Here we go again. Less than two years after the housing market collapsed, the U.S. economy is threatened by a new bubble in asset prices. This time, four billowing balloons are hovering: two commodities — gold and oil — stocks, and government bonds. Don't be fooled into thinking that last week's 5% drop in the S&P, and the recent sell-off in oil, remotely makes them fairly valued, let alone bargains. Equities and commodities, as well as Treasuries, which actually rallied as stocks dropped, still have a long way to fall. The reason: They've already seen huge run-ups that put their prices far above their historic averages, and far above the levels justified by fundamentals. Two examples: Most companies can't possibly grow earnings fast enough to support their lofty valuations, and oil and gold are so expensive that we'll see what high prices always bring, a surge in new supply. That makes a price-pounding glut inevitable. Since the start of 2009, oil has returned to the danger zone by jumping 63% to $75 a barrel, and gold has risen more than 20% to set astounding new records by climbing above $1,100 an ounce. … The real threat: Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, "cash-for-gold" stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth. When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years. – CNN
Dominant Social Theme: Gold is done.
Free-Market Analysis: Every time we read one of these articles lumping gold in with other "investment" entities we feel an article coming on. Gold is not a stock, not a commodity, it is a money metal – and there are factors that influence it that go far beyond supply and demand. By lumping gold in with other so-called bubbles, the article in our opinion does investors no service. In fact, it may confuse investors about what gold is and why it is "different" from the fiat-based money instruments like stocks and bonds. Silver is also a money metal by the way and shares many characteristics with gold, including a historical price ratio.
Stocks, bonds, other forms of paper money – even commodities that are ubiquitous in the West – are not like gold and silver. And when it comes to securities, the differences couldn't be starker. In fact, the modern investing era, when seen from a certain standpoint represents a kind of financial "dreamtime." We started writing about "dreamtime" long ago within the context of the current economic crisis.
Here's how Wikipedia explains it: "[Dreamtime] establishes the structures of society, rules for social behavior, and the ceremonies performed to ensure continuity of life and land. The Dreaming governs the laws of community, cultural lore and how people are required to behave in their communities. The condition that is met when people live according to law, and live the lore: perpetuating initiations … singing the songs, dancing the dances, telling the stories …"
For us, the initiation of central banking – especially in America – began a kind of euphoric dreamtime that was initially realized with the Roaring 20s, and then again in the second half of the 20th century when the central banking meme was the strongest. We perceived the entire epoch as a kind of fantasy in which America, and in fact the entire West, was to be convinced that a tightly managed and endlessly inflated fiat-money regime was the key to prosperity. We eventually came to believe that the financial crisis, in which all of the West's phony financial instrumentalities almost collapsed like a house of cards, spelled the end of epoch of central banking dreamtime.
… Wall Street was never a business model. It was an invention of monetary stimulation, a convenient way to centralize assets and remove the spending power of the people's specie (gold and silver coin). Wall Street … was merely a means to an end. It was a show, a parade, a gilded curtain designed to hide the reality of the man in the booth, the "Great Oz." – the Daily Bell (https://www.thedailybell.com/211/The-end-of-Wall-Street.html)
Now like all memes, central banking will stagger on – as the West's "capitalist" system will also. But seeing the anger seething in the hinterlands – and not only in America – and the bureaucratic panic over how to maintain the façade that disguises the financial totalitarianism of the current system, we remain convinced that something fundamental has changed. Confidence has leaked away. Something has ended, and something else has begun. We are not wise enough to say what that something else is, but we think it will be somewhat different from what has gone before, and perhaps a little better eventually from the standpoint of the average individual.
In any event, bearing the above in mind, we can see that gold is not a stock, silver is not a bond and that honest money is not to be conflated with the paper notes of a "dreamtime." Gold and silver are MONEY METALS and have intrinsic value. Their value in fact is at least commensurate to the time and effort spent finding them and digging them out of the ground. There is no value in a paper note because it costs virtually nothing to produce, especially an electronic one. There is obvious goodness and value in gold and silver – we see it anyway.
Gold and silver do well when the financial memes of the elite collapse. As paper money loses value, gold and silver gain. They are a barometer of worry, they are also a "safe haven" – a place that has provided surety for millennia. Today, we are still in the middle of a big collapse. The paper and electronic money that the central bankers have pumped into their "down line' – the big banks and trading firms – have stabilized the situation for the moment. But at some point that money will have to be drained from the system and the chances are that there could be significant inflation before bankers figure out the time is ripe to do so – if they even have the political wherewithal to do so.
Is it possible that the retrenchment of paper/electronic capital will temporarily cause the honest money marts to recede as many of the "down line" funds head for the sidelines? The answer is yes. At the first sign of a systemic pullback all "hot" sectors will likely be affected. And from that perspective, gold is no different. Where it is very different is the mid-and long-term trends, which are based on momentum generated by a broad awareness of the fraud perpetrated by an elite that continuously tries to manipulate the public into a state of complete obliviousness while they drain the productivity and wealth of the nation. And that means the individual pocketbooks of everyday "mom and pops." But it is the children of these "mom and pops" whose Internet spawned awakenings will quickly resuscitate whatever short-lived pullback transpires when the broad systemic bubble bursts. Primarily because the pullback will be caused by panic selling from those who spend more time reading mainstream propaganda than those surfing credible alternative media sites on the ‘Net. And nowadays, the paper readers have a lot less sway, or so it appears.
We don't know if the price of gold is overinflated at this moment. The CNN article predicts gold will travel back down to US$500 in the next couple of years. But that price must make the assumption (among others) that central bankers will be successful in draining the monetary inflation that hangs over the head of economies worldwide like a kind of economic sword of Damocles.
You see, gold is different. If price inflation picks up, gold will not likely go down to US$500 though the stock market could certainly deflate. And if the economy slows, worldwide, we have a hard time seeing how oil retains its high price. If US borrowing continues at its present clip, we have a hard time seeing how US Treasuries retain value. What we are trying to say here is that to treat gold from the perspective of a CNN-style bubble analysis is to lose sight of its money-metal characteristics and the impact the Internet is having in reshaping the great conversation.
We would not be so foolish as to predict a price for gold, either now or in the near future, near or far. We've speculated on some numbers in the past, but the main point we've made – and one we'll stick to – is that gold and silver will top out pricewise when the current fiat-money bear market subsides. And if the 1970s are any guide that may not be until all the excess money that central banks have printed is drained from the system. That would then constitute the full bear-market cycle. As far back as the early 2000s, we were predicting the full cycle would stretch out toward 2015, and we still believe that may be the case. Gold and silver, whatever numbers they reach, will certainly be in play until the cycle turns.