Metal vs. Bernanke

Offered gold or central bankers, wouldn't you take the metal every time...?

WE'VE HAD OUR EYE on gold and the Dollar recently, writes Bill Bonner in his Daily Reckoning.

As the Dollar rises, gold goes down. This is not the way we thought it would happen. We expected a crack in the stock market first.

But you never know. And we'll take what we can get. Gold is correcting; that's what we were waiting for. Well, we don't really know what is happening. Stocks rose last week, with the Dow adding a few points. So far, no sign of the rout we're expecting. We'll leave our tattered Crash Alert Flag flying anyway...just in case.

Gold dropped 4.3% meanwhile, but has turned higher. Was that all there was to it? Was that the dip you're supposed to buy?

We wish we could tell you. As far as we call tell, this is the part of the market that is "noise" and not much more. Gold is a very good bet for the long term. Because it is a bet against Bernanke & Co.

Look at it this way, where would your rather put your money...on the brains and integrity of America's central bankers...or on a dumb metal? We'll take the metal!

Just look at what the Bernanke team does. Listen to what they say. They have no idea what they are doing...and yet, they are doing a lot of it. They more than doubled the US monetary base in less than 18 months. They've bought hundreds of billions worth of the banks' dodgy loans. They've threatened to drop money from helicopters rather than permit the economy to correct its mistakes.

We'll take gold, thank you very much...and wait to see what happens next.

Markets are closer to living things than to inanimate objects. They have hearts, souls, and a sense of humor. They don't merely react to circumstances. They create circumstances. And then they react to them. And then they give a good laugh. That's why Modern Portfolio Theory and the Efficient Market Hypothesis are such folderol. They expect markets to act like rubber balls or iron filings. They expect them to behave like objects, rather than like human beings.

Anthropogenic Global Warming is probably a hollow conceit. Anthropogenic Market Warming, on the other hand, is a certainty. Put out enough hot money...mix with boundless delusions...and that is what you get.

Anthropogenic Global Warming, or AGW, is what climate scientists call the hypothesis that human behavior is causing the world to heat up. Anthropogenic means 'caused by humans.' Supposedly, humans release carbon dioxide that creates a greenhouse effect, raising temperatures. That's what the scientists claim.

The trouble is there aren't really any climate scientists and nobody really knows what is going on. Real science requires an ability to reproduce results and disprove an assertion. If there's no way to prove that a hypothesis isn't so, it's not really science. It's just guesswork. Nobody can prove much of anything related to the earth's climate. You can't do a controlled experiment. All you have is cogitation and conjecture.

Markets are the same way. Nobody knows for sure why anything happens. But we do know that humans play a central role in market behavior and that what they think matters. That's why you can't measure risk by looking back on past behavior. Investors didn't think the same things then.

In the '90s, investors began to believe that stocks always outperformed bonds and that the US stock market was the safest, surest bet on the planet. This gave them an almost unlimited faith in Wall Street, in equities and in the future. Stocks soared. Then, what happened? In the next decade, US stocks underperformed bonds and were the world's worst-performing major equity market.

Now that's a sense of humor!

And now what do investors believe? They think we are in a recovery. They don't expect it to be very robust. They may be mad at the authorities for giving so much money to the bankers, but they have confidence that the situation is under control. US bonds are still the world's best credits, in their eyes. And stocks are still almost as good as money in the bank. Sure, they may take a hit...but they always bounce back.

The bear has his work cut out for him. He must demolish these confident, inherently bullish, attitudes. He gave investors a fright in '08-'09. As near as we can tell, he succeeded in chasing consumers out of the park. With no source of finance or increased income, consumers have been forced to cut back. They have no choice. Fashion often follows necessity; conspicuous consumption is giving way to frugality.

But investors – particularly speculators – are still believers. The feds couldn't juice up consumer spending...but they wasted no time putting the asset markets into the blender. Speculators enjoy real short-term lending rates below zero...and the fruit of TARP. And now comes word that the feds are going to extend TARP until October 2010...and use unspent funds in other stimulating ways.

No wonder the markets are so frothy! Just watch. Mr. Bear is going to blow the froth off. That's his job.

Looking to Buy Gold today...?