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The party line from many goldbugs is that precious metals are “still in a long term up trend”, and that recent mayhem in the markets only confirms that the U.S. economy and U.S. dollar are headed for serious troubles. Predictably, Sinclair recently chimed in:
“The Fed will predictably move to ultra-expansionary, non drainable methods akin to a new Helicopter Drop of liquidity to try and save their and therefore the administration’s bacon.
The dollar will fall like a stone from whatever level it is at. Gold will rocket and non-derivative risk gold shares will join gold in that positive action.”
While longer-term Mr. Sinclair may be right, what happens to gold if Fed bailout efforts do not immediately gain traction in the marketplace? What happens if asset deflation outpaces monetary inflation? Or, more specifically:
* Can gold rally even if stocks, bonds, and/or real estate collapse?
The non-answer from many bugs seems to be not to get to specific: Gold will rally because the Fed will print! And although this investment approach has cost many newcomers over the last year and may be akin to buying internet stocks in the late 1990s based upon ‘new economy’ dreaming, many seasoned individuals continue to play the theme up:
“I've said it for years, and I'll say it again -- it's a case of "inflate or die," and the US has no intention of dying.” Russell
That the US Federal Reserve ‘inflated’ from 1980 to 2001 and the price of gold still managed to ‘die’ doesn’t seem to be on the minds of Russell and others…
In short, while owning some gold as a long-term hedge against paper may be wise, it could be dangerous in the short term to conclude that it is always a great time to buy/accumulate more gold simply because the Fed will print.
Big Speculations Contrast Small Degree of Conviction
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Although I have not taken a firm stance on gold this year, I have repeatedly suggested the following for some time: gold must make the jump from inflation hedge to crisis hedge. Unfortunately this jump has not been made yet, which lends to the speculation that the next big break in gold could be lower rather than higher (if you assume inflation is not an immediate threat).
For the record, gold has rallied dramatically in recent years because of producer dehedgeing, a reduction in central bank gold sales, increased investor demand, a weakening US dollar, strengthening commodity prices, and a dramatic increase in global liquidity (hedge funds have been playing in every market, including gold). With the obvious exception of the US dollar being unable to rally for very long, are the other drivers of gold’s historic rally all in doubt?
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Given that gold should perform well if the global economy heats up again and/or central banks are extremely effective at boosting asset prices, the real question going forward is how will gold cope with what could be sustained period of asset price deflation and central bank impotence. To reiterate:
Can gold rally even if stocks, bonds, and/or real estate collapse?
The evidence to date suggests no...
One potentially positive development is that gold lease rates have recently started to move higher. Largely irrelevant in recent years, significantly higher lease rates could impair the paper pushing power of the manipulators.
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