Gold's Stampede Into Bogus Paper

Gold's Stampede Into Bogus Paper

Global markets continued to punish gold yesterday for the speculative excesses of crude oil, a mere commodity. With the dollar robustly on the rise in recent weeks, spurred in part by the prospect of a plunging energy-trade deficit, it’s easy to understand why investors would treat the dollar as money and gold as a commodity. Of course, they have it exactly wrong, as most of you will already know. How can we be certain of this? Well, for one, neither Paulson nor anyone else at Treasury can refute the following statement: The $20 bills in our wallets are fundamentally worth no more than the $1 bills. Indeed, and indisputably, if either bill has any value at all, it resides in the durability and ultra high-quality of the paper on which the various denominations have arbitrarily been printed. Too bad there is only one person in a position of leadership -- Ron Paul -- who understands this.

If we sound churlish over the thrashing that precious metals have received in recent weeks, it is not because it took us by surprise. In fact, Rick’s Picks has provided a series of downbeat forecasts for gold and silver all the way down, and there is yet one more querulous target to be achieved that lies beneath even the 824.50 nadir of yesterday’s insensate plunge. There is also to consider a worst-case fantasy target of sorts that we disseminated yesterday in the chat room: $654. It is based on the price of gold following crude oil all the way to the bottom of its presumptive bear market. We’ve repeatedly said that oil prices are not correcting but crashing, and this would imply they will be at least cut in half from the $148 peak recorded in mid-July. So what would $74 crude mean for gold? Well, if bullion were to continue falling 60% as steeply as oil, which is what it’s done since crude prices began their collapse nearly a month ago, it would imply a $654 low for gold.

'Strong' Dollar a Falsehood

But we don’t expect that to happen, not at all. More likely is that oil will fall well below $74 as the world slips into severe recession or depression; and gold will begin to resist its pull, acting more and more money-like as the revelation of the dollar’s fundamental worthlessness spreads to every corner of the world where dollars are held as reserves. For now, though, gold bugs need to recognize that as overdone as the selling of precious metals has become, and as detached from reality as those who have been doing the selling evidently are, the fleeting illusion of a “strong” dollar is one that cannot possibly endure. In the meantime, we have the modern-day tool of technical analysis to help us avoid serious financial injury even as we rub our eyes in disbelief. While this misguided trend runs its course, however, we should not even try to make sense of a world in which investors trip over each other to trade gold for paper.