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Gold Is Forever

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Yellow metal, despite corrections, will continue to go higher.

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The Next Time Down

As I read the newspapers over the long weekend, I was struck by how bleak they were. Not that I was surprised - but one can never know in advance when events in the economy will finally cause the masses to realize how difficult the environment is.

In reading the papers, it was obvious to me that it's becoming clear to everyone that the next time down is well under way - though the average person wouldn't call it "the next time down."

1980-1982 vs. Now

I was trying to remember the last time I'd seen the economic news quite so ugly. For me, the 1980-1982 period is as close an example as I've lived through.

Of course, it was quite different. Many of the problems were a function of the sky-high interest rates set by Paul Volcker (a consequence of money-supply targets, not interest-rate targets) to break the back of inflation. Also, the world looked very different, as the USSR was still in existence, and capitalism wasn't even a gleam in the eye of communist China.

What we're now dealing with is roughly 20 years' worth of massive speculation and excess leverage, championed by the United States and mimicked by various countries around the world. It appears that the potential for the newest round of financial weakness is being precipitated by economic problems in Eastern Europe, which is impacting the European banks (especially German ones).

Of course, we're at the stage now where economic weakness is feeding back into everything, making the situation more difficult for banks everywhere. And it's becoming clear to nearly everyone that many banks are not just illiquid, but insolvent.

The Globe Took Up Our Gauntlet

The next-time-down scenario that I outlined many years ago is hitting now with full force. However, at the time I hadn't really thought through the implications of the speculative nature of what had transpired in the entire world, because when I first started thinking about and discussing this outcome, the rest of the world hadn't yet gotten quite so drunk.

But as it turns out, by the time the madness of the crowds finally breathed its last on the upside, the insanity we saw at home had been pursued in many other countries. Iceland is bankrupt, Ireland may be following suit, and who knows which others may soon be joining that sorry parade.

The one surprising outcome thus far is that dollar has been able to stay as strong as it has (which I believe is a temporary phenomenon). It's becoming clearer to everyone that currencies (the dollar included) have no intrinsic value, as they're just pieces of paper. Which, in my opinion, is part of what's put the bid in gold recently.

I've talked a fair bit about the angst regarding the high price of gold. But gold is still $60 below where it was when the Bear Stearns/ JPMorgan (JPM) shotgun marriage was arranged. (Not that $1030 is a correct reference point; nonetheless, gold traded there.)

Now ask yourself: Is the world a better or safer place financially since that occurred? (And then, consider the monetization of debt that we'll see all over the planet.)

I know it appears as though gold is expensive, and it will continue to be subject to violent corrections along the way. But it seems to me that the path of least resistance will continue to be higher.
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No positions in stocks mentioned.

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