"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Tuesday, August 30, 2011

Gold a Bubble? The Answer Lies in the Wording, Watson.

A thought occurred to me while reading Hutt's book on Say's Law. A lot of info is hidden in how you describe the situation. Here is an example.

Say the price of gold goes up. That is something factual. The question is, is that rise a bubble or not? No way of knowing, really, other than the seat of the pants idea that if something gets more expensive, really more expensive, it must be a bubble.

But what if we word things differently? We can describe the same fact by saying the value of the dollar is going down relative to gold. This description, equally factual, really gets us thinking. Is the dollar really losing value, not just in relation to gold? If yes, are there any reason for its loss of value? If we see any reasons, are those reasons here to stay?

Once we answer yes to all these questions, as AE does, then we look at the rising price of gold in a completely different light. Gold has gone up because the dollar has gone down. Those are two ways of saying the same thing. And the second way, that the dollar has declined, is a description of something permanent. The obvious conclusion is that the high price of gold is also with us for good, and is not a bubble at all.

Now don't get me wrong. I'm not saying that every time gold rises, it will never go down. Just a look at the recent violent swings in gold's price show that not to be true. But long term, big picture, allowing for short term swings, the price of gold is just going to keep on rising. Only when the reasons for the decline of the dollar disappear will gold stop it's skyward climb. Some say we'll need violence in the streets for that to happen. Let's hope they're wrong.

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