A Warning for Gold Bugs: This Rally Won’t Last … Gold prices surged 16.5% in the first quarter … Gold investors should enjoy the party while they can. –Wall Street Journal
This small article is incorrect in some big ways.
It’s negative about gold despite the surge (or perhaps because of it) and predicts gold is headed back down against the dollar.
It also claims that “gold doesn’t have any intrinsic value.”
Unlike stocks, the article reminds us, gold does not represent the value of something else, something larger, the way equity does.
The article seeks to remind us that when you are purchasing Microsoft or Apple, you are buying a small portions of huge organizations with fantastic products and promising futures.
When you buy gold, you are merely purchasing a funny-colored metal.
But both of these statements are untrue.
Gold has intrinsic value because its value has been recognized, historically, for thousands of years. In a hundred or a thousand years, it will like have approximately the same purchasing power as today.
Why the constant misinformation about gold in the mainstream media?
Gold has always been a target because mainstream financial media in the West serves the financial interests of central banking. And central bankers don’t like gold because it’s not controllable the way fiat is.
Central banks can print as much fiat as they want. But only so much gold emerges from the ground each year. And only a certain amount circulates.
Thus central banks are constrained by volume and availability when it comes to gold. As a result, there has been a long term effort to replace gold-as-money with debt-based fiat.
This effort began in the modern day with fiat propagandist John Maynard Keynes who called gold a “barbarous relic.” Central bankers continue to use Keynes’s monetary theories to justify voluminous money printing. This is a big reason why the world’s economy is in such a mess today.
Also, as part of their monetary strategies, bankers continue to suppress the value and popularity of money metals, especially gold. This provides them more control over the “formal” economy – or so they believe – though informal “gray” and “black” economies expand as a result.
What central bankers are doing constitutes a price fix. Price fixes really never work. The suppression of gold reduces prosperity. The monetization of the economy creates price inflation.
Over time, gold finds its rightful level and value relative to paper currencies. We are at such a point where gold is beginning to reassert its power and become less controllable against fiat.
This is because central bankers have kept interest rates too low for too long and credit has expanded voluminously as a result.
Markets are becoming more unsettled and volatile as numerous asset bubbles have formed. The biggest bubble is in the so-called derivatives markets, which may be as large as $1.5 thousand trillion now – an incomprehensible number.
The imposition of negative interest rates is another ludicrous solution that will predictably have unexpected and negative results.
We have dealt with one of the article’s issues, which is the argument that gold has no “value.” The other argument the article makes is that gold is not going to be a good investment going forward.
Factors driving gold in the first quarter included fears about a Chinese market meltdown and generally negative economic news. The article claims that the first quarter’s turbulent times have “dissipated.”
This is simply untrue. China’s problems are going to get worse, not better. Much of the wealth of the Chinese middle class is tied up in empty apartments in vacant cities. Eventually, as always happens, there will come a time when valuations of these “investments” will drop to realistic levels. It won’t be pretty.
Central bankers have already inflated beyond reason since 2008. Eventually, this excess credit, some $100 trillion of it, will circulate. The West’s larger asset bubbles, including the derivatives bubble, are bound to burst at some point, and some may have already.
Central bankers won’t be able to raise rates for fear of destabilizing what little economic progress has been made. The result will be something that defined the 1970s – a period analogous to this one. We’ve mentioned it in numerous articles: Stagflation.
We’re seeing more articles about stagflation now as reality of its emergence is beginning to be recognized by the mainstream media. CNBC recently posted an article entitled, “Wall Street’s latest dirty word—stagflation.”
The last bout of stagflation in the 1970s pushed gold to around $800 an ounce, a valuation that still hasn’t been reached again when accounting for inflation. This is why some analysts eventually expect gold to travel to $2000 an ounce or more against the dollar.
Conclusion: Much in the world today is unsettled and frightening. Continued purchases of gold and silver are an apt, if modest, remedy. It’s paid off before.