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One Thousand Dollar Gold, Revisited
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(September 14, 2009) On Tuesday September 8, gold traded above $1,000 for the first time in over a year, while US equities hit new highs for 2009, at the same time that US Treasuries strengthened in price. As they say, go figure.
This past week marked the 8th anniversary of 9/11/01, and the first anniversary of 2008’s September Disaster, including the demise of once-mighty Lehman Brothers. You might remember the events of a year ago, the panic that set in, and the unwavering efforts of our government to rescue big institutions such as AIG and Citicorp, but somewhat inexplicably, not Lehman Brothers.

A year ago, the ‘too big to fail’ mindset became more or less official policy for our Treasury and the Fed, and a flood of money was created and dispensed in haste. The very largeness of these ailing institutions, under this new policy, led to such largesse. Through this intervention, taxpayers, and their children and grandchildren, were able to involuntarily lend a helping hand to the most gargantuan of the banks and insurance companies.

How Lehman Brothers failed to make the cut for such charity will be discussed and debated for the next few decades. But a year ago, Lehman’s demise was certainly a major catalyst in the general financial panic of ’08.

In the past week of these unhappy anniversaries, gold once again found the $1,000 level. Of course the big question is, where will it go from here?

The financial press was its usual dismissive self about this move in gold. As good an example as any is this commentary by Chris Wallace at CBS’ Moneywatch.com:

“What’s causing the bull run? It certainly doesn’t seem to be fundamentals. According to statistics published by the World Gold Council, which has an obvious self-interest in driving gold prices higher, total gold demand in the second quarter was down 9 percent compared with the same period last year. It said demand for gold jewelry was down 22 percent compared to 2008 and industrial use of gold fell 21 percent. The only part of the gold market that flourished was financial speculation, which was up a whopping 46 percent on year earlier levels.”

So, according to Mr. Wallace, when individuals and institutions put gold away as a hedge against inflation, fiat currency depreciation, and general uncertainty, such acquisitions are easily written off as mere “financial speculation.”

What Mr. Wallace misses when he says that “It certainly doesn’t seem to be the fundamentals” is that there is nothing more “fundamental” than acquisition of gold for long term insurance. Gold is the ultimate currency, one that will survive whatever comes next in this world, including any amount of ‘quantitative easing’ that governments may pursue. Gold is money, pure and simple, the purest and strongest money in a world in which central banks turn out dollars, euro, pounds, etc. with unbridled ease and without limits.

Individuals and institutions who are concerned about the value, soundness, or even the continued viability of fiat currencies are exchanging these “synthetic” currencies for gold. Calling such a shift in asset allocation ‘financial speculation’ is to miss the point entirely. Acquiring gold is a flight to quality, a run for the ‘home base’ of value that you turn to when prospects for the future seem uncertain.

Gold buyers today are, in part, reacting to the mountains of debt visible outside their windows. And that’s not a metaphor - we mean it literally:

Look out your window onto your neighborhood, and just imagine what is owed in mortgage payments on the homes that you see, against what those homes are actually worth in today’s market. By viewing just a few of your neighbor’s domiciles you’re probably seeing hundreds of thousands of dollars in debt in excess of value. If you are fortunate enough to live in a swankier enclave, you can probably view millions of dollars of negative equity.

Scary, isn’t it? Believe me, it scares Tim Geithner and Ben Bernanke plenty. Even as you read this, they are thinking of new ‘solutions’ to this real estate ‘problem.’ Mostly what this problem calls for is inflation, enough inflation to make the millions of American families who live in overly debt-laden homes whole again. To make the hurt go away. To allow the US consumer to start consuming again. More inflation, that’s all we need.

Remember, in this country the constituency for inflation is in the majority - every person in debt benefits from it. Only a small minority (i.e., those that have money) is better off with a stronger dollar. In this political world, which side do you think will win?

David Einhorn who runs the hedge fund Greenlight Capital, pretty much nailed the quandary that the Fed and Treasury are in a recent letter to his investors:

“The size of the Fed’s balance sheet is exploding and the currency is being debased. 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.”

 

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