October 07, 2009

Gold Rush

I ran into a friend this morning who mentioned, “I guess you were right about gold.” In the past 24 hours, the yellow metal has surged to $1040 and has thus been on everybody’s lips. I smiled, mentioning that I wasn’t right about gold: in all my economic writing and “investment advice,” I pretty much echo higher minds, like the Austrian-inflected investor Marc Faber; my truly original insights are few and far between. More importantly, I have no idea whether this new price level indicates that gold will continue to explode upwards or perhaps collapse down to $800, before making its inevitable rise. I know next to nothing about technical analysis; and I also don’t care. I have the utmost confidence that in the coming 5-10 years, gold will be priced in the tens of thousands, maybe hundreds of thousands, of dollars per ounce. When this occurs exactly is unimportant (or rather important for traders and market timers, not for me.)

Gold is, of course, the classic hedge against inflation, and since we have a Fed chairman who speaks openly about his willingness to print copious amounts of paper, it’s a good investment. But in many ways, the gold bet is just as much about geopolitics as it is about Bernanke. Without going into too many details, since ‘44, the dollar has been the world’s “reserve currency” (meaning that it’s been used by central banks and governments as a store of value), and it’s also been the currency in which oil has been priced. Put simply, for 65 years, there has been a built-in, structural demand for the dollar that has propped up its value even as the Fed and its banks have inflated and the nation has run massive trade and account deficits. This will come to an end. And when, say, China or Middle Eastern leaders get rid of their greenbacks (as the latter have, reportedly, been planning to do), trillions of dollars that had been hoarded will rush back into the United States. Put simply, it’d be “too many dollars chasing too few goods,” the definition of inflation.

Now, all this has been touched on in mainstream sources, usually with the calming reassurance that China would never—never!—do it since it’d be so bad for everyone involved. The figure of 2 trillion in Beijing ‘s reserves is bandied about—a sum so large, it would seem, that the Chinese could never rid themselves of it without crashing their own government and economy. The lender has become indentured to his debtor. 

In a video I stumbled across yesterday, Jim Sinclair, one of the great gold investors in the world, claims that the inflationary nightmare scenario, which, we’re told, will never, ever happen, is already occurring. And though they continue to buy short-term treasuries at auction to keep up appearances, the Chinese are already diversifying themselves out of dollars by buying—with dollars—commodities like gold and copper. Sinclair speculates that China is actually only sitting 800, maybe 400, billion dollars in reserves. Perhaps one day soon, they’ll have none. 

(The section I’m referring to begins around 4:15, but the entire interview is well worth listening to.)   

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