Everyone has a different cast on things. Over the decades I've embraced every economic theory and philosophy although since the mid '70s I've primarily been of the Friedmann - Von Hayek camp. All of the various views have virtues and each seems more relevant in a given era. I don't believe the differences are enough to make a difference. The only essential thing is to cling tenaciously to a few core principles. I doubt any of the schools would disagree with those principles. The problem arises between the cup and lip. There are many different ways to achieve or serve the principles and many actually accomplish the opposite.
For example, you tend to believe that deflation would raise gold prices and you can give various evidence for that. The only evidence that exists is circumstances surrounding the plight of the economy during the '30s and the public fear of savings institutions induced by the collapse of banks. There is certainly a rational argument that gold is an end game hedge, but we never deal with that dire of situation. So maybe it isn't a viable argument. Can you see that under extreme conditions that the price of gold would become indefinitely high, hence completely not fungible, and thus perfectly worthless? You want to trade your Double Eagle, but the other party will only give you a life saving loaf of bread for it. In the final analysis gold is only a trading vehicle because it does not create future value, nor does it encourage people to do constructive action.
When we buy gold or gold stocks we are putting pressure on Central Banks to be responsible. The FED watches gold price more closely than any other indicator. They will raise rates if gold rises too quickly and so undo the chief reason to buy gold. Thus, with a completely responsible FED the price of gold would never change. That was the course the FED was on until 1995. It is so unfortunate that they gave up all that hard won discipline. All those hearings in front of Congress, the stress meter, academic and professional review, endless public and media criticism, lost because the governors forgot the past. They talk as though they still are disciplined, but they must be judged by their actions.
I believe the only time to hold gold entities is during an environment of rising expectations of monetary excess. Note I didn't say inflation. If I had said monetary inflation that is also correct, but monetary inflation doesn't necessarily mean an increase in general prices. Thus we can have monetary inflation and a decrease in the general price level! If the FED creates excess money and the people don't use the money in a way that adds to GDP, the money will go somewhere else, perhaps to consumption, precious metals, or savings. You have to have certain economic and psychological conditions in place for the money to end up driving the general price level. Those conditions started to appear earlier this year, but they substantially evaporated with the advent of Asian turmoil.
The conditions are developing such that the price of gold will rise, but there won't be significant effect in real economy. That depends upon further actions of the FED. They will do just enough to prop up the economy and in so doing cause gold to rise, but not so much that inflation will get all out of hand. The dollar could have big moves amplifying these intrinsic effects. If the dollar persists down, there's no question that there will be major buying of gold entities as a precautionary measure. This is the reason for buying gold stocks and buying ABX in particular. |
