Gold Rush 2012: Gloom and Glory

Henry Paulson: Former head of Goldman Sachs and the Treasury Department, who helped orchestrate the infamous bailouts of 2008.

Goldman Sachs is like the fourth branch of government. Indeed, with the revolving door between the Treasury department and Wall Street, one can hardly differentiate between the two. Does the government control Goldman Sachs? Does Goldman Sachs control the government? Are they simply one in the same? The lines are blurry.

There is no doubt that the Establishment hates gold. This is because the Establishment cannot control gold. Governments abandoned gold as currency in order to expand their power over our everyday lives. Gold is loathed by the government and all those dependent upon the government. Thus, when an uber-establishmentarian institution like Goldman Sachs begins singing gold’s praises, it tells us that the dollar and other fiat currencies are truly in trouble.

Henry Paulson: Former head of Goldman Sachs and the Treasury Department, who helped orchestrate the infamous bailouts of 2008.

Goldman Sachs says gold is going to “take off” in 2012. They are calling for a $1,940 per ounce price target on the precious metal. Goldman is advising clients to be “overweight” in commodities in general, but especially gold. Morgan Stanley goes even further, calling for $2,200 gold by the end of 2012. Why are these big-money institutions – so dependent on easy fiat money – finally giving gold its due?

Gold’s rise in 2012 is virtually inevitable for at least three reasons: (1) The euro debt crisis, (2) the ongoing (but unspoken) U.S. financial crisis, and (3) general global instability. Each of these catalysts for gold’s rise will be discussed below.

Euro Debt Crisis

On an almost daily basis, news out of Europe is having the greatest impact on the U.S. stock market, as well as gold and silver prices. It started in Greece and spread to Spain and Italy, but let’s not forget Iceland, which saw its economy completely implode last year. Now France has seen its credit rating downgraded from AAA to AA – and France is supposed to be one of the more “responsible” European governments.

The citizens of Europe, by and large, are not like those of the U.S. They traded in their freedom for security long ago. Did you know that in many European countries, parents cannot even name their children without the government’s permission? Even in an advanced economy like Germany, the government greatly restricts entry into business and serves almost literally like a nanny, paying women tax dollars to stay home and take care of their children.

Greeks riot in the name of socialism. They've come to expect it.

The flip-side of all this, however, is that when the citizens don’t get what they have come to expect, they react – and not in the manner of the comparatively sissified Tea Party and Occupy movements. No, these protesters are for real, and with such a lack of respect for property rights instilled in them from birth, they have no qualms rioting and perpetrating violence. With greater cultural homogeneity, citizens of the individual European nations are not easily divided and conquered by their rulers, like Americans are, and thus their governments live in greater fear of them. The Tea Party and Occupy movements are cute by comparison – no one in D.C. really fears them. But the protesters in Europe have a real chance to tear down their governments and make heads roll in the street – it has happened before.

This fear of instability in Europe, and the threat that it could help bring down the entire financial system, is bullish for gold. That’s because when people lose faith in the security of paper money, they run to that which was money before the politicians’ paper promises: gold. Gold was money from the time of the dawn of civilization all the way through 1971, and when the European Union inevitably crumbles, gold might have its monetary status restored.

U.S. Financial Crisis

Hey, remember the U.S. financial crisis? It was a doozey, wasn’t it? I’m so glad we’re in recovery now… Oh, wait – there was no recovery. The crisis is still ongoing. But you wouldn’t know that from listening to the establishmentarian media.

It’s amazing how short of an attention span the media and its consumers – including investors – have. For instance, last week it was a big deal that France had its credit rating downgraded from AAA to AA. Well, that happened to the U.S. months ago. That’s right, the U.S. had a worse credit rating than socialist France for months! If a downgrade from AAA to AA signals the pending death of France, what does it say about the U.S.? And let’s not forget that it was very difficult for S&P – so dependent on the state – to tell the truth and downgrade the U.S. In reality, the U.S. does not deserve an AA rating – its bonds are more rightly rated as “junk.”

Ben Bernanke: This man cannot save us.

But have no fear, Ben Bernanke and the Federal Reserve are here to save us! Luckily, fewer and fewer Americans are continuing to believe this. Thanks to the efforts of Ron Paul and people at the Mises Institute, even some politicians are talking about how dangerous the Fed is. Of course, none of them but Ron Paul really want to do anything about it, but it has still expanded public awareness of the Fed’s destructive role in the economy.

Nevertheless, in a supposed effort to “save” us, the Fed has promised to continue the destruction via its program of continued low interest rates. Low interest rates fuel money creation, which is by definition inflation, and with inflation, the dollar loses value. A less valuable dollar automatically means that gold will be more valuable when measured in dollars, but more importantly, the real, inflation-adjusted value of gold is bound to go up, too. This is because in an inflationary environment, investors want to get out of the dollar and dollar-denominated assets, and into safer havens – such as gold.

Global Instability

Since the end of World War II, the dollar has been the world’s reserve currency. This means that foreign central banks hold dollars in their vaults to help give their own domestic currency value. What gives the Chinese yuan its value? The fact that the Chinese central bank holds a ton of U.S. dollars. U.S. dollars are as “good as gold,” right? Well, that has been the conventional thinking for the past 100+ years, but that conventional thinking has been turned on its head.

Prior to World War II, gold was the world’s reserve currency, and with the impending demise of both the dollar and the euro, many emerging-market central banks are stocking up on gold. This, of course, is bullish for the precious metal. But on a more sinister note, there are other factors at play on the global scale that play into gold’s favor; most notably, the seemingly inevitable war between the U.S. and/or Israel and Iran.

Anti-Iran protest -- not in Tel Aviv, but New York City.

Americans have been trained by the public school system to love war. We are taught that the U.S. has been justified in every military intervention, and that “we” fight wars to protect our freedom (and the freedom of those we are bombing). People cheered on the wars in Afghanistan and Iraq, the former of which still goes on and the latter of which ended in an unadmitted but humiliating defeat. Now it is well known that both wars were sold on lies, and most people – even those who cheered them on in the beginning – now think both wars were bad ideas. Nevertheless, there is growing support for an even more ill-conceived war; this time with Iran.

Simply put, a war with Iran would send the price of gold through the roof. Morgan Stanley’s prediction of $2,200 is probably based on the assumption of war, but I think it is too modest. The sky would literally be the limit for gold if such a conflict were to come to pass, as the U.S. economy would be choked into submission by the resulting scarcity of oil imports. Once this happened, what would the Fed do? Inflate, inflate, inflate, of course. And, with the presidential election coming in 2012, and all of the leading Republicans – except Ron Paul, of course – ignorantly banging the drums of war, the likelihood of war is greater than ever. Sure, Barack Obama will probably be reelected, but he may invade Iran in a “wag the dog” strategy just to be safe. His Nobel Peace Prize hasn’t stopped him from bombing Pakistan.

Gloom and Glory

Are we gold and silver people because we are pessimists, or are we pessimists because we are gold and silver people? I prefer to think of us not as pessimists at all, but as realists. We’ve taken the red pill, and we see the world for how it is, not how we wish it were. Seeing the world for how it is is important in making the world how it should be. The second step in doing so is to prepare yourself for the inevitable, and you do that by buying gold and silver.

Yes, silver. Everything stated here for gold could perhaps be doubly true for silver. And when the dust settles and the smoke clears, those holding the gold and silver are going to be the ones responsible for rebuilding society. Society needs to be rebuilt. So ultimately, our view isn’t pessimistic, but optimistic. Instead of “doom and gloom,” I prefer to think of our outlook as “gloom and glory.”