Published: November 10, 2010

"Is gold going vertical?"

The question was put to us by our Family Office strategist, Rob Marstrand.

"We could be getting to the final stage of this bull market faster than we thought," he added.

Yesterday, the price of gold rose to new record - over $1,400. This was also the day that news reached the world that the head of the World Bank had defected. Mr. Zoellick jumped the fence...he's no longer among the dopes.

You know who we're talking about...the vain and foolish economists who think central planning will work. "Give the economy more liquidity!" "Raise rates!" "More fiscal stimulus!" "More austerity."

These guys act like they know what they are talking about. But they are quacks. Mountebanks. Phonies.

Not Zoellick. He said it was time to begin talking about a new gold standard.

Gold jumped $5. What can stop it now?

But there's always a surprise, isn't there? We know that the dollar is going the way of all paper - to the dump. Maybe the surprise is how long it takes to get there.

Maybe gold is going vertical. Or maybe it is just toying with us.

A friend came to us over the weekend. He had four Austrian Corona 1 oz. gold coins. He wanted to sell them.

"I just need some cash now. It breaks my heart to sell them, but I've got to pay expenses."

The expenses were a little unusual. He was buying a ticket for a Vietnamese woman and her children to come to the US to live. But that's another story...

Somehow, your author has gotten a local reputation as a buyer of gold coins. So much the better. We're not trading. We're not investing. We're just adding a coin now and then to our collection. We buy. We put them away. We forget about them.

"But at $1,400 an ounce?" you ask. "Isn't gold in a bubble?"

Well, yes...and no. We liked buying the coins much more at $500 than we do today at $1,400. The price makes us a little nervous.

Gold is in a bull market, not yet a bubble. It will probably stay in a bull market for a long time - until they re-establish a gold standard for paper money...or until the international monetary system cracks up...whichever comes first.

But there's something a little dangerous about $1,400 gold. Too much, too fast. Of course, in the final stage of the bull market, the yellow metal will trade for far more. Ordinary people will buy gold to protect themselves from inflation. They'll get sick of watching prices on bread, diapers and gasoline go up. They'll be desperate to grab hold of something more stable. They'll buy gold at almost any price.

But we're not there yet. There's very little consumer price inflation now. The inflation we're experiencing so far is the monetary kind - an inflation of the monetary base, not consumer prices. No one particularly cares about this kind of inflation. The other kind of inflation - in the CPI - could still be years ahead.

Right now, the economy is still de-leveraging. Bloomberg has the news:

US households cut their debt last quarter, borrowing less against homes and closing credit card accounts, according to a survey by the Federal Reserve Bank of New York.

Consumer indebtedness totaled $11.6 trillion at the end of September, down $110 billion, or 0.9 percent from the end of June, according to the New York Fed's quarterly report on household debt and credit. Households have slashed about $1 trillion from outstanding consumer debts since the peak in the third quarter of 2008, the New York Fed said.

US households, facing a jobless rate that's persisted near a 26-year high, have slashed debt and increased savings following the worst financial crisis since the Great Depression. That's pared consumer spending and slowed the economic recovery, helping to prompt the Fed's decision last week to start another round of unconventional monetary stimulus.

"Consumer debt is declining but only part of the reduction is attributable to defaults or charge-offs," Donghoon Lee, a senior economist at the New York Fed, said in a statement. "Americans are borrowing less and paying off more debt than in the recent past. This change, which we continue to study carefully, can be a result of both tightening credit standards and voluntary changes in saving behavior."

People still lack jobs...which means, they still lack money. And while they lack money, they need to cut back on their spending - which helps keep prices down.

The common man is not fretting about inflation. He's not worrying about his savings or the cash in his pocket. He's not desperate to get out of the dollar. Au contraire, he'd like to get into some cash...so he could pay his bills.

Which brings us back to this weekend's transaction. If the gold market had entered its third and final stage, our friend wouldn't have come over to offer us gold coins. Instead, he'd be holding onto his gold and would be desperate to get more of it.

"But what if he needed to buy something - like airline tickets?" you ask. "You can't buy things with gold."

True enough. But when we get to the last stage of the gold market...when gold really does go vertical...gold will be the LAST thing people will sell. Gold may have gone up $5 yesterday. But in the final stage it will go up a hundred dollars per day...or more.

Yes, dear reader, the excitement is still ahead. More hurrahs for the gold market. More profits for gold investors.

Trouble is, it could be far ahead.

-- Bill Bonner
Editor
Daily Reckoning

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Note: This article originally appeared on Daily Reckoning