2012: A little bit about gold

I was going to talk about gold as a hedge and hedges in general. Forgot to. Gold is money. If government scrip declines in value a unit of scrip will buy less gold than it would have before the decline. Gold will probably continue being an effective hedge against loss of the value of the dollar. The stock market, to an extent, and of course depending on stock, sector, etc., also is a hedge against the dollar. The Federal Reserve does QE, money volume increases, and the value of the dollar drops through dilution (just like a stock). The stock market goes up because the new money chases the market up, hedging the loss in the dollar's value. That is why Wall Street loves QE. Remember that the dollar today is worth what sixty cents was worth in 2000. If you look at the S&P 500 monthly chart from 1995 to present you will see two highs very close to 1500 (1498 in Jan. 2000 then 1525 in July 2007). In July 2012 the monthly was 1418. A cyclic view is that we can expect a high 7.5 years after the July 2007 high (as 7.5 years is the time between Jan. 2000 and July 2007). That would be Jan. 2014 and followed by a monthly low about 800 after two and a half years (with no TARP, QE, trillion dollar treasury raid, etc.) to six months (with full bore intervention). Another way to look at this is that as compared to the January 2000 dollar our current dollar is worth 60 cents of Jan 2000 money, then the current S&P 500 is not 1418.16 but instead 851 in Jan 2000 dollars. So what we have, in constant dollars, is a succession of lower highs and lower lows dating back twelve and a half years. The only asset that worked, in constant dollars, over this entire time period, has been gold. If enough people decide that the modern fiscal and monetary system is crooked then the good old modern monetary and fiscal world is history. This will cause really bad stuff like vaporizing every last bank deposit in the world, all the derivatives, all the underlying, the whole thing. The modern world will be stopped in two minutes after all bank accounts become simultaneously valueless. Probably the only institutions to make the transition to the New World will be military. This is why the "establishment" is so hostile to gold. So, hey, I don't know what the price of gold will be. The dollar has strengthened sizeably against various currencies, the Chinese and Indians have stopped importing gold for personal use, new gold production is coming on line fast, and the changes are not well reflected in the various indexes. You just gotta take any authoritative didactic proclamation with a big pinch of salt. Heavy support for gold about $1500 per ounce. If the Fed lays off the QE gold should trend very slowly upward. QE would cause a return to the trend line of Jan 2009 - July 2011. Notice that the gold price line during this period exactly inverted the declining dollar. Gold was holding constant value, that is. The dollar was losing value. One requirement of good money is that it be a reliable store of value. During this period (Jan '09 - Jul '11) gold was a reliable store of value while the dollar was not. Marc Faber likes gold. So does George Soros although he won't say so. As it becomes time to escape the Euro dollars are bought. This is happening now at an increasing rate. If faith is lost in the dollar then really all that is left is gold. The USA is actually in worse financial situation than is the Euro zone, but the USD will still buy you oil, if at a ridiculous price. By the way, the only reason OPEC still accepts dollars for oil purchases is that Saudi, UAE, Qatar, Sudan etc. won't last a minute without American military cover. That means, quid pro quo, that either the USA is willing and able to go to war with Iran and defeat Iran utterly, or a new Persian Empire controls the oil countries and the USA won't be able to buy fuel or sell government bonds. Americans would die in large numbers. Elections would be cancelled for the "duration of the emergency". The "emergency" would end up lasting a long time, longer than you or I have to live. No way to make better estimates of the human costs than the 14th Century Black Death, the Seventeenth Century Thirty Years War, or the American Indian's Sixteenth Century European plagues (smallpox, bubonic plague, typhus, typhoid, cholera). Could also be easier, could also be harder.