Is this a good time for gold?
The economy is good for owning gold, but it doesn't seem like it because the dollar is going up.
Bull and bear sculptures by gold bars. The author argues that it is a good time to buy gold, even though the dollar is high.
Creativ Studio Heinemann/Westend61/Newscom/File
Not much market movement Tuesday. Dow basically flat. Gold rose $30. Gold investors don’t seem to be able to decide. Is the economy good for gold…or bad?
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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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Here’s our opinion: This is a good time to own gold. But it won’t seem like a good time. Not now. Because the Great Correction just gets worse and worse. And as the correction bites the economy, the dollar goes up against almost everything.
“Gold is not going down,” says David Rosenberg. But we’re not so sure. Gold investors bought gold to protect themselves against the dollar. But in the short and medium term, they won’t need protection against the dollar. They’ll need protection against everything else! They’re likely to be disappointed with gold and drop it as this period of de-leveraging drags on.
Yesterday, we promised to explain what was really behind what Tyler Cowen calls “The Great Stagnation.” We haven’t forgotten. We’ll come back to it. Just hold on.
First, let’s look at how this world economy is slipping into a worldwide depression.
Just check out the container shipping volumes at California ports. They’re down nearly 10% from a year ago. That’s a big drop in world trade. What happened? Did Americans finally get enough gadgets and gizmos from Asia? And what does it mean for the Asian exporters? Their economies depend on buying from overseas. They’re export economies. Of course, it is true that local demand is increasing. Eventually they’ll adjust to fewer exports and more domestic consumption. But adjustments take time…and are usually linked to major financial crises. What will happen?
Here’s an answer from Britain’s Telegraph newspaper:
China ‘faces subprime credit bubble crisis’
Monetary tightening in China threatens to pop the $1.7 trillion (£1.07 trillion) credit bubble in local government finance and expose the country’s simmering “subprime” crisis, according to the Communist Party’s economic guru.
Mr. Cheng said China is entering a “very tough period” as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice.
“The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults,” he told a meeting at the World Economic Forum in Dalian. “Our version of subprime in the US is lending to local authorities and the government is taking this very seriously.”
“Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare.”
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