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Bill Fleckenstein // Bill Fleckenstein

Contrarian Chronicles9/14/2009 12:01 AM ET

A golden opportunity for investors?

The busy money-printing machines are more predictable than the still-sputtering economy, making gold a smart choice even after a spike to $1,000 an ounce.

By Bill Fleckenstein
MSN Money

Economic activity continues to be fitful. But Jim Grant (in a recent issue of Grant's Interest Rate Observer; subscription required) makes the case, based on his own reasoning and research from the Economic Cycle Research Institute, that whatever bounce the economy is experiencing or will experience in the short term might be bigger than people think.

That's not to say that any economic bounce will evolve into a "normal" job-creating, self-reinforcing recovery. I don't believe it will. But at this point, it's not important to have an opinion about that.

The important thing is to know that for the time being, economic activity is not slowing down.

However, given the mind-set of central bankers and finance ministers the world over, whatever the rate of improvement is, it won't be fast enough (especially given high rates of unemployment), and they will continue to create extra stimuli -- ergo my desire to try to capitalize on this money printing in any way I can.

As I have noted repeatedly, the United States' money printing will lead to a weaker dollar and, ultimately, plenty of inflation. For me, protection against that outcome is provided by gold, silver and specific precious-metal-related stocks, which is why I have discussed this subject so often.

Jim shares a great quote from English economist A.C. Pigou: "The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant."

And therein lies the psychological mind-set that creates opportunities. (Which is why that is a quote to save for all time.)

For deflation-minded bond lovers, this is a warning. Let's face it: Someday interest rates will have to rise, which means bonds must sink in value. Though that day is still a ways off, at some point shorting fixed income with both hands will be very profitable.

Putting Barrick's move into perspective

Meanwhile, I continue to be comfortable owning gold. In a related story to its recent upside move, Barrick Gold (ABX, news, msgs) announced Tuesday night that it was going to close out its remaining hedges and take a $5 billion-plus charge, selling about $3.5 billion in stock to be able to do so.

For those who don't know, Barrick hedged against any drop in gold prices by selling its future production in the futures market. This worked well when prices were stable to falling, but the rise in the price of gold made the hedges a multibillion-dollar (and growing) liability that it has chosen to eliminate.

It is almost certain that some folks knew about this development two weeks ago, which may have helped precipitate the spike in gold to $1,000 an ounce.

Many people will call Barrick’s move a sign of a top in the gold market. The fact that Barrick is finally throwing in the towel on its hedge book will tempt contrarian-minded folks who dislike gold to fade that move by selling into the spike. I think, however, that it's just another brick in the wall of the continuing bull market in gold.

Yes, part of the run-up was probably due to this move by Barrick, and yes, we could have a correction at any time. But I feel strongly that any correction we see in the near term will be on the small side. I just have the sense that there are more people who actually care about gold who would like to see it lower rather than higher, because I believe they want to increase their positions. It is my opinion that few people have what would be considered chunky positions.

See spot gold run

What's also worth noting: In early 2008, when gold tried to punch through $1,000 (after an upward run that started around $650 or $800, depending on how you interpret the chart), it failed.

Video: The inflation-deflation debate

Earlier this year, gold ran from either $700 or $800 (again, depending on how you want to look at the chart). But this charge seems to have been mounted from $950, or possibly $900. Thus, it's less "extended," which to me makes it more likely that gold will punch through $1,000 and keep going.

In sum, I find it very unlikely that gold is making a top at this point. In fact, it's probably getting ready to go for a bit of a sprint after it frustrates more people. We shall see.


A couple of weeks ago I was interviewed by Jim Puplava of Financial Sense, and I thought it went pretty well. Click here to listen.

At the time of publication, Bill Fleckenstein did not own shares of any company mentioned in this column. He did own gold bullion and gold futures.

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