u2022 Gold has risen over our $600 target price. But barely. What’s ahead for the metal? If only we knew!
So far, there has been nothing unusual about the gold price action. It was under $300 when George W. Bush took office. Since then, it shot up with other commodities — to over $700…far outpacing the returns you were likely to get from any other major asset class.
As gold gathered momentum and press coverage, the need for a correction increased. From $725 an ounce on May 12, the price fell to $567 on June 20th. Since then, it has been up and down and nowhere in particular, "building a base," say the pros, for another move upwards. We now may be at the beginning of that next move to the upside.
But this assumes that we are right about the major trend. We judge gold to be in a bull market. For two decades, the price of gold fell. Now, we figure, it is going in the other direction. Of course, it is more than that. A lot has happened during those two decades.
The world’s supply of "money," debt and credit has vastly increased. By contrast, the supply of gold hasn’t even kept up with increases in GDP. And while there is no reason that gold should go up with increases in GDP, credit derivatives, beer or anything else…there is still a tendency for things to go wrong from time to time. And when things go wrong, people begin to hunker down…and wonder what they really have…and what it is really worth. They watch their hedge fund accounts blow up…they see their dollar bills shrink by inflation…they look at the news programs and realize their stocks are only worth a fraction of what they were a few days before…they talk to their neighbors and realize that their house is worth only half what they paid for it. What can they do?
They reach for something solid to hang onto — something real…something that holds up under pressure. They reach, traditionally, for gold.
Gold is not a perfect money. Nor is it a perfect way to store wealth. But its defect in good times becomes its virtue in bad ones. When the going is good, the returns from gold can’t match what you get from a heavily leveraged hedge fund or a house in a hot market. But when the going gets tough, gold gets going…and soon passes all the burnt out hulks of hedge funds…and bombed out houses…and worn-out bonds.
We don’t buy gold to make money; we buy it not to lose any.
u2022 “I don’t think there is much chance that the United States will attack Iran,” said Lord Rees-Mogg over lunch yesterday. “Or, I should say, the oil market doesn’t seem to think Bush will attack Iran, and I think the oil industry knows better than anyone what the Bush administration is up to in the Mideast. I mean, they’re connected at every level.
“But there are also other good reasons for the Americans not to attack Iran. They could hit the country’s nuclear installations, for example, fairly easily. But Iran would stop the flow of oil. And other nations would join it. And Americans wouldn’t like that very much. There’s just not enough margin in the oil market to permit that kind of disruption.
“And the United States would lose all its allies. Even Britain couldn’t continue its support if the United States attacked Iran. I know the neo-cons think they are defending Western civilization…but they risk convincing the rest of the world that the thing Western civilization needs protection against most is the U.S.A.”
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.
