Is the Bull Market in Bullion Over?

Most mainstream pundits seem to think the economy is recovering.

The worriers can stop worrying, they say. The US has plenty of cheap oil. Unemployment levels are falling. The housing market is recovering.

This is not time to buy gold, they say. The world is not going to end. You won't need it.

All year long, we've heard analysts tell us that the bull market in gold was over. Most recently, Goldman Sachs' top commodity man announced that gold will go down next year, as real interest rates once again turn positive.

Gold was a nice thing to hold when the world was in a financial crisis, goes the argument. But now, the trouble is behind us.

Markets have stabilized. Europe has figured out how to manage its sovereign debt issues. China is not going to blow up anytime soon. And the US is on the road to a sustained recovery, thanks in large measure to huge new oil and gas output.

Who needs insurance in a world where nothing goes seriously wrong?

And yet, gold holds above $1,700 an ounce. It's up about $150 an ounce from the beginning of the year. Let's see... That's nearly a 10% increase. Not too shabby for an insurance policy.

Central Banks Are Still Buyers

And now comes word in the Financial Times that Americans are buying so many gold coins the U.S. Mint can barely keep up.

Silly fellows. Don't they know there's nothing to worry about?

And what's this? Apparently, foreign central banks are being silly too. Here's another FT report:

In 2009 [...] China announced that it had been buying gold and India purchased 200 tons from the International Monetary Fund.

Since then, Thailand, South Korea, Sri Lanka and Bangladesh have all bought significant quantities for the first time in years, making Asian central banks the driver of official sector purchasing.

Now the gold bug appears to be catching in Latin America.

Why are these central banks buying gold? Don't they know that gold holdings don't earn them any money? Don't they know they'd be better off with US Treasuries? Don't they know the dollar is as good as gold?

Apparently not.

"Pulling a Gono"

And we're not so sure either...

If the US really were in a recovery we'd soon see interest rates rise... and consumer prices go up too. You would expect gold to go up along with everything else.

Then things would get interesting. The Fed would have to choose: either back off from its EZ money policies or risk runaway inflation.

If the Fed were to "pull a Volcker," it would be time to sell gold. But 2013 is not 1979. And Ben Bernanke is no Paul Volcker.

More than likely, Bernanke will "pull a Gono."

Gideon Gono is the governor of the Reserve Bank of Zimbabwe, and was responsible for the hyperinflation there between about 2005 and 2008, when the value of the Zim dollar didn't just go down -- it disappeared completely. (Toward the end of 2008, the rate of inflation reached 89,700,000,000,000,000,000,000%!)

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About the Author
Bill Bonner

Bill Bonner is founder and president of Agora Inc. 

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