The End of Gold

by: David Bailey
January 26, 2009

Ask your barber about gold. He or she will tell you it's a good investment.

He or she will explain to you that the dollar is terribly weak because the Federal Reserve is printing huge amounts of money so gold is the only safe investment these days. He or she heard it on a commercial on AM radio - actually, not one commercial, but dozens. A bunch of his or her friends and relatives sent him or her emails about how gold was going to rise to $2,000 or maybe even $5,000 or even $10,000 per ounce. It was even on TV. Wow, if he or she had any money to invest he or she would sure buy gold.

But that's really the problem: he or she doesn't have any money. He or she cannot expand his or her business because his or her bank will not lend her the money - or him. His or her house may well be near foreclosure. His or her credit card company is about to drop him or bomb her with interest rates she can't pay. He will not get a car loan to replace the clunker parked behind the shop and she won't get a student loan to learn another skill when local layoffs cut demand in the barbering business.

The supply of dollars is shrinking, thus...



...the price is once again rising – fast.

If people would only read a little further into their recently-dusted-off macroeconomics textbooks they'd find that while the government creates some money, the private system generally creates multiples of that amount. Well, it used to. Now what the private system does is destroy money as loans and credit lines are called in and cowardly business “leaders” throw layoff gasoline on the deflation fire. People are figuring out that the recent glut in bank reserves they see in the Fed's H.3 release is not an inflationary blast, but a probably insufficient bulwark against deflationary disaster. If Citibank (C) didn't tell you that loudly enough, I hope Bank of America (BAC) did. If you didn't hear their message, just wait for the next debacle. The American capitalist system has become a money-destroying machine.

Once deflation sets in, there will be no profits to be found – anywhere. But as I write this and gold puts in the second spike of a double or triple top, the value proposition short gold becomes really too good to ignore. If gold can break convincingly out of the anti-bubble, fine, you stop out somewhere between here and north of $1000/oz. Pick your spot, but it's not a bad loss. If gold cannot break out of the commodities anti-bubble, you are in contrarian heaven. In that scenario, gold loses a minimum of $250/oz before it gets another sustained uptrend and the fundamentals remain bearish for the foreseeable future. I think this present spike in gold will prove about as reliable as the recent spike in the euro:



They are (were) both based on the same, flawed, short dollar thesis.

In my view, going long gold is just another manifestation of the Deflation Denial syndrome. I think the smart play – maybe the only play – is to be long deflation in this environment. If you can find a better deflation play than going short gold – make it.

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at http://seekingalpha.com/article/116404-the-end-of-gold?source=feed


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ps. I THINK HE'S WRONG!