Gold and the Great Correction

Where now for gold prices...?

IN OUR GUESS, both stocks and gold SHOULD be going down. That doesn't mean they will go down, of course. But at least it gives us a point of reference, writes Bill Bonner, founder of the Daily Reckoning.

They should go down because there's a Great Correction going on. There's no secret to it. Sometimes stocks are expensive and sometimes they're cheap. When an economy is expanding, it makes sense for stocks to be expensive...companies' sales are going up...profits should increase too. 

But when an economy is contracting...or, more precisely, when credit is contracting...stocks should be priced for shrinking sales, followed by shrinking profits. That is, they should be cheap, not expensive. Stocks are now priced for an expansion, not a correction. They should go down.

Investors are figuring that out...little by little. As they do, stocks go down. Simple as pie.

But gold is a little trickier. By our reckoning, gold is a little expensive. It buys more stuff than usual.

Of course, it should be a little expensive. Looking ahead, the whole world's banking, credit, and monetary systems are wobbling. Gold is the only money you can trust. So smart investors, smart CEOs, smart family men, and smart central bank chiefs are all thinking the same thing – that they should lay in a supply of gold as a reserve against catastrophe. So they're buying.

But in a Great Correction...assuming things don't fall apart...the value of paper money goes up. Or, to put it another way, the price of assets and other stuff tends to go down as demand falls. Broadly speaking, it is a deflationary world. And paper money is good money in deflation. As long as the system holds together.

And since, according to our guesswork, the system will probably hold together a bit longer...we figure speculators will begin to sell gold to get cash.

Besides, gold has had a spectacular 11-year run. It's time for a rest for the metal...and a test for the metal lovers. That's just the way it works. Markets and lovers always test their admirers. Gold should be giving its fans a test...before moving in the final stage of the bull market.

Will you pass the test, Dear Reader? Will you be true?

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