The saying goes that, in a recession, “Cash is king.” That saying has a lot of merit. If you look across all of the asset prices of everything over the past year or so, cash seems to have outperformed them all. All save one. A year ago gold closed at $792.50 an ounce. Today it was $838.70. Investors often figure that gold and oil will perform similarly, but oil is a roughly half of where it was a year ago while gold is still ahead. The dollar rose in value during the crush of the recession, but have a look at where it is today.
The dollar has fallen on hard times recently as the chairman has stepped forward and offered to run the printing presses until banks could afford to loan money to each other at zero percent. Still, even with the fall in the USDX, the dollar is still above where it was a year ago. Investors often say that gold performs inversely to the dollar, but here we see that both have strengthened over the last year. What does that tell us?
To me it says that people want to stay liquid during this downturn, but where to store the liquid assets? Cash is the traditional safe haven to wait out he downturn, but with the central bankers of the world acting in concert to see who can make their currency the more worthless, it does seem a rather precarious place to park your assets. The market data seems pretty clear from all of this. In this downturn, people are demanding gold. As I’ve said in previous blog posts, the demand for physical gold has outstripped the dealers ability to supply it. And despite the fact that the price for gold seems to be set by the COMEX where paper claims to gold are bandied back and forth, you just can’t keep a good commodity down. Cash may be king in economic downturns, but when cash is as suspect as it is today, gold is emperor.
As Bill Bonner said in today’s Daily Reckoning, gold may be the main, or even ONLY, beneficiary of the massive amounts of fiat money that is being forced into the system. And this just brings us back to fundamentals. It is said that Vince Lombardi would start every year’s training camp by presenting a football to his team and saying “Gentleman, this is a football.” He hoped to make his team brilliant on the basics.
In this blog, I’ve talked about the gold standard a number of times. I’ve gotten numerous questions from people asking, “But why gold. It has little intrinsic worth.” To them I now have to say, “Oh really? Well then why is it one of the only asset classes (and the ONLY commodity) that is up over the last twelve months?” No other commodity has survived the past twelve months: not oil, not platinum, not silver. Even at a time when all of the major financial forces of the world continually seek to demonetize it, gold stands alone as the protector of value. The only other safe haven in these times has been US Treasury bonds, but given the meager yields offered on them and how the dollar has performed over the last couple of weeks (see above graph) I think it’s safe to say that government bonds are no longer a safe haven. Gold is where people need to invest, and they need to invest in it now.
Gold may vacillate in its value on that goofy COMEX market from one day to the next. Sometimes it can vacillate wildly, but that’s just because two opposed forces are in conflict. There is the force of people seeking to maintain their liquidity in a safe asset which is driving the price up, and there are the central banks of the world trying to drive the price down. In the end, I feel confident that we will have a clear winner, and I’m prepared to bet on it.