Gold went so low because the FED practiced money supply targeting between 1988 and 1993. They gave that up because it wasn't generating instant prosperity. People had to work to add value.
From 1980 to 1988 gold was depressed from 50 years of debasement which culminated in extraordinarily high real cost for loanable funds. After 1980 the FED on balance stayed out and so nominally erred on the side of restraint. When the market wanted to drop more quickly to reflect the deflationary forces in place, the FED wouldn't let it. This was overt erring on the side of restraint.
After the '87 crash the FED decided excesses in either direction were wrong. They hadn't fully learned what the lesson of 1980 taught. The real lesson is not to err on this side or that, it is not to interfere with the market's determination of the rate of interest. For complex reasons not fully understood by anyone, the FED decided to try money supply targeting with minimal interest rate manipulation. They could do this because the system was still deflating and there was a paucity of extra demand for loanable funds. It was a benign environment to try money targeting.
In such an environment there is no debasement so gold's 50 years of inflation driven price premium evaporated. There were other factors that took away the fear premium like the end of the Cold War and there were economic factors like tax cuts, budget discipline, revival of capitalism, reduction of the growth in the welfare state, that took the pressure off expectations for future inflation. Maybe most important was the effect of socialism in foreign countries which kept foreign labor cheap and so constrained the will to inflate of American labor.
This is now being destroyed very slowly because the FED has gone back to interest rate targeting. They think they know how to fix rates so that no problems will arise. It is that belief that is the root of their failure. That has been the history of monetary authority. They can never see the damage being done until way after the fact.
Right now they are holding down the federal funds rate from rising. Why are they doing this? The demand for loanable funds is starting to rise steeply and the money supply is on a long term rapid growth trend from previous similar actions. The market has raised treasury rates which are beyond FED control to reflect the market's recognition that when demand exceeds supply, rates must rise to slow down the demand. You can make a lot of arguments about Japanese repatriation selling and bottoming of commodity prices, but the real issue is demand and supply of funds disbalance due to concern about the potential of future inflation.
Gold is now fairly well-correlated with T-bond yields with the yields leading by several months. Gold is an emotional commodity. They'll buy it when they see trouble. Major markets turn slowly. When you buy the bottom you have to buy and hold. Otherwise, if you want to trade, you have to wait until the honchos through their buying make price move substantially. They won't say anything while they're buying, but once they're long and prices are up, they will be shooting their mouths off. They aren't trying to con you or dump on you, they are doing it because they're proud of their great skill and ability. The problem with that is that they don't have any because all of what I've said above completely escapes them. The above is the only reason gold will rise. All other reasons including the coming Chinese-Japanese War are just fluff. Gold couldn't rise much without debasement. |
