Ah, nothing focuses the mind that a good ol’ fashioned stock market sell-off. Nothing is more likely to cause people to decide that Bush is a really bad president, or inspire pessimism about the future. One might think that a war in Iraq and US equity valuations have politically nothing to do with each other, but when portfolios show declining cash value, blame flies in unexpected ways. Depending on how long this lasts, we might find that brutal criticism of all this president’s policies will become even more ubiquitous.
Meanwhile, looking through my email archive from yesterday, I see this alert from Frank Shostak: “The central bank of China’s tighter stance runs the risk of creating a financial accident, which could have serious effects on US real economic activity.”
So let us make another prediction: Republicans will blame China for its reckless monetary policy. And while the data seem to suggest that there is merit to the idea, Frank himself says that we must distinguish between the bullet (bubble in the US) and a trigger (China’s inflation).
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I’m a little curious as to why gold followed the markets down after hours. The fundamentals are still there for a movement upward, I suppose this might be a good time to head down to the coin shop and pick up some PMs.
A credit boom that increased disposable income could have led people to buy any and all securities and investments, not excluding gold.
Which article is that Shostak quote from?
His perspective is invaluable, as he is one of the few people in the world talking about a depreciating yuan.
“So let us make another prediction: Republicans will blame China for its reckless monetary policy. ”
Not that he’s always partisan, but ol’ Matt Drudge (DrudgeReport.com) has the following headline up in big red letters: …IT BEGAN IN SHANGHAI
According to the graph Jeffrey Tucker displays of M1 in China, the supply has been rising rapidly, without interruption, since the start of 2005. Although I don’t for a second minimize the importance to US and other markets of tightening by the People’s Bank of China, what basis is there to think that significant tightening is in progress?
I have pondered Shostak’s observation that the yuan may be overvalued because of rapid money growth in China for the last five years, compared with much slower, gradually declining money growth during that time in the US. Assuming the offically pegged exchange rate of several years back had substantially undervalued the yuan, then who knows where this divergence in money grwoth rates leaves today’s fundamental value of the yuan versus the dollar? If the yuan has been overvalued over, say, the past year or two, as Frank Shostak contends, why has the Chinese central bank accumulated huge dollar reserves? One explanation is they do so, as dedicated mercantilists, to prevent the undervalued yuan from rising. Another explanation might be that the yuan’s overvaluation, say, of the last one or two years, has subsidized the Chinese central bank’s purchase of dollar assets.
Can anyone clear up my confusion about this?
Matthew writes: “I’m a little curious as to why gold followed the markets down after hours.”
Gold and the stock markets have been pretty much positively correlated for several years now. This is probably a function of the increase in money supply to some degree — i.e. all markets rise nominally during times of massive inflation of the money supply.
I’m not sure which fundamentals you are referring to, but note that there is no correlation between gold and the money supply either (as common sense would wrongly lead one to believe). From 1980 to 2000, the money supply tripled while the price of gold was cut in half. This is the OPPOSITE of what fundamental analysis (and I believe Austrians) would predict.
There is no reason why gold couldn’t follow the stock market downward for a while.
“note that there is no correlation between gold and the money supply either”
Well, I’d say that’s the problem, to be sure. Moreover, that’s the fundamental against which they are fighting at Mises.org isn’t it?
Don’t speculate on gold as if it was always worth “twice more than paper money”…
Gold is just… a credit bubble.
Frank says that gold is falling because of the liquidity scramble. It’s probably not “overbought”; it’s just useful in a crisis.
Artisan, you think gold is in a bubble? Wow.
Mark – I suspect capital (in dollars) has caused the accumulation of dollar reserves much faster than has trade.
Well, maybe to say a bubble is too much… but one can see gold is not just bought by people in fear of recession. It is also a speculation on the Chinese demand (while the dollar plunges anyways) … all of this seems to be very much driven by inflation in fact …
I think gold fell because of (future) lower industrial demand by China. Haven’t seen figures for that though. It might also be that a central bank put in a gold sale again.
