Is Gold Going Up or Down?
Over at LRC, Michael Rozeff has a surprising analysis where he lays out a few convincing arguments that gold prices are too high right now, relative to other prices. He concludes that gold is "overvalued" and that its downward trend may very well continue.
I won't quibble with his numerical arguments, but I think they are at best irrelevant. Investors care about forward-looking analysis, and I think forces are in place for serious price inflation over the next several years. First, Bernanke truly believes price deflation was the ultimate cause of the Great Depression, and so he will do whatever it takes to prevent it again. Second, Barney Frank and Paul Krugman are openly calling for Keynesian pump-priming to save the economy from disaster. Third, the growth in the monetary base has been absolutely jaw-dropping in recent weeks. (I provide links and a chart for these points in this blog post.)
It's true, all of these factors could still be reversed. If Ron Paul were elected president, and Lew Rockwell were put in charge of the Federal Reserve, it would be possible that the train could be stopped, and massive price inflation could be avoided.
But with the actual people who will be in power during the next few years? I think high prices are just around the corner...
Comments (48)
misled
until I see gold go way up, and regain some of the saving i've lost, i'll continue to feel like i've been misled by the mises institute and the LRC.
Published: October 30, 2008 1:54 PM
Jardinero1
While the printing presses are running at warp factor 10, one has to balance that against the sharp deceleration in the velocity of money and the fact that lending has ground to a halt. Weighing those factors in means that the overall money supply is still contracting in the spite of Comrades Bernanke and Paulson's best efforts to the contrary.
I can't predict what the end result will be but I don't think price inflation is going to be the endgame.
Published: October 30, 2008 2:03 PM
Yancey Ward
People buying gold looking to make big profits are being foolish, in my opinion. You buy gold as a hedge against systemic financial disaster, and you don't put everything into gold, either unless you are certain of the disaster. I think a 10-15% weighting is more than enough.
Published: October 30, 2008 2:10 PM
Crosbie Fitch
On the subject of gold, has this amusing parody already done the rounds?
http://uk.youtube.com/watch?v=eVB-SSkkLnY
Published: October 30, 2008 2:11 PM
Chris
I agree with Mr. Murphy on this one. Gold has experienced a correction just as every other market experiences.
I also believe that you don't buy gold for the purpose of selling it later for more dollars...anyone who hangs around Mises.org long enough will most likely come to that conclusion as well.
Published: October 30, 2008 2:25 PM
Brent
Gold coins or bars not being used to make other goods are not investments. People can make money speculating on the short run fluctuations of the price of gold, but as is always the case, don't speculate if you don't fully understand things and if you can't afford to be wrong. For most people, you do what Yancey suggested -- hold it as a long-run hedge against inflation and the chance of the demise of the current currency.
Published: October 30, 2008 2:36 PM
eric lansing
http://www.thelongwaveanalyst.ca/pdf/V5_1.pdf
Published: October 30, 2008 2:52 PM
Jay D
I agree with Jardinero1. We aren't talking about "price deflation" here are we? With the credit contraction we are talking about acual deflation right? I'm told that in fractional reserve banking, credit is money. Money is destroyed as credit dries up. Sudden actual deflation can cause economic disruptions.The monetary base chart can shoot up, but if it is only making up for the credit contraction, the money supply doesn't change much, so there isn't much inflation.
Published: October 30, 2008 3:06 PM
Joseph
The main reason for the current drop in gold is massive central bank leasing (unreported). The main players in the financial meltdown fear a flight out of fiat currency as it invalidates their whole world view.
Published: October 30, 2008 3:12 PM
Vincent Cook
I agree with Mr. Murphy too. While Mr. Rozeff is correct in noting that the purchasing power of gold relative to many consumer goods is currently above its historical norms, gold also has a history of reverting back to such norms rather slowly--over a period of years typically. In the mean time, inflation and/or defaults can make gold very attractive in the short run in spite of the reversion tendency.
There is also the problem that the choice and weighting of goods to compare gold against is always arbitrary. That being the case, perhaps one should ignore the government's consumer price indices altogether and consider the prices of goods that have been around essentially unchanged since the days of the gold standard. My favorite example is Levi's 501 jeans, which were first offered for sale in the late 19th century at $1.25 (with gold at $20.67). The current 501 list price is $37, a multiplier of 29.6. That would imply a current gold price of ~$612.
