Tuesday, September 8, 2009


$1000 Gold: "Was[n't] the Spring, Then Spring Became the Summer / Who'd a Believed You'd Come Aloooong?"

Gold broke $1000 this morning. I had previously confidently predicted (in the comments here) it would happen "by summer." OK I was wrong about that, and the reason is that I foolishly thought the politicians would pressure the banks to lend out all those new reserves. (That was the whole justification for the bailouts, you may remember. It wasn't about shoring up insolvent banks, it was about keeping credit flowing so businesses could make their payrolls--you know, the businesses that borrow money every month to pay their employees.)

Anyway I was off on my prediction, but I also want to remind everyone that my main antagonists in this keep talking of a giant deflationary credit collapse. I don't have any specific predictions handy that I can point to, but these people would not have said back in January that gold would break $1000 again in 2009.

Seems to me that you were right. "By summer" does not mean before summer; it means before or during summer, which ends on September 21st.

So, congrats!
Well thanks english bob, but that's not what I meant. I meant, by the time summer arrives, gold will be above $1,000.
I say you double down... "By winter's end, gold will reach $2000"
This comment has been removed by the author.

I've been following the inflation / deflation debate pretty closely. What are your thoughts on Mish's latest gold post where he discussed gold performance during what he considers "credit events"?

This makes sense to me as gold is the ultimate store of value when you think the world is going to hell in a handcart. Also, I know some (maybe you? I confess I don't remember) discussed the 1980 - 2000 period as "cherry picking" ... however, I think that the expansion of credit (both amount and availability) gives credibility (pun intended) to mish's argument that this is what led to gold's overall decline in this period. Perhaps the amount of the decline is a bit overblown due to the bubble in gold in the 70's ... but directionally I think the move makes sense.

So, I guess the question going forward is whether or not we're in for another "credit event". This could be the continued destruction of the dollar, major bank failures, etc.

From what I've read, I believe it is undeniable that the total amount of money in the system is shrinking due to the contraction of credit and stricter lending standards being employed by banks. However, there is a lot of dry powder in the system that could quickly destroy the dollar if political pressure is put on the banks to lend (as you suggested).

If I had to boil it down, I think gold will perform well in two instances at complete opposite ends of the spectrum. 1, in a hyperinflationary scenario where credit becomes incredibly available due to a flood of reserves entering the system all at once ... or 2, in the exact opposite case where money flies away from traditional equity / fixed income investments due to credit concerns and seeks a safe haven in gold. In the first case, gold behaves much like any commodity. In the second, it is acting in its role as money.

Sorry for the long comment ... I wanted to get my thoughts out there to see what you had to say.
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