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Strategies & Market Trends : Asia Forum
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To: Jay Scott who wrote (6544)9/21/1998 3:43:00 PM
From: Henry Volquardsen  Read Replies (1) of 9980
 
Jay,

Let me start by saying I am not a gold bug. I will say that gold has some predictive value but no more or less than any commodity. Also it needs to be looked at in a global context.

However let's look at the current predictive capability of gold. It's hard to make an argument that gold has correctly predicted recent economic trends. Yes the price of gold has declined vs the US dollar and under this theory that would predict declining price levels in the US. However we have not seen that. In fact the one thing the Fed has been most concerned about is signs of an inflationary uptick in such indicators as employment costs. Over the last few years in which gold prices have declined it is difficult to argue that we have seen a deflationary trend in the US.

The response I usually hear to that is that the deflation is not occurring in the US but is occurring in the emerging markets. Yet those currencies have all weakened significantly against the dollar to the effect that gold has risen substanially in terms of most of the emerging market currencies. Shouldn't the theory state that inflation is in fact a problem in those currencies since gold is so strong? Clearly that is not the case.

I believe Greenspan recognizes that there are other things happening and gold does not have an overriding predictive ability. That is not to say there are not reasons to argue for a Fed rate cut. I believe a rate cut would be appropriate. I just don't believe gold is giving us reliable signals one way or the other.

Henry
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