Goldbugs and inflation
by Mike Kimel
Howard Hill on has been arguing with gold bugs:
I know that some readers are going to say “Wait. The gold market is saying inflation, not deflation.”
That’s not how I see it. I see the negative real rate on cash parked in T-bills (three month yield 0%, 12 month yield 0.08%) as a clear indication that prices are going down, not up. As more and more market participants equate gold to another currency, they are simply diversifying their cash into that currency along with Dollars, Pounds, Swiss Francs, Yen and Euros. If you consider the total bullion supply, the allocation into gold is less than $10 trillion worldwide, a small fraction of the total debt held as investment.
The key to understanding the mixed signals of gold and the bond market(s) is to realize that boiling every bit of information in the market down to a single price eliminates much of the information. Once that information is reduced to a single data point, you can’t actually re-create it. We’re left guessing at what forces are at work that put the prices where they are.
Gold’s price may also change depending on current interest rates and the value of the USD; as precious metals were used as money in the past, and these days, they are the primary materials used to create jewelry and coinage. The most valuable precious metals are gold and silver, while metals in the platinum group are also highly traded.. You may also want to see here how to convert 401k to gold and silver!
The one thing that makes no sense is to look at one market (eg gold) and conclude that there is inflation ahead while ignoring other larger markets that are telling the opposite story.
Let us assume, just for a bit, that some of the thinking at the Fed is not completely mistaken. In this instance, let’s assume that driving down returns on short-term and low-risk assets forces money into other assets. Gold would be one of those assets.
Let’s also assume, jsut for a bit, that gold bugs aren’t completely mistaken. Gold can reflect inflationary concerns. If some gold investors believe there is a risk of inflation, that would tend to push money into gold. Now, that fear needn’t be valid in order for some money to head for gold.
There are also those more sophisticated investors who think in terms of portfolio balance. If the real return on short term deposits is negative, then the risk of holding gold – relative to holding short-term deposits – is diminished. If the Fed overshoots in its efforts to gin up a bit of inflation, gold will come in handy. If not, no harm done, as long as gold doesn’t have a real return worse than the slightly negative return on short-term deposits.
If there is a deflationary risk that the Fed responds to with inflationary policy, we should expect gold prices to go up. The Fed doesn’t have to be wrong about the deflationary risk in order for gold prices go rise.
most of the gold bugs i know are doomsteaders…they arent betting inflation or deflation…they’re betting all fiat currencies will no longer be accepted as tender when the shit hits the fan & civilation collapses…
ive tried to convince them that gold only has value as long as civil exchanges exist where you can exchange it for a fiat currency which you can then spend for what you need…in a time of chaos, you’d rather have a surplus of hand tools, knives, hatchets, & stainless steel pots to use as barter than gold or silver…
“The one thing that makes no sense is to look at one market (eg gold) and conclude that there is inflation ahead while ignoring other larger markets that are telling the opposite story.”
The same can be said for only looking at bond yields as an inflation indicator.
Looking at the trailing 12 month performance of other markets:
Corn: 80.6% increase
Coffee: 62.2% increase
Heating Oil: 52.9% increase
Rice: 49.8% increase
Sugar: 48% increase
Oats: 37.8% increase
Orange Juice: 21% increase
Cotton: 18.3 % increase
Wheat: 11% increase
“That’s not how I see it. I see the negative real rate on cash parked in T-bills (three month yield 0%, 12 month yield 0.08%) as a clear indication that prices are going down, not up.”
Bonds are a market and yields increase/decrease for many reasons, which may or may not include inflation expectations. What is the perceived risk in equities? How likely is the bond issuer to make payments? Can bond holders expect a premium if they sell at a later date?
Gold holds special significance because the dollar used to be backed by the precious metal. That, coupled with its history of holding value, allows people to view it as a control ‘currency’. One that governments cannot create out of thin air.
Not to sound ignorant (which I actually am in this case), but gold “holds value” no matter what you pay for it?
US economic data:
Price Indexes
Consumer Price Index
http://www.econoside.com/index.php?idr=1
Import / Export Price Indexes
http://www.econoside.com/index.php?idr=4
Producer Price Index
http://www.econoside.com/index.php?idr=2
Arguably, gold represents not the fear of normal run of the mill inflation but runaway, dollar destorying hyperinflation. At some level, gold is a “black swan” investment. And with the economy very unsettled, people ARE more worried about that prospect. That doesn’t mean that any sort of large number of people are worried about that possibility.
Arguably, gold represents not the fear of normal run of the mill inflation but runaway, dollar destorying hyperinflation. At some level, gold is a “black swan” investment. And with the economy very unsettled, people ARE more worried about that prospect. That doesn’t mean that any sort of large number of people are worried about that possibility.
there’s the hussle aspect of it, too, which Krugman took on, btw, by citing Kash:
The Glenn Beck / DeBeers Connection…
somehow i screwed up the link: http://krugman.blogs.nytimes.com/2011/07/19/the-glenn-beck-debeers-connection/
Anna,
Gold is an asset class and it does not need a doomsday threat to maintain its status. However, it is unique in that society (with few exceptions) has always had a reverence for it. The case for gold is similar to alternative investments, like fine art or diamond jewelry. Gold just has a more liquid market. Degas paintings hold value. Just because the prices of these works fluctuate does not change this fact. Hopefully, the world’s monetary situation will stabilize. If/when this occurs, gold may go thru a significant correction, maybe to 300 dollars an ounce. Yet there will be some future economic event that will send its price skyrocketing again.
For those looking at bond yields to predict inflation:
What are Greek bonds and German bonds telling you? I hope you guys are not concluding that Greece will have significant inflation and Germany will experience deflation….