Why buy gold in a deflationary economy
The Dow rose 20 points yesterday鈥fter a fabulous increase the day before.
Gold went up $38.
We鈥檝e already given you our forecast. We think gold AND stocks are going down. But what do we know?
The role of markets is to make fools out of market analysts. So, the shrewd forecaster has to be careful. He shouldn鈥檛 be too precise in his predictions. He can say what direction prices are going. Or he can say when. But not both.
If we tell you that 鈥榮tocks are going up,鈥� we鈥檙e sure to be proven right 鈥� if we wait long enough!
Likewise, if we say 鈥榶ou鈥檒l see gold hit a high this autumn鈥� we leave ourselves plenty of slack to shape events to fit our forecast. It鈥檚 bound to hit some kind of high during that period.
But here at The Daily Reckoning, we have no reason to hedge. No reason to wiggle and slide. You don鈥檛 pay for this subscription: you get what you pay for!
For 11 years we鈥檝e told dear readers to 鈥榖uy gold; it鈥檚 going up.鈥� This was good advice. Gold did go up鈥ore than any other asset.
Now, what are we saying? We鈥檙e still urging readers to buy gold. Gold is the only true money. It鈥檚 been used as money for thousands of years. And it will probably be used for thousands more. At least, we have a strong hunch it will be used when today鈥檚 claptrap money system blows up.
Still, the system may surprise us鈥ike an old refrigerator, it may last a lot longer than we think it should.
Did we explain why? Well鈥�.here鈥檚 the explanation again:
We鈥檙e in a Great Correction. Recently, this correction has given every indication of hanging around for a long time 鈥� a la Japan.
We鈥檙e also in a period when the feds are throwing caution to the winds in order to over-turn the correction. But, here鈥檚 what has happened: the feds have not been able to do it. They鈥檝e tossed a lot of caution to the winds already. But the winds don鈥檛 care; the correction continues. Just read the headlines. Consumer sentiment is sinking. House prices are still going down. The number of people on food stamps is going up.
This is fundamentally a deflationary economy. It鈥檚 not an inflationary economy. It鈥檚 not an economy that will take up the Fed鈥檚 EZ money and transform it into consumer demand. It鈥檚 not an economy that will borrow money from the banks and increase employment and the money supply. The feds have been unable to ignite the kind of 鈥榓nimal spirits鈥� you need in order to get inflation rates up. They鈥檝e tried everything. It hasn鈥檛 worked.
No, it鈥檚 an economy where demand is falling. We saw that yesterday. Gasoline use in the US has dropped to an 8-year low. Households are saving money. Incomes are going down. The real economy is shrinking.
At the household level, thrift is on the rise. Among the investoriat, fear is the dominant emotion. This stock market could collapse any day; all it needs is the right headline.
The Fed has been forced to tell the world that it will keep its key lending rate at zero for two years. This is an admission that nothing has worked in the fight against the Great Correction. It is a clear signal that the US will follow Japan down that long, lonesome highway鈥owards a multi-decade slump. The US has already had one 鈥榣ost decade.鈥� Most likely, it will now lose another one. For now, the feds have been beat.
The victory of fear over greed means that investors are no longer concerned with the return ON their money; they鈥檙e worried about the return OF their money. And they think that the safest place for their money is in US Treasury debt. Lend money to the people who print it; what could go wrong?
Well鈥hat鈥檚 what we鈥檒l find out when this current stage of Great Correction/de-leveraging comes to an end.
When? How? We don鈥檛 know.
But NB鈥e don鈥檛 really know what is coming. So, we try to figure out what we think you should BELIEVE is coming. And right now, there鈥檚 a lot of risk in stocks鈥nd in bonds. And in the short term, there鈥檚 risk in gold too.
You鈥檙e probably best off believing that stocks will go down鈥�.gold will go down鈥nd that the economy will remain in a period of fear/demand destruction for months, and probably years, before a major corner is turned.
In the meantime, stick with gold (as insurance) and cash (as ammunition).
At least that way, if the price of gold goes up鈥ou鈥檒l feel rich. If it goes down, you鈥檒l feel smart. And then you can use your cash to buy more gold.
