Gold held above US$1,600/oz yesterday. You'd think it would do better. Ben Bernanke just pledged to keep his printing presses whirring…even though some areas of the economy -such as housing - are improving.
Won't an improving economy bring more of this printing press money out in the open…where it will bid up prices?
And if the economy doesn't improve, won't Ben Bernanke keep printing money…even increasing the output of his dollar-printing machines…until the old buck finally gives way?
So, why is gold doing so badly? Is the bull market in gold, which began nearly 14 years ago, finally over?
Those questions were put to a panel of which we were part, in Cafayate last weekend. The questioners were mostly 'hard money' people. The questioned, including your editor, had a generally gold-buggish bias too.
So, what were the answers?
We can only recall our own.
A couple years ago a cache of gold objects and coins was found in Yorkshire. These were items that had probably been buried to hide them from the fighting that was going on in the area during the 8th century. No one knows what happened to the owners, but they never returned to dig up the treasure. Instead, it was found by accident, 1,300 years later.
And yet the gold of which the objects were made is just as good as it was then. And the value of it - compared to goods and services on offer - is also about the same, at least inasmuch as we are able to piece together prices from that era and compare them with prices today.
That…and everything else we know about it…leads me to believe that gold in the future will be worth more or less what it is worth today too. In our lifetimes, we've seen gold go up and go down. But it doesn't go away. And if you had gone out to buy a new Buick in 1935 or so…you would have paid for it with about 25 gold ounce coins. You can do that today, too.
So, if you are thinking of the long run, you will definitely want to hold gold rather than shares in today's corporations…or today's paper dollars…or promises by government to repay you in its own IOU paper currency.
Of course, I know that many of you are not concerned with the long run. In the long run we're all dead. So what does matter? It's the short run that matters. And in the short run what is gold likely to do?
Who knows? But it would be very strange for a 14-year bull market to end with its subject still reasonably priced. Typically, they end with unreasonable prices.
Gold is not especially overpriced now. There is no gold mania happening. The cover of Time magazine is not featuring a gold coin or predicting the end of paper money. Adjusted for even the Bureau of Labor Statistic's inflation rate, gold still hasn't come near its high set 32 years ago.
Most people in America have still never seen a gold coin. But they will. Unless this time really is different…unless this really is a new monetary era…you can presume that what happened in the past will happen again.
And what happened in the past was that paper money systems always blew up and gold always becomes infinitely expensive in terms of the depreciating paper money.
We don't know when this will happen. But we don't see any reason why it shouldn't. They keep telling us that The Federal Reserve is doing no harm by printing $85 billion more each month.
Official inflation rates are low…and falling, they say.
But if they calculated the inflation rate the way they did when people were wearing Whip Inflation Now buttons, back in the Carter years, the CPI would be at 9.6%. And bond yields would be at 10% or 12%.
…And people would be struggling to pay 13% mortgages…and the feds would be desperate to sell bonds with 15% coupons…and the dollar would be collapsing…and the entire system would have the shakes…and we wouldn't be having this discussion. We'd all be expecting inflation to hit 20% and happily waiting for gold to reach $5,000 an ounce.
No one knows where the price of gold is going next year or the year after. All we know is that the risks of owning it are fairly low…while the risks of not owning it are high.