Vieserre, the Devil's Advocate:
Although some place their hope for a rise in gold because of inflationary pressures due to low unemployment and increasingly forceful wage demands; I aver the issue is not whether inflationary pressures are building, for that is given, but what happens next. All of the following will contribute to lower inflation: The downward revisions presently being affected to the calculation of the CPI and its affect on COLA, (b) continued monetary restraint by the Fed as evidenced by the flatness of the yield curve, and moderate money, credit and debt growth, and finally (c) the impact of the strong US dollar on import prices, export prices and hence on domestic price level. While the pickup in inflation could eventually cause the Fed to tighten, the slowing in growth should be the more obvious development over the second half of this year, helping to keep policy on hold.
The idea of stagflation, suggested by some, has no historical precedent which would be applicable to present economic conditions. The once and only time this occurred was due to the oil price shock coupled with the sharp rise in agricultural goods due to drought which caused inflation by a shortage of "supply" as opposed to excessive "demand" and there is nothing to suggest, absent a significant sharp decline in the dollar, that this is now foreseeable.
Further, there is a school of thought by Baverman et al, that inflationary cycles are becoming increasingly smaller in magnitude such that inflation will be eventually wrung out. This is evidenced by the continuation of a LT disinflationary trend which is approaching Zero.
The fact that some products or services of our society may be increasing in price, such as drugs and medical costs, owing to being sheltered by outside competition, does not mean that general price is being affected to the detriment of the economy and the general populace - as clearly seen by the CPI and PPI.
While nonfederal debt is rising at a fast clip, its share of GDP is only 9.6%. Federal borrowing as a percent of GDP is zero-the lowest since the 1970s. The federal budget is in surplus for the first time since late 1960s. Excluding interest payments, the surplus is over "$300 billion!" This does square with inflation expectations.
Further, forget inflation to cause an increase in the price of gold. If inflation comes out of the closet, the Fed has reiterated its determination to raise rates - and when this has happened recently, gold has fallen instead of rising as it became more expensive to hold. There is nothing that suggests that the Greenspan-led Fed cannot continue to be successful in containing inflation. It is only when inflationary conditions occur which will cause a secular reversal of the LT disinflationary trend, that gold will be sought as a refuge against inflation. And this is out of sight.
Although some soothsayers believe that the EURO will lead to the Dollar's decline. At this stage, it is merely wishful thinking. There are inherent problems in trying to make a strong Euro in the face of a monetary rather than political union, where nationalistic goals, social tendencies and diverse cultures play a most important role.
If there is any hope for a rise in gold, it must be based on a secular change in inflation brought about by a fall in the dollar due to the Trade Deficit and National Debt.
As to the Trade Deficit, I recently read an economic report that states there is nothing wrong with the US trade deficit as it merely reflects the strength of the US economy and assists in maintaining low inflation. This has an effluvium of bovine species pastoral from whence it came. The continued trade deficit is a cancerous sore which adversely affects a certain segment of US industry from being able to compete on a global basis. As a consequence, the longer this continues, the less capital investment will be made in the affected industry as investment will go elsewhere to earn a greater profit. Therefore, the less likely this industry will be able to compete even if the deficit were reduced. Outsourcing, instead of helping, aggravates it. And the contention that dollars flowing back to the US as capital investment negates any damage to the current account is rubbish. For when these dollars flow back, they are invested in those industries which offer the greatest profit potential rather than the affected industries - and thus we see such extremes in internet stocks and the like rather then in basic industry. And if this continues, we indeed will become a nation of YAHOOS.
Still further, the national foreign debt cannot be anything but harmful in the LT with continuous dollar outflow adding to the pile of US dollars floating about who knows where. It may be arguably beneficial in the ST for US citizens to be able to buy products which they otherwise could not afford by the transfer of their monetary assets ("wealth") elsewhere and on credit that foreigners are financing by acquiring US bonds, but a time will come when the piper must be paid. And how does one return a used car for the same amount of money.
It is only a matter of time before the trade deficit, causing a reduction in GDP and US industrial global competition, and the National Debt, with insufficient US savings, will cause a significant fall in the surplus dollars. Then the Fed will certainly be on the horns of a no-win dilemma to either reduce interest rates to counter the fall of a reduction in GDP and stock market or to raise rates to counter an increase in inflation brought about by the cost of imported goods and reduction in global competitiveness.
The supply price shock derived from the increase in cost of imports may then lead to stagflation to a degree. But it is not clear how gold will react re the US dollar. Will it be driven by the inflation, or by the reduction in the GDP. If the commoditrians are right, an increase in demand from the fall in the dollar should be supportive of price, but it would certainly not result in $400.00 gold.
In fact, there is absolutely no presently foreseeable, economical or commodity related reason why gold should significantly increase in price. And that is precisely what the gold market is telling us.
Vieserre
PS AHHAHA, I welcome your considered response, which I am sure will be made with the impartiality for which your posts are so noted. : )
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