Published: October 30, 2008 3:29 PM
michael rozeff
As far as the analysis goes, I find now that it is confirmed by a paper written in 2006 by Profs. Levin and Wright available here: http://www.pensions.gold.org/uk/price_drivers/investment/
That site mentions a price of $503 in 2006, which translates to about $543 today (adding in 8% inflation.)
In addition, we have the The Golden Constant by Jastram, a much-lauded book that uses the same approach, but with wholesale prices.
We can be quite sure, then, that gold and such price indexes track over the very long run. They can significantly diverge for long periods, however.
If I had invested $2 million in gold in April at $1,000 an ounce, I could have bought 2,000 ounces. At today's price of $750, I can buy 2,667 ounces. The entry point matters quite a lot. Anyone who bought gold in 1980 for $800 or even $300 or $500 for years thereafter suffered quite badly. But anyone who entered in 2001 and after has done very well. Timing matters.
Is it irrelevant to have some notion that gold is worth about $550 an ounce on the CPI method or $656 using M1? It's irrelevant if you are certain that only one or a few states-of-the-world lie directly ahead of us, which involve significantly higher inflation. The problem is that there are other possible outcomes. What if gold does drop to $500? Gold is a very volatile commodity. It can rise or fall $150 in a day. In 1980, it fell $143 in one day. What if someone invests $2,000,000 now at $750 and gold declines to $600 the next day? There is an immediate loss of $400,000. I use large numbers on purpose. For a small investor, these matters may not be so important. But for serious (large) investment they are.
Look forward, Bob says. He's certainly correct. In 1980, what did the looking forward see? Did it see 21 years of bear market in gold while inflation kept going and going and going? Gold at that point was far, far above a reasonable estimate based on the CPI. In April of this year, gold was almost double such an estimate. Perhaps the gold market had already discounted the subsequent money-pumping we are seeing now. A market usually does not discount the same thing twice.
Bob's forecast may pan out and provide him with a golden reward. On the other hand, there is risk here. Nothing is without risk. There are many other possible results. There is many a slip betwixt cup and lip. Money can rise now and fall later. Money can rise and credit not rise as much. Credit can rise and prices not rise as much. How much of a bet will someone place on believing that the quantity theory accurately predicts the value of the dollar in this case?
I'm not revealing my portfolio, nor am I even recommending a move one way or another for anyone else. I'm pointing out some facts that do have relevance because they give some notion of the risks that a gold buyer faces. There is no investment that does not have risks. To ignore them while attaching a very high probability to one's own prognosis is to be a plunger.
I'm risk-averse. If the downside on gold is $200 (a drop from 750 to 550), then I want an upside of $600 at a minimum. (That's a gain-loss ratio of 3-1.) I want to be able to see gold at $1,350. If $550 is consistent with today's CPI, then the value consistent with $1,350 has to be 1350/550 higher, or up by 145% from today. That's like getting 20% inflation for 7 years. How likely is that?
Published: October 30, 2008 4:11 PM
Andras
Misled,
Don't mistake the paper (future) price of gold with the market price of the metal. Shortly (before inauguration)the former will default and you will have a real system of price discovery. Then we talk again.
Published: October 30, 2008 4:13 PM
YerMawm
Vincent - Nice example. Also need to consider productivity gains and other inputs into your calculation. These things might cause the price of 501's to drop relative to gold. There may even be some things that caused it to increase. Overall how many 501's are produced compared to amount of gold in the economy, and compared to the 19th c.?
501's are no longer made in USA as they were in the 1900's, and are more likely made somewhere cheaper than the US. Levis.com price is $48, this assumes $1.25 is list price at that time, rather than the price at the local Liquidating Mervyn's Store. This would make gold ~$793.
Your on the right track, but our goods for comparison need to be the same No small task,
Published: October 30, 2008 4:36 PM
Oil Shock
How about comparing the price of an oz of gold to the total price of a Hand Made Suite and a Hand Made leather shoe.
Published: October 30, 2008 4:44 PM
Bob Murphy
A few responses:
(1) Misled, I'm sorry if you feel betrayed. But did you get out of stocks and into gold? If so, it was still a good move.
(2) I'm not talking so much about "profiting" from this, I'm more talking about hedging.
