A post we came across earlier today talked about gold being one of the few things that went up after the near global market slaughter Monday before the Chinese government pumped some liquidity into the system.
We posted our own gold bit before the government intervened, financialspuds.blogspot.com Magic Is As Magic Does, to present a somewhat different picture from all the MSM memes making the rounds going into 2016. One thing you know for sure Congress and the Federal Reserve never take responsibility for any of their mishaps.
During the subprime frenzy many in Congress insisted every American should own a home. At the time they didn't seem to care how or why. And we don't know how that sat with the country's landlords, but when that bubble burst, we heard the usual refrain from these people: "Don't look at us." Now if you look at the rise of rents since the subprime disaster a cynic might say those landlord's must of dumped a lot of money in those politicians pockets.
Former Fed Chairman Greenspan helped create the TMT bubble, his successor, Bernanke, the subprime mess and of late Yellen's Fed the fracking bubble and what many believe a bubble yet to go snap, crackle and pop, the bond market.
So what does all this have to with gold. Well, first off you have to sully gold's attractiveness to compete with these other entities. One of the raps against gold, a lot like savings and checking accounts these past several years, to mention just a few, is it pays no interest.
Gold also competes with fiat money. You remember it, the stuff that gets printed out of thin air. So here's a recent interview about the yellow metal you might find interesting. Note that the gentleman being interviewed is mining guy. Just try to suspend your judgement, not much different from an equity's guy talking equities.
TGR: Now that the Federal Reserve has increased the key interest rate slightly, the expectation is that the value of the dollar will increase relative to other currencies. How could that be the sign of a bottom for gold?
RR: I cut my teeth in the gold business in the 1970s when the prime interest rate in the U.S. increased from 4% to 15%, and the gold price went from $35/ounce ($35/oz) to $850/oz. I also remember that the gold price increased in 2002 in a climate of increasing U.S. interest rates.
The question is more about the reason that interest rates get raised than it is about the simple fact that interest rates go up. If interest rates go up because there is an anticipation of the deterioration in the price of the dollar and, as a consequence, savers deserve more compensation for lending credit, that sort of ethos is supportive to the gold price. If, by contrast, Janet Yellen can make not just the first 25 basis point interest rate rise succeed but subsequent interest rates rise, too, in other words if she can get a positive real interest rate on the U.S. 10-year treasury that exceeds the depreciation in the purchasing power of the currency, then I think we'll see renewed dollar strength. I don't believe she's going to be able to do that, but the market will determine that.
TGR: Back in the 1970s, the international currency situation was different. Today, the euro and the yuan are part of a currency basket competing with the dollar. If gold is priced in U.S. dollars but now we have competitive currencies, is the logic used in the 1970s relevant anymore?
RR: Although we are in a multicurrency world, the dollar hegemony relative to other currencies has stayed intact. If you owned gold in almost any currency in the world in the last 18 months, gold performed its role as a store of value relative to the depreciation in currencies. It was only the strength of the U.S. dollar relative to all other media of exchange, including gold, that caused gold to perform poorly in U.S. dollar terms. To the extent that the U.S. dollar hegemony in world trade begins to be compromised in favor of other currencies, that weakening would be beneficial to the gold price.
You see, any time the denominator declines, the numerator becomes less important. That means if the dollar buys less of everything, it buys less gold, ergo, the gold price goes up at least nominally. Probably more importantly, however, the response that we've seen in the last 10 years to financial uncertainty has been an attraction for international investors into U.S. Treasuries as a store of value. If the purchasing power obtained from the real interest rate on U.S. Treasuries comes to be seen globally as negative, the attractiveness of U.S. Treasuries generally, relative to gold, will decline.
What traditionally has happened in periods of uncertainty is that investors have chosen to store some portion of their wealth in gold. The U.S. Treasuries have replaced gold to some degree over the last 10 or 15 years. My suspicion is that gold will regain some of the market share it has lost to the U.S. Treasuries as a consequence of a reduction in confidence in the U.S. dollar and U.S. Treasuries. At current interest rates, with the ongoing deterioration in the purchasing power of the dollar, U.S. Treasuries are a very flawed instrument despite their popularity.
TGR: Why are they popular?
RR: I think they are popular because people have an intrinsic sense that losing 1 or 2% a year in purchasing power beats losing 30% a year in the equities markets. People are genuinely afraid of the direction in the economy. They're afraid of a replay of 2008.
Super investor George Soros once said that you make large amounts of money by finding a popularly held public precept that's wrong and betting against it. I just last night watched the movieThe Big Short, and I was reminded that it's not uncommon to have the financial services industry, the government and the populace believe something to be true that is categorically false. I'm not suggesting that the U.S. 10-year Treasuries are as stupidly overpriced as the U.S. housing market and mortgage-related securities were in the last part of the last decade, but I do suspect that we are in a bond bubble, in particular a sovereign bond bubble. I suspect that a 30-year bull market in bonds is fairly close to being over. Raising rates is very difficult for the principal value of bonds. I think we're closer to the end of the bond bull market than we are to the beginning and that's very good for gold.
TGR: In terms of resources, are there some widely held popular beliefs that you believe are not true?
RR: I do. Sadly, as an American, I think the hegemony of the U.S. economy relative to the rest of the world economy is a widely held precept that's untrue. Remember in 2011, the pro-gold narrative revolved around on-balance sheet liabilities of the U.S. government—just the federal government, not the state and local governments—of $16 trillion ($16T). That was considered unserviceable in an economy that generated new private savings of $500 billion a year. If $16T was unserviceable in 2011, how can $19T be serviceable today? Was $55T in off-balance sheet liabilities—Medicare, Medicaid and Social Security—in 2011 less serviceable than $90T in off-balance sheet liabilities today? More:
http://mining.com/web/veteran-investor-rick-rule-reveals-a-unique-arbitrage-opportunity.
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