Skip to: Content
Skip to: Site Navigation
Skip to: Search


The Daily Reckoning

Gold soars as the dow drops: why that's bad news for you

It only makes sense to favor gold over productive investments at a time like this: when the world's monetary system is heading for a crackup.

By Guest blogger / June 10, 2010

A Jordanian goldsmith holds gold bracelets at his shop in Amman on June 9. Gold has risen to a new record high of $1,245 as investors flee the stock market.

Muhammad Hamed/Reuters

Enlarge

Baltimore, Maryland – They fought the correction; the correction won.

Skip to next paragraph

Recent posts

We refer to Bernanke, Summers, Obama, Geithner, Krugman – the whole lot of them. They added three trillion dollars to US debt in the last two years. In two more years the debt will be at 100% of GDP. Add in the debts they’ve guaranteed – from Fannie Mae, for example, and state and local debt implicitly backed by the feds – and you’re already at 150% of GDP. Worse than Greece, in other words.

And what do we get for it? A recovery? A healthy economy? A gold medal?

We’ll take the gold medal, thank you. It’s the only one that’s real.

The stock market was ready for a little bounce yesterday. So that’s what it did…a little bounce – the Dow up 123.

Gold kept climbing – to a new record high of $1,245.

If you had asked us 10 years ago which we’d rather have – stocks or gold – we would have said gold. Ask us now. Same answer.

Gold.

There aren’t many times when it makes sense to favor gold over productive investments. But this is one of those times.

Why? Because the world’s monetary system is heading for a crackup. And because the people running it have no idea what they are doing.

Bloomberg:

Pimco’s Crescenzi Sees ‘Endpoint’ in Devaluations

June 8 (Bloomberg) – Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager.

“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”

The Obama administration forecast a $1.6 trillion budget deficit, the most ever, in the current fiscal year that began Oct. 1.

You can fight a correction. You can delay it. You can distort it. You can make it bigger and nastier. But you can’t beat it. Eventually, mistakes have to be corrected…one way or another.

Usually, the mistakes take the shape of bad investments or bad loans. You can pretend that they’re still worth what you have in them. You can bail out the lenders and/or the investors. You can default and inflate. But somehow, someone, sometime is going to take a loss.

That’s when you need gold. Every other asset could have bad debt behind it…in it…or standing so close beside it that a blow-up would be damaging.

The correction that began in ’07 was needed to address all the bad debt built up in the bubble years. The feds tried to stop it. Since they didn’t have any money they had to fight it by borrowing more money – that is, by increasing the level of debt!

We knew that wasn’t going to work.

And now, there’s bad private debt…and bad public sector debt too. And now we’re approaching a Keynesian “endpoint” when lenders are growing wary. They’ve already cut off Greece. They’ve warned the rest of Europe. And when they stop lending…then, all your props fall down…along with the economy…and the markets too…

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.