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Auguries The Wolf At The Door

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November 24, 2012

The Three Little Pigs: Straw is not an optimum building material.

Gold was up (at press time) $37.60 (+2.2%) for the week to $1,751.40, and silver was up $1.54 (+4.7%) to $34.21. Bloomberg reported that gold reached a five-week high, and silver reached a six-week high “as the [US] dollar’s drop spurred demand for the metals as alternative investments.”

Reuters reported that, according to UBS, gold had faced “a key technical level” at $1,739.10. “Our technical strategist notes that a break above this level, which is the month’s high, would be a crucial bullish development that would open up $1,748.95, the 62% percent retracement of the October-November selloff ahead of $1,794.80, the October high.” Having risen $23.20 Friday, gold has already gained back that 62% and more.

Earlier this week, Bloomberg asserted that “Gold’s 12-year rally, the longest in at least nine decades, is poised to continue in 2013 as central bank stimulus spurs investors from John Paulson to George Soros to accumulate the highest combined bullion holdings ever.” As a rule, it is never a good idea to bet against the Angel of Death. Perhaps in response, a panel of 16 analysts convened by Bloomberg set a 4Q 2013 gold price target of $1,925.

This would represent a new nominal (but not inflation-adjusted) high. What is most striking about the 12-year bull market is that the price of gold is 6.5 times higher than in 2000 despite the lack of an economic disaster. Yes, there was a knockdown in 2008, but as our betters never cease to tell us, their actions righted the ship and saved the day.

The worldwide debt crisis may be considered a slow-motion disaster which will continue until it ends, one way or another. But what of the potential of the short, sharp shock? Disasterologists have for several years considered an Israeli attack on Iran to be one possible grand calamity.

In January 2012, Philip Giraldi’s essay “What War With Iran Might Look Like” concluded that it might look like World War III. Two videos released this week by Future Money Trends don’t go that far, but such an eventuality is not ruled out, as “The Day The World Ended” Parts 1 and 2 predict only the first-day consequences of an Israeli attack.

Here’s the scenario. Even before the markets open, oil and gold soar in price. President Obama stands with Israel, and Iran blows up the Saudi oilfields. Shortly thereafter, oil hits $305 a barrel and gold hits $2,600. Canada, Mexico and other countries “temporarily” nationalize their oil industries.

After Iran befouls the Strait of Hormuz with oil, the price reaches $450. The Dow opens down 1,100; there is panic buying of goods everywhere; and gas stations exhaust their supplies. Obama addresses the American people that evening appealing for calm. He announces that US oil has been nationalized, as have the Internet and all other broadcasting. The US has been put on the gold standard, and the metal trades at over $5,000 an ounce.

Those that entertain this kind of speculation will find above scenario plausible. Those that don’t will find it risible or infra dig. It cannot be emphasized too strongly, however, that catastrophes tend not to be widely anticipated—at least by the great and good. Who thought that the Estates-General would lead to the Reign of Terror? Or that Kerensky would yield to Lenin? In our lifetime, the experts were gobsmacked by the sudden and total collapse of the Eastern Bloc and the Soviet Union.

What is most remarkable about our present situation is that, essentially, nothing has changed since 2008. A few thousand people sitting in front of computer screens still control our destiny. Apparently, there is no alternative. Consider the US presidential election. Did either candidate manifest any understanding of the scope of our difficulties? Did either candidate suggest the possession of the faculties necessary to lead their country through a crisis? Should the wolf appear at our door, would he find a house made of straw?

One could surmise that Paulson and Soros have pondered the answers to these questions and acted accordingly. And so the bull market in gold is likely to continue. But what if the broader market, that is to say ordinary investors, reaches the same conclusions as the big boys? Then all bets are off, even without another war in the Middle East.

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