Why Gold ...
Grows More Precious Every Day

By Bill Bonner
Nov. 22, 2005

Markets rise - first for the right reasons, and then for the wrong ones.

We're thinking of gold. The precious metal becomes even more precious every day. Yesterday, it nudged up against $490 (Dec. contracts.) This leaves us feeling a little left behind. Our buying target is still at $450. The price fell as low as $459 a few weeks ago. We were tempted. We wondered whether to stick with our discipline - buying below our target figures - or whether to merely buy whenever we have the money. A few years from now gold at any price under $500 is likely to look like a great bargain - even the chance of a lifetime.

Gold is rising for the right reasons. Gold is insurance against financial breakdown, inflation, and mendacity. As the lies mount up, the price of gold rises. Lies cause people to believe things that aren't true, which leads them to do preposterous and suicidal things.

While energy, housing, and health care rise at record rates, for example, people believe that "inflation" is not a problem. Statisticians at U.S. Labor Department "black sites" have twisted and hammered the numbers so much they're ready to perjure themselves: "Do you see any inflation? We don't see any inflation."

More evidence of mistreatment came in yesterday's news:

According to the U.S. Labor Department, hotel prices were down 2.5% in September from a year earlier. But don't expect to find lower prices the next time you check into the Holiday Inn. Industry executives say prices are actually rising - sharply.

Patrick Jackman, a U.S. Labor Department statistician, explained that the government's number boys had put hotel rates on the rack, put pliers to them, and pulled out hotel rates for business travel, which have been going up. The price of a standard room at the Waldorf-Astoria hotel in New York is up 20% over last year.

"People shouldn't be surprised to see gold trade in the four digits," said John Hathaway of the Toqueville Gold Fund. Let's see...four digits...that is more than $1,000!

We wouldn't be surprised, but we would be disappointed. Gold is now cheap and almost hidden. People are buying it for the right reason: because it is cheap. It also provides an insurance against human error, complacency, and shock. We see signs, though, that gold is coming out of the closet. The price is approaching $500, and the financial press is beginning to notice. "Four-Digit Gold," is Barron's headline.

But Hathaway sees the world's financial cup not half empty, but filling up.

"There is not a lot of [gold] around. If you took one-tenth of one percent of global financial assets and stuck them in gold, you would wind up with a couple of years of mine supply. It is a trade you can't do. But it still gets back to the question as towhy people get more interest in gold, and it's not all based on bearishness. India is getting more prosperous, and Indians like gold. China is getting more prosperous and the Chinese like gold. More disposable income in Asia definitely helps gold."

When gold goes over $500, it is sure to get attention. Then, the second stage of the bull market will begin - the stage when ordinary investors and institutional money managers put some of their money into gold. These are people who probably don't read The Daily Reckoning and don't necessarily share our view of the world economy. But they will notice that the price of gold has doubled in the last six years. They won't understand why the price is rising, but they won't want to miss it. As prudent investors, they will place a small part of their funds in the yellow metal - just in case.

* * *


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* * *

This mainstream buying, along with the fundamentals of course, will drive up the price of gold further. Eventually, speculators will begin to buy it for the wrong reasons. They will expect it to soar. At first, they will be right. In the short run, markets are like democracies: voters get what they want. In the long run, they get more or less what they deserve. When the price of gold goes over $1,000, the bull market will be in its bubble phase. The price may go far higher - depending on what else is going on in the economy and the markets. But this will be a time to be careful...when we stop adding to our positions and begin to reduce them.

But that is still a long way off. Right now, we are wondering whether to move our buying target up to $475. If we're right about what is coming, whether we bought at $450 or $485 is not going to make much difference. Still, we don't like to abandon our system. A man who believes in nothing is ready to believe anything; a man who has no self-discipline will be disciplined by others; and a man who...well, we can't think of an appropriate dictum. But there must be one. Use your own judgment, dear reader.

Looking around, we see hardly a single number, fact, news item, or presidential press conference that doesn't need footnotes, retraction or medical attention. All have been stretched, crunched, twisted or bent into such grotesque shapes that even their own mothers wouldn't recognize them.

Americans do not spend too much; there is merely a "savings glut" overseas that we help absorb. Nor is there a housing bubble anywhere in the United States; everybody knows houses go up forever. Nor does the administration sanction torture of alleged terrorists; it just uses "unique" methods. No kidding, we read it in today's paper. The CIA defines torture in the same spirit that the U.S. Labor Department defines inflation: "uniquely." They both get the answers they want.

We sigh. We are reminded of a more innocent, more honest age: when gold stood behind the dollar, when children said please and thank you, and soldiers treated their adversaries with respect.

SOURCE: DailyReckoning

DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.

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