Gold tested the low end of its trading range twice last week, but ended the week higher. Silver had a rougher go of it, which is not unusual, fighting off a steep sell off but still ending the week lower.
The silver/gold ratio, the number of ounces of silver needed to buy an ounce of gold, has steadily increased from upper 50s to end the week at 53.
Gold ended the week at the high end of its range and whether it goes up or down from here depends on why it went down last week. Right from the beginning the gold selling seemed overdone; there just wasn’t anything in the financial news to account for such a steep correction.
Even though the Federal Reserve announced a willingness to print more money last week, they haven’t actually done it. The economy continues to improve, but clawing our way out of the hole we’ve been in doesn’t really count as growth.
I won’t be convinced of a true bear market for gold until I see a path to sustainable growth and a shift away from cheap money policies, which means we’re good with gold until at least 2014 and possibly longer as the U.S. settles into a Japanese style zombie recovery, crippled by growing cries for austerity.
The only sure bet is continuing to hedge against script currency. I’ve been thinking about the nature of money every since it dawned on me that our currency is little more than numbers in a computer exchangeable for pieces of paper adorned with pictures of our dead ancestors. Sometimes enlightenment comes by just saying things out loud.
Our currency is truly worth nothing. There is nothing backing it up except our collective faith in the words Federal Reserve Note printed across the top. You can convert numbers in a computer to paper with that phrase printed across the top and then convert that paper back to numbers in a computer. When it comes to moving money around, those are your options. You can’t go back to the government and trade their funny paper for something else. Because you can’t ask for something besides pieces of paper, the government has no incentive to deal honestly with currency issues because there’s no check on the Fed.
Precious metals allow you to opt out of that phony paper game by trading some of that paper, some of those numbers in a computer, for something with intrinsic substantive value. They’re something that will retain some small relative value on the global stage, regardless of what happens to the paper we pass back and forth now.