Donald, I think you are wrong, and what I am going to say sure will not be pleasant to many on this thread.
Gold is dead for good as a currency of the last resort. It is elementary, worldwide gold production at about 2400 tons yearly and at about $300/oz comes to about (give or take) 20 some billion bucks annually. If gold were to be a currency of last resort its supply growth should be equal to the growth of the economies of the world. Even if you accepted reserves at only 10% that situation would put the world into a straight jacket of worlwide annual growth of only 200 Billions annualy, this in a world ecomomy well in excess of 20 trillions. The result? The world would be doomed to a growth rate of about 1% an untenable position. Of course, you could revalue gold upward everytime it acts as a restraint to growth, but that will result in artificial inflation.
The central bankers have recognized the straight jacket the gold standard was on world economies, but investors have not. They are still in the nostalgic world of the gold standard, and as a result gold still maintain a portion of it former allure. But the central bankers are determined to turn gold into a simple industrial commodity which will respond to the simple forces of supply and demand. In view off this reality, the bankers chose to get another 3% on their money (gold loan are now getting almost 3%) and buy US treasuries, which nothing but the future right to tax us tax payers.
Now, the second part of your argument makes a lot of sense, the problem of excess exporting countries, or countries trying to propel themselves to a higher standard of living by exporting furiously, is causing dislocations in the market. I for one, believe that these dislocations can be accomodated by a moderate deflation overseas and in essence nil inflation or mild deflation here. As long as the demand side of the equation is not too much out of balance with the supply and we do not get into a major deflation, that is actually quite bullish for US securities. If, however, the UAW wins its battle of protectionism and our country (and others) move to isolationism, than we will get into a severe deflationary spiral led by drying up of demand relative to supply. I certainly do not see any signs of such an event in the next six to 18 months.
Zeev |
