By Jordan Roy-Byrne
Monday morning I was greeted via my inbox with a Bloomberg report on Gold (NYSE:GLD). Bloomberg has a series called “The Dark Side of Gold.” Its important to note this isn’t the first time the news organization has attempted a hit-piece on Gold. I wrote about this exactly one year ago and identified the cases and examples of Bloomberg’s gold bashing.
The crux of the biased series (one that even makes CNBC blush) is how Gold ETF’s are responsible for Gold’s rise and contributing to a bubble. It is insinuated that because the ETF’s are easily tradeable, a torrent of sell orders would cause Gold could to fall sharply, ala 1980.
Gold’s rise actually has very little to do with the GLD ETF. It really is a non-factor when you consider any of the following reasons: Threat of sovereign debt defaults, debt monetization in Europe, Japan and US, 0%-1% interest rates, commodity bull market, and falling gold production. The GLD ETF is an effect of the bull market, not a cause. The same is true with mutual funds during the bull market in the 1980s and 1990s.
In the two minute preview video, Bloomberg’s Carol Masser makes two ridiculous claims in a span of about four seconds. She claims that prior to the Gold ETF, only “conspiracy theorists” were buying Gold and that it cost a “fortune” because of holding costs and commissions. This is nothing other than failed hyperbole, seeking to demonize Gold and gold bulls. I’m not an expert on the exact ongoings of the physical market but I’m sure that it at that time it didn’t “cost a fortune” to buy Gold. Meanwhile, any conspiracy theorists have clearly made a lot of money.
Oh, I forgot to note at the very start of the video, the woman claims that even “college coeds” are buying Gold. Really Bloomberg? Where is the evidence of that? Google that and I bet you are more likely to find softcore pornography than any hard-hitting evidence on such a ridiculous assertion.
Speaking of “hard-hitting,” Bloomberg interviewed Mark Williams of Boston University, who on camera made the case that Gold is in a bubble by providing zero evidence. A googling of the professor reveals he was perfect for this series, as he is a notorious hard-money hater. In November he wrote an editorial about how the gold-standard should be relegated to the dustbin of history. The only thing that will be relegated to the dusbin of history is our fiat currency system. It’s happened before and will happen again.
Finally, they trut out the Soros quote of Gold being “the ultimate bubble.” There needs to be some clarification of this point. Soros is increasing his Gold position, which is already his largest position. In reality, he’s not saying it is the ultimate bubble. Soros believes Gold will become the ultimate bubble and that is why Gold is his largest position.
In reality making Gold the focus misses and obfuscates the real issues at hand. This is about the future of our monetary system and fiat currency. I can understand that Gold could fall $300 at anytime and the perception of it lacking utility but explain to us how the fiat system will survive? No fiat currency has ever survived the “dustbin of history.”
Fiat currencies have value based on the ability of government to meet its obligations. As we and others have picked up on, the USA’s interest expense is now over $400 Billion and currently 17% of tax revenue. This is with interest rates at historical lows and a national debt of $14 Trillion. That doesn’t include agency debt of $3 Trillion and an estimated $2.8 Trillion from the states.
The situation is going to get worse. The states will likely need support in 2011 and perhaps a bailout by 2013. The continuation of the Bush tax cuts adds another $700 Billion to the deficit over the next two years. The most important variable of all, interest rates is now moving in the wrong direction.
Two years from now, the US government would be dealing with over $17 Trillion in debt and at the least, a 50% rise in interest payments. Even if interest rates hold around 4%, you are still looking at an interest expense equivalent to 25% of tax revenue. And that accounts for growth in tax revenue.
This speaks to why the Fed is monetizing the debt under the guise of economic stimulus and quantitative easing. They have to, and they are just getting started. In the coming months and years, the Fed will have to monetize more as the debt burden grows larger. Moreover, the Fed will periodically have to buy bonds to try and keep rates down. As rates rise, so does the debt burden. The perception is that rising rates is bearish for Gold. While this can be true in the very short run, it is quite the opposite in the larger picture if you have a huge debt burden.
We are in a new era. This isn’t the 1980s and 1990s. The typical stockbroker, financial planner and mainstream publication doesn’t get it. They’ve barely figured out this is a bull market for hard assets. Those who assume Gold is a bubble couldn’t be more clueless about the state of affairs. They should do themselves a favor and study monetary history. Governments going broke, the restructuring of debts and monetary systems is nothing new.
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