Nature's Antidote to Financial Chicanery


As long-time sufferers know, we are not exactly bullish on gold. We buy gold, but we have no real opinion about what the price will be or when it will be there. We like to own gold, in other words, not speculate on it.

Gold is nature’s antidote to human financial chicanery. The more distorted and stretched the world’s money system becomes, the more important it is to own gold to protect yourself.

The keeps us abreast of the latest distortions:

“For starters, our country has become a nation of debt where anybody can get a line of credit. Once reserved for the select few, many Americans are now relying on credit to purchase the essentials of everyday life. Americans no longer save what they earn. Second, the U.S. government for all intensive purposes is bankrupt with a debt in the trillions. Third, the Federal Reserve throughout its existence has continuously devalued our currency by expanding the money supply. They continue to do so, but since they stopped reporting the M3 money supply numbers we no longer know exactly how much they are destroying the currency. Fourth, foreigners are looking for ways to withdraw from U.S. currency holdings into something more stable. Fifth, the housing boom Alan Greenspan created is in the midst of crashing. Anyone with adjustable rate mortgages or home equity loans are getting slammed. Sixth, real wages are going down and the price of tangible assets is going up. Seventh, the Government Accountability Office is warning of a future economic disaster. Eighth, U.S. Treasury Secretary Hank Paulson is now organizing more frequent meetings of the President’s Working Group in Financial Markets otherwise known as the Plunge Protection Team every six weeks. The question is why would Paulson be organizing additional meetings of this group if the economy is in good shape?”

Gold is pulled out of the ground only grudgingly and reluctantly. Each year, the total amount of it above terra firma increases by only about 1.7 percent. But paper or electronic wealth (of nominal dollar-based assets) is lighter than air. It puffs, floats, soars, zooms, orbits…and pretty soon, it has lost all connection to the on-the-ground reality of the real economy.

But gold never gets too far from it.

Recently, we’ve been watching an HBO series on the history of the Roman Empire. In last night’s episode, we saw how close the fight between Caesar and Pompey for control of Rome really was. There was cunning and bravery on both sides. But only one side had the gold. When Pompey fled Rome, he made sure that the treasury went with him. But the treasure was waylaid…lost…and then recovered by Caesar. So, in the end, while Pompey may have had more troops, he had no way to pay them. We’ll have to wait until tonight to find out what happens, but we have a feeling that it’s the yellow stuff that will decide what happens.

Every government, before and since, has succumbed to the "Golden Rule" — he who has the gold makes the rules. When things are going well, a government can get by on paper money, I.O.U.s and credit. But when the going gets tough, suppliers, soldiers, and creditors lose faith in paper and promises; they want real money. And gold is real money.

Gold is up in price now simply because there are too many paper and electronic promises floating around. The Financial Times, for example, reports "panic selling" in the derivatives market. It seems that what’s hopping out of everyone’s hands is credit default swaps. Well, credit default swaps are what institutional investors buy when they fear the going might get tough. But now, instead of buying them, they’re selling them…and selling them down to record low prices.

Apparently, a lot of people don’t think a lot of credit will go bad for a lot of time.

But of course, that is just what most people tend to think…right before the gods let out a belly laugh…and things go bad in a big way.

u2022 Now, here’s a real negative for gold. Bloomberg reports that 27 out of 35 analysts are now bullish on the metal. They expect a weaker U.S. economy will drag down the dollar — and boost gold in the process. Rarely do prices rise when experts expect them to. But maybe this time, it will be different…and maybe gold will rise much more than the experts expect.

u2022 Expectations for housing, meanwhile, continue to be rosy…if not downright peachy. Everyone admits housing is coming down…but they insist it will come down in a "soft landing." Soon, we expect to see them begin redefining what soft is.

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.