Gold Doesn’t Always Need Inflation to Rise

How are we doing? Our Trade of the Decade, that is?

Yesterday, gold took a big dip down – minus $15. It closed under the $1,000 level. Now we’ll find out if the Chinese are supporting it at $1,000…or not.

If so, it should soon bounce back. If not…well, who knows?

But our Trade of the Decade doesn’t worry about what the metal does on a day-to-day basis. Back in 1998, we just noticed that the gold/stocks relationship had reached an absurd extreme. It took 43 ounces of gold to buy the Dow stocks. We figured that ratio was bound to come down.

It has. At today’s prices, you can buy the Dow for less than 10 ounces of gold.

David Rosenberg looks at 10-year returns by asset class. Here’s his chart:

Buy gold on dips; sell stocks on rallies. It was good advice 10 years ago. Is it still good advice?

Of course, it depends on what happens next. If the feds succeed at inspiring growth without also causing higher levels of inflation, gold will be a bad place for your money – relative to stocks. But here at Markets and Money we are cheerfully, confidently, and calmly enjoying a depression. We don’t think it will stop any time soon.

What that means to us is that stocks are not likely to go up. And we don’t expect inflation to increase anytime soon either. So, as to gold itself, that puts us in an ambiguous position. On the one hand, depression will probably not push up gold prices – at least, not at the beginning. On the other hand, it won’t push up stock prices either.

On the one hand, the economy is probably going to sink further. Yesterday’s news brought the rally in stocks to a halt. The Dow lost 41 points after it was reported that the rate of existing house sales had fallen in August, following 4 months of gains.

But it’s very hard to make a diagnosis on this patient. He’s so doped up.

The Fed pumped $2 trillion worth of drugs into the economy. It won’t say exactly what elixirs it used…or what veins it put them into. But all this money must have an effect. Federal employment, for example, is rising.

Here, an aside. When people get government jobs, the employment numbers increase. But is the economy better off? It depends on what the people are doing, doesn’t it. If you think additional federal workers add to our prosperity or the quality of our lives…well, you probably shouldn’t be reading Markets and Money. In our view, the feds already had too many parasites on the payroll.

But if the feds can make the world a better place, let’s hire more of them! Heck, let’s all work for the federal government.

Even with rising federal employment, the economy is still sinking. One headline tells us that luxury hotels may be headed for bankruptcy; their $850 rooms are empty. Another tells us that there are people living in the drainpipes under Las Vegas. Obvious solution: give the drainpipe people jobs with the government…and put them up in the luxury rooms! Hey…they can call room service and stimulate the economy even further.

The US Post Office has a problem too. It may need a $4 billion bailout, says one news item. Another tells us that ‘exhaustion’ has hit a new record. ‘Exhaustion’ refers to people whose unemployment benefits have run out. Apparently, more than half the unemployed run out of benefits before they find a new job – more than ever before.

Which brings us to the other hand. Without a real recovery in the real economy, the feds are going to keep their hands on the pumps. While the depression decreases the odds of inflation…the feds’ reaction increases them.

Of course, gold doesn’t always need inflation to rise…and stocks can do what they want.

So let’s see…economy sinking…should be bad for inflation. But maybe not…

Or, economy sinks with falling prices…should be bad for gold. But maybe not…

Or, economy improves…should be good for gold. But maybe not…

On the one hand…on the other hand… Harry Truman once remarked, “Send me a one-armed economist.” We’re tempted to cut off one of the hands ourselves.

But let’s forget the hands. Major trends tend to run in long, long cycles. Consumer credit has been expanding since 1945. It is contracting now. That trend is not likely to end after just six quarters. Instead, it is likely to continue for a long time. And it is likely to inspire tremendous exertions to stop it on the part of the feds. As to the exact type of ‘flation that will result, we can only guess that there will be more of it. As to stocks, we guess that they will decline – in real terms – as long as the credit contraction continues. And as to gold, it is sure to go up and down.

At $1,000, is gold cheap?

The first car we ever owned was a ’37 Buick that we bought in the ’60s for just $75. It ran well. The only problem it had was a dented trunk door. New, that car cost just $825 – or about 24 ounces of gold.

Today, 24 ounces of gold is worth about $24,000. Can you buy a new car for that? Well…yes, you can. But not a new Buick. The 2009 Buick Lucerne sells for more than $29,000. So maybe gold is a little low. But not much.

In a stable, prosperous and growing economy, $1,000 gold might be no bargain. But what about a world that is probably in a multi-year depression…that the feds are fighting with trillions of dollars’ worth of new cash and credit? What about a world where the world’s largest debtor is borrowing another $9 trillion over the next ten years? What about a world where the imperial power is losing its grip? What are the odds that something will go wrong? What are the chances that the feds will miscalculate? And what will happen if they do? Possibly, the depression will deepen…and $1,000 gold will seem too expensive. Possibly, the feds will add too much new money to the financial system, causing a new bubble in gold. Possibly, the Chinese will dump the dollar…causing the dollar and the US bond market to collapse.

Too many ‘possiblies.’ Too many things we know we don’t know. And too many things we don’t know we don’t know too. And too many things about which we have no clue. We’re tired of thinking about it.

Until the picture becomes clearer, we will stick with our trade…buy gold on dips, sell stocks on rallies.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "Gold Doesn’t Always Need Inflation to Rise"

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Coffee Addict
The re-emergence of racist and elitist red & yellow peril crap everywhere you look basically seals the fate of western economies. Actions to limit Chinese access to so called strategic resources are but one tangent of this stupidity. IF the Keynesian inspired “kick” starts were to achieve anything an “orderly” baton change was required. The banks would remain open and business would continue with trade off consumer inflation as a backdrop. Low interest rates and a bit of stimulous (it was hoped) would give Eastern economies the breathing space required to ramp up consumption within their own spheres. Protectionism and… Read more »
Greg Atkinson

The problem here is the graph that Bill is using is flawed because it is only looking at capital gains. This is the oldest trick in the book, forget tax, dividends, rental yields etc then pick the best time frame for gold and bingo…it really does shine! (and remember this is all in USD terms, so Australian readers beware)

Is the richest man in America a gold trader? fact last time I checked gold traders were not even in the top 20…so what does that tell you?

“What about a world where the imperial power is losing its grip? What are the odds that something will go wrong? What are the chances that the feds will miscalculate? And what will happen if they do?” What if the feds are not miscalculating? There is as much chance that they know where it’s all headed, and want to make sure as hell it heads there (perhaps they are just putting too many nails in the coffin, and people are noticing). They are smarter than we give them credit for. A strong America is a barrier to the ascendency of… Read more »
Greg Atkinson

Coffee Addict it seems one minute the Chinese are our best friends and we want them to buy our stuff and the next minute they are a security threat. It seems to be a curious relationship we are having with our biggest trading partner. It is also interesting how the Chinese cannot buy a stake in a miner that digs stuff up around Womerra but they would be free to buy real estate sitting right next to the Garden Island naval base. Strange.

On gold and Nixon, I always wondered if the Simpson’s Mr Burns and Arthur Burns had any correlation? Note the cc copies to Mr Greenspan and how deep Kissinger was in on every issue. The biggest point for mine though was that of the underlining manipulation of gold reserves and the threat from Europe to kill it to out the US anyway. This and the fact that from way back to the early 20th century that gold reserves standing behind has proved to have had little to no ameliorating or suppressive effect on containing inflation are central tenets of… Read more »
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