Why we want gold to fail

Paul Jacob

11/29/2009 12:00:57 AM - Paul Jacob

An ancient saying has it that “gold doesn’t stink.” A modern corollary might be: “Investors do.” Well, at least I’ve caught a whiff of something: A short-term fall in the price of gold, soon.

A subset of investors have gone perhaps a bit too whole hog, and the price of gold is now racing upwards at an increasingly unsustainable rate.

It’s an ancient observation: What goes up must come down.

The exceptions are those rare things that reach escape velocity. Gold hasn’t reached that, nor is it likely to.

For some reason, in markets, whenever prices move upward faster, there’s a contingent of investors who believe the price will never go down. I find this weird. A year-and-a-half ago I warned that petroleum prices would come down. I wrote this because I had begun hearing all this talk about how prices would never come down again. We were going to experience high gas prices forever. Environmentalists were pushing this, with “peak oil.” Media people were pushing it, with hysterical news stories.

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So I thought it a safe bet. Oil would come down, at least by the end of summer.

And it did.

Some of my readers hailed me as a, ahem, minor prophet. But I just thought I was articulating some common sense. As a commentator with a daily program titled “Common Sense,” long before Glenn Beck appropriated that Paine-ful phrase for his recent book, I have trained myself to elaborate a common-sense perspective on all sorts of things.

Besides, I had at least one astute economist on my side.

Now, again, I have read the writing on the . . . blog. Daryl Guppy insists that gold has hit a spiraling-upward trend that cannot last, at least in current market conditions, and so will collapse in price soon.

I have no position in gold, save for a wedding band and one very shiny tooth. Nothing rides on this. And I suppose Guppy could be wrong. But what he says makes sense.

As I understand it, gold attracts investors afraid of economic collapse, or (worst of all possible worlds) hyperinflation.

And there are reasons we should all worry about that. What our government will do when it can no longer repay its debts — or even continue in debt maintenance — is anybody’s guess. A traditional response has been to print money and devalue debt by making the money worth less. The problem with this is that at some point that process of making money “worth less” makes it “worthless.” And that’s just not a good thing.

That’s what Zimbabwe’s in the midst of right now.

That’s how Germany wound up with the Nazis.

If it happened in the United States, it could end what has been called our “American Experiment.”

Almost anything could result.

At present, the political consequences of the foreseeable crisis should be one thing, but are another.

Since we know that our federal government is pushing closer and closer to deep economic instability, Americans should unite around one simple idea: No more budget deficits. Immediately return to budget surpluses — not “by the end of Obama’s first term.” (That’s an old evasion. Bush did it, too.) Any member of the House or Senate who votes for a budget that is deeply in deficit is engaging in something close to treason.

But that is not how current politics plays. Americans may be riled up, but don’t see how they can change anything. The Tea Party movement showed some real contrarian spirit, and has provided the established media and political voices with an unsettling glimmer of things to come. But still, disaster seems far away.

I have the feeling that this “far away” is not really all that far.

Still, it’s probably far enough to allow for a major correction in gold. Hyperinflation is probably not a near-term likelihood. The recent increase in the money supply may not prove so inflationary as some have thought. Wasn’t it a “reflation,” after a deflation? Investors looking at the increase in the quantity of money may have jumped the gun on its inflationary significance.

A lot of people would sigh in relief at a gold drop. That would reinforce the notion that the dollar hasn’t hit its downward value spiral. Yet.

And none of us really want the dollar to fail. Do we really want to endure a major crisis? No.

Sayonara, high gold prices. The world is just not ready for you yet.

Still, your heyday (high day, high epoch) will come.

Of course, the reason I want gold to go down in price — even collapse — is to allow me to buy a much larger stock than I am now able.

Gold sports a longer-term significance than it appeared to possess back in the ’80s and ’90s, when our monetary system was stable and our government’s debt burden still manageable. Neither situation seems to be the case now, especially regarding debt (just weeks ago Congress raised the debt limit to $12.1 trillion — and many expect another such upward adjustment to be required soon). There’s a major chance of a major inflation up ahead.

Owning gold is the furthest thing from idiotic. Buying more at the next major downturn in price, probably wise.

But what of Friday’s $15 drop? A drop in the bucket? Don’t ask me. Still, that caveat aside, while the experts predict a downward plummet in the gold price, I hazard that this downward fall will not fall far at all.