News of the world included the Dow losing some 1,000 points in the month of August, and then on Thursday an unexpectedly gloomy US jobs report that genuinely surprised the markets. Gold’s reaction was simple: fewer jobs means that the economy is not doing so well, therefore the Fed will likely be in an accommodative mood when they meet in a couple of weeks to decide on a possible rate cut.

Gold prices hit a three-week high of $672 on Friday August 31st, and moved up early this past week, and then the employment report set off the fireworks, pushing gold to prices not seen since May of 2006.

Alan Abelson’s column in the September 10th Barrons’s drew a gold lesson from the current credit trouble afoot,

“As the credit crunch deepens and widens, “Scarcely will they finish putting the subprime situation under house arrest..” before other problems, including credit card debt and commercial real-estate loans, cause the credit engine to sputter, and the Fed repair crew has no other option other than to ‘print and spend.’"

Abelson concludes, “That…is what gold this week so dramatically figured out. And what equities, we might add, are only beginning to learn.“

Javier Blas of the Financial Times quoted James Gutman of Goldman Sachs as saying, “Gold will continue to face upside pressure driven largely by weakness in the US dollar.” Mr. Gutman was further cited as predicting that gold prices will rise to $725 over the next twelve months. This call that gold will rise over the next 365 days only as much as it did over the past 72 hours seems a little tepid, but gold bullishness is not part of the corporate culture at Goldman Sachs.

Another view comes from John Hathaway of the Tocqueville group, in his August 29th article, “A New Chapter for Gold:”

“The general meltdown in credit is the ideal macroeconomic scenario to launch gold into all time high territory. While those same conditions have been disruptive for gold and gold shares in the short term as investors sell whatever they can to meet margin calls, it is important to understand that this is a necessary passage to higher ground. Gold must shed the perception of recent years that it is just another "run of the mill" tangible asset and emerge as the premier way to escape financial havoc.”

As to the dollar and gold prices, the Fed is classically between a rock and a hard place. The pressure to lower the Fed funds rate at its September 18th meeting is strong – to kick-start credit demand, the housing market, and large segments of the faltering US economy, and perhaps not just a quarter-point will do the job. On the dreaded other hand, substantially lowering US rates may send the dollar into a downward spiral.

So for Chairman Bernanke and the Fed, the question is whether to support the US economy, or the US dollar. Our bet, based on several decades of experience, is that the economy will get the (attempted) boost, and the dollar, and its buying power, will get the shaft.

Gold, that forgotten and most anti-social of elements, will be the ultimate beneficiary. As we have pointed out before, society pays lip service to the horrors of inflation, but for the most part, we’re all for it. Didn’t we enjoy watching our house going up in value, back when it was doing so? Don’t we appreciate our salary hikes and what they say about us, even if in our hearts we know they’re only cost-of-living increases?

Factually, the dollar tumbling downward reduces our net worth in direct proportion to how many dollars we own, or are owed in the future. But psychologically, most of us are consoled by that fact that inflation is an affliction shared equally by everyone else in our dollar economy. It seems bad that everything is going up in price, but talk with other people, and you discover that the things that they buy are also going up in price! It’s actually good party chatter, and we all enjoy telling stories of prices today versus what they were – just last month, or just a couple of years ago.

The funny things about the human economic animal is, once you rise above the basic needs of food, shelter, and clothing, most of us are relativists who measure our financial comfort against other people that we know. Inflation, being universal, therefore seems to be a zero-sum game that’s not worth worrying about.

Of course that’s assuming that your neighbors aren’t taking steps to protect themselves by buying gold without telling you, that is. They wouldn’t do that, would they?