Gold and the Recovery
Put Wall Street Journal writer James Mackintosh firmly in the clueless camp.
Mackintosh says Gold Will Need More Bad News to Keep Prospering.
If economic recovery continues, expect gold to suffer: There will be less need for insurance, fewer worries about the dollar’s reserve status and lower prospects of more Fed action. Of course, if the Fed lets inflation rip gold might ultimately rise a lot more—but for now, at least, investors see little chance of this.
Gold-Dollar Relationship
With the US dollar index at 93, where it is today, gold was at $2,000 and $1400 and $320.
Something else is going on and recoveries have nothing to do with it.
Also see my July 27 article, Nonsense from the WSJ on Gold vs the Dollar
Reserve Currency?
Mackintosh does get some things right. He does not expect the dollar is about to lose its status as the world’s anchor currency, and neither do I for reasons explained many times.
Faith in Central Banks
It is lack of faith in central banks propelling the dollar. We had three major recoveries in 2000, in 2009 and in 2020 with gold rising in each.
It’s the monetary stimulus stupid.
We can have a Fed-induced orgy of a recovery (we already have on in the stock market, just not the real economy), and it will fuel gold, not collapse it.
No Magic Money Multiplier
Hello. There is No Magic Money Multiplier but the Fed believes there is.
As long as central banks and governments keep debasing money, there will be little faith in central banks but lots of faith in gold.
For discussion of reserve currency status, please see What Would It Take to Dethrone the Dollar?
Mish
Only a fool buys bonds in a zero-interest-rate environment when yield entirely comes from future price increases predicated on lower interest rates. Ditto with shares, high-priced with ridiculous PE ratios.
What I want to know is:
How long can the Fed keep zero rates going?
When market euphoria ends, how long to the collapse?
How far will Democrats go to beat Trump?
The price of gold in every country reflects the debasement or appreciation of their respective currency.
DXY is only a measure against a basket of currencies, which all are depreciating.
DXY @~ 93 in 2003 and now in 2020 would imply that the purchasing power is equal. Is it?
‘It is lack of faith in central banks propelling the dollar.’ Really?
I understand your thesis. Absolutely right. But what has all of it to do with the price of gold? Nothing mate … All the knowledge there is to know about faith in central banks, the recovery, QE and whatever else is known to all the market participants in the gold market. Gold bugs seem to forget that for every buyer there is a seller! For every market participant ‘loosing faith’ in central banks there is one that decides the rally is overdone, central banks have control and it is time to take a profit.
Markets fluctuate, sometimes violently always based on emotions around collective knowledge about that market. Sometimes bulls overwhelm bears, sometimes the opposite but it is not about knowledge, its about emotion. Regardless, all the emotion about all the knowledge about the gold market is in the chart, it is in the price at all times.
If we analyze price we see that silver is lagging this rally. Not a good signs for the bulls. We also see that miners are lagging this rally. That worries me. Hell the HUI is at 2006 price levels! That is a 14 year standstill. You could have made a fortune on Facebook and Tesla in that period. Bitcoin was not even born then. Do I prefer Facebook and Tesla here. Of course not! But both shares are likely still in a bull market. Precious metals likely aren’t.
Sell your gold? I’m not. Not yet at least but seriously considering. Seeing analysts on TV with ‘in gold we trust’ hats scares me. Seeing silver and miners lagging scares me. Reading these articles scares me. Buffet buying Barrick shares knowing that he bought ConocoPhillips at the 2008 peak in oil and sold airliners in March at the low scares me. Proof enough that stepping into the gold market here at these prices is not a wise decision. Of course I could be wrong but you cannot accuse me of being stupid.
At some point all faith in central banks will melt away. At some point the house of cards will collapse. As Lacy Hunt explains, the law of diminishing returns will eventually push the Fisher equation below the zero bound and with the Fed constraint at the zero bound with the FED’s fund rate we risk entering a downward spiral. Deflation and fear will set in.
Will gold save us then? What happens when we get a panic in debt markets? Will the yellow metal spike into stratosphere then? I’m scared it will not. A furious mark down across asset classes seems more likely. I’m afraid that dollars under the mattress might do a lot better then. But hey, I’m not a financial blogger, just a stupid loser wasting his time to reply.
Whew..You got a lot off your shoulders there hopefully you can sleep well tonight and wake up with more positive vibes! Not sure what will save us in your scenarios but we do know gold has been around for 1000’s of years. I am sleeping much better with that one simple thought.
Gold is a commodity nothing more. It’s price rises and falls with inflation. At present we have a new phenomena I call false inflation. It is caused by a combination of government monetary give away’s and suspension of debt default via forbearance.
The problem is, neither of these things is sustainable. The government cannot afford to keep borrowing and giving money away, and the debt holders cannot afford to just let their debts go unpaid, and not take action.
The government actions being taken are politically motivated, to ensure incumbents in each party get re elected. Both sides are extremely motivated as Trump and Congress both have problems with their public popularity.
