It should be pointed out that although punditsers on CNBC keep panning gold by comparing its price action with that of 1980 there's no similarity whatsoever.
In Sept '79 FED figured out that they had a backward bending supply curve on their hands. The more money they pumped in to prevent the fed funds rate from rising, the higher fed fund rate would rise because of rising expectations for inflation. Who wants to lend to a money abuser? When FED finally figured out that their bids in the bond market were being ignored they bit the coin and left. Without FED the fed funds rate was allowed to rise to equilibrium which at that time was 300BP higher. That took several months because the trading desk working outside of the FOMC directive( Keynesians all, there) at first dragged its feet leaving. By Jan 1, 1980, the handwriting was on the wall. It still took 3 weeks for the gold market to figure out "ohmagod, we got discipline". At the end of Jan the PM market started to drop with belief. And FED did nothing and could do nothing to reenter the market although the entire staff was convinced that by allowing the market to set the rate of interest would result in a depression.
There was an ensuing GDP recession, the worst that has ever been since the '30s, but not in RE prices. The recession occurred because the economic system had also to reach its own natural equilibrium outside of FED meddling and interventionism which had persisted since the late '60s. Lenders were so doubtful about FED that they were shy to come back and so the entire interest rate rate structure remained at extraordinarily high levels for years. Even so, high rates had little impact on Reagan's tax cut incentivized recovery, but high rates killed gold, oil, and commodities.
In contrast, what do we have now? NOTHING like that. What I see is constantly rising prices and zero interest rates, an impossible combo. What do you see? Deflation? Don't lie to me. Has gold been rising because of inflation? No. It has been rising because Berdoo and all the CBs have pledged their all that they would push down unemployment with monetary policy. Monetary policy can't "push down" unemployment. That requires right fiscal policy which Europe and the US don't have. So gold has risen in rational expectation that FED would have to pump. Problem is, as stated here, and only here, in spite of the abundant evidence supporting the thesis, pumping only piles up reserves in banks. Doesn't reduce unemployment.
What does FED then have to do? Taper off? Reduce pumping? FED's independence rides on the false Keynesian view held also by Congress that we must pump down unemployment. Forget self preservation. FED can't back off from pumping short of hyper inflation, because otherwise the failed fiscal policy of Baboon will cause the ever growing Coxie's army to take vengeance and invade and surround the WH, 100,000 strong. Meanwhile, Baboon admin has spent and wants to spend while the food stamp hoards rise in numbers. The difference has to be papered over even though anyone can see through the piled up paper as it sits idly in transparent banks. |