(3) I agree that part of the low price is due to the divergence in paper and physical markets, but that is probably because I'm biased. I.e. I haven't done careful research here, I'm just surprised at how much gold would fall even on days when the world was panicked. And then I would hear anecdotes from various people about months-long shortages from coin dealers etc.
(4) Mike: I hope you weren't offended by my blog post. It was curt but I wasn't saying your analysis per se was wrong. What I meant was, even if it's true that gold right now has to fall 25% to get back in line with CPI, that by itself doesn't mean gold is a bad thing to hold if one expects CPI to increase (say) 10% on average for the next three years. Add in the slight but real risk of an outright dollar collapse (it could literally happen at any time if the Chinese decide to dump Treasurys), and that's a pretty cheap insurance policy.
I did think this particular argument you gave was rather unfair:
I'm risk-averse. If the downside on gold is $200 (a drop from 750 to 550), then I want an upside of $600 at a minimum. (That's a gain-loss ratio of 3-1.) I want to be able to see gold at $1,350. If $550 is consistent with today's CPI, then the value consistent with $1,350 has to be 1350/550 higher, or up by 145% from today. That's like getting 20% inflation for 7 years. How likely is that?
The casual reader might have concluded that I am banking on 20% inflation for seven years, when no, that huge threshold is popping out only because of your 3-1 stacking against gold.
I could do the same thing with any strategy you recommend. Watch this: "So Mike, you don't like gold, OK, what should I hold instead? Stocks? Well, I'm risk averse, so insist on a 3-1 spread. Looking back at the 1970s--the last time the Fed went nuts and we had a very activist federal government--stocks had horrible (inflation adjusted) returns. So to compensate for that possible loss, I would want the S&P 500 to increase in nominal terms 20% over the next 7 years. How likely is that?"
OK, now dropping the facetious tone: I'm rounding for simplicity, but I think you are saying the CPI needs to go up by 45% to justify a gold price of $750/oz. That works out to annualized inflation of about 5.5% for seven years in a row. I think that outcome is extremely likely.
(It's true, in the scenario I just painted, gold would merely tread water while the CPI "caught up" with it. But investors are tolerating very low nominal yields on "safe" assets. So if I think the odds of annualized inflation of at least 5.5% for 7 years in a row, are just as good as the US government honoring its debt instruments, then even with Rozeff's analysis, gold right now at $750/oz isn't a bad buy.)
I apologize in advance if I messed up the above calculations...
Published: October 30, 2008 4:53 PM
Sag
Bob Murphy and Michael Rozeff,
Thank you. This is great stuff...!
Published: October 30, 2008 5:19 PM
maera
Rezoff mentioned other metals in the article. Wouldn't it be better to buy silver or even copper if the prices are still low & you are worried about the dollar than to buy gold at a premium?
Published: October 30, 2008 6:20 PM
David C
If you look on ebay, and on other auction sites, and at dealers who are not out of gold, gold/silver is WAY higher than the comdex spot price.
Many claim that banks are intentionally loosing money on gold shorts to keep the prices in check against the dollar. Ironically, this could exacerbate the financial disaster because many hedge funds were using gold futures as a hedge against financial disaster.
Published: October 30, 2008 6:30 PM
Michael Rozeff
Hi Bob. Offended? Not in the slightest.
I used 3-1 gain/loss because Phil O'Connor and I studied the US stock market and it provided that on average over a long period. We found also that some professional speculators use that number. (The realized ratio would be lower now as losses have been so large compared to gains recently.)
I think it is good that you backed out an implicit 5.5% inflation for 7 years to reach TODAY's price. That at least suggests what is built into today's price. It's a kind of comparison and that is what investors should be doing is comparing alternatives, such as silver, nickel, oil, and mining shares.
For example, gold is getting some competition from some stocks these days. Last I looked FCX was $25 (now bounced to $30) with a generous and secure yield of 6.7%. Now, FCX is a copper-molybdenum-gold producer, a premier one. If there is inflation, it will participate. It is likely to be slow for quite awhile (2-3 years) and close down mines, but it has many assets. Its price is 2/3 of book value! The downside is to 17-21 is my guess. The lower you can buy it at, the better. A lower price reduces the risk and makes it easier to get that 3-1 gain/loss ratio.
Short of the disaster that makes gold golden, the metal is just another possible opportunity to speculate from my perspective. They all have risk and they all need to be evaluated carefully.
