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Gold crossed the $1,000 threshold again recently. For the right reasons... and perhaps the wrong ones. Separating the good from the bad and the ugly is the challenge of today's column.
The press attributed gold's rise to benign causes. The end of the world seems to have been postponed – indefinitely. Bloomberg reported that a clear majority of those polled thought the world economy was recovering. With no more fear of the deflation devil, investors felt they were in the arms of angels. Surely Ben Bernanke watched over them even when they slept. Most people – including the president of the United States – attributed the recovery to the archangel Ben. "Investors give Bernanke high marks," said the headline.
As for Tim Geithner, he took no chances; he sang his own praises. Speaking to a gathering of the G20, he congratulated them all: "... facing the greatest challenge to the world economy in generations, the G20 gathered here in London and committed to an unprecedented programme of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway."
Stocks are still up. Commodities too. Oil is over $70. Most encouraging of all: the ten-year Treasury note yields only 3.47%. So what evil sends investors running to the protection of gold? None, say the papers; investors buy gold in anticipation of a recovery, which will bring with it tightened supplies and rising demand. Every economist, investor and hair stylist knows what this means – inflation.
But if growth is underway, investors should be glad there's not more of it. The key indicators of real economic progress are negative. Employment is not rising; it is falling. Nearly seven million Americans have lost their jobs since the recession began. In California, only three of five working-age residents have a job. Those who are still working are putting in the shortest work weeks ever recorded. How could the economy be growing with fewer people earning money? The New York Times tried to explain the enigma by calling it a "jobless recovery". But a recovery without jobs seems unsatisfying, like a loveless marriage or a fat-free burger.
Another key indicator is personal spending. Not surprisingly, that is down. Maybe it is a spending-less recovery too. The level of consumer spending is down 33% from a year ago. Discretionary spending in the US is now down to a level not seen in 50 years. Consumers aren't spending partly because they have no money, and partly because they apply what money they have left to relieving the headache from their previous spending spree. In July, they reduced their personal debt hangover by more than $21bn – four times what economists had forecast.
These are, of course, the same economists who pimp for the angels at Bernanke & Co. If they're right, we have a spending-less, jobless recovery pushing up the price of gold. Or, they are all clueless. Readers may come to their own conclusions.
We offer an alternate interpretation. We begin with a doubt about the one now on the table. In the popular version, the more the recovery seems real, the more investors fear real inflation. This drives them to buy gold. As inflation rises, so will the price of gold. If this were correct, we could also expect remedial measures from the US central bank. The Fed should withdraw its monetary stimulus, returning the economy to a kind of normalcy it hasn't seen in years. The risk, not insignificant, is that Fed economists will err. It may loosen monetary policy too slowly or too quickly. Asked about the risk, Janet Yellen, president of the Fed's San Francisco branch, replied: "I'm more concerned that we will be tempted to tighten policy too soon, aborting recovery. That's just what happened in 1936... the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system... let this not be another 1937."
Gold bulls are counting on it. And the Chinese – with the most to lose – are buyers too. "Gold is definitely an alternative [to the dollar]," said Cheng Siwei of the Peoples' Republic, "but when we buy, the price goes up. We have to do it carefully so as not stimulate the market." The gold bulls may be right. But we'd add a nuance. We're not surprised by Fed errors. What surprises us is the rare accidental success. It would take a miracle for central bankers to find exactly the rate the market needs precisely when it needs it most. The '37 error might have been an accidental success. It pushed the market in the direction it may have wanted to go – towards further liquidation. At least the decks were clear when the post-war boom came. Maybe we'll get lucky and the Fed will make the same error again.
Not likely. Today's recovery, based on hot money from the feds, is a fake. It won't cause inflation, not soon. When this becomes clear, commodities will sink – along with stocks... and gold. Central banks, ignoring the futility of their hot money programme so far, will add more hot money. Eventually, the gold bulls will be proven more right than they imagine. But they may be proven wrong first.
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Bill Bonner
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