Gold
Touches a New Record by Bill
Bonner - October 9, 2009
“Gold
continues to climb…stoked by inflation worries,” says a headline
in the International Herald Tribune.
Yesterday, it touched a new record – $1,050
– even as the dollar rose, oil slumped under $70 and stocks
dipped very slightly.
Well, what do you expect? The United States
added $1 trillion to its monetary base in the last year or
so. The federal government is running a deficit of $1.7 trillion
this year. And along comes Barack Obama with an idea to stimulate
employment – spend more money! This time, Obama’s plan is
a kind of “Cash for Workers” program…in which businesses get
a tax credit for hiring new employees.
Gold investors must think the new program
will be the straw they’ve been waiting for. Government has
piled bales of costly new initiatives on this poor camel’s
back. Still, he stands up straight.
So, is gold at $1,000 a bargain…or a trap?
Or both.
We begin by asking: where’s the inflation?
We don’t see any inflation. What we do see is deflation.
Barclays Capital says gold could go to $1,500.
We don’t know where they got that number. It could go to $15,000
for all we know. Or it could go down, too.
Our guess is that it will go down enough scare
the bejesus out of speculators. Then, it will soar.
But, hey, we’re just guessing – along with
everyone else.
Sooner or later gold is probably headed to
the lunatic moon. We’re sticking with the yellow metal. We
don’t want to miss that ride.
But when?
Ah…we’re going to stick our necks out and
say “eventually.” We’re sure we’re right about this. Just
don’t ask us for more precision; we have none. And what bothers
us is that between eventually and now there could be a lot
of time and a lot of trouble. And one trouble that could come
up pretty fast is another crash in the stock market.
If the stock markets of the world take another
dive…like they did last year…gold will probably go down with
them. Not as much, but down nonetheless. So, if we were speculating…we’d
probably be short gold and short stocks too. We’d bet against
bonds too – even though we think they will probably go up
in the short run. The smart, long-term money – in both stocks
and bonds – is probably on the short side.
However, we never speculate – except in print.
As to ideas about how the world works we have plenty. We speculate
daily. As to gold, stocks and commodities, we prefer to hold
onto our long-term positions.
What seems fairly sure to us is that this
recovery is a fraud. It’s a mountebank and a flimflam.
And now approaches a moment of truth – earnings
announcements. Stock market investors bid up shares on the
theory that sales and profits would rise. Will they? We don’t
think so.
We think sales are going to be disappointing…and
earnings will be even worse. If so, we’ll see analysts begin
to change their expectations…and announce that the results
are “not as bad as expected.”
If we get a few really bad announcements –
with results much worse than expected – it could sink the
rally. Then again, if we’re surprised with exceptionally good
reports…it could send the market in the other direction.
Good results will also cause us to question
our position. Maybe the economy is not sinking into a chronic
depression, after all. Could we be wrong?
Ha ha…are you kidding, dear reader? Of course,
we can be wrong. When we were younger we were uncertain about
things. But now that we’re older, we’re not so sure.
Here is what we’re pretty sure about:
1) The credit cycle has topped out.
Americans are saving – think of the poor boomers,
10 years older but not a penny richer than they were in 1999.
Stocks have gone nowhere but down in real terms. Houses hit
a high in 2006…now, they’re off 30%…and still going down.
Jobs? Forget it…there are already 15 million people who are
unemployed and about 200,000 more every month. The job market
is unlikely to recover for another 6–13 years – that is, after
many of the boomers are retired! And if you are lucky enough
to have a job, you’re not likely to get a raise…not with so
much spare capacity in the labor market.
Under those conditions, a consumer boom is
very unlikely.
2) We know that a period of credit contraction
is deflationary.
Prices go down as demand falls. Buyers disappear
from the malls that once knew them, while the factories that
produce stuff grow dusty and quiet.
But we know the feds hate falling prices.
And we know they are taking extraordinary actions to get prices
to go up. So far, their efforts have been a giant flop. Prices
are falling in the United States at the fastest pace since
the ’50s.
Most of the feds’ efforts have been directed
towards keeping the bankers fat and happy…and getting themselves
a bigger share of America’s output. They took funds designed
to relaunch the US economy, for example, and used them to
buy themselves a big position in the auto industry, the financial
industry and the insurance industry.
3) We know too, by the way they conducted
themselves in those affairs, that the feds have become much
more aggressive…throwing their weight around in the private
sector as never before.
What we don’t know is how this affects markets
in the short term. So far, consumer prices are falling, but
the stock market is enjoying a bounce. Is it a real, new bull
market? Or just a bear market bounce? It is probably a bear
market bounce…but it has been going for long enough that we
have to at least consider the idea that it is a genuine bull
market. That’s why the numbers from this quarter are important…they’ll
tell us if the companies themselves are expanding earnings
fast enough to justify investors’ optimism.
4) We know too that there is a whole lot of
’flation going on.
We are just unable to tell you what kind of
’flation it is. The monetary base is way up – it increased
by $1 trillion in the last 12 months. But the money-in-circulation
has barely budged. The feds give the banks overnight loans
at practically zero interest. Then, the banks lend it back
to the feds at nearly 4% more.
What happens to it then? Well, what do you
think…it is wasted on typical federal government scams and
humbugs.
So, relatively little of the money actually
ends up in the consumer economy. And so, we can’t tell you
whether the ’flation will have a “in” prefix or a “de” prefix.
They’re just two letters. But they will make a whole alphabet
of difference to the economy and to your investments.
5) Most important, we are dead sure that the
people running America’s financial policies are jackasses.
We say that with all due respect, which is
probably not much. They have only one idea – and it is a bad
one. They think economies are improved by more consumer spending.
They don’t seem to care why consumers occasionally cut back
on their spending. All that matters to them is finding ways
to get the consumer shopping again. So they try tax cuts and
government spending…bailouts and boondoggles…zero interest
lending and federal takeovers…cash for clunkers, cash for
houses, cash for employees….
…trillions worth of claptrap and folderol.
But what a nuisance! The fool consumer still won’t shop!
But they’re determined to keep trying. That’s
why we can be pretty sure that, eventually, they’ll get inflation
rates up. One way or another. And then, gold at $1000 will
seem like an outrageous bargain.