What is going on in the gold market? Our favorite metal fell below $645 yesterday. Gold prices have gone nowhere in a year. Gold bugs are beginning to wonder. Is it time to give up on gold and embrace the Great Worldwide Credit Bubble?
We wouldn’t do that.
We are still in what Mises referred to as a Crack Up Boom. It is a great boom, to be sure. Prices of all sorts of strange assets – including Zimbabwe stocks – are going up. But they are going up not because they are becoming inherently more valuable, quite the contrary. They are going up because of inflation. There is much more purchasing power in the world. Much more liquidity. Much more cash and credit – concentrated at the upper end, where people tend to buy high-priced items.
There is no particular reason why a painting or a house should be worth a lot more today than it was 10 years ago. It still gives exactly the same service. It’s just that there is more money bidding for it.
For the moment, this inflation is loved by everyone – because it is boosting asset prices, not so much consumer prices. Still, consumer prices are starting to budge upwards, too – especially in the exporting countries, such as China. As basic costs increase, so does the incentive to use its great pile of cash to pay them – rather than recycle the money into the world credit system. Sooner or later, foreigners will tire of funding U.S. and British excess consumption. They will find it more appealing, or more urgent, to finance their own consumption. Then, the cost of financing will rise. M&A activity will decline. Companies, deals and households that depend on low-priced credit will go belly up. And the credit bubble will be over.
We don’t know when…or even how…this will come about. But at the end of a Crack-Up Boom the currency cracks along with asset prices. When that happens people will wonder what their own dollars, yen, euros and pounds are worth. A few will want to lay in a little gold just in case. Perhaps even a few central banks.
Gold has been in a bull market for almost exactly eight years. The price has risen from $256 to over $700…and since backed off to below $650. Anything could happen, but it would be an odd bull market in gold that produced so little excitement. And it would be an odd Crack-Up Boom that produced so little fear and destruction. And it would be a damned odd world in which a bunch of government employees in central banks could create a truly lasting New Era in monetary history.
No, dear reader, don’t worry. This bull market in gold is far from over. This New Era of paper money, backed only by faith, will crack up. Sooner or later, as we keep saying.
Markets and Money