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.