"If gold doesn't play a role anymore, then why in the world do so many wall street people on tv keep on referring to gold as an indicator that there is no inflation?"
Wall street are by and far trend players. They create the runs on stocks and the demise of stocks. It doesn't matter if your company is paying a dividend of 5%, if they don't like it, it's trashed. They make the rules, and seldom follow them. They've made the Internet bubble, and then will talk it down. So when they say that gold is a indicator of inflation... it's only true for a while.
Gold & Inflation: if you look back a long time ago, I suggested that inflation can and is masked by M2 growth. It can be hidden for years. Gold does best in deflationary times, and not inflationary times. This can be demonstrated by plotting CPI versus POG and compared to times of recessions. But the CPI, by no means reflects inflation, but is part of the equation. By adding M2 as well you get a more reliable picture. So why does Wall Street use gold as an indicator. Usually, Gold has gone up in price while the US cash outflows are on the increase. This usually coincides with a rising interest rate imbalance. Inflation was allowed to increase at a faster rate then what Bonds can handle, so a interest rate versus inflation bubble forms. And before the divergence is narrowed, the POG rises. But should interest rates rise to far, and the cash inflows occur, then the POG will start to fall. Thus POG has a large correlation to the change in the US dollar index {Trade Weighted Dollar}, and is secondary to interest rates.
decisionpoint.com
decisionpoint.com
Look closely at those two charts, and you'll see a lag in between where the XAU falls, and then rises. Initially the M2 rate was causing the USD dollar outflows, and then a pick up in the M2 rate caused the POG to rise, while the outflows continued. This was in a falling US dollar index, which is deflationary and not inflationary, as the bonds yields reflected. So POG was performing best in a case of deflation. {far be it a short time frame}
decisionpoint.com
During the last year M2 rate has been adding liquidity to the US markets, and thus has allowed the creation of a financial and asset bubble to form in the equities markets. This gave the Dow the ability to hit new highs. But when the liquidity of the M2 was removed in May, it was only a matter of weeks before the Dow started to correct. Note: that is when the fast MACD started to downtrend for M2. It's also the time when the Dow started to go sideways. As the M2 MACD downtrend, the pressure grew on the DOW, until August, when the DOW corrected, and Greenspan dramatically increased M2 rates, again. This help to expand the bubble at a further rate. And by inflating M2, created masked inflation. This inflation does not show up in CPI data, and as far as US residents go, does not show up. This is why Gold bounced in Sept, and why the XAU rose. During this week we have seen a rising USD index, a rising bond yield, and a rising POG. This is a true unbalanced equation, unless you consider the M2 rate {not the M2} The M2 rate appears to be nearly peaked, as the recent M2 data suggests, unless Greenspan has a few surprises. It's obvious that he has backed away from inflating the money supply, and may start to remove liquidity again. This will most likely result in higher yields, but unlike in Aug, the US dollar index may appreciate as the foreign CB's may finally realize their problems and be handling it. If this is so, then as the dollar rises, and the Dow corrects {and it will correct} then the POG will also decrease. This will be evident in a low inflation environment, as Greenspan uses M2 to control the inflation that shows up. So the M2 rate will actually be level and slower, but M2 will still increase.
“Wouldn't it seem quite reasonable that Rubin who knows how the market works and knows how to "intervene" to get what he wants can easily use gold as a means to suggest that there is no inflation.”
This is why Rubin doesn't go around saying that there isn't inflation. He knows that it's only the M2 growth that has hidden it from the eyes of the Americans, and that a good economist could easily point it out to the public. And this M2 growth has exported inflation to the remaining world over the years, and has resulted in unstable inflationary trends. Except to Canada and Australian, where Gold sales has separated the currency from being overly strong, and has allowed active depreciating of their currencies. This has kept Canada and Australia out of recession, and has actually allowed their countries to grow, while Asian countries, and Europe have actually worsen to negative growth. One need only look to Britain and Germany to realize they are in recessions. This is why you've seen a mark increase in both the Canadain and Australian currencies this week.
Inflation in the USA is higher then what the CPI reflects as can be witnessed from the bond yields. It use to be that bond yields would trade at 3.5% {or so} above the inflation rate. Inflation rate in the USA is reported at around .5%, which is why many suggest that bonds could, should go to 4% during the year. But truth be, the bonds are reflecting a true higher rate of 1.8%. So it follows that with a lower M2 rate, and a higher interest rates, that the US dollar should get higher cash inflows {US dollar index goes up and with it the Euro should go down} and the POG will suffer. The only instance that would cause a higher POG in an increasing US dollar, would be hyperinflation. But I doubt that Greenspan would lower the M2 rate that fast. M2 which masks inflation, is itself inflationary. Reduction of M2 rate a rapid pace, such as Jan of 1987 till Oct 1987, resulted
in rapid inflation, and ended in the Oct correction, and Greenspan reinflating M2.
So why is gold going up this week and the XAU lagging? Greenspan during the FOMC suggested that Clinton & Gore were wrong to suggest that social security money be invested into the markets. Greenspan, who's term is near ending, may not be reappointed by Clinton. If this should happen, then you might see the new head of the Fed not follow the same economics as Greenspan does. And in deed you may see excessive monetary extremes, and a rise in the POG. But the POG speculation which is obviously in the markets, as can be seen by the futures and spot, has not filtered over to XAU speculation. This is why the POG may climb $2.60 on a day, and fall back to zero, or lower by the close. The risk for the POG is to drop much lower then what it is at. My valuation based on monetarism is at $270 for the POG. This is why I own equity put options, but am happy to day trade the speculation with the POG by owning the equity. |
