Posted on 04/15/2013 10:38:01 AM PDT by Shout Bits
The week's financial news is the collapse of the price of Gold. As of this article's publication, the highly volatile commodity had fallen below $1375 per ounce from a high of nearly $1900 in September 2011. Gold is most often traded in highly levered securities such as futures or the equity of mining corporations, so such a drop in the actual, or spot price of the metal is big news. So, why is gold falling?
Some reports cite a slowing demand from China as well as Cyprus's plan to sell $500 billion in bullion as reasons for the collapse. However, one must remember that the market for gold is as liquid and robust as any commodity. Cyprus's move is meaningless to such a market, and even China cannot influence gold, especially by buying spot. There are larger and more fundamental forces causing the collapse.
Not to belabor the obvious, but gold is not a productive asset – with a few industrial exceptions, it serves no purpose. Indeed its shininess is a byproduct of its inert nature. However, for some reason deep in the human psyche, gold has always been money and its real value has never changed. Therefore, gold is negatively correlated with the expected value of fiat currency (i.e. Gold goes up with expected inflation).
Since gold's price reflects expectations of inflation, the 2011 rally implied an expected inflation rate of about 6% per year for around ten years. Given the Fed's unending monetary expansion, such a market prediction was aggressive but not beyond reason. In theory, such easy money should result in inflation, but so far there has been no repeat of the 1970s' monetary disaster.
According to most macro-economic theories, monetary expansion enables capital investment, which stimulates the economy, which can then unleash inflation. However, the US is in the middle of a non-recovery, or a mini-depression. Recessions are usually a period of balance sheet healing – bad assets are written off, and resources are redirected to more productive purposes. When bank and corporate balance sheets are rationalized, a boom in growth usually follows. The 1980's were a textbook example of writing off bad assets and repurposing resources. What followed was an economic boom that lasted 20 years. Recessions are where dishonest balance sheets are restored to economic reality so that rational investment decisions can fuel new growth.
The government's policies since the economic collapse of 2008 have all discouraged the normal process by which a recession becomes a boom. The government discouraged labor participation by extending unemployment and other safety net entitlements. More people have permanently left the workforce than in any modern time. The government spent nearly a trillion dollars on stimulus, which directed resources to non-productive purposes that stymied wealth creation. TARP and the Fed's QE programs have prevented banks from writing off bad debts and returning those assets to market value. The Fed pays large banks to not make new loans by offering an attractive spread on reserve funds. By buying questionable mortgage bonds, real estate prices have returned to their bubble highs, yet construction remains below the rate required to replace aging homes and accommodate population growth.
The government's efforts to prevent an economic reset have resulted in a low-growth, jobless recovery. The pattern closely resembles the results of FDR's stabilization and economic control policies – the flat line deflationary non-recovery of the Great Depression. The current pattern also resembles the lost 15 years of Japan's non-recovery. Pres. Obama, like Japan and FDR, like tried to manipulate capital markets and government spending to stabilize big economic players. By dropping money into shoring up failed bank, corporate, and union balance sheets, Obama's policies are creating a liquidity trap similar to FDR's and Japan's.
Gold prices reflect a new realization that the global economy is nowhere near healing. China missed its growth forecast, which means global demand for manufactured goods is not healthy. Japan has initiated a currency war of currency devaluation, and while the US has warned Japan, the Fed continues to pump cash into its own liquidity trap.
The answer is uncomplicated and proven: follow the Volker model of the 1980's. Shut off the currency pump. Quit bailing out banks by paying them a guaranteed spread for not lending money. Explicitly deny further bailouts, and allow corporate, bank, and union balance sheets to reflect economic reality. The result will likely be the same as in 1982, a sharp recession followed by unprecedented wealth creation. Gold prices are a symptom of the market's expectation of a global depression, but as with FDR, depressions are unnatural creations of government policies. The great tragedy is that Obama is following FDR's prescription for another depression precisely.
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With Kerry and Moonbeam Brown seeking Chinese investment in our infrastructure, the message seems to be the US is flat broke.
At some point, when we start talking about bank account confiscation and IRA account size limits, physical gold will look good again. Not ETFs or mining stocks, physical gold. It is harder for them to find what you buried.
You may know that FDR outlawed private gold investment. Some people buried their gold, others stored it in Canada. The government was relentless in hunting these people down, and even long after gold ownership was restored under Nixon, the government prosecuted people who turned up with then banned gold coins.
Current account deficits must be repaid, and the most common way is through capital account purchases by foreign creditors.
“Some reports cite a slowing demand from China as well as Cyprus’s plan to sell $500 billion in bullion as reasons for the collapse.”
Proving ONCE AGAIN that Journalism majors HATE math.
Cyprus has about a million people, if they had $500B in gold, that would be an average of $2 Million for a family of 4. They would not be broke, instead they’d have the Emirs licking their toes.
of course we atre broke
did people not notice, despite obama bowing to the president of China and the king of Saudi Arabia, that the US became the biggest buyers of our own treasury debt
when Bernanke the so-called student of tthe Great Depression, started buying our debt with more debt?
all we have left to barter is abandoning allies, dismantling our military and shipping China our natural resources
Not to belabor the obvious, but gold is not a productive asset
That sentence betrays a typical misunderstanding about who is actually the government and who works for them. :)
Sorry, OneVike, but the rest of the paragraph acknowledged gold’s industrial use, especially in semiconductors.
However, the primary use of gold is as a stockpile of wealth and jewelry. The fact that gold can be found in sewage (interesting, I did not know that) does not prove your point in ay way.
I would say that large banks are quasi-governmental institutions that are used to promote government policies of wealth redistribution and monetary expansion.
Central banks bought more gold in 2012 than any year since 1964......and in 3 months everything started turning up roses????
I bought gold at $400/oz. and I will be a buyer at $1300/oz.
News Flash: The regime is printing $80 BILLION out of thin air EVERY MONTH......this ain’t rocket science.
My thoughts precisely.
Interesting coincidence that metals and equity markets tank on the same day a few hours ahead of the Boston Marathon explosions.
Gold gone cold. Well, it may take more than three days but I’m gonna bet that physical gold makes the greatest come back from the grave since Jesus (but of course no where near the significance or magnitude of His accomplishment mind you).
“Some reports cite a slowing demand from China as well as Cyprus’s plan to sell $500 billion in bullion as reasons for the collapse.”
I want to apologize for this error. Cyprus is selling $500 million. An absolutely trivial amount.
a little advice for gold holders..
rosevelt confiscated it...
one year, a man with a gold coin was legal, while a man with a pint of whiskey was a criminal..
one year later, the exact opposite was true...
just sayin’.....
rosevelt confiscated it...
Don't keep it in a bank. Problem solved.
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