When the election is over and the problems must be dealt with, the government give away’s will be curtailed, and the debts will be allowed to default. The result will be mass deflation and gold will drop in value along with everything else as the reality of monetary destruction asserts itself.
This is setting up to be one of the largest examples of a whipsaw in history.
IMO, people are buying gold because the alternatives are not hard assets or are not very liquid. Even if you buy blue chip stocks, there’s nothing stopping companies from massively increasing the float to raise money.
James Mackintosh appears to have limited knowledge of the economics of gold.
Or,..he’s a stooge for some front attempting to constantly manipulate gold prices.
As Mish so well stated,…” As long as central banks and governments keep debasing money, there will be little faith in central banks but lots of faith in gold.”
And central banks are performing that feat with Pythagorean accuracy !
Trump gets reelected,he will default on the trillions owed to China!Stiffing China out of trillions will be the template to restructure/writeoff the 30 plus trillion in red ink,which means the dollar as WRC is over.
Really?
China only owns a bit more than a $trillion in treasuries. After that, who (what friendly country) is the US going to stiff?
Preferably, and necessarily so if the US is ever to regain any stature at all, al of them. Indebtedness, is perhaps the most entangling alliance of all.
Not so fast.
Federal Reserve (and all other central banks) have a balance sheet. Assets (securities held), Liabilities (federal reserve notes or their digital equivalent Out There), and a tiny sliver of capital.
QE has sort of worked in that (in theory) at any time securities held can be sold, thereby sucking up FRNs Out There. Keeping inflation in check. Now, if things get Krazy enough (a skirmish in South China Seas?) they might think they can get away with repudiating China held treasuries. But everyone? That is full blown Zimbabwe.
OMG,…how uninformed are you ? What a completely asinine comment.
[ Trump gets reelected,he will default on the trillions owed to China! ]
China will spin circles around Trump and already has (see China& Iran inking a deal)
This is not the Apprentice,…it’s real life and Trump has f’d on so many fronts it’s historical.
Put down the Trumpalina kool-aid cup and gulp a dose of reality.
Why in the world would the US default? the debt is denominated in USD. They can pay off the principal as it matures with computer bits or pieces of paper with green ink on them.
“If economic recovery continues,”
…
Haha. Good one.
There has been NO economic recovery. What has happened is massive fiscal stimulus by fedgov. The 6 months (February – July) saw a fedgov deficit of $2.418 trillion. And not to be forgotten Forbearance (rent moratorium, too) on any loan just for the asking. Once the training wheels come off … down we go.
The Swiss town that taxes its wealthy without scaring them away
The US and Switzerland seem not far off overall in taxation
The Swiss have a higher level of privacy though, and I also expect the wealthy don’t feel like they are being permanently eyed up as a future source of taxation.
Swiss debt to gdp is around 30% if I remember, in the US you are heavy into deficit spending and high debt to gdp. That also makes US currency a liability in some ways.
The Swiss National Bank is run by a bunch of Keynesian dunderheads, but other than that, Switzerland continues to be a leading proponent of good government and liberty.
All Switzerland has a Fortune’s (wealth) tax which works out to less than 1 % in most cases but what they don’t have is a Capital gains Tax. The main debt is basically mortgage debt not Consumer credit card . . . the Swiss are just better personal money managers than the rest of the world !!!
Gold is the original crypto…you have to mine it after all. Having been involved int he Gold “mania” of the early ’00 I will tell you this; as gold prices climb, the incidence of “fake” gold will multiply — this will eventually increase transaction costs.
We got scamed (a big Swiss private bank) with two fake gold bars — gold price were slightly below $2,000 and the scam was very well executed — they replace part of the gold bar with Tungsten — which has nearly the same density as gold. Tungsten cost about $300 per kg. After that unless we had a certified seller we would always process the gold before accepting it into our vaults, increasing the transaction cost rather dramatically
Had a main european bank dish me many thousands in false notes once, got wet and the ink ran, but otherwise very presentable .
People like presentation, I guess fake coins would be easiest to detect (because of detail, dimension, sg, sound even). Otherwise a drill or it is not hard to melt , but then you take some value away usually for either and melting down anything more than an ounce is not for most people.
I thought they had come up with a way for bars though, sort of “seismic” reflection or something ?
X-ray fluorescence only checks the surface, but a metallurgical ultrasound rig would detect the interface between a block of tungsten inside of a gold outer layer.
I read an interesting article about part of Alan Greenspan’s tenure, can’t remember the exact dates but the gist of it was this: He believed the movement in the gold price was an early indicator of inflation expectations and there was a lag of about a year. So The Fed at the time would adjust the fed funds rate in accordance with the gold price early warning system. This had the affect of curtailing Gold’s price rise and kept inflation in check. If he was right, today’s bull market is signalling inflation expectations, whether inflation eventuates or not we don’t know yet. However, The Fed clearly aren’t going to raise rates, in fact they want inflation, so inflation expectations will persist, and those concerned with inflation will continue to have no confidence in the Fed, (or any other central bank for that matter).
“in fact they want inflation, so inflation expectations will persist,”
…
Not doing a good job.
People have no faith in the official calculations though.