Published: October 30, 2008 6:54 PM
Ned Netterville
The federal government is engaged in a policy of monetary inflation and intervention in the economy because Keynesian soothsayers (aka, Ivy-League economists) are warning that if action (read intervention) isn't forthcoming another Great Depression will be. The government is doing its damnedest to pump up the economy with the tools available to it, but so far nothing seems to be working. And for the first time in history, it now appears that the governments of other major-economy nations may join the US in coordinated measures to prevent worldwide depression and restore economic growth.
Who knows? It may work, but according to Austrian theory, only for a time, and in the process the "bailouts" will only make the inevitable next recession/depression even worse than this one. However, I suspect that the governments, even in combination, have spent whatever ability they may have once had to control a world economy by monetary and fiscal manipulations. Of course that doesn't mean they won't keep on trying. Unfortunately, if monetary and fiscal procedures fails, governments will be sorely tempted to go beyond what is currently deemed constitutional, and the pragmatists among us will urge them on.
Based on the present strength of the dollar, the low yield on US government securities, and the declining price of gold, it seems to me that the markets, reflecting the momentary views of many people, retain a lot of faith in government, which I believe is misplaced. If economic recovery doesn't materialize, and faith in government falters, what value will the market then place on items secured only by "the full faith and credit" of government? By then it may be too late to trade dollars or government bonds for gold, so I'd be inclined to hang on to gold and other items with intrinsic rather than purely faith-based value.
Published: October 30, 2008 7:12 PM
Bruce Koerber
A perspective on gold:
Who thinks that they will be alive when societies begin to adopt classical liberalism? If you think that will happen during your lifetime then having gold will be a real source of wealth for you.
If such a positive transformation of society happens in a more distant time frame then having gold is a good protection for you against the destruction of the purchasing power of any and all assets valued in fiat currencies.
Published: October 30, 2008 7:30 PM
Maturin
So just what should we all be holding?
The Levi's 501's are sounding pretty good to me!
Is there a futures market in them?
Seriously, I am wondering if the question should be not "if the Chinese dump Treasurys," but when. Is it not likely that they will buy up all the gold they can get as they do so, and it would skyrocket?
Could someone explain why the Chinese would want to hold on to Treasurys if Paulson/Bernanke-driven inflation is likely to exceed their yield over the next few years? I am assuming they are not holding exclusively the TIPS type of Treasurys. (Which is linked to the bogus numbers generated by the Guvmint, anyway, rather than true inflation, as I recall Dr. Murphy recently pointed out in one of his articles.)
According to http://www.atimes.com/atimes/global_economy/if22dj02.html The Chinese were holding $1.2 trillion in their central bank last year. How much are they holding right now? That would be some serious dumping if they decided they needed a hedge against $US inflation. And the SEC could not touch them for "manipulating prices" if they decided to destroy the US dollar and snap up some bargains in Wall St banks.
Published: October 30, 2008 7:32 PM
Krazy Kaju
Meh, I think gold might be up in the long term. With massive amounts of liquidity being pumped in ATM and the Fed expanding M0 at amazing rates, it looks like gold might be heading north after this recession.
Published: October 30, 2008 7:45 PM
Lester Hunt
Guys,
Thanks for this great discussion. I've been worrying my pretty little head about gold lately, for the obvious reason that I bought some and was disappointed with the immediate results.
What about the theory put forth by "Joseph," above, that central banks are engaged in massive "leasing" of gold?
Published: October 30, 2008 8:03 PM
Hal P.
Great discussion going on here. I tend to agree that inflation is going to be a problem over the next couple of years. I remain a bit troubled by the amount of paper gold being traded verses the amount of actual gold reserves. I would love to see buyers actually require delivery and see what happens.
Published: October 30, 2008 8:24 PM
George
I wouldn't worry about the Chinese dumping Treasuries.
Just not buying more will cause enough problems.
Looking ahead, If you hold "save & secure" short term t-bills for a few years at say 1% yield before taxes (like .5% after taxes?) then any inflation more than about zero will put you behind. At least with gold there won't be any income taxes along the way until you sell....
Published: October 30, 2008 10:35 PM
M
The United States is going bankrupt. The only reason the whole system hasn't yet collapsed yet is because of some foolish faith in the United States Government and in turn, the dollar, worldwide.
With the huge financial asteroid upcoming, outlined by former US Comptroller General David Walker, based around medicare, prescription drug entitlements and social security, the dollar is finished.
