Phil Anthropy

The End of Gold

As mentioned in other comments, gold prices appear to some to be manipulated heavily. I have heard of a bank carry trade, where banks lease each other gold, the lessee pays 1% for the lease, sells the gold to drive the price down, uses the received funds to buy a gold future, and invests the rest in U.S. treasuries or insured bonds. At the end of the day, the lessor receives the 1% on what should actually be in-house gold reserves. The lessee gets a few percent, and the price of gold is driven down. Regardless of whether this is true or not (and I do not accuse anyone of wrongdoing), gold price fluctuations, mysteriously, do not correspond to market conditions that would be anticipated to drive the prices up or down.

Interest rates are also manipulated (some say), such as treasuries being bought by the billions with Chinese and Saudi recycled dollars, to keep rates low. Some believe that there is very little actual honesty in the markets at this point, if indeed there ever was,

The battle between inflation and deflation has been joined, but there is not yet a predictable outcome. It looks to me as though deflation will win out, because the destruction of money and credit resulting from unwinding the astounding amount of leverage used by large international interests seems too much to overcome. We can invest billions of dollars, but when credit (money) is destroyed, its multiplier effect is also destroyed. I do not believe it is possible to inflate enough trillions of dollars into the U.S. economy to overcome the destruction of credit and its multiplier.

In terms of gold, some believe gold prices will be manipulated to fall in order to make the dollar -- a fiat currency worth nothing but the ink and paper used to print it -- a safe haven. In the long run, many believe that gold will emerge victorious, when the dollar becomes hyperinflated. One thing is clear: so far, the track record of gold is better than the track record of the dollar as a store of value.

Inflation Fears Are Inflated

If we listen to what the prez. of Iran said recently, it's the West keeping oil prices high, for their own purposes. This sounds like a bunch of hooey, particularly since I have heard allegations that the Iranians and Venezuelans were slowing down the tankers to keep prices high, but perhaps those were rumors. Let's take a fresh look.

Who stands to benefit from high oil prices? If we have a huge negative balance of payments and a huge budget deficit, wouldn't that tend to weaken the dollar? Yet, the dollar is strengthening. As long as oil is pegged to the dollar, rising oil prices increase the demand for dollars to pay for it, shielding our currency from the weakness it actually deserves in terms of inflation of the money supply.

One might ask what happens to the dollars spent for oil. I conjecture that these are recycled by the oil producing nations, and in particular by Saudi Arabia, back into our treasuries and equities markets. This keeps interest rates low and prevents the stock market from crashing.

But what about the inflationary effect of our excess dollars, in general? Don't we need to raise interest rates to slow down the economy and prevent inflation? Not if the price of oil absorbs the excess dollars that were printed, keeping the economy moving slowly, which keep interest rates down and allows the financial institutions a chance to recover from the credit crunch.

Did I mention that higher oil prices, in the midst of these other advantages to our government, lead to higher tax revenues? The oil companies pay tax on their profits from domestically pumped oil, and the more profit, the more income tax.

So perhaps Iran's radical (but nobody ever said he was dumb) president has a point. It is in the specific interests of the U.S. government to keep oil prices high at this particular time. To let them fall might overheat our economy, leading to higher interest rates, which would tank the banks. Since the banks wouldn't like that, I suspect that measures will be taken so that it doesn't happen. Higher oil prices may be one of those measures, not a "free market" phenomenon.

Since I have no background in economics and no insider knowledge about my speculations, I thought I'd run this one up the flag pole and see the reaction.

If the economists in the audience can debunk this theory easily, so much the better, because I would rather it weren't the case. If it is indeed the case, then we have some political issues of much greater concern than high oil prices.

Six Calls for 2008

Agree that this is a high quality article. But it misses the theme that is driving the current world economy, which I call the Roger principle, an acronym for Rich Oligarchs Getting Even Richer. If one looks at world events today, as opposed to several decades ago, there is no longer even the semblance of a free market. When liquidity is needed, by magic it is forthcoming immediately from government and commercial sources, to "save" banks that have probably been earning double digit returns for the past decade on their leveraged investments. Therefore, my bet's on Roger, and Roger doesn't want a recession (unless he's a short seller this time around). I predict Dow 14,500 just before the elections.

Louis James on Why the Big Gold and Silver Spike Will Be Even Bigger This Time

I have heard that the price of gold is subject to manipulation by gold repository banks on a grand scale. If this is true, then gold remains a speculative play. Other commodities, such as food, are less speculative. For instance, the prices of milk and orange juice are up huge in the past 18 months. Since the price of gold is dependent on both industrial demand and fear, and is also subject to possible supply adjustment by banks leasing gold from their colleagues (among other techniques), being a gold bug at this level is risky. If the U.S. has a deflationary recession, which would be good for banks holding undefaulted mortgages, gold prices will languish. However, the long-term risk-reward ratio of gold is probably as good as most speculative investments.

Big Ben Panics and Gold Responds

Logical analysis and considered reasoning have long been useless in the U.S. economic model. When their is credit restriction due to lack of liquidity, liquidity is forthcoming, from a variety of sources. When there is consumer purchasing slowdown, government deficit purchasing increases. Once the underlying engine is explained it all makes sense: find the most powerful financial organizations you can, and see what will benefit them the most; that is what will happen.

There is no subprime problem. Depending on state law, people who default on their loans may be in debt for the rest of their lives under the new bankruptcy laws, paying back far more than they ever borrowed, while the houses are reclaimed at a discount by lenders. If banks need credit to cover defaults or sinkholes to unload their worthless debt, they'll get them.

Therefore, the stock market will go up and interest rates will stay about the same (they can't go up, because the Fed has just bought a boatload of bond-like instruments, which would lose value; they can't go down, because the dollar would weaken). So it's business as usual, except that the middle class will have to work longer hours to earn the same quality of life. Who knew?

Interest Rates Rising, Gold Declining: What Am I Missing?

Rising interest rates do not necessarily imply classical monetary inflation. If foreign governments diversify out of our treasuries, interest rates may rise without a weakening dollar, particularly if the Fed sells its foreign currency reserves to support the dollar or if the excess dollars are recycled into dollar-denominated commodities/futures. Unless the dollar weakens, gold should not increase in price as a currency hedge, although global demand could drive the price higher through normal market forces. Since both high inflation and deflation would have dire consequences for our economy, I think the Fed will try for stagflation. That implies to me that the dollar will weaken slowly, and that gold will increase in price slowly as well. I look for about 10% per year increase.