Global Investor: Inflate or Die and the Golden Rule

Eric Roseman (February 8, 2010)

To bet against gold is to bet that central banks will “get it right.” The odds of that happening are next to nil.

Gold’s decline from a nominal high of $1,216 an ounce in early December to $1,053 this morning is drawing a rising chorus among some distinguished bears that the nine-year bull market is over. Some pundits even claim gold is in a bubble.

The world’s greatest hedge fund manager since 1969, George Soros, was recently quoted on Bloomberg claiming “gold is in a bubble” while renowned economist, Nouriel Roubini, believes the gold bull market is over. In the absence of inflation, the latter thinks gold should be sold.

Nothing could be further from the truth.

The Sovereign Society and my Commodity Trend Alert service have been bullish on gold since about $400 an ounce and we remain positive for many reasons, namely out-of-control U.S. deficit spending, sovereign government debt accumulation, declining global gold production, growing currency chaos and, ultimately, high inflation over the next 3-5 years as the Fed fails to drain excess liquidity from the financial system.

Gold: Still one of my Favorites

It’s amazing to hear from some investment gurus that gold is in a bubble.

How can an asset such as gold be in a bubble when its all-time inflation-adjusted high is about $2,300 an ounce? Also, the gold price is only 24% higher than its nominal high in 1980. These are not bubble criteria by any means. For examples of classic bubbles, you can look to the NASDAQ, U.S. and Spanish housing, Chinese equities and real estate and Brazilian bank balance sheets, but not gold.

My bullish stance on gold went into “maximum overdrive” starting in late 2008. That’s when the Federal Reserve announced its plans to start “quantitative easing,” the codeword for monetizing government Treasury or government agency debt (GSEs) in a bid to keep mortgage-backed securities markets liquid and to mop-up excess Treasury sales.

And the case for gold remains compelling in the face of a massive credit overshoot likely to emerge in the United States.

I’m pretty convinced the Fed is desperate to grow inflation at any cost in order to defeat deflation in housing, domestic consumption, wages and employment. And some sort of bungled policy response is bound to occur in the near future, should interest rates at the long end rise and threaten a recovery.

My view remains that gold is now in another series of corrections since the bull market began 11 years ago at $252 an ounce.

The global exchange rate mechanism is flawed, wrought with enormous uncertainties and governed by individuals that don’t give a damn about our purchasing power vis-à-vis profligate spending. I have more faith in gold than the Fed, the ECB or The Bank of Japan – a bunch of drunks at the bar with no sense of monetary responsibility or financial integrity.

I remain more bullish than ever on gold.

Editor’s Note: If you think Eric’s passionate about gold, just take a look at what he has to say about silver.