Markets are irrational short term. When mass amounts of manipulation occur from very end of the spectrum they become even more irrational.
The dollar is going to die. Obama is going only going to speed up that process through more spending and more debt while further crippling business and sending people to the unemployment line for government handouts.
I'm putting everything in gold. I don't know where exactly it will wind up, but I know in the next twenty years the dollar won't be worth the paper it's printed on. I'll stick with real money, however I enjoy the discussion. Thanks all.
Published: October 30, 2008 11:28 PM
Michael Robers
Regarding Inflation,
It cannot be discounted that at the present moment deflation is occuring by individuals pulling deposits and equities out of banks and the stock market. In addition, the deflation is accentuated by a decrease in asset prices limiting credit expansion from borrowing on these assets.
However, the newly "printed money" be it paper or electronic still has to work its way through the economy. In the short run deflation is occuring from the slowing of credit expansion due to the rise in the federal funds rate to over 5%. In the long run the inflation will make itself apparent through higher prices. This increase in prices will not be uniform across regions or commodities nor predictable through mathematic formulas. The price increases will be determined by human action and preferences.
Published: October 30, 2008 11:54 PM
newson
those who think the deflation scenario is the one most likely to prevail medium/long term have got some explaining to do re: recent price behaviour of us long bonds. the october swoon on all world bourses was not accompanied by 10 or 30 year us treasuries making new highs, as invariably happened in past hiccups.
foreigners are obviously taking bernanke at his word, and the end of the longest of all bull markets (bonds) must be nigh.
Published: October 31, 2008 8:36 AM
newson
besides, dr murphy is right. if monetary measures don't feed through to prices fast enough, the new government will be printing treasuries as fast as they can think up crackpot spending initiatives. the fed will remain the buyer of last resort.
Published: October 31, 2008 8:53 AM
Adam
Jim Rogers = buying gold
Peter Schiff = buying gold
Ron Paul = buying gold
I'll go with these 3 on investment advice considering they predicted the situation we are in now, and have been buying gold since the beginning of this decade. If these guys thought gold was done with its run up, I don't think they would be buying more.
Published: October 31, 2008 9:15 AM
andy
Adam,
I'd be carefull, these guys are buying, but not just putting all their savings into it willy-nilly...for example Rogers is very adamant about warning that gold could go down to 6 or 500 before going much higher... so if you're going to need the money soon, I wouldn't take risks.
Published: October 31, 2008 10:15 AM
Fephisto
What andy said.
But, you know, it's not like gold is going to go bankrupt.
Published: October 31, 2008 10:31 AM
Adam
Andy,
Agreed.
But I figured the concept of short-term cash needs vs. long-term (1+ yr) was implied in this discussion and my comment. Any short-term activity is speculation.
Published: October 31, 2008 11:28 AM
redshirt
I agree with the general line of reasoning in this thread. I am buying gold and silver as a short term protection against a failure in the fiat currency and as a long term investment. (Besides, it can be fun to have some coin around!)
So there is some deflation going on the commodity prices go down. You can likely count on those prices coming up with inflation. If you are lucky, you might take advantage of a spike in the price at some time. Not a bad deal.
And of course, you run the same kinds of risks with stocks. Just look at the folks trying to retire now. Not being a day trading phenom, I'd likely do worse with stocks than with gold and silver. (I let the pros take care of my stocks and they still are not doing well.)
-r
Don't gamble if you can't afford to lose the money.
I can't find the link now... grumble... but I remember seeing a nice comparison of the buying power of gold vs. the dollar. Something like 64 oz of gold at $35/oz could buy you a car back in the 70's (about $2k) and still buys you a car now (a good one!). I think that is the idea.
Published: October 31, 2008 11:35 AM
eric lansing
sadly, the folks who blog at mises.org are not the brightest investment gurus.
newson - no explanation necessary. Please review Frank Shostak's (the best economist on this site) daily article archives and then perhaps Human Action or MES. Then try googling "Japan deflation" or perhaps reviewing AGD.
What am I missing here? ABCT says that inflationary booms lay the foundation for deflationary busts. Where is all this talk of hyperinflation coming from? Debt repudiation is deflationary and repudiation occures when the structure of production is stretched in such a way that it will not permit credit expansion (nobody wants to lend, nobody want to borrow).
