Look Who Needs a Bailout Now

12/15/2011 9:56 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Faith in a political solution to the debt crisis seems misplaced, but don’t tell that to some stubborn gold bulls, writes MoneyShow.com senior editor Igor Greenwald.

A world in which gold can fall 5% in a day is a scary place with one less imagined safe harbor.

The metal has had a spectacular run on faith that when push came to shove, the world’s paper currencies would be debased to paper over the debt mountain.

Now the realization may be dawning that they won’t be debased soon enough to forestall a global recession. Or maybe it’s central banks “printing gold” to unclog the hemorrhaging European banking system.

Feel free to pick an explanation suiting your biases. Just remember that, three years into supposedly promiscuous money printing, investors in their hour of need hopped into bed with the dirty old dollar, forsaking supposedly healthier currencies. And then they begged the Treasury to borrow their money at a negative real interest rate for 30 years—that mammoth budget deficit notwithstanding.

So fiscal rectitude doesn’t seem to be especially prized these days. What floats boats now is liquidity, the blessed state of not having to worry about rapidly depreciating assets.

And in this time of survival of the most liquid, it turns out that—far from being hardboiled cynics—gold bugs are some of the squishiest critters around. Their faith that the powers that be will be so kind as to fix things is a touching relic of an earlier, happier time.

So, for example, official forbearance is an article of faith for Jim Sinclair. “I firmly believe there is no political will, on the planet anywhere, but especially in the Western world, to invite a severe deflation,” he writes.

“I firmly believe you are more apt to have QE to infinity than you are to welcome rising unemployment and declining business activity.”

And this rock-hard belief allows Sinclair to perceive yesterday’s thrashing as an extremely bullish long-term sign: “It means to me that gold is going to rise to prices even higher than I expected.”

Maybe, but probably not before such sentiments are tearfully repented.

Similarly, while German officials strenuously object to any intervention that would let their luckless trading partners off the hook, hope dies hard among the true believers. Perhaps Germany has just revived a banking bailout fund decommissioned a year ago to finally drown all the skeptics in freshly printed euros, and simply forgot to signal this U-turn.

The faithful will not be fooled by protestations to the contrary by the German chancellor and head of the Bundesbank: “Folks, the plan is in place. The Eurozone inflation is coming. Bottom line: the Germans, French, and Brits will be back buying gold and other commodities in no time.”

This was the consensus view until last week, albeit completely unsupported by the facts, and the premium it implied is only in the early stages of being discounted. For a while now, official interventions have produced increasingly marginal results. There’s evidence the financial system has built up a resistance as well as an addiction to such actions.

The parallel between financial crisis interventions and psychiatric pharmacology seems especially apt, now that a very smart former banker has written very lucidly about the similarities.

The upshot of Ashwin Parameswaran’s analysis is that the patient (that’s us) very much wants a magic pill to keep the apocalyptic nightmares at bay. We want the pill, also known as “stability,” even as it becomes increasingly ineffective at a constant dosage over time. We want the pill even if it’s for the rest of our lifetimes.

The problem is, for Europe there is no pill other than a breakup of the euro or an admission from Berlin that the policies it’s championed have mainly caused harm. And China’s pill, assuming it finds one, is not going to involve another manic, debt-financed burst of overinvestment.

Meanwhile, the Fed is busy assuring Republicans that it’s not going to do anything more for Europe. As for America, it prescribes earnest prayer…and maybe if things get really terrible, it will buy some more mortgages.

The commodity markets are not buying the notion that the worst that can happen from all of this is a mild European recession. Europe’s banking system is showing stress reminiscent of 2008, and everyone remembers how quickly the US economy slid from bad to awful then under broadly similar conditions.

The political will to do much of anything about this seems to be missing in Washington, Berlin, and Beijing. If the patient still wants the pill, the doctor seems to have tired of prescribing it.

Maybe prayer is the answer. Gold bulls should definitely try it.

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