Gold News

Gold: "Analogue to Reality"...?

The easy money may have gone, but the big money's still to come in gold...

HEY! Good news everyone, writes Dan Denning in his Australian Daily Reckoning.

The heads of state at the APEC summit decided on Sunday to sort this whole Global Financial Crisis. "We resolved that we would aim to overcome the crisis within 18 months," the Wall Street Journal reports, quoting from the statement by the leaders of the 21 Asia-Pacific nations.

"Economic recovery is not yet on a solid footing...We will maintain our economic-stimulus policies until a durable economic recovery has clearly taken hold."

That's fantastic! Just 18 more months before we can put all of this behind us. Why didn't they aim to overcome the crisis a year ago? Oh well. Better late than never.

Of course, it is possible the leaders of the Asia-Pacific Economic Co-Operation gang have no idea what to do, and certainly don't agree on how to manage their currencies. The Journal reports that everyone is badgering the Americans and the Chinese to quit their cozy currency arrangement. America has effectively devalued the Dollar with low interest rates, and the Chinese have matched the devaluation because of the semi-formal currency peg.

The results is a global race to the bottom, otherwise known as competitive currency devaluation. Exporting nations must mimic the Fed and keep rates low (or sell their own currencies and buy Dollars) to stay competitive. It suits China and America for different reasons.

America's weak Dollar hasn't exactly helped exports like everyone expected. In fact, the trade deficit widened last month on a weaker Dollar, mostly due to huge oil imports. But as long as US interest rates are kept low, the housing market will not implode. The weak Dollar suits the Fed.

And a weak Yuan suits the Chinese for now. They remain the world's low cost producers. And their goods get even cheaper when the Yuan declines with the Dollar. More market share is good for Chinese producers. But it doesn't make any other exporters trying to compete in manufactured or consumer goods very happy. About the only people, or metal, made happy by the current state of affairs is gold.

The weekend edition of the Australian Financial Review had gold on the cover, incidentally. Underneath the giant golden letters it reads, "Why you shouldn't laugh about gold hitting $US2000 an oz", a forecast we made some time ago. But if anyone's laughing now, it's a nervous laughter.

Why? Well, the fact that the gold made the cover of the AFR confirmed our view that it was an excellent month to research uranium stocks instead! That's just what Diggers and Drillers editor Alex Cowie did. He published his first report as the full-time editor of Diggers and Drillers on Friday. It was on uranium, including one specific recommendation.

We talked with Alex about whether to write about gold this month or uranium. Trouble is, he'd already written about gold in October. We've been getting a lot of questions here at the DR about gold. The Gold Price is making new highs in US Dollars ($1,123.40 in the futures market last week), but hasn't carried over into Aussie Dollar.

The strong Aussie Dollar has capped the Aussie Gold Price for now. (You can read what Alex has to say about it here.) But even with the USD price setting new all-time highs day after day, the author of the AFR's piece, Robert Guy, is grudging in his recognition of gold's recent performance:

"Often dismissed as cranks and conspiracy theorists, true believers may have found vindication in gold's record-breaking run, which has underscored the migration of the mainstream to the long-held world view of these fringe dwellers."

And then he can't help himself...

"Gold bugs' dystopian vision of debased currencies, enfeebled banks, debt-burdened governments resorting to the printing press, coupled with the menacing spectre of inflation, presents a worrying analogue to reality."

An 'analogue to reality'...? Last we checked, all those things Guy mentions weren't just prophetic visions. They ARE reality. The real vision – in the sense of a something that appears in fevered recesses of the mind but has no existence in the physical world – is that government-led efforts to revive the economy by taking on more debt have actually worked and that everything is getting better and better.

But then, the idea that investors who Buy Gold are crazed believers is a convenient way of dismissing monetary history. Close your eyes and pretend everything is all right!

To understand the investment benefits of gold, you don't have to "believe" in gold in the way that, say, you have to believe in the Virgin birth or the resurrection to call yourself a Christian. You just have to understand how gold has always been part of a sound money system and how it promotes responsible government and personal liberty. It is not an act of faith. It's a rational conclusion.

Further, gold's physical attributes – durability, divisibility, transportability, relatively scarcity, and its sameness in all places – make it such a useful medium of exchange. To the extent that those qualities make for really useful money, gold does have an inherent value. Gold is very good money, which is why it's being remonetised after years in the Keynesian wilderness.

But we've written so much about gold in the past you are probably sick to death of it. So we'll conclude with two points. A sovereign debt crisis is brewing because Western Welfare states refuse to live within their means and are increasing public sector debt. This makes their currencies dangerous to own and their bonds subject to default. At the very least, most paper currencies face major devaluations.

The second point is that Gold Bullion is not a panacea for the problem of fiat currencies. It's a good start. But if you think the monetary world will somehow muddle through, then gold stocks give you leverage to a higher Gold Price. As eye-catching as gold's recent gains have been, we reckon most investors haven't begun to stock up and gold.

While the easy money in gold has been made, the big money has yet to be made.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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