Gold Gone Wild...

Bill Bonner - Wed 02 Dec, 2009

Gold’s best part is still ahead. And this is not just a bull market; this is a fortune maker.

London, England

Yesterday, gold closed at $1,200. Long-term Daily Reckoning sufferers can finally hold their heads up. We bought gold at the beginning of the bull market. New readers, with no gold buried in their back yards, may wonder: is it too late?

Here is a quick answer: no. We’re still a long way from gold’s ultimate destination. Our ‘Trade of the Decade’ was to buy gold on dips and sell stocks on rallies. The idea of that trade was that gold and stocks were going in opposite directions. Stocks were supposed to go down. Gold was supposed to go up. They would meet at some point, we imagined.

But lately they’ve been going in the same direction. Yesterday, for example, stocks rose with gold; the Dow added 126 points.

Which poses a bit of a dilemma. We think stocks are more likely to go down than up. Will gold go down too? Yes, probably.

Does that mean you shouldn’t buy gold here? No, not necessarily. If you’re trading, we’d suggest you wait. Gold is ready for a correction.

But it is usually a mistake to trade in and out during a major bull market. If the trade goes against you, you end up sitting by the sidelines as the market roars forward. You miss the best part.

Gold’s best part is still ahead. And this is not just a bull market; this is a fortune maker. Gold still hasn’t entered the bubble phase. It is just a very strong bull market. Eventually, it will soar... adding $100 in a single day. It will take our breath away. You want to be in it when that happens.

But is $1,200 the best price you can get to enter the gold market? Probably not. But it’s not a bad price. You can wait for a better one; but don’t wait too long.

John Hussman puts the odds of a major market crash sometime in the next 12 months at 80%. If stocks go, gold is likely to go down too. And it could stay down for a long time.

We keep our Crash Alert flag flying... and have a hunch the crash will come sooner rather than later. Day after day, the bubble gets bigger... and the pins get closer. Greece? Britain? The US?

Real estate? GDP? Bond sales? Christmas sales? So many pins... so little time.

One of the biggest pins is the record borrowing by governments. The longer it goes on... the bigger, sharper and closer the pin becomes.

Dubai was nothing... like getting stuck by a mosquito. It itches. It swells. But it does no lasting damage. It could be much worse. Now, the government of Dubai says that Dubai World is on its own. Good luck to the lenders.

Those Arabs are pretty smart. If the US feds had only done that with AIG, GM, Fannie Mae and other big debtors... the whole thing might have blown up and blown over... and now we’d be picking up the pieces and getting back to work.

Instead, the pols and central bankers trod in where angels and sensible investors feared to go at all. Now, they’re wondering how to tread out.

Germany announced that its deficit would not be as big as expected. Instead of 49 billion euros, it will be only 39 billion – below 3% of GDP this year. France says it’s bringing its deficits down too – to less than 3% of GDP by 2013.

The US and the UK, on the other hand, are out of control – with deficits over 12% of GDP and no credible plans for substantial reductions. As we reported last week, these deficits are largely structural – that is, they are the product of many years of mismanagement, not just this year’s crisis-respond claptrap. It’s hard to bring them down because they include public health, unemployment, social security and defense measures that are very difficult to stop.

Yes, stocks will react, eventually. Gold will come down with them. Then, at some point in the future, gold and stocks will de-couple... and gold will head to the moon.

A macroeconomic trader friend writes:

“There are major risks arising from the policies currently being pursued by politicians and monetary authorities. First is the risk of seriously devaluing the US dollar. Second, and more broadly, there’s a major risk of an outbreak of inflation in the longer term. There are large budget deficits being run by many countries. And there has been an unparalleled peace time growth of government debt in major economies. Gold is the only true hedge against all these risks.

“Investors need to regain confidence in the ability of the authorities to remove the various stimuli in a timely manner. They need to do so in a way that acts to contain inflation without compromising growth. Investors also need to believe governments can produce credible deficit reduction plans. Only once investors have this confidence in the authorities’ plans, will the bull market in gold look over. I believe gold can rally much further from here.”

More news… the death of the pound…

In comes a familiar sounding story from CityWire:

“Sterling has been tipped to fall sharply next year, going through parity with the euro and dropping against the dollar to multi-month lows, as a ‘deadly combination’ of loose monetary policy and fiscal tightening combine to batter the currency.”

So what’s it going to be? The death of the pound or the death of the dollar? There’s a good case for both, after all, given what our trader friend has just pointed out above.

All we know for sure is that the Forex markets are going to be an interesting place in 2010.

Remember, Forex is a zero-sum game. Currencies trade in pairs. So when one side of the pair falls, the other has to rise. That means there is always a bull market in the Forex market. And there is always a bear market.

No matter what happens in the global stock markets in 2010, there will be money to be made in Forex.

And remember, it’s no longer just a market for pros. We can all trade Forex just like any other market these days. Not sure how to get into it?

Take a look at Tom Tragett’s website. He shows you how simple it is. And if you’re looking to learn more about Forex… and to start trading it… just sign up for Tom’s Daily Briefing and regular trades…

You can see it all by following this link to the website.  

