Here we go again.

Economists and other observers of many persuasions are dead-on certain that the price of Gold is headed to the stratosphere, because the fundamentals demand it. Demand for physical Gold is up; production has tailed off and cannot keep up with demand; inflation and even hyperinflation are unavoidable now, or soon; the inflationary effect of the infusion of massive amounts of bailout funds by the Federal Government must result in devaluation of the dollar and, consequently, a rise in the price of Gold, to new heights. The fundamentals are coalescing to drive Gold. It’s obvious that Gold must rise. There is no other possible result.

However, the assertion is built upon the premise that inflation is the enemy, which is false. We see that the Fed’s efforts to inflate have not worked to stem the avalanche of declining prices at the retail level. Newspaper inserts are replete with special offers. Restaurants feature meals for two at reduced prices. Applebee’s asserts that “It’s a whole new neighborhood.” It certainly is: restaurants are hurting. They’re trying everything they can think of in order to draw customers inside the door. Consumers’ savings rates are higher than they have been in many years. (“Savings” includes paying down debt).

It is deflation which is the enemy, not inflation. Once deflation starts, the cycle becomes self-reinforcing and increasingly difficult to break.

The real tipoff that Gold is not going to soar to new heights is that so many experts think that it will. They are chattering with each other in a closed room; and every time the story goes around within this small circle of prognosticators, self-assured certainty is enhanced. When the field is so very strongly tilted in one direction, this phenomenon becomes a “fundamental” too, and it has the power to overwhelm all of the others.

I believe it is Jeremy Grantham who coined this expression, which ought to be kept firmly in mind during this period of self-assured certitude regarding the price of Gold: “What’s obvious is obviously wrong.”

William Kurtz July 1, 2009 http://www.candelaabra.com