The Path to $10,000 an Ounce Gold, Revisited

The Federal Reserve’s stock market wealth effect is getting stale. As investors contemplate the risks of the Fed losing control of long-term interest rates, stocks may start incorporating reality on the ground — not just Fed actions…

This week, we saw the spectacle of the most anticipated Fed meeting in recent history. In the end, the decision (surprise, surprise) was made to continue the Fed’s stimulus plan, to the tune of $85B a month.

However, most traders, obsessed with the tiniest tweaks to the monthly rate of Fed printing, are missing the big picture: Credit growth has outpaced the economy’s productive potential, both here and around the globe. Each successive growth spurt in money and credit has a weaker marginal impact on the real economy; this requires permanently easy monetary policy, and perhaps, eventually, a formal devaluation of paper against gold.

In his latest Gloom Boom & Doom Report, Marc Faber argues that the Fed has lost control of the bond market. Treasury note yields have doubled from the summer 2012 lows — a development that surely wasn’t part of the Fed’s stimulus playbook. Stock market bulls beware. “Having lost control of the bond market,” Faber writes, “it is likely that the Fed is also going to lose control of the stock market.”

Faber recommends investors reduce their equity positions. He sees the market at risk of an abrupt decline. Faber concludes: “The only asset classes that stand out as being oversold and of relatively good value are industrial commodities and mining companies.”

I agree. Value is scarce. Investors have bid up the prices of even the lowest quality companies far beyond any conservative estimates of value.

Today, I want to republish a year-old essay on gold and the paper dollar-based monetary system. Its core message still applies to what we’re seeing this week (and will apply a year from now.)

Much trouble can come of a monetary system that enables growth of unreserved credit beyond an economy’s ability to service that credit. It looks like the global economy is at this point, so it’s worth thinking about how the system might adjust.