Themes: Gold, Contrarian opinion, Economy, Debt
The trouble with being a contrarian is that you can never be quite contrarian enough.
We began having doubts about the ‘feds inflate... gold soars’ hypothesis last year. It was too easy... too obvious. And if it were that easy to inflate a nation’s currency, how come the Japanese couldn’t get the hang of it in the ‘90s?
So, we moved towards a contrarian position – inflation, yes... but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.
To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that’s all we ask of it, we are always satisfied. Even if it is down in the short run – and it went through an 18-year down cycle from 1980 to 1998 – it will come back in the long run.
Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in dollars nor in euros; he should count it in ounces.
Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now... everyone’s a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the gold price... followed by a new, big bull market after inflation has found its footing.
And so what does gold do? It goes up!
Yesterday, gold rose $11 – still comfortably above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we’d see it in the bond market. But instead of selling off – which is what Treasuries should do if there were any hint of inflation – bonds are going up.
Is gold going up because people are afraid of the dollar going down? Well, maybe. But that is like saying that the dollar is going down because people are afraid the price of gold is going up. Where’s the chicken? Where’s the egg? Which is the cause? Which is the effect?
The dollar is still going down... as gold rises. Yesterday, it closed just below $1.48 per euro. It is so low now that Americans’ cost of living is among the lowest in the world. The average house sells for just $160,000. That’s just over 100,000 euros. Even out in the country... you would have to do some serious searching for a nice house anywhere in Europe that you could buy for $100,000 euros.
And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse – by delaying it, disguising it or diverting it in another direction (such as converting deflation into hyperinflation).
Yesterday, the Dow rose again – up 51 points. As far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.
House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January an estimated 350,000 houses have been bought thanks to the program.
Household net worth also is going up – at least, that’s what the papers say. For the first time in 2 years. Of course, what do you expect? The feds are pushing up asset prices – giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends... so does the temporary wealth effect...
Is this still a contrarian view? Seems to us that it’s becoming more contrarian every day. The longer the rally goes on, the more people think it is the real McCoy.
Stay tuned…
More news, from Forex Trade Alert:
“Tonight sees the all important outcome of the Fed’s two day interest rate meeting,” writes Tom Tragett in this morning’s issue of his excellent daily round-up of the markets.
“The decision is due at 7.15pm ( UK time) and might encourage some profit taking on short dollar positions ahead of the outcome. The Consensus is for no change but USD short positions might get a little nervous just in case.
“The rally in equity markets that has seen the steepest rises in the S&P 500 and the Dow since the pullback after the crash of 29, are going to be extremely sensitive to any move up in interest rates.
“The Fed is naturally aware of this but it is also aware of the need to combat inflationary pressures that are building in some markets.
“On balance it would still seem to be too early for the Fed to act in raising rates as the recovery looks too fragile (which in turn questions the vertical nature of the current equity market rally), but I won’t be taking the outcome tonight as a foregone conclusion.
“ Sterling has risen back sharply from Monday’s lows touching 1.6415 against the dollar in Asia this morning. The price has since slipped back as Europe opens for business ahead of the release of the minutes from the Bank of England’s last policy meeting.
“It is clear from the mood and mindset of the BOE that a weaker pound is not a luxury, it’s a basic requirement. In seeking to help the pound down, the chances of foreign investment (which is most needed despite Brown and Darling’s efforts to tax it away!) increase with a lower level of sterling; be it Swiss financiers eyeing cheap London Property or American food companies eyeing a chocolate snack.
“However the BOE will need to walk a tight line here as a freefall in sterling could actually force their hands in raising interest rates to combat the inflationary pressures that may result from a collapsing currency.
“Put my two most prized possessions in a clamping device and make me call it 1.50 or 1.70 for pound versus dollar – well there’s only one call really and it’s not the higher one.
“The pullback from the 1.6135 on Monday to 1.6415 looks entirely corrective and we should see the GBP fall further under 1.6000 in coming days.”
Tom’s looking for the right level to enter a sterling trade. It’s too easy to be wrong-footed right now, so he’s not rushing in. To join him and also to discover his biggest Forex prediction of 2009, click here.
And back to Bill, with more thoughts:
*** If we are right, the massive effort by the feds will make things massively worse. That is the position taken by Arthur Laffer in a recent Wall Street Journal editorial, by the way:
“The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.
“The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products... beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!)... By the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That’s one helluva tax....
“Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon..."
“The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that’s the story.”
We had no doubt that inflation can occur during a depression; hey, we read the papers. Anyone who has followed the Zimbabwe story knows that you can have a deadly depression... and dizzying levels of inflation at the same time.
But there’s always more to the story. Devaluing the dollar in terms of gold had the immediate effect of increasing the money supply – it was like adding zeros to the currency.
In our wallet is a Ten Trillion dollar Zimbabwean bill, with a picture of stones on it. Those words – ‘ten trillion’ – did not get printed on that bill by accident. We assume they got printed on there by a printer in the employ of a government that figured that the cost of printing a ten trillion dollar bill was less than the cost of not printing it.
That is, by a desperate government that had so fouled-up the economy that a period of hyperinflation might seem like an improvement. Besides, hyperinflation might have a therapeutic, purgative effect.
But let us not get sidetracked by hyperinflation. It is nowhere in sight. Nor is its more civilized cousin – normal, polite inflation. The money supply in America – as measured by M2 – is contracting. The banks get money from the feds, but they don’t pass it along. The chain of reflation is broken – or at least temporarily stretched. Currently, it takes a long time for money to get from one end to the other. The cash tends to get waylaid –either by the bankers... or by consumers themselves. It stays in bank vaults... or in bank accounts. Money is not being multiplied by the speed by which it changes hands. Instead, it is divided by immobility. It sits. It shrinks. It waits for a real boom.
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. If you do wish to speculate with the gold price, get someone who knows what they’re talking about on your side. We sent you details earlier of one contact you should talk to if you want gold shares in your portfolio. He believes that you could soon be profiting from the biggest gold stock surge for 78 years. In case you missed that, you can access his report by clicking here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
