Who will need gold?

Sep 15, 2011

Baltimore, Maryland

"Retail sales in US unexpected stagnate," says a Bloomberg headline.

Unexpectedly? Guess they don't read the Daily Reckoning. Stagnating sales are what you get in a Great Correction. We've been saying so for the last 4 years.

In an expansion, well...everything expands. Why make it complicated?

In a contraction...everything contracts. What do you expect? That's what it's all about. That's how it works.

And when you have a consumer economy, what contracts most? Consumer spending, of course. Simple, huh?

And when consumer spending contracts, business sales go down. Eventually profits go down. And eventually investors realize that holding stocks is not going to be profitable. Then, stocks go down too.

And here's another Bloomberg headline:
Wholesale Prices in US Are Little Changed as Energy, Vehicle Costs Drop

Surprise, surprise! The feds pump in trillions in cash and credit. Still, they can't get prices to go up significantly

Contractions are deflationary.

That's why we don't expect the price of gold to rise.

And now that Germany and France have gotten together with China and all have agreed that they aren't going to throw poor little Greece off the Euro-Bus...gold has nothing to do but go down. No crises on the horizon. No inflation either.

So who needs gold?

Well.... we all will. But maybe not just yet...

"Gold fulfills the functions for which money is used better than any other type of money," wrote Lord Rees Mogg in his introduction to "The Case for Gold" - a three volume tome rehearsing the history of the yellow metal.

But if gold is the best money, how come we don't use it rather than dollars?

Lord Rees-Mogg explains: "The problem for gold is not that it doesn't work, but that it works too well. ...it imposes limits on human behaviour, and those limits can be resented and rejected. Indeed, it can become impossible for a government to maintain the discipline of gold..."

Ah yes....

Limits. There are always limits. You can ignore limits. You can reject limits. You can pretend they don't exist. But you can't ignore the consequences of ignoring the limits.

Right now, the economy is in a major contraction. As long as this phase continues, you only need gold as insurance against a catastrophe. But what would cause a catastrophe? The feds, of course.

In a contraction, the market itself imposes limits. It forces asset prices down. It undermines businesses. And it drives debtors and creditors into bankruptcy.

The feds don't like limits. And they don't like contractions. Especially not when an election is coming up. Maybe they'll keep their nerve. Maybe they won't. They could do something reckless and desperate...in an effort to over-come natural limits. That's when the merde will really hit the fan... That's when you'll need your gold.

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*** Here's an interesting item.

In July, consumer credit rose. This was much applauded and much discussed. Analysts said that the $12 billion increase proved that the credit expansion of the last 60 years was not over. They thought it meant that recovery was just around the corner. Consumers were borrowing again they said...so they must be spending too.

But it turned out, it wasn't exactly consumers who were doing the borrowing. It was students. And they weren't borrowing to spend. They were borrowing to pay the high costs of education.

Real consumer credit went down, as expected. Credit card debt, for example, fell some $4 billion.

And guess what else. Many of them will never pay the money back.

Government-backed student loans have risen from less than $100 billion in '08 to about $400 billion today. We don't know why. But we smell a zombie.

The default rate is rising. And we suspect that many 'students' are actually people marking time in universities because they can't find a good job in the outside world.

Speaking of which...Senate GOP leader Mitch McConnell describes Obama's jobs plan as a "re-election plan, not a jobs plan."

But it's so easy to criticize! Give the prez credit. At least he's trying.

At least, he's trying to get re-elected, that is.

*** Yesterday's subject was intriguing - at least to us. We'll stick with it.

What if everything you thought you knew about investing wasn't so? Or, to put it another way...what if everything you learned about investing was learned in an unusual period in investment history? A period that won't be repeated in our lifetimes?

You're used to stocks going up, right? But they don't always go up. They only go up - in general - when the economy grows.

But economies always grow, right?

Well, maybe not. How much did the economy grow in 2011 BC? Nobody knows, right? But we'll take a guess. It didn't grow at all.

And guess how the real economy in the US is growing this year?
Probably about as much as it did 4,000 years ago.

No, we're not kidding. The numbers are all over the place. But they're all near zero. Even the feds say the economy is "barely" growing...or that the 'recovery is very fragile.'

Guess how many jobs the economy added in 2011BC? We don't know that either, but we'll take another guess: zero.

Okay...you see where we're going with this. This economy sucks, right?

But here's the thing. You think the suckiness of this economy is a temporary thing. You think the economy USUALLY does okay. You think that there is something inherent in technology...that is it always finding new and better ways to do things...and that as a result we all get richer all the time, right?

Well, what if you're wrong?

What's the measure of wealth? Here's one way to look at it. It's how much output you can get from a unit of time. You take your bare hands...you try to dig a ditch. Your output is very limited. So, in a remarkable breakthrough, someone invents a spade! The first ones are made of wood. But they get better and better. Now, with a steel spade in his hands a man can dig much more hole in the same amount of time. He is richer. He can produce more. He can improve his standard of living just by using the tools he has available to him.

But then what? Then...maybe 5,000 years after the invention of the first hoe, a man invents a machine to do the digging...a backhoe. Now, he's really smoking. With a backhoe he can dig 10...20...times faster than a man with a regular hoe.

The first mechanical diggers are clumsy. Steam-powered. But gradually they get better. Now, they're so smooth and responsive a good back-hoe operator can use them to light a man's cigarette for him. No kidding, it's included in back-hoe rodeo contests.

Mechanical diggers have been around for 100 years. They've gotten bigger and better. Presumably, each new generation of machines pays off. But not like they used to. The first backhoes produced huge new gains in productivity. The last produced only marginal gains.

Meanwhile, the energy needed to run the machines becomes more expensive. At 15 cents a gallon, the investment in fuel and machinery was almost sure to be worth it. Now, at $4 a gallon, a man has to think twice. If he has a small hole to dig, he might be better off digging it with a spade!

The energy revolution may have peaked. Growth may be a thing of the past.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Who will need gold?"

anupam garg

Sep 15, 2011

gold will go down
energy revolution is over
deflation ahead


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