Gold Will Not Save You

As this sell-off unfolds, driven by the unwinding of the submergingprime market, you are beginning to hear the proclamations of the uber-bears who say we are about to go into a 1930s-style depression. Or at least the chances of entering one are higher than ever.  If we do, they argue, your prudent course of action is to buy gold.

Do not listen to them.

They are wrong.

Perhaps they are right about the impending depression, I don't know.  But since many of them have been predicting one since 1980, I'm not holding my breath.

However, let's say they are correct.  If they are, gold will not rise.  Gold will fall.  Why?  Because the forces that have pushed asset prices up all around the world - in some cases to ridiculous levels - are the same forces that pushed gold up as well.  Gold has been as big of a benefactor of the excess monetary creation engineered by the Fed, the Bank of Japan, the Bank of China, Wall Street, etc., etc., as any other asset class.  If we go into a depression, credit will contract, liquidity will contract, the supply of money will contract, asset prices will contract, and gold prices will contract.  After all, that is what a depression is.

The uber-bears argue that the Fed will flood the system with money causing gold to rise.  I agree.  This is what I would expect the Fed to do, and this is the reaction I would expect from the gold markets.  However, between now and then, gold won't be at $650.  Why would it?  The bears argue that gold is money.  If it is money, and if money is contracting, gold will go to $550 or $450 or somewhere much lower than where it is today.  Perhaps then it will shoot up to $1000 or $2000 or wherever they think its going, I don't know.  But to say that you should own gold right now because the financial system is imploding which will eventually force the the Fed to crank the presses is very bad advice, in my opinion.  Its like saying you should own stocks right now because the Fed will cut rates when the economy falls into a depression.  So don't listen to it.

If you think a Depression is possible, own low-risk bills, notes, bonds and deposits.

For the record, I own gold and silver stocks.

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