Why the Price of Gold Goes Up in a Struggling Economy

We’re not exactly in Las Vegas. Not yet. But we’re on our way. Yesterday, we had a funeral in Paris. Today, we have a speech to give in Las Vegas.

This is not the way we planned it. It’s just the way things work out.

Yesterday was a bit of a letdown. After having hit a new record high on Tuesday, gold decided to take it easy on Wednesday. The price slid $3.

Stocks, meanwhile, showed a little progress. Not much.

So we still have no clear trend. We wait. We wait.

For a while it looks like the next leg down has finally begun. Then, it looks like we’re in for another rally.

The only sure thing, so far, is that gold goes up. Even that is not really sure…but it is surer than just about everything else.

Our dear readers who bought gold back in 1999 have made about 4 times their money. This year alone it is up 15% – a very respectable return. Most of that has come as a result of paper currencies going down. Investors are buying gold to protect themselves.

They may also be getting a little insurance from a much more serious level of inflation which many think is coming. We think it is coming too. But in our view it looked like it would be awhile before it showed up. We’re in a major de-leveraging. You don’t get the normal cost-push or demand-pull inflation in a de-leveraging cycle. You get something else…something much more violent and dangerous.

But, heck, we wouldn’t rule out anything.

We made money on gold over the last 10 years simply because gold was cheap when we bought it. We were betting on regression to the mean. Nine times out of ten, when you bet on regression to the mean, you’ll make money.

Can you make money buying gold now? Yes, but now you’re betting on a different phenomenon. Actually, to hear the analysts tell the story, you’ve still got a good chance of making money. If the economy picks up, inflation will likely pick up too – ergo, higher gold prices.

If the economy sinks into deflation, gold still goes up. Why? Because deflation is sure to bring worry, doubt, and trouble.

Then, there are those who think we’re headed to hyperinflation. If so, you ain’t seen nothing yet as far as gold is concerned. The price could get to $5,000 an ounce…and beyond.

What do we think? Well, we agree with them all, more or less. The best bet is probably that we’ll stay in a Japan-like trance for a while longer. This is not necessarily good for gold. And not necessarily bad. Most likely, the yellow metal will meander around…generally headed upwards.

On the other hand, who knows?

The trouble with this market is that there are too many people who think they know. Many are saying that gold is a “can’t lose” investment. Maybe they’re right. But we don’t like the sound of it.

And more thoughts…

After the church service, the black-clad, downcast group made its way a few blocks to one of the main entrances to Père Lachaise cemetery – probably the most famous cemetery in the world. It’s the largest cemetery intra-muros in Paris, laid out by the same person who designed the stock exchange. We followed the casket…up over the cobble-stoned streets between the large sycamore trees to its final resting place.

At first Père Lachaise was thought to be too far from the heart of the city, so its sponsors began a marketing campaign. They advertised that they were moving the bones of a few famous people to the cemetery. Pretty soon, people couldn’t wait to be buried there; they must have figured since they would be there for a long time they might as well enjoy the neighbors.

Now there are over 300,000 people buried in Père Lachaise, including Sarah Bernhardt, Georges Bizet and Jim Morrison. But one of the most interesting internees is probably Judah P. Benjamin.

Here’s a question for you, dear reader. Who was America’s finest president?

Chester Arthur? William Henry Harrison? No, Jefferson Davis!

We’re not really serious about that. The War of Secession was a disaster for the South. Davis should have done more to avoid it. A campaign of non-violent resistance, a la Gandhi, for example, might have been more successful.

But who knows. When people get their blood up they’ll do any fool thing you can imagine. A president has to follow them. Because he’s their leader.

So who was America’s best Secretary of State? Maybe it was Judah P. Benjamin.

Benjamin was an accomplished lawyer and planter. Then he became the second Jewish senator in American history and later took the role of Secretary of State of the Confederate States of America. He was invited to join the US Supreme Court twice. Both times, he refused. Once in the US Senate a fellow senator referred to him as a “Hebrew with Egyptian Principles.”

Benjamin replied:

“It is true that I am a Jew, and when my ancestors were receiving their Ten Commandments from the immediate Deity, amidst the thundering and lightnings of Mt. Sinai, the ancestors of my opponent were herding swine in the forests of Britain.”

And when they drove Ol’ Dixie down, Benjamin fled to Britain, where he had another successful legal career.

In some ways his personal life is more curious. He married a woman from a great Creole family in New Orleans. They had one daughter. But his wife decided she’d rather live in Paris, so she took the daughter and left. She spent the rest of her life in Paris, where Benjamin came to visit every summer.

Then, at the end of his career, Benjamin rejoined his family, died in Paris and is buried at Père Lachaise.


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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16 Comments on "Why the Price of Gold Goes Up in a Struggling Economy"

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Soros says Gold is in a bubble…. He is still holding the stuff though ;)
I’m guessing he is trying to spook the market into a sell phase so he can buy more

Meanwhile back at the ranch gold keeps rising….

The price of gold struck a record high above $US1280 an ounce in Hong Kong trade on Friday.

The precious metal rose to $US1280.20 an ounce in afternoon trading, after opening at $US1274.00.

