It’s beginning to look as though the gold market is taking a stand. As Wall Street’s mood swings
grow ever more manic, gold seems to be keeping its head. Celebration, however, would be
premature.
It is highly unlikely that the favorable service-sector report was sufficient to turn Wall Street
around. Growing signs of further QE, however, are a completely different story.
“Disappointing U.S. economic data, new strains in financial markets and deepening worries
about Europe’s fiscal crisis have prompted a shift at the Federal Reserve, putting back on the
table the possibility of action to spur the recovery,” says the Wall Street Journal. “Top Fed
officials have said that they would support new measures if they became convinced the U.S.
wasn’t making progress on bringing down unemployment.”
Not in the least bit coincidentally, the new jobless claims report is due – just two weeks before
the next FOMC meeting. It will be most interesting to see how the markets react.
If the numbers suggest that the economy is improving, stocks would strengthen while the
prospects for free money would be postponed. Should the numbers be disappointing, stocks
would start tumbling again but almost certainly be rescued by QE3 in some disguise.
That shows how far the stock market has retreated from the free market ideal. Any attempt
to “fix” the market invariable does more harm than good. Yet we persist.
“Gold’s status as a safe haven is looking shaky,” said the Wall Street Journal just one week ago.
That may be one way of looking at it, but it seems more reasonable that the myth of free money
simply refuses to die.
The dollar faced hasn’t been this deeply in trouble since the 1980s. Back then Paul Volcker
pulled it back from the brink with a bold, albeit highly unpopular move. “To save the dollar he
let interest rates rise – painfully so – to levels that the market demanded in order to restore faith in
and desire for the dollar,” says Gary Gibson, managing editor of Whiskey and Gunpowder.
It worked wondrously, but only because Volcker had a robust economy to back him up. The Fed
has no such luxury today. We are now beginning to realize that Volcker merely postponed the
inevitable. “He didn’t just kick the can down the road. He put the can in a catapult and let it fly,”
says Gibson.
We have finally caught up with Volcker’s can. It is has rusted through over the years and if the
Fed tries to give it another swift kick it will probably disintegrate. But if the Fed were to refrain
and let inflation have its day in this fragile economy the house of cards would not just fall, it
would be blown to kingdom come.
There is no easy way out this time. “Personally, I can still not envision an endgame here that
does not involve either high inflation or a substantial correction … of large parts of the financial
infrastructure,” Gibson says.
Over the next two weeks the gold market will give us a clue as to how near that endgame is.
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