Gold News

Gold $1000: An Outrageous Bargain?

Inflation, deflation and 5 facts gold investors should weigh...

"GOLD CONTINUES to climb...stoked by inflation worries," says a headline in the International Herald Tribune, writes Bill Bonner in his Daily Reckoning.

But is gold above $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 they did last 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.

Here at The Daily Reckoning, 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 could send the market in the other direction.

Good results will also cause us here at The Daily Reckoning 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 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. 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. The feds are now much more aggressive
We know that by the way they conducted themselves in those banking affairs...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. It is 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 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 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. The people running America's financial policies are jackasses
Most important of all, and we are dead sure. We say it 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 interest lending and federal 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!

The feds are determined to keep trying, however. 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.

"If there's an easier way to buy investment gold, I've yet to find it," says one BullionVault customer. Find out why if you're Ready to Buy  Gold...

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner 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.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals