Rising gold prices: Is it a trap?

Sep 24, 2010

Delray Beach, Florida

"Gold is saying something," writes Bloomberg columnist Mark Gilbert.

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What's it saying? Nobody knows. Well, at least nobody who works at the Daily Reckoning. We listen. We hear. But we still don't know what the hell gold is talking about. The yellow metal is speaking in riddles.

Yesterday, gold spoke again. It rose $4 to a new record high of $1,296. Tomorrow, it will probably hit yet another record - possibly over $1,300.

In the conventional wisdom, gold is telling us to watch out. Inflation is coming. Either the regular kind...the kind that comes with "growth"...or the kind that comes with the 'hyper' modifier. Almost everyone likes the regular kind. Almost no one likes the hyper kind

But being the contrary coots that we are, we're inclined to think that there will be many a slip between the cup of $1,300 gold and the puckered lips of gently rising inflation levels.

Watch out, dear reader, watch out.

Not that we're dissing gold or sassing the goldbugs. Not at all. We think it's going to $1,500...and then to $3,000. But next week?

Don't know. We have to keep listening...trying to interpret the whispers.

There's something all together too obvious and too easy about the gold market now. It just goes up. Year after year. Maybe it's a trap.

In 2000, there was a crash in dot.coms. The whole magic of the tech bubble suddenly disappeared. And guess what? Gold went up.

In 2001, the War on Terror began. And guess what? Gold went up again.

And again in 2002. And 2003. And 2004.

By 2005, the world economy was in the throes of a massive financial bubble. Everything was going up. Gold went up too.

In 2006, the US had a major housing bubble on its hands. Gold went up.

In 2007, the housing bubble started to lose air. Gold went up.

In 2008, Wall Street stared into the abyss. Lehman Bros. went broke. The feds took over housing finance, auto-making, insurance, commercial lending....and gold went up.

In 2009, the feds went all out to try to engineer a recovery. The Fed ballooned its balance sheet by $1.2 trillion. The federal budget went into deficit by nearly one and a half trillion. Still, gold went up.

And what's this? The recession officially ended more than a year ago. Housing and unemployment are still limping. De-leveraging is still underway (David Rosenberg calls it a 'depression')...and go figure. Gold is still going up.

Is there anything that can stop gold from going up? We don't know. But many smart people are coming to the conclusion that they can't lose with gold. If the economy recovers...gold is a cinch to go up along with inflation. If the economy falters....gold will go up when the Fed comes to the rescue with more printing press money.

And then, there are the Chinese. God knows they like gold. And they don't have much of it. If they're behind this gold market it could last for another 20 years (see below).

So gold is a "can't lose" investment.

We like gold. But we don't like "can't lose" investments. What to do?

*** How we wish we had more thoughts!

We're down here in Florida...overlooking the choppy Atlantic Ocean. The sky is gray. The wind is pushing the palm leaves up against our condo. The waves break ....the sea is white...and green... This is not a place for thoughts...

Delray Beach seems a little slow. Then again, it is off season.

But wherever we go we ask ourselves...what do people do here? What do they think? What do they want?

Along Atlantic Ave. they seem to want to sit in cafes and drink coffee. There are the old people...broken down by time and worry. And there are the young, tanned and toned...from surfing...running on the beach...and lifting weights.

The young probably want a life...but what do the older people want? We see couples sitting together...sometimes walking along, hand in hand. What are they looking for? Some time together...a cozy, soft life after a career of hard work? Do they want to relax? Enjoy life?

Maybe...but what we see is people looking for something to do with their time...with their thoughts...and with their lives.

A man of 55 can reasonably expect to live another 20 years. What is he going to do? Come down here. Get a motorcycle. Ride up Atlantic Ave. and stop for a coke? Or a beer? Go to the sports bar and watch a game? Make plans to get together for a barbecue on the weekend?

There is an air of empty desperation about the place. Of people who don't quite know what to do with themselves...except decorate their houses...have coffee...talk...talk...talk.

What do they talk about? Their children? Their lawn maintenance crew? Their hairstylists? Kant...and objective correlatives? Or housing prices?

Sociologists and other quacks have probably noticed. They've probably written papers on it. ...on what happens to people after they've cut themselves off from work...and the responsibilities of family.

In the extended families of yesteryear, there was always work to do... It never stopped. Gardens needed to be tended. Meals had to be prepared. Animals had to be fed. Children needed to be minded...taught...and prepared for the world. The work provided an easy answer to the eternal question: what am I supposed to do?

But in a life of leisure...what are you supposed to do? What is the purpose of it...only idle entertainment?

Perhaps, people down here cling to the beach the way an old priest clings to the cross. It gives meaning...sense...to their lives. It signals that they are on vacation - permanently. They don't have to answer the question at all. What am I supposed to do? Nothing. I'm on vacation.


Is the Bull market in Gold Over?

