The Price of Gold Has More Than Tripled

Friday, the Dow rose a big 189 points. Gold fell a big $14.

Readers will note that these trends are opposite to the way we think things ought to be going. For the entire decade, we’ve been long gold and short stocks. We’re going to stay in that position for the rest of the decade too – unless we lose all our money or think of a convincing reason to change.

So far, neither has happened. The price of gold has more than tripled. Stocks have mostly gone nowhere. And nothing has happened to make us think that the fundamentals are different today than they were in 2000.

The debt bubble has been only partially deflated. Americans are still living beyond their means. And the people who run America’s central bank and its central government are still numbskulls.

What then, to make of yesterday’s price trends? Maybe the Bernanke Fed and the Bush feds have won the battle; maybe they’ve succeeded in keeping the economy growing. Maybe the dollar will strengthen. Maybe gold will continue its death march, back down to where it began the decade – under $300. Maybe we’re the numbskulls.

Yes, and remember the feds “rebate” program? This week they began sending money they don’t have to people who didn’t earn it. It’s supposed to encourage consumers – who’ve been spending too much already – to spend more. Maybe it will work after all.

And the Fed’s latest interest rate cut – down to 2%…maybe that will work too.

And maybe enlightened public officials really can improve the world. When people have made errors – as they inevitably do – the feds can somehow make the errors disappear. They can pass laws and jiggle policies…and abracadabra, instead of suffering a correction…the whole thing is forgotten and it’s on to bigger and better things.

Which makes us wonder what went wrong in ancient Rome and modern Japan. The Romans tried every trick – from price controls to inflation to giving away bread (similar to the ‘tax rebate’ program). Still, the economy deteriorated. From the period which Gibbon considered the happiest and most prosperous of man’s history – the age of the Antonine Caesars – the empire slipped and slid…and finally collapsed into the Dark Ages, which lasted nearly a thousand years. Of course, the Romans did not have modern central banking. But the Japanese did. Their central bankers read the same books as ours do. They believe the same theories and have the same wrenches and pliers in their tool belts. How come they couldn’t fix whatever ailed Japan Inc.?

We don’t know. But yesterday, it looked like the U.S. authorities had things in hand. The U.S. economy is still growing, though barely. General Motors’ stock rose…and Citigroup found that it could raise even more money than expected.

Gold, meanwhile, continued its correction.

“What the wise man does at the beginning the fool does at the end,” says Warren Buffett. No doubt, the wise man bought gold below $300. But were they fools who bought over $900? We don’t think so. As near as we can tell, we are not at the end…we are still at the beginning of a monumental trend.

The credit bubble developed a major leak last year. Banks wobbled. Credits plunged. Hedge funds went broke. And the feds panicked. Bernanke and Co. pushed $200 billion in new cash and credits into the marketplace…and cut rates seven times. It was clear that the authorities had no interest in protecting the value of the dollar; they were desperately trying to avoid a serious correction. Naturally, gold went up.

Then, the markets calmed. It began to look as if the Bernanke & Bush team might win. Martin Feldstein, head of the National Bureau of Economic Research and a close friend of Ben Bernanke, said on television that 2% would probably mark the end of the Fed’s rate cuts. With no more rate cuts in sight…and an economy that seemed to have survived the crisis…speculators thought it was time to lighten up on gold. Silver too.

But what has changed? Oil is still over $100. The Chinese economy is still booming – with the manufacturing sector reportedly expanding at a record rate. Emerging market demand is so strong, it is holding key commodity prices up – even as demand from the United States eases off. In America, people are switching to smaller cars…but in other places, they’re buying so many new cars that gasoline use is still going up.

Which puts Americans in an even tighter jamb. A slowdown in the U.S. economy used to bring a bit of relief. Americans earned less…but prices fell too. For example, when Paul Volcker put up rates in the early ’80s, it caused a major recession. But it brought good news too – the higher rates rewarded savers. Higher rates also attracted money to the dollar; the greenback rose, which lowered prices.

Now, unemployment in the United States has reached a four-year high…but prices are still going up. Oh, dear reader, what have our geniuses really wrought? Americans’ earnings and assets are going down…while their consumer prices are going up – and their leaders congratulate themselves on having saved the economy from a correction.

A correction is just what the economy most needs, in our humble opinion…and what it is still going to get.

Bill Bonner
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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2 Comments on "The Price of Gold Has More Than Tripled"

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The excrement must hit the fan sooner or later for the distorted US financial markets. The US Fed’s welfare for banks and Wall St, their arrogant disinterest in inflation thereby trashing savers, their promotion of consumerism with free money programs, are all chickens that must eventually come home to roost.

Jon Bain

In retrospect on this. A great prediction Bill.
Much respect.

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