people figured we were under the wrong impression that there was
a war going on or something in the business of money with last
week's title, "Gold
Bulls Unite." Hah.
Keynesianism - you can fool all the
people all the time (people are irrational anyway, subject
to the "fetish of liquidity" and "animal spirits")
Rational Expectations - you can never
fool anyone, even a little bit
Austrianism - you can fool most
of the people some of the time but it will come back and bite
- Robert Blumen
Let me clear that up for those puppies
right now: you bet there is, but gold
bulls unite was simply "descriptive" of what has been happening.
Isn't it? Just doing my job. Babies. They're probably short.
For those unacquainted with monetary
history or the relationship between capitalism and gold, it is also
a jab at Marx's "workers of the world unite" plea. Yes, gold and
money happen to be smack in the middle of a war between capitalism
and socialism. If you don't care or believe us, change the channel,
because the rest of our analysis discounts it.
gold going to correct now? We don't know? I don't think so however.
Not if its rising momentum is an indication of anything. Not if
the US dollar index falls through 112 in the short term, and certainly
not if it falls through 108, where dollar bulls guard primary bull
Gold prices have certainly far from
reached a reasonable revaluation relative to their fundamentals
in our view, so whatever corrections there will be, we expect they'll
come when we least expect but also that they will continue to end
before we generally expect. Sentiment is far from too bullish at
this juncture to claim an end to what is unfolding today. The dollar
is fighting for its life in Forex markets as our governors try and
figure out how they can keep the inflation away from gold. So far,
there hasn't been much of a bounce. Dollar bulls are still pitted
against the ring wondering when round 1 will end.
At various points in the not too
distant future I'd bet there are going to be concerted attacks at
the gold market by its opponents. I've tried to come up with some
plausible angles that the banking community supporting the dollar
might attempt, but have concluded we aren't likely to see them until
the momentum dissipates in the market.
Reg Howe cleverly anticipated one:
a potential cancellation of the Washington
Agreement on gold signed by
15 European Bankers in 1999, which was seen as capping further sales
of gold at the time by the global banking industry.
Underlying this potential PR bomb
(favoring the dollar) is the debate about whether it would work
or not. Of course it will, for a while, at least until investors
really begin to understand the nature of the gold market's ascent
today. But in the end it wouldn't, and would only aggravate the
supply & demand imbalances already boiling beneath the surface.
In theory it should actually increase the speed by which the market
rejects the bankers' notes as money altogether. But all of that
depends on investor's perceptions of the truth.
The truth is that the banking system
needs its gold if it wants its notes (currency) to stay competitive
with gold on the free market, as money. They would not have the
nerve to act in contempt of this truth except when confidence in
the reserve currency at least is strong, and when they think they
can control the process. But today, the key players, which have
shared the risk in this, have grown weary of bullion banker's hedging
ideas, not to mention the fact that confidence in the dollar is
undergoing a big test right now.
The truth is "probably" that the
Washington Agreement was related to the launch of the Euro, and
was intended as a self-regulated measure that would prevent a further
competitive devaluation of their gold reserves. It would be a hair-brained
scheme to believe that by canceling the W.A. they could inspire
support for the Euro.
Or it would be motivated by US interests
trying to support a strong dollar/euro rate.
Anyway, concerns about an increasing
tendency to war haven't been dispelled, and I don't know that Terror
fears in some US cities have vanished. This is seen as one of the
main drivers of recent investment interest for gold in the US. It
has been. But here is the thing. Analysts that have been bearish
on gold are beginning to explain this as the reason for gold's comeback,
blaming September 11th and subsequent reports of growing fear in
New York. Accordingly, it must seem as if the gold market has been
forecasting just this. Thus, if global terrorism came to a halt,
gold prices should fall. Whew, then they could all be right.
For, there could be no other reason
to be bearish on the dollar could there? It's the same thinking
that leads investors to conclude the only reason the stock market
fell in September was due to the terrorist bombings, as if it would
have went up without that event. There were plenty of reasons the
stock market was going to fall anyway.
