Enlightening the Gold Bugs

Every once in while, I try to enlighten the gold bugs. It's a process I relish with as much joy as trying to explain to my daughter there is no Santa Claus, after she learns from her classmates she has been duped. The markets by there nature are full of people with less than perfect or imperfect information. And the beauty of this conundrum, we all assume that it's the other party being duped.

This by no means is scientific or deeply analytical, but the most prevalent opinion about the direction of a market is often wrong. But momentum riding is a very profitable trade, as long as you find a greater fool. It has become the single most popular belief that the dollar will decline in value significantly in 2009. It's absolutely main stream like peak oil, the new technology paradigm, the great BRIC society, and a host of other super trends. The problem with dollar argument is the dollar is rising despite the assumed quantitative easing of the federal reserve. The dollar is gaining strength day by day, and gold bugs continue to trumpet the collapse of the fiat.

The gold bugs continue to forecast runaway inflation, but refuse to notice that EVERYTHING we purchase is falling in dollar terms. Where's the $4 a gallon gas? Where's $4 a pound copper? Or what about $2000+ an ounce platinum? What's the price of your home? Do you think the gold bugs can clean there rose colored glasses long enough to see the FACTS? Gold bugs are the clandestine clan of legend, betting the end of the world's financial systems, while ignoring the falling prices of other hard assets. Relative to other hard assets, gold is 30-50% overvalued.

Gold bugs always say look at history, so let's take a look. From 1833-1931 gold sold for 20 bucks an ounce. In 1932 gold fell to $17 an ounce, this was the middle of the Great Depression. Finally, FDR devalued the currency by fixing gold at $35 an ounce. If FDR had not FIXED the price of gold, who knows if the downtrend started in 1932 would have finished. For thirty plus years gold was fixed at roughly $35 an ounce until Bretton Woods. Since then, gold has exploded, at the pace of 30X your money. So price stability in gold has been the norm until the last 35 years. The gold market is indeed manipulate, but contrary to what the bugs assume the manipulation is causing a bubble in the price of gold. (See the Hunt Brothers.)

The dollar is beginning a multi-decade run in my opinion, and I promise I'm the only one that will say that publicly. But the truth is the price of the dollar and most commodities (ex gold) is telling the smart money has exited the building. Deflation is on a tear, and I mean an absolute tear. And gold bugs have so much faith in the Fed to create inflation, the same Fed that many believe are incapable of finding the opening of a paper bag. Bernanke (aka Helicopter Ben) has stated he is surprised by the fact deflation exists in a fiat system. Did he say surprised? Yes, and I think a lot of people are going to be surprised.

I'll ask a question, what was the inflation rate during the implementation of the New Deal? What was the inflation rate during WW II? Many pundits believe that the Obama administration will be unleashing hyperinflation, but at least wait until prices increase before you trumpet your hyperinflation paranoia. Cash is king...there's a reason why that phrase exists. Deflation is more the norm than inflation, it's just we ALL are experts on inflation, so we talk our book.

I'll ask a simple question, is it widely believed we have exited the bubble generation? Is it possible that gold is the last bubble to pop? You can believe central bankers won't allow deflation, but do so at your own peril. Or what if deflation is inevitable despite the actions of the Fed? Treasuries are screaming cash is king, and gold is screaming inflation, one of these two markets is wrong. If you look at commodities, gold is the outlier. Anyone want to buy UUP?

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