Alas Poor Gold Bug

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"Listen to the wisdom of the One-handed Economist, and you will learn a valuable lesson. . ."

Alas, poor gold bug. Things are better than a week ago. Monday's gap is explosive. But here you sit, with gold about to break above $1,000 and make you rich. Yet you are torn with fear and doubt. When you look back at this period, you will think, "Why was I so scared? I made a beautiful play. I beat the stuffing out of all my friends. Why did I have such doubts?"

Therein hangs a tale, dear gold bug. Listen to the wisdom of the One-handed Economist, and you will learn a valuable lesson, which will serve you well both in the financial markets and in life. Every powerful move in the markets is preceded by a period where the large majority of the people are supremely confident that the exact opposite is going to happen. And the social pressure put on by these fools is difficult to resist.

We are in such a period right now. Basically every newspaper, magazine and TV news show is lying to you. Yes, virtually every source of news and opinion in the U.S. is screaming: "deflation." Whether they use the words "Great Depression," "Great Recession," "economic crisis" or whatever, the message is the same. Prices are going down.

If "inflation" is coming, then gold is going up. If "deflation" is coming, then gold is going down. There was a period in the late '60s and early '70s when gold was good no matter what happened because the price had been suppressed for 35 years by the U.S. government working through the London Gold Pool. The high price of labor and production materials forced the gold mines to close (in 1956), and very little new gold was being produced. So in 1968, when the London Gold Pool was broken, the prognosis for gold was very strongly up and even a mild "deflation" would not have stopped it.

Today we do not have that same undervaluation of gold that we had in the early 1970s. And, quite frankly, whether or not gold goes up or down long term depends on whether the U.S. government follows a policy of increasing or decreasing the money supply.

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