Gold, Recession, and Money Supply

Gold has been absolutely pulverized in the last few weeks.  It has fallen well below $1,600 per ounce.  This could mean one of two things.

The first scenario is that this is one last pullback (some call it a consolidation) before we see another huge run.  Of course, it is mainly the gold bulls who are saying this.

The second scenario is that the drop in the gold price (in terms of U.S. dollars) is signaling that the U.S. economy is headed back into recession (by official standards).

Either one of these scenarios is quite plausible at this point.  The preliminary reports on the fourth quarter GDP showed it being slightly negative, while unemployment rates continue to be high.  Another recession (if we ever left the first one) seems reasonable at this point.

On the other hand, if we don't go into another recession in 2013, then I see much higher prices for gold.  Buying right now is a bargain if this happens.  If another recession is held off, it will be an artificial propping up by the Fed.  It will be based on massive new amounts of money being created out of thin air.  If we have an artificial boom based on increasing fiat money, how can gold not do well in such an environment?

The adjusted monetary base has been on fire in the last two months.  It has exploded.  This can take some time to have significant effects.

As I have said in the past, this is a tug-of-war scenario between inflation and recession (or depression).  The Federal Reserve is happy to play Goldilocks right now and keep things in the middle.  But the middle-of-the-road policy is getting thinner to stay in.  It will have to fall one way or another eventually.  It is hard to believe that a middle-of-the-road policy means creating almost $100 billion per month in new money.  This just shows how bad the market is trying to correct itself.  The economy needs a massive reshuffling of resources from the past mistakes.  That is what a recession is.  But the Fed is not allowing it to take its course.

Just because of the massive monetary inflation alone, I tend to think that a deep recession will be avoided for right now.  This makes gold a bargain.

If we do go into another recession, then gold still won't be the worst thing to have (although gold stocks might be).  When the economy finally tanked in the fall of 2008, gold went down significantly.  But it still did not do as poorly as silver, oil, and the stock market.

If you have been waiting to invest in gold, then you just got a pullback.  What are you waiting for?