There are currently three legs to the pro-gold thesis:
- There is an ongoing secular increase in demand from Asia. If China’s per capita demand for gold equaled Hong Kong, total demand for gold would be about 4000 tons, more than the entire current demand for gold in the world. Though such voluminous demand from China is decades from happening, if ever, growing wealth in Asia will mean higher levels of Asian gold consumption in the years to come.
- As a response to the collapse of the tech bubble, the war in Iraq, and tax cuts coupled with a strange belief that “deficits don’t matter,” the Federal Reserve and the Bush administration made a conscious decision to let the dollar fall. Excess monetary creation and fiscal deficits are bad for a currency. However, the Fed is nearing the end of its easing cycle and taxes are poised to rise over the next few years as the new administration deals with the Bush deficits. Therefore, going forward, U.S. government policies will limit the decline of the dollar.
- There is a natural boundary to which fiat currencies cannot fall beyond relative to one another. At some point, the decline in the dollar leads to economic stresses in America’s major trading partners, causing currency devaluations around the world. The excess creation of money by the Fed leads to excess creation of money around the world, which supports gold prices.
To some extent, this has happened. Broad monetary aggregates in Europe have expanded by double-digits for much of this decade, as they have in Russia, the Middle East, China and many other countries. This partially explains why gold has risen in all currencies, not just against the dollar.
However, Trichet’s comments may be a game changer. If the ECB is going to abide by its mandate to focus solely on inflation (which seems to shock the Bubblevision perma-bulls such as Jack Bouridjian), then rates may be on the rise in Europe. If so, then rising rates in Europe knocks out the third leg of the gold bull argument.
I have heard gold bears argue that a rising dollar is bad for gold. If this were true in isolation, then gold would not have risen in other currencies. However, gold is up in price in all currencies.
What matters for the price of gold is not the relative value of the dollar (at least not in the short run). What matters is why there is relative strength or weakness in the dollar.
If the dollar rises because the U.S. is undertaking policies to strengthen its currency, that is bad for gold. If, on the other hand, the dollar rises because its’ trading partners are undertaking policies to weaken their own currencies, that is good for gold.
Put another way, if all the central banks around the world are easing, that is positive for gold no matter what the relative value of fiat currencies are. If, however, all the central banks are tightening, that is negative for gold, again no matter what the relative value of the fiat currencies are.
Given Bernanke’s speech a few days ago defending the dollar, and Trichet's comments on Thursday, taken at their word, this is ultimately bad for gold because it signals global monetary tightening. The price of gold in dollars may rise as the dollar falls against the euro on Trichet’s comments, as it did on Friday, but structurally, the ceiling for gold may now be limited, as it may be for all commodities.
The future looks bleak for the European Union remaining coherent with these countries needing relief. What ever the rate hikes are accomplishing for the currency, the counter action is to further bury the countries who are suffering.
The rate hikes and currency bluffs are just that - a bluff. It appears that they are done more for currency traders than currency support.
Even if the Euro strengthens against the dollar, my gold in dollar terms will hold its value as food prices and gasoline rise.
A solid value hedge never hurts.
Now, you seem to believe that the relative merits of other currencies will improve soon. Why is that? Talk is cheap; let's see the ECB actually raise rates before concluding anything about the euro, much less the dollar. I do not see any way the Fed follows an ECB lead here and raises rates; did you miss Friday's unemployment figures? Fiat currencies and democracy, "independent" central banks or not, are a deadly combination. There would be riots. If this is to turn into a game of chicken between Bernanke and Trichet, with 700m people on Bernanke's side, I can tell you right now who will blink first. And regardless, this drama and volatility makes both currencies less attractive than gold no matter the outcome.
Let's put it another way: suppose you're not a speculator but a saver. Three bankers stand before you asking you to deposit your life savings with them: Bernanke, Trichet, and Gold. Bernanke says you should trust him; his deposits are losing value and he doesn't pay much interest, but his depositors' loss expectations remain well-anchored according to their own internal studies. Besides, he has a strong-deposit policy. Trichet says he may give you a quarter-point more interest next year if the deposits in his bank keep losing value like they have been, but you notice his fellow bankers polishing daggers, ready to stab him in the neck if he tries it. Gold, as ever, says nothing, allowing 5000 years in the value-storage business to speak for themselves.
Gold's low yield makes it a lousy investment and speculators in it may win or lose. But for value storage, it's the only game in town. Anyone with money not actively invested would be nuts to hold it in dollars or euros instead of gold.
that's well put, and sound advice for us all
I prefer Platinum.
Apart from the ECB's stance duly noted on Thursday by the press, I have also read that Brazil and several other emerging markets will begin tightening.
A recent article in The Economist noted that emerging markets with dollar pegs will have a hard time tightening however if the US does not. They are averse to allowing exchange rates to rise since this might exacerbate inflation in the short run (from higher capital inflows). The Economist argued that so long as emerging markets failed to raise interest rates or depeg and allow exchange rates to appreciate, they would experience double digit inflation and commodity prices would remain high.
If this is true, does not the case for gold rests less with the European Union's monetary policy and more with the dollar and other currencies pegged to the dollar? As long as real interest rates are negative in the US and emerging markets then gold will go higher.
The key to commodity prices and when to sell seems to be real interest rate levels in the US and emerging markets.
Incidentally, I wouldn't mind being in euros either if the EU lifts rates. However, the ECB is going to have hard time acting alone. The ECB is in a bind: it needs a coordinated policy with other central banks to raise rates and fight inflation, but it also does not want to exacerbate economic conditions in some of its weaker countries, notably Spain, Portugal and Italy. There is already social unrest in Spain with several strikes by fishermen and truckers scheduled this week to protest the high price of oil. Higher interest rates will exacerbate the average Spanish household's ability to meet its monthly mortgage payment.
The fact is that gold is a commodity money. The term, "commodity money" has been around for at least a century.
Gold is a commodity, and it is a money. Gold is used in electronics, medicine, jewelry. There is gold in your computer.
From Wikipedia, the free encyclopedia:
"Commodity money is money whose value comes from a commodity out of which it is made. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, and candy."
Moreover, the word "currency" is incorrect in this case. Even in a fully convertible gold standard, paper receipts that are title for gold are the "currency," and the gold is the actual money.
If you want to be incorrect, you ought to do it correctly and say, "gold is money, not a commodity." In this way, you only have ONE thing wrong.
Simon Heapes, one of the finest minds in pm's and wealth protection today, describes it like this: "Yes some will make money trading in Forex. But it reminds me of a sinking ship, surrounded by sinking ships. The big one in the middle is the US. The ones surrounding it are all the other nations forced to devalue their currency because of US Inflation. The rats are jumping from ship to ship, trying to figure out which ship isnt going to sink (in terms of inflation). The answer is, none of them." You need to get off the ships and on to solid ground, which is gold and silver.
We are about to see alot of people lose everything, while others with the wisdom to see will be gathering great wealth.
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