David Lentz

Is the Gold Rally Really Over?

It never ceases to AMAZE me that the gold bugs can be so obviously of two minds about the subject of "money". They can treat it as exclusively and only printed (physical) cash -- of course an exceedingly tiny minority of the Fed-created "money" is in paper dollars -- and at the same time recognize that credit is money too, or some sort of lesser variant that they don't want to think about too awfully much, 'cause it makes their heads hurt.

You see, once you acknowledge that the Fed creates "money" by extending credit, you are (or should be) pretty much compelled to look at the "supply of money" as encompassing both physical dollars and extended credit (almost entirely extended credit, as it happens).

Or maybe they feel that they can treat credit extended by the Fed as somehow different from credit extended by Countrywide Finance -- yet each will purchase pretty much the same amount of physical assets, on the same dollar basis. The credit extended by the Fed is pretty much interchangeable with any other form of credit, subject to the willingness of the seller to accept it, and its ability to be exchanged for other forms of credit/money.

Money, in whatever form it occurs in, is simply an intermediary between assets.

So when gold bugs look at the Fed's high-speed virtual printing presses whirring away and completely ignore the ginormous vacuum of collapsed credit that they are attempting to replace, they miss the boat entirely.

Hence the disconnect between those concerned about deflation and those concerned about inflation.

The real concern should be how accurate the Fed can possibly be in this endeavor, with the fuzziness about what credit is sound and what is not forced into stark black-and-white contrast by mark-to-market accounting.

If the Fed overshoots the mark, we are left with an abundance of "money", and we get inflation. If the Fed undershoots, we get deflation. With inflation, the value of gold in dollars will increase, but with deflation, dollars will be preferable to gold (or most other hard assets).

The gold bugs had better be hoping that the Fed more than fills the credit vacuum, and should be worrying about the ability of the economy to accept so much Fed credit. Even if gold is worth $10,000 per ounce, it's pretty useless if you cannot buy groceries or gas with it. And once markets collapse, that's the scenario you are left with.