The pessimism is so thick you can cut it with a paper knife. Stocks are testing the lows of early summer. The second-quarter gross domestic product got a big downward revision Friday morning.
Yet I remain convinced we're not in a double-dip recession, and I think stocks should be accumulated at these levels. Here are my three reasons.
The first is gold. If the global economy was really heading toward another big leg down, we wouldn't see gold creeping back up to within a couple percentage points of its all-time high. (As loyal readers know, gold has been my "best-idea" investment for quite a while, so seeing it perform well is an end in itself for me. However, right now, I'm talking about what gold's rise implies for the rest of the world.)
Consider gold's performance when economic conditions were declining sharply in 2008, after Fannie Mae and Freddie Mac had been put into receivership, Lehman Brothers had failed and AIG had to be rescued. Those events triggered a sudden and severe global recession. What did gold do? It fell like a rock, as did everything else.
Gold isn't the "safe haven" investment the world thinks it is. In a panic, only cash is safe enough. So when conditions get really bad, gold gets sold for cash the same way stocks get sold for cash. That's what happened in the autumn of 2008. Stocks and gold crashed at the same time.
Right now, stocks are in a serious correction after a large rally from the March 2009 lows. However, gold isn't falling with stocks. It's within spitting distance of a record high. That suggests there's no way we're headed back into the vortex of despair we saw in 2008.
Plenty of people expect another disaster. If you read much investment commentary on the web, you know how shrill the bears are now. Every little bit of news -- anything that could possibly be construed as less than positive -- is seen as horribly negative. Some of these pundits seem to be cheerleading for the end of the world, like it's something they want to happen. When I read this stuff, I feel like I'm at a NASCAR race sitting in a crowd that's hoping for a fiery collision on the track.
Yet nothing is crashing. The economy is limping along. Stocks are in a correction. The bears are braying like donkeys, but gold isn't cooperating. If the world were really coming apart, gold would be going down.
Now the bears see it as just the opposite. For them, gold going up is another sign of the end of the world. They insist that gold is rising because everyone is scared to hold anything else. However, again, it doesn't work that way. When people are really scared, they sell gold along with everything else.
Put another way, gold is sensitive to inflation expectations. If we were headed into another serious recession, we would expect deflation, putting pressure on gold. Gold's rise suggests that inflation expectations are alive and well -- and compared to expecting deflation, that's a good thing.
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