By Jordan Roy-Byrne
Yesterday I came across a clip from one of the business channels. The discussion was about “king dollar” and Gold (NYSE:GLD). (The king dollar probably gives it away). Anyway, one of the guests quipped, “I’m on record that Gold is a dumb trade. It is rising based on fear and confusion and when that subsides, the Gold trade ends.”
First of all, Gold has been rising for ten years. It went down the twenty years prior. It is now in a structural bull market. This fact cannot be debated. There is no Gold “trade” unless you are trying to make a few points next week or month. It is a bull market. Repeatedly, the mainstream news makes this mistake. Moreover, find me a Gold bear that readily admits Gold is in a bull market. You can’t because every bear refers to Gold as a trade, as if its advance is an extended aberration that needs correcting or is unsustainable.
Secondly, there are real reasons for the bull market in Gold. Attributing “fear and confusion” to what is becoming a multi-decade bull market is borderline heretical. I understand that Wall Street stock jocks hate Gold. Fine. But let’s get one thing straight. There are real driving forces here which can be sustained into the future.
Sure Gold has been rising for 10 years but its outperformance since the start of the financial crisis must be explained. Currencies lose their value fastest when a nation cannot grow its way out of its debt burden. Western governments were already hugely indebted. Post-crisis, their debts have soared but their economies have struggled under the weight of those debts. As we’ve explained in past commentaries, marginal rises in interest rates will exacerbate these debt burdens.
Hence, we’ve already seen the beginnings of debt monetization in the US, Japan and Europe. There is no way to grow out of this situation. The debt burden is too burdensome and rising interest rates will only make it worse. More monetization is coming. This is how and why debt crisis’ become currency crisis.’ Ultimately governments cannot take in enough tax revenue, interest rates rise and they are forced to print money to stave off default.
Lost in the usual nonsense is the reasonable bearish argument for Gold. I’m not talking about the flimsy arguments like rising rates or deflation. I’m talking about how Gold is very much a speculation because in the present system, there is no need or use for it. Even though there are tremendously bullish driving forces at hand, the market is still “speculating” on the value of Gold and future value of various currencies. While the long-term trend is higher, if sentiment suddenly shifts, Gold could fall $200 or $300.
While mainstream suits, stock jocks and traders misunderstand and underestimate Gold, some of those in the highest ivory towers actually do not.
Last November, Robert Zoellick, the President of the World Bank said that leading economies should consider adopting a modified version of the gold standard. Among other things, Zoellick said:
“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”
Furthermore, only days ago Fed Governor Thomas Hoenig called the gold standard “a legitimate system.”
In an interview with KingWorldNews.com, Jim Rickards who has worked with both the Fed & US Treasury responded to recent developments:
“What Hoenig has done, as Robert Zoellick did before him, is to legitimize the debate. This is not the last word on gold and there is a long way to go both intellectually and mechanically before we get to a gold standard. What is important is that the discussion is now out of the shadows and in the main arena and it will take on a life of its own from here with participation from many sides. Hoening may have lost his vote on FOMC but he has not lost his voice.”
There are those who dismiss Gold entirely (like the source of the very first quotation) and then there are those who are equally as ignorant and see Gold in a bull market but think it is just a fad that will end as all bull markets do.
That is simply not the case. The bull market in precious metals is one that will ultimately restore sound fundamentals and sound money to western economies. The bubble is in fiat currencies, consumer debt, government debt and persistent deficits. The bull market in precious metals is the correction to those bubbles. Yes, it will not rise forever and yes, mining companies will crash at the end of all this.
But it is still very early. The recent gains in junior miners are only a hint of what is to come. As the fundamentals become more and more obvious, the Gold “trade” will only become larger and stronger. Many more participants soon will come on board. The gains in the junior miners will become larger, more extreme and truly spectacular. Our subscribers benefited in 2009 and 2010, but we are even more excited about 2011 and 2012.