This Gold Bug Ain't for Turning!

by Bill Bonner

Whoa! This is getting interesting...
Gold crashing on Monday. Slight recovery yesterday. Stocks crashed on Monday too. Now surging.
What happened to gold? No one knows. There were reports of a 124.4 ton sell order from an investment bank on Friday morning. But from whom? Why? Nobody knows.
From Bloomberg:

The CME's Comex unit is making it more expensive for speculators to trade after gold fell the most in 33 years today, dropping to the lowest since February 2011, after prices entered a bear market last week. Silver, also in a bear market, slumped 11% today and extended the year's loss to 23%.

In the financial markets, we spend most of our time waiting for something to happen. When years go by and nothing happens, we assume that nothing will ever happen. When it does happen, we are totally surprised.
Is something happening now? A major change of direction? Is another shoe dropping?
All Downhill for Gold?
A consensus is forming that the gold market has reversed direction. The bull market of the last 14 years has finally ended. It's all downhill from here, say the mainstream pundits.
But if that is true, what else will have to be true? The last bull market in gold ended when the Fed dramatically changed course.

Paul Volcker replaced G. William Miller as chairman in August 1979. A loose money policy became a tight money policy. Volcker jacked up interest rates, which had trailed behind the inflation rate by such a degree that real interest rates (the difference between nominal interest rates and the rate of consumer price inflation) were as high as 5%.
"Don't fight the Fed," they say on Wall Street. Those who fought the Fed back in the early 1980s were wiped out. The Fed was tightening – sharply. Volcker was determined to bring inflation rates down. That was not the time to own gold. It was the time to own bonds. You could buy a 10-year T-note with an 18% coupon. And interest rates (along with inflation rates) were headed down. Bonds would go up in value for the next 30 years.
By contrast, gold went down... down... down. By the end of the bear market in gold, there was hardly a single gold bug who was still sober or still solvent.
But what's the Fed doing now? Has it reversed course? Has Ben "Bubbles" Bernanke been replaced with a tough-as-nails inflation fighter? Has the FOMC vowed to stop printing money? Has the loosest monetary policy in US history given way to a tight policy?
Nope.
Has the bull market in bonds ended? Have the lowest interest rates in half a century suddenly started to turn up?
Nope again.

Bubbles, Crises, Booms and Busts

What has fundamentally changed to reverse the fundamental direction of the gold market? Nothing we know of. Instead, the Bank of Japan has recently joined the central banks of the US, the euro zone and Britain in promising to keep printing money "as long as necessary" to get the inflation rate UP!
Every major government in the Western world is running a big deficit. Every major central bank is printing money. And every saver, as David Stockman put it, is being "crucified on a cross of ZIRP."
That's right, too. Savers had a field day when the Fed changed direction in the early 1980s. They were paid to save... and paid well.
Now savers are being punished. They earn less in interest than the real rate of inflation. Is that changing?
At the time the last bull market in gold ended, everything stopped in its tracks and turned around. Stocks had been going down for at least 16 years; they suddenly started going up. Bonds had been going down too, ever since the end of World War II; they too started moving in the opposite direction. Savers were rewarded; borrowers were punished.
And gold reversed course and began an 18-year bear market. Is there any major turnaround now that would justify or at least signify a historic turn in the price of gold?
Nope.
Central banks and central governments are committed to a particular course of action. Does it lead to more valuable paper money? Does it lead to price stability? Does it lead to growth and glory?
Or does it lead to bubbles, crises, booms, busts and an eventual blowup? As far as we can tell, central banks are looking for trouble.
We still want to own as much gold as possible.