But some analysts always pick the
explanation of an exogenous event as if you could neatly chart the
history of the market according to certain such events through time.
Whether it is deliberate or not we
can only speculate, but one of the ways that the banking community
might fight the rising gold tide is through propaganda like this,
where professionally designated "economists" pin the blame neatly
The very convenience in pinning the
blame on exogenous events is their temporary nature. In other words,
once they go away everything is back to normal. Or so it is hoped.
Whatever one thinks, however, it
can't possibly be argued that the closer to the truth he or she
is, the better they'll do with their money. The moral of the story
is to think again before pinning the blame for a collapsing economy
and rising value of gold on September 11. The explanation we prefer
is that the (global) economy is suffering from an inflation breakdown
in the United States. In the one case, the investor may see the
"temporary" fear and terror as a buying opportunity for dollar assets.
In the other case, investors' confidence in dollar assets is far
from bottoming out.
(If you're not sure
of what we mean by the term "inflation breakdown," we've written
a summary of that idea at: Inflation
Before choosing sides however, we
recommend that you eliminate from your reading list any articles
or essays written by past or present employees of the Fed or perhaps
even any major investment bank. I can already tell you that in each
and every one of those the main explanation for the deteriorating
economy and rising gold values is going to be related to the war
Not one of them is likely to blame
the government and bank's inflation policies for a declining return
on financial assets (as in who do we blame for the bust side of
any monetary boom), and now the waning confidence in the dollar.
But they will be quick to list several problems in the economy today
from bad loans to rising default rates to contracting expenditures
by business as if they weren't just the symptoms of too much money
in the 1st place.
Simply making that connection should
illuminate the real reason for rising gold prices today: investors
are losing confidence in the management of the inflation agenda,
or in other words, support for the dollar to date. And all of this
began long before last September.
Inflation expectations are ever-present,
but the question is where will they show up next? Bankers and the
government prefer them to show up in asset prices.
Investors today need to determine
how inflation is affecting the valuation process. They are challenged
to do what every monetary historian knows they cannot do: predict
how the inflation will manifest. It's manifesting in gold today
for many reasons, but foremost is the loss of confidence in US dollar
denominated assets, and the shrinking US dollar investment premium.
All of which, in our view, were set into motion long before 9/11.
technically regarded, bad policy, because it is incapable of fully
attaining its goal and because it leads to consequences that are
not, or at least are not always, part of its aim. The favor it
enjoys is due solely to the circumstance that it is a policy concerning
whose aims and intentions public opinion can be longest deceived.
Its popularity, in fact, is rooted in the difficulty of fully
understanding its consequences - Ludwig von Mises, The Theory
of Money and Credit, pp 251
recent rise began in May 2001 just after the FOMC initially slashed
borrowing rates to keep asset values from devaluation (we don't
need to prove that they target asset prices; to believe they don't
is preposterously naive) and the consumer from saving. The Dow had
just dropped 1900 points or so and the US dollar was faking us out
with a small topping pattern near prior highs.
At the time, dollar bulls worked
hard channeling participants'
inflation expectations towards asset prices, for the dollar turned
to make a marginal new high in July after the Dow recovered all
of its prior losses. Yet gold
prices, while correcting, did not fall to new lows as most every
mainstream analyst expected. This we saw as bearish for the dollar.
Since then, and for the past year
in fact, we've been writing about the visible inverse relationship
between gold (including gold shares) and dollar assets.
Now as the more conspicuous drumbeat
of global wars and conflicts rises, mainstreet is suddenly flooded
with geniuses claiming to have epiphanies about the nature of the
rise in gold this year, that it must have been discounting war and
fear all along, and suggesting that
it is temporary because it is only driven by exogenous, unpredictable
events. What can we say about that except that the same analysts
that couldn't see it coming now say they've figured out why it's
here, and why it will end.
Anyway, we'll leave you with a highly
controversial thought to which I don't know the answer. Why is the
terrorism such a convenient