Something educational for MIW who thinks double digit returns annually are the norm.
I have explained all this before, a few times over the years of why prices cannot simply keep doubling at the same intervals. My explanation was easier for the sheep to understand. And like this explanation, you can see that in the beginning it looks viable and sustainable, but soon becomes unviable and unsustainable.
My example I have used over the years was this....
Would you work for me for one month ? And only one month, say thirty days. I will pay you one cent on the first day, and then double it everyday until the thirty days is up.So I would pay you 1 cent on the first day, 2 cents on the second day, 4 cents on the third day, 8 cents on the forth day and so on until the thirty days is up.
At first it does not look like much , but starting here with just one cent and see what happens after only thirty days.
The gold market is both simple and complex. It is basically a play on the prevailing reserve currency of the day. It used to be the reserve itself, and is now the unreserve, the shadow of intrinsic value against which the extant hegemonic currency is measured. That’s the simple part.
The complex part is that any attempt to calibrate the relationship between gold and the reserve currency is doomed if it looks for a one-to-one relationship. Gold is a relative measure of the market’s view of the stability or otherwise of the reserve, including all of those variables that go into such an assessment: monetary policy, fiscal stability, economic and trade strength, geo-political and strategic wherewithal.
That’s not to say that other factors don’t matter. Supply and demand and broader geo-political instability are also influential in the price. But over the long term it is the investment demand derived from gold’s unreserve role that determines the big trends.
This is clear in recent history. The 1990s was a period of absolute US economic, monetary, fiscal and strategic pre-eminence and gold sank to historic lows.
Since, these forces have been pushing the other way. The US hegemony is under pressure on many fronts; its economy has been weak and current account deteriorating; it’s monetary policy has been profligate and fiscal policy uncertain, at times captured. The gold market has reveled in the chaos.
In the past year or more the drivers of US instability have eased and we’ve witnessed a concomitant deterioration in the fundamentals of gold. The US dragged itself from Iraqi quagmire and it’s energy outlook improved. It’s economy has firmed and its fiscal outlook has stabilised. Monetary policy has been slow to tighten but rate rises are now firmly mooted.
When considering the price of gold then the key question is are these temporary reprieves or reversals in trend?
To map this out let’s examine the most probable scenario for the US in the global economy and affairs over the next five years.
Monetary geopolitics
The relative strategic and soft power decline of the US will continue and probably accelerate, as it appears to have been doing in the last 18 months. The rise of hugely populated emerging market challengers is a secular force and unstoppable strategically and a multi-polar world with China at its head is becoming a reality even today.
Increasingly, we are seeing direct challenges to the US dollar hegemony from these players. The architecture of US dollar dominance – the International Monetary Fund, World Bank and global derivative banks – remain very central but are being challenged at the margin. These institutions will reform in favour of rising powers or be bi-passed, as the new BRIC monetary fund illustrates. China has been knocking off the World Bank’s developmental role for a decade and more already, when and where it wants to.
Chinese and other emerging market banks will liberalise, become more sophisticated and expand outwards but US banking will be harder to dislodge. It’s dominance as market maker of US dollar currency and interest rate derivatives can’t be overestimated.
Besides, the inherent contradictions of the Chinese political state will prevent it from fully embracing capital freedom and any push for the yuan into wider reserve usage will be implicitly restricted and tied to more strict principles that are communist decreed in the national interest. A Sinosphere if you like, operating within the embrace of, but not surpassing, a global monetary superpower.
In conclusion, US dominance in global finance will persist for decades, even as its challengers mount. That offers a backdrop that is moderately supportive of gold.
US economy
The US economy is healing but not at the pace some would have you think. The source of its global monetary dominance is also its Achillies heal at home. The same money-centre banks that rule the global financial system also buy off, warp, and debauch domestic policy.
The result is an economic model that emigrates its export industries, blows repeated asset bubbles in their place and bails out the banking system every time it over-extends itself. The result is the cascading failure of the US middle class into debt, consumption paralysis and monetary exhaustion.
Some progress has been made on restoring investment as the driver of US growth. The so-called manufacturing renaissance has begun and it will continue as its competitiveness improves. But it will take decades of real exchange rate adjustment to fulfill its promise as Chinese and other emerging markets become more expensive. The process has received a huge boost from the fracking revolution.