Gold hit three new record highs last week. This week, following the announcement by the US Fed on Tuesday, it is hitting still more highs...closing in on $1,300 as we write.

Gold should go up with consumer prices. But, for nearly two decades - from 1980 to 1999 - gold went down while consumer and asset prices rose. Now, consumer prices are stable. Yet gold hits new records.

All views on gold are baroque. There's no line of thought on the subject that doesn't have a curve in it. Some buyers are loading up on gold because they see a recovery coming. Others are buying it because they don't. Recovery, say some, will boost consumer appetites, resulting in higher inflation levels and a higher price for gold. The absence of recovery, say others, will cause the Fed to undertake more money printing.

Those who have no opinion on the matter are among gold's most aggressive buyers. To them, gold looks like a 'can't lose' proposition. If the economy improves, gold rises naturally. If it doesn't improve, the Bernanke team will force it up.

And if not Bernanke, the Chinese. Gold makes up only 1.7% of China's foreign exchange reserves. Many people analysts believe China is targeting a 10% figure. If so, it would have to buy every ounce the world produces for two and a half years. Or, if it relies on only its own production - China is the world's largest producer - it would take nearly 20 years of steady accumulation to reach the 10% level.

The metal holding down the 79th place in the period table has many uses. People make spoons, forks and bathroom faucets out of it. It's occasionally used as roofing, or even as a murder weapon; Crassus had molten gold poured down his throat after being captured by the Parthians. And Lenin said he would line the public latrines with it. But the best use ever found for it was as money - as a reliable measure of wealth.

Even gold is not perfect as money. During the years following the Spanish conquest of their New World territories, for example, gold flooded back into the Iberian Peninsula. Soon there was much more gold than the other forms of wealth it was meant to represent. Each incremental ounce of gold was disappointing. It bought only a fraction as much as it had before this monetary inflation began. And had you bought it in 1980 you would have seen 90% of your purchasing power disappear before the bottom finally came. Even today, you still would not be back at break even. The price of gold will have to almost double from today's level to reach its inflation-adjusted high of 1980.

But this is what makes gold very different from other money. If you happen to have a billion-Mark note from the Weimar Republic or a trillion dollar note from Zimbabwe, you can hold onto that paper until hell freezes; its value will never return. Gold, on the other hand, will never go away. And when the post-1971 monetary system cracks up, gold is likely to return to its 1980 high...and keep going.

Over the centuries, mankind has often experimented with alternatives to gold. Driven by larceny or desperation, base metal and paper were tried on many occasions. Paper was particularly promising. You could put as many zeros on a piece of paper as you wanted, creating an infinite supply of 'money,' as Ben Bernanke once noticed, at negligible cost. But the experiments all ended badly. People realized that money gotten at no expense was only gotten rid of at great cost. Given the ability to create 'money' at will, a central banker will sooner or later create too much.

But one generation learns. The next forgets.

By 1971, Americans had forgotten everything they ever knew about money. Richard Nixon cut the final link between the US dollar and gold.

At first, it looked as though investors hadn't noticed. But then began a great bull market in gold that took the price from $43 to $850. And just then, when investors were most sure that paper dollars would soon be as worthless , a remarkable thing happened. Paul Volcker intervened. He made it clear that if the dollar were to go the way of all paper, it wouldn't be on his watch. Inflation rates fell, along with gold.

Whatever shards of monetary wisdom were still lying on the ground intact in 1971 have since been ground to dust. Now, Ben Bernanke strives as diligently to destroy the dollar as Paul Volcker did to protect it. And another generation awaits a whack on the knuckles.

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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5 Responses to "Rising gold prices: Is it a trap?"

Shashibhushan Gokhale

Dec 27, 2010

Paul Volcker is recognized the world over as the person who brought sense to economics in US. He is currently chairman of President Obama's Economic Recovery Advisory Board. I am surprised that he is unable to impact the decisions being made by US Fed. Any comments?


subhash arora

Nov 17, 2010


All this hype about Gold is based on very basic calculations of Inflation / purchasing power of paper currency.

Gold does not seem to be reached at the levels where the its purchasing power is at par with rise in people incomes.

The other factor to be considered is the rates of Silver vis-a-vis Gold. The reference point at 1990 levels, when Gold was around INR 3000 per 10 gm and Silver hovering around INR 90 per 10 gm.

These 2 factors will give the clear picture about the rates at which the yellow metal should have been now.

Evaluate it..........



Oct 3, 2010

A time will come where , 1 kg gold feeds a family of four for 100 years.



Sep 25, 2010

A very thought provoking article.


Thresiamma Dominic

Sep 24, 2010

Dear Sir,

If the GOLD price goes down experts gives an opinion of bearishness, sluggishness one should be cautious etc. and total economy is collapsed, we have to go to the ocean for ending our life but when it is going up also the wexperts gives warning that, one should be vgilant, any time it can come down etc. etc. Please spare this time Sir. Let it go up and touch the sky. We should be happy and celebrate. Good bye...

with regards


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