these independent nations with varying degrees of socialism as a business model in bed together on a common currency was never a good idea, though it sure seemed so at the time. They're not particularly interested in owning the dollar (via buying U.S. Treasuries) longer term, though they are certainly buying it now (we can see that in the chart). They realize that the U.S. will ultimately go the way of Greece...they're just not sure when.

Again, the press misses this stuff for various reasons that I won't go into here. They don't connect the dots. But rich people are rich because they can connect dots. They see this coming.

So what are they doing? They're putting their money into a physical thing: Gold.

And THAT is why gold is rising along with the Dollar. They tend to run inversely, but that's not the case right now.

If you want to do what rich people do, then you need to be involved in gold. They are.

You can buy into the "class warfare" argument all you want. It is everywhere. People criticizing those with money and believing that those "evil rich guys" are the cause of everything that's now wrong with the system. But if you'd like to instead think a little deeper and connect the dots, you'll find that the blame does not lie with the wealthy. The blame lies elsewhere...and the wealthy are doing what they always do. That is, they are protecting their money because they respect it. They are inherently "risk managers", which is why I always emphasize the need to manage risk.

If you want to be rich...then do what rich people do!

Dan