Remember the Great Gold Pullback?
Enjoy the hype from Paper Bugs while it lasts. Keep it filed for future use. Remember early this year, when gold dramatically pulled back from its highs? Gold "will pull back to $1,000" they said. Some said even further than that. It was all over for gold.
Yes, well, gold tumbled all the way to $1,310 and then turned upward again, charging well over $1,500. Once again, every gold bear scrambled to find an excuse. It's a bubble! of course, being the most common.
Rules for following precious metals
1. Paper bugs don't have original thoughts. The CAPS gold bears are no different. Some have fancier charts than others, but none of them - not even the ones that always beat their chest about how they are independent thinkers - actually has an original thought. It's all regarbled Keynesianism. It's all they know. It's the only model they were taught. It's the only model on the news they watch, on the blogs they read, etc. It was taught to them by professors - and professors know everything.
2. There is no such thing as a "normal price". There is no "mean price". No "stable average." Check the box for 'None of the Above.' Prices are formed from the subjective value scales of market actors. Prices arise from the demand of the good in question and the demand for the currency the price is calculated in.
As sick as this is going to sound, killing Bin Laden increases the demand for the dollar.
3. In the long run, the most important factor for the price of gold is the weakness of the currency you are measuring it in. As a sneak preview to my second rebuttal to Alex Dumortier, I'll let you in on a little secret. According to his/Keynesian "mean price" theory, there were at least 4 gold bubbles in the 1990s. I bet that's news to you. In fact, we saw 4 different currencies rapidly lose value against gold in that decade - one of which was a decade long secular bull run (if you understand fundamentals) or a decade long bubble (if you think economics exists independent of prices and people.)
Not one of them was actually a gold bubble, of course. The value of their currencies deteriorated because their econometricians convinced them to print a ton of paper.
Enjoy the next two weeks. That's about how long it takes for a story this big to be forgotten. Then gold and silver will head right back north, as the underlying monetary picture remains the same.
David in Qatar
Disclosure: Long gold and silver (I'm pretty sure you know that.)