What Crisis?

The Dubai World fear is dissolving like a sand castle on the seashore. After staying almost flat yesterday, gold futures made a new record high this morning: US$1199 and change for December delivery. Spot gold didn't quite make it that high, but it was close too. As I write this post, spot gold's at $1192.30.

This recovery can only fuel the optimism of gold bulls. Remember how scared people were? Remember the stories claiming that the much-waited-upon major correction was finally upon us? Remember the panic drop?

As it turns out, the panic was quickly reversed, and gold went into a holding pattern. One of the earmarks of an incipient bubble is prudent bears being made to look like fools. In a minor way, as Dubai World turned out to be a tempest in a teapot, we saw this pattern over the last several days. Gold's still oversold (as far as I know) but it snaps back as if it weren't.

Of course, pre-open stock futures are well up today too. And, the dollar is down. Gold keeps benefiting from being part of a "recovery trio," and will do so as long as it's widely believed that a strong U.S. dollar is an obstacle to U.S. recovery.

Fascinating report from a Zimbabwe visitor

Amongst goldbugs, Zimbabwe has become notorious because it's recently suffered an all-out hyperinflation. It's become a goldbug meme to equate Zimbabwe with the United States.

This travelogue by Alf Field, linked to at LewRockwell.com, presents a fascinating picture of a country that's recovering from the hyperinflation tornado. A large part of the piece brings the reader up to speed on the Mugabe government, and explains why the hyperinflation got rolling.

As it turns out, one of the triggers was massive money-printing to buy up foreign exchange to repay IMF loans. This fiddle produces an out-of-control spiral, because the money creation devalues the home currency. As the home currency goes down in terms of the foreign exchange needed, more needs to be printed to buy the same volume of foreign currency. The result is a Red Queen's Race.

People who believe that the U.S. is going to be another Zimbabwe should realize that the U.S. government has no need to buy any foreign exchange to pay off U.S. sovereign debt. It's true that Treasury indebtedness to foreign entities is worrisomely high, but it's all denominated in greenbacks.

Of course, there's the possibility of a future IMF loan to the U.S. government. (Wouldn't that be a come-down?)

Bloomberg commentator suggests U.S. Treasury sell gold reserve

That's the advice of David Pauly, in a column entitled "Gold Buyers Nip at Ultimate Emotional Experience." For those new to the game, it contains most of the standard talking points used by the gold-averse.

"Dubai downer" indeed

An article in Gold World News, "Dubai Downer To Stop Gold Charge," presents an interesting skittishness. It presents the gold bull market being stopped outright by the Dubai crisis, and supplies further items that suggest gold had risen too far too fast. The concluding paragraph says:

Clearly, this portends the end of the gold boom, with the economic depression set to cast its long shadow over the bouyant [sic] gold market. For many, it is a clear signal that the potential second down-leg in the world economy is here. Alive and kicking.

This kind of article would be pegged as "anti-gold" by gold enthusiasts. To find it in a Webzine called Gold World News suggests that bullishness is still not universal. We're seeing the usual journalists' ebb and flow, as driven by immediate-term ups and down, rather than a fixatious bullishness.

Brett Arends Compares Gold Bull To Stocks, And Finds Stocks Wanting

As I write this post, the most-read article in Marketwatch is an opinion piece by Brett Arends, "Gold run a reason to be wary of the stock market." He describes, fairly accurately, the state of the gold market when the bear ended in 2001 or so. In a word, it was comatose. He concludes that the long-term bear market in stocks isn't over, because we haven't seen the same level of apathy towards the stock market yet.

He's quite right about few people being around when gold finally bottomed, and he describes it well. My own believes gibe with his regarding the stock market, although I think "range-bound market" is a better descriptor. March 2009 may mark a multi-year low, but I believe there will be another near-generational buying opportunity in several years when valuations are a lot better.

Calm After The Plummet

Since trading began last night, gold has drifted slightly downwards. Given the Dubai panic, that may be good news all told.

Also, an official in China - Ji Xiaonan, who chairs an advisory body overseeing some large Chinese corporations - said that the recent panic may present a buying opportunity for the Chinese government. Given his position, this statement was basically an op-ed - but it may be echoed by Chinese central bank decision-makers.

Take-Out From Financial Sense Newshour Podcast

The Financial Sense Newshour podcast is an old goldbug show. Over the years, it's expanded considerably beyond its original hour: this week's show took more than six.

If there's any theme that was present (one that tied into its San Francisco Gold show special), it's that gold is not in a bubble because many juniors aren't moving all that much; some are undervalued given their prospects.

It's a good point. At the climax of the gold bubble, juniors will be priced almost as if they were producers already. Juniors with good exploration results will explode upwards. Although good results do lead to jump-ups already, we're actually far from that stage.

We're also far from the point when gold-exploration stocks capture major mindspace in the investment community. There are no "instant millionaires" from gold-exploration stocks. Capital is still scarce except for so-called elephant deposits.

That bring up another point, although a technical one. Thanks to a tightening of regulations after the Bre-X scandal, there are well-spelled-out procedures used to estimate the size of a deposit. Elephant-style deposits are one million ounces or more. It's quite possible to make a viable mine from a six-figure ounce deposit, but there's next to no interest in that size. Had we been in full-fledged bubble territory, there would be.

There's also talk of takeover activity in the gold-juniors world, where an exploration company with a million- or multimillion-ounce deposit gets bought up by a big producer. M & A activity in this sector is analagous to hedge-fund interest in gold itself.

The ride's far from over.