“Oh yes, we met a couple of years ago,” said a new friend at a party last night. “You said to buy gold. At the time I thought it was a little flakey…buying gold, that is. But then the price went up…and I thought of you.”
“Well, it isn’t going up now,” we replied. “But we wouldn’t give up on it. Not yet. Most analysts think the crisis in the financial sector is pretty much over. They think we’ve seen the worst. They don’t expect any more major banking failures. They think the dollar is coming back. And they expect the rate of inflation to moderate. They’re looking for a huge soft landing for the entire world economy.
“But financial analysis, at least on this kind of macro level, is mostly fraud. It’s impossible to keep track of all the various inputs – many of them purely psychological or emotional – and make a logical judgment about what will happen. You can form an opinion. But your opinion is usually driven by some kind of philosophical prejudice. Say, for example, you just don’t like to see all those Wall Street hotshots making huge bonuses for doing something that you know is mostly a kind of razz-ma-tazz designed to wow the little guys in the market. Then, you’re sure that they’re going to get their comeuppance, one way or another. So you look around and try to find justifications for your point of view. And there are so many facts and theories around, you can always find whatever you’re looking for.
“You know, things in the financial markets have been going very well for a very long time. Major stock market indices are down only about 15% from record highs. No major economy is even – for now – in a recession. Unemployment in the U.S. still hasn’t risen to 6%. Gold is no higher than it was 28 years ago – in nominal terms. People still lend money to the world’s biggest debtor – the U.S. government – at only 3.94% for 10 years. And the dollar is still taken as a ‘store of value,’ even though there are trillions of them in central bank vaults…and a whole rickety tower of dollar-based credits reaching up to the sun.
“But investors talk as though it were the end of the world. It’s not. It’s only the beginning of a major correction…and probably, only the beginning of the beginning.
“And when it is over, people will want more than 10% yield before they will lend to the feds. The world’s monetary system will probably have collapsed and been replaced with something new. Stocks will probably sell for less than 8 times earnings. Ten percent of the U.S. population will probably have gone bust – that’s 30 million people. And gold will probably sell for more than $2,000 an ounce.
“Of course,” we had to admit, “between here and there, anything could happen.”
Markets and Money