Time to give gold a break?
First, a look at the markets. They鈥檙e becoming exciting. Yesterday, for example, stocks reversed some of the losses from Friday. The Dow ended up 68 points, keeping the index above 11,000.
Going the other way, gold lost $49.
What to make of it?
In our guess鈥oth stocks and gold SHOULD be going down. That doesn鈥檛 mean they will go down, of course. But at least it gives us a point of reference.
They should go down because there鈥檚 a Great Correction going on. There鈥檚 no secret to it. Sometimes stocks are expensive and sometimes they鈥檙e cheap. When an economy is expanding, it makes sense for stocks to be expensive鈥ompanies鈥� sales are going up鈥rofits should increase too. But when an economy is contracting鈥r, more precisely, when credit is contracting鈥tocks should be priced for shrinking sales, followed by shrinking profits. That is, they should be cheap, not expensive. Stocks are now priced for an expansion, not a correction. They should go down.
Investors are figuring that out鈥ittle by little. As they do, stocks go down. Simple as pie.
But gold is a little trickier. By our reckoning, gold is a little expensive. It buys more stuff than usual.
Of course, it should be a little expensive. Looking ahead, the whole world鈥檚 banking, credit, and monetary systems are wobbling. Gold is the only money you can trust. So smart investors, smart CEOs, smart family men, and smart central bank chiefs are all thinking the same thing 鈥� that they should lay in a supply of gold as a reserve against catastrophe. So they鈥檙e buying.
But in a Great Correction鈥ssuming things don鈥檛 fall apart鈥he value of paper money goes up. Or, to put it another way, the price of assets and other stuff tends to go down as demand falls. Broadly speaking, it is a deflationary world. And paper money is good money in deflation. As long as the system holds together.
And since, according to our Daily Reckoning guesswork, the system will probably hold together a bit longer鈥e figure speculators will begin to sell gold to get cash.
Besides, gold has had a spectacular 11-year run. It鈥檚 time for a rest for the metal鈥nd a test for the metal lovers. That鈥檚 just the way it works. Markets and lovers always test their admirers. Gold should be giving its fans a test鈥efore moving in the final stage of the bull market.
Will you pass the test, Dear Reader? Will you be true?
