Buck Naked

u201CI got plenty of nuttin’…an’ nuttin’s plenty for me…u201D

Our essay today is on nothing…in particular.

We’ve mentioned earlier that often the best thing you can do is nothing. Inaction is an underrated virtue and an unappreciated skill. How do you lose weight? Just don’t eat. How do you save money? Just don’t spend. How do you avoid getting involved in a costly war against nobody in the Middle East? Just don’t go there. How do you live to a ripe old age? Just don’t die. How do you remain faithful to your spouse? Just don’t…well, never mind, you know as well as we do.

What we like about gold is the very thing that makes it a bad investment. It doesn’t do anything. You can build a house, rent it out…and you will get a return on your investment. Or, you can buy a stock. There, too, if the company makes money you may get something extra from the money you put in. But gold? No, it is inactive. It is faithful. It cannot give you a return because it does nothing to earn it. It doesn’t take chances. It doesn’t fool around. Then again, it won’t cheat on you or mislead you. It is what it appears to be and nothing more. You get what you see — an inert, rare place setting on the periodic table.

The price of gold hit our target price last week…and just kept going. Now, it is back up and we are buyers.

It would have been nice if gold had broken through $500 on the way down and given us the clear-cut, no-questions-about-it correction that we had been waiting for. It would have caused despair among casual buyers and shaken off speculators. It would have given us a chance to buy at an even better price!

But while markets always do what they’re u201Csupposedu201D to do, they never quite do what you expect. So, we’ll take what we can get. Gold is going up because it is supposed to go up. Because even though it is not perfect, it is the best money mankind never invented. It is money in the sense that it is a convenient reliable proxy for real wealth. And because there is a lot more of the other kind of money — the kind you make from trees — than there used to be.

In the short term, compared to green money, yellow money tends to go up and down. But, over the very long term, it has proven to be more reliable than anything else. You can buy a suit of clothes for an ounce of gold today — just as you could during the reign of Julius Caesar.

But why wouldn’t it be better to invest your money rather than hold it in such a lethargic form? Because there are times when inaction is better than action…when doing nothing with your money is better than doing something. When investments are overpriced, for example. Or, when the risks are under-appreciated. In the late ’70s, for example, the price of gold soared when it became apparent that the risk of consumer price inflation had been widely ignored.

That is not the case now. No, if you read the papers you get the impression that financial authorities all over the world are staying up at night worrying about consumer price inflation. Another 25 basis point increase in the Fed’s key lending rate is expected next week. There is talk of another one in August. Japan is tightening up lending. China is mopping up liquidity. The European central bank is raising rates. There are so many inflation hawks that their flapping practically eclipses the sun.

Yet the actual evidence of consumer price inflation is as skimpy as a Brazilian bikini. The feds’ bogus measure of housing costs — owner’s equivalent rent, which makes up almost 40% of core CPI — overstates the actual cost of having a roof over your head. Without the housing figure, core CPI has not moved one way or another since the middle of 2004.

And whoever else is, investors clearly aren’t worried about inflation. When the asset sell-off began a few weeks ago, speculators were busy selling off the very things they should have been buying: commodities and gold.

No, the danger comes not from consumer price inflation, but from asset price inflation. That is the risk that is under-estimated and un-hedged. In fact, the typical investor judges it no risk at all.

Asset price inflation is typically followed by asset price deflation. That is the part investors don’t like. It is when they find that they can exchange their houses, their stocks, their bonds for fewer paper dollars than before. It is likely to make them rather tearful when they do so; we think they may turn to gold for comfort.

The other kind of risk investors appear not to notice is the risk that the paper dollar will fall against other paper currencies. Warren Buffett may be concerned, but there are few Warren Buffetts in the marketplace. The typical investor barely thinks about it. He pays his bills in dollars. He spares no care for those of us here in Europe…lowly servants of U.S.-based businesses…sent off to foreign courts and overseas counting houses so that we may grub for money in foreign soil, and expand the great commercial empire’s reach.

But the exchange rate is a risk, too. And when it is discovered by the mob, they are likely to discover gold.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.