Which way will gold swing?
Have yourself a merry little depression.
Dow up 45 points. Gold down $9.
We鈥檙e still waiting for a major correction in the gold market. Each time one begins, it seems to run out of steam before doing any real damage. At yesterday鈥檚 closing price, $1,577, gold is still solidly ahead for the year.
So, where鈥檚 the soft spot? Where鈥檚 the test? Where will it come from? When?
Don鈥檛 worry, dear reader, Mr. Market will test us. He鈥檒l throw his curve ball. We have to be ready.
What if鈥�
鈥nstead of testing us on the downside, he tests us on the upside? This is not a prediction. Just a thought. What if gold suddenly shot up鈥nd looked like it was going to the moon. What would we do?
Citigroup鈥檚 metals expert puts a $3,400 price on gold 鈥渋n the next year or two.鈥�
Jim Rogers makes a similar forecast.
What if they鈥檙e right? We only mention it because The Trickster has more than one trick up his sleeve. And he鈥檚 perfectly capable of running the price up to $3,500 BEFORE testing us.
We could get giddy, watching the price of gold hit record after record. And then, just when we think it is ready to scale its final peak, gold could turn tail and run for the valley. We wouldn鈥檛 believe it. We would hold on. We would wait for it to go back up.
And then鈥ouldn鈥檛 we feel stupid, if we鈥檇 taken that ride all the way to over $3,000鈥nd then rode it all the way back to today鈥檚 level? Wouldn鈥檛 we be put out with ourselves, if we sold out then鈥hinking gold had put in its final top and we missed it?
According to the 50% principle鈥t could hit $3,000鈥ollapse to barely $1,500鈥nd then soar again鈥ossibly going to $5,000鈥r even $10,000. That鈥檚 what we鈥檒l get in the final 鈥榗rack up鈥� boom that is coming.
Who knows?
But what we see is more upside than downside for gold. Because the motor pulling gold up still has a lot of gas in the tank.
In the US the feds spend $1.60 for every dollar they raise in taxes. In Europe, the euro-feds prepare to bail out their banks and sovereign debtors.
And guess how much the feds have already spent? They were so desperate to avoid a debt crisis鈥r a depression鈥hat they threw the throttle wide open on the biggest rescue effort the world has ever seen. Bloomberg calculated that $7.7 trillion were put to work. Our estimate was higher 鈥� about $10 trillion, we guessed.
Well鈥e were both way off. Here鈥檚 the news report:
As part of the Ford Foundation project 鈥淎 Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,鈥� Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fed鈥檚 bailout of the financial system 鈥� the most comprehensive investigation of the raw data to date.
The extraordinary scope and magnitude of the recent financial crisis of 2007-09 required an extraordinary response by the Fed in the fulfillment of its lender-of-last-resort function.
The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.
Whoa! The feds put at risk an amount equal to 200% of US GDP. And for what? So that a depression wouldn鈥檛 knock 5% off GDP? Even the Great Depression of the 鈥�30s only set the US back by 30% of GDP. A similar setback today would cost the economy less than $5 trillion.
Do you see what we see? Even if it worked 鈥� which it didn鈥檛 鈥� the feds鈥� efforts would have been a disaster. Who would spend $29 trillion to save $5 trillion?
But wait. There鈥檚 more. This assumes that a depression is unnecessary鈥r that it doesn鈥檛 do any good. We know that鈥檚 not true. A depression does a lot of good. It wipes out bad investments and eliminates bad speculators. It forces capital into more productive, more profitable uses. It kills off zombie industries. It retires worn-out industries鈥nd reduces costs so that new industries can arise. It鈥檚 the 鈥榙estruction鈥� that Schumpeter鈥檚 鈥榗reative destruction鈥� needs.
The more we think about it, the more we鈥檙e beginning to like depressions. After scammy bailouts and bogus recoveries, a depression would be something to look forward to.
Bill Bonner
听蹿辞谤 The Daily Reckoning
