Gold - Keeping It Simple


"Money flowing into gold was a result of the change in inflationary expectations. . ."

There can be little doubt that the U.S. economy is in uncharted waters. The crash of 2008 and the U.S. government's response - and the world's response, for that matter - were unprecedented, which means that many of the old rulebooks get thrown out the window.

With markets having stabilized and rising, however, the search is on for the next great bubble, the asset class that will be the recipient of worldwide money-printing efforts. Newly printed money always flows somewhere, and not necessarily where governments want it to flow.

In the 1990's, easy money from the Greenspan Fed flowed unencumbered into the NASDAQ and technology stocks. The dollar rallied during that decade and gold declined to its low in the mid-$200 range by 1999. It was to be a "new era," where problems of the past would be buried for good, along with the barbarous relic that is gold.

This decade, we witnessed the epic housing bubble, which "bailed" the country out of the stock market collapse of 2000-2002. With tax breaks for homeowners, low interest rates, Fannie and Freddie, and President Bush telling Americans to go out and buy a home, it is easy to see how government policy tilted the playing field.

But note the trend change. Unlike the '90s, gold and the dollar went in opposite directions in the 2000's, offering up an important clue to astute investors: government would be unable to hide the inflation it was, and had been, creating. Thus, expectations had changed, and gold started to move higher as a result of those changed expectations.

Despite the fact this decade witnessed an enormous housing bubble (i.e., government got its way and was successful at creating another "good" bubble recipient of its money-printing efforts), some of the new money nevertheless flowed into precious metals and commodities, taking gold up almost five-fold at a little over $1,000 per ounce. Money flowing into gold was a result of the change in inflationary expectations, a trend that, given the trillions of new dollars that today are flowing from the Federal Reserve, remains firmly intact, if not accelerating, in our opinion.

We are, therefore, not sweating the search for the next great bubble, and sticking with the theme that has done quite well so far this decade.

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