"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, February 7, 2011

So What's Up With Gold?

It looks like the price of gold has settled in a range where it is trading sideways.  To me, it reflects a market suffering from some sort of bi-polar disorder.  Add some Middle East instability, QE2 helping to push up the stock market, a simmering EU crisis that lately hasn't made many headlines, and dubious unemployment figures coming out of the US Bureau of Labor Statistics, and what do you get?

Sideways movement.

But the overall trend, if one looks back ten years, is definitely to the upside.  And unless you think the global pension crisis, EU debt crisis, massive trade imbalances, massive Central Bank interventions, etc... are ending anytime soon, it's not looking to me that gold has peaked. Far from it.

I don't believe in short term forecasts on price movements - most people get those wrong.  I choose to look at overall macro trends, and to me, there is definitely an endgame that is unavoidable.  But I also believe that we are heading towards massive volatility.  Gold could even severely drop for awhile.

I still believe that gold will re-enter the global monetary system, in some form.  And that ultimately, the price will not plummet when this occurs.  I have covered my reasoning for this in my post back in September 2010: Gold Will Be A Bubble Until It Isn't.  I still stand by that.

I recently read an article that reminded me of that post I wrote in September last year written by Robert Lenzner for Forbes:

Gold Is Not The Ultimate Bubble Yet

In the article, Lenzner concludes with:
The ULTIMATE GOLD BUBBLE will occur when and if confidence in the dollar plummets due to an inability of dealing with the nation’s debt load or there is a sudden horrific spike in inflation, ie oil prices double to $200 a barrel– or some insane terrorist act frightens the holders of paper money into hoarding gold. 
A more reasonable ultimate bubble would be the decision to create a new global currency, which would have a serious weighting in gold. Think gold as a monetary reserve. It’s happening but gradually, not as a sudden panic. 

I agree with Lenzner "more reasonable ultimate bubble" and that it is indeed happening, and gradually so. Central Banks are becoming net buyers of gold for a reason. To them, it represents a debt free, counter-party free (pure) asset that relies on no other government's credit rating or currency (mis)management. To the Central Banks and Treasuries of the world, gold is insurance. It has only been forty years since gold has completely left the international monetary system.  For the thousands of years prior to that, there was never a period in history when  the entire world traded with pure fiat.  And so, privately, countries fear that this recent, fledgling global fiat experiment may end badly.

So when economists and governments make light of "gold bugs" as irrational worriers, you have to look at what they do, not what the say.  Governments, especially those in most developing nations, are buying the stuff.  They're worried.  But they can't tell you why they're worried, for such a statement could create a self fulfilling panic.

And so gold muddles along, exasperating those that trade it short term, or those that believe the "end is nigh" and they want that gold coin to turn into a jackpot tomorrow.  I am genuinely worried about how these global debt and trade imbalances play out.  History tells me that such imbalances are like negative stored energy.  That stored energy, created by a massive global credit bubble and massive trade imbalances - the largest in history - will not simply fizz out. Bubbles don't deflate.  They pop.  And there are societal and political repercussions to that.  I hold gold as insurance.  And like any type of insurance, I worry about having to rely on it.

Gold is not the bubble that will pop.  The current fiat paper debt based monetary system is the bubble that will pop.  That's what most neo-Keynesians and Monetarists are getting backwards - they see gold as the bubble, not credit.  But can you blame them?  It's not like they "saw this (crisis) coming."  And so how can anyone really believe them on how this monetary/debt crisis ends when they never saw it begin in the first place?


OKL said...

interesting to see the latest European ideas popping out from politicians, but its nothing particularly surprising- create a 2-tiered currency system.

i'm not exactly sure what this means when it comes to debt, but it certainly rings true with the current MMT system; it needs a strong central authority to keep humming... i really wouldnt be surprised if we start seeing more "world govt" or "world currency" in like 10-20yrs time.

Misthos said...

To me, it's difficult to gage what the Europeans ultimately want. There's too much bickering, and too many competing goals. The status quo obviously can't last. But last week's meeting in Brussels seems to be a serious development.

I don't think we'll get to a world gov't or world currency. This will end in a East verse West match somehow, someday. The Middle East is just the beginning.

The biggest obstacle to a global currency is lowering the western standard of living as the eastern standard of living rises. I guess I'm sort of a Malthusian in that regard. I don't think there are enough resources for everybody on the planet to live like the average American or European.

The peaceful sharing of resources is a rare historical phenomena, if it has ever existed.

The modern monetary system allows us to consume much more than ever before. And the world has ramped up consumption like never before.

OKL said...

i thought this post by simon johnson describes it pretty well;


Misthos said...

Yes, I agree with you and Simon Johnson - the elites are living in their own world. It's business as usual for them, unless you are a senior citizen that needs expensive medical treatment. Then we need fiscal discipline.

And others have argued that elites from different nations are more comfortable with each other than their own "commoner" compatriots. That's true too. And I guess that's where many see the potential for a world government or currency.

But no powerful country has ever abdicated its position in the world. A global currency or global government would require that kind of sacrifice.

For a global government or global currency to take over - that means the end of the nation-state.