Convoluted logic

After European finance ministers unveiled a $1 trillion bailout plan for Greece and other indebted nations, gold immediately crashed almost $30. Why did it crash if:

1) quantitative easing (money creation) is inflationary, and
2) gold is a hedge against inflation?

The answer is while gold is an effective hedge against inflation, it is an even better hedge against financial crisis (and eventual collapse). In light of the Club Med countries' fiscal problems, gold prices have been rising, as the possibility of bond defaults has become very real. Hence the correct flight to gold as a safety valve, and the incorrect flight to the USDollar as a long-term safe haven (I would agree the dollar may rise nominally in the short term--until the market figures out the USdollar is an impaired currency).

With the announcement of a bailout for indebted European countries, the markets perceive the possibility of a default has been taken off the table. Hence, the fear of a financial crisis subsided temporarily last night in Asian overseas trading. However, sober speculators realized quantitative easing is also inflationary, and subsequently drove the price of precious metals back up. Long-term, precious metals bulls will ultimately profit--whether inflation or financial crises occurs, probably both.

The Euro bailout is a precursor to more bailouts about to occur in the US. Attempts from both sides of the pond to normalize economic recovery will fail, as the bailouts are merely debt bandaids to major debt problems. I expect the Fed to "rescue" bankrupt states and municipalities, including currency swaps and quantitative easing as part of their monetary arsenal. The Fed certainly can't reduce short-term interest rates any further--we are already at zero.

In a related matter, European Central Bank (ECB) President Trichet last week declared the ECB would not resort to purchasing junk bonds from Greece, Spain or Portugal, in attempting to prop up the Euro currency. In a huge reversal last night, the ECB agreed to purchase said bonds. Talk about head fakes. In the process, the ECB slaughtered the bond vigilantes who were betting on the Euro collapsing, as well as the countries whose governments and citizens have been living beyond their means for decades. Ultimately, those bond vigilantes will be proven right, as the ECB has indeed extended the Euro zone life line, but they have done nothing to structurally resolve their debt problems. These bailouts merely delay the inevitable collapse; they do nothing to address the debt problems--if anything, they make them worse.

While current group think among economists, politicians, and academia have distorted Keynesian economics into its current monstrous from of government manipulation in markets, John Maynard Keynes for whom those economic theories have been named after, was absolutely correct with this comment:

"Markets can remain irrational far longer than you or I can remain solvent."

In other words, perfectly efficient markets with rational price discovery mechanisms are mythical in a world where markets are rigged and gamed to the advantage of a powerful few. I should correct myself: gold is not only a hedge against inflation and financial crisis, it also hedges an individual against a corrupt and reckless government money printing press. When one takes possession of physical gold, there are no counterparty risks. Thousands of banks have collapsed over the course of modern banking history. Thus, depositors and holders of derivatives have lost capital in our fiat currency financial system, unlike holders of gold, which have retained their store of value for thousands of years. With gold ownership, there are no other claims against it, and you won't get zeroed out.

The only way to be dispossessed is if the government confiscates it, which is exactly what Franklin Delano Roosevelt did by Presidential Executive Order 6102 in 1933:

http://www.wellsfargonevadagold.com/confiscation-order.pdf

See disclaimers on side bar.

Disclosure: long physical gold and silver, long precious metals mining shares.