Happy Holidays everyone. I am of the belief that gold/silver/copper does very badly in a deflationary environment. I think everything has gone up in price due to hyperinflationary credit growth and everything will go down in tandem during the debt repudiation phase.
In my view, it is purely supply and demand that impacts price, not money supply. If money velocity declines while money supply increases, we can still see a massively deflationary environment.
Psychology is at the heart of the price discovery mechanism. I think we're on the cusp of a major shift in psychology from extreme risk seeking behavior to risk aversion. During risk aversion, money slows down and eventually virtually stops. People shift from thinking "how can I make money" to "how can I preserve what I have".
When that happens, people want cash, not gold. They want less debt, less house, less stock, less risk. Gold is risk. A different kind of risk than financial instruments and houses, but it is risk nonetheless.
I think we now have more risk seeking behavior than even at the peak of the internet bubble. The internet bubble was confined to a select number of stocks in a select industry. We now have a bubble in everything. Houses, stocks, risky bonds, gold, commodities, etc. It's all the same symptom. Easy credit and a high propensity to maximize returns with little fear for loss.
I'm not sure what causes the major shift in psychology but I don't think it can get much more extreme. Absent a major event, I see the pendulum slowing shifting from extreme risk seeking back towards aversion. For prices to continue running higher in everything we need the pendulum continuing to move towards more risk. Stagnant risk will probably cause prices to remain flat at best. It could very well be that the feedback loop begins to go the other way where lower price begets more risk aversion which in turn feeds lower prices.
It's not in the psyche of people to seek gold for safety. Cash is safe. Liquidity is safe. Less debt is safe. Less stock is safe. More gold is not safe. It's only safe when you fear that central bankers will destroy your purchasing power. That's been the fear for the last 5 years. That fear is played out. Now people are long everything and in debt up to their eyeballs. Cash and US treasuries are about the most out of favor asset at the moment. It's at an extreme. There is a deep fear that if you hold safe cash that you at best won't get anywhere and at worst will lose ground in terms of purchasing.
For this reason, I think long term zero coupon treasuries will be the number one performing asset class in 2006. I think cash will outperform everything including gold. I think stocks, risky bonds, real estate, gold, silver, the CRB and even oil are lower one year from now than they are today.
Happy Holidays everyone. |
