Gold: The Big Question
Mr.Market's job isn't to make it easy for investors...
NOW, THE QUESTION we must ask ourselves is an old one, says Bill Bonner in his Daily Reckoning:
Is this the final, blow-out phase of the gold bull market that began 10 years ago? Or is it a trap...intended to catch the Johnny-come-latelies in the Gold Market?
Of course, we don't know any more than any other human being knows. But we've been watching Mr. Market for a long time. And we've come to the conclusion that he's an SOB.
Trouble is, you never know exactly what kind of an SOB he's going to be.
Is he going to lure investors into the Gold Market and give them a good whack? Or, is he going to drive the price of gold all the way to $3000...and leave us behind?
The old-timers, the scarred and battered confrere of gold bugs, in which we humbly confess membership, are a bit skeptical of this latest run-up in Gold Prices. We bought gold years ago. Heck, we bought so many Gold Coins so long ago that we've forgotten where we buried them. So, we wouldn't mind seeing gold race right up to its rendezvous with monetary destiny – without stopping for red lights or little old ladies in the crosswalks.
Trouble is, we don't think the world is ready for it. What do we mean by that?
We were hoping you wouldn't ask. It's complicated and confusing. In many ways, it's more of a feeling...an instinct...and a hunch...than a hard analysis. But here goes:
Look, here's the hero of the financial crisis, David Einhorn. In 2007, he figured out that the banks were going to get killed on their mortgage debt. He shorted them – particularly Lehman Bros. He made a fortune for himself and his investors.
Well, what's he doing now? Guess. He's Buying Gold.
David Einhorn, quoted in MarketWatch, said that given the present situation gold was the bet he felt most confident to make:
"If the chairman of the Fed is determined to debase the currency, he will succeed," Einhorn said. "Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."
In other words, gold is a one-way bet. But wait. It's not like Mr. Market to offer investors one-way bets. There's usually more to the story. And the twist is probably this:
Deflation will surely lead to more steps to debase the currency, but those steps don't necessarily or automatically take the feds where they want to go. We have no doubt that the Fed chairman is determined. What we doubt is that he is capable. We doubt, too that a 3.5% downturn over 24 months corrected 30 years of credit excess. There's still Hell to pay. It means another big takedown in the stock markets...crashes in China and emerging markets...and collapsing commodity prices. Investors won't like it.
Will they turn to gold for safety? Or to the Dollar? A year ago, they dropped gold and ran to the Dollar. Will they do the same this time? We don't know, but we doubt that SOB, Mr. Market, will make it easy for us, either way.