Question: I understand that inflation is really the reduction in purchasing power of the $. Can you expand on your statement “Our computer is bullish long-term because gold will play catch up as all commodities tend to do. It will blast off like a rocket ONLY when everything is set.” Specifically, “when everything is SET”. What does that mean?
Answer: Commodities in general have shorter lifespan than stocks and the longest real estate. Consequently, the blast off like a rocket in brief bursts rather than progressively trudge steadily higher. Gold rallied from $103 to $400 between 1975 and December 1979. In the last few weeks it rallied to $875. These are bursts or energy – panics to the upside. Therefore, gold will rally in a burst of energy ONLY when the real fundamentals that drive it are “set” and that is the Sovereign Debt Crisis.
Gold is not the orderly hedge against inflation which is a term that is really government propaganda putting the blame on the private sector as if it is the greed of corporations that causes prices to rise rather than the political fiscal mismanagement that reduces the purchasing power of the money.
CONFIDENCE is the name of the game. It is what you believe in that counts, not reality.Terrorists really believe in what they have been told and die for their beliefs. So you can yell “fiat” all you want, it means nothing when ALL money is always “fiat” only to varying degrees. It matters not even if the money is precious metals. Government has always tinkered with the weight and quality as illustrated above. The penny we have today use to be silver. It now costs more than a penny to make them from copper.
The problem has NEVER been what is money, it has been that government has a direct incentive to play games.Most people do not understand the full implications of Gresham’s Law. He advised Queen Elizabeth and saw the the massive debasement of her father Henry VIII had a profound impact upon the money supply. Bad money drives out good is much more than increasing the quantity. It meant that the money supply shrunk as people hoarded the higher quality or all the old coinage. Today, it means smart people do not HOARD cash, but invest it, the inversion of Gresham’s Law.
Until the general people recognize there is a real Sovereign Debt Crisis in the USA, then CONFIDENCE will not yet shift. We need a bit more time before all the pieces fall into place. The Dow making new highs in dollars is part of it, but we must wait for new highs in euros. Because this is all about capital flows, for gold to rally, we need other markets to line up as well including the Dow. They are doing so a little at a time in a slow but steady progression. German short-term rates went negative showing people were willing to pay Germany to hold their money. This is part of the whole shift in capital from PUBLIC to PRIVATE. Capital is first afraid of Southern Europe so the die-hard government believers buy Germany. Let the German elections look questionable and then they will move from Germany to US. Each step is predetermined. We need merely understand how capital flows and then you can see it coming like an aircraft carrier, slow, but determined. This is NOT opinion. This is by no means what I “think” will happen – this is the progression that has ALWAYS happened. We just follow the breadcrumbs.
The burst in gold to the upside will last a short time 3 years max. That is just the way it goes. Real estate is a the longest cycle in investments just as governments seem to die and reinvent themselves every 224 years. By the way, the USA was formed in 1789. Add 224 years and guess what – you get right now 2013.