People on this site are falling into the ivy leage error of ivory tower thinking... philosophy... ethics... blah blah blah. Where is the interest in Mr Market?
as for gold, it's difficult to see how one could be bearish.
(this guy is better than you at finance):
http://www.grantspub.com/archives/free.cfm?nid=338
Published: October 31, 2008 2:07 PM
michael rozeff
Gold is 718 today and the Dec. 2012 futures price is 810. That's 12.8% higher over 4 years, or 3.2% a year. You can pay for the 2012 gold in 2012, with 2012 dollars. If you think that the dollar will fall by 50%, say, why not buy the Dec. futures? Its cost in today's dollars will be only 405.
If the market believed in 50% inflation, it would be borrowing heavily and buying gold. The interest rate would rise to about 18% a year. Gold in 2012 would be priced at 1436.
Clearly, the gold market is not dominated by gold bugs or gold bulls, for that matter.
Published: October 31, 2008 2:24 PM
Adam
Eric,
Nobody wants to lend and nobody wants to borrow?
I'd have to disagree. The Fed is lending and there are lots of businesses out there accustomed to borrowing at artificially low interest rates, in fact their business model depends on it. See the Fed intervening in the commercial paper market.
I would agree that banks don't want to lend because nobody is credit worthy at 3% interest - that's why LIBOR was jacked up for so long last month and into this month.
Banks have to worry about loans defaulting and going out of business - the Fed doesn't, they'll just print more money - therefore the risk of elevated inflation.
Mr. Rozeff,
From early 2002 to early 2008 the dollar lost roughly 40-45% of its value. To think it could lose 50% in the next 4 years is not a stretch for the imagination.
Published: October 31, 2008 3:29 PM
Mike
I disagree, I believe the price of goods is lagging behind. Gold futures are being liquidated by hedge funds. There is disparity between paper gold and physical gold. Go to eBay and look what gold and silver coins are selling for, also Jason Hummel at http://silverstockreport.com/
recently had silver auction look at what was paid. I bought in and according to Comex I'd loose money but if I sold it on eBay I'd make money. Also coin dealers are willing to buy back at much higher prices...just my 2 cents
Published: October 31, 2008 4:50 PM
Stefan Guta
Just a quick link regarding the availability of gold products:
http://www.apmex.com/APMEXTop40/Default.aspx
While in normal conditions, I would have agreed with Mr. Rozeff arguing, these are not normal conditions that we are living these days. Mr. Rozeff is calculating the value of gold as a comodity, which gold was forced to become in the last decades.
But as the world economy and finance will have to restructure in the next 5-10 years - since dollar cannot be trusted anymore by creditor nations, and no other paper currency will ever be trusted to take its place in the market - the only practical alternative is to back all currencies by gold.
It wont happen overnight, but it will happen, as China and Russia have a lot of gold resources, and the "oil nations" have oil, which for the moment is as good as gold. Count India and Brasil in also. They will no longer sell their goods for pieces of paper. Dont dismiss them because they a "communists" - this does not mean they are stupid.
USA and Europe have in mind to create some sort of a World Central Bank, to take the place of the FED. Of course they would love this, since they are the ones with debt to pay, and this would permit them to continue this modus vivendi for another 40-50 years.
But China or Russia or "Oil Nations" will not go for this, since prolonging this status quo will mean they will never get their money back. If they force a gold backed financial sistem, they will get SOME money back.
So in these conditions, gold will no longer be a comodity. It will represent money, and if you calculate the total ammount of gold in the world and the total ammount of money in the world, the real price of gold is anywhere between 3000 and 10000 USD.
Published: October 31, 2008 5:59 PM
D. Saul Weiner
"Bernanke truly believes price deflation was the ultimate cause of the Great Depression, and so he will do whatever it takes to prevent it again"
Given the ineptitude of Ben and the USG in general, might not this be an argument in favor of low price inflation?
