You said:
It is not as much the US markets as the effect of this drop on the US dollar. The later is the greter influence on the price of gold.
The it is the stock market. You say above that the stock market falling would have a negative effect on the dollar.
I can't get:
I said that the US dollar is a greater influence on the price of gold than the US stock markets.
out of the above quote.
I didn't say:
Stock markets are not going up because the currency goes up.
but that is a far more accurate assessment of what happens because flow of funds, international hot money, will move into dollar denominated securities mostly debt instruments, but more and more into our stock market because of its liquidity.
You can't compare other country's currency and stock market relations because the dollar is the world's reserve currency. Maybe the yen has some better correlation with the NIKKEI but that's as far as it goes. Thus foreign stock markets are better correlated with the DOW than are to their own currencies.
This statement is another cart before the horse:
In the past several years, two exceptional factors affected this unprecedented bull market, the Internet frenzy and the explosive expansion of credit at all levels.
The Internet "frenzy" is a reaction to conditions that have driven most stocks upward. If one looks at the financial data available at the St Louis Fed there is little evidence of this explosive expansion of credit. If anything, it has to be the smallest expansion of credit relative to value created in any post WW II expansion. As much as it is against your prejudices there is real value being created by everyone world wide and it isn't a house of cards supported by credit. You don't get precarious credit without rampant inflation.
Gold can go lower. There is nothing but CBs supporting its price now. I don't expect that CBs will sell. However, the European CBs raised rates today. That is remarkably stupid and could lead to raw deflation. How secure is gold's price in that circumstance? The production cost is only holding the marginal price as determined by the dominant public market for jewelry. That price can be mauled if foreign countries sell gold to buy dollars. The long term price of gold will always eventually go to its recovery value, but that doesn't help a mining company who sees a price dip to $250 for a year, a price that wouldn't break gold out of its base.
Take a look at a chart of ABX. It has the look of a chart that is trying to resist the irresistible force of something pulling it down. It has to be one of the worst long term charts in the book. The strong dollar is definitely the effective deflationary force causing that look. A strong dollar doesn't mean there is deflation in the US.
Inflation is only a monetary phenomenon incidentally. You can have excess money being fiat created with no inflation. Inflation is caused by people demanding in compensation more than what they create in production and they can get away with this because they are within some kind of monopoly that gives them that power. The monopoly isn't necessary though. If everyone by themselves decides to demand more in compensation, you will have inflation unless they increase their effort. You might say that there has to be authority complicity in inflationary wage demands in the sense that people can demand more but that doesn't mean there is the money available to supply them. In the past that's where the CB came in to create short term fiat money to keep interest rates from rising due to borrowing to fund wage demands. That fiat money in itself isn't inflationary as long as it doesn't end up with even more and higher wage demands then demanded to protect from inflation, fueling the wage price spiral. This is the rationalization that motivates today's interest rate hike and the FED's decision to hold the line. The fiat money isn't the driver. It's merely an effect of the driven.
The biggest threat in the world today is deflation because technology has created the ability to relegate the cost of creating goods to almost nothing. At the same time much of the world persists with some degree of socialism. Socialism is a system that always results in deflationary depression. The world's CBs know the above mechanism and are very cautious about creating fiat money. I didn't believe that the European CBs would raise rates. I thought they would wait and bet on declining oil prices. They surprised me and erred on the side of discipline, too much discipline in my view, and definitely approaching outright recession. Tell me how strong wage demands can be in that environment.
If Europe goes into recession, there will be quite a slack in demand from them for oil. With the other factors on the supply side developing it is almost sure that oil will tumble to a degree not currently expected. This is the implicit intent of Euro CBs. If they didn't do something a persistent high oil price encourages the Euro to drop further threatening its existence. However, recession in Europe means less export demand and so the Euro won't be propped much nor for long. The Euro weakness reflects the inherent inefficiency of European political economic structures. Manipulating final demand won't address that.
The expectations of all this is being reflected in the current tech stock fall. When that's over the stock market could surprise people because the real world is in general on far firmer ground than it has been in the past. The firmness is a sign that what you see as absurd valuations are mostly justified. We are no where near having conditions supporting the bear case. In a bear market stocks look like they are rising. |
