Sunday, November 28, 2010

Gold Fever: Pondering the Causes

The New York Times

Published: November 25, 2010

It is part religion, part politics. It is a way to voice a lack of confidence in the central banks of the world and a yearning for the world as it used to be. It is an investment that historically made sense when inflation was rampant, and yet it is soaring while the Federal Reserve frets about the threat of deflation.

It is gold.

Over the last four decades, the only ones in which gold was freely traded, gold proved to be a good buy precisely when it appeared the system was failing. In the 1970s, gold zoomed upward from artificially low levels, while stocks did not come close to keeping up with inflation. In the 1980s and 1990s, stocks rose at rates greater than 15 percent a year, and gold went down. In the first decade of this century, stocks declined while gold rose at a compound rate of almost 15 percent a year.

So far this year, both gold and stocks are up. That combination is unlikely to last out the current decade.

Betting that $1,400 gold will soon be $1,800 gold or $2,500 gold is basically a bet that the West really is in permanent decline this time, with countries facing the prospect of bankruptcy or sharp reductions in spending on everything from schools to pensions. Or perhaps all of the above.

Let’s hope the bet is wrong.  LINK...
This is the ironic thing about being successful in the Gold business. It means there is economic and social "unrest" in society. No sane person wants Gold to go ballistic but I don't think there is much sanity in the current monetary policies of the Western nations. We now have QE in Europe for Ireland and the new QE in the USA. This cannot last long and Gold will be the only sound money in the world, it is inevitable and axiomatic. The big difference between Gold bulls and Equities bulls is that Gold Bulls fundamentally do NOT want to be right because of what it means for society, it's a "protection play," but sometimes the truth hurts and unfortunately this time it will really hurt.  BK