Gold The Antidote To Delusions Of Market Stability

Last week’s action reinforces my analogy of the financial markets being more akin to car-driving than roller-coasters. Most people drive recklessly far more often than they should but get away with it most of the time. With the market, an unrelenting stream of up days fostered an illusion of stability.

It becomes clearer that these markets and the economy are being driven by “artificial” forces — government-supplied liquidity, high-frequency traders, subsidized industrial concerns. On the ground, this economic recovery feels even more artificial than the preceding housing-led upturn. During the Bush administration, wages had stagnated while basic living costs rose substantially but at least people had jobs! Wages still aren’t going anywhere, living costs dropped for a brief flash before springing back and unemployment lingers near double-digits (true unemployment is well above 10%).

Interesting to note that physical gold held up well last week. The miners’ share prices, while not as sturdy as the physical commodity, did not suffer the plunges of the broader market and correspondingly, mostly missed out on today’s bounce-back. Minefinders (MFN) reported poor results last week, due to inability to lower operating costs and suffered accordingly but the gold miners in general are not keeping pace with the gold price. Most market commentators seem clued into gold’s benefit as portfolio insurance and at $1,200/oz, I can’t recommend building a position at these levels. Most of the producing miners are fairly valued so investors may just have to wait for a good entry point.

Albert Einstein is quoted as saying, “Problems cannot be solved by the same level of thinking that created them” and yet, the powers-that-be seek to solve debt/solvency problems with the same easy-money policies that created them, only on a bigger scale than has ever been attempted. No one ever said genius applied to economic policy but this seems like madness (the flip side of genius, perhaps?). It is unfathomable that our leaders’ current actions will lead to a happy ending but we must be aware that disaster can be staved off for what may feel like perpetuity. During that time, many investors will engage in the financial equivalent of driving while texting or steering with one knee going 70mph. They may get away with it for a time but at some point, they will suffer immensely for reckless behavior. Patience and a little portfolio insurance (in the form of gold) is required.

[This post excerpted from the weekly watchlist commentary of Enlightened American Premium.]

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