Published: October 31, 2008 8:38 PM
newson
eric lansing says:
"What am I missing here? ABCT says that inflationary booms lay the foundation for deflationary busts."
this is the case absent state intervention, which is precisely what you are missing. the administration and the federal reserve have made it quite clear that no measure is too extreme to be excluded in combating asset price falls. so far, bernanke's rhetoric has been followed by action.
mzm has fallen since july, but a few months of deflation doesn't mean it's 29-32 all over again. rothbard's agd finishes before roosevelt severs the gold link and devalues the dollar. the rest of the thirties sees banks' balance sheets restored, thanks to a lovely yield curve ride. once gold convertibility was blocked, there ceased to be any prolonged deflation in the usa.
where's your evidence about the japanese "deflation"? falling domestic prices (asset, producer and consumer), yes, but shrinking money supply? i don't think so. the banks were recapitalized, and that the vast pool of yen created became the "carry trade" that fueled bubbles outside japan.
in addition, the bank of japan had to be more careful than the fed will be, because of the propensity of the japanese to save (can't stiff a large chunk of voters).
if there is prolonged cessation of both borrowing and lending, other creative means will be employed to put a floor under asset prices. there is no way deflation cannot be staved off by a monetary authority/government until there is a complete currency collapse (misesian crack-up boom).
i like jim grant and agree with him on gold, but what's your point?
Published: October 31, 2008 10:16 PM
michael rozeff
I'm not terribly bearish on gold. Just somewhat.
On inflation, someone showed me that graph of the monetary base shooting vertically upwards (I already knew about it) and asked me if that meant high inflation coming. My answer follows.
I do not know.
I know four facts. The inflation-adjusted bonds have been doing lousy. Gold has been lackluster. The dollar is going up. The trade-weighted exchange rate is going up vertically (negative for gold).
Another fact is that Bernanke in published remarks is aware of setting off a hyperinflation and aware that he has to take away the punch bowl at some point.
I have been known to call many of his remarks stupid, which many are, but he knows enough to realize that if inflation gets going at any substantial rate the t-bill rates will shoot up and the government deficit will soar and the game will be over.
Published: November 1, 2008 11:54 AM
michael rozeff
David Ranson has some good work on how gold anticipates inflation and bond yields by 12-24 months. Gold is an excellent portfolio diversifier for this reason (he recommended about 18%).
At some point before the next round of inflation, gold will rise again. We have just lived through an inflation episode. Gold forecasted it handily. The markets suggest that we are now in a deflationary period, and gold began forecasting that some months ago. As gold drops in price it is becoming more and more of a better buy for the next round of inflation when this deflation abates.
Published: November 1, 2008 2:30 PM
michael rozeff
David Ranson has some good work on how gold anticipates inflation and bond yields by 12-24 months. Gold is an excellent portfolio diversifier for this reason (he recommended about 18%).
At some point before the next round of inflation, gold will rise again. We have just lived through an inflation episode. Gold forecasted it handily. The markets suggest that we are now in a deflationary period, and gold began forecasting that some months ago. As gold drops in price it is becoming more and more of a better buy for the next round of inflation when this deflation abates.
Published: November 1, 2008 2:31 PM
Andy
Gold prices are on the way back up! What might happen to gold prices long term though, no one knows (we are in a crazy market). But it good be a good way to hedge against further economic turmoil, future inflation and a good diversification plan in 2009. I think we will be at a $1000 sometime this month.
Published: February 3, 2009 8:22 AM
Capt Brian
I feel strongly that gold and silver are the only long term real money. It is simple really, [regarding your currency], the more there is of it around, and if it is not backed by something of value other than good faith, then it too is fiat money. And as usual, men screw up the financial world with greed. Then we have to go back to real money 'til they get it straight enough to feel good about it. Let me put it this way... If I put one once of pure gold [or even silver[ in your hand, and in the other I put the equilivant in paper money of any currency you choose, which would you feel better walking away with in your pocket, the fiat currency, or the piece of gold. You make the choice, and you will probably be right. NO kidding. Try it.
Published: April 1, 2009 7:41 PM
M D
India bought 200 tonnes of gold from IMF for 6.7Billions US for $1045 per Ounce. IMF is scheduled to sell total 403.3 tonnes of gold.
Now do the math, if the Gold goes up then Dollar will go down.
According to definition, IMF is supposed to promote trade by increasing the exchange stability of the major currencies.
They will not do anything by which Dollar goes down even further. IMF is acquiring Dollars, which means that Dollar will hold or go up. That means the gold prices at the best will hold or start going down.
China is supposed to buy the rest of 200.3 tonnes of gold but they are holding back. May be they fear that with India they will end up carrying the bag of deflated Gold. While Dollar starts climbing up.
Interesting times we live in.
Published: November 4, 2009 5:34 PM