Gold dropped $18.80 yesterday to a two-month low.
We don’t know whom to thank — calculating manipulators or panicking speculators. But we have two hunches. One, that the price of gold will probably drop below $600 before this correction is over. And two, that anyone who sells now will feel like a genius next week and a moron a year from now. (We admit that we filched that last line from an article in this coming weekend’s Sunday Times. We liked it so much we couldn’t resist. Then, we realized that it was attributed to us! Readers will wonder how we get to read the papers before they are printed. But we have to have some trade secrets.)
It was not just gold. Investors dumped whatever investments they considered too speculative for those they thought safer. A worldwide “flight from risk” is underway.
The trouble with “flights from risk” is that they are often going to the wrong airport. While emerging markets, commodities, and gold sell off — the Dow steadies, while the dollar and U.S. Treasury bonds rise. This is a little like picnickers fleeing the slopes of Vesuvius. Hearing the rumbling, they scramble into a jet, fly around the world, and then lay down their blankets on the side of Mt. St. Helens. Ah, home again! Back where never is heard a discouraging word…and the skies are not cloudy all day.
For now, the “flight from risk” seems to be full of speculators, carrying them from “risky” markets, such as the Bombay Stock Exchange, which dropped 4.7% yesterday, over to the New York Stock Exchange, which rose modestly.
The Fed has tightened all the way to a funds rate of 5%. Meanwhile, Japan’s fire hose of liquidity suddenly began to splutter and dribble. Then, the head Fed man stepped up and said right out loud that he was worried about inflation. Finally, the race sped up yesterday: Asian central banks — from the Korean to the Indian — announced tightening measures. Even the Europeans declared they were girding their loins to fight inflation. The ECB raised its funds rate by a quarter of a percent to 2.75%.
Faced with this sudden binge of sobriety, of course, speculators took flight. Their faces twitched. Their knees jerked. Their palms began to sweat. And what would you expect? They boarded the “flight from risk,” high-tailing it away from the exotic, foreign, and mysterious investments they were only just chatting up. They fled back into the arms of the old, familiar dollar. They came back to mama.
Alas, the old girl ain’t what she used to be. Too many wild parties. Too much liquidity late at night. Too much smoke and mirrors. The years and abuse have taken their toll. In the dark night of panic, speculators may not notice the deep lines of debt on her face, the cheap makeup with which she covers up her deficits, and the hidden girdles and padding that buff out her faded posture and swindle her admirers. Wait until they get a good look at her!
Speculators, a notoriously fickle crowd, are quite capable of changing their minds — even in mid-flight. Right now, they see risk in gold and safety in paper. That their eyesight will improve is the abiding faith of The Daily Reckoning. It is what keeps us going.
When their vision is clearer, speculators will see things as their forefathers did before them. They will come to see the dollar as a risky piece of paper and gold as a sure store of wealth. They will come to see what foreign governments already know. Yesterday, we learned that the Russians have now moved as much as half of the foreign exchange reserves of its central bank into Euro and Sterling.
That speculators nonetheless fly away from gold rather than toward it proves to us that this bull market in the yellow metal has barely begun. When the bull really begins to rampage, speculators will run out of the dollar, not into it, and see every new drop of liquidity as more evidence that mama dollar has lost her mind.
u2022 U.S. forces proudly displayed the photo of a dead man yesterday. Bombing a house to kill the man, reports said, U.S. airmen also killed five other people — including a child. What the child did to deserve the death sentence was never addressed.
But this is war. And in a war, innocent people die as well as the guilty, especially when it is a war against nobody-in-particular.
What are we fighting for? We turn to the Commander-in-Chief for elucidation:
"This is only the beginning. The message has spread from Damascus to Tehran that the future belongs to freedom, and we will not rest until the promise of liberty reaches every people in every nation.”
u2022 We walked home from work yesterday. Our course took us by many of London’s great monuments. Every few paces we were reminded of the greatness of the empire. There was Nelson at Trafalgar, and Wellington at Waterloo. And there was Apsley House, given to the man who defeated Napoleon by a grateful nation. And there in front of Buckingham Palace itself, a large fountain commemorates the empire’s victory over nature and economy, too…with statues showing her people bringing industry, commerce and agriculture under control. And then, at the end of the park are pillars recording how the British Empire ruled not merely the waves, but the continents: Asia…Africa…North America.
Ah yes, what a great time to be white and English. When God was still in his heaven. When Queen Victoria was on her throne. When Britannia ruled the world!
Passing by St. James Park, we caught a glimpse of the marshal splendor of it. There were horse guards, a band, and what looked like a whole regiment dressed in bright scarlet uniforms. And another decked out with gold filigree. Exactly what the occasion was, we didn’t notice, but we saw that it cost seven pounds for a seat in the bleachers.
As we walked through Knightsbridge, we saw more of the residue of empire…or perhaps the marks of the new era of globalization. There were restaurants of every conceivable variety, from Chinese to Argentine. And on the streets, a Babel of languages. In the space of two blocks, we heard German, Swedish, Spanish, Italian, French, and a variety of African and Indian languages we couldn’t identify.
“The wogs start at Calais,” the British used to say. But now the wogs begin at Charing Cross — and they’re taking over the city. Everywhere you look there are foreigners (ourselves included!). Forty percent of the property in central London sold last year was bought by foreigners. And last week’s news reported that 45% of the City (equivalent to Wall Street in New York) is now owned by foreigners. Now, rich Persians sit while Englishmen shine their shoes. Rich Indians drive around in new Lamborghinis sold to them by middle-class Brits. Rich Russians rent storefronts to English real estate agents, who sell their best properties to foreigners. That is how it goes, isn’t it? You rule the barbarians…until the barbarians rule you. The flies conquer the flypaper.
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.
