Power Begets Gold, then Gold Begets Power

The financial world is slowing down. Analysts…economists…and blabbermouths are getting ready for the holidays. The news flow is quieting. The noise is abating.

So, let’s talk about gold. But first…a note about the little train that couldn’t.

The Eurostar connects London and Paris. Last Friday, several trains entered the tunnel and stopped. According to the press reports, the weather was unusually cold in France and unusually warm in the tunnel, causing some sort of malfunction and stranding 2,000 travelers under the dark water and thousands more on both sides of the channel. It was a blow to France’s pride; the French consider their train technology to be the best in the world. Yesterday, President Sarkozy called the head of the Eurostar and chewed him out…and this morning, the trains were meant to be running again.

We rose at 5AM to rush to the Gare du Nord, so we could get the 6:43 to London.

“You’re going to take the Eurostar,” said the taxi driver with a laugh. “Well…good luck…”

When we got there, it was obvious something was wrong. Passengers weren’t lining up in an orderly fashion. Instead, hundreds of travelers who had been waiting three days for a train formed a miserable, complaining mob. We were just trying to figure out what was going on when a phalanx of police came down the steps, followed by another group of Eurostar staff members. They wandered around…formed up the passengers into lines…answered questions and then, nothing happened. We waited. We waited.

“This is intolerable,” one French passenger yelled at a young woman in uniform. “You people have no respect for your customers. We’ve been waiting days to get back to our families…and you treat us like cattle. It wasn’t our fault the trains didn’t run as they were supposed to. It was your fault. And you should have done a better job of dealing with the trouble you caused.”

A murmur of approval went up from the crowd. The clerk walked away. We waited. Finally, after half an hour, your editor gave up. His business in London could wait. We walked over to our office, only about 20 minutes away on foot.

Now…back to gold…

The price fell $15 yesterday, to close below $1,100. We expected a correction in the gold market. But we thought it would come along with a correction in the stock market. Stocks rose 85 points on the Dow yesterday.

We take this as a warning: something is going on that we don’t understand. That said, there’s a lot going on that we don’t understand.

But the broad patterns generally make sense. Boom was followed by bust. As dear readers know, the force of a correction is equal and opposite to the deception that preceded it. The deception of the Bubble Era being exceptional, the correction would be exceptional too – even under the best of circumstances.

But these are not the best of circumstances. Because several other things are happening…things that need to be reckoned with, too.

  • The US is losing its privileged place in the world. Americans now compete with many other people in many other places for the world’s resources – including its savings.
  • The international monetary system, an experimental system built of paper dollars, may be falling apart.
  • The days of cheap and bountiful energy are over.
  • Governments are going broke. State governments. National governments. In Europe. In the Middle East. And in America.
  • The engine of economic growth – Americans’ willingness to go into debt in order to consume more and more of the world’s output – has gone into reverse.
  • And, governments are meddling on an unprecedented scale…delaying and avoiding necessary adjustments, possibly turning an ordinary depression into a Great Depression…or even a Much Greater Depression.

These are not small challenges. Any one of them would be a worthy crisis on its own. Put them together and you have the makings of a catastrophe.

What will happen? Don’t know. Wish we did.

A series of mini-disasters? Or one big planet-wide blow-up?

Or, are the authorities so smart that they can engineer trouble-free solutions to these challenges?

If you have confidence in Obama…Bernanke…Geithner…Congress…the European Central Bank…the Bank of China…and so forth… Well, you have no business reading Markets and Money! Heck…let them figure it out. Everything will be fine. Go back to the TV…

If, on the other hand, you have a sly suspicion that the authorities are headed for the rocks…you should own some gold. Traditionally, gold is what people buy when they are afraid things might not work out as planned.


As near as we can tell, gold is fairly priced. It will buy about as much as it would have bought 500 years ago…or 2,000 years ago, for that matter. That’s what’s nice about it. It doesn’t make you any money, but it doesn’t lose you any money either.

Of course, the price of gold can still vary substantially. In the last bull market in gold – from the trough in ’67 to the peak in ’80 – gold rose 1550%. That was a good time sell. The next two decades saw the price sawed in half…and then sawed in half again.

Now it is going up again. Most likely, it is merely adjusting to the inflation of the previous three decades. Or perhaps it is anticipating more inflation ahead.

As to the inflation ahead, we’re not so sure. There’s probably a long, dark, cold period of depression to go through before we get to the heat of hyperinflation. But then…who knows? As those challenges listed above hint, anything could happen.

Here at Markets and Money we are neither bullish nor bearish on gold. We don’t know whether it will go up or down. But as to our confidence in human beings, we have no doubt. In our opinion, the world’s most popular economists – notably Ben Bernanke and Paul Krugman – would probably make fine bartenders. They are good at providing ‘liquidity,’ and not much more. They have no idea what is happening in the world of finance…and their idea of what to do about it will almost surely make things worse. Meanwhile, we feel we can count on Congress and the president too. The nation may already have a net worth of MINUS $70 trillion (according to John Williams of ShadowStats)…but they will surely keep spending until the nation goes broke.

Typically, power begets gold…then gold begets power…and then both gold and power are begotten by someone else. The world never stands still, even for someone with a million dollars’ worth of Krugerrands in his home safe.

The BRICs – Brazil, Russia, India and China – are begetting power. Their economies are growing much faster than the developed, mature economies of the west. They grew by selling products – often in dollars. This left them with dollars as financial reserves. They have little gold.

For a very long time, dollars were ‘as good as gold’ – or almost. But now the power equations need to be reworked. The BRICs are gaining power…but find themselves still hostage to America’s paper money. Inevitably, they’re going to follow India’s recent example…as well as the example of practically every nation to gain power throughout history; they’re going to add to their supplies of gold.

A rising power acquires gold. A fading gives it up. The US has more than 8,000 tonnes of gold…nearly 80% of its reserves. Meanwhile, China – America’s most likely rival for superpower status – has only 600 tonnes of gold. It keeps less than 1% of its reserves in the yellow metal. Put all the BRICs together and you get 1,500 tonnes, less than a quarter of the US hoard. And the BRICs have 10 times as many people.

Official purchases of gold by central banks have been negative for many years. They still are. In the 2nd and 3rd quarters central banks sold more than they bought. Imagine if they suddenly went positive! If the BRICs wanted to bring their reserves up to just half the level of the US, they’d have to buy 2,500 tonnes.

Until tomorrow,

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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Paul Murray
“The US is losing its privileged place in the world.” The US did not simply acquire 25% of the world resources in exchange for nothing. The equation was simple: the US sold *security* to the pontentates of the oil-producing nations – buy which we mean *protection from their own populations*. In exchange, the US received unlimited quantities of oil, by way of the price being denominated in US dollars, which the USA simply prints. President Barack Obama recently admitted that the main (if not only) reason for spending money to help the domestic civilian scene is that the military relies… Read more »
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