Fiscal repair is continuing. From despairing forecasts a few years ago, and deficits of 8 and 10% during the crisis years, the US now has a relatively stable path of deficits at under 4% of GDP. Still not great but manageable and not that much worse than Australia. As well, even former champions of the previous economic model, such as Larry Summers, are beginning to talk of “secular stagnation” and contemplating new (or rather old) ways to restore investment-led growth.
But, in the mean time, impatient policy-makers that exist in harmony with the big banks continue to over-utilise their monetary levers and they have already blown three-quarters of the next bubble in super cheap debt and excessive stock market valuations.
This is the primary support for the gold price over the next decade and it’s a very big one. The Federal Reserve has no regard for the value of its own currency and it’s doctrine of cleaning up bubbles rather than leaning against them appears intact. The US dollar seems likely to rise over the next two years as tightening transpires against the backdrop of an increasingly frenetic corporate and market cycle, and gold may have to revisit its $1200 lows. But it is probable that gold will rally in anticipation of the next bust, no more than two year hence.
Like the GFC, when the bust comes, gold may crash again on the global margin squeeze, but it will then rally afterwards as the Fed prints again, even more aggressively than before.
Australian dollar
For Australians, no analysis of the gold price is complete without reference to the local currency.
The combined inflation of the currency, wages and prices must be reversed so that non-resource exporters and import competers can become competitive enough to invest again and fill the growth gap left by Dutch disease.
Some of this can be achieved through the accumulating falls in the currency. But even the 21% decline in the dollar since its peak at $1.10 has only made a small dent in the REER.
Many of the bilateral charts are far worse than this basket chart. Australia’s REER against our non-resource competitors in developed markets like the US, UK and Japan remain at unprecedented levels.
Crucially, to rectify this, the dollar must fall much further. But more, as that induces inflation in tradable products at home, wages must not be allowed to rise in response or the devaluation is lost in inflation and competitiveness is not improved. In short, to cure Dutch disease you need a real devaluation with falling real incomes. That is the key to understanding macro investment trends in the years ahead.
The repair job will will be long and arduous and impossible without a far lower currency. The devaluation may come bit by bit or all in a rush but when it does come gold will shine for Australians.
As I wrote this post, I have myself oscillated around the investment case for gold. Having clarified my thoughts, I now reckon that the US is stronger than my assumption going in, but probably not strong enough. That really is the nub of it for the gold price.
Since 1900 the gold stockpile has grown, but so has the human stockpile. Since then there has been about 22 or 23 grams of above ground gold for each person. This results in the price of gold and general human labour remaining in association. This a key feature that makes gold a monetary commodity and measuring stick. This varying between a cardinal and fixed relationship.
Meanwhile paper money can be created in any quantity. It is mutant for it can mutate to be anything.
As it is under Basel rules 6 to 7% more paper currency is added to the equation on average each year, while the gold stockpile increases at 1.5% pa. So quite simply on average gold will rise 4.5% to 5.5% against the range of Basel inspired floating currencies.
My feeling is gold has bottomed and while the FED continues with it's "normal printing money" and zirp rates gold is most likely to rise in this latter part of the year.
I bought phys 40oz this morning at $1340 (aud) an ounce. I bought for four reasons.
1. I have sold my house and I don't want all of my equity in cash. 2. The AUD will weaken against the USD. 3. There is a massive financial shitstorm brewing and I need a safe haven. 4. Unlike Aussie property, Gold is historically very good value at the moment.
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
Gold is rising again. Unemployment rate in USA has ticked higher.....
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
Gold shows no sign of retreating from its $1400 base, slow and steady wins the race. Interesting I read an article yesterday revealing how gold sales from the perth mint, the US mint and probably other western mints have declined now.
The story made the point that most people who wanted a hedge have gotten on board now. I certainly have, gold is an insurance policy, a simple hedge and once you have your stake you move on. The big mistake many little investors make is to keep piling into the same asset as it rises and rises.
If gold has a big blowoff rise from these levels though we will no doubt see a whole new crowd rush in. Just as we saw in property investment after the 2002 bubble in property began to ramp up. It was pure madness fueled by a half dozen tv shows and one government incentive after another, one banking policy softening after another and one RBA interest rate drop after another.
Now it's clear property is on a losing streak and clear that those millions who rushed in after 2002 bought into a bubble. Why are people so gullible?
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
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