Another week, another new bull market high for the $US spot future Gold close. You never would have known it from the "dramas" earlier in the week. Gold was down slightly on Monday and didn't move at all (on a spot future closing basis) on Tuesday and Wednesday. As truly befitting the "wall of worry" which any legitimate bull market climbs, there was an instantaneous reaction. Abetted by a sudden swan dive on world stock markets, Gold stocks in all the major markets (US, Canada, Australia, South Africa, London) took hefty dives right across the board.
Part of the reason for this was the usual one. When Gold finally surpassed its previous bull market highs three weeks ago, the mainstream financial and investment media was pretty well forced to pay attention. They did so in their usual manner: "Gold is overbought!" "Gold is getting ahead of itself." "The recent surge in $US Gold prices is not justified on economic 'fundamentals'!" "At these levels, Gold is due for a correction!"
Contrast this to the unbridled glee with which every new surge of the Dow and especially the Nasdaq in the late 1990s was greeted. No stock was ever "overbought". No sell recommendation was ever made. No index height was ever "too high". And if there was a correction, it was merely a "buying opportunity". Please remember too that all this guff was being churned out long after the market indexes peaked in January - March 2000.
In sum, and especially after the stock market dip in the late summer of 1998, there was never a hint of "worry" from the mainstream financial media. That is in itself a RED LIGHT warning that the bull market is nearing its peak. You can see examples of this by examining the newspapers from the summer of 1929 and 1987. You can see definitive examples by examining the mainstream commentary for the entire year of 1999. Bull markets climb a wall of worry. When the worry dissipates and becomes a mix of greed and complacency, you may know that the days of the bull market are numbered.
The $US Gold price hit a "double bottom" just above the $US 250 level in February 2001 after rebounding from almost the same level in August 1999. Measuring the present bull market from the end of that double bottom it is now only four months short of being five years old. By way of comparison, the great Dow bull of the 1980s which ended with the Crash of October 1987 lasted five years and two months - only six months longer than the present Gold bull. The great bull market of the 1990s lasted from November 1994 to January/March 2000. That is also a little over five years. By those standards, this Gold bull market is getting a bit long in the tooth.
The difference is that in stark contrast to all three of the stock market bulls outlined above, the "wall of worry" has been an omnipresent feature of the current Gold bull market. It has never gone away. Ever since the bull began in early 2001, predictions that it has ended have been coming out - like clockwork - every two or three months. Every peak has been THE peak and every correction the start of Gold's bear market.
Again, the reason for this is clear enough. As far as 98% of the financial community is concerned, Gold has been in a bear market for more than a quarter of a century, ever since its $US 850 high in January 1980. This is, of course, ridiculous. We have never yet heard anyone say that the Dow was in a bear market from 1929 to 1953 - yet that 24 years was how long it took the index to regain the high it set in September 1929.
This attitude towards Gold is a variation on the most dangerous confusion in modern monetary and financial analysis - the inability to distinguish between money and real wealth. Money is NOT wealth, it is merely the medium by which wealth can most easily be exchanged. Before it can be exchanged, it must be PRODUCED. Anyone who wants to cure him or herself of this confusion merely needs to read (or re-read) Robinson Crusoe by Daniel Dafoe. The possession of all the Gold (or paper) in the world would not have saved Crusoe from starving to death. He was saved by the WEALTH he was able to recover from the wreck of his ship - and from his prudence, perseverence, and ingenuity in using that to create more wealth. This is a crucial distinction which has been all but lost in the modern world of "finance".
In this regard, the funniest aspect of recent financial analysis is a grudging admission of the emergence of actual "inflation" in the US. Funnier still is the sudden outbreak of statements from Fed officials that they are guarding against the "virus of inflation".
The years of the Gold "bear market" (and it is still a bear market because Gold has not yet reached its 1980 highs, right?)have been the years of the greatest global inflation in the history of the world. The ultimate engine of this inflation has, of course, been the Fed under that "genius of monetary manipulation" Alan Greenspan. Driving forward along their stated course of "price stability", the Fed (with Wall Street and the investing public cheering from the bleachers) has benignly watched as financial asset bubble after financial asset bubble was formed, blown up to massive proportions, and burst.
The one thing that PAPER ASSET FINANCIAL MARKETS have NOT enjoyed over the past quarter century has been "price stability". What has, over most of that time, been "stable" have been consumer goods, commodities of all desctriptions, and the precious metals.
According to the Fed, and the mainstream investment media, creating vast and ever increasing amounts of paper CLAIMS to wealth is not "inflation". Nor are soaring stock or bond or real estate prices signs of "inflation". Nor are astronomic debt levels at every level of the economy the results of "inflation". In short, no matter how much "money" is brought into existence and no matter how high the prices for assets which are dependent on the creation of money go, there is no inflation because prices are "stable".
Which prices? The prices of the items of REAL WEALTH - raw resources, commodities, producer goods and consumer goods. Only when the prices of these items - the only ones which count in the REAL economy - start to rise is the "virus of inflation" raising its ugly head. Only when the prices of these items rise is the quest for "price stability" in danger. Only when the shortage of GOODS which is the inevitable result of a maniacal pursuit of the "production" of (fiat) money rears its head is the situation in need of remedial action.
The fundamental economic problem in the US (and in many other nations, especially the other English-speaking ones) is the capacity to create wealth has lagged DEVASTATINGLY behind the capacity to create debt. As long as the new "money" created by this debt creation capacity was circulating about in the sphere of financial (read paper) assets, the results could be hidden. But as it always does, that era is fast coming to an end.
It is true that the Bush Administration, as incompetent a governing coterie as history records and worthy to stand with the worst of the Emperors of Rome's decline, have speeded up this process. But that is mere coincidence in the bigger scheme of things. The fact is that the process was and is inevitable.
We have all lived our lives in a world in which the "omnipotence" of government in general and financial manipulation in particular have been taken for granted. The last time that it was REALLY seriously questioned was in the aftermath of the 1929 crash. The last time that any disquiet at all was shown was when Gold spiked to $US 850 in 1979-80. For all of our adult lives, paper money and those who bring paper money into existence have reigned supreme and unchallenged.
That is why most people, even avid and knowledgeable Gold "bugs", still view this Gold bull market with misgivings. They have never accepted the fact that economic laws are just as immutable as the laws of nature. Nor have they ever accepted the fact that a "check" for any amount of US Dollars is not the same thing as a rebuilt city of New Orleans - or for that matter ten million rounds of ammunition to continue the "war against terror".
As long as Gold continues to climb the "wall of worry", there is absolutely nothing to worry about. We think it will be climbing it for a long time yet. Sit back and enjoy the ride.