Are We on the Cusp of a New Bull Market in Gold?

The Dow rose 18 points yesterday, but doesn’t seem in a hurry to go anywhere. Gold fell $14 an ounce. At $1,327 an ounce, the gold price is still about 12% higher than where it started the year.

Our question for today: Is there really a new bull market for the yellow metal?

Of course, the answer is only known to the gods and the NSA. For us mere mortals, it fits comfortably into the vast library of which we have forgotten the address and lost the key. Only in the fullness of time will we have the answer. In the meantime, we await developments.

But let us poke around in the grass. We will not find the answer we are looking for. But we may find something else that might be useful…

Keeping Score

Money, by definition, observation and experience, has no intrinsic value. It is just a way to hold your place in line. Or as T. Boone Pickens says, it is “just a way of keeping score in life.”

Of course, money keeps score on only a part of life… and probably not the most important part. But in matters material it tells you how you stack up against your fellow man. It also tells you how much of the world’s output – stuff and services – have your name on them.

For that purpose, gold is the best thing never invented. A virtual currency such as bitcoin may someday prove superior, but for now gold is No. 1.

Alas, there’s a crack in every pot God ever made. And gold, too, has its fissures and faults. Sometimes, it yields to other forms of money. Last year, for example, you could move ahead in line by holding the dollar. Gold surrendered about 30% of its dollar value.

A major reason why gold so often looks good is that the alternatives so often look so bad. They are nicely summarized for us by Vivek Kaul, who we met recently on a trip to Mumbai, India.

Kaul’s new book, Easy Money: Evolution of Money from Robinson Crusoe to the First World War, tells the sorry story of the competition – the substitutes, the ersatz currencies, the monetary impostors that the world has seen come and, inevitably, go.

The origins of today’s money system can be found in Venice in the 12^th century. The Bank of Venice was founded in 1171. Other banks realized they could make a business of holding deposits from rich merchants who were profiting from trade with the East. They took deposits of gold and gave receipts, which gradually came to be trusted. Writes Kaul:

As time went by, some banks developed a reputation for probity and honesty. This led to merchants, who had accounts with these banks, simply transferring receipts of these banks when they had to pay one another. This led to these receipts functioning as “paper“ money. 

 

In some time, people running these banks also figured out that their depositors do not all come on the same day asking for their deposits back. So, in the intermittent period, they could loan out the deposited money to others for a fee. They could also simply print fake deposit receipts not backed by gold or silver, but which looked exactly like the original deposit receipt and lend that money out.

The Strange Tale of the “Massachusetts Pound”

History doesn’t always give you a clear view of the future. But sometimes, the story of the past has the same cast of characters, themes and plot twists.

In the American colonies, for example, Mr. EZ Money was one of the first immigrants to step off the boat.

After him, in 1690, it must have been an early Bush who came up with the following idea: The colony would raise an army to invade Quebec, then the capital of New France. What exactly the Yankees had against Quebec was never made clear. But humans entertain the gods, from time to time, with blunders and blockheadishness.

In the event, an army was raised. The expedition set out. It was a disaster. Thirty men died fighting. Two hundred died of smallpox. And the loot, which was meant to pay for the adventure, was never captured.

What to do? Issue paper money!

Called the “Massachusetts Pound,” it was already on the decline when it was made legal tender in 1721. Already, merchants had drawn its measure and refused to take it. So, the government reacted in typical blockhead fashion: It made it a crime not to take the paper money at face value.

Other colonies were close behind. Here in Ben Bernanke’s home state, the assembly was wrestling with the bills from its own failed expedition. What could be done?

In 1702, it decided: Print money!

One bad idea led, like a sink drain to a sewer line, to an even worse one. Soon, paper money was flowing all through the colonies. And it stank. Rhode Island was the “biggest money printer of them all,” writes Kaul. Against hard currency, its paper money lost about 95% of its value by 1748. “In Pennsylvania, the most responsible colony when it came to printing money, paper currency had lost 80% of its value.”

Later, these paper monies disappeared completely.

Regards,

Bill

Market Insight:

Is Bitcoin’s Difficulty Gold’s Opportunity?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

Bitcoin buffs are going to hate me for today’s chart.

It compares the recent price action in bitcoin (blue line) with that of the South Sea Bubble.

Source: Mebane Faber

The South Sea Company was a British joint-stock company whose shares peaked at over £1,000 (unadjusted for inflation) in 1720 and then fell back to £100 before the year was out.

This wiped out the wealth of thousands of investors – including English math and physics genius Sir Isaac Newton. He reportedly lost £20,000 (equivalent to about £2.4 million in today’s money).

I’m showing you this chart not to poke fun at bitcoin (which I find extremely interesting in principle), but to add some context for the recent recovery in gold.

Of course, it’s probably a stretch to think that the rush of capital out of bitcoin is moving the dial in the much more liquid gold market. But on the other hand, the popularity of bitcoin shows that folks are genuinely concerned about the fate of fiat currencies under Global QE.

Gold has just hit a 17-week high at $1,345 an once yesterday… after the longest stretch of monthly gains since last August.

And net commercial long positions in gold on the Comex division of the NYSE have doubled so far in 2014 – hitting a four-month high. This signals that professional investors are starting to pay attention to gold’s profit potential again.

The roller coaster ride for gold since its September 2011 peak of $1,900 an ounce to its recent lows of about $1,200 an ounce is basic investor physiology writ large.

At $1,900 an ounce, everyone thought gold was going to continue to rocket higher toward $2,500… even $3,000… an ounce. At $1,200 an ounce, everyone thought it was destined to continue to fall to $800 an ounce.

This is just another example of the advantage of a contrarian view – something we hold dear at Bonner & Partners. (In fact, we’re giving away a free report with two of our favorite gold plays along with a free hardcover copy of Bill’s book on the big build up of debt in the US here).

The best time to buy is when others are fearful. The best time to sell is when others are greedy.

And forever will it be so…