Thanks for the comments, I’m a little new to investing in gold. I suppose that when you’re discussing prices denominated in fiat currency, relative prices are all that matters. Pumping up the money supply should raise the price of all asset classes, however financial euphoria and “conventional wisdom” should create bubbles in certain markets. I’m taking a long-term approach to gold and I’ll continue to keep about half of my savings there regardless of the current spot price.
I wouldn’t call it investing in gold if you’re holding the metal. It’s more like putting money in your mattress, because it’s not going to earn any interest. If you want to invest in gold, buy gold miners stocks.
Matt, you should buy gold as way to hedge your other investments, not to make a principle investment in itself. Furthermore, holding bullion in itself has other advantages, as making it easier to evade wealth/capital gains taxes.
Thanks, Kurt. Now some gov’t junior analyst sitting in his gray cubicle has to get up off his butt, walk across the hall and grab form 1345432245, fill it out and send it on to his superiors. Contrary to your suggestion, I report all my income to the government, as does everyone on this blog, gold related or not.
I view owning physical gold no differently than owning real estate, fine art, antiques, etc – it’s tangible property. Just because something doesn’t pay interest doesn’t mean it’s not an investment. Funny money comes and goes but gold will continue to endure. As the fiat system continues to spiral out of control, the more real money you have, the better.
Real estate, if it is a good investment, tends to be positive carry for its owners. Serious investors, even those worried about a systemic collapse, wouldn’t own more than a few percent in gold. Compound interest rates add up to too much money over time to make it worth it. Gold has definitely been influenced by expectations of Chinese growth recently, so a collapse in China should lead to a retracement of gold prices.
However, China collapsing before the 2008 olympics or during a year when local party leaders are motivated to show good results (It’s a congress year!) seems relatively unlikely. The non-neutral new money this cycle seems to be distorted around the US consumer and housing. This affects China (and gold), but only indirectly.
Gold, not unlike other commodities and real estate, has been affected by the credit bubble too. First, I am willing to bet that many investors made leveraged bets on the value of gold. Second, gold is used as an industrial input to many higher end goods such as consumer electronics and jewlery; demand for these items is being affected now by a deflating credit bubble.
The value in owning gold is not what happens while the credit bubble deflates, but in what the federal government and the federal reserve do to “aleveate” the situation. If Ben “helicopter” Bernanke decides to crank up the printing presses, then Gold will become very valuable (relatively speaking). If not then gold is going to take a huge dump just like my parent’s house in Miami. Crap.
On the other hand you could by stock in companies that produce “feel good” items. Budweiser, Nintendo are my two top picks. And another plus is that the items they sell are usually bought in cash, not debt.
Gold has definitely been influenced by expectations of Chinese growth recently, so a collapse in China should lead to a retracement of gold prices.
I suppose it could, but then again the perception of an iminent collapse in China (e.g. of the purchasing power of the yuan) could cause more of its citizens to withdraw their money from banks and the stock market and buy gold in order to weather the storm.
International Institute of Management (IIM) released a new report warning about the U.S. economic risks. The report:
1. Uncovers the forces behind Feb 27th stock market meltdown and the Chinese reaction to the outlook of U.S. Economy.
2. Forecasts the future behavior of U.S. and global markets.
Med Yones, the author of the white paper, warns against costly policy mistakes and provides a detailed analysis of the economic, social and geopolitical risks facing the United States
The complete text of the report is available at:
http://www.iim-edu.org/u.s.economyrisks/
Banker – You think there’s (by implication) an alternative for central banks?
In my view, they follow market psychology and are forced to take a position however much they might not want to – how could it be otherwise with the immense size of financial assets outside their control?
Example: 2 trillion in buying power wants to move to ‘hard goods’ at the same time huge debt has been taken on. You think the Fed can resist that even though it might be a huge hit to borrowers? They might not want to tighten, but tighten they will.
And the reverse is true as well.
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