It is impossible to predict the price of money. Gold always is the final arbiter of that price. It is in our genes to believe it works that way. When gold soared during in the late '70s, the worst ravages of inflation had already occurred. There is a stimulus,a lag, and then a response. Big money develops a conviction slowly and buys the top. We are in the reverse situation now. Big money sells the bottom. It is all mood and emotion.
The points you make are solid. Like all economic phenomena you can always create as many good pro as con arguments. Which side the rational or irrational money flows is random. At the top in 1980 few had any reason to sell gold. No one knew that was the top. I didn't. No one knew if 21% interest rates would be enough. I didn't. I did know the 15% yield on T-bonds was a terrific buy even if fed funds went to 30%. I bought.
I feel the same about gold now, but I don't have the strength of conviction I did with the bonds. The bonds were a safe claim on future return. Gold never implies a future return. It is a speculation on a surprising change coming in the future. Like all investments it's just a guess.
One thing you didn't list: an assessment of the unexpected. There is no con argument for the depreciation of gold under a regime of unexpected good news. There can't be because there can't be any better news. Every event in the world has been negative for gold and the economic circumstance in this country simply can't get better. Any better would actually go beyond the optimum and precipitate the bad. But the downside to the economy knows no bounds. I assert this because nothing in legislation has been significantly constructive such that the root problems that caused the malaise of the past have been rooted out. When the FED threw in the towel in 1982, they sank the chance to stay the course to a disciplined monetary future. As you've heard me say before, they now are compromising on inflation. That is the issue. Everything else is window dressing. It took me ten years during the '70s to realize that and I had created the same list as you have with different names and places. They are practicing inflation support through targeting interest rates, free market interference so the market never knows the equilibrium level. This isn't pronounced now because the economy still supplies back enough money to the money market such that tinkerings are presumably inconsequential. That's what the Burns FED thought too. They could never see how the problem crept up on little cat's feet. By the time the problem was significant they didn't have the guts to go in and take America back to the Greeeaaat Depression and leave her to her own devices to get out. Volcker had to come in and do the hatchet work, but by that time the powers that be accepted that the route back was inevitable. So actually I'm claiming that the only reason for gold is these subtle changes in attitudes and sudden unexpected change.
Think about the big earthquake that racks California busting lots of the fiber optic cable in ground. In 1906 the SF quake effectively ended the era of the big railroad expansion, not by track destroyed, but by confidence waylaid until it came to a crescendo in the Panic of 1907. It was an old fashioned run on money at the NYSE money post (see Jesse). Before it was over JP Morgan had to bail the entire country out with the eventual effect of forcing Congress to create the FED in 1913. Well, we've got a new kind of transportation now, so all we need is the Cal quake which is long overdue. In light of that I like my gold stock hedge. |