Surely those who bought ten years ago, if there are any left holding gold should be dumping at these all time high prices? Or maybe they’re just enjoying the thrill to see how high this bull can climb? The real answer is, what are the alternatives? I think everyone should take on board the advice of old to keep 10% of one’s net worth in gold. In uncertain times, and this article just reeks of uncertainty or caution – a rising gold price will automatically float your gold holding up to higher levels percentage wise. A good strategy could be… Read more »
Comment by Ben on 19 September 2010: A good strategy could be to rebalance things once in a while (say when the gold became 30%). Sell the excess gold to keep it at 10% overall and invest the proceeds into other assets etc. I rebalanced my portfolio UP to 30% exposure to Gold (mining companies) 20% other shares and 50% Cash.. Portfolio is now around 37% Gold with increases in the Gold Mining Company shares… One of my other stocks is up 27% but the holdings are small so has not really impacted the value of the portfolio much.. (.29%)… Read more »
Ned S

Shoes: “I believe there is still too much volatility in the market for a buy and hold strategy for someone my age or younger” – That should apply even more so to oldies approaching retirement age I imagine?

I believe there is too much risk in stocks/bullion/currency for people my age or older who aren’t skilled traders to have significant exposure to them. Not that I’d recommend buying Oz housing at these prices either. But if a correction comes I’ll want in.

Comment by Ned S on 19 September 2010: Shoes: “I believe there is still too much volatility in the market for a buy and hold strategy for someone my age or younger” – That should apply even more so to oldies approaching retirement age I imagine? There are some good income yielding stocks that are attractive, not much growth prospects in the near term but income should be ok… Income/Asset/Taxation issues are different for a 55+yo than they are for a 42yo for sure.. Overweight in any one asset class is not my idea of a good retirement plan.. Shares,… Read more »
Ned S
It’s just been a different game at different times over the years for different people Shoes. Both you and Biker value flexibility. I’m a bit more of a ‘stick in the mud’ I imagine. Not that highly motivated. Worst case scenario for me though, should be the home is paid off and I’ll go into retirement on the aged pension debt free with tax free rental income from one house in the name of my SMSF coming in. I’d hope to do a bit better than that of course. Avoi being relient on a p[ension at all even. But if… Read more »
Yes, flexibility is the key, Ned. Along with good health. Reading DR(US) today, I was intrigued by the gloomy picture painted on Baby Boomer security in the US. It does not look good for Americans retiring now. Over three decades ago we reasoned that inflation might make Australian pensions barely enough to survive on by 2012. The plan we developed definitely exceeded our expectations, to the point where we’ll never get a cent in OAPs. Not complaining about that! :) It remains critically important to be able to take advantage of opportunities and that’s why offsets remain a vital part… Read more »
Comment by Stillgotshoeson on 19 September 2010: Your comment is awaiting moderation. Comment by Biker on 19 September 2010: Yes, flexibility is the key, Ned. Along with good health. Reading DR(US) today, I was intrigued by the gloomy picture painted on Baby Boomer security in the US. It does not look good for Americans retiring now. Reported Attack Page! This web page at http://www.dailyreckoning.com has been reported as an attack page and has been blocked based on your security preferences. Attack pages try to install programs that steal private information, use your computer to attack others, or damage your system.… Read more »
Ned S

Thanks Shoes – Run a scan here and leave DRA to sort it out tomorrow then hey!


Just another reason to use Apple products. :D


better still, linux (open source, unlike what Aus. Defence forces uses ffs).

in times of trouble, wont the government demand a hand in of all that gold? I thought that’s what happened in the US in the only Great depression (as opposed to this greater depression). gov’t wants it for the same reasons the owners did, stability and influence. again, in your teeth and never smile at a crocodile.


“…better still, linux…”

As you say, it’s even less a target. We’re penguins from way back.

“…wont the government demand a hand in of all that gold?”

Probably have a go at our Super first…! Hopefully ours will be in offsets before they can grab it… . :D


This is one that DR might be interested in too. Journo’s get at it for free but we have to pay. I believe that rents might have seen Australia dive on the index from the mid 80’s onward in Australia, with UK a year or two behind, and the mid 90’s in America – but that is an untested assumption. I’m not sure if the report is historical.


The reference came from an article in The Economist

Standards of living, Beyond GDP
A new global comparison of standards of living

Some News Items This is the first of two posts – so that it is not too long. The first post set the scene for an update of the James Scullin, Gough Whitlam and Kevin Rudd Rhyme in light of the recent election and as what it may indicate for the future in light of the American recession ending in 2009. In regard to the latter, the quote below is from James Stack’s subscription Newsletter of June 5, 2009: “Although it won’t be recognized by the NBER or economists until much later this year, the 2007-09 recession is likely ending… Read more »
James Scullin, Gough Whitlam and Kevin Rudd Rhyme Update The Australian Labor party defeated Conservative parties and came to power just as the American post-war booms were about to go bust – post-WW1, 1921-1929; post-WW2, 1949-1973 and post-Cold War, 1991-2007. James Scullin Labor PM, October 22, 1929 – January 6, 1932. Gough Whitlam Labor PM, December 5, 1972 – November 11, 1975. Kevin Rudd Labor PM, December 3, 2007 – June 24, 2010. Dow Jones Industrial Average peaks: September 3, 1929. January 11, 1973. October 9, 2007. The nominal high in the American blue-chip sharemarket, index the Dow Jones Industrial… Read more »

So, summing up watcher7, nothing ever changes.
Groundhog decades.

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