Why I Got Gold Wrong

Includes: DBP, GLD, IAU
by: David Bailey

There should now be no question that America is in a deflationary crisis. Therefore, holding gold - a commodity - is fundamental financial insanity. And yet gold is skyrocketing. I missed the fact that, psychologically, people have little choice.

One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.

I went through the asset classes, thinking in terms of a simple phrase that might characterize people's opinion of them:

  • Commodities: See "deflation" above.
  • Real estate/REITs: Are you kidding?
  • Mortgage-Backed Securities: Full of Lemon Loans, the whole problem. Next.
  • Corporate Bonds: Spreads too high, too much risk.
  • Municipal Bonds: No bond insurance, hurt by falling tax revenues.
  • Treasury Bonds: Yields INCREDIBLY low.
  • Foreign bonds: Nobody even knows how to buy them.
  • American Stocks: Cramer says "1987".
  • Emerging market stocks: 1987 or 1929, take your pick.
  • Even Money Market accounts are in trouble as the Reserve Fund "broke the buck".

That doesn't leave much. I come up with MAYBE European/Japanese stocks...and gold.

Gold is the only asset with - if you'll allow me - an untarnished brand.

Therefore, tragically, gold will go up and fast as people lose faith in other assets. It will also go up on the false, chimerical belief that somehow gold is money.

Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency.

In the modern world, gold operates as a vehicle for currency arbitrage - a place to temporarily park your assets until you decide what currency you want them in. But it is a creature OF the currency system, not a backing for it and certainly not a substitute. For this reason the dollar index - despite unprecedented turmoil and low short-term rates - does little:

Once people decide they need that currency - to buy things - they sell their gold. And that's what people will do - en masse - when they start to need the money they have "saved" by buying gold.

In the meantime, goldbugs, have fun and, as ever...