And more thoughts:

*** The crisis is over, say the feds. Now, they can begin turning off the taps.

“Fed takes first step in exit strategy,” is the headline in the Financial Times. A more accurate headline would have been...

“Fed dodges and weaves... fakes exit.”

The only way to exit is by the door the Fed came in. It barged into the market buying up toxic assets and Treasury notes and bonds. In order to get back out the door, it has to get rid of all the debts it gobbled up. How? It has to sell them back to the people it bought them from – or to someone else.

Instead, the Fed has come up with a subterfuge: the reverse repo.

“In a reverse repo,” the Financial Times explains, “the Fed sells assets, such as Treasury securities, to dealers for cash, with an agreement to buy them back later at a slightly higher price... ”

No kidding. That’s what it says. Now, let us put the question to you, dear reader. Having thus reverse repo-ed a boatload of debt, has the Fed:

• unloaded its unwanted debt and drained liquidity from the system,

• not unloaded any debt at all... but merely lent out the credits at negative interest rates

• postponed the problem until later?

If you answered “all of the above” you are not paying attention to the choices we’ve given you. It’s not on the list. Still, it’s probably the right answer...

The Fed says it’s going to try out this reverse repo trick and see how it works. We can tell them now. Save them some trouble. Either the Fed is the bagman of bad US debt, or it is not. It is either in or out. Long or short. Either Fannie Mae, AIG, GM are backed by the government or they’re not. If they’re not, the market will sort them out in its own good time. If they are the bagmen... well, then, the feds will squirm and dissemble... get themselves in deeper and deeper... until, finally, the bags drag them beneath the surface.

This reverse repo is just a scam to disguise the situation... so the Fed can pretend to exit without actually going out the door.

***We talked about the origins of US government scofflaw-ism a couple of days ago and promised a follow up. What sparked the idea was the recent newspaper report that President Obama has called for an extension of George Bush’s post-9/11 emergency measures – such as eavesdropping and the suspension of the Bill of Rights in terrorist cases.

Today, we see that he has announced another troop surge in Afghanistan, with no declaration of war from the US Congress (whom would they declare war against?) We pin this lawlessness on Napoleon Bonaparte’s nephew, Charles Joseph Bonaparte.

This story comes to us from one of our favorite raconteurs of Baltimore history – H.L. Mencken. It answers a question we posed ourselves for many years: what happened to them? The Bonapartes of Baltimore, that is.

Jerome Bonaparte, Napoleon’s younger brother, came to Baltimore in the early 19 th century. There, he met the beautiful Betsy Patterson, from a prosperous Scotch-Irish family that gave its name to a leafy park that later became a centre for drug use and homicides. But back in the 19 th century, Baltimore was still a civilized place. And when Napoleon’s bro’ came, he was apparently attracted both by the energy of the place as well as the seductive charm of Ms. Patterson.

Jerome stayed in Baltimore long enough to leave his name on the founders’ brass plaque in the Maryland Club, of which your editor is a member, and to leave Ms. Patterson with child. Later, under Napoleon’s heavy thumb, he rejected his Baltimore connections in order to aim for something grander, leaving the aforementioned Ms. Patterson abandoned in Paris... later to return, enfant en main, to Baltimore. This issue – Jerome Bonaparte-Patterson – had two sons of his own, one of whom, Charles Joseph, devoted himself to public service... which is to say, he became a dangerous and meddlesome hack. Somehow, he caught the eye of Theodore Roosevelt, who had just enough knowledge of history to be flattered at the thought of a Bonaparte under his command, so he put him in as his Secretary of the Navy.

“He was the worst Secretary of the Navy ever heard of,” writes Mencken. He did not move to Washington, which was seen as a step in the wrong direction in those days. Instead, he kept his house in Baltimore and took the train down to the Navy Department in Washington. By the time he got down to work it was time for lunch. After dinning, he turned around and went home.

This proved that he had the talent for even greater responsibility in Washington, so Roosevelt elevated him to Attorney General. Normally, a semi-comatose Attorney General is the best kind. He is not chasing terrorists or Dadaists or climatologists. Bonaparte was one of the best. For three years, he did nothing. Then, something stirred him to action. Roosevelt had his eye on a group of Italian immigrants in Paterson, New Jersey. He was sure they were undermining the republic with seditious literature. They were anarchists, with a small circulation newspaper, written in Italian, who were no danger to anyone, except perhaps themselves. Nevertheless, Roosevelt thought he heard the walls crack. He was determined to stop them before the roof fell in. So he put his Attorney General on the case.

The trouble was that Mr. Bonaparte had sworn to uphold the law of the land. And the law of the land clearly gave the anarchists freedom of the press. It was then that the Roosevelt/Bonaparte team came up with a model for all the scalawags and scoundrels who have ever since smudged high office in the United States of America. They simply ignored the law and banned the Italians’ rag from the US mail. Thus was established the hallowed principle of American jurisprudence – it is perfectly all right to turn your back on the highest and most sacred laws of the land, as long as you can get away with.

Until tomorrow,

Bill Bonner

The Daly Reckoning

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