Is Gold Going Up Because People Fear Inflation?

Bill Bonner
Provided as a courtesy of Agora Publishing & The Daily Reckoning
Sep 25, 2009

The trouble with being a contrarian is that you can never be quite contrarian enough.

We began having doubts about the 'feds inflate...gold soars' hypothesis last year. It was too easy...too obvious. And if it were that easy to inflate a nation's currency, how come the Japanese couldn't get the hang of it in the '90s?

So, we moved towards a contrarian position - inflation, yes...but not for a while. And gold? Well, we are in it for the long run. In the short run, anything could happen.

To clarify our view on gold, the Daily Reckoning is not bearish on the metal. It is not bullish on the metal either. It is buggish. We are gold bugs. In the long run, gold will retain its value. Since that's all we ask of it, we are always satisfied. Even if it is down in the short run - and it went through an 18-year downcycle from 1980 to 1998 - it will come back in the long run.

Gold is not a speculation for us; it is a means of saving money. As Richard Russell says, a man should count his wealth neither in dollars nor in euros; he should count it in ounces.

Our views on gold are still contrarian. But our views on the gold market have become commonplace. Now...everyone's a contrarian. As we read the opinions and the blogs, it has become common to forecast a dip in the gold price...followed by a new, big bull market after inflation has found its footing.

And so what does gold do? It goes up!

Yesterday, gold rose $11 - still comfortably above the $1,000 mark. Is gold going up because people fear inflation? Apparently not. If they were afraid of inflation we'd see it in the bond market. But instead of selling off - which is what Treasuries should do if there were any hint of inflation - bonds are going up.

Is gold going up because people are afraid of the dollar going down? Well, maybe. But that is like saying that the dollar is going down because people are afraid the price of gold is going up. Where's the chicken? Where's the egg? Which is the cause? Which is the effect?

The dollar is still going down...as gold rises. Yesterday, it closed just below $1.48 per euro. It is so low now that Americans' cost of living is among the lowest in the world. The average house sells for just $160,000. That's just over 100,000 euros. Even out in the country...you would have to do some serious searching for a nice house anywhere in Europe that you could buy for $100,000 euros.

And what about the economy? Our contrarian position has remained unchanged. As we put it last week, there are few problems that enlightened central banking can solve; a credit contraction is not one of them. All the bankers can do is to make it worse - by delaying it, disguising it or diverting it in another direction (such as converting deflation into hyperinflation).

Yesterday, the Dow rose again - up 51 points. As far as we can tell, the rally is still on. And now, the news media and the statisticians are in full support.

House prices rose 0.3% in July. Hooray! Of course, the government is giving huge tax credits to new house buyers. Since that program began in January, an estimated 350,000 houses have been bought thanks to the program.

Household net worth also is going up for the first time in two years - at least, that's what the papers say. Of course, what do you expect? The feds are pushing up asset prices - giving them the biggest push in the history of man. But remember, the market is also doing its usual post-crash bounce. When the bounce ends...so does the temporary wealth effect...

Is this still a contrarian view? Seems to us that it's becoming more contrarian every day. The longer the rally goes on the more people think it is the real McCoy.

Stay tuned...

Bill Bonner

Sep 24, 2009
Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

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